-----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, AZuwVGu/nAz11D5fa/CgXjRF2J9Xugiz4f1koY1xzdAB/0FRkKWI+lsu+JJPp/Q9 I4ufczhmgQBy+/MnpMQTAQ== 0001047469-99-011255.txt : 19990326 0001047469-99-011255.hdr.sgml : 19990326 ACCESSION NUMBER: 0001047469-99-011255 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: 99572154 BUSINESS ADDRESS: STREET 1: 10181 TRUCKEE TAHOE AIRPORT RD STREET 2: P O BOX 61000 CITY: TRUCKEE STATE: CA ZIP: 96161-9010 BUSINESS PHONE: 5305823000 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 FORM 10-K - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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, 1998 Commission File No. 0-15450 SIERRAWEST BANCORP - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) California 68-0091859 - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer 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. / / 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, 1999: $163,772,000 (based on closing sales price at March 15, 1999) Number of shares of Common Stock outstanding at March 15, 1999: 5,333,335. TABLE OF CONTENTS
PART I Page No. ------ -------- ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . .30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . .30 PART II ------- ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK. . . . . . . . . . . . . . . .31 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . .32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . .35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . .55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . .59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . 107 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 107 ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 111 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 115 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 117 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K . 118
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 20 branch offices in the following communities: Truckee (two branches), South Lake Tahoe, Tahoe City, Kings Beach, Grass Valley (two branches), Auburn, Vacaville (two branches), Fairfield (two branches), Benicia, Vallejo (two branches), Concord and Sacramento (two branches), California, and in Reno and Carson City, Nevada. In addition, SierraWest Bank maintains lending offices or agency relationships, primarily for its SBA lending activities, in the following states: California, Nevada, Arizona, Florida, Colorado, Alabama, Georgia, Oregon, Tennessee, Texas and Washington. 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 April 15, 1998, the Company completed the acquisition of California Community Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental Pacific Bank (CPB), under the pooling-of-interests method of accounting and accordingly, the Company's historical consolidated results have been restated. On the acquisition date, CCBC had assets of $206 million, deposits of $184 million and shareholders' equity of $15.4 million. No gain or loss for tax purposes was recognized by CCBC shareholders, except with respect to cash received in lieu of fractional shares. The value of the acquisition, based upon an average price of $37.94 per share totaled approximately $44.7 million. On February 25, 1999, the Company entered into an Agreement and Plan of Merger ("Plan") with BancWest Corporation ("BancWest"). Under the terms of the Plan, BancWest will acquire all the outstanding common stock of the Company in exchange for 0.82 shares of BancWest common stock. The merger, which is expected to close in the second or third quarter of 1999 is subject to the approval of the Company's shareholders, various regulatory agencies and certain other conditions. The transaction is expected to be accounted for under the pooling-of-interests accounting method. 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 -3- 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 securitizes 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 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 (including the risk that systems may not process dates after December 31, 1999 properly) 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 $398.5 million at December 31, 1993 to $879.2 million at December 31, 1998, a compound annual increase of 17.1%. The Company's assets grew 11.7% in 1998. For the year ended December 31, 1998, the Company reported net income of $7.7 million, or a return on average assets of approximately 0.9% and return on average equity of 10.5%. Excluding costs associated with the Company's acquisition of CCBC, net income would total $10.5 million and return on average equity would increase to 14.3%. At December 31, 1998, the Company had total loans of $625.0 million, loan loss reserves of $8.7 million, deposits of $782.6 million and total equity capital of $78.3 million. GENERAL LENDING OVERVIEW The four general areas in which the Company has directed its lending activities are: SBA loans; residential and non-SBA commercial real estate loans; commercial loans and consumer loans to individuals (including home equity lines of credit). As of December 31, 1998, these four categories accounted for approximately 30%, 49%, 19%, and 2%, respectively, of the Company's total loan portfolio. SMALL BUSINESS ADMINISTRATION LENDING The Company ranked 11th in the nation by dollars of Small Business Administration ("SBA") government guaranteed ("SBA 7(a)") loans generated by banks for the SBA's fiscal year ended September 30, 1998 as published by the SBA. For the fiscal year ending September 30, 1999 the Federal government approved a level of SBA loans guaranteed of $10 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, and the rules and regulations promulgated thereunder. 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 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. -4- The Company operates in California, Nevada, Oregon, Alabama and Tennessee under the Preferred Lender Program. 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. 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 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. 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, 1998, 1997 and 1996 was 4%, 4% and 16%, respectively. Beginning in 1995 and continuing through 1997, the Company retained the guaranteed portions of most of the loans generated in its portfolio. During 1998 the Company began selling a significant portion of the guaranteed portions of loans it originates. 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. In addition, the SBA also shares in the liquidation costs on a pro rata basis. 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. 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 or loans to any one borrower to whom the guarantee can apply 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, 1998, included in total SBA loans of $185.3 million were portions of loans guaranteed by the SBA totaling $68.8 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. -5- SBA SERVICING. As of December 31, 1998, 1997 and 1996, the Company serviced 1,612, 1,537 and 1,438 SBA loans, respectively, with a total unpaid principal balance of approximately $497 million, $457 million and $423 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 portions of loans sold to investors, servicing also entails 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 included in other assets. At December 31, 1998, the balance of the servicing asset, net of a valuation allowance of $420 thousand, was $2.0 million and its market value was also $2.0 million. The I/O strips receivable were recorded at $22.1 million net of an unrealized loss of $528 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 1997 securitization, unguaranteed SBA 504 and similar loans sold in 1998's securitization and sold guaranteed portions of Business and Industry loans ("B&I"). See "SBA Securitization" and "Other Government Lending" below. Income from the servicing spread received for the years ended December 31, 1998, 1997 and 1996, was $7.7 million, $6.3 million and $5.6 million, respectively. Amortization of the related asset(s) for these same periods was $3.5 million, $1.7 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. -6- Servicing spread primarily represents the servicing spread on previously sold guaranteed portions of SBA 7(a) loans and securitized loans. In addition to servicing spread generated from the sale and securitization of SBA 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 of adjustment. Additionally a decrease in the fair value of the I/O strips receivable would also be expected under these circumstances. During 1997 and continuing into 1998, the Company experienced an increase in the prepayment speed of its SBA loan portfolio. During 1998 the Company recorded a valuation allowance on its servicing assets totaling $420 thousand. The offset to this valuation allowance is a reduction in service fee income. Additionally, during this period the Company has experienced a decline in the value of its I/O strips receivable. 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 attempts to mitigate 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, 1998 are loans totaling $67.4 million related to this and similar lending programs in conjunction with the SBA. 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. Because of recent changes in SBA regulations the Company is unlikely to securitize additional unguaranteed portions of its SBA 7(a) loans in the future. During 1998, the Company completed a securitization of SBA 504 and similar loans. This securitization included loans totaling approximately $85 million. The securitization included 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 also included 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 securitization, which totaled $890 thousand, was substantially lower than the 1997 securitization gain. The Company intends to continue to securitize this product in economically viable sized transactions, which the Company considers to be in excess of $75 million. 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 $28.6 million at December 31, 1998. No sales of B&I loans were made during 1998. 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 -7- 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, the Company has various outstanding commitments to extend credit that are not reflected in the financial statements. As of December 31, 1998, the Company had approximately $222 million in undisbursed loan commitments and $4.3 million in standby letters of credit. About 28% of the undisbursed loan commitments relate to SBA loans, while the remaining represent undisbursed construction, commercial, real estate and personal loans (including equity lines of credit). Most of these off-balance sheet items are or will be secured by real estate or other assets; however, a portion are unsecured commercial lines of credit. Off-balance sheet items undergo a level of underwriting scrutiny similar to the criteria applied to the Company's loan portfolio, and outstanding balances are monitored to minimize risk and loss exposure. 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: 1998 1997 1996 1995 1994 --------- --------- --------- --------- ---------- SBA loans: SBA guaranteed loans(1). . . . . . . . $ 91,975 $ 82,079 $ 63,142 $ 47,557 $ 17,053 Other SBA loans(2) . . . . . . . . . . 93,326 86,325 85,065 71,321 79,649 --------- --------- --------- --------- ---------- Total SBA Loans . . . . . . . . . . . . 185,301 168,404 148,207 118,878 96,702 --------- --------- --------- --------- ---------- Real estate loans (includes loans secured primarily by real estate, except for SBA loans): Construction and land development . . 68,506 69,723 42,635 41,054 27,663 Mortgage. . . . . . . . . . . . . . . 225,529 186,493 144,463 110,559 96,712 Equity lines of credit. . . . . . . . 15,030 18,127 17,153 14,334 10,670 --------- --------- --------- --------- ---------- Total Real Estate Loans . . . . . . . . 309,065 274,343 204,251 165,947 135,045 --------- --------- --------- --------- ---------- Commercial and industrial loans . . . . 115,656 87,898 65,195 52,047 40,034 Individual and other loans. . . . . . . 9,614 9,954 10,435 10,109 11,211 Lease receivables . . . . . . . . . . . 5,347 13,114 8,304 3,380 202 --------- --------- --------- --------- ---------- Total Loans . . . . . . . . . . . . . . 624,983 553,713 436,392 350,361 283,194 Less allowance for possible loan losses 8,709 7,891 5,647 5,003 4,654 --------- --------- --------- --------- ---------- Total Net Loans . . . . . . . . . . . . $616,274 $545,822 $ 430,745 $ 345,358 $ 278,540 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ----------
(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 $68.8 million, $59.9 million, $37.6 million, $30.8 million and $12.2 million at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (2) Includes the unguaranteed retained portion of loans for which the guaranteed portion has been sold to investors and loans on 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 -8- 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 Company's loan policy. 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, 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 Directors' Loan Committee for approval. Approved SBA loan 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 80% were collateralized by commercial real estate at December 31, 1998. Prior to submission of the application to the SBA for guarantee, as required, any real property to be taken as collateral is appraised by independent appraisers. SierraWest Bank's management presents written reports to the Directors' Loan Committee monthly, including the Allowance for Loan and Lease Loss analysis and Lending Activity Summary. The Chief Credit Officer also presents a statistical analysis of loan delinquencies by loan type. 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, the FDIC and by external and internal personnel. The Directors' 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 Allowance for Loan and Lease Loss analysis takes into consideration an analysis of several components to the lending portfolio. Provisions are based on several criteria, including loan exposure by grade of the loan and collateral coverage, type of credit and a subjective assessment of various factors affecting the loan portfolio. The problem loans graded Special Mentioned or worse are analyzed by the loan officer on a quarterly or semi-annual basis, depending on the severity of the loan grade and level of loss potential. This analysis is documented in writing with each problem loan analyzed for credit quality, collateral adequacy and potential exposure based on liquidation collateral values (primarily real estate). Based on historical trends the Company allocates general reserves to its loan and lease portfolio. A 1% general reserve is allocated to the covered portion of the principal and a specific reserve is allocated to the uncovered portion, ranging from 10% to 50%, depending on severity of the loan grade. Other reserves are allocated, if it is determined there are circumstances that would warrant additional reserves (e.g. potential environmental problems, disruptions in the company, temporary economic setbacks). The documentation for all changes to and from problem loan grades and accompanying loss reserve analysis is approved by Credit Administration management. No loss reserve provisions are allocated for the government guaranteed portions of loans. Pass loans are reserved as a pool at 1%, regardless of collateral pledged. As a pool, equipment leases, net of municipal leases, are reserved at 2.4%. Credit card and Ready Reserve (overdraft lines) balances are reserved at 5%. Reserves are allocated at 1% of one-sixth of the undisbursed loan proceeds, on the theory that these loans are, on the average, fully disbursed over six months. In addition to the 1% reserve, the bank applies a reserve factor to the pass loans based on several discretionary factors. The areas assessed on a quarterly basis by the Chief Credit Officer cover the following issues: Credit Policy (adequacy), Economy (stability), Volume (loan growth, portfolio distribution), Management (adequacy, staffing issues, etc), Credit Review (internal and external results), Concentrations (risk potential), Competitive/Regional (environment and economic factors), Past Due/Classified (portfolio trends) and Year 2000 (risk assessment efforts). Each area is graded from Excellent to Poor, with a Satisfactory rating requiring no -9- adjustment, an Excellent rating resulting in a negative 0.02% adjustment and less than Satisfactory ratings resulting in increased reserve adjustments at 0.02% incremental adjustments. Other adjustments are Marginally Satisfactory +0.02%, Needs Improvement +0.04%, Fair +0.06% and Poor +0.08%. A composite of the grade factors in the areas provides the additional reserve to be allocated against the pass loans. The adjustment for the assessment of the borrower's Y2K efforts was introduced in the first quarter of 1998. The aggregate calculated minimum reserve level is compared to the actual level of reserves and a level based on an informal calculation of the Interagency Recommended formula. These factors, in addition to potential problem credits and anticipated losses and recoveries in the near future, determine the level of loan loss provisions to be allocated for the month. This determination is based on collaboration between Credit Administration and the Controller's Department. The bank is in the process of reassessing its Allowance for Loan and Lease Loss methodology to bring it more in line with industry practices. Under consideration is the development of allocation factors for Special Mentioned and Substandard loans to more clearly reflect the bank's loss experience using migration analysis. The revised factors should then be allocated as a pool to the Special Mentioned and Substandard loans, in addition to the current allocation for Doubtful loans. The calculation of specific reserves would be focused on loans with higher risk of loss, with a focus on loans not adequately covered by collateral. Discretionary factors would be used to account for differences in the current loss rates versus historical loss rates developed from the migration analysis. Prior to implementation, the revised methodology is to be discussed with the bank's accountants, regulatory bodies and the bank's external credit review consultants for acceptability and conformity with industry best practices. While these factors are essentially subjective, management considers the allowance of $8.7 million at December 31, 1998 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, in the process of collection 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. -10- 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, ------------------------------------------------------------ 1998 1997 1996 1995 1994 --------- --------- --------- --------- ----------- NONPERFORMING ASSETS: Nonaccrual loans: SBA . . . . . . . . . . . . . . . $ 4,736 $ 5,307 $ 4,985 $ 5,351 $ 2,423 Other . . . . . . . . . . . . . . 3,928 1,642 448 1,174 1,317 In-substance foreclosures. . . . . . 0 0 0 0 572 Other real estate owned. . . . . . . 1,059 1,534 596 940 916 --------- --------- --------- --------- ----------- Total nonperforming assets. . . . $ 9,723 $ 8,483 $ 6,029 $ 7,465 $ 5,228 --------- --------- --------- --------- ----------- --------- --------- --------- --------- ----------- Accruing loans past due 90 days or more: SBA . . . . . . . . . . . . . . . $ 2,795 $ 1,127 $ 1,071 $ 816 $ 1,754 Other . . . . . . . . . . . . . . 361 449 1,128 285 505 Restructured loans (in compliance with modified terms) . . . . . . . $ 1,916 $ 1,922 $ 1,249 $ 548 $ 194 Nonperforming assets to total assets (1) . . . . . . . . . 1.1% 1.1% 0.9% 1.5% 1.3% Allowance for possible loan and lease losses to nonaccrual loans . . . . 100.5% 113.6% 103.9% 76.7% 124.4%
- --------- (1) Nonperforming assets exclude restructured loans in compliance with modified terms and accruing loans past 90 days or more. Of total gross loans and leases at December 31, 1998, $8.7 million were considered to be impaired. The allowance for possible loan and lease losses included $1.1 million related to these loans. The amount of interest received and recognized on these impaired loans in 1998 was $419 thousand. The average recorded investment in impaired loans during 1998 was $7.3 million. Of total gross loans and leases at December 31, 1997, $6.9 million were considered to be impaired. The allowance for possible loan and lease losses included $867 thousand related to these loans. The amount of interest received and recognized on these impaired loans in 1997 was $416 thousand. The average recorded investment in impaired loans during 1997 was $6.8 million. While the portfolio has grown significantly in 1998, the level of nonperforming loans as a percentage of total loans has remained steady, with nonaccrual loan totals reducing in the SBA guaranteed products, offset by increases on non-SBA products. Other Real Estate Owned totals have declined both in numbers and dollars, with a quicker turnover in foreclosed property seen in 1998. Although the level of nonperforming assets will depend on the future economic environment, as of March 15, 1999, in addition to the assets disclosed in the above chart, management of the Company has identified approximately $570 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. -11- The following table shows the loans outstanding, actual charge-offs, recoveries on loans previously charged off, the allowance for possible loan and lease losses and pertinent ratios during the periods and as of the dates indicated (dollars in thousands).
December 31, ----------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Average loans. . . . . . . . . . . . . . $ 553,756 $ 496,633 $ 396,668 $ 313,736 $ 273,873 Total loans at end of period . . . . . . 624,983 553,713 436,392 350,361 283,195 Allowance for possible loan and lease losses: Balance--beginning of period . $ 7,891 $ 5,647 $ 5,003 $ 4,654 $ 4,562 --------- --------- --------- --------- --------- Actual charge-offs: SBA. . . . . . . . . . . . . . . . . . 863 820 114 595 447 Commercial and industrial. . . . . . . 730 681 554 454 511 Leases . . . . . . . . . . . . . . . . 133 14 84 0 0 Real estate. . . . . . . . . . . . . . 56 30 264 143 206 Installment. . . . . . . . . . . . . . 285 169 73 115 150 --------- --------- --------- --------- --------- Total . . . . . . . . . . . . . . . . 2,067 1,714 1,089 1,307 1,314 --------- --------- --------- --------- --------- Less recoveries: SBA. . . . . . . . . . . . . . . . . . 210 57 87 20 74 Commercial and industrial. . . . . . . 274 159 183 28 188 Leases . . . . . . . . . . . . . . . . 0 6 0 0 0 Real estate. . . . . . . . . . . . . . 1 13 26 0 0 Installment. . . . . . . . . . . . . . 30 60 16 14 3 --------- --------- --------- --------- --------- Total . . . . . . . . . . . . . . . . 515 295 312 62 265 --------- --------- --------- --------- --------- Net charge-offs. . . . . . . . . . . . . 1,552 1,419 777 1,245 1,049 Allowance applicable to sold loans . . . 0 0 0 0 0 Provision for possible loan and lease losses . . . . . . . . . . . . . . . . 2,370 2,799 1,421 1,594 1,141 --------- --------- --------- --------- --------- Acquisition. . . . . . . . . . . . . . 0 864 0 0 0 --------- --------- --------- --------- --------- Balance--end of period . . . . . . . . . $ 8,709 $ 7,891 $ 5,647 $ 5,003 $ 4,654 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratios: Net loans charged off to average loans outstanding . . . . . . . . . . 0.28% 0.29% 0.20% 0.40% 0.38% Net loans charged off to total loans at end of period. . . . . . . . . . . 0.25 0.26 0.18 0.36 0.37 Provision for possible loan and lease losses to average loans . . . . . . . 0.43 0.56 0.36 0.51 0.42 Provision for possible loan and lease losses to total loans at end of period 0.38 0.51 0.33 0.45 0.40 Net loans charged off to end of period allowance for possible loan and lease losses . . . . . . . . 17.8 18.0 13.8 24.9 22.5 Allowance for possible loan and lease losses to total loans and leases at end of period. . . . . . . . . . . 1.39 1.43 1.29 1.43 1.64
- ---------- Net loan loss activity by product remains fairly consistent between 1997 and 1998, with the overall increase in net charge-offs attributable to installment loans and other products. The bulk of the increase came from unusual/infrequent items: a charge-off of $135 thousand, which has since been recovered, and a $133 thousand loss on a commercial lease. The overall allowance for loan loss reserves to total loans at the end of 1998 has declined slightly to 1.39%, from 1.43% for 1997. A review of charge-off activity by category for the major lending categories of commercial, construction/real estate and government lending loans, reveals a stable to declining charge-off rate. While relative increases were seen in the consumer and lease products, those totals are small and were significantly affected by one-time items. The unallocated portion of reserves is 6.6% at 12/31/98, down from 9.2% at 12/31/97. For the purposes of the table on page 14 these unallocated portions of reserves have been allocated to the various loan categories. The reduction of reserve levels is supported by a reduced level of problem loans to total loans from period to period, -12- a flat net charge-off percentage and an improved subjective assessment, resulting in a decline in the discretionary factor from 80 basis points to 40 basis points. This improvement resulted from improvements in credit administration and the credit review process. In 1998 there was a slight increase in the ratio of classified loans (loans classified in accordance with regulatory guidelines) to total loans from 5.6% to 5.7%; however, the profile of classified loans shows a positive shift during the year from non-performing substandard and doubtful credits to substandard credits. While delinquencies have increased from 2.8% to 3.2%, the bulk of the increase is seen in a few large, conforming real estate loans. -13- 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, ------------------------------------------------ 1998 1997 --------------------- ---------------------- Amount Percentage Amount Percentage ------- ---------- ------- ---------- SBA loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,342 30% $ 2,227 30% Commercial and industrial loans (2). . . . . . . . . . . . . . . 3,048 19 2,682 18 Real estate loans. . . . . . . . . . . . . . . . . . . . . . . . 3,949 49 2,480 49 Consumer loans to individuals(1) . . . . . . . . . . . . . . . . 370 2 502 3 ------- ---------- ------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,709 100% $ 7,891 100% ------- ---------- ------- ---------- ------- ---------- ------- ----------
December 31, ------------------------------------------------------------------------- 1996 1995 1994 ---------------------- --------------------- ---------------------- Amount Percentage Amount Percentage Amount Percentage -------- ---------- ------- ---------- ------- ---------- SBA loans. . . . . . . . . . . . . . . . $ 1,561 33% $ 1,468 34% $ 2,372 34% Commercial and industrial loans(2) . . . 1,934 18 1,808 19 865 14 Real estate loans. . . . . . . . . . . . 1,845 42 1,439 40 1,205 44 Consumer loans to individuals(1) . . . . 307 7 288 7 212 8 -------- ---------- ------- ---------- ------- ---------- Total. . . . . . . . . . . . . . . . $ 5,647 100% $ 5,003 100% $ 4,654 100% -------- ---------- ------- ---------- ------- ---------- -------- ---------- ------- ---------- ------- ----------
- ---------- (1) Includes equity lines of credit. (2) Includes commercial leases. In allocating the Company's allowance for possible loan and lease losses, management has considered the credit risk in various loan categories in its portfolio. Historically, most of the Company's loan losses have been in its commercial lending area, including local commercial loans and SBA loans. From inception of its SBA lending program in 1983, the Company has sustained relatively low loan losses from these loans, averaging less than 0.5% of loans outstanding per year. Most of the Company's other loan losses have been for loans to businesses in the bank's local service areas, including the Lake Tahoe basin and Reno, Nevada. The service area has expanded to Sacramento and along the Highway 80 corridor to the San Francisco Bay Area with the establishment of a commercial lending office in Sacramento in 1996, the acquisition of Mercantile Bank in 1997 and the acquisition of Continental Pacific Bank in 1998. 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 increased its lending in conforming commercial real estate development projects centered in the Sacramento and Reno markets. While every effort has been made to allocate the allowance to specific categories of loans, management believes that any allocation of the allowance for possible loan and lease losses 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. -14- 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, 1998. 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 or other indexes such as the five year Treasury, or may reset after a defined period based on a predefined index.
Year Ended December 31, 1998 ----------------------------------------------------- After One Within But Within After One Year(1) Five Years Five Years Total ----------- ----------- ----------- ---------- Real estate - construction . . . . . . . $ 55,743 $ 5,243 $ 7,520 $ 68,506 Commercial, except SBA . . . . . . . . . 75,973 37,160 2,523 115,656 SBA. . . . . . . . . . . . . . . . . . . 4,539 26,208 154,553 185,300 Distribution between fixed and floating interest rate: Fixed interest rates . . . . . . . . . 19,755 13,612 32,495 65,862 Floating interest rates. . . . . . . . 116,500 54,999 132,101 303,600
- ---------- (1) Demand loan and overdrafts are shown as "Within One Year" -15- 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 shareholders' 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, -------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------ ----------------------------- ------------------------------ Average Yield/ Average Yield/ Average Yield/ Balance Rate Interest Balance Rate Interest Balance Rate Interest -------- ------ -------- -------- ------ -------- -------- ------ -------- ASSETS: Interest-earning assets: Loans(1) . . . . . . . . . . $553,756 9.86% $54,593 $496,633 10.14% $50,383 $396,688 10.39% $41,210 Investment Securities: Taxable. . . . . . . . . . 91,782 5.81 5,330 87,678 6.11 5,353 55,259 5.94 3,285 Tax exempt(3). . . . . . . 17,596 5.01 881 12,074 5.14 620 10,387 5.24 544 Mutual funds . . . . . . . . 2,446 1.84 45 2,857 2.35 67 1,342 7.30 98 Federal funds sold(5). . . . 75,960 5.25 3,990 36,798 5.33 1,960 21,486 5.22 1,121 Other . . . . . . . . . . . 5,158 5.10 263 3,888 4.68 182 2,225 5.08 113 -------- -------- -------- -------- -------- -------- Total interest-earning assets . . . . . . . . . 746,698 8.72 65,102 639,928 9.15 58,565 487,387 9.51 46,371 Allowance for possible loan losses. . . . . . . . . . (8,090) (6,912) (5,646) Non-interest-earning assets: Cash and due from banks. . . . . . . . . . . 39,517 38,018 28,586 Premises and equipment, net. . . . . . . . . . . . 13,012 14,031 13,409 I/O strips receivable and servicing assets(2). . . . 22,455 17,621 14,304 Other assets . . . . . . . . 20,385 14,413 12,558 -------- -------- -------- Total average assets . . . . $833,977 $717,099 $550,598 -------- -------- -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Transaction accounts(4). . . $251,246 2.94% 7,385 $218,239 3.00% 6,551 $167,855 2.85% $ 4,781 Savings accounts . . . . . . 24,876 2.02 503 23,524 2.14 504 22,830 2.12 484 Certificates of deposit. . . 308,363 5.53 17,052 272,611 5.66 15,442 205,731 5.55 11,427 Convertible debentures . . . 1,540 3.25 50 5,564 5.09 283 13,204 8.12 1,072 Other liabilities. . . . . . 4,457 14.14 630 3,507 12.57 441 3,254 6.02 196 -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities. . . . . . . . . 590,482 4.34 25,620 523,445 4.44 23,221 412,874 4.35 17,960 Non-interest-bearing liabilities: Deposits . . . . . . . . . . 158,175 124,000 88,455 Other liabilities. . . . . . 12,075 9,625 4,817 -------- -------- -------- Total liabilities. . . . . . 760,732 657,070 506,146 Total shareholders' equity . . . . . . . . . . 73,245 60,029 44,452 -------- -------- -------- Total liabilities and shareholders' equity . . . . . . . . . . $833,977 $717,099 $550,598 -------- -------- -------- -------- -------- -------- -------- -------- -------- Net interest income. . . . . . $39,482 $35,344 $28,411 -------- -------- -------- -------- -------- -------- Interest income as a percentage of interest - earning assets . . . . . . 8.72% 9.15% 9.51% Interest expense as a percentage of interest - earning assets . . . . . . 3.43 3.63 3.68 ------ ------ ------ Net interest margin. . . . . . 5.29% 5.52% 5.83% ------ ------ ------ ------ ------ ------
- ---------- (1) Includes nonaccrual loans with an average balance of $7.3 million, $6.8 million, and $6.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. (2) Represents excess servicing assets in 1996. (3) The tax equivalent yield on tax exempt investment securities was 7.37%, 7.45% and 7.60% in 1998, 1997 and 1996. The tax equivalent yield is calculated by dividing the adjusted yield by one minus the Federal Tax rate. The adjusted yield is determined by subtracting the Tefra penalty from the unadjusted tax exempt investment yield. The unadjusted tax exempt investment yield is computed by dividing tax exempt interest income by the average historical cost of tax exempt securities. The Tefra penalty is computed by dividing total interest expense (annualized) by average assets and multiplying the result by 20% (Tefra disallowance) and 35% or 34% (Federal Tax rate). (4) Includes money market savings accounts. (5) Includes securities purchased under agreements to resell. -16- 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, --------------------------------------------------------------------- 1998 1997 1996 --------------------- --------------------- --------------------- Book Market Book Market Book Market Value(1) Value Value(1) Value Value(1) Value --------- --------- --------- --------- --------- --------- U.S. Treasury securities . . . . . . . . $ 29,461 $ 29,461 $ 47,646 $ 47,646 $ 27,403 $ 27,402 Securities of U.S. government agencies. . . . . . . . . . . . . . . . 38,189 38,189 14,349 14,349 18,325 18,325 Securities of states and political subdivisions. . . . . . . . . 21,917 21,917 14,070 14,070 10,675 10,675 Mortgage-backed securities . . . . . . . 43,652 43,652 30,919 30,919 29,557 29,557 FHLB Stock . . . . . . . . . . . . . . . 763 763 592 592 490 490 --------- --------- --------- --------- --------- --------- Total. . . . . . . . . . . . . . . . . $ 133,982 $ 133,982 $ 107,576 $ 107,576 $ 86,450 $ 86,449 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- - ----------
(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. There were no securities classified as held to maturity at December 31, 1998. In addition, in prior years, the Company has invested in mutual funds whose assets are invested primarily in U.S. government securities. There were no investments in mutual funds at December 31, 1998. 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 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. -17- MATURITY OF INVESTMENT SECURITIES The following table presents the maturities for investment securities (except for FHLB Stock with a carrying value of $763 thousand) as of December 31, 1998 (dollars in thousands). December 31, 1998 ---------------------------------- Weighted Book Average Market Value Yield Value --------- --------- --------- U.S. Treasury securities: Within 1 year. . . . . . . . . . . . . . . . . . . . . . . $ 29,461 5.94% $ 29,461 U.S. government agencies: Within 1 year. . . . . . . . . . . . . . . . . . . . . . . 5,387 5.11 5,387 After 1 year but within 5 years. . . . . . . . . . . . . . 27,790 5.15 27,790 After 5 years but within 10 years. . . . . . . . . . . . . 404 7.48 404 Over 10 years. . . . . . . . . . . . . . . . . . . . . . . 4,608 6.55 4,608 --------- --------- Total U. S. government agencies securities . . . . . . . 38,189 5.34 38,189 --------- --------- Securities of states and political subdivisions(1): After 1 year but within 5 years. . . . . . . . . . . . . . 2,056 5.48 2,056 After 5 years but within 10 years. . . . . . . . . . . . . 3,810 5.20 3,810 Over 10 years. . . . . . . . . . . . . . . . . . . . . . . 16,051 5.00 16,051 --------- --------- Total securities of states and political subdivisions. . 21,917 5.08 21,917 --------- --------- Mortgage - backed securities:. . . . . . . . . . . . . . . . 43,652 6.37 43,652 --------- --------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133,219 5.77 $ 133,219 --------- --------- --------- ---------
(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, 1998, the Company had a total of $443.8 million in demand deposits (including money market savings and checking accounts), with an average account balance of $14.3 thousand; $24.5 million in savings deposits for individuals and corporations, with an average balance of $2.6 thousand; and $314.2 million in CDs, of which $159.9 million were in the form of CDs in denominations of $100 thousand or more. Average CD balances for the year ended December 31, 1996 were 42.4% of average total deposits. Average CD balances increased to 42.7% of average total deposits for the year ended December 31, 1997, but decreased to 41.5% of average total deposits for the year ended December 31, 1998. Deposit accounts at SierraWest Bank are insured by the FDIC to the maximum amount permitted by law. As of December 31, 1998, approximately 3% 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, 1998 were deposits of $12.9 million which were classified as broker deposits. 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. -18- 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. The following table indicates the maturity of the Company's CDs of $100 thousand or more as of December 31, 1998 (dollars in thousands):
December 31, 1998 ----------------------------- Percentage Balance of Total ---------- ---------- Three months or less $ 77,812 48.7% Over three months through six months 39,294 24.6 Over six months through twelve months 30,892 19.3 Over twelve months 11,907 7.4 ---------- ---------- Total $ 159,905 100.0% ---------- ---------- ---------- ----------
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 11th in the nation by dollars of SBA 7(a) loans generated by banks for the SBA's fiscal year ended September 30, 1998. 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 $ 28,695 $ 1,069,942 Nevada California 4 30 $ 145,941 $ 981,885 Placer California 3 69 $ 91,741 $ 2,050,169 Sacramento California 2 192 $ 125,150 $ 10,135,152 Solano California 7 53 $ 168,427 $ 1,952,791 Contra Costa California 1 219 $ 11,112 $ 15,500,256 Carson City Nevada 1 17 $ 65,580 $ 697,253 Washoe Nevada 1 80 $ 127,825 $ 3,323,543
A total of 14 financial institutions in Nevada County at June 30, 1998 were included in the above survey. Of these 14, SierraWest Bank ranked second in terms of total deposits held. In Placer County, SierraWest Bank ranked eighth out of 22 institutions. In Solano County, California, SierraWest Bank ranked fifth out of 15 financial institutions. In Washoe County, Nevada, SierraWest Bank ranked seventh out of 12 financial institutions and in Carson City County, SierraWest Bank ranked seventh out of 11 financial institutions. As disclosed above, SierraWest Bank's presence in the other counties is not significant. -19- (1) Based on the annual survey of banking office deposits as of June 30, 1998 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. -20- 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. -21- Transactions between Bancorp and its subsidiary are subject to a number of other restrictions. Federal Reserve policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Additionally, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit, sale or lease of property, or furnishing of services. Subject to certain limitations, depository institution subsidiaries of bank holding companies may extend credit to, invest in the securities of, purchase assets from, or issue a guarantee, acceptance, or letter of credit on behalf of, an affiliate, provided that the aggregate of such transactions with each affiliate 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 activities. 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%. -22- 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 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 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, 1998 (dollars in thousands).
