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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, 1997
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 files
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. [ ]
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 20, 1998:
$1,374,172,000
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 20, 1998
Title of Class
Common Stock, no par value
Shares Outstanding
42,652,768
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 19, 1998
for Annual Meeting of Shareholders
to be held on April 21, 1998
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 2
Item 2 Description of Properties 26
Item 3 Legal Proceedings 27
Item 4 Submission of Matters to a Vote of Security Holders 27
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6 Selected Financial Data 29
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 30
Item 8 Financial Statements and Supplementary Data 56
Item 9 Changes in and Disagreements on Accounting and Financial Disclosure 99
PART III
Item 10 Directors and Executive Officers of the Registrant 99
Item 11 Executive Compensation 99
Item 12 Security Ownership of Certain Beneficial Owners and Management 99
Item 13 Certain Relationships and Related Transactions 99
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 100
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 of 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 significantly increasing;
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" 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 and Central
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 company engaged in financing accounts
receivable and inventory lines of credit and term business
loans and 100 percent of Community Banker Services
Corporation, a company 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, Bank 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.
The business combination 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 accounts receivable and
inventory lines of credit and term business loans.
On April 12, 1997, the Company acquired ValliCorp
Holdings, Inc., parent company of ValliWide Bank, the
largest independent bank holding company headquartered in
Central California. The acquisition became effective
through the issuance of shares of the Company's common
stock in exchange for all of the outstanding shares of
ValliCorp Holdings, Inc. The business combination was
accounted for on a pooling-of-interests basis. ValliWide
Bank remained as a separate subsidiary bank of the Company.
On June 20, 1997, ValliWide Bank ceased to exist as a
subsidiary of the Company, when it was merged with and
into WAB.
On January 22, 1998, the Board of Directors of the Company
authorized a three-to-one split of the Company's common
stock in which each share of the Company's common stock is
converted into three shares, with record and effective
dates of February 10 and February 25, 1998, respectively.
At December 31, 1997, the Company had consolidated assets
of approximately $3.85 billion, deposits of approximately
$3.08 billion and shareholders' equity of approximately
$407.2 million.
General
Westamerica Bancorporation is a community oriented bank
holding company headquartered in San Rafael, California.
The principal communities served are located in Northern
and Central California, from Mendocino, Lake and Nevada
Counties in the North, to Kern and San Luis Obispo
counties in the South. The Company's strategic focus is on
the banking needs of small businesses. The Company chose
this particular focus in the late 1980's as it recognized
that concentrating on a few niche markets was going to be
the key to the Company's profitable survival in the
consolidating banking business.
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 150,000,000 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 42,799,020
were outstanding at December 31, 1997. Pursuant to its
stock option plans, at December 31, 1997, the Company had
exercisable options outstanding of 1,147,920. As of
December 31, 1997, 191,118 shares of Company Common Stock
remained available for grants under the Company's stock
option plans (and stock purchase plan). Sales of
substantial amounts of Company Common Stock in the public
market 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, 1997, real
estate served as the principal source of collateral with
respect to approximately 53 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 securities portfolio, as well as the
Company's financial condition and results of operations in
general and the market value of the Company's 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 customers 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
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. See also the section
"Year 2000 Compliance" in the Management's Discussion and
Analysis contained in this report.
Employees
At December 31, 1997, the Company and its subsidiaries
employed 1,144 full-time equivalent staff. Employee
relations are believed to be good.
The Effect of Government Policy on Banking
The earnings and growth of the Company 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 ("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 ("BHCA"). The
Company reports to, registers with, and may be examined
by, the FRB. The FRB also has the authority to examine the
Company's subsidiaries. The costs of any such examination
by the FRB are payable by the Company.
The Company is a bank holding company within the meaning
of Section 3700 of the California Financial Code. As such
the Company and the Banks are subject to examination by,
and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner).
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 section
entitled "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.
The 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 "opted in" to the Interstate Banking and
Branching Act provisions regarding interstate branching by
enacting the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 ("IBBA").
Under the IBBA, (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 or 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 (c) the Commissioner will be
authorized to approve an interstate acquisition or merger
which would result in a deposit concentration exceeding
30% if the Commissioner finds that the transaction is
consistent with public convenience and advantage. 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. 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.
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. See section entitled "Restrictions on
Dividends and other Distributions" for additional
restrictions.
Transactions between the Company and the 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. The 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, the Company may not sell a
low-quality asset to a depository institution subsidiary.
The FRB has adopted comprehensive amendments to Regulation
Y which became effective April 21, 1997, and are intended
to improve the competitiveness of bank holding companies
by, among other things: (i) expanding the list of
permissible nonbanking activities in which well-run bank
holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding
companies to obtain approval to engage in other nonbanking
activities and (iii) eliminating most of the anti-tying
restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides
for a streamlining and expedited review process for bank
acquisition proposals submitted by well-run bank holding
companies and eliminates certain duplicative reporting
requirements when there has been a further change in bank
control or in bank directors or officers after an earlier
approved change.
In order for a bank holding company to qualify as
well-run, both it and the insured depository institutions
that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company
must, on a consolidated basis: (i) maintain a total
risk-based capital ratio of 10% or greater; (ii) maintain
a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a
specified capital level. Its lead insured depository
institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the
applicable bank regulator, 80% of the total risk-weighted
assets held by its insured depository institutions must be
held by institutions that are well-capitalized, and none
of its insured depository institutions may be
undercapitalized.
To qualify as "well-managed": (i) the bank holding
company, its lead depository institution and its
depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at
their most recent examination or review, must have received
a composite rating, rating for management and rating for
compliance which were at least satisfactory; (ii) none of
the bank holding company's depository institutions may
have received one of the two lowest composite ratings; and
(iii) neither the bank holding company nor any of its
depository institutions during the previous 12 months may
have been subject to a formal enforcement order or action.
The permissible non-banking activities in which bank
holding companies may engage include: (i) extending credit
and servicing loans; (ii) real estate and personal
property appraising; (iii) arranging commercial real
estate equity financing; (iv) check-guaranty services; (v)
collection agency services; (vi) credit bureau services;
(vii) asset management, servicing and collection; (viii)
acquiring debt in default; (ix) real estate settlement
services; (x) leasing personal or real property; (xi)
operating nonbank depository institutions; (xii) trust
company functions; (xiii) financial and investment
advisory activities; (xiv) riskless principal
transactions; (xv) private placement services; (xvi)
foreign exchange trading for a bank holding company's own
account; (xvii) dealing and related activities in gold,
silver, platinum and palladium; (xviii) employee benefits
consulting; (xix) career counseling services; (xx)
printing and selling checks; (xxi) insurance agency and
underwriting services; (xxii) community development
activities; (xxiii) data processing; and (xxiv) money
order, savings bond and traveler's checks services. A bank
holding company's provision of these services is subject
to numerous qualifications, limitations and restrictions.
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 California Department of Financial
Institutions ("DFI") and the FDIC. As members of the
Federal Reserve System, the Banks' primary federal
regulator is the FRB. The regulations of these agencies
affect most aspects of the Banks' business and prescribe
permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the
permissible scope of the Banks' activities and various
other requirements. The DFI was created pursuant to AB
3351, effective July 1, 1997, and combines the State
Banking Department, the Department of Savings and Loan,
and regulatory oversight over industrial loan companies
and credit unions with the DFI. For the most part, the DFI
is merely assuming the responsibilities and authorities
previously held by the existing previous regulators.
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 Opportunity (Regulation B).
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, stockholder
rights and duties, and investments and lending activities.
Whenever it appears that the contributed capital of a
California bank is impaired, the Commissioner shall order
the bank to correct such impairment. If a 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 California Interstate
Banking and Branching Cleanup Act was enacted, which
revised the DFI'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 revised
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 Commissioner.
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 must have been 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 FDIC 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 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.
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 revised standards will be available to
well-capitalized or adequately-capitalized national banks.
Since state banks may only make equity investments if of a
type permissible for national banks, this revised
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 certain loans.
In determining the capital level a bank is 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 it will recognize for
purposes of determining the capital adequacy of a bank.
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 the allowance for
loan losses 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 allowance 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 adjusted average risk-adjusted assets and off
balance sheet items of 4%.
On September 16, 1997, the FDIC adopted a final rule
lowering the risk-based capital requirements for certain
small business loans and leases sold with recourse. The
final rule on small business loans and leases sold with
recourse essentially makes permanent an interim
interagency rule in effect since 1995 that reduced the
minimum capital levels that institutions must maintain for
those transactions. Under the final rule, a qualifying
institution that sells small business loans and leases
with recourse must hold capital only against the amount of
recourse retained. In general, a qualifying institution is
one that is well-capitalized under the FDIC's prompt
corrective action rules. The amount of recourse that can
receive the preferential capital treatment cannot exceed
15% of the institution's total risk-based capital.
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. See
Note 8 to the consolidated financial statements for
capital ratios for the Company and the Banks compared to
the standards for well-capitalized depository institutions
and for minimum capital requirements.
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.
Under the prompt corrective action provisions of FDICIA,
an insured depository institution generally will be
classified in the following categories based on the
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
The power of the board of directors of an insured
depository institution to declare a cash dividend or other
distribution with respect to capital is subject to
statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the
earnings, financial condition and cash needs of the
institution, as well as general business conditions.
FDICIA prohibits insured depository institutions from
paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions,
including dividends, if, after such transaction, the
institution would be undercapitalized.
In addition to the restrictions imposed under federal law,
banks chartered under California law generally may only
pay cash dividends to the extent such payments do not
exceed the lesser of retained earnings of the bank or the
bank's net income for its last three fiscal years (less
any distributions to shareholders during 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. The FDIC is authorized to
borrow up to $30 billion from the United States Treasury;
up to 90% of the fair market value of assets of
institutions acquired by the FDIC as receiver from the
Federal Financing Bank; and from depository institutions
that are members of the BIF. Any borrowings not repaid by
asset sales are to be repaid through insurance premiums
assessed to member institutions. Such premiums must be
sufficient to repay any borrowed funds within 15 years and
provide insurance fund reserves of $1.25 for each $100 of
insured deposits. FDICIA also provides authority for
special assessments against insured deposits. 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 revised 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
were to 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 were 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 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 Banks are 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 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
The Taxpayer Relief Act of 1997 provides for Education
Individual Retirement Accounts ("Education IRA"), a new
type of tax-free savings vehicle to pay qualified higher
education expenses. A maximum of $500 per year may be
contributed to Education IRAs for any beneficiary under
the age of 18 years, provided the contributor has adjusted
gross income for the year not exceeding $95,000 ($150,000
for joint returns). No income tax deduction is provided
for a contribution to an Education IRA. Until a
distribution is made from an Education IRA, earnings on
contributions to the account are not subject to tax. In
addition, distributions from an Education IRA are
excludable from gross income to the extent that the
distribution does not exceed qualified higher education
expenses incurred by the beneficiary during the year the
distribution is made. The trustee or custodian of an
Education IRA must be a bank or another person approved by
the Internal Revenue Service ("IRS"), including an entity
already approved by the IRS to be a nonbank trustee or
custodian of an Individual Retirement Account.
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.
In June 1997, the U.S. Environmental Protection Agency
("EPA") issued its official policy with regard to the
liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). By way of background, in 1992 the EPA
issued its CERCLA Lender Liability Rule which was intended
to be a regulation for the enforcement of CERCLA as to
lenders. In 1994 the Lender Liability Rule was stricken by
the U.S. Court of Appeals for the District of Columbia in
Kelley v. EPA. The EPA retained the Lender Liability Rule,
characterizing it as its internal enforcement policy. The
Asset Conservation Act adopted language similar to the
EPA's Lender Liability Rule. In its June 1997
announcement, the EPA indicated that it will treat those
provisions of the Lender Liability Rule that are similar
to the Asset Conservation Act "as guidance in
interpreting" the lender liability exemption under the Act.
In 1997, California adopted the Environmental
Responsibility Acceptance Act (Cal. Civil Code Sections
850-855)(the "Act"). The main purposes of the Act are to
facilitate (I) the notification of government agencies and
potentially responsible parties (e.g., for cleanup) of the
existence of contamination and (ii) the cleanup or other
remediation of contamination by the potentially
responsible parties. The Act requires owners of sites who
have actual awareness of a release of a hazardous material
that exceeds a specified notification threshold to take
all reasonable steps to identify the potentially
responsible parties and to send a notice of potential
liability to the parties and the appropriate oversight
agency. Potentially responsible parties that receive such
notice must respond with either a "commitment statement"
to conduct certain response actions (as defined in the
Act) or a "negative response." Potentially responsible
parties who become aware of a release must provide the
owner with a report of the release and either a
"commitment statement" or a "negative response." Persons
failing to provide the requisite notice lose certain
rights to damages. Neither the failure to issue a
"commitment statement" nor its issuance is to be construed
as an admission of liability for the release. Commitment
statements that are accepted run with the land, thereby
binding future owners. The notification requirements of
the Act do not take effect until July 31, 1998. However,
the Act's notification requirements apply to past
releases, if they occurred after January 1, 1995. Notices
for such past releases must be given by December 31, 1998.
Pending Legislation and Regulations
There are 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.
On September 16, 1997, the FDIC proposed two new rules
governing minimum capital levels that FDIC-supervised
banks must maintain against the risks to which they are
exposed. The proposed rules were developed in consultation
with the OCC, the FRB, and the Office of Thrift
Supervision ("OTS").
The first proposed rule would make risk-based capital
standards consistent for two types of credit enhancements
(i.e., recourse arrangements and direct credit
substitutes) and would require different amounts of
capital for different risk positions in asset
securitization transactions. Similar proposals are being
considered by the other federal banking agencies as well.
Under the proposed rule, banks holding the riskiest part
of a securitization would have higher capital requirements
than those holding less risky sections.
The second proposed rule would permit limited amounts of
unrealized gains on equity securities to be recognized for
risk-based capital purposes. The proposal on equity
securities would permit institutions to include in Tier 2
capital 45% of the net unrealized pre-tax gains on
available-for-sale equity securities. The proposal would
increase the amount of regulatory capital for some
institutions.
