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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
Commission file number: 0-19231
WESTERN SIERRA BANCORP
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(Exact name of Registrant as specified in its charter)
CALIFORNIA 68-0390121
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(State or other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
3350 COUNTRY CLUB DR., SUITE 202, CAMERON PARK, CA 95682
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (530) 677-5600
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed under 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
the filing requirements for the past 90 days. Yes X No ___
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 [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates on March 1, 2001 (based on the closing sale price of the
Common Stock) was $34,796,588.
As of March 1, 2001 there were 3,448,782 shares outstanding of the
Registrant's common stock.
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TABLE OF CONTENTS
PAGE
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PART I
Forward-Looking Information........................................................................................... 3
Item 1. Business............................................................................................ 4
Item 2. Properties.......................................................................................... 11
Item 3. Legal Proceedings................................................................................... 11
Item 4. Submission of Matters to a Vote of Securities Holders............................................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................... 12
Item 6. Selected Financial Data............................................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................... 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.......................................... 31
Item 8. Financial Statements and Supplementary Data......................................................... 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................................................. 36
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................. 36
Item 11. Executive Compensation.............................................................................. 36
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 36
Item 13. Certain Relationships and Related Transactions...................................................... 36
PART IV
Item 14. Exhibits, Financial Statements, Financial Statements Schedules and
Reports on Form 8-K................................................................................. 37
2
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes forward-looking information which is
subject to the "safe harbor" created by the Securities Act of 1933 and
Securities Exchange Act of 1934. These forward-looking statements (which
involve the Western Sierra Bancorp's (Western Sierra) plans, beliefs and
goals, refer to estimates or use similar terms) 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 and changes in the
regulatory environment
- Changes in the interest rate environment and volatility of rate
sensitive deposits
- Declines in the health of the economy nationally or regionally which
could reduce the demand for loans or reduce the value of real estate
collateral securing most of the Company's loans
- Credit quality deterioration which could cause an increase in the
provision for loan losses
- Changes in the securities markets
- Asset/Liability matching risks and liquidity risks
Western Sierra undertakes no obligation to revise or publicly release the
results of any revision to these forward-looking statements. For additional
information concerning risks and uncertainties related to Western Sierra and
its operations please refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 and other information
in this Report.
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. Western Sierra Bancorp was incorporated under the laws of the State
of California on July 11, 1996. Western Sierra was organized pursuant to a
plan of reorganization for the purpose of becoming the parent corporation of
Western Sierra National Bank, and on December 31, 1996, the reorganization
was effected and shares of Western Sierra common stock were issued to the
shareholders of Western Sierra National Bank for the common shares held by
Western Sierra National Bank's shareholders. In April 1999, Western Sierra
acquired Roseville 1st National Bank and Lake Community Bank in a stock for
stock exchange. In May of 2000, Western Sierra acquired Sentinel Community
Bank in a stock for stock exchange. In addition, these mergers were accounted
for as a pooling of interest and accordingly, all prior period financial
statements have been restated to reflect the combined operations of Western
Sierra, Roseville 1st National Bank, Lake Community Bank and Sentinel
Community Bank. Sentinel Community Bank was merged into Western Sierra
National Bank. Also in May of 2000, Roseville 1st National Bank was merged
into Western Sierra National Bank. In October of 2000, Western Sierra
National Bank purchased the deposits and certain other assets and liabilities
of the Columbia branch of Pacific State Bank. Western Sierra is a registered
bank holding company under the Bank Holding Company Act. Western Sierra
conducts its operations at 3350 Country Club Drive, Suite 202, Cameron Park,
California 95682.
Western Sierra National Bank was organized under national banking laws and
commenced operations as a national bank on January 4, 1984. Western Sierra
National Bank is a member of the Federal Reserve System and its deposits are
insured to the maximum amount permitted by law by the FDIC. Western Sierra
National Bank's head office is located at 4011 Plaza Goldorado Circle,
Cameron Park, and its branch offices are located at 2661 Sanders Drive,
Pollock Pines, 3970 J Missouri Flat Road, Placerville, 1450 Broadway,
Placerville, 3880 El Dorado Hills Blvd., El Dorado Hills, 571 5th Street,
Lincoln, 1545 River Park Dr. #101 & #200, Sacramento, 229 South Washington
Street, Sonora, 13753-A Mono Way, Sonora, 18711 Tiffeni Drive, Twain Harte,
1801 Douglas Blvd., Roseville, 6951 Douglas Blvd., Granite Bay, and 22712
Main Street, Columbia. Western Sierra National Bank does not have any
affiliates or subsidiaries, other than Lake Community Bank and Sentinel
Associates, Inc.
Roseville 1st National Bank was founded in 1983 as Countryside Thrift and
Loan (Countryside). Countryside operated as an industrial loan company until
its conversion to a national bank on July 1, 1992. Roseville 1st National
Bank was merged into Western Sierra National Bank in May of 2000, and
operates as a DBA Roseville 1st National Bank - a branch of Western Sierra
National Bank.
Lake Community Bank was incorporated as a banking corporation under the laws
of the State of California on March 9, 1984 and commenced operations as a
California state-chartered bank on
4
November 15, 1984. Lake Community Bank is an insured bank under the Federal
Deposit Insurance Act and is not a member of the Federal Reserve System. Lake
Community Bank engages in the general commercial banking business in Lake
County in the State of California from its headquarters banking office
located at 805 Eleventh Street, Lakeport, California, and its branch located
at 4280 Main Street, Kelseyville, California. Lake Community Bank does not
have any affiliates or subsidiaries, other than Western Sierra National Bank
and Sentinel Associates, Inc.
Sentinel Community was incorporated under the laws of the State of California
on December 24, 1980, and commenced operations on April 2, 1982. The
corporation was formed as a State Chartered Savings and Loan Association.
Sentinel Community converted its charter to a Federal Savings and Loan
Association on June 9, 1989. In October of 1996, Sentinel Community changed
its name to Sentinel Community Bank, while remaining chartered as a Federal
Savings and Loan Association. Sentinel Community Bank was merged into Western
Sierra National Bank in May, 2000, and operates as a DBA Sentinel Community
Bank - a branch of Western Sierra National Bank.
Western Sierra has an inactive subsidiary (acquired from Sentinel), Sentinel
Associates, Inc., which is administered out of the main office. Sentinel
Associates, Inc., was formed in October, 1983, for the purpose of developing
single family residential real estate.
BANKING SERVICES. Western Sierra is a locally owned and operated bank holding
company, and its primary service area is the Northern California communities
of Cameron Park, Pollock Pines, Placerville, El Dorado Hills, Lincoln,
Sacramento, Roseville, Granite Bay, Sonora, Twain Harte, Columbia, Lakeport
and the surrounding communities. Western Sierra's primary business is
servicing the banking needs of these communities and its marketing strategy
stresses its local ownership and commitment to serve the banking needs of
individuals living and working in Western Sierra's primary service areas and
local businesses, including retail, professional and real estate-related
activities, in those service areas.
Western Sierra offers a broad range of services to individuals and businesses
in its primary service areas with an emphasis upon efficiency and
personalized attention. Western Sierra provides a full line of consumer
services and also offers specialized services, such as courier services to
small businesses, middle market companies and professional firms. Each of
Western Sierra's subsidiary banks offers personal and business checking and
savings accounts (including individual interest-bearing negotiable orders of
withdrawal ("NOW"), money market accounts and/or accounts combining checking
and savings accounts with automatic transfer), IRA accounts, time
certificates of deposit and direct deposit of social security, pension and
payroll checks, computer cash management and internet banking including bill
payment. Western Sierra's subsidiary banks also make available commercial,
construction, accounts receivable, inventory, automobile, home improvement,
real estate, commercial real estate, single family mortgage, agricultural,
Small Business Administration, office equipment, leasehold improvement,
installment and credit card loans (as well as overdraft protection lines of
credit), issue drafts and standby letters of credit, sell travelers' checks
(issued by an independent entity), offer ATMs tied in with major statewide
and
5
national networks, extend special considerations to senior citizens and offer
other customary commercial banking services.
Most of Western Sierra's deposits are obtained from commercial businesses,
professionals and individuals. There is no concentration of deposits or any
customer with 5% or more of any of the subsidiary banks' deposits.
Other special services and products include both personal and business
economy checking products, business cash management products and mortgage
products and services.
EMPLOYEES. At December 31, 2000, Western Sierra and its subsidiaries employed
213 persons on a full-time equivalent basis. Western Sierra believes its
employee relations are excellent.
SUPERVISION AND REGULATION. Western Sierra is a bank holding company within
the meaning of the Bank Holding Company Act of 1956, as amended (BHCA), and
is registered as such with and is subject to the supervision of the Board of
Governors of the Federal Reserve System (the FRB). Generally, a bank holding
company is required to obtain the approval of the FRB before it may acquire
all or substantially all of the assets of any bank, or ownership or control
of the voting shares of any bank if, after giving effect to such acquisition
of shares, the bank holding company would own or control more than 5% of the
voting shares of such bank. The FRB's approval is also required for the
merger or consolidation of bank holding companies.
Western Sierra is required to file reports with the FRB and provide such
additional information as the FRB may require. The FRB also has the authority
to examine Western Sierra and each of its subsidiaries, as well as any
arrangements between Western Sierra and any of its subsidiaries, with the
cost of any such examination to be borne by Western Sierra.
Banking subsidiaries of bank holding companies are also subject to certain
restrictions imposed by federal law in dealings with their holding companies
and other affiliates. Subject to certain restrictions set forth in the
Federal Reserve Act, a bank can loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, or issue a guarantee, acceptance, or letter of credit on behalf of
an affiliate, provided that the aggregate amount of the above transactions of
the bank and its subsidiaries does not exceed 10 percent of the capital stock
and surplus of the bank on a per affiliate basis or 20 percent of the capital
stock and surplus of the bank on an aggregate affiliate basis. In addition,
such transactions must be on terms and conditions that are consistent with
safe and sound banking practices and, in particular, a bank and its
subsidiaries generally may not purchase from an affiliate a low-quality
asset, as that term is defined in the Federal Reserve Act. Such restrictions
also prevent a bank holding company and its other affiliates from borrowing
from a banking subsidiary of the bank holding company unless the loans are
secured by marketable collateral of designated amounts. Further, Western
Sierra and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services.
A bank holding company is prohibited from itself engaging in or acquiring
direct or indirect ownership or control of more than 5% of the voting shares
of any company engaged in
6
nonbanking activities. One of the principal exceptions to the prohibition is
for activities found by the FRB by order or regulation to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto. In making these determinations, the FRB considers whether
the performance of such activities by a bank holding company would offer
advantages to the public which outweigh possible adverse effects.
Federal Reserve Regulation Y sets out those activities which are regarded as
closely related to banking or managing or controlling banks, and thus, are
permissible activities that may be engaged in by bank holding companies
subject to approval in individual cases by the FRB. Most of these activities
are now permitted for national banks. There has been litigation challenging
the validity of certain activities authorized by the FRB for bank holding
companies, and the FRB has various regulations in this regard still under
consideration. The future scope of permitted activities is uncertain.
Western Sierra National Bank is subject to primary supervision, examination
and regulation by the Office of the Comptroller of the Currency (the
Comptroller) and also subject to applicable regulations of the FDIC and the
FRB, and in addition the provisions of California law, insofar as they are
not preempted by federal banking law. Lake Community Bank is subject to
primary supervision, examination and regulation by the California Department
of Financial Institutions (DFI) and the FDIC and is subject to applicable
regulations of the FRB. The deposits of both financial institutions are
insured by the FDIC to applicable limits. As a consequence of the extensive
regulation of commercial banking activities in California and the United
States, the subsidiary banks' businesses are particularly susceptible to
changes in California and federal legislation and regulations, which may have
the effect of increasing the cost of doing business, limiting permissible
activities or increasing competition.
Various other requirements and restrictions under the laws of the United
States and the State of California affect the operations of the subsidiary
banks. Federal and California statutes and regulations relate to many aspects
of the banks' operations, including reserves against deposits, interest rates
payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, branching, capital requirements and disclosure
obligations to depositors and borrowers. The Comptroller regulates the number
and locations of the branch offices of a national bank, but may only permit a
national bank to maintain branches in locations and under the conditions
imposed by state laws upon state banks. California law presently permits a
bank to locate a branch office in any locality in the state. Additionally,
California law exempts banks, including national banks, from California usury
laws.
IMPACT OF MONETARY POLICIES. The earnings and growth of Western Sierra are
subject to the influence of domestic and foreign economic conditions,
including inflation, recession and unemployment. The earnings of Western
Sierra are affected not only by general economic conditions but also by the
monetary and fiscal policies of the United States and federal agencies,
particularly the Federal Reserve. The Federal Reserve can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United State Government
securities and by its control of the discount rates applicable to borrowings
by banks from the Federal Reserve System. The actions of the Federal Reserve
in
7
these areas influence the growth of bank loans, investments and deposits and
affect the interest rates charged on loans and paid on deposits. As
demonstrated over the past several years by the Federal Reserve's actions
regarding interest rates, its policies have had a significant effect on the
operating results of commercial banks and are expected to continue to do so
in the future. The nature and timing of any future changes in monetary
policies are not predictable.
RECENT AND PROPOSED LEGISLATION. The operations of Western Sierra are subject
to extensive regulation by federal, state and local governmental authorities
and are subject to the various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations.
Western Sierra believes that it is in substantial compliance in all material
respects with applicable federal, state and local laws, rules and
regulations. Because the business of Western Sierra and its subsidiaries are
highly regulated, the laws, rules and regulations applicable to each of them
are subject to regular modification and change.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are
frequently made in Congress, in the California legislature and before various
bank regulatory agencies. Most recently, the Gramm-Leach-Bliley Act was
signed into law. This legislation eliminates many of the barriers that have
separated the insurance, securities and bank industries since the Great
Depression. The federal banking agencies (the Federal Reserve, FDIC, Office
of the Comptroller of the Currency) among others, are currently drafting
regulations to implement the Gramm-Leach-Bliley Act. The likelihood of any
major change from these regulations, and the impact such change may have on
Western Sierra is impossible to predict.
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, is the
result of a decade of debate in the Congress regarding a fundamental
reformation of the nations' financial system. The law is subdivided into
seven titles, by functional area. Title I acts to facilitate affiliations
among banks, insurance companies and securities firms. Title II narrows the
exemptions from the securities laws previously enjoyed by banks, requires the
Federal Reserve and the SEC to work together to draft rules governing certain
securities activities of banks and creates a new, voluntary investment bank
holding company. Title III restates the proposition that the states are the
functional regulators for all insurance activities, including the insurance
activities of federally-chartered banks. The law bars the states from
prohibiting insurance activities by depository institutions. The law
encourages the states to develop uniform or reciprocal rules for the
licensing of insurance agents. Title IV prohibits the creation of additional
unitary thrift holding companies. Title V imposes significant requirements on
financial institutions related to the transfer of nonpublic personal
information. These provisions require each institution to develop and
distribute to accountholders an information disclosure policy, and requires
that the policy allow customers to, and for the institution to, honor a
customer's request to "opt-out" of the proposed transfer of specified
nonpublic information to third parties. Title VI reforms the Federal Home
Loan Bank system to allow broader access among depository institutions to the
systems advance programs, and to improve the corporate governance and capital
maintenance requirements for the system. Title VII addresses a multitude of
issues including disclosure of ATM surcharging
8
practices, disclosure of agreements among non-governmental entities and
insured depository institutions which donate to non-governmental entities
regarding donations made in connection with the Community Reinvestment Act,
and disclosure by the recipient non-governmental entities of how such funds
are used. Additionally, the law extends the period of time between CRA
examinations of community banks.
Western Sierra intends to comply with all provisions of the
Gramm-Leach-Bliley Act and all implementing regulations as they become
effective, and intends to develop appropriate policies and procedures to meet
its responsibilities in connection with the privacy provisions of Title V of
that Act.
CONSUMER PROTECTION LAWS AND REGULATIONS. The bank regulatory agencies are
focusing greater attention on compliance with consumer protection laws and
they are implementing regulations. Examination and enforcement have become
more intense in nature and insured institutions have been advised to monitor
carefully compliance with such laws and regulations. Western Sierra is
subject to many federal consumer protection statutes and regulations, some of
which are discussed below.
The Community Reinvestment Act (CRA) is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal
regulatory agencies, in examining insured depository institutions, to assess
a bank's record of helping meet the credit needs of its entire community,
including low and moderate-income neighborhoods, consistent with safe and
sound banking practices. The CRA further requires the agencies to take a
financial institution's record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic
branches, mergers or acquisitions, or holding company formations. The
agencies use the CRA assessment factors in order to provide a rating to the
financial institution. The four point rating scale ranges from a high of
"outstanding" to a low of "substantial noncompliance."
The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in
any credit transaction, whether for consumer or business purposes, on the
basis of race, color, religion, national origin, sex, marital status, age
(except in limited circumstances), receipt of income from public assistance
programs, or good faith exercise of any rights under the Consumer Credit
Protection Act. The Truth in Lending Act (TILA) is designed to ensure that
credit terms are disclosed in a meaningful way so that consumers may compare
credit terms more readily and knowledgeably. As a result of the TILA, all
creditors must use the same credit terminology to express rates and payments,
including the annual percentage rate, the finance charge, the amount
financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices, including making it
unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race color, religion, national
origin, sex, handicap or familial status. A number of lending practices have
been found by the courts to be, or may be considered, illegal under the FH
Act, including some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act (HMDA) grew out of public concern over
credit shortages in certain urban neighborhoods
9
and provides public information that will help show whether financial
institutions are serving the housing credit needs of the neighborhoods and
communities in which they are located. The HMDA also includes a "fair
lending" aspect that requires the collection and disclosure of data about
applicant and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimination statutes.
