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 formed two nonbank subsidiaries for the sole purpose of issuing trust preferred securities, one in July 2001 and the other in December 2001. These two subsidiaries are discussed in the section titled "Trust Preferred Securities." Western Sierra is a registered bank holding company under the Bank Holding Company Act. Western Sierra conducts its operations at 4080 Plaza Goldorado Circle, Cameron Park, Ca. 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 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.
On November 15, 2001 Western Sierra entered into a merger agreement with Central California Bank, (Central), of Sonora, Ca. Under the merger agreement's terms each share of Central common stock issued and outstanding will be converted into the right to receive Western Sierra common stock, cash, or a combination of both. The transaction is expected to close on April 1, 2002.
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 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, 2001, Western Sierra and its subsidiaries employed 188 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 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 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 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 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).
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.
Other. The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. The USA Patriot Act places particular focus on account relationships between banks and accounts maintained for foreign persons and financial institutions and gives the Secretary of the Treasury significant new authority to detect and combat financial crime. Western Sierra may incur additional compliance costs or be required to expend additional funds; the extent of these expenditures is unknown at this time. It is the intent of Western Sierra to be in total compliance with this new law.
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 the 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.
Recent Accounting Pronouncements. 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 has had a significant impact on its financial statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, Business Combinations. This statement addresses the financial accounting and reporting for business combinations, which are to be accounted for using a single method, the purchase method. In addition, this statement requires that intangible assets be recognized as assets apart from good will if they meet one of the two criteria, the contractual-legal criterion or the separability criterion. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets. This Statement addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested annually for impairment. Intangible assets that have finite useful lives continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling. Because goodwill will no longer be amortized, the reported amounts of goodwill will not decrease in the same time and in the same manner as under previous standards. The provisions of this Statement are required to be applied starting with the years beginning after December 15, 2001. However goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the provisions of this statement.
Western Sierra accounted for the acquisitions of Roseville First National Bank, Lake Community Bank and Sentinel Community as pooling of interests. The proposed acquisition of Central California Bank will be treated in accordance with the abovementioned SFAS 142 and 143.
In October 2001, the FASB issued Statement 144, Accounting for the Impairment or Disposal of Long Lived Assets, that replaces FASB Statement No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of. The accounting model for long lived assets to be disposed of by sale applies to all long lived assets including discontinued operations, and replaces the provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. Statement 144 requires that those long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of Statement 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and generally are to be applied prospectively. In management's opinion, the adoption of this statement will not have a material impact on the Company's current financial position or results of operations.
Trust Preferred Securities
On July 10, 2001, Western Sierra Bancorp (Bancorp) formed a wholly owned Connecticut statutory business trust, Western Sierra Statutory Trust I (Western Trust I) as amended and restated on July 31, 2001. On July 31, 2001 Bancorp issued to Western Trust I Floating Rate Junior Subordinated Deferrable Interest Debentures Due 2031 (Debentures) in the aggregate principal amount of $6,000,000. These debentures qualify as Tier I capital under Federal Reserve Board guidelines. In exchange for these debentures Western Trust I paid Bancorp $6,000,000. Western Trust I funded its purchase of debentures by issuing $6,000,000 in floating rate capital securities (capital securities), which were then pooled and sold. Western Trust I secured capital securities with Debentures issued by Bancorp. The Debentures are the only asset of Western Trust I. The interest rate on both instruments is the same and is computed on actual days divided by 360 times the rate. The rate is the three month LIBOR (London Interbank Offered Rate) plus 3.58% not to exceed 12.5% adjustable quarterly. The proceeds from the Debentures were used to retire short-term debt and the related accrued interest ($3,522,000) repurchase stock ($2,076,000) (see note 3) and to partially fund the construction of new corporate headquarters ($122,000).
The Debentures and capital securities accrue and pay distributions quarterly based on the floating rate described above on the stated liquidation value of $1,000 per security. Bancorp has entered into contractual agreements which, taken collectively, fully and unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on the capital securities; (2) the redemption price with respect to any capital securities called for redemption by Western Trust I, and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of Western Trust I.
The capital securities are mandatorily redeemable upon maturity of the Debentures on July 31, 2031, or upon earlier redemption as provided in the indenture.
