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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number 1-9383
WESTAMERICA BANCORPORATION
(Exact name of the registrant as specified in its charter)
CALIFORNIA
(State of incorporation)
94-2156203
(I.R.S. Employer Identification Number)
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 257-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ x ] NO
Indicate by check mark if disclosure of delinquent filer
pursuant to Item 405 of Regulation S-K (Section 229.405
of this chapter) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to
the closing price of the stock, as of March 21, 1997:
$592,757,000
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 21, 1997
Title of Class
Common Stock, no par value
Shares Outstanding
8,972,673
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 20, 1997
for Annual Meeting of Shareholders
to be held on April 22, 1997
Incorporated into:
Part III
* Only selected portions of the documents specified are
incorporated by reference into this report, as more
particularly described herein. Except to the extent
expressly incorporated herein by reference, such documents
shall not be deemed to be filed as part of this Annual
Report on Form 10-K.
TABLE OF CONTENTS
PART I
Page
Item 1 Business ........................................... 4
Item 2 Properties ......................................... 25
Item 3 Legal Proceedings .................................. 26
Item 4 Submission of Matters to a Vote of
Security Holders .................................. 26
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters ....................... 26
Item 6 Selected Financial Data ............................ 28
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 29
Item 8 Financial Statements and Supplementary Data ........ 56
Item 9 Changes in and Disagreements on Accounting
and Financial Disclosure .......................... 92
PART III
Item 10 Directors and Executive Officers of the Registrant . 92
Item 11 Executive Compensation ............................. 92
Item 12 Security Ownership of Certain Beneficial Owners
and Management .................................... 92
Item 13 Certain Relationships and Related Transactions ..... 92
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 93
PART I
ITEM I. Business
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the "safe
harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results
to differ materially from those in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the following
factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins;
general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a
deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets. See also "Certain Additional Business Risks" on
pages 8 through 9 herein and other risk factors discussed elsewhere
in this Report.
WESTAMERICA BANCORPORATION (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956 ("BHC"), as
amended. The Company was incorporated under the laws of the State of
California as "Independent Bankshares Corporation" on February 11, 1972.
Its principal executive offices are located at 1108 Fifth Avenue, San
Rafael, California 94901, and its telephone number is (415) 257-8000.
The Company provides a full range of banking services to individual and
corporate customers in Northern California through its subsidiary banks,
Westamerica Bank and Bank of Lake County (the "Banks"). The Banks
are subject to competition from other financial institutions and
regulations from certain agencies and undergo periodic examinations by
those regulatory authorities. In addition, the Company also owns 100
percent of the capital stock of Westamerica Commercial Credit, Inc., a
newly formed company engaged in financing account receivable and
inventory lines of credit and term business loans and 100 percent of
Community Banker Services Corporation, engaged in providing the Company
and its subsidiaries data processing services and other support
functions.
The Company was originally formed pursuant to a plan of reorganization
among three previously unaffiliated banks: Bank of Marin, Bank of Sonoma
County and First National Bank of Mendocino County (formerly First
National Bank of Cloverdale). The reorganization was consummated on
December 31, 1972 and, on January 1, 1973, the Company began operations
as a bank holding company. Subsequently, the Company acquired Bank of
Lake County (a California chartered bank) in 1974, Gold Country Bank in
1979 and Vaca Valley Bank in 1981, in each case by the exchange of
the Company's Common Stock for the outstanding shares of the acquired
banks.
In mid-1983, the Company consolidated the six subsidiary banks into a
single subsidiary bank. The consolidation was accomplished by the merger
of the five state-chartered banks (Bank of Marin, Banks of Sonoma
County, Bank of Lake County, Gold Country Bank and Vaca Valley Bank)
into First National Bank of Mendocino County which subsequently
changed its name to Westamerica Bank ("WAB"), a national banking
association organized and existing under the laws of the United States.
In August, 1988, the Company formed a new bank, but named it Bank of
Lake County, National Association, and effected the sale of WAB's assets
and liabilities of its three Lake County branches to the newly formed
bank.
In August, 1988, the sale of Bank of Lake County, National Association
to Napa Valley Bancorp was consummated.
On February 28, 1992, the Company acquired John Muir National Bank
through a merger of such bank with and into WAB in exchange for the
issuance of the Company's Common Stock for all the outstanding shares of
John Muir National Bank. The business transaction was accounted for on a
pooling-of-interests basis.
On April 15, 1993, the Company acquired Napa Valley Bancorp, a bank
holding company, whose subsidiaries included Napa Valley Bank, 88
percent interest in Bank of Lake County, 50 percent interest in Sonoma
Valley Bank, Suisun Valley Bank and Napa Valley Bancorp Services
Corporation, which was established to provide data processing and other
services to Napa Valley Bancorp's subsidiaries. This business
transaction was accounted for on a pooling-of-interests basis. Shortly
after, Suisun Valley Bank was merged into Westamerica Bank, the name of
Napa Valley Bancorp Services Corporation was changed to Community Banker
Services Corporation and the Company sold its 50 percent interest in
Sonoma Valley Bank. The Company retained its 88 percent interest in Bank
of Lake County.
In June 1993, the Company accepted from WAB a dividend in the form of
all outstanding shares of capital stock of WAB's subsidiary, Weststar
Mortgage Corporation, a California Corporation established to conduct
mortgage banking activities. Immediately after the receipt of this
dividend, the Company contributed all of the capital stock of Weststar
Mortgage Corporation to its subsidiary, Community Banker Services
Corporation.
WAB and Bank of Lake County became state-chartered banks in June 1993
and December 1993, respectively.
In December 1994, the Company completed the purchase of the remaining 12
percent investment in Bank of Lake County from outside investors,
becoming the sole owner of Bank of Lake County.
On January 31, 1995, the Company acquired PV Financial, parent company
of PV National Bank, through a merger of such bank with and into WAB in
exchange for the issuance of shares of the Company's Common Stock for
all the outstanding shares of PV Financial. The business combination was
accounted for on a pooling-of-interests basis.
On June 6, 1995, the merger of CapitolBank Sacramento with and into WAB
became effective. Under the terms of the merger, the Company issued
shares of its common stock in exchange for all of CapitolBank
Sacramento's common stock. This acquisition was accounted for on a
pooling-of-interests basis.
On July 17, 1995, the Company acquired North Bay Bancorp, parent company
of Novato National Bank. Under the terms of the merger agreement, the
Company issued shares of its common stock in exchange for all of the
outstanding shares of common stock of North Bay Bancorp. The subsidiary
bank was merged with and into WAB. The business combination was
accounted for on a pooling-of-interests basis.
On April 12, 1996 Napa Valley Bank was merged into WAB.
In November 1996, the Company finalized the formation of a new
subsidiary, Westamerica Commercial Credit, Inc., which engages in
financing account receivable and inventory lines of credit and term
business loans.
On November 11, 1996, the Company entered into an Agreement and Plan of
Reorganization with ValliCorp Holdings, Inc. ("ValliCorp") pursuant to
which ValliCorp agreed to merge with and into the Company. The merger
had not been consummated as of the date of this report.
At December 31, 1996, the Company had consolidated assets of
approximately $2.55 billion, deposits of approximately $2.08 billion and
shareholders' equity of approximately $238.9 million.
See Note 19 to the consolidated financial statements included in this
report regarding a pending acquisition.
SERVICE AREA
The Banks serve the following twelve major markets:
Marin County. Marin County is one of the most affluent counties
in California and has a population of approximately 239,500.
San Rafael and Novato are the largest communities in the
county, with populations of approximately 52,400 and 46,500,
respectively. Both are in close proximity to the city of San
Francisco. The area served by WAB is a relatively densely
populated area whose economic make-up is primarily residential,
commercial and light industrial.
Sonoma-Mendocino Counties. Of the eight San Francisco-Bay Area
counties, Sonoma County is geographically the largest. The
population of the county is approximately 421,500. The city of
Santa Rosa is the largest population center in Sonoma County
with an estimated population of 125,700. Light industry,
agriculture and food processing are the primary industries in
Sonoma County, with tourism and recreational activities growing
steadily. WAB also serves Mendocino County, population 86,230,
where the major business is agriculture.
Solano County. WAB serves all of Solano County, with an
estimated population of 373,100. Vallejo is the largest city in
the county, with a population of approximately 112,300. While
light industry and the service sector are growing steadily, the
federal government is the largest employer in the county.
Stanislaus County. Included in the counties served by WAB is
Stanislaus County, with an estimated population of 415,300. The
largest city is Modesto, with a population of approximately
178,700. The county's primary industry is agriculture.
Contra Costa County. During 1996, WAB opened one new branch in
the city of Lafayette, with a population of approximately
23,550, to serve, together with four other WAB branch
locations, Contra Costa's growing commercial and industrial
construction industry. The population of the county is
approximately 870,700.
Sacramento County. WAB has operated in Sacramento, the state
capital of California, since 1982, a presence enhanced in 1995
through the merger with CapitolBank. The county has a
population of approximately 1,123,400. Major industries include
agriculture, government, manufacturing and wholesale and retail
trade. Sacramento is also a major transportation center for the
state.
Nevada County. WAB is currently serving most of Nevada County,
an area generally known as the "Gold Country". The population
of the entire county, where tourism, agriculture and wood
product manufacturing are the major industries, is
approximately 87,000.
Placer County. WAB operates a branch in Roseville, located
approximately 15 miles east of WAB's Sacramento office, to
serve the growing area of the Sierra Nevada foothills. The
population of Placer County is approximately 206,000.
San Francisco County. WAB has operated in the financial center
of the city of San Francisco since 1987. The business of this
branch facility is focused on commercial lending and deposit
relationships in that city.
Napa County. WAB has seven office locations in Napa County. The
population of the county is approximately 119,000, with
agriculture being its major source of business, followed by
tourism.
Alameda County. During 1996, WAB opened a new branch location
in the city of Pleasanton in Alameda County. The major source
of business of the county, with an estimated population of
1,356,100, is commerce and retail businesses.
Lake County. Bank of Lake County, ("Lake County's Bank"),
("BLC") has four office locations in Lake County, which has an
estimated population of approximately 55,300. Agriculture is
the primary industry of the county, followed closely by
recreation and tourism.
Neither the Company nor any of its subsidiaries have any foreign
or international activities or operations.
All population figures contained in the previous discussion are
1996 estimates as prepared by the California Department of
Finance.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set
forth below, any one of which could cause the Company's actual results
to vary materially from recent results or from the Company's anticipated
future results.
Shares of Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could
adversely affect the market price. The Articles of Incorporation of the
Company authorize the issuance of 50,000,000 shares of common stock (and
two classes of 1,000,000 shares each, denominated "Class B Common Stock"
and "Preferred Stock", respectively) of which approximately 9,434,870
shares of common stock were outstanding at December 31, 1996. Pursuant
to its stock option plans, at December 31, 1996, the Company had
outstanding options to purchase 634,958 shares of Company Common Stock.
As of December 31, 1996 165,518 shares of Company Common Stock remained
available for grants under the Company's stock option plan. Sales of
substantial amounts of Company Common Stock in the public market or
issuance of new securities in connection with acquisitions could
adversely affect the market price of Common Stock.
A portion of the loan portfolio of the Company is dependent on real
estate. At December 31, 1996, real estate served as the principal source
of collateral with respect to approximately 55 percent of the
Company's loan portfolio. A worsening of current economic conditions or
rising interest rates could have an adverse effect on the demand for new
loans, the ability of borrowers to repay outstanding loans, the
value of real estate and other collateral securing loans and the value
of the available-for-sale investment portfolio, as well as the Company's
financial condition and results of operations in general and the market
value of the Company Common Stock. Acts of nature, including earthquakes
and floods, which may cause uninsured damage and other loss of value to
real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or
employee fraud. The Company maintains a system of internal controls to
mitigate against such occurrences and maintains insurance coverage for
such risks, but should such an event occur that is not prevented or
detected by the Company's internal controls, uninsured or in excess of
applicable insurance limits, it could have a significant adverse impact
on the Company's business, financial condition or results of operations.
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings growth of the Company's banking subsidiaries are affected
not only by local market area factors and general economic conditions,
but also by government monetary and fiscal policies. For example, the
Board of Governors of the Federal Reserve System (the "FRB") influences
the supply of money through its open market operations in U.S.
Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business and earnings
of the Company cannot be predicted. Additionally, state and federal tax
policies can impact banking organizations. Effective January 1, 1997,
applicable California law and corporation tax rates were reduced by 5%
in order to keep California competitive with other western states.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is
particularly susceptible to being affected by the enactment of federal
and state legislation which may have the effect of increasing or
decreasing the cost of doing business, modifying permissible activities
or enhancing the competitive position of other financial institutions.
Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of the Company. In response to
various business failures in the savings and loan industry and in the
banking industry, in December 1991, Congress enacted, and the President
signed into law, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). FDICIA substantially revised the bank regulatory
framework and deposit insurance funding provisions of the Federal
Deposit Insurance Act and made revisions to several other federal
banking statutes.
Implementation of the various provisions of FDICIA is subject to
the adoption of regulations by the various regulatory agencies,
the manner in which the regulatory agencies implement those
regulations and certain phase-in periods.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended (the "BHCA"). As such, the Company
reports to, registers with, and may be examined by, the FRB. The FRB
also has the authority to examine the subsidiaries of the Company. The
costs of any such examination by the FRB are payable by the applicable
parent holding company.
The FRB has significant supervisory and regulatory authority over the
Company and its affiliates. The FRB requires the Company to maintain
certain levels of capital. See "Capital Standards". The FRB also has the
authority to take enforcement action against any bank holding company
that commits any unsafe or unsound practice, or violates certain laws,
regulations or conditions imposed in writing by the FRB. See "Prompt
Corrective Action and Other Enforcement Mechanisms".
Under the BHCA, a company generally must obtain the prior
approval of the FRB before it exercises a controlling influence
over a bank, or acquires directly or indirectly, more than 5%
of the voting shares or substantially all of the assets of any
bank or bank holding company. Thus, the Company is required to
obtain the prior approval of the FRB before they acquire, merge
or consolidate with any bank or bank holding company; any company
seeking to acquire, merge or consolidate with the Company also would be
required to obtain the approval of the FRB.
A bank holding company is generally prohibited under the BHCA
from acquiring ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities
other than banking, managing banks or providing services to
affiliates of the holding company. A bank holding company, with
the approval of the FRB, may engage, or acquire the voting
shares of companies engaged, in activities that the FRB has
determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank
holding company must demonstrate that the benefits to the
public of the proposed activity will outweigh the possible
adverse effects associated with such activity.
Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching
Act"), a bank holding company became able to acquire banks in
states other than its home state beginning September 29, 1995
without regard to the permissibility of such acquisitions under
state law, but subject to any state requirement that the bank
has been organized and operating for a minimum period of time,
not to exceed five years, and the requirement that the bank
holding company, prior to or following the proposed
acquisition, controls no more than 10% of the total amount of
deposits of insured depository institutions in the United
States and no more than 30% of such deposits in that state (or
such lesser or greater amount set by law).
The Interstate Banking and Branching Act also authorizes banks
to merge across state lines, therefore creating interstate
branches, beginning June 1, 1997. Under such legislation, each
state has the opportunity to "opt out" of this provision,
thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate
branching within that state prior to June 1, 1997. Furthermore,
pursuant to such act, a bank is now able to open new branches
in a state in which it does not already have banking
operations, if the laws of such state permit such de novo
branching. California enacted legislation to "opt in" to the
Interstate Banking and Branching Act provisions regarding
interstate branching, allowing a state bank chartered in a
state other than California to acquire by merger or purchase,
at any time after effectiveness of the Caldera, Weggeland, and
Killea California Interstate Banking and Branching Act of 1995
(the "IBBA"), a California bank or industrial loan company
which is at least five (5) years old and thereby establish one
or more California branch offices. However, the IBBA prohibits
a state bank chartered in a state other than California from
entering California by purchasing a California branch office of
a California bank or industrial loan company without purchasing
the entire entity or by establishing a de novo California
branch office. See the section entitled "Recently Enacted
Legislation" for additional information.
Proposals to change the laws and regulations governing the
banking industry are frequently introduced in Congress, in the
state legislatures and before the various bank regulatory
agencies.
The FRB generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue
pressure on the capital of subsidiary banks or would be funded
only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position.
The FRB's policy is that a bank holding company should not
continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each
dividend and its prospective rate of earnings retention appears
consistent with its capital needs, asset quality and overall
financial condition.
Transactions between holding companies and any of their
subsidiary banks are subject to a number of other restrictions.
FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the
fair market value of the services rendered (or, if no market
exists, actual costs plus a reasonable profit). Subject to
certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in
securities of, purchase assets from, or issue a guarantee,
acceptance, or letter of credit on behalf of, an affiliate,
provided that the aggregate of such transactions with
affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with
affiliates may not exceed 20% of the capital stock and surplus
of such institution. A bank holding company may only borrow
from depository institution subsidiaries if the loan is secured
by marketable obligations with a value of a designated amount
in excess of the loan. Further, a bank holding company may not
sell a low-quality asset to a depository institution subsidiary.
Generally, a bank holding company and its subsidiaries are
prohibited from engaging in tie-in arrangements in connection
with the extension of credit, sale or lease of property, or
furnishing of services unless the FRB permits an exception to
the tying prohibitions pursuant to exemption authority
available to it under applicable law. The FRB, however, has
adopted a rule, effective September 2, 1994, amending the
anti-tying provisions to permit a bank or bank holding company
to offer a lower price on a loan, deposit or trust service
(traditional bank product), or on securities brokerage
services, on the condition that the customer obtain a
traditional bank product from an affiliate. Additionally, as of
January 23, 1995, a bank holding company, or a nonbank
subsidiary, may offer lower prices on any of its products or
services on the condition that a customer obtain another
product or service from such company or any of its nonbank
affiliates, provided that all products offered in the package
arrangement are separately available for purchase.
The Company is also a bank holding company within the meaning
of Section 3700 of the California Financial Code. As such, the
Company and its subsidiaries are subject to examination by, and
may be required to file reports with, the California
Superintendent of banks (the "Superintendent"). Regulations
have not yet been proposed or adopted, and no other steps have
been taken, to implement the Superintendent's powers under this
statute.
BANK SUPERVISION AND REGULATION
The Banks are California chartered banks insured by the Federal
Deposit Insurance Corporation (the "FDIC"), and as such are
subject to regulation, supervision and regular examination by
the Superintendent. As members of the Federal Reserve System,
the Banks' primary federal regulator is the FRB. The regulations of
these agencies affect most aspects of such bank subsidiaries' business
and prescribe permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the permissible
scope of the activities and various other requirements for such bank
subsidiaries. Pursuant to AB 3351, which was adopted by the California
legislature during 1996, all of the California state regulatory
authorities for state-chartered depository institutions will be
consolidated under a new state agency, the Department of Financial
Institutions ("DFI") effective July 1, 1997. The newly created DFI
combines the State Banking Department and the Department of Savings and
Loan, while regulatory oversight over industrial loan companies and
credit unions will be shifted from the Department of Corporations to the
DFI. For the most part, the DFI is merely assuming the responsibilities
and authorities previously held by the existing regulators.
Under California law, a state chartered bank is subject to various
restrictions on, and requirements regarding, its operations and
administration including the maintenance of branch offices and automated
teller machines, capital and reserve requirements, deposits and
borrowings, shareholder rights and duties, and investments and lending
activities. Whenever it appears that the contributed capital of a
California chartered bank is impaired, the Superintendent shall
order the bank to correct such impairment. If a California chartered
bank is unable to correct the impairment, such bank is required to levy
and collect an assessment upon its common shares. If such assessment
becomes delinquent, such common shares are to be sold by the bank.
During 1996 the Interstate Banking and Branching Cleanup Act was
enacted, which revised the Superintendent's assessment methodology for
state-chartered banks in order to provide a better basis of comparison
to the method used by the Office of the Comptroller of the Currency
("OCC"). Under the new methodology, the average assessment for state
banks will be approximately 39% of the OCC's annual charges for national
bank supervision.
California law permits a state chartered bank to invest in the stock and
securities of other corporations, subject to a state-chartered bank
receiving either general authorization or, depending on the amount of
the proposed investment, specific authorization from the Superintendent.
FDICIA, however, imposes limitations on the activities and equity
investments of state chartered, federally insured banks. The limitations
on equity investments were effective December 19, 1991, and the
limitations on activities became effective December 19, 1992. The FDIC
rules on investments prohibit a state bank from acquiring an equity
investment of a type, or in an amount, not permissible for a national
bank. Non-permissible investments were required to be divested by state
banks no later than December 19, 1996. FDICIA prohibits a state bank
from engaging as a principal in any activity that is not permissible for
a national bank, unless the bank is adequately capitalized and the
appropriate federal regulator approves the activity after determining
that such activity does not pose a significant risk to the deposit
insurance fund. The FDIC rules on activities generally permit
subsidiaries of banks, without prior specific FDIC authorization, to
engage in those activities that have been approved by the FRB for bank
holding companies because such activities are so closely related to
banking to be a proper incident thereto. Other activities generally
require specific FDIC prior approval, and the FDIC may impose
additional restrictions on such activities on a case-by-case basis in
approving applications to engage in otherwise impermissible activities.