The Right To Financial Privacy Act (RFPA) imposes a new requirement for
financial institutions to provide new privacy protections to consumers.
Financial institutions must provide disclosures to consumers of its privacy
policy, and state the rights of consumers to direct their financial
institution not to share their nonpublic personal information with third
parties (opt out).
Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders
to provide borrowers with disclosures regarding the nature and cost of real
estate settlements. Also, RESPA prohibits certain abusive practices, such as
kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursement and other
penalties. Due to heightened regulatory concern related to compliance with
CRA, TILA, FH Act, ECOA, HMDA, RFPA and RESPA generally, Western Sierra may
incur additional compliance costs or be required to expend additional funds
for investments in its local community.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY, which
was subsequently amended in June 1999 by SFAS 137 and in June 2000 by SFAS
138. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS 137 deferred the required
adoption date to fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS 138 addressed certain issues causing difficulties in implementing
SFAS 133. Western Sierra adopted these statements on January 1, 2001 and, in
management's opinion, the implementation of these pronouncements is not
expected to have a material effect on the future consolidated financial
statements.
In September 2000, the FASB issued SFAS 140, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, to replace
SFAS 125 which was issued in June 1996. The original statement addresses
issues related to transfers of financial assets in which the transferor has
some continuing involvement with the transferred assets or with the
transferee. SFAS 140 resolves implementation issues which arose as a result
of SFAS 125, but carries forward most of the provisions of the original
statement. SFAS 140 is effective for transfers occurring after March 31, 2001
and for disclosures relating to securitization transactions and collateral
for fiscal years ending after December 15, 2000. Management does not believe
the adoption of this statement will have a significant impact on its
financial statements.
The Financial Standards Accounting Board released for comment on February 14,
2001, a revised proposal for the elimination of "pooling of interests"
accounting. The FASB indicated that it would accept comments through March
16, 2001. As proposed, it is currently anticipated that the FASB will issue a
final statement in June 2001, which would likely require, among other
matters, that all mergers initiated after the issuance of the final statement
be accounted for as "purchase" transactions. As proposed, a merger or
business combination would be considered initiated if the major terms of the
transaction, including the exchange or conversion ratio, are publicly
announced or otherwise disclosed to shareholders of the combining companies.
The revised proposal contemplates that goodwill will not be amortized to
earnings as originally proposed. Instead, goodwill would be recognized as an
asset in the financial statements, measured as the excess of the cost of an
acquired entity over the net of the amounts assigned to identifiable assets
acquired and liabilities assumed, and then tested for impairment to assess
losses and expensed against earnings only in the periods in which the
recorded value of goodwill exceeded its implied fair value, based on
standards to be specified in the final statement. The effect of the proposal
upon bank mergers is uncertain, however, the goodwill in a purchase
accounting transaction may not be included in the calculation of regulatory
capital requirements and some investment bankers have expressed the view that
the elimination of "pooling of interests" accounting will result in lower
merger premiums for sellers with the possibility of fewer transactions
occurring after the effective date of the final statement.
10
OTHER. Other legislation which has been or may be proposed to the United
States Congress and the California Legislature and regulations which may be
proposed by the FDIC and the DFI may affect the business of Western Sierra.
It cannot be predicted whether any pending or proposed legislation or
regulations will be adopted or the effect such legislation or regulations may
have upon the business or Western Sierra.
OTHER INFORMATION CONCERNING WESTERN SIERRA. Western Sierra holds no material
patents, trademarks, licenses, franchises or concessions.
No expenditures were made by Western Sierra since inception on material
research activities relating to the development of services or the
improvement of existing services. Based upon present business activities,
compliance with federal, state and local provisions regulating discharge of
materials into the environment will have no material effects upon the capital
expenditures, earnings and competitive position of Western Sierra.
ITEM 2. PROPERTIES
Western Sierra owns six depository branches and leases twelve other locations
used in the normal course of business located throughout Western Sierra's
service areas. There are no contingent rental payments and Western Sierra has
two sublease arrangements. Total rental expenses under all leases, including
premises, totaled $381,000, $361,000 and $376,000, in 2000, 1999 and 1998
respectively. The expiration dates of the leases vary, with the first such
lease expiring during 2001 and the last such lease expiring during 2007.
Western Sierra maintains insurance coverage on its premises, leaseholds and
equipment, including business interruption and record reconstruction coverage.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Western Sierra and/or its subsidiary banks are a party to
claims and legal proceedings arising in the ordinary course of business.
Western Sierra's management is not aware of any material pending litigation
proceedings to which either it or any of its subsidiary banks is a party or
has recently been a party, which will have a material adverse effect on the
financial condition or results of operations of Western Sierra taken as a
whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of the security holders during the fourth
quarter of the period covered by this report.
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PART II
ITEM 5. MARKET PRICE & DIVIDENDS
Western Sierra common stock is publicly traded on the NASDAQ National Market
under the symbol "WSBA". As of December 31, 2000, there were 1,606
shareholders of record of Western Sierra's common stock.
Western Sierra's common stock began trading on the NASDAQ National Market
Exchange (NASDAQ) under the symbol "WSBA" July 29, 1999. Prior to that date,
the common stock was not listed on any exchange and was quoted on the OTC
Bulletin Board under the symbol "WESA". The following table shows the high
and low prices for the common stock, for each quarter as reported by NASDAQ
and the OTC Bulletin Board. The prices have been adjusted to reflect the
stock dividends issued in 2000 and 1999.
Western Sierra Bancorp
Common Stock Prices
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4
2000 2000 2000 2000 1999 1999 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
High $12.92 $11.57 $10.89 $11.56 $15.95 $15.24 $14.40 $13.57
Low 9.52 9.07 8.84 9.88 14.76 11.90 11.22 10.95
Volume 272,184 151,144 198,458 264,811 40,005 82,005 207,117 174,737
Under applicable Federal laws, the Comptroller restricts the total dividend
payment of any national banking association in any calendar year to the net
income of the year, as defined, combined with the net income for the two
preceding years, less distributions made to shareholders during the same
three-year period. In addition, the California Financial Code restricts the
total dividend payment of any State banking association in any calendar year
to the lesser of (1) the bank's retained earnings or (2) the bank's net
income for its last three fiscal years, less distributions made to
shareholders during the same three-year period. At December 31, 2000, the
subsidiaries had $7,754,371 in retained earnings available for dividend
payments to Western Sierra.
Western Sierra' primary source of revenue to pay dividends to its
shareholders is dividends from its subsidiaries. The amount and payment of
dividends by Western Sierra is set by Western Sierra's Board of Directors.
Any further dividends will be decided based on a number of factors including
results of operations, general business conditions, capital requirements,
general financial conditions, and other factors deemed relevant by the Board
of Directors.
Prior to the merger with Western Sierra, Sentinel Community Bank paid a $.34
per share cash dividend to shareholders of record as of 12/31/99. The
dividend was paid on Jan 6, 2000 and totaled $483,529.
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ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF CONSOLIDATED FINANCIAL DATA AND PERFORMANCE RATIOS
At or for the Year ended December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
STATEMENTS OF OPERATIONS:
Interest income $ 34,048 $ 28,508 $ 26,854 $ 24,518 $ 21,332
Interest expense 14,595 10,858 10,994 9,857 8,759
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 19,453 17,650 15,860 14,661 12,573
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 380 920 1,011 1,243 1,406
Non-interest income 3,745 3,580 4,284 3,484 3,028
Non-interest expense 16,602 15,401 16,556 14,347 11,955
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,216 4,909 2,577 2,555 2,240
Provision for income taxes 2,332 1,601 875 924 817
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,884 $ 3,308 $ 1,702 $ 1,631 $ 1,423
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
For the year:
Return on average assets 0.91% 0.87% 0.49% 0.55% 0.55%
Return on average equity 12.18 11.71 6.13 6.44 6.20
Net interest margin 4.98 5.10 5.06 5.70 6.03
Efficiency ratio 71.57 72.54 82.19 79.09 76.63
At December 31:
Average equity to average assets 7.51% 7.44% 8.00% 8.67% 9.24%
Total capital to risk-adjusted assets 11.00 12.40 12.80 12.80 11.60
Allowance for loan and lease losses to loans 1.33 1.38 1.39 1.53 1.22
Loans to deposits 75.90 79.94 62.72 67.47 74.11
Non-performing assets to capital 0.03 0.04 .013 0.21 0.30
BALANCE SHEET:
Total assets $474,603 $391,883 $382,503 $321,738 $267,505
Total loans 329,251 274,356 215,410 198,310 178,203
Allowance for loan and lease losses 4,395 3,794 2,988 3,014 2,169
Total deposits 433,771 343,184 343,442 292,454 240,457
Shareholders' equity 36,137 30,915 29,307 26,386 24,727
SHARE DATA:
Common Shares Outstanding (in thousands) 3,449 3,256 3,046 2,891 2,742
Book Value Per Share $ 10.47 $ 9.49 $ 9.62 $ 9.13 $ 9.02
Basic Earnings Per Share $ 1.14 $ 0.98 $ 0.53 $ 0.49 $ 0.43
Diluted Earnings Per Share $ 1.12 $ 0.95 $ 0.51 $ 0.48 $ 0.42
Cash Dividends Per Share $ 0.05 $ 0.05 $ 0.04 $ 0.11 $ 0.13
13
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS
GENERAL. The Board of Directors and Management of Western Sierra believe that
the Company plays an important role in the economic well being of the
communities it serves. Its Subsidiary banks have a continuing responsibility
to provide a wide range of lending and deposit services to both individuals
and businesses. These services are tailored to meet the needs of the
communities served by Western Sierra and its subsidiary banks.
Various loan products are offered which promote home ownership and affordable
housing, fuel job growth and support community economic development. Types of
loans offered range from personal and commercial loans to real estate,
construction, agricultural, and mortgage loans. Banking decisions are made
locally and the goal is customer satisfaction.
Various deposit products are offered which are geared to provide both
individual and business customers with a wide range of choices. These
products include both high and low volume transaction accounts, savings and
money market products, certificate of deposit accounts with a wide range of
maturities, and IRA accounts including Roth and Educational IRAs as well.
Western Sierra remains committed to its shareholders and will continue its
efforts in 2001 to increase shareholder value. During 1999, the Company
became a member of NASDAQ and began trading on the NASDAQ exchange. As a
result, there has been increased liquidity in the Company's stock. During
2000, Management worked closely with its market makers and expanded the
information provided in the quarterly shareholder newsletter. The Company did
receive a "Buy" rating from Hoefer & Arnett early in the year. Management is
aware of the adverse stock market conditions over the past year, and the fact
that Western Sierra is still a relatively small and unnoticed Company. In
2001, Management will continue to spend time with both its market makers, and
others who can help increase the visibility of the Company, its earnings and
projections.
The following discussion is designed to provide a better understanding of
significant trends related to Western Sierra's financial condition, results
of operations, liquidity, capital resources and interest rate sensitivity. It
should be read in conjunction with Western Sierra's audited financial
statements and notes thereto and the other financial information appearing
elsewhere herein.
The following discussion pertains to Western Sierra's financial condition,
changes in financial condition and results of operations as of December 31,
2000 and 1999 and for each of the three years in the period ended December
31, 2000. The consolidated financial statements of Western Sierra include the
financial position and results of operations of Roseville 1st Community
Bancorp, Lake Community Bank and Sentinel Community Bank both before and
after their respective mergers with Western Sierra as a result of applying
the pooling-of-interests method of accounting for each transaction. The
discussion should be read in conjunction with Western
14
Sierra's audited consolidated financial statements and notes thereto and the
other financial information appearing elsewhere herein.
FINANCIAL CONDITION
2000 COMPARED TO 1999
The Company experienced another year of growth and expansion in 2000. Total
assets at December 31, 2000 were $474.6 million, an increase of $82.7
million, or 21%, over total assets of $391.9 million at December 31,1999.
Loans were $329.2 million, an increase of $54.9 million or 20%, over total
loans of $274.3 million at December 31, 1999. Loan growth was the result of
continued marketing efforts, strong economic conditions and the increased
lending opportunities and additional market areas resulting from the mergers
of Roseville 1st National Bank, Lake Community bank and Sentinel Community
Bank. In addition Western Sierra occasionally purchased pools of loans in
order to further diversify the portfolio and maximize profitability.
Total deposits at December 31, 2000 were $433.8 million, an increase of $90.6
million, or 26.4%, over total deposits of $343.2 million at December 31,
1999. Most of the deposit growth occurred in time deposits of $100,000 or
more, an increase of 59% to $86.4 million at December 31, 2000. NOW accounts
increased 26% to $52.8 million at December 31, 2000 and other time deposits
increased 28% to $139.8 million at December 31, 2000. The majority of Western
Sierra's deposits remain local core deposits. Lake Community Bank does
occasionally fund its loan growth with non-local certificates of deposit.
Total shareholders' equity at December 31, 2000 was $36.1 million, an
increase of $5.2 million over total shareholders' equity of $30.9 million at
December 31, 1999. The increase in equity is due to an increase in retained
earnings of $3.8 million for the twelve months ended December 31, 2000 and
the exercise of stock options by employees and directors, which was partially
offset by the repurchase of 29,165 shares of Western Sierra common stock
during 2000.
1999 COMPARED TO 1998
The total assets at December 31, 1999 were $391.9 million, an increase of
$9.3 million or 2.4% over total assets of $382.5 million at December 31,
1998. Loans were $274.4 million, an increase of $59.0 million or 27% over
total loans of $215.4 million at December 31, 1998.
Total deposits at December 31, 1999 were $343.2 million, almost even with
total deposits of $343.4 million at December 31, 1998. Non-interest bearing
deposits decreased 8% to $71.6 million at December 31, 1999, while interest
bearing deposits increased 2.5% to $271.6 million at December 31, 1999, for a
net decrease of $300,000 in total deposits for the year 1999.
Total shareholders' equity at December 31, 1999 was $30.9 million, an
increase of $1.6 million over total shareholders' equity of $29.3 million at
December 31, 1998. The increase in equity was due to an increase in retained
earnings of $3.3 million for the twelve months ended December 31, 1999 and
the exercise of stock options by employees and directors, and a change in the
unrealized loss on available-for-sale securities in 1999.
15
RESULTS OF OPERATIONS
NET INCOME. Western Sierra recorded net income of $3.9 million, or $1.12
diluted earnings per share, for the year ended December 31, 2000 compared to
net income of $3.3 million, or $.95 diluted earnings per share, in 1999 and
net income of $1.7 million, or $.51 diluted earnings per share, in 1998.
The increase in net income for each year above is generally attributed to
increases net interest income resulting from increases in earning assets,
lower provisions for loan losses attributable to improved credit quality, and
operating efficiencies.
NET INTEREST INCOME AND NET INTEREST MARGIN
Total interest income increased from $26.9 million in 1998 to $28.5 million
in 1999, and to $34.0 million in 2000, representing a 6.0% increase in 1999
over 1998 and a 19.3% increase in 2000 over 1999. The total interest income
increases in the periods discussed were primarily the result of growth in
Western Sierra's established market areas. Total interest expense decreased
from $11.0 million in 1998 to $10.9 million in 1999, and increased to $14.6
million in 2000, representing a 0.9% decrease in 1999 from 1998, and a 33.9%
increase in 2000 over 1999. The minimal decrease in interest expense from
1998 to 1999 was due to slightly lower interest rates across all deposit
types. The increase in interest expense in 2000 from 1999 was due to both
increased deposits and an increasing interest rate environment.
Western Sierra's net interest margin was 5.06% in 1998, 5.10% in 1999 and
4.98% in 2000. The change from 1998 to 1999 was a result of a lower yield on
earning assets combined with an almost equal lower yield in interest expense.
In 2000, Western Sierra felt its net interest margin tighten with competition
keeping earning asset yields from increasing at the same pace as rates for
time deposits during the same period.
The following table presents for the years indicated the distribution of
consolidated average assets, liabilities and shareholders' equity, as well as
the total dollar amounts of interest income from average earning assets and
the resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates.
Nonaccrual loans, which are not considered material, are included in the
calculation of the average balances of loans which interest not accrued is
excluded. Savings deposits include NOW and money market accounts.
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------- ----------------------------- -----------------------------
(dollars in thousands)
EARNING ASSETS:
Portfolio loans $295,654 $27,941 9.45 % $247,975 $22,847 9.21 % $207,815 $20,507 9.87 %
Investment securities(1) 71,145 4,416 6.21 % 77,489 4,505 5.82 % 73,735 4,581 6.21 %
Federal funds sold 21,796 1,591 7.30 % 16,868 944 5.59 % 23,874 1,168 4.89 %
Interest bearing 1,857 100 5.39 % 3,468 212 6.11 % 8,167 598 7.32 %
deposits in banks ----------------- ----------------- -----------------
Average earnings assets 390,452 34,048 8.72 % 345,800 28,508 8.24 % 313,591 26,854 8.56 %
Other assets 41,608 37,582 36,384
Less ALLL (3,991) (3,335) (3,058)
------ ------ ------
Average total assets $428,069 $380,047 $346,917
- ------------------------------------------------------------------------------------------------------------------------
16
INTEREST-BEARING LIABILITIES:
Savings deposits $120,199 2,653 2.21 % $106,551 2,484 2.33 % $96,464 2,671 2.77 %
Time deposits 193,550 11,565 5.98 % 161,796 7,907 4.89 % 157,250 8,012 5.10 %
Other borrowings 6,264 377 6.02 % 9,443 467 4.96 % 6,069 311 5.12 %
----------------- ----------------- -----------------
320,013 14,595 4.56 % 277,790 10,858 3.91 % 259,783 10,994 4.23 %
------- ------ ------
Non-interest bearing 75,559 71,207 56,330
deposits
Other liabilities 333 2,789 3,024
Shareholders' equity 32,164 28,261 27,780
------ ------ ------
Average liabilities & $428,069 $380,047 $346,917
equity ======== ======== ========
Net interest spread 4.16 % 4.33 % 4.33 %
Net interest income and margin $19,453 4.98 % $17,650 5.10 % $15,860 5.06 %
======= ======= =======
(1) Not computed on a tax equivalent basis.
