UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File No. 0-15450
SIERRAWEST BANCORP
(Exact name of registrant as specified in its charter)
California 68-0091859
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10181 Truckee-Tahoe Airport Road
P.O. Box 61000 Truckee, CA 96160-9010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (530) 582-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value,
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1998: $145,509,000 (based on closing sales price at
March 13, 1998)
Number of shares of Common Stock outstanding at March 15, 1998: 4,116,547.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Items 10, 11, 12 and 13 are incorporated by reference from SierraWest
Bancorp's annual proxy statement to shareholders which will be filed with the
Commission no later than 120 days after December 31, 1997.
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TABLE OF CONTENTS
Page No.
PART I
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ITEM 1. BUSINESS...............................................................................................3
ITEM 2. PROPERTIES.............................................................................................26
ITEM 3. LEGAL PROCEEDINGS......................................................................................26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................26
PART II
ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK..................................................................27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...................................................................28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................................................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................................................87
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................................87
ITEM 11. EXECUTIVE COMPENSATION..................................................................................87
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................... 87
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.......................................88
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PART I
ITEM 1. BUSINESS
General Development of the Business
SierraWest Bancorp ("Bancorp", "SWB", or together with its subsidiary, the
"Company") was incorporated under the laws of the State of California on
December 5, 1985 as a bank holding company. Pursuant to a plan of
reorganization, SWB acquired 100% of the outstanding shares of common stock of
SierraWest Bank, then named Truckee River Bank in a one-for-one exchange of its
stock for the stock of SierraWest Bank on July 31, 1986. The activities of SWB
are subject to the supervision of the Board of Governors of the Federal Reserve
System (the "FRB"). SWB may engage, directly or through subsidiary corporations,
in those activities closely related to banking which are specifically permitted
under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). SWB's
principal executive office is located at 10181 Truckee-Tahoe Airport Road,
Truckee, California 96161 and its telephone number is (530) 582-3000.
SierraWest Bank was incorporated under the laws of the State of California as
Truckee River Bank on March 19, 1980, and, with the approval of the California
Commissioner of Financial Institutions (the "Commissioner"), opened for business
on January 20, 1981. Truckee River Bank commenced operations in Truckee,
California, a small tourist-based town located in the County of Nevada and
situated in the High Sierra about 12 miles north of Lake Tahoe. Truckee River
Bank changed its name to SierraWest Bank in early 1996. SierraWest Bank
maintains 12 branch offices in the following communities: Truckee (two
branches), South Lake Tahoe, Tahoe City, Kings Beach, Grass Valley (two
branches), Auburn and Sacramento (two branches), California, and (following the
merger in October of 1996 of SierraWest Bank and SierraWest Bank, Nevada, then a
wholly-owned Nevada bank subsidiary of SWB) in Reno and Carson City, Nevada. In
addition, SierraWest Bank maintains 10 lending offices, primarily for its SBA
lending activities, in the following communities: Truckee, San Francisco,
Sacramento, Fresno and Chico, California; Reno and Las Vegas, Nevada; Portland,
Oregon; Denver, Colorado and Chattanooga, Tennessee. SierraWest Bank's deposits
are insured by the FDIC up to applicable limits.
In June 1997, SWB acquired Mercantile Bank, formerly a state-chartered
commercial bank with its principal office in Sacramento, California, through a
merger of Mercantile Bank with and into SierraWest Bank. On the acquisition
date, Mercantile Bank had assets of $42.8 million, deposits of $37.7 million and
shareholders' equity of $4.9 million. The consideration for the acquisition was
a combination of cash and shares of SWB common stock with an aggregate value of
approximately $6.6 million. The acquisition was treated as a purchase for
accounting purposes.
On November 13, 1997, the Company signed a definitive agreement to acquire the
outstanding common stock of California Community Bancshares ("CCBC") in a
transaction valued at approximately $39 million, based on the closing price of
SWB stock on November 13, 1997. CCBC, the parent of Continental Pacific Bank, is
headquartered in Vacaville, California. Continental Pacific Bank operates eight
banking offices in Solano and Contra Costa counties in California. CCBC had
total assets of $197 million at December 31, 1997. The merger, which is
scheduled to close during the first half of 1998, is subject to the approval of
CCBC's and SWB's shareholders and federal and state regulators, as well as
certain other terms and conditions.
The Company offers commercial banking services, including the acceptance of
demand, savings and time deposits, and the making of commercial, real estate,
personal, home improvement, automobile and other installment and term loans. It
offers traveler's checks, safe deposit boxes, note collection services, notary
public, ATMs and other customary bank services, except international banking and
trust services. Annuities and mutual fund investments are also offered through
third party providers. Merchant drafts are processed pursuant to established
bank card programs. Additionally, the Company provides a 24 hour automated
telephone inquiry service, and a P.C. banking product for its business
customers. In 1996, the Company started a loan purchase program for the
acquisition of real estate loans which it plans to securitize in the future in
marketable parcels.
Certain statements in this document include forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive
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pressure in the banking industry increases significantly; changes in the
interest rate environment reduce margins; general economic conditions, either
nationally or regionally, are less favorable than expected, resulting in, among
other things, a deterioration in credit quality and an increase in the provision
for possible loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate sensitive deposits; operational risks
including data processing system failures or fraud; asset/liability matching
risks and liquidity risks; and changes in the securities markets.
Narrative Description of Business
The Company's total assets have grown from $243.8 million at December 31, 1992
to $589.8 million at December 31, 1997, a compound annual increase of 19.3%. The
Company's assets grew 31.7% in 1997 and are expected to grow at a relatively
high rate in 1998. For the year ended December 31, 1997, the Company reported
net income of $7.5 million, or a return on average assets of approximately 1.43%
and return on average equity of 16.5%. At December 31, 1997, the Company had
total loans of $426.5 million, loan loss reserves of $6.6 million, deposits of
$526.3 million and total equity capital of $53.6 million.
General Lending Overview
The five general areas in which the Company has directed its lending activities
are: SBA loans; residential and non-SBA commercial real estate loans; commercial
loans; consumer loans to individuals (including home equity lines of credit);
and commercial leases. As of December 31, 1997, these five categories accounted
for approximately 38%, 39%, 18%, 2% and 3%, respectively, of the Company's total
loan portfolio. In 1997 the Company exited its commercial leasing activities.
Small Business Administration Lending
The Company ranked 18th in the nation by number of Small Business Administration
("SBA") government guaranteed ("SBA 7(a)") loans generated by banks for the
SBA's fiscal year ended September 30, 1996 as published by the SBA. The SBA has
not published its fiscal 1997 rankings; however the Company believes that its
ranking has not changed significantly. In 1997 the Federal government approved a
level of SBA loans guaranteed of $9.5 billion and in 1998 this level is expected
to increase to over $10.0 billion.
The SBA is headquartered in Washington, D.C., and operates through ten regions
throughout the United States. The SBA administers three levels of lender
participation in its general business loan program, pursuant to Section 7(a) of
the Small Business Act of 1953, as amended, and the rules and regulations
promulgated thereunder (the "Small Business Act"). Under the first level of
lender participation, commonly known as the Guaranteed Participant Program or
"Section 7(a)", the lender gathers and processes data from applicants and
forwards it, along with its request for the SBA's guarantee, to the local SBA
office. The SBA then completes an independent analysis and makes its decision on
the loan application. SBA turnaround time on such applications can vary greatly,
depending on the backlog of loan applications.
Under the second level of lender participation, known as the Certified Lender
Program, the lender (the "Certified Lender") gathers and processes the
application and makes its request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs a review of the lender's credit
analysis on an expedited basis, which review is generally completed within three
working days. The SBA requires that lenders originate loans meeting certain
portfolio quality and volume criteria before authorizing lenders to participate
as Certified Lenders. Authorization to act as a Certified Lender is granted
independently by each SBA district office.
The Company operates in California, Nevada, Oregon and Tennessee as a Preferred
Lender ("Preferred Lender"). This designation is the third and highest lender
status granted by the SBA. Under this level of lender participation, the lender
has the authority to approve a loan and to obligate the SBA to guarantee the
loan without submitting an application to the SBA for credit review. The
Preferred Lender is required to promptly notify the SBA of the approved loan,
along with the submission of pertinent SBA documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the lower two levels and involve meeting additional
portfolio quality and volume requirements. The Company may, at its option,
submit loans for approval under the Certified Lender Program.
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The Company has, over the last fifteen years, developed an in-house expertise in
the generation and sale of SBA guaranteed loans. The Company's activities in the
SBA loan area are expected to continue to be a significant factor in the
earnings of the Company. In the past, the Company has acquired SBA loans,
mortgage loans and the rights to service these loans from the RTC and others.
Prior to 1995 the Company sold the guaranteed portion of SBA 7(a) loans
(typically secured by first trust deeds on commercial real estate), generally
70% to 90% of the SBA 7(a) loan value, that it generated in the secondary
marketplace and retained the remaining percentage for its own portfolio.
Currently, the maximum guarantee is 80%. The percentage of the retained portion
of previously sold SBA 7(a) loans to total loans included in the loan portfolio
of the Company at December 31, 1997, 1996 and 1995 was 5%, 26% and 30%,
respectively. In 1995, the Company made a decision to change its strategy with
respect to the sale of SBA 7(a) loans. A significant portion of the guaranteed
portion of loans is now being retained, and the Company intends to securitize
and sell portions of the unguaranteed amount. The Company's first securitization
was completed in June 1997. The Company has, in the past and will continue in
the future, elected to sell selected guaranteed portions of loans to reduce
credit concentrations in a particular industry or for other reasons.
SBA 7(a) loans are made for terms from 7 to 25 years depending on the purpose of
the loan. In addition to being guaranteed by the SBA, most of the Company's SBA
7(a) loans are collateralized by real estate. In the event of a default, the
Company shares in the proceeds upon the sale of collateral on a pro rata basis
with the SBA, e.g., if the unguaranteed portion of a loan is 20%, then 20% of
the net liquidation proceeds would be available to the Company for payment of
the unguaranteed portion of the loan.
Since 1983, to support its SBA program, the Company has relied in part on SBA
packagers who refer SBA loans to the Company and provide certain services to the
borrowers. The packagers receive fees of a fixed amount from the borrower,
subject to limits prescribed by the SBA. The packagers also receive a fee from
the Company for referring SBA loans to the Company. The referral fee payments
are included in the basis of the loans and hence are not disclosed separately in
the Company's financial statements. Referral fees incurred by the Company for
SBA 7(a) loans from the years ended December 31, 1997, 1996 and 1995 were $242
thousand, $90 thousand and $200 thousand, respectively. The Company's
relationships with its SBA packagers are informal arrangements.
SBA Guarantees. On October 12, 1995 the President signed the Small Business
Lending Enhancement Act of 1995. This act amended the maximum guarantee
percentage for loans made under the SBA's 7(a) program to 80% for loans up to
$100 thousand and 75% for all loans above $100 thousand. The maximum amount of
any loan that the guarantee can apply to was set at $750 thousand. At the same
time, the fee structure was revised to include a fee of 0.5% per annum on the
guaranteed portion of the outstanding balance of all loans approved on or after
October 12, 1995. As of December 31, 1997, included in total SBA loans of $163.8
million were portions of loans guaranteed by the SBA totaling $57.5 million.
The SBA guarantee is conditional upon compliance with SBA regulations. In
connection with the underwriting and closing/servicing process, the Company
examines all loan files for compliance with SBA regulations; however, there can
be no assurance that all loans will comply with SBA regulations in all
instances. In the event of a default by a borrower on an SBA loan, if the SBA
establishes that any resulting loss is attributable to significant technical
deficiencies in the manner in which the loan was originated, documented or
funded by the Company, the SBA may seek recovery of funds from the Company. With
respect to the guaranteed portion of SBA loans that have been sold in the
secondary market, the SBA will honor its guarantee and may then seek
reimbursement from the Company in the event a proven loss is deemed to be
attributable to technical deficiencies. Loss of all or part of the SBA guarantee
on a loan could result in a loss to the Company if the underlying collateral on
the loan is insufficient to cover the outstanding loan value on such loan. The
Company maintains insurance coverage of $2.5 million against losses of the SBA
guarantee related to technical deficiencies.
SBA Servicing. As of December 31, 1997, 1996 and 1995, the Company serviced
1,486, 1,402, and 1,370 SBA loans, respectively, with a total unpaid principal
balance of approximately $452 million, $420 million and $413 million,
respectively.
The servicing of SBA loans entails the collection of principal and interest
payments from borrowers, and for unguaranteed portions securitized and sold the
remittance of required payments to the trustee. For guaranteed
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portions of loans sold to investors the remittance of the investor's share of
principal and interest payments to Colson Securities Corp. (the exclusive Fiscal
and Transfer Agent for the guaranteed portion of SBA loans sold into the
secondary market), the review of financial statements of borrowers and site
inspections. Servicing also entails the taking of certain actions required to
protect the Company's and the SBA's position in the event of default by the
borrower, including the liquidation of collateral.
To compensate it for the cost of servicing, the Company, pursuant to generally
accepted accounting principles ("GAAP"), sets aside part of the interest
receivable on the portion of loans sold to cover its future costs and a
reasonable future profit.
SBA Sales. SBA 7(a) loans are primarily written at variable rates of interest
which are limited to a maximum of 275 basis points over the lowest prime lending
rate published in the Western Edition of The Wall Street Journal. The interest
rate on most of the Company's SBA 7(a) loans adjusts on the first day of each
month. With respect to loans sold, the guaranteed portions of SBA loans are
converted into government guaranteed certificates, which are sold to investors,
and which yield for the investor a rate that is lower than the note rates. The
investor may pay a premium over the principal amount of the loan purchased and
additionally a portion of the interest on the sold portion of the loan will be
retained by SierraWest Bank. The difference between the rate on the loan that is
retained by the Company and the rate that the investor receives plus a fee of
0.5% collected by the SBA is referred to as the servicing spread. Lenders are
required by the SBA to maintain a minimum of 40 basis points of servicing spread
unless loans are sold for cash premiums, in which case this increases to 100
basis points. When the SBA lender retains higher levels of servicing spread,
lower cash premiums are received from investors.
Prior to January 1, 1997, the unamortized book value of the servicing spread
less the normal servicing cost was recorded on the Company's balance sheet as
excess servicing assets.
Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
In accordance with the accounting standards provided by this statement, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. Implementation of SFAS No. 125 had the effect of reclassifying the
previously recorded excess servicing asset into two separate assets. The first
asset represents the servicing spread in excess of 40 basis points and less than
or equal to 100 basis points for those loans sold at a premium. This is referred
to as a servicing asset. All other servicing spread in excess of normal
servicing cost is recorded as an interest-only ("I/O") strip receivable. I/O
strips receivable are classified as interest-only strips receivable available
for sale and are carried at fair value. The servicing asset is carried at cost,
less any required valuation allowance and is classified as an other asset.
At December 31, 1997, the balance of the servicing asset was $2.0 million and
its market value was also $2.0 million. The I/O strip receivables were recorded
at $17.1 million which included an unrealized gain of $700 thousand. These
assets represent servicing spread generated from sold guaranteed portions of SBA
7(a) loans, the unguaranteed portion of SBA 7(a) loans sold in the June
securitization and sold guaranteed portions of Business and Industry loans
("B&I"). See "Other Government Lending" below. Income from the servicing spread
received for the years ended December 31, 1997, 1996 and 1995, was $6.3 million,
$5.6 million and $6.2 million, respectively. Amortization of the related
asset(s) for these same periods was $1.7 million, $1.5 million and $1.5 million,
respectively. The surplus income from the servicing spread over the amortization
represents an important part of the Company's income.
Servicing spread primarily represents the servicing spread on previously sold
guaranteed portions of SBA 7(a) loans. During 1997, this servicing spread
benefitted from the June securitization, with approximately $1 million
attributable to this source. In addition to servicing spread generated from the
sale of SBA 7(a) loans, servicing spread has been generated on the sale of the
guaranteed portions of B&I loans. To date servicing spread from this source has
not been significant.
In recording the initial value of the servicing assets and I/O strips
receivable, the Company uses estimates which are made based on management's
expectations of future prepayment rates and other considerations. If actual
prepayments with respect to sold loans occur more quickly than was projected at
the time such loans were sold, the carrying value of the servicing assets may
have to be written down through a charge to earnings in the period
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of adjustment. Additionally a decrease in the fair value of the I/O strips
receivable would also be expected under these circumstances. If actual
prepayments with respect to sold loans occur more slowly then estimated, the
carrying value of the servicing assets on the Company's Consolidated Statement
of Financial Condition would not increase, although total income would exceed
previously estimated amounts.
SBA 504 Loans. The SBA provides long term financing to small businesses through
its 504 loan program, by partnering with banks to assist small businesses in
buying land, buildings, machinery and equipment. Under this program, the bank
provides 50% of the financing and obtains a first lien position on the
collateral. The SBA works through a local Certified Development Company to
provide 40% of the required financing and the small business provides 10% of the
project cost. There are no government guarantees provided under this program,
however the bank mitigates its risk with these loans by having a low loan to
value on the collateral, which is usually real property. Included in the
Company's SBA loan portfolio at December 31, 1997 are loans totaling $65.6
million related to this and similar lending programs in conjunction with the
SBA. Most of these loans are expected to be included in the Company's planned
1998 securitization.
SBA Securitization. In June 1997 the Company securitized $51.3 million of the
unguaranteed portion of its SBA 7(a) loans. This was the first bank
securitization of this product. The Company booked a gain of $2.6 million on
this securitization. The Company intends to securitize additional unguaranteed
portions of its SBA 7(a) loans in the future but only at such times as it is
able to accumulate sufficient product to provide for an economically viable
sized transaction which the Company considers to be in excess of $40 million.
The Company is currently in the process of completing a securitization of its
SBA 504 loans. This securitization is expected to include loans totaling
approximately $80 million and is expected to be finalized in the second quarter
of 1998. The securitization will include loans generated by the Company through
its loan production offices and branches and loans purchased from third party
financial institutions through the Company's wholesale loan purchase program.
The securitization will also include a limited amount of similar conventional
loans where the SBA has not been involved in the loan origination. Because the
average yield on these loans is lower than the average yield on loans in the
Company's 1997 securitization the gain on this planned securitization is
expected to be substantially lower than the 1997 gain.
Other Government Lending
The U.S. Department of Agriculture Rural Development ("USDA")offers a guaranteed
loan program, known as the B&I Loan Program. This program is designed to
stimulate economic activity in rural communities with populations of 50,000 or
less. Commercial and industrial businesses and real estate projects are the
target of the program. The Bank participates by financing up to $10,000,000,
with the USDA providing an 80% guarantee on loans up to $5,000,000 and 70% on
loans from $5,000,000 to $10,000,000. These guarantees are similar to those
offered through the SBA 7(a) program and can be sold on the secondary market.
Included in the Company's loan portfolio are B&I loans totaling $13.9 million at
December 31, 1997. In 1997, the Company sold $10.4 million in guaranteed
portions of B&I Loans.
Other Lending Activities
The Company's commercial loans are primarily made to small and medium-sized
businesses and are for terms ranging from one to seven years, with the majority
of loans being due in less than five years. The Bank provides conventional
commercial term real estate loans, both owner occupied and investor owned, with
maturities of 5-10 years and monthly amortizing payments scheduled over 25
years. Construction loans are also provided, for residential and commercial
purposes, with terms ranging from 6 to 18 months. Consumer loans are typically
for a maximum term of 36 months for unsecured loans and for a term of not more
than the depreciable life of tangible property used as collateral for secured
loans. Beginning in 1995, the Company provided 100% equipment lease financing to
small and medium-sized businesses and municipalities with terms ranging from two
to seven years. The Company exited its leasing activities during 1997.
Loan Commitments
In the normal course of business, there are various outstanding commitments to
extend credit that are not reflected in the financial statements. As of December
31, 1997, the Company had approximately $151 million in undisbursed loan
commitments and $4.8 million in standby letters of credit. About 27 percent of
the
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undisbursed loan commitments relate to SBA loans, while the remaining represent
undisbursed construction, commercial, real estate and personal loans (including
equity lines of credit). Most of these off-balance sheet items are or will be
secured by real estate or other assets; however, a portion are unsecured
commercial lines of credit. Off-balance sheet items undergo a level of
underwriting scrutiny similar to the criteria applied to the Company's loan
portfolio, and outstanding balances are monitored to minimize risk and loss
exposure.
Distribution of Loans
The distribution of the Company's loan portfolio, as of the dates indicated, is
shown in the following table (in thousands):
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December 31,
Type of Loan: 1997 1996 1995 1994 1993
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SBA loans:
SBA guaranteed loans(1).............. $ 78,924 $ 62,409 $ 45,864 $ 16,299 $ 16,825
Other SBA loans(2)................... 85,902 84,612 71,201 79,649 71,683
--------- --------- --------- -------- --------
Total SBA Loans....................... 164,826 147,021 117,065 95,948 88,508
--------- --------- --------- -------- --------
Real estate loans (includes loans secured
primarily by real estate, except for SBA loans):
Construction and land development... 63,703 36,261 31,564 18,310 15,450
Mortgage ........................... 97,982 62,883 35,484 18,268 17,908
Equity lines of credit.............. 6,641 4,725 3,735 1,689 1,058
--------- --------- --------- -------- --------
Total Real Estate Loans............... 168,326 103,869 70,783 38,267 34,416
--------- --------- --------- -------- --------
Commercial and industrial loans....... 79,938 57,325 42,204 31,157 26,850
Individual and other loans............ 6,945 6,847 6,537 7,365 9,828
Lease receivables..................... 13,114 8,304 3,380 202 217
--------- --------- --------- -------- --------
Total Loans........................... 433,149 323,366 239,969 172,939 159,819
Less allowance for possible loan losses 6,649 4,546 3,845 3,546 3,472
--------- --------- --------- -------- --------
Total Net Loans....................... $ 426,500 $ 318,820 $ 236,124 $169,393 $156,347
========= ========= ========= ======== ========
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(1) Loans guaranteed in part by the SBA which are in process of
disbursement, available for sale, or awaiting sale. The total
guaranteed portion was $57.5 million, $37.0 million, $29.2 million,
$11.6 million and $12.6 million at December 31, 1997, 1996, 1995, 1994
and 1993, respectively.
(2) Includes the unguaranteed retained portion of loans for which the
guaranteed portion has been sold to investors and loans which the
Company has a first lien position on collateral and the SBA has
secondary liens.
Credit Risk Management
In managing its loan portfolio, the Company utilizes procedures designed to
achieve an acceptable level of quality and to bring any potential losses or
potential defaults in existing loans to the attention of the appropriate
management personnel. As used in this discussion, the term "loan" encompasses
both loans and leases. Each loan officer is granted a lending limit by the Chief
Credit Officer, subject to review and approval by the Board of Directors of
SierraWest Bank. Each lending officer has primary responsibility to conduct
credit and documentation reviews of the loans for which he or she is
responsible. The Chief Credit Officer is responsible for the general supervision
of the loan portfolio and adherence by the loan officers to the loan policy of
such bank.
Loan officers evaluate the applicant's financial statements, credit reports,
business reports and plans and other data to determine if the credit and
collateral satisfy the Company's standards as to historic debt service coverage,
reasonableness of projections, strength of management and sufficiency of
secondary repayment and SBA and B&I eligibility rules, if applicable.
Recommended applications are approved by loan officers up to their designated
lending limits. Those loans in excess of individual lending limits are approved
by the Chief Credit Officer or other officer with appropriate administrative
lending authority. If a loan exceeds the Chief Credit Officer's lending limit,
it is forwarded to the Director's Loan Committee for approval. Approved SBA loan
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applications not made under the Preferred Lender Program, are then submitted to
the district SBA office for approval. All SBA loans are secured by various
collateral including, where appropriate, real estate, machinery and equipment,
inventory and accounts receivable, or such other assets as are specified in the
SBA loan authorization. In the case of the Company's SBA loans, approximately
87% were collateralized by commercial real estate at December 31, 1997. Prior to
submission of the application to the SBA for guarantee, any real property to be
taken as collateral is appraised by independent appraisers.
SierraWest Bank's management presents a written report to the Director's Loan
Committee monthly, listing all loans over $100 thousand that are 30 days or
more past due. Management and the Board of Directors of SierraWest Bank also
review all loan evaluations made during periodic examinations by the
Superintendent of Financial Institutions of the State of California and the
FDIC. The Director's Loan Committee of SierraWest Bank reviews and approves the
Bank's credit policy, as well as management reports on the quality of the loan
portfolio.
The Company maintains an allowance for possible loan losses to provide for
potential losses in its loan portfolio. The allowance is established through
charges to earnings in the form of provision for possible loan losses. Loan
losses are charged to, and recoveries credited to, the allowance for possible
loan losses. The allowance for possible loan losses is determined after
considering various factors such as loan loss experience, current economic
conditions, maturity of the loan portfolio, size of the loan portfolio, industry
concentrations, borrower credit history, the existing allowance for possible
loan losses, independent loan reviews, current charges and recoveries and the
overall quality of the portfolio, as determined by management, regulatory
agencies and independent credit review consultants retained by the Company.
While these factors are essentially subjective, management considers the
allowance of $6.6 million at December 31, 1997 to be adequate.
The Company's credit services department is responsible for monitoring,
collecting and liquidating loans. In addition, on a selective basis, the
servicing staff conducts site inspections after loan funding and periodically
during the life of the loan to verify the use of the proceeds and maintenance of
collateral and to assist in the collection process and management of classified
loans.
Asset Quality
The performance of the Company's loan portfolio is evaluated regularly by
management. The Company places a loan on nonaccrual status when any installment
of principal or interest is 90 days or more past due, unless, in management's
opinion, the loan is well secured and the collection of principal and interest
is probable, or management determines the ultimate collection of principal or
interest on a loan to be unlikely. When a loan is placed on nonaccrual status,
the Company's general policy is to reverse and charge against current income
previously accrued but unpaid interest. Interest income on such loans is
subsequently recognized only to the extent that cash is received and future
collection of principal is deemed by management to be probable.
Loans for which the collateral has been repossessed are written down to fair
value and classified as Other Real Estate Owned ("OREO") or, if the collateral
is personal property, as other assets, on the Company's financial statements.
-9-
<PAGE>
The following table sets forth the amount of the Company's nonperforming assets
as of the dates indicated (amounts in thousands except percentage amounts).
<TABLE>
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Nonaccrual loans:
SBA............................ $ 5,281 $4,985 $ 5,351 $2,423 $ 2,517
Other.......................... 702 378 125 59 355
In-substance foreclosures.......... 0 0 0 572 711
Other real estate owned............ 1,438 446 758 542 456
------- ------ ------- ------ -------
Total nonperforming assets..... $ 7,421 $5,809 $ 6,234 $3,596 $ 4,039
======= ====== ======= ====== =======
Accruing loans past due 90 days or more:
SBA............................ $ 1,127 $1,071 $ 816 $1,754 $ 496
Other.......................... 255 1,061 207 9 1,029
Restructured loans (in compliance
with modified terms)............. $ 660 $ 275 $ 78 $ 194 $ 201
Nonperforming assets to
total assets..................... 1.3% 1.3% 1.8% 1.4% 1.6%
Allowance for possible loan and lease
losses to nonaccrual loans....... 111.1% 84.8% 70.2% 142.9% 120.9%
</TABLE>
Of total gross loans and leases at December 31, 1997, $6.0 million were
considered to be impaired. The allowance for possible loan and lease losses
included $718 thousand related to these loans. The amount of interest received
and recognized on these impaired loans in 1997 was $413 thousand. The average
recorded investment in impaired loans during 1997 was $5.7 million.
Of total gross loans and leases at December 31, 1996, $5.4 million were
considered to be impaired. The allowance for possible loan and lease losses
included $565 thousand related to these loans. The amount of interest received
and recognized on these impaired loans in 1996 was $310 thousand. The average
recorded investment in impaired loans during 1996 was $5.6 million.
Although the level of nonperforming assets will depend on the future economic
environment, as of March 13, 1998, in addition to the assets disclosed in the
above chart, management of the Company has identified approximately $727
thousand in potential problem loans as to which it has serious doubts as to the
ability of the borrowers to comply with the present repayment terms and which
may become nonperforming assets, based on known information about possible
credit problems of the borrower.
-10-
<PAGE>
The following table shows the loans outstanding, actual charge-offs, recoveries
on loans previously charged off, the allowance for possible loan losses and
pertinent ratios during the periods and as of the dates indicated (amounts in
thousands except percentage amounts).
<TABLE>
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans....................... $ 378,732 $284,487 $ 203,231 $ 166,366 $ 159,463
Total loans at end of period........ 433,149 323,366 239,969 172,939 159,819
Allowance for possible loan and lease
losses: Balance--beginning of period $ 4,546 $ 3,845 $ 3,546 $ 3,472 $ 2,742
---------- -------- --------- --------- ---------
Actual charge-offs:
SBA............................... 820 114 595 447 391
Commercial and industrial......... 593 337 350 467 143
Leases............................ 14 84 0 0 0
Real estate....................... 0 0 40 60 190
Installment....................... 63 58 40 101 42
---------- -------- --------- --------- ---------
Total........................... 1,490 593 1,025 1,075 766
------------ -------- --------- --------- ---------
Less recoveries:
SBA............................... 57 87 20 74 14
Commercial and industrial......... 135 182 26 187 52
Leases............................ 6 0 0 0 0
Real estate....................... 0 0 0 0 0
Installment....................... 51 15 8 3 6
--------- -------- --------- --------- ---------
Total........................... 249 284 54 264 72
--------- -------- --------- --------- ---------
Net charge-offs..................... 1,241 309 971 811 694
Allowance applicable to sold loans.. 0 0 0 0 (136)
Provision for possible loan and lease
losses............................ 2,480 1,010 1,270 885 1,560
--------- -------- --------- --------- ---------
Acquisition....................... 864 0 0 0 0
--------- -------- --------- --------- ---------
Balance--end of period.............. $ 6,649 $ 4,546 $ 3,845 $ 3,546 $ 3,472
========= ======== ========= ========= =========
Ratios:
Net loans charged off to average
loans outstanding.............. 0.33% 0.11% 0.48% 0.49% 0.44%
Net loans charged off to total loans
at end of period............... 0.29 0.10 0.41 0.47 0.43
Provision for possible loan and lease
losses to average loans........ 0.65 0.36 0.62 0.53 0.98
Provision for possible loan and lease
losses to total loans at end of period 0.57 0.31 0.53 0.51 0.98
Net loans charged off to end of
period allowance for possible
loan and lease losses.......... 18.7 6.80 25.25 22.87 19.99
Allowance for possible loan and lease
losses to total loans and leases
at end of period 1.54 1.41 1.60 2.10 2.17
</TABLE>
-11-
<PAGE>
The following table sets forth management's historical allocation of the
allowance for possible loan losses by loan category and percentage of loans in
each category. Percentage amounts are the percentage of loans in each category
to total loans at the dates indicated (dollars in thousands).
<TABLE>
December 31,
1997 1996
Amount Percentage Amount Percentage
<S> <C> <C> <C> <C>
SBA loans........................................ $2,205 38% $1,561 45%
Commercial and industrial loans (2).............. 2,449 22 1,720 21
Real estate loans................................ 1,673 37 1,010 30
Consumer loans to individuals(1)................. 322 3 255 4
------ ---- ------ ---
Total........................................ $6,649 100% $4,546 100%
====== === ====== ===
</TABLE>
<TABLE>
December 31,
1995 1994 1993
----------------------- ---------------------- ------------------------
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
SBA loans...................... $1,468 38% $2,372 56% $2,379 55%
Commercial and industrial loans(2) 1,592 41 627 18 541 17
Real estate loans.............. 564 15 366 21 334 22
Consumer loans to
individuals(1)............... 221 6 181 5 218 6
------ ---- ------ --- ------ ---
Total...................... $3,845 100% $3,546 100% $3,472 100%
====== === ====== === ====== ===
</TABLE>
(1) Includes equity lines of credit.
(2) Includes commercial leases.
In allocating the Company's allowance for possible loan losses management has
considered the credit risk in the various loan categories in its portfolio.
Historically, most of the Company's loan losses have been in its commercial
lending area. This area includes local commercial loans and SBA loans. From
inception of its SBA lending program in 1983, the Company has sustained a
relatively low level of losses from these loans, averaging less than 0.5% of
loans outstanding per year. Most of the Company's other commercial loan losses
have been for loans to businesses within the Tahoe basin area or in Reno,
Nevada. It is important to the Company to maintain good relations with local
business concerns and, to this end, it supports small local businesses with
commercial loans. To offset the added risk these loans represent, the Company
charges a higher interest rate. It also attempts to manage risk in this area
through its loan review process.
Because the Company's residential real estate loans consist primarily of
construction lending with prearranged loan takeouts, losses on such loans have
been minimal. The Company has not participated in commercial real estate
development projects.
While every effort has been made to allocate the allowance to specific
categories of loans, management believes that any allocation of the loan loss
allowance into loan categories lends an appearance of exactness which does not
exist, in that the allowance is utilized as a single unallocated allowance
available for losses on all types of loans.
-12-
<PAGE>
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table sets forth the distribution by maturity date of certain of
the Company's loan categories (in thousands) as of December 31, 1997. In
addition, the table shows the distribution between total loans with
predetermined (fixed) interest rates and those with variable (floating) interest
rates (in thousands). Floating rates generally fluctuate with changes in the
prime rate of leading banking institutions.
<TABLE>
Year Ended
December 31, 1997
After One
Within But Within After
One Year(1) Five Years Five Years Total
<S> <C> <C> <C> <C>
Real estate - construction.................. $ 48,881 $ 3,120 $ 11,702 $ 63,703
Commercial, except SBA...................... 47,716 29,611 2,611 79,938
SBA......................................... 6,374 21,140 137,312 164,826
Distribution between fixed and
floating interest rate:
Fixed interest rates..................... 18,110 33,977 44,241 96,328
Floating interest rates.................. 103,677 73,271 159,873 336,821
</TABLE>
(1) Demand loan and overdrafts are shown as "Within One Year"
-13-
<PAGE>
Average Assets, Liabilities and Shareholders' Equity; Interest Income and
Expense
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and share holders' equity, as well as the total
dollar amount of interest income from average interest-earning assets and
resultant yields and the dollar amounts of interest expense and average
interest-bearing liabilities and resultant rates (in thousands except percentage
amounts):
<TABLE>
Year Ended December 31,
1997 1996 1995
--------------------------------- ------------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest Balance Rate Interest
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans(1)........... $ 378,732 10.39% $ 39,357 $284,487 10.72% $ 30,506 $ 203,231 11.60% $ 23,582
Investment securities(2) 48,629 5.98 2,909 28,712 5.62 1,614 26,546 5.29 1,403
Mutual funds....... 2,857 2.35 67 1,342 7.30 98 1,627 8.05 131
Federal funds sold. 33,616 5.34 1,795 18,017 5.21 938 10,534 5.64 594
Other ............. 3,888 4.68 182 2,225 5.08 113 2,097 5.77 121
--------- ----- -------- -------- --------- ---------
Total interest-earning
assets......... 467,722 9.47 44,310 334,783 9.94 33,269 244,035 10.58 25,831
Allowance for possible
loan losses......... (5,737) (4,497) (3,685)
Non-earning assets:
Cash and due from
banks.......... 28,107 19,894 16,444
Premises and equipment,
net............ 11,798 11,224 7,817
Excess Servicing on
SBA loans(3)... 17,621 14,304 15,492
Other assets..... 6,487 5,912 6,091
--------- -------- ---------
Total average asset $ 525,998 $381,620 $ 286,194
========= ======== =========
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
Transaction accounts $ 145,743 2.92 4,259 $102,963 2.54% 2,620 $ 87,600 2.28% $ 1,995
Savings accounts 13,288 2.09 278 13,573 2.09 283 13,409 2.13 286
Certificates of deposit 212,729 5.79 12,322 155,585 5.68 8,832 91,517 5.85 5,352
Convertible debentures 2,547 2.36 60 9,294 8.22 764 10,000 8.50 850
Other liabilities 279 64.52 180 289 (1.38) (4) 376 2.13 8
--------- ------- -------- ------- --------- ----------
Total interest-bearing
liabilities...... 374,586 4.56 17,099 281,704 4.44 12,495 202,902 4.18 8,491
Non-interest-bearing liabilities:
Transaction accounts 97,082 63,638 51,261
Other liabilities 8,797 4,556 2,767
--------- -------- ---------
Total liabilities 480,465 349,898 256,930
Shareholders' equity:
Common stock..... 21,752 11,450 10,799
Retained earnings 23,074 20,399 18,793
Unrealized loss on
securities....... 707 (127) (328)
--------- -------- ---------
Total shareholders'
equity......... 45,533 31,722 29,264
--------- -------- ---------
Total liabilities and
shareholders'
equity......... $ 525,998 $381,620 $ 286,194
========= ------- ======== -------- ========= ----------
Net interest income $27,211 $ 20,774 $ 17,340
======= ======== ==========
Interest income as a
percentage of interest-
earning assets 9.47% 9.94% 10.58%
Interest expense as a
percentage of interest-
earning assets... (3.65) (3.73) (3.48)
----- ---- ----
Net interest margin 5.82% 6.21% 7.10%
==== ==== ====
</TABLE>
(1) Includes nonaccrual loans with an average balance of $5.7 million,
$5.6 million, and $3.4 million for the years ended December 31, 1997, 1996
and 1995, respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
tax-equivalent basis because such securities are not significant.
(3) Represents I/O strips receivable and servicing assets in 1997.