On December 18, 2001, Western Sierra Bancorp (Bancorp) formed a wholly owned Connecticut statutory business trust, Western Sierra Statutory Trust II (Western Trust II). On December 18, 2001 Bancorp issued to Western Trust II Floating Rate Junior Subordinated Deferrable Interest Debentures Due 2031 (Debentures) in the aggregate principal amount of $10,000,000. These debentures qualify as Tier I capital, subject to limitations, under Federal Reserve Board guidelines. In exchange for these
debentures Western Trust II paid Bancorp $10,000,000. Western Trust II funded its purchase of debentures by issuing $10,000,000 in floating rate capital securities (capital securities), which were then pooled and sold. Western Trust II secured capital securities with Debentures issued by Bancorp. The Debentures are the only asset of Western Trust II. The interest rate on both instruments is the same and is computed on actual days divided by 360 times the rate. The rate is the three month LIBOR (London Interbank Offered Rate) plus 3.60% not to exceed 12.5% adjustable quarterly. The proceeds from the Debentures were used to retire short-term debt and the related accrued interest ($2,113,000), to partially fund the construction of new corporate headquarters ($1,379,000) with the balance temporarily invested and available for corporate purposes.
The Debentures and capital securities accrue and pay distributions quarterly based on the floating rate described above on the stated liquidation value of $1,000 per security. Bancorp has entered into contractual agreements which, taken collectively, fully and unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on the capital securities; (2) the redemption price with respect to any capital securities called for redemption by Western Trust I, and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of Western Trust I.
The capital securities are mandatorily redeemable upon maturity of the Debentures on December 18, 2031, or upon earlier redemption as provided in the indenture.
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.
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 $453,000, $381,000 and $361,000, in 2001, 2000 and 1999 respectively. The expiration dates of the leases vary, with the first such lease expiring during 2002 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.
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.
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.
PART II
Item 5.
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, 2001, there were 1,506 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. The prices have been adjusted to reflect the stock dividends issued in 2001 and 2000.
Western Sierra Bancorp
Common Stock Prices
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, 2001, the subsidiaries had $11,842,000 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 $.32 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.
Item 6.
Item 6. Selected Financial Data
Summary of Consolidated Financial Data and Performance Ratios
Item 7.
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 2002 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. It is the opinion of Management that the increase in trading volume and market price of the company's stock is a direct reflection of its positive performance in a market that is awash with bad news.
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 pertains to Western Sierra's financial condition, changes in financial condition and results of operations as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001. 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 Sierra's audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein.
FINANCIAL CONDITION
2001 Compared to 2000
The Company experienced another year of growth and expansion in 2001. Total assets at December 31, 2001 were $510.6 million, an increase of $36.0 million, or 7.6%, over total assets of $474.6 million at December 31, 2000. Loans were $388.4 million, an increase of $59.2 million or 18.0%, over total loans of $329.3 million at December 31, 2000. Loan growth was the result of continued marketing efforts, strong demand in our market area (in contrast to the relative weak market in the Nation as a whole) 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, 2001 were $448.6 million, an increase of $14.8 million, or 3.4%, over total deposits of $433.8 million at December 31, 2000. Most of the deposit growth occurred in non-interest bearing deposits, an increase of 23.0% to $100.0 million at December 31, 2001. NOW accounts increased 10.2% to $58.2 million at December 31, 2001 and time deposits decreased 8.8% to $202.8 million at December 31, 2001. It is the opinion of management that the relatively low current
market rate has discouraged investment in time deposits. 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, 2001 was $39.9 million, an increase of $3.8 million over total shareholders' equity of $36.1 million at December 31, 2000. The increase in equity is due to an increase in retained earnings of $3.2 million for the twelve months ended December 31, 2001 and the exercise of stock options by employees and directors, which was partially offset by the repurchase of 163,000 shares of Western Sierra common stock during 2001. Please see the Consolidated Statement of Changes in Shareholders' Equity in the audited financial statements for a detailed analysis of these changes.
2000 Compared to 1999
The total assets at December 31, 2000 were $474.6 million, an increase of $82.7 million or 21.1% over total assets of $391.9 million at December 31, 1999. Loans were $329.3 million, an increase of $54.9 million or 20.0% over total loans of $274.4 million at December 31, 1999.
Total deposits at December 31, 2000 were $433.8 million, over total deposits of $343.2 million at December 31, 1999, an increase of 26.4% or $90.6 million. Most of the deposit growth occurred in time deposits of $100,000 or more, an increase of 59.0% 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 28.0% 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 was due to an increase in retained earnings of $2.0 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's stock, and a change in the unrealized loss on available-for-sale securities in 2000.
RESULTS OF OPERATIONS
Net Income. Western Sierra recorded net income of $5.4 million, or $1.47 diluted earnings per share, for the year ended December 31, 2001 compared to net income of $3.9 million, or $1.06 diluted earnings per share, in 2000 and net income of $3.3 million, or $0.90 diluted earnings per share, in 1999.