The following table sets forth changes in interest income and interest
expense for each major category of earning assets and interest-bearing
liabilities, and the amount of change attributable to volume and rate changes
for the years indicated. Changes not solely attributable to rate or volume
have been allocated to rate.
2000 over 1999 1999 over 1998
Change in net interest income due to Change in net interest income due to
------------------------------------ -------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(in thousands)
EARNING ASSETS:
Portfolio loans $4,393 $701 $5,094 $3,963 ($1,623) $2,340
Investment Securities (1) (369) 280 (89) 233 (307) (76)
Federal funds sold 275 3723 647 (343) 119 (224)
Interest bearing deposits in banks (98) (14) (112) (344) (42) (386)
------------------------------------ -------------------------------------
Average earning assets 4,201 1,339 5,540 3,509 (1,854) 1,654
------------------------------------ -------------------------------------
INTEREST-BEARING LIABILITIES:
Savings deposits 318 (149) 169 279 (466) (187)
Time deposits 1,552 2,106 3,658 232 (337) (105)
Other borrowings (157) 67 (90) 173 (17) 156
------------------------------------ -------------------------------------
1,712 2,025 3,737 684 (820) (136)
------------------------------------ -------------------------------------
Net interest differential $2,489 $(686) $1,803 $2,825 $(1,035) $1,791
==================================== =====================================
(1) Not computed on a tax equivalent basis.
NON-INTEREST INCOME. Non-interest income increased 4.6%, or $165,000, to $3.7
million for 2000 as compared to $3.6 million for 1999. Non-interest income
for 1999 decreased by $704,000 or 19% from the $4.3 million earned during
1998.
The following table describes the components of non-interest income for the
years ended December 31, 2000, 1999 and 1998.
NON-INTEREST INCOME
GREATER THAN 1% OF GROSS REVENUE
Year Ended December 31,
17
2000 1999 1998
---- ---- ----
(in thousands)
Service charges $1,626 $1,623 $1,643
Gain on sale of loans 1,239 1,214 1,839
Other income 880 743 802
--- --- ---
Total $3,745 $3,580 $4,284
====== ====== ======
The decrease in 1999 and 2000 from 1998 was primarily the result of a slower
market for home mortgages due to increasing interest rates. Western Sierra
will continue to implement strategies to increase its non-interest income to
help offset the decreasing interest margins the industry is experiencing.
NON-INTEREST EXPENSE. Non-interest expense amounted to $16.6 million in 2000,
$15.4 million in 1999 and $16.6 million in 1998. This represents a slight
increase of $1.2 million, or 7.8%, in 2000 and a decrease of $1.2 million, or
7%, in 1999 when compared to 1998.
Western Sierra continues to believe that to be able to compete in the current
environment of decreasing interest margins and increased competition, the
controlling of operating expenses is essential. The consolidation of many
operational functions in addition to other areas such as supplies, forms,
advertising and marketing was completed in 1999. This had a positive impact
on the Company's overhead and efficiency ratios. During 2000, additional
accounting and data processing responsibilities were combined to further
enhance the operating efficiencies of the organization. Management will
continue to closely monitor this area.
The following table describes the components of other non-interest expense
for the years ended December 31, 2000, 1999 and 1998.
NON-INTEREST EXPENSE
GREATER THAN 1% OF GROSS REVENUE
Year Ended December 31,
2000 1999 1998
---- ---- ----
(in thousands)
Salaries and benefits $ 8,561 $ 7,790 $ 8,036
Occupancy/FF&E 2,301 2,401 2,334
Merger expenses 1,143 353 1,112
Professional fees 799 810 715
Data processing 621 585 380
Stationary and supplies 410 255 292
Advertising/Promotion 245 166 244
Other real estate - 102 639
18
Other operating expense 2,522 2,939 2,804
----- ----- -----
Total $16,602 $15,401 $16,556
======= ======= =======
19
PROVISION FOR LOAN AND LEASE LOSSES. The provision for loan and lease losses
corresponds directly to the level of the allowance that management deems
sufficient to offset potential losses. The balance in the allowance reflects
the amount which, in management's judgement, is adequate to provide for these
potential losses after weighing the mix of the loan portfolio, current
economic conditions, past loan experience and such other factors as deserve
recognition in estimating loan and lease losses.
Management allocated $380,000 as a provision for loan and lease losses in
2000, $920,000 in 1999 and $1.0 million in 1998. Loan recoveries net of
charge-offs in 2000 were $221,000. In 1999, loan charge-offs net of
recoveries were $114,000, and in 1998 were $1.0 million. The ratio of the
allowance for loan and lease losses to total gross loans was 1.33% in 2000,
1.38% in 1999, and 1.39% in 1998.
In management's opinion, the balance of the allowance for loan losses at
December 31, 2000 was sufficient to sustain any foreseeable losses in the
loan portfolio at that time. However, no assurances can be given that Western
Sierra will not sustain substantially higher loan and lease losses.
INCOME TAXES. Income taxes were $2.3 million in 2000, $1.6 million in 1999
and $875,000 in 1998, representing effective tax rates of 37.5%, 32.6% and
34.0%, respectively.
LIQUIDITY. A Funds Management Policy has been developed by Western Sierra's
management and approved by Western Sierra's Board of Directors which
establishes guidelines for the investments and liquidity of Western Sierra.
The goals of this policy are to provide liquidity to meet the financial
requirements of Western Sierra's customers, maintain adequate reserves as
required by regulatory agencies and maximize earnings of Western Sierra.
Liquidity of Western Sierra at December 31, 2000 was 19.8%, at December 31,
1999 was 15.5% and at December 31, 1998 was 36.8% based on liquid assets
(consisting of cash and due from banks, investments not pledged, federal
funds sold and loans available-for-sale) divided by total liabilities.
Western Sierra's management believes it maintains adequate liquidity levels.
INVESTMENT PORTFOLIO. Western Sierra classifies its investment securities as
trading, held to maturity or available for sale. Western Sierra's intent is
to hold all securities classified as held to maturity until maturity and
management believes that it has the ability to do so. Securities available
for sale may be sold to implement Western Sierra asset/liability management
strategies and in response to changes in interest rates, prepayment rates and
similar factors.
The following table summarizes the maturities of Western Sierra's securities
at their carrying value and their weighted average yields at December 31,
2000. Yields on tax-exempt securities have not been computed on a
tax-equivalent basis.
Available For Sale
WITHIN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL
(Dollars in Thousands AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
Thousands)
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Govt. & Agencies $26,784 6.60% $5,142 7.43% $3,744 6.81% $0 0.00% $35,670 6.74%
Municipal Obligations 785 5.15% 4,960 5.14% 8,056 5.64% 1,183 5.12% 14,984 5.41%
Corp. and Other 1,824 6.09% 4,816 6.61% 939 9.40% 933 6.00% 8,512 6.83%
-------------------------------------------------------------------------------------------------------
20
Total $29,393 6.53 % $14,918 6.40 % $12,739 6.26 % $2,116 5.51 % $59,166 6.40%
-------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity
------------------- ------------------ ------------------- ---------------- ---------------------
Within One Year One to Five Years Five to Ten Years Over Ten Years Total
------------------- ------------------ ------------------- ---------------- ---------------------
(Dollars in Thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------------------- ------------------ ------------------- ---------------- ---------------------
U.S. Govt. & Agencies $7,449 6.14% $224 5.96% $487 5.85% $0 0% $8,160 6.11%
Municipal Obligations 0 0% 1,417 5.66% 2,027 4.85% 0 0% 3,444 5.18%
------------------- ------------------ ------------------- ---------------- ---------------------
Total $7,449 6.14% $1,641 5.70% $2,514 5.04% $0 0% $11,604 5.83%
------------------- ------------------ ------------------- ---------------- ---------------------
- ----------------------------------------------------------------------------------------------------------------------------------
21
The following tables summarize the values of the Company's investment
securities held on the dates indicated:
AVAILABLE FOR SALE (MARKET)
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Agencies $35,670 $31,582 $48,965
Municipal Obligations 14,984 14,318 15,901
Corporate and Other Bonds 7,579 6,467 4,587
Stock and Other Investments 933 3,747 862
--- ----- ---
Total $59,166 $56,114 $70,315
======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Agencies $ 8,160 $10,518 $ 9,195
Municipal Obligations 3,444 3,517 2,270
----- ----- -----
Total $11,604 $14,035 $11,465
======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO. Western Sierra experienced a 44.8% increase in loan
production during 2000 over 1999. Despite this record increase in loan
volume, portfolio quality remained uncompromised as evidenced by criticized
assets (including ORE) at 14.59% of capital and delinquencies as a percentage
of total loans at .16% for Western Sierra National Bank and .002% for Lake
Community Bank. The majority of Western Sierra's criticized assets were
acquired in the merger with Sentinel Community Bank. Without the merger, this
ratio would have been considerably lower. The reduction of the classified
assets acquired in the Sentinel merger will be a high priority for 2001.
Western Sierra's largest historical lending categories are real estate loans
and commercial loans. These categories accounted for approximately 83.9% and
13.0% respectively of Western Sierra's total loan portfolio at December 31,
2000, and approximately 72.6% and 19.3% respectively of Western Sierra's
total loan portfolio at December 31,1999. Loans are carried at face amount,
less payments collected and the allowance for possible loan losses. Interest
on all loans is accrued
22
monthly on a simple interest basis. Typically, once a loan is placed on
nonaccrual status, Western Sierra reverses interest accrued through the date
of the transfer. Loans are placed on nonaccrual status when principal or
interest on a loan is past due 90 days or more, unless the loan is both
well-secured and in the process of collection. Interest actually received for
loans on nonaccrual status is recognized as income at the time of receipt for
loans for which the ultimate collectibility of principal is not in doubt.
Problem loans are maintained on accrual status only when management of
Western Sierra is confident of full repayment within a reasonable period of
time.
The rates of interest charged on variable rate loans are set at specific
increments in relation to Western Sierra's published lending rate and vary as
Western Sierra's lending rate varies. At December 31, 2000, approximately
53.1% of Western Sierra's loan portfolio was compromised of variable rate
loans, and at December 31, 1999, approximately 50.2% of Western Sierra's loan
portfolio was compromised of variable interest rate loans.
The following table sets forth the amounts of loans outstanding by category
as of the dates indicated.
December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------
(in thousands)
Real estate mortgage $217,095 $157,368 $120,339 $111,354 $100,771
Real estate construction 59,106 41,758 23,559 25,687 28,454
Commercial 38,854 51,205 47,806 40,664 33,199
Lease financing 3,982 1,763 1,383 698 1,019
Installment 6,051 7,680 6,716 6,878 6,405
Agriculture 5,025 15,370 16,268 13,942 9,409
-----------------------------------------------------------------
Less deferred fees (862) (788) (661) (913) (1,054)
-----------------------------------------------------------------
Total loans 329,251 274,356 215,410 198,310 178,203
Less allowance for loan and lease losses (4,395) (3,794) (2,988) (3,014) (2,170)
-----------------------------------------------------------------
Net loans $324,856 $270,562 $212,422 $195,296 $176,034
=================================================================
While Real Estate and Commercial remain the foundation of Western Sierra's
historical lending mix, some changes in the mix have occurred due to the
changing economic environment and the resulting change in demand for certain
loan types. While Western Sierra remains committed to the agricultural
industry in Lake County, there was a decrease in agricultural loan
outstandings to $5.0 million at December 31, 2000 from $15.4 million at
December 31, 1999. This decrease was a result of agricultural loan pay-offs
and fewer renewals and extensions at this time. Some of these credits were
problem credits which were carefully and diligently worked through, adding
more stringent financial requirements for any renewals or extensions, thus
significantly improving the overall loan portfolio quality.
23
COMMERCIAL LOANS. Commercial loans are made for the purpose of providing
working capital, financing the purchase of equipment or inventory and for
other business purposes. Such loans include loans with maturities ranging
from 30 to 360 days and term loans, which are loans with maturities normally
ranging from one to five years. Short-term business loans are generally used
to finance current transactions and typically provide for periodic interest
payment, with principal being payable at maturity or periodically. Term loans
normally provide for monthly payments of both principal and interest.
Western Sierra extends lines of credit to business customers. On business
credit lines, Western Sierra specifies a maximum amount which it stands ready
to lend to the customer during a specified period in return for which the
customer agrees to maintain its primary banking relationship with Western
Sierra. The purpose for which such loans will be used and the security
pledged, if any, are determined before Western Sierra's commitment is
extended. Normally Western Sierra does not make credit line commitments in
material amounts for periods in excess of one year.
REAL ESTATE LOANS. Real Estate loans are primarily made for the purpose of
purchasing, refinancing, improving or constructing family residences as well
as commercial and industrial properties.
At December 31, 2000, approximately 58.8% of Western Sierra's single family
real estate construction loans consisted of loans secured by first trust
deeds on the construction of owner-occupied single family dwellings, and the
remaining 41.1% consisted of loans secured by first deeds on speculative
single family dwellings. Construction loans are generally written with terms
of six to twelve months and usually do not exceed a loan to appraised value
ratio of 75 to 80%. The risk associated with speculative construction lending
includes the borrower's inability to complete and sell the project, the
borrower's incorrect estimate of necessary construction funds and/or time for
completion and economic changes, including depressed real estate values and
increased interest rates. Management has established underwriting criteria to
minimize losses on speculative construction loans by lending only to
experienced developers and contractors with proven track records. To date
Western Sierra has not suffered any significant losses through its
speculative real estate construction loans.
LOAN COMMITMENTS. In the normal course of business, there are various
commitments outstanding to extend credit that are not reflected in the
financial statements. Annual review of commercial credit lines and ongoing
monitoring of outstanding balances reduces the risk of loss associated with
these commitments. As of December 31, 2000, Western Sierra had $59.2 million
in unfunded commercial real estate loan commitments which are secured by real
estate and $25.6 million in unfunded commercial commitments unsecured by real
estate. In addition, Western Sierra had $16.2 million in other unused
commitments. The Company's undisbursed commercial loan commitments represent
primarily business lines of credit. The undisbursed construction commitments
represented undisbursed funding on construction projects in process. The
mortgage loan commitments represented approved but unfunded mortgage loans
with Western Sierra's mortgage banking business.
24
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 60% of the commitments at December 31, 2000
will be exercised during 2001.
MATURITY DISTRIBUTION. The following table sets forth of loans outstanding of
Western Sierra as of December 31, 2000 which based on the remaining scheduled
repayments of principal, have the ability to be repriced or are due in the
category stated.
LESS THAN ONE YEAR TO AFTER
(Dollars in thousands) ONE YEAR FIVE YEARS FIVE YEARS TOTAL
--------- ----------- ---------- -----
December 31, 2000
Fixed rate $ 35,604 $34,692 $85,091 $155,387
Variable rate 135,240 38,991 495 174,726
-------- ------- ------- --------
Sub-Total $170,844 $73,683 $85,586 $330,113
Less Fees 862
--------
Total $329,251
ASSET QUALITY. Western Sierra attempts to minimize credit risk through its
underwriting and credit review policies. The Company conducts its own
internal credit review processes. The Board of Directors through the loan
committee, reviews the asset quality of new and problem loans on a monthly
basis and reports the findings to the full Board. In management's opinion,
this loan review system facilitates the early identification of potential
problem loans.
With respect to Western Sierra's policy of placing loans 90 days or more
past due on nonaccrual status unless the loan is well secured and in the
process of collection. A loan is considered to be in the process of
collection if, based on a probable specific event, it is expected that the
loan will be repaid or brought current. Generally, this collection period
would not exceed 90 days. When a loan is placed on nonaccrual status Western
Sierra'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. Where the
collectibility of the principal of or interest on a loan is considered to be
doubtful by management, it is placed on nonaccrual status prior to becoming
90 days delinquent.
Interest income is recognized on impaired loans in a manner similar to that
of all loans. It is Western Sierra's policy to place loans that are
delinquent 90 days or more as to principal or interest on nonaccrual status
unless secured and in the process of collection and to reverse from current
income accrued but uncollected interest. Cash payments subsequently received
on nonaccrual loans are recognized as income only where the future collection
of principal is considered by management to be probable.
25
The following table sets forth the amount of Western Sierra's nonperforming
assets as of the dates indicated.
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans $1,121 $543 $1,406 $3,398 $3,044
Accruing loans past due 90 days or more --- --- --- --- ---
Restructured loans (in compliance with
modified terms) 277
---------------------------------------------------------------
Total nonperforming loans 1,121 543 1,683 3,398 3,044
Other real estate 715 2,241 2,240 4,273
---------------------------------------------------------------
Total nonperforming assets $1,121 $1,258 $3,924 $5,638 $7,317
===============================================================
Nonperforming loans to total loans 0.34% 0.20% 0.78% 1.72% 1.71%
Nonperforming assets to total assets 0.24 0.32 1.03 1.75 2.74
Allowance for loan and leases losses
to nonperforming assets 392.06 301.59 76.15 53.46 29.64
Allowance for loan and leases losses
to nonperforming loans 392.06 698.71 177.54 88.70 71.25
26
The following table provides certain information for the years indicated with
respect to Western Sierra's allowance for loan losses as well as charge-off
and recovery activity.