-14-
<PAGE>
Investment Securities & Investments in Mutual Funds
The Company's current investment policy provides for the purchase of U.S.
Treasury securities, obligations of U.S. government agencies, U.S. government
sponsored agencies, corporate bonds, commercial paper, banker's acceptances,
pass-through mortgage-backed securities, adjustable rate mortgage pass-through
securities, collateralized mortgage obligations, asset-backed securities,
municipal general obligation and revenue bonds, mutual funds and certificates of
deposit. The Company's policy requires all corporate bonds, commercial paper,
mortgage-backed securities, collateralized mortgage obligations or municipal
securities be rated "A" or better by any nationally recognized rating agency. If
a local municipality is issuing an unrated bond, the Company may purchase it
after normal credit underwriting procedures are performed.
The Company's investment committee reviews all securities transactions on a
monthly basis and presents a monthly report to the Board of Directors of the
Company covering this review. Under California law, SierraWest Bank may not
invest an amount exceeding 15% of its shareholders' equity in the securities of
any one obligor, subject to certain exceptions (e.g., obligations of the United
States and the State of California). Acceptable securities (i.e., Federal or
state government or any county or municipality securities) may be pledged to
secure public deposits in excess of $100 thousand.
The following table summarizes the amounts and the distribution of the Company's
investment securities (in thousands):
<TABLE>
December 31,
1997 1996 1995
-------------------- -------------------- ---------------------
Book Market Book Market Book Market
Value(1) Value Value(1) Value Value(1) Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 36,606 $ 36,606 $ 19,463 $ 19,462 $ 18,137 $ 18,144
Securities of U.S. government
agencies.................................. 1,485 1,485 1,005 1,005 7,486 7,486
Securities of states and
political subdivisions.................... 9,387 9,387 5,991 5,991 2,608 2,608
Other securities............................ 11,633 11,633 7,422 7,422 112 112
-------- -------- -------- -------- -------- --------
Total..................................... $ 59,111 $ 59,111 $ 33,881 $ 33,880 $ 28,343 $ 28,350
======== ======== ======== ======== ========= ========
</TABLE>
(1) Securities held to maturity are stated at cost, adjusted for
amortization of premium and accretion of discount. Securities
available for sale are recorded at fair value.
In addition the Company invests in mutual funds whose assets are invested
primarily in U.S. government securities. At December 31, 1997 and 1996, mutual
funds with an estimated market value of $0.7 million and $1.3 million have been
classified as available for sale. At these same dates the Company had recorded
an unrealized loss on mutual funds, net of tax, of $47 thousand and $99
thousand. The weighted average maturity of portfolio securities held by the
mutual funds at December 31, 1997 and 1996 was 7.1 and 7.2 years.
-15-
<PAGE>
Maturity of Investment Securities
The following table presents the maturities for investment securities (except
for investments in mutual funds with a carrying value of $733 thousand) as of
December 31, 1997 (dollars in thousands).
<TABLE>
December 31, 1997
Weighted
Book Average Market
Value Yield Value
<S> <C> <C> <C>
U.S. Treasury securities:
Within 1 year................................................................... $ 9,981 5.85% $ 9,981
After 1 year but within 5 years............................................... 26,625 6.16 26,625
--------- ---------
Total U.S. Treasury securities................................................ 36,606 6.08 36,606
--------- ---------
U.S. government agencies:
After 1 year but within 5 years................................................. 1,485 6.52 1,485
Securities of states and political subdivisions(1):
Within 1 year................................................................... 346 3.78 346
After 5 years but within 10 years............................................... 608 4.89 608
Over 10 years................................................................... 8,433 5.24 8,433
--------- ---------
Total securities of states and political subdivisions ...................... 9,387 5.16 9,387
--------- ---------
Mortgage - backed securities:..................................................... 11,633 6.74 11,633
--------- ---------
Total............................................................................. $ 59,111 6.07% $ 59,111
========= =========
</TABLE>
(1) Interest on these tax-exempt obligations has not been tax effected to
include the related tax benefits in calculating the average yield.
Deposits
As of December 31, 1997, the Company had a total of $289.0 million in demand
deposits (including money market and NOW accounts), with an average account
balance of $13,680; $14.0 million in savings deposits for individuals and
corporations, with an average balance of $2,231; and $223.2 million in CDs, of
which $90.6 million were in the form of CDs in denominations greater than $100
thousand. Average CD balances for the year ended December 31, 1995 were 37.5% of
average total deposits. Average CD balances increased to 46.3% of average total
deposits for the year ended December 31, 1996, but decreased to 45.4% of average
total deposits for the year ended December 31, 1997. Deposit accounts at
SierraWest Bank are insured by the FDIC to the maximum amount permitted by law.
As of December 31, 1997, approximately 6% of total deposits were held on behalf
of public entities. Deposits of public entities in excess of amounts insured by
the FDIC are secured by SierraWest Bank by pledging securities. Included in
deposits at December 31, 1997 were certificates of deposit of $1.4 million which
were generated directly through brokers.
In 1992, SierraWest Bank began to make available to its customers money market
investment funds and annuities. Volume has been increasing during recent years;
however income from this source is not significant. The Company does not believe
that placement by customers of funds in these alternative investment sources has
had any overall negative impact on the level of the Banks' deposits.
The Company's business is subject to some seasonal influences. Deposits tend to
decrease during the off- season for tourism in "the Sierra", which is between
March and May and between September and November.
-16-
<PAGE>
The following table indicates the maturity of the Company's CDs of $100 thousand
or more as of December 31, 1997 (dollars in thousands):
December 31, 1997
Percentage
Balance of Total
Three months or less............................. $ 42,050 37.3%
Over three months through six months............. 30,415 27.0
Over six months through twelve months............ 31,527 28.0
Over twelve months............................... 8,635 7.7
--------- ----
Total............................................ $112,627 100.0%
======== =====
Competition from Other Financial Institutions
The Company competes for deposits and loans principally with major commercial
banks, other independent banks, savings and loan associations, savings banks,
thrift and loan associations, credit unions, mortgage companies, insurance
companies and other lending institutions. With respect to deposits, additional
significant competition arises from corporate and governmental debt securities,
as well as money market mutual funds. Several of the nation's largest savings
and loan associations and commercial banks have a significant number of branch
offices in the areas in which the Company conducts operations. Among the
advantages of the larger of these institutions are their ability to make larger
loans, finance extensive advertising campaigns, access international money
markets and generally allocate their investment assets to regions of highest
yield and demand.
The Company ranked 18th in the nation by number of SBA 7(a) loans generated by
banks for the SBA's fiscal year ended September 30, 1996. The SBA has not
published its fiscal 1997 rankings; however the Company believes that its
ranking has not changed significantly from 1996.
The Company's competitive position with respect to deposit-gathering in its
market places is illustrated in the following chart(1) (dollars in thousands):
<TABLE>
Total Deposits Held
# of Company # of Banking Deposits Held by all Banks
County State Branches Offices by Company and offices
<S> <C> <C> <C> <C> <C>
El Dorado California 1 37 $ 27,498 $1,015,301
Nevada California 5 28 $ 187,014 $1,002,004
Placer California 2 66 $ 60,975 $1,939,540
Sacramento California 2 192 $ 96,290 $9,498,879
Carson City Nevada 1 13 $ 31,022 $ 645,780
Washoe Nevada 1 79 $ 107,140 $2,822,519
</TABLE>
A total of 15 financial institutions in Nevada County at June 30, 1997 were
included in the above survey. Of these 15, SierraWest Bank ranked second in
terms of total deposits held. In Placer County, SierraWest Bank ranked tenth out
of twenty-two institutions. In Washoe County, Nevada, SierraWest Bank ranked
seventh out of 12 financial institutions. As disclosed above, SierraWest Bank's
presence in the other counties is not significant.
(1) Based on the annual survey of banking office deposits as of June 30, 1997
conducted by the FDIC. Banking offices include each banking office of commercial
banks, savings institutions, and each U.S. branch of a foreign bank for all FDIC
insured commercial banks, savings institutions, and U.S. branches of foreign
banks.
-17-
<PAGE>
Supervision and Regulation
The Effect of Governmental Policy on Banking
The earnings and growth of SierraWest Bank are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Federal Reserve influences the supply of
money through its open market operations in U.S. Government securities and
adjustments to the discount rates applicable to borrowings by depository
institutions and others. Such actions influence the growth of loans, investments
and deposits and also affect interest rates charged on loans and paid on
deposits. The nature and impact of future changes in such policies on the
business and earnings of SierraWest Bank cannot be predicted.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company is particularly susceptible to
being affected by the enactment of Federal and state legislation which may have
the effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company. See "Recently
Enacted Legislation" herein.
Regulation and Supervision of Bank Holding Companies
Bancorp is a bank holding company subject to the Bank Holding Company Act of
1956, as amended ("BHCA"). Bancorp reports to, registers with, and may be
examined by, the Federal Reserve. The Federal Reserve also has the authority to
examine Bancorp's subsidiary. The costs of any examination by the Federal
Reserve are payable by Bancorp.
The Federal Reserve has significant supervisory and regulatory authority over
Bancorp and its affiliates. The Federal Reserve requires Bancorp to maintain
certain levels of capital. See "--Capital Standards." The Federal Reserve also
has the authority to take enforcement action against any bank holding company
that commits any unsafe or unsound practice, or violates certain laws,
regulations or conditions imposed in writing by the Federal Reserve. See
"--Prompt Corrective Action and Other Enforcement Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of (or, if it
is considered "well-managed" give prior notice to) the Federal Reserve before it
exercises a controlling influence over, or acquires directly or indirectly, more
than 5% of the voting shares or substantially all of the assets of any bank or
bank holding company. Thus, Bancorp is required to obtain the prior approval of
or give prior notice to the Federal Reserve before it acquires, merges or
consolidates with any bank or bank holding company; any company seeking to
acquire, merge or consolidate with Bancorp also would be required to obtain the
approval of or give prior notice to the Federal Reserve.
Bancorp is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. A bank holding company, with the approval of the Federal
Reserve, may engage, or acquire the voting shares of companies engaged, in
activities that the Federal Reserve has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. A
bank holding company must demonstrate that the benefits to the public of the
proposed activity will outweigh the possible adverse effects associated with
such activity.
The Federal Reserve generally prohibits a bank holding company from declaring or
paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
Federal Reserve's policy is that a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition.
Transactions between Bancorp and its subsidiary are subject to a number of other
restrictions. Federal Reserve policies forbid the payment by bank subsidiaries
of management fees which are unreasonable in amount or
-18-
<PAGE>
exceed the fair market value of the services rendered (or, if no market exists,
actual costs plus a reasonable profit). Additionally, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit, sale or lease of property, or
furnishing of services. Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. Bancorp
may only borrow from depository institution subsidiaries if the loan is secured
by marketable obligations with a value of a designated amount in excess of the
loan. Further, Bancorp may not sell a low-quality asset to a depository
institution subsidiary.
Commercial banking organizations, insured depository institutions, and mortgage
bankers are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations. In addition to
substantive penalties and corrective measures that may be required for a
violation of such laws, the Federal banking agencies may take compliance with
such laws into account when regulating and supervising other activi ties. The
Federal Reserve may not approve applications to acquire the voting shares of
another insured depository institution based on incorrect reporting of home
mortgage lending data, and the possibility that applicants may have engaged in
discriminatory treatment of minorities in mortgage lending in violation of the
Equal Credit Opportunity Act.
Bank Regulation and Supervision
As a California state-chartered bank, SierraWest Bank is regulated, supervised
and regularly examined by the California Department of Financial Institutions
("DFI"). Under California law, SierraWest Bank is subject to various
restrictions on, and requirements regarding, its operations and administration
including the maintenance of branch offices and automated teller machines,
capital and reserve requirements, deposits and borrowings, stockholder rights
and duties, and investment and lending activities. SierraWest Bank is not a
member of the Federal Reserve System; SierraWest Bank, however, is subject to
certain regulations of the Federal Reserve including reserve requirements. The
primary Federal regulator of SierraWest Bank is the FDIC.
Capital Standards
The FDIC and other Federal banking agencies have risk based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing its
qualifying capital by its total risk- adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, term preferred stock, term subordinated debt
and certain other instruments with certain characteristics of equity. The
inclusion of elements of Tier 2 capital are subject to certain other
requirements and limitations of the Federal banking agencies. Since December 31,
1992, the Federal banking agencies have required a minimum ratio of qualifying
total capital to risk-adjusted assets and off balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to risk-adjusted assets and off balance sheet
items of 4%.
In addition to the risk-based guidelines, Federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio
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must be at least 100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical purposes, must be at least
4% to 5%. In addition to these uniform risk based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the regulators to improve capital standards to take account of risks
other than credit risk. In June 1996 a joint agency policy statement was issued
by all of the Federal banking agencies to provide guidance on sound practices
for managing interest rate risk. The agencies did not in the policy statement
elect to implement a standardized measure and quantitative capital charge,
though the matter was left open for future implementation. Rather, the policy
statement provided standards for the banking agencies to evaluate the adequacy
and effectiveness of a bank's interest rate risk management and guidance to
bankers for managing interest rate risk. Specifically, effective interest rate
risk management requires that there be (i) effective board and senior management
oversight of the bank's interest rate risk activities, (ii) appropriate policies
and practices in place to control and limit risks, (iii) accurate and timely
identification and measurement of interest rate risk, (iv) an adequate system
for monitoring and reporting risk exposures and (v) appropriate internal
controls for effective risk management.
The following tables present the capital ratios for the Company and SierraWest
Bank, computed in accordance with their applicable regulatory guidelines,
compared to the standards for well-capitalized depository institutions, as of
December 31, 1997 (dollars in thousands).
<TABLE>
The Company
Actual To Be Well Capitalized For Capital
Qualifying Under Prompt Corrective Adequacy
Capital Ratio Action ProvisionsPurposes
<S> <C> <C> <C> <C>
Leverage...................................... $ 51,003 8.9% N/A 4.0%
Tier 1 Risk Based............................. 51,003 11.1 N/A 4.0
Total Risk Based.............................. 56,742 12.4 N/A 8.0
</TABLE>
<TABLE>
SierraWest Bank
Actual To Be Well Capitalized For Capital
Qualifying Under Prompt Corrective Adequacy
Capital Ratio Action ProvisionsPurposes
<S> <C> <C> <C> <C>
Leverage...................................... $ 47,898 8.3% 5.0% 4.0%
Tier 1 Risk Based............................. 47,898 10.4 6.0 4.0
Total Risk Based.............................. 53,656 11.7 10.0 8.0
</TABLE>
Effective in 1997 regulatory reports of condition and income are reported on a
GAAP basis; however regulatory capital ratios are calculated in accordance with
the regulatory agency's capital standards. This can result in significant
differences in the amount of capital reported under GAAP and the amount included
in the regulatory ratios. Future changes in FDIC regulations or practices could
further reduce the amount of capital recognized for purposes of capital
adequacy. Such changes could affect the ability of the Company to grow and could
restrict the amount of profits, if any, available for the payment of dividends.
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<PAGE>
Prompt Corrective Action and Other Enforcement Mechanisms
FDICIA requires each Federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital ratios.
The most recent regulations from the Federal banking agencies defined the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized"
Total risk-based capital of at least 10%; Tier 1 risk-based capital of at least
6%; and Leverage ratio of at least 5%.
"Adequately capitalized" Total risk-based capital of at least 8%; Tier 1
risk-based capital of at least 4%; and Leverage ratio of at least 4%.
"Undercapitalized" Total risk-based capital less than 8%; Tier 1 risk-based
capital less than 4%; or Leverage ratio less than 4%.
"Significantly undercapitalized" Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 3%; or Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate Federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The Federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be closely
monitored by the appropriate Federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate Federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the Federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and
required Federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions, the
use of brokered deposits and the aggregate extensions of credit by
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<PAGE>
a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
In addition to the statutory limitations, FDICIA requires the Federal banking
agencies to prescribe, by regulation, standards for all insured depository
institutions for such things as classified loans and asset growth. The Riegle
Community Development and Regulatory Improvement Act of 1994 amended FDICIA to
allow the Federal banking regulators to implement these standards by either
regulation or guidelines. See "Recently Enacted Legislation."
Federal regulations prescribe uniform guidelines for real estate lending. The
regulations require insured depository institutions to adopt written policies
establishing standards, consistent with such guidelines, for extensions of
credit secured by real estate. The policies must address loan portfolio
management, underwriting standards and loan to value limits that do not exceed
the supervisory limits prescribed by the regulations.
In July 1995, the federal banking agencies published Interagency Guidelines
Establishing Standards for Safety and Soundness. By adopting the standards as
guidelines, the agencies retained the authority to require an institution to
submit to an acceptable compliance plan as well as the flexibility to pursue
other more appropriate or effective courses of action given the specific
circumstances and severity of an institution's noncompliance with one or more
standards.
The federal banking agencies have issued an interagency policy statement that,
among other things, establishes certain benchmark ratios of loan loss reserves
to certain classified assets. The benchmark set forth by such policy statement
is the sum of (i) 100% of assets classified loss; (ii) 50% of assets classified
doubtful; (iii) 15% of assets classified substandard; and (iv) estimated credit
losses on other assets over the upcoming 12 months. This amount is neither a
"floor" nor a "safe harbor" level for an institution's allowance for loan
losses.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
In addition to the restrictions imposed under Federal law, banks chartered under
California law generally may only pay cash dividends to the extent such payments
do not exceed the lesser of retained earnings of the bank or the bank's net
income for its last three fiscal years (less any distributions to shareholders
during such period). In the event a bank desires to pay cash dividends in excess
of such amount, the bank may pay a cash dividend with the prior approval of the
DFI in an amount not exceeding the greatest of the bank's retained earnings, the
bank's net income for its last fiscal year, or the bank's net income for its
current fiscal year.
State and federal regulators also have authority to prohibit a depository
institution from engaging in business practices which are considered to be
unsafe or unsound, possibly including payment of dividends or other payments
under certain circumstances even if such payments are not expressly prohibited
by statute.
Community Reinvestment Act and Fair Lending Developments
SierraWest Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In March 1994, the Federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove
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<PAGE>
discrimination: overt evidence of discrimination, evidence of disparate
treatment, and evidence of disparate impact.
In 1996, new compliance and examination guidelines for the CRA were promulgated
by each of the federal banking regulatory agencies, fully replacing the prior
rules and regulatory expectations with new ones ostensibly more performance
based than before to be fully phased in as of July 1, 1997. The guidelines
provide for streamlined examinations of smaller institutions.
In January 1998, the FRB revised its regulations under the Equal Credit
Opportunity Act ("ECOA") to create a legal privilege for information developed
by creditors as a result of "self-tests" they voluntarily conduct to determine
the level of their compliance with ECOA. The privilege protects against use of
such information by a government agency for examination purposes or by private
litigants in any proceeding alleging a violation of the ECOA. The privilege
applies only if the institution takes appropriate corrective action to address
possible violations that are discovered in the test.
Premiums for Deposit Insurance and Assessments for Examinations
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is
authorized to borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository institutions that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. See
Recently Enacted Legislation - 1996 Act. Effective November 14, 1995, the new
assessment rate schedule for deposit premiums ranges from $0 per $100 of
deposits to $.27 per $100 of deposits applicable to BIF members.
FDICIA requires all insured depository institutions to undergo a full-scope,
on-site examination by their primary Federal banking agency at least once every
12 months. A special rule allows for examination of certain small well
capitalized and well managed institutions every 18 months. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate Federal banking agency against each institution or
affiliate as it deems necessary or appropriate.
Recently Enacted Legislation
On September 29, 1994, the President signed into law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"),
which has eliminated many of the current restrictions to interstate banking and
branching. The Interstate Banking Act permits full nationwide interstate banking
to adequately capitalized and adequately managed bank holding companies
beginning September 29, 1995 without regard to whether such transaction is
expressly prohibited under the laws of any state. The Interstate Banking Act's
branching provisions permit full nationwide interstate bank merger transactions
to adequately capitalized and adequately managed banks beginning June 1, 1997.
However, states retain the right to completely opt out of interstate bank
mergers and to continue to require that out-of-state banks comply with the
states' rules governing entry.
The states that opt out must have enacted a law after September 29, 1994 and
before June 1, 1997 that (i) applies equally to all out-of-state banks and (ii)
expressly prohibits merger transactions with out-of-state banks. States which
opt out of allowing interstate bank merger transactions will preclude the
mergers of banks in the opting out state with banks located in other states. In
addition, banks located in states that opt out are not permitted to have
interstate branches. Only Texas has opted out of interstate banking.
The Riegle-Neal Amendments Act of 1997 amends federal law to provide that
branches of state banks that operate in other states will be governed in most
cases by the laws of the home state, rather than the laws of the host state.
Exceptions are that a host state may apply its own laws of community
reinvestment, consumer protection, fair lending and interstate branching. Host
states cannot supplement or restrict powers granted by a bank's home state. The
amendment will assure state chartered banks with interstate branches uniform
treatment in most areas of their operation.
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<PAGE>
The laws governing interstate banking and interstate bank mergers provide that
transactions, which result in the bank holding company or bank controlling or
holding in excess of ten percent of the total deposits nationwide or thirty
percent of the total deposits statewide, will not be permitted except under
certain specified conditions. However, any state may waive the thirty percent
provision for such state. In addition, a state may impose a cap of less than
thirty percent of the total amount of deposits held by a bank holding company or
bank provided such cap is not discriminatory to out-of-state bank holding
companies or banks.
In September 1995, Governor Pete Wilson signed Assembly Bill 1482 (known as the
Caldera, Weggeland, and Killea California Interstate Banking and Branching Act
of 1995 and referred to herein as the "CIBBA") which allows for early interstate
branching in California. Under the federally enacted Interstate Banking Act,
discussed above and in more detail below, individual states could "opt-out" of
the federal law that would allow banks on an interstate basis to engage in
interstate branching by merging out-of-state banks with host state banks after
June 1, 1997.
Section 3824 of the California Financial Code ("Section 3824") as added by CIBBA
provides for the election of California to "opt-in" under the Interstate Banking
Act allowing interstate bank merger transactions prior to July 1, 1997 of an
out-of-state bank with a California bank that has been in existence for at least
five years. California banks are therefore permitted to merge with out-of-state
banks where the states of such out-of-state banks have not "opted out" under the
Interstate Banking Act. The five year age limitation is not required when the
California bank is in danger of failing or in certain other emergency
situations.
Under the Interstate Banking Act, California may also allow interstate branching
through the acquisition of a branch in California without the acquisition of an
entire California bank. Section 3824 provides an express prohibition against
interstate branching through the acquisition of a branch in California without
the acquisition of the entire California bank. The Interstate Banking Act also
has a provision allowing states to "opt-in" with respect to permitting
interstate branching through the establishment of de novo or new branches by
out-of-state banks. Section 3824 provides that California expressly prohibits
interstate branching through the establishment of de novo branches of
out-of-state banks in California, or in other words, California did not "opt-in"
this aspect of the Interstate Banking Act. CIBBA also amends the California
Financial Code to include agency provisions to allow California banks to
establish affiliated insured depository institution agencies out of state as
allowed under the Interstate Banking Act.
Other provisions of CIBBA amend the intrastate branching laws, govern the use of
shared ATM's, allow the repurchase of stock with the prior written consent of
the Superintendent, and amend intrastate branch acquisition and bank merger
laws. Another banking bill enacted in California in 1995 was Senate Bill 855
(known as the State Bank Parity Act and is referred to herein as the "SBPA").
SBPA went into effect on January 1, 1996, and its purpose is to allow a
California state bank to be on a level playing field with a national bank by the
elimination of certain disparities and allowing the California Superintendent of
Banks authority to implement certain changes in California banking law which are
parallel to changes in national banking law such as closer conformance of
California's version of Regulation O to the FRB's version of Regulation O.
The Economic Growth and Regulatory Paperwork Reduction Act (the "1996 Act") as
part of the Omnibus Appropriations Bill was enacted on September 30, 1996 and
includes many banking related provisions. The most important banking provision
is the recapitalization of the Savings Association Insurance Fund ("SAIF"). The
1996 Act provides for a one time assessment of approximately 65 basis points per
$100 of deposits of SAIF insured deposits including Oakar deposits payable on
November 30, 1996. For the years 1997 through 1999 the banking industry will
assist in the payment of interest on FICO bonds that were issued to help pay for
the clean up of the savings and loan industry. Banks will pay approximately 1.3
cents per $100 of deposits for this special assessment, and after the year 2000,
banks will pay approximately 2.4 cents per $100 of deposits until the FICO bonds
mature in 2017. There is a three year moratorium on conversions of SAIF deposits
to BIF deposits. The 1996 Act also has certain regulatory relief provisions for
the banking industry. Lender liability under the Superfund is eliminated for
lenders who foreclose on property that is contaminated provided that the lenders
were not involved with the management of the entity that contributed to the
contamination. There is a five year sunset provision for the elimination of
civil liability under the Truth in Savings Act. The FRB and Department of
Housing and Urban Development are to develop a single format for Real Estate
Settlement Procedures Act and Truth in Lending Act ("TILA") disclosures. TILA
disclosures for adjustable mortgage loans are to be simplified. Significant
revisions are made to the Fair Credit Reporting Act ("FCRA") including requiring
that entities which provide information to credit bureaus conduct an
investigation if a consumer claims the information
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<PAGE>
to be in error. Regulatory agencies may not examine for FCRA compliance unless
there is a consumer complaint investigation that reveals a violation or where
the agency otherwise finds a violation. In the area of the Equal Credit
Opportunity Act, banks that self-test for compliance with fair lending laws will
be protected from the results of the test provided that appropriate corrective
action is taken when violations are found.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board adopted SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 also requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 also requires descriptive information about the way that
the operating segments were determined, the products and services provided by
the operating segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment amounts from period to
period. Both statements are effective for fiscal years beginning after December
15, 1997. Adoption of SFAS No. 130 and No. 131 will not impact the Company's
financial position, results of operations or cash flows.
Employees
As of March 13, 1998, the Company employed 277 persons (225 full-time and 52
part-time). The Company's employees are not represented by a union or covered by
a collective bargaining agreement and management believes that, in general, its
employee relations are good.
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ITEM 2. PROPERTIES
The Company currently maintains an administrative facility in Truckee,
California which is utilized by Bancorp and SierraWest Bank. During 1997, the
Company sold and leased back its real property in Carson City, Nevada. The
Company maintains twelve branches, ten stand-alone loan production offices, and
one remote off-site ATM machine. All branches and loan production offices are
leased to the Company except for the administrative facility and the Reno branch
which are owned by the Company. The Company believes that it has adequate space
within its current facilities to provide for expansion and growth in the near
future.
ITEM 3. LEGAL PROCEEDINGS
During 1987, SierraWest Bank ("the Bank") took title, through foreclosure, of a
property located in Placer County which subsequent to the Bank's sale of the
property was determined to be contaminated with a form of hydrocarbons. At the
time it owned the property, the Bank became aware of and investigated the status
of certain underground tanks that had existed on the property. The Bank hired a
consultant to study the tanks and properly seal them. Several years later, and
after resale of the property, contamination was observed in the area of at least
one of the buried tanks and along an adjoining riverbank of the Yuba River. The
Bank, at the time of resale of the property, was not aware of this contamination
adjacent to the tanks but was aware of the existence of the tanks and disclosed
this to its purchaser.
A formal plan of remediation has not been approved by the County of Placer or
the State Regional Water Quality Board but is being finalized by an independent
consultant retained for this purpose. As a result of the discovery of the
contamination, two civil lawsuits were instituted against the Bank and other
prior owners by the current owner of the property, Rainbow Holding Company, who
is also the Bank's borrower. One of the actions, the state court matter, was
dismissed by agreement of the parties. The other matter, filed in the summer of
1995 in the U.S. District Court, Eastern District of California, is ongoing,
with mediation ongoing before a retired Superior Court Judge.
The Bank's external and internal counsel on this matter believe that the Bank's
share of the cost of remediation and the costs of defense will not be material
to the Bank's or the Company's performance and will be within existing reserves
established by the Bank for this matter. It is also expected that clean-up of
the property will commence during 1998 at the conclusion of mediation and a
raising of sufficient funds.
In addition, the Company is subject to some minor pending and threatened legal
actions which arise out of the normal course of business and, in the opinion of
Management and the Company's General Counsel, the disposition of these claims
currently pending will not have a material adverse affect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote of
security holders through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK
On July 16, 1991 Bancorp's Common Stock commenced quotation on Nasdaq under the
symbol "STBS". Effective with the change in the Bancorp's name during 1996 to
SierraWest Bancorp, this symbol changed to "SWBS". The following table sets
forth the high and low sales prices of the Bancorp's stock as reported on Nasdaq
for the periods indicated.
High Low
1996
First Quarter.............................. 13.13 10.63
Second Quarter............................. 15.38 12.50
Third Quarter.............................. 15.00 12.88
Fourth Quarter............................. 15.75 14.13
1997
First Quarter.............................. 19.63 15.38
Second Quarter............................. 21.13 17.50
Third Quarter.............................. 25.75 19.75
Fourth Quarter............................. 36.00 24.75
1998
First Quarter (through March 13, 1998) 37.75 30.00
The above quotes prior to August 20, 1997, have not been restated to give effect
for the 5% stock dividend paid on that date.
At March 13, 1998, there were 959 shareholders of record, additionally
management believes there are approximately 1,800 beneficial holders of its
Common Stock. On March 13, 1998, the closing sales price of Bancorp's common
stock on Nasdaq was $36.875.
Bancorp paid cash dividends, as adjusted for the 5% stock dividend, of $0.31 per
share in 1997 and $0.29 per share in 1996. On February 26, 1998 the Bancorp's
Board of Directors declared a dividend at $0.20 per share, payable on March 30,
1998. During 1998, Bancorp's Board of Directors will continue its policy of
reviewing dividend payments on a semi-annual basis.
During the first six months of 1997, $8.5 million of the Company's 8 1/2 %
convertible debentures were converted into 852 thousand shares of common stock.
This represented the balance of debentures outstanding.
On July 24, 1997, the Company's Board of Directors declared a 5% stock dividend
payable to shareholders of record on August 20, 1997. The dividend was paid
August 29, 1997.
There are regulatory limitations on cash dividends that may be paid by Bancorp,
as well as limitations on cash dividends that may be paid by the Bank, which
could, in turn, limit Bancorp's ability to pay dividends. Under Federal law and
applicable Federal regulations, capital distributions would be prohibited, with
limited exceptions, if a bank were categorized as "undercapitalized." Further,
the FDIC has the authority to prohibit the payment of dividends by SierraWest
Bank if it finds that such payment would constitute an unsafe or unsound
practice. See "Supervision and Regulation--Bank Regulation and Supervision."
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for the
Company as of and for each of the five years in the period ended December 31,
1997. The statements of operations data and statements of financial condition
data for each of the five years in the period ended December 31, 1997 are
derived from the consolidated financial statements of the Company and the notes
thereto. The information below is qualified in its entirety by the detailed
information included elsewhere herein and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein. Average assets and equity are computed as the
average of daily balances (dollars in thousands, except per share amounts).
<TABLE>
At or for the Year Ended
December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Total interest income.................................. $ 44,310 $ 33,269 $ 25,831 $ 19,657 $ 17,246
Total interest expense................................. 17,099 12,495 8,491 5,597 4,503
---------- --------- --------- -------- ---------
Net interest income.................................... 27,211 20,774 17,340 14,060 12,743
Provision for possible loan and lease losses........... 2,480 1,010 1,270 885 1,560
---------- --------- --------- -------- ---------
Net interest income after provision for possible
loan and lease losses................................ 24,731 19,764 16,070 13,175 11,183
Total non-interest income.............................. 11,766 7,338 7,969 9,177 10,214
Total non-interest expense............................. 24,281 21,697 20,944 17,486 17,023
Provision for income taxes............................. 4,707 2,077 1,179 1,863 1,670
---------- --------- --------- -------- ---------
Net income............................................. $ 7,509 $ 3,328 $ 1,916 $ 3,003 $ 2,704
========== ========= ========= ======== =========
Statements of Financial Condition Data
Total assets........................................... $ 589,755 $ 447,889 $ 337,518 $259,975 $ 250,065
Loans and leases, net(1)............................... 426,500 318,820 236,124 169,393 156,347
Allowance for possible loan and lease losses........... 6,649 4,546 3,845 3,546 3,472
Total deposits......................................... 526,269 399,651 293,154 218,876 220,768
Convertible debentures................................. 0 8,520 10,000 10,000 250
Shareholders' equity................................... 53,630 33,916 29,833 28,163 25,645
Per Share Data(2)
Book value............................................. $ 13.08 $ 11.66 $ 10.96 $ 10.24 $ 9.43
Net income:
Basic................................................ 2.03 1.18 0.70 1.10 0.99
Diluted.............................................. 1.82 0.96 0.63 0.91 0.98
Cash dividends declared................................ 0.31 0.29 0.23 0 0
Shares used to compute net income per share:
Basic................................................ 3,693 2,809 2,728 2,728 2,720
Diluted.............................................. 4,155 3,920 3,862 3,785 2,783
Dividend payout ratio:
Basic................................................ 15.3% 24.6% 32.9% 0.0% 0.0%
Diluted.............................................. 17.0 30.2 36.5 0.0 0.0
Selected Ratios
Return on average assets............................... 1.4% 0.9% 0.7% 1.2% 1.2%
Return on average shareholders' equity................. 16.5 10.5 6.5 11.2 11.1
Net interest margin(3)................................. 5.8 6.2 7.1 6.5 6.7
Average shareholders' equity to average assets......... 8.7 8.3 10.2 10.4 10.4
</TABLE>
-28-
<PAGE>
<TABLE>
At or for the Year Ended
December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios
Allowance for possible loan and lease losses
to total loans and leases.............................. 1.5% 1.4% 1.6% 2.1% 2.2%
Allowance for possible loan and lease
losses to nonaccrual loans............................. 111.1% 84.8 70.2 142.9 120.9
Net charge-offs to average loans outstanding.............. 0.3 0.1 0.5 0.5 0.4
Nonaccrual and restructured performing loans to total loans 1.5 1.7 2.3 1.5 1.9
Nonperforming assets to total assets...................... 1.3 1.3 1.8 1.4 1.6
</TABLE>
(1) The term "Loans and leases, net" means total loans, including loans
held for sale, less the allowance for possible loan and lease losses.
(2) All per share data has been adjusted to reflect stock dividend and
stock splits and has been restated under the guidelines of SFAS 128.
See "Market for the Bancorp's Common Stock." Book value per share is
calculated as total shareholders' equity divided by the number of
shares outstanding at the end of the period.
(3) Ratio of net interest income to total average earning assets.
-29-
<PAGE>
Selected Quarterly Financial Information
The following table sets forth the Company's unaudited data regarding operations
for each quarter of 1997 and 1996. This information, in the opinion of
management, includes all adjustments (which are of a normal recurring nature)
necessary to state fairly the information therein. The operating results for any
quarter are not necessarily indicative of results for any future period (amounts
in thousands except per share data).
<TABLE>
Quarter
First Second Third Fourth
1997
<S> <C> <C> <C> <C>
Interest income.................................... $ 9,692 $ 10,564 $ 11,876 $ 12,178
Interest expense................................... 3,767 4,069 4,634 4,629
-------- --------- --------- ---------
Net interest income................................ 5,925 6,495 7,242 7,549
Provision for possible loan and lease losses....... 450 950 540 540
-------- --------- --------- ---------
Net interest income after provision for possible
loan and lease losses............................ 5,475 5,545 6,702 7,009
Total non-interest income.......................... 1,880 4,644 2,581 2,661
Total non-interest expense......................... 5,475 6,622 6,042 6,142
-------- --------- --------- ---------
Income before provision for income taxes........... 1,880 3,567 3,241 3,528
Provision for income taxes......................... 713 1,390 1,245 1,359
-------- --------- --------- ---------
Net income......................................... $ 1,167 $ 2,177 $ 1,996 $ 2,169
======== ========= ========= =========
Basic earnings per share(1)........................ $ 0.38 $ 0.62 $ 0.50 $ 0.53
Diluted earnings per share(1)...................... 0.31 0.54 0.47 0.50
1996
Interest income.................................... $ 7,426 $ 7,803 $ 8,714 $ 9,326
Interest expense................................... 2,748 2,889 3,275 3,583
-------- --------- --------- ---------
Net interest income................................ 4,678 4,914 5,439 5,743
Provision for possible loan and lease losses..... 510 150 250 100
-------- --------- --------- ---------
Net interest income after provision for possible
loan and lease losses............................ 4,168 4,764 5,189 5,643
Total non-interest income........................ 1,666 1,755 1,825 2,092
Total non-interest expense......................... 4,910 5,920 5,472 5,395
-------- --------- --------- ---------
Income before provision for income taxes........... 924 599 1,542 2,340
Provision for income taxes......................... 357 211 602 907
-------- --------- --------- ---------
Net income......................................... $ 567 $ 388 $ 940 $ 1,433
======== ========= ========= =========
Basic earnings per share(1)........................ $ 0.21 $ 0.14 $ 0.33 $ 0.50
Diluted earnings per share(1)...................... 0.17 0.13 0.27 0.39
</TABLE>
(1) All per share data has been adjusted to reflect stock dividend and stock
splits and has been restated under the guidelines of SFAS 128.