The increase in net income for each year above is generally attributed to increases net interest income resulting from increases in earning assets partially offset by an increase in provisions for loan losses, and operating efficiencies.
Net Interest Income and Net Interest Margin
Total interest income increased from $28.5 million in 1999 to $34.0 million in 2000, and to $35.8 million in 2001, representing a 19.4% increase in 2000 over 1999 and a 5.1% increase in 2001 over 2000. 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 increased from $10.9 million in 1999 to $14.6 million in 2000, and decreased to $13.8 million in 2001, representing a 34.4% increase in 2000 from 1999, and a 5.8% decrease in 2001 over 2000. The decrease in interest expense from 2000 to 2001 was due to lower interest rates across all deposit types applied to a larger deposit base and more importantly a change in the deposit mix from higher to lower paying 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 5.10% in 1999, 4.98% in 2000 and 4.87% in 2001. The change over these periods was a result of competition keeping earning asset yields from changing at the same pace as rates paid 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. Savings deposits include NOW and money market accounts.
(1)Not computed on a tax equivalent basis.
(2)For the purpose of this schedule the interest in Western Sierra's junior subordinated debentures is included in other borrowings. 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.
(1)Not computed on a tax equivalent basis.
(2)For the purpose of this schedule the interest in Western Sierra's junior subordinated debentures is included in other borrowing. Non-interest income. Non-interest income increased 45.4%, or $1.7 million, to $5.4 million for 2001 as compared to $3.7 million for 2000. Non-interest income for 2000 increased by $165,000 or 4.6% from the $3.6 million earned during 1999.
The following table describes the components of non-interest income for the years ended December 31, 2001, 2000 and 1999.
NON-INTEREST INCOME
>1% of Gross Revenue
The increase in 2001 from 2000 and 1999 was primarily the result of an improved market for home mortgages due to decreasing interest rates. Western Sierra will continue to implement strategies to increase its non-interest income to help offset the decreasing net interest margins the industry is experiencing.
Non-interest expense. Non-interest expense amounted to $17.9 million in 2001, $16.6 million in 2000 and $15.4 million in 1999. This represents an increase of $1.3 million, or 7.8%, in 2001 and an increase of $1.2 million, or 7.8%, in 2000 when compared to 1999. 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 and 2001 additional accounting and data processing responsibilities were combined to further enhance the operating efficiencies of the organization. Management continues to closely monitor this area. Salaries and benefits have continued to increase due primarily to commissions and incentives paid. Management believes that the increase in business more then compensates for this increase in incentives. Merger expense in 2000 related to the acquisition of Sentinel accounted for as a pooling of interests. Professional fees increased 91.7% or $733 thousand in 2001 over 2000 primarily due to a major study of the entire organization and all of its profit centers. It is the opinion of management that this expenditure will result in a much more efficient organization and a greater return to the shareholders; however, actual results may differ.
The following table describes the components of other non-interest expense for the years ended December 31, 2001, 2000 and 1999.
NON-INTEREST EXPENSE
>1% of Gross Revenue
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 $925,000 as a provision for loan and lease losses in 2001, $380,000 in 2000 and $920,000 in 1999. Loan recoveries net of charge-offs in 2000 were $221,000. In 2001, loan charge-offs net of recoveries were $224,000, and in 1999 were $114,000. The ratio of the allowance for loan and lease losses to total gross loans was 1.31% in 2001, 1.33% in 2000, and 1.38% in 1999.
In management's opinion, the balance of the allowance for loan losses at December 31, 2001 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 $3.2 million in 2001, $2.3 million in 2000 and $1.6 million in 1999, representing effective tax rates of 37.3%, 37.5% and 32.6%, 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, 2001 was 17.1%, at December 31, 2000 was 19.8% and at December 31, 1999 was 15.5% 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's 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, 2001. Yields on tax-exempt securities have not been computed on a tax-equivalent basis.
The following tables summarize the values of the Company's investment securities held on the dates indicated:
Loan Portfolio. Western Sierra experienced an 11.6% increase in loan production during 2001 over 2000. Despite this increase, portfolio quality remained uncompromised as evidenced by criticized assets (including OREO) at 13.05% of capital and delinquencies as a percentage of total loans at 0.03%. The "criticized asset to capital ratio" was an improvement over the prior year (year 2000 was 14.59%) and primarily due to the successful workout of Sentinel Community Bank problem loans.
Western Sierra's largest historical lending categories are real estate loans and commercial loans. These categories accounted for approximately 79.3% and 16.5% respectively of Western Sierra's total loan portfolio at December 31, 2001, and approximately 83.9% and 13.0% respectively of Western Sierra's total loan portfolio at December 31, 2000. Loans are carried at face amount, less payments collected and the allowance for possible loan losses. Interest on all loans is accrued 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, 2001, approximately 49.1% of Western Sierra's loan portfolio was compromised of variable rate loans, and at December 31, 2000, approximately 53.1% 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.