The Company ---------------------------------------------------------------------- Actual ------------------------- To Be Well Capitalized For Capital Qualifying Under Prompt Corrective Adequacy Capital Ratio Action Provisions Purposes ---------- ------ ----------------------- ----------- Leverage . . . . . . . $76,146 8.8% N/A 4.0% Tier 1 Risk Based. . . 76,146 11.2 N/A 4.0 Total Risk Based . . . 84,684 12.4 N/A 8.0
SierraWest Bank ---------------------------------------------------------------------- Actual ------------------------- To Be Well Capitalized For Capital Qualifying Under Prompt Corrective Adequacy Capital Ratio Action Provisions Purposes ---------- ------ ----------------------- ----------- Leverage . . . . . . . $67,712 7.8% 5.0% 4.0% Tier 1 Risk Based. . . 67,712 9.9 6.0 4.0 Total Risk Based . . . 76,277 11.1 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. 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. -23- 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. Applicable regulations 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. -24- SAFETY AND SOUNDNESS STANDARDS FDICIA also implemented certain specific restrictions on transactions and required Federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. In addition to the statutory limitations, FDICIA requires the Federal banking agencies to prescribe, by regulation, standards for all insured depository institutions for such things as classified loans and asset growth. The Riegle Community Development and Regulatory Improvement Act of 1994 amended FDICIA to allow the Federal banking regulators to implement these standards by either regulation or guidelines. See "Interstate Banking." 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 -25- 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 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 that were fully phased in as of July 1, 1997. The guidelines provide for streamlined examinations of smaller institutions. PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS FDICIA established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. See Recently Enacted Legislation - 1996 Act. Effective November 14, 1995, the new assessment rate schedule for deposit premiums ranges from $0 per $100 of deposits to $.27 per $100 of deposits applicable to BIF members. 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. INTERSTATE BANKING The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), eliminated many of the 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 in 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 retained 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. Banks located in states that opt out are not permitted to have interstate branches. Only Texas 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. -26- 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. Assembly Bill 1482 (known as the Caldera, Weggeland and Killea California Interstate Banking and Branching Act of 1995 and referred to herein as "CIBBA") permits an out-of-state bank to acquire or merge with a California bank that has been in existence for at least five years. California law 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. California law 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 ATMs, 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 Commissioner of Financial Institutions 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. ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT 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 was the recapitalization of the Savings Association Insurance Fund ("SAIF"). The 1996 Act provided 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 was required to 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 currently 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. The 1996 Act also had certain regulatory relief provisions for the banking industry. Lender liability under the Superfund was 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 have been simplified. Significant revisions are made to the Fair Credit Reporting Act ("FCRA") including requiring that entities which provide information to credit bureaus conduct an investigation if a consumer claims the information to be in error. Regulatory agencies may not examine for FCRA compliance unless there is a consumer complaint investigation that reveals a violation or where the agency otherwise finds a violation. In the area of the Equal Credit Opportunity Act, banks that self-test for compliance with fair lending laws will be protected from the results of the test provided that appropriate corrective action is taken when violations are found. ACCOUNTING PRONOUNCEMENTS On January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and interim reporting standards for an enterprise's business -27- segments and related disclosures about its products, services, geographic areas, and major customers. This statement will not impact the Company's consolidated financial position, results of operations or cash flows. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities and reports its operations on the basis of a single business segment. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is in the process of determining the impact of SFAS No. 133 on the Company's financial statements, which is not expected to be material. -28- EMPLOYEES As of March 15, 1999, the Company employed 371 persons (286 full-time and 85 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. -29- 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 twenty branches, 12 stand-alone loan production offices, and one remote off-site ATM machine. The Company owns a 32,000 sq. ft. office building in Vacaville, California. The building was partially occupied by CCBC's corporate offices and currently approximately 84% of this building is leased to third party tenants. The Company does not anticipate retaining future ownership of this building. 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 is currently constructing a new branch facility in Vacaville, California to replace a current leased facility. 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 the purchaser. A formal settlement agreement has been executed by the parties and is awaiting final court approval by the Eastern California District of the U. S. District Court where an action was filed in the summer of 1995. Under the terms of the formal settlement, the Bank will pay a small sum to a common fund for remediation of the property and the Bank further agrees to refinance on behalf of the existing owner of the property two senior liens and to consolidate certain other debt securing the property into a new deed of trust contingent upon remediation of the contamination by a licensed contractor and approval by the appropriate governmental agencies. 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 effect 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 1998 to a vote of security holders through the solicitation of proxies or otherwise. -30- PART II ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK ------------------------------------- Bancorp's Common Stock is quoted on the Nasdaq National Market under the symbol "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 ---- ----- 1997 - ---- First Quarter. . . . . . . . . . . . . $18.69 $14.64 Second Quarter . . . . . . . . . . . . 20.12 16.68 Third Quarter. . . . . . . . . . . . . 25.75 18.81 Fourth Quarter . . . . . . . . . . . . 36.00 24.75 1998 - ---- First Quarter. . . . . . . . . . . . . 39.00 30.00 Second Quarter . . . . . . . . . . . . 39.00 29.75 Third Quarter. . . . . . . . . . . . . 35.75 20.50 Fourth Quarter . . . . . . . . . . . . 28.00 18.00 1999 - ---- First Quarter (through March 15, 1999) 32.56 23.50
At March 15, 1999, there were 1,405 shareholders of record. Additionally management believes there are approximately 2,000 beneficial holders of its Common Stock. On March 15, 1999, the closing sales price of Bancorp's common stock on Nasdaq was $32.25. Bancorp paid cash dividends of $0.40 per share in 1998, and as adjusted for a 5% stock dividend paid August 29, 1997, $0.31 per share in 1997. On February 25, 1999 Bancorp's Board of Directors declared a dividend of $0.26 per share, payable on March 31, 1999. During 1999, 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. In addition, the Company acquired $2.4 million of debentures with the acquisition of CCBC. These debentures were called for redemption during 1998 with all but $44 thousand converting to common stock at a conversion rate of $15.39 per share. 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." -31- 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, 1998. The statements of operations data and statements of financial condition data for each of the five years in the period ended December 31, 1998 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, --------------------------------------------------------------------- 1998 1997(6) 1996(6) 1995(6) 1994(6) --------- --------- --------- --------- --------- STATEMENTS OF OPERATIONS DATA Total interest income. . . . . . . . . . . . . . . . $ 65,102 $ 58,565 $ 46,371 $ 38,141 $ 30,610 Total interest expense . . . . . . . . . . . . . . . 25,620 23,221 17,960 13,972 9,693 --------- --------- --------- --------- --------- Net interest income. . . . . . . . . . . . . . . . . 39,482 35,344 28,411 24,169 20,917 Provision for possible loan and lease losses . . . . 2,370 2,799 1,421 1,594 1,141 --------- --------- --------- --------- --------- Net interest income after provision for possible loan and lease losses. . . . . . . . . . . . . . . 37,112 32,545 26,990 22,575 19,776 Total non-interest income. . . . . . . . . . . . . . 14,601 13,686 9,370 10,147 10,839 Total non-interest expense . . . . . . . . . . . . . 38,268 31,610 28,478 27,574 23,964 Provision for income taxes . . . . . . . . . . . . . 5,767 5,673 2,995 1,827 2,427 --------- --------- --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 $ 3,321 $ 4,224 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- STATEMENTS OF FINANCIAL CONDITION DATA Total assets . . . . . . . . . . . . . . . . . . . . $ 879,169 $ 786,746 $ 639,718 $ 497,601 $ 416,707 Loans and leases, net(1) . . . . . . . . . . . . . . 616,274 545,822 430,745 345,358 278,541 Allowance for possible loan and lease losses . . . . 8,709 7,891 5,647 5,003 4,654 Total deposits . . . . . . . . . . . . . . . . . . . 782,552 701,001 569,994 435,388 359,603 Convertible debentures . . . . . . . . . . . . . . . 0 2,468 12,210 14,025 14,025 Notes payable. . . . . . . . . . . . . . . . . . . . 2,650 2,650 2,650 0 0 Shareholders' equity . . . . . . . . . . . . . . . . 78,270 69,383 47,285 42,095 38,889 PER SHARE DATA(2) Book value . . . . . . . . . . . . . . . . . . . . . $ 14.76 $ 13.82 $ 12.67 $ 11.95 $ 10.98 Net income: Basic. . . . . . . . . . . . . . . . . . . . . . . 1.49 1.96 1.35 0.94 1.20 Diluted. . . . . . . . . . . . . . . . . . . . . . 1.41 1.73 1.10 0.81 1.00 Cash dividends declared(4) . . . . . . . . . . . . . 0.40 0.40 0.38 0.31 0.14 Shares used to compute net income per share: Basic. . . . . . . . . . . . . . . . . . . . . . . 5,151 4,566 3,622 3,525 3,518 Diluted. . . . . . . . . . . . . . . . . . . . . . 5,474 5,280 5,014 4,951 4,859 Dividend payout ratio: Basic. . . . . . . . . . . . . . . . . . . . . . . 26.7% 20.2% 28.0% 33.2% 11.3% Diluted. . . . . . . . . . . . . . . . . . . . . . 28.2 23.0 34.3 38.5 13.5 SELECTED RATIOS Return on average assets . . . . . . . . . . . . . . 0.9% 1.2% 0.9% 0.7% 1.0% Return on average shareholders' equity . . . . . . . 10.5 14.9 11.0 8.2 11.3 Net interest margin(3) . . . . . . . . . . . . . . . 5.3 5.5 5.8 6.3 6.0 Average shareholders' equity to average assets . . . 8.8 8.4 8.1 9.2 9.1
-32-
At or for the Year Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ASSET QUALITY RATIOS Allowance for possible loan and lease losses to total loans and leases . . . . . . . . . . . . . . . . . . 1.4% 1.4% 1.3% 1.4% 1.6% Allowance for possible loan and lease losses to nonaccrual loans. . . . . . . . . . . . . . . . . . 100.5 113.6 103.9 76.7 124.4 Net charge-offs to average loans outstanding . . . . . . . . . 0.3 0.3 0.2 0.4 0.4 Nonaccrual and restructured performing loans to total loans. . 1.7 1.6 1.5 2.0 1.4 Nonperforming assets to total assets(5). . . . . . . . . . . . 1.1 1.1 0.9 1.5 1.3
- ------------------ (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 Bancorp's Common Stock." Book value per share is calculated as total shareholders' equity divided by the number of shares outstanding at the end of the period. (3) Ratio of net interest income to total average earning assets. (4) Dividends declared per share is calculated by dividing the amount of cash dividends by the weighted average number of common shares. (5) For purposes of this schedule nonperforming assets are defined as nonaccrual loans and other real estate owned. (6) Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. -33- SELECTED QUARTERLY FINANCIAL INFORMATION The following table sets forth the Company's unaudited data regarding operations for each quarter of 1998 and 1997. 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 (2) Second Third Fourth ---------- -------- -------- --------- 1998 - ---- Interest income. . . . . . . . . . . . . . . $ 16,014 $ 16,075 $ 16,543 $ 16,470 Interest expense . . . . . . . . . . . . . . 6,221 6,543 6,685 6,171 ---------- -------- -------- --------- Net interest income. . . . . . . . . . . . . 9,793 9,532 9,858 10,299 Provision for possible loan and lease losses 525 905 440 500 ---------- -------- -------- --------- Net interest income after provision for possible loan and lease losses. . . . . . . . . . . 9,268 8,627 9,418 9,799 Total non-interest income. . . . . . . . . . 2,870 4,050 3,944 3,737 Total non-interest expense . . . . . . . . . 8,733 12,340 8,621 8,574 ---------- -------- -------- --------- Income before provision for income taxes . . 3,405 337 4,741 4,962 Provision for income taxes . . . . . . . . . 1,386 416 1,921 2,044 ---------- -------- -------- --------- Net income (loss). . . . . . . . . . . . . . $ 2,019 $ (79) $ 2,820 $ 2,918 ---------- -------- -------- --------- ---------- -------- -------- --------- Basic earnings per share (1) . . . . . . . . $ 0.40 $ (0.02) $ 0.54 $ 0.55 Diluted earnings per share (1) . . . . . . . 0.37 (0.02) 0.51 0.54 1997 (2) - -------- Interest income. . . . . . . . . . . . . . . $ 13,139 $ 14,085 $ 15,508 $ 15,833 Interest expense . . . . . . . . . . . . . . 5,305 5,588 6,160 6,168 ---------- -------- -------- --------- Net interest income. . . . . . . . . . . . . 7,834 8,497 9,348 9,665 Provision for possible loan and lease losses 539 1,030 615 615 ---------- -------- -------- --------- Net interest income after provision for possible loan and lease losses. . . . . . . . . . . 7,295 7,467 8,733 9,050 Total non-interest income. . . . . . . . . . 2,220 5,101 3,073 3,292 Total non-interest expense . . . . . . . . . 7,067 8,299 7,852 8,392 ---------- -------- -------- --------- Income before provision for income taxes . . 2,448 4,269 3,954 3,950 Provision for income taxes . . . . . . . . . 917 1,651 1,509 1,596 ---------- -------- -------- --------- Net income . . . . . . . . . . . . . . . . . $ 1,531 $ 2,618 $ 2,445 $ 2,354 ---------- -------- -------- --------- ---------- -------- -------- --------- Basic earnings per share (1) . . . . . . . . $ 0.39 $ 0.59 $ 0.49 $ 0.47 Diluted earnings per share (1) . . . . . . . 0.32 0.52 0.46 0.44
(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. (2) Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. -34- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 The Company derives income from four principal revenue sources: (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 1998 of $85 million in SBA 504 and similar loans and 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 (4) service charges and fees on deposit accounts. On April 15, 1998, the Company completed the acquisition of California Community Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental Pacific Bank (CPB), utilizing the pooling-of-interests method of accounting and accordingly, the Company's historical consolidated results have been restated. Net income for the year ended December 31, 1998 decreased 14%, from $8.9 million during 1997 to $7.7 million during 1998. This decrease resulted from an increase of 21% in non-interest expense. Of the $6.7 million increase in non-interest expense during 1998, $4.0 million relates to non-recurring costs incurred from the Company's acquisition of CCBC. Excluding the after tax effect of these costs would result in net income of $10.5 million during 1998. Net income for the year ended December 31, 1997 increased by 83%, from $4.9 million during 1996 to $8.9 million during 1997. This increase resulted primarily from an increase in net interest income related to strong asset growth and a $2.6 million gain realized on 1997's securitization. The following table summarizes the operating results for the years ended December 31, 1998, 1997, and 1996 (amounts in thousands except percentage amounts):
December 31, 1998 over 1997 1997 over 1996 -------------------------------- ----------------------- ------------------------- 1998 1997 1996 Amount Percentage(1) Amount Percentage(1) ------- ------- ------- ------- ------------- -------- ------------- Total interest income. . . . . . $65,102 $58,565 $46,371 $ 6,537 11.2% $ 12,194 26.3% Total interest expense . . . . . 25,620 23,221 17,960 2,399 10.3 5,261 29.3 ------- ------- ------- ------- -------- Net interest income. . . . . . . 39,482 35,344 28,411 4,138 11.7 6,933 24.4 Provision for possible loan and lease losses . . . . 2,370 2,799 1,421 (429) (15.3) 1,378 97.0 ------- ------- ------- ------- -------- Net interest income after provision for possible loan and lease losses . . . . 37,112 32,545 26,990 4,567 14.0 5,555 20.6 Total non-interest income. . . . 14,601 13,686 9,370 915 6.7 4,316 46.1 Total non-interest expense . . . 38,268 31,610 28,478 6,658 21.1 3,132 11.0 ------- ------- ------- ------- -------- Income before provision for taxes 13,445 14,621 7,882 (1,176) (8.0) 6,739 85.5 Provision for income taxes . . . 5,767 5,673 2,995 94 1.7 2,678 89.4 ------- ------- ------- ------- -------- Net Income . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 $(1,270) (14.2) $ 4,061 83.1 ------- ------- ------- ------- -------- ------- ------- ------- ------- --------
- ---------- (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 distribution 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. -35- 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.
1998 over 1997 1997 over 1996 --------------------------------- --------------------------------- Volume Rate Total Volume Rate Total --------- --------- --------- --------- --------- --------- INCREASE (DECREASE) IN INTEREST INCOME: Loans. . . . . . . . . . . . . . . . $ 5,795 $(1,585) $ 4,210 $10,383 $(1,210) $ 9,173 Mutual funds . . . . . . . . . . . . (10) (12) (22) 111 (142) (31) Taxable securities . . . . . . . . . 251 (274) (23) 1,927 141 2,068 Tax-exempt securities. . . . . . . . 284 (23) 261 88 (12) 76 Federal funds sold(2). . . . . . . . 2,086 (56) 2,030 799 40 839 Other. . . . . . . . . . . . . . . . 59 22 81 84 (15) 69 --------- --------- --------- --------- --------- --------- Total. . . . . . . . . . . . . . . . 8,465 (1,928) 6,537 13,392 (1,198) 12,194 --------- --------- --------- --------- --------- --------- INCREASE (DECREASE) IN INTEREST EXPENSE: Deposits: Savings deposits . . . . . . . . . 29 (30) (1) 15 5 20 Transaction accounts(1). . . . . . 991 (157) 834 1,435 335 1,770 Time deposits. . . . . . . . . . . 2,025 (415) 1,610 3,715 300 4,015 --------- --------- --------- --------- --------- --------- Total. . . . . . . . . . . . . . . . 3,045 (602) 2,443 5,165 640 5,805 --------- --------- --------- --------- --------- --------- Other. . . . . . . . . . . . . . . . 119 70 189 15 230 245 Convertible debentures . . . . . . . (205) (28) (233) (620) (169) (789) --------- --------- --------- --------- --------- --------- Total. . . . . . . . . . . . . . . . 2,959 (560) 2,399 4,560 701 5,261 --------- --------- --------- --------- --------- --------- Increase in net interest income. . . . . . . . $ 5,506 $(1,368) $ 4,138 $ 8,832 $(1,899) $ 6,933 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(1) Includes money market savings accounts. (2) Includes securities purchased under agreements to resell. As disclosed in the foregoing table, the Company's net interest income in 1998 and 1997 increased over preceding years. In both 1998 and 1997 volume increases were primarily related to an increase in the asset size of the Company. During 1998 and 1997, total daily average assets increased by 16.3% and 30.2%, respectively. Total daily average interest-earning assets increased by 16.7% in 1998 and 31.3% in 1997. During these same periods, the volume component of the increase in net interest income was 15.6% and 31.1%, respectively. The Company has funded much of its growth through the use of interest-bearing deposits. The Company charges interest rates and fees in accordance with market interest rates, general economic conditions, capital and liquidity constraints, and desired net interest margin levels. Approximately 57% 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 18% 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. For additional discussion of the Company's interest rate risk management, see "Quantitative and Qualitative Disclosures About Market Risk". -36- The average prime rate for 1998 was 8.35% compared to 8.44% in 1997. This decrease equates to a negative rate variance on loans tied to prime in 1998 of $0.3 million. In total, the Company experienced an actual negative rate variance of $1.6 million. The difference includes a decrease in the contribution of loan fees. As a percentage of average loans, loan fees represented 0.23% in 1998, 0.30% in 1997 and 0.41% in 1996. In addition to the effect of loan fees on yield, other factors resulting in a reduction in yield during 1998 and 1997 include aggressive growth in the loan portfolio, the 1997 securitization and a movement to more fixed rate loan products. The Company has been aggressive in growing its loan portfolio and has encountered price competition for larger, higher quality loans, and the decrease in loan yields reflects this. Average loans increased by 11.5% in 1998 and 25.2% in 1997. In addition to the effect of competition on loan yield, the Company's 1997 securitization had the effect of reducing the Company's overall loan yield. Loans included in this securitization generally earned interest at a higher rate than the weighted average rate of the Company's remaining loan portfolio. Additionally, the Company has been increasing the amount of loans in its portfolio with fixed rates that may reset after approximately five years and are priced based on a spread over the five year Treasury rates. These loans generally have a lower rate than the current rate earned on the Company's variable rate loans. In 1997, the average prime rate was 8.44% compared to 8.27% for 1996. This 1997 increase equated to a positive price variance on loans tied to prime in 1997 of $0.5 million. However, the Company's entire loan portfolio experienced a negative price variance of $1.2 million. The difference includes a decrease in the contribution of loan fees, increased competitive pressures, the 1997 securitization and decreases in yield on variable rate loans tied to lagging indexes such as certificates of deposit index and cost of funds index. The positive volume variance in federal funds sold during 1998 and 1997 resulted from the Company's increase in liquid assets as its overall size increased. During 1998 and 1997 the Company also experienced several months when it held a large amount of federal funds sold related to the cash infusion from its 1998 and 1997 securitizations. The 1998 securitization resulted in a larger cash infusion and therefore had a larger impact on federal funds sold. Those funds were used to support loan growth and lessen the Company's reliance on out-of-area CDs. In addition, a higher level of federal funds sold was desired given the increase in loan funding levels. The 1998 and 1997 rate variances in federal funds sold are primarily attributed to the interest rate changes during these periods. During 1998 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 1998 and 1997 the Company 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 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, exclusive of deposits acquired in the acquisition of CCBC, increased from $13.8 million in 1996 to $26.8 million in 1997. The increase in investment securities in 1998 relates primarily to growth in the Company's asset base. The positive rate variance in 1997 in taxable investment securities includes the effect of an increase in mortgage-backed securities in the Company's investment portfolio and market interest rate conditions. The negative rate variance in 1998 primarily relates to market conditions. 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. The Company sold its remaining mutual fund investments during 1998. -37- The average balance and average rate paid on interest bearing transaction accounts, including money market savings accounts, and time certificates of deposit during 1998 and 1997 are as follows:
Year Ended December 31, ------------------------------------------------- (Dollars in thousands) 1998 1997 ----------------------- ----------------------- Transaction Time Transaction Time ----------- --------- ----------- --------- Average Balance. . . . . $251,246 $308,363 $218,239 $272,611 Rate paid. . . . . . . . 2.94% 5.53% 3.00% 5.66%
The rates paid on the Company's deposits are primarily driven by market conditions in its service areas. The Company has been successful in expanding its deposits throughout its branch network, but the largest increases have been generated at its Sacramento, California operations, and its Northern Nevada operations. During 1995, the Company opened four new branches located in Carson City, Nevada, and in Sacramento, South Grass Valley and Auburn, California. During the fourth quarter of 1996, CCBC purchased a branch located in Concord, California, and in June, 1997, the Company purchased Mercantile Bank, with its sole branch located in downtown Sacramento, California. Additionally, during 1996 the Company moved its Reno, Nevada branch into a larger facility. Of the total $33 million increase in average interest bearing transaction accounts during 1998, $15 million relate to the Company's Reno and Carson City branches and $14 million to its Sacramento operations. Average time deposits increased by $36 million during 1998, of which $22 million relates to the Company's Nevada operations and $18 million relates to Sacramento, California operations. The Company was successful in reducing its reliance on out-of-area CDs. Average out-of-area CDs decreased by $19 million in 1998. Average interest bearing transaction accounts at the former CCBC branches increased by $2 million and average time deposits at these branches increased by $3 million. Average interest bearing transaction accounts increased by $50.4 million in 1997. Average interest bearing transaction accounts increased in 1997 by $22 million at the branches added in 1995. The downtown Sacramento facility purchased in 1997 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 $66.9 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 CDs decreased by $4.7 million. The former CCBC branches contributed $7.6 million in growth in interest-bearing transaction accounts and $9.7 million in growth in average time deposits during the 1997 period. The rate variance in other interest bearing liabilities during 1998 and 1997 includes the effect of the Company's interest rate swap agreements and the interest component of payments made under the Company's Salary Continuation and Director Emeritus plans. The negative rate and volume variances during 1998 and 1997 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. The Company announced during 1998 and 1997 that it would redeem its outstanding convertible debentures. The debentures called for redemption in 1998 were acquired upon the acquisition of CCBC. Because the Company's stock was trading at a price significantly above the redemption price, most debenture holders chose to convert the debentures into common stock prior to the redemption dates. -38- PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES. At December 31, 1998, 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 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 estimable loan and lease losses to provide for potential losses inherent 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 charge-offs 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 the 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. During 1996, net losses in the SBA loan portfolio were an unusually low $27 thousand. For 1997, SBA net loan losses totaled $763 thousand and 1998 net losses totaled $653 thousand. The provision for loan and lease losses was $2.4 million and $2.8 million for the years ended December 31, 1998 and 1997, respectively. The provision for both years includes the effect of growth in the loan portfolio. Unguaranteed loans increased $61 million and $93 million during 1998 and 1997, respectively. The increase in the provision in 1998 and 1997 includes additional amounts to reestablish the level of reserves after net loan losses of $1.6 million and $1.4 million, respectively. The allowance for possible loan and lease losses as a percentage of loans and leases was 1.39% at December 31, 1998, 1.43% at December 31, 1997 and 1.29% at December 31, 1996. The increase of 0.10% in the allowance for possible loan and lease losses as a percentage of loans from December, 1996 includes 0.09% related to the acquisition of Mercantile Bank. Guaranteed portions of loans were $72.3 million and $62.5 million at December 31, 1998 and 1997, 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 1.58% at December 31, 1998 and 1.61% at December 31, 1997. Of total gross loans and leases at December 31, 1998, $8.7 million were considered to be impaired. The allowance for possible loan and lease losses included $1.1 million related to these loans. The average recorded investment in impaired loans during the year ended December 31, 1998 was $7.3 million. For additional discussion see "Businesses - Asset Quality." -39- 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 -------------------------- 1998 1997 1996 ------ ------ ------ Nonaccrual loans to total loans and leases 1.4% 1.3% 1.2% Allowance for possible loan and lease losses to nonaccrual loans 100.5% 113.6% 103.9% Allowance for possible loan and lease losses to total loans and leases 1.4% 1.4% 1.3%
If the guaranteed portions of loans on nonaccrual status, which total $2.0 million, are excluded from the calculations, the ratio of nonaccrual loans to total loans and leases at December 31, 1998 declines to 1.1% and the allowance for possible loan and lease losses to nonaccrual loans increases to 131.4%. At December 31, 1997, excluding the guaranteed portions of loans on nonaccrual, these same percentages were 0.9% and 155.9%, respectively. The following table sets forth the amount of the Company's nonperforming loans as of the dates indicated (amounts in thousands).
December 31 -------------------------- 1998 1997 1996 ------ ------ ------ Nonaccrual loans: SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,736 $5,307 $4,985 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,928 1,642 448 Accruing loans past due 90 days or more: SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,795 $1,127 $1,071 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 361 449 1,128 Restructured loans (in compliance with modified terms) . . . $1,916 $1,922 $1,249
Management considers the allowance of $8.7 million at December 31, 1998, 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, 1998 increased by 6.7% from the 1997 level. For 1997 non-interest income increased by 46.1% as compared to 1996. -40- The following table summarizes the principal elements of total non-interest income and discloses the increases (decreases) and percent of increases (decreases) for 1998 and 1997 (amounts in thousands except percentage amounts):
Increase (Decrease) ----------------------------------------------- Year Ended December 31, 1998 over 1997 1997 over 1996 -------------------------------- ------------------------ ------------------- 1998 1997 1996 Amount Percentage Amount Percentage ------- ------- ------- -------- ---------- ------- ---------- Service charges. . . . . . . . . $ 3,475 $ 3,207 $ 2,565 $ 268 8.4% $ 642 25.0% Securities gains . . . . . . . . 326 51 75 275 539.2 (24) (32.0) Net gain on sale of loans. . . . 2,020 694 479 1,326 191.1 215 44.9 Net gain on securitization . . . 890 2,626 0 (1,736) (66.1) 2,626 100.0 Net loan servicing income and I/O strip income. . . . . . 4,230 4,595 4,100 (365) (7.9) 495 12.1 Real estate income . . . . . . . 504 503 542 1 0.2 (39) (7.2) Other income . . . . . . . . . . 3,156 2,010 1,609 1,146 57.0 401 24.9 ------- ------- ------- -------- -------- $14,601 $13,686 $ 9,370 $ 915 6.7 $ 4,316 46.1 ------- ------- ------- -------- -------- ------- ------- ------- -------- --------
Service charges on deposit accounts increased by 8.4% and 25% during 1998 and 1997, respectively. The increase during 1997 resulted from a change in service charge structure during February of 1997 and growth in the Company checking account deposit base. 1998's income reflects the Company's growth. During September 1998 the Company sold $7.1 million of investment securities and recorded a gain of $314 thousand on sale. This sale was made to take advantage of market conditions. U.S. Treasury securities were sold and replaced with U.S. agency securities having a similar remaining life. In 1998 the Company completed a securitization of $85 million in SBA 504 and similar loans and recorded a gain of $890 thousand on this transaction. Related to this transaction the Company recorded a recourse obligation of $2.8 million, representing the present value of projected future losses, and interest-only strips receivable totaling $8.8 million. In 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. 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. Because the average yield on the loans included in 1998's securitization was lower than the average yield on loans in the Company's 1997 securitization the gain on this securitization was substantially lower than the 1997 gain. Sales of the guaranteed portion of SBA 7(a) loans in 1998, 1997 and 1996 were $32.3 million, $9.6 million, and $6.9 million, respectively. In 1995 the Company altered its strategy with respect to the sale of SBA 7(a) loans. Rather than continuing to sell the guaranteed portion of the portfolio the Company began to retain the guaranteed portion and 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. The Company intends to continue to hold a significant percentage of the guaranteed portions of SBA loans in its portfolio; however with the increase in prepayments, management believes it is prudent to increase its sales of SBA loans into the secondary market. 1998's increase in loan sales reflects this strategy. The Company currently expects to sell up to $40.0 million in guaranteed portions of SBA loans during 1999. Saleable guaranteed portions of SBA loans in the Company's loan portfolio at December 31, 1998 totaled $54 million. -41- 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. There were no sales of B & I loans in 1998. 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. To support its SBA program the Company relies 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 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 ("LPO"s) in Fresno in December 1995, in Oregon, Colorado and Tennessee during 1997 and in Florida, Washington, Oregon, Alabama, Georgia, Texas, and Tennessee in 1998. Depending on individual circumstances the Company staffs an LPO either with full time employees or will enter into an agency relationship with an independent third party. LPO offices located in Jacksonville, Florida, Atlanta, Georgia, Huntsville, Alabama and Portland, Oregon (one of two offices) are staffed by third party independent contractors. Those relationships provide for a base fee and a referral fee on loans generated. Net loan servicing and I/O strip income decreased by 7.9% in 1998 compared to 1997. This compares to an increase of 12.1% in 1997 from 1996. 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. 1998's decrease in net loan servicing and I/O strip income is related to an increase in amortization of these assets. Servicing and interest-only strip income totaled $7.7 million during 1998 and $6.3 million during 1997. Included in 1998's income is $1.5 million related to the 1998 securitization. Amortization, including a $420 thousand valuation allowance on the company's servicing assets, totaled $3.5 million in 1998 and $1.7 million during 1997. 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 increased from $5.6 million in 1996 to $6.3 million in 1997. 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 continuing into 1998, the Company has experienced an increase in the prepayment speed of its SBA loan portfolio. In response to this increase in prepayments, the Company increased the speed at which it amortizes its servicing and interest-only strip assets. This had the effect of increasing amortization the Company would have recorded in 1998 by approximately $1 million. During 1998 the Company has recorded a valuation allowance on its servicing assets totaling $420 thousand. The offset to this valuation allowance is a reduction in service fee income. Income from real estate relates to Pacific Plaza East, a 32,000 square foot commercial office building in Vacaville, California. The decline in income on the property during 1997 was due to a reduction in the occupancy rate from 100% in 1996 to 93% in 1997. At December 31, 1997 and 1998, the building was approximately 84% occupied. The Company anticipates selling the property in 1999. Other income consists primarily of merchant credit card fees, the sales of mutual funds and annuities through a third party marketer and rental income. The increase in other income in 1998 includes $134 thousand in merchant credit card fees and $84 thousand rental income. -42- There was no significant change during 1998 in revenue from sales of mutual funds and annuities. During 1998 the Company outsourced its official checks to a third party. This has the effect of reducing non-interest-bearing demand deposits, but the loss of those deposits is offset by fees paid to the Company by the third party. Fees from this source contributed approximately $170 thousand to the increase in non-interest income. In addition, other income in 1998 includes $455 thousand related to a decrease in the estimated recourse obligation recorded on the 1997 securitization. The increase in other income during 1997 includes $74 thousand in rental income, $179 thousand in income from the sale of mutual funds and annuities and a $131 thousand insurance recovery of legal costs incurred in prior years. The increase in revenue from the sale of mutual funds and annuities during 1997 was primarily related to an increase in emphasis on and staffing for this activity. 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 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 presents 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 Expenses Expenses ------------ --------- --------- ---------- ------------ 1998 833,977 2.5% 0.8% 1.3% 1998(1) 833,977 2.2 0.8 1.2 1997 717,099 2.4 0.8 1.3 1997(2) 717,099 2.4 0.8 1.2 1996 550,598 2.8 0.9 1.5
(1) Excludes merger costs of $3,971 thousand. (2) Excludes merger costs of $433 thousand. -43- The following table summarizes the principal elements of non-interest expenses and discloses the increases (decreases) and percent of increases (decreases) for 1998 and 1997 (amounts in thousands except percentage amounts):