Year Ended December 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------
(dollars in thousands)
Balance at beginning of period $3,794 $2,988 $3,014 $2,169 $2,180
---------------------------------------------------------
Charge-offs:
Commercial 116 231 868 110 219
Real estate mortgage 171 28 133 125 851
Real estate construction - - - 40 94
Lease financing - - - - -
Installment 62 25 112 174 307
Agriculture - - - - -
---------------------------------------------------------
Total charge-offs 349 284 1,113 449 1,471
---------------------------------------------------------
Recoveries:
Commercial 169 139 40 9 10
Real estate mortgage 382 - - 4 10
Real estate construction - - - - -
Lease financing - - - - -
Installment 19 31 36 37 34
Agriculture - - - - -
---------------------------------------------------------
Total recoveries 570 170 76 50 54
---------------------------------------------------------
Net (recoveries) charge-offs (221) 114 1,037 399 1,417
---------------------------------------------------------
Provision for loan and lease losses 380 920 1,011 1,243 1,406
---------------------------------------------------------
Balance at end of period $4,395 $3,794 $2,988 $3,014 $2,169
---------------------------------------------------------
Net recoveries charge-offs during the period
to average loans (0.75)% 0.05% 0.50% 0.21% 0.81%
Allowance for loan and leases losses to total loans 1.33 1.38 1.39 1.53 1.22
Allowance for loan and leases losses
to nonperforming loans 392.06 698.71 177.54 88.70 71.25
27
The allowance for loan and lease losses is established through charges to
earnings in the form of the provision for loan and lease losses. Loan and
lease losses are charged to and recoveries are credited to the allowance for
loan and lease losses. The provision for loan and lease losses is determined
after considering various factors such as loan and lease loss experience,
current economic conditions, maturity of the portfolio, size of the
portfolio, industry concentrations, borrower credit history, the existing
allowance for loan and lease losses, independent loan reviews, current
charges and recoveries to the allowance for loan and lease losses and the
overall quality of the portfolio as determined by management, regulatory
agencies, and independent credit review consultants retained by Western
Sierra.
The adequacy of Western Sierra's allowance for loan loss reserve is based on
specific and formula allocations to Western Sierra's loan portfolio. Specific
allocations are made for identified problem or potential problem loans. The
specific allocations are increased or decreased through management's
reevaluation of the status of the particular problem loans. Loans which do
not receive a specific allocation receive an allowance allocation based on a
formula represented by a percentage factor based on underlying collateral,
type of loan, historical charge-offs and general economic conditions which is
applied against the general portfolio segments.
It is the policy of management to make additions to the allowance for loan
and lease losses so that it remains adequate to cover anticipated charge-offs
and management believes that the allowance at December 31, 2000 is adequate.
However, the determination of the amount of the allowance is judgmental and
subject to economic conditions which cannot be predicted with certainty.
Accordingly, Western Sierra cannot predict whether charge-offs of loans in
excess of the allowance may be required in future periods.
The provision for loan and lease losses reflects an accrual sufficient to
cover projected probable charge-offs and the maintenance of the allowance at
a level deemed adequate to absorb potential future losses.
The table below sets forth the allocation of the allowance for loan and lease
losses by loan type as of the dates specified. The allocation of individual
categories of loans includes amounts applicable to specifically identified as
well as unidentified losses inherent in that segment of the portfolio and
will necessarily change whenever management determines that the risk
characteristics of the portfolio have changed.
28
Management believes that any breakdown or allocation of the allowance for
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 all loans and undisbursed commitments.
The allocation below should not be interpreted as an indication of the
specific amounts or loan categories in which future charge-offs may occur:
December 31,
----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------
Allowance % of Allowance % of Allowance % of Allowance % of Allowance % of
for Losses Loans for Losses Loans for Losses Loans for Losses Loans for Losses Loans
----------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial $ 732 12% $ 367 19% $493 22% $456 20% $351 18%
Real estate mortgage 1,442 66% 1,171 57% 809 56% 930 56% 780 56%
Real estate 392 18% 320 15% 140 11% 185 14% 198 16%
construction
Lease financing 40 1% 18 1% 14 1% 7 10 1%
Installment and 90 2% 96 3% 100 3% 7 3% 80 4%
other
Agriculture 50 1% 154 5% 162 7% 129 7% 94 5%
Unallocated 1,649 1,668 1,270 1,300 656
----------------------------------------------------------------------------------------------
Total $4,395 100% $3,794 100% $2,987 100% $3,014 100% $2,169 100%
----------------------------------------------------------------------------------------------
DEPOSIT STRUCTURE. Deposits represent Western Sierra's primary source of
funds. Deposits are primarily core deposits in that they are demand, savings
and time deposits generated from local businesses and individuals. These
sources are considered to be relatively stable, long-term relationships
thereby enhancing steady growth of the deposit base without major
fluctuations in overall deposit balances. Western Sierra experiences to a
small degree some seasonality with slower growth period between November
through April, and the higher growth period from May through October. In
order to assist in meeting any funding demands, Western Sierra maintains
unsecured borrowing arrangements with several correspondent banks in addition
to a secured borrowing arrangement with the Federal Home Loan Bank for longer
more permanent funding needs.
The following chart sets forth the distribution of Western Sierra's average
daily deposits for the periods indicated.
Year Ended December 31,
------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------
(dollars in thousands)
Transaction accounts:
Savings $28,777 2.01 % $28,715 2.01 % $27,276 2.10%
NOW & Money Market 91,422 2.50 77,836 2.49 69,168 3.13%
Noninterest bearing 75,559 --- 71,207 --- 56,330 ---
Time deposits 193,550 5.98 161,796 4.89 157,250 5.10
Western Sierra's time deposits of $100,000 or more had the following schedule
of maturities at December 31, 2000:
29
Amount
--------------
(in thousands)
Remaining Maturity:
Three months or less $41,718
Over three months to six months 31,855
Over six months to 12 months 11,265
Over 12 months 3,028
-----
Total $87,866
=======
Time deposits of $100,000 or more are generally from Western Sierra's local
business and individual customer base. The potential impact on Western
Sierra's liquidity from the withdrawal of these deposits is discussed in
Western Sierra's asset and liability management committee, and is considered
to be minimal.
OTHER BORROWINGS. Western Sierra's short-term borrowing arrangements are
discussed in detail in note 8 to the financial statements.
The following table summarizes the balances outstanding at year end, the
highest amount of borrowings outstanding for a month-end during the year, the
average balance of borrowings and the weighted average rate for the years
ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------------------------------------------------
Balance at Year End $ 950 $15,300 $ 6,150
Interest Rate at Year End 9.41% 6.59% 7.02%
Maximum Amount at any Month End $13,817 $15,300 $ 6,150
Average Interest Rate 6.02% 4.95% 5.12%
TERMS. The terms of the short-term borrowings over this three year period
varied, consisting of the following:
1) Overnight Federal Funds purchased
2) Three and six month term borrowings under a blanket lien agreement
with FHLB, with Mortgage loans as collateral
3) Line of credit advances with FHLB, with securities as collateral
The majority of the borrowings were on behalf of Sentinel Community Bank
prior to the merger, which as a savings institution, depended more heavily on
this as a source of funds than does Western Sierra. Therefore this trend is
expected to decline substantially in the future.
30
ITEM 7a. QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a financial institution, Western Sierra's primary component of market risk
is interest rate volatility. Fluctuation in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of
the Banks' assets and liabilities, and the market value of all interest
earning assets and interest bearing liabilities, other than those which
possess a short term to maturity. Since virtually all of Western Sierra's
interest earning assets and all of Western Sierra's interest bearing
liabilities are located at the Bank level, virtually all of Western Sierra's
interest rate risk exposure lies at the Bank level. As a result, all
significant interest rate risk management procedures are performed at the
Bank level. Based upon the nature of their operations, the Banks are not
subject to foreign currency exchange or commodity price risk. The Banks' real
estate loan portfolios, concentrated primarily within northern California,
are subject to risks associated with the local economies.
The fundamental objective of Western Sierra's management of its assets and
liabilities is to maximize its economic value while maintaining adequate
liquidity and an exposure to interest rate risk deemed by management to be
acceptable. Management believes an acceptable degree of exposure to interest
rate risk results from the management of assets and liabilities through
maturities, pricing and mix to attempt to neutralize the potential impact of
changes in market interest rates. The Banks' profitability is dependent to a
large extent upon their net interest income which is the difference between
their interest income on interest-earning assets, such as loans and
securities, and their interest expense on interest-bearing liabilities, such
as deposits and borrowings. The Banks, like other financial institutions, are
subject to interest rate risk to the degree that their interest-earning
assets reprice differently than their interest-bearing liabilities. The Banks
manage their mix of assets and liabilities with the goals of limiting their
exposure to interest rate risk, ensuring adequate liquidity, and coordinating
their sources and uses of funds.
The Banks seek to control their interest rate risk exposure in a manner that
will allow for adequate levels of earnings and capital over a range of
possible interest rate environments. The Banks have adopted formal policies
and practices to monitor and manage interest rate risk exposure. As part of
this effort, the Banks will measure interest rate risk utilizing both an
internal ALMII module which runs on the mainframe computer system and
utilizing third party sources which can be compared and analyzed enabling
management to make any adjustments as necessary.
The following table sets forth as of December 31, 2000, the distribution of
repricing opportunities for Western Sierra's earning assets and
interest-bearing liabilities, the interest rate sensitivity gap, the
cumulative interest rate sensitivity gap, the interest rate sensitivity gap
ratio (i.e. earning assets divided by interest-bearing liabilities) and the
cumulative interest rate sensitivity gap ratio.
31
AFTER THREE
MONTHS BUT AFTER SIX MONTHS AFTER ONE YEAR
WITHIN WITHIN SIX BUT WITHIN BUT WITHIN AFTER FIVE
THREE MONTHS MONTHS ONE YEAR FIVE YEARS YEARS TOTAL
--------------------------------------------------------------------------------------
EARNING ASSETS:
Federal funds sold $27,570 $27,785
Investment securities and other 10,052 $9,627 $13,449 $15,573 $22,084 70,785
Loans 116,948 8,121 32,486 76,341 90,960 324,856
--------------------------------------------------------------------------------------
Total earning assets 154,570 17,784 45,935 91,914 113,044 403,503
INTEREST-BEARING LIABILITIES:
Savings $19,245 $9,624 $28,869
Interest-bearing transaction accounts 79,923 17,543 97,466
Time deposits 97,247 83,677 33,923 11,308 226,155
Other borrowings 1,150 1,150
--------------------------------------------------------------------------------------
Total interest-bearing liabilities 196,415 110,844 35,073 11,308 353,640
Interest rate sensitivity gap $(41,845) $(64,909) $10,862 $78,482 $106,956 $50,363
Cumulative interest rate sensitivity
gap (41,845) (106,754) (95,892) (56,593) 50,363
Interest rate sensitivity gap ratio (0.79) (0.41) (1.31) 8.33 1.14
Cumulative interest rate sensitivity
gap ratio (0.79) (0.56) (0.64) (0.84) 1.14
The opportunity to reprice assets in the same dollar amounts and at the same
time as liabilities would minimize interest rate risk in any interest rate
environment. The difference between the amounts of assets and liabilities
repriced at the same time, or "gap", represents the risk, or opportunity, in
repricing. In general, if more assets than liabilities are repriced at a
given time in a rising rate environment net interest income would improve
while in a declining rate environment net interest income would decline. If
more liabilities than assets were repriced under the same conditions the
opposite would result. Western Sierra appears liability sensitive in the
immediate to six month area, and turns asset sensitive in the longer term.
This can be and is influenced by the fact that interest-bearing transaction
accounts which consist of money market, NOW and savings deposit accounts are
classified as repricing within three months when in fact these deposits may
be immediately repriced at management's option, thus assisting in the further
management of interest rate risk. Western Sierra lists these deposits as it
has because this is the actual historical trend Western Sierra has
experienced.
CAPITAL STANDARDS. The 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
certain loans.
As of December 31, 2000, Western Sierra's capital ratios exceeded applicable
regulatory requirements. The following tables present the capital ratios for
Western Sierra and the Banks compared to the standards for well-capitalized
bank holding companies and depository institutions as of December 31, 2000
(amounts in thousands except percentage amounts).
32
THE COMPANY
--------------------------------------------------------------------------------------
MINIMUM
ACTUAL CAPITAL
----------------------
CAPITAL RATIO REQUIREMENT
------- ----- -----------
Leverage..................................... $ 36,034 7.90% 4.0%
Tier 1 Risk-Based............................ 36,034 9.80 4.0
Total Risk-Based............................. 40,409 11.00 8.0
THE BANKS
--------------------------------------------------------------------------------------
WESTERN LAKE WELL MINIMUM
ACTUAL ACTUAL CAPITALIZED CAPITAL
------ ------
CAPITAL RATIO CAPITAL RATIO RATIO REQUIREMENT
------- ----- ------- ----- ----- -----------
Leverage $24,841 6.90% $ 9,039 8.70% 5.0% 4.0%
Tier 1 Risk-Based 24,841 9.20 9,039 9.70 6.0 4.0
Total Risk-Based 27,961 10.30 10,206 10.90 10.0 8.0
The current and projected capital positions of the Company and its Banks and
the impact of capital plans and long-term strategies are reviewed regularly
by management. Western Sierra's policy is to maintain ratios above the
prescribed well-capitalized ratios at all times. Management believes as of
December 31, 2000, that Western Sierra exceeds all capital adequacy
requirements to which it is subject.
33
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
FINANCIAL STATEMENTS. The following consolidated financial statements of
Western Sierra and its subsidiaries, and independent auditors' report
included in the Annual Report of Western Sierra to its shareholders for the
years ended December 31, 2000, 1999 and 1998.
PAGE
------
Independent Auditors' Report F-1
Consolidated Financial Statements of Western Sierra Bancorp & Subsidiaries
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-5-6
Notes to Consolidated Financial Statements F-7
34
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Shareholders
Western Sierra Bancorp
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Western
Sierra Bancorp and subsidiaries (the "Company") as of December 31, 2000 and 1999
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2000. 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 did
not audit the balance sheet of Sentinel Community Bank as of December 31, 1999,
or the related statements of income, changes in shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1999,
which statements reflect total assets of $92,623,000 as of December 31, 1999,
and net earnings of $503,000 and $601,000 for the years ended December 31, 1999
and 1998, respectively. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for Sentinel Community Bank for 1999 and 1998, is based solely
upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, based upon our audits and the reports of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Western
Sierra Bancorp and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000, in conformity with
generally accepted accounting principles.
The consolidated financial statements as of December 31, 2000 and 1999
and for each of the years in the three-year period ended December 31, 2000 have
been restated to reflect the pooling of interests with Lake Community Bank,
Roseville 1st Community Bancorp and Sentinel Community Bank as described in Note
2 to the consolidated financial statements.
/s/ Perry-Smith LLP
February 2, 2001
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
We have audited the consolidated balance sheet of SENTINEL COMMUNITY BANK AND
SUBSIDIARY (the Bank) as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Sentinel Community Bank and Subsidiary at December 31, 1999, and the
consolidated results of their operations and their consolidated cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Moss Adams LLP
Stockton, California
January 28, 2000
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Sentinel Community Bank
and Subsidiary
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Sentinel Community Bank and Subsidiary for the year
ended December 31, 1998. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and consolidated cash flows for the year ended December 31, 1998
in conformity with accounting principles generally accepted in the United
States of America.
Grant Thornton, LLP
San Francisco, California
February 26, 1999
F-1
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
2000 1999
------------- ----------
ASSETS
Cash and due from banks $ 24,382 $ 20,400
Federal funds sold 27,570 6,675
Interest-bearing deposits in banks 495 891
Loans held for sale 3,349 964
Trading securities (Note 3) 15 175
Available-for-sale investment securities (Notes 3 and 8) 59,166 56,114
Held-to-maturity investment securities (market value of $11,600 in 2000 and
$13,844 in 1999) (Notes 3 and 8) 11,604 14,035
Loans and leases, less allowance for loan and lease losses of $4,395 in 2000
and $3,794 in 1999 (Notes 4, 9 and 13) 324,856 270,562
Premises and equipment, net (Notes 5 and 9) 11,678 9,971
Accrued interest receivable and other assets (Notes 2, 6, 12 and 14) 11,488 12,096
------------- ----------
$ 474,603 $ 391,883
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 13):
Non-interest bearing (Note 11) $ 81,281 $ 71,594
Interest bearing (Note 7) 352,490 271,590
------------- ----------
Total deposits 433,771 343,184
Short-term borrowings (Notes 8 and 13) 950 15,300
Long-term debt (Notes 8 and 13) 200
Accrued interest payable and other liabilities 3,545 2,484
------------- ----------
Total liabilities 438,466 360,968
------------- ----------
Commitments and contingencies (Note 9)
Shareholders' equity (Note 10):
Preferred stock - no par value; 10,000,000 shares authorized; none issued
Common stock - no par value; 10,000,000 shares authorized; issued -
3,448,782 shares in 2000 and 3,255,895 shares in 1999 20,553 18,812
Retained earnings 16,415 14,341
Unearned ESOP shares (33,674 shares in 2000 and 19,516 shares in 1999,
at cost) (Note 14) (500) (300)
Accumulated other comprehensive loss (Notes 3 and 15) (331) (1,938)
------------- ----------
Total shareholders' equity 36,137 30,915
------------- ----------
$ 474,603 $ 391,883
============= ==========
The accompanying notes are an integral
part of these financial statements.