While Real Estate and Commercial lending remain the foundation of Western Sierra's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. Western Sierra remains committed to the agricultural industry in Lake County; there was an increase in agricultural loan outstanding to
$8.6 million at December 31, 2001 from $5.0 million at December 31, 2000. This increase brings us closer to our historic levels of agricultural lending. We will continue to pursue high quality agricultural loans as an important part of our overall loan portfolio.
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 that 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.
Commercial loans were lower in 2000 due primarily to several large loans closing out prior to year-end. In 2001 the total amount outstanding returned to anticipated levels.
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, 2001, approximately $29.7 million of Western Sierra's single family real estate construction loans consisted of loans secured by first trust deeds on the construction of speculative single family dwellings and the remaining $17.5 million consisted of loans secured by first trust deeds on the construction of owner-occupied 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, 2001, the Company had $72.5 million in unfunded commercial real estate loan commitments which are secured by real estate and $31.7 million in unfunded commercial commitments unsecured by real estate. In addition, the company had $16.3 million in other unused commitments. The Company's undisbursed commercial loan commitments represent primarily business lines of credit. The undisbursed construction commitments represent undisbursed funding on construction projects in process. The mortgage loan commitments represent approved but unfunded mortgage loans with the Company's mortgage banking business.
Based upon prior experience and prevailing economic conditions, it is anticipated that approximately 60% of the commitments at December 31, 2001 will be exercised during 2002.
Maturity Distribution. The following table sets forth the maturity of certain loan categories. Excluded categories are residential mortgages of 1-4 family residences, personal installment loans and
lease financing outstanding as of December 31, 2001. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates:
Asset Quality. The Company 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 of Directors In management's opinion, this loan review system facilitates the early identification of potential problem loans.
The Company's places 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 the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is deemed by management to be probable. Where the collectibility of the principal 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 the Company'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.
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.
The following table provides certain information for the years indicated with respect to the Company's allowance for loan and lease losses as well as charge-off and recovery activity.
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 the Company.
The adequacy of the Company's allowance for loan and lease losses is based on specific and formula allocations to the Company'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, 2001 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, the Company 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 loan portfolio and will necessarily change whenever management determines that the risk characteristics of the loan portfolio have changed.
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:
Deposit Structure. Deposits represent the Bank'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. The Company experiences to a small degree some seasonality with the slower growth period between November through April, and the higher growth period May through October. In order to assist in meeting any funding demands, the Company 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 the Company's average daily deposits for the periods indicated.
The Company's time deposits of $100,000 or more had the following schedule of maturities at December 31, 2001:
Time deposits of $100,000 or more are generally from the Company's local business and individual customer base. The potential impact on the Company's liquidity from the withdrawal of these deposits is discussed in the Company's asset and liability management committee, and is considered to be minimal.
Other Borrowings. The company'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, 2001, 2000 and 1999
Terms. The terms of the Short-term Borrowings over this three year period varied, consisting of three different methods:
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.
Item 7a.
Item 7a. Quantitative & Qualitative Disclosure About Market Risk
As a financial institution, the Company'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 the Company's interest earning assets and all of the Company's interest bearing liabilities are located at the Bank level, virtually all of the Company'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 the Company's management of its assets and liabilities is to maximize the economic value of the Company 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 together, enabling management to make any adjustments as necessary.
The following table sets forth as of December 31, 2001, the distribution of repricing opportunities for the Company'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.
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. The Company lists these deposits as it has because this is the actual historical trend the Company 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, 2001, the Company's and its subsidiary banks' capital ratios exceeded applicable regulatory requirements. The following tables present the capital ratios for the Company and
the Banks compared to the standards for bank holding companies and well capitalized depository institutions as of December 31, 2001 (amounts in thousands except percentage amounts).
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.
Shareholder Equity. The shareholder's equity of Western Sierra increased from $30.9 million at December 31, 1999, to $36.1 million at December 31, 2000 and to $39.9 million at December 31, 2001. These increases are attributable to retained earnings, the exercise of stock options and adjustments for unrealized gains and losses on available-for-sale securities. Western Sierra is subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Western Sierra must meet specific capital guidelines that involve quantitative measures of Western Sierra's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Western Sierra's capital amounts and classifications are also subject to qualitative judgements by the regulators regarding components, risk-weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Western Sierra to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings less goodwill) to risk-weighted assets and of Tier 1 capital to average assets. Management believes as of December 31, 2001, that Western Sierra exceeds all capital adequacy requirements to which it is subject.