-30-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations For the Years Ended December 31, 1997, 1996 and 1995
The Company derives or has derived income from four principal areas of business:
(1) net interest income, which is the difference between the interest income the
Company receives on interest-bearing loans and investments and the interest
expense it pays on interest-bearing liabilities such as deposits and borrowings;
(2) the origination and sale of SBA loans including the securitization during
1997 of $51 million in unguaranteed portions of SBA loans; (3) servicing fee
income and interest only strip income which results from the ongoing servicing
of loans sold by the Company and other loans pursuant to purchased servicing
rights; and (4) service charges and fees on deposit accounts.
Net income for the year ended December 31, 1997 increased 126%, from $3.3
million during 1996 to $7.5 million during 1997. This increase resulted from a
31% increase in net interest income and from a 60% increase in non-interest
income. Partially offsetting the increase in income was an increase of 12% in
non-interest expense and an increase of 146% in the provision for possible loan
and lease losses.
The following table summarizes the operating results for the years ended
December 31, 1997, 1996, and 1995 (amounts in thousands except percentage
amounts):
<TABLE>
December 31, 1997 over 1996 1996 over 1995
------------ -------------- --------------
1997 1996 1995 Amount Percentage(1) Amount Percentage(1)
---- ---- ---- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income......... $ 44,310 $33,269 $25,831 $ 11,041 33.2% $ 7,438 28.8%
Total interest expense........ 17,099 12,495 8,491 4,604 36.8 4,004 47.2
-------- ------- ------- -------- --------
Net interest income........... 27,211 20,774 17,340 6,437 31.0 3,434 19.8
Provision for possible
loan and lease losses....... 2,480 1,010 1,270 1,470 145.5 (260) (20.5)
-------- ------- ------- -------- --------
Net interest income after
provision for possible
loan and lease losses...... 24,731 19,764 16,070 4,967 25.1 3,694 23.0
Total non-interest income..... 11,766 7,338 7,969 4,428 60.3 (631) (7.9)
Total non-interest expense.... 24,281 21,697 20,944 2,584 11.9 753 3.6
-------- ------- ------- -------- --------
Income before provision for taxes 12,216 5,405 3,095 6,811 126.0 2,310 74.6
Provision for income taxes.... 4,707 2,077 1,179 2,630 126.6 898 76.2
-------- ------- ------- -------- --------
Net Income $ 7,509 $ 3,328 $ 1,916 $ 4,181 125.6 $ 1,412 73.7
======== ======= ======= ======== ========
</TABLE>
(1) Increase (decrease) over previous year's amount.
Net Interest Income. Net interest income is influenced by a number of factors
such as the volume and distribu tion of interest earning assets, the rate
charged on loans for interest and fees, the rate earned on investments and
federal funds sold and the rate paid for deposits and other liabilities.
-31-
<PAGE>
The following table sets forth (in thousands), for the periods indicated, a
summary of the changes in interest income and interest expense resulting from
changes in volume and from changes in rates. Income from tax-exempt securities
has not been presented on a tax-equivalent basis as it is not significant. For
purposes of this table, the change not solely attributable to volume or rate has
been allocated to change due to rate.
<TABLE>
1997 over 1996 1996 over 1995
-------------- --------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income:
Loans....................................... $ 10,106 $ (1,255) $ 8,851 $ 9,429 $ (2,505) $ 6,924
Mutual funds................................ 111 (142) (31) (23) (10) (33)
Taxable securities.......................... 935 176 1,111 (57) 99 42
Tax-exempt securities....................... 179 5 184 139 30 169
Federal funds sold.......................... 812 45 857 422 (78) 344
Other....................................... 7 62 69 7 (15) (8)
--------- --------- --------- --------- --------- ---------
Total....................................... 12,150 (1,109) 11,041 9,917 (2,479) 7,438
--------- --------- --------- --------- --------- ---------
Increase (Decrease) in Interest Expense:
Deposits:
Savings deposits.......................... (5) 0 (5) 3 (6) (3)
Transaction accounts...................... 1,089 550 1,639 350 275 625
Time deposits............................. 3,244 246 3,490 3,747 (267) 3,480
--------- --------- --------- --------- --------- ---------
Total....................................... 4,328 796 5,124 4,100 2 4,102
--------- --------- --------- --------- --------- ---------
Other ...................................... 0 184 184 (2) (10) (12)
Convertible debentures...................... (555) (149) (704) (60) (26) (86)
--------- --------- --------- --------- --------- ---------
Total....................................... 3,773 831 4,604 4,038 (34) 4,004
--------- --------- --------- --------- --------- ---------
Increase in
net interest income....................... $ 8,377 $ (1,940) $ 6,437 $ 5,879 $ (2,445) $ 3,434
========= ========= ========= ========= ========= =========
</TABLE>
As disclosed in the foregoing table, the Company's net interest income in 1997
and 1996 increased over preceding years. In both 1997 and 1996 volume increases
were primarily related to an increase in the asset size of the Company. During
1997 and 1996, total daily average assets increased by 37.8% and 33.3%,
respectively. During these same periods, the volume component of the increase in
net interest income was 40.3% and 33.9%, respectively.
During 1996 and 1997, the rate of increase in the volume component of the
increase in net interest income exceeded the increase in average daily assets,
primarily as a result of an increase in the percentage of average interest
earning assets to average total assets from 85.3% in 1995 to 87.7% during 1996
and 88.9% in 1997. This increase in average interest earning assets was
partially offset in 1996 by a decrease in average non-interest-bearing deposits
as a percentage of average total deposits from 21.0% in 1995 to 19.0% in 1996.
During 1997 this percent increased to 20.7%.
During 1995, 1996 and in 1997, the Company found itself in the position of
funding much of its growth through the use of interest-bearing deposits. The
Company charges interest rates and fees in accordance with general economic
conditions, capital and liquidity constraints, and desired net interest margin
levels.
Approximately 69% of the Company's loan portfolio consists of variable rate
loans tied to the prime rate for leading banks and as used by the Company
("prime rate"). An additional 9% are variable rates tied to other indexes. The
prime rate is influenced by forces outside the Company's control. Because the
Company has a lower volume of variable rate deposits than variable rate loans,
the Company would expect to incur a reduction in its net interest margin when
interest rates fall, and when interest rates rise, the reverse would be expected
to apply.
-32-
<PAGE>
During the first quarter of 1996 the Company moved to mitigate the effect of the
change in the prime rate on its net interest income by entering into a three
year $20 million notional amount interest rate swap agreement with a major bank.
Under this agreement the other bank pays a fixed rate of 8.17% and receives from
the Company the prime rate. If prime increases by 1%, the Company would pay the
other bank $216 thousand on an annual basis. Conversely, if prime decreases by
1%, the other bank would pay the Company $184 thousand on an annual basis. At
the current prime rate of 8.5%, the Company will pay the other bank $66 thousand
annually. Any payments made or received by the Company under the terms of the
agreement are more than offset by the corresponding increase or decrease in
interest on its variable rate loans. This transaction has a similar effect to
that of converting approximately 6% of the Company's variable rate loans to a
fixed rate.
The average prime rate for 1997 was 8.44% compared to 8.27% in 1996. This
increase equates to a positive price variance in 1997 of $0.5 million compared
to an actual negative price variance of $1.3 million. The difference includes a
decrease in the contribution of loan fees. As a percentage of average loans,
loan fees represented 0.27% in 1997, 0.42% in 1996 and 0.55% in 1995. In
addition to the decrease in prime and the decline in loan fees as a percentage
of average loans, during 1996 and 1997 the Company has experienced increased
competition in the pricing of its loans.
The Company has been aggressive in growing its loan portfolio and has
encountered price competition in its service areas, particularly the Sacramento
and Reno markets. There is strong competition in these markets for larger,
higher quality loans, and the decrease in loan yields reflects this.
In 1996, the average prime rate was 8.27% compared to 8.83% for 1995. This 1996
decrease equated to a negative price variance in 1996 of $1.3 million compared
to an actual negative price variance of $2.5 million. The difference includes a
decrease in the contribution of loan fees, and increased competitive pressures.
The positive volume variance in federal funds sold during 1997 and 1996 resulted
from the Company's increase in liquid assets as its overall size increased.
During 1997 the Company also experienced several months when it held a large
amount of federal funds sold related to the cash infusion from its June, 1997
securitization. Those funds were used to support loan growth and lessen the
Company's reliance on out-of-area C.D.'s. In addition, a higher level of federal
funds sold was desired given the increase in loan funding levels.
The 1997 and 1996 rate variances in federal funds sold are primarily attributed
to the interest rate changes during these periods.
During 1996 and 1997 the Company increased its holding of guaranteed portions of
SBA loans. These loans, which can be sold in relatively short periods of time,
provide an available source of additional liquidity. During 1996 and 1997 the
Company has decreased its reliance on short-term U.S. securities in funding its
liquidity needs while increasing its holdings of longer term tax-exempt
securities. These tax-exempt securities provide an attractive investment
alternative given the current interest rate environment and the increase in the
average maturity of the investment portfolio is consistent with the additional
sources of short-term liquidity.
The Company has increased its U.S. Government security portfolio during 1997
primarily to meet its requirement for the pledging of these and similar
securities to support public deposits. Average public deposits increased from
$13.8 million in 1996 to $26.8 million in 1997.
The positive rate variance in 1996 and 1997 in taxable investment securities
includes the effect of the introduction of mortgage-backed securities into the
Company's investment portfolio and market interest rate conditions. The weighted
average original maturity of the tax-exempt portfolio has increased from 12.1
years at December 31, 1995 to 14.0 years at December 31, 1996. The positive rate
variance in tax-exempt securities primarily relates to this increase.
Mutual funds consist of investments in mutual funds whose assets are invested
primarily in U.S. government securities. The increase in volume and decline in
rate during 1997 relates to the acquisition of a mutual fund purchased primarily
for tax planning purchases. This fund was sold during December of 1997 resulting
in a gain of $87 thousand, however no interest was received from the fund during
the time the Company held this investment.
-33-
<PAGE>
The average balance and average rate paid on interest bearing transaction
accounts during 1997 and 1996 are as follows:
Year Ended December 31,
1997 1996
------------------------- --------------------
Money Money
NOW Market NOW Market
Average Balance............. $ 54,631 $91,112 $43,660 $59,303
Rate paid................... 1.41% 3.83% 1.23% 3.51%
The rates paid on the Company's deposits are primarily driven by market
conditions in its service areas. In 1995 the average rate paid on time deposits
declined to 5.68% from 5.85% during 1995, but the rate paid on money market
accounts increased. This increase in money market rates includes the effect of
tiering money market accounts at the Company's Nevada operations and general
market conditions in the Company's service area.
Average interest bearing transaction accounts increased by $42.8 million in 1997
and $15.4 million in 1996. During 1995 the Company added four new branches
located in Carson City, Nevada, and in Sacramento, South Grass Valley and
Auburn, California. Average interest bearing transaction accounts increased in
1997 by $22.2 million at these branches and by $14.9 million during 1996.
In addition to the branches opened in 1995 the Company acquired Mercantile Bank
located in downtown Sacramento, California, in June of 1997 and moved to an
enlarged Reno, Nevada facility during 1996. The former Mercantile facility added
average interest bearing transaction accounts totaling $8.4 million while the
Reno facility grew its average interest bearing transaction accounts by $12
million.
Average time deposits increased by $57.1 million during 1997. Of this increase
$33.3 million was generated at the four branches opened in 1995, $7.3 at the new
downtown Sacramento facility and $7.6 million at the Reno facility. Average
out-of-area CD's decreased by $4.7 million. In 1997 the average rate paid on
time deposits increased to 5.79%.
The Company relied on time deposits to fund most of its growth during 1996.
Average time deposits increased by $64.1 million during 1996. Of this increase,
$23.0 million was generated at the four new branches and average out-of-area
CD's increased by $8.6 million. In addition, average time deposits held by
public agencies increased by $8.3 million. Out-of-area CD's totaled $45.8
million at December 31, 1996 or 11.5% of total deposits at that same date. The
rate variances in time deposits for 1996 and 1997 primarily relate to market
conditions.
The rate variance in other interest bearing liabilities during 1997 includes the
effect of the Company's $20 million interest rate swap agreement and the
interest component of payments made under the Company's Salary Continuation and
Director Emeritus plans.
The negative rate and volume variances during 1997 and 1996 in convertible
debentures relate to the conversion into common stock. When presented for
conversion any accrued but unpaid interest on debentures was forfeited by the
debenture holder.
During 1997 the Company's outstanding convertible debentures were converted into
Company stock. During the period from January 1, 1997 to May 4, 1997, $4.85
million of the Company's 8 1/2% convertible debentures were converted into 485.1
thousand shares of common stock. On May 5, 1997, the Company announced it would
redeem the remaining $3.67 million in debentures effective June 30, 1997. These
debentures were converted into 366.9 thousand shares of Company stock. During
1996 $1.48 million in debentures were converted into common stock.
Provision for Possible Loan and Lease Losses. At December 31, 1997,
approximately 74% of the Company's loan portfolio was held in loans
collateralized primarily by real estate. Particular attention is given by the
Company to factors affecting the real estate markets. The primary risk elements
considered by management with respect to commercial real estate loans are
changes in real estate values in the Company's market area and
-34-
<PAGE>
general economic conditions. The primary risks associated with other commercial
loans are the financial condition of the borrower, general economic conditions
in the Company's market area, the sufficiency of collateral, the timeliness of
payment and interest rate fluctuations. The primary risk elements considered by
management with respect to other loans are the lack of timely payment and the
value of collateral. The Company has a reporting system that monitors past due
loans and management has adopted policies to preserve the Company's position as
a creditor.
The Company maintains its allowance for possible loan and lease losses to
provide for potential losses in its loan and lease portfolio. The allowance is
established through charges to earnings in the form of a provision for possible
loan and lease losses. Loan losses are charged to, and recoveries are credited
to, the allowance for possible loan and lease losses. The provision for possible
loan and lease losses is determined after considering various factors such as
loan loss experience, current economic conditions, maturity of the loan
portfolio, size of the loan portfolio, industry concentrations, borrower credit
history, the existing allowance for possible loan and lease losses, independent
loan reviews, current charges and recoveries and the overall quality of the
portfolio, as determined by management, regulatory agencies and independent
credit review consultants retained by the Company.
In evaluating the Company's allowance for possible loan and lease losses,
management considers the credit risk in the various loan categories in its
portfolio. Historically, most of the Company's loan losses have been in its
commercial lending portfolio which includes SBA loans and local commercial
loans. From inception of its SBA lending program in 1983, the Company has
sustained 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.
Most of the Company's other loan losses have been for loans to businesses within
the Tahoe basin area and in its Nevada operations. It is important for the
Company to maintain good relations with local business concerns and, to this
end, it supports small local businesses with commercial loans. The Company also
attempts to mitigate this risk inherent in these loans through the loan review
and approval process.
The provision for loan and lease losses was $2,480 thousand and $1,010 thousand
for the years ended December 31, 1997 and 1996, respectively. The provision for
both years includes the effect of growth in the loan portfolio. Unguaranteed
loans increased $87.2 million and $76 million during 1997 and 1996,
respectively. The 1997 increase is after the securitization and sale of $51.3
million of unguaranteed portions of SBA loans. The increase in provision in 1997
includes additional amounts to reestablish the level of reserves after net loan
losses of $1,241 thousand.
The allowance for possible loan and lease losses as a percentage of loans and
leases was 1.54% at December 31, 1997, 1.41% at December 31, 1996 and 1.60% at
December 31, 1995. The increase of 0.13% in the allowance for possible loan and
lease losses as a percentage of loans from December, 1996 includes 0.11% related
to the acquisition of Mercantile Bank. Guaranteed portions of loans were $60.0
million and $37.4 million at December 31, 1997 and 1996, respectively. Excluding
loans and portions of loans guaranteed by the federal government, the allowance
for possible loan and lease losses to total loans and leases was 1.78% at
December 31, 1997 and 1.59% at December 31, 1996.
Of total gross loans and leases at December 31, 1997, $6.0 million were
considered to be impaired. The allowance for possible loan and lease losses
included $718 thousand related to these loans. The average recorded investment
in impaired loans during the year ended December 31, 1997 was $5.7 million.
-35-
<PAGE>
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 and leases,
as of the dates indicated.
<TABLE>
December 31
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Nonaccrual loans to total loans and leases 1.4% 1.7% 2.3%
Allowance for possible loan and lease
losses to nonaccrual loans 111.1% 84.8% 70.2%
Allowance for possible loan and lease
losses to total loans and leases 1.5% 1.4% 1.6%
</TABLE>
If the guaranteed portions of loans on nonaccrual status, which total $1.9
million, are excluded from the calculations, the ratio of nonaccrual loans to
total loans and leases at December 31, 1997 declines to 1.0% and the allowance
for possible loan and lease losses to nonaccrual loans increases to 161.3%.
At December 31, 1996, excluding the guaranteed portions of loans on nonaccrual,
these same percentages are 1.0% and 141.8%, respectively.
The following table sets forth the amount of the Company's nonperforming loans
as of the dates indicated (amounts in thousands).
<TABLE>
December 31
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Nonaccrual loans:
SBA .................................................................. $5,281 $4,985 $5,351
Other................................................................. 702 378 125
Accruing loans past due 90 days or more:
SBA .................................................................. $1,127 $1,071 $ 816
Other................................................................. 255 1,061 207
Restructured loans (in compliance with modified terms)................. $ 660 $ 275 $ 78
</TABLE>
Management considers the allowance of $6.6 million at December 31, 1997, to be
adequate as a reserve against foreseeable losses at that time.
Total Non-Interest Income. Total non-interest income for the year ended December
31, 1997 increased by 60.3% from the 1996 level. For 1996 non-interest income
decreased by 7.9% as compared to 1995.
-36-
<PAGE>
The following table summarizes the principal elements of total non-interest
income and discloses the increases (decreases) and percent of increases
(decreases) for 1997 and 1996 (amounts in thousands except percentage amounts):
<TABLE>
Increase (Decrease)
Year Ended December 31, 1997 over 1996 1996 over 1995
1997 1996 1995 Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges................ $ 2,299 $ 1,722 $1,755 $ 577 33.5% $ (33) (1.9)%
Securities (losses)/gains...... 8 (8) (62) 16 200.0 54 87.1
Net gain on sale of loans...... 694 373 307 321 86.1 66 21.5
Net gain on securitization..... 2,626 0 0 2,626 100.0 0 N/A
Net loan servicing income
and I/O strip income.......... 4,577 4,087 4,667 490 12.0 (580) (12.4)
Other income................... 1,562 1,164 1,302 398 34.2 (138) (10.6)
------- ------- ------ ------ -------
$11,766 $ 7,338 $7,969 $4,428 60.3 $ (631) (7.9)
======= ======= ====== ====== =======
</TABLE>
Service charges on deposit accounts increased by 33.5% during 1997. This
increase resulted from a change in service charge structure during February of
1997 and an increase in average non-interest-bearing demand deposits.
During June 1997 the Company completed its first securitization of the
unguaranteed portion of SBA 7(a) loans. This sale included over $51 million in
loans. A gain of approximately $2.6 million was recorded upon this sale. Related
to this transaction the Company recorded a recourse obligation of $3.3 million.
This represents the present value of projected future losses, discounted using a
risk-free interest rate of 5.65%. In addition the Company's interest-only strips
receivable, excluding the fair market value adjustment, increased by
approximately $4 million related to the securitization and discount on loans
decreased by approximately $2.6 million. Included in loans and leases at
December 31, 1997 are discounts on the retained portion of government guaranteed
loans of $3.4 million. This compares to $5.6 million at December 31, 1996.
The Company is planning a securitization of approximately $80 million of SBA 504
and similar loans. Because the average yield on these loans is lower than the
average yield on loans in the Company's 1997 securitization the gain on this
planned securitization is expected to be substantially lower than the 1997 gain.
Sales of the guaranteed portion of SBA 7(a) loans in 1997, 1996 and 1995 were
$9.6 million, $5.6 million, and $5.6 million, respectively. In 1996 the Company
altered its strategy with respect to the sale of SBA 7(a) loans. Rather than
continuing to sell the guaranteed portion of the portfolio the Company began to
retain the guaranteed portion and to securitize and sell portions of
unguaranteed SBA loans. The SBA loan sales in 1997 were made both to facilitate
the securitization and to reduce industry concentrations. The 1996 sales were
made primarily to reduce the Company's balance of loans to the hotel/motel
industry. By selling these guaranteed portions the Company is able to take
advantage of new lending opportunities in this industry while maintaining an
acceptable concentration level.
In addition to sales of SBA 7(a) loans the Company sells the guaranteed portion
of the Business & Industry loans ("B&I") loans it generates. Sales of the
guaranteed portion of B&I loans totaled $10.4 million in 1997 and $3.6 million
in 1996. 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.
The net gain on sale of the guaranteed portion of SBA and B&I loans during 1997
totaled $694 thousand. This compares to $373 thousand during 1996.
At December 31, 1997 the Company had $46.7 million of guaranteed portions of SBA
loans which it could sell, an increase of $17.6 million over the $29.1 million
held at December 31, 1996.
To support its SBA program the Company has, since 1983, relied in part on third
party SBA loan packagers. The packagers refer proposed SBA loans to the Company
and provide certain services to the borrowers. The packagers receive fees of a
fixed amount from the borrowers, not exceeding limits prescribed by the SBA, for
preparing the SBA loan application for the borrower. They also receive a fee
from the Company for referring
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the loans. These referral fee payments are included in the basis of loans and
hence are not disclosed separately in the Company's financial statements.
The Company expanded its ability to generate an increased volume of SBA loans
through the establishment of new loan production offices in Buena Park in
Southern California in February 1995, in Fresno in December 1995, and in
Portland Oregon, Denver Colorado, and Chattanooga, Tennessee during 1997. In
addition, the Company added personnel at other offices.
The Company experienced disappointing results at its Buena Park facility and
closed it during 1996. In lieu of providing a full office, the Company
contracted with an established loan broker to provide SBA loan referrals from
the Southern California market. The contract gives the Company an exclusive
right of first refusal on all 7(a) loans referred by this broker.
In addition, the Company has increased its efforts to diversify its lending
activities and during 1996 and 1997 has experienced significant gains in its
construction, real estate and non-SBA commercial loan portfolios.
Net loan servicing and I/O strip income increased by 12.0% in 1997 compared to
1996. This compares to a decrease of 12.4% in 1996 from 1995. Net loan servicing
and I/O strip income primarily consists of income generated from previously sold
or securitized SBA loans. Servicing and I/O strip income on SBA loans is
reported net of the amortization of the related servicing and I/O strip assets.
Amortization is based on the expected average life of the related loans. To
date, actual prepayment experience reflects an average life in excess of the
estimated life.
The increase in net servicing and I/O strip income during 1997 relates to the
June 1997 securitization of $51 million in unguaranteed portions of SBA loans.
Servicing and I/O strip income exclusive of amortization has increased from $5.6
million in 1996 to $6.3 million in 1997. This compares to a decline in 1996 of
$600 thousand from $6.2 million in 1995. A decline of approximately $300
thousand would have been experienced in 1997 absent the securitization. These
declines relate to payments on existing loans including normal amortization and
prepayments. During 1997 and 1996, the Company experienced an increase in
prepayments associated with refinancing by other banks.
Other income consists primarily of merchant credit card fees, the sales of
mutual funds, and annuities through a third party marketer, rental income and
gains during 1995 on sale of the right to service mortgage loans. Beginning in
1996 the Company increased its staffing and emphasis on sale of mutual funds and
annuities generating revenue of $333 thousand from this source, an increase of
$240 thousand from the $93 thousand generated from these sales during 1995.
During 1997 an increase was again achieved with revenue of $483 thousand from
this source.
Merchant credit card revenue totaled $517 thousand in 1997, $473 thousand in
1996 and $442 thousand in 1995. Rental income totaled $203 thousand in 1997 and
$129 thousand in 1996. An additional source of the increase in other income
during 1997 was a $131 thousand insurance recovery of legal costs related to a
litigation matter settled in the Company's favor during 1996.
Gain on sales of servicing rights on mortgage loans totaled $190 thousand in
1995. During 1995, as a result of the decline in profitability of this operation
and to focus on the Company's most strategically important activities, the
Company closed its mortgage banking operations. As a result of a termination of
its mortgage banking operations, the Company did not generate gains from the
sale of mortgage servicing rights in 1996 or 1997.
During 1995 the Company recorded income of $242 thousand related to its mortgage
banking operations and $83 thousand in rental income. Additionally, during
December 1995, the Company sold $5.3 million in commercial real estate loans
from the portfolio and recorded a gain of $176 thousand on this sale.
Non-Interest Expense. The ratio of the Company's non-interest expenses to total
assets is higher than for California banks in general because SierraWest Bank
experiences higher operating expenses in its Lake Tahoe area of operation and
employs additional personnel and utilizes additional facilities to manage its
SBA loan program. Because of the extreme climatic conditions in the Lake Tahoe
area of operations (temperatures range from -35 degrees to +100 degrees and
average snow levels exceed 150 inches per year), local building codes require
more expensive construction and the Company experiences added costs of heating
and snow removal
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which increase occupancy costs. Additionally, the Company's supplies are
generally more expensive than in larger metropolitan regions because of the
added cost of freight.
The following table computes the ratio of major non-interest expense categories
to total average assets (in thousands except for percentage amounts):
<TABLE>
Salaries Occupancy
and and Other
Year Ended Average Related Equipment Non-Interest
December 31, Assets Benefits(1) Expenses Expenses
<S> <C> <C> <C> <C> <C>
1997 $525,998 2.4% 0.8% 1.3%
1996 381,620 3.1 0.9 1.6
1995 286,194 3.7 1.2 2.4
</TABLE>
(1) Excludes bonuses. Including bonuses, percentages would be 2.6%, 3.2%
and 3.7% for the years ended December 31, 1997, 1996 and 1995,
respectively.
The following table summarizes the principal elements of non-interest expenses
and discloses the increases (decreases) and percent of increases (decreases) for
1997 and 1996 (amounts in thousands except percentage amounts):
<TABLE>
Increase (Decrease)
Year Ended December 31, 1997 over 1996 1996 over 1995
1997 1996 1995 Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and related benefits $12,599 $11,884 $10,564 $ 715 6.0% $ 1,320 12.5%
Bonuses...................... 810 202 63 608 300.8 139 220.6
Occupancy and equipment...... 4,180 3,486 3,401 694 19.9 85 2.5
Insurance.................... 233 242 277 (9) (3.7) (35) (12.6)
Postage...................... 364 337 304 27 8.0 33 10.9
Stationery and supplies...... 369 416 334 (47) (11.3) 82 24.6
Telephone.................... 425 374 350 51 13.6 24 6.9
Advertising.................. 697 600 715 97 16.2 (115) (16.1)
Legal fees................... 190 484 470 (294) (60.7) 14 3.0
Consulting fees.............. 1,082 506 263 576 113.8 243 92.4
Audit and accounting fees.... 202 151 150 51 33.8 1 0.7
Directors' fees and expenses. 508 429 909 79 18.4 (480) (52.8)
FDIC assessments............. 51 4 284 47 1,175.0 (280) (98.6)
Other........................ 2,571 2,582 2,860 (11) (0.4) (278) (9.7)
------- ------- ------- -------- -------
$24,281 $21,697 $20,944 $ 2,584 11.9 $ 753 3.6
======= ======= ======= ======= =======
</TABLE>
The increase in base salary expense during 1997 relates to the Company's growth
including the new downtown Sacramento branch and the newly opened government
guaranteed lending offices, and an increase in loan and deposit volumes.
Additionally, this reflects normal annual merit increases. This was partially
offset by reductions in the Company's workforce related to an outside
consultant's review of the Company's operations. In total, base salaries and
wages increased by $91 thousand over 1996 levels. Commission and incentive costs
increased by $860 thousand from 1996 levels. SBA and B&I loan volume increased
in 1997, and commission expense related to these loans increased by
approximately $303 thousand. In 1997, the Company expanded its commission
program to increase the benefits available to loan offices and business
development officers, resulting in an increase of $351 thousand. Incentives of
$74 thousand were incurred in 1997 as a result of the securitization. Consistent
with an increase in volume, commissions paid to the Company's noninsured product
representatives increased by $90 thousand in 1997 as compared to 1996.
The increase in salary expense in 1996 as compared to 1995 includes the effect
of the four new branches opened in 1995, partially offset by the termination of
the Company's mortgage operations. Commissions and incentive pay have, exclusive
of mortgage banking operations, increased by $883 thousand during 1996 as
compared to 1995, including a $438 thousand increase in commissions paid for the
generation of SBA and other government guaranteed loans. In 1996, the Company
increased the number of employees whose compensation
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is partially commission based and changed the commission structure of many of
its loan production personnel. The increase includes these changes as well as an
increase in volume of loan originations.
The increase in bonus expense in 1997 relates to bonuses earned by the Company's
Senior Management. Bonuses are payable under the Company's Senior Management
Bonus Plan to non-commissioned Senior Vice Presidents and above, exclusive of
the CEO, Chief Counsel and Chief Auditor, upon achieving certain predefined
goals. Bonus expense related to this plan totaled $422 thousand in 1997. No
bonuses were paid under this plan in 1996, although bonuses totaling $35
thousand were paid to Senior Management in 1996, based on recommendations made
by the CEO to the Director's Personnel Committee.
The CEO, the head of the Company's legal department and the head of the
Company's audit department are not included in the Senior Management incentive
plan. Their bonuses are determined by the Company's Board of Directors. Bonus
expense for these individuals totaled $200 thousand in 1997. This compares to
$37 thousand in 1996 related to the Audit and Legal departments.
The increase in bonus expense in 1996 over 1995 was primarily attributable to
bonus payments to full time noncommissioned employees below the rank of Senior
Vice President. The bonus expense in 1995 relates to the Legal and Audit
departments. In addition, during 1995 the Company had an incentive plan in place
covering all non-commissioned employees; however, no bonuses were earned under
this plan.
The rise in occupancy and equipment expense during 1997 is primarily
attributable to maintenance and repair costs on an expanded computer hardware
and data communications network, as well as depreciation on an increased base of
fixed assets. Specifically, $388 thousand relates to the acquisition of
Mercantile Bank and expansion of our branches in Reno and Carson City, Nevada.
The Company maintains a financial institutions bond for its operations and
directors and officers insurance. The decrease in overall insurance costs from
1995 levels resulted from a softening of the insurance market for financial
institutions and a change in insurance carriers. The increase in postage relates
to the increase in the size of the Company. Stationery and supplies costs
increased in excess of the increase in average assets during 1995 primarily
related to $45 thousand incurred for the start up and 1995 operations of the
four new branches. This cost remained high in 1996 because of costs associated
with printing forms and supplies following the change in the Company's name.
Telephone costs during 1996 and 1997 included the costs of an expanded branch
system and an upgrade and expansion of the Company's data communication
telephone lines. Advertising in 1995 includes an expanded budget and costs
related to the new branches. In 1997 the increase in advertising includes the
effect of an expansion of the Company's SBA advertising efforts, the acquisition
of Mercantile Bank and the costs of printing new product brochures.
The increase in legal expense during 1996 relates primarily to two litigation
matters. One matter went to trial in June 1996 and was decided in the Company's
favor. Increased costs were incurred in the second matter, which is ongoing and
relates to a property acquired by the Company through foreclosure and
subsequently sold. (See Item 3. "Legal Proceedings" for a description of this
matter.) Legal expenses during 1995 primarily relate to general litigation
matters and a voluntary internal investigation of the Company's investment in an
entity known as Community Assets Management.
During the first quarter of 1997, the Company engaged an outside consulting firm
to assist in identifying opportunities to reduce operating expenses and to
recommend more efficient methods of operating. The increase in consulting costs
is primarily related to this engagement. Total consulting expense related to
this engagement in 1997 was $544 thousand. Additionally, consulting costs in
1997 included $150 thousand paid related to the Company's pending acquisition of
CCBC. The increase in audit and accounting fees during 1997 primarily relates to
costs associated with the June 1997 securitization.
The increase in consulting during 1996 primarily relates to costs associated
with the changing of the name of the Company's subsidiary. Other significant
components of consulting expenses during 1996 include payments made for outside
credit reviews of the Company's loan portfolio and $90 thousand paid to an SBA
loan broker who provides referrals from the southern California marketplace.
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Directors' expenses in 1995 includes a one-time $528 thousand pre-tax charge for
the Director Emeritus Program, which provides retirement benefits to certain
directors who chose to participate in the program. The increase in Directors'
expenses in 1997 relates to the Company's Directors Deferred Compensation and
Stock Award Plan. This plan allows for the deferral of Director fees in the form
of phantom shares of common stock. As the market value of the Company stock
increases, an adjustment to reflect the increased value of this stock is
recorded as Director Expense. Conversely, if the stock should decrease in value
a credit to expense would be recorded.
The decrease in FDIC assessments from 1995 levels is related to a reduction in
rates. Effective June 1, 1995, the FDIC revised its rate schedule reducing rates
to reflect the fact that the Bank Insurance Fund was fully recapitalized at the
end of May 1995. The increase in 1997 relates to the newly assessed FICO
premium.
Included in other expense in 1997 is a charge of $442 thousand for a reduction
in staffing. The Company recorded as a reduction of other expense $250 thousand
related to a decrease in the estimated recourse obligation recorded on its June
1997 securitization.
Included in other expenses in 1996 are $352 thousand related to a reduction in
staffing effective May 1, 1996, $70 thousand on a litigation matter and $114
thousand related to a servicing error on an SBA loan. Other expense in 1995
includes a $100 thousand business loss related to other real estate owned, $232
thousand related to two litigation matters, $243 thousand related to the
termination of the Company's mortgage operations, and a pretax charge of $530
thousand during the fourth quarter related to the closing of the Company's
branch located in the Crescent V Shopping Center in South Lake Tahoe,
California. The customer accounts formerly maintained in this branch were
transferred to the Company's Bijou branch which is located approximately one
mile away.
Provision for Income Taxes. The provision for income taxes was $4.7 million,
$2.1 million and $1.2 million for the years ended December 31, 1997, 1996 and
1995, respectively, representing 38.5%, 38.4% and 38.1%, of income before
taxation for the respective years.
Included in the Company's earnings are items which are exempt from federal and,
in some cases, state income taxes. These items include interest on certain loans
and securities of state and county municipalities and the increase in the cash
surrender value of life insurance policies on certain officers and directors.
Liquidity
Liquidity refers to the Company's ability to maintain adequate cash flows to
fund operations and meet obligations and other commitments on a timely basis.
The Company's liquidity management policies are structured so as to maximize the
probability of funds being available to meet present and future financial
obligations and to take advantage of business opportunities. Financial
obligations arise from withdrawals of deposits, repayment on maturity of
purchased funds, extensions of loans or other forms of credit, purchase of
loans, payment of interest on deposits and borrowings, payment of operating
expenses, and capital expenditures.
The Company has various sources of liquidity. Increases in liquidity result from
the maturity or sale of assets. Other than cash itself, short-term investments
like federal funds sold are the most liquid assets. Also, investment securities
available for sale can be sold prior to maturity as part of prudent
asset/liability management in response to changes in interest rates and/or
prepayment risk as well as to meet liquidity needs. Additionally, liquidity is
provided by loan repayments and by selling loans in the normal course of
business. At December 31, 1997, the Company had $46.7 million in guaranteed
portions of SBA loans available for sale, most of which could be sold within a
short period of time compared to $29.1 million of SBA loans available for sale
at December 31, 1996. In management's view, these loans represent an available
source of liquidity. Deposits such as demand deposits, savings deposits and
retail time deposits also provide a source of liquidity. They tend to be stable
sources of funds except that they are subject to seasonal fluctuations. The
Company maintains an adequate level of cash and quasi-cash items to meet its
day-to-day needs and in addition, at December 31, 1997, the Company had an
unsecured line of credit totaling $7.5 million with one of its correspondent
banks.
During 1995 the Company changed its strategy from the selling of the guaranteed
portion of SBA loans to retaining these portions of loans in its portfolio.
Additionally, the Company announced its intention to securitize
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and sell the unguaranteed portion of SBA loans. The Company completed the first
such securitization during June, 1997 which included $51 million of the
unguaranteed portions of SBA loans.
Cash and due from banks and federal funds sold as a percentage of total deposits
were 11.6% at December 31, 1997 as compared to 14.7% at December 31, 1996.
Although a decrease in the percentage for 1997 was experienced this was offset
by the additional liquidity provided by the increase in SBA loans available for
sale. Cash and due from banks totaled $47.7 million at December 31, 1997 as
compared to $26.4 million at December 31, 1996, and federal funds sold totaled
$13.5 million at December 31, 1997 as compared to $32.2 million at December 31,
1996. Federal funds sold represent deposits with major banks and are
predominantly uninsured. The uninsured portion of these deposits together with
the uninsured portion of cash deposited with other institutions totaled $15.9
million as of December 31, 1997. In the event of a failure of any of these
institutions, the Company could lose all or part of its deposits. To mitigate
this risk, the Company periodically examines the financial statements of these
institutions and limits the amount it deposits with any single institution.
Total gross loans and leases, exclusive of unearned income on leases and
deferred loan fees/costs, increased by $110.7 million from $325.1 million at
December 31, 1996 to $435.8 million at December 31, 1997. The increase included
$17.5 million in SBA loans, $22.1 million in other commercial loans, $37.4
million in real estate - mortgage, $27.5 million in real estate-construction,
$6.1 million in leases and $0.1 million in individual and other loans. The
increase in SBA loans relates to the Company's decision to retain the guaranteed
portion of SBA loans, to an increase in lending directed towards the SBA's 504
program and to an increase in the volume of new loan originations. Exclusive of
the securitization this increase would have totaled $62 million. The increase in
other loans reflects the Company's efforts to expand and diversify its non-SBA
lending activities. The increase in real estate and construction loans primarily
relates to Sacramento and Reno operations. The $110.7 million increase in the
loan portfolio since December 31, 1996 was funded with increased time deposits,
an increase in other deposits acquired at the Company's four branches opened in
1995, the acquisition of Mercantile Bank and growth in the Company's Northern
Nevada Operations.