F-2
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
------------- ------------- ---------
Interest income:
Interest and fees on loans and leases $ 27,941 $ 22,847 $ 20,507
Interest on Federal funds sold 1,591 944 1,168
Interest on investment securities:
Taxable 3,606 3,742 4,170
Exempt from Federal income taxes 810 763 411
Interest on deposits in banks 100 212 598
--- --- ---
Total interest income 34,048 28,508 26,854
------ ------ ------
Interest expense:
Interest on deposits (Note 7) 14,218 10,391 10,683
Interest on borrowings (Note 8) 377 467 311
--- --- ---
Total interest expense 14,595 10,858 10,994
------ ------ ------
Net interest income 19,453 17,650 15,860
Provision for loan and lease losses (Note 4) 380 920 1,011
--- --- -----
Net interest income after provision for loan and lease losses 19,073 16,730 14,849
------ ------ ------
Non-interest income:
Service charges and fees 1,626 1,623 1,643
Gain on sale and packaging of residential mortgage and government-
guaranteed commercial loans 1,239 1,214 1,839
Gain (loss) on sale of investment securities, net (Note 3) 10 (66) 42
Trading securities income (Note 3) 30 42
Other income 840 767 760
--- --- -----
Total non-interest income 3,745 3,580 4,284
----- ----- -----
Other expenses:
Salaries and employee benefits (Notes 4 and 14) 8,561 7,790 8,036
Occupancy (Notes 5 and 9) 1,097 1,163 1,039
Equipment (Note 5) 1,204 1,238 1,295
Merger and acquisition expenses (Note 2) 1,143 353 1,112
Other expenses (Note 11) 4,597 4,857 5,074
----- ----- -----
Total other expenses 16,602 15,401 16,556
------ ------ ------
Income before income taxes 6,216 4,909 2,577
Income taxes (Note 12) 2,332 1,601 875
----- ----- ---
Net income $ 3,884 $ 3,308 $ 1,702
========== ========== ========
Basic earnings per share (Note 10) $ 1.14 $ .98 $ .53
======== ======== ======
Diluted earnings per share (Note 10) $ 1.12 $ .95 $ .51
======== ======== ======
The accompanying notes are an integral
part of these financial statements.
F-3
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
ACCUM-
ULATED
OTHER
COMPRE-
COMMON STOCK UNEARNED HENSIVE SHARE- COMPRE-
---------------------- ESOP RETAINED INCOME HOLDERS" HENSIVE
SHARES AMOUNT SHARES EARNINGS (LOSS) EQUITY INCOME
--------- ----------- -------- ----------- ---------- ----------- --------
Balance, January 1, 1998, restated 2,891,159 $ 14,977 $ 11,269 $ 140 $ 26,386
Comprehensive income:
Net income 1,702 1,702 $ 1,702
Other comprehensive income, net of tax:
Unrealized gains on available-
for-sale investment securities
(Note 15) 3 3 3
--------
Total comprehensive income $ 1,705
========
Stock options exercised and related
tax benefit 155,174 1,349 1,349
Cash dividend (133) (133)
--------- ----------- -------- ----------- ---------- -----------
Balance, December 31, 1998 3,046,333 16,326 12,838 143 29,307
Comprehensive income:
Net income 3,308 3,308 $ 3,308
Other comprehensive loss, net of tax:
Unrealized losses on available-
for-sale investment securities
(Note 15) (2,081) (2,081) (2,081)
-------
Total comprehensive income $ 1,227
=======
Stock options exercised and related
tax benefit 93,253 905 905
5% stock dividend 120,508 1,634 (1,634)
Repurchase and retirement of common
stock (Note 10) (4,199) (53) (53)
Cash dividend (150) (150)
Fractional shares (Note 2) (21) (21)
Unearned ESOP shares (Note 14) $ (300) (300)
--------- ----------- -------- ----------- ---------- -----------
Balance, December 31, 1999 3,255,895 18,812 (300) 14,341 (1,938) 30,915
Comprehensive income:
Net income 3,884 3,884 $ 3,884
Other comprehensive income, net of tax:
Unrealized gains on available-
for-sale investment securities
(Notes 3 and 15) 1,607 1,607 1,607
-------
Total comprehensive income $ 5,491
=======
Stock options exercised and related
tax benefit 58,645 507 507
5% stock dividend 163,407 1,634 (1,634)
Repurchase and retirement of common
stock (Note 10) (29,165) (400) (400)
Cash dividend (164) (164)
Fractional shares (Note 2) (12) (12)
Unearned ESOP shares (Note 14) (200) (200)
--------- ----------- -------- ----------- ---------- -----------
Balance, December 31, 2000 3,448,782 $ 20,553 $ (500) $ 16,415 $ (331) $ 36,137
========= =========== ======== =========== ========== ===========
2000 1999 1998
---- ---- ----
Disclosure of reclassification amount, net of taxes (Note 15):
Unrealized holding gains (losses) arising during the year $ 1,613 $ (2,120) $ 28
Less: reclassification adjustment for gains (losses) included in net income 6 (39) 25
-------- --------- -------
Net unrealized holding gains (losses) on available-for-sale
investment securities $ 1,607 $ (2,081) $ 3
======= ========= =======
The accompanying notes are an integral part of these financial statements.
F-4
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net income $ 3,884 $ 3,308 $ 1,702
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses 380 920 1,011
Depreciation and amortization 1,182 1,098 1,096
Deferred loan and lease origination fees, net 74 110 (236)
Amortization of investment security premiums, net of accretion 8 234 17
(Gain) loss on sale of available-for-sale investment securities (10) 66 (42)
Provision for losses on other real estate 51 49 508
(Gain) loss on sale of premises and equipment (13) (8) 1
(Gain) loss on sale of other real estate (50) 113 (43)
Decrease (increase) in trading securities 160 (170)
Increase in cash surrender value of life insurance policies (66) (193) (208)
(Increase) decrease in loans held for sale (2,385) 3,517 (1,806)
(Increase) decrease in accrued interest receivable and other assets (876) 32 (1,101)
Increase (decrease) in accrued interest payable and other liabilities 1,024 (1,120) 1,041
Deferred taxes 251 (476) (348)
Provision for impairment of former premises and equipment 393
------- ------- -------
Net cash provided by operating activities 3,614 7,480 1,985
------- ------- -------
Cash flows from investing activities:
Cash acquired in the purchase of selected assets and liabilities of
another bank 4,015
Proceeds from called available-for-sale investment securities 3,240 6,454 14,235
Proceeds from the sale of available-for-sale investment securities 999 6,191 7,505
Proceeds from called held-to-maturity investment securities 3,000
Proceeds from matured available-for-sale investment securities 2,666 4,858 9,821
Proceeds from matured held-to-maturity investment securities 50 50 26
Purchases of available-for-sale investment securities (9,943) (7,546) (71,287)
Purchases of held-to-maturity investment securities (9,815) (6,914)
Principal repayments received from available-for-sale SBA pools and
mortgage-backed securities 2,398 3,233 3,255
Principal repayments received from held-to-maturity mortgage-backed
securities 2,440 7,134 10,590
Net increase in loans and leases (54,089) (58,501) (20,005)
Proceeds from the sale of premises and equipment 276 47
Purchases of premises and equipment (3,084) (1,467) (2,255)
Proceeds from the sale of other real estate 55 695 701
Capitalized additions to other real estate (162)
Proceeds from the surrendered officer life insurance 504
Net decrease in interest-bearing deposits in banks 396 5,148 4,935
Purchase of life insurance policies (160) (295)
------- ------- -------
Net cash used in investing activities (50,741) (43,814) (46,051)
------- ------- -------
(Continued)
F-5
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
---- ---- ----
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits $ 26,229 $ 3,301 $ 31,395
Net increase (decrease) in time deposits 60,251 (3,559) 19,593
Net (decrease) increase in short-term borrowings (14,350) 8,850 6,150
Payments for fractional shares (12) (21)
Repurchase of common stock (400) (53)
Proceeds from ESOP borrowings 200 300
Purchase of unearned ESOP shares (200) (300)
Proceeds from the exercise of stock options 450 631 1,111
Cash dividends paid (164) (150) (468)
---- ---- ----
Net cash provided by financing activities 72,004 8,999 57,781
------ ----- ------
Increase (decrease) in cash and cash equivalents 24,877 (27,335) 13,715
Cash and cash equivalents at beginning of year 27,075 54,410 40,695
------ ------ ------
Cash and cash equivalents at end of year $ 51,952 $ 27,075 $ 54,410
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 13,806 $ 10,982 $ 11,006
Income taxes $ 2,827 $ 1,636 $ 1,745
Non-cash investing activities:
Real estate acquired through foreclosure $ 241 $ 273 $ 1,406
Net change in unrealized gain on available-for-sale investment securities $ 2,469 $ (3,240) $ 4
Supplemental schedule related to acquisition:
On October 13, 2000, the Company acquired certain assets and liabilities of
the Columbia branch of Pacific State Bank (Note 17):
Deposits assumed $ 4,107
Fair value of assets and liabilities acquired, net (50)
Premium paid for deposits (42)
----------
Cash acquired $ 4,015
=========
The accompanying notes are an integral
part of these financial statements.
F-6
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Western Sierra Bancorp (the "Company") was incorporated on July 11,
1996, and subsequently obtained approval from the Board of Governors of
the Federal Reserve System to be a bank holding company. On December
31, 1996, Western Sierra National Bank (WSNB) consummated a merger with
Western Sierra Bancorp. On April 30, 1999, the Company consummated
mergers with Roseville 1st Community Bancorp (R1CB) and Lake Community
Bank (LCB). On May 5, 2000, R1NB merged into WSNB and ceased to exist
as a separate entity. On May 31, 2000, the Company completed its
acquisition of Sentinel Community Bank (SCB) through the merger of SCB
with and into WSNB. The mergers qualified as tax-free exchanges and
were accounted for under the pooling-of-interests method of accounting.
Information concerning common stock, stock option plans and per share
data has been restated on an equivalent share basis. WSNB and LCB (the
"subsidiaries") engage in consumer, commercial and agricultural
banking, offering a wide range of products and services to individuals
and businesses in El Dorado, Placer, Sacramento, Lake, Tuolumne and
Sonora counties.
The accounting and reporting policies of the Company and its
subsidiaries conform with generally accepted accounting principles and
prevailing practices within the financial services industry.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 2000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
transactions and accounts have been eliminated in consolidation.
INVESTMENT SECURITIES
Investments are classified into the following categories:
- Trading securities, reported at fair value, with unrealized
gains and losses included in earnings.
- Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and
reported, net of taxes, as accumulated other comprehensive
income (loss) within shareholders' equity.
- Held-to-maturity securities, which management has the positive
intent and ability to hold, reported at amortized cost,
adjusted for the accretion of discounts and amortization of
premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
Gains or losses on the sale of investment securities are computed on
the specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums. In
addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
LOAN SALES AND SERVICING
Originated mortgage loans are either held in the loan portfolio or sold
in the secondary market. Loans held for sale are carried at the lower
of cost or market value. Market value is determined by the specific
identification method as of the balance sheet date or the date which
investors have committed to purchase the loans. At the time the loans
are sold, the related right to service the loans are either retained,
earning future servicing income, or released in exchange for a one-time
servicing-released premium. Mortgage loans subsequently transferred to
the loan portfolio are transferred at the lower of cost or market value
at the date of transfer. Any difference between the carrying amount of
the loan and its outstanding principal balance is recognized as an
adjustment to yield by the interest method. Loans serviced for others
totaled $20,962,000 and $26,099,000 as of December 31, 2000 and 1999,
respectively.
On December 21, 2000, the Company sold its rights to service the
above-mentioned loans to another financial institution and recognized a
pre-tax gain of $76,000. Cash proceeds of $58,000 were received upon
the close of escrow and a receivable of $134,000 was recorded. Under
the terms of the sales agreement, the Company will continue to service
these loans until March 2001.
F-7
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOAN SALES AND SERVICING (Continued)
The guaranteed portion of certain Small Business Administration (SBA)
loans are sold to third parties with the unguaranteed portion retained.
A premium in excess of the adjusted carrying value of the loan is
generally recognized at the time of sale. A portion of this premium may
be required to be refunded if the borrower defaults or the loan prepays
within ninety days of the settlement date. However, there were no sales
of loans subject to these recourse provisions at December 31, 2000,
1999 or 1998. SBA loans with unpaid balances of $6,116,000 and
$4,324,000 were being serviced for others at December 31, 2000 and
1999, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination
of loans which are sold or securitized with servicing rights retained
are recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing,
and are subsequently amortized in proportion to and over the period of
the related net servicing income or expense. Servicing assets are
periodically evaluated for impairment. Servicing rights were not
considered material for disclosure purposes.
In addition, commercial loans totaling $18,258,000 and $23,247,000 were
serviced for others as of December 31, 2000 and 1999, respectively.
These loans were sold without recourse and, therefore, their balances
are not included on the balance sheet.
LOANS AND LEASES
Loans and leases are stated at principal balances outstanding, except
for loans transferred from loans held for sale which are carried at the
lower of principal balance or market value at the date of transfer,
adjusted for accretion of discounts. Interest is accrued daily based
upon outstanding loan and lease balances. However, when, in the opinion
of management, loans and leases are considered to be impaired and the
future collectibility of interest and principal is in serious doubt,
loans and leases are placed on nonaccrual status and the accrual of
interest income is suspended. Any interest accrued but unpaid is
charged against income. Payments received are applied to reduce
principal to the extent necessary to ensure collection. Subsequent
payments on these loans and leases, or payments received on nonaccrual
loans and leases for which the ultimate collectibility of principal is
not in doubt, are applied first to earned but unpaid interest and then
to principal.
An impaired loan or lease is measured based on the present value of
expected future cash flows discounted at the instrument's effective
interest rate or, as a practical matter, at the instrument's observable
market price or the fair value of collateral if the loan or lease is
collateral dependent. A loan or lease is considered impaired when,
based on current information and events, it is probable that the
Company will be unable to collect all amounts due (including both
principal and interest) in accordance with the contractual terms of the
loan or lease agreement.
Loan and lease origination fees, commitment fees, direct loan and lease
origination costs and purchase premiums and discounts on loans and
leases are deferred and recognized as an adjustment of yield, to be
amortized to interest income over the contractual term of the loan or
lease. The unamortized balance of deferred fees and costs is reported
as a component of net loans and leases.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained to provide for
probable losses related to impaired loans and leases and other losses
on loans and leases identified by management as doubtful, substandard
and special mention, as well as losses that can be expected to occur in
the normal course of business. The determination of the allowance is
based on estimates made by management, to include consideration of the
character of the loan and lease portfolio, specifically identified
problem loans, potential losses inherent in the portfolio taken as a
whole and economic conditions in the Company's service area.
Loans and leases determined to be impaired or classified are
individually evaluated by management for specific risk of loss. In
addition, reserve factors are assigned to currently performing loans
and leases based on management's assessment of the following for each
identified loan and lease type: (1) inherent credit risk, (2)
historical losses and, (3) where the Company has not experienced
losses, the loss experience of peer banks. Management also computes
specific and expected loss reserves for loan and lease commitments.
These estimates are particularly susceptible to changes in the economic
environment and market conditions.
The Company's Loan Committee reviews the adequacy of the allowance for
loan and lease losses at least quarterly, to include consideration of
the relative risks in the portfolio and current economic conditions.
The allowance for loan and lease losses is adjusted based on that
review if, in the judgment of the Loan Committee and management,
changes are warranted.
F-8
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
The allowance is established through a provision for loan and lease
losses which is charged to expense. Additions to the allowance for loan
and lease losses are expected to maintain the adequacy of the total
allowance for loan and lease losses after credit losses and loan and
lease growth. The allowance for loan and lease losses at December 31,
2000 and 1999, respectively, reflects management's estimate of losses
in the portfolio.
OTHER REAL ESTATE
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property, net of
estimated selling costs, is charged against the allowance for loan and
lease losses. A valuation allowance for losses on other real estate is
maintained to provide for temporary declines in value. The allowance is
established through a provision for losses on other real estate which
is included in other expenses. Subsequent gains or losses on sales or
writedowns resulting from permanent impairments are recorded in other
income or expense as incurred. There was no other real estate held by
the Company at December 31, 2000. Other real estate held by the Company
at December 31, 1999 totaled $715,000 and was included on the
consolidated balance sheet in accrued interest income and other assets.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost. Depreciation is determined
using the straight-line method over the estimated useful lives of the
related assets. The useful lives of premises are estimated to be thirty
to forty years. The useful lives of furniture, fixtures and equipment
are estimated to be one to fifteen years. Leasehold improvements are
amortized over the life of the asset or the term of the related lease,
whichever is shorter. When assets are sold or otherwise disposed of,
the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is recognized
in income for the period. The cost of maintenance and repairs is
charged to expense as incurred.
INCOME TAXES
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents
each entity's proportionate share of the consolidated provision for
income taxes.
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. On the consolidated balance sheet, net
deferred tax assets are included in accrued interest receivable and
other assets.
CASH EQUIVALENTS
For the purpose of the consolidated statement of cash flows, cash and
due from banks and Federal funds sold are considered to be cash
equivalents. Generally, Federal funds are sold for one day periods.
EARNINGS PER SHARE
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted
EPS. Earnings per share is retroactively adjusted for stock dividends
for all periods presented. In addition, EPS has been restated on an
equivalent share basis for all periods presented in connection with the
mergers previously noted.