Item 8.
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, 2001, 2000 and 1999.
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, 2001 and 2000 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, 2001. 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 consolidated statements of income, changes in shareholders' equity and cash flows of Sentinel Community Bank and subsidiary for the year ended December 31, 1999, which statements reflect net earnings of $503,000. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Sentinel Community Bank and subsidiary for 1999, is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated 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 report 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
/s/ Perry-Smith LLP
February 1,
INDEPENDENT AUDITOR'S REPORT
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 (the Bank) for the year ended December 31, 1999. 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 cash flows of Sentinel Community Bank and Subsidiary for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Stockton, California
January 28, 2000
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2001 and 2000
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
The accompanying notes are an integral part of these financial consolidated statements.
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2001, 2000 and
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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, Roseville 1st National Bank (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.
On July 31, 2001 and December 18, 2001, the Company formed two wholly-owned subsidiaries, Western Sierra Statutory Trust I and Western Sierra Statutory Trust II, both Connecticut statutory business trusts, for the purpose of issuing and selling trust preferred securities (see Note 10).
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 2001.
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. Mortgage loans serviced for others totaled $20,962,000 as of December 31, 2000.
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 continued to service those loans until March 2001.
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, 2001, 2000 or 1999. SBA loans with unpaid balances of $6,924,000 and $6,116,000 were being serviced for others at December 31, 2001 and 2000, 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, participations in commercial loans totaling $24,261,000 and $18,258,000 were serviced for others as of December 31, 2001 and 2000, respectively. These loans were sold without recourse and, therefore, their balances are not included in 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.
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, 2001 and 2000, respectively, reflects management's estimate of possible 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, 2001 and 2000.
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.
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.
Impact of New Financial Accounting Standards
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to replace SFAS No. 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 No. 140 resolves implementation issues which arose as a result of SFAS No. 125, but carries forward most of the provisions of the original statement. SFAS 140 was 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 has had a significant impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 addresses the financial accounting and reporting for business combinations and requires the use of a single method to account for business combinations, the purchase method of accounting. In addition, SFAS No. 141 requires that intangible assets be recognized as assets apart from goodwill if they meet one of two criteria, the contractual-legal criterion or the separability criterion. SFAS No. 141 applies to all business combinations for which the date of acquisition is July 1, 2001 or later.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142, goodwill and other intangible assets that have indefinite useful lives will be evaluated periodically for impairment rather than amortized. The provisions of this statement apply to financial statements for fiscal years beginning after December 15, 2001, except for goodwill or other intangible assets acquired after June 30, 2001 for which SFAS No. 142 is immediately effective. The Company will account for goodwill recognized in its acquisition of Central California Bank discussed in Note 2 under the guidance of SFAS 142.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provision of Accounting Principles Board Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less costs to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. Management does not believe the adoption of this statement will have a significant impact on the Company's financial position or results of operations.
2. MERGERS AND ACQUISITIONS
On November 15, 2001, the Board of Directors entered into a proposed merger agreement with Central California Bank (CCB). Under the agreement, CCB would become a wholly-owned subsidiary of the Company, subject to shareholder and regulatory approvals. The merger will be accounted for under the purchase method of accounting, at an agreed upon price of $14.10 per share of CCB stock owned at January 30, 2002, or approximately $8,640,000. If approved, each CCB shareholder will
receive a fixed value of $14.10 in cash, the Company's stock or a combination of cash and stock. The Company anticipates the transaction will close on April 1, 2002.
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 was accounted for as a pooling of interest.
On May 5, 2000, 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, principally deposits totaling $4,107,000, of the Columbia branch of Pacific State Bank on October 13, 2000. 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 $57,000, $55,000 and $54,000 for the years ended December 31, 2001, 2000 and 1999, 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 poolings of interests.
3. TRADING AND INVESTMENT SECURITIES
Trading Securities
The estimated market value of trading securities at December 31, 2001 and 2000 totaled $16,000 and $15,000, respectively. Net unrealized appreciation of trading securities of $1,000, $21,000 and $42,000 was included in non-interest income for the years ended December 31, 2001, 2000 and 1999, respectively. 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, 2001 and 1999. There were no transfers of trading securities for the years ended December 31, 2001, 2000 and 1999.
Investment Securities
The amortized cost and estimated market value of investment securities at December 31, 2001 and 2000 consisted of the following:
Available-for Sale:
Net unrealized losses on available-for-sale investment securities totaling $326,000 were recorded, net of $111,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2001. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the year ended December 31, 2001 totaled $24,461,000 and $120,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2001.