Certain other pending legislative proposals include bills
to let banks pay interest on business checking accounts,
to cap consumer liability for stolen debit cards, and to
give judges the authority to force high-income borrowers
to repay their debts rather than cancel them through
bankruptcy.
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
In the past, an independent bank's principal competitors
for deposits and loans have been other banks (particularly
major banks), savings and loan associations and credit
unions. To a lesser extent, competition was also provided
by thrift and loans, mortgage brokerage companies and
insurance companies. Other institutions, such as brokerage
houses, mutual fund companies, credit card companies, and
even retail establishments have offered new investment
vehicles which also compete with banks for deposit
business. 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 market, and it is anticipated that
this trend will continue.
The enactment of the IBBA in 1994 as well as the
California Interstate Banking and Branching Act of 1995
will likely increase competition within California. See
the "Regulation and Supervision of Bank Holding Companies"
section discussed earlier in this report. 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.
According to information obtained by the Company through
an independent market research firm, WAB was the second
largest financial institution in terms of total deposits
in Marin County at June 30, 1997, 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, 1997 WAB ranked fourth
in WAB's Sonoma-Mendocino counties service area, with
approximately a 9 percent share of the market, third in
the Fresno service area with approximately 11 percent of
total deposits, and was fifth in the Solano-Contra
Costa-Alameda counties service area, with a market share
of approximately 5 percent. Completion of the merger with
ValliWide bank in 1997 resulted in the formation of the
"South Valley Region" encompassing portions of Kern, San
Luis Obispo, Tulare and Kings counties. In terms of total
deposits, WAB ranked, as of June 30, 1997, fifth among all
financial institutions servicing the area with
approximately 9 percent of the market. In addition, WAB's
market share in the Sacramento-Placer-Nevada-Yolo counties
service area was approximately 6 percent, ranking sixth
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,
1997, with approximately 16 percent market share. The same
source of data reports that BLC ranked third, in terms of
total deposits, in market share in the Lake County service
area with 16 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 one of 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.
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.
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 were no matters submitted to a vote of the
shareholders during the fourth quarter of 1997.
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 prices for
the common stock, for each quarter, as reported by NASDAQ:
(Restated for a three-to-one stock split authorized January 22,
1998 and effective February 25, 1998)
Period
1997: High Low
------- -------
First quarter $24.17 $18.83
Second quarter 25.83 19.27
Third quarter 29.33 24.58
Fourth quarter 35.00 28.54
1996:
First quarter $15.75 $14.42
Second quarter 16.75 15.33
Third quarter 17.00 15.50
Fourth quarter 19.58 16.50
As of December 31, 1997, there were 8,611 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, 1997, $98.4 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 $21.667 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 $21.667, 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) 1997 1996 * 1995 * 1994 * 1993 *
- ---------------------------------------------------------------------------------------------
Year ended December 31
Interest income $270,670 $274,182 $283,704 $256,638 $237,165
Interest expense 88,054 91,700 95,627 73,321 72,251
- ---------------------------------------------------------------------------------------------
Net interest income 182,616 182,482 188,077 183,317 164,914
Provision for loan losses 7,645 12,306 15,229 11,378 13,503
Non-interest income 37,013 36,307 34,227 36,929 44,249
Non-interest expense 137,878 136,051 141,960 150,128 161,227
- ---------------------------------------------------------------------------------------------
Income before income taxes 74,106 70,432 65,115 58,740 34,433
Provision for income taxes 25,990 23,605 21,930 20,627 11,103
- ---------------------------------------------------------------------------------------------
Net income $48,116 $46,827 $43,185 $38,113 $23,330
=============================================================================================
Earnings per share: **
Basic $1.12 $1.10 $0.99 $0.87 $0.58
Diluted 1.10 1.08 0.98 0.87 0.57
Per share: **
Dividends paid $0.36 $0.30 $0.25 $0.21 $0.19
Book value at December 31 9.51 8.84 8.12 7.41 7.01
Average common shares outstanding ** 43,040 42,759 43,747 43,732 40,510
Average diluted common shares outstand ** 43,827 43,358 44,274 44,061 40,924
Shares outstanding at December 31 ** 42,799 42,889 43,228 43,351 42,879
At December 31
Loans, net $2,211,307 $2,236,319 $2,209,653 $2,220,122 $2,071,405
Total assets 3,848,444 3,866,774 3,880,299 3,793,196 3,641,984
Total deposits 3,078,501 3,228,700 3,270,907 3,249,823 3,194,395
Funds purchased 264,848 167,447 186,032 135,426 76,298
Debt financing and notes payable 52,500 58,865 40,932 51,647 37,614
Shareholders' equity 407,152 379,279 351,058 321,169 300,670
Financial Ratios:
For the year:
Return on assets 1.28% 1.24% 1.14% 1.04% 0.70%
Return on equity 12.71% 13.22% 12.73% 12.24% 8.96%
Net interest margin *** 5.63% 5.54% 5.68% 5.67% 5.59%
Net loan losses to average loans 0.35% 0.51% 0.59% 0.43% 0.56%
Non-interest expense/revenues *** 60.15% 60.08% 63.86% 68.16% 77.08%
At December 31:
Equity to assets 10.58% 9.81% 9.05% 8.47% 8.26%
Total capital to risk-adjusted as 14.76% 14.95% 14.39% 13.58% 12.99%
Loan loss reserve to loans 2.24% 2.23% 2.15% 2.05% 2.01%
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
** Restated for a three-to-one stock split authorized January 22, 1998 and
effective February 25, 1998
*** 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
the credit quality and an in 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 and liquidity risks; and changes in
the securities markets. For further information on risks and
uncertainties see also "Certain Additional Business Risks" 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 as well as with the other information presented
throughout the report.
All financial information has been restated on a historical basis
to reflect the ValliCorp Holdings, Inc. ("ValliCorp") acquisition
on April 12, 1997 (the "Merger") using the pooling-of-interests
method of accounting.
On January 22, 1998, the Board of Directors of the Company
authorized a three-for-one stock split of the Company's Common
Stock, effective February 25, 1998, in which each share of the
Company's Common Stock is converted into three shares.
Consequently, all related information in this report has been
restated to reflect the effect of the stock split.
The Company achieved earnings of $48.1 million in 1997,
representing a 3 percent increase from the $46.8 million earned
in 1996 and 11 percent higher than 1995 earnings of $43.2
million.
COMPONENTS OF NET INCOME
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
(In millions)
Net interest income * $192.2 $190.1 $194.6
Provision for loan losses (7.6) (12.3) (15.2)
Non-interest income 37.0 36.3 34.2
Non-interest expense (137.9) (136.1) (142.0)
Taxes * (35.6) (31.2) (28.4)
- -----------------------------------------------------------------------------------------
Net income $48.1 $46.8 $43.2
=========================================================================================
Net income as a percentage of
average total assets 1.28% 1.24% 1.14%
=========================================================================================
* Fully taxable equivalent (FTE)
Basic earnings per share in 1997 were $1.12, compared to $1.10 and
$.99 in 1996 and 1995, respectively. During 1997, the Company
benefited from increased net interest income, primarily due to a
decrease in short-term borrowed funds in part offset by a reduction
in the average balance of earning assets. Also contributing to
increased earnings, the Company lowered its loan loss provision in
recognition of improved credit quality and lower net credit losses,
and benefited from increased non-interest income. Higher
non-interest expense included approximately $18.8 million ($12.8
million after tax) in charges associated with the Merger. Earnings
in 1996 were favorably affected compared to 1995 by increases in
earning asset yields, a lower loan loss provision, higher
non-interest income and expense controls, which were partially
offset by lower average balances of earning assets. The Company's
return on average total assets was 1.28 percent in 1997, compared
to 1.24 percent and 1.14 percent in 1996 and 1995, respectively.
Return on average equity in 1997 was 12.71 percent, compared to
13.22 percent and 12.73 percent, respectively, in the two previous
years.
NET INTEREST INCOME
The Company's primary source of revenue is net interest income,
which is the difference between interest income on earning assets
and interest expense on interest-bearing liabilities. Net interest
income (FTE) in 1997 increased $2.1 million from 1996 to $192.2
million. Comparing 1996 to 1995, net interest income (FTE)
decreased $4.5 million.
Components of Net Interest Income
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
(In millions)
Interest income $270.7 $274.2 $283.7
Interest expense (88.1) (91.7) (95.6)
FTE adjustment 9.6 7.6 6.5
- -----------------------------------------------------------------------------------------
Net interest income (FTE) $192.2 $190.1 $194.6
=========================================================================================
Average earning assets $3,414.6 $3,434.6 $3,426.7
Net interest margin (FTE) 5.63% 5.54% 5.68%
=========================================================================================
Interest income (FTE) decreased $1.5 million from 1996, primarily
due to a $20.0 million decrease in average earning asset balances.
Categories of earning assets that decreased included most types of
consumer loans, partially offset by increases in targeted commercial
credits. The average investment portfolio balances also decreased
from 1996, as reductions in short-term funds sold, participation
certificates and U.S. Treasury securities were in part offset by
increases in tax-free and U.S. Agency securities. Comparing 1996 to
1995, interest income (FTE) decreased $8.4 million, principally due
to a 26 basis point decrease in earning-asset yields in part offset
by a $7.9 million increase in average balances.
The revenue decrease in 1997 was more than offset by a $3.6 million
decrease in interest expense, the result of a decrease of 2 basis
points in rates paid on interest-bearing liabilities combined with
a $92.5 million decrease in average balances, and a $31.0 million
increase in the average balance of non-interest bearing demand
deposits. Comparing 1996 to 1995, the Company experienced a $3.9
million reduction in interest expense, primarily due to a $34.6
million decrease in the average balance of interest-bearing
liabilities and a 10 basis point decrease in the rates paid
combined with an increase of $29.4 million in the average balance
of non-interest bearing demand deposits.
In both periods, Company has consistently been successful at
reducing high-rate time deposits while increasing the balances of
more profitable, lower-cost transaction accounts.
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.
Distribution of assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
- -----------------------------------------------------------------------------------------
Full Year 1997
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rates
Average Income/ Earned/
Balance Expense Paid
- -----------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $30,125 $1,635 5.43 %
Trading account securities -- -- --
Investment securities 1,136,415 73,888 6.50
Loans:
Commercial 1,394,425 129,473 9.29
Real estate construction 85,409 9,386 10.99
Real estate residential 350,825 27,138 7.74
Consumer 417,389 38,756 9.29
- -----------------------------------------------------------------------------
Earning assets 3,414,588 280,276 8.21
Other assets 335,063
- -----------------------------------------------------------------
Total assets $3,749,651
=================================================================
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $781,001 $-- -- %
Savings and interest-bearing
transaction 1,533,939 34,743 2.26
Time less than $100,000 479,692 24,425 5.09
Time $100,000 or more 323,840 17,096 5.28
- -----------------------------------------------------------------------------
Total interest-bearing deposits 2,337,471 76,264 3.26
Funds purchased 162,592 7,803 4.80
Debt financing and notes payable 57,483 3,987 6.94
- -----------------------------------------------------------------------------
Total interest-bearing liabilities 2,557,546 88,054 3.44
Other liabilities 32,499
Shareholders' equity 378,605
- -----------------------------------------------------------------
Total liabilities and shareholders' equity $3,749,651
=================================================================
Net interest spread (1) 4.77 %
Net interest income and interest margin (2) $192,222 5.63 %
=========================================================================================
(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 assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
- -----------------------------------------------------------------------------------------
Full Year 1996
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rates
Average Income/ Earned/
Balance Expense Paid
- -----------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $94,612 $5,218 5.52 %
Trading account securities 17 1 5.88
Investment securities 1,090,422 67,923 6.23
Loans:
Commercial 1,344,626 126,582 9.41
Real estate construction 118,893 12,515 10.53
Real estate residential 320,440 26,486 8.27
Consumer 465,561 43,116 9.26
- -----------------------------------------------------------------------------
Earning assets 3,434,571 281,841 8.21
Other assets 346,613
- -----------------------------------------------------------------
Total assets $3,781,184
=================================================================
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $750,204 $-- -- %
Savings and interest-bearing
transaction 1,559,531 34,936 2.24
Time less than $100,000 520,968 26,143 5.02
Time $100,000 or more 313,050 16,506 5.27
- -----------------------------------------------------------------------------
Total interest-bearing deposits 2,393,549 77,585 3.24
Funds purchased 196,453 9,974 5.08
Debt financing and notes payable 60,045 4,141 6.90
- -----------------------------------------------------------------------------
Total interest-bearing liabilities 2,650,047 91,700 3.46
Other liabilities 26,847
Shareholders' equity 354,086
- -----------------------------------------------------------------
Total liabilities and shareholders' equity $3,781,184
=================================================================
Net interest spread (1) 4.75 %
Net interest income and interest margin (2) $190,141 5.54 %
=========================================================================================
(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 assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
- -----------------------------------------------------------------------------------------
Full Year 1995
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rates
Average Income/ Earned/
Balance Expense Paid
- -----------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $65,150 $3,880 5.96 %
Trading account securities 11 1 9.09
Investment securities 1,106,547 67,432 6.09
Loans:
Commercial 1,303,319 129,090 9.90
Real estate construction 151,242 15,626 10.33
Real estate residential 295,013 26,811 9.09
Consumer 505,373 47,408 9.38
- -----------------------------------------------------------------------------
Earning assets 3,426,655 290,248 8.47
Other assets 346,673
- -----------------------------------------------------------------
Total assets $3,773,328
=================================================================
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $720,799 $-- -- %
Savings and interest-bearing
transaction 1,617,469 37,456 2.32
Time less than $100,000 567,448 29,758 5.24
Time $100,000 or more 296,109 16,218 5.48
- -----------------------------------------------------------------------------
Total interest-bearing deposits 2,481,026 83,432 3.36
Funds purchased 155,350 8,708 5.61
Debt financing and notes payable 48,241 3,487 7.23
- -----------------------------------------------------------------------------
Total interest-bearing liabilities 2,684,617 95,627 3.56
Other liabilities 28,756
Shareholders' equity 339,156
- -----------------------------------------------------------------
Total liabilities and shareholders' equity $3,773,328
=================================================================
Net interest spread (1) 4.91 %
Net interest income and interest margin (2) $194,621 5.68 %
=========================================================================================
(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 ended
December 31,
1997 compared with 1996
- -----------------------------------------------------------------------------
Total
Increase/
Volume Rate (Decrease)
- -----------------------------------------------------------------------------
Increase (decrease) in (In thousands)
interest and fee income:
Money market assets and funds sold ($3,501) ($82) ($3,583)
Trading account securities (1) -- (1)
Investment securities (1) 2,926 3,039 5,965
Loans:
Commercial (1) 4,586 (1,695) 2,891
Real estate construction (3,709) 580 (3,129)
Real estate residential 2,014 (1,362) 652
Consumer (4,473) 113 (4,360)
- -----------------------------------------------------------------------------
Total loans (1) (1,582) (2,364) (3,946)
- -----------------------------------------------------------------------------
Total (decrease) increase in
interest and fee income (1) (2,158) 593 (1,565)
- -----------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (593) 400 (193)
Time less than $ 100,000 (2,109) 391 (1,718)
Time $ 100,000 or more 570 20 590
- -----------------------------------------------------------------------------
Total interest-bearing deposits (2,132) 811 (1,321)
Funds purchased (1,648) (523) (2,171)
Notes and mortgages payable (178) 24 (154)
- -----------------------------------------------------------------------------
Total (decrease) increase in
interest expense (3,958) 312 (3,646)
- -----------------------------------------------------------------------------
Increase in
net interest income (1) $1,800 $281 $2,081
=============================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
- -----------------------------------------------------------------------------
For the years ended
December 31,
1996 compared with 1995
- -----------------------------------------------------------------------------
Total
Increase/
Volume Rate (Decrease)
- -----------------------------------------------------------------------------
Increase (decrease) in (In thousands)
interest and fee income:
Money market assets and funds sold $1,599 ($261) $1,338
Trading account securities -- -- --
Investment securities (1) (941) 1,432 491
Loans:
Commercial (1) 4,451 (6,959) (2,508)
Real estate construction (3,411) 300 (3,111)
Real estate residential 6,480 (6,805) (325)
Consumer (3,694) (598) (4,292)
- -----------------------------------------------------------------------------
Total loans (1) 3,826 (14,062) (10,236)
- -----------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 4,484 (12,891) (8,407)
- -----------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (1,319) (1,201) (2,520)
Time less than $ 100,000 (2,369) (1,246) (3,615)
Time $ 100,000 or more 828 (540) 288
- -----------------------------------------------------------------------------
Total interest-bearing deposits (2,860) (2,987) (5,847)
Funds purchased 1,967 (701) 1,266
Notes and mortgages payable 805 (151) 654
- -----------------------------------------------------------------------------
Total decrease in
interest expense (88) (3,839) (3,927)
- -----------------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $4,572 ($9,052) ($4,480)
=============================================================================
(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 $7.6 million for 1997,
compared to $12.3 million in 1996 and $15.2 million in 1995. The
reductions in the provision in 1997 and 1996 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 and
positive economic conditions. 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.