The Banks are also subject to applicable provisions of California law,
insofar as such provisions are not in conflict with or preempted by
federal banking law. In addition, the Banks are subject to certain
regulations of the FRB dealing primarily with check-clearing activities,
establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity
(Regulation B).
During 1996, the OCC adopted a regulation to revise and streamline its
procedures with respect to corporate activities of national banks, to be
effective December 31, 1996. These revised standards allow the OCC to
approve, on a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking, including activities
in which the parent bank is not permitted to engage. Such a standard
allows a national bank to conduct an activity approved for a bank
holding company through a bank operating subsidiary such as acting as an
investment or financial advisor, leasing personal property and providing
financial advice to customers. In general, these new standards will be
available to well-capitalized or adequately-capitalized national banks.
Since state banks may only make equity investments if a type permissible
for national banks, this new regulation might result in some
liberalization of the types of investments permissible for state banks.
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 agreements, which
are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance
sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such
as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
In determining the capital level that banking organizations are required
to maintain, the federal banking agencies do not, in all respects,
follow generally accepted accounting principles ("GAAP") and
have special rules which have the effect of reducing the amount of
capital they will recognize for purposes of determining the capital
adequacy of the Company and its subsidiaries. These rules are called
regulatory accounting principles ("RAP"). In December 1993, the
federal banking agencies issued an interagency policy statement on the
allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified
assets. Future changes in the regulations or practices of the federal
banking agencies could further reduce the amount of capital recognized
for purposes of capital adequacy. Such a change could affect the
ability of the Company to grow and could restrict the amounts of
profits, if any, available for the payment of dividends.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets and
off balance sheet items. The regulators measure risk-adjusted assets and
off balance sheet items against both total qualifying capital (the sum
of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1
capital. Tier 1 capital consists of common stock, retained earnings,
noncumulative perpetual preferred stock, other types of qualifying
common stock and minority interests in certain subsidiaries, less most
other intangible assets and other adjustments. Net unrealized
gains/losses on available-for-sale equity securities with readily
determinable fair values must be deducted in determining Tier 1 capital.
Additionally, as of April 1, 1995, for Tier 1 capital purposes, deferred
tax assets that can only be realized if the institution earns sufficient
taxable income in the future will be limited to the amount that the
institution is expected to realize within one year, or ten percent of
Tier 1 capital, whichever is less. Tier 2 capital may consist of a
limited amount of the reserve for loan losses, term preferred stock and
other types of preferred stock not qualifying as Tier 1 capital, term
subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital
are subject to certain other requirements and limitations of the federal
banking agencies. Since December 31, 1992, the federal banking
agencies have required a minimum ratio of qualifying total capital to
risk-adjusted assets and off balance sheet items of 8%, and a minimum
ratio of Tier 1 capital to risk-adjusted assets and off balance sheet
items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1
capital to adjusted average total assets, referred to as the leverage
capital ratio. For banking organizations rated in the highest of the
five categories used by regulators to rate banking organizations, the
minimum leverage ratio of Tier 1 capital to total assets must be 3%. It
is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong
capital position is a significant part of the regulators' rating. For
all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3%
minimum. Thus, the effective minimum leverage ratio, for all practical
purposes, must be at least 4% or 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
The following tables present the capital ratios for the Company and its
subsidiaries, compared to the standards for well-capitalized depository
institutions, as of December 31, 1996.
Westamerica Bancorporation
- -------------------------------------------------------------------
For Capital Adequacy
Actual Purposes
(Dollars in thousands) Capital Ratio Amount Ratio
- -------------------------------------------------------------------
Leverage $230,981 9.20% $100,394 4.00%
Tier 1 Risk-based 230,981 12.61 73,269 4.00
Total Risk-based 274,026 14.96 146,538 8.00
Westamerica Bank
- -------------------------------------------------------------------
For Capital Adequacy
Actual Purposes
(Dollars in thousands) Capital Ratio Amount Ratio
- -------------------------------------------------------------------
Leverage $194,194 8.11% $95,757 4.00%
Tier 1 Risk-based 194,194 11.22 69,257 4.00
Total Risk-based 241,981 13.98 138,515 8.00
Bank of Lake County
- -------------------------------------------------------------------
For Capital Adequacy
Actual Purposes
(Dollars in thousands) Capital Ratio Amount Ratio
- -------------------------------------------------------------------
Leverage $9,721 10.79% $3,605 4.00%
Tier 1 Risk-based 9,721 16.36 2,376 4.00
Total Risk-based 10,474 17.63 4,752 8.00
Banking agencies have recently adopted final regulations which mandate
that regulators take into consideration concentrations of credit risk
and risks from non-traditional activities, as well as an institution's
ability to manage those risks, when determining the adequacy of an
institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. Banking agencies
also have recently adopted final regulations requiring regulators to
consider interest rate risk (when the interest rate sensitivity of an
institution's assets does not match the sensitivity of its liabilities
or its off-balance-sheet position) in evaluating a bank's capital
adequacy. This final rule does not codify a measurement framework for
assessing the level of a bank's interest rate risk exposure. The
information and exposure estimates collected through a new proposed
supervisory measurement process, described in the banking agencies'
joint policy statement on interest rate risk, would be one quantitative
factor used to determine the adequacy of an individual bank's capital
for interest rate risk. The focus of that proposed process is on a
bank's economic value exposure. Other quantitative factors include the
bank's historical financial performance and its earnings exposure to
interest rate movements. Examiners also will consider qualitative
factors, including the adequacy of the bank's internal interest rate
risk management. The banking agencies intend for this case-by-case
approach for assessing a bank's capital adequacy for interest rate risk
to be a transitional arrangement.
The second step will consist of a proposed rule that would establish an
explicit minimum capital charge for interest rate risk, based on the
level of a bank's measured interest rate risk exposure. The banking
agencies intend to implement this second step at some future date, after
the banking agencies and the banking industry have gained more
experience with the proposed supervisory measurement and assessment
process.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions,
including but no limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulators defining the following five categories in which an
insured institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of
FDICIA. An insured depository institution generally will be classified
in the following categories based on capital measures indicated below:
- ---------------------------------------------------------------------------------------
Total Tier 1
risk-based risk-based Leverage
capital capital ratio
- ---------------------------------------------------------------------------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized less than: 8% 4% 4%
Significantly undercapitalized less than: 6% 3% 3%
Critically undercapitalized Tangible equity/total assets less than 2%
- ---------------------------------------------------------------------------------------
An institution that, based upon its capital levels, is classified as
"well capitalized", "adequately capitalized" or "undercapitalized" may
be treated as though it were in the next lower category if the
appropriate federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an unsafe or
unsound practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as "critically undercapitalized" unless its capital
ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking
agency. Undercapitalized institutions must submit an acceptable
capital restoration plan with a guarantee of performance issued
by the holding company. Further restrictions and sanctions are
required to be imposed on insured depository institutions that
are critically undercapitalized. The most important additional
measure is that the appropriate federal banking agency is
required to either appoint a receiver for the institution
within 90 days, or obtain the concurrence of the FDIC in
another form of action.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be
subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting their
business or for violations of any law, rule, regulation or any
condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money
penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of
removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions
or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not
granted. Additionally, a holding company's inability to serve
as a source of strength to its subsidiary banking organizations
could serve as an additional basis for a regulatory action
against the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions and
required federal banking regulators to adopt overall safety and
soundness standards for depository institutions related to
internal control, loan underwriting and documentation and asset
growth. Among other things, FDICIA limits the interest rates
paid on deposits by undercapitalized institutions, restricts
the use of brokered deposits, limits the aggregate extensions
of credit by a depository institution to an executive officer,
director, principal shareholder or related interest, and
reduces deposit insurance coverage for deposits offered by
undercapitalized institutions for deposits by certain employee
benefits accounts.
In addition to the statutory limitations, FDICIA originally
required the federal banking agencies to prescribe, by
regulation, standards for all insured depository institutions
for such things as classified loans and asset growth. In 1994,
FDICIA was amended to (a) authorize the agencies to establish
safety and soundness standards by regulation or by guideline
for all insured depository institutions; (b) give the agencies
greater flexibility in prescribing asset quality and earnings
standards; and eliminate the requirement that such
standards apply to depository institution holding companies.
On July 10, 1995 the federal banking agencies published
Interagency Guidelines Establishing Standards for Safety and
Soundness. By adopting the standards as guidelines, the
agencies retained the authority to require an institution to
submit to an acceptable compliance plan as well as the
flexibility to pursue other more appropriate or effective
courses of action given the specific circumstances and severity
of an institution's noncompliance with one or more standards.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
Holders of the Company's common stock are entitled to receive
dividends as and when declared by the Board of Directors of the
Company out of funds legally available therefor under the laws
of the State of California. The GCL provides that a corporation
may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed
distribution. The GCL further provides that in the event sufficient
retained earnings are not available for the proposed distribution a
corporation may nevertheless make a contribution to its shareholders if,
after giving effect to the distribution, it meets two conditions, which
generally stated are as follows: (I) the corporation's assets must equal
at least 125% of its liabilities; and (ii) the corporation's
current assets must equal at least its current liabilities or,
if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal
years was less than the average of the corporation's interest
expense for such fiscal years, then the corporation's current
assets must equal at least 125% of its current liabilities.
The Company is also subject to certain restrictions on its ability to
pay dividends under the terms of certain of its debt agreements. In
1996, the Company issued and sold $22,500,000 aggregate principal amount
of its 7.11% Senior Notes due February 1, 2006 (the "Senior Notes"),
payable semiannually, pursuant to a Senior Note Agreement dated as of
February 1, 1996 (the "Senior Note Agreement"). The Senior Notes require
that, commencing February 1, 2000 and ending February 1, 2005,
the Company shall make principal repayments of the lesser of
$3,214,286 or the principal amount then outstanding. The Senior Note
Agreement contains covenants and other provisions usual and customary
for senior indebtedness of this type, including, but not limited to,
capital debt maintenance ratios, maintenance of specified levels of
consolidated tangible net worth, limitations on indebtedness, a fixed
charge coverage ratio and restrictions on the payment of dividends or
other distributions. The Company is in full compliance with the terms
of the Senior Note Agreement. The Senior Note Agreement does not
currently limit the payment of regular quarterly dividends.
The Company's dividends will generally be declared based on the
dividends received from its bank subsidiaries. These are state
chartered banks and are subject to provisions of state and federal law.
The limitations of such subsidiaries' ability to declare and pay
dividends could affect the Company's ability to pay dividends.
Generally, the power of the board of directors of any insured
depository institution to declare a cash dividend or other
distribution with respect to capital is subject to statutory
and regulatory restrictions which limit the amount available
for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general
business conditions. FDICIA prohibits insured depository
institutions from paying management fees to any controlling
persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to
the extent such payments do not exceed the lesser of retained earnings
of the bank or the bank's net income for its last three fiscal years
(less any distributions to shareholders during that period). In the
event a bank desires to pay cash dividends in excess of such amount, the
bank may pay a cash dividend with the prior approval of the
Superintendent in an amount not exceeding the greatest of the bank's
retained earnings, the bank's net income for its last fiscal year, or
the bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or
unsound, possibly including payment of dividends or other payments under
certain circumstances even if such payments are not expressly prohibited
by statute.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
All of the bank subsidiaries of the Company have their deposits
insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC also administers the Savings Association
Insurance Fund ("SAIF"), which insures deposits in thrift
institutions. FDICIA authorized the FDIC to borrow from the
United States Treasury (or from depository institutions that
are members of the BIF) amounts not exceeding in the aggregate
$30 billion, and to borrow from the Federal Financing Bank
amounts not greater than 90% of the fair market value of assets
of institutions acquired by the FDIC as receiver. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums
assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund
reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. No
assurance can be given at this time as to what the future level of
premiums will be.
As required by FDICIA, the FDIC adopted a transitional risk-based
assessment system for deposit insurance premiums which became effective
January 1, 1993. On November 14, 1995 the Board of Directors of the FDIC
adopted a resolution to reduce to a range of 0 to 27 basis points the
assessment rates applicable to deposits assessable by the BIF for
semiannual assessment periods beginning January 1, 1996. The new
assessment schedule would retain the risk based characteristics
of the current system. On November 26, 1996 the FDIC decided to
continue in effect the current BIF assessment rate schedule.
The FDIC may make limited adjustments to the above rate schedule not to
exceed an increase or decrease of 5 basis points without public notice
and comment rulemaking. The amount of an adjustment adopted by the Board
is to be determined by the following considerations: (a) the amount of
assessment revenue necessary to maintain the reserve ratio at the
designated reserve ratio and (b) the assessment schedule that would
generate such amount of assessment revenue considering the risk profile
of BIF members. In determining the relevant amount of assessment
revenue, the Board is to consider the BIF's expected operating expenses,
case resolution expenditures and income, the effect of assessments on
BIF members' earnings and capital, and any other factors the Board may
deem appropriate.
In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act")
in order to raise the level of SAIF reserves, and to reduce the
possibility that bonds issued by the Financing Corporation ("FICO")
would go into default. The FICO was a special purpose government
corporation that issued $8.2 billion in bonds to recapitalize the
Federal Savings and Loan Insurance Corporation. Interest on the FICO
bonds was paid from the proceeds of assessment made on the deposits of
SAIF members. Because of the almost $800 million needed to pay for the
annual interest on the FICO bonds, the payments of SAIF members were
not increasing the SAIF reserve to a sufficient level to allow the FDIC
to reduce assessment rates (as had been done for BIF deposits), and SAIF
members were employing certain strategies to either exit the system or
transfer deposits to BIF coverage.
Pursuant to the Funds Act, the FDIC imposed a special one-time
assessment on all institutions that held SAIF assessable deposits as of
March 31, 1995 of an estimated 65.7 cents per $100 of SAIF assessable
deposits. Certain discounts and exemptions from the assessment were
available. For example, BIF-member banks that had acquired SAIF-insured
deposits from thrifts were generally entitled to a 20% discount on the
special assessment if the bank satisfied certain statutory thresholds
(the bank's acquired SAIF deposits, as adjusted, must be less than half
of its total domestic deposits). Furthermore, beginning January 1, 1997,
all FDIC-insured institutions will be assessed to cover the interest
payments due on FICO bonds. For calendar years 1997 through 1999, BIF
members will pay one-fifth the rate SAIF members will pay, and beginning
in 2000 both types of institutions will pay the same rate. BIF members
will be required to pay a FICO assessment of approximately 1.3 basis
points for the semiannual FICO assessment in 1997.
The Funds Act also authorized the FDIC to rebate assessments paid by BIF
members if the BIF has reserves exceeding its designated reserve ratio
of 1.25% of total estimated insured deposits. The adjusted BIF balance
was $25.888 billion on June 30, 1996, a reserve ratio of 1.30%. The FDIC
has expressed its view that the long-term needs of the BIF are a factor
in setting the effective average BIF assessment rate, and that the
FDIC is uncertain whether the current favorable conditions represent a
long-term trend.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Company's bank subsidiaries are each subject to certain fair lending
requirements and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA") activities. The CRA
generally requires the federal banking agencies to evaluate the record
of a financial institution in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In
addition to substantive penalties and corrective measures that may be
required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account
when regulating and supervising other activities. On November 15, 1993
the FRB announced that it would not approve the application of a certain
New England bank holding company to acquire the voting shares of another
insured depository institution. The Federal Reserve issued a statement
indicating its failure to approve the application was based on incorrect
reporting of home mortgage lending data by the applicant, and the
possibility that the applicant may have engaged in discriminatory
treatment of minorities in mortgage lending in violation of the Equal
Credit Opportunity Act.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to
prove discrimination: overt evidence of discrimination, evidence of
disparate treatment, and evidence of disparate impact.
In 1996, new compliance and examination guidelines for the CRA were
promulgated by each of the federal banking regulatory agencies, fully
replacing the prior rules and regulatory expectations with new ones,
ostensibly more performance based than before, to be fully phased in as
of July 1, 1997. The guidelines provide for streamlined examinations of
smaller institutions.
RECENTLY ENACTED LEGISLATION
On September 29, 1995, the IBBA became effective. The IBBA implemented
the federal Interstate Banking and Branching Act. The main features of
this legislation are (a) out-of-state banks that wish to establish a
California branch office to conduct core banking business must first
acquire an existing 5 year old California bank of industrial loan
company by merger or purchase; (b) California state-chartered banks will
be empowered to conduct various authorized branch-like activities
on an agency basis through affiliated and unaffiliated insured
depository institutions in California and other states and the
Superintendent will be authorized to approve an interstate acquisition
or merger which would result in a deposit concentration exceeding 30% if
the Superintendent finds that the transaction is consistent with public
convenience and advantage. The legislation also contains extensive
provisions governing intrastate and interstate (a) intra-industry sales,
mergers and conversions between banks and between industrial loan
companies and (b) inter-industry transactions involving banks, savings
associations and industrial loan companies.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and
the underground storage tank provisions of the Resource Conversation and
Recovery Act ("RCRA") to provide lenders and fiduciaries with greater
protections from environmental liability. The definition of "owner or
operator" under CERCLA has been amended to exclude a lender who: (I)
holds indicia of ownership in a property primarily to protect its
security interest, but does not participate in the property's management
or (ii) forecloses on a property, or, after foreclosure, sells,
re-leases (in the case of a lease finance transaction), or liquidates
the property, maintains business activities, winds up operations,
undertakes a response under CERCLA, or takes measures to preserve,
protect or prepare property prior to sale or disposition, so long as the
lender did not participate in the property's management prior to sale.
In order to preserve these protections, a lender who forecloses on
property must seek to sell, re-lease, or otherwise divest itself of the
property at the earliest practicable, commercially reasonable time, and
on reasonable terms. "Participation in management" is defined as actual
participation in the management or operational affairs of the facility,
not merely having the capacity to influence or the unexercised right to
control operations. Similar changes have been made in RCRA.
The California legislature adopted a similar bill to provide that,
subject to numerous exceptions, a lender acting in the capacity of a
lender shall not be liable under any state or local statute, regulation
or ordinance, other than the California Hazardous Waste Control Law, to
undertake a cleanup, pay damages, penalties or fines, or forfeit
property as a result of the release of hazardous materials at or from
the property. Under this bill a lender which had not participated
in the management of the property prior to foreclosure may take actions
similar to those set forth in the CERCLA and RCRA amendments without
losing its immunity from liability. To preserve that immunity, after
foreclosure, the lender must take commercially reasonable steps to
divest itself of the property in a reasonably expeditious manner.
PENDING LEGISLATION
There are a number of pending legislative proposals to reform the
Glass-Steagall Act to allow affiliations between banks and other firms
engaged in "financial activities", including insurance companies and
securities firms. Glass-Steagall reform will likely be affected by a
bank insurance powers case decided during 1996 by the U.S. Supreme
Court, which gave national banks greater opportunities to sell
traditional insurance products, such as life, automobile, and property
and casualty policies. In a similar recent case, the Court upheld a
determination of the Office of the Comptroller of the Currency that
national banks may sell annuities.
Certain other pending legislative proposals include bills to free
withdrawals from individual retirement accounts from penalties for
first-home purchases and other purposes and eliminate most Community
Reinvestment Act reporting requirements.
While the effect of such proposed legislation and regulatory reform on
the business of financial institutions cannot be accurately predicted at
this time, it seems likely that a significant amount of consolidating in
the banking industry will continue to occur throughout the remainder of
the decade.
COMPETITION
The Banks compete with other commercial banks, savings and loan
associations, thrift and loans, credit unions, brokerage firms, money
market mutual funds, finance and insurance companies, mortgage banking
firms and even retail establishments. The direction of federal
legislation in recent years seems to favor competition between different
types of financial institutions and to foster new entrants into the
financial services markets, and it is anticipated that this trend will
continue.
According to information obtained by the Company through an independent
market research firm, WAB was the third largest financial institution in
terms of total deposits in Marin County at June 30, 1996, at which date
it had approximately 12 percent of total deposits held in federally
insured depository institutions in that county. According to the same
source of information and in terms of total deposits, as of June 30,
1996 WAB ranked third in WAB's Sonoma-Mendocino counties service area,
with approximately an 8 percent share of the market, and was third in
the Solano-Contra Costa counties service area, with a market share of
approximately 5 percent of the market. In addition, WAB's market share
in the Sacramento-Placer-Nevada counties service area was approximately
5 percent, ranking third among its competitors. The share of the market
for deposits and loans held by WAB in San Francisco and Alameda Counties
is not significant. According to the same source of information, WAB
ranked second in terms of total deposits in the Napa Valley service area
as of June 30, 1996, with approximately 17 percent market share. The
same source of data reports that BLC ranked second, in terms of total
deposits, in market share in the Lake County service area with 17
percent of the total.
The Banks provide checking and savings deposit services as well as
commercial, real estate and personal loans. In addition, most of the
branches offer safe deposit facilities, automated teller units,
collection services and other investment services.
The Banks believe that personal, prompt, professional service and
community identity are important in the banking business. To this end,
each of one the Banks has sought to retain its community identity and
has emphasized personalized services through "big bank resources with
small bank resourcefulness".