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 at December 31, 2000. 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. 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. There were no transfers of available-for-sale investment securities during the years ended December 31, 2000 and 1999.
Held-to-Maturity:
There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2001, 2000 and 1999.
The amortized cost and estimated market value of investment securities at December 31, 2001 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.
Investment securities with amortized costs totaling $22,938,000 and $40,060,000 and market values totaling $22,978,000 and $39,592,000 were pledged to secure treasury tax and loan accounts, public deposits and short-term borrowing arrangements at December 31, 2001 and 2000, respectively.
4. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in thousands):
Certain loans have been pledged to secure borrowing arrangements (see Note 8).
Changes in the allowance for loan and lease losses were as follows (dollars in thousands):
The recorded investment in loans and leases that were considered to be impaired totaled $2,576,000 and $803,000 at December 31, 2001 and 2000, respectively. The related allowance for loan and lease losses for these loans and leases at December 31, 2001 and 2000 was $244,000 and $35,000, respectively. The average recorded investment in impaired loans and leases for the years ended December 31, 2001, 2000 and 1999 was $2,486,000, $693,000 and $952,000, respectively. The Company recognized $27,000, $26,000 and $3,000 in interest income on a cash basis on impaired loans and leases during these same periods.
At December 31, 2001 and 2000, nonaccrual loans and leases totaled $2,656,000 and $1,121,000, respectively. Interest foregone on nonaccrual loans and leases totaled $237,000, $81,000 and $27,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Salaries and employee benefits totaling $1,266,000, $1,425,000 and $1,055,000 have been deferred as loan and lease origination costs during 2001, 2000 and 1999, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in thousands):
Depreciation and amortization included in occupancy and equipment expense totaled $1,318,000, $1,127,000 and $1,044,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
6. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the following (dollars in thousands):
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following (dollars in thousands):
Aggregate annual maturities of time deposits are as follows (dollars in thousands):
Interest expense recognized on interest-bearing deposits consisted of the following (dollars in thousands):
8. BORROWING ARRANGEMENTS
Short-Term
The Company has $12,000,000 in unsecured borrowing arrangements with three of its correspondent banks. At December 31, 2001, there was $2,000,000 in short-term borrowings bearing an interest rate of 1.5% under these arrangements. An advance totaling $150,000 was outstanding from Pacific Coast Bankers' Bank at December 31, 2000 bearing an interest rate of 10.5%.
At December 31, 2001, the Company could also borrow up to $35,661,000 from the Federal Home Loan Bank on either a short-term or long-term basis, secured by investment securities with amortized costs totaling $7,127,000 and estimated market values totaling $7,202,000 and mortgage loans with carrying values totaling approximately $49,280,000. There were no borrowings outstanding under this arrangement at December 31, 2001 and 2000, respectively.
During 2001, the Company entered into an agreement with Pacific Coast Bankers' Bank to establish a $5,000,000 revolving line of credit with a variable interest rate of prime plus .75% and maturity date of March 22, 2002, secured by 592,070 shares of Western Sierra National Bank stock and 51 shares of Lake Community Bank stock. There were no advances on the line of credit at December 31, 2001.
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 $750,000 with a fixed interest rate of 8% and maturity date of March 1, 2002. There were no advances on the line of credit at December 31, 2001. Advances on the line of credit totaled $500,000 at 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, 2002. The loan is guaranteed by Western Sierra Bancorp. Advances on the line of credit totaled $300,000 at December 31, 2001 and 2000, 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 $100,000 and $200,000 at December 31, 2001 and 2000, respectively.
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 2007 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 and sublease rental income are as follows (dollars in thousands):
Rental expense included in occupancy expense totaled $453,000, $381,000 and $361,000 for the years ended December 31, 2001, 2000 and 1999, 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.
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):
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 79% and 84% of the Company's loan portfolio at December 31, 2001 and 2000, 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.
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 a percentage of their reservable deposits. The reserve balances held by the Company's banking subsidiaries with the Federal Reserve Bank totaled $25,000 and $1,631,000 at December 31, 2001 and 2000, respectively.
Correspondent Banking Agreements
The Company maintains funds on deposit with other federally insured institutions under correspondent banking agreements. Uninsured deposits totaled $2,356,000 at December 31, 2001.
10. MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUSTS
Guaranteed Preferred Beneficial Interest Securities of Western Sierra Statutory Trusts
Western Sierra Statutory Trust I (Trust I) and Western Sierra Statutory Trust II (Trust II) are Connecticut statutory business trusts formed by the Company for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.