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 98 months at December 31, 1997
and, on the same date, those investments included $230.5 million
in fixed rate and $500 thousand 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, 1997, the Banks held $1,003.2 million classified as
investments available for sale. At December 31, 1997, an
unrealized gain of $18.4 million, net of taxes of $13.4 million,
related to these securities, was held in shareholders' equity.
The Company had no trading securities at December 31, 1997.
For more information on investment securities, see Notes 1 and 2
to the consolidated financial statements.
The following table shows the carrying amount (fair value) of the
Company's investment securities available for sale as of the dates
indicated:
- -----------------------------------------------------------------------------------------
At December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $277,790 $299,739 $296,646
U.S. Government agencies and corporations 181,124 274,468 293,354
States and political subdivisions 203,405 128,631 136,866
Asset-backed securities 184,377 94,282 80,923
Other 156,538 95,341 62,134
- -----------------------------------------------------------------------------------------
Total $1,003,234 $892,461 $869,923
=========================================================================================
The following table sets forth the relative maturities and yields
of the Company's available-for-sale securities (stated at amortized
cost) at December 31, 1997. Weighted average yields have been
computed by dividing annual interest income, adjusted for
amortization of premium and accretion of discount, by the amortized
cost 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.
Available for sale
- -----------------------------------------------------------------------------------------------------------------------------
After One After Five
Within but Within but Within After Ten Mortgage-
One Year Five Years Ten Years Years backed Other Total
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury $90,484 $185,525 $-- $-- $-- $-- $276,009
Interest rate 6.02% 6.06% --% --% --% --% 6.05%
U.S. Government agencies
and corporations 37,608 81,903 6,280 -- -- -- 125,791
Interest rate 6.08% 6.12% --% --% --% --% 5.80%
States and political
subdivisions 8,784 37,499 44,408 106,120 -- -- 196,811
Interest rate 7.37% 7.61% 7.66% 7.55% --% --% 7.58%
Asset-backed securities 303 86,761 96,918 -- 183,982
Interest rate 5.83% 6.90% 6.15% --% --% --% 6.12%
Other securities 21,000 90,655 6,735 -- -- -- 118,390
Interest rate 6.17% 6.23% 7.13% --% --% --% 6.27%
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 158,179 482,343 154,341 106,120 -- -- 900,983
Interest rate 6.13% 6.23% 6.38% 7.55% --% --% 6.39%
Mortgage-backed -- -- -- -- 55,001 -- 55,001
Interest rate --% --% --% --% 6.14% --% 6.14%
Other securities without
set maturities -- -- -- -- -- 15,447 15,447
Interest rate --% --% --% --% --% 9.15% 9.15%
- -----------------------------------------------------------------------------------------------------------------------------
Total $158,179 $482,343 $154,341 $106,120 $55,001 $15,447 $971,431
Interest rate 6.13% 6.23% 6.38% 7.55% 6.14% 0.0915 6.42%
=============================================================================================================================
The following table shows the carrying amount (amortized cost) and
fair value of the Company's investment securities held to
maturity as of the dates indicated:
- -----------------------------------------------------------------------------------------
At December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $-- $998 $982
U.S. Government agencies and corporations 83,656 79,743 175,898
States and political subdivisions 136,965 131,343 123,582
Asset-backed securities -- 191 3,264
Other 10,339 3,157 4,095
- -----------------------------------------------------------------------------------------
Total $230,960 $215,432 $307,821
=========================================================================================
Fair value $236,896 $218,009 $310,377
=========================================================================================
The following table sets forth the relative maturities and yields
of the Company's held-to-maturity securities at December 31, 1997.
Weighted average yields have been computed by dividing annual
interest income, adjusted for amortization of premium and accretion
of discount, by the amortized 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-
One Year Five Years Ten Years Years backed Other Total
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government Agencies
and Corporations $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
States and Political
Subdivisions 15 14,766 76,696 45,488 -- -- 136,965
Interest rate 9.65% 8.03% 7.61% 7.81% --% --% 7.72%
Asset-backed securities $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
Other securities $-- $-- $-- 10,339 -- -- 10,339
Interest rate --% --% --% 5.53% --% --% 5.53%
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 15 14,766 76,696 55,827 -- -- 147,304
Interest rate 9.65% 8.03% 7.61% 7.39% --% --% 7.57%
Mortgage-backed -- -- -- -- 83,656 -- 83,656
Interest rate --% --% --% --% 6.05% --% 6.05%
- -----------------------------------------------------------------------------------------------------------------------------
Total $15 $14,766 $76,696 $55,827 $83,656 $0 $230,960
Interest rate 9.65% 8.03% 7.61% 7.39% 6.05% --% 7.02%
=============================================================================================================================
LOAN PORTFOLIO
The following table shows the composition of the loan portfolio of
the Company by type of loan and type of borrower, on the dates
indicated:
- -----------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Commercial and commercial real estate $1,437,118 $1,455,984 $1,260,082 $1,244,561 $1,198,089
Real estate construction 66,782 101,136 128,901 175,962 176,337
Real estate residential 361,909 276,951 378,971 333,685 313,122
Consumer 404,382 462,734 502,441 528,875 442,071
Unearned income (8,254) (9,565) (12,248) (16,381) (15,801)
- -----------------------------------------------------------------------------------------------------------------
Gross loans 2,261,937 2,287,240 2,258,147 2,266,702 2,113,818
Allowance for loan losses (50,630) (50,921) (48,494) (46,580) (42,413)
- -----------------------------------------------------------------------------------------------------------------
Net loans $2,211,307 $2,236,319 $2,209,653 $2,220,122 $2,071,405
=================================================================================================================
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, 1997. Balances exclude loans to individuals and
residential mortgages totaling $758.0 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* $914,831 $257,878 $264,409 $1,437,118
Real estate construction 65,540 1,242 -- 66,782
- -----------------------------------------------------------------------------------------------------
Total $980,371 $259,120 $264,409 $1,503,900
=====================================================================================================
Loans with fixed interest rates $105,328 $259,120 $264,409 $628,857
Loans with floating interest rates 875,043 -- -- 875,043
- -----------------------------------------------------------------------------------------------------
Total $980,371 $259,120 $264,409 $1,503,900
=====================================================================================================
* Includes demand loans
COMMITMENTS AND LETTERS 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 customers' 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 and continues its strategy to control exposure
to loans with higher credit risk and increase diversification of
earning assets. 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 summarizes the Company's classified assets for
the periods indicated:
- -----------------------------------------------------------------------------
At December 31, 1997 1996
- -----------------------------------------------------------------------------
(In millions)
Classified loans $67.5 $62.9
Other classified assets 7.4 9.9
- -----------------------------------------------------------------------------
Total classified assets $74.9 $72.8
=============================================================================
Classified loans at December 31, 1997 increased $4.6 million or 7
percent to $67.5 million from December 31, 1996, reflecting the
implementation of the Company's strict standards for loans acquired
through the Merger. Other classified assets decreased $2.5 million
from prior year, due to sales and write-downs of properties
acquired in satisfaction of debt ("other real estate owned")
partially offset by new foreclosures on loans with real estate
collateral.
Non-Performing Assets
Non-performing assets include non-accrual loans, loans 90 or more
days past due 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,
some 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 total non-performing assets. When the ability to fully
collect non-accrual loan principal is in doubt, cash payments
received are applied against the principal balance of the loans
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. Performing
non-accrual loans are reinstated to accrual status when
improvements in credit quality eliminate the doubt as to the full
collectibility of both interest and principal.
The following table summarizes the non-performing assets of the
Company for the periods indicated:
- -----------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
(In millions)
Performing non-accrual loans $1.6 $4.3 $2.4 $2.0 $1.9
Non-performing non-accrual loans 16.5 12.5 25.0 15.6 20.0
- -----------------------------------------------------------------------------------------------------------------
Non-accrual loans 18.1 16.8 27.4 17.6 21.9
- -----------------------------------------------------------------------------------------------------------------
Restructured loans -- 0.2 0.3 0.6 0.9
Loans 90 or more days past due
and still accruing 1.0 1.8 1.7 4.8 2.9
- -----------------------------------------------------------------------------------------------------------------
Total non-performing loans 19.1 18.8 29.4 23.0 25.7
Other real estate owned 7.4 9.9 7.6 11.7 17.5
- -----------------------------------------------------------------------------------------------------------------
Total non-performing assets $26.5 $28.7 $37.0 $34.7 $43.2
=================================================================================================================
Allowance for loan losses as a
percentage of non-performing loans 265% 271% 165% 203% 165%
Allowance for loan losses as a percentage
of total non-performing assets 191% 177% 131% 134% 98%
=================================================================================================================
Performing non-accrual loans decreased $2.7 million to $1.6 million
at December 31, 1997 while non-performing non-accrual loans
increased $4.0 million to $16.5 million at December 31, 1997,
primarily due to the addition of commercial real estate loans
partially offset by loan collections, write-downs, payoffs and
sales. The $2.5 million decrease in other real estate owned
balances from December 31, 1996 was due to write-downs and
liquidations net of additions from non-accrual loans on loans with
real estate collateral. The increase in other real estate owned
balances at December 31, 1996 from December 31, 1995 was due to new
foreclosures and transfers of loans with real estate collateral net
of sales and write-downs of properties acquired in satisfaction of
debt.
The amount of gross interest income that would have been recorded
for non-accrual loans for the year ended December 31, 1997, if all
such loans had been current in accordance with their original terms
while outstanding during the period, was $1.6 million in 1997 and
1996 and $3.0 million in 1995. The amount of interest income that
was recognized on non-accrual loans from cash payments made in
1997, 1996 and 1995 was $462 thousand, $270 thousand and $242
thousand, respectively. Cash payments received, which were applied
against the book balance of performing and non-performing
non-accrual loans outstanding at December 31, 1997, totaled
approximately $573 thousand, compared to $111 thousand and $299
thousand in 1996 and 1995, respectively.
The overall credit quality of the loan portfolio continues to be
strong; however, the total non-performing assets could fluctuate
from year to year. The performance of any individual loan can be
impacted by external factors such as the interest rate environment
or factors particular to the borrower. The Company expects to
continue to reduce non-performing assets; however, the Company can
give no assurance that additional increases in non-accrual loans
will not occur in future periods.
Loan Loss Experience
The Company's allowance for loan losses is maintained at a level
estimated to be adequate to provide for losses that can be
reasonably anticipated based upon specific conditions, credit loss
experience, the amount of past due, non-performing loans and
classified loans, recommendations of regulatory authorities,
prevailing economic conditions and other factors. The allowance is
allocated to segments of the loan portfolio based in part on
quantitative analyses of historical credit loss experience, in
which criticized and classified loan balances are analyzed using a
linear regression model to determine standard allocation
percentages. The results of this analysis are applied to current
criticized and classified loan balances to allocate the allowance 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. A portion of the allowance is also
allocated to impaired loans. Management considers the $50.6 million
allowance for loan losses, which constituted 2.24 percent of total
loans at December 31, 1997, to be adequate as a reserve against
inherent losses. However, while the Company's policy is to charge
off in the current period those loans on which the loss is
considered probable, the risk exists of future losses which cannot
be precisely quantified or attributed to particular loans or
classes of loans. Management continues to evaluate the loan
portfolio and assess current economic conditions that will dictate
future allowance levels.
