-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IYNaMMqSdVoWHN37dC5xgx/mcs3PraVG13LExpOEA2dL1P2adAq7kfsrJssXxz/e ybfDrzGz/wCRgQ1taBQo1w== 0000790555-98-000010.txt : 19980330 0000790555-98-000010.hdr.sgml : 19980330 ACCESSION NUMBER: 0000790555-98-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRAWEST BANCORP CENTRAL INDEX KEY: 0000790555 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 680091859 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11611 FILM NUMBER: 98576730 BUSINESS ADDRESS: STREET 1: 10181 TRUCKEE TAHOE AIRPORT RD STREET 2: P O BOX 61000 CITY: TRUCKEE STATE: CA ZIP: 96161-9010 BUSINESS PHONE: 9165823000 MAIL ADDRESS: STREET 1: PO BOX 61000 CITY: TRUCKEE STATE: CA ZIP: 96160 FORMER COMPANY: FORMER CONFORMED NAME: SIERRA TAHOE BANCORP DATE OF NAME CHANGE: 19920703 10-K 1 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. TABLE OF CONTENTS Page No. PART I 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
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 -3- 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. -4- 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 -5- 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 -6- 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 -7- 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): December 31, Type of Loan: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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 ========= ========= ========= ======== ========
(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 -8- 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- The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated (amounts in thousands except percentage amounts). December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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%
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- 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). December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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
-11- 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). December 31, 1997 1996 Amount Percentage Amount Percentage 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% ====== === ====== ===
December 31, 1995 1994 1993 ----------------------- ---------------------- ------------------------ Amount Percentage Amount Percentage Amount Percentage 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% ====== === ====== === ====== ===
(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- 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. Year Ended December 31, 1997 After One Within But Within After One Year(1) Five Years Five Years Total 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
(1) Demand loan and overdrafts are shown as "Within One Year" -13- 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): Year Ended December 31, 1997 1996 1995 --------------------------------- ------------------------------- ------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Rate Interest Balance Rate Interest Balance Rate Interest 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% ==== ==== ====
(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- 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): December 31, 1997 1996 1995 -------------------- -------------------- --------------------- Book Market Book Market Book Market Value(1) Value Value(1) Value Value(1) Value 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 ======== ======== ======== ======== ========= ========
(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- 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). December 31, 1997 Weighted Book Average Market Value Yield Value 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 ========= =========
(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- 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): Total Deposits Held # of Company # of Banking Deposits Held by all Banks County State Branches Offices by Company and offices 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
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- 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- 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 -19- 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). The Company Actual To Be Well Capitalized For Capital Qualifying Under Prompt Corrective Adequacy Capital Ratio Action ProvisionsPurposes 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
SierraWest Bank Actual To Be Well Capitalized For Capital Qualifying Under Prompt Corrective Adequacy Capital Ratio Action ProvisionsPurposes 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
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. -20- 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 -21- 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 -22- 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. -23- 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 -24- 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. -25- 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. -26- 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." -27- 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). At or for the Year Ended December 31, --------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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
-28- At or for the Year Ended December 31, -------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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
(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- 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). Quarter First Second Third Fourth 1997 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
(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- 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): December 31, 1997 over 1996 1996 over 1995 ------------ -------------- -------------- 1997 1996 1995 Amount Percentage(1) Amount Percentage(1) ---- ---- ---- ------ ------------- ------ ------------- 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 ======== ======= ======= ======== ========
(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- 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. 1997 over 1996 1996 over 1995 -------------- -------------- Volume Rate Total Volume Rate Total 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 ========= ========= ========= ========= ========= =========
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- 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- 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- 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- 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. December 31 1997 1996 1995 ------- ------ ------ 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%
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). December 31 1997 1996 1995 ------- ------ ------ 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
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- 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): Increase (Decrease) Year Ended December 31, 1997 over 1996 1996 over 1995 1997 1996 1995 Amount Percentage Amount Percentage 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) ======= ======= ====== ====== =======
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 -37- 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 -38- 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): Salaries Occupancy and and Other Year Ended Average Related Equipment Non-Interest December 31, Assets Benefits(1) Expenses Expenses 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
(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): Increase (Decrease) Year Ended December 31, 1997 over 1996 1996 over 1995 1997 1996 1995 Amount Percentage Amount Percentage 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 ======= ======= ======= ======= =======
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 -39- 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. -40- 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 -41- 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 -42- 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 -43- 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. -44- 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- 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). December 31, 1997 Next Day Over Three One Year to Three Months Through Through Over Immediately Months Twelve Months Five Years Five Years Total 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% ======== ========= ========= ========= =========
(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- 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). December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- 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 ========= ======= ======= ======= ======= ======== ======== ========
(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- 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- 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- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS December 31, 1997 1996 (in thousands) 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 =========== ==========
See notes to consolidated financial statements. -50- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued) LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 1997 1996 (in thousands except share amounts) 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 =========== ===========
See notes to consolidated financial statements. -51- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (continued) Year Ended December 31, 1997 1996 1995 (in thousands, except per share amounts) 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