The Company is planning a securitization approximately $80 million of SBA 504
and similar loans in 1998. These loans are transferred to held for sale status
once they are identified. Loans held for sale decreased by $12.4 million due to
the completion of the SBA 7(a) Securitization.
Deposits increased by $126.6 million from $399.7 million at December 31, 1996 to
$526.3 million at December 31, 1997. This included increases of $38.5 million in
interest-bearing transaction accounts, $49.6 million in non-interest-bearing
demand accounts, $37.8 million in time deposits and $0.7 million in savings
accounts.
The increase in deposits is primarily attributable to the Mercantile acquisition
and growth in our larger branches. Deposits at the downtown Sacramento branch
were $41.5 million at December 31, 1997. Total deposits at the Company's main
Sacramento branch and its northern Nevada branches increased by $35.5 million
and $55.3 million, respectively, from December 31, 1996 levels. During the same
period, out-of-area certificates of deposit decreased by $35.7 million, as the
proceeds of the securitization were used to reduce the Company's reliance on
these funds.
In part to mitigate the effect of seasonality of its deposit sources which is
due to the local tourist-based economy in part of the Company's service area and
in part to provide interim financing of loans the Company intends to securitize,
SierraWest Bank utilizes a "money desk" to solicit out-of-area CDS. These CDs
supplement its other deposit sources, provide additional liquidity and
additionally, help support its loan growth. These deposits, which at December
31, 1995, 1996 and 1997 totaled $34.7 million, $45.8 million and $10.1 million,
respectively, represented 11.9%, 11.5% and 1.9% of total deposits as of December
31, 1995, 1996 and 1997, respectively.
To attract out-of-area CDS, SierraWest Bank subscribes to a listing service
which lists nationally the rate the Bank is prepared to pay. Customers call
SierraWest Bank directly and place deposits. Additionally, beginning in 1995
SierraWest Bank began accepting referrals by brokers which can result in a
slightly lower cost of those deposits. At December 31, 1997 $1.4 million of CD's
have been acquired through broker referrals. To attract deposits, SierraWest
Bank pays a market rate which may at times be above the comparable rate offered
by SierraWest Bank to its local depositors. The overhead costs associated with
these out-of-area deposits is, however, lower than that for local deposits since
local deposits require the use of bank branch facilities and hence the Company
believes the cost of these funds does not normally exceed the cost SierraWest
Bank incurs
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<PAGE>
to generate comparable deposits through its branch system. While out-of-area
deposits are acquired at an acceptable cost, SierraWest Bank monitors the level
of these deposits because it is concerned that out-of-area deposits are more
rate sensitive and volatile and that there may be some exposure for increased
costs in the future should the supply tighten. If interest rates rise rapidly,
the Company's reliance on these deposits could have an adverse impact on net
interest income if the costs to retain those deposits rise faster than rates
charged on interest-earning assets.
Effective January 1, 1997, upon implementation of SFAS 125, the Company's excess
servicing receivable and purchased servicing rights were reclassified as a
servicing asset for that portion of the receivables that did not exceed
contractually specified servicing fees and interest-only strips receivable for
the portion which exceeds contractually specified servicing fees. The amortized
book value of the servicing asset was $2.0 million at December 31, 1997. The
interest-only strips receivable are measured like available-for-sale investments
in debt securities under SFAS 115. Included in other assets December 31, 1997,
are interest only strips receivable with an estimated market value of $17.1
million. This includes an unrealized gain of $0.7 million.
Capital Resources
At December 31, 1997, the Company had shareholders' equity of $53.6 million as
compared to $33.9 million at December 31, 1996. The Company's growth strategy is
to expand its banking business, internally and through possible acquisitions.
Such expansion is contingent on the retention of internally generated earnings,
and the possible issuance of new equity or additional debt, as well as the
satisfaction of other factors including obtaining regulatory approvals.
The Company's strategy is to expand its banking business, through internal
growth and acquisitions, both within its present service areas, particularly in
the Reno metropolitan market and adjacent areas, and the Sacramento Valley
locations. It also plans to increase the volume and geographic scope of its SBA
lending to leverage on its SBA loan origination and servicing capabilities. In
connection with this objective, the Company established loan production offices,
during 1995 in Buena Park in southern California and in Fresno, California and
during 1997 in Portland, Oregon, Denver, Colorado and Chattanooga, Tennessee.
The Buena Park office was closed in 1996.
Effective June 30, 1997 the Company acquired Mercantile Bank. Based in
Sacramento, Mercantile was a business bank primarily servicing the commercial
and real estate loan industry and had total assets of $42.8 million. Loans and
deposits acquired pursuant to the acquisition of Mercantile totaled $26.1
million and $37.7 million. Under the terms of the transaction, shareholders of
Mercantile received total compensation of $6.6 million on the acquisition date.
The compensation consisted of $170,790 shares of Company common stock and $3.3
million in cash. Goodwill and other intangible assets recorded upon the
acquisition of Mercantile totaled $1.8 million. See Note 19 of Notes to
Consolidated Financial Statements.
On November 13, 1997, the Company signed a definitive agreement to acquire the
outstanding common stock of California Community Bancshares ("CCBC") in a
transaction valued at approximately $39 million, based on the closing price of
SWB stock on November 13, 1997. CCBC, the parent of Continental Pacific Bank, is
headquartered in Vacaville, California. Continental Pacific Bank operates eight
banking offices in Solano and Contra Costa counties in California. CCBC had
total assets of $197 million at December 31, 1997. The merger, which is
scheduled to close during the first half of 1998, is subject to the approval of
CCBC's and SWB's shareholders and federal and state regulators, as well as
certain other terms and conditions.
Under the terms of the proposed transaction, shareholders of CCBC will receive
shares of SWB common stock at an exchange ratio to be determined by a formula
based on the average of the closing prices of SWB common stock during a defined
20-day period prior to the effective date of the transaction. For example, if
the average price during the 20-day period were $33.75, the closing price of SWB
stock on December 31, 1997, each share of CCBC stock would be exchanged for
approximately 0.90 shares of SWB common stock. This transaction is expected to
be accounted for as a pooling-of-interests.
During June 1996 the Company completed construction of a new regional facility
in Reno, Nevada. Total costs incurred for the land and building at December 31,
1997 were $3.9 million. The Company currently occupies approximately 15,257
square feet of this 28,600 square foot facility. The remaining space is leased
or to be
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leased until needed by the Company for expansion. At February 28, 1998 a total
of 3,375 square feet had been leased out, with 5,870 square feet of leasable
space remaining.
On July 30, 1997, the Company sold its real property in Carson City, Nevada.
This property is being leased back on behalf of the Company's Carson City branch
for an initial term of thirteen years at an annual rate of $134 thousand for the
first five years and increasing thereafter. The gain on the sale was $164
thousand which has been deferred and is being amortized as a reduction of future
rental expense.
On February 8, 1994, the Company sold to the public $10,000,000 of 8 1/2%
optional convertible subordinated debentures, convertible at the option of the
holder at $10.00 per share. These debentures mature on February 1, 2004 and are
redeemable on or after February 1, 1997 in whole or in part at the option of the
Company. Convertible debentures outstanding at December 31, 1996 and 1995
consisted of $8,520,000 and $10,000,000, respectively of these 8 1/2% optional
convertible subordinated debentures. A total of $1,480,000 of debentures were
converted into 148,000 shares of common stock during 1996. During the six months
ended June 30, 1997, the remaining $8.5 million of these debentures were
converted to common stock.
On December 21, 1995, the Company designated 200,000 shares of its 10,000,000
authorized preferred shares as Series A Junior Participating Preferred Stock.
These shares were created by the Company to facilitate a shareholder protection
rights plan. During January of 1996 a dividend of rights was made to existing
stockholders to acquire stock of the Company. This plan is designed to protect
the Company and its stockholders against abusive takeover attempts and tactics.
In essence, the rights plan would dilute the interests of an entity attempting
to take control of the Company if the attempt is not deemed by the Board of
Directors to be in the best interests of all stockholders. If the Board of
Directors determines that an offer is in the best interests of the stockholders,
the stock rights may be redeemed for nominal value, allowing the entity to
acquire control of the Company.
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, will face 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.
The Company is in the process of communicating with customers that the Company
has significant lending relationships with and other third parties to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 issues. 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.
The Company began the process of identifying the changes required to its
software and hardware in 1997 in consultation with software and hardware
providers, a consulting firm and bank regulators. While the Company believes it
is taking all appropriate steps to assure that its information systems are
prepared for the year 2000, it is dependent on vendor compliance to some extent.
The Company is requiring its systems and software vendors to represent that the
services and products provided are, or will be, year 2000 compliant, and
contemplates a program of testing compliance to commence in 1998. The Company
estimates that its costs related to year 2000 compliance will be at least
$200,000 and may be significantly more. This cost is being funded through
operating cash flows. The "year 2000" problem is pervasive and complex as
virtually every computer operation will be affected in some way by the rollover
of the two digit year value to 00. Consequently, no assurance can be given that
year 2000 compliance can be achieved without costs and uncertainties that might
affect future financial results or cause reported financial information not to
be necessarily indicative of future operating results or future financial
condition.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not have
any market risk sensitive instruments entered into for trading purposes.
Management uses several different tools to monitor its interest rate risk. One
measure of exposure to interest rate risk is gap analysis. A positive gap for a
given period means that the amount of interest-earning assets maturing or
otherwise repricing within such period is greater than the amount of
interest-bearing liabilities maturing or otherwise repricing within the same
period. The Company has a positive gap. Also, the Company uses interest rate
shock simulations to estimate the effect of certain hypothetical rate changes.
Based upon the Company's shock simulations net interest income is expected to
rise with increasing rates and fall with declining rates.
The Company's positive gap is the result the majority of its loans having
floating rates and a significant portion of its investments having a maturity of
one year or less, while a significant portion of its liabilities are non
interest and low interest bearing accounts that are insensitive to rate changes.
Management has taken several steps to reduce the positive gap of the Company. In
1997, the Company added fixed rate loans and increased the number of longer term
investments. Also, in 1996, the Company entered into a fixed for floating swap
agreement with a correspondent bank. The swap agreement requires the Company to
pay a floating rate tied to prime and receive a fixed rate. The Company intends
to continue increasing the number of fixed rate loans and investments held and
the use of derivative products such as swaps. Also, in 1997, the Company
securitized the unguaranteed portions of loans made under the Small Business
Administration's 7(a) program. Securitization is an effective asset liability
management tool because the asset and liability cash flows and repricings are
closely matched. The Company intends to continue using securitization as a
source of funding its loans in the future.
-45-
<PAGE>
The following table sets forth the distribution of repricing opportunities of
the Company's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), the cumulative interest rate sensitivity
gap and the cumulative gap as a percentage of total interest-earning assets, as
of December 31, 1997. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant and may be affected by many factors, including the behavior
of customers in response to changes in interest rates. This table should,
therefore, be used only as a guide as to the possible effect changes in interest
rates might have on the net margins of the Company (dollars in thousands).
<TABLE>
December 31, 1997
Next Day Over Three One Year
to Three Months Through Through Over
Immediately Months Twelve Months Five Years Five Years Total
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold............... $ 13,500 $ 0 $ 0 $ 0 $ 0 $ 13,500
Mutual funds..................... 733 0 0 0 0 733
Interest-bearing deposits........ 0 396 0 0 0 396
Taxable investment securities.... 0 3,402 9,266 33,320 3,736 49,724
Non-taxable investment securities 0 0 346 0 9,041 9,387
Loans............................ 183,082 130,072 16,460 58,386 45,149 433,149
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 197,315 133,870 26,072 91,706 57,926 506,889
--------- --------- --------- --------- --------- ---------
Liabilities:
Savings deposits(1).............. 172,910 0 0 0 0 172,910
Time deposits.................... 0 84,918 116,575 21,659 85 223,237
Lease obligations................ 0 2 7 49 239 297
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 172,910 84,920 116,582 21,708 324 396,444
--------- --------- --------- --------- --------- ---------
Net interest-earning assets (liabilities) $ 24,405 $ 48,950 $ (90,510) $ 69,998 $ 57,602 $ 110,445
========= ========= ========= ========= ========= =========
Cumulative net interest earning assets
(liabilities) ("GAP")............ $ 24,405 $ 73,355 $ (17,155) $ 52,843 $ 110,445
========= ========= ========= ========= =========
Cumulative GAP as a percentage of
total interest-earning assets.... 4.8% 14.5% (3.4)% 10.4% 21.8%
======== ========= ========= ========= =========
</TABLE>
(1) Savings deposits include interest-bearing transaction accounts.
(2) Includes loans which matured on or prior to December 31, 1997.
At December 31, 1997, the Company had $357.3 million in assets and $374.4
million in liabilities repricing within one year. This means that $17.1 million
more in interest rate sensitive liabilities than interest rate sensitive assets
will change to the then current rate (changes occur due to the instruments being
at a variable rate or because the maturity of the instrument requires its
replacement at the then current rate). Interest income is likely to be affected
to a greater extent than interest expense for any changes in interest rates
during the Immediately to Twelve Month periods. If rates were to fall during
this period, interest income would decline by a greater amount than interest
expense and net income would be reduced. Conversely, if rates were to rise, the
reverse would apply.
-46-
<PAGE>
The following table sets forth the distribution of the expected maturities of
the Company's interest-earning assets and interest-bearing liabilities as well
as the fair value of these instruments. Expected maturities are based on
contractual payments adjusted for the estimated effect of prepayments. Loans
have been assumed to prepay at an average rate of 8% per year. This rate is
consistent with historical information on the Company's SBA loan portfolio. With
respect to other loans the Company has not tracked its historical prepay speed;
but for the purposes of this table has utilized an 8% rate. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the one year or less maturity category (dollars in thousands).
<TABLE>
December 31, 1997
1998 1999 2000 2001 2002 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold................ $ 13,500 $ 0 $ 0 $ 0 $ 0 $ 0 $ 13,500 $ 13,500
Weighted average rate........... 5.32 5.32
Interest-bearing deposits......... 396 0 0 0 0 0 396 396
Weighted average rate........... 5.79 5.79
Mutual Funds...................... 733 0 0 0 0 0 733 733
Weighted average yield.......... 6.35 6.35
Investment securities............. 13,014 27,125 1,319 1,110 3,766 12,777 59,111 59,111
Weighted average yield(3)....... 5.92 6.07 6.72 6.74 7.35 5.73 6.07
Fixed rate loans.................. 24,353 16,379 13,330 9,386 8,203 24,677 96,328 97,041
Weighted average rate........... 9.24 9.77 9.63 9.58 9.54 8.38 9.22
Variable rate loans (1)........... 122,129 39,207 27,942 27,906 24,106 95,531 336,821 340,193
Weighted average rate........... 9.97 10.36 10.18 10.23 10.34 10.24 10.16
--------- ------ ------- ------- ------- -------- -------- --------
Total Interest-earning assets $ 174,125 $82,711 $42,591 $38,402 $36,075 $132,985 $506,889 $510,974
========= ======= ======= ======= ======= ======== ======== ========
Savings deposits(2)............... $ 172,910 $ 0 $ 0 $ 0 $ 0 $ 0 $172,910 $172,910
Weighted average rate........... 2.88 2.88
Time Deposits..................... 201,493 16,473 2,645 1,109 1,432 85 223,237 223,932
Weighted average rate........... 5.75 5.98 6.13 6.19 6.19 6.80 5.78
Lease Obligations................. 9 10 12 13 14 239 297 297
Weighted average yield.......... 11.23 11.23 11.23 11.23 11.23 11.23 11.23
--------- ------- ------- ------- ------- -------- -------- --------
Total interest-bearing liabilities $ 374,412 $16,483 $ 2,657 $ 1,122 $ 1,446 $ 324 $396,444 $397,139
========= ======= ======= ======= ======= ======== ======== ========
</TABLE>
(1) Of the total variable rate loans 92.5% reprice or mature in one year
or less.
(2) Savings deposits include interest-bearing transaction accounts.
(3) Interest on tax-exempt obligations has not been tax effected to include the
related tax benefits in calculating the weighted average yield.
The Company's $20 million notional amount interest rate swap maturities in
March, 1999. Under this agreement the other party to the swap pays a fixed rate
of 8.17% and receives from the Company the prime rate. The swap had an estimated
fair value of a negative $47 thousand at December 31, 1997.
-47-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report................................................49
Consolidated Financial Statements of SierraWest Bancorp
Consolidated Statements of Financial Condition............................50
Consolidated Statements of Income.........................................52
Consolidated Statements of Shareholders' Equity...........................54
Consolidated Statements of Cash Flows.....................................55
Notes to Consolidated Financial Statements................................59
-48-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
SierraWest Bancorp
Truckee, California
We have audited the accompanying consolidated statements of financial condition
of SierraWest Bancorp and subsidiary ("Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of SierraWest Bancorp and subsidiary
at December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 4, to the consolidated financial statements, on January 1,
1997 the Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Debt."
/s/ Deloitte & Touche LLP
Sacramento, California
February 10, 1998
-49-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
December 31,
1997 1996
(in thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks................................... $ 47,660 $ 26,434
Interest-bearing deposits
in other banks.......................................... 396 0
Federal funds sold........................................ 13,500 32,200
----------- ----------
Total Cash and Cash Equivalents........................... 61,556 58,634
Investment securities and investments in mutual funds:
Mutual funds available for sale........................... 733 1,335
Held to maturity, market value $1,000 and $2,000.......... 1,000 2,001
Available for sale........................................ 58,111 31,880
Loans held for sale.......................................... 17,061 29,489
Loans and leases, net of unearned lease income,
deferred loan fees/costs and allowance for
possible loan and lease losses............................ 409,439 289,331
Interest-only strips receivable.............................. 17,076 0
Excess servicing on SBA loans................................ 0 14,338
Bank premises, leasehold improvements
and equipment, net........................................ 10,780 12,358
Accrued interest receivable and
other assets.............................................. 13,999 8,523
----------- ----------
TOTAL ASSETS.............................................. $ 589,755 $ 447,889
=========== ==========
</TABLE>
See notes to consolidated financial statements.
-50-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
December 31,
1997 1996
(in thousands except share amounts)
<S> <C> <C>
Deposits:
Non-interest-bearing demand............................... $ 130,122 $ 80,525
Savings................................................... 14,023 13,289
Interest bearing transaction accounts..................... 158,887 120,417
Time ..................................................... 223,237 185,420
----------- -----------
Total Deposits............................................ 526,269 399,651
Other liabilities and interest payable....................... 9,856 5,802
Convertible debentures....................................... 0 8,520
----------- -----------
Total Liabilities......................................... 536,125 413,973
Shareholders' equity:
Preferred stock, no par value;
9,800,000 shares authorized;
none issued............................................. 0 0
Preferred stock series A, no par value; 200,000
shares authorized; none issued.......................... 0 0
Common stock, no par value; 10,000,000
shares authorized; 4,099,811 and 2,771,139 shares
issued and outstanding at December 31, 1997 and
1996, respectively...................................... 29,587 12,291
Retained earnings......................................... 23,281 21,654
Unrealized gain(loss) on investment securities and
interest-only strips receivable, net of tax of
$535 and $21............................................ 762 (29)
----------- -----------
Total Shareholders' Equity................................ 53,630 33,916
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.................................... $ 589,755 $ 447,889
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-51-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(continued)
<TABLE>
Year Ended December 31,
1997 1996 1995
(in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Loans and leases.............................................. $ 39,357 $ 30,506 $ 23,582
Federal funds sold............................................ 1,795 938 594
Investment securities
U.S. Treasury............................................... 1,765 931 976
U.S. Government agencies.................................... 120 85 385
States and political subdivisions........................... 382 198 29
Other....................................................... 709 498 144
Other assets.................................................. 182 113 121
---------- ---------- -----------
Total Interest Income......................................... 44,310 33,269 25,831
Interest expense:
Savings deposits.............................................. 278 283 286
Transaction accounts.......................................... 4,259 2,620 1,995
Time deposits ................................................ 12,322 8,832 5,352
Convertible debentures........................................ 60 764 850
Other......................................................... 180 (4) 8
---------- --------- -----------
Total Interest Expense........................................ 17,099 12,495 8,491
---------- --------- -----------
Net Interest Income........................................... 27,211 20,774 17,340
Provision for possible loan and lease losses.................. 2,480 1,010 1,270
---------- --------- -----------
Net Interest Income After Provision for Possible
Loan and Lease Losses....................................... 24,731 19,764 16,070
</TABLE>
See notes to consolidated financial statements.
-52-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(continued)
<TABLE>
Year Ended December 31,
1997 1996 1995
(in thousands, except per share amounts)
<S> <C> <C> <C>
Non-interest income:
Net servicing and interest-only strip income............... $ 4,577 $ 4,087 $ 4,667
Net gain on sale and securitization of loans............... 3,320 373 307
Service charges on deposit accounts........................ 2,299 1,722 1,755
Other...................................................... 1,570 1,156 1,240
---------- ---------- -----------
Total Non-interest Income................................. 11,766 7,338 7,969
Non-interest expense:
Salaries and related benefits.............................. 13,409 12,086 10,627
Net occupancy and equipment expense........................ 4,180 3,486 3,401
Other expense.............................................. 6,692 6,125 6,916
---------- ---------- -----------
Total Non-interest Expense................................. 24,281 21,697 20,944
---------- ---------- -----------
Income before provision for income taxes................... 12,216 5,405 3,095
Provision for income taxes................................. 4,707 2,077 1,179
---------- ---------- -----------
Net Income................................................. $ 7,509 $ 3,328 $ 1,916
========== ========== ===========
Basic Earnings per share................................... $ 2.03 $ 1.18 $ 0.70
========== =========== ===========
Weighted average shares used to calculate
basic earnings per share................................... 3,693 2,809 2,728
========== =========== ===========
Diluted Earnings per share................................. $ 1.82 $ 0.96 $ 0.63
========== =========== ===========
Weighted average shares used to calculate
diluted earnings per share................................. 4,155 3,920 3,862
========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-53-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
Unrealized
Common Stock Retained Gain/(Loss)
Shares Amounts Earnings Net of Taxes Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.................. 2,620 $ 11,002 $ 17,839 $ (678) $28,163
Net Income............................... 0 0 1,916 0 1,916
Stock options exercised.................. 20 142 0 0 142
Common stock issued on
conversion of debentures............... 2 10 0 0 10
Common stock repurchased................. (50) (445) 0 0 (445)
Cash dividends paid...................... 0 0 (624) 0 (624)
Net change in unrealized gain(loss)
on available for sale securities,
net of tax............................. 0 0 0 671 671
----- -------- --------- ------- --------
Balance at December 31, 1995 ............... 2,592 10,709 19,131 (7) 29,833
----- --------- --------- ------- --------
Net Income............................... 0 0 3,328 0 3,328
Stock options exercised.................. 31 212 0 0 212
Common stock issued on
conversion of debentures............... 148 1,370 0 0 1,370
Cash dividends paid...................... 0 0 (805) 0 (805)
Net change in unrealized gain(loss)
on available for sale securities,
net of tax............................. 0 0 0 (22) (22)
----- -------- --------- ------- --------
Balance at December 31, 1996 ............... 2,771 12,291 21,654 (29) 33,916
----- -------- --------- ------- --------
Net Income............................... 0 0 7,509 0 7,509
Stock options exercised.................. 112 877 0 0 877
Tax benefit derived from the
exercise of stock options.............. 0 457 0 0 457
Common stock issued on
conversion of debentures............... 852 7,952 0 0 7,952
Cash dividend paid ...................... 0 0 (1,178) 0 (1,178)
Common stock issued for
acquisition............................ 171 3,317 0 0 3,317
Stock dividend on common stock........... 194 4,693 (4,693) 0 0
Cash paid in lieu of
fractional shares....................... 0 0 (11) 0 (11)
Net change in unrealized gain(loss) on
interest-only strips receivable and
available for sale securities,
net of tax............................... 0 0 0 791 791
----- -------- --------- ------- --------
Balance at December 31, 1997................ 4,100 $29,587 $ 23,281 $ 762 $ 53,630
===== ======== ========= ======= ========
</TABLE>
See notes to consolidated financial statements.
-54-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
1997 1996 1995
(in thousands)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
<S> <C> <C> <C>
Cash flows from operating activities:
Interest and fees received................................. $ 44,053 $ 32,506 $ 24,411
Service charges............................................ 2,299 1,722 1,754
Servicing income and interest-only strips
receivable income received................................ 6,295 5,574 6,186
Interest paid.............................................. (17,130) (12,292) (8,251)
Cash paid to suppliers and employees....................... (22,502) (20,141) (18,142)
Income taxes paid.......................................... (4,225) (1,640) (1,334)
Mortgage and other loans originated or purchased
for sale.................................................. (9,220) 0 (25,176)
Government loans originated or purchased for sale.......... (78,062) (7,672) (22,163)
Mortgage and other loans sold.............................. 9,220 0 27,000
Government loans sold or securitized....................... 71,338 9,214 5,646
Other ..................................................... 1,056 1,179 1,230
--------- ---------- ---------
Net cash provided by (used in) operating activities........ 3,122 8,450 (8,839)
Cash flows from investing activities:
Proceeds from:
Sales of mutual funds................................... 2,697 0 454
Maturities of investment securities held to maturity.... 1,012 1,378 773
Maturities of investment securities available for
sale.................................................. 11,168 10,958 3,500
Sales of investment securities available for sale....... 0 8,239 8,484
Sales of investment securities -
held to maturity...................................... 0 0 999
Purchase of investment securities -
available for sale....................................... (33,491) (26,248) (9,999)
Purchase of mutual funds -
available for sale....................................... (2,000) 0 0
Loans and leases made net of principal collections......... (77,597) (84,700) (52,571)
Capital expenditures....................................... (687) (4,536) (3,012)
Proceeds from sale of assets............................... 1,523 0 0
Net cash received in acquisition......................... 8,570 0 0
--------- ---------- ---------
Net cash used in investing activities...................... (88,805) (94,909) (51,372)
</TABLE>
See notes to consolidated financial statements.
-55-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
Year Ended December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest bearing,
and savings accounts........................................ 65,695 48,686 3,606
Net increase in time deposits................................. 23,222 57,811 70,672
Cash dividends paid........................................... (1,178) (805) (624)
Cash paid in lieu of fractional shares....................... (11) 0 0
Cash received for stock options exercised..................... 877 212 142
Repurchase of common stock.................................... 0 0 (445)
--------- ----------- ---------
Net cash provided by financing activities..................... 88,605 105,904 73,351
--------- ----------- ---------
Net increase in cash and cash equivalents..................... 2,922 19,445 13,140
Cash and cash equivalents - beginning of period............... 58,634 39,189 26,049
--------- ----------- ---------
Cash and cash equivalents - end of period..................... $ 61,556 $ 58,634 $ 39,189
========= =========== =========
</TABLE>
See notes to consolidated financial statements.
-56-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
Year Ended December 31,
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES
Net income.................................................... $ 7,509 $ 3,328 $ 1,916
Adjustments to reconcile net income to net cash provided:.....
Depreciation and amortization.............................. 1,461 1,197 1,119
Provision for possible loan and lease losses............... 2,480 1,010 1,270
Amortization of servicing asset and interest-only
strips receivable......................................... 1,718 0 0
Amortization of excess servicing........................... 0 1,315 1,348
Amortization of purchased mortgage servicing
rights.................................................... 0 172 172
Gain on sale of government loans........................... (3,748) (392) 108
Loans originated or purchased for sale..................... (87,282) (7,672) (47,339)
Loans sold................................................. 80,558 9,214 32,646
Effect of changes in assets and liabilities-
net of effects from acquisition:
Interest receivable....................................... (896) (347) (534)
Interest payable.......................................... (31) 203 241
Deferred loan fees........................................ 833 14 (312)
Prepaid expenses.......................................... 34 (313) 110
Other assets.............................................. (473) 141 83
Accrued expenses.......................................... 961 671 1,139
Current taxes payable..................................... 680 127 (15)
Deferred taxes............................................ (198) 309 (140)
Other..................................................... (484) (527) (651)
--------- --------- ----------
Total adjustments.......................................... (4,387) 5,122 (10,755)
--------- --------- ----------
Net cash provided by (used in) operating activities $ 3,122 $ 8,450 $ (8,839)
========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
-57-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
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 $8,520,000, $1,370,000 and $10,000
of convertible debentures in 1997, 1996 and 1995, respectively. These amounts
are net of debenture offering costs of $568,000, $110,000 and $0 in 1997, 1996
and 1995.
For the years ended December 31, 1997, 1996 and 1995, $1,361,000, $446,000
and $373,000 of loans, respectively, were transferred to other real estate
owned.
On August 20, 1997, the Company issued a 5% stock dividend totaling
approximately $4.7 million.
In 1997 and 1996, $35.4 million and $15.7 million of unguaranteed SBA loans
were transferred to held for sale status. In addition, $9.6 million and $9.2
million of government guaranteed SBA loans were transferred to held for sale
status and subsequently sold and included in the Consolidated Statements of Cash
Flows.
In 1995, $572,000 of assets formerly classified as in-substance
foreclosures were reclassified as loans.
In 1995, $20.0 million of unguaranteed SBA loans originated in earlier
years were transferred to held for sale status. Concurrently, $21.4 million of
guaranteed SBA loans were transferred to the Company's investment portfolio at
cost, which was lower than market.
See notes to consolidated financial statements.
-58-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting and Reporting Policies:
The accompanying consolidated financial statements include the accounts of
SierraWest Bancorp ("Bancorp") and its subsidiary, SierraWest Bank (collectively
referred to as the "Company"). Bancorp was incorporated under the laws of the
State of California on December 5, 1985. During 1996, SierraWest Bancorp's two
banking subsidiaries changed their names to SierraWest Bank (the "Bank"), and on
October 1, 1996, Bancorp's Nevada subsidiary, formerly Sierra Bank of Nevada,
was merged into its California subsidiary, formerly Truckee River Bank.
Effective December 19, 1996, SierraWest Bank's subsidiary, Sierra Tahoe Mortgage
Company, was dissolved. Operations of this line of business were terminated in
1995.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practices within the banking
industry. The more significant accounting and reporting policies not described
elsewhere in these notes to financial statements are discussed below.
Significant intercompany transactions have been eliminated in consolidation.
Nature of Operations. The Company is a one-bank holding company and
operates ten branches in Northern California and two in Northern Nevada. Its
primary source of revenue is interest on SBA, real estate, and other commercial
loans provided to customers, who are predominantly small businesses and
individuals.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents in the consolidated
statements of cash flows include cash and due from banks, interest-bearing
deposits in other banks and federal funds sold.
Investments in Mutual Funds. Investments in mutual funds consist of mutual
funds whose assets are invested primarily in U.S. Government securities. At
December 31, 1997 and 1996, all mutual fund investments are classified as
available for sale and carried at market value. Unrealized gains and losses on
mutual funds are reported, net of tax, as a separate component of shareholders'
equity. Interest income on mutual funds is recorded as earned.
Investment Securities. In accordance with Statement of Financial Accounting
Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company has classified its investment securities and mutual
funds as held to maturity or available for sale. Securities held to maturity are
carried at cost adjusted by the accretion of discounts and amortization of
premiums. The Company's policy of carrying such investment securities at
amortized cost is based upon its ability and management's intent to hold these
investment securities to maturity. Securities available for sale may be sold to
implement the Company's asset/liability management strategies and in response to
changes in interest rates, prepayment rates and similar factors. These
securities are recorded at their market values. Unrealized gains or losses are
included as a separate component of shareholders' equity, net of tax. Gains or
losses on sales of investment securities are based on the specific
identification method.
Loans Held for Sale. Loans held for sale are valued at the lower of cost or
market value. Valuation adjustments, if any, are charged through the income
statement. In practice, the adjustment is charged against the gain (loss) on
sale of loans. At December 31, 1997, loans held for sale consist of the
unguaranteed portion of loans which the Company intends to sell on a securitized
basis and the guaranteed portions of Business and Industry ("B&I") loans the
Company intends to sell in 1998. At December 31, 1996 loans held for sale
consist of the unguaranteed portion of loans which the Company intends to sell
on a securitized basis.
-59-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Loans and Loan Fees. Loans receivable that Management has the intent and
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding principal balances reduced by any charge-offs and
net of any deferred fees or costs and unamortized premiums and discounts on
purchased loans. Interest income on loans and leases is recognized as earned.
When a loan is 90 days past due with respect to principal or interest, and in
the opinion of Management, interest or principal is not collectible, or at such
earlier time as Management determines that the collectibility of such principal
or interest is unlikely, the accrual of interest is discontinued and all accrued
but uncollected interest income is reversed. Cash payments subsequently received
on nonaccrual loans are recognized as income only where the future collection of
the recorded value of the loan is considered by management to be probable. Loan
fees net of certain related direct costs to originate loans are deferred and
amortized over the contractual life of the loan using a method that approximates
a level yield method.
Allowance for Possible Loan and Lease Losses. The allowance for possible
loan and lease losses is maintained at a level considered adequate to provide
for losses that can be reasonably anticipated. The allowance is increased by
provisions and reduced by charge-offs (net of recoveries). The Company's
provision is based on Management's overall evaluation of the inherent risks in
the loan and lease portfolio and detailed evaluations of the collectibility of
specific loans. This evaluation process requires the use of current estimates,
which may vary from the ultimate collectibility experienced in the future. The
estimates used are reviewed periodically, and, as adjustments become necessary,
they are charged to operations in the period in which they become known.
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure". SFAS
No. 114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
as a practical expedient at the loan's observable market rate or the fair value
of the collateral if the loan is collateral dependent. The Company's impaired
loans are collateral dependent and therefore measured using the fair value of
the collateral. SFAS No. 114 also requires that impaired loans for which
foreclosure is probable should be accounted for as loans. SFAS No. 118 amends
SFAS No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans and requires certain information to be
disclosed. Interest is recognized on impaired loans when cash is received and
the future collection of principal is considered by management to be probable.
A loan is impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Loans are measured for impairment
as part of the Company's normal loan review process. Impairment losses are
included in the allowance for possible loan and lease losses through a charge to
provision for loan and lease losses.
Lease Receivables. Leases are accounted for as direct financing leases and
are carried net of unearned income. Income from these leases is recognized on a
basis which produces a level yield on the outstanding net investment in the
lease.
Sales and Servicing of SBA 7(a) Loans. The Company originates loans to
customers under a Small Business Administration ("SBA") program that generally
provides for SBA guarantees of up to 80% of each loan. Prior to 1995, the
Company sold the guaranteed portion of each loan to a third party and retained
the unguaranteed portion in its own portfolio. Beginning in 1995, the Company
retained both the guaranteed and unguaranteed portions of most of the loans
generated in its portfolio. For the guaranteed portion of SBA loans sold, the
Company may be required to refund the sales premium received on such sales, if
the borrower defaults or the loan prepays within 90 days of the settlement date.
A gain is recognized on the sale of SBA loans through collection on sale of a
premium over the adjusted carrying value, through retention of an ongoing rate
differential less a normal service fee (excess servicing fee) between the rate
paid by the borrower to the Company and the rate paid by the Company to the
purchaser, or both.
-60-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
On January 1, 1997, the Company adopted SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
The statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-component approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. Adoption of SFAS
125 has not had a significant impact on the financial condition or operations of
the Company.
To calculate the gain (loss) on sale of SBA 7(a) loans, the Company's
investment in an SBA loan is allocated among the retained portion of the loan,
the servicing retained, the interest-only strip and the sold portion of the
loan, based on the relative fair market value of each portion. The gain (loss)
on the sold portion of the loan is recognized at the time of sale based on the
difference between the sale proceeds and the allocated investment. As a result
of the relative fair value allocation, the carrying value of the retained
portion is discounted, with the discount accreted to interest income over the
life of the loan. That portion of the excess servicing fees that represent
contractually specified servicing fees (contractual servicing) are reflected as
a servicing asset which is amortized over an estimated life using a method
approximating the level yield method; in the event future prepayments exceed
Management's estimates and future expected cash flows are inadequate to cover
the unamortized servicing asset, additional amortization would be recognized.
The portion of excess servicing fees in excess of the contractual servicing fees
is reflected as interest-only (I/O) strips receivable which are classified as
interest-only strips receivable available for sale and are carried at fair
value. Prior to the adoption of SFAS No. 125 on January 1, 1997 the excess
servicing fees were reflected as excess servicing assets which were amortized
over an estimated life using a method approximating the level yield method. In
its calculation of excess servicing fees the Company has used 0.4% as its
estimate of a normal servicing fee.
The Company accounts for the sales of the guaranteed portion of Business
and Industry loans in a similar manner.
Bank Premises, Leasehold Improvements and Equipment. Premises, leasehold
improvements and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed principally by the straight-line method
over the estimated useful lives of the assets, which are: buildings, 30 years;
leasehold improvements, 1 to 10 years; furniture and equipment, 3 to 5 years.
Fixed assets are assessed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
Be Disposed Of."