The following table summarizes the loan loss experience of the
Company for the periods indicated:
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Total loans outstanding $2,261,937 $2,287,240 $2,258,147 $2,266,702 $2,113,818
Average loans outstanding during the period 2,248,048 2,249,520 2,254,946 2,105,164 2,016,808
Analysis of the reserve:
Beginning balance $50,921 $48,494 $46,580 $42,413 $37,398
Additions to the reserve charged to
operating expense 7,645 12,306 15,229 11,378 13,503
Allowance acquired through merger -- 1,665 -- 1,755 3,430
Credit losses:
Commercial and commercial real estate (6,824) (7,998) (7,395) (5,752) (7,988)
Real estate construction (962) (781) (1,401) (790) (2,377)
Real estate residential (374) (1,862) (3,682) (2,069) (632)
Consumer (4,324) (5,376) (3,742) (3,207) (3,179)
- -----------------------------------------------------------------------------------------------------------------
Total (12,484) (16,017) (16,220) (11,818) (14,176)
Credit loss recoveries:
Commercial and commercial real estate 2,499 2,227 1,518 1,417 1,600
Real estate construction 160 44 3 65 18
Real estate residential 34 72 26 -- 5
Consumer 1,855 2,130 1,358 1,370 1,319
- -----------------------------------------------------------------------------------------------------------------
Total 4,548 4,473 2,905 2,852 2,942
Net credit losses (7,936) (11,544) (13,315) (8,966) (11,234)
Sale of Sonoma Valley Bank -- -- -- -- (684)
- -----------------------------------------------------------------------------------------------------------------
Balance, end of period $50,630 $50,921 $48,494 $46,580 $42,413
=================================================================================================================
Net credit losses to average loans 0.35% 0.51% 0.59% 0.43% 0.56%
Allowance for loan losses as a percentage
of loans outstanding 2.24% 2.23% 2.15% 2.05% 2.01%
Allocation of the Allowance for Loan Losses
The following table presents the allocation of the allowance for loan losses
for the dates indicated: At December 31,
- -----------------------------------------------------------------------------------------------------
1997 1996
Allocation Loans as Allocation Loans as
of the Percent of the Percent
Allowance of Total Allowance of Total
Balance Loans Balance Loans
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial $22,649 63% $22,743 64%
Real estate construction 4,374 3% 3,471 4%
Real estate residential 87 16% 2,489 12%
Consumer 4,356 18% 6,543 20%
Unallocated portion of the allowance 19,164 -- 15,675 --
- -----------------------------------------------------------------------------------------------------
Total $50,630 100% $50,921 100%
=====================================================================================================
At December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
Allocation Loans as Allocation Loans as Allocation Loans as
of the Percent of the Percent of the Percent
Allowance of Total Allowance of Total Allowance of Total
Balance Loans Balance Loans Balance Loans
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial $21,849 56% $19,202 55% $21,929 57%
Real estate construction 5,683 6% 3,852 8% 4,286 8%
Real estate residential 1,733 16% 2,021 15% 2,191 15%
Consumer 6,401 22% 6,513 22% 5,967 20%
Unallocated portion of the allowance 12,828 -- 14,992 -- 8,040 --
- -----------------------------------------------------------------------------------------------------------------------------
Total $48,494 100% $46,580 100% $42,413 100%
=============================================================================================================================
The increase in the allocation of commercial loans from December
1996 to December 1997 is primarily due to fluctuations in the
balance of criticized loans and reallocation of specific reserves
prior to the Merger.
The Company considers a loan to be 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. The Company does not
apply this definition 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 thousand and
$100 thousand, 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. The Company
generally identifies loans to be reported 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, 1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Non-accrual loans $18,146 $16,835
Other 4,333 3,785
- -----------------------------------------------------------------------------
Total impaired loans $22,479 $20,620
=============================================================================
Specific reserves $2,238 $2,156
=============================================================================
The $4.3 million balance in loans classified as impaired as of
December 31, 1997, other than non-accrual loans, is due to two
commercial real estate loans, with collateral exposure that may
preclude ultimate full repayment, and two credits classified as
"Trouble Debt Restructured," after forgiveness of principal on one
and rewriting the other into two notes, one of which was written
off.
The average balance of the Company's impaired loans for the year
ended December 31, 1997 was $22.0 million compared to $24.2 million
in 1996. The amount of that recorded investment for which there is
no related allowance for credit losses was $0. 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 industry standard 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 10 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,
1997 did not result in a fluctuation of net interest income
exceeding 10 percent.
In adjusting the Company's asset/liability position, Management
attempts to manage interest rate risk while enhancing net
interest margins. At times, depending on the level of general
interest rates, the relationship between long- and short-term
interest rates, market conditions and competitive factors,
Management may determine to increase the Company's interest
rate risk position somewhat in order to increase its net interest
margin. The Company's results of operations and net portfolio
values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long- and short-term
interest rates.
Interest Rate Risk
One approach to quantify interest rate risk is to use a simulation
model to project changes in net interest income ("NII") that result
from forecast changes in interest rates. This analysis calculates
the difference between a NII forecast over a 12-month period using
a flat interest rate scenario and a NII forecast using a rising (or
falling) rate scenario, where the Fed Funds rate, serving as a
"driver," is made to rise (or fall) evenly by 200 basis points over
the 12-month forecast interval triggering a response in the other
rates. According to the Company's Board policy, the simulated
changes in NII should always be less than 10 percent or steps must
be taken to reduce interest rate risk. According to the same
policy, if the simulated changes in NII reach 7.5 percent, a closer
inspection of the risk will be put in place to determine what steps
could be taken to control risk should it grow worse. As can be seen
from the results of the model illustrated as follows, the simulated
change in NII, based on the 12-month period ending December 31,
1998, falls well within the 10 percent risk limits.
- -----------------------------------------------------------------
Estimated Increase
Changes in (Decrease) in NII
Interest Estimated -----------------------
Rates NII Amount Amount Percent
- -----------------------------------------------------------------
(Basis Points) (Dollars in millions)
+200 $201.4 $3.0 1.50%
-- 198.4 --
-200 194.8 (3.6) -1.80%
The Company does not currently engage in trading activities or
use derivative instruments to control interest rate risk, even
though such activities may be permitted with the approval of
the Company's Board of Directors.
Interest rate risk is the most significant market risk affecting
the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, do not
arise in the normal course of the Company's business activities.
Interest Rate Sensitivity Analysis
The following table summarizes the interest rate sensitivity gaps
inherent in the Company's asset and liability portfolios at
December 31, 1997:
- -----------------------------------------------------------------------------------------------------------------
Repricing within:
- -----------------------------------------------------------------------------------------
0-90 91-180 181-365 Over One Non-
(In millions) Days Days Days Year repricing Total
- -----------------------------------------------------------------------------------------------------------------
Assets
Investment securities $216 $53 $133 $832 $-- $1,234
Loans 1,095 96 166 905 -- 2,262
Other assets -- -- -- -- 352 352
- -----------------------------------------------------------------------------------------------------------------
Total assets $1,311 $149 $299 $1,737 $352 $3,848
- -----------------------------------------------------------------------------------------------------------------
Liabilities
Non-interest bearing $-- $-- $-- $-- $852 $852
Interest bearing:
Transaction 555 -- -- -- -- 555
Money market savings 152 152 304 -- -- 608
Passbook savings 294 -- -- -- -- 294
Time 407 151 132 79 -- 769
Short-term borrowings 265 -- -- -- -- 265
Debt financing and notes payable -- -- 5 48 -- 53
Other liabilities -- -- -- -- 45 45
Shareholders' equity -- -- -- -- 407 407
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,673 $303 $441 $127 $1,304 $3,848
- -----------------------------------------------------------------------------------------------------------------
Net (liabilities) assets
subject to repricing ($362) ($154) ($142) $1,610 ($952)
- -----------------------------------------------------------------------------------------------------
Cumulative net (liabilities)
assets subject
to repricing ($362) ($516) ($658) $952 $--
=====================================================================================================
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
securities available for sale. At December 31, 1997, investment
securities available for sale totaled $1,003.2 million. In
addition, the Company generated significant liquidity from its
operating activities. The Company's profitability in 1997, 1996 and
1995 generated substantial cash flows provided from operations
totaling $78.5 million, $56.7 million and $64.0 million,
respectively.
Additional cash flows may be provided by financing activities,
primarily the acceptance of customer deposits and short- and
long-term borrowings from banks. During 1997 and 1996, deposits
decreased $150.2 million and $108.0 million, respectively, which,
added to the cash used by the Company in its share repurchase program
and other retirement of stock activities of $35.6 million and $27.6
million and dividends paid to the Company's shareholders, exceeded
a $97.4 million increase in short-term borrowings in 1997 and the
issuance of $22.5 million of the Company's Senior Notes in 1996.
These were the major factors in the total cash flows used by
financing activities of $91.3 million and $147.2 million,
respectively, for 1997 and 1996. Comparatively, financing
activities provided $35.3 million in cash flows during 1995, as a
$21.1 million increase in deposits and a $45.1 million increase in
short-term funding exceeded payments on debt financing and
long-term notes payable, retirement of stock and dividends paid to
shareholders.
The Company uses cash flows to make investments in loans and
investment securities. Net repayments of loans were $9.1 million in
1997, compared to $22.3 million in 1996 and an increase in balances
of $3.3 million 1995. It is the intention of the Company to
increase loan volume without jeopardizing credit quality; this is
the primary reason for investing excess cash flows in lower-risk
investments securities which increased $106.2 million in 1997. This
compares with a decrease in 1996 of $87.6 million, mostly due to
premerger activity at ValliCorp and an increase of $39.0 million in
1995.
The Company anticipates increasing its cash levels through the end
of 1998 mainly due to increased profitability and retained
earnings. For the same period, it is anticipated that the
investment securities portfolio and demand for loans will continue
to moderately increase. The growth in deposit balances is expected
to follow the anticipated growth in loan and investment balances
through the end of 1998.
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 $27.9 million
or 7 percent from the previous year end and increased $56.8
million or 16 percent from December 31, 1995. The ratio of total
risk-based capital to risk-adjusted assets was 14.76 percent at
December 31, 1997, compared to 14.95 percent at December
31, 1996. Tier I risk-based capital to risk-adjusted assets was
12.82 percent at December 31, 1997, compared to 12.96 percent
at December 31, 1996.
Capital to Risk-Adjusted Assets
- -----------------------------------------------------------------------------------------
Minimum
Regulatory
Capital
At December 31, 1997 1996 Requirements
- -----------------------------------------------------------------------------------------
Tier I Capital 12.82% 12.96% 4.00%
Total Capital 14.76% 14.95% 8.00%
Leverage ratio 9.97% 9.27% 4.00%
=========================================================================================
The risk-based capital ratios declined in 1997 as the increase in
total assets outpaced the growth in equity. 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." Adjusted for the three-to-one
stock split, the Board of Directors of the Company authorized,
beginning in 1994, the repurchase of 3,252,150 shares of common
stock from time to time, subject to appropriate regulatory and
other accounting requirements. These purchases are made
periodically in the open market and reduce the dilutive impact of
issuing new shares to meet stock performance, option plans,
acquisitions and other requirements. During 1997, the Company
acquired 1,040,886 shares of its common stock on the open market,
compared to 1,207,800 in 1996, 721,350 in 1995 and 93,000 in 1994.
FINANCIAL RATIOS
The following table shows key financial ratios for the periods
indicated:
- -----------------------------------------------------------------------------------------------------
At December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Return on average total assets 1.28% 1.24% 1.14%
Return on shareholders' equity 12.71% 13.22% 12.73%
Average shareholders' equity as a percentage of:
Average total assets 10.10% 9.36% 8.99%
Average total loans 16.84% 15.74% 15.04%
Average total deposits 12.14% 11.26% 10.59%
Dividend payout ratio (diluted EPS) 33.00% 28.00% 26.00%
=====================================================================================================
DEPOSIT CATEGORIES
The Company primarily attracts deposits from local businesses and
professionals, as well as through retail certificates of deposit,
savings and checking accounts.
The following table summarizes the Company's average daily amount
of deposits and the rates paid for the periods indicated:
- -----------------------------------------------------------------------------------------------------------------
1997 1996
Percentage Percentage
Average of Total Average of Total
Balance Deposits Rate * Balance Deposits Rate *
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Non-interest bearing demand $781,001 25.0% --% $750,204 23.9% --%
Interest bearing:
Transaction 548,139 17.6% 1.22% 523,973 16.7% 1.23%
Savings 985,800 31.6% 2.84% 1,035,559 32.9% 2.75%
Time less than $100,000 479,692 15.4% 5.09% 520,968 16.5% 5.02%
Time $100,000 or more 323,840 10.4% 5.28% 313,050 10.0% 5.27%
- -----------------------------------------------------------------------------------------------------------------
Total $3,118,472 100.0% 3.26% $3,143,754 100.0% 3.24%
=================================================================================================================
*Rate is computed based on interest-bearing deposits
- -----------------------------------------------------------------------------
1995
Percentage
Average of Total
Balance Deposits Rate *
- -----------------------------------------------------------------------------
Non-interest bearing demand $720,799 22.5% --%
Interest bearing:
Transaction 495,249 15.5% 1.19%
Savings 1,122,220 35.0% 2.81%
Time less than $100,000 567,448 17.8% 5.24%
Time $100,000 or more 296,109 9.2% 5.48%
- -----------------------------------------------------------------------------
Total $3,201,825 100.0% 3.36%
=============================================================================
*Rate is computed based on interest-bearing deposits
In 1997, total average deposits decreased 1 percent from 1996
primarily due to decreases in savings and retail certificates of
deposits as a result of the runoff business that was anticipated
from the Merger completed in 1997. However, to counteract this
effect, aggressive policies in place resulted in a 4 percent
increase in the average balance of non-interest bearing and
transaction demand accounts.
In 1996, total average deposits decreased 2 percent primarily
related to decreases in savings and retail certificates of deposit.
A declining rate environment and the runoff of business after
merger activity are the major reasons for this decline.