Increase (Decrease) ----------------------------------------------- Year Ended December 31, 1998 over 1997 1997 over 1996 -------------------------------- ---------------------- ---------------------- 1998 1997 1996 Amount Percentage Amount Percentage ------- ------- ------- -------- ---------- ------- ---------- Salaries and related benefits. . $19,832 $15,870 $15,054 $ 3,962 25.0% $ 816 5.4% Bonuses. . . . . . . . . . . . . 994 1,015 374 (21) (2.1) 641 171.4 Occupancy and equipment. . . . . 6,466 5,653 4,852 813 14.4 801 16.5 Insurance. . . . . . . . . . . . 376 336 335 40 11.9 1 0.3 Postage. . . . . . . . . . . . . 573 476 438 97 20.4 38 8.7 Stationery and supplies. . . . . 669 619 639 50 8.1 (20) (3.1) Telephone. . . . . . . . . . . . 589 539 461 50 9.3 78 16.9 Advertising. . . . . . . . . . . 1,062 774 721 288 37.2 53 7.4 Legal fees . . . . . . . . . . . 479 334 666 145 43.4 (332) (49.8) Consulting fees. . . . . . . . . 1,243 1,113 671 130 11.7 442 65.9 Audit and accounting fees. . . . 415 370 229 45 12.2 141 61.6 Directors' fees and expenses . . 462 597 506 (135) (22.6) 91 18.0 Real estate. . . . . . . . . . . 305 377 300 (72) (19.1) 77 25.7 Sundry losses. . . . . . . . . . 733 580 839 153 26.4 (259) (30.9) Other. . . . . . . . . . . . . . 4,070 2,957 2,393 1,113 37.6 564 23.6 ------- ------- ------- ------- ------- $38,268 $31,610 $28,478 $ 6,658 21.1 $ 3,132 11.0 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Of the $6.7 million increase during 1998 in non-interest expense, $4.0 million relates to non-recurring merger expenses related to the Company's acquisition of CCBC. Salaries and related benefits include merger costs of $2.4 million and consulting includes merger costs of $629 thousand. Included in 1997's non-interest expense is $433 thousand of merger expense of which $250 thousand was in consulting costs, $95 thousand in legal costs and $88 thousand in audit and accounting fees. Excluding merger costs totaling $358 thousand, base salaries increased by $328 thousand or 2.8%. Savings related to the consolidation of CCBC into SWB were partially offset by expansion of the Company's operations, primarily its SBA operations. The largest single increase in salaries and related benefits during 1998 was a $0.9 million increase in commission and incentive payments, primarily related to SBA lending activities. The increase in base salary expense during 1997 relates to the Company's growth including the downtown Sacramento branch and the government guaranteed lending offices, and an increase in loan and deposit volumes. 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 $168 thousand over 1996 levels. Commission and incentive costs increased by $800 thousand from 1996 levels. The increase in commission and incentive costs during 1997 was primarily related to increased SBA lending activity including the 1997 securitization and an expanded commission program designed for the Company's non-SBA lending officers and business development officers. Consistent with an increase in volume, commissions paid to the Company's noninsured product representatives increased by $97 thousand in 1997 as compared to 1996. The increase in bonus expense in 1997 relates to bonuses earned by the Company's senior management. Bonuses are payable 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. Bonus expense in 1998 related to the Company's senior management totaled $696 thousand. Of this amount, $331 thousand relates to costs under the Company's bonus plan and $365 thousand relates to discretionary bonus payments made to the Company's CEO, CFO, Chief Auditor and the Company's in house attorney. The CEO, General Counsel and Chief Auditor 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. -44- Included in 1998's occupancy and equipment expenses is $164 thousand in merger related costs. The balance of the increase includes the upgrading of the Company's PC network and growth in the Company, including the addition of Mercantile Bank in June of 1997 and various SBA loan offices. 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. In addition, 1997's occupancy costs includes the effect of the Concord branch purchased in October, 1997. The increase in insurance expense during 1998 was related to $42 thousand in merger costs. The increase in postage primarily relates to the increase in size of the Company. Stationery costs in 1998 included $17 thousand in merger related costs. Telephone costs during 1997 and 1998 included the costs of an expanded branch system and an upgrade and expansion of the Company's data communication telephone lines. The increase in advertising costs in 1998 reflects an expanded advertising budget to support the Company's growth. The increase in legal expenses, consulting expense and accounting expense in 1998 relates primarily to merger costs. Legal expense includes merger costs of $220 thousand. Consulting costs related to the CCBC acquisition in 1998 were $629 thousand and non-recurring merger related accounting costs were $131 thousand. An additional component of the increase in consulting costs in 1998 were costs related to the implementation of procedures and processes required to document the Company's internal controls and compliance with law as required under the FDIC Improvement Act of 1991. The high level of 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. 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 $250 thousand related to the Company's acquisition of CCBC. The increase in audit and accounting fees during 1997 primarily relates to merger costs and costs associated with the June 1997 securitization. The decrease in Directors' expenses in 1998 and increase 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 phantom stock is recorded as Director Expense. Conversely, a decrease in value, as experienced in 1998, results in a credit to expense. The increase in real estate expense during 1997 relates to a $59 thousand write down of the carrying value of undeveloped property. Sundry losses in 1998 include approximately $200 thousand in write downs in the value of OREO properties and $139 thousand in merger related costs. 1997's sundry losses primarily relate to charges for a reduction in staffing. 1996's losses primarily relate to $352 thousand related to a reduction in staffing and $114 thousand related to a servicing error on an SBA loan. The increase in other expense in 1997 and 1996 primarily relates to the Company's growth. The increase during 1998 includes growth in the Company, a $300 thousand increase in costs related to an expansion of the Company's non-interest bearing title company account relationships, $109 thousand related to an increase in the amortization of intangibles recorded upon the acquisition of Mercantile Bank, and approximately $140 thousand related to the reclassification of certain data communication expenses from equipment expense to other expense. PROVISION FOR INCOME TAXES. Provision for income taxes have been made at the prevailing statutory rates and include the effect of items which are classified as permanent differences for federal and state income tax. The -45- provision for income taxes was $5,767 thousand, $5,673 thousand and $2,995 thousand for the years ended December 31, 1998, 1997 and 1996, respectively, representing 42.9%, 38.8% and 38.0% of income before taxation for the respective periods. The increase in the 1998 percentage primarily relates to certain merger expenses which may not be deductible for federal and state taxes. 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 and securities purchased under agreements to resell 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, 1998, the Company had $57.2 million in guaranteed portions of SBA loans available for sale, most of which could be sold within a short period of time compared to $49.1 million of SBA loans available for sale at December 31, 1997. 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, 1998, the Company had unsecured lines of credit totaling $32.4 million with its correspondent banks. During both 1998 and 1997 the Company completed a securitization of SBA loans. The Company believes that it has now established the ability to securitize and sell SBA loans and has incorporated the ability to securitize nonguaranteed SBA loans into liquidity strategies. Cash and due from banks, federal funds sold, and securities purchased under agreements to resell as a percentage of total deposits were 8.7% at December 31, 1998 as compared to 11.5% at December 31, 1997. Although a decrease in the percentage for 1998 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 $53.5 million at December 31, 1998 as compared to $58.3 million at December 31, 1997, and federal funds sold and securities purchased under agreements to resell totaled $14.4 million at December 31, 1998 as compared to $22.3 million at December 31, 1997. The uninsured portion of federal funds sold together with the uninsured portion of cash deposited with other institutions totaled $13.4 million as of December 31, 1998. 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 loans and leases, exclusive of the allowance for possible loan losses, increased by $71.3 million from $553.7 million at December 31, 1997 to $625.0 million at December 31, 1998. The increase included $16.9 million in SBA loans, $27.8 million in other commercial loans and $34.7 million in real estate and equity lines of credit. Other loans decreased by $0.3 million and leases decreased by $7.8 million. The increase in SBA loans relates to an increase in lending directed towards the SBA's 504 program and to an increase in the volume of new loan originations. The increase in other loans reflects the Company's efforts to expand and diversify its non-SBA lending activities. Exclusive of the 1998 securitization the increase in loans would have totaled $147.7 million. The increase in the loan portfolio since December 31, 1997 was funded with increased deposits. Deposits increased by $81.6 million from $701.0 million at December 31, 1997 to $782.6 million at December 31, 1998. This included increases of $35.0 million in interest-bearing transaction and money market accounts, $15.1 -46- million in non-interest-bearing demand accounts, $31.1 million in time deposits and $0.3 million in savings accounts. The Company has been successful in expanding its deposits throughout its branch network, however the largest increases during 1998 have been generated at its Northern Nevada locations. Deposits at the Company's Reno, Nevada branch increased by $16.3 million and the Carson City, Nevada branch deposits increased by $20.5 million. During 1996 the Company moved its Reno, Nevada branch into an enlarged facility. The Carson City branch was opened during 1995 and has experienced strong deposit growth during each of its first three full years of existence. 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, 1996, 1997 and 1998 totaled $45.8 million, $10.1 million and $9.4 million, respectively, represented 8.0%, 1.4% and 1.2% of total deposits as of December 31, 1996, 1997 and 1998, 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, 1998 $12.5 million of CDs are classified as brokered deposits. To attract deposits, SierraWest Bank pays a market rate which may at times be above the comparable rate offered by SierraWest Bank to its local depositors. The overhead costs associated with these out-of-area deposits is, however, lower than that for local deposits since local deposits require the use of bank branch facilities and hence the Company believes the cost of these funds does not normally exceed the cost SierraWest Bank incurs to generate comparable deposits through its branch system. While out-of-area deposits are acquired at an acceptable cost, SierraWest Bank monitors the level of these deposits because it is concerned that out-of-area deposits are more rate sensitive and volatile and that there may be some exposure for increased costs in the future should the supply tighten. If interest rates rise rapidly, the Company's reliance on these deposits could have an adverse impact on net interest income if the costs to retain those deposits rise faster than rates charged on interest-earning assets. CAPITAL RESOURCES On February 25, 1999, the Company entered into an Agreement and Plan of Merger with BancWest Corporation. Under the terms of the Plan BancWest will acquire all the outstanding common stock of the Company in exchange for 0.82 shares of BancWest common stock. The merger, which is expected to close in the third quarter of 1999 is subject to the approval of the Company's shareholders, various regulatory agencies and certain other conditions. The transaction is expected to be accounted for under the pooling-of-interests accounting method. Concurrently with the execution and delivery of the merger agreement, BancWest and the Company entered into a stock option agreement. Under the stock option agreement, the Company gave BancWest an option to purchase up to 1,059,490 shares of the Company common stock representing approximately 19.9% of the outstanding shares of the Company common stock. BancWest has the right to purchase the shares for $28.875 per share. At December 31, 1998, the Company had shareholders' equity of $78.3 million as compared to $69.4 million at December 31, 1997. The Company's growth strategy has been to expand its banking business, internally and through acquisitions. In connection with this objective, the Company established loan production offices or agency relationships during 1997 in Oregon, Washington, Colorado and Tennessee, and during 1998 in Florida, Oregon, Alabama, Georgia, Texas and Tennessee. On April 15, 1998, the Company completed the acquisition of California Community Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental Pacific Bank (CPB), under the pooling-of-interests method of accounting and accordingly, the Company's historical consolidated results have been restated. On the acquisition date, CCBC had assets of $206 million, deposits of $184 million and shareholders' equity of $15.4 million. No gain or loss for tax purposes was recognized by CCBC shareholders, except with respect to cash -47- received in lieu of fractional shares. The value of the acquisition, based upon an average price of $37.94 per share totaled approximately $44.7 million. See Note 20 of Notes to Consolidated Financial Statements. 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. The transaction was accounted for under the purchase method of accounting. See Note 20 of Notes to Consolidated Financial Statements. The Company has in the past issued convertible debentures to provide capital resources to support its expansion. During 1997 a total of $9.7 million in debentures were converted to common stock and in 1998 $2.4 million in debentures were converted to common stock and $44 thousand were redeemed in cash. At December 31, 1998 there were no debentures outstanding. 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 shareholders to acquire stock of the Company. This plan is designed to protect the Company and its shareholders 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 shareholders. If the Board of Directors determines that an offer is in the best interests of the shareholders, the stock rights may be redeemed for nominal value, allowing the entity to acquire control of the Company. During February 1999 the rights plan was amended to exclude BancWest from the provisions of the plan. -48- YEAR 2000 Many existing computer programs use only two digits to identify a year in the date datum field (e.g., "98" for "1998"). As a result, the Company, like most other companies, faces a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates beginning in the year 2000. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. In June of 1996, the Federal Financial Institutions Examination Council (FFIEC) released its first alert to the financial services industry concerning Year 2000 risks. This council is comprised of (1) the Board of Governors of the Federal Reserve System(FRB); (2) the Federal Deposit Insurance Corporation; (3) the Office of the Comptroller of the Currency; (4) the National Credit Union Administration and (5) the Office of Thrift Supervision. On May 5, 1997, the FFIEC issued Interagency Guidelines outlining Year 2000 Project Management Goals and called for every financial institution to have a Year 2000 plan. This plan required an inclusion of an assessment of the Year 2000 risk posed by "mission critical" systems and required plans which ensured that testing was substantially complete for mission critical systems by December 31, 1998. A third set of guidelines was issued on December 22, 1997, further elaborating regulatory expectations regarding the Year 2000 or "millennium bug" problem. This release specifically included the requirement that each institution determine the level of "portfolio risk", posed by borrowers with potential Year 2000 problems, which could lead to impaired performance on the part of the borrower and, by implication, the financial institution as creditor. Since December, 1997, there have been additional Interagency Statements released on the topics of Impact on Customers, Vendor Readiness, Testing Guidance, Customer Awareness Programs, Contingency Planning Guidance and Fiduciary Services Guidance. In December 1998 a FFIEC guidance was released which addressed time lines for the preparation of Remediation Contingency Plans and of Business Resumption Contingency Plans. All financial institutions regulated by any of the regulatory bodies of the FFIEC are required to follow the guidelines outlined in each of the Interagency Statements. Examiners from the FFIEC member agencies conducted first round supervisory reviews of all financial institutions' Year 2000 conversion efforts during the first half of 1998. During the 4th quarter of 1998 regulators began the Phase II exams addressing all areas of Year 2000 compliance to date. Our Phase II exam was recently conducted and our regulators have reviewed our plans and testing performed to date and noted our progress. Examiners categorize an organization's efforts as "Satisfactory", "Needs Improvement" or "Unsatisfactory". The FDIC intends to mandate supervisory action for virtually all institutions assessed less than satisfactory. In addition, the FDIC will consider a change in a component or composite rating if identified deficiencies so warrant. Focusing on financial institutions alone will not prevent Year 2000 disruptions. Consequently, examiners will also be conducting supervisory reviews on data processing service providers and third-party software vendors who provide services to federally insured financial institutions. THE COMPANY'S STATE OF READINESS In 1997, the Company identified five steps to be accomplished for formulation of an action plan: (1) AWARENESS - Awareness of Year 2000 problems. The Company set up a Year 2000 Steering committee to oversee the progress in solving the problems associated with Year 2000 issues. Progress is reported monthly at the Company's Board and Committee meetings and documented in the committee and board minutes. (2) ASSESSMENT - An inventory of affected systems has been performed, the problem assessed, risks measured and an action plan formalized. (3) RENOVATION - In this phase, modifications were made and vendors managed according to the action plan. Detailed test plans and schedules were developed. The entire project continues to be monitored and results are documented. (4) VALIDATION - Tests were conducted and results analyzed to confirm that the changes made bring the affected system into compliance and no new problems have surfaced as a result of the changes. -49- (5) IMPLEMENTATION - Replacement of the non-compliant systems occurred. The systems were put into production and appropriately interfaced with one another. Training also occurred and contingency plans were prepared as required. A review by the end user and the Internal Audit Department will be conducted to insure the accuracy of the test results. The Company, with the help of consultants, began identifying 260 systems in use throughout the Bank and performed preliminary assessment of the risk of non-compliance associated with each one. Each system was given an overall risk assessment of "high", "moderate", "low", "no risk" or "unknown" risk. In deriving the overall risk rating, three separate components were considered: A.) CRITICALITY: How critical is the system to the organization? B.) CONFIDENCE: How confident are we that the vendor will make their system compliant? C.) CONTROL: How much control do we have in the process? The Company has identified eleven (11) Mission Critical A-Priority Systems considered to be most critical regardless of the risk of non-compliance and the degree of control the Company has over the renovation of these systems. They are listed below: (1) Core Application Software (2) Customer Information System & Data Warehouse (3) Operating System (4) PC Server Based Application & Operating System (5) Network Hardware (6) Loan Document Processing (7) ACH Processing (8) Wire Transfer & Settlement (9) ATM Processing (10) Telephone Banking (11) Disaster Recovery & Back-up The Company established a test plan for its mission critical applications. Testing of these items commenced in September 1998 and was substantially completed by December 31, 1998. Monthly status reports continue to be presented to the Board of Directors. CORE APPLICATION SOFTWARE AND CUSTOMER INFORMATION SYSTEM & DATA WAREHOUSE The current level of software has been certified as Year 2000 compliant by the vendor as well as reviewed and assessed by FDIC. The Company performed an independent test of the "Century Date Change" (CDC) at its disaster recovery site during the first quarter of 1999. Early review of the test results reaffirm the software is Year 2000 compliant. OPERATING SYSTEM The upgrade to the operating system software was installed on September 19, 1998 and is designed to work hand-in-hand with the major information technology system. Testing of the system occurred with installation in September and was found to have no Year 2000 compliance issues. PC SERVER BASED APPLICATION & OPERATING SYSTEM AND NETWORK HARDWARE The Network Department has completed the replacement of non-compliant system hardware and software. Testing has been completed and certification has been received by vendors. Individual applications, spreadsheets, etc. are scheduled for review in early 1999. -50- LOAN DOCUMENT PROCESSING Loan document processing software has been tested. The current version is certified and is Year 2000 compliant with documentation on file with the Year 2000 Project Manager. -51- ACH PROCESSING AND WIRE TRANSFER & SETTLEMENT Testing on the current version of the Fed-Line software is now complete. Certification has been received from the Department Manager. Integration testing of systems that reside in several different Departments is scheduled. ATM PROCESSING The Company has completed testing with the processor. Certification of Year 2000 compliance has been received. TELEPHONE BANKING The telephone banking system required an upgrade that was approved for purchase in the 4th quarter of 1998. The compliant version is scheduled to be installed in March 1999 and testing is scheduled to be completed in the 2nd quarter of 1999. The vendor has certified the upgrade as Year 2000 compliant. DISASTER RECOVERY & BACK-UP End-of-Year (1998) files were created by the Company's Data Processing Department and forwarded to the Disaster Recovery Vendor in early January 1999. Preliminary indications are that the CDC test was successful. NON-INFORMATION TECHNOLOGY A facility inspection worksheet was forwarded to each Office for inventory and identification of all non-IT date sensitive systems. Systems such as vaults, telephone systems, and HVAC systems have been identified and certification has been or will be received soon. YEAR 2000 PLAN MANAGEMENT In order to effectively manage the Year 2000 Plan, the Company has grouped all phases of the project into one of six categories as defined in the FFIEC guidelines: (1) Business Risk (2) Due Diligence on Service Providers and Software Vendors Readiness (3) Impact on Customers (4) Testing (5) Customer Awareness Programs (6) Contingency Planning With the identification of our A-Priority Mission Critical Systems, business risk was measured for each application, process and vendor/customer relationship. In general, the Company believes the business risk associated with A-Priority Mission Critical systems to be low. As tests progressed and non-compliant systems were identified, Remediation Contingency Plans were created. Remediation Contingency Plans were created as required in regulatory guidelines. The Company's progress on due diligence and testing was previously discussed in the section describing its eleven mission critical systems. Guidance for Customer Awareness and Impact on Customers continues to be addressed. Some of the on-going programs are education of the Company's staff, community presentations by the Company's Legal Department and by the Year 2000 Project Manager and mailings to customers. Customers have been provided with a toll-free number of the Year 2000 Project Manager to call for any questions. -52- The assessment of "high risk" borrowers and depositors is a continual project. Customers are identified using the criteria established in the Company's Policies on Year 2000 Borrower Risk and Year 2000 Depositor Risk. The Credit Services Manager and the Operations Division Manager are responsible for on-going evaluation. COSTS TO ADDRESS THE YEAR 2000 ISSUES Costs directly related to Year 2000 issues totaling $153,000 were incurred through March 1, 1999. Incurred costs consist of the salary of a full-time Year 2000 Manager, travel and seminars for staff, customer education expenses, computer hardware purchases of $19,000, telephone expenses of $23,000, consultant costs of $22,000, and additional software purchases of $19,000. These costs are being funded through operating cash flows. Additional estimated costs relating to Year 2000 issues have been identified to be approximately $165,000. As the project continues, the costs may prove to be significantly higher. Of the estimated additional costs, $41,000 has been identified for additional hardware and software purchases, $11,000 has been estimated for testing of customer's credit card accounts, and an additional $113,000 has been estimated for staff salaries and travel and seminar expenses. The Year 2000 issue is pervasive and complex as virtually every computer system will be affected in some way by the Year 2000 date change. Consequently, no assurance can be given that Year 2000 compliance can be achieved without costs and uncertainties that might have a material adverse effect on future financial results or cause reported financial information not to be necessarily indicative of future operating results or future financial condition. However it is anticipated that any disruption of services would be partial and brief, and that there will not be a material impact on revenues or earnings. RISKS OF THE COMPANY'S YEAR 2000 ISSUES The Company has substantially completed testing on mission-critical applications. Most tests were successful and those systems that were identified as non-compliant have been upgraded or will soon be upgraded. The Company is confident all mission-critical applications will function normally at all critical dates. A Business Resumption Contingency Plan is currently in development to address issues such as loss of power, loss of telephones or loss of computers. BUSINESS RESUMPTION CONTINGENCY PLAN As mentioned previously the company is developing a Business Resumption Contingency Plan as required by regulatory agencies to address possible disruptions of core business functions. The purpose of the Business Resumption Plan is to address the risks associated with the failure of systems on specific critical dates. The Business Resumption Plan is intended to provide assurance that the mission-critical functions will continue if one or more systems fail. There are four phases of the Year 2000 Business Resumption Contingency Planning process which include: 1. Establishing organizational planning guidelines that define the business continuity planning strategy. 2. Completing a Business Impact Analysis where we are assessing the potential impact of mission-critical system failures on core business functions. 3. Developing a Contingency Plan that establishes a timeline for implementation and action, and trigger dates for activation. 4. Designing a method of Validation so that the Business Resumption Plan can be tested for viability. The Company expects to have completed all phases of its Business Resumption Plan by the end of the second quarter of 1999. The Plan will be used in-conjunction with the Company's current Disaster Recovery Plan. When the Plan is complete the Company's Internal Audit Department will conduct an independent review of the Plan. -53- B-Priority systems, defined as non-mission critical, are being identified and testing is scheduled for completion by September 1999. -54- 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 negative cumulative gap over the next twelve months. 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 interest rate sensitivity is the result of 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 interest rate sensitivity of the Company. In 1998 and 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 for a notional amount of $20 million with a correspondent bank. The swap agreement requires the Company to pay a floating rate tied to prime and receive a fixed rate. The swap agreement expired in March, 1999. On April 15, 1998, the Company completed the acquisition of California Community Bancshares Corporation and its wholly owned subsidiary Continental Pacific Bank (CPB). CPB's net interest income was expected to fall with increasing rates and rise with declining rates, which helped offset the Company's interest rate sensitivity. CPB had two swap agreements with a correspondent bank, with notional amounts of $10 million and $0.9 million. The swap agreements were assumed by the Company at the time of the acquisition. The swaps acquired from CPB increased the interest rate sensitivity of the Company. 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 1998 and 1997, the Company securitized loans. 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. -55- 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, 1998. 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, 1998 ---------------------------------------------------------------------------- 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 . . . . . . . . . . $ 14,400 $ 0 $ 0 $ 0 $ 0 $ 14,400 Taxable investment securities. . . . . 0 63,140 22,401 21,973 4,551 112,065 Non-taxable investment securities. . . 0 0 0 2,056 19,861 21,917 Loans. . . . . . . . . . . . . . . . . 225,207 149,602 75,387 86,431 88,356 624,983 Other interest earning assets. . . . . 6,275 0 0 0 0 6,275 ----------- --------- -------------- ---------- ---------- ---------- Total interest-earning assets. . . 245,882 212,742 97,788 110,460 112,768 779,640 ----------- --------- -------------- ---------- ---------- ---------- Liabilities: Savings deposits(1). . . . . . . . . . 290,986 0 0 0 0 290,986 Time deposits. . . . . . . . . . . . . 47 154,035 132,751 27,279 95 314,207 Other interest-bearing liabilities . . 0 99 306 3,782 223 4,410 ----------- --------- -------------- ---------- ---------- ---------- Total interest-bearing liabilities 291,033 154,134 133,057 31,061 318 609,603 ----------- --------- -------------- ---------- ---------- ---------- Net interest-earning assets (liabilities) $ (45,151) $ 58,608 $ (35,269) $ 79,399 $112,450 $170,037 ----------- --------- -------------- ---------- ---------- ---------- ----------- --------- -------------- ---------- ---------- ---------- Cumulative net interest earning assets (liabilities) ("GAP"). . . . . . . . . $ (45,151) $ 13,457 $(21,812) $ 57,587 $170,037 ----------- --------- -------------- ---------- ---------- ----------- --------- -------------- ---------- ---------- Cumulative GAP as a percentage of Total interest-earning assets. . . (5.8)% 1.7% (2.8)% 7.4% 21.8% ----------- --------- -------------- ---------- ---------- ----------- --------- -------------- ---------- ----------
- ---------- (1) Savings deposits include interest-bearing transaction accounts. (2) Includes loans which matured on or prior to December 31, 1998. At December 31, 1998, the Company had $556.4 million in assets and $578.2 million in liabilities repricing within one year. This means that $21.8 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. -56- 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 at December 31, 1998. Expected maturities are based on contractual payments adjusted for the estimated effect of prepayments. SBA loans have been assumed to prepay at an average rate of 14% per year. This rate is consistent with historical information on the Company's SBA loan portfolio and the SBA industry. 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, 1998 ---------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair Value -------- --------- ---------- --------- --------- ---------- -------- ---------- Federal funds sold. . . . . . . . $ 14,400 $ 0 $ 0 $ 0 $ 0 $ 0 $ 14,400 $ 14,400 Weighted average rate. . . . . . 4.54 0 0 0 0 0 4.54 Investment securities . . . . . . 44,804 25,242 15,812 13,096 3,778 31,250 133,982 133,982 Weighted average yield(3). . . . 6.05 5.63 5.86 5.61 6.08 5.45 5.77 Fixed rate loans. . . . . . . . . 41,612 18,535 15,163 10,138 10,627 59,567 155,642 157,202 Weighted average rate. . . . . . 8.61 9.33 9.18 9.12 8.94 8.66 8.83 Variable rate loans (1) . . . . . 178,588 65,228 42,736 40,447 32,913 109,429 469,341 480,727 Weighted average rate. . . . . . 9.22 9.58 9.53 9.48 9.66 9.96 9.52 Other interest-earning assets . . 6,275 0 0 0 0 0 6,275 6,275 Weighted average rate. . . . . . 5.27 0 0 0 0 0 5.27 -------- --------- ---------- --------- --------- ---------- -------- ---------- Total Interest-earning assets . . $285,679 $109,005 $ 73,711 $ 63,681 $ 47,318 $200,246 $779,640 $792,586 -------- --------- ---------- --------- --------- ---------- -------- ---------- -------- --------- ---------- --------- --------- ---------- -------- ---------- Savings deposits(2) . . . . . . . $290,986 $ 0 $ 0 $ 0 $ 0 $ 0 $290,986 $290,986 Weighted average rate. . . . . . 2.39 0 0 0 0 0 2.39 Time Deposits . . . . . . . . . . 283,112 20,763 3,516 4,228 2,315 273 314,207 315,941 Weighted average rate. . . . . . 5.09 5.54 5.84 6.08 5.85 5.99 5.15 Other interest-bearing liabilities 405 465 1,283 117 1,917 223 4,410 4,556 Weighted average yield . . . . . 13.78 13.83 9.53 14.20 6.96 11.23 9.46 -------- --------- ---------- --------- --------- ---------- -------- ---------- Total interest-bearing liabilities $574,503 $ 21,228 $ 4,799 $ 4,345 $4,232 $ 496 $609,603 $611,483 -------- --------- ---------- --------- --------- ---------- -------- ---------- -------- --------- ---------- --------- --------- ---------- -------- ----------
- ---------- (1) Of the total variable rate loans 89% reprice 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 matures 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 positive $75 thousand at December 31, 1998. The Company's $10 million notional amount interest rate swap matures in May, 2001. Under this agreement the other party to the swap pays a floating ratio equal to the United States Treasury Bill rate and the Company pays a floating rate equal to the Eleventh District Cost of Funds plus 65 basis points. The Company's $0.9 million notional amount interest rate swap matures in January, 2004. Under this agreement the other party to the swap pays a floating rate equal to the one year constant maturity Treasury rate adjusted weekly, and the Company pays a fixed rate of 6.74%. The $10 million swap had an estimated fair value of a negative $167 thousand at December 31, 1998 and the $0.9 million swap had an estimated fair value of a negative $75 thousand at this date. -57- 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. This table excludes information with respect to CCBC. CCBC was not required to provide this data and it is impracticable to gather the information required to accurately prepare a table for 1997 which includes CCBC. 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% reprice 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. -58- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . .60 Consolidated Financial Statements of SierraWest Bancorp Consolidated Statements of Financial Condition . . . . . . . . . . . . . .61 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . .63 Consolidated Statements of Shareholders' Equity. . . . . . . . . . . . . .65 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . .67 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .70
-59- 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 as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Sacramento, California January 29, 1999 (February 25, 1999 as to the first paragraph of Note 20 to the consolidated financial statements). -60- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS
December 31, ----------------------- 1998 1997* -------- -------- (in thousands) Cash and cash equivalents: Cash and due from banks . . . . . . . . . . . . . $ 53,481 $ 58,345 Federal funds sold and securities purchased under agreements to resell . . . . . . 14,400 22,275 -------- -------- Total Cash and Cash Equivalents . . . . . . . . . 67,881 80,620 Investment securities and investments in mutual funds: Mutual funds available for sale . . . . . . . . . 0 733 Held to maturity, market value $0 and $1,000. . . 0 1,000 Available for sale. . . . . . . . . . . . . . . . 133,982 106,576 Loans held for sale. . . . . . . . . . . . . . . . 114,247 17,061 Loans and leases, net of unearned lease income, deferred loan fees/costs and allowance for possible loan and lease losses . . . . . . . . . 502,027 528,761 Interest-only strips receivable. . . . . . . . . . 22,125 17,076 Bank premises, leasehold improvements and equipment, net . . . . . . . . . . . . . . . 13,482 12,829 Accrued interest receivable and other assets . . . 25,425 22,090 -------- --------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . $879,169 $ 786,746 -------- --------- -------- ---------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. See notes to consolidated financial statements. -61- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued) LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, ----------------------- 1998 1997* -------- -------- (in thousands except share amounts) Deposits: Non-interest-bearing demand . . . . . . . . . . . $177,359 $162,242 Savings . . . . . . . . . . . . . . . . . . . . . 24,523 24,259 Interest bearing transaction and money market accounts. . . . . . . . . . . . . . 266,463 231,424 Time . . . . . . . . . . . . . . . . . . . . . . 314,207 283,076 -------- -------- Total Deposits. . . . . . . . . . . . . . . . . . 782,552 701,001 Other liabilities and interest payable . . . . . . 18,347 13,894 Convertible debentures . . . . . . . . . . . . . . 0 2,468 -------- -------- Total Liabilities . . . . . . . . . . . . . . . . 800,899 717,363 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; 5,301,756 and 5,019,254 shares issued and outstanding at December 31, 1998 and 1997, respectively . . . . . . . . . . . . . 45,983 42,148 Retained earnings . . . . . . . . . . . . . . . . 32,230 26,598 Accumulated other comprehensive income, net of tax of $40 and $445. . . . . . . . . . . . . . . 57 637 -------- -------- Total Shareholders' Equity. . . . . . . . . . . . 78,270 69,383 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . $879,169 $786,746 -------- -------- -------- --------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. See notes to consolidated financial statements. -62- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, --------------------------------- 1998 1997* 1996* ------- -------- ------- (in thousands, except per share amounts) Interest income: Loans and leases . . . . . . . . . . . $54,593 $50,383 $41,210 Federal funds sold . . . . . . . . . . 3,990 1,960 1,121 Securities: Taxable . . . . . . . . . . . . . . . 5,375 5,420 3,383 Exempt from federal taxes . . . . . . 881 620 544 Other assets . . . . . . . . . . . . . 263 182 113 ------- -------- ------- Total Interest Income. . . . . . . . . 65,102 58,565 46,371 Interest expense: Savings deposits . . . . . . . . . . . 503 504 484 Transaction and money market accounts. 7,385 6,551 4,781 Time deposits. . . . . . . . . . . . . 17,052 15,442 11,427 Convertible debentures . . . . . . . . 50 283 1,072 Other. . . . . . . . . . . . . . . . . 630 441 196 ------- -------- ------- Total Interest Expense . . . . . . . . 25,620 23,221 17,960 ------- -------- ------- Net Interest Income. . . . . . . . . . 39,482 35,344 28,411 Provision for possible loan and lease losses . . . . . . . . . . . . . . . 2,370 2,799 1,421 ------- -------- ------- Net Interest Income After Provision for Possible Loan and Lease Losses . . . 37,112 32,545 26,990
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. See notes to consolidated financial statements. -63- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (continued)
Year Ended December 31, --------------------------------- 1998 1997* 1996* ------- ------- ------- (in thousands, except per share amounts) Non-interest income: Net servicing and interest-only strip income . . . . . . . . . . . . . . $ 4,230 $ 4,595 $ 4,100 Net gain on sale and securitization of loans . . . . . . . . . . . . . . . . 2,910 3,320 479 Service charges on deposit accounts . . . 3,475 3,207 2,565 Other . . . . . . . . . . . . . . . . . . 3,986 2,564 2,226 ------- ------- ------- Total Non-interest Income. . . . . . . . 14,601 13,686 9,370 Non-interest expense: Salaries and related benefits . . . . . . 20,826 16,885 15,428 Net occupancy and equipment expense . . . 6,466 5,653 4,852 Other expense . . . . . . . . . . . . . . 10,976 9,072 8,198 ------- ------- ------- Total Non-interest Expense. . . . . . . . 38,268 31,610 28,478 ------- ------- ------- Income before provision for income taxes. 13,445 14,621 7,882 Provision for income taxes. . . . . . . . 5,767 5,673 2,995 ------- ------- ------- Net Income. . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 ------- ------- ------- ------- ------- ------- Basic Earnings per share . . . . . . . . $ 1.49 $ 1.96 $ 1.35 ------- ------- ------- ------- ------- ------- Weighted average shares used to calculate basic earnings per share. . . . . . . . . 5,151 4,566 3,622 ------- ------- ------- ------- ------- ------- Diluted Earnings per share. . . . . . . . $ 1.41 $ 1.73 $ 1.10 ------- ------- ------- ------- ------- ------- Weighted average shares used to calculate diluted earnings per share. . . . . . . . 5,474 5,280 5,014 ------- ------- ------- ------- ------- -------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. See notes to consolidated financial statements. -64- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Accumulated Other Common Stock Comprehensive ------------------- Comprehensive Retained Income, Shares Amounts Income Earnings Net of Taxes Total ------- ------- ------ -------- ------------ ----- Balance at January 1, 1996*. . . . . . 3,392 $21,523 $20,644 $ (72) $42,095 Comprehensive Income Net Income . . . . . . . . . . . . . . . . 0 0 $4,887 4,887 0 4,887 Other comprehensive income, net of tax of $168 . . . . . . . . . . . Unrealized gain(loss) on available for sale securities, net of reclassification adjustment of $75 0 0 (233) (233) (233) ----- Total Comprehensive Income . . . . . . . . . 4,654 ----- ----- Stock options exercised. . . . . . . . . . . 32 226 0 0 226 Common stock issued on conversion of debentures . . . . . . . . . 170 1,677 0 0 1,677 Cash dividends paid. . . . . . . . . . . . . 0 0 (1,367) 0 (1,367) ----- ------ ------- --- ------- Balance at December 31, 1996*. . . . . . . . 3,594 23,426 24,164 (305) 47,285 ----- ------ ------- --- ------- Comprehensive Income Net Income . . . . . . . . . . . . . . . . 0 0 8,948 8,948 0 8,948 Other comprehensive income, net of tax of $665 . . . . . . . . . . . Unrealized gain(loss) on interest-only strips receivable and available for sale securities, net of reclassification adjustment of $51 0 0 942 0 942 942 ----- Total comprehensive income . . . . . . . . . 9,890 ----- ----- Stock options exercised. . . . . . . . . . . 129 1,081 0 0 1,081 Tax benefit derived from the exercise of stock options. . . . . . . . . 0 547 0 0 547 Common stock issued on conversion of debentures . . . . . . . . . 931 9,084 0 0 9,084 Cash dividends paid. . . . . . . . . . . . . 0 0 (1,810) 0 (1,810) 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) ----- ------ ------ --- ------ Balance at December 31, 1997*. . . . . . . . 5,019 42,148 26,598 637 69,383 ----- ------ ------ --- ------