Other Real Estate Owned. Property acquired by the Company through
foreclosure is initially recorded in the consolidated statements of financial
condition at the lower of estimated fair value less the cost to sell or cost at
the date of foreclosure. At the time a property is acquired, if the fair value
is less than the loan amounts outstanding, any difference is charged against the
allowance for possible loan and lease losses. After acquisition, valuations are
periodically performed and, if the carrying value of the property exceeds the
fair value, less estimated costs to sell, a valuation allowance is established
by a charge to operations.
Operating costs on foreclosed real estate are expensed as incurred. Costs
incurred for physical improve ments to foreclosed real estate are capitalized if
the value is recoverable through future sale.
Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." No compensation expense has been recognized in the financial
statements for employee stock arrangements. The Company presents the required
pro forma disclosures of the effect of stock based compensation on net income
and earnings per share using the fair value method in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation".
-61-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
Earnings per Share. In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings Per Share". This Statement replaces
previous earnings per share reporting requirements. Earnings per share under
the new methods must be dually presented on the Statement of Income for all
periods presented. In addition, the Statement requires a reconciliation of the
numerators and denominators of basic and diluted per-share computations. SFAS
No. 128 is effective for interim and annual periods ending after December 15,
1997. All earnings per share information has been restated in accordance with
SFAS No. 128.
Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Reconciliation of the numerators and denominators is
presented in Note 13.
Derivative Financial Instruments. During the first quarter of 1996, the
Company entered into an interest rate swap agreement with a major bank to reduce
its exposure to fluctuations in interest rates. The Company accounts for these
activities as matched swaps in accordance with settlement accounting. An
interest rate swap is considered to be a matched swap if it is linked through
designation with an asset or liability, or both, that is on the balance sheet,
provided that it has the opposite interest characteristics of such balance sheet
items. The notional principal amount is $20 million, and the term is three
years. Under the agreement, the other bank pays a fixed rate of 8.17% and
receives from the Company the prime rate. Net interest income or expense
resulting from the differential between the fixed and prime rates is recorded
under settlement accounting on a current basis and any resultant accrual is
settled quarterly. The related amount payable to or receivable from the other
bank is included in other liabilities or assets. The fair value of the swap is
not recognized in the financial statements. The net interest expense recognized
in 1997 and 1996 was approximately $55,000 and $13,000, respectively.
Accounting Pronouncements. In June 1997, the financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 also requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 also requires descriptive information about the way that
the operating segments were determined, the products and services provided by
the operating segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment amounts from period to
period. Both statements are effective for fiscal years beginning after December
15, 1997. Adoption of SFAS No. 130 and No. 131 will not impact the Company's
financial position, results of operations or cash flows.
-62-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Reclassifications. Certain items in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
2. Investment Securities and Investments in Mutual Funds:
The amortized cost and estimated market values of investments in securities
and mutual funds are as follows (amounts in thousands):
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
<S> <C> <C> <C> <C> <C>
December 31, 1997
Held to Maturity:
U.S. Treasury securities................ $ 1,000 $ 0 $ 0 $ 1,000 $ 1,000
Available for Sale:
U.S. Treasury securities................ $ 35,398 $ 208 $ 0 $ 35,606 $ 35,606
Securities of U.S.
government agencies................. 1,478 7 0 1,485 1,485
Securities of states and
political subdivisions.............. 9,014 373 0 9,387 9,387
Mortgage-backed securities.............. 11,520 113 0 11,633 11,633
---------- --------- --------- ---------- ----------
Total available for sale................ $ 57,410 $ 701 $ 0 $ 58,111 $ 58,111
========== ========= ========= ========== ==========
Mutual funds available for sale......... $ 812 $ 0 $ (79) $ 733 $ 733
========== ========= ========= ========== ==========
December 31, 1996
Held to Maturity:
U.S. Treasury securities................ $ 2,001 $ 0 $ 1 $ 2,000 $ 2,001
Available for Sale:
U.S. Treasury securities................ $ 17,428 $ 49 $ 15 $ 17,462 $ 17,462
Securities of U.S.
government agencies................. 999 6 0 1,005 1,005
Securities of states and
political subdivisions.............. 5,951 59 19 5,991 5,991
Mortgage-backed securities.............. 7,387 45 10 7,422 7,422
---------- --------- --------- ---------- ----------
Total available for sale................ $ 31,765 $ 159 $ 44 $ 31,880 $ 31,880
========== ========= ========= ========== ==========
Mutual funds available for sale......... $ 1,500 $ 0 $ 165 $ 1,335 $ 1,335
========== ========= ========= ========== ==========
</TABLE>
-63-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Scheduled maturities of investment securities at December 31, 1997 were as
follows (amounts in thousands):
<TABLE>
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Within 1 year.......................................... $ 1,000 $ 1,000 $ 9,312 $ 9,327
After 1 year but within 5 years........................ 0 0 27,910 28,110
After 5 years but within 10 years...................... 0 0 590 608
After 10 years......................................... 0 0 8,078 8,433
-------- --------- ---------- -----------
1,000 1,000 45,890 46,478
Mortgage-backed securities............................. 0 0 11,520 11,633
-------- --------- ---------- -----------
Total.................................................. $ 1,000 $ 1,000 $ 57,410 $ 58,111
======== ========= ========== ===========
</TABLE>
Expected maturities of mortgage-backed securities can differ from contractual
maturities because borrowers have the right to call or prepay obligations with
or without call or prepayment penalties. In addition, such factors as
prepayments and interest rates may affect the yield and the carrying value of
mortgage-backed securities. At December 31, 1997 and 1996, the Company had no
high-risk collateralized mortgage obligations as defined by regulatory agencies.
The average maturity of portfolio securities held by mutual funds classified
as available for sale was 7.1 years at December 31, 1997.
Assets pledged to secure public deposits include investment securities at
December 31, 1997 of approximately $35,013,000 and loans and investment
securities at December 31, 1996, of approximately $24,201,000.
No debt securities were sold during 1997. Proceeds from sales of investments
in debt securities were $8,351,000 and $9,483,000 during 1996 and 1995,
respectively. The Company recorded gross realized losses of $8,000 and $62,000
on the sales of investments in debt securities during 1996 and 1995,
respectively. The Company realized tax benefits of $3,000 and $25,000 on debt
securities losses in 1996 and 1995, respectively. Proceeds from sales of mutual
funds were $2,697,000 in 1997 with a related gain of approximately $9,000. No
mutual funds were sold in 1996 or 1995.
Sales of investment securities classified as held to maturity in 1995 consisted
of a single security which was sold within 90 days of its maturity date. The
amortized cost at the date of sale was $998,203 and the loss realized was
$1,172.
3. Loans, Leases, Allowance for Possible Loan and Lease Losses and Loans Held
for Sale:
The Company's customers are located throughout its service areas covering
primarily the whole of Northern California including San Francisco and
Sacramento and Reno and Carson City, Nevada. Approximately 38% of the Company's
loans at December 31, 1997, have been generated through the Company's SBA
lending activities. Of these loans, the SBA guarantee extends to approximately
35%. $20,080,000 of the Company's loan portfolio represents the retained portion
of SBA loans for which the SBA guaranteed portion has been sold to investors.
Approximately 87% of these loans are collateralized by commercial real estate
and the balance by other business assets. The Company's loans are not
concentrated in any particular industry segment.
-64-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
At December 31, 1997 and 1996, the loan portfolio consisted of the
following (amounts in thousands):
1997 1996
---- ----
<S> <C> <C>
Commercial................................................................ $ 228,996 $ 174,445
Real estate--mortgage..................................................... 102,602 67,690
Real estate--construction................................................. 64,151 36,633
Individual and other...................................................... 6,920 6,824
Lease receivables......................................................... 16,055 9,994
----------- -----------
Total gross loans and leases.............................................. 418,724 295,586
Unearned income on leases................................................. 2,941 1,690
Net deferred loan fees.................................................... (305) 19
Allowance for possible loan and lease losses.............................. 6,649 4,546
----------- -----------
Total loans and leases, net of unearned income on leases, net
deferred fees and allowance for possible loan and lease losses......... $ 409,439 $ 289,331
=========== ===========
Loans held for sale....................................................... $ 17,061 $ 29,489
=========== ===========
</TABLE>
Included in commercial loans and loans held for sale are SBA loans
totaling $163,764,000 and $146,266,000 at December 31, 1997 and 1996,
respectively. The guaranteed portion of SBA loans in process of disbursement
totaled $8,897,000 and $5,559,000 at December 31, 1997 and 1996, respectively.
When these loans are fully disbursed, they will be available for sale. The
guaranteed portion of loans which are in the Company's loan portfolio totaled
$46,710,000 and $29,066,000 at December 31, 1997 and 1996, respectively. The
Company plans to hold these loans in the portfolio, but may sell them if
necessary. Loans and portions of loans guaranteed by the federal government were
approximately $60,030,000 and $37,444,000 at December 31, 1997 and 1996,
respectively.
The following schedule provides a summary of the future minimum lease
receivable payments to be received over the next five years (in thousands).
1998 $ 4,842
1999 4,056
2000 3,145
2001 2,261
2002 1,030
Thereafter 721
--------
Total $ 16,055
========
There are no contingent rentals included in income for each of the three years
in the period ended December 31, 1996.
Of total gross loans and leases at December 31, 1997, $5,983,000 were
considered to be impaired. The allowance for possible loan and lease losses
included $718,000 related to these loans. The amount of interest received and
recognized on these impaired loans in 1997 was $413,000. The average recorded
investment in impaired loans during 1997 was $5,715,000.
Of total gross loans and leases at December 31, 1996, $5,400,000 were
considered to be impaired. The allowance for possible loan and lease losses
included $565,000 related to these loans. The amount of interest received and
recognized on these impaired loans in 1996 was $310,000. The average recorded
investment in impaired loans during 1996 was $5,600,000.
-65-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The changes in the allowance for possible loan and lease losses for the
years ended December 31, 1997, 1996, and 1995 were as follows (amounts in
thousands):
<TABLE>
Year Ended
December 31,
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year.................................... $ 4,546 $ 3,845 $ 3,546
Provision for possible loan and lease losses.................. 2,480 1,010 1,270
Loans charged off............................................. (1,490) (593) (1,025)
Recoveries.................................................... 249 284 54
Acquisition................................................... 864 0 0
--------- --------- ---------
Balance, end of period........................................ $ 6,649 $ 4,546 $ 3,845
========= ========= =========
</TABLE>
As of December 31, 1997 and 1996, loans totaling $5,983,000 and $5,363,000,
respectively, were on nonaccrual status. Forgone interest on loans that were on
nonaccrual status for the years ended December 31, 1997, 1996 and 1995,
approximated $237,000, $320,000 and $243,000, respectively. Cash collections of
interest on nonaccrual loans for the same periods of $413,000, $310,000, and
$221,000, respectively, were included in interest on loans in the Consolidated
Statements of Income. The principal balance of loans where scheduled payments
are 90 days or more past their due date and where interest has been accrued
totaled $1,382,000, $2,132,000, and $1,023,000, as of December 31, 1997, 1996
and 1995, respectively. Management believes these loans are adequately secured
and interest recorded on these loans will be collected.
Other real estate owned was $1,438,000 and $446,000 at December 31, 1997,
and 1996, respectively, and is recorded in other assets. At December 31, 1997
and 1996 the balance in the allowance for losses on other real estate owned was
zero. During the years ended December 31, 1997 and 1996, there was no
significant activity in the allowance for losses on other real estate owned.
-66-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. Sales and Servicing of SBA Loans:
Prior to January 1, 1997 the Company's excess servicing fees were recorded
as excess servicing assets which were amortized over the estimated life of the
related loans. Effective January 1, 1997, under provisions of SFAS 125, excess
servicing assets of $12.0 million recognized on SBA, and $0.15 million on B&I
loans sold prior to January 1, 1997 and mortgage servicing assets of $0.6
million, were reclassified to interest-only strips receivable. The balance of
excess servicing assets at January 1, 1997 were reclassified to servicing
assets. These assets are amortized as an offset to loan servicing income and I/O
strip income over the estimated life of the related loans.
Interest-only strip receivables are classified as interest-only strips
receivable available for sale and are carried at fair value. On a quarterly
basis the Company reviews its servicing assets, stratified by loan type, for
impairment. The amount of impairment recognized is the amount by which the
carrying amount of the servicing assets exceeds their fair value. This amount is
recorded as a valuation allowance. There was no activity in the valuation
allowance during 1997. The fair value of the Company's servicing assets at
December 31, 1997 based on the current quoted market prices for similar
instruments was estimated at $2.1 million. The carrying amount at this same date
was also $2.1 million.
A summary of the activity in SBA loans for the years ended December 31, 1997,
1996 and 1995, is as follows (amounts in thousands):
<TABLE>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Excess servicing retained on January 1, ................................... $ 14,188 $14,813 $ 16,027
Reclassification to servicing assets....................................... 2,180 0 0
Reclassification to I/O strips (1)......................................... 12,758 0 0
Additions to excess servicing assets at sale............................... 0 690 134
Additions to servicing assets at sale...................................... 114 0 0
Additions to I/O strips at sale (2)........................................ 5,089 0 0
Amortization charged against earnings -
servicing assets/excess servicing......................................... 273 1,315 1,348
Amortization charged against earnings - I/O strips......................... 1,446 0 0
Balance of excess servicing retained at December 31........................ 0 14,188 14,813
Balance of servicing assets at December 31................................. 2,021 0 0
Balance of I/O strips at December 31....................................... 16,401 0 0
Unrealized gain on I/O strips at December 31............................... 675 0 0
</TABLE>
(1) Includes $600 thousand in purchased mortgage servicing rights and $150
thousand in excess servicing on B&I loans.
(2) Includes $367 thousand related to B&I loan sales.
Included in the fair value of I/O strips at December 31, 1997 is $512
thousand related to B&I loans of which $15 thousand represents the unrealized
gain on these assets. Excess servicing retained at December 31, 1996 includes
$150 thousand generated on the sale of B&I loans.
Sales of guaranteed portions of SBA loans totaled $9.6 million, $5.6
million and $5.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
In June, 1997 $51.3 million of unguaranteed portions of SBA loans were
securitized. A gain of $2.6 million was recorded upon securitization and
approximately $4 million in additional I/O strips receivable was recorded. A
recourse obligation of $3,272 thousand was recorded at securitization of which
$250 thousand was subsequently credited to expense related to the paydown of
loans included in the securitization.
-67-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the years ended December 31, 1997, 1996 and 1995, $78.1 million, $7.3
million and $22.2 million of unguaranteed portions of SBA and similar loans,
respectively, were originated for sale.
During June 1990, the Company purchased the rights to service the
guaranteed portion of SBA loans from a third party. The unpaid principal balance
of such loans serviced for others by the Company exclusive of nonaccrual loans,
was $11,651,000 and $11,580,000 at December 31, 1996 and 1995, respectively. The
balance of purchased servicing rights was $600,000 and $772,000 at December 1996
and 1995, respectively. Amortization of purchased servicing rights was $172,000
in 1996 and 1995.
5. Bank Premises, Leasehold Improvements and Equipment:
Bank premises, leasehold improvements and equipment at December 31, 1997
and 1996, consisted of the following (amounts in thousands):
<TABLE>
December 31, 1997
Accumulated
Depreciation/ Net
Cost Amortization Book Value
<S> <C> <C> <C>
Land...................................................... $ 948 $ 0 $ 948
Buildings................................................. 8,749 1,361 7,388
Leasehold improvements.................................... 732 541 191
Furniture and equipment................................... 7,504 5,251 2,253
-------------- ------------ ------------
Total..................................................... $ 17,933 $ 7,153 $ 10,780
============== ============ ============
December 31, 1996
Accumulated
Depreciation/ Net
Cost Amortization Book Value
Land...................................................... $ 1,425 $ 0 $ 1,425
Buildings................................................. 9,439 1,059 8,380
Leasehold improvements.................................... 639 501 138
Furniture and equipment................................... 6,814 4,399 2,415
-------------- ------------ ------------
Total..................................................... $ 18,317 $ 5,959 $ 12,358
============== ============ ============
</TABLE>
Depreciation and amortization amounts included in net occupancy and
equipment expenses were $1,352,000, $1,145,000 and $1,076,000, for the years
ended December 31, 1997, 1996 and 1995, respectively.
6. Deposits:
The aggregate amount of certificates of deposits with balances of $100,000
or more, was $112,627,000 and $84,911,000 at December 31, 1997 and 1996,
respectively.
-68-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Maturities of certificates of deposit at December 31, 1997 were as follows
(amounts in thousands):
Year
1998...................................... 201,493
1999...................................... 16,473
2000...................................... 2,645
2001...................................... 1,109
2002...................................... 1,432
Thereafter................................ 85
----------
$ 223,237
==========
7. Convertible Debentures:
On February 8, 1994, Bancorp sold to the public $10,000,000 of 8 1/2%
optional convertible subordinated debentures, convertible at the option of the
holder at $10.00 per share. These debentures were scheduled to mature on
February 1, 2004 and are redeemable on or after February 1, 1997 in whole or in
part at the option of Bancorp. During 1997 notice was given to the debenture
holders that the remaining outstanding debentures would be redeemed effective
June 30, 1997, if not converted by June 30, 1997. Prior to the close of business
on June 30, 1997, the remaining balance of $8,520,000 of the Company's 8 1/2%
convertible debentures were converted to 852 thousand shares of common stock.
The balance of convertible debentures outstanding at December 31, 1996 was
$8,520,000.
8. Salary Continuation Plan:
The Company has a Salary Continuation Plan covering certain of its senior
officers and directors. Under this plan, the officers and directors or their
beneficiaries will receive monthly payments after retirement or if earlier,
death. Certain officers and directors agreements provide for an acceleration of
benefits such that the full amount due under the agreement would become payable
in the case of a change of control of the Company. The Company has accrued
$114,197, $104,820 and $66,818 as compensation expense in 1997, 1996 and 1995,
respectively, under this plan. To protect the Company in the event of death
prior to retirement, the Company has secured life insurance on the lives of the
covered officers and directors.
9. Commitments and Contingent Liabilities:
Lease Payments. The Company is obligated for rental payments under certain
operating lease, capitalized lease and contract agreements, some of which
contain renewal options. Total rental expense included in net occupancy and
equipment expense amounted to $1,152,000, $1,106,000 and $1,211,000, for the
years ended December 31, 1997, 1996 and 1995, respectively. At December 31,
1997, future minimum rentals to be received under noncancellable subleases were
approximately $362,000.
-69-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
At December 31, 1997, future minimum payments, by year and in the
aggregate, under the capital leases and noncancellable operating leases with
initial or remaining terms of one year or more consisted of the following (in
thousands):
Capital Operating
Year Leases Leases
1998...................................... $ 42 $ 1,134
1999...................................... 42 1,003
2000...................................... 42 900
2001...................................... 42 667
2002...................................... 42 790
Thereafter................................ 383 1,304
-------- --------
Total minimum lease payments.............. 593 $ 5,798
========
Less amount representing interest......... (296)
--------
Present value of net minimum
lease payments.......................... $ 297
========
Commitments to Lend. In the normal course of business, there are
outstanding various commitments and contingent liabilities, such as commitments
to extend credit and letters of credit, which are not reflected in the
consolidated financial statements. As of December 31, 1997 and 1996, the Company
had outstanding $151,044,000 and $78,053,000, respectively, in commitments to
extend credit and $4,780,000 and $2,024,000, respectively, in standby letters of
credit. At December 31, 1997, no losses are anticipated as a result of these
commitments.
Loan commitments are typically contingent upon the borrower meeting
certain financial and other covenants, and such commitments typically have fixed
expiration dates and sometimes require payment of fees. Approximately
$40,352,000 of the commitments at December 31, 1997, relate to SBA loans which
may require a construction phase, generally lasting less than 12 months. The
remainder relate primarily to commercial lines of credit, construction loans,
equity lines of credit, and commercial loans. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt or equity
securities, or business assets.
Standby letters of credit are conditional commitments written by the
Company to guarantee the performance of a client to a third party. These
guarantees are issued to the Company's commercial clients, and are typically
short-term in nature. Credit risk is similar to that involved in extending loan
commitments to customers, and the Company accordingly uses evaluation and
collateral requirements similar to those for loan commitments. Most such
commitments are collateralized.
Legal Actions. During 1987, the Bank took title, through foreclosure, of a
property located in Placer County which subsequent to the Bank's sale of the
property was determined to be contaminated with a form of hydrocarbons. At the
time it owned the property, the Bank became aware of and investigated the status
of certain underground tanks that had existed on the property. The Bank hired a
consultant to study the tanks and properly seal them. Several years later, and
after resale of the property, contamination was observed in the area of at least
one of the buried tanks and along an adjoining riverbank of the Yuba River. The
Bank, at the time of resale of the property, was not aware of this contamination
adjacent to the tanks but was aware of the existence of the tanks and disclosed
this to its purchaser.
A formal plan of remediation has not been approved by the County of Placer or
the State Regional Water Quality Board but is being finalized by an independent
consultant retained for this purpose. As a result of the discovery of the
contamination, two civil lawsuits were instituted against the Bank and other
prior owners by the current owner of the property, Rainbow Holding Company, who
is also the Bank's borrower. One of the actions, the state court
-70-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
matter, was dismissed by agreement of the parties. The other matter, filed in
the summer of 1995 in the U.S. District Court, Eastern District of California,
is ongoing, with mediation before a retired Superior Court Judge.
The Company'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 expected that clean-up
of the property will commence during 1998 at the conclusion of remediation and a
raising of sufficient funds.
In addition, the Company is subject to some minor pending and threatened legal
actions which arise out of the normal course of business and, in the opinion of
Management and the Company's General Counsel, the disposition of these claims
currently pending will not have a material adverse affect on the Company's
financial position or results of operations.
Reserves. The Company is required to maintain reserves with the Federal
Reserve Bank of San Francisco equal to a percentage of its reservable deposits.
The reserve requirement at December 31, 1997 and 1996 was $10,486,000 and
$5,054,000, respectively. As compensation for check-clearing services,
additional compensating balances of $2,750,000 and $1,500,000 are required to be
maintained with the Federal Reserve Bank. In addition, at December 31, 1997, the
Company had restricted access to approximately $2.2 million in cash balances
which are required to be maintained pursuant to its 1997 securitization.
10. Income Taxes:
The current and deferred amounts of the tax provision for the years ended
December 31, 1997, 1996 and 1995 are as follows (amounts in thousands):
<TABLE>
December 31,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal Currently payable...................... $ 3,901 $ 1,392 $ 1,030
Deferred............................... (206) 234 (93)
State Currently payable...................... 1,004 376 289
Deferred............................... 8 75 (47)
---------- ----------- ----------
$ 4,707 $ 2,077 $ 1,179
========== =========== ==========
Total Currently payable...................... $ 4,905 $ 1,768 $ 1,319
Deferred............................... (198) 309 (140)
---------- ----------- ----------
$ 4,707 $ 2,077 $ 1,179
========== =========== ==========
</TABLE>
-71-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
net deferred tax liability as of December 31, 1997 and 1996 are as follows
(amounts in thousands):
<TABLE>
December 31,
Deferred Tax Assets: 1997 1996
---- ----
<S> <C> <C>
Book loan loss allowance in excess of tax loan loss allowance $ 2,469 $ 1,603
State taxes paid or accrued 341 153
Accrued personal leave 232 248
Deferred compensation 351 222
Unrealized loss on investment securities 0 21
Accrued expenses 502 582
Other 450 275
------- -------
4,345 3,104
------- -------
Deferred Tax Liabilities:
Unamortized book gain in excess of unamortized tax gain
on sale of SBA loans $ 2,217 $ 2,285
Deferred loan costs 1,104 618
Loans marked to market 665 573
Unrealized gain on investment securities and I/O strips receivable 535 0
Other 309 351
------- -------
4,830 3,827
------- -------
Net deferred tax liability $ 485 $ 723
======= =======
</TABLE>
The total tax provision differs from the statutory federal income tax
rates for the reasons shown in the following table:
<TABLE>
December 31,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax at statutory federal rate ............................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit.......................... 5.4 5.0 4.4
Income exempt from federal taxation.......................... (1.1) (1.7) (0.4)
Increase in cash surrender value
of life insurance policies................................. (0.4) (0.7) (1.3)
Other, net................................................... (0.4) 0.8 0.4
----- ----- ----
Effective tax rate........................................... 38.5% 38.4% 38.1%
==== ==== ====
</TABLE>
-72-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. Preferred Stock
On December 21, 1995, the Company designated 200,000 shares of its
10,000,000 authorized preferred shares as Series A Junior Participating
Preferred Stock (Series A stock). One share of Series A stock has the same
voting and participation rights as one hundred shares of common stock. On this
same date, the Company's Board of Directors adopted a shareholder rights
protection plan (the Plan) and declared a dividend of one stock right for each
share of common stock outstanding on January 16, 1996. Upon the occurrence of
certain events, the right is convertible into one one-hundredth of a share of
Series A stock for an exercise price of $40. As the rights are not convertible
at the option of the holder and there is no assurance that they will become
convertible, the Company has not assigned a value to the rights. The Plan became
effective March 3, 1996. On January 29, 1998, the Company amended the Plan and
increased the exercise price of the stock rights from $40 to $100.
12. Other Expense:
Other expense for the years ended December 31, 1997, 1996 and 1995 include
the following (amounts in thousands):
<TABLE>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Advertising................................. $ 697 $ 600 $ 715
Consulting.................................. 1,082 506 263
Directors' fees and expenses................ 508 429 909
FDIC assessments............................ 51 4 284
Insurance(1)................................ 233 242 277
Legal fees.................................. 190 484 470
Postage..................................... 364 337 304
Stationery and supplies..................... 369 416 334
Telephone................................... 425 374 350
Sundry losses............................... 534 808 1,370
Other....................................... 2,239 1,925 1,640
-------- ---------- ----------
$ 6,692 $ 6,125 $ 6,916
======== ========== ==========
</TABLE>
(1) Excludes medical insurance and workers' compensation premiums which are
included in salaries and related benefits.
13. Earnings Per Share:
During the fourth quarter of 1997, the Company adopted SFAS No. 128, Earnings
Per Share. This statement replaces previous earnings per share reporting
requirements and requires presentation of both basic and diluted earnings per
share. All earnings per common and equivalent share information has been
restated to give effect to the adoption of SFAS No. 128. Basic earnings per
share is computed by dividing net income by the weighted average common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if options or other contracts to issue common stock
were exercised and converted into common stock.
-73-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 years ended December 31:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Calculation of Basic Earnings Per Share
Numerator - net income $7,509 $3,328 $ 1,916
Denominator - weighted average common shares
outstanding 3,693 2,809 2,728
------ ------ -------
Basic Earnings Per Share $ 2.03 $ 1.18 $ 0.70
====== ====== =======
Calculation of Diluted Earnings Per Share
Numerator:
Net Income $7,509 $3,328 $ 1,916
Effect of convertible debentures 35 448 499
------ ------ -------
Net Income and assumed conversions $7,544 $3,776 $ 2,415
Denominator:
Weighted average common shares outstanding 3,693 2,809 $ 2,728
Dilutive effect of options 189 134 84
Dilutive effect of convertible debentures 273 977 1,050
------ ------ -------
4,155 3,920 3,862
------ ------ -------
Diluted Earnings Per Share $ 1.82 $ 0.96 $ 0.63
====== ====== =======
</TABLE>
14. Employee Stock Option Plan:
Under the Company's 1988 stock option plan, 519,750 shares of stock were
reserved for employee stock options. Options under this plan could be granted to
full-time salaried officers and employees and to directors of Bancorp and its
subsidiaries at the fair market value of the stock on the date of grant. With
the exception of non-employee director options granted after August 16, 1995,
options granted under the 1988 plan are exercisable for a period of five years,
with 20% of the options vesting each year. Options granted to non-employee
directors after August 16, 1995 are fully vested upon grant and have a term and
exercise period of ten years. The 1988 plan was terminated in 1996 and replaced
by a new plan, under which 472,500 shares are available for issuance. Options
under this plan may be granted to full-time salaried officers and employees at
the fair market value of the stock on the date of the grant. The options have a
term of ten years and vesting provisions are determined by a committee of the
Board of Directors, with a minimum of 20% of the options vesting each year.
-74-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following is a summary of stock option activity:
(Adjusted to reflect the 5% stock dividend paid August 29, 1997)
<TABLE>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding, January 1, 1995..................................... 356,636 $ 6.56
Granted ...................................................... 171,452 9.85
Terminated ............................................ . . . (114,201) 6.38
Exercised .................................................... (21,619) 6.58
---------
Outstanding, December 31, 1995 (156,658 exercisable
at a weighted average price of $7.93)........................... 392,268 8.05
Granted....................................................... 78,750 13.63
Terminated.................................................... (26,607) 7.43
Exercised..................................................... (32,256) 6.58
---------
Outstanding, December 31, 1996 (242,419 exercisable
at a weighted average price of $9.27)........................... 412,155 9.28
Granted....................................................... 64,550 18.63
Terminated.................................................... (15,750) 10.41
Exercised..................................................... (116,647) 7.52
---------
Outstanding, December 31, 1997................................... 344,308 11.57
</TABLE>
Additional information regarding options outstanding as of December 31, 1997 is
as follows:
<TABLE>
Options Outstanding Options Exercisable
Weighted Average
Remaining
Range of Number Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (Yrs) Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 4.76 8,663 0.1 $ 4.76 6,930 $ 4.76
$ 6.19 - 7.62 64,370 0.7 6.74 30,450 6.71
$ 8.81 - 9.29 75,370 6.2 9.20 64,871 9.25
$10.71 - 11.19 61,005 3.0 10.75 20,685 10.74
$12.50 - 22.86 129,150 8.8 15.56 55,650 13.63
$24.13 - 27.63 5,750 9.7 25.96 0
------- -------
344,308 178,586
======= =======
</TABLE>
At December 31, 1997, 335,500 shares were available for future grants under the
1996 plan.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of 1995. Under SFAS No. 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The fair value of the options granted during 1997, 1996 and 1995 is
estimated as $397,000, $352,000 and $516,000 on the date of grant using a
binomial options pricing model with the following assumptions: For employee
grants made in 1997: expected life, seven and one-half years; average risk free
interest rate 6.19%. For non-employee grants made in 1995: expected life, seven
years; risk free interest rate, 5.93%. For fully vested grants made in 1996:
expected life, seven years; risk free interest rate, 5.97%. For all other
employee grants made in 1996 and 1995: expected life, four years; risk free
interest rates, 5.76% in 1996 and 5.79% in 1995.
-75-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For 1997 grants stock volatility was assumed to be 25%. For all grants made in
1996 and 1995, stock volatility was assumed to be 30%.
Dividends were assumed to be payable at 2.5% during all years presented. The
weighted average per share fair value of the 1997, 1996 and 1995 awards was
$6.15, $4.69 and $3.24, respectively. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
Had compensation cost for the grants been determined based upon the fair value
method, the Company's net income and earnings per share would have been adjusted
to the pro forma amounts indicated below.
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income
As reported................................ $ 7,509 $ 3,328 $ 1,916
Pro forma-basic............................ 7,426 3,133 1,722
Pro forma-diluted.......................... 7,461 3,581 2,221
Basic earnings per share
As reported................................ $ 2.03 $ 1.18 $ 0.70
Pro forma.................................. 2.01 1.12 0.63
Diluted earnings per share
As reported................................ $ 1.82 $ 0.96 $ 0.63
Pro forma.................................. 1.80 0.92 0.58
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1995 has
been excluded from the pro forma calculation; accordingly, the pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
15. Employee Stock Ownership Plan:
Officers and other employees of Bancorp and its subsidiary are eligible
for participation in the "SierraWest Bancorp KSOP Plan" (the "KSOP") which
provides for a qualified cash or deferred arrangement and discretionary employer
matching and profit sharing contributions. The Company contributes to the plan
at the discretion of the Board of Directors. Contributions can take the form of
cash contributions or Bancorp common stock. Contributions of $317,000, $238,000,
and $198,000 were made to the KSOP in 1997, 1996 and 1995, respectively.
16. Capital Requirements and Regulatory Restrictions:
The Company is regulated by the Federal Reserve Board and is limited as to the
payment of dividends by California corporate law to the amount of its retained
earnings. SierraWest Bank is regulated by the Federal Deposit Insurance
Corporation (the "FDIC"), whose regulations generally do not limit the payment
of dividends. In addition to the FDIC, SierraWest Bank is also regulated by the
California State Banking Department. California banking laws limit cash
dividends to the lesser of retained earnings or net income for the last three
years, net of the amount of distributions made to shareholders during such
period. At December 31, 1997, in accordance with statutory restrictions,
$11,587,000 of Bancorp's retained earnings were restricted as to the payment of
dividends; however, banking regulations also require that each bank maintain
certain capital ratios. These requirements may further act to limit the payment
of dividends.
The Company and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and, possibly,
additional discretionary - actions by regulators that, if undertaken, could have
a material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets,
-76-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and the
Bank's prompt corrective action classification are also subject to qualitative
judgements by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
The most recent notifications from the Federal Deposit Insurance
Corporation for the Bank as of December 31, 1997 and 1996 categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts (in thousands) and ratios
are also presented, respectively, in the following tables.
<TABLE>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $ 56,742 12.4% $ 36,660 8.0% N/A N/A
SierraWest Bank 53,656 11.7% 36,782 8.0% 45,978 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 51,003 11.1% 18,330 4.0% N/A N/A
SierraWest Bank 47,898 10.4% 18,391 4.0% 27,587 6.0%
Tier I Capital (to Average Assets):
Consolidated 51,003 8.9% 23,030 4.0% N/A N/A
SierraWest Bank 47,898 8.3% 23,030 4.0% 28,787 5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $ 46,668 13.6% $ 27,452 8.0% N/A N/A
SierraWest Bank 35,866 10.7% 26,816 8.0% 33,520 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 33,846 9.8% 13,815 4.0% N/A N/A
SierraWest Bank 31,670 9.4% 13,477 4.0% 20,215 6.0%
Tier I Capital (to Average Assets):
Consolidated 33,846 7.9% 17,137 4.0% N/A N/A
SierraWest Bank 31,670 7.6% 16,668 4.0% 20,836 5.0%
</TABLE>
SierraWest Bank's ratios are calculated under regulatory accounting principles.
-77-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
17. Related Party Transactions:
In the ordinary course of business, the Company makes loans to directors,
senior officers and shareholders on substantially the same terms, including
interest rates and collateral, as comparable transactions with unaffiliated
persons. During 1997, there was one such loan with a balance of in excess of
$60,000. At December 31, 1997 the balance was $1,048,000. Loan disbursements
during 1997 on this loan totaled $1,065,000 and payments made totaled $17,000.
As of December 31, 1996, there were no loans outstanding to directors, senior
officers, and principal shareholders and their known associates which, in
aggregate, exceeded $60,000.
18. Disclosures About Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
that the Company disclose the fair value of financial instruments for which it
is practicable to estimate that value. Although Management uses its best
judgment in assessing fair value, there are inherent weaknesses in any
estimating technique that may be reflected in the fair values disclosed. The
fair value estimates are made at a discrete point in time based on relevant
market data, information about the financial instruments and other factors.
Estimates of fair value of instruments without quoted market prices are
subjective in nature and involve various assumptions and estimates that are
matters of judgment. Changes in the assumptions used could significantly affect
these estimates. Fair value has not been adjusted to reflect changes in market
condition for the period subsequent to December 31, 1997 and 1996. Therefore,
estimates presented herein are not necessarily indicative of amounts which could
be realized in a current transaction.
The following estimates and assumptions were used at December 31, 1997 and 1996,
to estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value:
Cash and Cash Equivalents. For cash and cash equivalents, the carrying amount
is estimated to be fair value.
Investment Securities and Mutual Funds. For investment securities and mutual
funds, fair values are based on quoted market prices or dealer quotes. If a
quoted price is not available, fair value is estimated using quoted market
prices for similar securities.
Loan Receivables. The fair value of non-SBA loans is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of loans held or available for sale is estimated
using quoted market prices for similar loans or the expected gain in the case of
loans being pooled for securitization. SBA loans in process which will become
available for sale after final disbursement are valued at cost plus the
estimated gain on sale but excluding any gain allocable to the undisbursed
portion of the loans. In assigning current market rates, it has been assumed
that these reflect future losses and that no additional provision for loan and
lease losses is required. The unguaranteed portion of SBA loans not being pooled
have been valued at book value, which approximates fair value. Loans on
nonaccrual or work out status have been valued at an estimated average
realization value for the underlying collateral based on past experience in
liquidation of comparable loans.
Excess Servicing/Servicing Asset/I/O Strips Receivable. The servicing spread net
of normal servicing is valued at the current rate paid by the market for SBA
interest strips at December 31, 1997 and 1996. A discount to the SBA strip
pricing is applied to reflect a reduction in marketability for servicing spread
included in the Company's June, 1997 securitization.
Cash Surrender Value of Life Insurance. The carrying amount is estimated to be
the fair value.
Deposit Liabilities. The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
-78-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Convertible Debentures. Fair value is based on quoted market prices at December
31, 1996.
Commitments to Fund Loans. The Company's commitments to fund loans are primarily
for adjustable rate loans indexed to the prime rate. For these commitments,
there is no difference between the committed amount and fair value. At December
31, 1997 and 1996, the Company's commitments to fund fixed rate loans were at
rates which approximated market. The unrealized gain from the subsequent sale of
the commitment portion of government loans in process at December 31, 1997 and
1996 is estimated to be $334 thousand and $839 thousand, respectively.