The following table sets forth, by time remaining to maturity, the
Company's domestic time deposits in amounts of $100,000 or more:
- -----------------------------------------------------------------
At December 31, 1997
- -----------------------------------------------------------------
(In thousands)
Three months or less $218,592
Over three through six months 41,414
Over six through twelve months 40,110
Over twelve months 11,026
- -----------------------------------------------------------------
Total $311,142
=================================================================
SHORT-TERM BORROWINGS
The following table sets forth the short-term borrowings of the
Company for the periods indicated:
- -----------------------------------------------------------------------------------------
At December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
Federal funds purchased $50,000 $6,300 $55,410
Other borrowed funds:
Retail repurchase agreements 103,346 112,594 91,622
Other 111,502 48,553 39,000
- -----------------------------------------------------------------------------------------
Total other borrowed funds $214,848 $161,147 $130,622
- -----------------------------------------------------------------------------------------
Total funds purchased $264,848 $167,447 $186,032
=========================================================================================
Further detail of the other borrowed funds is as follows:
- -----------------------------------------------------------------------------------------
At December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
Outstanding:
Average for the year $153,013 $172,808 $140,083
Maximum during the year 227,463 217,589 154,022
Interest rates:
Average for the year 4.73% 5.07% 5.57%
Average at period end 4.76% 4.90% 5.31%
NON-INTEREST INCOME
Components of Non-Interest Income
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
(In millions)
Deposit account fees $20.6 $21.0 $20.1
Credit card merchant fees 3.7 4.5 3.6
Mortgage banking income 1.5 2.0 2.2
Financial services commissions 1.2 0.8 0.6
Trust fees 0.5 0.4 0.6
Other 9.5 7.6 7.1
- -----------------------------------------------------------------------------------------
Total $37.0 $36.3 $34.2
=========================================================================================
Non-interest income was $37.0 million in 1997, $700 thousand higher
than 1996. Other non-interest income was $1.9 million higher,
including higher gains on asset sales. In addition, financial
services commissions were $400 thousand higher than 1996 primarily
due to increased sales volume and additional services provided and
trust fees were $100 thousand higher than 1996 including increased
personal and retirement plan business. Partially offsetting these
changes, credit card merchant fees were $800 thousand lower than
prior year, mortgage banking income was $500 thousand lower due to
lower refinancing volumes resulting in lower income from sales of
loans and servicing fees, and deposit account fees were $400
thousand lower due to reduced volume partially offset by higher
account analysis fees assessed. Non-interest income was $36.3
million in 1996, $2.1 million higher than 1995. Deposit account
fees and merchant credit card income were $900 thousand, each,
higher than 1996 due to increased volume. Other was $500 thousand
higher, principally due to higher gains on asset sales and
financial services commissions were $200 thousand higher due to
increased sales volume. Partially offsetting these changes,
mortgage banking income was $200 thousand lower than 1995 due to
reduced servicing income and trust fees were $200 thousand lower
than prior year primarily due to account runoff.
NON-INTEREST EXPENSE
Components of Non-Interest Expense
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
(In millions)
Salaries $50.4 $47.6 $52.9
Other personnel benefits 12.1 13.4 13.3
Occupancy 22.2 17.5 16.4
Equipment 10.8 10.1 10.9
Professional fees 9.2 6.0 5.9
Data processing 6.2 6.0 5.1
Stationery and supplies 2.5 1.5 3.1
Advertising and public relations 1.9 3.3 2.9
Merchant credit card 1.7 2.3 1.3
Loan expense 1.7 1.8 1.8
Operational losses 1.2 1.5 1.0
Other real estate owned 1.0 1.0 1.8
Insurance 0.5 0.8 1.5
FDIC insurance assessment 0.4 0.1 3.8
Other 16.1 23.2 20.3
- -----------------------------------------------------------------------------------------
Total $137.9 $136.1 $142.0
=========================================================================================
Average full-time equivalent staff 1,288 1,569 1,586
Average assets per full-time equivalent staff
staff (millions) $2.91 $2.41 $2.38
=========================================================================================
Non-interest expense increased $1.8 million in 1997 compared to
1996. Major increases from 1996 relate to costs of approximately
$18.8 million in connection with the Merger, which are included in
employee-related expenses, occupancy and equipment, stationery and
supplies, professional fees and data processing expenses. Partially
offsetting these changes, other non-interest expense decreased $7.1
million, principally due to merger integration and branch
restructuring costs recognized at ValliCorp during 1996, in
connection with its three acquisitions effected in February, March
and September of that year, and its planned branch sales in the
first and second quarters of 1997 that were approved by the Board
of Directors of ValliCorp Holdings, Inc. at the end of 1996. In
addition, expenses were reduced in 1997 in advertising and public
relations, merchant credit card, insurance and other costs,
primarily due to merger efficiencies.
Comparing 1996 and 1995, non-interest expense decreased $5.9
million. Lower expense in 1996 was in part 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 consolidations of operations and strict cost
controls. These were the major reasons for the decreases in
employee related, equipment, stationery and supplies, other real
estate owned and insurance expenses. In addition, the Company
benefited from the elimination of FDIC premiums. Occupancy expenses
increased from 1995, as part of ValliCorp's growth and expansion
plans to consolidate various support and administrative
functions in a centralized headquarters office. Data processing
costs increased mostly due to ValliCorp outsourcing certain data
processing functions. Other non-interest expenses increased from
1995, reflecting merger integration and branch restructuring costs.
Merger-related activity accounted for the increases in advertising
and public relations expenses and operational losses. Completing
the total change, merchant credit card expenses also increased from
1995, commensurate with the revenue growth in services provided to
merchant customers.
The ratio of average assets per full-time equivalent staff was
$2.91 million in 1997 compared to $2.41 million and $2.38 million
in 1996 and 1995, 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 1,586 in 1995 to 1,569 and 1,288 in
1996 and 1997, respectively.
PROVISION FOR INCOME TAX
The provision for income tax increased by $2.4 million in 1997
mainly as a direct result of higher pretax income partially offset
by an increase in tax-exempt interest income from municipal
securities and loans. The 1997 provision of $26.0 million reflects
an effective tax rate of 35.1 percent compared to provisions of
$23.6 million in 1996 and $21.9 million in 1995, representing
effective tax rates of 33.5 percent and 33.7 percent, respectively.
The increase in the effective tax rate in 1997 was primarily due to
increases in non-tax-deductible merger related expenses.
YEAR 2000 COMPLIANCE
The Company has undertaken a major project to ensure that its
internal operating systems, as well as those of its major customers
and suppliers, will be fully capable of processing Year 2000
transactions. The initial phase of the project was to assess and
identify all internal business processes requiring modification and
to develop comprehensive renovation plans as needed. This phase was
largely completed in late 1997. The second phase, expected to be
accomplished by the end of 1998, will be to execute those
renovation plans and begin testing systems by simulating Year 2000
data conditions. Testing and implementation is planned to be
completed during the first half of 1999.
The primary cost of the project has been and will continue to be
the reallocation of internal resources, and therefore does not
represent incremental expense to the Company. The estimated value
of internal resources allocated to Year 2000 compliance efforts in
1997 was approximately $300 thousand. The Company estimates the
total such cost of compliance will be approximately $3.0 million.
It is not expected that Year 2000 compliance expenditures will have
a material effect on the Company's results of operations, liquidity
and capital resources. The Company relies upon third-party software
vendors and service providers for substantially all of its
electronic data processing and does not operate any proprietary
programs which are critical to the Company's operations. Thus, the
focus of the Company is to monitor the progress of its primary
software providers towards compliance with Year 2000 issues and
prepare to test actual data of the Company in simulated processing
of future sensitive dates.
ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements Page
Consolidated Balance Sheets as of December 31, 1997 and 1996 57
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 58
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1997, 1996 and 1995 59
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 60
Notes to Consolidated Financial Statements 61
Independent Auditors' Report 95
Management's Letter of Financial Responsibility 96
Other Independent Auditors' Reports 97
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
- ---------------------------------------------------------------------------
Balances as of December 31, 1997 1996 *
- ---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents (Note 16) $250,824 $355,177
Money market assets 250 250
Investment securities available for sale (Note 2) 1,003,234 892,461
Investment securities held to maturity;
market values of
$236,896 in 1997 and $218,009 in 1996 (Note 2) 230,960 215,432
Loans, net of an allowance for loan losses of:
$50,630 in 1997 and $50,921 in 1996
(Notes 3, 4 and 15) 2,211,307 2,236,319
Other real estate owned 7,381 9,912
Premises and equipment, net (Notes 5 and 6) 48,412 63,968
Interest receivable and other assets (Note 9) 96,076 93,255
- ---------------------------------------------------------------------------
Total assets $3,848,444 $3,866,774
===========================================================================
LIABILITIES
Deposits:
Non-interest bearing $852,153 $834,964
Interest bearing:
Transaction 554,825 379,468
Savings 902,381 1,189,554
Time (Notes 2 and 6) 769,142 824,714
- ---------------------------------------------------------------------------
Total deposits 3,078,501 3,228,700
Short-term borrowed funds (Note 6) 264,848 167,447
Liability for interest, taxes and
other expenses (Note 9) 45,443 32,483
Debt financing and notes payable (Note 6) 52,500 58,865
- ---------------------------------------------------------------------------
Total liabilities 3,441,292 3,487,495
- ---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 7 and 16)
Common Stock (no par value)
Authorized** - 150,000 shares
Issued and outstanding** -
42,799 in 1997 and 42,889 in 1996 198,517 187,210
Unrealized gain on securities
available for sale, net 17,923 6,019
Retained earnings 190,712 186,050
- ---------------------------------------------------------------------------
Total shareholders' equity 407,152 379,279
- ---------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,848,444 $3,866,774
===========================================================================
* Restated on a historical basis to reflect the April 12, 1997 acquisition
of ValliCorp Holdings, Inc. on a pooling-of-interests basis
** Restated for a three-to-one stock split authorized January 22, 1998 and
effective February 25, 1998
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, 1997 1996 * 1995 *
- -------------------------------------------------------------------------------------
INTEREST INCOME
Loans $201,999 $206,887 $217,826
Money market assets and funds sold 1,635 5,219 3,881
Investment securities:
Available for sale
Taxable 46,620 41,416 16,464
Tax-exempt 7,957 7,353 283
Held to maturity
Taxable 5,199 6,233 32,005
Tax-exempt 7,260 7,074 13,245
- -------------------------------------------------------------------------------------
Total interest income 270,670 274,182 283,704
- -------------------------------------------------------------------------------------
INTEREST EXPENSE
Transaction deposits 6,706 6,462 5,876
Savings deposits 28,036 28,474 31,580
Time deposits (Note 6) 41,522 42,649 45,976
Funds purchased (Note 6) 7,803 9,974 8,708
Debt financing and notes payable (Note 6) 3,987 4,141 3,487
- -------------------------------------------------------------------------------------
Total interest expense 88,054 91,700 95,627
- -------------------------------------------------------------------------------------
NET INTEREST INCOME 182,616 182,482 188,077
Provision for loan losses (Note 3) 7,645 12,306 15,229
- -------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 174,971 170,176 172,848
- -------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 20,624 20,984 20,053
Merchant credit card 3,737 4,549 3,594
Mortgage banking 1,521 1,986 2,225
Financial services commissions 1,153 788 611
Trust fees 504 386 615
Securities gain (loss) 198 45 (74)
Other 9,276 7,569 7,203
- -------------------------------------------------------------------------------------
Total non-interest income 37,013 36,307 34,227
- -------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and related benefits (Note 14) 62,485 61,033 66,232
Occupancy (Notes 5 and 12) 22,166 17,466 16,390
Furniture and equipment (Notes 5 and 12) 10,799 10,075 10,917
Professional fees 9,185 5,997 5,872
Data processing 6,234 6,029 5,061
Other real estate owned
and property held for sale 1,121 955 1,762
Other 25,888 34,496 35,726
- -------------------------------------------------------------------------------------
Total non-interest expense 137,878 136,051 141,960
- -------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 74,106 70,432 65,115
Provision for income taxes (Note 9) 25,990 23,605 21,930
- -------------------------------------------------------------------------------------
NET INCOME $48,116 $46,827 $43,185
=====================================================================================
Average shares outstanding** 43,040 42,759 43,747
Diluted average shares outstanding** 43,827 43,358 44,274
PER SHARE DATA** (Notes 7 and 19)
Basic earnings $1.12 $1.10 $0.99
Diluted earnings 1.10 1.08 0.98
Dividends paid 0.36 0.30 0.25
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
** Restated for a three-to-one stock split authorized January 22, 1998
and effective February 25, 1998
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, 1994 * $176,691 ($6,058) $150,536 $321,169
Net income for the year -- -- 43,185 43,185
Stock issued 4,323 -- -- 4,323
Purchase and retirement of stock (2,640) -- (9,701) (12,341)
Dividends -- -- (13,171) (13,171)
Unrealized gain on securities available for sale, net -- 7,213 -- 7,213
- ------------------------------------------------------------------------------------------------------
December 31, 1995 * $178,374 $1,155 $170,849 $350,378
Net income for the year -- -- 46,827 46,827
Stock issued 17,892 -- -- 17,892
Purchase of treasury stock (5,253) -- -- (5,253)
Purchase and retirement of stock (3,803) -- (18,505) (22,308)
Dividends -- -- (13,121) (13,121)
Unrealized gain on securities available for sale, net -- 4,864 -- 4,864
- ------------------------------------------------------------------------------------------------------
December 31, 1996 * $187,210 $6,019 $186,050 $379,279
Net income for the year -- -- 48,116 48,116
Stock issued 16,853 -- -- 16,853
Purchase and retirement of stock (5,546) -- (30,048) (35,594)
Dividends -- -- (13,406) (13,406)
Unrealized gain on securities available for sale, net -- 11,904 -- 11,904
- ------------------------------------------------------------------------------------------------------
December 31, 1997 $198,517 $17,923 $190,712 $407,152
======================================================================================================
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 1996 * 1995 *
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $48,116 $46,827 $43,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,828 9,995 10,633
Loan loss provision 7,645 12,306 15,229
Amortization of deferred net loan (cost) fees (1,215) (1,105) (1,858)
Decrease (increase) in interest income receivable 1,460 1,586 (1,353)
Decrease (increase) in other assets 940 (14,735) 96
Increase (decrease) in income taxes payable 3,135 (1,224) (2,129)
(Decrease) increase in interest expense payable (321) 559 82
Decrease in other liabilities (5,340) (4,309) (1,851)
(Gain) loss on sales of investment securities (198) (45) 74
Gain on sales of branches (678) -- --
Net loss on sales/write-down of equipment 7,785 212 1,586
Originations of loans for resale (12,157) (56,988) (60,178)
Net proceeds from sale of loans originated for resale 19,301 62,920 58,900
Net (gain) loss on sale of property acquired in satisfaction of debt (1,184) (173) 27
Write-down on property acquired in satisfaction of debt 1,422 834 1,515
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 78,539 56,660 63,958
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash obtained in merger -- 4,391 --
Net repayments/(disbursements) of loans 9,102 22,290 (3,293)
Purchases of investment securities available for sale (441,926) (339,666) (220,428)
Purchases of investment securities held to maturity (73,115) (26,448) (92,810)
Purchases of property, plant and equipment (5,036) (19,158) (9,106)
Proceeds from maturity of securities available for sale 327,738 294,339 103,263
Proceeds from maturity of securities held to maturity 57,588 116,898 125,545
Proceeds from sale of securities available for sale 23,736 42,475 44,029
Proceeds from sale of securities held to maturity -- -- 1,316
Proceeds from sale of property and equipment 4,004 1,965 417
Proceeds from property acquired in satisfaction
of debt 6,327 5,676 6,771
- ---------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (91,582) 102,762 (44,296)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (150,199) (108,027) 21,084
Net increase (decrease) in short-term borrowings 97,401 (18,585) 45,106
Additions net of principal payments on notes and mortgages payable -- (5,015) (5,007)
(Repayments) additions to notes payable (6,365) 22,500 (5,524)
Exercise of stock options/issuance of shares 16,853 4,541 4,139
Cash in lieu of fractional shares -- -- (36)
Retirement of common stock (35,594) (27,561) (12,341)
Dividends paid (13,406) (15,005) (12,101)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (91,310) (147,152) 35,320
- ---------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (104,353) 12,270 54,982
Cash and cash equivalents at beginning of year 355,177 342,907 287,925
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $250,824 $355,177 $342,907
=====================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Supplemental disclosure of non-cash activities
Loans transferred to other real estate owned $2,604 $8,837 $8,140
Premises transferred to other real estate owned 1,430 -- --
Unrealized gain on securities available for sale, net 11,904 4,864 7,213
Supplemental disclosure of cash flow activity
Interest paid for the period 88,168 89,999 96,810
Income tax payments for the period 24,297 26,086 22,713
Conversion of subordinated notes into common stock -- 84 184
Financing sales of premises and other real estate -- 345 333
Dividends declared but not yet paid -- -- 1,884
Common stock issued for Auburn Bancorp merger -- 13,267 --
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
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.