Competitive conditions continue to intensify as various legislative
enactments have continued to dissolve historical barriers to the
financial markets. Competition is expected to further increase in the
state of California as a result of legislation enacted in 1994 and 1995.
The enactment of the Interstate Banking and Branching Act in 1994 as
well as the California Interstate Banking and Branching Act of 1995 will
likely increase competition within California. See "Regulation and
Supervision of Bank Holding Companies" above. Regulatory reform, as well
as other changes in federal and California law, will also affect
competition. While the impact of these changes, and of other proposed
changes, cannot be predicted with certainty, it is clear that the
business of banking in California will remain highly competitive.
Legislative changes, as well as technological and economic factors, can
be expected to have an ongoing impact on competitive conditions within
the financial services industry. As an active participant in the
financial markets, the Company believes that it continually adapts to
these changing competitive conditions.
Employees
At December 31, 1996, the Company employed 827 full-time equivalent
staff. Employee relations are believed to be good.
ITEM 2. Properties
BRANCH OFFICES AND FACILITIES
The Banks are engaged in the banking business through fifty-seven
offices in thirteen counties in Northern California including eleven
offices in Marin County, nine in Sonoma County, seven in Napa County,
six in Solano County, five in Stanislaus County, five in Contra Costa
County, four in Lake County, three in Mendocino County, two in Nevada
County, two in Sacramento County, one in San Francisco County, one in
Placer County and one in Alameda County. All offices are constructed and
equipped to meet prescribed security requirements.
The Company owns fifteen branch office locations and two administrative
buildings, including the Company's headquarters. Forty two banking
offices are leased. Most of the leases contain multiple five-year
renewal options and provisions for rental increases, principally for
changes in the cost of living index, property taxes and maintenance.
ITEM 3. Legal Proceedings
Neither the Company or its subsidiaries is a party to any material
pending legal proceeding, nor is their property the subject of any
material pending legal proceeding, except ordinary routine legal
proceedings arising in the ordinary course of the Company's business,
none of which are expected to have a material adverse impact upon the
Company's business, financial position or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
There no matters submitted to a vote of the shareholders during
the fourth quarter of 1996.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is traded on the NASDAQ National
Market Exchange ("NASDAQ") under the symbol "WABC". The
following table shows the high and the low closing price for
the common stock, for each quarter, as reported by NASDAQ:
Period
- -----------------------------------------------------------
1996 High Low
- -----------------------------------------------------------
First quarter $47.25 $43.25
Second quarter 50.25 46.00
Third quarter 51.00 46.50
Fourth quarter 58.75 49.50
- -----------------------------------------------------------
1995 High Low
- -----------------------------------------------------------
First quarter $33.25 $29.50
Second quarter 37.50 33.00
Third quarter 38.50 36.50
Fourth quarter 43.25 38.50
As of December 31, 1996, there were 6,751 shareholders of
record of the Company's common stock.
The Company has paid cash dividends on its common stock in every quarter
since commencing operations on January 1, 1973, and it is currently the
intention of the Board of Directors of the Company to continue payment
of cash dividends on a quarterly basis. There is no assurance, however,
that any dividends will be paid since they are dependent upon earnings,
financial condition and capital requirements of the Company and its
subsidiaries. As of December 31, 1996, $74.5 million was available for
payment of dividends by the Company to its shareholders, under
applicable laws and regulations.
Additional information (required by Item 5) regarding the amount of cash
dividends declared on common stock for the two most recent fiscal years
is discussed in Note 18 to the consolidated financial statements
included in this report.
As discussed in Note 7 to the consolidated financial statements, in
December 1986, the Company declared a dividend distribution of one
common share purchase right (a "Right") for each outstanding share of
common stock. The terms of the Rights were amended and restated on
September 28, 1989. On March 23, 1995, the Board of Directors of the
Company approved a further amendment and restatement of Rights. The
Amended and Restated Rights Agreement entitles the holders of each
share of the Company Common Stock to the right (each, a "Westamerica
Right"), when exercisable, to purchase from the Company one share of its
Common Stock at a price of $65.00 per share, subject to adjustment in
certain circumstances. A Westamerica Right is attached to each share of
the Company Common Stock. The Westamerica Rights only become exercisable
and trade separately from the Company Common Stock following the
earlier of (I) a public announcement that a person or a group of
affiliated or associated persons has become the beneficial owner of the
Company securities having 15 percent or more of the Company's voting
power (an "Acquiring Person") or (ii) 10 days following the
commencement of, or a public announcement of an intention to make, a
tender or exchange offer which would result in any person having
beneficial ownership of securities having 15 percent or more of such
voting power. Upon becoming exercisable, each holder of a Westamerica
Right (other than an Acquiring Person whose rights will become null and
void) will, for at least a 60-day period thereafter, have the right
(subject to the following sentence), upon payment of the exercise
price of $65.00, to receive upon exercise that number of shares of the
Company Common Stock having a market value of twice the exercise price
of the Westamerica Right, to the extent available. Subject to applicable
law, the Board of Directors, at its option, may at any time after a
Person becomes an Acquiring Person (but not after the acquisition by
such Person of 50 percent or more of the outstanding Company Common
Stock), exchange all or part of the then outstanding and exercisable
Westamerica Rights (except for Westamerica Rights which have become
void) for shares of the Company Common Stock equivalent to one share of
the Company Common Stock per Westamerica Right or, alternatively, for
substitute consideration consisting of cash, securities of the Company
or other assets (or any combination thereof).
ITEM 6. Selected Financial Data
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
(In thousands, except per share data )
- ------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Interest income $174,265 $174,377 $166,094 $165,975 $185,060
Interest expense 60,917 58,612 49,860 51,158 69,951
- ------------------------------------------------------------------------------------------------------------
Net interest income 113,348 115,765 116,234 114,817 115,109
Provision for loan losses 4,575 5,595 7,420 10,581 8,410
Non-interest income 22,043 21,533 25,999 33,806 30,646
Non-interest expense 75,627 86,340 94,341 121,441 111,662
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 55,189 45,363 40,472 16,601 25,683
Provision for loan losses 17,449 13,979 12,810 4,507 9,642
- ------------------------------------------------------------------------------------------------------------
Net income $37,740 $31,384 $27,662 $12,094 $16,041
============================================================================================================
Net income $3.93 $3.18 $2.79 $1.22 $1.66
Dividends declared 0.95 0.77 0.64 0.57 0.51
Book value at December 31 25.33 22.87 20.67 19.03 18.18
Average common shares outstanding 9,613 9,877 9,916 9,884 9,678
Shares outstanding at December 31 9,435 9,793 9,901 9,914 9,772
At December 31
Cash and cash equivalents $149,429 $182,133 $180,957 $157,750 $198,011
Investment securities and
money market assets 894,288 862,762 826,896 807,490 654,883
Loans, net 1,409,318 1,353,732 1,354,539 1,368,923 1,424,436
Other assets 95,452 92,317 95,035 94,685 99,385
- ------------------------------------------------------------------------------------------------------------
Total assets $2,548,487 $2,490,944 $2,457,427 $2,428,848 $2,376,715
============================================================================================================
Non-interest bearing deposits $515,451 $497,489 $472,301 $462,636 $397,185
Interest bearing deposits 1,565,945 1,552,032 1,599,391 1,647,395 1,744,900
Funds purchased 161,147 175,622 135,426 76,298 19,056
Notes and mortgages payable 42,500 20,000 25,524 36,352 19,412
Other liabilities 24,498 21,864 20,124 17,523 18,522
Shareholders' equity 238,946 223,937 204,661 188,644 177,640
- ------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,548,487 $2,490,944 $2,457,427 $2,428,848 $2,376,715
============================================================================================================
Financial Ratios
For the year:
Return on assets 1.52% 1.30% 1.13% 0.51% 0.68%
Return on equity 16.79% 14.61% 14.13% 6.73% 9.49%
Net interest margin * 5.31% 5.56% 5.45% 5.50% 5.51%
Net loan losses to average loans 0.23% 0.35% 0.34% 0.65% 0.50%
Non-interest expense/revenues * 52.87% 60.02% 63.93% 80.18% 75.19%
At December 31:
Equity to assets 9.38% 8.99% 8.33% 7.77% 7.47%
Total capital to risk-adjusted assets 14.96% 15.18% 15.01% 14.13% 12.25%
Loan loss reserve to loans 2.42% 2.42% 2.34% 2.15% 2.03%
* Fully taxable equivalent
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited
to, the following factors: competitive pressure in the banking industry
increases significantly; changes in the interest rate environment reduce
margins, general economic conditions, either nationally or regionally,
are less favorable than expected, resulting in, among other things, a
deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets. See also "Certain Additional Business Risks" on
pages 8 through 9 herein and other risk factors discussed elsewhere
in this Report.
The following discussion addresses information pertaining to the
financial condition and results of operations of Westamerica
Bancorporation (the "Company") that may not be otherwise apparent from a
review of the consolidated financial statements and related footnotes.
It should be read in conjunction with those statements and notes found
on pages 57 through 91, as well as with the other information
presented throughout the report.
The Company achieved record earnings of $37.7 million in 1996,
representing a 20 percent increase from the $31.4 million earned in 1995
and 36 percent higher than 1994 earnings of $27.7 million.
Components of Net Income
- ----------------------------------------------------------------
(In millions) 1996 1995 1994
- ----------------------------------------------------------------
Net interest income * $121.0 $122.3 $121.6
Provision for loan losses (4.6) (5.6) (7.4)
Non-interest income 22.0 21.5 26.0
Non-interest expense (75.6) (86.3) (94.3)
Taxes * (25.1) (20.5) (18.2)
- ----------------------------------------------------------------
Net income $37.7 $31.4 $27.7
================================================================
Net income as a percentage of
average total assets 1.52% 1.30% 1.13%
================================================================
* Fully taxable equivalent (FTE)
On a per share basis, 1996 net income was $3.93, compared to $3.18 and
$2.79 in 1995 and 1994, respectively. During 1996, the Company benefited
from increased non-interest income, continuing expense controls and a
lower loan loss provision, which offset a decline in net interest
income, primarily due to a decrease in earning asset yields, an increase
in cost of funds, and higher income taxes. Earnings in 1995 were
favorably affected compared to 1994 by increases in earning asset yields
and expense controls, which were partially offset by increases
in cost of funds and declines in non-interest income. The Company's
return on average total assets was 1.52 percent in 1996, compared to
1.30 percent and 1.13 percent in 1995 and 1994, respectively. Return on
average equity in 1996 was 16.79 percent, compared to 14.61 percent and
14.13 percent, respectively, in the two previous years.
Net Interest Income
During 1996, the Company experienced a decline in lower-cost savings
account balances and a decrease in earning asset yields. These trends
were partially offset by an increase in average earning assets,
including an increase in the tax-free investment securities and loan
balances. The combination of these items resulted in an overall decrease
in the Company's net interest income levels from 1995.
Comparing 1995 to 1994, the Company was able to increase net interest
income levels, as increases in earning asset yields offset the decline
in average earning assets and lower-cost deposits.
Components of Net Interest Income
- ------------------------------------------------------------------
(In millions) 1996 1995 1994
- ------------------------------------------------------------------
Interest income $174.2 $174.4 $166.1
Interest expense (60.9) (58.6) (49.9)
FTE adjustment 7.7 6.5 5.4
- ------------------------------------------------------------------
Net interest income (FTE) $121.0 $122.3 $121.6
==================================================================
Average earning assets $2,279.3 $2,200.9 $2,230.1
Net interest margin (FTE) 5.31% 5.56% 5.45%
==================================================================
Net interest income (FTE) in 1996 decreased $1.3 million from 1995 to
$121.0 million. Interest income decreased $200,000 from 1995, the
combined effect of a 24 basis point decrease in earning-asset yields
partially offset by a $78.4 million increase in average balances. This
revenue increase was more than offset by a $2.3 million increase in
interest expense, the result of an increase of 5 basis points in rates
paid combined with a $37.8 million increase in the average balance
of interest-bearing liabilities. In addition, the FTE adjustment
increased $1.2 million due to increases in the average volume of
tax-free earning assets. Comparing 1995 to 1994, net interest income
increased $700,000. Interest income increased $8.3 million, the
combined effect of a 53 basis point increase in earning-asset yields
partially offset by a $29.2 million decrease in average balances. The
effect was offset by an $8.7 million increase in interest expense, the
result of an increase of 62 basis points in rates offset, in part, by a
$69.2 million decrease in the average balance on interest-bearing
liabilities. Completing the variance, the FTE adjustment increased $1.1
million in 1995 compared with 1994 due to increases in the average
volume of tax-free earning assets.
Summary of Average Balances, Yields/Rates and Interest
Differential
The following tables present, for the periods indicated, information
regarding the consolidated average assets, liabilities and shareholders'
equity, the amounts of interest income from average earning assets and
the resulting yields, and the amount of interest expense paid on
interest-bearing liabilities.
Average loan balances include non-performing loans. Interest income
includes proceeds from loans on non-accrual status only to the extent
cash payments have been received and applied as interest income. Yields
on securities and certain loans have been adjusted upward to reflect the
effect of income thereon exempt from federal income taxation at the
current statutory tax rate. Amortized loan fees, which are included in
interest and fee income on loans were $770,000 lower in 1996 than in
1995 and $1.3 million lower in 1995 than in 1994.
Distribution of Average Assets, Liabilities and Shareholders' Equity
Yields/Rates and Interest Margin
(In thousands) Full Year 1996
- -----------------------------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- -----------------------------------------------------------------
Assets
Money market assets and
funds sold $250 $-- -- %
Trading account securities 17 1 4.61
Investment securities 877,053 55,287 6.30
Loans:
Commercial 828,048 77,355 9.34
Real estate construction 45,530 5,258 11.55
Real estate residential 254,670 18,720 7.35
Consumer 273,759 25,303 9.24
- ----------------------------------------------------
Earning assets 2,279,327 181,924 7.98
Other assets 208,977
- ------------------------------------------
Total assets $2,488,304
==========================================
Liabilities and shareholders'
equity
Deposits
Non-interest bearing demand $474,436 $-- -- %
Savings and interest-bearing
transaction 1,047,584 23,419 2.24
Time less than $100,000 301,979 15,018 4.97
Time $100,000 or more 192,736 10,124 5.25
- ----------------------------------------------------
Total interest-bearing
deposits 1,542,299 48,561 3.15
Funds purchased 187,603 9,528 5.08
Notes and mortgages payable 39,397 2,828 7.18
- ----------------------------------------------------
Total interest-bearing
liabilities 1,769,299 60,917 3.44
Other liabilities 19,732
Shareholders' equity 224,837
- ------------------------------------------
Total liabilities and
shareholders' equity $2,488,304
==========================================
Net interest spread (1) 4.54 %
Net interest income and interest margin (2) $121,007 5.31 %
==================================================================
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on
interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest
income by total average earning assets.
Distribution of Average Assets, Liabilities and Shareholders' Equity
Yields/Rates and Interest Margin
(In thousands) Full Year 1995
- ---------------------------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------
Assets
Money market assets and
funds sold $4,886 $276 5.65 %
Trading account securities 11 1 6.35
Investment securities 826,329 51,289 6.21
Loans:
Commercial 806,103 79,010 9.80
Real estate construction 62,562 7,178 11.47
Real estate residential 213,967 15,919 7.44
Consumer 287,032 27,249 9.49
- -----------------------------------------------------
Earning assets 2,200,890 180,922 8.22
Other assets 215,973
- ----------------------------------------
Total assets $2,416,863
========================================
Liabilities and shareholders'
equity
Deposits
Non-interest bearing demand $451,560 $-- -- %
Savings and interest-bearing
transaction 1,087,169 24,519 2.26
Time less than $100,000 305,507 15,066 4.93
Time $100,000 or more 166,241 8,895 5.35
- ------------------------------------------------------
Total interest-bearing
deposits 1,558,917 48,480 3.11
Funds purchased 149,902 8,403 5.61
Notes and mortgages payable 22,667 1,729 7.63
- ------------------------------------------------------
Total interest-bearing
liabilities 1,731,486 58,612 3.39
Other liabilities 18,961
Shareholders' equity 214,856
- ----------------------------------------
Total liabilities and
shareholders' equity $2,416,863
========================================
Net interest spread (1) 4.83 %
Net interest income and interest margin (2) $122,310 5.56 %
================================================================
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on
interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest
income by total average earning assets.
Distribution of Average Assets, Liabilities and Shareholders' Equity
Yields/Rates and Interest Margin
(In thousands) Full Year 1994
- ------------------------------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ------------------------------------------------------------------
Money market assets and $35,514 $1,367 3.85 %
funds sold
Trading account securities 37 2 4.24
Investment securities 831,478 49,272 5.93
Loans:
Commercial 798,894 72,894 9.12
Real estate construction 76,875 7,695 10.01
Real estate residential 197,675 14,236 7.20
Consumer 292,080 25,959 8.89
- ------------------------------------------------------
Earning assets 2,232,553 171,425 7.68
Other assets 221,555
- --------------------------------------------
Total assets $2,454,108
============================================
Liabilities and shareholders'
equity
Deposits
Non-interest bearing demand $439,881 $-- -- %
Savings and interest-bearing
transaction 1,166,249 23,672 2.03
Time less than $100,000 320,915 12,533 3.91
Time $100,000 or more 153,504 5,762 3.75
- ------------------------------------------------------
Total interest-bearing deposits 1,640,668 41,967 2.56
Funds purchased 130,299 5,281 4.05
Notes and mortgages payable 29,690 2,612 8.80
- ------------------------------------------------------
Total interest-bearing
liabilities 1,800,657 49,860 2.77
Other liabilities 17,780
Shareholders' equity 195,790
- --------------------------------------------
Total liabilities and
shareholders' equity $2,454,108
============================================
Net interest spread (1) 4.91 %
Net interest income and interest margin (2) $121,565 5.45 %
================================================================
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on
interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest
income by total average earning assets.
Rate and volume variances. The following table sets forth a
summary of the changes in interest income and interest expense
from changes in average assets and liability balances (volume)
and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been
allocated in proportion to the respective volume and rate
components.
For the years
(In thousands) ended December 31,
- ----------------------------------------------------------------
1996 compared with 1995
------------------------------
Total
Increase/
Volume Rate (Decrease)
- ----------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and
funds sold ($134) ($142) ($276)
Trading account securities -- -- --
Investment securities (1) 3,188 810 3,998
Loans:
Commercial (1) 2,291 (3,946) (1,655)
Real estate construction (1,967) 47 (1,920)
Real estate residential 2,989 (188) 2,801
Consumer (1,239) (707) (1,946)
- ---------------------------------------------------------------
Total loans (1) 2,074 (4,794) (2,720)
- ---------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 5,128 (4,126) 1,002
- ---------------------------------------------------------------
Increase (decrease) in interest
expense:
Deposits:
Savings/interest-bearing (886) (214) (1,100)
Time less than $ 100,000 (180) 132 (48)
Time $ 100,000 or more 1,388 (159) 1,229
- ---------------------------------------------------------------
Total interest-bearing
deposits 322 (241) 81
Funds purchased 1,796 (671) 1,125
Notes and mortgages payable 1,194 (95) 1,099
- ---------------------------------------------------------------
Total increase (decrease) in
interest expense 3,312 (1,007) 2,305
- ---------------------------------------------------------------
Increase (decrease) in
net interest income (1) $1,816 ($3,119) ($1,303)
===============================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
For the years
(In thousands) ended December 31,
- ----------------------------------------------------------------
1995 compared with 1994
-------------------------------
Total
Increase/
Volume Rate (Decrease)
- ----------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and
funds sold ($2,386) $1,295 ($1,091)
Trading account securities (3) 2 (1)
Investment securities (1) (303) 2,320 2,017
Loans:
Commercial (1) 663 5,453 6,116
Real estate construction (2,407) 1,890 (517)
Real estate residential 1,201 482 1,683
Consumer (438) 1,728 1,290
- ----------------------------------------------------------------
Total loans (1) (981) 9,553 8,572
- ----------------------------------------------------------------
Total (decrease) increase in
interest and fee income (1) (3,673) 13,170 9,497
- ----------------------------------------------------------------
Increase (decrease) in interest
expense:
Deposits:
Savings/interest-bearing (1,326) 2,173 847
Time less than $ 100,000 (566) 3,099 2,533
Time $ 100,000 or more 511 2,622 3,133
- ----------------------------------------------------------------
Total interest-bearing
deposits (1,381) 7,894 6,513
Funds purchased 880 2,242 3,122
Notes and mortgages payable (565) (318) (883)
- ----------------------------------------------------------------
Total (decrease) increase in
interest expense (1,066) 9,818 8,752
- ----------------------------------------------------------------
Increase (decrease) in
net interest income (1) ($2,607) $3,352 $745
================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
Provision for Loan Losses
The provision for loan losses was $4.6 million for 1996, compared to
$5.6 million in 1995 and $7.4 million in 1994. The reductions in the
provision in 1996 and 1995 reflect the results of the Company's
continuing efforts to improve loan quality by enforcing strict
underwriting and administration procedures and aggressively pursuing
collection efforts with troubled debtors. For further information
regarding net credit losses and the reserve for loan losses, see the
"Asset Quality" section of this report.