Derivative Financial Instruments. Based on quoted market prices at December 31,
1997 and December 31, 1996, the interest rate swap had a negative fair value of
$47 thousand and $149 thousand, respectively.
Letters of Credit. The Company's standby letters of credit have been valued
based on the fees charged for such instruments at December 31, 1997 and 1996.
The difference between the letter of credit amounts and the fair value of such
amounts is immaterial.
The Company did not hold any commitments to sell loans at December 31, 1997 or
1996.
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
<TABLE>
December 31, 1997
Carrying Fair
Amount Value
<S> <C> <C>
Financial Assets:
Cash and cash equivalents............................................. $ 61,556 $ 61,556
Mutual funds.......................................................... 733 733
Investment securities................................................. 59,111 59,111
Loans receivable...................................................... 426,500 437,234
I/O strips receivable................................................. 17,076 17,076
Servicing asset....................................................... 2,021 2,021
Cash surrender value of life insurance................................ 2,437 2,437
------------- -------------
$ 569,434 $ 580,168
============= =============
Financial Liabilities:
Deposits.............................................................. $ 526,269 $ 526,964
============= =============
</TABLE>
-79-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
December 31, 1996
Carrying Fair
Amount Value
<S> <C> <C>
Financial Assets:
Cash and cash equivalents............................................. $ 58,634 $ 58,634
Mutual funds.......................................................... 1,335 1,335
Investment securities................................................. 33,881 33,880
Loans receivable...................................................... 318,820 328,971
Excess servicing...................................................... 14,338 17,242
Cash surrender value of life insurance................................ 2,292 2,292
------------- -----------
$ 429,300 $ 442,354
============= ===========
Financial Liabilities:
Deposits.............................................................. $ 399,651 $ 400,471
Convertible debentures................................................ 8,520 13,036
------------- -----------
$ 408,171 $ 413,507
============= ===========
</TABLE>
19. Mergers and Acquisition:
On June 30, 1997, SierraWest Bancorp and its subsidiary SierraWest Bank acquired
Mercantile Bank (Mercantile), a California Banking Corporation headquartered in
Sacramento, California. The results of operations of Mercantile are included in
the Statements of Income from date of acquisition. The transaction was accounted
for under the purchase method of accounting. This method requires that the
purchase price be allocated to the acquired assets and liabilities of Mercantile
on the basis of their estimated fair values.
The purchase price totaled $6,618,000 comprised of $3,301,000 of cash
compensation and $3,317,000 of stock including costs to issue the stock. At the
merger date, the fair value of assets acquired totaled approximately $42.8
million including net loans of approximately $26.1 million and investment
securities of approximately $3.5 million. The fair value of the liabilities
assumed approximated $37.9 million including deposits of $37.7 million. The
Company recorded goodwill of $1,072,000 which is being amortized over 15 years
and core deposit intangibles of $737,000 which is being amortized over 5 years,
both on a straight-line basis.
-80-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following unaudited pro-forma combined Summary of Operations presents a
pro-forma combined summary of operations of both companies for the years end
December 31, 1996 and 1997 and it is presented as if the merger had been
effective on January 1, 1996 and January 1, 1997. This pro-forma reflects
adjustments for amortization of purchase accounting adjustments. The unaudited
pro-forma of the Combined Summary of Operations data is intended for information
purposes only and is not necessarily indicative of future results of operations
of the Company or the results of operations that would have actually occurred
had the merger been effected during the periods presented.
Unaudited Pro Forma Combined Summary of Operations
(In thousands, except per share data)
<TABLE>
For the Years Ended December 31,
1997 1996
----- -----
<S> <C> <C>
Interest income............................................................. $ 46,110 $ 37,146
Interest Expense............................................................ 17,823 14,184
----------- ----------
Net interest income........................................................ 28,287 22,962
Provision for loan losses................................................... 2,621 1,438
------------ -----------
Net interest income after provision for loan losses........................ 25,666 21,524
Other operating income...................................................... 11,960 7,762
Other operating expense..................................................... 25,594 23,574
----------- ----------
Income before income taxes................................................. 12,032 5,712
Provision for income taxes.................................................. 4,634 2,235
------------ ----------
Net income . .............................................................. $ 7,398 3,477
=========== ==========
Basic Earnings Per Share.................................................... $ 1.96 $ 1.17
Weighted average common shares used
to calculate basic earnings per share...................................... 3,779 2,980
Net income adjusted for effect of convertible debentures. .................. $ 7,433 $ 3,925
Diluted Earnings Per Share.................................................. $ 1.75 $ 0.96
Weighted average common shares adjusted for dilutive
effect of options and convertible debentures............................... 4,240 4,091
</TABLE>
-81-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
On November 13, 1997, the Company and its wholly owned subsidiary SierraWest
Bank, and California Community Bancshares Corporation (CCBC) and its wholly
owned subsidiary Continental Pacific Bank (CPB) signed a Plan of Acquisition and
Merger (the Plan). The Plan provides that CPB will be merged with and into
SierraWest Bank. SierraWest Bank will be the surviving corporation in the bank
merger. The Company will also merge with California Community Bancshares
Corporation and will become the surviving corporation upon merging.
Under the terms of the proposed transaction, shareholders of CCBC will receive
shares of the Company's common stock at an exchange ratio to be determined by a
formula prior to the effective date of the transaction, based on the average of
the closing prices of the Company's common stock during a defined 20-day period.
For example, if the average price during the 20-day period were $33.75 , the
closing price of SWB stock on December 31, 1997, each share of CCBC stock would
be exchanged for approximately .90 shares of the Company's common stock. This
transaction is expected to be accounted for under the pooling-of-interest
accounting method.
The following unaudited pro-forma combined financial information, based on the
historical financial statements of the parties, summarizes the combined results
of operations of the Company and CCBC based on the pooling-of-interests method
of accounting, as if the combination had been consummated on January 1 of each
of the periods presented. Weighted average shares and earnings per share were
calculated based on an assumed exchange ratio of .90 subject to adjustments set
forth in the Plan.
Unaudited Pro-Forma Combined Summary of Operations
(In thousands, except per share data)
<TABLE>
For the Years Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Net interest income.......................................... $35,344 $28,411 $ 24,169
Net income(1)................................................ $ 8,948 $ 4,887 $ 3,321
Basic Earnings Per Share..................................... $ 1.93 $ 1.32 $ 0.92
======= ======= ========
Weighted average shares used
to calculate basic earnings per share....................... 4,642 3,693 3,594
Net income adjusted for effect of
convertible debentures...................................... $ 9,112 $5,513 $ 4,020
Diluted Earnings Per Share................................... $ 1.69 $ 1.08 $ 0.80
======= ====== ========
Weighted average common shares adjusted for
dilutive effect of options and convertible debentures....... 5,378 5,109 5,045
</TABLE>
(1) Certain merger-related expenses have been recorded prior to December 31,
1997. Merger-related expenses to be incurred by the Company and CCBC subsequent
to December 31, 1997 are currently estimated to be $2.8 million after-tax. These
expenses, relating to separation and benefit costs, professional and investment
banking fees, and other non-recurring Merger-related expenses, will be charged
against income of the combined company upon consummation of the Merger or the
period in which such costs are incurred. Accordingly, the effect of these costs
have not been reflected in the unaudited pro forma combined consolidated
financial information shown above. The amount of Merger-related costs may change
as additional information becomes available.
-82-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
20. Condensed Parent Company Only Financial Statements:
SIERRAWEST BANCORP STATEMENTS OF FINANCIAL CONDITION
December 31, (in thousands except for share amounts)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................................... $ 3,403 $ 3,655
Investment in subsidiaries........................................................ 50,595 37,106
Due from subsidiary............................................................... 0 29
Other ........................................................................... 216 2,705
----------- -----------
TOTAL ASSETS................................................................ $ 54,214 $ 43,495
=========== ===========
LIABILITIES
Accrued expenses.................................................................. $ 417 $ 1,007
Due to subsidiary................................................................. 8 51
Accounts payable.................................................................. 0 1
Convertible debentures............................................................ 0 8,520
Deferred Income................................................................... 159 0
----------- -----------
Total Liabilities........................................................... 584 9,579
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 9,800,000 shares
authorized; none issued..................................................... 0 0
Preferred stock series A, no par value; 200,000
shares authorized; none issued.............................................. 0 0
Common stock, no par value; 10,000,000 shares authorized;
4,099,811 and 2,771,139 shares issued and outstanding ..................... 29,587 12,291
Retained earnings................................................................. 23,281 21,654
Unrealized loss on investment securities available for sale, net of
tax of $535 and $21............................................................. 762 (29)
----------- -----------
Total Shareholders' Equity.................................................. 53,630 33,916
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.................................... $ 54,214 $ 43,495
=========== ===========
</TABLE>
-83-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SIERRAWEST BANCORP STATEMENTS OF INCOME For the Years Ended December 31, (in
thousands):
<TABLE>
1997 1996 1995
---- ---- ----
Income
<S> <C> <C> <C>
Service fees................................................ $ 0 $ 1,185 $ 1,389
Dividends from subsidiary................................... 2,154 1,000 300
Interest income............................................. 129 166 464
Other income................................................ 194 283 430
--------- ----------- -----------
Total Income......................................... 2,477 2,634 2,583
--------- ----------- -----------
Expense
Salaries and related benefits............................... (17) 1,553 1,820
Interest expense............................................ 75 728 861
Other expense............................................... 432 1,362 1,291
--------- ----------- -----------
Total Expense........................................ 490 3,643 3,972
--------- ----------- -----------
Gain (Loss) Before Income Tax Benefit
and Equity in Undistributed Income
of Subsidiary........................................ 1,987 (1,009) (1,389)
Applicable income tax benefit............................... 28 777 665
--------- ----------- -----------
Income (Loss) Before Equity in Undistributed
Income of Subsidiary.................................. 2,015 (232) (724)
Equity in Undistributed Income of
Subsidiary............................................ 5,494 3,560 2,640
--------- ----------- -----------
NET INCOME........................................... $ 7,509 $ 3,328 $ 1,916
========= =========== ===========
</TABLE>
-84-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SIERRAWEST BANCORP STATEMENTS OF CASH FLOWS For the Years Ended December 31, (in
thousands):
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
Cash flows from operating activities:
Service fees received................................. $ 22 $ 1,163 $ 1,389
Interest received..................................... 136 172 477
Other income received................................. 211 283 325
Interest paid......................................... (377) (780) (861)
Cash paid to suppliers and employees.................. (576) (2,723) (2,767)
Income tax refund..................................... 340 1,098 564
---------- ---------- ------------
Net cash used in operating activities....................... (244) (787) (873)
---------- ---------- ------------
Cash flows from investing activities:
Capital expenditures.................................. (72) (1,131) (164)
Proceeds from sale of building........................ 1,523 0 0
Loans sold............................................ 0 0 1,813
Principal payments collected on loans................. 0 0 42
Dividend received..................................... 2,154 1,000 300
Increase in investment in subsidiary.................. 0 0 (2,000)
Acquisition........................................... (3,301) 0 0
---------- ---------- ------------
Net cash provided by (used in) investing activities......... 304 (131) (9)
---------- ---------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 877 212 142
Dividend paid......................................... (1,178) (805) (624)
Cash paid in stock dividend - fractional shares....... (11) 0 0
Repurchase of common stock............................ 0 0 (445)
---------- ---------- ------------
Net cash (used in) provided by financing activities......... (312) (593) (927)
---------- ---------- ------------
Net (decrease) increase in cash and
cash equivalents...................................... (252) (1,511) (1,809)
Cash and cash equivalents beginning of year................. 3,655 5,166 6,975
---------- ---------- ------------
Cash and cash equivalents end of year ...................... $ 3,403 $ 3,655 $ 5,166
========== ========== ============
</TABLE>
-85-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
RECONCILIATION OF NET INCOME 1997 1996 1995
TO NET CASH USED IN ---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income.................................................. $ 7,509 $ 3,328 $ 1,916
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense................. 113 241 228
Effect of changes in:
Due from subsidiary.................................. 22 (22) 0
Due to subsidiary.................................... (43) 51 0
Other assets......................................... 16 124 92
Accrued expenses..................................... (525) (270) 37
Taxes payable........................................ 312 321 (101)
Gain on loan sales.................................... 0 0 (105)
Dividend from subsidiary.............................. (2,154) (1,000) (300)
Equity in undistributed income of
subsidiaries......................................... (5,494) (3,560) (2,640)
----------- ----------- ----------
Total Adjustments.................................... (7,753) (4,115) (2,789)
----------- ----------- ----------
Net cash used in operating
activities............................................ $ (244) $ (787) $ (873)
=========== =========== ==========
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
In 1997, $530,000 of I/O strips receivable were transferred to the Bancorp's
Subsidiary.
-86-
<PAGE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no changes in or disagreements on accounting disclosures with
accountants.
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning directors and executive officers of the Company, see
"ELECTION OF DIRECTORS" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A (the "Proxy Statement") which is incorporated herein
by reference.
ITEM 11.EXECUTIVE COMPENSATION
For information concerning executive compensation, see "ELECTION OF DIRECTORS"
in the Proxy Statement which is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial owners and
management, see "SHAREHOLDERS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in
the Proxy Statement which is incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions, see
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Proxy Statement which is
incorporated herein by reference.
-87-
<PAGE>
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements set forth on pages 48 through 87:
(i) Consolidated Statements of Financial Condition
as of December 31, 1997, and 1996.
(ii)Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995.
(iii)Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
(iv)Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995.
(v) Notes to Consolidated Financial Statements for
the years ended December 31, 1997, 1996 and
1995.
(vi)Report of Independent Auditor.
2. Financial Schedules:
None required.
Reports on Form 8-K:
The Company filed one Form 8-K since the filing of the
last Form 10-Q. Dated November 14, 1997, it reported the
signing of a definitive agreement by Bancorp with
California Community Bancshares Corporation to merge with
SierraWest Bancorp.
-88-
<PAGE>
Exhibits
Exhibit
Number Description
2.1 Plan of Acquisition and Merger by and between SierraWest Bancorp,
SierraWest Bank and Mercantile Bank, filed as Exhibit 2 to Registrant's
Form 8-K dated January 24, 1997, and by this reference incorporated
herein.
2.2 Merger Agreement between SierraWest Bank and Mercantile Bank dated June
26, 1997, filed as Exhibit 2.1 on the Registrant's Form 8-K dated June
30, 1997, and by this reference incorporated herein.
2.3 Plan of Acquisition and Merger by and between SierraWest Bancorp,
SierraWest Bank and California Community Bancshares, Continental
Pacific Bank, filed as Exhibit 2 to Registrant's Form 8-K dated
November 14, 1997, and by this reference incorporated herein.
3.1 Articles of Incorporation and by-laws, filed as Exhibit 3.1 to
Registrant's 1993 Annual Report on Form 10-K, and by this reference
incorporated herein.
3.2 Amendment to Articles of Incorporation and by-laws, filed as Exhibit
3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
4.1 Form of Indenture between the Registrant and American Stock Transfer &
Trust Company, as Trustee, relating to the issuance of the 8.5%
Subordinated Convertible Debentures due 2004, filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-2, dated February 5, 1994
(Registration NO. 33-72498), and by this reference incorporated herein.
4.2 Form of Debenture (included in Exhibit 4.1).
4.3 Rights Agreement between Sierra Tahoe Bancorp and American Stock
Transfer & Trust Co., dated January 16, 1996, filed as Exhibit 4 to
Registrant's Form 8-A dated January 3, 1996, as amended by Amendment
No.
1 filed January 30, 1998, and by reference incorporated herein.
10.1 Form of Financial Advisory and Sales Agency Agreement, filed as Exhibit
10.1 to Registrant's Registration Statement on Form S-2, dated February
5, 1994 (Registration NO. 33-72498), and by this reference incorporated
herein.
10.2 Sierra Tahoe Bancorp KSOP Plan, filed as Exhibit 10(m) to the
Registrant's 1992 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.3 Interest Rate Swap Agreement between Truckee River Bank and Sanwa Bank
California, dated March 1, 1996, filed as Exhibit 10.3 to Registrant's
1995 Annual Report on Form 10-K and by this reference incorporated
herein.
10.4 Sublease Agreement between Truckee River Bank and Pacific Pawnbrokers,
effective February 1, 1996, filed as Exhibit 10.4 to Registrant's 1995
Annual Report on Form 10-K and by this reference incorporated herein.
10.5 License and Service Agreement between Registrant and Essieh &
Associates, Inc., dated October 6, 1992, filed as Exhibit 10(r) to
Registrant's 1992 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.6 Rental lease between Truckee River Bank and Haciett Management
Corporation (SBA Reno office), dated January 28, 1993, filed as Exhibit
10(t) to Registrant's 1992 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.7 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Mary Jane Posnien, dated January 10, 1996, filed as Exhibit
10.7 to Registrant's 1996 Annual Report on Form 10-K, and by this
reference incorporated herein.
-89-
<PAGE>
10.8 Purchase and Sale Agreement between Rubin-Sadd Development Company and
Sierra Bank of Nevada dated December 15, 1995, filed as Exhibit 10.8 to
Registrant's 1995 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.9 Agreement between Registrant and American Institute of
Banking/California, filed as Exhibit 10(v) to Registrant's 1992 Annual
Report on Form 10-K, and by this reference incorporated herein.
10.10 Amendments to Sierra Tahoe Bancorp KSOP Plan, dated June 24, 1993 and
September 14, 1994, filed as Exhibit 10.10 to Registrant's 1994 Annual
Report on Form 10-K, and by this reference incorporated herein.
10.11 Three Agreements re Deferred Compensation for Executives, filed as
Exhibit 10(d) to the Registrant's 1986 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.12 Stock Plan Agreement, Incentive Stock Option Agreement and a
Non-Qualified Stock Option Agreement for the Registrant, filed as
Exhibit 10(b) to Registrant's 1988 Annual Report on Form 10-K, and by
this reference incorporated herein.
10.13 Equipment Sale Agreement between Sierra Tahoe Service Company and
Information Technology Inc., dated November 22, 1991, filed as Exhibit
10(g) to Registrant's 1991 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.14 Employment Agreement between Registrant and William T. Fike, dated
December 22, 1994, filed as Exhibit 10.14 to Registrant's 1994 Annual
Report on Form 10-K, and by this reference incorporated herein.
10.15 Stock Option Agreement between Sierra Tahoe Bancorp and Richard S.
Gaston dated August 17, 1995, filed as Exhibit 10.15 to Registrant's
1995 Annual Report on Form 10-K, and by this reference incorporated
herein.
10.16 Contract between Registrant and Federal Home Loan Mortgage Corporation,
dated March 31, 1992, and Attachment to Master Commitment Agreement,
dated April 9, 1992, filed as Exhibit 28(5) to Registrant's March 31,
1992 Quarterly Report on Form 10-Q, and by this reference incorporated
herein.
10.17 Stock Option Agreement between Sierra Tahoe Bancorp and David W. Clark
dated August 17, 1995, filed as Exhibit 10.17 to Registrant's 1995
Annual Report on Form 10-K, and by this reference incorporated herein.
10.18 Stock Option Agreement between Sierra Tahoe Bancorp and William W.
McClintock dated August 17, 1995, filed as Exhibit 10.18 to
Registrant's 1995 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.19 Sierra Tahoe Bancorp 1996 Stock Appreciation Rights Plan, filed as
Exhibit C to Registrant's Proxy Statement for its July 23, 1996 annual
meeting of shareholders, and by this reference incorporated herein.
10.20 Employee Stock Ownership Plan, filed as Exhibit 9 to Registrant's
Registration Statement on Form S-4, (Registration No. 33-3915), and by
this reference incorporated herein.
10.21 Cafeteria Plan Agreement, filed as Exhibit 10(f) to Registrant's 1986
Annual Report on Form 10-K, and by this reference incorporated herein.
10.22 Form of Trust Indenture, filed as Exhibit 4 to Registrant's
Registration Statement on Form S-2, dated June 25, 1991 (Registration
No. 33-41398), and by this reference incorporated herein.
10.23 Directors' Agreement, filed as Exhibit 2.3 to Registrant's Registration
Statement on Form S-4, (Registration No. 33-34954), and by this
reference incorporated herein.
-90-
<PAGE>
10.24 Sierra Tahoe Bancorp 1988 Stock Option Plan, filed as Exhibit 28 to
Registrant's Registration Statement on Form S-8, dated April 10, 1989
(Registration No. 33-28004), and by this reference incorporated herein.
10.25 Lease Agreement "Gateway at Donner Pass Limited" between Truckee River
Bank (Tenants) and Gateway at Donner Pass Limited (Landlords), dated
May 21, 1991, filed as Exhibit 28(G) to Registrant's September 30, 1991
Quarterly Report on Form 10-Q, and by this reference incorporated
herein.
10.26 Grass Valley Lease Agreement between Ray Stone Incorporated and Truckee
River Bank, filed as Exhibit 28(G) to Registrant's September 30, 1990
Quarterly Report on Form 10-Q, and by this reference incorporated
herein.
10.27 Lease and Memorandum of Lease between Walter Neal Olson and Patricia
Olson (Lessors) and Wells Fargo Bank, a California banking corporation
(Lessee), dated November 5, 1962, as amended on March 8, 1973, filed as
Exhibit 10.29 to Registrant's Registration Statement on Form S-2, dated
February 5, 1994 (Registration NO. 33-72498), and by this reference
incorporated herein.
10.28 Sublease between Wells Fargo Bank, N.A., a national banking association
(Sublessor), and Truckee River Bank, a California Statement Bank
(Sublessee), dated December 1, 1984, filed as Exhibit 10.30 to
Registrant's Registration Statement on Form S-2, dated February 5, 1994
(Registration NO. 33-72498), and by this reference incorporated herein.
10.29 Lease between Jerome Bunch, for himself and his assigns (Lessor), and
Truckee River Bank (Lessee), dated July 10, 1984, filed as Exhibit
10.31 to Registrant's Registration Statement on Form S-2, dated
February 5, 1994 (Registration NO. 33-72498), and by this reference
incorporated herein.
10.30 Lease between Charles E. Nagy and Martha Nagy (Lessor) and Truckee
River Bank (Lessee), dated June 10, 1989, filed as Exhibit 10.32 to
Registrant's Registration Statement on Form S-2, dated February 5, 1994
(Registration NO. 33-72498), and by this reference incorporated herein.
10.31 Lease between Truckee River Bank (Sublessor) and Tran-Sierra
Investment, Inc. (Sublessee), dated February 27, 1991, filed as Exhibit
10.33 to Registrant's Registration Statement on Form S-2, dated
February 5, 1994 (Registration NO. 33-72498), and by this reference
incorporated herein.
10.32 Credit Agreement between Sanwa Bank California and Truckee River Bank
dated October 10, 1995, filed as Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, and by this
reference incorporated herein.
10.33 Equipment Sale Agreement between Information Technology, Inc., and
Truckee River Bank, filed as Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, and by this
reference incorporated herein.
10.34 Lease between Midby-Rancho Partnership (Lessor) and Truckee River Bank
(Lessee), dated November 23, 1993, filed as Exhibit 10.34 to
Registrant's 1993 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.35 Stock Option Agreement between Sierra Tahoe Bancorp and Thomas M.
Watson dated August 17, 1995, filed as Exhibit 10.35 to Registrant's
1995 Annual Report on Form 10-K , and by this reference incorporated
herein.
10.36 Stock Option Agreement between Sierra Tahoe Bancorp and Jerrold T.
Henley dated August 17, 1995, filed as Exhibit 10.36 to Registrant's
1995 Annual Report on Form 10-K , and by this reference incorporated
herein.
10.37 Stock Option Agreement between Sierra Tahoe Bancorp and A. Morgan Jones
dated August 17, 1995, filed as Exhibit 10.37 to Registrant's 1995
Annual Report on Form 10-K , and by this reference incorporated herein.
-91-
<PAGE>
10.38 Sierra Tahoe Bancorp 1996 Stock Option Plan, filed as Exhibit A to
Registrant's Proxy Statement for its July 23, 1996 annual meeting of
shareholders, and by this reference incorporated herein.
10.39 Director's remuneration continuation agreement between Sierra Tahoe
Bancorp and David Clark, dated October 1, 1993, filed as Exhibit 10.39
to Registrant's 1993 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.40 Settlement Agreement and Mutual Release of All Claims re: American
River Bank, et al. v. Mutual Fund, Inc., et al. dated March 22, 1996,
filed as Exhibit 10.40 to Registrant's 1995 Annual Report on Form 10-K,
and by this reference incorporated herein.
10.41 Federal funds facility agreement between Union Bank of California and
Truckee River Bank dated April 8, 1996, filed as Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996, and by this reference incorporated herein.
10.42 First Amendment to Senior Management Benefits Agreement between Sierra
Tahoe Bancorp and David C. Broadley, dated April 2, 1996, filed as
Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, and by this reference incorporated
herein.
10.43 Incentive Stock Option Agreement between Registrant and Martin R.
Sorensen, dated May 18, 1994, filed as Exhibit 10.44 to Registrant's
1994 Annual Report on Form 10-K, and by this reference incorporated
herein.
10.44 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Patrick S. Day, dated January 10, 1996, including First
Amendment dated April 2, 1996, filed as Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.45 Deferred Fee Agreement between Sierra Tahoe Bancorp and Thomas M.
Watson, dated June 19, 1996, filed as Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.46 Federal Funds Agreement between Bank of California and Truckee River
Bank, dated March 31, 1994, filed as Exhibit 10.47 to Registrant's 1995
Annual Report on Form 10-K , and by this reference incorporated herein.
10.47 Agreement between American Financial Skylink and Sierra Tahoe Bancorp,
dated August 1, 1994, filed as Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994, and by
this reference incorporated herein.
10.48 Deferred Fee Agreement between Sierra Tahoe Bancorp and R. Coppola,
dated June 12, 1996, filed as Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and by this
reference incorporated herein.
10.49 Revolving Line of Credit Agreement between First Security Bank of Idaho
and Truckee River Bank, dated September 23, 1994, filed as Exhibit
10.50 to Registrant's 1994 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.50 Credit Agreement between Sanwa Bank California and Truckee River Bank,
dated July 29, 1994, filed as Exhibit 10.51 to Registrant's 1994 Annual
Report on Form 10-K, and by this reference incorporated herein.
10.51 Modification to sublease dated September 24, 1994 between First
Commercial Title, Inc. and Sierra Tahoe Mortgage Company, dated January
31, 1995, filed as Exhibit 10.52 to Registrant's 1994 Annual Report on
Form 10-K, and by this reference incorporated herein.
10.52 Lease Agreement between Hulse-Kinsey Trust and Truckee River Bank,
dated February 10, 1995, filed as Exhibit 10.53 to Registrant's 1994
Annual Report on Form 10-K, and by this reference incorporated herein.
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10.53 Assignment of License Agreements between Information Technology, Inc.,
Sierra Tahoe Servicing Corporation and Truckee River Bank, dated March
3, 1993, filed as Exhibit 10.54 to Registrant's 1994 Annual Report on
Form 10-K, and by this reference incorporated herein.
10.54 Deferred Fee Agreement between Sierra Tahoe Bancorp and Ronald A.
Johnson, dated May 23, 1996, filed as Exhibit 10.4 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.55 Fourth Addendum to Lease Agreement between Edwin Holt and Sierra Bank
of Nevada, dated February 17, 1995, filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, and by this reference incorporated herein.
10.56 Credit Agreement between Sierra Bank of Nevada and Bank of California,
dated March 21, 1995, filed as Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, and by this
reference incorporated herein.
10.57 Lease Agreement between Truckee River Bank and Realty Advisors, Inc.,
filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995, and by this reference incorporated
herein.
10.58 Lease Agreement Between Truckee River Bank and Western Investment Real
Estate Trust and Pinecreek Shopping Center Associates, filed as Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and by this reference incorporated herein.
10.59 Construction agreement between Sierra Bank of Nevada and Shaver
Construction, Inc., filed as Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, and by
this reference incorporated herein.
10.60 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Martin R. Sorensen dated January 17, 1996, filed as Exhibit
10.61 to Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.61 Executive Salary Continuation Agreement between Sierra Tahoe Bancorp
and Martin R. Sorensen, dated March 31, 1995, filed as Exhibit 10.63 to
Registrant's 1995 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.62 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
Martin R. Sorensen dated December 20, 1995, filed as Exhibit 10.64 to
Registrant's 1995 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.63 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
William T. Fike dated December 20, 1995, filed as Exhibit 10.67 to
Registrant's 1995 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.64 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and Pat
Day dated December 20, 1995, filed as Exhibit 10.68 to Registrant's
1995 Annual Report on Form 10-K, and by this reference incorporated
herein.
10.65 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and David
Broadley dated December 20, 1995, filed as Exhibit 10.69 to
Registrant's 1995 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.66 Incentive Stock Option Agreement between SierraWest Bancorp and Mary
Jane Posnien, dated December 23, 1996.
10.67 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and David C. Broadley dated January 17, 1996, filed as Exhibit
10.71 to Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
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10.68 Deferred Fee Agreement between Sierra Tahoe Bancorp and David W. Clark,
dated May 28, 1996, filed as Exhibit 10.5 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and by this
reference incorporated herein.
10.69 Deferred Fee Agreement between Sierra Tahoe Bancorp and Richard S.
Gaston, dated June 19, 1996, filed as Exhibit 10.6 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.70 Deferred Fee Agreement between Sierra Tahoe Bancorp and A. Morgan
Jones, dated June 7, 1996, filed as Exhibit 10.7 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.71 Deferred Fee Agreement between Sierra Tahoe Bancorp and John J.
Johnson, dated June 20, 1996, filed as Exhibit 10.8 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.72 Deferred Fee Agreement between Sierra Tahoe Bancorp and Jack V.
Leonesio, dated June 19, 1996, filed as Exhibit 10.9 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.73 Deferred Fee Agreement between Sierra Tahoe Bancorp and William
McClintock, dated June 13, 1996, filed as Exhibit 10.10 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.74 Deferred Fee Agreement between Sierra Tahoe Bancorp and Jerrold T.
Henley, dated May 29, 1996, filed as Exhibit 10.11 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
by this reference incorporated herein.
10.75 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
William T. Fike, dated July 1, 1996, filed as Exhibit 10.12 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, and by this reference incorporated herein.
10.76 Nonqualified Stock Option Agreement between Sierra Tahoe Bancorp and
William T. Fike, dated July 1, 1996, filed as Exhibit 10.13 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, and by this reference incorporated herein.
10.77 Fixed Price Construction Agreement between SierraWest Bank and Shaver
Construction, dated June 12, 1996, filed as Exhibit 10.14 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, and by this reference incorporated herein.
10.78 Amendment No. 1 to Employment Agreement between SierraWest Bancorp and
William T. Fike, dated June 27, 1996, filed as Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and by this reference incorporated herein.
10.79 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and William T. Fike, dated June 27, 1996, filed as
Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and by this reference incorporated
herein.
10.80 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and David C. Broadley, dated June 27, 1996, filed as
Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and by this reference incorporated
herein.
10.81 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and Martin R. Sorensen, dated June 27, 1996, filed
as Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
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10.82 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and William W. McClintock, dated June 27, 1996,
filed as Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, and by this reference
incorporated herein.
10.83 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and Jerrold T. Henley, dated June 27, 1996, filed as
Exhibit 10.7 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.84 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and A. Morgan Jones, dated June 27, 1996, filed as
Exhibit 10.8 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.85 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and Jack V. Leonesio, dated June 27, 1996, filed as
Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and by this reference incorporated
herein.
10.86 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and Thomas M. Watson, dated June 27, 1996, filed as
Exhibit 10.10 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.87 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and David W. Clark, dated June 27, 1996, filed as
Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.88 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and Richard S. Gaston, dated June 27, 1996, filed as
Exhibit 10.12 to Registrant's Quarterly Report on Form 10- Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.89 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and John J. Johnson, dated June 27, 1996, filed as
Exhibit 10.13 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.90 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and Ralph J. Coppola, dated June 27, 1996, filed as
Exhibit 10.14 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.91 Director's Amended and Restated Payment Continuation Agreement between
SierraWest Bancorp and Ronald A. Johnson, dated June 27, 1996, filed as
Exhibit 10.15 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and by this reference incorporated
herein.
10.92 Sierra Tahoe Bancorp Board of Directors Deferred Compensation and Stock
Award Plan, filed as Exhibit B to Registrant's Proxy Statement for its
July 23, 1996 annual meeting of shareholders, and by this reference
incorporated herein.
10.93 Loan commitment agreement between Union Bank of California and
SierraWest Bancorp dated February 25, 1997, filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997, and by this reference incorporated herein.
10.94 The Pooling and Servicing Agreement between SierraWest Bank, as Seller
and Servicer, and Marine Midland Bank, as Trustee, dated April 30,
1997, filed as Exhibit 28.1 on the Registrant's Form 8-K filed June 20,
1997, and by this reference incorporated herein.
10.95 Certificate Purchase Agreement between SierraWest Bank and Prudential
Securities regarding $51.4 million SBA loan-backed adjustable rate
certificates dated June 13, 1997, filed as Exhibit 28.2 on the
Registrant's Form 8-K filed June 20, 1997, and by this reference
incorporated herein.
10.96 Agreement for Purchase and sale of Carson City property, dated June 24,
1997, filed as Exhibit 10.1 on the Registrant's Form 10-Q for the
quarter ended June 30, 1997, and by this reference incorporated herein.
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10.97 Expression of Interest between Sanwa Bank California and SierraWest
Bank.
10.98 Financial Institutions Credit Agreement between Sanwa Bank California
and SierraWest Bank.
10.99 Revolving Credit and Collateral Loan Agreement dated as of May 1, 1997
by and between SierraWest Bank, and Imperial Bank.
21.1 Significant Subsidiaries of the Registrant
SierraWest Bank, a California Corporation.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 25, 1998 By: /s/ William T. Fike
--------------------
William T. Fike
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the date indicated.
<TABLE>
<S> <C> <C>
/s/ William T. Fike President and Chief Executive Officer March 25, 1998
- -------------------------------
William T. Fike Director
/s/ David C. Broadley Executive Vice President/ March 25, 1998
- ---------------------------- Principal Financial Officer
David C. Broadley
/s/ Richard L. Belstock Senior Vice President/ March 25, 1998
- ---------------------------- Principal Accounting Officer
Richard L. Belstock
/s/ Jerrold T. Henley Chairman of the Board March 25, 1998
- ------------------------------
Jerrold T. Henley
/s/ David W. Clark Director March 25, 1998
- -----------------------------
David W. Clark
/s/ A. Morgan Jones Director and Corporate Secretary March 25, 1998
- ----------------------------
A. Morgan Jones
/s/ Jack V. Leonesio Director March 25, 1998
- -----------------------------
Jack V. Leonesio
- ---------------------------- Director
William W. McClintock
/s/ Richard Gaston Director March 25, 1998
- ----------------------------
Richard Gaston
/s/ Thomas M. Watson Director March 25, 1998
- -------------------------
Thomas M. Watson
/s/ Ralph J. Coppola Director March 25, 1998
- ----------------------------
Ralph J. Coppola
/s/ John J. Johnson Director March 25, 1998
- -----------------------------
John J. Johnson
/s/ Ronald A. Johnson Director March 25, 1998
- ---------------------------
Ronald A. Johnson
</TABLE>
-97-
<PAGE>
Exhibit 10.97
EXPRESSION OF INTEREST
Effective as of October 1 , 1997, SANWA BANK CALIFORNIA ("Sanwa") is
interested in being allowed the opportunity to consider the requests of
SIERRAWEST BANK ("Client") for the credit accommodations described below.
THIS IS NOT A COMMITMENT OR OFFER TO EXTEND CREDIT. RATHER, THIS EXPRESSION
OF INTEREST PROVIDES THE TERMS UNDER WHICH SANWA MAY BID FOR SPECIFIC CREDIT
REQUESTS OF CLIENT AND SOME OF THE BASIC TERMS WHICH WILL GOVERN SHOULD SANWA'S
BID BE ACCEPTED.
Purpose(s). Extensions of credit shall be limited to the following types of
credit facilities:
[NA] A. Commercial Letters of Credit. For the (check as appropriate) [NA]
issuance [NA] confirmation of sight and/or usance commercial letters of credit.
All commercial letters of credit issued and/or confirmed under this credit
facility, together with any related drafts, shall aggregate to no greater than
$NA and have an expiry date of not later than one year after the date of
issuance.
[NA] B. Standby Letters of Credit. For the [NA] issuance [NA] confirmation
of standby letters of credit. All standby letters of credit issued and/or
confirmed under this credit facility, shall aggregate to no greater than $NA and
have an expiry date of not later than one year after the date of issuance.
[ X ] C. Federal Funds. In Sanwa's sole discretion, which shall depend on
its activity in the Fed Funds market, Sanwa shall permit Client [X] to purchase
[X] overnight [X] term (up to 30 days) Federal Funds ("Fed Funds") market up to
a maximum aggregate amount of $5,000,000.00.
[ X ] D. Foreign Exchange. For the [X] purchase [X] sale through Sanwa of
[X] spot (requiring completion within two business days) [X] forward (any
foreign exchange transaction which is to be completed after two business days
but not later than 183 days) contract to buy or sell foreign currency at a given
date up to a maximum aggregate amount of $5,000,000.00.
Delivery. Sanwa reserves the right to require payment in collected funds at
least one business day prior to the delivery date specified in any forward
contract as a condition of delivery of the specified currency. If such advance
payment will be required, Sanwa will so notify you at least two business days
prior to the stated delivery date.