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
company engaged in financing accounts receivable and inventory
lines of credit and term business loans. Significant intercompany
transactions have been eliminated in consolidation. All data for
1996 and 1995 have been restated to include the April 12, 1997
acquisition of ValliCorp Holdings, Inc., accounted for as a
pooling of interests. (Note 19)
Business Combinations. In a business combination accounted for as a
pooling of interests, the assets, liabilities and shareholders'
equity of the acquired entity are carried forward at their
historical amounts and its results of operations are combined with
the Company's results of operations. Additionally, the Company's
prior period financial statements are restated to give effect to
the merger. In a business combination accounted for as a purchase,
the results of operations of the acquired entity are included from
the date of acquisition. Assets and liabilities of the entity
acquired are recorded at fair value on the date of acquisition.
Goodwill and identified intangibles are amortized over their
estimated lives.
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. 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 Allowance for Loan Losses. The allowance 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 allowance 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. The Company recognizes a loan as
impaired when based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All
amounts due according to the contractual terms means that both the
contractual interest payments and the contractual principal
payments of a loan will be collected as scheduled in the loan
agreement.
Other Real Estate Owned. Other real estate owned is comprised
of property acquired through foreclosure proceedings,
acceptances of deeds-in-lieu of foreclosure and some vacated bank
properties. Losses recognized at the time of acquiring property in
full or partial satisfaction of debt are charged against the
allowance 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
or amortized assets are removed from the Company's balance
sheet.
Intangible assets. Intangible assets (which are included in Other
Assets) aggregating $14,391,000 and $16,506,000 (net of accumulated
amortization of $10,654,000 and $8,335,800) at December 31, 1997 and
1996, respectively, are comprised of core deposit intangibles and
goodwill acquired in business combinations. Core deposit
intangibles are amortized over the estimated lives of the existing
deposit bases (10 years) on a straight-line basis. Goodwill of
$9,563,000 in 1997 and $10,384,000 in 1996 (net of accumulated
depreciation of $3,257,000 and $2,367,000, respectively) is amortized
on a straight-line basis over 15 years. Management periodically
reviews the balances to determine if such balances have been
impaired.
Impairment of Long-Lived Assets. The Company reviews for impairment
of long-lived assets and certain intangibles to be held, whenever
events or changes indicate that the carrying amount of an asset may
not be recoverable.
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. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates in the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes.
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.
Transfers and Servicing of Financial Assets and Extinguishing of
Liabilities. 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. 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" ("SFAS 127"),
which defers certain provisions of SFAS 125 for one year. The
provisions of SFAS 125 which were not deferred by SFAS 127 were
effective January 1997 and were applied prospectively. The adoption
of the applicable provisions of SFAS 125 did not have a material
impact on the Company's financial condition and Management does not
expect that the adoption of the remaining provisions of these
Statements will have a material impact on the Company's financial
condition.
Earnings Per Share ("EPS"). In February of 1997, the Financial
Accounting Standards Board ("FASB") issued the Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). Under the provisions of SFAS 128, the
presentation of primary and fully diluted EPS as previously
required by APB Opinion No. 15 is replaced with basic and
diluted EPS. SFAS 128 also requires dual presentation of
basic and diluted EPS on the face of the income statement and
a reconciliation of the amounts used in the diluted EPS to
the amounts used in the basic EPS computation. Basic EPS is
computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the dilution that would
occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in
the issuance of common stock that would be shared in the
earnings of the Company. The Company adopted the provisions
of SFAS 128 on December 31, 1997 and, to conform with the
statement's requirements, all prior period EPS data have been
restated. The adoption of SFAS 128 did not have any effect on
the reported net income of the Company. On January 27, 1998, the
Board of Directors of the Company authorized a three-for-one stock
split of the Company's Common Stock in which every one share of the
Company's Common Stock is split and converted into three shares of
the Company's Common Stock. All share and per share information has
been restated for the three-to-one stock split effective February 25,
1998.
Comprehensive Income. In June of 1997, the Financial Accounting
Standards Board ("FASB") issued the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). Under the provisions of SFAS 130, an entity that
provides a full set of financial statements is required to report
comprehensive income in the presentation of its financial
statements. The term "comprehensive income" describes the total of
all components of comprehensive income including net income. "Other
comprehensive income" refers to revenues, expenses, and gains and
losses that are included in comprehensive income but are excluded
from net income as they have been recorded directly in equity under
the provisions of other FASB statements. SFAS 130 provides three
approaches to reporting comprehensive income: (i) as part of the
statement of income; (ii) as a separate statement that starts with
net income and adds the other components of comprehensive income;
(iii) as a part of the statements of changes in equity, by
identifying all of the elements of other comprehensive income
including net income. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Comparative financial statements
provided for earlier periods are required to be reclassified to
reflect application of the provisions of SFAS 130. The Company
expects that the adoption of SFAS 130 will not have any effect on
the reported net income.
Segments of an Enterprise and Related Information. In June of
1997, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS
131"). Under the provisions of SFAS 131, an entity is required to
report selected information about operating segments in annual
financial statements and interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The Statement uses
a "management approach" to identify operating segments and defines
an operating segment as a component of an enterprise (i) for which
discrete financial information is available; (ii) that engages in
business activities that may earn revenues and incur expenses
(including revenues and expenses relating to transactions with
other components of the same enterprise) and (iii) whose operating
results are regularly reviewed by the enterprise's chief operating
decision maker. Reportable segments (aggregated if appropriate) are
operating segments that meet specified quantitative thresholds
based on revenues, profit or loss and assets, using a ten percent
rule. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. Segment information that is presented for
comparative purposes is to be restated to conform to the
requirements of SFAS 131 unless it is impracticable to do so. The
required interim disclosures are not required to be made in the
initial year of application but the information for the interim
periods for the initial year is required as comparative information
in the second year of application.
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.
Reclassifications. 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, 1997, follows:
- --------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------
U.S. Treasury securities $276,009 $1,845 ($64) $277,790
Securities of U.S. Government
agencies and corporations 180,792 963 (631) 181,124
Obligations of States and
political subdivisions 196,811 6,653 (59) 203,405
Asset-backed securities 183,982 518 (123) 184,377
Other securities 133,837 22,834 (133) 156,538
- --------------------------------------------------------------------------------------
Total $971,431 $32,813 ($1,010) $1,003,234
======================================================================================
An analysis of the held-to-maturity investment securities portfolio
as of December 31, 1997, follows:
- --------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------
Securities of U.S. Government
agencies and corporations $83,656 $460 ($611) $83,505
Obligations of States and
political subdivisions 136,965 6,126 (39) 143,052
Other securities 10,339 -- -- 10,339
- --------------------------------------------------------------------------------------
Total $230,960 $6,586 ($650) $236,896
======================================================================================
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 $299,213 $982 ($456) $299,739
Securities of U.S. Government
agencies and corporations 277,883 380 (3,795) 274,468
Obligations of States and
political subdivisions 126,130 2,995 (494) 128,631
Asset-backed securities 94,145 189 (52) 94,282
Other securities 84,644 10,729 (32) 95,341
- --------------------------------------------------------------------------------------
Total $882,015 $15,275 ($4,829) $892,461
======================================================================================
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 $998 $-- ($4) $994
Securities of U.S. Government
agencies and corporations 79,743 485 (822) 79,406
Obligations of States and
political subdivisions 131,343 3,385 (467) 134,261
Asset-backed securities 191 -- -- 191
Other securities 3,157 -- -- 3,157
- --------------------------------------------------------------------------------------
Total $215,432 $3,870 ($1,293) $218,009
======================================================================================
The amortized cost and estimated market value of securities at
December 31, 1997, 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 $158,232 $158,572 $15 $15
1 to 5 years 482,975 485,329 16,072 16,401
5 to 10 years 153,765 156,031 77,140 80,618
Over 10 years 106,011 109,893 54,077 56,357
- --------------------------------------------------------------------------------------
Sub-total 900,983 909,825 147,304 153,391
Mortgage-backed 55,001 55,591 83,656 83,505
Other securities 15,447 37,818 -- --
- --------------------------------------------------------------------------------------
Total $971,431 $1,003,234 $230,960 $236,896
======================================================================================
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, 1997 and 1996,
the Company had no high-risk collateralized mortgage
obligations.
Proceeds from sales of securities during 1997, 1996 and 1995
were $23.7 million, $42.5 million and $45.4 million, respectively.
In 1997, the Company realized gains from the sale of these
securities in the amount of $198 thousand, compared to gains of
$45 thousand and losses of $74 thousand in 1996 and 1995, respectively.
As of December 31, 1997, $515.3 million of investment securities
were pledged to secure public deposits and short-term funding
needs, compared to $430.4 million in 1996.
Note 3: Loans and Allowance for Loan Losses
Loans at December 31, consisted of the following:
- --------------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------
Commercial $744,382 $839,336
Real estate-commercial 692,736 616,648
Real estate-construction 66,782 101,136
Real estate-residential 361,909 276,951
- --------------------------------------------------------------------------------------
Total real estate loans 1,121,427 994,735
Installment and personal 404,382 462,734
Unearned income (8,254) (9,565)
- --------------------------------------------------------------------------------------
Gross loans 2,261,937 2,287,240
Allowance for loan losses (50,630) (50,921)
- --------------------------------------------------------------------------------------
Net loans $2,211,307 $2,236,319
======================================================================================
Included in real estate-residential at December 31, 1997
and 1996 are loans held for resale of $3.3 million and
$1.3 million, respectively, the cost of which approximates
market value.
The following summarizes the allowance for loan losses of the
Company for the periods indicated:
- --------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
Balance at January 1, $50,921 $48,494 $46,580
Provision for loan losses 7,645 12,306 15,229
Loans charged off (12,484) (16,017) (16,220)
Recoveries of loans previously charged of 4,548 4,473 2,905
Allowance acquired through merger -- 1,665 --
- --------------------------------------------------------------------------------------
Balance at December 31, $50,630 $50,921 $48,494
======================================================================================
The following is a summary of interest foregone on non-accrual
and restructured loans for the years ended December 31:
- --------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
Interest income that would have been
recognized had the loans performed
in accordance with their original terms $1,632 $1,642 $3,027
Less: Interest income recognized on
non-accrual and restructured loans (462) (270) (242)
- --------------------------------------------------------------------------------------
Interest foregone on non-accrual
and restructured loans $1,170 $1,372 $2,785
- --------------------------------------------------------------------------------------
There were no commitments to lend additional funds to borrowers
whose loans are included above.
At December 31, 1997, the recorded investment in loans for which
impairment was recognized totaled $22.5 million compared to $20.6
million at December 31, 1996. The specific reserves at December 31,
1997 and 1996 were $2.2 million and $2.2 million, 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,
1997, the average recorded net investment in impaired loans was
approximately $22.0 million compared to $24.2 million and $21.5
million, respectively, at December 31, 1996 and 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.
Note 4: Concentration of Credit Risk
The Company's business activity is with customers in Northern and
Central California. The loan portfolio is well diversified with no
industry comprising greater than 10 percent of total loans
outstanding as of December 31, 1997 and 1996.