Investment Portfolio
The Company maintains a securities portfolio consisting of U.S
Treasury, U.S. Government agencies and corporations, state and
political subdivisions, asset-backed and other securities.
Investment securities are held in safekeeping by an independent
custodian. In November 1995, the Financial Accounting Standards
Board issued a special report, "A Guide to Implementation of
Statement No. 115, on Accounting for Certain Investments in Debt
and Equity Securities - Questions and Answers" (the "Special
Report"). The Special Report allowed companies to reassess the
appropriateness of the classifications of all securities and
account for any reclassification at fair value. The Company
adopted the reclassification provision stated in the Special
Report prior to December 31, 1995 and transferred $329.4 million
of securities held to maturity into available for sale. The
unrealized pretax gain upon transfer was $1.1 million as of
December 31, 1995.
The objective of the investment securities held to maturity is
to strengthen the portfolio yield, and to provide collateral to
pledge for federal, state and local government deposits and
other borrowing facilities. The investments held to maturity had
an average term to maturity of 81 months at December 31, 1996
and, on the same date, those investments included $196.8 million
in fixed rate and $600,000 in adjustable rate securities.
Investment securities available for sale are generally used to
supplement the Banks' liquidity. Unrealized net gains and losses
on these securities are recorded as an adjustment to equity, net
of taxes, and are not reflected in the current earnings of the
Company. If a security is sold, any gain or loss is recorded as
a charge to earnings and the equity adjustment is reversed. At
December 31, 1996, the Banks held $696.6 million classified as
investments available for sale. At December 31, 1996, an
unrealized gain of $7.8 million, net of taxes of $5.7 million,
related to these securities was held in shareholders' equity.
The Company had no trading securities at December 31, 1996.
For more information on investment securities, see Notes 1 and 2
to the consolidated financial statements.
The following table shows the amortized cost of the Company's
investment securities as of the dates indicated:
- --------------------------------------------------------------------
At December 31, 1996 1995 1994
- --------------------------------------------------------------------
(In thousands)
U.S. Treasury $272,896 $240,832 $279,014
U.S. Government agencies and corporations 201,656 248,964 275,221
States and political subdivisions 230,224 228,068 198,135
Asset backed securities 94,336 83,636 37,162
Other securities 81,367 58,079 40,785
- --------------------------------------------------------------------
Total $880,479 $859,579 $830,317
====================================================================
The following table is a summary of the relative maturities and yields
of the Company's investment securities as of December 31, 1996. Weighted
average yields have been computed by dividing annual interest income,
adjusted for amortization of premium and accretion of discount, by the
book value of the related security. Yields on state and political
subdivision securities have been calculated on a fully taxable
equivalent basis using the current statutory rate.
Held to Maturity
- -------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After ten Mortgage-
(Dollars in thousands) one year five years ten years years backed Other Total
- -------------------------------------------------------------------------------------------------------
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government agencies
and corporations -- -- -- -- -- -- --
Interest rate --% --% --% --% --% --% --%
States and political
subdivisions 619 6,914 65,117 50,085 -- -- 122,735
Interest rate 10.69% 9.10% 8.09% 8.36% --% --% 8.27%
Asset-backed 74 117 -- -- -- -- 191
Interest rate 5.26% 4.73% --% --% --% --% 4.94%
Other securities -- -- -- 3,157 -- -- 3,157
Interest rate --% --% --% 5.86% --% --% 5.86%
- --------------------------------------------------------------------------------------------------------
Subtotal 693 7,031 65,117 53,24 -- -- 126,083
Interest rate 10.11% 9.02% 8.09% 8.22% --% --% 8.20%
Mortgage Backed -- -- -- -- 71,345 -- 71,345
Interest rate --% --% --% --% 5.40% --% 5.40%
- --------------------------------------------------------------------------------------------------------
Total $693 $7,031 $65,117 $53,242 $71,345 $-- $197,428
Interest rate 10.11% 9.02% 8.09% 8.22% 5.40% --% 7.19%
========================================================================================================
Available for Sale
- -------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After ten Mortgage-
(Dollars in thousands) one year five years ten years years backed Other Total
- -------------------------------------------------------------------------------------------------------
U.S. Treasury $99,085 $173,811 $-- $-- $-- $-- $272,896
Interest rate 5.11% 6.05% --% --% --% --% 5.71%
U.S. Government Agencies
and Corporations 22,277 29,596 -- -- -- -- 51,873
Interest rate 5.96% 5.84% --% --% --% --% 5.89%
States and Political
Subdivisions 4,143 15,487 27,953 59,906 -- -- 107,489
Interest rate 9.27% 9.12% 7.60% 8.18% --% --% 8.21%
Asset Backed 607 60,605 32,933 -- -- -- 94,145
Interest rate 5.74% 6.00% 6.09% --% --% --% 6.03%
Other 33,116 25,990 -- -- -- -- 59,106
Interest rate 6.05% 6.13% --% --% --% --% 6.08%
- -------------------------------------------------------------------------------------------------------
Subtotal 159,228 305,489 60,886 59,906 -- -- 585,509
Interest rate 5.53% 6.18% 6.79% 8.18% --% --% 6.27%
Mortgage Backed -- -- -- -- 78,438 -- 78,438
Interest rate --% --% --% --% 5.77% --% 5.77%
Other securities without
set maturities -- -- -- -- -- 19,104 19,104
Interest rate --% --% --% --% --% 8.49% 8.49%
- -------------------------------------------------------------------------------------------------------
Total $159,228 $305,489 $60,886 $59,906 $78,438 $19,104 $683,051
Interest rate 5.53% 6.18% 6.79% 8.18% 5.77% 8.49% 6.28%
=======================================================================================================
Loan portfolio
The following table shows the composition of the loan portfolio
of the Company by type of loan or type of borrower, on the dates
indicated:
- --------------------------------------------------------------------------------------------
At December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------
(In thousands)
Commercial and commercial
real estate $857,811 $816,422 $813,589 $812,630 $820,666
Real estate construction 40,090 54,181 73,492 76,330 99,924
Real estate residential 276,951 237,535 207,477 206,264 201,080
Consumer 278,950 291,350 308,812 319,545 350,919
Unearned income (9,565) (12,248) (16,381) (15,801) (18,899)
- --------------------------------------------------------------------------------------------
Gross loans $1,444,237 $1,387,240 $1,386,989 $1,398,968 $1,453,690
Reserve for loan losses (34,919) (33,508) (32,450) (30,045) (29,254)
- --------------------------------------------------------------------------------------------
Net loans $1,409,318 $1,353,732 $1,354,539 $1,368,923 $1,424,436
============================================================================================
Maturities and Sensitivities of Selected Loans to Changes in Interest
Rates
The following table shows the maturity distribution and interest
rate sensitivity of commercial and real estate construction loans
at December 31, 1996. Balances exclude loans to individuals
and residential mortgages totaling $546.3 million. These types of
loans are typically paid in monthly installments over a number of
years.
- -----------------------------------------------------------------------------
Within One to After
One Year Five Years Five Years Total
- -----------------------------------------------------------------------------
(In thousands)
Commercial and commercial
real estate * $494,886 $172,260 $190,665 $857,811
Real estate construction 37,542 2,548 -- 40,090
- -----------------------------------------------------------------------------
Total $532,428 $174,808 $190,665 $897,901
=============================================================================
Loan with fixed
interest rates $41,195 $174,808 $190,665 $406,668
Loans with floating
interest rates 491,233 -- -- 491,233
- -----------------------------------------------------------------------------
Total $532,428 $174,808 $190,665 $897,901
=============================================================================
* Includes demand loans
Commitments and Lines of Credit
It is not the policy of the Company to issue formal commitments
on lines of credit except to a limited number of well
established and financially responsible local commercial
enterprises. Such commitments can be either secured or
unsecured and are typically in the form of revolving lines of
credit for seasonal working capital needs. Occasionally, such
commitments are in the form of Letters of Credit to facilitate
the customer's particular business transactions. Commitment
fees generally are not charged except where Letters of Credit
are involved. Commitments and lines of credit typically mature
within one year. For further information, see Note 13 to the
consolidated financial statements.
Asset Quality
The Company closely monitors the markets in which it conducts
its lending operations. The Company continues its strategy to
control its exposure to loans with higher credit risk and
increase diversification of earning assets into less risky
investments. Asset reviews are performed using grading
standards and criteria similar to those employed by bank
regulatory agencies. Assets receiving lesser grades fall under
the "classified assets" category, which includes all
non-performing assets and potential problem loans, and receive
an elevated level of attention to ensure collection.
The following is a summary of classified assets on the dates
indicated:
- -----------------------------------------------------------
At December 31, 1996 1995
- -----------------------------------------------------------
(In millions)
Classified loans $32.0 $44.9
Other classified assets 6.1 5.1
- -----------------------------------------------------------
Total classified assets $38.1 $50.0
===========================================================
Classified loans at December 31, 1996 decreased $12.9 million
or 29 percent to $32.0 million from December 31,1995, reflecting
improvements in the borrowers' financial condition and satisfaction of
debt. The improvement is primarily due to repayments and charge-offs of
classified loans with real estate collateral. Other classified assets
increased $1.0 million from the prior year, due to the net effect of new
foreclosures on loan collateral, and sales and write-downs of properties
acquired in satisfaction of debt ("other real estate owned").
Non-performing assets
Non-performing assets include non-accrual loans, loans 90 or more days
past due as to principal or interest and still accruing and other real
estate owned. Loans are placed on non-accrual status upon reaching 90
days or more delinquent, unless the loan is well secured and in the
process of collection. Interest previously accrued on loans placed on
non-accrual status is charged against interest income. In addition,
loans secured by real estate with temporarily impaired values and
commercial loans to borrowers experiencing financial difficulties are
placed on non-accrual status even though the borrowers continue to repay
the loans as scheduled. Such loans are classified by Management as
"performing non-accrual" and are included in the total non-performing
assets. Performing non-accrual loans are reinstated to accrual status
when improvements in credit quality eliminate Management's doubt as to
the full collectibility of both principal and interest and the loan is
brought current. When the ability to fully collect non-accrual loan
principal is in doubt, cash payments received are applied against the
principal balance of the loan until such time as full collection of the
remaining recorded balance is expected. Any additional payments
received after that point are recorded as interest income on a cash
basis.
The following summarizes the Company's non-performing assets
for the periods indicated:
- ----------------------------------------------------------------------------------
At December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------
(In millions)
Performing non-accrual loans $4.3 $2.4 $2.0 $1.9 $1.2
Non-performing non-accrual loans 3.3 7.5 8.3 13.9 36.2
- ----------------------------------------------------------------------------------
Total non-accrual loans 7.6 9.9 10.3 15.8 37.4
Loans 90 or more days past due
and still accruing 0.2 0.3 1.8 1.7 0.6
- ----------------------------------------------------------------------------------
Total non-performing loans 7.8 10.2 12.1 17.5 38.0
Other real estate owned 6.1 5.1 8.0 14.0 18.6
- ----------------------------------------------------------------------------------
Total non-performing assets $13.9 $15.3 $20.1 $31.5 $56.6
==================================================================================
Reserve for loan losses as a percentage
of non-performing loans 445% 329% 268% 172% 77%
Performing non-accrual loans increased $1.9 million to $4.3 million at
December 31, 1996, while non-performing non-accrual loans decreased $4.2
million to $3.3 million at December 31, 1996, due to loan collections,
write-downs, payoffs and sales. The increased other real estate owned
balance during 1996 was due to higher foreclosure on loans with real
estate collateral, net of write-downs and liquidations. The decreased
other real estate owned balance during 1995 from 1994 was due to asset
write-downs and liquidations.
The amount of gross interest income that would have been recorded for
non-accrual loans for the year ended December 31, 1996, if all such
loans had been current in accordance with their original terms while
outstanding during the period was $705,000, compared to $817,000 and
$1.2 million in 1995 and 1994, respectively. The amount of interest
income that was recognized on non-accrual loans from cash payments made
in 1996, 1995 and 1994 was $270,000, $237,000 and $413,000,
respectively. Cash payments received, which were applied against the
book balance of performing and non-performing non-accrual loans
outstanding at December 31, 1996, totaled $111,000, compared to $299,000
and $248,000 in 1995 and 1994, respectively.
Summary of Non-Accrual Loans
The following summarizes the Company's non-accrual loans for the
periods indicated:
- ----------------------------------------------------------------------------
At December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------
(In thousands)
Performing non-accrual loans $4,285 $2,464 $1,943 $1,927 $1,199
Non-performing non-accrual loans 3,334 7,486 8,347 13,852 36,182
- ----------------------------------------------------------------------------
Total non-accrual loans 7,619 9,950 10,290 15,779 37,381
- ----------------------------------------------------------------------------
Performing non-accrual loans
Commercial and commercial
real estate 4,285 1,367 1,761 1,198 1,125
Real estate construction -- 1,097 156 729 --
Real estate residential -- -- -- -- 74
Consumer -- -- 26 -- --
- ----------------------------------------------------------------------------
Total performing
non-accrual loans 4,285 2,464 1,943 1,927 1,199
- ----------------------------------------------------------------------------
Non-performing non-accrual loans
Commercial and commercial
real estate 2,096 3,642 4,201 9,143 22,671
Real estate construction 958 2,927 2,229 3,887 11,078
Real estate residential 114 645 1,774 197 2,142
Consumer 166 272 143 625 291
- ----------------------------------------------------------------------------
Total non-performing
non-accrual loans 3,334 7,486 8,347 13,852 36,182
- ----------------------------------------------------------------------------
Total non-accrual loans $7,619 $9,950 $10,290 $15,779 $37,381
============================================================================
Management of the Company believes that, the Company's loan loss
reserve of $34.9 million at December 31, 1996 was adequate to
provide for losses that could be reasonably anticipated based
upon specific conditions as determined by Management, credit
loss experience, the amount of past due and non-performing
loans, recommendations of regulatory authorities, prevailing
economic conditions and other factors. The reserve is allocated
to segments of the loan portfolio based in part on a
quantitative analysis of historical credit loss experience.
Criticized and classified loans balances are analyzed using a
linear regression model or standard allocation percentages. The
results of this analysis are applied to current criticized and
classified loan balances to allocate the reserve to the
respective segments of the loan portfolio. In addition, loans
with similar characteristics not usually criticized using
regulatory guidelines due to their small balances and numerous
accounts, are analyzed based on the historical rate of net
losses and delinquency trends grouped by the number of days the
payments on those loans are delinquent. Management continues to
evaluate the loan portfolio and assess current economic
conditions that will dictate future reserve levels.
Loan Loss Experience
The following table summarizes the Company's loan loss
experience for the periods indicated:
- -------------------------------------------------------------------------------------------------------
At December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
(In thousands)
Total loans outstanding $1,444,237 $1,387,240 $1,386,989 $1,398,968 $1,453,690
Average loans outstanding during
the period 1,402,007 1,369,663 1,363,109 1,410,485 1,471,777
Analysis of the reserve:
Balance, beginning of period $33,508 $32,450 $30,045 $29,254 $28,111
Credit losses:
Commercial and commercial real estate (3,207) (3,033) (4,004) (6,469) (5,286)
Real estate construction (301) (1,292) (750) (2,274) (1,657)
Real estate residential (28) (167) -- (114) (80)
Consumer (2,392) (2,278) (2,663) (2,657) (3,178)
- -------------------------------------------------------------------------------------------------------
Total (5,928) (6,770) (7,417) (11,514) (10,201)
- -------------------------------------------------------------------------------------------------------
Credit loss recoveries:
Commercial and commercial real estate 1,797 1,117 1,088 1,193 1,360
Real estate construction 44 3 65 -- --
Real estate residential -- -- -- 5 18
Consumer 923 1,113 1,249 1,210 1,556
- -------------------------------------------------------------------------------------------------------
Total 2,764 2,233 2,402 2,408 2,934
- -------------------------------------------------------------------------------------------------------
Net credit losses (3,164) (4,537) (5,015) (9,106) (7,267)
Sale of Sonoma Valley Bank -- -- -- (684) --
Additions to the reserve charged
to operating expense 4,575 5,595 7,420 10,581 8,410
- -------------------------------------------------------------------------------------------------------
Balance, end of period $34,919 $33,508 $32,450 $30,045 $29,254
=======================================================================================================
Net credit losses to average loans 0.23% 0.33% 0.37% 0.65% 0.49%
Reserve for loans losses as a
percentage of loans outstanding 2.42% 2.42% 2.34% 2.15% 2.01%
Allocation of the Loan Loss Reserve
The following table presents the allocation of the loan loss
reserve balance on the dates indicated:
- ----------------------------------------------------------------------
At December 31, 1996 1995
- ----------------------------------------------------------------------
Allocation Loans as Allocation Loans as
of Percent of of Percent of
Reserve Total Reserve Total
Balance Loans Balance Loans
- -----------------------------------------------------------------------
Dollars in thousands)
Commercial $13,629 59.4% $13,519 58.9%
Real estate construction 2,326 2.8% 3,586 3.9%
Real estate residential 66 19.2% 57 17.1%
Consumer 3,315 18.6% 3,588 20.1%
Unallocated portion
of the reserve 15,583 12,758
- ---------------------------------------------------------------------
Total $34,919 100.0% $33,508 100.0%
=====================================================================
- ---------------------------------------------------------------------
At December 31, 1994 1993
- ---------------------------------------------------------------------
Allocation Loans as Allocation Loans as
of Percent of of Percent of
Reserve Total Reserve Total
Balance Loans Balance Loans
- -----------------------------------------------------------------------
Dollars in thousands)
Commercial $11,596 58.6% $15,454 58.1%
Real estate construction 2,108 5.3% 2,592 5.5%
Real estate residential 47 15.0% 85 14.7%
Consumer 3,765 21.1% 3,921 21.7%
Unallocated portion
of the reserve 14,934 7,993
- ----------------------------------------------------------------------
Total $32,450 100.0% $30,045 100.0%
======================================================================
- -----------------------------------------------------------------
At December 31, 1992
- -----------------------------------------------------------------
Allocation Loans as
of Percent of
Reserve Total
(Dollars in thousands) Balance Loans
- -----------------------------------------------------------------
Commercial $16,610 56.5%
Real estate construction 964 6.9%
Real estate residential 545 13.8%
Consumer 3,872 22.8%
Unallocated portion of the reserve 7,263
- -----------------------------------------------------------------
Total $29,254 100.0%
=================================================================
The decrease in the allocation of construction loans from December 1995
to December 1996 is primarily due to fluctuations in the balance of
criticized loans. The increase in the allocation to commercial loans
from December 1994 to December 1995 is primarily due to the inclusion of
reserves allocated to certain loans acquired through the Company's 1995
mergers. The unallocated component includes Management's judgmental
determination of the amounts necessary for concentrations, economic
uncertainties and other subjective factors.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan" ("SFAS 114"), as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures" ("SFAS 118"). Under SFAS 114, a
loan is considered impaired when, based on current information and
events, it is "probable" that a creditor will be unable to collect all
amounts due (principal and interest) according to the contractual terms
of the loan agreement. The measurement of impairment may be based on (I)
the present value of the expected cash flows of the impaired loan
discounted at the loan's original effective interest rate, (ii) the
observable market price of the impaired loan or (iii) the fair value of
the collateral of a collateral-dependent loan. SFAS 114 as amended by
SFAS 118 does not apply to large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment.
In measuring impairment, the Company reviews all impaired commercial and
construction loans classified "Substandard" and "Doubtful" that meet
materiality thresholds of $250,000 and $100,000, respectively. All
"Loss" classified loans are fully reserved under the Company's standard
loan loss reserve methodology. The Company considers classified loans
below the established thresholds to represent immaterial loss risk.
Commercial and construction loans that are not classified, and large
groups of smaller-balance homogeneous loans such as installment,
personal revolving credit, residential real estate and student loans,
are evaluated collectively for impairment under the Company's standard
loan loss reserve methodology and are, therefore, excluded from the
provisions of SFAS 114. The Company generally identifies loans as
impaired when such loans are in non-accrual status or are considered
troubled debt restructurings due to the granting of a below-market rate
of interest or a partial forgiveness of indebtedness on an existing
loan.
The following summarizes the Company's impaired loans for the
periods indicated:
- -----------------------------------------------------------
At December 31, 1996 1995
- -----------------------------------------------------------
(In thousands)
Non-accrual loans $7,619 $9,950
Other 3,785 251
- -----------------------------------------------------------
Total impaired loans $11,404 $10,201
===========================================================
Specific reserves $1,184 $850
===========================================================
The $3.5 million increase in loans classified as impaired as of December
31, 1996, other than non-accrual loans, is due to the addition of two
commercial real estate loans, included in classified loan balances,
with collateral exposure as to which Management has doubt concerning
whether the Company will be able to collect all amounts due according to
the original contractual agreements. The average balances of the
Company's impaired loans for the year ended December 31, 1996 was $11.0
million compared to $10.3 million in 1995. In general, the Company does
not recognize any interest income on trouble debt restructurings or
loans that are classified as non-accrual. For other impaired loans,
interest income may be recorded as cash is received, provided that the
Company's recorded investment in such loans is deemed collectible.