STOCK-BASED COMPENSATION
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the exercise price.
However, if the fair value of stock-based compensation computed under a
fair value based method, as prescribed in Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
is material to the financial statements, pro forma net income and
earnings per share are disclosed as if the fair value method had been
applied.
F-9
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY, which was subsequently
amended in June 1999 by SFAS 137 and in June 2000 by SFAS 138. SFAS 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS 137
deferred the required adoption date to fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS 138 addresses certain issues
causing difficulties in implementing SFAS 133. The Company adopted
these statements on January 1, 2001 and, in management's opinion, the
implementation of these pronouncements is not expected to have a
material effect on the future consolidated financial statements.
In September 2000, the FASB issued SFAS 140, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES,
to replace SFAS 125 which was issued in June 1996. The original
statement addressed issues related to transfers of financial assets in
which the transferor has some continuing involvement with the
transferred assets or with the transferee. SFAS 140 resolves
implementation issues which arose as a result of SFAS 125, but carries
forward most of the provisions of the original statement. SFAS 140 is
effective for transfers occurring after March 31, 2001 and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Management does not
believe the adoption of this statement will have a significant impact
on its financial statements.
2. MERGERS AND ACQUISITIONS
On May 31, 2000, the Company completed its acquisition of Sentinel
Community Bank (SCB) through the merger of SCB with and into the
Company's wholly owned subsidiary, Western Sierra National Bank. The
Company exchanged 721,132 shares of its common stock (after adjustment
for fractional shares) for all of the common stock of SCB. Each share
of SCB was exchanged for 1.491 shares of the Company. In addition, SCB
stock options were converted at the same exchange ratio into options to
purchase 110,934 shares of the Company's common stock.
The merger has been accounted for as a pooling of interests and,
accordingly, all prior period financial statements have been restated
to include the combined results of operations, financial position and
cash flows of the Company and SCB. Information concerning common stock,
stock option plans and per share data has been restated on an
equivalent share basis. In addition, the Company and SCB incurred
$1,057,000 in merger related costs which were charged to operations
during the year ended December 31, 2000.
There were no material transactions between the Company or its bank
subsidiaries and SCB prior to the merger, and the effects of conforming
the accounting policies of SCB to those of the Company were not
material.
Selected financial information for the combining entities included in
the consolidated statements of income for the five months ended May 31,
2000 (unaudited) and the two years ended December 31, 1999 and 1998 is
as follows (dollars in thousands):
MAY 31,
2000 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1999 1998
-------------- ------------- ------------
NET INTEREST INCOME:
Western Sierra Bancorp and Subsidiaries $ 6,149 $ 13,787 $ 12,138
Sentinel Community Bank 1,797 3,863 3,722
----- ----- -----
Combined $ 7,946 $ 17,650 $ 15,860
============= ============= ==========
Net income:
Western Sierra Bancorp and Subsidiaries $ 1,368 $ 2,805 $ 1,101
Sentinel Community Bank 22 503 601
-- --- ---
Combined $ 1,390 $ 3,308 $ 1,702
============= ============= ==========
F-10
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. MERGERS AND ACQUISITIONS (Continued)
On May 5, 2000, Roseville 1st National Bank (R1NB), previously reported
as a wholly-owned subsidiary of the Company, merged into Western Sierra
National Bank (WSNB). All assets and liabilities of R1NB were
transferred to WSNB and R1NB ceased to exist as a separate entity.
Merger related costs of $39,000 were charged to operations during the
year ended December 31, 2000.
The Company acquired certain assets and liabilities of the Columbia
branch of Pacific State Bank on October 13, 2000, summarized as follows
(dollars in thousands):
Cash $ 4,015
Fair value of assets and liabilities acquired, net 50
Premium paid for deposits 42
-------------
Deposits assumed $ 4,107
=============
The deposit premium from the Columbia branch acquisition and deposit
premiums related to branch acquisitions that occurred in prior years
are included on the consolidated balance sheet in accrued interest
receivable and other assets and are being amortized using the
straight-line method over ten years. Amortization expense totaled
$55,000 for the year ended December 31, 2000 and $54,000 for each of
the years ended December 31, 1999 and 1998, respectively. Acquisition
related expenses of $47,000 were charged to operations during the year
ended December 31, 2000.
On April 30, 1999, the Company completed mergers with Lake Community
Bank (LCB) and Roseville 1st Community Bancorp (R1CB) by exchanging
856,597 and 387,486 shares, respectively, of its common stock (after
adjustment for fractional shares) for all the common stock of the two
entities. Each share of LCB and R1CB were exchanged for .6905 shares
and 1.211 shares, respectively, of the Company. In addition,
outstanding LCB and R1CB stock options were converted at the same
exchange ratios into options to purchase 67,391 and 66,643 shares,
respectively, of the Company's common stock. The mergers have been
accounted for as pooling of interests.
3. TRADING AND INVESTMENT SECURITIES
TRADING SECURITIES
The estimated market value of trading securities at December 31, 2000
and 1999 totaled $15,000 and $175,000, respectively. Net unrealized
appreciation of trading securities of $21,000 and $42,000 was included
in non-interest income for the years ended December 31, 2000 and 1999,
respectively. There were no unrealized appreciation or losses included
in earnings for the year ended December 31, 1998. Proceeds and gross
realized gains from the sale of trading securities for the year ended
December 31, 2000 totaled $242,000 and $9,000, respectively. There were
no sales of trading securities for the years ended December 31, 1999
and 1998. There were no transfers of trading securities for the years
ended December 31, 2000, 1999 and 1998.
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at December 31, 2000 and 1999 consisted of the following:
Available-for Sale:
2000
-------------------------------------------- --------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
U.S. Government agencies $ 26,992 $ 105 $ (380) $ 26,717
Obligations of states and political subdivisions 15,207 149 (372) 14,984
Government guaranteed mortgage-backed securities 8,955 49 (51) 8,953
Corporate debt securities 7,625 34 (80) 7,579
Federal Reserve Bank stock 302 302
Federal Home Loan Bank stock 385 385
Pacific Coast Bankers' Bank stock 225 225
Other 21 21
------------- ------------- ------------- --------------
$ 59,712 $ 337 $ (883)$ 59,166
============= ============= ============= ==============
F-11
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. TRADING AND INVESTMENT SECURITIES (Continued)
INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
Net unrealized losses on available-for-sale investment securities
totaling $546,000 were recorded net of $215,000 in tax benefits as
accumulated other comprehensive loss within shareholders' equity.
Proceeds and gross realized gains from the sale of available-for-sale
investment securities for the year ended December 31, 2000 totaled
$999,000 and $10,000, respectively. Proceeds from the redemption of
Federal Home Loan Bank stock, at cost, totaled $1,655,000 for the year
ended December 31, 2000. There were no transfers of available-for-sale
investment securities during the year ended December 31, 2000.
1999
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- ----------
(DOLLARS IN THOUSANDS)
U.S. Government agencies $ 24,186 $ 1 $ (1,174) $ 23,013
Obligations of states and political subdivisions 15,722 (1,404) 14,318
Mutual funds 2,131 (55) 2,076
Government guaranteed mortgage-backed securities 8,758 10 (199) 8,569
Corporate debt securities 6,661 (194) 6,467
Federal Reserve Bank stock 212 212
Federal Home Loan Bank stock 1,214 1,214
Pacific Coast Bankers" Bank stock 225 225
Other securities 20 20
------------- ------------- ------------- ----------
$ 59,129 $ 11 $ (3,026) $ 56,114
============= ============= ============= ==========
Net unrealized losses on available-for-sale investment securities
totaling $3,015,000 were recorded net of $1,077,000 in tax benefits as
accumulated other comprehensive loss within shareholders' equity.
Proceeds and gross realized gains and losses from the sale of
available-for-sale investment securities for the year ended December
31, 1999 totaled $6,191,000, $1,000 and $67,000, respectively. Proceeds
and gross realized gains and losses from the sale of available-for-sale
investment securities for the year ended December 31, 1998 totaled
$7,505,000, $45,000 and $3,000, respectively. There were no transfers
of available-for-sale investment securities during the years ended
December 31, 1999 and 1998.
Held-to-Maturity:
2000
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- ----------
(DOLLARS IN THOUSANDS)
U.S. Government agencies $ 1,000 $ (3) $ 997
Obligations of states and political subdivisions 3,444 $ 63 (24) 3,483
Government guaranteed mortgage-backed securities 7,160 24 (64) 7,120
------------- ------------- ------------- ----------
$ 11,604 $ 87 $ (91) $ 11,600
============= ============= ============= ==========
1999
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- ----------
(DOLLARS IN THOUSANDS)
U.S. Government agencies $ 1,000 $ (32) $ 968
Obligations of states and political subdivisions 3,517 $ 7 (153) 3,371
Government guaranteed mortgage-backed securities 9,518 93 (106) 9,505
------------- ------------- ------------- ----------
$ 14,035 $ 100 $ (291) $ 13,844
============= ============= ============= ==========
There were no sales or transfers of held-to-maturity investment
securities for the years ended December 31, 2000, 1999 and 1998.
F-12
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. TRADING AND INVESTMENT SECURITIES (Continued)
INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at December 31, 2000 by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------- ----------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------- ------------- ------------- ----------
(DOLLARS IN THOUSANDS)
Within one year $ 1,918 $ 1,914
After one year through five years 17,638 17,639 $ 60 $ 60
After five years through ten years 10,388 10,402 1,000 997
After ten years 17,375 16,950 3,384 3,423
------------- ------------- ------------- ----------
47,319 46,905 4,444 4,480
Investment securities not due at a single maturity date:
Government guaranteed mortgage-backed securities 8,955 8,953 7,160 7,120
SBA loan pools 2,505 2,375
Federal Reserve Bank stock 302 302
Federal Home Loan Bank stock 385 385
Pacific Coast Bankers' Bank stock 225 225
Other securities 21 21
------------- ------------- ------------- ----------
$ 59,712 $ 59,166 $ 11,604 $ 11,600
============= ============= ============= ===========
Investment securities with amortized costs totaling $40,060,000 and
$45,823,000 and market values totaling $39,592,000 and $44,045,000 were
pledged to secure treasury tax and loan accounts, public deposits and
short-term borrowing arrangements at December 31, 2000 and 1999,
respectively.
4. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in
thousands):
DECEMBER 31,
------------------------
2000 1999
---- ----
Commercial $ 38,854 $ 51,205
Real estate - mortgage 217,095 157,368
Real estate - construction 59,106 41,758
Agricultural 5,025 15,370
Lease financing 3,982 1,763
Installment 6,051 7,680
----- -----
330,113 275,144
Deferred loan and lease origination fees, net (862) (788)
Allowance for loan and lease losses (4,395) (3,794)
------ ------
$ 324,856 $ 270,562
============= ===========
Certain loans have been pledged to secure borrowing arrangements (see
Note 8).
F-13
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows
(dollars in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Balance, beginning of year $ 3,794 $ 2,988 $ 3,014
Provision charged to operations 380 920 1,011
Losses charged to allowance (349) (284) (1,113)
Recoveries 570 170 76
--- --- --
Balance, end of year $ 4,395 $ 3,794 $ 2,988
============= ============= =========
The recorded investment in loans and leases that were considered to be
impaired totaled $803,000 and $1,990,000 at December 31, 2000 and 1999,
respectively. The related allowance for loan and lease losses for these
loans and leases at December 31, 2000 and 1999 was $35,000 and
$349,000, respectively. The average recorded investment in impaired
loans and leases for the years ended December 31, 2000, 1999 and 1998
was $693,000, $952,000 and $1,753,000, respectively. The Company
recognized $26,000, $3,000 and $66,000 in interest income on a cash
basis on impaired loans and leases during these same periods.
At December 31, 2000 and 1999, nonaccrual loans and leases totaled
$1,121,000 and $719,000, respectively. Interest foregone on nonaccrual
loans and leases totaled $81,000, $27,000 and $67,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Salaries and employee benefits totaling $1,425,000, $1,055,000 and
$962,000 have been deferred as loan and lease origination costs during
2000, 1999 and 1998, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in
thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Land $ 2,708 $ 2,683
Buildings and improvements 7,090 5,428
Furniture, fixtures and equipment 7,958 6,872
Leasehold improvements 529 507
Construction in progress 151 400
--- ---
18,436 15,890
Less accumulated depreciation and amortization (6,758) (5,919)
------ ------
$ 11,678 $ 9,971
============= ===========
Depreciation and amortization included in occupancy and equipment
expense totaled $1,127,000, $1,044,000 and $1,042,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-14
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the following
(dollars in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Accrued interest receivable $ 3,360 $ 3,311
Deferred tax assets, net (Note 12) 2,308 3,421
Cash surrender value of officer life insurance policies (Note 14) 2,839 2,613
Deposit premium, net (Note 2) 373 386
Prepaid expenses 1,040 726
Other real estate 715
Other 1,568 924
----- ---
$ 11,488 $ 12,096
============= ============
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following (dollars in
thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Savings $ 28,869 $ 28,665
NOW accounts 52,841 41,948
Money market 44,625 37,515
Time, $100,000 or more 86,363 54,232
Other time 139,792 109,230
------- -------
$ 352,490 $ 271,590
============= ==========
Aggregate annual maturities of time deposits are as follows (dollars in
thousands):
YEAR ENDING
DECEMBER 31,
------------
2001 $ 215,243
2002 8,556
2003 1,556
2004 218
2005 582
-------------
$ 226,155
=============
Interest expense recognized on interest-bearing deposits consisted of
the following (dollars in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Savings $ 693 $ 647 $ 628
NOW accounts 690 613 648
Money market 1,598 1,221 1,024
Time, $100,000 or more 3,715 2,256 2,267
Other time 7,522 5,654 6,116
----- ----- -----
$ 14,218 $ 10,391 $ 10,683
============= ============= ===========
F-15
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. BORROWING ARRANGEMENTS
SHORT-TERM
The Company has $11,000,000 in unsecured borrowing arrangements with
three of its correspondent banks. In addition, as of December 31, 2000,
the Company could borrow up to $2,858,000 on an overnight basis from
the Federal Reserve Bank, secured by investment securities with
amortized costs totaling $3,000,000 and estimated market values
totaling $2,946,000. An advance totaling $150,000 was outstanding from
Pacific Coast Bankers' Bank at December 31, 2000 bearing an interest
rate of 10.5%. There were no short-term borrowings outstanding under
these arrangements at December 31, 1999.
At December 31, 2000, the Company could also borrow up to $46,037,000
from the Federal Home Loan Bank on either a short-term or long-term
basis, secured by investment securities with amortized costs totaling
$14,981,000 and estimated market values totaling $14,857,000 and
mortgage loans with carrying values totaling approximately $53,227,000.
There were no borrowings outstanding under this arrangement at December
31, 2000. An advance totaling $6,000,000 was outstanding from the
Federal Home Loan Bank at December 31, 1999 bearing an interest rate of
5.91% which matured on March 8, 2000. In addition, the Company had
$9,000,000 outstanding from the Federal Home Loan Bank with a weighted
average interest rate of 5.74% at December 31, 1999.
On January 31, 2000, the Company entered into an agreement with a
director to establish an unsecured revolving line of credit allowing
the Company to borrow up to $500,000 with a fixed interest rate of 8%
and maturity date of February 1, 2001. Advances on the line of credit
totaled $500,000 as of December 31, 2000.
On March 23, 1999, the Company's Employee Stock Ownership Plan entered
into an agreement with a director to establish a $300,000 revolving
line of credit with a fixed interest rate of 8.5% and maturity date of
March 23, 2001. The loan is guaranteed by Western Sierra Bancorp.
Advances on the line of credit totaled $300,000 at December 31, 2000
and 1999, respectively.
LONG-TERM
On April 19, 2000, the Company's Employee Stock Ownership Plan entered
into an agreement with a director to establish a $200,000 revolving
line of credit with a fixed interest rate of 8.5% and maturity date of
April 19, 2003. The loan is guaranteed by Western Sierra Bancorp.
Advances on the line of credit totaled $200,000 as of December 31,
2000.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its administrative office and certain of its branch
offices under noncancelable operating leases. These leases expire on
various dates through 2004 and have various renewal options ranging
from five to ten years. Rental payments include minimum rentals, plus
adjustments for changing price indexes. Future minimum lease payments
are as follows (dollars in thousands):
YEAR ENDING
DECEMBER 31,
2001 $ 534
2002 497
2003 381
2004 277
2005 237
Thereafter 306
-------------
$ 2,232
=============
Rental expense included in occupancy expense totaled $381,000, $361,000
and $376,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing
needs of its customers and to reduce its exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized on the balance sheet.
F-16
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit
is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and letters
of credit as they do for loans and leases included on the consolidated
balance sheet.
The following financial instruments represent off-balance-sheet credit
risk (dollars in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Commitments to extend credit:
Revolving lines of credit secured by 1-4 family residences $ 4,853 $ 4,735
Commercial real estate, construction and land development commitments:
Secured by real estate 59,171 37,713
Not secured by real estate 876 679
Other commercial commitments not secured by real estate 25,576 17,477
Agricultural commitments 4,191 5,826
Other unused commitments 3,912 3,794
------------- -----------
$ 98,579 $ 70,224
============= ===========
Letters of credit $ 2,574 $ 428
============= ===========
Real estate commitments are generally secured by property with
loan-to-value ratios not to exceed 80%. In addition, the majority of
the Company's commitments have variable interest rates.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but may include
deposits, accounts receivable, inventory, equipment, income-producing
commercial properties and residential real estate.