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 standby letters of credit related to real estate
loans of $69.8 million at December 31, 1997. 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
Cost Amortization Value
- --------------------------------------------------------------------------------------
1997 (In thousands)
Land $10,365 $- $10,365
Buildings and improvements 34,756 (9,437) 25,319
Leasehold improvements 5,864 (3,413) 2,451
Furniture and equipment 19,650 (9,373) 10,277
- --------------------------------------------------------------------------------------
Total $70,635 ($22,223) $48,412
======================================================================================
1996
Land $12,360 $ -- $12,360
Buildings and improvements 37,417 (9,646) 27,771
Leasehold improvements 13,916 (4,832) 9,084
Furniture and equipment 35,529 (20,776) 14,753
- --------------------------------------------------------------------------------------
Total $99,222 ($35,254) $63,968
======================================================================================
Depreciation and amortization included in operating expenses
amounted to $7.5 million in 1997, $8.5 million in 1996 and $8.6
million in 1995.
Note 6: Borrowed Funds
Debt financing and notes payable, including the unsecured obligations of the
Company, as of December 31, 1997 and 1996, were as follows:
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
(In thousands)
Federal Home Loan Bank notes in increments
of $5,000,000 starting in 1994 and each
dated December 1. Interest payable quarterly
at prime minus 2.05% to 2.32%; principal
payable annually in $5,000,000 increments
collateralized by $30,000,000 of commercial
and mortgage loans. $10,000 $15,000
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 22,500
Mandatory convertible subordinated debentures
dated April 1, 1986; interest payable quarterly
at prime plus 1.5%; principal mandatorily
convertible into common stock no later than
March 1998 or prior thereto at the option
of the holder, at $5.50 per share. -- 728
Optional convertible subordinated debentures
dated April 1, 1986; interest payable quarterly
at prime plus .75%; principal payable quarterly
at $22,734 with final payment due April 1998;
convertible, at the option of the holder into
common stock at $5.50 per share. -- 114
Two real property note obligations secured by
property and improvements; original principal amount
of $698,000 at 8.5% with monthly principal and
interest payments of $6,590 through June 2010. -- 523
- --------------------------------------------------------------------------------------
Total debt financing and notes payable $52,500 $58,865
======================================================================================
The prime interest rate related to all financing arrangements
was 8.50% and 8.25% at December 31, 1997 and 1996, respectively.
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, 1997 and 1996, 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, 1997 and 1996, the Banks had
$311.1 million and $328.2 million, respectively, in time deposit
accounts in excess of $100 thousand; interest on these accounts in
1997, 1996 and 1995 was $17.1 million, $16.8 million and $16.2
million, respectively.
Funds purchased include federal funds purchased and securities sold
with repurchase agreements. Fed funds purchased were $50.0 million
and $0 at December 31, 1997 and 1996, respectively. Securities sold
with repurchase agreements were $103.3 million at December 31, 1997
and $118.9 million at December 31, 1996. 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, 1997, 1996, and 1995, 566,091, 587,601 and
482,853 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,
2,250,000 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.
ValliCorp Holdings, Inc. also had separate stock options plans (the
"Stock Option Plans") whereby options were granted to certain
officers, directors and employees. Pursuant to the Merger,
effective April 12, 1997, all Stock Option Plans were terminated.
All outstanding options were substituted for the Company's stock
options, adjusted for the exchange ratio as defined in the merger
agreement. At December 31, 1996 and 1995, 1,327,470 and 1,387,194,
respectively, were available for issuance under the Stock Option
Plans. There were no options granted during 1997 under this plan,
and there were 286,488 and 196,215 options granted in 1996 and
1995, respectively.
Stock Options. A summary of the status of the Company's stock
options as of December 31, 1997, 1996 and 1995 and changes during
the years ended on those dates, follows:
- ------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,703,450 $10 2,623,974 $9
Granted 522,150 19 783,589 14
Exercised (1,056,165) 11 (528,281) 7
Forfeited (75,048) 16 (175,832) 13
- ------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,094,387 $12 2,703,450 $10
Options exercisable at end of year 1,147,920 1,322,049
======================================================================================================
- ----------------------------------------------------------------------
1995
- ----------------------------------------------------------------------
Weighted
Number Average
of Exercise
Shares Price
- ----------------------------------------------------------------------
Outstanding at beginning of year 2,982,585 $7
Granted 547,365 12
Exercised (778,245) 5
Forfeited (127,731) 10
- ----------------------------------------------------------------------
Outstanding at end of year 2,623,974 $8
Options exercisable at end of year 1,243,524
======================================================================
The following table summarizes information about options
outstanding at December 31, 1997 and 1996:
- ------------------------------------------------------------------------------------------------------
1997 Options outstanding Options exercisable
- ------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/97 Life Price at 12/31/97 Price
- ------------------------------------------------------------------------------------------------------
$3 - 5 126,894 3.5 years $4 85,017 $4
5 - 7 211,491 3.0 6 208,920 6
7 - 8 194,442 4.8 8 194,442 8
9 - 10 568,824 6.6 10 463,773 10
12 - 14 51,258 6.6 14 51,258 14
15 450,108 8.0 15 144,510 15
19 491,370 9.0 19 -- --
- ------------------------------------------------------------------------------------------------------
$3 - 19 2,094,387 6.7 years $12 1,147,920 $9
======================================================================================================
- ------------------------------------------------------------------------------------------------------
1996 Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
- ------------------------------------------------------------------------------------------------------
$3 - 5 227,217 4.4 years $4 138,609 $4
5 - 10 1,061,211 5.8 8 921,717 8
10 - 13 561,222 8.2 11 156,555 11
13 - 14 49,158 8.2 14 10,854 14
14 - 15 804,642 8.7 15 94,314 14
- ------------------------------------------------------------------------------------------------------
$3 - 15 2,703,450 7.1 years $10 1,322,049 $8
======================================================================================================
Restricted Performance Shares. A summary of the status of the
Company's RPSs as of December 31, 1997, 1996 and 1995, and
changes during the years ended on those dates, follows:
- --------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
Outstanding at beginning of year 268,050 270,900 256,200
Granted 64,410 76,800 97,050
Exercised (99,750) (74,100) (82,350)
Forfeited (82,020) (5,550) --
- --------------------------------------------------------------------------------------
Outstanding at end of year 150,690 268,050 270,900
======================================================================================
As of December 31, 1997, 1996 and 1995, the RPSs had a
weighted-average contractual life of 1.1, 1.2 and 1.3 years,
respectively. The Company expects that substantially all of the
RPSs outstanding at December 31, 1997 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 $2.6 million, $1.6 million and
$1.2 million for 1996 and 1995, respectively. There were no stock
appreciation rights or incentive stock options granted in 1997,
1996 and 1995.
The fair value of each non-qualified stock option grant is
estimated on the date of the grant using the Roll-Geske or the
Black-Scholes option-pricing models with the following assumptions
used for calculating weighted-average grants in 1997, 1996 and 1995:
1996
- --------------------------------------------------------------------------------------
Westamerica ValliCorp
1997 Bancorporation Holdings, Inc.
- --------------------------------------------------------------------------------------
Dividend yield 1.14% 1.80% 2.50%
Expected volatility 21.43% 17.00% 37.50%
Risk-free interest rate 6.35% 5.40% 6.20%
Expected lives 6 years 6 years 4.5 years
- --------------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------------
Westamerica ValliCorp
Bancorporation Holdings, Inc.
- --------------------------------------------------------------------------------------
Dividend yield 1.80% 2.00%
Expected volatility 19.00% 34.50%
Risk-free interest rate 5.75% 5.40%
Expected lives 6 years 4.5 years
- --------------------------------------------------------------------------------------
The weighted average fair value of non-qualified stock options
granted during 1997, 1996 and 1995 was $4.64, $4.06 and $3.47,
respectively.
The fair value of each RPS grant is estimated on the date of grant
using the Roll-Geske or the Black-Scholes option-pricing models with
the following assumptions used for calculating weighted-average RPS
grants in 1997, 1996 and 1995:
- --------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
Dividend yield 1.14% 1.80% 1.80%
Expected volatility 21.43% 17.00% 19.00%
Risk-free interest rate 6.35% 5.15% 7.60%
Expected lives 3 years 3 years 3 years
======================================================================================
The weighted average fair value of RPSs granted during 1997, 1996
and 1995 was $19.25, $14.83 and $10.05, 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) 1997 1996 1995
- --------------------------------------------------------------------------------------
Net income As reported $48,116 $46,827 $43,185
Pro forma 47,298 46,278 42,868
Weighted average shares (basic) 43,040 42,759 43,747
Weighted average shares (diluted) 43,827 43,358 44,274
Earnings per share: As reported (basic) $1.12 $1.10 $0.99
As reported (diluted) 1.10 1.08 0.98
Pro forma (basic) 1.10 1.08 0.98
Pro forma (diluted) 1.08 1.07 0.97
======================================================================================
A reconciliation of the diluted EPS computation to the amounts used
in the basic EPS computation for the periods presented follows:
- ----------------------------------------------------------------------
(In thousands, except per share data)
At December 31, 1997
- ----------------------------------------------------------------------
Number of Per Share
Net Income Shares Amount
- ----------------------------------------------------------------------
Basic EPS: Income available
to common shareholders $48,116 43,040 $1.12
Effect of dilutive
securities:
Stock options outstanding -- 787
- ----------------------------------------------------------------------
Diluted EPS: Income available
to common shareholders
plus assumed conversions $48,116 43,827 $1.10
======================================================================
- ----------------------------------------------------------------------
(In thousands, except per share data)
At December 31, 1996
- ----------------------------------------------------------------------
Number of Per Share
Net Income Shares Amount
- ----------------------------------------------------------------------
Basic EPS: Income available
to common shareholders $46,827 42,759 $1.10
Effect of dilutive
securities:
Stock options outstanding -- 599
- ----------------------------------------------------------------------
Diluted EPS: Income available
to common shareholders
plus assumed conversions $46,827 43,358 $1.08
======================================================================
- ----------------------------------------------------------------------
(In thousands, except per share data)
At December 31, 1995
- ----------------------------------------------------------------------
Number of Per Share
Net Income Shares Amount
- ----------------------------------------------------------------------
Basic EPS: Income available
to common shareholders $43,185 43,747 $0.99
Effect of dilutive
securities:
Stock options outstanding -- 527
- ----------------------------------------------------------------------
Diluted EPS: Income available
to common shareholders
plus assumed conversions $43,185 44,274 $0.98
======================================================================
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 150,000,000
shares of Common Stock presently authorized. At December 31, 1997,
no shares of Class B Common Stock 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 $21.667.
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 $43.333 worth of common stock of the Company for
$21.667. Under certain circumstances, the Rights may be redeemed
by the Company at a price of $.017 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 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, 1997, 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, 1997 and 1996:
- ---------------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
the FDICIA
For Capital Prompt Corrective
1997 Actual Adequacy Purposes Action Provisions:
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total Capital (to risk-weighted assets)
Consolidated Company $431,552 14.76% $233,919 8.00% $292,398 10.00%
Westamerica Bank 383,447 13.68% 224,306 8.00% 280,383 10.00%
Bank of Lake County 9,208 14.37% 5,126 8.00% 6,408 10.00%
Tier 1 Capital (to risk weighted assets)
Consolidated Company 374,828 12.82% 116,959 4.00% 175,439 6.00%
Westamerica Bank 322,228 11.49% 112,153 4.00% 168,230 6.00%
Bank of Lake County 8,398 13.11% 2,563 4.00% 3,845 6.00%
Leverage Ratio *
Consolidated Company 374,828 9.97% 150,312 4.00% 187,890 5.00%
Westamerica Bank 322,228 8.86% 145,512 4.00% 181,890 5.00%
Bank of Lake County 8,398 9.24% 3,637 4.00% 4,547 5.00%
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
the FDICIA
For Capital Prompt Corrective
1996 Actual Adequacy Purposes Action Provisions:
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total Capital (to risk-weighted assets)
Consolidated Company $411,622 14.95% $220,142 8.00% $275,178 10.00%
Westamerica Bank 365,409 13.79% 211,929 8.00% 264,911 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 356,804 12.97% 110,071 4.00% 165,107 6.00%
Westamerica Bank 306,093 11.55% 105,964 4.00% 158,947 6.00%
Bank of Lake County 9,721 16.36% 2,376 4.00% 3,564 6.00%
Leverage Ratio *
Consolidated Company 356,804 9.30% 153,481 4.00% 191,851 5.00%
Westamerica Bank 306,093 8.26% 148,230 4.00% 185,288 5.00%
Bank of Lake County 9,721 10.79% 3,605 4.00% 4,507 5.00%
=================================================================================================================================
* 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 1996 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) 1997 1996
- ----------------------------------------------------------------------
Deferred tax asset
Reserve for loan losses $20,559 $20,687
State franchise taxes 2,878 2,759
Deferred compensation 2,299 1,908
Real estate owned 2,306 2,059
Interest on non-accrual loans 1,249 674
Reserve for long-term lease commitments 1,080 1,242
Other reserves 962 843
Other 625 745
Net operating loss carryfowards 584 842
General tax credit carryforwards 215 215
- ----------------------------------------------------------------------
Subtotal deferred tax asset 32,757 31,974
Valuation allowance -- (486)
- ----------------------------------------------------------------------
Total deferred tax asset 32,757 31,488
- ----------------------------------------------------------------------
Deferred tax liability
Net deferred loan costs 3,288 1,762
Fixed assets 2,190 1,928
Securities available for sale 13,523 4,723
Intangible assets 827 1,311
Leases 500 590
Other 239 581
- ----------------------------------------------------------------------
Total deferred tax liability 20,567 10,895
- ----------------------------------------------------------------------
Net deferred tax asset $12,190 $20,593
======================================================================
The valuation allowance, which relates to the deferred tax asset
acquired through the merger with CapitolBank Sacramento in June of
1995, was eliminated as a result of operations making it more
likely than not that all available deferred tax assets will be
fully utilized.