Rates and Fees. As quoted at the time of a requested transaction. Client
acknowledges that in some instances the bid includes Sanwa's rate or profit
margin which may or may not be disclosed to Client.
Quotes. Any quotation given by Sanwa will be valid only as of the time
given. If not accepted by Client at that, which acceptance will be irrevocable,
the quote shall be deemed automatically withdrawn and cannot be accepted later.
Maximum Indebtedness. The maximum aggregate amount of all of the credit
accommodations which Sanwa is interested in considering is $5,000,000.00.
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Representations and Warranties. Should Sanwa elect to bid on credit
facilities to Client and should Client accept such bid, the following
representations and warranties (and any others that may be required by Sanwa at
the time of such bid) shall apply to such credit facilities (and a breach of
which shall constitute a default under any signed agreement with respect to such
facilities):
(a) Client is a corporation duly organized and validly existing under the
laws of [X] the State of California or [NA] of the United States of America, and
is properly licensed, qualified to do business and in good standing in, and,
where necessary to maintain Client's rights and privileges.
(b) The execution, delivery and performance by Client under any of the
documents executed by Client with respect to the credit facilities shall have
been duly authorized and does not then and will not: (i) violate any provision
of any law, rule, regulation, writ, judgment or injunction then in effect
affecting Client; (ii) result in a breach of or constitute a default under any
material agreement to which Client is then a party or by which it or its
properties may then be bound or affected; (iii) require any consent or approval
of its stockholders or violate any provision of its articles of incorporation or
by-laws; or (iv) require any consent or approval of any federal or state
regulatory authority.
(c) All financial statements, call reports, thrift financial reports,
information and other data which may have been or which may hereafter be
submitted by Client to Sanwa are true, accurate and correct and have been or
will be prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent Client's financial condition or,
as applicable, the other information disclosed herein. Since the most recent
submission of any such financial statement, information, or other data to Sanwa,
Client represents and warrants that no material adverse change in Client's
financial condition or operations has occurred which has not been fully
disclosed to Sanwa in writing.
Additional Covenants. Should Sanwa elect to bid on credit facilities to
Client and should Client accept such bid, the following covenants and agreements
(and any others that may be required by Sanwa at the time of such bid) shall
apply to such credit facilities (and a breach of which shall constitute a
default under each signed agreement with respect to such facilities):
(a) Client shall maintain at all times equity (Tier 1, total equity and
risk based capital) in accordance with applicable federal regulations.
(b) Client shall record on its Call Report or Thrift Financial Report and
in all other financial records appropriate notations reporting any credit
extended by Sanwa as a borrowing and not as a deposit.
(c) Client shall maintain the resolution of its Board of Directors which
authorizes this borrowing and the execution, delivery and performance of the
obligations hereunder as an official record of the Client and, further, will
maintain as the official records of Client the minutes of any meeting which
mention this borrowing.
(d) This provision is intended to establish a "netting contract" as defined
in Section 402(14) of the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") with respect to the entirety of obligations between Sanwa and
Client. All words and expressions used in this section which are defined in
FDICIA Section 402 shall have the same meaning herein as therein. If at any
time either Sanwa or Client becomes a failed financial institution, then, from
and after such time,
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<PAGE>
regardless of their source or derivation, including but not limited to those
arising out of the credit arrangement contemplated hereunder, shall be netted
and FDICIA Section 403 shall apply thereto.
Expiration Date. This expression of interest shall expire on
July 31, 1998.
IN WITNESS WHEREOF, this Expression of Interest has been executed by
the parties hereto as of the date first hereinabove written.
SANWA BANK CALIFORNIA SIERRAWEST BANK
By: /s/Robert Solomon By: /s/William H. McGaughey
Robert Solomon, Vice President William H. McGaughey,
(Name/Title) SVP/Treasurer
Address: 601 S. Figueroa St., W8-17 (Name/Title)
Los Angeles, CA 90017 Address:10181 Truckee-Tahoe Airport Rd.
Truckee, CA 96160
3
<PAGE>
Exhibit 10.98
FINANCIAL INSTITUTIONS AGREEMENT
CREDIT AGREEMENT
This Credit Agreement ("Agreement") is made and entered into this 1st day
of October, 1997, by and between SANWA BANK CALIFORNIA ("Sanwa") and SIERRAWEST
BANK ("Client"), with respect to the following:
1.00 Agreement to Lend.
1.01 Line of Credit. Subject to the terms and conditions hereof and so long
as no Event of Default occurs, Sanwa agrees to extend to Client certain credit
accommodations up to a total principal amount, including any sublimits, from
time to time outstanding of $250,000.00 ( the "Line of Credit"), as follows:
1.02 Purpose(s). Extensions of credit shall be limited to the following
types of credit facilities:
[X] A. Commercial Letters of Credit. For the [X] issuance [X] confirmation
of sight and/or usance commercial letters of credit. All commercial letters of
credit issued and/or confirmed under this credit facility, together with any
related drafts, shall aggregate to no greater than $250,000.00 and have an
expiry date of not later than one year after the date of issuance.
[X] B. Standby Letters of Credit. For the [X] issuance [X] confirmation of
standby letters of credit. All standby letters of credit issued and/or confirmed
under this credit facility shall aggregate to no greater than $250,000.00, and
have an expiry date of not later than one year after the date of issuance.
Sanwa may decline to issue a letter of credit for any reason, including without
limitation, the nature of the transaction, or its terms or in connection with
any transaction where Sanwa, due to the nationality or residence of the
beneficiary, would be prohibited by any applicable law, regulation or order from
issuing or confirming such letter of credit. Client may, but is not required, to
make such amendments as it deems appropriate to make the letter of credit
application or request for confirmation of letter of credit acceptable to Sanwa.
[X] C. Federal Funds. In Sanwa's sole discretion, which shall depend on,
among other things, its activity in the Fed Funds market, Sanwa shall permit
Client to purchase [X] overnight [X] term (up to 30 days) Federal Funds ("Fed
Funds") up to a maximum aggregate amount of $250,000.00; [NA] provided that,
absent Sanwa's prior approval and a 30 day out-of-debt period, Client shall have
no more than NA consecutive business days of borrowing in the Fed Funds market.
[X] D. Foreign Exchange. For the purchase and/or sale through Sanwa of [NA]
spot (requiring completion within two business days) [NA] forward (any foreign
exchange contract which is to be completed after two business days but not later
than NA days) contract to buy or sell foreign currency at a given date up to a
maximum aggregate face amount of $NA.
Sanwa may refuse to enter into a foreign exchange transaction with Client where
Sanwa, in its sole discretion, determines that such foreign currency is
unavailable, or where Sanwa would be prohibited by any applicable law,
regulation or order from purchasing such foreign currency.
[NA] E. Line of Credit Advances. Line of Credit Advances ("Advances") up to
a maximum aggregate amount of $NA.
Quotes. Any quotation given by Sanwa will be valid only as of the time
given. If not accepted by Client at that time, which acceptance will be
irrevocable, the quote shall be deemed automatically withdrawn and cannot be
accepted later.
Aggregate Limits. In addition to the Line of Credit limit set forth in
Section 1.01 above, in no event shall the outstanding and requested credit
accommodations described in Section 1.02 and NA above exceed $250,000.00.
1.03 Fees and Interest.
A. Commercial and/or Standby Letters of Credit.
1. Commercial Letters of Credit.
The fee for issuing any commercial letter of credit and any additional
letter of credit fees which may arise in connection therewith, including,
without limitation, the fees for amendment and payment, shall be: Sanwa's
minimum letter of credit fee for the applicable service plus 50% of the standard
letter of credit fee for such service in excess of the minimum fee. The letter
of credit fees are published from time to time in Sanwa's Schedule of Fees and
Charges. Client acknowledges receipt of Sanwa's current Schedule of Fees and
Charges.
The fee for confirming any commercial letter of credit and any additional
letter of credit fees which may arise in connection therewith, including,
without limitation, the fees for amendment and payment, shall be: Sanwa's
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<PAGE>
minimum letter of credit fee for the applicable service plus 50% of the standard
letter of credit fee for such service in excess of the minimum fee. The letter
of credit fees are published from time to time in Sanwa's Schedule of Fees and
Charges.
2. Standby Letters of Credit.
The fee for issuing any standby letter of credit shall be: Sanwa's minimum
letter of credit fee for the applicable service plus 50% of the standard letter
of credit fee for such service in excess of the minimum fee. The letter of
credit fees are published from time to time in Sanwa's Schedule of Fees and
Charges.
The fee for confirming any standby letter of credit shall be: Sanwa's
standard fee for such service, as set forth in Sanwa's Schedule of Fees and
Charges.
Any additional fees which may arise in connection with such letters of
credit, including, without limitation, the fees for amendment and payment, shall
be: Sanwa's minimum letter of credit fee for the applicable service plus 50% of
the standard letter of credit fee for such service in excess of the minimum fee.
The letter of credit fees are published from time to time in Sanwa's Schedule of
Fees and Charges.
B. Overnight Fed Funds. Interest shall accrue on any purchase of Fed Funds
at the rate quoted by Sanwa's Fed Funds trader in the Treasury Department (the
"Fed Funds Rate").
C. Foreign Exchange. Client acknowledges that the purchase and/or sale
price for foreign currency quoted to Client includes Sanwa's profit margin on
the transaction, which margin shall not be disclosed to Client. Client further
acknowledges that Client may seek to purchase or sell foreign exchange contracts
through another source which may offer Client a more favorable price on any
given date. Sanwa reserves the right to require payment in collected funds at
least one business day prior to the delivery date specified in any forward
contract as a condition of delivery of the specified currency. If such advance
payment will be required, Sanwa will so notify you at least two business days
prior to the stated delivery date.
D. Draws under Letters of Credit. Advances to pay any draw under a letter
of credit shall accrue interest at the rate set forth in the Loan Documents, as
defined herein, including, without limitation, the applicable Security Agreement
for Issuance of Commercial Letter of Credit or Security Agreement for Issuance
of Stand-by Letter of Credit.
E. Line of Credit Advances. Interest shall accrue on each Advance from the
date of the Advance at a variable rate equivalent to an index for a variable
interest rate which is quoted, published or announced from time to time by Sanwa
as its reference rate and as to which loans may be made by Sanwa at, below or
above such reference rate (the "Reference Rate") plus/minus NA% per annum (the
"Variable Rate"). Interest shall be adjusted concurrently with any change in the
Reference Rate. Interest hereunder shall be computed on the basis of NA days per
year, but charged on the actual number of days elapsed.
[NA] In addition to Variable Rate Advances, Sanwa agrees to make Advances
to Client, at Client's election, at a fixed rate for such period of time that
Sanwa may quote and offer, provided that any such period of time shall be for at
least NA days and shall not exceed NA days and provided further that any such
period of time does not extend beyond the Expiration Date (the "Interest
Period") for Advances in the minimum amount $NA and in $NA increments
thereafter. Such interest rate shall be a percentage approximately equivalent to
NA% per annum in excess of the rate which Sanwa determines in its sole and
absolute discretion to be equal to Sanwa's cost of acquiring funds (adjusted for
any and all assessments, surcharges and reserve requirements pertaining to the
borrowing or purchase by Sanwa of such funds) in an amount approximately equal
to the amount of the relevant Advance and for a period of time approximately
equal to the relevant Interest Period (the "Fixed Rate"). Advances based upon
the Fixed Rate are hereinafter referred to as "Fixed Rate Advances".
Interest on any Fixed Rate Advance shall be computed on the basis of NA
days per year, but charged on the actual number of days elapsed.
Client hereby promises and agrees to pay Sanwa interest as follows: (i) On
Variable Rate Advances at the time and in the manner provided in any note; and
(ii) on Fixed Rate Advances at the time and in the manner provided in any note.
If interest is not paid as and when it is due, the amount of such unpaid
interest shall bear interest, until paid in full, at the then applicable
interest rate.
1. Notice of Borrowing. Client may borrow under the Line of Credit by
requesting:
(a) [NA] A Variable Rate Advance. A Variable Rate Advance may be made on
the day notice is received by Sanwa; provided, however, that if Sanwa shall not
have received notice at or before 3:30 p.m. on the day such Advance is requested
to be made, such Variable Rate Advance may be made, at Sanwa's option, on the
next business day.
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(b) [NA] A Fixed Rate Advance. Notice of any Fixed Rate Advance shall be
received by Sanwa no later 11:00 a.m. two business days prior to the day (which
shall be a business day) on which Client requests such Fixed Rate Advance to be
made.
2. Prohibition Against Prepayment of Fixed Rate Advances. Notwithstanding
anything to the contrary herein or in any note, no prepayment shall be made on
any Fixed Rate Advance except on a day which is the last day of the Interest
Period pertaining thereto. If the whole or any part of any Fixed Rate Advance is
prepaid by reason of acceleration or otherwise, Client shall, upon Sanwa's
request, promptly pay to and indemnify Sanwa for all costs and any loss
(including interest) actually incurred by Sanwa and any loss (including loss of
profit resulting from the re-employment of funds) sustained by Sanwa as a
consequence of such prepayment.
3. Indemnification for Fixed Rate Costs. During any period of time in which
interest on any Advance is accruing on the basis of the Fixed Rate, Client
shall, upon Sanwa's request, promptly pay to and reimburse Sanwa for all costs
incurred and payments made by Sanwa by reason of any future assessment, reserve,
deposit or similar requirements or any surcharge, tax or fee imposed upon Sanwa
or as a result of Sanwa's compliance with any directive or requirement of any
regulatory authority pertaining or relating to funds used by Sanwa in quoting
and determining the Fixed Rate.
4. Conversion from Fixed Rate to Variable Rate. In the event that Sanwa
shall, at any time, determine that the accrual of interest on the basis of the
Fixed Rate (i) is infeasible because Sanwa is unable to determine the Fixed Rate
due to the unavailability of U.S. dollar deposits, contracts or certificates of
deposit in an amount approximately equal to the amount of the relevant Advance
and for a period of time approximately equal to the relevant Interest Period; or
(ii) is or has become unlawful or infeasible by reason of Sanwa's compliance
with any new law, rule, regulation, guideline or order, or any new
interpretation of any present law, rule, regulation, guideline or order, then
Sanwa shall give telephonic notice thereof (confirmed in writing) to Client, in
which event any Fixed Rate Advance shall be deemed to be a Variable Rate Advance
and interest shall thereupon immediately accrue at the Variable Rate.
1.04 Compensating Balances; Fee-in-Lieu of Compensating Balances. Maintain
demand deposits with Sanwa with net free compensating balances in an amount
equivalent to not less than $131,250.00 on an average daily basis during each
[NA] month [X] calendar quarter (the "Compensating Balance Requirement"). Client
shall pay to Sanwa on the 10th day following the last day of each [NA] month
[NA] calendar quarter (the "Time Period") a fee equivalent to (check as
applicable):
[X] the product of (i) the earnings credit rate for account
analysis purposes during the preceding Time Period; times (ii) the
difference, if any, by which the compensating balances to be
maintained by Client pursuant to this paragraph shall exceed the
amount of average daily balances actually maintained by Client during
such preceding Time Period.
[NA] NA% of the sum of $NA if the Compensating Balance
Requirement is not met.
For purposes of this paragraph, the term "net free compensating balances"
means balances of all accounts included in Client's account analysis statement.
1.05 Line Account. Sanwa shall maintain on its books a record of account in
which Sanwa shall make entries for each letter of credit, borrowing in the Fed
Funds market or Advance and such other debits and credits as shall be
appropriate in connection with the credit facility (the "Line Account"). Sanwa
shall provide Client with a monthly statement of Client's Line Account, which
statement shall be considered to be correct and conclusively binding on Client
unless Client notifies Sanwa to the contrary within 30 days after Client's
receipt of any statement which it deems to be incorrect.
1.06 Principal. Unless sooner due in accordance with the terms of this
Agreement or any note issued hereunder, Client promises and agrees to pay Sanwa
the amount of each (i) borrowing in the Fed Funds market upon maturity; (ii)
Advance at the Expiration Date; (iii) drawing under a letter of credit or draft
issued thereunder (each a "Drawing") on Sanwa's demand therefore; and (iv) pay
any foreign exchange transaction on the settlement date.
1.07 Expiration of Line of Credit.
1.07 A. Unless earlier terminated in accordance with the terms of this
Agreement, Sanwa's commitment to extend credit under the Line of Credit shall
automatically expire on July 31, 1998 (the "Expiration Date").
1.07 B. The commitment by Sanwa to issue Letters of Credit shall, unless
earlier terminated in accordance with the terms of this Agreement, automatically
terminate on the Expiration Date and no Letter of Credit shall expire on a date
which is (check as applicable) [NA] after the Expiration Date [X] more than 365
days after the Expiration Date.
1.07 C. The commitment by Sanwa to enter into foreign exchange transactions
shall, unless earlier terminated in accordance with this Agreement,
automatically terminate on the Expiration Date and no foreign exchange contract
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shall expire on a date which is (check as applicable) [NA] after the Expiration
Date [NA] more than 183 days after the Expiration Date.
2.00 Conditions Precedent.
2.01 Conditions Precedent to any Transactions. Prior to the extension of
credit under the Line of Credit, Client shall deliver or cause to be delivered
to Sanwa, in form and substance satisfactory to Sanwa: (i) Loan Fees of $NA;
(ii) evidence relating to the duly given approval and authorization to execute,
deliver and perform this Agreement, including, without limitation, a certificate
by Client's secretary that: (a) the Client's Board of Directors has adopted the
agreements encompassed hereunder; and (b) that such agreements are noted on the
Client's books and records as part of Client's official records; (iii) all other
documents, instruments and agreements required hereunder or by Sanwa; and (iv)
all other actions to be taken by Client hereunder or thereunder together with
such other documents and opinions as Sanwa may require with respect to the
transactions described herein (the "Loan Documents").
2.02 Conditions Precedent to Each Transaction under the Line of
Credit.
A. Representations and Warranties. The representations and warranties
set forth below and in any other document, instrument, agreement or
certificate delivered to Sanwa hereunder are true and correct.
B. Event of Default. No event has occurred and is continuing which
constitutes, or, with the lapse of time or giving of notice or both, would
constitute an Event of Default, as defined below.
C. Form of Letter of Credit Application. If Client seeks a letter of
credit pursuant to paragraph 1.02A or 1.02B above, Client shall have
delivered to Sanwa, Sanwa's standard form of application for letter of
credit duly completed and executed by and on behalf of Client. If Client is
seeking a letter of credit pursuant to paragraph 1.02A or 1.02B above in
connection with a letter of credit sought by one of Client's customers,
Client shall have delivered to Sanwa, Sanwa's standard form of application
for a letter of credit duly completed and executed by Client's customer and
by Client. Sanwa may decline to issue or confirm any letter of credit if
the application is not in a form acceptable to Sanwa, as determined at the
sole discretion of Sanwa.
D. Fees. Client shall have paid to Sanwa the fee applicable for any
letter of credit issued hereunder.
3.00 Representations and Warranties. Client hereby makes the following
representations and warranties to Sanwa, which representations and warranties
are continuing:
3.01 Status. Client is a corporation duly organized and validly existing
under the laws of [X] the State of California or [NA] of the United States of
America, and is properly licensed, qualified to do business and in good standing
in, and, where necessary to maintain Client's rights and privileges.
3.02 Authority. The execution, delivery and performance by Client hereunder
of the transactions contemplated hereby, and by any security agreement executed
in connection herewith (including the providing of any collateral or
compensating balances for any credit extended hereunder), have been duly
authorized and does and will not: (i) violate any provision of any law, rule,
regulation, writ, judgment or injunction presently in effect affecting Client;
(ii) result in a breach of or constitute a default under any material agreement
to which Client is a party or by which it or its properties may be bound or
affected; (iii) require any consent or approval of its stockholders or violate
any provision of its articles of incorporation or by-laws; or (iv) require any
consent or approval of any federal or state regulatory authority.
3.03 Financial Statements. All financial statements, call reports, thrift
financial reports, information and other data which may have been or which may
hereafter be submitted by Client to Sanwa are true, accurate and correct and
have been or will be prepared in accordance with generally accepted accounting
principles consistently applied and accurately represent Client's financial
condition or, as applicable, the other information disclosed herein. Since the
most recent submission of any such financial statement, information, or other
data to Sanwa, Client represents and warrants that no material adverse change in
Client's financial condition or operations has occurred which has not been fully
disclosed to Sanwa in writing.
4.00 Other Agreements. Client covenants and agrees that, during the term of
this Agreement, and so long thereafter as Client is indebted to Sanwa hereunder,
Client shall, unless Sanwa otherwise consents in writing:
4.01 Reporting Requirements. Deliver or cause to be delivered to Sanwa in
form and detail satisfactory to Sanwa:
A. Annual Statements. Not later than 120 days after the end of each of
Client's fiscal years, a copy of the annual financial report of Client for such
year, which report shall be a CPA audited report.
B. Call Reports or Thrift Financial Reports. Not later than 60 days after
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the end of each calendar quarter a copy of Client's most recent Call Report or
Thrift Financial Reports (or such other similar report required by Client's
regulator).
C. Other Information. Promptly upon Sanwa's request, such other information
pertaining to Client as Sanwa may reasonably request.
4.02 Financial Condition. Maintain at all times equity (Tier 1, total
equity and risk based capital) in accordance with applicable federal
regulations.
4.03 Borrowing/Not Deposit. Client shall record on its Call Report or
Thrift Financial Report and in all other financial records appropriate notations
reporting the credit hereunder as a borrowing and not as a deposit.
4.04 Maintain Corporate Records. Client shall maintain the resolution of
its Board of Directors which authorizes this borrowing and the execution,
delivery and performance of the obligations hereunder as an official record of
the Client and, further, will maintain as the official records of Client the
minutes of any meeting which mention this borrowing.
4.05 Senior Officer's Certificate. Upon request by Sanwa, Client must
deliver to Sanwa a certificate of a Senior Officer which certifies that the
transaction is governed by this Credit Agreement and related documents;
reconfirming the truth of all representations and warranties of Section 3.00, et
seq.; and certifying to compliance with all Other Agreements, as specified in
Section 4.00, et.seq.
4.06 Other.
___________NA__________________________________________________________________
_________________________________________________________________________.
5.00 Events of Default. Any one or more of the following described events
shall constitute an event of default (an "Event of Default") under this
Agreement:
5.01 Non-Payment. Client shall fail to pay any payment of principal or
interest or any other sum referred to in this Agreement within 10 days of when
due.
5.02 Performance Under This and Other Agreements. Client shall fail in any
material respect to perform or observe any term, covenant or agreement contained
in this Agreement or in any document, instrument or agreement evidencing or
relating to any indebtedness of Client (whether owed to Sanwa or third persons),
and any such failure (exclusive of the payment of money to Sanwa under this
Agreement or under any other document, instrument or agreement, which failure
shall constitute and be an immediate Event of Default if not paid when due or
when demanded to be due) shall continue for more than 30 days after written
notice from Sanwa to Client of the existence and character of such Event of
Default.
5.03 Representations and Warranties: Financial Statements. Any
representation or warranty made by Client under or in connection with this
Agreement or any financial statement given by Client shall prove to have been
incorrect in any material respect when made or given.
5.04 Insolvency. An order shall be made, appointing any receiver, custodian
or trustee for itself or any of its properties, assets or businesses.
5.05 Insurance. Client shall terminate or have terminated its deposit
insurance coverage as administered by the Federal Deposit Insurance Corporation
("FDIC") or any successor thereto or any other regulatory agency.
5.06 Suspension. Client shall voluntarily suspend the transaction of
business or allow to be suspended, revoked or expired any permit, license or
approval of any governmental body necessary to conduct Client's business as now
conducted.
6.00 Remedies on Default.
Upon the occurrence of any Event of Default, Sanwa may, at its sole
election, without demand and upon only such notice as may be required by law:
6.01 Acceleration. Declare any or all of the Client's indebtedness owing to
the Bank, whether under this Agreement or under any other document, instrument
or agreement, immediately due and payable, whether or not otherwise due and
payable.
6.02 Cease Extending Credit. Cease making Advances or otherwise extending
credit to or for the account of the Client under this Agreement or under any
other agreement now existing or hereafter entered into between the Client and
Sanwa.
6.03 Termination. Terminate this Agreement as to any future obligation of
Sanwa without affecting the Client's obligations to Sanwa or Sanwa's rights and
remedies under this Agreement or under any other document, instrument or
agreement.
6.04 Defaults and Letters of Credit. Upon the occurrence of any Event of
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Default, Sanwa may, at its sole and absolute discretion and in addition to any
other remedies available to it under the Agreement or otherwise, require Client
to pay immediately to Sanwa, for application against drawings under any
outstanding letters of credit, the outstanding principal of any such letters of
credit which have not expired. Any portion of the amount so paid to Sanwa which
is not applied to satisfy draws under any such letters of credit or any other
obligation of the Client to Sanwa shall be repaid to the Client without
interest.
6.05 Defaults and Foreign Exchange Transactions. Upon the occurrence of any
Event of Default, Sanwa may, at its sole and absolute discretion and in addition
to any other remedies available to it under the Agreement or otherwise, require
the Client to pay immediately to Sanwa, for application against the future
settlement price under any outstanding foreign exchange transaction, the
outstanding face amount of any such foreign exchange contract which have not
matured or settled and Client hereby grants to Sanwa a security interest in and
to such funds. Any portion of the amount so paid to Sanwa which is subsequently
applied to satisfy repayment on any such matured foreign exchange contract or
any other obligations of the Client to Sanwa shall be repaid to the Client
without interest.
6.06 Non-Exclusivity of Remedies. Exercise one or more of Sanwa's rights
set forth herein or seek such other rights or pursue such other remedies as may
be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Client and Sanwa, or otherwise.
7.00 Miscellaneous Provisions.
7.01 Amounts Payable on Demand. If Client fails to pay on demand any amount
so payable under this Agreement, such amount shall bear interest as provided in
the Loan Documents. If the Loan Documents do not provide a rate of interest,
where a Line of Credit for Client exists, Sanwa may, at its option and without
any obligation to do so and without waiving any default occasioned by Client's
failure to pay such amount, create an Advance in an amount equal to the amount
so payable, which Advance shall thereafter bear interest as provided under the
Line of Credit. If no Line of Credit is in existence, the amount due and payable
shall accrue interest at the Reference Rate (the "Variable Rate"). Interest
shall be adjusted concurrently with any change in the Reference Rate. Interest
hereunder shall be computed on the basis of 360 days per year, but charged on
the actual number of days elapsed.
7.02 Default Interest Rate. Client shall pay to Sanwa interest on any
indebtedness or amount payable under this Agreement, from the date that such
indebtedness or amount became due or was demanded to be due until paid in full,
at a rate which is 3% in excess of the rate otherwise provided under this
Agreement.
7.03 Indemnification for Letter of Credit Costs. Client shall, upon Sanwa's
request, promptly pay to and reimburse Sanwa for all costs incurred and payments
made by Sanwa by reason of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon Sanwa or as a result of
Sanwa's compliance with any directive or requirement of any regulatory authority
pertaining or relating to any letter of credit or acceptance.
7.04 Indemnification for Foreign Exchange Transactions. Client shall, upon
Sanwa's request, promptly pay to and reimburse Sanwa for all costs incurred and
payments made by Sanwa by reason of any assessment, reserve, deposit, capital
maintenance or similar requirement or any surcharge, tax or fee imposed upon
Sanwa or as a result of Sanwa's compliance with any directive or requirement of
any regulatory authority pertaining or relating to any foreign exchange
contract.
7.05 "Netting" Provision. This provision is intended to establish a
"netting contract" as defined in Section 402(14) of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), as may be amended from
time to time, with respect to the entirety of obligations between Sanwa and
Client. All words and expressions used in this section which are defined in
FDICIA Section 402 shall have the same meaning herein as therein. If at any time
either Sanwa or Client becomes a failed financial institution, then, from and
after such time, all covered contractual payment entitlements and all covered
contractual payment obligations between Sanwa and Client, regardless of their
source or derivation, including but not limited to those arising out of the
credit arrangement contemplated hereunder, shall be netted and FDICIA Section
403 shall apply thereto.
7.06 Accounting and Other Terms. All references to financial statements,
assets, liabilities and similar accounting terms not specifically defined in
this Agreement shall mean such financial statements prepared and such terms
determined in accordance with generally accepted accounting principles
consistently applied. Except where otherwise specified in this Agreement, all
financial data submitted or to be submitted to Sanwa pursuant to this Agreement
shall be prepared in accordance with generally accepted accounting principles
consistently applied. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the California Uniform Commercial Code.
7.07 Attorney's Fees. In the event of any action in relation to this
Agreement or any document, instrument or agreement executed with respect to,
evidencing or securing the indebtedness hereunder, the prevailing party, in
addition to all other sums to which it may be entitled, shall be entitled to
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reasonable attorneys' fees.
7.08 Notices. All notices, payments, requests, information and demands
which either party hereto may desire, or may be required to give or make to the
other party shall be given or made to such party by hand delivery or through
deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed to the address set forth below such party's signature to
this Agreement or to such other address as may be specified from time to time in
writing by either party to the other.
7.09 Waiver. Neither the failure nor delay by Sanwa in exercising any right
hereunder or under any document, instrument or agreement mentioned herein shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder or under any document, instrument or agreement mentioned herein
preclude other or further exercise thereof or the exercise of any other right;
nor shall any waiver of any right or default hereunder or under any other
document, instrument or agreement mentioned herein constitute a waiver of any
other right or default or constitute a waiver of any other default of the same
or any other term or provision.
7.10 Conflicting Provisions. To the extent that any of the terms or
provisions contained in this Agreement are inconsistent with those contained in
any other document, instrument or agreement executed pursuant hereto, the terms
and provisions contained herein shall control. Otherwise, such provisions shall
be considered cumulative.
7.11 Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of Client and Sanwa and their respective successors and
assigns, except that Client shall not have the right to assign its rights
hereunder or any interest herein without Sanwa's prior written consent. Sanwa
may sell, assign or grant participations in all or any portion of its rights and
benefits hereunder. Client agrees that, in connection with any such sale, grant
or assignment, Sanwa may deliver to the prospective buyer, participant or
assignee financial statements and other relevant information relating to Client.
7.12 Jurisdiction. This Agreement, any notes issued hereunder, and any
documents, instruments or agreements mentioned or referred to herein shall be
governed by and construed according to the laws of the State of California, to
the jurisdiction of whose courts the parties hereby submit.
7.13 Entire Agreement. This Agreement and the Loan Documents shall
constitute the entire and complete understanding of the parties with respect to
the transactions contemplated hereunder.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the date first hereinabove written.
SANWA BANK CALIFORNIA: SIERRAWEST BANK:
By: /s/ Robert Solomon By: /s/ William H. McGaughey
Robert Solomon, Vice President William H. McGaughey, SVP/Treasurer
(Name/Title) (Name/Title)
Address: 601 S. Figueroa Street By: /s/David Broadley
Los Angeles, CA 90017 David Broadley, EVP/CFO
(Name/Title)
Address: 10181 Truckee-Tahoe Airport Rd.
Truckee, CA 96160
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Exhibit 10.99
REVOLVING CREDIT AND COLLATERAL LOAN AGREEMENT
REVOLVING CREDIT AND COLLATERAL LOAN AGREEMENT dated as of May 1, 1997 by
and between SierraWest Bank, a California banking corporation (hereinafter
called "Company"), and IMPERIAL BANK, a California banking corporation
(hereinafter called "Bank").
In consideration of the mutual covenants and agreements contained herein,
Company and Bank agree as follows:
Section 1. DEFINITIONS
Defined Terms. All terms defined in this Agreement shall have the defined
meanings when used herein or in any note, certificate, report or other document
made or delivered pursuant to this Agreement, unless the context otherwise
requires. The following terms shall have the following meanings:
"Agreement" means this Revolving Credit and Collateral Loan Agreement as
originally executed and as the same may from time to time be amended or
supplemented.
"Business Day" means any day other than a Saturday, Sunday, or holiday
on which banks in the State of California are authorized by law to
close.
"Collateral" means all property referred to and described in Section 2.6
hereof.
"Deed of Trust" means a deed of trust or mortgage in form satisfactory
to Bank (a) which secures a Mortgage Note and (b) the lien of which constitutes
a first lien on the real property described therein subject only to (i) liens
for taxes, assessments, or similar governmental charges not yet due and payable,
(ii) zoning restrictions, (iii) mineral reservations, easements, covenants,
conditions and restrictions of record which shall neither defeat nor render
invalid such lien, nor materially impair the merchantability, or value of such
real property, and (iv) such other exceptions to title as have been approved in
writing by Bank.
"Event of Default means any event described in Section 8.1
hereof.
"FHA" means the Federal Housing Administration and any successor
thereto.
"FHA Mortgage" means a mortgage loan within acceptable limits insured
by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation and any
successor thereto.
"FNMA" means the Federal National Mortgage Association and
any successor thereto.
"GNMA" means the Government National Mortgage Association
and any successor thereto.
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"Interest Period" means the period commencing on the borrowing date on
which a Loan is disbursed and ending on the date three months thereafter when
selected by the Company in its notice of borrowing.
"Interest Rate" shall mean as to: (a) Prime Rate Loans, equal to the Prime
Rate; and (b) LIBOR Rate Loans, a rate of 2.00% per annum in excess of the LIBOR
Rate (based on the LIBOR Rate applicable for the Interest Period designated by
the Borrower).
"Investor" means a bank, trust company, savings and loan association,
pension fund, governmental authority, insurance company, investment company, or
securities broker or dealer, designated by Company and approved by Bank.
"Investor Commitment" means an existing, written agreement, in form and
substance satisfactory to Bank, to Company from an investor to purchase Mortgage
Loans.
"LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate Loan, the
rate of interest per annum determined by Bank (to be the per annum rate of
interest at which deposits in United States Dollars are offered to Bank in the
London interbank market in which Bank customarily participates) at 11:00AM
(local time in such interbank market) two (2) Business Days before the first day
of such Interest Period for a period approximately equal to such Interest Period
and in an amount approximately equal to the amount of such Loan.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate Loan,
a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1% equal
to (i) the LIBOR Base Rate for such Interest Period divided by (ii) 1 minus the
Reserve Requirement for such Interest Period.
"LIBOR Rate Loans" means any Loans made or a portion thereof on which
interest is payable based on the LIBOR Rate in accordance with the terms hereof.
"Loan" means each extension of credit by Bank to the Company hereunder.
"Loans" mean any or all of the loans from Bank to Company pursuant to this
Agreement.
"Mortgage Loan" means any loan evidenced by a Mortgage Note.
"Mortgage Note" means a negotiable promissory note executed by a bona fide
third party who has the capability to contract, payable to Company in monthly
installments, matures in thirty (30) years or less, and is secured by a Deed of
Trust on such real property described therein.
"Person" means a corporation, association, partnership, trust,
organization, business, individual or government or governmental agency or
political subdivision thereof.
"Prime Rate" means the floating commercial loan base or reference rate of
interest announced by Bank from time to time as its Prime Rate, which is not
necessarily the lowest rate offered by Bank at such time.
"Prime Rate Loans" means any Loans made or a portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms hereof.
"Regulatory Change" means, with respect to Bank, any change on or after the
date of this Loan Agreement in United States federal, state or foreign laws or
regulations, including Regulation D, or the adoption or making on or after such
date of
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any interpretations, directives or requests applying to a class of lenders,
including Bank, of or under any United States federal or state, or any foreign,
laws or regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Reserve Requirement" means, for any Interest Period, the average maximum
rate at which reserves (including any marginal, supplemental or emergency
reserves) are required to be maintained during such Interest Period under
Regulation D against "Eurocurrency liabilities" (as such term is used in
Regulation D) by member banks of the Federal Reserve System. Without limiting
the effect of the foregoing, the Reserve Requirement shall reflect any other
reserves required to be maintained by Bank by reason of any Regulatory Change
against (i) any category of liabilities which includes deposits by reference to
which the LIBOR Rate is to be determined as provided in the definition of "LIBOR
Base Rate" or (ii) any category of extensions of credit or other assets which
include Loans.
"Revolving Note" means the Company's promissory note issued to Bank
pursuant to Section 2.2 hereof with appropriate insertions.
"SBA" means the Small Business Association and any successor thereto.
"SBA Loan" means a Mortgage Loan within acceptable limits guaranteed
by the SBA.
"Servicing Portfolio" means the Mortgage Notes serviced by Company for the
purpose of processing payments thereon on behalf of the owner(s) thereof, for
which services Company is paid a fee.
"Tangible Net Worth shall mean the excess of all of the Company's assets
(excluding any value for goodwill, trademarks, patents, copyrights, organization
expense and other similar intangible items) over all its liabilities as
determined and computed in accordance with generally accepted accounting
principles consistently applied.
"Total Debt" shall mean the total of all items of indebtedness, obligation
or liability which would be included in determining total liabilities as shown
on the liability side of a balance sheet of the Company at the date as of which
Total Debt is to be determined.
"VA" means the Veterans' Administration and any successor thereto.
"VA Loan" means a Mortgage Loan within acceptable limits guaranteed by the
VA.