Letters of credit are conditional commitments to guarantee the
performance or financial obligation of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers.
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Company grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans and leases to customers
throughout El Dorado, Placer, Sacramento, Lake, Tuolumne and Sonora
counties.
In management's judgment, a concentration exists in real estate-related
loans which represented approximately 84% and 72% of the Company's loan
portfolio at December 31, 2000 and 1999, respectively. Although
management believes such concentrations to have no more than the normal
risk of collectibility, a substantial decline in the economy in
general, or a decline in real estate values in the Company's primary
market areas in particular, could have an adverse impact on
collectibility of these loans. Personal and business income represent
the primary source of repayment for a majority of these loans and
leases.
In addition, a substantial portion of the loans and leases in the Lake
County area are dependent upon the agribusiness and resort and
recreational economic sectors.
F-17
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not
materially affect the financial position or results of operations of
the Company.
FEDERAL RESERVE REQUIREMENT
Banks are required to maintain reserves with the Federal Reserve Bank
equal to the percentage of their reservable deposits. The reserve
balances held by the subsidiaries with the Federal Reserve Bank totaled
$1,631,000 and $1,625,000 at December 31, 2000 and 1999, respectively.
CORRESPONDENT BANKING AGREEMENTS
The Company maintains funds on deposit with other federally insured
institutions under correspondent banking agreements. Uninsured deposits
totaled $586,000 at December 31, 2000.
10. SHAREHOLDERS' EQUITY
DIVIDENDS
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. Under
applicable Federal laws, the Comptroller of the Currency restricts the
total dividend payment of any national banking association in any
calendar year to the net income of the year, as defined, combined with
the net income for the two preceding years, less distributions made to
shareholders during the same three-year period. In addition, the
California Financial Code restricts the total dividend payment of any
State banking association in any calendar year to the lesser of (1) the
bank's retained earnings or (2) the bank's net income for its last
three fiscal years, less distributions made to shareholders during the
same three-year period. At December 31, 2000, the subsidiaries had
$7,754,000 in retained earnings available for dividend payments to the
Company.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows (dollars in
thousands, except per share data):
WEIGHTED
AVERAGE
NUMBER OF
NET SHARES PER SHARE
FOR THE YEAR ENDED INCOME OUTSTANDING AMOUNT
------------------ ------ ----------- ------
DECEMBER 31, 2000
Basic earnings per share $ 3,884 3,420,397 $ 1.14
==========
Effect of dilutive stock options 56,269
------------- ---------
Diluted earnings per share $ 3,884 3,476,666 $ 1.12
============= ========= ==========
DECEMBER 31, 1999
Basic earnings per share $ 3,308 3,381,980 $ .98
==========
Effect of dilutive stock options 108,948
------------- ---------
Diluted earnings per share $ 3,308 3,490,928 $ .95
============= ========= =========
DECEMBER 31, 1998
Basic earnings per share $ 1,702 3,227,679 $ .53
==========
Effect of dilutive stock options 136,960
------------- ---------
Diluted earnings per share $ 1,702 3,364,639 $ .51
============= ========= =========
F-18
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
EARNINGS PER SHARE (Continued)
Shares of common stock issuable under stock options for which the
exercise prices were greater than the average market prices were not
included in the computation of diluted earnings per share due to their
antidilutive effect. Stock options not included in the computation of
diluted earnings per share ranged from 17,392 during the first quarter
to 75,981 for the remainder of the year ended December 31, 2000. There
were no stock options excluded from the calculation of diluted earnings
per share in 1999 and 1998.
STOCK OPTIONS
In 1999, 1997, 1990 and 1989, the Board of Directors adopted stock
option plans for which 564,223 shares of common stock remain reserved
for issuance to employees and Directors under incentive and
nonstatutory agreements. The plans require that the option price may
not be less than the fair market value of the stock at the date the
option is granted, and that the stock must be paid in full at the time
the option is exercised. The options expire on a date determined by the
Board of Directors, but not later than ten years from the date of
grant. The vesting period is determined by the Board of Directors and
is generally over five years. Outstanding options under the 1997 and
1989 plans are exercisable until their expiration; however, no new
options will be granted under these plans.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Accordingly, no compensation expense has been
recognized for options granted under its stock option plan. Had
compensation cost for the plan been determined based on the fair value
at grant date for awards in 2000 and 1999 consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below.
Compensation expense is recognized in the years in which the options
become vested.
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
---- ---- ----
(dollars in thousands, except per share data)
Net earnings - as reported $ 3,884 $ 3,308 $ 1,702
Net earnings - pro forma $ 3,748 $ 3,106 $ 1,643
Basic earnings per share - as reported $ 1.14 $ .98 $ .53
Basic earnings per share - pro forma $ 1.10 $ .91 $ .51
Diluted earnings per share - as reported $ 1.12 $ .95 $ .51
Diluted earnings per share - pro forma $ 1.08 $ .89 $ .49
The fair value of each option is estimated on the date of grant using
an option-pricing model with the following assumptions:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Dividend yield (not applicable)
Expected volatility 85.68% 78.10%
Risk-free interest rate 5.85% - 6.50% 5.48% to 5.58%
Expected option life 10 years 10 years
F-19
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
A summary of the combined activity within the plans follows:
2000 1999 1998
---------------------- ----------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------ -------- ------- -------
Options outstanding beginning of year 329,180 $ 8.84 363,479 $ 7.18 544,040 $ 6.90
Options granted 41,228 $ 10.30 96,035 $ 11.12
Options exercised (61,461) $ 7.39 (102,755) $ 6.14 (170,118) $ 6.30
Options canceled (18,459) $ 11.23 (27,579) $ 8.57 (10,443) $ 7.12
-------- ------- -------
Options outstanding, end of year 290,488 $ 9.21 329,180 $ 8.84 363,479 $ 7.18
======== ======= =======
Options exercisable, end of year 222,485 $ 8.74 242,346 $ 8.30 313,671 $ 7.18
======== ======= =======
Weighted average fair value of options
granted during the year $ 5.94 $ 6.73
A summary of options outstanding at December 31, 2000 follows:
NUMBER OF WEIGHTED NUMBER OF
OPTIONS AVERAGE OPTIONS
OUTSTANDING REMAINING EXERCISABLE
DECEMBER 31, CONTRACTUAL DECEMBER 31,
RANGE OF EXERCISE PRICES 2000 LIFE 2000
-------------- ------------- ------------
$ 4.19 - $ 6.64 59,120 3.6 years 59,120
$ 7.22 - $ 9.90 93,507 6.0 years 87,443
$ 10.24 - $ 12.81 137,861 7.6 years 75,922
--------- --------- ------- ------
290,488 222,485
======= =======
COMMON STOCK REPURCHASE PROGRAM
During 1999, the Board of Directors authorized the repurchase of up to
30,000 shares of the Company's common stock. Repurchases were generally
made in the open market at market prices. Substantially all shares
authorized under this plan have been repurchased as of December 31,
2000.
REGULATORY CAPITAL
The Company and its subsidiaries are subject to certain regulatory
capital requirements administered by the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency
(OCC) and the Federal Deposit Insurance Corporation (FDIC). Failure to
meet these minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
subsidiaries must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and its subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its subsidiaries to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets as set forth on the following
page. Each of these components is defined in the regulations.
Management believes that the Company and its subsidiaries meet all
their capital adequacy requirements as of December 31, 2000 and 1999.
F-20
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
In addition, the most recent notifications from the OCC and FDIC
categorized each of the subsidiaries as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the subsidiaries must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth
below. There are no conditions or events since that notification that
management believes have changed the categories.
2000 1999
------------------------ --------------------
AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- --------
(dollars in thousands)
LEVERAGE RATIO
Western Sierra Bancorp and Subsidiaries $ 36,034 7.9% $ 32,371 8.5%
Minimum regulatory requirement $ 18,230 4.0% $ 15,219 4.0%
Western Sierra National Bank $ 24,841 6.9% $ 21,022 7.2%
Minimum requirement for "Well-Capitalized" institution under
prompt corrective action $ 17,978 5.0% $ 14,630 5.0%
Minimum regulatory requirement $ 14,382 4.0% $ 11,704 4.0%
Lake Community Bank $ 9,039 9.7% $ 8,582 9.9%
Minimum requirement for "Well-Capitalized" institution under
prompt corrective action $ 4,673 5.0% $ 4,340 5.0%
Minimum regulatory requirement $ 3,738 4.0% $ 3,472 4.0%
TIER 1 RISK-BASED CAPITAL RATIO
Western Sierra Bancorp and Subsidiaries $ 36,034 9.8% $ 32,371 11.0%
Minimum regulatory requirement $ 14,662 4.0% $ 11,766 4.0%
Western Sierra National Bank $ 24,841 9.2% $ 21,022 9.9%
Minimum requirement for "Well-Capitalized" institution under
prompt corrective action $ 16,215 6.0% $ 12,780 6.0%
Minimum regulatory requirement $ 10,810 4.0% $ 8,520 4.0%
Lake Community Bank $ 9,039 9.7% $ 8,582 10.8%
Minimum requirement for "Well-Capitalized" institution under
prompt corrective action $ 5,595 6.0% $ 4,756 6.0%
Minimum regulatory requirement $ 3,730 4.0% $ 3,171 4.0%
TOTAL RISK-BASED CAPITAL RATIO
Western Sierra Bancorp and Subsidiaries $ 40,429 11.0% $ 35,912 12.4%
Minimum regulatory requirement $ 29,324 8.0% $ 23,527 8.0%
Western Sierra National Bank $ 27,961 10.3% $ 23,277 11.2%
Minimum requirement for "Well-Capitalized" institution under
prompt corrective action $ 27,024 10.0% $ 21,299 10.0%
Minimum regulatory requirement $ 21,619 8.0% $ 17,040 8.0%
Lake Community Bank $ 10,206 10.9% $ 9,576 12.1%
Minimum requirement for "Well-Capitalized" institution under
prompt corrective action $ 9,324 10.0% $ 7,927 10.0%
Minimum regulatory requirement $ 7,459 8.0% $ 6,342 8.0%
F-21
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. OTHER EXPENSES
Other expenses consisted of the following (dollars in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
-------------- -------------- -----------
Professional fees $ 799 $ 810 $ 715
Data processing 621 585 380
Stationery and supplies 410 255 292
Advertising and promotion 245 166 244
Other real estate 102 639
Other operating expenses 2,522 2,939 2,804
------------- ------------- -----------
$ 4,597 $ 4,857 $ 5,074
============= ============= ===========
Professional fees include amounts paid to outside vendors to perform
accounting, data processing, courier and other deposit related services
for companies maintaining large non-interest bearing deposits with the
Company. Total costs incurred are dependent upon the volume of deposits
and totaled $376,000, $300,000 and $108,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. During the same periods
the companies maintained average available balances of $14,376,000,
$12,718,000 and $5,931,000, respectively. The companies' non-interest
bearing deposits at December 31, 2000 and 1999 totaled $14,666,000 and
$11,336,000, respectively.
12. INCOME TAXES
The provision for income taxes for the years ended December 31, 2000,
1999 and 1998 consisted of the following (dollars in thousands):
FEDERAL STATE TOTAL
------------ ------------- -----------
2000
----
Current $ 1,469 $ 612 $ 2,081
Deferred 186 65 251
------------- ------------- -----------
Income tax expense $ 1,655 $ 677 $ 2,332
============= ============= ===========
1999
----
Current $ 1,482 $ 595 $ 2,077
Deferred (358) (118) (476)
------------- ------------- -----------
Income tax expense $ 1,124 $ 477 $ 1,601
============= ============= ===========
1998
----
Current $ 866 $ 357 $ 1,223
Deferred (225) (123) (348)
------------- ------------- -----------
Income tax expense $ 641 $ 234 $ 875
============= ============= ==========
F-22
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. INCOME TAXES (Continued)
Deferred tax assets (liabilities) are comprised of the following at
December 31, 2000 and 1999 (dollars in thousands):
2000 1999
------------- -------------
Deferred tax assets:
Allowance for loan and lease losses $ 1,501 $ 1,318
Other real estate 361
Deferred compensation 366 360
Net operating loss carryforward 60 80
Future benefit of State tax deduction 219 186
Loans held for sale 16 1
Organization costs 4 7
Deposit purchase premium 30 22
Premises and equipment 29
Unrealized loss on available-for-sale investment securities 215 1,077
Other 357 410
------------- -------------
Total deferred tax assets 2,768 3,851
------------- -------------
Deferred tax liabilities:
Future liability of State deferred tax assets (158) (147)
Adjustment for change in tax accounting method (72) (113)
Federal Home Loan Bank stock dividends (170) (133)
Premises and equipment (20)
Other (40) (37)
------------- -------------
Total deferred tax liabilities (460) (430)
------------- -------------
Net deferred tax assets $ 2,308 $ 3,421
============= ===========
As of December 31, 2000, the Company has Federal net operating loss
carryforwards totaling $176,000 which were acquired as a result of the
merger with R1CB. The loss carryforwards are limited to approximately
$59,000 per year and expire in 2004.
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate to operating income
before income taxes. The items comprising these differences for the
years ended December 31, 2000, 1999 and 1998 consisted of the following
(dollars in thousands):
2000 1999 1998
----------------------- ----------------------- ---------------------
AMOUNT RATE % AMOUNT RATE % AMOUNT RATE %
--------- ---------- --------- --------- --------- --------
Federal income tax expense, at statutory rate $ 2,113 34.0 $ 1,669 34.0 $ 877 34.0
State franchise tax, net of Federal tax effect 471 7.6 341 6.9 187 7.3
Benefit of tax-exempt income (256) (4.1) (343) (7.0) (187) (7.3)
Tax-exempt income from life insurance policies (22) (.3) (61) (1.3) (60) (2.3)
Taxable gain on surrendered life insurance policy 64 2.5
Other 26 .3 (5) (6) (.2)
----------- ---- ----------- ---- ----------- ----
Total income tax expense $ 2,332 37.5 $ 1,601 32.6 $ 875 34.0
=========== ==== =========== ==== =========== ====
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into
transactions with related parties, including directors. These
transactions are on substantially the same terms and conditions as
those prevailing for comparable transactions with unrelated parties.
F-23
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTY TRANSACTIONS (Continued)
The following is a summary of the aggregate activity involving related
parties during 2000 (dollars in thousands):
BORROWINGS
----------
Balance, January 1, 2000 $ 7,728
Disbursements 8,302
Amounts repaid (4,000)
------------
Balance, December 31, 2000 $ 12,030
============
Undisbursed commitments to related parties, December 31, 2000 $ 7,839
============
DEPOSITS
--------
Average outstanding deposits from related parties for the year ended
December 31, 2000 $ 5,528
============
LOANS TO THE COMPANY
The Company's Employee Stock Ownership Plan established revolving lines
of credit in the amount of $200,000 and $300,000 with a director during
2000 and 1999, respectively (see Notes 8 and 14).
The Company entered into an agreement with a director to establish an
unsecured revolving line of credit in the amount of $500,000 during
2000 (see Note 8).
14. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN
The Western Sierra Bancorp and Subsidiaries 401KSOP is available to
employees meeting certain service requirements. The Company's
contribution to the plan is discretionary and is allocated in the same
ratio as each participant's compensation bears to total compensation
for all participants. Contributions totaled $56,000, $80,000 and
$127,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Employee Stock Ownership Plan (ESOP) is designed to invest
primarily in securities of the Company purchased on the open market.
The purchase of shares is funded through contributions to the ESOP by
the Company and loans from certain members of the Board of Directors.
Contributions to the plan are at the sole discretion of the Board of
Directors and are limited on a participant-by-participant basis to the
lesser of $30,000 or 25% of the participant's compensation for the plan
year. Compensation is defined as all compensation paid during the plan
year which is considered to be W-2 income, to include amounts deferred
under the Company's 401KSOP. Employer contributions vest at a rate of
20% per year after two years of employment. Employee contributions are
not permitted. Benefits may be distributed in the form of qualifying
Company securities or cash. However, participants have the right to
demand that their benefits be distributed in the form of qualifying
Company securities.
During 1999, the ESOP purchased 19,516 shares of the Company's common
stock with the proceeds of a $300,000 loan to the ESOP by a member of
the Board of Directors. During 2000, the ESOP purchased 16,593 shares
of the Company"s common stock with the proceeds of a $200,000 loan to
the ESOP by a member of the Board of Directors. Interest expense of
$40,000 and $17,000 was incurred during the years ended December 31,
2000 and 1999, respectively.
The debt of the ESOP is recorded as debt of the Company and the shares
purchased with the proceeds are reported as unearned ESOP shares in
shareholders' equity. As the debt is repaid, shares are committed to be
released and the Company reports compensation expense equal to the
current market price of the shares. Committed to be released shares are
subsequently allocated to active employees and are recognized as
outstanding for earnings per share and capital ratio computations. Cash
dividends on allocated ESOP shares are recorded as a reduction of
retained earnings and are allocated to the participants; cash dividends
on unallocated ESOP shares are recorded as a reduction of debt and
accrued interest.
Compensation expense of $152,000, $179,000 and $90,000 was recognized
for the years ended December 31, 2000, 1999 and 1998, respectively.