Asset and Liability Management
The fundamental objective of the Company's management of assets and
liabilities is to maximize its economic value while maintaining adequate
liquidity and a conservative level of interest rate risk.
The primary analytical tool used by the Company to gauge interest rate
sensitivity is a simulation model used by many major banks and bank
regulators. This model is used to simulate, based on the current and
projected portfolio mix, the effects on net interest income of changes
in market interest rates. Under the Company's policy and practice, the
projected amount of net interest income over the ensuing twelve months
is not allowed to fluctuate more than ten percent, even under
alternate assumed interest rate changes of plus or minus 200
basis points. The results of the model indicated that the mix
of interest rate sensitive assets and liabilities at December
31, 1996 would not result in a fluctuation of net interest
income exceeding 10 percent.
The Company considers various methods of interest rate risk
management including interest rate swaps, utilized to hedge the
impact of interest rate fluctuations on interest-bearing assets
and liabilities in the current interest rate environment.
Interest rate swaps are agreements to exchange interest
payments computed on notional amounts, which are used as a
basis for the calculations only and do not represent exposure
to risk for the Company. The risk to the Company is associated
with fluctuations of interest rates and with the counterparty's
ability to meet its interest payment obligations. The Company
minimizes this credit risk by entering into contracts with
well-capitalized money-center banks and by requiring settlement
of only the net difference between the exchanged interest
payments. At December 31, 1996 and 1995, no interest rate swap
contracts were outstanding. During August 1995, two contracts,
with notional amounts totaling $60.0 million expired. The
Company paid a variable rate based on three-month LIBOR and
received an average fixed rate of 4.11 percent.
During 1994, the Company was engaged in four interest rate swaps, with
notional amounts totaling $110.0 million. Two swaps, with notional
amounts totaling $50.0 million expired in November and December, 1994.
The effect of entering into these contracts resulted in reductions of
net interest income of $763,000 and $604,000 in 1995 and 1994,
respectively.
Interest Rate Sensitivity Analysis
The following table summarizes the interest sensitivity gaps
inherent in the Company's asset and liability portfolios at
December 31, 1996:
- ----------------------------------------------------------------------------------------------------
Repricing within:
-----------------
0-30 31-90 91-180 181-365 Over One Non-
(In millions) Days Days Days Days Year Repricing Total
- ----------------------------------------------------------------------------------------------------
Assets
Investment securities $88 $70 $80 $92 $547 $17 $894
Loans 601 57 68 86 632 -- 1,444
Other assets -- -- -- -- -- 210 210
- ----------------------------------------------------------------------------------------------------
Total assets $689 $127 $148 $178 $1,179 $227 $2,548
- ----------------------------------------------------------------------------------------------------
Liabilities
Non-interest bearing $-- $-- $-- $-- $-- $515 $515
Interest bearing:
Transaction 379 -- -- -- -- -- 379
Money market savings 38 71 106 211 -- -- 426
Passbook savings 253 -- -- -- -- -- 253
Time 155 114 106 70 63 -- 508
Short-term borrowings 161 -- -- -- -- -- 161
Long-term debt -- -- -- -- 43 -- 43
Other liabilities -- -- -- -- -- 24 24
Shareholders' equity -- -- -- -- -- 239 239
- ----------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $986 $185 $212 $281 $106 $778 $2,548
- ----------------------------------------------------------------------------------------------------
Net liabilities) assets
subject to repricing ($297) ($58) ($64) ($103) $1,073 ($551)
- -----------------------------------------------------------------------------------------
Cumulative net (liabilities)
assets subject
to repricing ($297) ($355) ($419) ($522) $551 $--
=========================================================================================
The repricing terms of the table above do not represent contractual
principal maturity, but rather principal cash flows available for
repricing. The interest rate sensitivity report shown above categorizes
interest-bearing transaction deposits and savings deposits as repricing
within 30 days. However, it is the experience of Management that the
historical interest rate volatility of these interest-bearing
transaction and savings deposits can be similar to liabilities with
longer repricing dates, depending on market conditions. Moreover, the
degree to which these interest-bearing transaction and savings deposits
respond to changes in money market rates usually is less than
the response of interest rate sensitive loans. These factors
cause the cumulative net liability position shown above to
indicate a much greater degree of liability sensitivity than
Management believes really exists based on the additional
analysis previously discussed.
Liquidity
The principal sources of asset liquidity are marketable investment and
money market securities available for sale. At December 31, 1996,
investment securities available for sale totaled $696.6 million.
Changing the pattern from the last two years, gross loan balances grew
$64.6 million from 1995, compared to more moderate increases of $6.7
million and $20.7 million in 1995 and 1994, respectively. These
increases were in part funded by the cash generated by financing
activities represented, in 1996, by a $31.9 million increase in deposits
and the issuance of $22.5 million of the Company's Senior Notes,
partially offset by a decrease of $14.5 million in purchased funds.
These compare with decreases in deposits of $22.2 million and $38.3
million during 1995 and 1994, respectively, and reductions of $5.5
million and $10.8 million in long-term notes payable for the same
periods, offset by $40.2 million and $59.1 million increases in
purchased funds for 1995 and 1994, respectively. Cash provided by
financing activities was also used to fund the investment securities
portfolio which increased $13.4 million in 1996 and $29.3 million and
$27.4 million in 1995 and 1994, respectively.
The Company generates significant liquidity from its operating
activities. The Company's profitability in 1996, 1995 and 1994
generated cash flows provided by operations of $43.3 million, $40.1
million and $64.7 million, respectively.
It is the intention of the Company to continue to increase loan
volume without jeopardizing credit quality. Management of the
Company anticipates the Company will increase its cash levels
through the end of 1997 mainly through increased profitability
and retained earnings, although some adverse impacton the Company's
results of operations is expected to occur during the calendar quarter
in which its acquisition of ValliCorp Holdings, Inc. closes due to
merger related costs. For the same period, it is anticipated
that the investment securities portfolio and demand for loans
will continue to moderately increase. Growth in deposit
balances is expected by Management to follow the anticipated
growth in loan and investment balances through the end of 1997.
Acquisition
As discussed in Note 19 to the consolidated financial statements, on
November 11, 1996, the Company entered into a definitive agreement to
acquire by merger with ValliCorp Holdings, Inc. It is expected that this
merger will be consummated in the second quarter of 1997 and accounted
for according to the pooling-of-interests method.
Capital Resources
The current and projected capital position of the Company and
the impact of capital plans and long-term strategies is reviewed
regularly by Management. The Company's capital position represents the
level of capital available to support continued operations and
expansion. The Company's primary capital resource is shareholders'
equity, which increased $15.0 million or 7 percent from the previous
year end and increased $34.3 million or 17 percent from December 31,
1994. The ratio of total risk-based capital to risk-adjusted assets
was 14.96 percent at December 31, 1996, compared to 15.18 percent at
December 31, 1995. Tier I risk-based capital to risk-adjusted assets was
12.61 percent at December 31, 1996, compared to 12.77 percent at
December 31, 1995.
Capital to Risk-Adjusted Assets
- ----------------------------------------------------
Minimum
Regulatory
Capital
At December 31, 1996 1995 Requirements
- ---------------------------------------------------
Tier I Capital 12.61% 12.77% 4.00%
Total Capital 14.96% 15.18% 8.00%
Leverage ratio 9.20% 9.09% 4.00%
===================================================
The risk-based capital ratios declined in 1996 as the increase in total
assets outpaced the growth in equity. In addition, the level of
risk-adjusted assets increased, as loan growth exceeded the growth in
investment securities. Capital ratios are reviewed on a regular basis to
ensure that capital exceeds the prescribed regulatory minimums and is
adequate to meet the Company's future needs. All ratios are in excess of
the regulatory definition of "well capitalized". Beginning in 1994, the
the Company commenced to repurchase shares of its common stock from time
to time, subject to appropriate regulatory and other accounting
requirements. These purchases were made periodically in the open market
and reduced the dilutive impact of issuing new shares to meet stock
performance, option plans, acquisitions and other requirements. During
1996, the Company acquired a total of 402,600 shares of its common stock
on the open market, compared to 240,450 in 1995 and 31,000 in 1994.
Financial Ratios
The following table shows key financial ratios for the periods
indicated:
- -----------------------------------------------------------------
At December 31, 1996 1995 1994
- -----------------------------------------------------------------
Return on average total assets 1.52% 1.30% 1.13%
Return on average shareholders' equity 16.79% 14.61% 14.13%
Average shareholders' equity as a percent of:
Average total assets 9.04% 8.89% 7.98%
Average total loans 16.04% 15.69% 14.36%
Average total deposits 11.15% 10.69% 9.41%
Dividend payout ratio 24.00% 24.00% 23.00%
Deposit categories
The following table summarizes the Company's deposit categories
for the periods indicated:
- ----------------------------------------------------------------------------------------
1996 1995 1994
------------------ ---------------- ----------------
Percentage Percentage Percentage
of total of total of total
(Dollars in thousands) Amount deposits Amount deposits Amount deposits
- ------------------------------------------------------------------------------------------
Non-interest bearing demand $515,451 24.8% $497,489 24.2% $472,301 22.8%
Interest bearing:
Transaction 379,468 18.2 356,099 17.4 357,682 17.3
Savings 678,779 32.6 716,871 35.0 784,933 37.9
Time less than $100,000 300,398 14.4 309,312 15.1 319,623 15.4
Time $100,000 or more 207,300 10.0 169,750 8.3 137,153 6.6
- ---------------------------------------------------------------------------------------
Total $2,081,396 100.0% $2,049,521 100.0% $2,071,692 100.0
=======================================================================================
The decline in total deposits in 1995 compared to 1994 is due
to a combination of factors including the run-off of balances
after the 1995 Mergers. Due to aggressive policies in place,
the Company was able to increase its deposit totals to an
all-time high of $2,081 million, representing an increase of
$32 million or two percent over prior year.
The following table sets forth, by time remaining to maturity,
the Company's domestic time deposits in amounts of $100,000 or
more:
- -----------------------------------------------------------
(In thousands)
At December 31, 1996
- -----------------------------------------------------------
Three months or less $148,641
Over three through six months 31,143
Over six through twelve months 20,718
Over twelve months 6,798
- -----------------------------------------------------------
Total $207,300
===========================================================
Short Term Borrowings
The following table sets forth the short-term borrowings of the
Company for the periods indicated:
- ------------------------------------------------------------------
At December 31, 1996 1995 1994
- ------------------------------------------------------------------
(In thousands)
Federal funds purchased $-- $45,000 $1,300
Other borrowing funds:
Retail repurchased agreements 112,594 91,622 114,340
Other 48,553 39,000 19,786
- ------------------------------------------------------------------
Total other borrowing funds 161,147 130,622 134,126
- ------------------------------------------------------------------
Total funds purchased $161,147 $175,622 $135,426
==================================================================
Further detail of the other borrowed funds are as follows:
- --------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------
(In thousands)
Outstanding:
Average for the year $172,808 $140,083 $122,236
Maximum during the year 217,589 154,022 173,201
Interest rates:
Average for the year 5.05% 5.57% 4.09%
Average at period end 4.90% 5.31% 5.11%
Non-Interest Income
Components of Non-Interest Income
- ------------------------------------------------------------------
(In millions) 1996 1995 1994
- ------------------------------------------------------------------
Deposit account fees $12.8 $12.7 $12.9
Credit card merchant fees 2.7 2.4 2.4
Mortgage banking income 1.3 1.5 4.3
Financial services commissions 0.8 0.6 0.7
Trust fees 0.4 0.6 0.8
Other income 4.0 3.7 4.9
- ------------------------------------------------------------------
Total $22.0 $21.5 $26.0
==================================================================
Non-interest income was $22.0 million in 1996, $500,000 higher than
1995. Credit card merchant fees and financial services commissions were
approximately $300,000 and $200,000, respectively, higher than prior
year due to increased volume of activity. Deposit account fees were
$100,000 higher than 1995. Partially offsetting these increases,
mortgage banking income was $200,000 lower than 1995, due to reduced
servicing income and trust fees were $200,000 lower than prior year.
Non-interest income was $21.5 million in 1995, $4.5 million lower than
1994. Lower mortgage banking income due to reduced refinancing volumes
resulting in lower income from sales of loans, lower deposit account
fees and lower trust fees, account for the majority of the decrease.
Non-Interest Expense
Components of Non-Interest Expense
- -----------------------------------------------------------
(In millions) 1996 1995 1994
- -----------------------------------------------------------
Salaries $29.5 $32.6 $36.4
Other personnel benefits 8.7 8.6 8.7
Occupancy 10.3 10.7 10.6
Equipment 5.5 6.3 6.1
Data processing 4.0 4.2 4.5
Professional fees 2.5 3.9 4.1
FDIC insurance assessment -- 2.4 4.7
Stationery and supplies 1.6 1.6 1.7
Advertising and public relations 1.4 1.6 1.6
Loan expense 1.2 1.1 3.0
Operational losses 0.8 1.0 1.3
Merchant credit card 0.8 0.8 0.9
Insurance 0.6 1.0 0.9
Other real estate owned 0.4 0.9 0.6
Other expense 8.3 9.6 9.2
- -----------------------------------------------------------
Total $75.6 $86.3 $94.3
===========================================================
Average full-time
equivalent staff 825 898 1,024
Average assets per full-time
equivalent staff(In millions) $3.02 $2.69 $2.40
===========================================================
Non-interest expense decreased $10.7 million or 12 percent in
1996 compared to 1995. Lower expense in 1996 is due to one-time costs,
included in 1995, related to merger activity in that year and the
Company's continuing efforts to realize efficiencies through
streamlining and consolidation of operations and strict cost controls.
These were the major reasons for the decreases in almost all
non-interest expense categories, including $3.0 million lower
employee-related costs, a $1.4 million reduction in professional fees,
$1.2 million lower occupancy and equipment expenses, $500,000 lower
other real estate owned costs, $400,000 lower insurance expense and
$200,000, each, lower data processing costs, advertising and public
relations expenses and operational losses. In addition, the Company
benefited from the elimination of FDIC premiums, contributing $2.4
million to the total decrease in non-interest expense from 1995.
Non-interest expense decreased $8.0 million or 8 percent in
1995 compared with 1994. Lower expenses in 1995 reflect the
Company's improved efficiency and exercise of cost controls,
plus the effect of consolidating operations after the 1995
merger activity. The combination of these effects is the main
reason for the $3.9 million decrease in personnel related
expenses, $1.9 million reduction in loan related expenses, and
other reductions in most non-interest expense categories. In
addition, a $2.3 million reduction in FDIC insurance expense,
resulting from reduced premiums, contributed to the overall
year-to-year decreases.
The ratio of average assets per full-time equivalent staff was
$3.0 million in 1996 compared to $2.7 million and $2.4
million in 1995 and 1994, respectively. The Company's strategy
to improve efficiency and consolidate operations after merger
activity can be seen in the reduction of the average number of
full-time equivalent staff from 1,024 in 1994 to 898 and 825
in 1995 and 1996, respectively.
Provision for Income Tax
The provision for income tax increased by $3.5 million in 1996
mainly as a direct result of higher pretax income partially
offset by an increase in tax-exempt interest income from
municipal securities. The 1996 provision of $17.4 million
reflects an effective tax rate of 31.6 percent compared to
provisions of $14.0 million in 1995 and $12.8 million in 1994,
reflecting effective tax rates of 30.8 percent and 31.7 percent,
respectively.
ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements Page
----
Consolidated Balance Sheets as of December 31, 1996 and 1995 57
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 58
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1995 and 1994 59
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 60
Notes to consolidated financial statements 61
Independent Auditors' Report 90
Management's letter of Financial Responsibility 93
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
- ------------------------------------------------------------------------
Balances as of December 31, 1996 1995
- ------------------------------------------------------------------------
ASSETS
Cash and cash equivalents (Note 16) $149,429 $182,133
Money market assets 250 250
Investment securities
available for sale (Note 2) 696,610 620,337
Investment securities held to maturity;
market values of $199,872 in 1996 and
$244,303 in 1995 (Note 2) 197,428 242,175
Loans, net of reserve for loan losses of:
$34,919 in 1996 and $33,508 in 1995
(Notes 3, 4 and 15) 1,409,318 1,353,732
Other real estate owned 6,091 5,103
Premises and equipment, net (Notes 5 and 6) 34,895 26,625
Interest receivable and other assets (Note 9) 54,466 60,589
- ------------------------------------------------------------------------
Total assets $2,548,487 $2,490,944
========================================================================
LIABILITIES
Deposits:
Non-interest bearing $515,451 $497,489
Interest bearing:
Transaction 379,468 356,099
Savings 678,779 716,871
Time (Notes 2 and 6) 507,698 479,062
- ------------------------------------------------------------------------
Total deposits 2,081,396 2,049,521
Funds purchased (Note 6) 161,147 175,622
Liability for interest, taxes
and other expenses (Note 9) 24,498 21,864
Notes and mortgages payable (Note 6) 42,500 20,000
- ------------------------------------------------------------------------
Total liabilities 2,309,541 2,267,007
- ------------------------------------------------------------------------
Commitments and contingent
liabilities (Notes 4, 12 and 13)
SHAREHOLDERS' EQUITY (Notes 7 and 16)
Common stock (no par value)
Authorized - 50,000 shares
Issued and outstanding -
9,435 in 1996 and 9,793 in 1995 93,558 94,786
Unrealized gain on securities
available for sale, net of taxes 7,817 1,691
Retained earnings 137,571 127,460
- ------------------------------------------------------------------------
Total shareholders' equity 238,946 223,937
- ------------------------------------------------------------------------
Total liabilities
and shareholders' equity $2,548,487 $2,490,944
========================================================================
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
- -------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------
INTEREST INCOME
Loans $124,838 $128,264 $120,115
Money market assets and funds sold -- 276 1,367
Investment securities available for sale
Taxable 31,249 12,551 10,446
Non-taxable 6,253 270 174
Investment securities held to maturity
Taxable 5,563 21,797 24,678
Non-taxable 6,362 11,219 9,314
- -------------------------------------------------------------------------
Total interest income 174,265 174,377 166,094
INTEREST EXPENSE
Transaction deposits 4,330 3,802 3,669
Savings deposits 19,089 20,716 20,003
Time deposits (Note 6) 25,142 23,961 18,295
Funds purchased (Note 6) 9,528 8,403 5,281
Notes and mortgages payable (Note 6) 2,828 1,730 2,612
- -------------------------------------------------------------------------
Total interest expense 60,917 58,612 49,860
- -------------------------------------------------------------------------
NET INTEREST INCOME 113,348 115,765 116,234
Provision for loan losses (Note 3) 4,575 5,595 7,420
- -------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 108,773 110,170 108,814
NON-INTEREST INCOME
Service charges on deposit accounts 12,847 12,734 12,948
Merchant credit card 2,657 2,422 2,401
Mortgage banking 1,290 1,479 4,270
Financial services commissions 788 611 673
Trust fees 386 615 751
Net investment securities gain (loss) 29 19 (60)
Other 4,046 3,653 5,016
- -------------------------------------------------------------------------
Total non-interest income 22,043 21,533 25,999
NON-INTEREST EXPENSE
Salaries and related
benefits (Note 14) 38,171 41,171 45,106
Occupancy (Notes 5 and 12) 10,313 10,684 10,632
Equipment (Notes 5 and 12) 5,471 6,255 6,149
Data processing 4,027 4,239 4,466
Professional fees 2,451 3,905 4,079
FDIC insurance assessment 16 2,375 4,683
Other real estate owned 425 890 623
Other 14,753 16,821 18,603
- -------------------------------------------------------------------------
Total non-interest expense 75,627 86,340 94,341
- -------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 55,189 45,363 40,472
Provision for income taxes (Note 9) 17,449 13,979 12,810
- -------------------------------------------------------------------------
NET INCOME $37,740 $31,384 $27,662
=========================================================================
Average common shares outstanding 9,613 9,877 9,916
PER SHARE DATA (Notes 7 and 19)
Net income $3.93 $3.18 $2.79
Dividends declared 0.95 0.77 0.64
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
- -------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Securities
Available Retained
Common Stock for Sale Earnings Total
- -------------------------------------------------------------------------------------
December 31, 1993 $92,943 $2,434 $93,267 $188,644
Net income for the year - - 27,662 27,662
Stock issued 1,242 - - 1,242
Purchase and retirement of stock (556) - (1,932) (2,488)
Dividends - - (5,695) (5,695)
Unrealized loss on securities
available for sale - (4,704) - (4,704)
- ------------------------------------------------------------------------------------
December 31, 1994 $93,629 ($2,270) $113,302 $204,661
Net income for the year - - 31,384 31,384
Stock issued 3,797 - - 3,797
Purchase and retirement of stock (2,640) - (9,701) (12,341)
Dividends - - (7,489) (7,489)
Cash in lieu of fractional shares - - (36) (36)
Unrealized loss on securities
available for sale - 3,961 - 3,961
- ------------------------------------------------------------------------------------
December 31, 1995 $94,786 $1,691 $127,460 $223,937
Net income for the year - - 37,740 37,740
Stock issued 2,575 - - 2,575
Purchase and retirement of stock (3,803) - (18,546) (22,349)
Dividends - - (9,083) (9,083)
Unrealized loss on securities
available for sale - 6,126 - 6,126
- ------------------------------------------------------------------------------------
December 31, 1996 $93,558 $7,817 $137,571 $238,946
====================================================================================
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ----------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $37,740 $31,384 $27,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,062 4,731 5,231
Loan loss provision 4,575 5,595 7,420
Amortization of deferred net loan fees (1,105) (1,858) (1,143)
Increase in interest income receivable (821) (1,170) (1,379)
(Increase) decrease in other assets (2,053) 2,438 (1,871)
Decrease in income taxes payable (1,224) (2,129) (1,228)
Increase in interest expense payable 559 82 469
Increase (decrease) in other liabilities 299 (1,413) 1,428
Net (gain) loss on sales of investment securities (29) (19) 60
Loss on sales/write down of equipment 212 1,586 179
Originations of loans for resale (7,089) (8,920) (134,221)
Proceeds from sale of loans originated for resale 7,905 9,254 161,887
(Gain) loss on sale of property acquired in
satisfaction of debt (173) 27 175
Write down on property acquired in satisfaction of debt 454 513 3
Net purchases of trading securities -- -- 10
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 43,312 40,101 64,682
INVESTING ACTIVITIES
Net disbursements of loans (63,544) (4,878) (19,559)
Purchases of investment securities available for sale (289,505) (140,160) (110,944)
Purchases of investment securities held to maturity (26,448) (52,928) (412,652)
Purchases of property, plant and equipment (14,225) (3,662) (3,327)
Proceeds from maturity of securities available for sale 188,921 66,621 45,498
Proceeds from maturity of securities held to maturity 71,199 91,592 346,380
Proceeds from sale of securities available for sale 42,459 4,310 104,294
Proceeds from sale of securities held to maturity -- 1,316 --
Proceeds from sale of property, plant and equipment 1,681 52 --
Proceeds from property acquired in satisfaction of debt 2,403 2,380 5,815
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (87,059) (35,357) (44,495)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 31,875 (22,171) (38,339)
Net (decrease) increase in fed funds purchased (14,475) 40,196 59,128
Additions (reductions) in notes and mortgages payable 22,500 (5,524) (10,828)
Issuance of shares of common stock 2,575 3,797 1,242
Cash in lieu of fractional shares -- (36) --
Retirement of common stock (22,349) (12,341) (2,488)
Dividends (9,083) (7,489) (5,695)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,043 (3,568) 3,020
- ----------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (32,704) 1,176 23,207
Cash and cash equivalents at beginning of year 182,133 180,957 157,750
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $149,429 $182,133 $180,957
==============================================================================================
Supplemental disclosure of non-cash activities
Loans transferred to other real estate owned $3,672 $4,095 $4,474
Transfer of securities from held to maturity to
to available for sale -- 329,357 --
Unrealized gain (loss) on securities available for sale,
net of taxes 6,126 3,961 (4,704)
Supplemental disclosure of cash flow activity
Interest paid for the period 58,205 58,581 50,156
Income tax payments for the period 18,286 15,394 14,016
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
Note 1: Business and Accounting Policies
Westamerica Bancorporation, a registered bank holding Company (the
"Company"), provides a full range of banking services to individual and
corporate customers in Northern California through its subsidiary banks,
Westamerica Bank and Bank of Lake County (the "Banks"). The Banks are
subject to competition from other financial institutions and to the
regulations of certain agencies and undergo periodic examinations by
those regulatory authorities. During April 1996, the Company merged one
of its subsidiary banks, Napa Valley Bank with and into Westamerica
Bank, its largest subsidiary.