In July and December 2001, the Company issued to Trust I and Trust II subordinated deferrable interest debentures due July 31, 2031 and December 18, 2031, respectively. Simultaneously, Trust I and
Trust II issued 6,000 and 10,000 floating rate capital securities, with liquidation values of $1,000 per security, for gross proceeds of $16,000,000. The subordinated debentures represent the sole assets of the Trusts. The subordinated debentures are redeemable by the Company, subject to the receipt by the Company of prior approval from the Federal Reserve Bank (FRB), if then required under applicable capital guidelines or policies of the FRB. The Company may redeem Trust I on any July 31st on or after July 31, 2006. The Company may redeem Trust II on any December 18 on or after December 18, 2006. The redemption price shall be par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture. The floating rate capital securities are subject to mandatory redemption to the extent of any early redemption of the subordinated debentures and upon maturity of the subordinated debentures on July 31, 2031 and December 18, 2031.
Holders of the securities are entitled to cumulative cash distributions on the liquidation amount of $1,000 per security. Interest rates on each set of capital securities and debentures are the same and are computed on a 360-day basis. For the $6,000,000 in debentures and capital securities issued in July 2001, the rate is the three-month London Interbank Offered Rate (LIBOR) plus 3.58%, with a maximum rate of 12.5% annually, adjustable quarterly. For the $10,000,000 in debentures and capital securities issued in December 2001, the rate is LIBOR plus 3.60%, with a maximum rate of 12.5% annually, adjustable quarterly.
11. 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, 2001, the subsidiaries had $11,842,000 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):
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 option grants for the issuance of 3,500 shares were not included in the computation of diluted earnings per share during the third quarter of the year ended December 31, 2001. Stock options not included in the computation of diluted earnings per share ranged from 18,262 during the first quarter to 79,780 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.
Stock Options
In 1999, 1997, 1990 and 1989, the Board of Directors adopted stock option plans for which 365,952 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 plans. Had compensation cost for the plans been determined based on the fair value at grant date for awards in 2001, 2000, 1999 and 1997 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.
The fair value of each option is estimated on the date of grant using an option-pricing model with the following assumptions:
A summary of the combined activity within the plans follows:
A summary of options outstanding at December 31, 2001 follows:
Common Stock Repurchase Program
During 2001 and 1999, the Board of Directors authorized the repurchase of up to 329,000 and 30,000 shares, respectively, of the Company's common stock. Repurchases were generally made in the open market at market prices. At December 31, 2001, approximately 166,000 shares authorized under the 2001 plan remain available for repurchase. The repurchase is in contemplation of reissuing such shares as part of the Company's recurring declaration of annual stock dividends.
Regulatory Capital
The Company and its banking 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 banking 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 banking 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 banking 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 banking subsidiaries meet all their capital adequacy requirements as of December 31, 2001 and 2000.
In addition, the most recent notifications from the OCC and FDIC categorized each of the banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the banking 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.
12. OTHER EXPENSES
Other expenses consisted of the following (dollars in thousands):
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 $369,000, $376,000 and $300,000 for the years ended December 31, 2001, 2000 and 1999, respectively. During the same periods the companies maintained average available balances of $17,259,000, $14,376,000 and $12,718,000, respectively. The companies' non-interest bearing deposits at December 31, 2001 and 2000 totaled $20,577,000 and $14,666,000, respectively.
13. INCOME TAXES
The provision for income taxes for the years ended December 31, 2001, 2000 and 1999 consisted of the following (dollars in thousands):
Deferred tax assets (liabilities) are comprised of the following at December 31, 2001 and 2000 (dollars in thousands):
As of December 31, 2001, the Company has Federal net operating loss carryforwards totaling $117,000 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 consisted of the following (dollars in thousands):
14. 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.
The following is a summary of the aggregate activity involving related parties during 2001 (dollars in thousands):
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 15).
The Company entered into an agreement with a director to establish an unsecured revolving line of credit in the amount of $750,000 during 2000 (see Note 8).
15. BENEFIT PLANS
Profit Sharing Plan
The Western Sierra Bancorp and Subsidiaries 401KSOP is available to employees meeting certain service requirements. Under the plan, employees may defer a selected percentage of their annual compensation. The contribution to the plan is discretionary and is allocated as follows:
•A matching contribution to be determined by the Board of Directors each plan year under which a percentage of each participant's contribution is matched.
•Additional employer contributions to the plan may be made at the discretion of the Board of Directors and shall be allocated in the same ratio as each participant's contribution bears to total compensation.
Employer contributions totaled $90,000, $56,000 and $80,000 for the years ended December 31, 2001, 2000 and 1999, 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 (see Note 8). 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 20,492 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 17,423 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 related to these loans totaled $37,000, $40,000 and $17,000 during the years ended December 31, 2001 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 $201,000, $152,000 and $179,000 was recognized for the years ended December 31, 2001, 2000 and 1999, respectively.