F-24
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. EMPLOYEE BENEFIT PLANS (Continued)
EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
Allocated, committed-to-be-released and unallocated ESOP shares as of
December 31, 2000, 1999 and 1998, adjusted for stock dividends, were as
follows (dollars in thousands):
2000 1999 1998
------------- -------------- ----------
Allocated 27,588 24,074 20,648
Committed-to-be released 19,061 3,514 3,426
Unallocated 33,674 19,516
------------- ------------- ----------
Total ESOP shares 80,323 47,104 24,074
============= ============= ==========
Fair value of unallocated shares $ 362 $ 265 $ -
============= ============= ==========
SALARY CONTINUATION PLAN
Under the salary continuation plan, the Company is obligated to provide
eight key executives, or their designated beneficiaries, with annual
benefits for fifteen years after retirement or death. These benefits
are substantially equivalent to those available under insurance
policies purchased by the Company on the lives of the executives. The
estimated present value of these future benefits are accrued over the
period from the effective date of the plan until the executives'
expected retirement dates. The expense recognized under this plan
totaled $186,000, $206,000 and $257,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
Under this plan, the Company invested in single premium life insurance
policies with cash surrender values totaling $2,839,000 and $2,613,000
at December 31, 2000 and 1999, respectively. On the consolidated
balance sheet, the cash surrender value of life insurance polices is
included in accrued interest receivable and other assets. Income on
these policies, net of expense, totaled $66,000, $193,000 and $208,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
15. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of other
comprehensive income (loss) that historically has not been
recognized in the calculation of net income. Unrealized gains and
losses on the Company's available-for-sale investment securities are
included in other comprehensive income (loss). Total comprehensive
income and the components of accumulated other comprehensive income
(loss) are presented in the Statement of Changes in Shareholders'
Equity.
At December 31, 2000, 1999 and 1998, the Company held securities
classified as available-for-sale which had unrealized gains (losses) as
follows (dollars in thousands):
TAX
BEFORE (EXPENSE) AFTER
TAX BENEFIT TAX
------------- ------------- ------------
FOR THE YEAR ENDED DECEMBER 31, 2000
Other comprehensive income:
Unrealized holding gains $ 2,479 $ (866) $ 1,613
Less: reclassification adjustment for gains included in net income 10 (4) 6
------------- ------------- ------------
Net unrealized holding gains $ 2,469 $ (862) $ 1,607
============= ============= ============
FOR THE YEAR ENDED DECEMBER 31, 1999
Other comprehensive loss:
Unrealized holding losses $ (3,306) $ 1,186 $ (2,120)
Less: reclassification adjustment for losses included in net income (66) 27 (39)
------------- ------------- ------------
Net unrealized holding losses $ (3,240) $ 1,159 $ (2,081)
============= ============= =============
F-25
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. COMPREHENSIVE INCOME (Continued)
TAX
BEFORE BENEFIT AFTER
TAX (EXPENSE) TAX
------ ------- -----
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 46 $ (18) $ 28
Less: reclassification adjustment for gains included in net income 42 (17) 25
------------- ------------- -----------
Net unrealized holding gains $ 4 $ (1) $ 3
============= ============= ===========
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which
it is practicable to estimate fair value. These estimates are made at a
specific point in time based on relevant market data and information
about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering the Company's
entire holdings of a particular financial instrument for sale at one
time, nor do they attempt to estimate the value of anticipated future
business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by the Company to
estimate the fair value of its financial instruments at December 31,
2000 and 1999:
CASH, CASH EQUIVALENTS AND SHORT-TERM BORROWINGS: For cash, cash
equivalents and short-term borrowings, the carrying amount is estimated
to be fair value.
INTEREST-BEARING DEPOSITS IN BANKS: The fair values of interest-bearing
deposits in banks are estimated by discounting their future cash flow
using rates at each reporting date for instruments with similar
remaining maturities offered by comparable financial institutions.
TRADING AND INVESTMENT SECURITIES: For trading and investment
securities, fair values are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
estimated using quoted market prices for similar securities and
indications of value provided by brokers.
LOANS AND LEASES: For variable-rate loans and leases that reprice
frequently with no significant change in credit risk, fair values are
based on carrying values. Fair values of loans held for sale are
estimated using quoted market prices for similar loans. The fair values
for other loans and leases are estimated using discounted cash flow
analyses, using interest rates being offered at each reporting date for
loans and leases with similar terms to borrowers of comparable
creditworthiness. The carrying amount of accrued interest receivable
approximates its fair value.
CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES: The fair value of life
insurance policies are based on cash surrender values at each reporting
date as provided by the insurers.
DEPOSITS: The fair values for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using discounted cash flow analysis using
interest rates offered by the Company at each reporting date for
certificates with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
LONG-TERM DEBT: The fair value of long-term debt is estimated using a
discounted cash flow analysis using interest rates currently available
for similar debt instruments.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit are
primarily for variable rate loans and letters of credit. For these
commitments, there is no difference between the commitment amounts and
their fair values. Commitments to fund fixed rate loans are at rates
which approximate fair value at each reporting date.
F-26
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value of the Company's financial instruments are as
follows (dollars in thousands):
DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- ------------
Financial assets:
Cash and due from banks $ 24,382 $ 24,382 $ 20,400 $ 20,400
Federal funds sold 27,570 27,570 6,675 6,675
Interest-bearing deposits in banks 495 495 891 891
Loans held for sale 3,349 3,385 964 967
Trading and investment securities 70,785 70,781 70,324 70,133
Loans and leases 324,856 332,483 270,562 272,717
Accrued interest receivable 3,360 3,360 3,311 3,311
Cash surrender value of life insurance policies 2,839 2,839 2,613 2,613
------------- ------------- ------------- ------------
$ 457,636 $ 465,295 $ 375,740 $ 377,707
============= ============= ============= ============
Financial liabilities:
Deposits $ 433,771 $ 434,200 $ 343,184 $ 344,106
Short-term borrowings 950 950 15,300 15,300
Long-term debt 200 200
Accrued interest payable 1,496 1,496 707 707
------------- ------------- ------------- ------------
$ 436,417 $ 436,846 $ 359,191 $ 360,113
============= ============= ============= ============
Off-balance-sheet financial
instruments:
Commitments to extend credit $ 98,579 $ 98,579 $ 70,224 $ 70,224
Letters of credit 2,574 2,574 428 576
------------- ------------- ------------- ------------
$ 101,153 $ 101,153 $ 70,652 $ 70,800
============= ============= ============= ============
F-27
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
2000 1999
------------- ------------
ASSETS
Cash and due from banks $ 170 $ 940
Investment in subsidiaries 33,982 28,148
Trading securities 15 175
Available-for-sale investment securities 21 170
Premises and equipment 1,919 651
Other assets 1,599 1,534
------------- ------------
Total assets $ 37,706 $ 31,618
============= ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Short-term borrowings $ 950 $ 300
Long-term debt 200
Accrued expenses and other liabilities 419 403
------------- ------------
Total liabilities 1,569 703
------------- ------------
Shareholders' equity:
Common stock 20,553 18,812
Retained earnings 16,415 14,341
Unearned ESOP shares (500) (300)
Accumulated other comprehensive loss (331) (1,938)
------------- ------------
Total shareholders' equity 36,137 30,915
------------- ------------
Total liabilities and shareholders' equity $ 37,706 $ 31,618
============= ============
F-28
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
---- ---- ----
Income:
Dividends declared by subsidiaries - eliminated in consolidation $ 1,000 $ 1,850 $ 456
Other income from subsidiaries - eliminated in consolidation 2,729 1,079
Interest income 1 11
Trading securities income 30 42
------------- ------------- ------------
Total income 3,760 2,971 467
------------- ------------- ------------
Expenses:
Salaries and benefits 2,884 1,521
Occupancy and equipment 357 69
Data processing fees 427 364
Postage expense 124 3 1
Interest expense 69 12 1
Professional fees 89 138 7
Director fees 64 55 41
Merger costs 498 194 456
Other expenses 403 119 90
------------- ------------- ------------
Total expenses 4,915 2,475 596
------------- ------------- ------------
(Loss) income before equity in undistributed income of
subsidiaries (1,155) 496 (129)
Equity in undistributed income of subsidiaries 4,271 2,262 1,593
------------- ------------- ------------
Income before income tax benefit 3,116 2,758 1,464
Income tax benefit 768 550 238
------------- ------------- ------------
Net income $ 3,884 $ 3,308 $ 1,702
============= ============= ============
F-29
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
------------- ------------- -----------
Cash flows from operating activities:
Net income $ 3,884 $ 3,308 $ 1,702
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Undistributed earnings of subsidiaries (4,271) (2,262) (1,593)
Decrease (increase) in trading securities 160 (170)
Depreciation 296 12
Increase in other assets (243) (659) (179)
Increase in other liabilities 16 232 170
Deferred taxes 235 (72) (167)
------------- ------------- -----------
Net cash provided by (used in) operating activities 77 389 (67)
------------- ------------- -----------
Cash flows from investing activities:
Purchase of available-for-sale investment securities (172)
Proceeds from the sale of available-for-sale investment securities 149
Proceeds from called available-for-sale investment securities 2
Increase in construction in progress (142) (6)
Purchases of premises and equipment (1,422) (54) (603)
Proceeds from the sale of assets to subsidiary 80
Purchase of common stock from subsidiary (120)
------------- ------------- -----------
Net cash used in investing activities (1,535) (230) (523)
------------- ------------- -----------
Cash flows from financing activities:
Proceeds from (repayment of) short-term borrowings 650 (150) 150
Repurchase of common stock (400) (26)
Proceeds from ESOP borrowings 200 300
Purchase of unearned ESOP shares (200) (300)
Payments for fractional shares (12) (21)
Proceeds from exercise of stock options 450 515 697
------------- ------------- -----------
Net cash provided by financing activities 688 318 847
------------- ------------- -----------
Net (decrease) increase in cash and cash equivalents (770) 477 257
Cash and cash equivalents at beginning of year 940 463 206
------------- ------------- -----------
Cash and cash equivalents at end of year $ 170 $ 940 $ 463
============= ============= ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense $ 32 $ 12 $ 1
Non-cash investing activities:
Net change in unrealized gain on available-for-sale investment
securities $ 2,469 $ (3,240) $ 4
Proceeds and tax benefit from stock issuance from Lake Community
Bank prior to merger $ 159
Repurchase of common stock from Lake Community Bank prior to
merger $ (27)
Payment of cash dividend by Sentinel Community Bank prior to merger $ 164
F-30
QUARTERLY RESULTS
UNAUDITED QUARTERLY STATEMENTS OF OPERATIONS DATA
(dollars in thousands)
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
2000 2000 2000 2000 1999 1999 1999 1999
------------------------------------ ----------------------------------
Net interest income $5,018 $5,063 $4,865 $4,507 $4,880 $4,379 $4,326 $4,065
Provision for credit losses (100) 140 180 160 290 190 185 255
Other operating income from continuing 992 991 890 872 903 898 857 922
operations
Other operating expenses from 4,299 3,899 4,705 3,699 4,175 3,706 3,900 3,620
continuing operations ------------------------------------ ----------------------------------
Income from continuing operations before
income taxes and extraordinary item 1,811 2,015 870 1,520 1,318 1,381 1,098 1,112
Provision for income taxes 718 756 326 532 430 450 358 363
------------------------------------ ----------------------------------
Net income $1,093 $1,259 $ 544 $ 988 $ 888 $ 931 $ 740 $ 749
==================================== ==================================
==================================== ==================================
Per share:
Basic earnings per share: $ .32 $ .37 $ .17 $ .28 $ .26 $ .27 $ .21 $ .22
Diluted earnings per share: $ .31 $ .36 $ .16 $ .28 $ .25 $ .26 $ .21 $.21
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item can be found in Western Sierra's
Definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and is by this reference incorporated herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item can be found in Western Sierra's
Definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and is by this reference incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item can be found in Western Sierra's
Definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and is by this reference incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of Western Sierra and their
immediate families, as well as the companies with which they are associated,
are customers of, or have had banking transactions with, Western Sierra in
the ordinary course of Western Sierra's business, and Western Sierra expects
to have banking transactions with such persons in the future. In management's
opinion, all loans and commitments to lend in such transactions were made in
compliance with applicable laws and on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other persons of similar creditworthiness and in the
opinion of management did not involve more than a normal risk of
collectibility or present other unfavorable features.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS:
(1) Listed and included in Part II, Item 8.
(2) FINANCIAL STATEMENT SCHEDULES:
In accordance with Regulation S-X, the
financial statement schedules have been
omitted because they are not applicable to
or required of the Company or the required
information is included in the financial
statements or notes thereto.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
(c) EXHIBITS
The following documents are included or incorporated by
reference in this Annual Report on Form 10K.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of the Registrant riled in the
registration statement of Registrant on Form S-4 file
#333-6667 as Exhibit 3.2 is incorporated here by this
reference.
3.2 Bylaws as amended of Registrant filed in the registration
statement of Registrant on Form S-4 File #333-6667 as
Exhibit 3.2 is incorporated here by this reference.
10. Material Contracts of Registrant filed in the registration
statement of Registrant on Form S-4 filed on March 24,
2000 as Exhibits 10.1 through 10.19 and are incorporated
here by this reference.
37
10.1 Placerville branch lease dated June 23, 1987 as amended is
contained in Registrant's S-4 File #333-66675 as Exhibit
10.1 and is incorporated by this reference herein.
10.2 Severance benefits agreement for Gary Gall is contained in
Registrant's S-4 File #333-66675 as Exhibit 10.2 and is
incorporated by this reference herein.
10.3 Severance benefits agreement for Kirk Dowdell is contained
in Registrant's S-4 File #333-33256 as Exhibit 10.1 and is
incorporated by this reference herein
10.4 Salary continuation agreement for Gary Gall as amended is
contained in Registrant's S-4 File #333-66675 as Exhibit
10.4 and is incorporated by this reference herein.
10.5 Stock option agreement dated April 11, 1995 for Gary Gall
is contained in Registrant's S-4 File #333-66675 as
Exhibit 10.5 and is incorporated by this reference herein.
10.6 Stock option agreement dated November 14, 1996 for Gary
Gall is contained in Registrant's S-4 File #333-66675 as
Exhibit 10.6 and is incorporated by this reference herein.
10.7 Stock option agreement dated May 20, 1997 for Gary Gall is
contained in Registrant's S-4 File #333-66675 as Exhibit
10.7 and is incorporated by this reference herein.
10.8 Stock option agreement dated May 19, 1999 for Gary Gall is
contained in Registrant's S-4 File #333-33256 as Exhibit
10.4 and is incorporated by this reference herein.
10.9 Stock option agreement dated May 19, 1999 for Gary Gall is
contained in Registrant's S-4 File #333-66675 as Exhibit
10.3 and is incorporated by this reference herein.
10.10 Western Sierra National Bank 1989 Stock Option Plan and
form of incentive stock option and nonqualified stock
option agreement is contained in Registrant's S-4 File
#333-66675 as Exhibit 10.10 and is incorporated by this
reference herein.
10.11 Western Sierra Bancorp 1997 Stock Option Plan and form of
incentive stock option agreement and nonqualified stock
option agreement is contained in Registrant's S-4 File
#333-66675 as Exhibit 10.11 and is incorporated by this
reference herein.
10.12 Western Sierra National Bank Incentive Compensation Plan
for senior management is contained in Registrant's S-4
File #333-66675 as Exhibit 10.12 and is incorporated by
this reference herein.
10.13 Indemnification agreement for Gary Gall is contained in
Registrant's S-4 File #333-66675 as Exhibit 10.13 and is
incorporated by this reference herein.
10.14 Indemnification agreement form for directors of Western
Sierra National Bank is contained in Registrant's S-4 File
#333-66675 as Exhibit 10.15 and is incorporated by this
reference herein.
23.1 Consent of Perry Smith LLP
23.2 Consent of Moss Adams LLP
23.3 Consent of Grant Thornton LLP
38
SIGNATURES
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.
WESTERN SIERRA BANCORP
By: ------------------------------------------- Dated:
Gary D. Gall
President and Chief Executive Officer
(Principal Executive Officer)
And By: ---------------------------------------- Dated:
Lesa Fynes
Senior Vice President
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
39
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 and on the date indicated.
/s/ Barbara L. Cook
- --------------------------------------------- Dated: April 2, 2001
Barbara L. Cook, Director
/s/ William J. Fisher
- --------------------------------------------- Dated: April 2, 2001
William J. Fisher, Director
/s/ Richard L. Golemon
- --------------------------------------------- Dated: April 2, 2001
Richard L. Golemon, Director
/s/ Harold S. Prescott
- --------------------------------------------- Dated: April 2, 2001
Harold S. Prescott, Director
/s/ Darol B. Rasmussen
- --------------------------------------------- Dated: April 2, 2001
Darol B. Rasmussen, Director
/s/ Osvaldo I. Scariot
- --------------------------------------------- Dated: April 2, 2001
Osvaldo I. Scariot, Director
/s/ Alan J. Kleinert
- --------------------------------------------- Dated: April 2, 2001
Alan J. Kleinert, Director
/s/ Howard A. Jahn
- --------------------------------------------- Dated: April 2, 2001
Howard A. Jahn, Director
40
/s/ Thomas Manz
- --------------------------------------------- Dated: April 2, 2001
Thomas Manz, Director
/s/ Kirk C. Doyle
- --------------------------------------------- Dated: April 2, 2001
Kirk C. Doyle, Director
/s/ Lawrence Davis
- --------------------------------------------- Dated: April 2, 2001
Lawrence Davis, Director
/s/ Howard Van Lente
- --------------------------------------------- Dated: April 2, 2001
Howard Van Lente, Director
/s/ John H. Helms
- --------------------------------------------- Dated: April 2, 2001
John H. Helms, Director
/s/ Charles W. Bacchi
- --------------------------------------------- Dated: April 2, 2001
Charles W. Bacchi, Director
and Chairman of the Board
41