See notes to consolidated financial statements. -52- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (continued) Year Ended December 31, 1997 1996 1995 (in thousands, except per share amounts) 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 ========== =========== ===========
See notes to consolidated financial statements. -53- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) Unrealized Common Stock Retained Gain/(Loss) Shares Amounts Earnings Net of Taxes Total 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 ===== ======== ========= ======= ========
See notes to consolidated financial statements. -54- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1997 1996 1995 (in thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 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)
See notes to consolidated financial statements. -55- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Year Ended December 31, 1997 1996 1995 (in thousands) 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 ========= =========== =========
See notes to consolidated financial statements. -56- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Year Ended December 31, 1997 1996 1995 ---- ---- ---- (in thousands) 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) ========= ========= ==========
See notes to consolidated financial statements. -57- 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- 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- 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- 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- 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- 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): Gross Gross Estimated Amortized Unrealized Unrealized Market Carrying Cost Gains Losses Value Value 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 ========== ========= ========= ========== ==========
-63- 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): Held to Maturity Available for Sale Amortized Fair Amortized Fair Cost Value Cost Value 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 ======== ========= ========== ===========
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- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At December 31, 1997 and 1996, the loan portfolio consisted of the following (amounts in thousands): 1997 1996 ---- ---- 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 =========== ===========
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- 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): Year Ended December 31, 1997 1996 1995 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 ========= ========= =========
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- 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): December 31, 1997 1996 1995 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
(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- 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): December 31, 1997 Accumulated Depreciation/ Net Cost Amortization Book Value 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 ============== ============ ============
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- 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- 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- 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): December 31, ------------ 1997 1996 1995 ---- ---- ---- 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 ========== =========== ==========
-71- 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): December 31, Deferred Tax Assets: 1997 1996 ---- ---- 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 ======= =======
The total tax provision differs from the statutory federal income tax rates for the reasons shown in the following table: December 31, ------------ 1997 1996 1995 ---- ---- ---- 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% ==== ==== ====
-72- 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): Year Ended December 31, 1997 1996 1995 ---- ---- ---- 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 ======== ========== ==========
(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- 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: 1997 1996 1995 ---- ---- ---- 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 ====== ====== =======
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- 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) Number of Weighted Average Shares Exercise Price 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
Additional information regarding options outstanding as of December 31, 1997 is as follows: 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 $ 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 ======= =======
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- 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. 1997 1996 1995 ---- ---- ---- 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
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- 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. To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio 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%
SierraWest Bank's ratios are calculated under regulatory accounting principles. -77- 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- 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): December 31, 1997 Carrying Fair Amount Value 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 ============= =============
-79- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1996 Carrying Fair Amount Value 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 ============= ===========
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- 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) For the Years Ended December 31, 1997 1996 ----- ----- 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
-81- 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) For the Years Ended December 31, 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
(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- 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) 1997 1996 ---- ---- 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 =========== ===========
-83- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SIERRAWEST BANCORP STATEMENTS OF INCOME For the Years Ended December 31, (in thousands): 1997 1996 1995 ---- ---- ---- Income 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 ========= =========== ===========
-84- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SIERRAWEST BANCORP STATEMENTS OF CASH FLOWS For the Years Ended December 31, (in thousands): 1997 1996 1995 ---- ---- ---- 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 ========== ========== ============
-85- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) RECONCILIATION OF NET INCOME 1997 1996 1995 TO NET CASH USED IN ---- ---- ---- OPERATING ACTIVITIES 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) =========== =========== ==========
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- 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- 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- 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- 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- 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- 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. -92- 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. -93- 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. -94- 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. -95- 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 -96- 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. /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
-97- 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. 1 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, 2 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 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 1 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. 2 (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 4 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 5 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 6 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 8 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 9 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. 1 "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 2 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 3 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. 4 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. 5 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 6 (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 7 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; 8 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. 9 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; 10 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 11 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 12 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 13 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. 14 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. 15 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 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 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 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 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 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 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 EX-27 2
9 1000 Year Dec-31-1997 Dec-31-1997 47,660 396 13,500 0 58,844 1,000 1,000 433,149 6,649 589,755 526,269 0 9,856 0 0 0 29,587 24,043 589,755 39,357 2,976 1,977 44,310 16,859 17,099 27,211 2,480 8 24,281 12,216 7,509 0 0 7,509 2.03 1.82 5.82 5,983 1,382 0 0 4,546 1,490 249 6,649 6,649 0 0
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