(Continued) * Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. -65- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) (Concluded)
Accumulated Other Common Stock Comprehensive ------------------- Comprehensive Retained Income, Shares Amounts Income Earnings Net of Taxes Total ------- ------- ------ -------- ------------ ----- Balance at December 31, 1997* (forward). . . 5,019 $42,148 $26,598 $ 637 $69,383 Comprehensive income Net Income . . . . . . . . . . . . . . . . 0 0 $7,678 7,678 0 7,678 Other comprehensive income, net of tax of $406. . . . . . . . . . . Unrealized gain(loss) on interest-only strips receivable and available for sale securities, net of reclassification adjustment of $326 0 0 (580) (580) (580) ------ Total Comprehensive Income $7,098 ------ ------ Stock options exercised. . . . . . . . . . . 126 1,094 0 0 1,094 Tax benefit derived from the exercise of stock options. . . . . . . . . 0 460 0 0 460 Common stock issued on conversion of debentures . . . . . . . . . 157 2,281 0 0 2,281 Cash dividend paid . . . . . . . . . . . . . 0 0 (2,046) 0 (2,046) ----- -------- ------- ---- ------- Balance at December 31, 1998 . . . . . . . . 5,302 $ 45,983 $32,230 $ 57 $78,270 ----- -------- ------- ---- ------- ----- -------- ------- ---- -------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. See notes to consolidated financial statements. -66- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------- 1998 1997* 1996* -------- ---------- -------- (in thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 Adjustments to reconcile net income to net cash provided: Depreciation and amortization. . . . . . . . . . . . . 2,322 1,925 1,628 Provision for possible loan and lease losses . . . . . 2,370 2,799 1,421 Amortization of servicing asset and interest-only strips receivable . . . . . . . . . . . . . . . . . . 3,460 1,718 0 Amortization of excess servicing . . . . . . . . . . . 0 0 1,315 Amortization of purchased mortgage servicing rights. . . . . . . . . . . . . . . . . . . . . . . . 0 0 172 Gain on sale of government loans . . . . . . . . . . . (5,658) (3,748) (392) Loans originated or purchased for sale . . . . . . . . (138,397) (87,282) (7,672) Loans sold . . . . . . . . . . . . . . . . . . . . . . 126,134 80,558 9,214 Effect of changes in assets and liabilities-net of effects from acquisition: Interest receivable . . . . . . . . . . . . . . . . . 321 (1,023) (737) Interest payable. . . . . . . . . . . . . . . . . . . (140) (54) 299 Prepaid expenses. . . . . . . . . . . . . . . . . . . 86 57 (171) Other assets. . . . . . . . . . . . . . . . . . . . . 1,517 (383) (342) Accrued expenses. . . . . . . . . . . . . . . . . . . 24 979 572 Current taxes payable . . . . . . . . . . . . . . . . 533 479 210 Deferred taxes. . . . . . . . . . . . . . . . . . . . (2,489) (266) 441 Other . . . . . . . . . . . . . . . . . . . . . . . . (596) (282) (503) -------- ---------- -------- Total adjustments . . . . . . . . . . . . . . . . . . (10,513) (4,523) 5,455 -------- ---------- -------- Net cash (used in) provided by operating activities . (2,835) 4,425 10,342 -------- ---------- --------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. See notes to consolidated financial statements. -67- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended December 31, ------------------------------------ 1998 1997* 1996* ------- --------- ------- (in thousands) Cash flows from investing activities: Proceeds from: Sales of mutual funds . . . . . . . . . . . . . . . . . . 2,816 2,697 0 Maturities of investment securities held to maturity. . . 1,000 1,012 1,378 Maturities of investment securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . 33,159 21,662 15,374 Sales of investment securities available for sale . . . . 7,025 6,015 14,874 Purchase of investment securities - available for sale . . . . . . . . . . . . . . . . . . . . (67,904) (45,819) (60,523) Purchase of mutual funds - available for sale . . . . . . . . . . . . . . . . . . . . (2,000) (2,000) 0 Loans and leases made net of principal collections. . . . . (61,990) (84,480) (87,878) Capital expenditures. . . . . . . . . . . . . . . . . . . . (2,099) (931) (5,128) Proceeds from sale of assets. . . . . . . . . . . . . . . . 0 1,574 119 Net cash received in acquisition. . . . . . . . . . . . . . 0 8,570 0 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 159 124 ------- ------- -------- Net cash used in investing activities . . . . . . . . . . . (89,871) (91,541) (121,660) Cash flows from financing activities: Net increase in demand, interest bearing, and savings accounts . . . . . . . . . . . . . . . . . . . 50,420 70,941 63,060 Net increase in time deposits . . . . . . . . . . . . . . . 31,131 22,365 71,546 Net change in securities sold under repurchase agreements. . . . . . . . . . . . . . . . . . . (589) (404) 327 Net change in notes payable and debentures. . . . . . . . . (44) 0 2,650 Cash dividends paid . . . . . . . . . . . . . . . . . . . . (2,045) (1,810) (1,367) Cash paid in lieu of fractional shares. . . . . . . . . . . 0 (11) 0 Cash received for stock options exercised . . . . . . . . . 1,094 1,081 226 ------- ------- -------- Net cash provided by financing activities . . . . . . . . . 79,967 92,162 136,442 ------- ------- -------- Net (decrease) increase in cash and cash equivalents. . . . (12,739) 5,046 25,124 Cash and cash equivalents - beginning of period . . . . . . 80,620 75,574 50,450 ------- ------- -------- Cash and cash equivalents - end of period . . . . . . . . . $ 67,881 $80,620 $75,574 ------- ------- -------- ------- ------- --------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. See notes to consolidated financial statements. -68- SIERRAWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL DISCLOSURES (in thousands) 1998 1997* 1996* ------- --------- ------- (in thousands) Cash Paid For Income Taxes. . . . . . . . . . . . . . . . . 7,999 5,453 2,378 Cash Paid For Interest Payments . . . . . . . . . . . . . . 25,760 23,251 17,735
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES On June 30, 1997, the Company purchased all the capital stock of Mercantile Bank for $6.6 million. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 44,609,000 Cash paid for capital stock 3,301,000 Common stock issued for capital stock 3,317,000 ------------ Liabilities assumed $ 37,991,000 ------------ ------------
Common stock was issued in conversion of $2,281,000, $9,084,000 and $1,677,000 of convertible debentures in 1998, 1997 and 1996, respectively. These amounts are net of debenture offering costs of $143,000, $658,000 and $138,000 in 1998, 1997 and 1996. For the years ended December 31, 1998, 1997 and 1996, $853,000, $1,798,000 and $546,000 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 1998, 1997 and 1996, $17.8 million, $35.4 million and $15.7 million of unguaranteed SBA loans were transferred to held for sale status. In addition, $32.3 million, $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 1998 $1,248,000 in loans were transferred to other assets. See notes to consolidated financial statements. -69- 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"). The Bancorp is a one-bank holding company headquartered in Truckee, California. The Company operates as one business segment providing services to the Company's clients in Northern California and Northern Nevada through its 20 branches and various loan production offices. The Company's principal business consists of attracting deposits from the general public and using the funds to originate SBA, real estate and other commercial loans to customers who are primarily small businesses and individuals. Its primary source of revenue is interest on loans and investments. The Company is not dependent on any single customer for more than 10% of the Company's revenues. 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. 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, federal funds sold and securities purchased under agreements to resell. 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 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. The Company did not hold any investments in mutual funds at December 31, 1998. 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, 1998, loans held for sale consist of the unguaranteed portion of loans which the Company intends to sell on a securitized basis, guaranteed portions of SBA loans it intends to sell in 1999 and the guaranteed portions of Business and Industry ("B&I") loans that are available for sale. -70- 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 B &I loans that are available for sale. -71- 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 inherent in the portfolio. 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 and continuing through 1997, the Company retained both the guaranteed and unguaranteed portions of most of the loans generated in its portfolio. During 1998 the Company began selling a significant portion of the guaranteed portions of loans it originates. 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 -72- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. The Company accounts for loan sales and securitizations in accordance with 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 are 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 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 whenever there is an indication that the carrying amount of an asset may not be recoverable. INVESTMENT IN REAL ESTATE. The Company owns a 32,000 sq. ft. office building located in Vacaville, California. The building was partially occupied by the corporate offices of California Community Bancshares Corporation ("CCBC") and currently approximately 84% of the building is occupied by third party tenants. Assets related to the building are included in other assets. Income and expenses are included in other non-interest income and other non-interest expense. The Company does not anticipate retaining future ownership of this building. 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. -73- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Operating costs on foreclosed real estate are expensed as incurred. Costs incurred for physical improvements 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. 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 14. DERIVATIVE FINANCIAL INSTRUMENTS. As described below, during 1996 and 1997, the Company entered into interest rate swap agreements with a major bank and with the FHLB 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. -74- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Original Notional Issue Original Company Company Amount Date Term Pays Receives $20,000,000 1-5-1996 Three years Prime 8.17% (variable rate) (fixed rate) $10,000,000 5-24-1996 Five years COFI plus .65% Three month (variable rate) treasury bill (variable rate) $ 900,000 1-24-1997 Seven years 6.74% One year constant (fixed rate) maturity treasury index (variable rate)
Net interest income or expense resulting from the rate differential is recorded under settlement accounting on a current basis. The related amount payable to or receivable from the other bank or the FHLB is included in other liabilities or assets. The fair value of the swaps are not recognized in the financial statements. The net interest expense recognized in 1998, 1997 and 1996 was approximately $130,000, $105,000 and $32,000, respectively. COMPREHENSIVE INCOME. On January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. This statement requires that all items recognized under accounting standards as components of comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This statement also requires that an entity classify items of other comprehensive income by their nature in an annual financial statement. Comprehensive income includes net income and other comprehensive income. The Company's only source of other comprehensive income is derived from unrealized gains and losses on investment securities held-for-sale. Reclassification adjustments result from gains or losses on investment securities that were realized and included in net income of the current period that also had been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose. They are excluded from comprehensive income of the current period to avoid double counting. Annual financial statements for all prior periods have been restated. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE. On January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas, and major customers. This statement will not impact the Company's consolidated financial position, results of operations or cash flows. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities and reports its operations on the basis of a single business segment. ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is in the process of determining the impact of SFAS No. 133 on the Company's financial statements, which is not expected to be material. RECLASSIFICATIONS. Certain items in the 1996 and 1997 financial statements have been reclassified to conform to the 1998 presentation. -75- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. INVESTMENT SECURITIES AND INVESTMENTS IN MUTUAL FUNDS: The amortized cost and estimated market values of investments in securities and mutual funds are as follows (amounts in thousands):
Estimated Gross Gross ------------------------- Amortized Unrealized Unrealized Market Carrying Cost Gains Losses Value Value ----------- ------------ ----------- ------------ --------- DECEMBER 31, 1998 Available for Sale: U.S. Treasury securities . . . . . . . . $ 29,293 $ 168 $ 0 $ 29,461 $ 29,461 Securities of U.S. government agencies. . . . . . . . . . 38,240 19 70 38,189 38,189 Securities of states and political subdivisions . . . . . . . . 21,019 898 0 21,917 21,917 Mortgage-backed securities . . . . . . . 44,042 101 491 43,652 43,652 FHLB Stock . . . . . . . . . . . . . . . 763 0 0 763 763 ----------- ------------ ----------- ------------ --------- Total available for sale . . . . . . . . $ 133,357 $ 1,186 $ 561 $ 133,982 $ 133,982 ----------- ------------ ----------- ------------ --------- ----------- ------------ ----------- ------------ --------- 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 . . . . . . . . $ 46,384 $ 262 $ 0 $ 46,646 $ 46,646 Securities of U.S. government agencies. . . . . . . . . . 14,379 15 45 14,349 14,349 Securities of states and political subdivisions . . . . . . . . 13,604 499 33 14,070 14,070 Mortgage-backed securities . . . . . . . 31,131 118 330 30,919 30,919 FHLB Stock . . . . . . . . . . . . . . . 592 0 0 592 592 ----------- ------------ ----------- ------------ --------- Total available for sale . . . . . . . . $ 106,090 $ 894 $ 408 $ 106,576 $ 106,576 ----------- ------------ ----------- ------------ --------- ----------- ------------ ----------- ------------ --------- Mutual funds available for sale. . . . . $ 812 $ 0 $ 79 $ 733 $ 733 ----------- ------------ ----------- ------------ --------- ----------- ------------ ----------- ------------ ---------
-76- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Scheduled maturities of investment securities at December 31, 1998 were as follows (amounts in thousands):
Available for Sale ------------------------ Amortized Fair Cost Value ----------- --------- Within 1 year . . . . . . . . . . . . . . . . . . $ 34,678 $ 34,848 After 1 year but within 5 years . . . . . . . . . 29,819 29,846 After 5 years but within 10 years . . . . . . . . 4,021 4,214 After 10 years. . . . . . . . . . . . . . . . . . 20,034 20,659 FHLB Stock. . . . . . . . . . . . . . . . . . . . 763 763 Mortgage-backed securities. . . . . . . . . . . . 44,042 43,652 ----------- --------- Total . . . . . . . . . . . . . . . . . . . . . . $133,357 $133,982 ----------- --------- ----------- ---------
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, 1998, the Company held high-risk collateralized mortgage obligations with an amortized cost of $1,344,000 and a fair value of $1,275,000 as defined by regulatory agencies. At December 31, 1997, the Company had no high-risk collateralized mortgage obligations as defined by regulatory agencies. Assets pledged to secure public deposits and borrowings and for other purposes required by law or contract include investment securities at December 31, 1998 of approximately $36,455,000 and at December 31, 1997, of approximately $46,168,000. Proceeds from the sale of investments in debt securities were $7,025,000, $6,015,000 and $14,986,000 during 1998, 1997 and 1996, respectively. The Company recorded gross realized gains of $313,000, $42,000 and $88,000 thousand on the sales of investments in debt securities during 1998, 1997 and 1996, respectively. Gross realized losses on the sales of investment in debt securities were $13,000 during 1996. Proceeds from the sales of mutual funds were $2,816,000 during 1998 and $2,697,000 in 1997. Gains on sales of mutual funds were approximately $4,000 in 1998 and $9,000 in 1997. No mutual funds were sold in 1996. 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 29% of the Company's loans at December 31, 1998, have been generated through the Company's SBA lending activities. Of these loans, the SBA guarantee extends to approximately 37% of the outstanding balance. $24.4 million 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 80% 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. -77- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At December 31, 1998 and 1997, the loan portfolio consisted of the following (amounts in thousands):
1998 1997 ---------- --------- Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216,045 $ 240,599 Real estate--mortgage. . . . . . . . . . . . . . . . . . . . . . . 210,376 203,001 Real estate--construction. . . . . . . . . . . . . . . . . . . . . 68,922 70,193 Individual and other . . . . . . . . . . . . . . . . . . . . . . . 9,578 9,938 Lease receivables. . . . . . . . . . . . . . . . . . . . . . . . . 6,338 16,055 ---------- --------- Total gross loans and leases . . . . . . . . . . . . . . . . . . . 511,259 539,786 Unearned income on leases. . . . . . . . . . . . . . . . . . . . . 991 2,941 Net deferred loan fees . . . . . . . . . . . . . . . . . . . . . . (468) 193 Allowance for possible loan and lease losses . . . . . . . . . . . 8,709 7,891 ---------- --------- Total loans and leases, net of unearned income on leases, net deferred fees and allowance for possible loan and lease losses. $ 502,027 $ 528,761 ---------- --------- ---------- --------- Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . $ 114,247 $ 17,061 ---------- --------- ---------- ---------
Included in commercial loans and loans held for sale are SBA loans totaling $183,768,000 and $167,321,000 at December 31, 1998 and 1997, respectively. The guaranteed portion of SBA loans in process of disbursement totaled $8,796,000 and $8,897,000 at December 31, 1998 and 1997, respectively. When these loans are fully disbursed, they will be available for sale. Loans and portions of loans guaranteed by the federal government were approximately $72 million and $62 million at December 31, 1998 and 1997, respectively. Approximately $40 million and $2.5 million of those loans were included in loans held for sale at December 31, 1998 and 1997, respectively. The following schedule provides a summary of the future minimum lease receivable payments to be received over the next five years (in thousands).
1999 $ 2,609 2000 1,953 2001 1,277 2002 358 2003 141 ------- Total $ 6,338 ------- -------
There are no contingent rentals included in income for each of the three years in the period ended December 31, 1998. Of total gross loans and leases at December 31, 1998, $8.7 million were considered to be impaired. The allowance for possible loan and lease losses included $1.1 million related to these loans. The amount of interest received and recognized on these impaired loans in 1998 was $419,000. The average recorded investment in impaired loans during 1998 was $7.3 million. Of total gross loans and leases at December 31, 1997, $6.9 million were considered to be impaired. The allowance for possible loan and lease losses included $867,000 related to these loans. The amount of -78- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) interest received and recognized on these impaired loans in 1997 was $416,000. The average recorded investment in impaired loans during 1997 was $6.8 million. The changes in the allowance for possible loan and lease losses for the years ended December 31, 1998, 1997, and 1996 were as follows (amounts in thousands):
Year Ended December 31, --------------------------- 1998 1997 1996 ------- ------- ------- Balance, beginning of year . . . . . . . . . . $ 7,891 $ 5,647 $ 5,003 Provision for possible loan and lease losses . 2,370 2,799 1,421 Loans charged off. . . . . . . . . . . . . . . (2,067) (1,714) (1,089) Recoveries . . . . . . . . . . . . . . . . . . 515 295 312 Acquisition. . . . . . . . . . . . . . . . . . 0 864 0 ------- ------- ------- Balance, end of period . . . . . . . . . . . . $ 8,709 $ 7,891 $ 5,647 ------- ------- ------- ------- ------- -------
As of December 31, 1998 and 1997, loans totaling $8,664,000 and $6,949,000, respectively, were on nonaccrual status. Forgone interest on loans that were on nonaccrual status for the years ended December 31, 1998, 1997 and 1996, approximated $501,000, $311,000 and $327,000, respectively. Cash collections of interest on nonaccrual loans for the same periods of $419,000, $416,000, and $320,000, 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 $3,156,000, $1,576,000, and $2,199,000, as of December 31, 1998, 1997 and 1996, respectively. Management believes these loans are adequately secured and interest recorded on these loans will be collected. At December 31, 1998 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or who had restructured loans. Other real estate owned was $1,059,000 and $1,534,000 at December 31, 1998, and 1997, respectively, and is recorded in other assets. At December 31, 1998 and 1997 the balance in the allowance for losses on other real estate owned was zero. During the years ended December 31, 1998 and 1997, there was no significant activity in the allowance for losses on other real estate owned. -79- 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 loans 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 strips receivable 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. During 1998 the valuation allowance was increased by $420,000 which was recorded as a charge to income. The ending balance at December 31, 1998 in the valuation allowance was $420,000. The fair value of the Company's servicing assets at December 31, 1998 based on the current quoted market prices for similar instruments was estimated at $2.0 million. The carrying amount net of valuation allowance, at this same date was also $2.0 million. During 1998, the Company changed its estimates regarding the prepayment speeds of SBA loans it originates and services for investors. The net effect on income before provision for income taxes for 1998 was a decrease of approximately $1 million. A summary of the activity in SBA loans for the years ended December 31, 1998, 1997 and 1996, is as follows (amounts in thousands):
December 31, -------------------------------------- 1998 1997 1996 -------- -------- ------- Excess servicing retained on January 1,. . . . . . . . . . . $ 0 $ 14,188 $14,813 Reclassification to servicing assets . . . . . . . . . . . . 0 2,180 0 Reclassification to I/O strips (1) . . . . . . . . . . . . . 0 12,758 0 Servicing assets at January 1, . . . . . . . . . . . . . . . 2,021 0 0 I/O strips at January 1, . . . . . . . . . . . . . . . . . . 16,401 0 0 Additions to excess servicing assets at sale . . . . . . . . 0 0 690 Additions to servicing assets at sale. . . . . . . . . . . . 685 114 0 Additions to I/O strips at sale (2). . . . . . . . . . . . . 9,031 5,089 0 Amortization charged against earnings - servicing assets/excess servicing . . . . . . . . . . . . . 261 273 1,315 Amortization charged against earnings - I/O strips . . . . . 2,779 1,446 0 Balance of excess servicing retained at December 31. . . . . 0 0 14,188 Balance of servicing assets at December 31 . . . . . . . . . 2,445 2,021 0 Balance of I/O strips at December 31 . . . . . . . . . . . . 22,653 16,401 0 Unrealized (loss)/gain on I/O strips at December 31. . . . . (528) 675 0 Servicing assets valuation allowance at December 31. . . . . (420) 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 during 1997. -80- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -81- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Included in the fair value of I/O strips at December 31, 1998 and 1997, respectively is $464 thousand and $512 thousand related to B&I loans of which $11 thousand and $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 $32.3 million, $9.6 million and $6.9 million for the years ended December 31, 1998, 1997 and 1996, respectively. In 1998 the Company completed a securitization of $85 million in SBA 504 and similar loans and recorded a gain of $890 thousand on this transaction. Related to this transaction the Company recorded a recourse obligation of $2.8 million, representing the present value of projected future losses, and interest-only strips receivable totaling $8.8 million. 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 interest-only strips receivable was recorded. A recourse obligation of $3,272 thousand was recorded at securitization of which $250 thousand in 1997 and $455 thousand in 1998 was subsequently credited to expense related to the paydown of loans included in the securitization. For the years ended December 31, 1998, 1997 and 1996, $96.3 million, $78.1 million and $7.3 million of unguaranteed portions of SBA and similar loans, respectively, were originated for sale. 5. BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT: Bank premises, leasehold improvements and equipment at December 31, 1998 and 1997, consisted of the following (amounts in thousands):
December 31, 1998 ------------------------------------------ Accumulated Depreciation/ Net Cost Amortization Book Value -------- -------------- ---------- Land . . . . . . . . . . . . . . . . . . $ 1,475 $ 0 $ 1,475 Buildings. . . . . . . . . . . . . . . . 8,848 1,682 7,166 Leasehold improvements . . . . . . . . . 3,865 2,246 1,619 Furniture and equipment. . . . . . . . . 11,283 8,061 3,222 -------- -------------- ---------- Total. . . . . . . . . . . . . . . . . . $ 25,471 $ 11,989 $ 13,482 -------- -------------- ---------- -------- -------------- ----------
-82- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997 ------------------------------------------ Accumulated Depreciation/ Net Cost Amortization Book Value -------- -------------- ---------- Land . . . . . . . . . . . . . . . . . . $ 1,080 $ 0 $ 1,080 Buildings. . . . . . . . . . . . . . . . 8,749 1,361 7,388 Leasehold improvements . . . . . . . . . 3,604 1,982 1,622 Furniture and equipment. . . . . . . . . 9,822 7,083 2,739 -------- -------------- ---------- Total. . . . . . . . . . . . . . . . . . $ 23,255 $ 10,426 $ 12,829 -------- -------------- ---------- -------- -------------- ----------
Depreciation and amortization amounts included in net occupancy and equipment expenses were $1,951,000, $1,816,000 and $1,576,000, for the years ended December 31, 1998, 1997 and 1996, respectively. 6. DEPOSITS: The aggregate amount of certificates of deposit with balances of $100,000 or more, was $159,905,000 and $107,141,000 at December 31, 1998 and 1997, respectively. Maturities of certificates of deposit at December 31, 1998 were as follows (amounts in thousands):
Year ---- 1999 . . . . . . . . . . . . . 283,291 2000 . . . . . . . . . . . . . 20,762 2001 . . . . . . . . . . . . . 3,517 2002 . . . . . . . . . . . . . 4,227 2003 . . . . . . . . . . . . . 2,315 Thereafter . . . . . . . . . . 95 --------- $ 314,207 --------- ---------
7. CONVERTIBLE DEBENTURES: Convertible subordinated debentures, which totaled $2,468 thousand at December 31, 1997, were originally issued by Continental Pacific Bank during 1993. These debentures were variable rate with a minimum rate of 8%. Balances outstanding at December 31, 1997, and during 1998 carried an interest rate of 8%. During 1998, the Company called these debentures for redemption effective August 31, 1998, if not converted by August 31, 1998. A total of $2,424 thousand of debentures were converted to Company common stock at the conversion rate of $15.39 per share. The balance of $44 thousand were redeemed at 100% of the principal value. 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 -83- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) the full amount due under the agreement would become payable in the case of a change of control of the Company. The Company recognized $95,000, $114,000 and $105,000 as compensation expense in 1998, 1997 and 1996, 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. CCBC had a Salary Continuation Plan covering certain of its senior officers. Upon the acquisition of CCBC by the Company an acceleration of benefits under this plan was activated resulting in a 1998 charge to compensation expense, including normal accruals, of $2,054,000. Charges accrued under this plan were $55,000 in 1997 and $41,000 in 1996. Amounts due by the Company under the plan have been transferred to a third party trust. 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 $1,895,000, $1,728,000 and $1,642,000, for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, future minimum rentals to be received under noncancellable subleases were approximately $303,000. At December 31, 1998, 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 $ 1,954 1999 . . . . . . . . . . . . . . . . . . 42 1,774 2000 . . . . . . . . . . . . . . . . . . 42 1,416 2001 . . . . . . . . . . . . . . . . . . 42 1,389 2002 . . . . . . . . . . . . . . . . . . 42 999 Thereafter . . . . . . . . . . . . . . . 342 2,833 -------- --------- Total minimum lease payments . . . . . . 552 $10,365 --------- --------- Less amount representing interest. . . . (263) -------- Present value of net minimum lease payments . . . . . . . . . . . . $ 289 -------- --------
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, 1998 and 1997, the Company had outstanding $222,066,000 and $169,235,000, respectively, in commitments to extend credit and $4,337,000 and $5,312,000, respectively, in standby letters of credit. At December 31, 1998, 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 $62,188,000 of the commitments at December 31, 1998, relate to SBA loans which may require a construction phase, generally lasting less than 12 months. The remainder relate primarily to -84- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 the purchaser. A formal settlement agreement has been executed by the parties and is awaiting final court approval by the Eastern California District of the U. S. District Court where an action was filed in the summer of 1995. Under the terms of the formal settlement, the Bank will pay a small sum to a common fund for remediation of the property and the Bank further agrees to refinance on behalf of the existing owner of the property two senior liens and to consolidate certain other debt securing the property into a new deed of trust contingent upon remediation of the contamination by a licensed contractor and approval by the appropriate governmental agencies. 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 effect 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, 1998 and 1997 was $0 and $11,102,000, respectively. As compensation for check-clearing services, additional compensating balances of $3,438,000 and $3,175,000 at December 31, 1998 and 1997, respectively, were required to be maintained with the Federal Reserve Bank. In addition, at December 31, 1998 and 1997, the Company had restricted access to approximately $3.7 million and $2.2 million of on balance sheet cash balances which are required to be maintained pursuant to its securitizations. 10. NOTES PAYABLE: Included in other liabilities at December 31, 1998 and 1997 are amounts borrowed from the FHLB. Borrowings require monthly interest payments with the principal payable at maturity. Amounts consist of the following:
Borrowing from the FHLB, matures March 26, 2001, interest at 6.44% $ 750,000 Borrowing from the FHLB, matures April 23, 2003, interest at 6.92% 1,900,000 -------------
-85- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total $ 2,650,000 ------------- -------------
-86- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) INCOME TAXES: The current and deferred amounts of the tax provision for the years ended December 31, 1998, 1997 and 1996 are as follows (amounts in thousands):
December 31, ------------------------------------- 1998 1997 1996 -------- -------- ------- Federal Currently payable. . . . . . . $ 6,668 $ 4,631 $ 1,921 Deferred . . . . . . . . . . . (2,218) (255) 332 State Currently payable. . . . . . . 1,588 1,308 633 Deferred . . . . . . . . . . . (271) (11) 109 -------- -------- ------- $ 5,767 $ 5,673 $ 2,995 -------- -------- ------- -------- -------- ------- Total Currently payable. . . . . . . $ 8,256 $ 5,939 $ 2,554 Deferred . . . . . . . . . . . (2,489) (266) 441 -------- -------- ------- $ 5,767 $ 5,673 $ 2,995 -------- -------- ------- -------- -------- -------
-87- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Deferred income taxes reflect the net tax effects of temporary differences 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, 1998 and 1997 are as follows (amounts in thousands):
December 31, ---------------------- Deferred Tax Assets: 1998 1997 ------- ------- Book loan loss allowance in excess of tax loan loss allowance $ 3,401 $ 2,862 State taxes paid or accrued 378 396 Accrued personal leave 298 232 Deferred compensation 1,391 418 Accrued expenses 586 502 Other 571 454 ------- ------- 6,625 4,864 ------- ------- Deferred Tax Liabilities: Unamortized book gain in excess of unamortized tax gain on sale of SBA loans $ 888 $ 2,217 Deferred loan costs 1,468 1,104 Loans and securities marked to market 590 748 Unrealized gain on investment securities and I/O strips receivable 39 444 Other 716 321 ------- ------- 3,701 4,834 ------- ------- Net deferred tax asset $ 2,924 $ 30 ------- ------- ------- -------
The total tax provision differs from the statutory federal income tax rates for the reasons shown in the following table:
December 31, ------------------------------ 1998 1997 1996 ----- ---- ----- Tax at statutory federal rate. . . . . . . . . . . 35.0% 35.0% 35.0% State taxes, net of federal benefit. . . . . . . . 4.8 5.4 5.0 Income exempt from federal taxation. . . . . . . . (2.1) (1.0) (1.6) Increase in cash surrender value of life insurance policies . . . . . . . . . . . (0.4) (0.3) (0.5) Nondeductible merger expenses. . . . . . . . . . . 2.8 0.9 0 Other, net . . . . . . . . . . . . . . . . . . . . 2.8 (1.2) 0.1 ----- ----- ----- Effective tax rate . . . . . . . . . . . . . . . . 42.9% 38.8% 38.0% ----- ----- ----- ----- ----- -----
-88- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. 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. On February 25, 1999, the Company amended the Plan to exclude BancWest Corporation from the provisions of the Plan. See Note 20. 13. OTHER EXPENSE: Other expense for the years ended December 31, 1998, 1997 and 1996 include the following (amounts in thousands):
Year Ended December 31, --------------------------------------- 1998 1997 1996 --------- -------- -------- Advertising. . . . . . . . . . . . $ 1,062 $ 774 $ 721 Audit and accounting fees. . . . . 415 370 229 Consulting . . . . . . . . . . . . 1,243 1,113 671 Directors' fees and expenses . . . 462 597 506 Insurance(1) . . . . . . . . . . . 376 336 335 Legal fees . . . . . . . . . . . . 479 334 666 Postage. . . . . . . . . . . . . . 573 476 438 Real estate expenses . . . . . . . 305 377 300 Stationery and supplies. . . . . . 669 619 639 Telephone. . . . . . . . . . . . . 589 539 461 Sundry losses. . . . . . . . . . . 733 580 839 Other. . . . . . . . . . . . . . . 4,070 2,957 2,393 --------- -------- -------- $ 10,976 $ 9,072 $ 8,198 --------- -------- -------- --------- -------- --------
- --------------- (1) Excludes medical insurance and workers' compensation premiums which are included in salaries and related benefits. 14. EARNINGS PER SHARE: During the fourth quarter of 1998, 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. -89- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -90- 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:
1998 1997 1996 ------- ------- ------- (in thousands, except per share data) CALCULATION OF BASIC EARNINGS PER SHARE Numerator - net income $7,678 $8,948 $4,887 Denominator - weighted average common shares outstanding 5,151 4,566 3,622 ------- ------- ------- Basic Earnings Per Share $ 1.49 $ 1.96 $ 1.35 ------- ------- ------- ------- ------- ------- CALCULATION OF DILUTED EARNINGS PER SHARE Numerator: Net Income $7,678 $8,948 $4,887 Effect of convertible debentures 29 164 626 ------- ------- ------- Net Income and assumed conversions $7,707 $9,112 $5,513 Denominator: Weighted average common shares outstanding 5,151 4,566 3,622 Dilutive effect of options 233 266 165 Dilutive effect of convertible debentures 90 448 1,227 ------- ------- ------- 5,474 5,280 5,014 ------- ------- ------- Diluted Earnings Per Share $ 1.41 $ 1.73 $ 1.10 ------- ------- ------- ------- ------- -------
15. 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 subsidiary 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. CCBC had two stock option plans. No options are currently issuable under these plans and the Company is currently in the process of terminating the plans. Outstanding options were adjusted for the exchange ratio as defined in the merger agreement. The following tables include activity in the CCBC plans as adjusted for the exchange ratio. -91- 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, 1996. . . . . . . . . . . . . . 502,306 $ 9.06 Granted . . . . . . . . . . . . . . . . . . . . . . . 82,063 13.80 Terminated. . . . . . . . . . . . . . . . . . . . . . (27,021) 7.61 Exercised . . . . . . . . . . . . . . . . . . . . . . (33,990) 6.65 -------- Outstanding, December 31, 1996 (325,650 exercisable at a weighted average price of $10.29) . . . . . . . . 523,358 10.05 Granted . . . . . . . . . . . . . . . . . . . . . . . 68,277 18.71 Terminated. . . . . . . . . . . . . . . . . . . . . . (16,578) 10.86 Exercised . . . . . . . . . . . . . . . . . . . . . . (132,947) 8.14 -------- Outstanding, December 31, 1997 (271,419 exercisable at a weighted average price of $11.09) . . . . . . . . 442,110 11.92 Granted . . . . . . . . . . . . . . . . . . . . . . . 33,190 28.13 Terminated. . . . . . . . . . . . . . . . . . . . . . (8,748) 7.67 Exercised . . . . . . . . . . . . . . . . . . . . . . (128,829) 9.25 -------- Outstanding, December 31, 1998. . . . . . . . . . . . . 337,723 14.41 -------- --------
Additional information regarding options outstanding as of December 31, 1998 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 --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 8.81 - 9.29 74,220 5.2 $ 9.20 67,920 $ 9.23 10.71 - 11.47 68,139 1.7 10.75 42,519 10.75 12.50 - 14.76 102,874 6.0 13.37 87,124 13.30 16.19 - 19.77 57,540 8.0 17.54 12,197 17.39 22.86 - 36.50 34,950 9.3 30.55 1,990 24.65 ------- ------- 337,723 211,750 ------- ------- ------- -------
At December 31, 1998, 304,200 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 -92- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) during 1998, 1997 and 1996 is estimated as $343,000, $397,000 and $352,000 on the date of grant using a binomial options pricing model with the following assumptions: For grants made in 1998: expected life, seven and one-half years; average risk free interest rate 5.38% and stock volatility 34%. For employee grants made in 1997: expected life, seven and one-half years; average risk free interest rate 6.19% and stock volatility 25%. 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: expected life, four years; risk free interest rates, 5.76%. For all grants made in 1996, stock volatility was assumed to be 30%. Dividends were assumed to be payable at 1.3% during 1998 and 2.5% during 1997 and 1996. The weighted average per share fair value of the 1998, 1997 and 1996 awards was $14.97, $6.15 and $4.69, 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.
1998 1997 1996 ------- ------- ------- (in thousands) Net income As reported. . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 Pro forma-basic. . . . . . . . . . 7,542 8,866 4,692 Pro forma-diluted. . . . . . . . . 7,572 9,030 5,318 Basic earnings per share As reported. . . . . . . . . . . . $ 1.49 $ 1.96 $ 1.35 Pro forma. . . . . . . . . . . . . 1.47 1.95 1.30 Diluted earnings per share As reported. . . . . . . . . . . . $ 1.41 $ 1.73 $ 1.10 Pro forma. . . . . . . . . . . . . 1.39 1.71 1.06
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. 16. 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 $448,000, $317,000, and $238,000 were made to the KSOP in 1998, 1997 and 1996, respectively. The CCBC profit sharing plan is currently in the process of being terminated. CCBC had a profit sharing plan for its employees under which annual contributions were made at the discretion of its Board of Directors. Contributions of approximately $185,000, $143,000 and $132,000 were made to this plan in 1998, 1997 and 1996, respectively. 17. CAPITAL REQUIREMENTS AND REGULATORY RESTRICTIONS: -93- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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, 1998, in accordance with statutory restrictions, $15.4 million of Bancorp's retained earnings were restricted as to the payment of dividends; however, banking regulations also require that each bank maintain certain capital ratios. These requirements may further act to limit the payment of dividends. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and, possibly, additional discretionary - actions by regulators that, if undertaken, could have a material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and the Bank's prompt corrective action classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, 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, 1998 and 1997 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. -94- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company's and the Bank's actual capital amounts (in thousands) and ratios are also presented, respectively, in the following tables.