Summary of Significant Accounting Policies
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles and general practices within
the banking industry. The following is a summary of significant policies
used in the preparation of the accompanying financial statements. In
preparing the financial statements, Management of the Company has made a
number of estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and liabilities
and the disclosure of income and expenses for the periods presented in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
Principles of Consolidation. The financial statements include the
accounts of the Company, and all the Company's subsidiaries which
include the Banks, Community Banker Services Corporation and Subsidiary,
Westcore and Westamerica Commercial Credit Inc., a newly formed company
which is engaged in financing accounts receivable and inventory lines of
credit and term business loans. Significant intercompany transactions
have been eliminated in consolidation. The statements of income, changes
in shareholders' equity and cash flows and the related footnotes
herein for the year ended December 31, 1994, have been restated to
reflect the mergers with PV Financial on January 31, 1995, CapitolBank
Sacramento on June 6, 1995 and North Bay Bancorp on July 17, 1995, all
on a pooling-of-interests basis.
Cash Equivalents. Cash equivalents include Due From Banks balances and
Federal Funds Sold which are both readily convertible to known amounts
of cash and are so near their maturity that they present insignificant
risk of changes in value because of interest rate volatility.
Securities. Investment securities consist of securities of the U.S.
Treasury, federal agencies, states, counties and municipalities, and
mortgage-backed, corporate debt and equity securities. Under the
provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company classifies its debt and marketable equity securities in one of
three categories: trading, available for sale or held to maturity.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Held-to-maturity securities are those
securities which the Company has the ability and intent to hold until
maturity. Securities not included in trading or held to maturity are
classified as available for sale. Trading and available-for-sale
securities are recorded at fair value. Held-to-maturity securities
are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized gains and losses on
trading securities are included in earnings. Unrealized gains and
losses, net of the related tax effect, on available-for-sale securities
are reported as a separate component of shareholders' equity until
realized. Unrealized gains and losses associated with transfers of
securities from held to maturity to available for sale are recorded as a
separate component of shareholders' equity. The unrealized gains and
losses included in the separate component of shareholders' equity for
securities transferred from available for sale to held to maturity are
maintained and amortized into earnings over the remaining life of the
security as an adjustment to yield in a manner consistent with the
amortization or accretion of premiums or discounts on the associated
security.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary, results in a charge to earnings and the establishment
of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related investment security as an adjustment to yield using the
effective interest method. Dividend and interest income are recognized
when earned. Realized gains and losses for securities classified as
available for sale or held to maturity are included in earnings and are
derived using the specific identification method for determining the
cost of securities sold.
Loans and Reserve for Loan Losses. The reserve for loan losses
is a combination of specific and general reserves available to
absorb estimated future losses throughout the loan portfolio and
is maintained at a level considered adequate to provide for such
losses. Credit reviews of the loan portfolio, designed to
identify problem loans and to monitor these estimates, are
conducted continually, taking into consideration market
conditions, current and anticipated developments applicable to
the borrowers and the economy, and the results of recent
examinations by regulatory agencies. Management approves the
conclusions resulting from credit reviews. Ultimate losses may
vary from current estimates. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Company's reserve for possible loan
losses. Such agencies may require the Company to recognize
additions to the reserve based on their judgment of
information available to them at the time of their examination.
Loans are stated at the principal amount outstanding, net of
unearned discount and deferred fees. Unearned interest on
discounted loans is amortized over the life of these loans,
using the sum-of-the-months digits formula for which the results
are not materially different from those obtained by using the
interest method. For all other loans, interest is accrued daily
on the outstanding balances. Loans which are more than 90 days
delinquent with respect to interest or principal, unless they
are well secured and in the process of collection, and other
loans on which full recovery of principal or interest is in
doubt, are placed on non-accrual status. Non-refundable fees and
certain costs associated with originating or acquiring loans are
deferred and amortized as an adjustment to interest income over
the estimated respective loan lives. Loans held for sale are
identified upon origination and are reported at the lower of
cost or market value on an individual loan basis.
Other Real Estate Owned. Other real estate owned is comprised
of property acquired through foreclosure proceedings or
acceptances of deeds-in-lieu of foreclosure. Losses
recognized at the time of acquiring property in full or partial
satisfaction of debt are charged against the reserve for loan
losses. Other real estate owned is recorded at the lower of the
related loan balance or fair value of the collateral, generally
based upon an independent property appraisal, less estimated
disposition costs. Subsequently, other real estate owned is
valued at the lower of the amount recorded at the date acquired
or the then current fair value less estimated disposition costs.
Subsequent losses incurred due to the declines in annual independent
property appraisals are recognized as non-interest expense. Routine
holding costs, such as property taxes, insurance, maintenance and losses
from sales and dispositions are recognized as non-interest expense.
Premises and Equipment. Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed
substantially on the straight-line method over the estimated useful life
of each type of asset. Estimated useful lives of premises and equipment
range from 20 to 50 years and from 3 to 20 years, respectively.
Leasehold improvements are amortized over the terms of the lease or
their estimated useful life, whichever is shorter. Fully depreciated
and/or amortized assets are removed from the Company's balance
sheet.
Impairment of Long-Lived Assets. In 1995, the Financial
Accounting Standard Board ("FASB") issued the Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). Under the provisions of SFAS
121, long-lived assets and certain identifiable intangibles to be
held and used are reviewed for impairment whenever events or
changes indicate that the carrying amount of an asset may not
be recoverable. The Company adopted the provisions of SFAS
121 on January 1, 1996. The adoption of SFAS 121 did not have
any effect on the Company's financial statements as currently
presented.
Interest Rate Swap Agreements. The Company uses interest rate
swap agreements as an asset/liability management strategy to
reduce interest rate risk. These agreements are exchanges of
fixed and variable interest payments based on a notional
principal amount. The primary risk associated with swaps is the
exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contracts. The Company
controls the credit risk of these agreements through dealing with
reputable parties, credit approvals, limits and monitoring
procedures. The Company is not a dealer but an end user of
these instruments and does not use them for trading purposes.
As a hedging mechanism, the differential to be paid or received
on such agreements is recognized over the life of the
agreements. Payments made and/or received in connection with
early termination of interest rate swap agreements are
recognized over the remaining term of the swap agreement.
Earnings Per Share. Earnings per share amounts are computed on
the basis of the weighted average of common and common
equivalent shares outstanding during each of the years. Fully diluted
earnings per share approximated primary earnings per share in
each of the years in the three-year period ended December 31,
1996.
Accounting for Stock-Based Compensation. Prior to January 1,
1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation
expense would be recorded on the date of grant generally if the
current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"), which
permits the Company to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 also allows the Company to
continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS
123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure of SFAS 123.
Income Taxes. The Company and its subsidiaries file consolidated
tax returns. For financial reporting purposes, the income tax
effects of transactions are recognized in the year in which they
enter into the determination of recorded income, regardless of
when they are recognized for income tax purposes. Accordingly,
the provisions for income taxes in the consolidated statements
of income include charges or credits for deferred income taxes
relating to temporary differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements.
Other. Securities and other property held by the Banks in a
fiduciary or agency capacity are not included in the financial
statements since such items are not assets of the Company or its
subsidiaries.
Certain amounts in prior years' financial statements have been
reclassified to conform with the current presentation. These
reclassifications have no effect on previously reported income.
Note 2: Investment Securities
An analysis of the available-for-sale investment securities
portfolio as of December 31, 1996, follows:
- ---------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------
U.S. Treasury securities $272,896 $982 ($404) $273,474
Securities of U.S. Government
agencies and corporations 130,311 170 (454) 130,027
Obligations of States and
political subdivisions 107,489 2,197 (463) 109,223
Asset-backed securities 94,145 189 (52) 94,282
Other securities 78,210 11,420 (26) 89,604
- ------------------------------------------------------------------------------------
Total $683,051 $14,958 ($1,399) $696,610
====================================================================================
An analysis of the held-to-maturity investment securities portfolio
as of December 31, 1996, follows:
- ------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
U.S. Treasury securities $-- $-- $-- $--
Securities of U.S. Government
agencies and corporations 71,345 371 (544) 71,172
Obligations of States and
political subdivisions 122,735 3,081 (464) 125,352
Asset-backed securities 191 -- -- 191
Other securities 3,157 -- -- 3,157
- ------------------------------------------------------------------------------------
Total $197,428 $3,452 ($1,008) $199,872
====================================================================================
An analysis of the available-for-sale investment securities
portfolio as of December 31, 1995, follows:
- ------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
U.S. Treasury securities $240,832 $992 ($595) $241,229
Securities of U.S. Government
agencies and corporations 123,902 177 (762) 123,317
Obligations of States and
political subdivisions 118,314 2,636 (580) 120,370
Asset-backed securities 80,372 624 (73) 80,923
Other securities 53,984 549 (35) 54,498
- ------------------------------------------------------------------------------------
Total $617,404 $4,978 ($2,045) $620,337
====================================================================================
An analysis of the held-to-maturity investment securities portfolio
as of December 31, 1995, follows:
- ------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
U.S. Treasury securities $-- $-- $-- $--
Securities of U.S. Government
agencies and corporations 125,062 508 (1,102) 124,468
Obligations of States and
political subdivisions 109,754 3,330 (605) 112,479
Asset-backed securities 3,264 3 (6) 3,261
Other securities 4,095 2 (2) 4,095
- ------------------------------------------------------------------------------------
Total $242,175 $3,843 ($1,715) $244,303
====================================================================================
The amortized cost and estimated market value of securities at
December 31, 1996, by contractual maturity, are shown in the
following table:
- -----------------------------------------------------------------------
Securities Available Securities Held
for Sale to Maturity
------------------------ -------------------------
Estimated Estimated
Maturity in years Amortized Market Amortized Market
(In thousands) Cost Value Cost Value
- -----------------------------------------------------------------------
1 year or less $159,228 $159,284 $693 $701
1 to 5 years 305,489 306,321 7,031 7,280
5 to 10 years 60,886 61,019 65,117 66,146
Over 10 years 59,906 61,232 53,242 54,573
- -----------------------------------------------------------------------
Sub-total 585,509 587,856 126,083 128,700
Mortgage-backed 78,438 78,302 71,345 71,172
Other securities 19,104 30,452 -- --
- -----------------------------------------------------------------------
Total $683,051 $696,610 $197,428 $199,872
=======================================================================
Expected maturities of mortgage-backed securities can differ from
contractual maturities because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. In
addition, such factors as prepayments and interest rates may affect the
yield on the carrying value of mortgage-backed securities. At December
31, 1996 and 1995, the Company had no high-risk collateralized mortgage
obligations.
Proceeds from sales of securities during 1996, 1995 and 1994 were $42.5
million, $5.6 million and $104.3 million, respectively. In 1996, the
Company realized gains from the sale of these securities in the amount
of $29,000, compared to gains of $19,000 in 1995 and losses of $60,000
in 1994.
In November 1995, the FASB issued a special report, "A Guide to
Implementation of Statement No. 115, on Accounting for Certain
Investments in Debt and Equity Securities - Questions and Answers" (the
"Special Report"). The Special Report allowed companies to reassess the
appropriateness of the classifications of all securities held and
account for any resulting reclassification at fair value.
Reclassifications from this one-time reassessment will not call into
question the intent of an enterprise to hold other debt securities to
maturity in the future, provided that it was performed by December 31,
1995. The Company adopted the reclassification provisions stated in
the Special Report prior to December 31, 1995 and transferred $329.4
million of held-to-maturity securities into available-for-sale. The
unrealized pretax gain upon transfer was $1.1 million as of December 31,
1995.
As of December 31, 1996, $348.4 million of investment securities held to
maturity were pledged to secure public deposits and short-term funding
needs, compared to $321.0 million in 1995.
Note 3: Loans and Reserve for Loan Losses
Loans at December 31, consisted of the following:
- ----------------------------------------------------------
(In thousands) 1996 1995
- ----------------------------------------------------------
Commercial $375,273 $339,142
Real estate-commercial 482,538 477,280
Real estate-construction 40,090 54,181
Real estate-residential 276,951 237,535
- ----------------------------------------------------------
Total real estate loans 799,579 768,996
Installment and personal 278,950 291,350
Unearned income (9,565) (12,248)
- ----------------------------------------------------------
Gross loans 1,444,237 1,387,240
Reserve for loan losses (34,919) (33,508)
- ----------------------------------------------------------
Net loans $1,409,318 $1,353,732
==========================================================
Included in real estate-residential at December 31, 1996 and 1995 are
loans held for resale of $1.3 million and $2.1 million, respectively,
the cost of which approximates market value.
The following summarizes the reserve for loan losses of the
Company for the periods indicated:
- ----------------------------------------------------------------
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------
Balance at January 1, $33,508 $32,450 $30,045
Provision for loan losses 4,575 5,595 7,420
Loans charged off (5,928) (6,770) (7,417)
Recoveries of loans
previously charged off 2,764 2,233 2,402
- ---------------------------------------------------------------
Balance at December 31, $34,919 $33,508 $32,450
===============================================================
The Company had no troubled debt restructurings at December
31, 1996 and 1995 and $4.4 million at December 31, 1994. The
Company had non-accrual loans of $7.6 million, $9.9 million
and $10.3 million as of December 31, 1996, 1995 and 1994,
respectively.
The following is a summary of interest foregone on non-accrual
and restructured loans for the years ended December 31:
- -----------------------------------------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------
Interest income that would have
recognized had the loans performed
in accordance with their original terms $705 $823 $1,538
Less: Interest income recognized on
non-accrual and restructured loans (270) (242) (677)
- ------------------------------------------------------------------
Interest foregone on non-accrual
and restructured loans $435 $581 $861
==================================================================
There were no commitments to lend additional funds to borrowers
whose loans are included above.
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS
No. 118 (collectively referred to as "SFAS 114") on January 1, 1995.
SFAS 114 requires entities to measure certain impaired loans based on
the present value of future cash flows discounted at the loan's
effective interest rate, or at the loan's market value or the fair value
of collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including scheduled
interest payments. If the measurement of the impaired loans is less than
the recorded investment in the loan, impairment is recognized by
creating or adjusting an existing allocation of the allowance for
loan losses. The adoption of SFAS 114 did not have a material effect on
the Company's financial statements, as the Company's policy of measuring
loan impairment was consistent with methods prescribed in these
standards. At December 31, 1996, the recorded investment in loans for
which impairment was recognized totaled $11.4 million compared to $10.2
million at December 31, 1995. The specific reserves at December
31, 1996 and 1995 were $1.2 million and $850,000, respectively. The
amount of that recorded investment for which there is no related
allowance for credit losses was $0. For the year ended December 31,
1996, the average recorded net investment in impaired loans
was approximately $11.0 million compared to $10.3 million at December
31, 1995. In general, the Company does not recognize any interest income
on troubled debt restructurings or loans that are classified as
non-accrual. For other impaired loans, interest income may be recorded
as cash is received, provided that the Company's recorded investment in
such loans is deemed collectible.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), which
amends Statement of Financial Accounting Standards No. 65. SFAS 122
eliminates the accounting distinction to recognize as separate assets
the rights to service mortgage loans for others depending on how the
servicing rights were acquired, whether by purchase of loans or by
origination of loans. SFAS 122 also requires the assessment of
capitalized mortgage servicing rights for impairment to be based on the
current value of those rights. The Company adopted SFAS 122 on January
1, 1996 and, based on the low volume of conventional loan funding during
1996, the adoption did not have a material impact on the Company's
financial condition.
In June, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishing of Liabilities" ("SFAS 125"). SFAS 125 provides
guidance for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS 125, is effective
January 1997, and is to be applied prospectively. In December 1996, the
FASB issued the Financial Accounting Standard No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125", which
defers certain provisions of SFAS 125 for one year. Management does
not expect that the adoption of these Statements will have a material
impact on the Company's financial condition.
Note 4: Concentration of Credit Risk
The Company's business activity is with customers in Northern
California. The loan portfolio is well diversified with no industry
comprising greater than ten percent of total loans outstanding as of
December 31, 1996 and 1995.
The Company has a significant amount of credit arrangements that are
secured by real estate collateral. In addition to real estate loans
outstanding as disclosed in Note 3, the Company had loan commitments and
stand-by letters of credit related to real estate loans of $25.3 million
at December 31, 1996. The Company requires collateral on all real
estate loans and generally attempts to maintain loan-to-value ratios no
greater than 75 percent on commercial real estate loans and no greater
than 80 percent on residential real estate loans.
Note 5: Premises and Equipment
Premises and equipment as of December 31 consisted of
the following:
- ------------------------------------------------------------------
Accumulated
Depreciation
and Net Book
(In thousands) Cost Amortization Value
- ------------------------------------------------------------------
1996
Land $8,112 $- $8,112
Buildings and improvements 26,445 (7,318) 19,127
Leasehold improvements 3,854 (2,460) 1,394
Furniture and equipment 12,067 (5,805) 6,262
- ------------------------------------------------------------------
Total $50,478 ($15,583) $34,895
==================================================================
1995
Land $4,212 $- $4,212
Buildings and improvements 18,634 (7,061) 11,573
Leasehold improvements 4,499 (2,848) 1,651
Furniture and equipment 18,130 (8,941) 9,189
- ------------------------------------------------------------------
Total $45,475 ($18,850) $26,625
==================================================================
Depreciation and amortization included in operating expenses amount to
$4.1 million in 1996, $4.7 million in 1995 and $5.2 million in 1994 .