Allocated, committed-to-be-released and unallocated ESOP shares as of December 31, 2001, 2000 and 1999, adjusted for stock dividends, were as follows (dollars in thousands):
Salary Continuation Plan
Under the salary continuation plan, the Company is obligated to provide seven 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 $132,000, $186,000 and $206,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Under this plan, the Company invested in single premium life insurance policies with cash surrender values totaling $2,875,000 and $2,839,000 at December 31, 2001 and 2000, 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 $47,000, $66,000 and $193,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Director Retirement Plan
During 2001, the Board of Directors approved a retirement plan for certain directors electing early retirement from the Company. The plan provides for annual payments of $7,200 for ten years and became effective with their retirement on June 30, 2001. The estimated present value of these future payments, totaling $266,000, is included in other expense in the consolidated statement of income.
16. 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 consolidated statement of changes in shareholders' equity.
At December 31, 2001, 2000 and 1999, the Company held securities classified as available-for-sale which had unrealized gains (losses) as follows (dollars in thousands):
17. 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, 2001 and 2000:
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.
Mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trusts: The fair value of mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trusts was determined based on the current market value for like kind instruments of a similar maturity and structure.
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.
The estimated fair value of the Company's financial instruments are as follows (dollars in thousands):
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
December 31, 2001 and 2000
(Dollars in thousands)
STATEMENT OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
Quarterly Results
UNAUDITED QUARTERLY STATEMENTS OF OPERATIONS DATA
(dollars in thousands)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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.
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.
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.
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.
PART IV
Item 14.
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
A Form 8-K relating to the acquisition of Central California Bank was filed on November 15, 2001 and incorporated by reference.
(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
11.
Statement re: computation of per share earnings is included in Note 10 to the financial statements included as item 9.
21.
Subsidiaries of the registrant are Western Sierra National Bank, a national banking association, and Lake Community Bank, a California banking corporation. Western Sierra National Bank also does business as Roseville 1st National Bank-a branch of Western Sierra bank, and Sentinel Community
22.
Various required consents are filed with the registration statement of the Registrant on Form S-4 as Exhibit 23 filed on February 28, 2002 and Form S-4A as Exhibit 24 filed February 27, 2002 and incorporated by reference.
23.1
Consent of Perry-Smith LLP
23.2
Consent of Moss Adams LLP
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:
/s/ GARY D. GALL Gary D. Gall
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 29, 2002
And By:
/s/ DAMON WOODWARD Damon Woodward
Vice President
Controller
(Principal Financial Officer
and Principal Accounting Officer)
Dated: March 29, 2002
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 Barbara L. Cook, Director
Dated: March 29, 2002
/s/ WILLIAM J. FISHER William J. Fisher, Director
Dated: March 29, 2002
/s/ HAROLD S. PRESCOTT Harold S. Prescott, Director
Dated: March 29, 2002
/s/ OSVALDO I. SCARIOT Osvaldo I. Scariot, Director
Dated: March 29, 2002
/s/ ALAN J. KLEINERT Alan J. Kleinert, Director
Dated: March 29, 2002
/s/ HOWARD A. JAHN Howard A. Jahn, Director
Dated: March 29, 2002
/s/ THOMAS MANZ Thomas Manz, Director
Dated: March 29, 2002
/s/ LAWRENCE DAVIS Lawrence Davis, Director
Dated: March 29, 2002
/s/ DOUGLAS A. NORDELL Douglas A. Nordell, Director
Dated: March 29, 2002
/s/ CHARLES W. BACCHI Charles W. Bacchi, Director and Chairman of the Board
Dated: March 29, 2002
PART I
Item 1. Description of Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission Of Matters To A Vote Of Security Holders
PART II
Item 5. Market Price & Dividends
Item 6. Selected Financial Data
Item 7. Management's Discussion & Analysis
Item 7a. Quantitative & Qualitative Disclosure About Market Risk
Item 8. Financial Statements & Supplementary Data
INDEPENDENT AUDITOR'S REPORT
WESTERN SIERRA BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2001 and 2000 (Dollars in thousands)
WESTERN SIERRA BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME For the Years Ended December 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data)
WESTERN SIERRA BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 2001, 2000 and 1999 (Dollars in thousands)
WESTERN SIERRA BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999 (Dollars in thousands)
WESTERN SIERRA BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) For the Years Ended December 31, 2001, 2000 and 1999 (Dollars in thousands)
WESTERN SIERRA BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
SIGNATURES