To Be Well Capitalized Under Prompt For Capital Corrective Actual Adequacy Purposes Action Provisions ---------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- ---------- ------- ---------- ------- As of December 31, 1998: Total Capital (to Risk Weighted Assets): Consolidated $ 84,684 12.4% $ 54,632 8.0% N/A N/A SierraWest Bank 76,277 11.1% 54,802 8.0% 68,502 10.0% Tier I Capital (to Risk Weighted Assets): Consolidated 76,146 11.2% 27,316 4.0% N/A N/A SierraWest Bank 67,712 9.9% 27,401 4.0% 41,101 6.0% Tier I Capital (to Average Assets): Consolidated 76,146 8.8% 34,801 4.0% N/A N/A SierraWest Bank 67,712 7.8% 34,784 4.0% 43,480 5.0% As of December 31, 1997: Total Capital (to Risk Weighted Assets): Consolidated $ 75,826 12.7% $ 47,855 8.0% N/A N/A SierraWest Bank 72,087 12.0% 47,942 8.0% 59,928 10.0% Tier I Capital (to Risk Weighted Assets): Consolidated 66,377 11.1% 23,928 4.0% N/A N/A SierraWest Bank 61,419 10.2% 23,971 4.0% 35,957 6.0% Tier I Capital (to Average Assets): Consolidated 66,377 8.6% 30,802 4.0% N/A N/A SierraWest Bank 61,419 8.0% 30,785 4.0% 38,482 5.0%
18. 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. Summary of the activity for the years ended December 31, 1998 and 1997 is as follows (renewals are not reflected as either new loans or repayments):
1998 1997 ------------- ------------- Balance at beginning of year $ 4,413,441 $ 3,493,092 Borrowings 1,014,729 1,331,000 Principal repayments (1,097,722) (410,651) Other Changes* (2,877,505) 0 ------------- ------------- Balance at end of year $ 1,452,943 $ 4,413,441 ------------- ------------- ------------- -------------
*Represents loans to former directors and executive officers who are no longer related parties. -95- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. 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, 1998 and 1997. 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, 1998 and 1997, 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 for securitization 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 or by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the 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, 1998 and 1997. 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. -96- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTES PAYABLE. The fair value of notes payable is estimated by discounting the contractual cash flows using the current interest rate at which similar borrowings for the same remaining maturities could be made. -97- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) CONVERTIBLE DEBENTURES. Fair value is based on quoted market prices at December 31, 1997. 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, 1998 and 1997, 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, 1998 and 1997 is estimated to be $409 thousand and $334 thousand, respectively. DERIVATIVE FINANCIAL INSTRUMENTS. Based on quoted market prices at December 31, 1998 and December 31, 1997, the interest rate swaps had a negative fair value of $167 thousand and $286 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, 1998 and 1997. 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, 1998 or 1997. The estimated fair values of the Company's financial instruments are as follows (in thousands):
December 31, 1998 ------------------------- Carrying Fair Amount Value ---------- ---------- Financial Assets: Cash and cash equivalents. . . . . . . . . $ 67,881 $ 67,881 Investment securities. . . . . . . . . . . 133,982 133,982 Loans receivable . . . . . . . . . . . . . 616,274 637,929 I/O strips receivable. . . . . . . . . . . 22,125 22,125 Servicing asset. . . . . . . . . . . . . . 2,025 2,025 Cash surrender value of life insurance . . 2,461 2,461 ---------- ---------- $ 844,748 $ 866,403 ---------- ---------- ---------- ---------- Financial Liabilities: Deposits . . . . . . . . . . . . . . . . . 782,552 784,286 Notes payable. . . . . . . . . . . . . . . 2,650 2,796 ---------- ---------- $ 785,202 $ 787,082 ---------- ---------- ---------- ----------
-98- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997 ------------------------ Carrying Fair Amount Value --------- --------- Financial Assets: Cash and cash equivalents. . . . . . . . . $ 80,620 $ 80,620 Mutual funds . . . . . . . . . . . . . . . 733 733 Investment securities. . . . . . . . . . . 107,576 107,576 Loans receivable . . . . . . . . . . . . . 545,822 555,620 I/O strips receivable. . . . . . . . . . . 17,076 17,076 Servicing asset. . . . . . . . . . . . . . 2,021 2,021 Cash surrender value of life insurance . . 2,437 2,437 --------- --------- $ 756,285 $ 766,083 --------- --------- --------- --------- Financial Liabilities: Deposits . . . . . . . . . . . . . . . . . $ 701,001 $ 701,647 Notes payable. . . . . . . . . . . . . . . 2,650 2,533 Convertible debentures . . . . . . . . . . 2,468 2,468 --------- --------- $ 706,119 $ 706,648 --------- --------- --------- ---------
20. MERGERS AND ACQUISITION: On February 25, 1999, the Company entered into an Agreement and Plan of Merger ("Plan") with BancWest Corporation ("BancWest"). Under the terms of the Plan, BancWest will acquire all the outstanding common stock of the Company in exchange for 0.82 shares of BancWest common stock. The merger, which is expected to close in the second or third quarter of 1999, is subject to the approval of the Company's shareholders, various regulatory agencies and certain other conditions. On April 15, 1998, the Company completed the acquisition of California Community Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental Pacific Bank (CPB), under the pooling-of-interests method of accounting and accordingly, the Company's historical consolidated results have been restated. Under the terms of the Plan of Acquisition and Merger dated November 13, 1997, shareholders of CCBC received 928 thousand shares of Bancorp's common stock at an exchange ratio of 0.8283 which was based upon a price of $37.94 which was the average closing price for Bancorp's stock from March 11, 1998 to April 7, 1998. The value of the acquisition, based upon an average price of $37.94 per share totaled approximately $44.7 million. -99- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following presents a combined summary of operations of the Company and CCBC for the quarter ended March 31, 1998 and the years ended December 31, 1997 and 1996, and it is presented as if the merger had been effective on January 1, 1996.
SWB CCBC COMBINED ---------- ---------- ---------- (in thousands, except per share data) Three months ended March 31, 1998 (unaudited) Net interest income. . . . . . . . . . . . . . $ 7,703 $ 2,090 $ 9,793 Net income . . . . . . . . . . . . . . . . . . 1,755 264 2,019 Basic Earnings Per Share . . . . . . . . . . . 0.43 0.24 0.40 Diluted Earnings Per Share . . . . . . . . . . 0.40 0.21 0.37 Year ended December 31, 1997 Net interest income. . . . . . . . . . . . . . $ 27,211 $ 8,133 $ 35,344 Net income . . . . . . . . . . . . . . . . . . 7,509 1,439 8,948 Basic Earnings Per Share . . . . . . . . . . . 2.03 1.36 1.96 Diluted Earnings Per Share . . . . . . . . . . 1.82 1.15 1.73 Year ended December 31, 1996 Net interest income. . . . . . . . . . . . . . $ 20,774 $ 7,637 $ 28,411 Net income . . . . . . . . . . . . . . . . . . 3,328 1,559 4,887 Basic Earnings Per Share . . . . . . . . . . . 1.18 1.59 1.35 Diluted Earnings Per Share . . . . . . . . . . 0.96 1.32 1.10 At December 31, 1997 Total Assets . . . . . . . . . . . . . . . . $ 589,755 $ 196,991 $ 786,746 Total Deposits . . . . . . . . . . . . . . . 526,269 174,732 701,001 Total Shareholder's Equity . . . . . . . . . 53,630 15,753 69,383
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. -100- 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, 1997 and 1996 and it is presented as if the merger had been effective on January 1, 1997 and January 1, 1996. 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. . . . . . . . . . . . . . . . . . . . . . . $ 60,365 $ 50,248 Interest Expense . . . . . . . . . . . . . . . . . . . . . . 23,945 19,649 ---------- ---------- Net interest income. . . . . . . . . . . . . . . . . . . . . 36,420 30,599 Provision for loan losses. . . . . . . . . . . . . . . . . . 2,940 1,849 ---------- ---------- Net interest income after provision for loan losses. . . . . 33,480 28,750 Other operating income . . . . . . . . . . . . . . . . . . . 13,880 9,794 Other operating expense. . . . . . . . . . . . . . . . . . . 32,923 30,355 ---------- ---------- Income before income taxes . . . . . . . . . . . . . . . . . 14,437 8,189 Provision for income taxes . . . . . . . . . . . . . . . . . 5,600 3,153 ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,837 $ 5,036 ---------- ---------- ---------- ---------- Basic Earnings Per Share . . . . . . . . . . . . . . . . . . $ 1.90 $ 1.33 Weighted average common shares used to calculate basic earnings per share. . . . . . . . . . . 4,652 3,793 Net income adjusted for effect of convertible debentures . . $ 9,001 $ 5,662 Diluted Earnings Per Share . . . . . . . . . . . . . . . . . $ 1.68 $ 1.09 Weighted average common shares adjusted for dilutive effect of options and convertible debentures . . . . . . . 5,365 5,185
-101- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 21. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS: SIERRAWEST BANCORP STATEMENTS OF FINANCIAL CONDITION December 31, (in thousands except for share amounts)
1998 1997* --------- --------- ASSETS Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 8,439 $ 3,571 Investment in subsidiary . . . . . . . . . . . . . . . . . . 69,858 64,588 Due from subsidiary. . . . . . . . . . . . . . . . . . . . . 0 73 Note receivable from subsidiary. . . . . . . . . . . . . . . 0 3,669 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 433 598 --------- --------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $ 78,730 $ 72,499 --------- --------- --------- --------- LIABILITIES Accrued expenses . . . . . . . . . . . . . . . . . . . . . . $ 283 $ 481 Due to subsidiary. . . . . . . . . . . . . . . . . . . . . . 31 8 Convertible debentures . . . . . . . . . . . . . . . . . . . 0 2,468 Deferred Income. . . . . . . . . . . . . . . . . . . . . . . 146 159 --------- --------- Total Liabilities. . . . . . . . . . . . . . . . . . . . . 460 3,116 --------- --------- 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; 5,301,756 and 5,019,254 shares issued and outstanding. . . 45,983 42,148 Retained earnings. . . . . . . . . . . . . . . . . . . . . . 32,230 26,598 Accumulated other comprehensive income, net of tax of $40 and $445. . . . . . . . . . . . . . . . . 57 637 --------- --------- Total Shareholders' Equity . . . . . . . . . . . . . . . . 78,270 69,383 --------- --------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY . . . . . . . . . $ 78,730 $ 72,499 --------- --------- --------- ---------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. -102- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SIERRAWEST BANCORP STATEMENTS OF INCOME AND COMPRENSIVE INCOME For the Years Ended December 31, (in thousands):
1998 1997* 1996* ------- ------- ------- INCOME Service fees . . . . . . . . . . . . . . . . $ 0 $ 0 $1,185 Dividends from subsidiary. . . . . . . . . . 2,014 2,904 1,710 Interest income. . . . . . . . . . . . . . . 350 424 417 Other income . . . . . . . . . . . . . . . . 0 194 283 ------- ------ ------- Total Income. . . . . . . . . . . . . . . 2,364 3,522 3,595 ------- ------ ------- EXPENSE Salaries and related benefits. . . . . . . . 11 (17) 1,553 Interest expense . . . . . . . . . . . . . . 87 298 982 Other expense. . . . . . . . . . . . . . . . 489 756 1,597 ------- ------ ------- Total Expense . . . . . . . . . . . . . . 587 1,037 4,132 ------- ------ ------- Gain (Loss) Before Income Tax Benefit and Equity in Undistributed Income of Subsidiary. . . . . . . . . . . . . . . 1,777 2,485 (537) Applicable income tax benefit. . . . . . . . 51 38 892 ------- ------ ------- Income Before Equity in Undistributed Income of Subsidiary . . . . . . . . . . . 1,828 2,523 355 Equity in Undistributed Income of Subsidiary . . . . . . . . . . . . . . . . 5,850 6,425 4,532 ------- ------ ------- NET INCOME . . . . . . . . . . . . . . . . . $7,678 $8,948 $4,887 ------- ------ ------- Other Comprehensive Income, net of tax . . . $ (580) $ 942 $ (233) ------- ------ ------- TOTAL COMPREHENSIVE INCOME . . . . . . . . . $7,098 $9,890 $4,654 ------- ------ ------- ------- ------ -------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. -103- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SIERRAWEST BANCORP STATEMENTS OF CASH FLOWS For the Years Ended December 31, (in thousands):
1998 1997* 1996* -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization expense. . . . . . . . 21 150 280 Effect of changes in: Due from subsidiary. . . . . . . . . . . . . . . . 72 22 (95) Due to subsidiary. . . . . . . . . . . . . . . . . 23 (43) 51 Other assets . . . . . . . . . . . . . . . . . . . 11 103 (205) Accrued expenses . . . . . . . . . . . . . . . . . (63) (556) (175) Taxes payable. . . . . . . . . . . . . . . . . . . 302 213 206 Dividend from subsidiary . . . . . . . . . . . . . . (2,014) (2,904) (1,710) Equity in undistributed income of subsidiaries. . . . . . . . . . . . . . . . . . . . (5,850) (6,425) (4,532) -------- -------- -------- Total Adjustments. . . . . . . . . . . . . . . . . . (7,498) (9,440) (6,180) -------- -------- -------- Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . 180 (492) (1,293) Cash flows from investing activities: Capital expenditures. . . . . . . . . . . . . . . . 0 (72) (1,131) Proceeds from sale of building. . . . . . . . . . . 0 1,523 0 Dividend received . . . . . . . . . . . . . . . . . 2,014 2,904 1,710 Acquisition . . . . . . . . . . . . . . . . . . . . 0 (3,301) 0 -------- -------- -------- Net cash provided by investing activities. . . . . . 2,014 1,054 579 -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock. . . . . . . 1,110 1,081 212 Dividend paid . . . . . . . . . . . . . . . . . . . (2,045) (1,810) (1,247) Cash paid - fractional shares . . . . . . . . . . . (16) (11) 0 Change in note receivable from subsidiary . . . . . 3,669 0 (3,669) Convertible debentures. . . . . . . . . . . . . . . (44) 0 4,025 Other . . . . . . . . . . . . . . . . . . . . . . . 0 0 (24) -------- -------- -------- Net cash provided by (used in) financing activities. 2,674 (740) (703) -------- -------- -------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . 4,868 (178) (1,417) Cash and cash equivalents beginning of year. . . . . 3,571 3,749 5,166 -------- -------- -------- Cash and cash equivalents end of year. . . . . . . . $ 8,439 $ 3,571 $ 3,749 -------- -------- -------- -------- -------- --------
* Restated on a historical basis to reflect the acquisition of California Community Bancshares Corporation on April 15, 1998, under the pooling-of-interests method of accounting. -104- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -105- SIERRAWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUPPLEMENTAL DISCLOSURES
1998 1997 1996 ---- ---- ---- (in thousands) Interest Payments 136 625 960
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. -106- 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
YEAR FIRST APPOINTED POSITION AND PRINCIPAL OCCUPATION NAME AGE DIRECTOR DURING THE PAST FIVE YEARS - ----------------- --- ---------- ------------------------------------------------------------------------- CURRENT DIRECTORS David W. Clark 61 1990 Chairman/CEO of Clark and Sullivan Constructors, Inc. since January 1977. Ralph J. Coppola 64 1996 Self-employed physician and auto dealer. William T. Fike 51 1992 President/CEO and Director of the Bancorp since July 1992. President/CEO of SierraWest Bank since October 1996. Executive Vice President and Chief Operating Officer of the Bancorp from May 1991 to July 1992. Richard S. Gaston 65 1995 Chairman and Director of Gaston & Wilkerson Management Group, real estate investments and management. Jerrold T. Henley 61 1986 Chairman of the Bancorp since July 1992. President/CEO of the Bancorp from its inception to June 1992. John J. Johnson 65 1996 Retired. Owner, Johnson's Sporting World, Reno, Nevada until April 1992. Ronald A. Johnson 58 1996 Self-employed CPA and financial consultant. A. Morgan Jones 67 1986 Attorney. President and director of Truckee River Associates, (commercial real estate management, development and sales). Jack V. Leonesio 55 1986 Owner of a restaurant/bar in Truckee, California since 1973 and co-owner of a bar in Reno, Nevada since April 1994. William W. McClintock 53 1986 Self-employed CPA and financial consultant.
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YEAR FIRST APPOINTED POSITION AND PRINCIPAL OCCUPATION NAME AGE DIRECTOR DURING THE PAST FIVE YEARS - ----------------- --- ---------- ------------------------------------------------------------------------- CURRENT DIRECTORS Bernard E. Moore 69 1998 President of Bernard Moore, Inc., d.b.a. Moore Tractor, Inc., which sells farm and industrial equipment. Between 1983 and April 1998, Director of Continental Pacific Bank. Continental Pacific Bank's Chairman of the Board from 1986 until it merged with SierraWest Bank in April 1998. Between 1995 and April 1998, Chairman of the Board of Directors of California Community Bancshares Corporation, Continental Pacific Bank's holding company. Gary E. Stein 53 1998 Physician in Vacaville, California, formerly with UC Davis Medical Group, now retired. Director of California Community Bancshares Corporation since its inception in 1995 and a Director of Continental Pacific Bank since 1983 until its merger with SierraWest Bank in April 1998. Thomas M. Watson 55 1986 Managing Officer, Truckee River Associates, (commercial real estate management, development and sales). EXECUTIVE OFFICERS William T. Fike 51 President/CEO and Director of the Bancorp since July 1992. President/CEO of SierraWest Bank since October, 1996. Executive Vice President and Chief Operating Officer of the Bancorp, from May 1991 to July 1992. David C. Broadley 55 Executive Vice President and Chief Financial Officer of the Bancorp since February 1994. Executive Vice President and Chief Financial Officer of SierraWest Bank since February 1995. Senior Vice President and Chief Financial Officer of the Bancorp, from 1985 to 1994. Patrick S. Day 49 Executive Vice President and Chief Credit Officer of the Bancorp and SierraWest Bank since July 1995. Executive Vice President and Chief Operating Officer of Business & Professional Bank from January through June 1995. Principal of PSD Associates, a bank consulting company, from 1993 to 1995. Executive Vice President and Chief Credit Officer of Bank of San Francisco from 1991 to 1993.
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POSITION AND PRINCIPAL OCCUPATION NAME AGE DURING THE PAST FIVE YEARS - ----------------- --- ------------------------------------------------------------------------- Robert C. Silver 56 Senior Vice President, manager of Administration Division for SierraWest Bank since November, 1995. Senior Vice President and Director of Human Resources for SierraWest Bank from July, 1991 through October, 1995. Richard L. Belstock 42 Senior Vice President, Controller and Chief Accounting Officer for the Bancorp since August 1997. Senior Vice President and Controller of the Bancorp from July 1994 through September 1996. Senior Vice President and Controller of SierraWest Bank since June, 1994. Vice President and Assistant Controller for the Bancorp from August,1990 through June, 1994. Mary Jane Posnien 55 Senior Vice President, Manager of Operations Division for SierraWest Bank since March 1998. Senior Vice President of Operations Division for SierraWest Bank from November 1995 to August 1997. Senior Vice President of Operations for Sierra Bank of Nevada from March 1995 to November 1995. Vice President of Operations for Sierra Bank of Nevada from December 1993 to March 1995. Manager of Gotcha Covered, a carpet/window covering store from 1991 through 1993.
Except as described above, none of the directors or nominees were selected pursuant to any arrangement or understanding other than with the directors of the Bancorp acting within their capacities as such. There are no family relationships between any of the directors and executive officers of the Bancorp. COMPENSATION OF DIRECTORS Directors' fees for board and committee meetings are as follows:
BOARD MEETINGS COMMITTEE MEETINGS ------------------------- ------------------------ RETAINER ATTENDANCE RETAINER ATTENDANCE -------- ---------- -------- ---------- Chairman of the Board $3,383/month $0 $0 $0 Director $1,500/month $0 (1) $0 $150/meeting(2) Committee Chairman N/A N/A $100/month $150/meeting(2)
(1) Compensation for attendance at special board meetings is $150 per director per meeting. (2) Fee for attendance at Directors' Loan Committee is $250 per meeting. In addition to the above fees, an educational allowance is determined annually by the Board. The Chairman of the Board allocates funds for educational expenses pursuant to requests submitted by each director until the allowance is exhausted. -109- The Bancorp's Deferred Compensation and Stock Award plan is provided to members of the Board of Directors who are not employees of SWB or of its subsidiary ("Outside Directors"). Under this plan Outside Directors are required to take on a deferred basis one-third of their directors' fees for regular board meetings in the form of promised shares of SWB common stock. The remaining amount of director fees for regular board meetings may also be deferred and paid in SWB common stock at the election of the director. The purpose of this plan is to enable Outside Directors to defer receipt of compensation for their services to later years and to provide part of the compensation for their services in promised shares of SWB common stock in order to better align the interest of Outside Directors with those of the Bancorp's Shareholders. Expenses for the directors and their spouses related to attendance at the Company's annual weekend directors' retreat are paid for by the Company. Directors are eligible for coverage under the Company's group health insurance plan. Premiums for health insurance coverage are shared between the director and the Company on the same basis as that for Company employees. Additionally, the Company pays for premiums covering the first $25,000 of accidental death benefits and the administration of KEOGH plans for directors, if they elect to participate. The Company maintains a salary continuation plan (see "Salary Continuation Plan" on page 113) for its executive officers, certain senior officers and its directors. As of December 31, 1998, the Bancorp's non-employee directors were credited with $201,097 in accrued benefits under the directors' salary continuation plan. The Company allocated $113,075 to the Salary Continuation Plan in 1998 on behalf of its non-employee directors. SECTION 16(a) BENEFICIAL OWNERSHIP AND COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Bancorp's directors, certain officers and persons who own more than ten percent of a registered class of the Bancorp's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Directors, certain officers and greater than ten-percent shareholders ("Reporting Persons") are required by SEC regulation to furnish the Bancorp with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Bancorp believes that from January 1, 1998, to December 31, 1998, all filing requirements applicable to its Reporting Persons were complied with, except that Mr. R. Johnson was late in filing a Form 4 covering one transaction. -110- ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------------------- ---------------------- ------------------- # OF SHARES # OF NAME AND OTHER RESTRICTED SHARES LTIP ALL PRINCIPAL ANNUAL STOCK OPTIONS/ PAY- OTHER POSITION YEAR SALARY BONUS COMP. AWARDS SARS(2) OUTS COMP. - ---------- ---- -------- --------- ------ ---------- -------- ----- ------- William T. Fike 1998 $260,417 $ 225,000 $4,428 0 0 0 $21,709 President/CEO of 1997 $247,760 $ 135,000 $3,394 0 0 0 $21,005 the Bancorp 1996 $230,384(1) $ 0 $4,643 0 52,500 0 $17,351 and the Bank David C. Broadley 1998 $156,917 $ 60,000 $4,721 0 0 0 $23,594 Executive Vice 1997 $140,376 $ 73,870 $3,668 0 0 0 $20,902 President/CFO of 1996 $131,256 $ 0 $ 106 0 0 0 $20,154 the Bancorp and the Bank Patrick S. Day 1998 $134,333 $ 47,726 $5,399 0 0 0 $ 5,376 Executive Vice 1997 $129,167 $ 67,972 $3,395 0 0 0 $ 4,391 President of the 1996 $126,519 $ 0 $3,858 0 0 0 $ 2,245 Company and the Bank Robert C. Silver 1998 $100,347 $ 35,653 $ 138 0 0 0 $ 8,422 Senior Vice 1997 $ 98,078 $ 49,780 $ 0 0 2,750 0 $ 6,333 President of 1996 $ 87,369 $ 0 $ 0 0 0 0 $ 4,423 the Bank Richard L. Belstock 1998 $ 87,362 $ 31,086 $ 0 0 0 0 $ 6,052 Senior Vice 1997 $ 83,202 $ 43,783 $ 0 0 0 0 $ 4,440 President/Controller 1996 $ 81,101 $ 15,000 $ 0 0 0 0 $ 3,114 of the Bancorp and the Bank
Notes: - ------ (1) Includes payment of accrued vacation pay of $30,384. (2) Adjusted for 5% stock dividend paid August 29, 1997. BONUS - Bonuses are generally paid in the year after they are earned. For purposes of this table, bonuses have been reflected in the year earned, not the year paid. OTHER ANNUAL COMPENSATION - Includes value of personal use of Company provided automobiles and reimbursements for the personal portion of club dues and spousal travel expenses. -111- ALL OTHER COMPENSATION - Includes the following:
COMPANY CONTRIBUTIONS TO 401(k) PLAN FOR: 1998 1997 1996 -------- --------- ---------- Mr. Fike $ 5,000 $ 4,750 $ 4,652 Mr. Broadley $ 5,000 $ 4,145 $ 3,896 Mr. Day $ 3,035 $ 1,938 $ 938 Mr. Silver $ 4,504 $ 2,779 $ 2,566 Mr. Belstock $ 3,934 $ 2,946 $ 2,383 COMPANY CONTRIBUTIONS TO ESOP PLAN FOR: Mr. Fike $ 2,028(1) $ 2,715 $ 1,240 Mr. Broadley $ 2,028(1) $ 2,382 $ 1,085 Mr. Day $ 2,028(1) $ 2,192 $ 1,046 Mr. Silver $ 2,028(1) $ 1,664 $ 722 Mr. Belstock $ 2,028(1) $ 1,412 $ 671 (1) Amount estimated for 1998, pending final plan accounting for the 1998 plan year. ALLOCATIONS TO SALARY CONTINUATION PLAN FOR: Mr. Fike $12,031 $10,890 $ 9,858 Mr. Broadley $14,226 $12,877 $ 13,675 COST OF LIFE INSURANCE PROVIDED BY COMPANY OF WHICH THE BENEFIT EXCEEDED $50,000 FOR: Mr. Fike $ 2,650 $ 2,650 $ 1,601 Mr. Broadley $ 2,340 $ 1,498 $ 1,498 Mr. Day $ 313 $ 261 $ 261 Mr. Silver $ 1,890 $ 1,890 $ 1,135 Mr. Belstock $ 90 $ 82 $ 60
OPTION/SAR GRANTS DURING 1998 FISCAL YEAR No stock options were issued during 1998 to those individuals listed in the summary table. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES FY-END-#SHARES FY END-$ ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE - ------------- ----------- -------------- --------------- -------------------- Mr. Fike 45,987 $ 926,560 47,200 / 6,300 $ 589,530 / 92,712 Mr. Broadley 5,280 $ 127,900 2,835 / 2,520 $ 40,146 / 35,685 Mr. Day 0 $ 0 6,720 / 5,880 $ 103,160 / 91,265 Mr. Silver 2,362 $ 58,488 1,180 / 3,460 $ 9,331 / 19,481 Mr. Belstock 2,257 $ 49,332 1,680 / 3,360 $ 23,290 / 46,580
-112- The value of unexercised In-the-money options and the value realized on exercise of stock options is calculated by subtracting the exercise price from the fair market value at December 31, 1998 or the date of exercises, respectively, of the securities underlying the options. All share amounts have been adjusted for the 5% stock dividend paid August 29, 1997. SALARY CONTINUATION PLAN The Company has entered into agreements with certain directors of the Bancorp and the Bank and certain executive officers of the Bank, to provide for salary continuation benefits upon the retirement or earlier death of the directors and executive officers. The benefits pursuant to this plan are: $50,000 per year for Mr. Fike and $40,000 per year for Mr. Broadley payable for a period of 20 years following retirement at age 65 or earlier death. Benefits for the participating directors are $4,000 per year for 15 years, beginning 15 years after their respective plan commencement dates. In the event of earlier death, the benefits are payable to the officer's or director's designated beneficiary. The Company has secured life insurance policies for the purpose of protecting it from loss in the event of earlier death. In the event of earlier retirement or early termination of office or employment of the officer or director, a reduced benefit is payable. At the option of the officer or director a reduced benefit may be received in a lump sum based on a discounting formula. Accrued benefits for both officers and directors vest 20% per year over a five-year period from the date of association with the Company. Additionally, there are restrictions on the covered individual from engaging in any competing occupation upon retirement and provisions requiring the covered individual to perform advisory services, for compensation, for a period of five (5) years following retirement or early termination of office or employment. During 1996 the agreements of Messrs. Fike and Broadley and certain directors of SWB were modified to provide for an acceleration of benefits such that the full amount due under the agreement would become payable in the case of a change of control of the Company. For the Directors' plan this would be in the form of a lump sum payment based on a discounting formula. The plan for Messrs. Fike and Broadley provided for this payment in the form of 240 equal monthly installments. The agreements were further modified to eliminate the restrictions described above related to engaging in a competing occupation and the performance of advisory services upon a change in control. As of December 31, 1998, executive officers were credited with the following accrued benefits under this Plan: David C. Broadley $ 120,491 William T. Fike 67,772
EMPLOYMENT AGREEMENTS Effective October 1, 1994, the Company entered into an employment agreement with Mr. Fike covering the terms of his employment, compensation, and conditions of termination. Unless employment is terminated or the agreement is extended, Mr. Fike's employment will continue until December 31, 2000. His base salary was set initially at $200,000 per year and he is eligible for bonuses and participation in all employee benefit programs. He will be considered for periodic increases in base salary at the discretion of the Board of Directors. He will continue to participate in the Salary Continuation Plan and be provided with a Company car and a country club membership. In the event of termination without cause, Mr. Fike will receive all amounts owing to him at the date of termination, a lump-sum severance payment equal to eighteen months' base salary, direct payment of the premiums necessary to continue then existing medical coverage for 18 months at the rate equivalent to Company employees and retention of his Company-provided automobile and country club membership. During the month of February 1997 Mr. Fike's base salary was increased to $250,000 per year and during February 1998 Mr. Fike's base salary was increased to $262,500 per year. In January 1999, Mr. Fike's employment agreement was amended to allow for a scale back of payments to be made to Mr. Fike if any payment to be made, or benefit to be provided, pursuant to the agreement would constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as -113- amended. The payments to be made, or benefits to be provided, shall be reduced so that the aggregate present value of all parachute payments does not exceed 299% of Mr. Fike's "annualized includible compensation for the base period" (as such term is defined in Section 280G(d)(1) of the Code). -114- In 1996, Messrs. Broadley, Day, Silver and Belstock entered into Senior Manager Separation Benefits Agreements. Under the terms of these agreements as amended during 1997 and 1998, certain benefits would become payable to the manager in the event of the termination of employment for any reason, other than a material violation of the Company's personnel policies and procedures. Ms. Posnien entered into her agreement in 1998. The benefit includes one year's base salary (as to Messrs. Broadley and Day) or nine months' base salary (as to Mr. Silver and Ms. Posnien) or six months base salary (as to Mr. Belstock) paid as a lump sum or in 24 equal semi-monthly payments (as to Messrs. Broadley and Day) or 18 equal semi-monthly payments (as to Mr. Silver and Ms. Posnien) or twelve equal semi-monthly payments (as to Mr. Belstock) at the election of the executive officer. If the semi-monthly payments are chosen, health benefits continue to be provided on the same terms as during active employment. For Mr. Broadley, in the event of a change in control or reorganization of the Company, the executive officer may, within a nine month period, resign from the Company and receive the same benefits as would be payable upon involuntary termination. Additionally, as to Mr. Broadley, upon termination of service for any reason, except for cause, he is entitled to receive the Company-provided automobile in use by him at the time of his termination. For Messrs. Day and Silver and Ms. Posnien, resignation in response to and reasonably promptly following a material reduction in job duties and responsibilities and/or material reduction in compensation which reduction in job duties, responsibilities and/or compensation occurs within six months following a change in control would result in benefits the same as would be payable upon involuntary termination. PERSONNEL/COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION With the exception of Jerrold Henley and William Fike, no member of the Personnel/Compensation Committee is a former or current officer or employee of the Company. Mr. Henley retired as President and CEO of the Bancorp in June 1992. Mr. Fike succeeded Mr. Henley as President and CEO of the Bancorp. There are no compensation committee interlocks between the Bancorp and other entities involving Company executive officers and Company directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Management of the Company knows of no person who owns, beneficially or of record, either individually or together with associates, five percent (5%) or more of the outstanding shares of the Bancorp's common stock, except as set forth in the table on the following page. This table sets forth, as of March 15, 1999 the number and percentage of shares of Company's outstanding common stock beneficially owned, directly or indirectly, by each of Company's current directors, the Bancorp's CEO, the four next most highly compensated executive officers of the Bancorp whose salary and bonus exceeded $100,000 during 1998 ("named executive officers") and principal shareholders, and by the directors and executive officers of the Bancorp as a group. The shares "beneficially owned" are determined under Securities and Exchange Commission Rules, and do not necessarily indicate ownership for any other purpose. In general, beneficial ownership includes shares over which a director, principal shareholder, or executive officer has sole or shared voting or investment power and shares which such person has the right to acquire within sixty (60) days of March 15, 1999. Management is not aware of any arrangements which may, at a subsequent date, result in a change of control of the Company. -115-
SHARES SHARES OWNED OWNED WITH WITH SOLE VOTING SHARED SHARES AND VOTING AND ACQUIRABLE PERCENT NAME AND ADDRESS INVESTMENT INVESTMENT WITHIN OF TOTAL OF BENEFICIAL OWNER (1) POWER POWER (3) 60 DAYS (2)(4) TOTAL SHARES - ------------------------------ ----------- ----------- -------------- ----------- ----------- Directors and Nominees and Named Executive Officers Richard L. Belstock 3,308 0 1,680 4,988 * David C. Broadley 26,220 8,350 2,835 37,405 * David W. Clark 9,985 5,864 7,095 22,944 * Ralph J. Coppola 7,430 0 2,017 9,447 * Patrick S. Day 1,914 0 6,720 8,634 * William T. Fike 51,401 9,112 47,200 107,713 2.1% Richard Gaston 3,866 0 2,335 6,201 * Jerrold T. Henley 47,725 0 9,381 57,106 1.1% John J. Johnson 2,388 1,155 2,383 5,926 * Ronald A. Johnson 3,931 100 671 4,702 * A. Morgan Jones 1,727 650 9,334 11,711 * Jack V. Leonesio 16,688 0 671 17,359 * William W. McClintock 7,820 105 9,334 17,259 * Bernard E. Moore 7,648 0 263 7,911 * Robert C. Silver 754 8,350 1,180 10,284 * Gary E. Stein 17,912 1,704 263 19,879 * Thomas M. Watson 8,102 0 10,733 18,835 * Total for Directors and Executive Officers (numbering 18) 219,752 35,390 118,507 373,649 7.1% Principal Shareholders Investors of America, L. P. 39 Glen Eagles Drive St. Louis, MO 63124 297,045 297,045 5.6%
(1) The address for all Directors, Nominees and Named Executive Officers is c/o SierraWest Bancorp, P.O. Box 6100, Truckee, CA 96160. (2) Includes shares that can be purchased through Bancorp's stock option plan. For non-employee directors, includes 671 shares earned under the Directors Deferred compensation and Stock Award Plan for all but Mr. Clark (688 shares), Mr. Henley (718 shares), Mr. Watson (2,070 shares), Mr. Stein (159 shares), Mr. Moore (159 shares) and Mr. Coppola (2,017 shares). (3) Mssrs. Fike, Broadley and Silver have voting authority for 8,350 shares of unallocated SWB common stock held by the SWB ESOP plan. (4) Upon completion of the proposed merger, all unvested options will become vested. Unvested options granted to the above listed total 27,609. *less than one percent -116- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Some of the directors of the Bancorp and the companies with which they are associated are customers of, or have had banking transactions with, the Bank in the ordinary course of its business and the Bank expects to have banking transactions with these persons in the future. In Management's opinion, since January 1, 1998, all loans and commitments to lend included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons of similar credit worthiness and, in the opinion of Management, did not involve more than a normal risk of collectability or present other unfavorable features. -117- 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 59 through 106: (i) Consolidated Statements of Financial Condition as of December 31, 1998, and 1997. (ii) Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996. (iii) Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996. (iv) Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. (v) Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996. (vi) Report of Independent Auditor. 2. Financial Schedules: None required. Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1998. -118- 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. 2.4 Agreement and Plan of and Merger between SierraWest Bancorp, SierraWest Bank and California Community Bancshares and Continental Pacific Bank, filed as Exhibit 2.1 to Registrant's Form 8-K dated April 15, 1998 and by this reference incorporated herein. 2.5 Agreement and Plan of Merger dated February 25, 1999, among BancWest Corporation, Bank of the West and SierraWest Bancorp, (incorporated herein by reference to Exhibit 2 to Bank West Corporation's Current Report on Form 8-K filed with the Commission on February 26, 1999), filed as Exhibit 2.1 to the Registrant's Form 8-K dated February 25, 1999 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. 3.3 Amended Bylaws of SierraWest Bancorp. 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. 4.4 Amendment to Rights Agreement dated as of February 25, 1999 between SierraWest Bancorp and American Stock Transfer and Trust Co., as Rights Agent, including the Summary of Rights to Purchase Preferred Shares filed as Exhibit 4.3 of the Registrant's Form 8-K dated February 25, 1999 and by this reference incorporated herein. -119- 10.1 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. 10.2 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. 10.3 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. 10.4 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. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 Directors' Agreement, filed as Exhibit 2.3 to Registrant's Registration Statement on Form S-4, (Registration No. 33-34954), and by this reference incorporated herein. 10.10 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. 10.11 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. 10.12 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. 10.13 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. 10.14 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. -120- 10.15 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. 10.16 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. 10.17 Sierra Tahoe Bancorp Amended 1988 Stock Option Plan, filed as Exhibit A to Registrant's Proxy Statement for its August 16, 1995 annual meeting of shareholders, and by this reference incorporated herein. 10.18 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. 10.19 Senior Manager Separation Benefits Agreement between Sierra Tahoe Bancorp and David C. Broadley dated January 17, 1996, filed as Exhibit 10.71 to Registrant's 1995 Annual Report on Form 10-K, and by this reference incorporated herein. 10.20 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. 10.21 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. 10.22 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. 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. -121- 10.28 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. 10.29 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. 10.30 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. 10.31 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. 10.32 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. 10.33 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. 10.34 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. 10.35 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. 10.36 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. 10.37 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. 10.38 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 -122- Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and by this reference incorporated herein. 10.39 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. 10.40 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. 10.41 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. 10.42 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. 10.43 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. 10.44 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. 10.45 Expression of Interest between Sanwa Bank California and SierraWest Bank, filed as Exhibit 10-97 to Registrant's 1997 Annual Report on Form 10-K and by this reference incorporated herein. 10.46 Financial Institutions Credit Agreement between Sanwa Bank and SierraWest Bank, filed as Exhibit 10-98 to Registrant's 1997 Annual Report on Form 10-K and by this reference incorporated herein. 10.47 Revolving Credit and Collateral Loan Agreement dated as of May 1, 1997 by and between SierraWest Bank and Imperial Bank, filed as Exhibit 10-99 to Registrant's 1997 Annual Report on Form 10-K and by this reference incorporated herein. 10.48 The Pooling and Servicing Agreement between SierraWest Bank, as Seller and Servicer, and Marine Midland Bank, as Trustee, dated March 31, 1998, filed on the Registrant's Form 8-K dated May 8, 1998, and by this reference incorporated herein. 10.49 Stock Option Agreement, dated as of February 25, 1999, between SierraWest Bancorp and BancWest Corporation (incorporated herein by reference to Exhibit 10 to BancWest Corporation's Current Report on Form 8-K filed with the Commission on February 26, 1999) filed on the Registrant's Form 8-K dated February 25, 1999 and by this reference incorporated herein. 10.50 Senior Manager Separation Benefits Agreement between Sierra Tahoe Bancorp and Richard L. Belstock dated January 10, 1996. -123- 10.51 Senior Manager Separation Benefits Agreement between Sierra Tahoe Bancorp and Robert C. Silver dated January 10, 1996. 10.52 Amended and Restated Employment Agreement dated August 28, 1998, between SierraWest Bank and William T. Fike. 10.53 Restated and Amended Senior Manager Separation Benefits Agreement dated September 21, 1998, between Sierra West Bank and Robert C. Silver. 10.54 Restated and Amended Senior Manager Separation Benefits Agreement dated September 21, 1998, between SierraWest Bank and Mary Jane Posnien. 10.55 Amendment No. 1 to the Senior Manager Separation Benefits Agreement between Sierra Tahoe Bancorp and David C. Broadley dated November 9, 1998. 10.56 Second Amendment to Senior Manager Separation Benefits Agreement between SierraWest Bancorp and Patrick S. Day. 10.57 First Amendment to Amended and Restated Employment Agreement dated August 28, 1998 between SierraWest Bank and William T. Fike dated January 8, 1999. 10.58 Board Policy Regarding Taxation of Nonqualified Option Exercise Upon And After Change of Control. 21.1 Significant Subsidiaries of the Registrant SierraWest Bank, a California Corporation. Conpac Development Corporation, a California Corporation 23.1 Consent of Deloitte & Touche LLP, independent auditors. 27.1 Financial Data Schedule - 1998 27.2 Financial Data Schedule - 1997 99.1 Press Release of SierraWest Bancorp issued February 25, 1999, regarding the merger of BancWest Corporation, Bank of the West and SierraWest Bancorp filed on the Registrant's Form 8-K dated February 25, 1999 and by this reference incorporated herein. 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, 1999 By:/s/ William T. Fike ---------------------------------- William T. Fike -124- 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, 1999 - -------------------------- Director William T. Fike /s/ David C. Broadley Executive Vice President/ March 25, 1999 - ------------------------- Principal Financial Officer David C. Broadley /s/ Richard L. Belstock Senior Vice President/ March 25, 1999 - ------------------------- Principal Accounting Officer Richard L. Belstock /s/ Jerrold T. Henley Chairman of the Board March 25, 1999 - ------------------------- Jerrold T. Henley /s/ David W. Clark Director March 25, 1999 - ------------------------- David W. Clark /s/ A. Morgan Jones Director and Corporate Secretary March 25, 1999 - ------------------------- A. Morgan Jones Director - ------------------------- Jack V. Leonesio /s/ William W. McClintock Director March 25, 1999 - ------------------------- William W. McClintock /s/ Richard Gaston Director March 25, 1999 - ------------------------- Richard Gaston /s/ Thomas M. Watson Director March 25, 1999 - ------------------------- Thomas M. Watson /s/ Ralph J. Coppola Director March 25, 1999 - ------------------------- Ralph J. Coppola /s/ John J. Johnson Director March 25, 1999 - ------------------------- John J. Johnson /s/ Ronald A. Johnson Director March 25, 1999 - ------------------------- Ronald A. Johnson /s/ Bernard E. Moore Director March 25, 1999 - ------------------------- Bernard E. Moore /s/ Gary E. Stein Director March 25, 1999 - ------------------------- Gary E. Stein