Note 6: Borrowed Funds
Notes payable, including the unsecured obligations of the Company, as of
December 31, 1996 and 1995, were as follows:
- -----------------------------------------------------------------
(In thousands) 1996 1995
- -----------------------------------------------------------------
Subordinated note, issued by Westamerica
Bank, originated in December 1993 and
maturing September 30, 2003. Interest of
6.99% per annum is payable semiannually on
March 31 and September 30, with principal
payment due at maturity. $20,000 $20,000
Senior notes, originated in February 1996
and maturing February 1, 2006. Interest of
7.11% per annum is payable semiannually on
February 1 and August 1, with certain
required payments commencing February 1,
2000 and the remaining principal amount
due at maturity. 22,500 --
--
- -----------------------------------------------------------------
Total notes payable $42,500 $20,000
=================================================================
The senior notes are subject to financial covenants requiring the
Company to maintain, at all times, certain minimum levels of
consolidated tangible net worth and maximum levels of capital debt. The
Company is currently in compliance with all of the covenants in the
senior notes indenture.
At December 31, 1996 and 1995, the Company had unused lines of credit
amounting to $2.5 million. Compensating balance arrangements are not
significant to the operations of the Company. At December 31, 1996 and
1995, the Banks had $207.3 million and $169.8, respectively, in time
deposit accounts in excess of $100,000; interest on these accounts in
1996, 1995 and 1994 was $10.1 million, $8.9 million and $5.8 million,
respectively.
Funds purchased include federal funds purchased and securities sold with
repurchase agreements. Securities sold with repurchase agreements were
$112.6 million at December 31, 1996 and $91.6 million at December 31,
1995. Securities under these repurchase agreements are held in the
custody of independent securities brokers.
Note 7: Shareholders' Equity
In 1995, the Company adopted the 1995 Stock Option Plan. Stock
appreciation rights, restricted performance shares, incentive stock
options and non-qualified stock options are available under this plan.
Under the terms of this plan, on January 1 of each year beginning in
1995, 2 percent of the Company's issued and outstanding shares of common
stock will be reserved for granting.
At December 31, 1996 and 1995, 195,867 and 160,951 shares,
respectively, were reserved for issuance. Options are granted at fair
market value and are generally exercisable in equal installments over a
three-year period with the first installment exercisable one year after
the date of the grant. Each incentive stock option has a maximum
ten-year term while non-qualified stock options may have a longer
term. A Restricted Performance Share ("RPS") grant becomes fully vested
after three years of being awarded, provided that the Company has
attained its performance goals for such three-year period.
Under the Stock Option Plan adopted by the Company in 1985, 750,000
shares were reserved for issuance. Stock appreciation rights, incentive
stock options and non-qualified stock options are available under this
plan. Options are granted at fair market value and are generally
exercisable in equal installments over a three-year period with the
first installment exercisable one year after the date of the grant. Each
incentive stock option has a maximum ten-year term while non-qualified
stock options may have a longer term. The 1985 plan was amended in 1990
to provide for RPS grants. An RPS grant becomes fully vested after
three years of being awarded, provided that the Company has attained its
performance goals for such three-year period.
PV Financial, CapitolBank Sacramento, and North Bay Bancorp had separate
stock option plans (the "Option Plans") whereby options were granted to
certain officers, directors, and employees. Following the effective
dates of the mergers, the Option Plans were terminated. All outstanding
options were substituted for the Company's options, adjusted for the
exchange ratios as defined in the merger agreements. There were no
options granted during 1995 or 1996.
Stock Options. A summary of the status of the Company's stock options as
of December 31, 1996 and 1995 and changes during the years ended on
those dates, follows:
- ------------------------------------------------------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
- ------------------------------------------------------------------------
Outstanding at beginning of year 562,764 $22 665,386 $17
Granted 165,700 46 117,050 31
Exercised (81,477) 17 (202,940) 14
Forfeited (12,029) 31 (16,732) 19
- ------------------------------------------------------------------------
Outstanding at end of year 634,958 $29 562,764 $21
Options exercisable at end of year 328,260 286,818
========================================================================
The following table summarizes information about options
outstanding at December 31, 1996 and 1995:
1996 Options outstanding Options exercisable
- ---------------------------------------------------------------------------
Weighted
average Weighted Weighted
Range of Number remaining average Number average
exercise outstanding contractual exercise exercisable exercise
prices at 12/31/96 life in years price at 12/31/96 price
- ---------------------------------------------------------------------------
$8 - 9 1,296 3.1 $9 1,296 $9
10 -14 74,443 4.4 11 44,907 11
16 -19 95,472 4.5 18 93,760 18
22 -25 82,878 5.6 24 82,878 24
28 -31 218,219 7.6 29 105,419 29
46 162,650 9.1 46 -- --
- ---------------------------------------------------------------------------
$8 - 46 634,958 6.9 $29 328,260 $22
===========================================================================
1995 Options outstanding Options exercisable
- ---------------------------------------------------------------------------
Weighted
average Weighted Weighted
Range of Number remaining average Number average
exercise outstanding contractual exercise exercisable exercise
prices at 12/31/95 life in years price at 12/31/95 price
- ---------------------------------------------------------------------------
$7 - 9 6,102 1.5 $8 5,865 $7
9 -14 115,873 4.6 11 69,091 12
16 -19 109,938 5.1 18 106,301 18
22 -25 98,234 6.7 24 67,827 24
28 -31 232,617 8.6 29 37,734 28
- ---------------------------------------------------------------------------
$7 - 31 562,764 6.7 $22 286,818 $19
===========================================================================
Restricted Performance Shares. A summary of the status
of the Company's RPSs as of December 31, 1996 and 1995,
and changes during the years ended on those dates,
follows:
1996 1995
- ------------------------------------------------------------
Number of Number of
shares shares
- ------------------------------------------------------------
Outstanding at beginning of year 90,300 85,400
Granted 25,600 32,350
Exercised (24,700) (27,450)
Forfeited (1,850) --
- ------------------------------------------------------------
Outstanding at end of year 89,350 90,300
============================================================
As of December 31, 1996 and 1995, the RPSs had a weighted-average
contractual life of 1.2 and 1.3 years, respectively. The Company expects
that substantially all of the RPSs outstanding at December 31, 1996
will eventually vest based on projected performance.
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock options. The
compensation cost that has been charged against income for the Company's
RPSs granted was $1.6 million and $1.2 million for 1996 and 1995,
respectively. There were no stock appreciation rights or incentive stock
options granted in 1996 and 1995.
The fair value of each non-qualified stock option grant is estimated on
the date of the grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1996
and 1995, respectively: dividend yield of 1.8 percent for both years;
expected volatility of 17 percent and 19 percent; risk-free interest
rates of 5.40 percent and 5.75 percent; and expected lives of six years.
The weighted-average fair value of non-qualified stock options granted
during 1996 and 1995 was $10.28 and $7.41, respectively.
The fair value of each RPS grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions used for RPS grants in 1996 and 1995,
respectively: dividend yield of 1.8 percent for both years; expected
volatility of 17 percent and 19 percent; risk-free interest rates of
5.15 percent and 7.60 percent; and expected lives of 3 years. The
weighted-average fair value of RPSs granted during 1996 and 1995 was
$44.49 and $30.14, respectively.
Had compensation cost for the Company's 1995 and 1985 Stock Option Plans
been determined consistent with SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
- ---------------------------------------------------------------
(In thousands, except per share data) 1996 1995
- ---------------------------------------------------------------
Net income As Reported $37,740 $31,384
Pro forma 37,501 31,293
Earnings per share As Reported $3.93 $3.18
Pro forma 3.90 3.17
===============================================================
Shareholders have authorized issuance of two new classes of 1,000,000
shares each, to be denominated "Class B Common Stock" and "Preferred
Stock", respectively, in addition to the 50,000,000 shares of
Common Stock presently authorized. At December 31, 1996, no shares of
Class B or Preferred Stock had been issued.
In December 1986, the Company declared a dividend distribution of one
common share purchase right (the "Right") for each outstanding share of
common stock. The Rights are exercisable only in the event of an
acquisition of, or announcement of a tender offer to acquire, 15 percent
or more of the Company's stock without the prior consent of the Board of
Directors. If the Rights become exercisable, the holder may purchase
one share of the Company's common stock for $65. Following an
acquisition of 15 percent of the Company's common stock or 50 percent or
more of its assets without prior consent of the Company, each Right will
also entitle the holder to purchase $130 worth of common stock of the
Company for $65. Under certain circumstances, the Rights may be redeemed
by the Company at a price of $.05 per Right prior to becoming
exercisable and in certain circumstances thereafter. The Rights expire
on December 31, 1999, or earlier, in connection with certain
Board-approved transactions.
Note 8: Risk-Based Capital
The Company and the Banks are subject to various regulatory capital
adequacy requirements administered by federal and state agencies. The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required that regulatory agencies adopt regulations defining five
capital tiers for banks: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Failure to meet minimum capital requirements can
initiate discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements.
Quantitative measures, established by the regulators to ensure capital
adequacy, require that the Company and the Banks maintain minimum ratios
of capital to risk-weighted assets. There are two categories of
capital under the guidelines. Tier 1 capital includes common
shareholders' equity and qualifying preferred stock less goodwill and
other deductions including the unrealized net gains and losses, after
taxes, of available-for-sale securities. Tier 2 capital includes
preferred stock not qualifying for Tier 1 capital, mandatory convertible
debt, subordinated debt, certain unsecured senior debt, certain
unsecured senior debt issued by the Company and the allowance for loan
losses, subject to limitations by the guidelines. Under the guidelines,
capital is compared to the relative risk of the balance sheet, derived
from applying one of four risk weights (0%, 20%, 50% and 100%) to the
different balance sheet and off-balance sheet assets, primarily based on
the credit risk of the counterparty. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weighting and other factors.
As of December 31, 1996, Management believes that the Company and the
Banks met all capital adequacy requirements to which they are subject.
The most recent notification from the Federal Reserve Board categorized
the Company and the Banks as well capitalized under the FDICIA
regulatory framework for prompt corrective action. To be well
capitalized, the institution must maintain a total risk-based capital
ratio as set forth in the following table and not be subject to a
capital directive order. Since that notification, there are no
conditions or events that Management believes have changed the
risk-based capital category of the Company or the Banks.
The following table shows capital ratios for the Company and the Banks
as of December 31, 1996:
- -------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
(In thousands) the FDICIA
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
- -------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------
Total Capital (to risk-weighted assets)
Consolidated Company $274,026 14.96% $146,538 8.00% $183,172 10.00%
Westamerica Bank 241,981 13.98% 138,515 8.00% 173,143 10.00%
Bank of Lake County 10,474 17.63% 4,752 8.00% 5,940 10.00%
Tier 1 Capital (to risk weighted assets)
Consolidated Company 230,981 12.61% 73,269 4.00% 109,903 6.00%
Westamerica Bank 194,194 11.22% 69,257 4.00% 103,886 6.00%
Bank of Lake County 9,721 16.36% 2,376 4.00% 3,564 6.00%
Leverage Ratio *
Consolidated Company 230,981 9.20% 100,394 4.00% 125,493 5.00%
Westamerica Bank 194,194 8.11% 95,757 4.00% 119,696 5.00%
Bank of Lake County 9,721 10.79% 3,605 4.00% 4,507 5.00%
===========================================================================================
[FN]
* The leverage ratio consists of Tier 1 capital divided by quarterly
average assets. The minimum leverage ratio guideline is 3 percent for
banking organizations that do not anticipate significant growth and that
have well-diversified risk, excellent asset quality, high liquidity,
good earnings and, in general, are considered top-rated, strong banking
organizations.
Note 9: Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the amounts reported in
the financial statements of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Amounts
for the current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts shown on
the tax returns as filed. Accordingly, the variances from the amounts
previously reported for 1995 are primarily as a result of adjustments to
conform to tax returns as filed.
The components of the net deferred tax asset as of December 31, are as
follows:
- --------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------
Deferred tax asset
Reserve for loan losses $14,196 $13,706
State franchise taxes 2,220 1,694
Deferred compensation 1,908 1,533
Real estate owned 1,648 1,800
Other 1,012 1,115
Net operating loss carryfowards 842 1,100
General tax credit carryforwards 215 215
- --------------------------------------------------------------
Subtotal deferred tax asset 22,041 21,163
Valuation allowance (486) (486)
- --------------------------------------------------------------
Total deferred tax asset 21,555 20,677
Deferred tax liability
Net deferred loan costs 545 662
Fixed assets 639 951
Securities available for sale 5,741 1,242
Other 164 211
- --------------------------------------------------------------
Total deferred tax liability 7,089 3,066
- --------------------------------------------------------------
Net deferred tax asset $14,466 $17,611
==============================================================
A valuation allowance has been provided to reduce the deferred tax asset
to an amount which is more likely than not to be realized. The valuation
allowance, which relates to the deferred tax asset acquired through the
merger with CapitolBank Sacramento in June 1995, remained unchanged for
the year ended December 31, 1996.
The provision for federal and state income taxes consists of amounts
currently payable and amounts deferred which, for the years ended
December 31, are as follows:
- --------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------
Current income tax expense:
Federal $12,461 $10,580 $10,087
State 6,342 5,009 4,642
- --------------------------------------------------------------------
Total current 18,803 15,589 14,729
- --------------------------------------------------------------------
Deferred income tax (benefit) expense:
Federal (1,292) (1,759) (1,605)
State (220) 149 (314)
- --------------------------------------------------------------------
Total deferred (1,512) (1,610) (1,919)
Adjustment of net deferred tax asset for
enacted changes in tax rates:
Federal -- -- --
State 158 -- --
- --------------------------------------------------------------------
Provision for income taxes $17,449 $13,979 $12,810
====================================================================
The provision for income taxes differs from the provision computed by
applying the statutory federal income tax rate to income before taxes,
as follows:
- --------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------
Federal income taxes due at
statutory rate $19,316 $15,877 $14,110
(Reductions) increases in income
taxes resulting from:
Interest on state and municipal
securities not taxable for federal
income tax purposes (5,371) (4,435) (3,392)
Reduction in the valuation
allowance -- (906) --
State franchise taxes, net of
federal income tax benefit 4,082 3,353 2,791
Deferred benefit and other (578) 90 (699)
- --------------------------------------------------------------------
Provision for income taxes $17,449 $13,979 $12,810
====================================================================
At December 31, 1996, the Company had the following net operating loss
and the general tax credit carryforwards for tax return purposes:
- ------------------------------------------------------------
Net
Expires December 31, Operating Loss Tax Credit
(In thousands) Carryforwards Carryforwards
- ------------------------------------------------------------
2003 $-- $160
2007 2,345 --
2008 14 --
- -------------------------------------------------------------
Total $2,359 $160
=============================================================
Note 10: Fair Value of Financial Instruments
The fair value of financial instruments do not represent actual amounts
that may be realized upon the sale or liquidation of the related assets
or liabilities. In addition, these values do not give effect to
discounts to fair value which may occur when financial instruments are
sold in larger quantities. The fair values presented represent the
Company's best estimate of fair value using the methodologies discussed
below. The fair value of financial instruments which have a relatively
short period of time between their origination and their expected
realization were valued using historical cost. Such financial
instruments and their estimated fair value at December 31, were:
- ------------------------------------------------------------------
(In thousands) 1996 1995
- ------------------------------------------------------------------
Cash and cash equivalents $149,429 $182,133
Money market assets 250 250
Interest and taxes receivable 41,277 39,060
Non-interest bearing and interest-bearing
transaction and savings deposits 1,573,698 1,570,459
Funds purchased 161,147 175,622
Interest payable 5,677 5,118
==================================================================
The fair value at December 31, of the following financial instruments
was estimated using quoted market prices:
- ------------------------------------------------------------------
(In thousands) 1996 1995
- ------------------------------------------------------------------
Investment securities available for sale $696,610 $620,337
Investment securities held to maturity 199,872 244,303
==================================================================
Loans were separated into two groups for valuation.
Variable rate loans, except for those described below, which reprice
frequently with changes in market rates, were valued using historical
data. Fixed rate loans and variable rate loans that have reached their
maximum rates were valued by discounting the future cash flows expected
to be received from the loans using current interest rates charged on
loans with similar characteristics. Additionally, the $34.9 million
reserve for loan losses was applied against the estimated fair value to
recognize future defaults of contractual cash flows. The estimated fair
values of loans at December 31, were:
- ------------------------------------------------------------------
(In thousands) 1996 1995
- ------------------------------------------------------------------
Loans $1,402,974 $1,351,732
- ------------------------------------------------------------------
The fair value of time deposits and notes and mortgages payable was
estimated by discounting future cash flows related to these financial
instruments using current market rates for financial instruments with
similar characteristics. The estimated fair values at December 31, were:
- ------------------------------------------------------------------
(In thousands) 1996 1995
- ------------------------------------------------------------------
Time deposits $507,942 $480,401
Notes and mortgages payable 42,500 20,000
- ------------------------------------------------------------------
The majority of the Company's commitments to extend credit carry current
market interest rates if converted to loans. Because these commitments
are generally unassignable by either the Company or the borrower, they
only have value to the Company and the borrower.
Note 11: Interest Rate Risk Management
Interest rate risk is influenced by market forces. However, that risk
may be controlled by monitoring and managing the repricing
characteristics of interest-bearing assets and liabilities. The primary
analytical tool used by Management to gauge interest rate sensitivity is
a simulation model used by many major banks and bank regulators. This
industry standard model is used to simulate the effects on net interest
income of changes in market interest rates that are up to 2 percent
higher or 2 percent lower than current levels. The results of the model
indicated that the mix of interest-rate sensitive assets and liabilities
at December 31, 1996 would not result in a fluctuation of net interest
income exceeding 10 percent, even under alternate assumed interest rate
changes of plus or minus 200 basis points. In evaluating exposure to
interest rate risk, the Company considers the effects of various factors
in implementing interest rate risk management activities, including the
utilization of interest rate swaps to hedge interest rates paid on
deposit accounts.
Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to the notional
amounts.
There were no interest rate swaps outstanding at December 31, 1996 and
1995. In 1995, interest rate swap contracts with notional amounts
totaling $60.0 million matured. For these contracts, the Company paid a
floating rate, based on the three-month London Interbank Offering Rate
(LIBOR), and received a weighted average fixed rate of 4.11 percent.
Using interest rate swaps, the Company is exposed to credit-related
losses in the event of nonperformance by the counterparty; however,
according to the Company's policy, the Company deals only with highly
rated counterparties.
Note 12: Lease Commitments
Fifteen banking offices and a centralized administrative service center
are owned and forty-two banking offices are leased. Substantially all
the leases contain multiple renewal options and provisions for rental
increases, principally for cost of living index, property taxes and
maintenance. The Company also leases certain pieces of equipment.
Minimum future rental payments, net of sublease income, at December 31,
1996, are as follows:
- ---------------------------------------
(In thousands)
- ---------------------------------------
1997 $4,137
1998 3,605
1999 3,368
2000 1,606
2001 831
Thereafter 1,676
- ---------------------------------------
Total minimum lease payments $15,223
=======================================
During 1996, all administrative offices moved from six different
locations, two of which were leased, to one central facility located in
Fairfield, California. Total rentals for premises and equipment net of
sublease income included in non-interest expense were $5.3 million in
1996, $5.6 million in 1995 and $5.5 million in 1994.
Note 13: Commitments and Contingent Liabilities
Loan commitments are agreements to lend to a customer provided there is
no violation of any condition established in the agreement. Commitments
generally have fixed expirations dates or other termination clauses.
Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
funding requirements. Loan commitments are subject to the Company's
normal credit policies and collateral requirements. Unfunded loan
commitments were $241.7 million and $221.2 million at December 31, 1996
and 1995, respectively. Standby letters of credit commit the Company to
make payments on behalf of customers when certain specified future
events occur. Standby letters of credit are primarily issued to support
customers' short-term financing requirements and must meet the Company's
normal credit policies and collateral requirements. Standby letters of
credit outstanding totaled $11.8 million and $7.7 million at
December 31, 1996 and 1995, respectively.
The Company, because of the nature of its business, is subject to
various threatened or filed legal cases. The Company, based on the
advice of legal counsel, does not expect such cases will have a
material, adverse effect on its financial position or results of
operations.
Note 14: Retirement Benefit Plans
The Company sponsors a defined benefit Retirement Plan covering
substantially all of its salaried employees with one or more years of
service. The Company's policy is to expense costs as they accrue as
determined by the Projected Unit Cost method. The Company's funding
policy is to contribute annually the maximum amount that can be deducted
for federal income tax purposes.
The following table sets forth the Retirement Plan's funded status as of
December 31 and the pension cost for the years ended December 31:
- -----------------------------------------------------------
(In thousands) 1996 1995
- -----------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation ($11,040) ($10,657)
Non-vested benefit obligation (68) (63)
- -----------------------------------------------------------
Accumulated benefit obligation (11,108) (10,720)
Additional benefits related to
projected salary increases (1,609) (1,231)
- -----------------------------------------------------------
Projected benefit obligation (12,717) (11,951)
Plan assets at fair market value 12,591 12,369
- -----------------------------------------------------------
Funded status - projected benefit
obligation (in excess of) or
less than plan assets ($126) $418
===========================================================
Comprised of:
Prepaid pension cost $143 $--
Accrued pension liability -- 117
Unrecognized net gain 192 338
Unrecognized prior service (benefit) cost (204) 271
Unrecognized net obligation,
net of amortization (257) (308)
- -----------------------------------------------------------
Total ($126) $418
===========================================================
Net pension cost included in the following
components:
Service cost during the period $205 $117
Interest cost on projected
benefit obligation 745 697
Actual return on plan assets (1,304) (2,864)
Net amortization and deferral 394 2,125
- -----------------------------------------------------------
Net periodic pension cost $40 $75
===========================================================
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 6.00 percent and 5.50 percent, respectively, at
December 31, 1996 and 5.50 percent and 4.50 percent, respectively, at
December 31, 1995. The expected long-term rate of return on plan assets
in 1996 was 7.50 percent compared to 7.00 percent in 1995.