Section 2. AMOUNT AND TERMS OF CREDIT
2.1 Loans. Subject to the terms and conditions of this Agreement, Bank
agrees to make Loans (herein the "Loan" ) to Company, which amount shall not
exceed the sum of ten million dollars ($10,000,000.00) in the aggregate
outstanding at any one time. Bank's obligation to make the Loans shall terminate
on the maturity date set forth in the Revolving Note as described in Section 2.2
hereof subject to any renewal extension of the Revolving Note. Each LIBOR Rate
Loan shall be made upon the irrevocable written request of Borrower received by
Bank not later than 11:00AM (California time) on the Business Day three (3)
Business Days prior to the date such
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Loan is to be made. Each such notice shall specify the date such Loan is to be
made, which day shall be a Business Day, the amount of such Loan, the Interest
Period for such Loan, and comply with such other requirements as Bank determines
are reasonable or desirable in connection herewith. Each written request for a
LIBOR Rate Loan shall be in the form of a LIBOR Rate Loan Borrowing Certificate
as set forth on Exhibit A, which shall be duly executed by the Borrower.
2.2 Revolving Note. The obligation of Company to repay the Loans shall be
evidenced by a Revolving Note, payable as set forth in Sections 2.4 and 2.5
hereof, all amounts outstanding becoming finally due and payable as specified in
the Revolving Note if not paid before. Bank shall record the principal amount of
the initial Loan on the books and records of Bank. Additional Loans made by Bank
and payments and prepayments of principal with respect to the Revolving Note
shall be evidenced by notations made by Bank on the books and records of Bank.
The aggregate unpaid amount of Loans set forth on the books and records of Bank
shall be presumptive evidence of the principal amount owing and unpaid on the
Revolving Note.
2.3 Interest. a. The Revolving Note shall bear interest upon the unpaid
principal balance which is not a LIBOR Loan from its date at a fluctuating rate
per annum equal to Bank's Prime Rate. All interest shall be calculated on the
basis of a year of 360 days and the actual number of days. Any change in the
interest rate on the Revolving Note resulting from a change in the Prime Rate
shall become effective as of the day on which such change in the Prime Rate
shall become effective.
b. Any LIBOR Rate Loans shall automatically convert to Prime Rate Loans
upon the last day of the applicable Interest Period, unless Bank has received
and approved a complete and proper request to continue such LIBOR Rate Loan at
least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any LIBOR Rate Loans shall, at Bank's option, convert to Prime
Rate Loans in the event that (i) a Default, or event which with the notice or
passage of time or both would constitute a Default, shall exist, (ii) this
Agreement shall terminate, or (iii) the aggregate principal amount of LIBOR Rate
Loans at any time exceeds the Maximum Availability. Borrower agrees to pay to
Bank, upon demand by Bank ( or Bank may, at its option, charge Borrower's loan
account) any amounts required to compensate Bank for any loss (including loss of
anticipated profits), cost or expense incurred by such person, as a result of
the conversion of LIBOR Rate Loans to Prime Rate Loans pursuant to any of the
foregoing.
c. On all Loans, Interest shall be payable by Borrower to Bank monthly in
arrears not later than the tenth (10th) day of each calendar month at the
applicable Interest Rate. Should interest not be paid before the tenth day of
the month, it shall thereafter bear like interest as the principal.
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2.4 Regular Principal Payments. The amount received directly by Company or
from sale of said Mortgage Loans to any designated government or institutional
investor or by any other collection of any principal amount shall be due and
payable to Bank immediately following such receipt for application to unpaid
principal and interest on the Loans.
2.5 Payment of Principal on Demand. Company will pay Bank on demand the
full amount of any outstanding Loan in the event that:
A. Said Loan shall be outstanding for more than 90 days.
B. Any default shall occur with respect to the corresponding Mortgage
Loan.
2.6 Collateral. As security for the Loans and any other obligations of
Company under this Agreement, Company does hereby pledge, assign and hypothecate
to Bank, and grant to Bank a security interest in, the following:
A. Mortgage Notes, Deeds of Trust, documents and other property as shall be
deposited with or held by Bank or its agent in trust for Bank pursuant to this
Agreement, the Mortgage Loans evidenced thereby and the proceeds thereof;
B. All hazard insurance policies, title insurance policies, and any
proceeds thereof, and any condemnation proceeds;
C. All files, surveys, certificates, correspondence, appraisals, computer
programs, tapes, discs, cards, accounting records and all other records,
information and data of Company relating to the Mortgage Loans assigned
hereunder;
D. Any and all deposit accounts maintained by Company with Bank; and
E. Any other property and proceeds thereof that may from time to time
hereafter be delivered by Company to Bank or to its agent to be held in trust
for Bank pursuant to this Agreement.
F. Any and all assets of Company, real or personal.
G. All Investor Commitments covering the Mortgage Loans assigned hereunder
to the extent that the granting of a security interest in same shall not violate
any restrictions against assignment contained in said investor commitments, and
in the proceeds resulting from sales by Company pursuant thereto.
H. All Servicing Rights and proceeds thereof.
2.7 Limitations on Amounts Funded. In no event shall any advance under any
Loan exceed the maximum investor commitment ceiling of the corresponding
Mortgage Loan assigned hereunder, as those ceilings may change from time to
time. Bank reserves the right to approve any changes in these ceilings.
2.8 Transmittal of Mortgage Loans.
A. So long as no Event of Default shall occur or exist, Bank may, in its
discretion, deliver or release any Mortgage Loan constituting Collateral and all
related documents to Company so that Company may transmit such documents to the
appropriate investor for purchase in accordance with the Purchase Contract or
Investor Commitment.
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B. Transmittal shall be in such form as shall be satisfactory to Bank,
including, without limitation, (a) Company's execution and delivery of a Trust
Receipt with appropriate insertions for any Mortgage Loan released to Company,
and (b) written notice to Bank from any officer of Company authorized to request
a Revolving Loan specified herein.
C. In the case of Mortgage Loans, the approved investor shall immediately
return all loan documents to Bank if payment is not made within thirty (30) days
from the date of transmittal by Bank, and Company shall immediately return all
loan documents to Bank if transmittal to an approved investor is not completed
within three (3) days from the date of transmittal by Bank. Payments received
from approved investors shall be applied first to the satisfaction of Company's
obligations under this Agreement, and charges in connection therewith, and the
remainder, if any, shall be paid to Company.
2.9 Redemption of Collateral. So long as no Event of Default shall occur or
exist, Company may redeem, free from any security interest of Bank, any Mortgage
Loan constituting Collateral and all related documents upon payment to Bank of
the principal amount of the Loan advanced therefor plus interest accrued
thereon.
2.10 Disbursement of Loans. Bank shall fund according to a funding schedule
submitted by Company into a pre-designated funding account maintained by Company
at Bank.
2.11 Holiday Payments. If any payment to be made by Company hereunder or
under the Revolving Note shall become due on a day other than a Business Day,
such payment shall be made on the next succeeding Business Day and such
extension of time shall be included in computing any interest in respect of such
payment.
2.12 Additional Requirements/Provisions Regarding LIBOR Rate Loans; etc.
A. If for any reason (including voluntary or mandatory prepayment or
acceleration), Bank receives all or part of the principal amount of a LIBOR Rate
Loan prior to the last day of the Interest Period for such Loan, Borrower shall
immediately notify Borrower's account officer at Bank and, on demand by Bank,
pay Bank the amount (if any) by which (i) the additional interest which would
have been payable on the amount so received had it not been received until the
last day of such Interest Period exceeds (ii) the interest which would have been
recoverable by Bank by placing the amount so received on deposit in the
certificate of deposit markets or the offshore currency interbank markets or
United States Treasury investment products, as the case may be, for a period
starting on the date on which it was so received and ending on the last day of
such Interest Period at the interest rate determined by Bank in its reasonable
discretion. Bank's determination as to such amount shall be conclusive absent
manifest error.
B. Borrower shall pay to Bank, upon demand by Bank, from time to time such
amounts as Bank may determine to be necessary to compensate it for any costs
incurred by Bank that Bank determines are attributable to its making or
maintaining of any amount receivable by Bank hereunder in respect of any Loans
relating thereto
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(such increases in costs and reductions in amounts receivable being herein
called "Additional Costs"), in each case resulting from any Regulatory Change
which:
i. changes the basis of taxation of any amounts payable to Bank under this
Supplement in respect of any Loans (other than changes which affect taxes
measured by or imposed on the overall net income of Bank by the jurisdiction in
which such Bank has its principal office); or
ii. imposes or modifies any reserve, special deposit or similar
requirements relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of Bank (including any Loans or any deposits
referred to in the definition of "LIBOR Base Rate"); or
iii. imposes any other condition affecting this Supplement (or any of such
extensions of credit or liabilities). Bank will notify Borrower of any event
occurring after the date of the Loan Agreement which will entitle Bank to
compensation pursuant to this section as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation. Bank will
furnish Borrower with a statement setting forth the basis and amount of each
request by Bank for compensation under this Section 4. Determinations and
allocations by Bank for purposes of this Section 4 of the effect of any
Regulatory Change on its costs of maintaining its obligations to make Loans or
of making or maintaining Loans or on amounts receivable by it in respect of
Loans, and of the additional amounts required to compensate Bank in respect of
any Additional Costs, shall be conclusive absent manifest error.
C. Borrower shall pay to Bank, upon the request of Bank, such amount or
amounts as shall be sufficient (in the sole good faith opinion of such Bank) to
compensate it for any loss, costs or expense incurred by it as a result of any
failure by Borrower to borrow a Loan on the date for such borrowing specified in
the relevant notice of borrowing hereunder.
d. If Bank shall determine that the adoption or implementation of any
applicable law, rule, regulation or treaty regarding capital adequacy, or any
change therein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Bank (or its
applicable lending office) with any respect or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on capital of Bank or any person on entity controlling Bank (a "Parent")
as a consequence of its obligations hereunder to a level below that which Bank
(or its Parent) could have achieved but for such adoption, change or compliance
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by Bank to be material, then from time to time, within 125 days
after demand by Bank, Borrower shall pay to Bank such additional amount
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or amounts as will compensate Bank for such reduction. A statement of Bank
claiming compensation under this Section and setting forth the additional amount
or amounts to be paid to it hereunder shall be conclusive absent manifest error.
E. If at any time Bank, in its sole and absolute discretion, determines
that: (i) the amount of the LIBOR Rate Loans for periods equal to the
corresponding Interest Periods are not available to Bank in the offshore
currency interbank markets, or (ii) the LIBOR Rate does not accurately reflect
the cost to Bank of lending the LIBOR Rate Loan, then Bank shall promptly give
notice thereof to Borrower, and upon the giving of such notice Bank's obligation
to make the LIBOR Rate Loans shall terminate, unless Bank and the Borrower agree
in writing to a different interest rate applicable to LIBOR Rate Loans. If it
shall become unlawful for Bank to continue to fund or maintain any Loans, or to
perform its obligations hereunder, upon demand by Bank, Borrower shall prepay
the Loans in full with accrued interest thereon and all other amounts payable by
Borrower hereunder (including, without limitation, any amount payable in
connection with such prepayment).
Section 3. CONDITIONS OF LENDING
3.1 Conditions Precedent to Borrowing. Bank shall not be obligated to lend
to Company and no Loan shall be made to Company under this Agreement unless the
following conditions precedent have been satisfied:
A.Company shall comply, and shall have complied, with all of the covenants,
representations and warranties under this Agreement and no Event of Default
shall have occurred and be continuing.
B.Company shall have validly executed and delivered to Bank in form and
substance satisfactory to Bank the following:
1. A corporate resolution of the Board of Directors of Company
authorizing the execution of this Agreement, the Revolving Note, and any and all
other documents related to this Agreement;
2. This Agreement duly executed;
3. The Revolving Note duly executed;
4. Such other documents as Bank may reasonably request or as
otherwise specified herein in order to effect fully the
purposes of this Agreement.
3.2 Conditions Precedent to First Borrowing and Each Subsequent Borrowing.
The obligation of Bank to make each Loan hereunder is subject to the following
conditions:
A. Each Mortgage Loan constituting Collateral is on residential or
commercial property in such jurisdictions as may be approved by Bank; is secured
by a first lien on said property and originated under the SBA 504 program or
have an SBA 7(a) loan in junior position on the property. There shall exist no
default under any assigned Mortgage Note or corresponding Mortgage Loan, and
each Mortgage Loan must be approved by Bank for use as Collateral hereunder;
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B. Bank shall have received the following in form and substance
satisfactory to Bank:
1. Original Mortgage Note endorsed in blank by Company;
2. Assignment to Bank of the Deed of Trust. Such
Assignment shall be recorded at Bank's discretion;
3. Certified Copy of the Deed of Trust;
4. Collateral Transmittal Sheet;
5. U.S. Small Business Association PLP confirmation
letter;
6. SBA Authorization and Loan Agreement or
Authorization for Debenture Guarantee to PLP or CLP lender; and
7. Other documentation as Bank may reasonably require.
Section 4. COMPANY'S REPRESENTATIONS AND WARRANTIES
Company makes the following representations and warranties which shall be deemed
to be continuing representations and warranties so long as any credit hereunder
shall be available and until payment in full of the Revolving Note:
4.1 Existence and Rights. Company is a corporation duly organized and
existing in good standing under the laws of the State of California without
limit as to the duration of its existence; Company has corporate powers and
adequate authority, rights and franchises to own its property and to carry on
its business as now conducted, and is duly qualified and in good standing in
each State in which the character of its business makes such qualification
necessary; Company has the corporate power and adequate authority to make and
carry out this Agreement and to issue the Revolving Note as herein provided; and
Company's chief executive office is located in the State of California.
4.2 Agreement and Revolving Note Authorized. The execution, delivery and
performance of this Agreement, and the execution and delivery of the Revolving
Note are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
conflict with any law or regulation or any term or provision of its Articles of
Incorporation or bylaws; and this Agreement is, and the Revolving Note when
delivered for value received will be, the valid, binding and legally enforceable
obligations of Company in accordance with their terms.
4.3 No Conflict. The execution, delivery and performance of this Agreement
and of the Revolving Note will not breach or constitute a default under any
agreement, indenture, undertaking or other instrument to which Company is a
party or by which it or any of its property may be bound or affected, and, other
than in favor of Bank, such execution, delivery and performance will not result
in the creation or imposition of (or the obligation to create or impose) any
lien, charge or encumbrance on, or security interest in, any of its property
pursuant to the provisions of any of the foregoing.
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4.4 Litigation. There is no litigation or other proceeding pending or, to
the knowledge of Company, threatened against or affecting it or its properties
which, if determined adversely to Company, would have a materially adverse
effect on the financial condition, properties or operations of Company, and it
is not in default with respect to any order, writ, injunction, decree or demand
of any court or other governmental or regulatory authority.
4.5 Financial Condition. The opening balance sheet of Company as of
December 31, 1996, a copy of which has heretofore been delivered to Bank by
Company, and all other statements and data submitted in writing in connection
with the request for the credit granted by this Agreement are true and correct,
and said balance sheet truly represents the financial condition of Company as at
the date thereof, and have been prepared in accordance with generally accepted
accounting principles on a basis consistently maintained. Since said date there
have been no changes in the assets or liabilities or financial condition of
Company other than changes in the ordinary course of business, and no such
changes have been materially adverse changes. Company has no knowledge of any
liabilities, contingent or otherwise, at said date not reflected in said balance
sheet, and Company has not entered into any commitments or contracts which are
not reflected in said balance sheet, other than in the ordinary and normal
course of its business, which may have a materially adverse effect upon its
financial condition, operations or business as conducted.
4.6 Tax and Renegotiation. Company's federal income tax liability has been
finally determined for all years to and including fiscal year 1996, and Company
has no liability for renegotiation of profits; all applicable state franchise
and income taxes have been paid.
4.7 Regulations G, T, & U. Company is not engaged principally or as one of
its important activities, in the business of extending credit for the purpose of
purchasing or carrying any margin stock (as defined within Regulations G, T, & U
of the Board of Governors of the Federal Reserve System), and not more than
twenty-five percent (25%) of the value of the Company's assets and other
property consists of such margin stock.
4.8 Other Regulations. Neither Company nor any affiliate thereof is subject
to any statute or regulation restricting the ability of company or any affiliate
thereof to incur indebtedness or encumber its respective properties.
4.9 Compliance With Real Estate Legislation. Any Mortgage Loan constituting
Collateral will have been made in compliance with the following laws and any
regulations promulgated thereunder, including the making of all required
disclosures correctly to all Persons entitled to receive them within the time
specified by such law or rules.
A. Real Estate Settlement Procedures Act of 1974;
B. Equal Credit Opportunity Act - Regulation B;
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C. Truth In Lending Act - Regulation Z.
Further, Company is fully familiar with the requirements of the laws of the
applicable jurisdiction which assigned Mortgage Loans originate with regard to
fair lending practices, and all Mortgage Loans which are assigned to secure
Loans hereunder shall be made in strict compliance with the provisions of any
act, law or regulation which governs lending practices in the applicable
jurisdiction.
4.11 Title to Notes and Mortgages. At the time of their assignment to Bank
as Collateral, the Mortgage Notes and Deeds of Trust will be held by Company as
the true and lawful owner thereof, each Mortgage Note will evidence a bona fide
indebtedness incurred by the maker thereof in the amount of such Mortgage Note,
and each Deed of Trust will represent a valid first lien on the property
described therein. There are, or will be, no defenses, counterclaims, or setoffs
to the knowledge of Company which may be asserted against the Mortgage Notes or
the holder thereof. All financial information relating to the Collateral,
submitted by Company to Bank, whether previously or in the future, is or will be
true and correct.
4.12 Compliance with Commitments. Each Mortgage Loan assigned hereunder
will comply in all respects with underwriting standards as appicable of SBA,
FNMA, FHLMC, GNMA, HUD, or institutional investor designated and approved by
Bank as amended from time to time.
4.13 Loans in Special Flood Hazard Areas. Company will not make, increase,
extend or renew any Mortgage Loan secured by real property located or to be
located in a Special Floor Hazard Area so designated by the Secretary of Housing
and Urban Development if said Mortgage Loan is to be assigned as Collateral
under this Agreement, unless the community in which such area is situated is
then participating in the National Flood Insurance Program, and the property
covered by the related Deed of Trust is insured under such program.
Section 5. BANK'S REPRESENTATIONS
5.1 Non-reliance. Bank is not relying on or looking to any capital stock or
other security (as defined in Regulation U of the Board of Governors of the
Federal Reserve System) now or hereafter owned by Company for the repayment of
the Revolving Loans.
5.2 Investment Intent. Bank is making the Revolving Loans and receiving the
Revolving Note for its own account and not with a view to the distribution
thereof subject, nevertheless, to any requirement that its property shall at all
times be within its control, and subject further to Bank's right (reserved
hereby) to sell participations in the Revolving Note.
Section 6. COMPANY'S AFFIRMATIVE COVENANTS
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Company covenants and agrees that, so long as any credit hereunder shall be
available and until payment in full of the Revolving Note, unless Bank shall
otherwise consent in writing, Company shall do all of the following:
6.1 Corporate Rights and Facilities. Maintain and preserve its corporate
existence and all rights, privileges, franchises and other authority adequate
for the conduct of its business; maintain its properties, equipment and
facilities in good order and repair; conduct its business in an orderly manner
without voluntary interruption; and maintain its chief executive office in the
State of California.
6.2 Insurance. Maintain insurance with responsible insurance carriers
against such risks and in such amounts as is customarily carried by similar
businesses, including, without limitation, errors and omissions, fire, public
liability, property damage, workers' compensation and interruption of business
insurance.
6.3 Taxes and Other Liabilities. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
A. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse effect upon
its financial condition or the loss of any rights of redemption from any sale
thereunder; and
B. It shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting principles) adequate with respect
thereto.
6.4 Other Taxes and Charges. Pay all governmental charges or taxes (except
income, franchise or other similar taxes) at any time payable or ruled to be
payable in respect of the existence, execution or delivery of this Agreement or
the existence or issuance of the Revolving Note by reason of any existing or
hereafter enacted federal or state statute.
6.5 Records and Report. Maintain a system of accounting in accordance with
generally accepted accounting principles on a basis consistently maintained;
permit representatives of Bank to have access to and to examine its properties,
books and records at all reasonable times; and furnish at Company's expense to
the Bank:
A. As soon as available, and in any event within 45 days after the close of
each quarter of the first three quarters of each fiscal year of Company,
commencing with the quarter ending December 31, 1996, a balance sheet, profit
and loss statement and reconciliation of capital accounts of Company as at the
close of such quarter and covering operations for the portion of Company's
fiscal year ending on the last day of such quarter, all in reasonable detail and
stating in comparative form the figures for the corresponding date and period in
the previous fiscal year, prepared in accordance with generally accepted
accounting principles on a basis consistently maintained by Company and
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certified by an appropriate officer of company, subject, however, to year-end
audit adjustments;
B. As soon as available, and in any event within 90 days after the close of
each fiscal year respectively, a balance sheet, profit and loss statement and
reconciliation of capital accounts of Company as at the close of and for such
fiscal year, all in reasonable detail and stating in comparative form the
figures as at the close of and for the previous fiscal year, audited by and with
the unqualified opinion of certified public accountants satisfactory to Bank;
C. Promptly after thereof by Company, copies of any detailed audit reports
submitted to Company by independent accountants in connection with each annual
or interim audit of the accounts of the Company made by such accountants;
D. Currently with delivery of the documents provided for in Section 6.5B
hereof, a certificate of the President and Executive Vice President of Company,
stating that Company has performed and observed each and every covenant
contained in this Agreement to be performed by it and that no Event of Default
has occurred and no condition then exists which constitutes an Event of Default
hereunder or would constitute such an Event of Default upon the giving of
notice, the lapse of time, or both, specified herein; or, if any such event has
occurred or any such condition exists, specifying the nature thereof; and
E. Such other information relating to the affairs of Company as Bank may
reasonably request from time to time.
6.6 Notice of Certain Events. Promptly notify Bank in writing of the
occurrence of any (a) Event of Default hereunder or event which would become an
Event of Default hereunder upon giving of notice, the lapse of time, or both;
(b) event which entitles Bank to accelerate the maturity of any Mortgage note;
(c) event which entitles Bank to receive the proceeds of any insurance policies
associated with any Mortgage Loan assigned hereunder; (d) event which entitles
Bank to receive any proceeds payable to Bank by the terms of the Deed of Trust
securing any Mortgage Note; (e) assignment, transfer, pledge or other
encumbrance of any shares of FNMA, FHLMC, GNMA, or HUD stock which Company owns
or may hereafter acquire and which are restricted from sale under any existing
or future Investor servicing agreement; (f) contemplated sale, assignment,
transfer, pledge or other encumbrance of twenty-five percent (25%) or more of
Company's total Servicing Portfolio; (g) change in the location of Company's
executive headquarters; (h) change in the name or trade name of Company; or (i)
event which entitles Bank to payment on demand of any Revolving Loan as set
forth in Section 2.5 hereof.
6.7 Bank Expenses. Pay all out-of-pocket expenses and processing fees to
the Bank in connection with the administration and enforcement of this Agreement
and the Revolving Loans and security therefor, or any waiver or amendment of any
provision hereof. Company agrees to indemnify Bank from and hold it harmless
against any transfer taxes, documentary taxes, assessments or charges made by
any governmental authority by reason of the execution, delivery and performance
of this Agreement, the Revolving Loans and security therefor. The obligations of
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Company under this Section 6.7 shall survive payment of any Revolving Loan and
assignment of any rights hereunder.
6.8 Regulatory Compliance. Originate Mortgage Loans in compliance with all
applicable federal, state and local laws and regulations, including without
limitation those specified in Section 4.9 hereof, and, at Bank's request provide
Bank with an opinion of counsel for Company with respect to the matters set
forth in Section 4.1, 4.2, 4.3, 4.7, 4.8, and 4.9 hereof and such other matters
as Bank shall reasonably request.
Section 7. COMPANY'S NEGATIVE COVENANTS
Company covenants and agrees that so long as any credit hereunder shall be
available and until payment in full of the Revolving Note, Company shall not do
any of the following without the written consent of Bank:
7.1 Type of Business. Make any substantial change in the present character
of its business.
7.2 Loans and Investments. Lend money or extend credit other than in the
ordinary and normal course of its business as presently conducted; invest other
than in (a) direct obligations of the United States Government, (b) interest
bearing certificates of deposit issued by any commercial banking institution or
savings and loan association with total assets of not less than One Hundred
Fifty Million Dollars ($150,000,000) and organized under the laws of the United
States or any State thereof, (c) prime commercial paper rated Prime 1 or higher
by Moody, A-1 or higher by Standard and Poors, and F-1 or higher by Fitch, (d)
stock of FNMA and FHLMC, and (e) GNMA securities.
7.3 Sale of Business. Sell any assets except in the ordinary and normal
course of its business as now conducted; or sell, lease, assign, or transfer any
substantial part of its business or fixed assets, or twenty-five percent (25%)
or more of its affiliate's total Servicing Portfolio, or any property or other
assets necessary for the continuance of its business as now conducted,
including, without limitation, the selling of any property or other asset
accompanied by the leasing back of the same.
7.4 Regulations G, T, and U. Use the proceeds of the Revolving Loans,
directly or indirectly, to purchase or carry any margin stock (within the
meaning of Regulations G, T, and U of the Board of Governors of the Federal
Reserve System) or extend credit to others for the purpose of purchasing or
carrying, directly or indirectly, any margin stock.
7.5 Transfers, Encumbrances, and Subordination of Collateral. Transfer,
further encumber or subordinate Company's interest in any of the collateral,
including without limitation the real property described in the Deeds of Trust
assigned hereunder.
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7.6 Liens. Create, incur, assume, or permit to exist any lien, security
interest, pledge, assignment, encumbrance or charge of any kind, except in favor
of Bank, of or on twenty-five percent (25%) or more of its total Servicing
Portfolio or any accounts maintained with Bank.
7.7 Other Borrowings. Incur any indebtedness not in the ordinary course of
its business including deposts.
Section 8. EVENTS OF DEFAULT
8.1 Events of Default. Events of Default, as used herein, means any
one or more of the following events:
A. Failure to Pay Note. Failure to pay any installment of principal of, or
interest on, the Revolving Note when due or any other monetary obligations as
required hereunder.
B. Default in Other Agreements. Failure to pay, or any default on the
payment of, any principal of or any interest on any indebtedness of Company, or
any breach with respect to any term of any evidence of such indebtedness, or of
any loan agreement, mortgage, indenture or other agreement relating thereto,
whether or not waived by the note holder or obligee.
C. Breach of Covenant. Failure of Company to perform any other terms or
condition of this Agreement binding upon Company.
D. Breach of Representation or Warranty. Any of Company's representations
or warranties made herein or any statement or certificate at any time given in
writing pursuant hereto or in connection herewith shall be false or misleading
in any material respect.
E. Bankruptcy or Insolvency. A court having jurisdiction shall enter a
decree or order for relief in respect of the Company in an involuntary case
under any applicable insolvency or other similar law now or hereafter in effect,
or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Company, or for any substantial part of its
properties, or ordering the winding up or liquidation of its affairs; or the
Company shall commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or shall consent to
the entry of an order for relief in an involuntary case under any such law, or
shall consent to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or similar official) of
the Company, or for any substantial part of its properties, or shall make any
general assignment for the benefit of creditors, or shall fail generally to pay
its debts as they become due or shall take any corporate action in furtherance
of any of the foregoing.
F. Judgments, Attachments. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Company or any
of its assets and shall remain unvacated, unbonded or unstayed for a period of
30 days or in any event later than five days prior to the date of any proposed
sale thereunder.
8.2 Remedies Upon Default.
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A. Upon the occurrence of an Event of Default, automatically upon the
happening of any Event of Default specified in Section 8.1E hereof, and with
respect to the other Events of Default at its option, without demand,
presentment or notice, all of which hereby are expressly waived by Company, Bank
(or the holder of the Revolving Note) may exercise one or more of the following
remedies:
1. Terminate all credit hereunder and all obligations of Bank to make any
Revolving Loan hereunder.
2. Declare the Revolving Note to be immediately due and payable, whereupon
it shall be due and payable.
3. Notify all obligors on or under the Collateral that the same has been
assigned to Bank and that all payments thereon are to be made directly to Bank
or such other party as may be designated by Bank; settle, compromise, or
release, in whole or in part, any amounts owing on the Collateral or any portion
thereof by any obligor on terms acceptable to Bank; enforce payment and
prosecute any action or proceeding with respect to any and all Collateral;
extend the time of payment, make allowances and adjustments and issue credits in
Bank's name or in the name of the Company; where any such Collateral is in
default, foreclose on, and enforce security interests in, such Collateral by any
available judicial procedure or with judicial process and sell property acquired
as a result of such foreclosure; pay, purchase, contest, interplead or
compromise any encumbrance, charge or lien which in the judgment of Bank appears
to be prior or superior to Bank's interest.
4. Act as servicer of each item of collateral requiring servicing and
perform all obligations required in connection with FNMA, FHLMC, GNMA, or HUD
Commitments, or contract with a third party to so act or perform, such third
party's fees to be paid by Company.
5. Proceed in the foreclosure of Bank's security interest in the Collateral
in any manner permitted by law or provided for herein, and exercise all rights
and remedies under the Uniform Commercial Code including selling the Collateral
at public or private sale, without having the Collateral at the place of sale,
and upon terms and in such manner as Bank may determine, and Bank may purchase
same at any such sale. Bank may retain the Collateral in full satisfaction of
the indebtedness secured thereby.
6. Exercise any and all other rights and remedies of Bank as it shall deem
appropriate at law, in equity, or otherwise.
B. Upon any Event of Default hereunder and any default by any party
obligated under any of the Collateral, Bank may, but shall not be obligated to
(a) collect by legal proceedings all interest, principal payments and other sums
payable on account of such Collateral, (b) grant extensions of time, (c) make
any compromise or settlement it seems desirable with respect to such Collateral,
(d) waive or release security, (e) foreclose by any appropriate means any
Mortgage Loan which is in default, (f) pursue any other rights and remedies
available to Company, and/or (g) require Company to pursue, in its own name but
for the benefit of Bank, any one or more of the remedies described in (a)
through (f) above.
If any Mortgage Loan shall be foreclosed pursuant to the preceding
sentence, such foreclosure may be by judicial or non-judicial sale, and Bank
shall be
16
<PAGE>
entitled to direct the order and manner of sale and cause the sale to be made on
any terms and conditions it deems appropriate and to apply all cash proceeds of
the sale (after deduction of expenses of sale) to the balance owing on the
Revolving Note. Without limiting the generality of the foregoing, Bank may bid
all or a portion of the indebtedness owing under the Mortgage Note and may
become the purchaser of and take title to the property securing the Mortgage
Loan. In such event, Company shall receive credit against the balance owing on
the Revolving Note only to the amount of the indebtedness bid by Bank, and in
connection with any such sale, Company hereby waives any defenses or benefits
that may be derived from California Code of Civil Procedure Sections 580(a),
580(d), or 726 or any similar laws of any other jurisdiction and all suretyship
defenses.
C. Bank shall have the right to enforce one or more remedies hereunder
successively or concurrently, and any such action shall not stop or prevent Bank
from pursuing any further remedy which it may have hereunder or by law.
8.3 Application of Proceeds. Any money collected by Bank pursuant to
Section 8.2 hereof (whether by means of voluntary payment, foreclosure, or
otherwise) shall be promptly applied as follows unless otherwise required by
provision of applicable law:
A. First, to the payment of all expenses incurred by Bank under this
Agreement and in enforcing its rights hereunder, including without limitation
all costs and expenses of collection, attorneys' fees, court costs, and
foreclosure expenses.
B. Next, to the payment of all Revolving Loans due and unpaid by Company to
Bank (including interest accrued on the Revolving Note).
C. Next, to the payment of any other amounts owed by Company to Bank under
this Agreement.
D. Next, to Company. It is expressly understood between the parties hereto
that Bank's ability to collect any deficiency on the Revolving Note shall in no
way be impaired by the above-referenced application of proceeds.
Section 9. MISCELLANEOUS
9.1 Survival of Warranties. All agreements, representations and warranties
made herein shall survive the execution and delivery of this Agreement, the
making of the Revolving Loans hereunder and the execution and delivery of the
Revolving Note.
9.2 Failure of Indulgence Not Waiver. No failure or delay on the part of
Bank or any holder of the Revolving Note in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing under this Agreement and the Revolving Note are cumulative to,
and not exclusive of, any rights or remedies otherwise available.
17
<PAGE>
9.3 Modification. This Agreement and the Revolving Note may not be amended,
waived or modified in any manner without the written consent of Bank and
Company.
9.4 Notices. Except as otherwise expressly provided herein, any notice
herein required or permitted to be given shall be in writing and may be
personally served or sent by United States mail and shall be deemed to have been
given when deposited in the United States mail, registered, with postage prepaid
and properly addressed. For the purposes hereof, the addresses of the parties
hereto (until notice of a change thereof served as provided in this Section 9.4)
shall be as follows:
IMPERIAL BANK
9920 South La Cienega Blvd., Suite 1001
Inglewood, California 90301
Attn: Paul Ng, Vice President
9.5 Separability. In case any provision in this Agreement or in the
Revolving Note shall be invalid, illegal or unenforceable, such provision shall
be severable from the remainder of such contract and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
9.6 Applicable Law. This Agreement, the Revolving Note, all documents
provided for herein and the rights and obligations of the parties thereto shall
be governed by the laws of the State of California. The Bank retains all of its
rights under federal law, including those relating to the charging of interest
rates.
9.7 Assignability. This Agreement is not assignable by Company.
9.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.9 Section Headings. The various headings used in this Agreement are
inserted for convenience only and shall not affect the meaning or
interpretations of this Agreement or any provision hereof.
9.10 Further Assurances. At any time or from time to time upon the request
of Bank, Company will execute and deliver such further documents and do such
other acts and things as Bank may reasonably request in order to effect fully
the purposes of this Agreement and the Revolving Note and to provide for the
payment of the Revolving Loans and interest thereon in accordance with the terms
of this Agreement and the Revolving Note.
9.11 Indemnity by Company.
18
<PAGE>
A. Company agrees to indemnify, save and hold harmless Bank and its
directors, officers, agents, and employees (collectively the "indemnitees") from
and against:
1. Any and all writs, subpoenas, claims, demands, actions, or causes of
action of any Person which may be served on or asserted against any indemnitee
if the writ, subpoena, claim, demand, action, or cause of action that the Person
has, serves on or asserts against the Company or any of its officers or
employees arises from the enforcement of this Agreement; and
2. Any and all liabilities, losses, costs, or expenses (including without
limitation reasonable attorneys' fees) that any indemnitee suffers or incurs as
a result of the service or assertion of any writ, subpoena, claim, demand,
action, or cause of action specified in Section 9.11A.1.
B. Performance and/or payment of any obligation or liability of Company to
any indemnitee as provided for herein shall be and hereby is secured by the
Collateral.
9.12 Power of Attorney. Company does hereby make, constitute and appoint
Bank its irrevocable, true and lawful attorney with the power to endorse the
name of Company upon any checks or other evidence of payment that may come into
the possession of Bank, upon Mortgage Notes and Deeds of Trust constituting
Collateral hereunder; to endorse the name of Company upon any document or
instrument relating to the Collateral, including, but not limited to, deeds,
trust deeds, subordinations, releases, reconveyances and modification
agreements; in its name or otherwise, to demand, sue for, collect and give
acquittances for, any and all moneys due or to become due upon the Collateral;
to compromise, prosecute or defend any action, claim or proceeding with respect
thereto; and to do any and all things necessary and proper to carry out the
purposes herein contemplated. Company further agrees, upon request of Bank, to
execute powers of attorney in recordable form and deliver same to Bank.
9.13 Termination. Either party may terminate this Agreement by giving
written notice to the other party at least 120 days in advance of such
termination date. In the event of any termination of this Agreement, either
automatically or by notice, the terms of this Agreement shall remain in full
force and effect until the Revolving Note and all other obligations to Bank
hereunder have been paid and/or performed in full.
9.14 Reference Provision. a. Other than non-judicial foreclosures of
Collateral and the granting of provisional remedies by a court of competent
jurisdiction, each controversy, dispute or claim ("Claim") between the parties
arising out of or relating to this Agreement, which is not settled in writing
within ten days after the "Claim Date" (defined as the date on which a party
gives written notice to all other parties that a controversy, dispute or claim
exists), will be settled by a reference proceeding in Los Angeles, California in
accordance with the provisions of Section 638 et seq. of the California Code of
Civil Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any Claim, including whether such Claim
is subject to the reference proceeding and
19
<PAGE>
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court of Los Angeles
(the "Court"). The referee shall be a retired Judge selected by mutual agreement
of the parties, and if they cannot so agree within thirty days after the Claim
Date, the referee shall be selected by the Presiding Judge of the Court. The
referee shall be appointed to sit as a temporary judge, as authorized by law.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall entered pursuant to CCP 644 in the Court. All
discovery permitted by this Agreement shall be completed no later than fifteen
(15) days before the first hearing date established by the referee. The referee
may extend such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and, request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
b. The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties expressly reserve the right to
findings of fact, conclusions of law, a written statement of decision, and the
right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
20
<PAGE>
This Agreement is executed on behalf of the parties by duly authorized
representatives as of the date first above written.
SIERRAWEST BANK
BY: /s/William H. McGaughey
-----------------------
William H. McGaughey
Senior Vice President/Treasurer
IMPERIAL BANK
BY: /s/Kathy Rosner-Galitz
----------------------
Kathy Rosner-Galitz
Vice President
21
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-28004 on Form S-8, Registration Statement No. 33-13031 on Form S-8 and
Registration Statement No. 33-15013 on Form S-8 of SierraWest Bancorp of our
report dated February 10, 1998, appearing in this Annual Report on Form 10-K of
SierraWest Bancorp for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Sacramento, California
March 26, 1998
1
<PAGE>
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
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0
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