EX-3.3 2 EXHIBIT 3.3 Exhibit 3.3 Amended Bylaws of SierraWest Bancorp AMENDED AND RESTATED BYLAWS OF SIERRAWEST BANCORP, a California Corporation
TABLE OF CONTENTS PAGE ---- Article I. Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1. Principal Executive Office. . . . . . . . . . . . . 1 Section 2. Other Offices . . . . . . . . . . . . . . . . . . . 1 Article II. Meetings of Shareholders. . . . . . . . . . . . . . . . . . . . . 1 Section 1. Place of Meetings . . . . . . . . . . . . . . . . . 1 Section 2. Annual Meetings . . . . . . . . . . . . . . . . . . 1 Section 3. Special Meetings. . . . . . . . . . . . . . . . . . 1 Section 4. Notice of Meetings. . . . . . . . . . . . . . . . . 2 Section 5. Manner of Giving Notice . . . . . . . . . . . . . . 2 Section 6. Quorum of the Shareholders. . . . . . . . . . . . . 2 Section 7. Adjourned Meeting and Notice Thereof. . . . . . . . 3 Section 8. Voting. . . . . . . . . . . . . . . . . . . . . . . 3 Section 9. Validation of Defectively Called or Noticed Meetings. . . . . . . . . . . . . . . . . . 4 Section 10. Action Without Meeting. . . . . . . . . . . . . . . 4 Section 11. Proxies . . . . . . . . . . . . . . . . . . . . . . 4 Section 12. Inspectors of Election. . . . . . . . . . . . . . . 5 Article III. Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1. Powers of Directors . . . . . . . . . . . . . . . . 5 Section 2. Number of Directors . . . . . . . . . . . . . . . . 6 Section 3. Nominations for Election of Directors . . . . . . . 7 Section 4. Election and Term of Office.. . . . . . . . . . . . 7 Section 5. Removal of Directors. . . . . . . . . . . . . . . . 7 Section 6. Vacancies in the Board of Directors . . . . . . . . 8 Section 7. Location of Regular Board of Directors Meetings . . 8 Section 8. Location of Annual Board of Directors Meetings. . . 8 Section 9. Time of Regular Board of Directors Meetings . . . . 8 Section 10. Special Board of Directors Meetings . . . . . . . . 9 Section 11. Quorum of Directors . . . . . . . . . . . . . . . . 9 Section 12. Participation by Directors in Meetings by Conference Telephone. . . . . . . . . . . . . . . . 9 Section 13. Validation of Defectively Called or Noticed Meetings . . . . . . . . . . . . . . . . . 9 Section 14. Waiver of Notice by Directors . . . . . . . . . . .10 Section 15. Adjournment of Board of Directors Meetings. . . . .10 Section 16. Action by the Board of Directors Without Meeting. .10 Section 17. Fees and Compensation of Directors. . . . . . . . .10 Section 18. Rights of Inspection by Directors . . . . . . . . .10 Section 19. Transactions Between Directors and Corporation; i Banking Regulations . . . . . . . . . . . . . . . .11 Section 20. Qualifications of Directors . . . . . . . . . . . .12 Section 21. Director Emeritus . . . . . . . . . . . . . . . . .12 Article IV. Committees of the Board . . . . . . . . . . . . . . . . . . . . .12 Section 1. Committees of the Board . . . . . . . . . . . . . .13 Section 2. Membership of Committees. . . . . . . . . . . . . .12 Section 3. Notice of Committee Meetings. . . . . . . . . . . .13 Section 4. Quorum. . . . . . . . . . . . . . . . . . . . . . .13 Section 5. Powers of Committees. . . . . . . . . . . . . . . .13 Section 6. Minutes of Meetings . . . . . . . . . . . . . . . .13 Article V. Officers of the Corporation . . . . . . . . . . . . . . . . . . .14 Section 1. Officers. . . . . . . . . . . . . . . . . . . . . .14 Section 2. Election . . . . . . . . . . . . . . . . . . . . .14 Section 3. Subordinate Officers. . . . . . . . . . . . . . . .14 Section 4. Removal and Resignation . . . . . . . . . . . . . .14 Section 5. Vacancies . . . . . . . . . . . . . . . . . . . . .14 Section 6. Chairman of the Board . . . . . . . . . . . . . . .14 Section 7. Vice Chairman . . . . . . . . . . . . . . . . . . .15 Section 8. President . . . . . . . . . . . . . . . . . . . . .15 Section 9. Executive Vice Presidents, Senior Vice-Presidents, Vice Presidents and Assistant Vice Presidents . . .15 Section 10. Secretary . . . . . . . . . . . . . . . . . . . . .15 Section 11. Assistant Secretary . . . . . . . . . . . . . . . .15 Section 12. Chief Financial Officer . . . . . . . . . . . . . .16 Section 13. Controller and Assistant Financial Officer. . . . .16 Section 14. Salaries. . . . . . . . . . . . . . . . . . . . . .15 Section 15. Officers Holding More Than One Office . . . . . . .16 Section 16. Inability to Act. . . . . . . . . . . . . . . . . .16 Article VI. Other Bylaw Provisions. . . . . . . . . . . . . . . . . . . . . .16 Section 1. Inspection of Corporate Records . . . . . . . . . .16 Section 2. Inspection of Bylaws. . . . . . . . . . . . . . . .17 Section 3. Endorsement of Documents; Contracts . . . . . . . .17 Section 4. Annual and Other Reports. . . . . . . . . . . . . .17 Section 5. Certificates of Stock . . . . . . . . . . . . . . .18 Section 6. Representation of Shares of Other Corporations. . .18 Section 7. Seal. . . . . . . . . . . . . . . . . . . . . . . .18 Section 8. Fiscal Year . . . . . . . . . . . . . . . . . . . .18 Section 9. Construction and Definitions. . . . . . . . . . . .18 Section 10. Bylaws Provisions Contrary to or Inconsistent ii with Provision of Law . . . . . . . . . . . . . . .19 Section 11. Record Date . . . . . . . . . . . . . . . . . . . .19 Article VII. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . .19 Section 1. Definitions . . . . . . . . . . . . . . . . . . . .19 Section 2. When an Agent May be Indemnified. . . . . . . . . .20 Section 3. Determination of Whether an Agent Shall be Indemnified . . . . . . . . . . . . . . . . . . . .21 Section 4. Advancement of Expenses . . . . . . . . . . . . . .21 Section 5. Other Indemnification . . . . . . . . . . . . . . .21 Section 6. Limitation of Indemnification . . . . . . . . . . .21 Section 7. Insurance . . . . . . . . . . . . . . . . . . . . .22 Article VIII. Amendments to Bylaws . . . . . . . . . . . . . . . . . . . . . .22 Section 1. Amendment by Shareholders . . . . . . . . . . . . .22 Section 2. Amendment by Directors. . . . . . . . . . . . . . .22 Certificate of Secretary. . . . . . . . . . . . . .23
iii AMENDED AND RESTATED BYLAWS OF SIERRAWEST BANCORP ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The Board of Directors shall fix the location of the principal executive office of the Corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the Corporation has one or more business offices in the State of California, the Board of Directors shall fix and designate a principal business office in the State of California. SECTION 2. OTHER OFFICES. Branch or other subordinate offices may, at any time, be established by the Board at such other place or places as it deems appropriate. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California as designated by the Board of Directors from time to time. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the Corporation. SECTION 2. ANNUAL MEETING. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. The date so designated shall be within five (5) months after the end of the fiscal year of the Corporation or not later than fifteen (15) months after the last annual meeting of the shareholders. At this meeting, directors shall be elected, and any other proper business brought before the shareholders may be transacted. SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President, or collectively by the holders of at least ten percent (10%) of the Corporation's outstanding shares. If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or by registered or certified mail to the Chairman of the Board, the President, or the Secretary of the Corporation. The appropriate officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting or at any other time the appropriate officer deems fit, not less than ten (10) nor more than sixty (60) days after receipt of the request. The notice shall comply with the provisions of Article II, Section 4 of these Bylaws. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may request a shareholder list and may give the notice. Nothing in this paragraph shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. 1 SECTION 4. NOTICE OF MEETINGS. Written notice (in accordance with Section 5 of this Article II) of each annual or special meeting of shareholders shall be given not less than ten (10) nor more than sixty (60) days before the date of an annual or special meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and: (a) in the case of a special meeting, the specific nature of the business to be transacted, and no other business may be transacted at a special meeting except such business that has been duly noticed and is within the powers of the shareholders; or (b) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action if in accordance with the rules regarding annual meetings. The notice of any meeting at which directors are to be elected shall include the names of all nominees intended at the time of the notice to be presented by the Board for election. Any information contained in a proxy statement sent with such notice or other soliciting material sent with the notice may be deemed to satisfy this notice requirement. If action is proposed to be taken at any annual or special meeting for approval of: (a) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"); (b) an amendment of the Articles of Incorporation, pursuant to Section 902 of that Code; (c) a reorganization of the Corporation, pursuant to Section 1200, et. seq. of that Code; (d) a voluntary dissolution of the Corporation, pursuant to Section 1900 of that Code; or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state, in summary, the nature of that proposal. SECTION 5. MANNER OF GIVING NOTICE. Notice of a shareholders' meeting shall be given either personally or by first-class mail, expedited mail, facsimile, telegraphic or other written communication, charges prepaid, addressed to the shareholder at the last known address of that shareholder appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice. If the notice is later returned, it shall be deemed given when sent. If no address is given, notice may be given by posting notice of the meeting in the Corporation's newsletter, posting a notice at the principal offices, or, by publishing a notice at least once in a newspaper of general circulation in the county in which that office is located. Notice to a securities broker, financial advisor, attorney or accountant who purports to represent a shareholder shall be deemed to be notice to the shareholder. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of mailing or other means of giving any notice in accordance with the above provisions, executed by the Secretary, Assistant Secretary or other transfer agent shall be prima facie evidence of the giving of notice hereunder. SECTION 6. QUORUM OF THE SHAREHOLDERS. A majority of the outstanding voting shares, represented in person or by proxy, shall constitute a quorum of the shareholders for the transaction of business. The shareholders present at the commencement of a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of all or part of the shareholders so as to leave less than a quorum present so long as any action taken is 2 approved by at least a majority of the shares that would constitute a majority of a quorum, had the quorum continued to be present. SECTION 7. ADJOURNED MEETING AND NOTICE THEREOF. Any annual or special shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 6 of this Article) no other business may be transacted at such meeting. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice of continued status need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, when any shareholders' meeting is adjourned for more than forty-five (45) days from the date set for the original meeting, or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of a newly noticed meeting. At any adjourned meeting the Corporation may transact any business which may have been transacted at the original meeting. SECTION 8. VOTING. The shareholders entitled to notice of any annual or special meeting or to vote at any such meeting shall only be persons in whose name shares exist on the stock records of the Corporation as of the record date determined in accordance with Article V, Section 10. Voting shall, in all cases, be subject to the provisions of Sections 702 through 704, inclusive, of the Code (relating to voting shares held by a fiduciary, in the name of a Corporation, or in joint ownership). A shareholders' vote may be oral or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder prior to the commencement of voting. On any matter other than election of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal; however, if a shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum was initially present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter, except as to the election of directors wherein cumulative voting is allowed, shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Code, the Articles of Incorporation or by Federal or State banking laws. Subject to the following sentence and to the provisions of Section 708 of the Code, every shareholder entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder feels appropriate. No shareholder shall be entitled to cumulate votes for any candidate or candidates pursuant to the preceding sentence unless such candidate or candidates' names have been placed in nomination prior to the voting. In 3 any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted shall be elected. SECTION 9. VALIDATION OF A DEFECTIVELY CALLED OR NOTICED MEETING. The transaction of any meeting of shareholders, however called and noticed, and wherever held, are as valid as a meeting duly held after regular call and notice provided that: (a) a quorum is present either in person or by proxy; and (b) either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a waiver of notice, or a consent to the holding of the meeting or approves of the minutes thereof. All such waivers, consents, or approvals may act to ratify an action earlier taken and shall be filed with the corporate records or made a part of the minutes of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of shareholders need be specified in any written waiver of notice, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Article II, Section 4, the waiver of notice or consent shall state a summary of the nature of the action taken. Attendance by a shareholder at a meeting shall also constitute a waiver of notice of that meeting unless the shareholder objects, prior to the commencement of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. However, attendance by a shareholder at a meeting is not waiver of any right to object to the consideration of matters not included in the notice of the meeting if the shareholder is entitled to notice of the general nature of a proposal pursuant to the second paragraph of Article II, Section 4. SECTION 10. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Subject to Section 603 of the Code, any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the holders of the outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, either in person or by proxy. All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records. Provided, however, that: (a) unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous consent shall be given, as provided by Section 603(b) of the Code; and (b) in the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that subject to applicable law, a director may be elected at any time to fill a vacancy on the Board of Directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. Any written consent may be revoked by a writing received by the Secretary of the Corporation prior to the time that written consents equal to the number of shares required to authorize the proposed action have been filed with the Secretary. Such revocation is effective upon its receipt by the Secretary of the Corporation. Unless a record date for voting purposes is fixed as provided in Article VI, Section 10, the record date for determining shareholders entitled to give consent pursuant to this Section 10 shall be the day on which the first written consent was given. SECTION 11. PROXIES. Every person entitled to vote shares or execute written consents has the right to do so either in person or by one or more persons authorized by a written proxy executed and dated 4 by such shareholder and filed with the Secretary of the Corporation prior to the commencement of any meeting of the shareholders at which time any such proxy is intended to be used or prior to the use of such written consent. A validly executed proxy which does not state that it is irrevocable continues in full force and effect unless: (1) revoked by the person executing it, and prior to any vote pursuant thereto, by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by that shareholder, or by attendance at the meeting and voting in person by the person executing the proxy; or (2) written notice of the death or incapacity of the shareholder issuing the proxy is received by the Corporation before the vote pursuant thereto is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless otherwise expressly stated in the proxy. An irrevocable proxy that satisfies the requirements of 705(e) of the Code shall not be revoked except in accordance with its terms or if it becomes revocable under the provisions of 705 (e) or (f) of said Code. SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Board may appoint any persons (other than nominees for office as inspectors of election) to act at such meeting and any adjournment thereof. If no inspectors of election are so appointed, or if any persons so appointed fail to appear or fail or refuse to act, the Chairman of any such meeting may, and on the request of any shareholder or shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present shall determine whether one (1) or three (3) inspectors are to be appointed. The duties of such inspectors shall be as prescribed by Section 707(b) of the Code and shall include: (a) determining the number of shares outstanding and the voting power of each; (b) determining the number of shares represented at the meeting; (c) determining the existence of a quorum; (d) determining the authenticity, validity and effect of proxies; (e) receiving votes, ballots or consents; (f) hearing and determining all challenges and questions in any way arising in connection with the right to vote; (g) counting and tabulating all votes or consents; (h) determining when the polls shall close; (i) determining the results of the election; and (j) doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act, or certificate of a majority of inspectors is effective in all respects as the decision, act or certificate of all. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution on the proxies, regardless of postmark dates on the envelopes in which they are mailed. The inspectors shall invalidate all proxies which were not solicited in accordance with applicable provisions of law. The inspectors of the election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. ARTICLE III DIRECTORS SECTION 1. POWERS OF DIRECTORS. Subject to the provisions of the Code, any Federal or State banking regulations and any limitations to the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised 5 by or under the direction of the Board of Directors (the "Board"). The Board may delegate the management of the day-to-day operation of the business of the Corporation to the officers and employees of the Corporation provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Without restricting any and all general powers allowed by statute or decisional law, it is hereby expressly declared that the Board shall have the following POWERS IN ADDITION to the other powers that may be enumerated elsewhere in these Bylaws or pursuant to applicable law: (a) To select and remove all officers, employees, agents, consultants, vendors and similar persons employed or engaging with the Corporation; prescribing any powers and duties for officers and employees as are consistent with Federal and State law and with the Articles and these Bylaws; fixing officer and employee compensation; and disciplining officers and employees; (b) To conduct, manage, and control the affairs and business of the Corporation and to make such rules and regulations therefore which are not inconsistent with applicable law, the Articles or these Bylaws, as the Board may deem best; (c) To adopt and use a corporate seal; to prescribe the forms of certificates of stock and other securities; and to alter the form of such seal and of such certificates or other securities from time to time as in their judgment the Board may deem best; (d) To authorize the issuance of shares of stock of any class or type of the Corporation from time to time, upon such terms and for such consideration as may be lawful; (e) To borrow money and incur indebtedness for the purposes of the Corporation; and to cause to be executed and delivered therefore in the corporate name, promissory and capital notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor and any agreements pertaining thereto; (f) To prescribe the manner in which and the person or persons by whom any or all of the checks, drafts, notes, contracts and other corporate instruments shall be executed; (g) To determine or change the location of the principal executive office of the Corporation and to determine or change the location of other branch or subordinate offices; (h) To determine the location of shareholder's meetings pursuant to Article II, Section 1; and (i) Generally, to do and perform each and every act or thing whatever that may pertain to or be authorized by the Board of a financial institution under the laws of this State. SECTION 2. NUMBER OF DIRECTORS. The authorized number of directors shall be not less than seven (7) nor more than thirteen (13) unless changed by an amendment to these Bylaws which change is adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. 6 SECTION 3. NOMINATIONS FOR ELECTION OF DIRECTORS. Nominations for election of members of the Board of Directors may be made by the Board of Directors or by any holder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Notice of intention to make any nominations (other than for persons named in the notice of any meeting calling for the election of directors) are required to be made in writing and to be delivered or mailed to the President of the Corporation by the later of: (i) the close of business twenty-one (21) days prior to any meeting of stockholders calling for the election of directors; or (ii) ten (10) days after the date of mailing of notice of the meeting to stockholders. Such notification must contain the following information (to the extent reasonably known to the notifying stockholder): (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the Corporation owned by each proposed nominee; (d) the name and residence address of the notifying stockholder; (e) the number of shares of capital stock of the Corporation owned by the notifying stockholder; (f) the number of shares of capital stock of any bank, bank holding company, savings and loan association or other depository institution owned beneficially by the nominee or by the notifying stockholder as well as the identities and locations of any such institutions; (g) whether the proposed nominee has ever been convicted of or has pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust or has ever filed any petition in bankruptcy or has been adjudged bankrupt; and (h) a statement regarding the nominee's compliance with Article III, Section 19 of these Bylaws. The notification shall be signed by the nominating stockholder and by each nominee, and shall be accompanied by a written consent to be named as a nominee for election as a director from each proposed nominee. Nominations not made in accordance with these procedures shall be disregarded by the chairman of the meeting, and upon his instructions, the inspectors of election shall disregard all votes cast for each such nominee. The foregoing requirements do not apply to the nomination of a person to replace a proposed nominee who has become unable to serve as a director between the last day for giving notice in accordance with this Section 3 and the date of election of directors if the procedure called for in this paragraph was followed with respect to the nomination of the proposed nominee. A copy of Article III, Section 19 of these Bylaws will be provided to any shareholder upon receipt by the Corporation of a written request therefore. SECTION 4. ELECTION AND TERM OF OFFICE FOR DIRECTORS. The directors shall be elected at each annual meeting of shareholders but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders noticed for that purpose. Each director shall hold office until the next annual meeting or until his or her successor has been elected and qualified, whichever is longer. SECTION 5. REMOVAL OF DIRECTORS. The entire Board or any individual director may be removed from office by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of the directors. However, unless the entire Board is removed, no individual director may be removed if the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast, (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected; and the provisions of this Section 5 apply to the vote of that class or series and not to the vote of the outstanding shares as a whole. 7 SECTION 6. VACANCIES IN THE BOARD OF DIRECTORS. A vacancy or vacancies in the Board shall be deemed to exist in case of the death, resignation, or removal of any director, if the authorized number of directors is increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony or a gross misdemeanor. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, Secretary, or the Board as a whole, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. Vacancies in the Board may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. Each director so elected shall hold office until the next annual meeting. A vacancy in the Board existing as the result of a removal of a director pursuant to Section 5 of this Article, may not be filled by the directors, but shall be filled by the vote of the shareholders. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. No reduction in the authorized number of directors shall have the effect of removing any director prior to the expiration of the director's term of office but shall become effective as of the next annual meeting. SECTION 7. LOCATION OF REGULAR BOARD OF DIRECTORS MEETINGS. Regular meetings of the Board shall be held at a place which has been designated in the notice of meeting. If there is no notice, the meeting shall be held at the principal office of the Corporation, or at a place designated by resolution of the Board or by the written consent of the Board. Any regular or special meeting is valid wherever held if held upon written consent of all members of the Board given either before or after the meeting and filed with the Secretary of the Corporation or the meeting is otherwise deemed valid pursuant to these Bylaws. SECTION 8. LOCATION OF ANNUAL BOARD OF DIRECTORS MEETINGS. Immediately following each annual meeting of shareholders and at the same place, the Board shall hold an annual Board meeting for the purpose of election or reelection of officers, and the transaction of other business. Notice of this meeting shall not be required. SECTION 9. TIME OF REGULAR BOARD OF DIRECTORS MEETINGS. Regular meetings of the Board shall be held at such date and time as the Board may from time to time notice; provided, however, should said day fall upon a legal holiday observed by the Corporation at its principal office, then said meeting shall be held at the same time and place on the next succeeding full business day. Call and notice of all regular monthly or otherwise published meetings of the Board are hereby dispensed with. 8 SECTION 10. SPECIAL BOARD OF DIRECTORS MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, the Secretary or by any two directors. Special meetings of the Board shall be held upon not less than four days written notice (if sent by U.S. Mail), two (2) days (if delivered by expedited next day delivery), or forty-eight (48) hours notice (if delivered personally, by telephone or by telegraph). Any such notice shall be addressed or delivered to each director at such director's address as shown upon the latest records of the Corporation or as may have been given to the Corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. Such notice of special meeting shall, in summary form, specify the purpose of the meeting. If no place is stated, the meeting will be held at the principal office of the Corporation. Notice of any special meeting of the Board need not be given to any director who attends the meeting without protesting (either prior thereto or at its commencement) to the lack of notice to such director. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient, at the time it is delivered to a common carrier for transmission or when it is actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. SECTION 11. QUORUM OF DIRECTORS. A majority of the elected directors constitutes a quorum of the Board for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number is required by the Articles. The existence of a quorum shall be subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 (as to appointment of committees), and Section 317(e) (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of one or more directors, if any action taken is approved by at least a majority of the directors required for a quorum at such meeting. SECTION 12. PARTICIPATION BY DIRECTORS IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board may participate in a meeting through use of a conference telephone, computer network or video conference or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this Section shall be deemed the equivalent of "presence" in person at such meeting. SECTION 13. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either -9- before or after the meeting, each of the directors not present or who, though present, has prior to the meeting or at its commencement, protested the lack of proper notice to him, (i) signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof, or (ii) waives notice and withdraws his objection. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting, unless a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called, noticed, or convened; provided, however, if after stating his objection, the objecting director continues to attend and by his attendance participates in any matters other than those to which he objected, he shall be deemed to have waived notice of such meeting and withdrawn his objections. SECTION 14. WAIVER OF NOTICE BY DIRECTORS. The transaction of any meeting of the Board, however called and noticed or wherever held, shall be considered valid as though the meeting was duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 15. ADJOURNMENT OF BOARD OF DIRECTORS MEETINGS. A majority of the directors present, whether or not a quorum is present, may adjourn any directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 10 of this Article III, to the directors who were not present at the time of the adjournment. SECTION 16. ACTION BY THE BOARD OF DIRECTORS WITHOUT MEETING. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same effect as a unanimous vote of the Board. Such consent or consents shall be filed with the minutes of the proceedings of the Board. SECTION 17. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board. This Section 17 shall not be construed to preclude any director from serving the Corporation in any other capacity as an officer, employee, agent or otherwise, and receiving compensation for those services. SECTION 18. RIGHTS OF INSPECTION BY DIRECTORS. Every director of the Corporation shall have the absolute right, at any reasonable time, to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the Corporation and its subsidiary Corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney. -10- SECTION 19. TRANSACTIONS BETWEEN DIRECTORS AND CORPORATION; BANKING REGULATIONS. (a) No contract or other transaction between the Corporation and one or more of its directors, or between the Corporation and any Corporation, firm or association in which one or more of its directors has a material financial interest, is either void or voidable because such director or directors are present at the meeting of the Board or a committee thereof which authorizes, approves or ratifies the contract or transaction, if: (1) The material facts as to the transaction and as to such director's direct or indirect interest are fully disclosed or known to the shareholders and such contract or transaction is approved by a majority of the shareholders entitled to vote in good faith, with the shares owned by the interested director or directors not being entitled to vote thereon; (2) The material facts as to the transaction and as to such director's interest are fully disclosed or known to the Board or committee of the Board, and the Board or committee of the Board authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract is just and reasonable to the Corporation at the time it is authorized, approved or ratified; or (3) As to contracts or transactions not approved as provided in paragraph (1) or (2) of this subsection, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the Corporation at the time it was authorized, approved or ratified. A common directorship alone does not constitute a material financial interest within the meaning of this subsection. A director is not interested, within the meaning of this subsection, in a resolution fixing the compensation of another director as a director, officer or employee of the Corporation, notwithstanding the fact that the first director is also receiving compensation from the Corporation. The fact that the director or directors having a material financial interest in the transaction nominated, appointed or voted for one or more directors entitled to vote on the contract or transaction shall also not make those directors entitled to vote interested within the meaning of this subsection. (b) No contract or other transaction between this Corporation and any other Corporation or association of which one or more of its directors are directors is either void or voidable because such director or directors are present at the meeting of the Board, or a committee thereof, which authorizes, approves or ratifies the contract or transaction, if: (1) The material facts as to the transaction and as to such director's or the directorship are fully disclosed or known to the Board or committee and the Board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the common director or directors or the contract or transaction is approved by the shareholders in good faith; or -11- (2) As to contracts or transactions not approved as provided in paragraph (1) of this subsection, the contract is deemed just and reasonable to the Corporation at the time it was approved, authorized or ratified. This subsection shall not apply to contracts or transactions covered by subsection (a). (c) Interested or common directors may be counted in determining the presence of a quorum at a meeting of the Board or a committee thereof which authorizes, approves or ratifies a contract or transaction. SECTION 20. QUALIFICATIONS OF DIRECTORS. No person shall serve as a member of the Board of Directors: (a) who is a director, officer, employee, agent, nominee, material consulting accountant, analyst, attorney or policy decision maker for any other financial institution, lender or bank holding company, or affiliate or subsidiary thereof, engaged in business in California or Nevada; (b) who has or is the assignee or nominee of anyone who has any contract, arrangement or understanding with any other financial institution, lender or bank holding company, or affiliate or subsidiary thereof, engaged in business in California or Nevada, or with any officer, director, employee, agent, nominee, material consulting accountant, analyst, attorney or policy decision maker thereof, pursuant to which that person could be called upon to reveal or in any way utilize information obtained as a director or will, directly or indirectly, attempt to effect or encourage any action of this Corporation; (c) who has or will have attained the age of seventy (70) years or older at the time of any notice of nomination pursuant to Article III, Section 3 of these Bylaws or their election as a director of this Corporation, whichever is sooner; or (d) who does not own at least $10,000 in fair market value of the Corporation's common stock within one (1) year from their election to the Board of Directors. Subsection (d) shall not apply to an individual hired by the Corporation's Board of Directors to be President and Chief Executive Officer of this Corporation until such time as that individual has been employed by the Corporation for a period of two (2) years. The Board of Directors of this Corporation or a committee thereof, shall make the final determination as to whether any person who seeks to become a director qualifies under this section of the Bylaws. SECTION 21. DIRECTOR EMERITUS. A director who has retired from the Board under any approved director emeritus program shall be designated a director emeritus. Director emeritus members may attend such Board functions as may be enumerated in their respective emeritus program(s) or designated by the Board from time-to-time. ARTICLE IV -12- COMMITTEES OF THE BOARD SECTION 1. COMMITTEES OF THE BOARD. The Chairman of the Board of Directors may, from time to time, appoint such committees of the Board as may be required by Federal and/or state banking laws or may be deemed necessary to fulfill the needs of the Corporation. The Chairman of the Board shall appoint one (1) or more committee member(s) to serve as chairman or co-chair of such committee and who shall be charged with calling, giving notice and presiding over committee meetings and reporting thereon to the Board. SECTION 2. MEMBERSHIP OF COMMITTEES. The membership of each committee created shall be composed of such directors, officers or employees of the Corporation or any director, officer or employee of any parent subsidiary corporation, as appointed by the Chairman of the Board of Directors. Each committee shall consist of at least two (2) members. Pursuant to Section 311 of the Code, at least two (2) directors shall serve on each committee. All appointed members shall be entitled to one (1) vote. In addition to those members appointed by the Board, the Chairman of the Board shall be deemed to be a voting at large member of all committees created by the Board unless the Chairman is precluded from being a committee member by the Code or banking laws. The Chairman shall be considered an AD HOC member of all Committees. SECTION 3. NOTICE OF COMMITTEE MEETINGS. The appointed chairman of a committee shall give written or oral notice of meetings to each committee member at least five (5) days prior to the meeting in the case of a written notice or not less than twenty-four (24) hours prior to the meeting if notice is delivered personally, by telephone or by telegraph. At any meeting, the chairman may affix a regular time, date and location for such committee meetings and thereby eliminate further notice requirements for such regularly scheduled meetings. For purposes of this section, notice shall be deemed given when mailed to a committee member's listed home or business address. SECTION 4. QUORUM. A majority of duly appointed committee members shall constitute a quorum for purposes of the committee recommending actions to the Board of Directors. Although the Chairman of the Board is deemed to be a member at large of each authorized committee pursuant to Section 2 of this Article, the absence of the Chairman at the meeting of any committee shall not affect the existence or nonexistence of a committee quorum as required by this section and the committee shall compute a quorum as if the Chairman is not required to be a member. SECTION 5. POWERS OF COMMITTEES. Unless specifically delegated responsibility by the Board of Directors upon creation of such a committee or during its pendency, a committee shall have only advisory powers to recommend proposals to be subsequently approved by the Board pursuant to Article III, Section 11. SECTION 6. MINUTES OF MEETINGS. Each committee appointed by the Board of Directors shall keep minutes of each meeting and its proceedings thereat which shall be made available to the Board for review and approval. ARTICLE V -13- OFFICERS OF THE CORPORATION SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of the Board, a President, a Secretary, and a Chief Financial Officer. One of these officers will also be designated by the Board to be the General Manager and Chief Executive Officer of the Corporation. The Corporation may also have a Vice Chairman of the Board, one or more Executive and Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries and such other officers as may be elected or appointed in accordance with provisions of Section 3 of this Article. One person may hold two or more offices, except no officer shall hold a combination of President and Chief Financial Officer or President and Secretary. SECTION 2. ELECTION. The officers of the Corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal or other disqualification from service, or until their respective successors shall be elected, subject to the rights, if any, of an officer under any contract of employment. The Corporation herein incorporates all powers granted to financial institutions pursuant to local, state and national banking laws regarding hiring and termination of officers. SECTION 3. SUBORDINATE OFFICERS. The Board may elect, and may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board may from time to time determine. SECTION 4. REMOVAL AND RESIGNATION. Subject to the rights, if any, of an officer under any contract of employment or applicable law, any officer may be removed, either with or without cause, by the Board at any time, or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the Corporation, but without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office. SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board shall exercise and perform such powers and duties as may be assigned from time to time by the Board. Unless otherwise changed by the Board, his duties shall include presiding at regular and special meetings of the Board, the appointment of Board committees, and the preparation of the Board meeting agendas in conjunction with the Chief Executive Officer. -14- SECTION 7. VICE CHAIRMAN. The Vice Chairman of the Board, if there shall be such an officer, shall in the absence of the Chairman of the Board of Directors, preside at all meetings of the Board and of the shareholders, and exercise and perform such other powers and duties as may be assigned from time to time by the Board. SECTION 8. PRESIDENT. Subject to such powers, if any, as may be given by the Board to the Chairman of the Board, the President, if there is such an officer, is the General Manager and Chief Executive Officer of the Corporation and has, subject to the control of the Board, general supervision, direction, and control of the business and officers of the Corporation. In the absence of both the Chairman of the Board and the Vice Chairman, or if there be none, the President shall preside at all meetings of the shareholders and at all meetings of the Board. The President has the general powers and duties of management usually vested in the office of President and General Manager of a Corporation and such other powers and duties as may be prescribed by the Board. SECTION 9. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS, VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS. In the absence or disability of the President, and unless an alternate plan of succession has been approved, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board, the Bylaws, the President or the Chairman of the Board. SECTION 10. SECRETARY. The Secretary shall keep or cause to be kept, at the principal office and such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board, and its committees, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive office or business office in accordance with Section 213 of the Code. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the Corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders, of the Board and of any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. SECTION 11. ASSISTANT SECRETARY. The Assistant Secretary or the Assistant Secretaries, if there shall be such an officer, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties of the Secretary as provided in these Bylaws or as may be assigned from time to time by the President or by the Board of Directors. -15- SECTION 12. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares, and shall send or cause to be sent to the shareholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all times be open to inspection by any director of the Corporation. The Chief Financial Officer shall also: (a) deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board; (b) disburse the funds of the Corporation as may be ordered by the Board; (c) render to the President and directors, whenever they request it, an account of all transactions engaged in as Treasurer and of the financial condition of the Corporation; and (d) shall have such other powers and perform such other duties as may be prescribed by the Board. SECTION 13. CONTROLLER AND ASSISTANT FINANCIAL OFFICERS. The Controller and Assistant Financial Officers, in the order of their seniority, shall, in the absence or disability of the Chief Financial Officer, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such additional powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. SECTION 14. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that such officer is also a director of the Corporation. SECTION 15. OFFICERS HOLDING MORE THAN ONE OFFICE. Any two (2) or more officers, except those of President and Chief Financial Officer, or President and Secretary, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. SECTION 16. INABILITY TO ACT. In the case of absence or inability to act of any officer of the Corporation and of any person herein authorized to act in his place, the Board may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select. ARTICLE VI OTHER BYLAW PROVISIONS SECTION 1. INSPECTION OF CORPORATE RECORDS. Subject to Section 1600 of the Code, the accounting books and records, the record of shareholders and minutes of proceedings of the shareholders, the Board of Directors, and committees of the Board of this Corporation and any of its subsidiaries, shall be open to inspection upon five (5) business days notice and a written demand on the Corporation of any shareholder or holder of a voter's trust certificate. The written demand must state a purpose reasonably related to such holder's interest as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may -16- be made in person or by agent or attorney. The right of inspection includes the right to copy or make abstracts. SECTION 2. INSPECTION OF BYLAWS. The Corporation shall keep in its principal office the original or a copy of these Bylaws as amended to date which shall be open to inspection by shareholders at all reasonable times during office hours. SECTION 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the provisions of applicable law, the authorization of the Board of Directors and the provisions of these Bylaws, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance, or other instrument in writing and any assignment or endorsements thereof executed or entered into between this Corporation and any other person or entity, when signed by the President or any Vice President, and the Treasurer or any Assistant Treasurer of this Corporation, or when stamped with a facsimile signature of such appropriate officers in the case of share certificates, shall be valid and binding upon this Corporation in the absence of actual knowledge on the part of the other person or entity that the signing officers had not the authority to execute the same. Any such instruments may be signed by any other person or persons and in such manner as from time to time shall be determined by the Board, and unless so authorized by the Board, no officer, agent, or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. SECTION 4. ANNUAL AND OTHER REPORTS. The board of directors of the corporation shall cause an annual report to be sent to the shareholders within a reasonable period (or as otherwise required by law) after the close of the fiscal or calendar year. The requirement for such annual report is dispensed with so long as this corporation has less than 100 shareholders of record. Such report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. A shareholder or shareholders holding at least five percent of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year which ended more than 30 days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the annual report for the last fiscal year. The corporation shall deliver the statement to the person making the request within 30 days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the corporation for twelve (12) months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. The corporation shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared and a balance sheet as of the end of the period. The quarterly income statements and balance sheets referred -17- to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. SECTION 5. CERTIFICATES OF STOCK. Every holder of shares of the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the President or Vice President and by the Chief Financial Officer or Assistant Financial Officers or by the Secretary or Assistant Secretary, or a facsimile signature of such persons stamped thereon, certifying the number of shares and the class or series of shares owned by the shareholder. If any officer, transfer agent, or registrar who has signed a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent, or registrar at the date of issue. Except as provided in this Section, no new certificates for shares shall be issued in lieu of an old one unless the latter is surrendered and canceled at the same time. The Board may, however, in case any certificate for shares is alleged to have been lost, stolen, or destroyed, authorize the issuance of a new certificate in lieu thereof, and the Corporation may require that the Corporation be given a lost instruments bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft, or destruction of such certificate or the issuance of such new certificate. Prior to the due presentment for registration of transfer in the stock transfer book of the Corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California. SECTION 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or any other officer or officers authorized by the Board or the President are each authorized to vote, represent, and exercise on behalf of the Corporation all rights incident to any and all shares of any other Corporation or Corporations standing in the name of the Corporation. The authority herein granted may be exercised by any such officer in person or by any other person authorized to do so by proxy or power of attorney duly executed by said officer. SECTION 7. SEAL. The corporate seal of the Corporation shall be as approved from time to time by the Board of Directors in accordance with Article III, Section 1(c) of these Bylaws. SECTION 8. FISCAL YEAR. The fiscal year of this Corporation shall begin on the first day of January and end on the 31st day of December of each year. SECTION 9. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction, and definitions contained in the General Corporations Law of California shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a Corporation and a natural person. -18- SECTION 10. BYLAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence, clause or phrase of these Bylaws which is contrary to or inconsistent with any applicable provision of the Accountancy Corporation Board of the State of California or other applicable law of the State of California or of the United States shall not apply so long as said provisions of law shall remain in effect. However, such result shall not affect the validity of applicability of any other portions of these Bylaws. It is hereby declared that these Bylaws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. SECTION 11. RECORD DATE. The Board may fix, in advance, a record date for the determination of the shareholders entitled: (a) to notice of any meeting; (b) to vote; (c) to receive payment of any dividend or other distribution; (d) to any allotment of rights; or (e) to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the Corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than forty-five (45) days. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than set forth in this Section or Article II, Section 10 shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. ARTICLE VII INDEMNIFICATION SECTION 1. DEFINITIONS. For the purposes of this Article VII, the following definitions shall apply: (a) "Agent" means any person who is or was a director, officer, employee or other agent of this Corporation, or is or was serving at the request of this Corporation as a director, officer, or agent of another or domestic Corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic Corporation which was a predecessor Corporation of this Corporation or of another enterprise Corporation of this Corporation or of another enterprise at the request of such predecessor Corporation, but does not include any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such (even though otherwise an "agent"); -19- (b) "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and (c) "Expenses" includes, without limitation, attorney's fees and any expenses of establishing a right to indemnification under Section 2, subdivision (c) or Section 3, subdivision (c) of this Article VII. SECTION 2. WHEN AN AGENT MAY BE INDEMNIFIED. (a) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this Corporation) by reason of the fact that such person is or was an agent of this Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of this Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this Corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (b) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this Corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of this Corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of this Corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this subdivision (b): (1) In respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to this Corporation, in the performance of such person's duty to this Corporation, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of this case, such person is fairly and reasonably entitled to indemnity for the expenses which such court shall determine; (2) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (3) Of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. (c) To the extent that an agent of this Corporation has been successful on the merits in defense of any proceedings referred to in subdivision (b) or (c) or in defense of any claim, issue or -20- matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. SECTION 3. DETERMINATION OF WHETHER AN AGENT SHALL BE INDEMNIFIED. Except as provided in Section 2, subdivision (c), any indemnification under this section shall be made by this Corporation only if authorized in the specific case, upon a determination that indemnification of that agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Section 2, subdivisions (a) or (b), by: (a) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (b) Approval or ratification by an affirmative vote of a majority of the shares of this Corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. For such purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or (c) The court in which such proceeding is or was pending, upon application made by this Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by this Corporation. SECTION 4. ADVANCEMENT OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this Corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this section. SECTION 5. OTHER INDEMNIFICATION. Nothing contained in this section shall affect any right to indemnification to which persons (other than directors and officers of this Corporation or any subsidiary hereof) may be entitled by contract or otherwise. SECTION 6. LIMITATION OF INDEMNIFICATION. No indemnification or advance shall be made under this section, except as provided in Section 2, subdivision (c) or Section 3, subdivision (c) of this Article, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the Articles, the Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -21- SECTION 7. INSURANCE. Upon and in the event of a determination by the Board of Directors of this Corporation to purchase such insurance, this Corporation may purchase and maintain insurance on behalf of any agent of the Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not this Corporation would have the power to indemnify the agent against such liability under the provisions of this section. ARTICLE VIII AMENDMENTS TO BYLAWS SECTION 1. AMENDMENT BY SHAREHOLDERS. Amendments to these Bylaws may be adopted or these Bylaws may be restated by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of the Corporation set forth the number of authorized directors of the Corporation, the authorized number of directors may be changed only by an amendment of the Articles. SECTION 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section l of this Article VIII, changes to these Bylaws, other than a Bylaw or an amendment of a Bylaw changing the authorized number of directors, may be adopted, amended, or repealed by the Board of Directors. -22- CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: 1. That I am the duly elected and acting secretary of SierraWest Bancorp, a California Corporation; and 2. That the foregoing Amended and Restated Bylaws, comprising twenty-three (23) pages, constitute the Bylaws of said Corporation as duly adopted by action of the Board of Directors of the Corporation duly taken on the 27th day of January, 1999. /s/ A. MORGAN JONES - --------------------------------------- A. Morgan Jones, Secretary -23- EX-10.50 3 EXHIBIT 10.50 EXHIBIT 10.50 SENIOR MANAGER SEPARATION BENEFITS AGREEMENT THIS SENIOR MANAGER SEPARATION BENEFITS AGREEMENT (the "Agreement") is made and entered into as of January 10, 1996, by and between SIERRA TAHOE BANCORP, a California Corporation and its banking subsidiaries TRUCKEE RIVER BANK and SIERRA BANK OF NEVADA (hereinafter "STB"), with its principal offices located at 10181 Truckee Tahoe Airport Road, P.O. Box 61000, Truckee, California 96161 and RICHARD L. BELSTOCK, an individual ("RLB"). WITNESSETH WHEREAS, RLB is currently designated a senior officer and 'at will' employee of Truckee River Bank and Sierra Bank of Nevada and expects to remain a senior officer and employee subject to the policies and conditions contained within the STB Personnel Policies and Procedures; WHEREAS, both STB and RLB feel it is in their respective and mutual best interests to preagree upon appropriate and reasonable separation compensation that will be paid to RLB should STB ever determine that RLB should, for whatever reason, be terminated from his position and leave the company; WHEREAS, STB and RLB agree that the benefits described herein constitute full payment of and shall completely supersede and constitute full satisfaction of any and all other monetary or nonmonetary benefits paid as a result of the termination of RLB for any reason by STB except as may be additionally required beyond the sums and benefits paid hereunder by law. WHEREAS, nothing in this Agreement is intended to change the current at will employment of RLB or create a contract of employment. Further, this Agreement shall only cover situations wherein STB requests the termination of RLB and shall not apply if RLB elects to voluntarily leave STB. NOW, THEREFORE, in consideration of the promises set forth below and for other good and valuable consideration, including the mutual covenants and agreements herein contained, the receipt and sufficiency of which is hereby acknowledged, STB and RLB hereby agree as follows: 1 1. Applicability of Agreement; Definition of Termination: This Agreement coveys additional benefits not otherwise due to employees generally and shall become operative upon RLB's termination of employment for any reason by STB, its affiliates and, their respective officers or directors, so long as that termination did not result from a final determination of the Human Resources Director and the Personnel Committee of the Board of Directors of STB that RLB's termination resulted from a material violation of the STB Personnel policies and procedures (i.e. termination for cause) (hereinafter referred to as the "Termination"). This Agreement shall not apply as to any event not covered under the definition of the term 'Termination'. Following the defined Termination, and the payment of benefits under this Agreement, it is expressly agreed and understood that STB shall not be precluded from rehiring RLB's position either now or in the future and such rehiring shall not be deemed to nullify or change this Agreement if it is otherwise applicable. 2. Conditions For Payment of Separation Benefits. STB shall pay the separation benefits set forth in Paragraph 3 to RLB after each of the following requirements have been satisfied in the reasonable discretion of STB: A. A defined Termination as set forth in Paragraph 1 has occurred and RLB has left (or will promptly thereafter leave) the employment of STB; and B. RLB consent to and does expressly waive, release, indemnify and fully hold STB, its subsidiary companies and each of their employees, officers and directors harmless with regard to his employment at STB; the manner of his Termination; and any other matters reasonably related to his employment. RLB agrees to initiate no action, of any type or kind, regarding his employment or Termination and if such an action is initiated he agrees that such action may be promptly closed, dismissed or summarily disallowed, or, if it shall continue, that RLB will indemnify STB for the legal fees, costs and expenses resulting from their defense of that action; and C. RLB agrees to and shall maintain the confidentiality of any and all proprietary secrets, processes and plans of STB and its subsidiaries made known to RLB during his employment. STB may elect to advance the separation benefits set forth in Paragraph 2 prior to the satisfaction of each of the above requirements in this Paragraph 3, or in anticipation of full performance by RLB, and should any requirement not be satisfied within a reasonable period thereafter or continuously performed, RLB, upon request of STB and presentation of proof of nonperformance and a reasonable period to cure the continuing nonperformance, shall promptly return the separation benefit(s) paid or granted to him and this Agreement shall terminate. 3. Separation Benefits. STB shall, in addition to any final salary, vacation, personal leave, retirement plan and other monetary or nonmonetary benefit(s) covered under one or more separate agreement(s) and otherwise due or applicable to RLB upon Termination (except benefits due under an agreement or policy concerning office closure or reduction in 2 force laws so long as less than the sums being paid hereunder), pay to RLB upon Termination one of the following benefits, at the election and option of RLB: A. A lump sum payment equal to SIX (6) months of monthly salary, less any and all applicable taxes, deductions arising from benefit elections or any other sums required to be deducted by law, rule or regulation. If this option is elected, and RLB elects continued health coverage under COBRA, STB will require RLB to pay the full rate allowed by COBRA for any continued health insurance coverage elected at the time of Termination; or B. Continuation of monthly salary for SIX (6) months, less any and all applicable taxes, deductions arising from benefit elections or other sums required to be deducted by law, rule or regulation. If this option is elected, and if RLB elects to continue health insurance coverage under COBRA, STB will continue to charge RLB's the applicable employee coverage rate for Six (6) months if said applicable employee rate may be properly granted to RLB without violating any existing policy or law and if said rate is lower than the COBRA rate that may be assessed. The payment option elected shall be deemed the "Separation Benefit". Said Separation Benefit shall result in a waiver of any other separation benefits due to RLB following the Termination as more fully set forth in Paragraph 4. 4. Express Waiver and Release of Other Separation Benefits. By executing this Agreement, RLB agrees that the Separation Benefit paid pursuant to this Agreement, provided the payments or benefits at least equal those payments or benefits that must be paid to terminated employees by law, shall be deemed to be the equivalent and substitute for any legally or customarily required separation payments due to RLB and STB shall be given full credit for sums paid hereunder as to any legal or customarily requirements to pay separation and payments hereunder shall be deemed to have fully satisfied STB's obligations with regard to any legally or customarily mandated separation payments due to RLB upon his termination, including, but not limited to, any laws or customs regarding reduction in force or job-site closing. If additional sums are legally required, or are adjudicated as required, this Agreement shall be deemed to be automatically amended to credit against the sums due the amount paid hereunder and this Agreement shall be deemed to include any additionally required benefits or payments. 5. Reserved. 6. Binding Effect of Agreement. This Agreement shall inure to the benefit of and be binding upon the heirs, administrators, personal representatives, successors and assigns of RLB and STB, as the case may be. 7. No Contest; Reimbursement of Benefits: The parties hereby mutually agree that in the event that RLB contests this Agreement, or any of the provisions hereunder, by the 3 filing or commencement of any action or proceeding relating to his employment or Termination of any kind or nature whatsoever against STB, its parent company or affiliate companies or is re-employed by STB involuntarily by court order, or an enforceable judgment is obtained against STB, then STB shall have the absolute right: (i) to enforce repayment in full on the date of such re-employment of all sums paid to RLB hereunder, which sums shall include the payment or value of any benefits received by RLB hereunder, as a credit in offset, reduction and satisfaction of all or any portion of such judgment, or, (ii) if there is no judgment, against wages due to RLB. 8. Captions: The captions set forth herein are included solely for ease and convenience of reference and are not to be considered or construed in the interpretation of this Agreement. 9. Entire Agreement: This Agreement constitutes and contains the entire agreement between the parties and no statement or representation of either party hereto, their agents, officers, directors or employees made outside of this Agreement and not contained herein shall form a part of this Agreement or be binding upon the other party. This Agreement shall not be changed, modified, altered or amended, except by written instrument signed by the parties hereto. 10. Governing Law: This Agreement shall be construed and governed in accordance with the laws of the State wherein RLB is predominantly employed, with venue appropriate in the County wherein RLB is predominantly employed. Any provision of this Agreement prohibited by law shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. In the event of any litigation or action being commenced with regard to this Agreement, the prevailing party shall be awarded their reasonable attorneys fees, costs and expenses. 11. Informed Consent and Waiver: RLB has executed this Agreement on a fully informed, voluntary basis. RLB understands and agrees that the separation benefit provided for herein will preclude RLB's right to seek other separation benefits, except as allowed by law, and that RLB has been given the right and opportunity to consult with an advisor or attorney prior to the execution of this Agreement. IN WITNESS WHEREOF, the parties hereto have made, executed and delivered this Agreement as of the day and year first above written. /s/ Richard L. Belstock - ----------------------- RICHARD L. BELSTOCK 4 SIERRA TAHOE BANCORP, a California Corporation By: /s/ William T. Fike ------------------------ William T. Fike Its: President/CEO 5 EX-10.51 4 EXHIBIT 10.51 EXHIBIT 10.51 SENIOR MANAGER SEPARATION BENEFITS AGREEMENT THIS SENIOR MANAGER SEPARATION BENEFITS AGREEMENT (the "Agreement") is made and entered into as of January 10, 1996, by and between SIERRA TAHOE BANCORP, a California Corporation (hereinafter "STB"), with its principal offices located at 10181 Truckee Tahoe Airport Road, P.O. Box 61000, Truckee, California 96161 and ROBERT C. SILVER, an individual ("BCS"). WITNESSETH WHEREAS, BCS is currently designated a senior officer and 'at will' employee of STB and expects to remain a senior officer and employee subject to the policies and conditions contained within the STB Personnel Policies and Procedures; WHEREAS, both STB and BCS feel it is in their respective and mutual best interests to preagree upon appropriate and reasonable separation compensation that will be paid to BCS should STB ever determine that BCS should, for whatever reason, be terminated from his position at STB and leave the Company; WHEREAS, STB and BCS agree that the benefits described herein constitute full payment of and shall completely supersede and constitute full satisfaction of any and all other monetary or nonmonetary benefits paid as a result of the termination of BCS for any reason by STB except as may be additionally required beyond the sums and benefits paid hereunder by law. WHEREAS, nothing in this Agreement is intended to change the current at will employment of BCS or create a contract of employment. Further, this Agreement shall only cover situations wherein STB requests the termination of BCS and shall not apply if BCS elects to voluntarily leave STB. NOW, THEREFORE, in consideration of the promises set forth below and for other good and valuable consideration, including the mutual covenants and agreements herein contained, the receipt and sufficiency of which is hereby acknowledged, STB and BCS hereby agree as follows: 1. Applicability of Agreement; Definition of Termination: This Agreement coveys additional benefits not otherwise due to employees generally and shall become operative upon 1 BCS's termination of employment for any reason by STB, its affiliates and, their respective officers or directors, so long as that termination did not result from a final determination of the Human Resources Director and the Personnel Committee of the Board of Directors of STB that BCS's termination resulted from a material violation of the STB Personnel policies and procedures (i.e. termination for cause) (hereinafter referred to as the "Termination"). This Agreement shall not apply as to any event not covered under the definition of the term 'Termination'. Following the defined Termination, and the payment of benefits under this Agreement, it is expressly agreed and understood that STB shall not be precluded from rehiring BCS's position either now or in the future and such rehiring shall not be deemed to nullify or change this Agreement if it is otherwise applicable. 2. Conditions For Payment of Separation Benefits. STB shall pay the separation benefits set forth in Paragraph 3 to BCS after each of the following requirements have been satisfied in the reasonable discretion of STB: A. A defined Termination as set forth in Paragraph 1 has occurred and BCS has left (or will promptly thereafter leave) the employment of STB; and B. BCS consent to and does expressly waive, release, indemnify and fully hold STB, its subsidiary companies and each of their employees, officers and directors harmless with regard to his employment at STB; the manner of his Termination; and any other matters reasonably related to his employment. BCS agrees to initiate no action, of any type or kind, regarding his employment or Termination and if such an action is initiated he agrees that such action may be promptly closed, dismissed or summarily disallowed, or, if it shall continue, that BCS will indemnify STB for the legal fees, costs and expenses resulting from their defense of that action; and C. BCS agrees to and shall maintain the confidentiality of any and all proprietary secrets, processes and plans of STB and its subsidiaries made known to BCS during his employment. STB may elect to advance the separation benefits set forth in Paragraph 2 prior to the satisfaction of each of the above requirements in this Paragraph 3, or in anticipation of full performance by BCS, and should any requirement not be satisfied within a reasonable period thereafter or continuously performed, BCS, upon request of STB and presentation of proof of nonperformance and a reasonable period to cure the continuing nonperformance, shall promptly return the separation benefit(s) paid or granted to him and this Agreement shall terminate. 3. Separation Benefits. STB shall, in addition to any final salary, vacation, personal leave, retirement plan and other monetary or nonmonetary benefit(s) covered under one or more separate agreement(s) and otherwise due or applicable to BCS upon Termination (except benefits due under an agreement or policy concerning office closure or reduction in force laws so long as less than the sums being paid hereunder), pay to BCS upon Termination 2 one of the following benefits, at the election and option of BCS: A. A lump sum payment equal to SIX (6) months of monthly salary, less any and all applicable taxes, deductions arising from benefit elections or any other sums required to be deducted by law, rule or regulation. If this option is elected, and BCS elects continued health coverage under COBRA, STB will require BCS to pay the full rate allowed by COBRA for any continued health insurance coverage elected at the time of Termination; or B. Continuation of monthly salary for SIX (6) months, less any and all applicable taxes, deductions arising from benefit elections or other sums required to be deducted by law, rule or regulation. If this option is elected, and if BCS elects to continue health insurance coverage under COBRA, STB will continue to charge BCS's the applicable employee coverage rate for Six (6) months if said applicable employee rate may be properly granted to BCS without violating any existing policy or law and if said rate is lower than the COBRA rate that may be assessed. The payment option elected shall be deemed the "Separation Benefit". Said Separation Benefit shall result in a waiver of any other separation benefits due to BCS following the Termination as more fully set forth in Paragraph 4. 4. Express Waiver and Release of Other Separation Benefits. By executing this Agreement, BCS agrees that the Separation Benefit paid pursuant to this Agreement, provided the payments or benefits at least equal those payments or benefits that must be paid to terminated employees by law, shall be deemed to be the equivalent and substitute for any legally or customarily required separation payments due to BCS and STB shall be given full credit for sums paid hereunder as to any legal or customarily requirements to pay separation and payments hereunder shall be deemed to have fully satisfied STB's obligations with regard to any legally or customarily mandated separation payments due to BCS upon his termination, including, but not limited to, any laws or customs regarding reduction in force or job-site closing. If additional sums are legally required, or are adjudicated as required, this Agreement shall be deemed to be automatically amended to credit against the sums due the amount paid hereunder and this Agreement shall be deemed to include any additionally required benefits or payments. 5. Reserved. 6. Binding Effect of Agreement. This Agreement shall inure to the benefit of and be binding upon the heirs, administrators, personal representatives, successors and assigns of BCS and STB, as the case may be. 7. No Contest; Reimbursement of Benefits: The parties hereby mutually agree that in the event that BCS contests this Agreement, or any of the provisions hereunder, by the 3 filing or commencement of any action or proceeding relating to his employment or Termination of any kind or nature whatsoever against STB, its parent company or affiliate companies or is re-employed by STB involuntarily by court order, or an enforceable judgment is obtained against STB, then STB shall have the absolute right: (i) to enforce repayment in full on the date of such re-employment of all sums paid to BCS hereunder, which sums shall include the payment or value of any benefits received by BCS hereunder, as a credit in offset, reduction and satisfaction of all or any portion of such judgment, or, (ii) if there is no judgment, against wages due to BCS. 8. Captions: The captions set forth herein are included solely for ease and convenience of reference and are not to be considered or construed in the interpretation of this Agreement. 9. Entire Agreement: This Agreement constitutes and contains the entire agreement between the parties and no statement or representation of either party hereto, their agents, officers, directors or employees made outside of this Agreement and not contained herein shall form a part of this Agreement or be binding upon the other party. This Agreement shall not be changed, modified, altered or amended, except by written instrument signed by the parties hereto. 10. Governing Law: This Agreement shall be construed and governed in accordance with the laws of the State wherein BCS is predominantly employed, with venue appropriate in the County wherein BCS is predominantly employed. Any provision of this Agreement prohibited by law shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. In the event of any litigation or action being commenced with regard to this Agreement, the prevailing party shall be awarded their reasonable attorneys fees, costs and expenses. 11. Informed Consent and Waiver: BCS has executed this Agreement on a fully informed, voluntary basis. BCS understands and agrees that the separation benefit provided for herein will preclude BCS's right to seek other separation benefits, except as allowed by law, and that BCS has been given the right and opportunity to consult with an advisor or attorney prior to the execution of this Agreement. IN WITNESS WHEREOF, the parties hereto have made, executed and delivered this Agreement as of the day and year first above written. /s/ Robert C. Silver - ----------------------- ROBERT C. SILVER 4 SIERRA TAHOE BANCORP, a California Corporation By: /s/ William T. Fike ---------------------- William T. Fike Its: President/CEO 5 EX-10.52 5 EXHIBIT 10.52 EXHIBIT 10.52 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is executed this 28th day of August, 1998 ("Execution Date") and is deemed effective as of October 1, 1994 ("Effective Date") between SierraWest Bank, a California banking corporation ("SierraWest"), and William T. Fike ("Fike"). 1. SierraWest or its predecessors has employed Fike pursuant to a written employment agreement effective October 1, 1994, which agreement has been amended by the parties from time to time. 2. SierraWest desires to continue to employ Fike as President and Chief Executive Officer of SierraWest, and Fike desires to be so employed by SierraWest and the Parties wish to make additional amendments to the agreement. 3. This Agreement sets forth the restated and amended terms and conditions of Fike's continued employment as President and Chief Executive Officer of SierraWest, and replaces and supercedes all prior agreements relating to the subject matter hereof. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 EMPLOYMENT 1. 1.1 POSITION. Fike will continue to be employed as President and Chief Executive Officer ("CEO") of SierraWest from the date of this Agreement until his employment is terminated pursuant to its terms. As President and CEO, Fike shall: (a) report to the Board of Directors of SierraWest ("Board"); (b) assist the Board in developing and implementing SierraWest's ongoing business strategy and objectives; (c) exercise overall executive responsibility for the management and operation of SierraWest; and (d) exercise such other duties, powers and responsibilities not inconsistent with his role as President and CEO as the Board in its judgment may assign to him from time to time. In addition, Fike agrees to serve without additional compensation as a member of the Board of SierraWest and/or of any of its subsidiaries and/or to hold additional offices with SierraWest or any subsidiary, not inconsistent with his position as President and CEO, if requested by the Board of SierraWest in the reasonable exercise of its business judgment. 1.2 NON-COMPETITION DURING EMPLOYMENT. Fike shall devote substantially all of his business time, skill, attention and best efforts to SierraWest's business and shall discharge and 1 fulfill his responsibilities in a fully professional manner. Fike shall not render services to any other person or entity without the prior written consent of SierraWest, nor engage in any activity which conflicts or interferes with the full performance of his duties and responsibilities for SierraWest. The above notwithstanding, nothing in this Agreement is intended to preclude Fike from engaging reasonably in charitable or community activities so long as such activities do not interfere materially with the full performance of his duties and responsibilities under this Agreement. 1.3 TERM OF EMPLOYMENT. Fike's employment pursuant to this Agreement shall continue until December 31, 2000, unless (i) sooner terminated in accordance with Article 3 below or (ii) extended by written agreement of the parties hereto. ARTICLE 2 COMPENSATION 2. 2.1 SALARY. In consideration of services rendered, Fike will be paid a base salary at the rate of no less than $262,500 on an annualized basis, earned and payable semi-monthly or otherwise as consistent with the regular payroll periods and practices of SierraWest, less any deductions required by law or authorized by Fike. Fike will be considered for periodic increases in base salary pursuant to SierraWest's normal policies and procedures for executive salary increases, which currently provide for annual reviews of executive salaries. Any increases shall be made in the sole business judgment of the Board in light of Fike's performance, internal and external business conditions, and other factors considered appropriate by the Board. Fike's salary will not be reduced at any time below its then current level, including any periodic increases which Fike may have been granted, without both SierraWest's and Fike's consent. 2.2 INCENTIVE COMPENSATION. Fike is eligible to participate in SierraWest's annual incentive compensation program as currently established and modified from time to time. Eligibility does not guarantee the grant of any award, and actual bonus(es) (if any) payable to Fike will be determined by the terms of the Plan or its successor. SierraWest reserves the right to modify, amend or discontinue its annual incentive plan at any time. 2.3 BENEFITS. During the term of his employment under this Agreement, Fike shall receive the following benefits: (a) Fike shall be eligible to participate or continue to participate in all employee benefit plans maintained or hereinafter instituted by SierraWest, including (without limitation) any disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determinations of any committee administering such plan or program. 2 (b) Fike will continue to participate in the Salary Continuation Plan under its existing terms and conditions, which currently provides for an annual benefit of $50,000.00 per year for 20 years following retirement at age 65 or earlier death. The amount and the extent of benefits to which Fike is entitled will be governed by the terms of the Salary Continuation Plan, as may be amended from time to time. (c) SierraWest will provide Fike, for his sole use, with an automobile of a type and style consistent with his position as President and CEO and his legitimate business needs. Alternatively, SierraWest may elect in its sole discretion to provide Fike with a car allowance which will enable Fike to own or lease and operate an equivalent vehicle in accordance with SierraWest's policies, as may be amended from time to time. The purchase of an automobile for Fike shall be subject to the approval of the Compensation Committee of the Board. (d) Fike is eligible to participate in SierraWest's long-term incentive plan as may be developed and as modified from time to time. In addition, the Board may grant awards of SierraWest stock options to Fike pursuant to its Stock Option Plan or otherwise. As of the Execution Date, Fike has been awarded options to purchase 99,487 shares of stock, of which he has exercised 25,987 options. Any awards of stock options or other long-term incentives are granted at the sole discretion of the Board and subject to the terms of the Plan. SierraWest reserves the right to modify, amend or discontinue its long-term incentive plan(s) at any time. Upon termination of Fike's employment for any reason, Fike shall retain all rights to benefits vested as of the termination date under such plans and in accordance with their terms. All further rights to participate in or earn benefits under such plans shall cease as of the termination date. 2.4 EXPENSES. Fike shall be reimbursed for reasonable travel and business expenses incurred in the performance of his duties hereunder, subject to approval of the Chairman of the Board. 2.5 MEMBERSHIPS AND OTHER MAJOR PURCHASES. SierraWest shall purchase and hold in Executive's name for his use during the term of this Agreement, a full membership in Montreux Country Club located in the State of Nevada. It is agreed and understood that Executive has provided, and will continue to provide, all requested particulars to the Board Compensation Committee, regarding this membership and any other membership or other major purchases which the Board may consider purchasing for the benefit of Executive. The Board will consider and approve or disapprove such requests in the reasonable exercise of its business judgment. 3 2.5.1 Executive specifically agrees that in the event his employment is terminated for any reason pursuant to which he is not entitled, under the provisions of this Agreement, to retain ownership of the Montreux Country Club membership, or any other membership which may have been purchased in his name, he will promptly take all action necessary to transfer ownership of the membership to SierraWest. 2.5.2 SierraWest specifically agrees that in the event Fike's employment is terminated for any reason pursuant to which is he entitled, under the provisions of this Agreement, to retain ownership of the Montreux Country club membership, or any other membership which may have been purchased in his name, and further in the event that there exist any unpaid membership dues regarding the ownership of the club membership, SierraWest will pay promptly those fees. ARTICLE 3 TERMINATION OF EMPLOYMENT 3. 3.1 TERMINATION FOR CAUSE. SierraWest may terminate Fike's employment for cause without any breach of this Agreement at any time effective immediately upon giving written notice. For purposes of this Agreement, Cause is defined as any of the following: (a) Fike's conviction of (i) a felony, or (ii) misdemeanor involving moral turpitude or financial misconduct; (b) Fike engaging in fraudulent or unethical business practices forbidden by law or contrary to SierraWest's internally distributed policies, including but not limited to financial reporting and confidentiality requirements; (c) Fike misappropriating assets of SierraWest or any of its affiliates; (d) Fike engaging in any of the following conduct (after thirty days' written notice from SierraWest that he is subject to immediate termination if such conduct continues or reoccurs): (i) continued failure to perform his duties; (ii) repeated insobriety or drug use; (iii) continued or repeated absence for reasons other than disability or sickness; or (iv) failure to cure a material breach of this Agreement not otherwise described in this Section 3.1. A determination that cause as defined in subsections (b) through (d) has occurred shall be made by a vote of a majority of the Board. Upon a Termination for Cause, SierraWest shall pay Fike only: (i) his base salary through the date of termination at the rate in effect at that time; (ii) vacation and personal days accrued but unpaid through the date of termination; and (iii) reimbursement for any approved unreimbursed expenses incurred pursuant to Section 2.4 hereof. SierraWest shall have no further obligation or liability to Fike, except with respect to 4 benefits already vested pursuant to the terms of the respective benefits plans. 3.2 TERMINATION ON DEATH. Fike's employment pursuant to this Agreement shall terminate immediately upon his death. In such event, SierraWest shall pay to Fike's surviving spouse or his estate, as appropriate: (i) his salary through the date of termination at the rate in effect at that time; (ii) accrued but unpaid vacation and personal days through the date of termination; (iii) an amount equal to any bonus he would have been awarded, paid on a prorate basis, after the end of SierraWest's year and in conjunction with other executive bonus payments; and (iv) reimbursement for approved unreimbursed expenses incurred pursuant to Section 2.4 herein. SierraWest shall have no further obligation or liability to Fike, except with respect to benefits already vested pursuant to the terms of the respective benefits plans. 