The Company sponsors a defined contribution Deferred Profit-Sharing Plan
covering substantially all of its salaried employees with one or more
years of service. Participant deferred profit-sharing account balances
offset benefits accrued under the Retirement Plan. The coordination of
benefits of the two plans results in the Retirement Plan benefit formula
establishing the minimum value of participant retirement benefits which,
if not provided by the Deferred Profit-Sharing Plan, are guaranteed by
the Retirement Plan.
The costs charged to non-interest expense related to benefits provided
by the Retirement Plan and the Deferred Profit-Sharing Plan were $1.3
million in 1996, $1.4 million in 1995 and $1.3 million in 1994. The
Company intends to terminate the Retirement Plan in 1997.
In addition to the Retirement Plan and the Deferred Profit-Sharing Plan,
all salaried employees are eligible to participate in the voluntary Tax
Deferred Savings/Retirement Plan (ESOP) upon completion of a 90-day
introductory period. This Plan allows employees to defer, on a pretax
basis, a portion of their salaries as contributions to the Plan.
Participants may invest in ten funds, including one fund that invests
exclusively in Westamerica Bancorporation common stock. The matching
contributions charged to compensation expense were $1.1 million in 1996,
$1.2 million in 1995 and $710,000 in 1994.
Effective December 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). Adoption of SFAS 106
required a change from the cash method to an actuarial based accrual
method of accounting for postretirement benefits other than pensions.
The Company offers continuation of group insurance coverage to employees
electing early retirement, as defined by the Retirement Plan, for the
period from the date of early retirement until age sixty-five. The
Company contributes an amount toward early retirees' insurance premiums
which is fixed at the time of early retirement. The Company reimburses
Medicare Part B premiums for all retirees over age sixty-five, as
defined by the Retirement Plan.
The following table sets forth the net periodic postretirement benefit
cost for the years ended December 31, and the funded status of the Plan
at December 31:
- --------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------
Service cost $245 $155
Interest cost 102 86
Actual return on plan assets -- --
Amortization of unrecognized
transition obligation 61 61
Other, net -- --
- --------------------------------------------------------------
Net periodic cost $408 $302
==============================================================
Accumulated postretirement benefit obligation
attributable to:
Retirees $1,094 $1,240
Fully eligible participants 462 307
Other 396 159
- --------------------------------------------------------------
Total $1,952 $1,706
- --------------------------------------------------------------
Fair value of plan assets -- --
- --------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets $1,952 $1,706
==============================================================
Comprised of:
Unrecognized prior service cost $-- $--
Unrecognized net gain (loss) -- --
Unrecognized transition obligation 1,285 1,346
Recognized postretirement obligation 667 360
- --------------------------------------------------------------
Total $1,952 $1,706
==============================================================
The discount rate used in measuring the accumulated post- retirement
benefit obligation was 6.0 percent and 5.5 percent at December 31, 1996
and 1995, respectively. The assumed health care cost trend rate used to
measure the expected cost of benefits covered by the plan was 2 percent
for 1997 and beyond. The effect of a one percentage point increase on
the assumed health care cost trend for each future year would increase
the aggregate of the service cost components of the 1996 and 1995 net
periodic cost by $183,000 and $82,000, respectively, and increase the
accumulated postretirement benefit obligation at December 31, 1996 and
1995 by $302,000 and $287,000, respectively.
Note 15: Related Party Transactions
Certain directors and executive officers of the Company and/or its
subsidiaries were loan customers of the Banks during 1996 and 1995. All
such loans were made in the ordinary course of business on normal credit
terms, including interest rate and collateral requirements. In the
opinion of Management, these credit transactions did not involve, at the
time they were contracted, more than the normal risk of collectibility
or present other unfavorable features.
The table below reflects information concerning loans to certain
directors and executive officers and/or family members during 1996 and
1995:
- ---------------------------------------------------------------
(In thousands) 1996 1995
- ---------------------------------------------------------------
Beginning balance $4,247 $4,041
Payoffs/principal payments (1,552) (767)
Originations 46 973
- ---------------------------------------------------------------
At December 31, $2,741 $4,247
===============================================================
Percent of total loans outstanding 0.19% 0.31%
Note 16: Regulatory Matters
Payment of dividends to the Company by Westamerica Bank, the largest
subsidiary bank, is limited under regulations for Federal Reserve member
banks. The amount that can be paid in any calendar year, without prior
approval from regulatory agencies, cannot exceed the net profits (as
defined) for that year plus the net profits of the preceding two
calendar years less dividends declared. Under this regulation,
Westamerica Bank was not restricted as to the payment of $26.5
million in dividends to the Company as of December 31, 1996. The Company
consistently has paid quarterly dividends to its shareholders since its
formation in 1972. As of December 31, 1996, $74.5 million was
available for payment of dividends by the Company to its shareholders.
The Banks are required to maintain reserves with the Federal Reserve
Bank equal to a percentage of its reservable deposits. The Banks' daily
average on deposit at the Federal Reserve Bank was $23.9 million in 1996
and $47.3 million in 1995.
Note 17: Westamerica Bancorporation (Parent Company Only)
Statements of Income (In thousands)
- --------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
Dividends from subsidiaries $33,468 $22,262 $19,680
Interest income 1,402 381 200
Other income 4,244 4,224 4,552
- --------------------------------------------------------------------
Total income 39,114 26,867 24,432
- --------------------------------------------------------------------
Interest on borrowings 1,416 324 1,029
Salaries and benefits 5,911 5,768 5,529
Other non-interest expense 3,717 5,552 3,951
- --------------------------------------------------------------------
Total expenses 11,044 11,644 10,509
- --------------------------------------------------------------------
Income before taxes and
equity in undistributed
income of subsidiaries 28,070 15,223 13,923
Income tax benefit 2,382 2,663 2,386
Equity in undistributed
income from subsidiaries 7,288 13,498 11,353
- --------------------------------------------------------------------
Net income $37,740 $31,384 $27,662
====================================================================
Balance Sheets (In thousands)
- --------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------
Assets
Cash and cash equivalents $18,842 $6,077
Money market assets and
Investment securities available for sale 18,477 250
Investment in subsidiaries 215,451 211,605
Premises and equipment 16,322 1,972
Accounts receivable from affiliates 347 251
Other assets 3,715 10,390
- --------------------------------------------------------------------
Total assets $273,154 $230,545
====================================================================
Liabilities
Notes payable $22,500 $--
Notes payable to affiliates -- 506
Other liabilities 11,708 6,102
- --------------------------------------------------------------------
Total liabilities 34,208 6,608
Shareholders' equity 238,946 223,937
- --------------------------------------------------------------------
Total liabilities and shareholders' equity $273,154 $230,545
====================================================================
Statements of Cash Flows (In thousands)
- --------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------
Operating Activities
Net income $37,740 $31,384 $27,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 231 61 83
Undistributed earnings of affiliates (7,288) (13,498) (11,353)
Increase in accounts receivable from affiliates (96) (95) (91)
Increase in other assets (1,014) (3,565) (4,016)
Increase in other liabilities 1,416 1,181 1,607
Net gain on real estate venture -- -- 22
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 30,989 15,468 13,914
Investing Activities
Purchases of premises and equipment (10,826) (1,978) (92)
Net change in land held for sale 721 80 --
Net change in loan balances -- 148 921
Investment in subsidiaries (500) -- (140)
Purchase of investment securities
available for sale (756) -- (4,500)
Proceeds from maturities of
investment securities available -- 6,511 7,000
- --------------------------------------------------------------------------------------
Net cash (used in) provided
by investing activities (11,361) 4,761 3,189
Financing Activities
- --------------------------------------------------------------------------------------
Net additions (reductions) in notes payable 21,994 (4,494) (9,796)
Proceeds from issuance of shares of common stock 2,575 3,797 1,242
Cash in lieu of fractional shares -- (36) --
Retirement of common stock (22,349) (12,341) (2,488)
Dividends (9,083) (7,489) (5,695)
- --------------------------------------------------------------------------------------
Net cash used in financing activities (6,863) (20,563) (16,737)
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 12,765 (334) 366
Cash and cash equivalents at beginning of year 6,077 6,411 6,045
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $18,842 $6,077 $6,411
======================================================================================
Supplemental disclosure:
Non-cash dividend in the form of real property from
Westamerica Bank $3,755 $ -- $ --
Unrealized gain on securities available for sale,
net of taxes 6,126 -- --
Note 18: Quarterly Financial Information (Unaudited)
- ----------------------------------------------------------------------------------
(In thousands except per share data
and price range
of common stock) March 31, June 30, Sept. 30, Dec. 31,
- ----------------------------------------------------------------------------------
1996
Interest income $43,324 $43,146 $43,482 $44,313
Net interest income 28,217 27,928 28,069 29,134
Provision for loan losses 1,275 1,200 1,050 1,050
Non-interest income 5,352 5,287 5,642 5,762
Non-interest expense 18,866 18,442 18,988 19,331
Income before taxes 13,428 13,573 13,673 14,515
Net income 9,148 9,351 9,466 9,775
Earnings per share 0.94 0.96 1.00 1.04
Dividends declared per share 0.23 0.23 0.23 0.26
Price range, common stock 43.25-47.25 $46.00-50.25 $46.50-51.00 $49.50-58.75
- ---------------------------------------------------------------------------------
1995
Interest income $43,659 $43,662 $43,396 $43,660
Net interest income 29,660 28,977 28,363 28,765
Provision for loan losses 1,335 1,835 1,150 1,275
Non-interest income 5,119 5,434 5,537 5,443
Non-interest expense 22,404 23,730 20,386 19,820
Income before taxes 11,040 8,846 12,364 13,113
Net income 7,550 6,538 8,388 8,908
Earnings per share 0.76 0.66 0.85 0.91
Dividends declared per share 0.17 0.20 0.20 0.20
Price range, common stock $29.50-33.25 $33.00-37.50 $36.50-38.50 $38.50-43.25
=================================================================================
Note 19: Acquisition
On November 11, 1996, the Company and ValliCorp Holdings, Inc.
("ValliCorp"), a bank holding company located in Fresno, California,
signed a Definitive Agreement and Plan of Reorganization (the "Merger
Agreement"), under which all of the outstanding shares of ValliCorp
Common Stock will be exchanged for shares of the Company's Common Stock
pursuant to a tax-free exchange. The Merger Agreement provides for
ValliCorp shareholders to receive $21.00 in Westamerica Common Stock for
each outstanding share of ValliCorp Common Stock, subject to adjustments
if certain conditions in connection with the Company's average share
price occur and other conditions as defined in the Merger Agreement.
The following unaudited pro forma combined financial information, based
on the historical financial statements of the parties, summarizes the
combined results of operations of the Company and ValliCorp on a
pooling-of-interests basis, as if the combination had been consummated
on January 1 of each of the periods presented. Earnings per share were
calculated on an assumed exchange ratio of .4098, subject to possible
adjustments as described above.
- ----------------------------------------------------------------
(In thousands, except per share data) (Unaudited)
Years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------
Total assets at year end $3,867,560 $3,880,299 $3,793,196
Net loans at year end 2,227,812 2,204,495 2,220,122
Deposits at year end 3,228,700 3,270,907 3,249,823
Shareholders' equity
at year end 379,279 350,378 321,169
Net interest income 182,479 188,074 183,317
Net income 46,827 43,186 38,113
Earnings per share 3.08 2.80 2.47
================================================================
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders of Westamerica
Bancorporation:
We have audited the accompanying consolidated balance sheets of
Westamerica Bancorporation and subsidiaries (the Company) as of December
31, 1996 and 1995, 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, 1996. 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. As
discussed in Note 1 to the consolidated financial statements, the
statements of income, changes in shareholders' equity, and cash flows
for the year ended December 31, 1994, and the related footnote
disclosures have been restated on a historical basis to reflect the
January 31, 1995 acquisition of PV Financial, the June 6, 1995
acquisition of CapitolBank Sacramento, and the July 17, 1995 acquisition
of North Bay Bancorp, on a pooling-of-interests basis. We did
not audit the financial statements of PV Financial and North Bay Bancorp
as of and for the year ended December 31, 1994, which statements reflect
net income constituting 9 percent in 1994, of the restated consolidated
totals. Those statements included in the 1994 restated consolidated
totals were audited by other auditors whose reports have been furnished
to us, and our opinion, insofar as it relates to the amounts
included for PV Financial and North Bay Bancorp, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits and the reports of the other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Westamerica Bancorporation and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each
of the years in the three year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick L.L.P.
- ----------------------------
KPMG Peat Marwick L.L.P.
MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY
TO OUR SHAREHOLDERS:
The Management of Westamerica Bancorporation is responsible for the
preparation, integrity, reliability and consistency of the information
contained in this annual report. The financial statements, which
necessarily include amounts based on judgments and estimates, were
prepared in conformity with generally accepted accounting principles and
prevailing practices in the banking industry. All other financial
information appearing throughout this annual report is presented in a
manner consistent with the financial statements.
Management has established and maintains a system of internal controls
that provides reasonable assurance that the underlying financial records
are reliable for preparing the financial statements, and that assets are
safeguarded from unauthorized use or loss. This system includes
extensive written policies and operating procedures and a comprehensive
internal audit function, and is supported by the careful selection and
training of staff, an organizational structure providing for division of
responsibility, and a Code of Ethics covering standards of personal and
business conduct. Management believes that, as of December 31, 1996 the
Corporation's internal control environment is adequate to provide
reasonable assurance as to the integrity and reliability of the
financial statements and related financial information contained in the
annual report.
The system of internal controls is under the general oversight of the
Board of Directors acting through its Audit Committee, which is
comprised entirely of outside directors.
The Audit Committee monitors the effectiveness of and compliance with
internal controls through a continuous program of internal audit and
credit examinations. This is accomplished through periodic meetings with
Management, internal auditors, loan quality examiners, regulatory
examiners and independent auditors to assure that each is carrying out
their responsibilities.
The Corporation's financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants elected by the
shareholders. All financial records and related data, as well as the
minutes of shareholders and directors meetings, have been made available
to them. Management believes that all representations made to the
independent auditors during their audit were valid and appropriate.
/s/ David Payne
- ---------------
David L. Payne
Chairman, President and Chief Executive Officer
/s/ Dennis Hansen
- -----------------
Dennis R. Hansen
Senior Vice President and Controller
San Francisco, California
January 21, 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
PV Financial
We have audited the accompanying consolidated balance sheets of PV
Financial and Subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of earnings, stockholders' equity and
cash flows for each of the years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PV Financial and Subsidiary as of December 31, 1994 and 1993, and the
consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1994,
in conformity with generally accepted accounting principles.
As described in Note 1, Securities, the Company changed its method of
accounting for securities as of December 31, 1993.
/s/ Grant Thornton LLP
------------------
Grant Thornton LLP
Stockton, California
January 13, 1995
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of North Bay Bancorp:
We have audited the accompanying balance sheets of North Bay Bancorp (a
California corporation) and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1994. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
North Bay Bancorp and Subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 10, certain arbitration and litigation matters are
pending against the Bank and the outcome is uncertain at this time.
Accordingly, no provisions for any liabilities that may result upon the
final settlement of these matters have been made in the accompanying
financial statements.
/s/ Arthur Andersen LLP
-------------------
Arthur Andersen LLP
San Francisco, California
February 17, 1995
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated herein by
reference from the "Election of Directors", "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" sections on
Pages 2 through 7 of the Company's Proxy Statement dated March 20, 1997,
which has been filed with the Commission pursuant Regulation 14A.
ITEM 11. Executive Compensation
The information required by this Item 11 is incorporated herein by
reference from the "Executive Compensation" and "Other Arrangements"
sections on Pages 8 through 10 of the Company's Proxy Statement
dated March 20, 1997, which has been filed with the Commission pursuant
to Regulation 14A.
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management
The information required by this Item 12 is incorporated herein by
reference from the "Security Ownership of Certain Beneficial Owners and
Management" section on Pages 5 through 6 of the Company's Proxy
Statement dated March 20, 1997, which has been filed with the Commission
pursuant to Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by this Item 13 is incorporated herein by
reference from the "Certain Information About the Board of Directors and
Certain Committees of the Board - Indebtedness of Directors and
Management" section on Page 4 of the Company's Proxy Statement dated
March 20, 1997, which has been filed with the Commission pursuant to
Regulation 14A.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. All Financial Statements
See Index to Financial Statements on page 56
(a) 2. Financial statement schedules required. None. (Information
included in Financial Statements)
(a) 3. Exhibits
The following documents are included or incorporated by
reference in this annual report on Form 10-K:
Exhibit
Number
2(a) Agreement and Plan of reorganization, between and
among Westamerica Bancorporation, ValliCorp Holdings,
Inc., and ValliWide bank, incorporated herein by
reference to Exhibit 2.1 of Registrant's Registration
Statement on Form S-4, Commission File No. 333-17335,
filed with the Securities and Exchange Commission on
December 5, 1996.
3(a) Restated Articles of Incorporation (composite copy) ***
3(b) By-laws *
4(a) Amended and Restated Rights Agreement - March 23, 1995,
incorporated herein by reference to Exhibit 4.2 of the
Registrant's Registration Statement on Form S-4,
Amendment No. 1, Commission File No. 333-17335, filed
with the Securities and Exchange Commission on
January 6, 1997.
10(a)o 1995 Stock Option Plan ***
10(b)o Employment Agreement with E. Joseph Bowler dated ***
January 7, 1987 (Employment)
10(c)o Employment Agreement with Robert W. Entwisle dated ***
January 7, 1987 (Employment)
10(d) Senior Note Agreement of Westamerica Bancorporation
dated February 1, 1996, of $22,500,000 at 7.11 percent
incorporated herein by reference to Exhibit 10-j of
Registrant's Annual Report of Form 10-K/A for the
fiscal year ended December 31, 1995, filed with the
Securities and Exchange Commission on May 1, 1996.
11 Computation of Earnings Per Share on common and common
equivalent shares and on common shares assuming full
dilution.
21 Subsidiaries of the registrant.
23(a) Consent of KPMG Peat Marwick LLP
23(b) Consent of Grant Thornton LLP
23(c) Consent of Arthur Andersen LLP
27 Financial Data Schedule
----------------------
* Exhibit 3(b), is incorporated by reference from
Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1986.
** Exhibit 10(a) is incorporated herein by reference from
Form S-8 dated June 6, 1995
*** Exhibits 3(a), 10(b) and 10(c) are incorporated herein
by reference from Exhibits 3(a), 10(n), 10(o), and
10(q) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1986.
o Indicates contract or compensatory plan or
arrangement
The Company will furnish to shareholders a copy of any
exhibit listed above, but not contained herein, upon
written request to the Office of the Corporate
Secretary, Westamerica Bancorporation, P.O. Box 567,
San Rafael, California 94915, and payment to the
Company of $.25 per page.
(b) 1. Report on Form 8-K
On November 13, 1996, the Company filed a report on Form 8-K
announcing that it had entered into an Agreement and Plan of
Reorganization dated November 11, 1996, with ValliCorp
Holdings, Inc., and ValliWide Bank.
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.
WESTAMERICA BANCORPORATION
/s/ Dennis Hansen
- -----------------
Dennis R. Hansen
Senior Vice President and Controller
Principal Accounting Officer
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.
Signature Title Date
- --------- ----- ----
/s/ David L. Payne Chairman of the Board and
- ------------------------------ Director March 27, 1997
David L. Payne President and
Chief Executive Officer
/s/ E. Joseph Bowler Senior Vice President and
- ------------------------------ Treasurer March 27, 1997
E. Joseph Bowler
/s/ Etta Allen Director March 27, 1997
- ------------------------------
Etta Allen
/s/ Louis E. Bartolini Director March 27, 1997
- ------------------------------
Louis E. Bartolini
/s/ Charles I. Daniels, Jr. Director March 27, 1997
- ------------------------------
Charles I. Daniels, Jr.
/s/ Don Emerson Director March 27, 1997
- ------------------------------
Don Emerson
/s/ Arthur C. Latno Director March 27, 1997
- ------------------------------
Arthur C. Latno
/s/ Patrick D. Lynch Director March 27, 1997
- ------------------------------
Patrick D. Lynch
/s/ Catherine Cope MacMillan Director March 27, 1997
- ------------------------------
Catherine Cope MacMillan
/s/ Dwight H. Murray, Jr. M.D. Director March 27, 1997
- ------------------------------
Dwight H. Murray, Jr. M.D.
/s/ Ronald A. Nelson Director March 27, 1997
- ------------------------------
Ronald A. Nelson
/s/ Carl Otto Director March 27, 1997
- ------------------------------
Carl Otto
/s/ Edward B. Sylvester Director March 27, 1997
- ------------------------------
Edward B. Sylvester