3.3 TERMINATION FOR COMPLETE DISABILITY. SierraWest, at its option and upon written notice to Fike, may terminate Fike's employment without any breach of this Agreement upon Fike's complete disability. For purposes of this Agreement, Complete Disability is defined as being unable to perform or substantially impaired in the performance of duties hereunder by reason of illness or other physical or mental incapacity for more than one-half of the business days in any six (6) month period. Termination for Complete Disability shall be effective upon the giving of written notice. In such event, SierraWest shall pay to Fike: (i) his salary through the date of termination at the rate in effect at that time; (ii) accrued but unpaid vacation and personal days through the date of termination; (iii) an amount equal to any bonus he would have been awarded, paid on a prorate basis, after the end of SierraWest's year and in conjunction with other executive bonus payments; and (iv) reimbursement for approved unreimbursed expenses incurred pursuant to Section 2.4 herein. SierraWest shall have no further obligation or liability to Fike, except with respect to benefits already vested pursuant to the terms of the respective benefits plans. 3.4 TERMINATION WITHOUT CAUSE OR UPON REORGANIZATION OR AT THE EXPIRATION OF THE TERM. SierraWest may terminate Fike's employment without any breach of this Agreement at any time and upon written notice Without Cause, which for purposes of this Agreement means for any reasons other than for Cause, upon Death or for Complete Disability. SierraWest may also terminate Fike's employment without any breach of this Agreement upon a Change of Control as defined herein. In the event of Termination Without Cause or Termination upon a Change of Control, or in the event that this Agreement expires at the end of its term and the parties fail to extend, renew or replace it with another employment agreement ("Termination at the Expiration of the Term), SierraWest shall pay to Fike the following, in liquidation of all its obligations under this Agreement: (i) his salary through the date of termination at the rate in effect at that time; (ii) his accrued but unpaid vacation and personal days through the date of termination; (iii) an amount equal to any bonus he would have been awarded, paid on a prorata basis, after the end of SierraWest's year and in conjunction with other executive bonus payments; (iv) reimbursement for approved unreimbursed expenses incurred pursuant to Section 2.4 herein; (v) transfer to or retention of (as applicable) his ownership, without penalty, of the automobile and club membership provided pursuant to PARA 2.3(c) and PARA 2.5 respectively of this Agreement; (vi) an amount in the nature of severance pay equal to 18 months' base salary, payable in a lump sum as soon after the date of termination as is 5 practicable; and (vii) direct payment of premiums necessary for Fike to continue his existing medical coverage for 18 months under SierraWest's group health plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended ("COBRA") so that any expense to Fike to continue such coverage is comparable to the expense which employees comparable to Fike and still employed by SierraWest are charged for comparable benefits. SierraWest shall have no further obligation or liability to Fike, except with respect to benefits already vested pursuant to the terms of the respective benefit plans. For the purposes hereof, "Change of Control" is defined as any one of the following, provided however that Change of Control shall be without the monetary assistance of the FDIC: (i) an acquisition (other than directly from SierraWest) by an individual, entity or group (excluding SierraWest or one of its employee benefit plans or an entity controlled by SierraWest's shareholders) of 20% or more of SierraWest's common stock or voting securities; (ii) a change in a majority of the current Board of Directors (excluding any persons approved by a vote of at least a majority of the Board other than in connection with an actual or threatened proxy contest); (iii) liquidation or dissolution of SierraWest or a merger, consolidation or sale of all or substantially of the SierraWest's assets ("Business Combination") other than one in which all or substantially all of SierraWest's shareholders receive 50% or more of the stock of the company resulting from the Business Combination, at least a majority of the board of directors of the resulting corporation were members of the incumbent board, and after which no person owns 20% or more of the stock of the resulting corporation who did not own such stock immediately before the Business Combination. 3.5 VOLUNTARY TERMINATION. Fike may terminate employment at any time for personal reasons by giving SierraWest 90 days' advance written notice of such termination. In this event, SierraWest will pay the salary, accrued vacation and personal days to which Fike is entitled through the end of the notice period or any other period Fike continues to provide service as mutually agreed, and SierraWest's obligations under this Agreement will then cease. Fike agrees to cooperate fully with SierraWest and the Board during the notice period or other period as agreed in order to effectuate as smooth a transition as possible. Fike will not be entitled to any annual or long-term incentive award for the year in which he voluntarily terminates his employment. SierraWest shall have no further obligation or liability to Fike, except with respect to benefits already vested pursuant to the terms of the respective benefits plans. 3.6 TERMINATION FOR GOOD REASON. Fike may also terminate his employment for "Good Reason". For purposes of this Agreement, Good Reason shall mean any one of the following: (i) any assignment to Fike of duties other than those contemplated by this Agreement or in accordance with those typically assumed by a President and Chief Executive Officer or which represent a material reduction in the scope and authority of Fike's position; (ii) a SierraWest required relocation of Fike's principal place of work which requires an increase in Fike's normal commute of more than 35 miles; (iii) any reduction in salary below his then current salary level which is not agreed to by Fike; or (iv) within the period up to 365 days following a Change of Control, Fike concludes in good faith and so notifies SierraWest or its successor on sixty (60) days' written notice that, because of changes following the Change of Control, 6 he can no longer properly or effectively discharge his duties and responsibilities, whether as President and CEO or otherwise as assigned and mutually agreed at that time. If Fike terminates his employment for Good Reason, he shall be entitled to those benefits he would have received in the event of Termination Upon Change of Control. 3.7 TERMINATION OBLIGATIONS. Fike acknowledges and agrees that all personal property and equipment furnished to or prepared by Fike in the course of or incident to his employment belong to the SierraWest and shall be promptly returned to SierraWest upon termination of employment. 3.8 NON-COMPETITION FOLLOWING TERMINATION. Following termination of employment for any reason other than in connection with a Change of Control, and while receiving any termination payments from SierraWest or its successor, Fike shall not provide service or assistance to or otherwise become associated with, either an employee, director, owner, consultant or other affiliate, any business within 125 miles of any SierraWest facility or subsidiary whose principal business activities compete with the principal business activities of SierraWest or any subsidiary. The requirement regarding non-competition shall be eliminated in the event that Fike's employment is terminated either by SierraWest, or any successor, in connection with a Change of Control or by Fike's resignation for Good Reason in connection with a Change of Control. In addition, for a period of two years from the date of termination Fike shall not, directly or indirectly, solicit, entice or encourage any then-current employees of SierraWest to terminate their employment with SierraWest or its Affiliates and accept employment with any company, partnership, corporation or other organization of which Fike is a partner, employee, stock holder, director, officer, consultant or otherwise is affiliated. 3.9 PROPRIETARY INFORMATION. During the Period of Employment and for two years following any termination of employment, Fike shall not, without written consent of SierraWest, disclose to any person, other than an employee of SierraWest or its Affiliates, or use for his own benefit, any material confidential or proprietary information or any trade secrets obtained while an employee of SierraWest. For purposes of this agreement, confidential or proprietary information means all business information of whatever nature regarding SierraWest, its subsidiaries and affiliated companies, or about any of its products, potential products, lending or distribution processes which is not generally known to the public at large. Trade secrets means information which derives independent economic value from not being generally known to the public or to others who can derive economic value from its disclosure or use and is the subject of reasonable efforts to maintain its secrecy. This information specifically includes but is not limited to technological information, customer lists, types and prices of product, future plans, sales methods, and salary and other personnel information. 7 ARTICLE 4 MISCELLANEOUS 4. 4.1 INDEMNIFICATION. SierraWest shall indemnify and hold harmless Fike to the maximum extent permitted by law against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees incurred by him, in connection with the defense of, or as a result of any action or proceeding in which he is made or is threatened to be made a party by reason of the fact that he is or was an officer of the Company, regardless of whether such action or proceeding is one brought by or in the right of SierraWest. Fike agrees to reimburse SierraWest for all sums paid pursuant to this provision in the event it is ultimately determined by a court of competent jurisdiction that payment of any specific sum was inappropriate under this provision. SierraWest represents and warrants that these undertakings are not in conflict with its articles or bylaws or with any validly existing agreement or other proper corporate action. 4.2 ASSIGNMENT. This Agreement may not be assigned by either party hereto without the prior written consent of the other. This Agreement is personal to Fike and, except as expressly set forth herein, the rights of Fike hereunder shall not inure to any successor, assignee, beneficiary or legal representative of Fike. 4.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 4.4 NOTICES. All notices hereunder shall be in writing and shall be deemed given upon personal delivery or upon certified mailing, return receipt requested, to the addresses set forth below: If to SierraWest: SierraWest Bank P.O. Box 61000 Truckee, CA 96160 Attention: Chairman of the Board If to Fike: William T. Fike SierraWest Bank P.O. Box 61000 Truckee, CA 96160 Either party may change its notice address by written notice to the other in accordance herewith. 8 4.5 AMENDMENT: ENTIRE AGREEMENT. This Agreement may be amended only by a writing signed by both parties. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, and expressly terminates and supersedes any and all prior oral and written understandings and agreements with regard to such subject matter. 4.6 ATTORNEY'S FEES. If any action is brought hereunder, the prevailing party shall be entitled to recover all costs of such action, including, without limitation, reasonable attorneys' fees, to be fixed by the court or arbitrator in such action. 4.7 ARBITRATION. SierraWest and Fike understand and agree that in the event that any dispute arises between the parties as to interpretation, validity, or enforcement of any part of this Agreement, any and all such disputes shall be resolved exclusively through final and binding arbitration in Sacramento, California, in accordance with the Commercial Arbitration Rules, then existing, of the American Arbitration Association ("Association"). Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided however that SierraWest shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of the confidentiality or non-compete provisions of this Agreement and Fike hereby consents that such restraining order or injunction may be granted without the necessity of SierraWest posting any bond. 4.8 SEVERABILITY AND ENFORCEMENT. If any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of the Agreement shall remain in full force and effect. 4.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of October 1, 1994. SIERRAWEST BANK, a California banking corporation By: /s/ Jerrold T. Henley Date: 9/4/98 -------------------------- ------- Jerrold T. Henley Chairman of the Board /s/ William T. Fike Date: 8/28/98 -------------------------- ------- William T. Fike 9 EX-10.53 6 EXHIBIT 10.53 EXHIBIT 10.53 RESTATED AND AMENDED SENIOR MANAGER SEPARATION BENEFITS AGREEMENT THIS RESTATED AND AMENDED SENIOR MANAGER SEPARATION BENEFITS AGREEMENT ("Agreement") is made and entered into as of September 21, 1998 and deemed effective as of January 10, 1996, by and between SIERRAWEST BANK, a California banking corporation and its banking subsidiary TRUCKEE RIVER BANK (hereinafter "Company"), with its principal offices located at 10181 Truckee Tahoe Airport Road, P.O. Box 61000, Truckee, California 96161 and Robert C. Silver, an individual ("Executive"). This Agreement replaces and supercedes all prior agreements between the parties relating to the subject matter hereof. WITNESSETH WHEREAS, Executive currently serves as a senior officer and 'at will' employee of Company and reasonably expects to remain a senior officer and employee subject to the policies and conditions contained within the Company's Personnel Policies and Procedures; WHEREAS, the parties deem it to be in their respective and mutual best interests to agree on appropriate and reasonable separation compensation payable to Executive should Executive's employment with Company terminate under certain circumstances. NOW, THEREFORE, in consideration of the promises set forth below and for other good and valuable consideration, the parties agree as follows: 1. Applicability of Agreement: Definition of Termination: This Agreement provides for additional benefits not otherwise due to Executive and/or to employees generally upon employment termination and is intended to become operative only upon Executive's termination of employment and only under the following circumstances: (i) termination by Company "without cause;" or (ii) resignation by Executive "for good reason." Termination of employment due to Executive's death, disability, "cause" or resignation other than "for good reason" is not covered by this Agreement. (a) For purposes of this Agreement, "cause" is defined as any one or more of the following: (i) conduct constituting a felony, a misdemeanor involving moral turpitude or financial misconduct; (ii) engaging in fraudulent or unethical business practices prohibited by law or company policies; (iii) material violation of any company policies or procedures, as determined by the Human Resources director and the Personnel Committee of the Board of Directors; (iv) continued failure, refusal or inability to perform material job duties, repeated drug or alcohol abuse, or a pattern of absence for reasons other than disability or illness, (all following ten days' written notice setting forth the nature of the 1 basis as described in subsection (iv)). (b) For purposes of this Agreement, resignation "for good cause" means resignation in response to and reasonably promptly following a material reduction in job duties and responsibilities and/or material reduction in compensation, which material reduction in job duties, responsibilities and/or compensation occurs within six (6) months following a Change of Control. For this purpose, Change of Control is defined as any one of the following, provided however that Change of Control shall be without the monetary assistance of the FDIC: (i) an acquisition (other than directly from Company) by an individual, entity or group (excluding Company or one of its employee benefit plans or an entity controlled by Company's shareholders) of 20% or more of Company's common stock or voting securities; (ii) a change in a majority of the current Board of Directors (excluding any persons approved by a vote of at least a majority of the Board other than in connection with an actual or threatened proxy contest); (iii) liquidation or dissolution of Company or a merger, consolidation or sale of all or substantially of the Company's assets ("Business Combination") other than one in which all or substantially all of Company's shareholders receive 50% or more of the stock of the company resulting from the Business Combination, at least a majority of the board of directors of the resulting corporation were members of the incumbent board, and after which no person owns 20% or more of the stock of the resulting corporation who did not own such stock immediately before the Business Combination. 2. Conditions For Payment of Separation Benefits. Separation benefits set forth in Paragraph 3 are due and payable to Executive only after each of the following requirements has been satisfied: a. A termination as defined in Paragraph 1 has occurred; b. Executive has left or will promptly thereafter leave his/her employment; and c. Executive has executed a waiver, release and indemnification in a form acceptable to the Company with regard to any and all claims which might be brought relating to his employment with the Company or termination therefrom; and d. Executive has agreed, in a form acceptable to the Company, to maintain the confidentiality of any and all confidential and/or proprietary information and/or trade secrets, processes and plans of the Company learned or otherwise made known to him during his employment. 3. Separation Benefits. In addition to any earned but unpaid compensation (including salary and vacation) up to the termination date, and in addition to any vested benefits to which Executive may be entitled up to the termination date under any other plan or agreement with the Company, the Company will pay Executive, at his option, either a or b below: a. A lump sum payment equal to NINE (9) months of monthly salary, less any and all necessary withholdings and authorized deductions arising from benefit elections or any other sums required to be deducted by law, rule or regulation. If Executive elects this option, and further if Executive elects to continue health coverage pursuant to the provisions of the 2 Consolidated Omnibus Reconciliation Act of 1986, as amended ("COBRA") Executive will be required to pay the full premium rate authorized by COBRA for any continued health insurance coverage elected at the time of Termination; or b. Continuation of monthly salary for NINE (9) months, less any and all necessary withholdings and authorized deductions arising from benefit elections, or any other sums required to be deducted by law, rule or regulation. If Executive elects this option, and further if Executive elects to continue health coverage pursuant to the provisions of COBRA, the Company will continue to charge Executive the applicable employee coverage rate for Nine (9) months provided such arrangement does not violate any existing policy or law and provided that the employee rate is lower than the COBRA rate that may be assessed. The payment option elected shall be deemed the "Separation Benefit" and will result automatically in a waiver of any other separation benefits which might be due to Executive following the Termination as more fully set forth in Paragraph 4. 4. Acknowledgment, Express Waiver and Release of Other Separation Benefits. Executive acknowledges that the Separation Benefit paid pursuant to this Agreement exceeds any benefits he is otherwise entitled to receive, and further that payments hereunder are deemed to satisfy fully any other obligations that the Company may have with regard to separation benefits payable upon his termination, including but not limited to any laws or customs regarding reduction in force or job-site closing. To the extent that any additional sums are adjudicated or otherwise determined to be required to be paid to Executive on termination, the parties agree that all sums paid pursuant to this Agreement shall be credited automatically against any amounts otherwise determined to be required to be paid. 5. Binding Effect of Agreement. This Agreement shall inure to the benefit of and be binding upon the heirs, administrators, personal representatives, successors and assigns of the Company and Executive respectively. 6. At Will Employment. Executive acknowledges that nothing in this Agreement is intended to change the "at will" nature of his employment. 7. Captions: The captions set forth herein are included solely for ease and convenience of reference and are not to be considered or construed in the interpretation of this Agreement. 8. Entire Agreement: This Agreement constitutes the entire agreement between the parties and no statement or representation of either party hereto, their agents, officers, directors or employees made outside of this Agreement and not contained herein shall form a part of this Agreement or be binding upon the other party. This Agreement shall not be changed, modified, altered or amended, except by written instrument signed by the parties hereto. 9. Governing Law: This Agreement shall be construed and governed in accordance with the laws of the State of California, with venue appropriate in the County wherein Executive is predominantly employed. Any provision of this Agreement prohibited by law shall be 3 ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. In the event of any litigation or action being commenced with regard to this Agreement, the prevailing party shall be awarded its reasonable attorneys fees, costs and expenses. 10. Authority and Informed Consent: Executive represents and warrants that he has the sole right and exclusive authority to execute this Agreement and that he is not restricted in so doing; that he is executing this Agreement on a fully informed, voluntary basis; and that he has had a full and complete opportunity to seek and obtain the advice of counsel or other adviser of his choosing prior to executing this Agreement. IN WITNESS WHEREOF, the parties hereto have made, executed and delivered this Agreement as of the day and year first above written. /s/ Robert C. Silver - -------------------- Robert C. Silver SIERRAWEST BANK, a California corporation /s/ William T. Fike - ----------------------- By: William T. Fike Its: President and CEO 4 EX-10.54 7 EXHIBIT 10.54 EXHIBIT 10.54 RESTATED AND AMENDED SENIOR MANAGER SEPARATION BENEFITS AGREEMENT THIS RESTATED AND AMENDED SENIOR MANAGER SEPARATION BENEFITS AGREEMENT ("Agreement") is made and entered into as of September 21, 1998 and deemed effective as of January 10, 1996, by and between SIERRAWEST BANK, a California banking corporation and its banking subsidiary TRUCKEE RIVER BANK (hereinafter "Company"), with its principal offices located at 10181 Truckee Tahoe Airport Road, P.O. Box 61000, Truckee, California 96161 and Mary Jane Posnien, an individual ("Executive"). This Agreement replaces and supercedes all prior agreements between the parties relating to the subject matter hereof. WITNESSETH WHEREAS, Executive currently serves as a senior officer and 'at will' employee of Company and reasonably expects to remain a senior officer and employee subject to the policies and conditions contained within the Company's Personnel Policies and Procedures; WHEREAS, the parties deem it to be in their respective and mutual best interests to agree on appropriate and reasonable separation compensation payable to Executive should Executive's employment with Company terminate under certain circumstances. NOW, THEREFORE, in consideration of the promises set forth below and for other good and valuable consideration, the parties agree as follows: 1. APPLICABILITY OF AGREEMENT: DEFINITION OF TERMINATION: This Agreement provides for additional benefits not otherwise due to Executive and/or to employees generally upon employment termination and is intended to become operative only upon Executive's termination of employment and only under the following circumstances: (i) termination by Company "without cause;" or (ii) resignation by Executive "for good reason." Termination of employment due to Executive's death, disability, "cause" or resignation other than "for good reason" is not covered by this Agreement. (a) For purposes of this Agreement, "cause" is defined as any one or more of the following: (i) conduct constituting a felony, a misdemeanor involving moral turpitude or financial misconduct; (ii) engaging in fraudulent or unethical business practices prohibited by law or company policies; (iii) material violation of any company policies or procedures, as determined by the Human Resources director and the Personnel Committee of the Board of Directors; (iv) continued failure, refusal or inability to perform material job duties, repeated drug or alcohol abuse, or a pattern of absence for reasons other than disability or illness, (all following ten days' written notice setting forth the nature of the basis as described in subsection (iv)). (b) For purposes of this Agreement, resignation "for good cause" means 1 resignation in response to and reasonably promptly following a material reduction in job duties and responsibilities and/or material reduction in compensation, which material reduction in job duties, responsibilities and/or compensation occurs within six (6) months following a Change of Control. For this purpose, Change of Control is defined as any one of the following, provided however that Change of Control shall be without the monetary assistance of the FDIC: (i) an acquisition (other than directly from Company) by an individual, entity or group (excluding Company or one of its employee benefit plans or an entity controlled by Company's shareholders) of 20% or more of Company's common stock or voting securities; (ii) a change in a majority of the current Board of Directors (excluding any persons approved by a vote of at least a majority of the Board other than in connection with an actual or threatened proxy contest); (iii) liquidation or dissolution of Company or a merger, consolidation or sale of all or substantially of the Company's assets ("Business Combination") other than one in which all or substantially all of Company's shareholders receive 50% or more of the stock of the company resulting from the Business Combination, at least a majority of the board of directors of the resulting corporation were members of the incumbent board, and after which no person owns 20% or more of the stock of the resulting corporation who did not own such stock immediately before the Business Combination. 2. CONDITIONS FOR PAYMENT OF SEPARATION BENEFITS. Separation benefits set forth in Paragraph 3 are due and payable to Executive only after each of the following requirements has been satisfied: a. A termination as defined in Paragraph 1 has occurred; b. Executive has left or will promptly thereafter leave his/her employment; and c. Executive has executed a waiver, release and indemnification in a form acceptable to the Company with regard to any and all claims which might be brought relating to his employment with the Company or termination therefrom; and d. Executive has agreed, in a form acceptable to the Company, to maintain the confidentiality of any and all confidential and/or proprietary information and/or trade secrets, processes and plans of the Company learned or otherwise made known to him during his employment. 3. SEPARATION BENEFITS. In addition to any earned but unpaid compensation (including salary and vacation) up to the termination date, and in addition to any vested benefits to which Executive may be entitled up to the termination date under any other plan or agreement with the Company, the Company will pay Executive, at his option, either a or b below: a. A lump sum payment equal to NINE (9) months of monthly salary, less any and all necessary withholdings and authorized deductions arising from benefit elections or any other sums required to be deducted by law, rule or regulation. If Executive elects this option, and further if Executive elects to continue health coverage pursuant to the provisions of the Consolidated Omnibus Reconciliation Act of 1986, as amended ("COBRA") Executive will be required to pay the full premium rate authorized by COBRA for any continued health 2 insurance coverage elected at the time of Termination; or b. Continuation of monthly salary for NINE (9) months, less any and all necessary withholdings and authorized deductions arising from benefit elections, or any other sums required to be deducted by law, rule or regulation. If Executive elects this option, and further if Executive elects to continue health coverage pursuant to the provisions of COBRA, the Company will continue to charge Executive the applicable employee coverage rate for Nine (9) months provided such arrangement does not violate any existing policy or law and provided that the employee rate is lower than the COBRA rate that may be assessed. The payment option elected shall be deemed the "Separation Benefit" and will result automatically in a waiver of any other separation benefits which might be due to Executive following the Termination as more fully set forth in Paragraph 4. 4. ACKNOWLEDGMENT, EXPRESS WAIVER AND RELEASE OF OTHER SEPARATION BENEFITS. Executive acknowledges that the Separation Benefit paid pursuant to this Agreement exceeds any benefits he is otherwise entitled to receive, and further that payments hereunder are deemed to satisfy fully any other obligations that the Company may have with regard to separation benefits payable upon his termination, including but not limited to any laws or customs regarding reduction in force or job-site closing. To the extent that any additional sums are adjudicated or otherwise determined to be required to be paid to Executive on termination, the parties agree that all sums paid pursuant to this Agreement shall be credited automatically against any amounts otherwise determined to be required to be paid. 5. BINDING EFFECT OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the heirs, administrators, personal representatives, successors and assigns of the Company and Executive respectively. 6. AT WILL EMPLOYMENT. Executive acknowledges that nothing in this Agreement is intended to change the "at will" nature of his employment. 7. CAPTIONS: The captions set forth herein are included solely for ease and convenience of reference and are not to be considered or construed in the interpretation of this Agreement. 8. ENTIRE AGREEMENT: This Agreement constitutes the entire agreement between the parties and no statement or representation of either party hereto, their agents, officers, directors or employees made outside of this Agreement and not contained herein shall form a part of this Agreement or be binding upon the other party. This Agreement shall not be changed, modified, altered or amended, except by written instrument signed by the parties hereto. 9. GOVERNING LAW: This Agreement shall be construed and governed in accordance with the laws of the State of California, with venue appropriate in the County wherein Executive is predominantly employed. Any provision of this Agreement prohibited by law shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. In the event of 3 any litigation or action being commenced with regard to this Agreement, the prevailing party shall be awarded its reasonable attorneys fees, costs and expenses. 10. AUTHORITY AND INFORMED CONSENT: Executive represents and warrants that he has the sole right and exclusive authority to execute this Agreement and that he is not restricted in so doing; that he is executing this Agreement on a fully informed, voluntary basis; and that he has had a full and complete opportunity to seek and obtain the advice of counsel or other adviser of his choosing prior to executing this Agreement. IN WITNESS WHEREOF, the parties hereto have made, executed and delivered this Agreement as of the day and year first above written. /s/ Mary Jane Posnien - --------------------- Mary Jane Posnien SIERRAWEST BANK, a California corporation By: /s/ William T. Fike ----------------------- William T. Fike Its: President and CEO 4 EX-10.55 8 EXHIBIT 10.55 EXHIBIT 10.55 AMENDMENT NO. 1 TO SENIOR MANAGER SEPARATION BENEFITS AGREEMENT This amendment No. 1 ("Amendment") to the Senior Manager Separation Benefits Agreement by and between Sierra Tahoe Bankcorp, predecessor to SierraWest Bank, a California corporation ("Company") and David C. Broadley, and individual ("DCB") and dated as of January 17, 1996 ("Agreement") is made and entered into as of November 09, 1998 by and between Company and DCB. WHEREAS, DCB continues to serve as a senior officer and "at-will" employee of Company and reasonably expects to remain a senior officer and employee subject to the policies and conditions of the Company; and WHEREAS, the parties deem it in their best interest to amend the Agreement to provide an additional benefit to DCB upon his termination of service with the Company. NOW, THEREFORE, in consideration of the promises set forth below and for other good and valuable consideration, the parties agree as follows: 1. The provisions of Section 3 of the Agreement, under the heading "SEPARATION BENEFITS" shall be renumbered as Section 3(A), the text of which shall otherwise remain the same. At the end of Section 3(A), a new subsection 3(B) shall be inserted, the full text of which is as follows: "ADDITIONAL BENEFIT. Upon the termination of service of DCB for any reason except for termination for cause, the Company will transfer to DCB the ownership of whatever automobile the Company may be providing to him at the time of termination, whether such automobile is being provided pursuant to the Company's regular car allowance program or otherwise. The Company shall transfer ownership of such automobile to DCB promptly following the termination. The Company will also provide DCB such documents or other records necessary for him to properly record and/or account for such transfer to his ownership." 2. Except as amended herein, all other provisions of the Agreement remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year written above. /s/ David C. Broadley - --------------------- DAVID C. BROADLEY SIERRAWEST BANK By: /s/ William T. Fike ------------------- Its: President & CEO ------------------- 1 EX-10.56 9 EXHIBIT 10.56 EXHIBIT 10.56 SECOND AMENDMENT TO SENIOR MANAGER SEPARATION BENEFITS AGREEMENT This Second Amendment to the Senior Manager Separation Benefits Agreement (the "Agreement") is made this 20th day of March, 1998 by and between, Sierra West Bancorp, a California Corporation (formerly known as Sierra Tahoe Bancorp) and its banking subsidiary, Sierra West Bank (formerly known as Truckee River Bank) ("collectively, SWB"), and Patrick S. Day, an individual ("PSD"), as follows: RECITALS: A. On or about January 10, 1996, SWB and PSD entered into a Senior Manager Separation Benefits Agreement wherein the parties preagreed upon reasonable separation compensation to be paid to PSD should SWB ever determine that PSD should, for whatever reason, be terminated from his position and leave the company. B. Since the execution of the Agreement, PSD has been allotted additional duties and responsibilities and, due to the change in responsibilities, is eligible for additional compensation under the Agreement. C. PSD and SWB wish to amend certain terms of the Agreement. NOW, THEREFORE, the parties agree as follows: The references to "NINE (9) in Paragraphs 3(A) and 3(B) on page 3 of the Agreement shall be deleted in their entirety and in their place and stead shall be inserted references to "TWELVE (12)". Except as herein amended, all terms and conditions of the Agreement shall remain the same. IN WITNESS WHEREOF the parties hereto have set their hands as of the date and 1 year first above written. /s/ Patrick S. Day - ---------------------- PATRICK S. DAY ("PSD") SIERRA WEST BANCORP, a California Corporation ("SWB") By: /s/ William Fike -------------------- William Fike, Its: Chief Executive Office 2 EX-10.57 10 EXHIBIT 10.57 Exhibit 10.57 FIRST AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT ("Amendment") to that Amended and Restated Employment Agreement dated August 28, 1998 ("Agreement") is entered into between SierraWest Bank, a California banking corporation ("SierraWest") and William T. Fike ("Fike") as of January 8, 1999. NOW THEREFORE, the parties hereto agree as follows: 1. The Agreement is hereby amended to add a new Section 2.6 as follows: 2.6 SECTION 280G CUTBACK PROVISION. Notwithstanding any other provision of this Agreement, if any payment to be made or benefit to be provided to Fike pursuant to this Agreement, after taking into account all other payments or benefits provided by SierraWest to Fike, would constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the payments to be made or benefits to be provided to Fike shall be reduced so that the Aggregate present value of all parachute payments does not exceed 299% of Fike's "annualized includible compensation for the base period" (as such term is defined in Section 280G(d)(1) of the Code). The determination of any reduction in the payments or benefits to be provided to Fike shall be made by SierraWest and any dispute with respect thereto shall be resolved in accordance with Section 4.7 of this Agreement. 2. All other terms and conditions of the Agreement shall remain in full force and effect. 3. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment to be effective as of October 1, 1994. SIERRAWEST BANK, a California banking corporation By: /s/ Jerrold T. Henley Date: 1/8/99 --------------------- Jerrold T. Henley Chairman of the Board /s/ William T. Fike Date: 1/8/99 ------------------- William T. Fike 3 EX-10.58 11 EXHIBIT 10.58 EXHIBIT 10.58 BOARD POLICY REGARDING TAXATION OF NONQUALIFIED OPTION EXERCISE UPON AND AFTER CHANGE OF CONTROL BACKGROUND: The Company has issued to its directors and/or executive officers certain nonqualified options in Company stock. The recipient of a nonqualified option grant can expect to realize income taxable at ordinary income rates under Section 83(a) of the Internal Revenue Code. This taxation is normally triggered upon exercise or other disposition of the option(s) under Treasury Regulation 1.83-7(b)(2) and in most cases not on the date of grant. The income tax realized is based upon the spread between the excess in fair market value over the exercise price. This spread, taxed at ordinary income tax rates, will be included in the optionees' taxable income in the year exercised or disposed of. Since nonqualifed options are considered to be issued - - in part - - in recognition of or payment for director and/or executive officer services, they have an appearance of wages, and certain taxes may be required to be paid related to the exercise. Yet, due to the unique nature of nonqualifed options, and recognizing that the exercise price must go to the corporation to purchase the stock, an alternative mechanism must be found to "fund" the payment of taxes. This is normally through the sale of some of the stock being exercised. It is in the Company's interest to see that the director and/or executive officer who exercises nonqualifed options to purchase Company stock be required to sell as little stock as possible in order to fund this tax obligation related to the exercise of nonqualified stock options. One method to minimize the number of shares that a director and/or executive officer is required to liquidate to fund the tax obligation is to refund an indirect tax benefit given to the Company and created by the exercise. Upon exercise or other disposition of the nonqualifed option, the Company normally receives an equivalent deduction for the spread being taxed to the optionee. This is, essentially, the mirror image of the sum being taxed to the optionee and is a deduction given to the Company due to the decision of the director to exercise and not due to any direct activity of the Company. As such, it is in its nature simply a windfall to the Company that results in a tax benefit to the Company given for no other reason than the exercise of a nonqualified option. That windfall has an ascertainable value which can be a refundable payment to the optionee. The Directors feel that prior to any change in control that the tax burden imposed upon the exercising optionee should be borne by the exercising optionee and the reciprocal tax benefit remaining with the Company as its benefit since the decision to exercise is the optionee's decision. However, upon change of control in the Company, the decision to exercise become less voluntary. A director or executive officer's service may be terminated at that point - either immediately or sometime after the change in control has occurred. The director or executive officer, pursuant to the plan which issued the nonqualifed options would likely be required to exercise those options, if at all, at potentially a tax disadvantageous time. As such, the Directors feel that the company 1 should assist a director or executive officer at such time to minimize the tax burden imposed by exercising nonqualifed options following the change in control and continuing thereafter until the service of the optionee as director and/or executive officer ends. If during the period between change in control and termination of employment an optionee exercises the nonqualified option(s) granted, either in part or in whole, the Company acknowledges that such exercise may not be wholly voluntary and agrees to be responsible for refunding a sum equal to the imputed tax benefit(s) provided to the Company by the option exercise occurring upon or after change of control and paying or crediting said imputed tax benefit to the optionee as set forth below. POLICY: The Board, pursuant to its enabling resolution passed in August 1997, hereby institutes the following specific policies: NONQUALIFIED OPTIONS EXERCISED PRIOR TO CHANGE IN CONTROL. Directors or executive officers exercising any nonqualifed options prior to the effective date for change in control of the Company (change of control being generally defined as an acquisition of more than 20% of the Company's common stock; a change in the majority of the current Board of Directors; or, the liquidation or dissolution of the Company or of substantially all the assets of the Company) shall be responsible for any and all taxes incurred as a result of his or her exercise as set forth in the plan governing the nonqualified options and applicable law. No payment or credit shall be given to the exercising optionee for pre-change of control exercises of nonqualified options for the imputed tax benefit realized by the Company as a result of exercise of nonqualified options. NONQUALIFIED OPTIONS EXERCISED UPON OR AFTER CHANGE OF CONTROL. Directors or executive officers exercising any nonqualifed options upon or after the effective date for changing control of the Company (change in control being generally defined as an acquisition of more than 20% of the Company's common stock; a change in the majority of the current Board of Directors; or the liquidation or dissolution of the Company or of substantially all the assets of the Company) until the termination of employment shall be responsible for any and all taxes incurred as a result of his or her exercise as set forth in the plan governing the nonqualified options and applicable law; provided, however, and under the circumstances of this subparagraph (b), the Company agrees to and shall pay to the director or executive officer within fifteen (15) days of receipt of the sums from the optionee to purchase nonqualifed options the estimated imputed value of the tax benefit realized or reasonably estimated to be realized by the Company, if any, as a result of the exercise. Should, upon later final determination, the estimated imputed value be found to be greater than or less than the estimated payment made to the optionee, an appropriate adjusting payment to or from the optionee shall be made. 2 EX-23.1 12 EXHIBIT 23.1 Exhibit 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement No. 33-13031, Registration Statement No. 33-15013, Registration Statement No. 33-28004, and Registration Statement No. 33-51773 of SierraWest Bancorp on Forms S-8, of our report dated January 29, 1999 (February 25, 1999 as to the first paragraph of Note 20 to the consolidated financial statements) appearing in the Annual Report on Form 10-K of SierraWest Bancorp for the year ended December 31, 1998. /s/ Deloitte & Touche LLP Sacramento, California March 25, 1999 EX-27.1 13 EXHIBIT 27.1 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SIERRAWEST BANCORP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 53,481 0 14,400 0 133,982 0 0 624,983 8,709 869,169 782,552 0 15,409 2,650 0 0 45,983 32,287 879,169 54,593 6,256 4,253 65,102 24,940 25,620 39,482 2,370 317 38,268 13,445 7,678 0 0 7,678 1.49 1.41 5.29 8,664 3,156 1,916 570 7,891 2,067 515 8,709 8,709 0 0
EX-27.2 14 EXHIBIT 27.2 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SIERRAWEST BANCORP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 58,345 0 22,275 0 107,309 1,000 1,000 553,713 7,891 786,746 701,001 0 10,946 5,416 0 0 42,148 27,235 786,746 50,383 6,040 2,004 58,565 22,497 23,221 35,344 2,799 50 31,610 14,621 8,948 0 0 8,948 1.96 1.73 5.52 6,949 1,576 1,922 1,304 5,647 1,714 295 7,891 7,891 0 0 AMENDED TO CORRECT CLERICAL ERROR ON RESTATED SCHEDULE LINE ITEM "INTEREST- EXPENSE FILED 9/3/98 ON FORM 10-Q/A. ORIGINAL AMOUNT $724- CORRECTED AMOUNT $23,221.
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