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) 1997 1996 1995
- --------------------------------------------------------------------------------------
Current income tax expense:
Federal $18,164 $17,311 $16,666
State 8,223 7,805 7,032
- --------------------------------------------------------------------------------------
Total current 26,387 25,116 23,698
- --------------------------------------------------------------------------------------
Deferred income tax (benefit) expense:
Federal (594) (1,620) (2,106)
State 197 (75) 338
- --------------------------------------------------------------------------------------
Total deferred (397) (1,695) (1,768)
Adjustment of net deferred tax asset for
enacted changes in tax rates:
Federal -- -- --
State -- 184 --
- --------------------------------------------------------------------------------------
Provision for income taxes $25,990 $23,605 $21,930
======================================================================================
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) 1997 1996 1995
- --------------------------------------------------------------------------------------
Federal income taxes due at
statutory rate $25,937 $24,669 $22,790
(Reductions) increases in income
taxes resulting from:
Interest on state and municipal
securities not taxable for federal
income tax purposes (6,872) (5,906) (5,205)
Reduction in the valuation
allowance (486) -- (906)
State franchise taxes, net of
federal income tax benefit 5,473 5,198 4,795
Costs related to acquisitions 3,183 367 892
Other (1,245) (723) (436)
- --------------------------------------------------------------------------------------
Provision for income taxes $25,990 $23,605 $21,930
======================================================================================
At December 31, 1997, 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 $-- $215
2007 1,655 --
2008 14 --
- --------------------------------------------------------------------------------------
Total $1,669 $215
======================================================================================
Note 10: Fair Value of Financial Instruments
The fair value of financial instruments does 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 values 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 values at December 31, were:
- --------------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------
Cash and cash equivalents $250,824 $355,177
Money market assets 250 250
Interest and taxes receivable 59,384 55,602
Non-interest bearing and interest-bearing
transaction and savings deposits 2,309,359 2,403,986
Funds purchased 264,848 167,447
Interest payable 6,569 7,009
======================================================================================
The fair values at December 31, of the following financial
instruments were estimated using quoted market prices:
- --------------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------
Investment securities available for sale $1,003,234 $892,461
Investment securities held to maturity 236,896 218,009
======================================================================================
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 $50.6 million allowance 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) 1997 1996
- --------------------------------------------------------------------------------------
Loans $2,210,087 $2,221,974
- --------------------------------------------------------------------------------------
The fair values of time deposits and notes and mortgages
payable were 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) 1997 1996
- --------------------------------------------------------------------------------------
Time deposits $768,881 $825,854
Debt financing and notes payable 52,724 61,100
- --------------------------------------------------------------------------------------
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, 1997 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.
Note 12: Lease Commitments
Thirty-seven banking offices and a centralized administrative
service center are owned and 52 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, 1997, are as follows:
- ----------------------------------------------------------------------
(In thousands)
- ----------------------------------------------------------------------
1998 $6,455
1999 5,543
2000 3,335
2001 2,572
2002 1,693
Thereafter 9,254
- ----------------------------------------------------------------------
Total minimum lease payments $28,852
======================================================================
Total rentals for premises and equipment net of sublease
income included in non-interest expense were $6.3 million in
1997, $8.4 million in 1996 and $8.5 million in 1995.
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 expiration 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 $395.9 million and $462.3 million at December 31, 1997 and
1996, 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 $13.1 million and
$18.9 million at December 31, 1997 and 1996, 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
As of February 28, 1997, the Company terminated its defined benefit
Retirement Plan which covered substantially all of its salaried
employees with one or more years of service. Pursuant to the
Retirement Plan termination, the distribution of its assets was
recognized as a settlement. A settlement is defined as "a
transaction that (a) is an irrevocable action, (b) relieves the
employer (or the plan) of primary responsibility for a pension
benefit obligation, and (c) eliminates significant risks related
to the obligation and the assets used to effect the settlement."
The effect of the distribution of assets to settle all plan
liabilities resulted in no net gain or loss for the year ended
December 31, 1997.
The Company's policy was to expense costs as they accrued as
determined by the Projected Unit Cost method. The Company's funding
policy was to contribute annually the maximum amount that could be
deducted for federal income tax purposes.
The following table sets forth the Retirement Plan's funded status
at December 31, 1996, prior to settlement, with the effect of the
settlement and the status at December 31, 1997:
- ------------------------------------------------------------------------------------------------------
After
Curtailment
Effect of and Before
Settlement Settlement
as of as of
December 31, October 1, October 1, December 31,
1997 1997 1997 1996
- ------------------------------------------------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $-- $12,650 ($12,650) ($11,040)
Non-vested benefit obligation -- -- -- (68)
- ------------------------------------------------------------------------------------------------------
Accumulated benefit obligation -- 12,650 (12,650) (11,108)
Additional benefits related to
projected salary increases -- -- -- (1,609)
- ------------------------------------------------------------------------------------------------------
Projected benefit obligation -- 12,650 (12,650) (12,717)
Plan assets at fair market value -- (12,650) 12,650 12,591
- ------------------------------------------------------------------------------------------------------
Funded status - projected benefit
obligation in excess of
plan assets $-- $-- $-- ($126)
======================================================================================================
Comprised of:
Prepaid pension cost $-- $-- $-- $143
Unrecognized net (gain)loss -- 143 (143) 192
Unrecognized prior service benefit -- -- -- (204)
Unrecognized net obligation,
net of amortization -- -- -- (257)
- ------------------------------------------------------------------------------------------------------
Total $-- $143 ($143) ($126)
======================================================================================================
The following table sets forth the components of the 1997 and 1996
pension expense as follows:
- ----------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------
(In thousands)
Service cost during the period $-- $205
Interest cost on projected
benefit obligation 618 745
Actual return on plan assets (398) (1,304)
Net amortization and deferral (220) 394
Settlement loss 143 --
- ----------------------------------------------------------------------
Net periodic pension cost $143 $40
======================================================================
The discount rate used in determining the actuarial present value
of the benefit obligation was 6.55 percent at October 1, 1997, and
6.00 percent at December 31, 1996. The expected long-term rate of
return on plan assets was 7.50 percent as of October 1, 1997 and
December 31, 1996.
The Company sponsors a defined contribution Deferred Profit-Sharing
Plan covering substantially all of its salaried employees with one
or more years of service. Prior to the Retirement Plan's
settlement, participant deferred profit-sharing account balances
were used to offset benefits accrued under the Retirement Plan. The
coordination of benefits of the two plans resulted in the
Retirement Plan benefit formula establishing the minimum value of
participant retirement benefits which, if not provided by the
Deferred Profit-Sharing Plan, were 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 $1.0 million in 1997, $1.3 million in 1996 and $1.4
million in 1995.
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. The Tax Deferred
Savings/Retirement Plan allows employees to defer, on a pretax
basis, a portion of their salaries as contributions to this Plan.
Participants may invest in 10 funds, including one fund that
invests exclusively in Westamerica Bancorporation common stock. The
matching contributions charged to compensation expense were $1.8
million in 1997, $1.8 million in 1996 and $1.9 million in 1995.
The Company uses 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, 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 qualified retirees over age 65.
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:
- ----------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------
(In thousands)
Service cost $408 $245
Interest cost 127 102
Amortization of unrecognized
transition obligation 61 61
- ----------------------------------------------------------------------
Net periodic cost $596 $408
======================================================================
Accumulated postretirement benefit obligation
attributable to:
Retirees $1,180 $1,094
Fully eligible participants 622 462
Other 553 396
- ----------------------------------------------------------------------
Total 2,355 1,952
- ----------------------------------------------------------------------
Fair value of plan assets -- --
- ----------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets $2,355 $1,952
======================================================================
Comprised of:
Unrecognized transition obligation $1,224 $1,285
Recognized postretirement obligation 1,131 667
- ----------------------------------------------------------------------
Total $2,355 $1,952
======================================================================
The discount rate used in measuring the accumulated post-
retirement benefit obligation was 6.5 percent and 6.0 percent at
December 31, 1997 and 1996, respectively. The assumed health care
cost trend rate used to measure the expected cost of benefits
covered by the plan was 2 percent for 1998 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 1997 and 1996 net periodic cost by
$205 thousand and $183 thousand, respectively, and increase the
accumulated postretirement benefit obligation at December 31, 1997
and 1996 by $334 thousand and $302 thousand, 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 1997 and 1996. 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 1997 and 1996:
- ----------------------------------------------------------------------
(In thousands) 1997 1996
- ----------------------------------------------------------------------
Beginning balance $5,390 $11,789
Originations 816 7,759
Payoffs/principal payments (1,068) (10,904)
Other changes * (2,649) (3,254)
- ----------------------------------------------------------------------
At December 31, $2,489 $5,390
======================================================================
Percent of total loans outstanding 0.11% 0.24%
- ----------------------------------------------------------------------
* Other changes in 1997 and 1996 represent loans to former
directors and executive officers who are no longer related
parties.
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 up to $37.2 million in dividends to
the Company as of December 31, 1997. The Company consistently has
paid quarterly dividends to its shareholders since its formation in
1972. As of December 31, 1997, $98.4 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 $31.5 million in
1997 and $66.7 million in 1996.
Note 17: Westamerica Bancorporation (Parent Company Only)
Statements of Income (In thousands)
- ------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 1996* 1995*
- ------------------------------------------------------------------------------------------------------
Dividends from subsidiaries $41,538 $44,467 $26,917
Interest income 1,903 1,851 430
Other income 5,317 4,248 4,452
- ------------------------------------------------------------------------------------------------------
Total income 48,758 50,566 31,799
- ------------------------------------------------------------------------------------------------------
Interest on borrowings 1,624 1,501 425
Salaries and benefits 6,634 5,911 5,768
Other expense 8,046 6,398 6,514
- ------------------------------------------------------------------------------------------------------
Total expenses 16,304 13,810 12,707
- ------------------------------------------------------------------------------------------------------
Income before taxes and equity in undistributed
income of subsidiaries 32,454 36,756 19,092
Income tax benefit 2,101 2,783 2,821
Equity in undistributed income from subsidiaries 13,561 7,288 21,272
- ------------------------------------------------------------------------------------------------------
Net income $48,116 $46,827 $43,185
======================================================================================================
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
Balance Sheets (In thousands)
- --------------------------------------------------------------------------------------
December 31, 1997 1996*
- --------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $29,897 $33,645
Money market assets and investment securities AFS 27,183 16,124
Line of credit from affiliates 3,776 --
Investment in subsidiaries 361,083 342,601
Premises and equipment 17,143 16,322
Accounts receivable from affiliates 1,253 347
Other assets 5,252 5,424
- --------------------------------------------------------------------------------------
Total assets $445,587 $414,463
======================================================================================
Liabilities
Notes payable $22,500 $23,342
Other liabilities 15,935 11,842
- --------------------------------------------------------------------------------------
Total liabilities 38,435 35,184
Shareholders' equity 407,152 379,279
- --------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $445,587 $414,463
======================================================================================
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
Statements of Cash Flows (In thousands)
- ------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 1996* 1995*
- ------------------------------------------------------------------------------------------------------
Operating Activities
Net income $48,116 $46,827 $43,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 684 450 202
Undistributed earnings of affiliates (13,561) (7,288) (21,272)
Increase in accounts receivable from affiliates (906) (96) (95)
Decrease (increase) in other assets 405 308 (4,732)
(Decrease)increase in other liabilities (885) 1,373 266
(Gain) loss on sales of assets (1,756) -- 44
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,097 41,574 17,598
Investing Activities
Purchases of premises and equipment (1,505) (10,826) (1,978)
Net cash obtained in merger -- 218 --
Net change in land held for sale -- 721 80
Net change in loan balances (3,776) -- 148
Investment in subsidiaries -- (500) --
Purchase of investment securities available for sale -- (756) --
Proceeds from sale of other assets 2,260 -- 1,979
Proceeds from maturities of investment securities
available for sale -- -- 6,511
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (3,021) (11,143) 6,740
Financing Activities
Net additions (reductions) in notes payable (677) 21,988 (4,501)
Exercise of stock options/issuance of shares 16,853 5,516 4,819
Cash in lieu of fractional shares -- -- (36)
Retirement of common stock (35,594) (27,561) (12,341)
Dividends (13,406) (7,904) (12,101)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (32,824) (7,961) (24,160)
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,748) 22,470 178
Cash and cash equivalents at beginning of year 33,645 11,175 10,997
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $29,897 $33,645 $11,175
======================================================================================================
Supplemental disclosure:
Non-cash dividend in the form of real property from
Westamerica Bank $-- $3,755 $ --
Unrealized gain on securities available for sale, net 11,904 6,126 --
Conversion of subordinated notes into common stock -- 84 184
Dividends declared, not yet paid -- -- 1,884
Capital contribution to subsidiary -- -- 741
Issuance of common stock for Auburn merger -- 13,267 --
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
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,
- ----------------------------------------------------------------------------------------------------------------------
1997
Interest income $66,526 $67,417 $68,477 $68,250
Net interest income 44,423 45,501 46,307 46,385
Provision for loan losses 3,550 1,050 1,650 1,395
Non-interest income 9,789 9,477 8,776 8,971
Non-interest expense 36,572 49,174 26,202 25,930
Income before taxes 14,090 4,754 27,231 28,031
Net income 9,365 2,813 17,660 18,278
Basic earnings per share 0.21 0.07 0.41 0.43
Diluted earnings per share 0.21 0.07 0.40 0.42
Dividends paid per share 0.08 0.09 0.09 0.10
Price range, common stock $18.83-24.17 $19.27-25.83 $24.58-29.33 $28.54-35.00
- ----------------------------------------------------------------------------------------------------------------------
1996 *
Interest income $68,596 $67,756 $67,643 $70,187
Net interest income 45,481 45,000 44,764 47,237
Provision for loan losses 3,200 2,802 3,152 3,152
Non-interest income 8,484 8,990 9,198 9,635
Non-interest expense 36,965 31,291 32,965 34,830
Income before taxes 13,800 19,897 17,845 18,890
Net income 9,360 13,108 11,903 12,456
Basic earnings per share $0.22 $0.31 $0.28 $0.29
Diluted earnings per share 0.21 0.30 0.28 0.29
Dividends paid per share 0.06 0.08 0.08 0.08
Price range, common stock $14.42-15.75 $15.33-16.75 $15.50-17.00 $16.50-19.58
- ----------------------------------------------------------------------------------------------------------------------
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interest basis
On January 22, 1998, the Board of Directors of the Company
authorized a three-for-one stock split of the Company's Common
Stock in which every one share of the Company's Common Stock is
split and converted into three shares of the Company's Common
Stock. It was further resolved that the effective date of the stock
split shall be February 25, 1998 with a record date of February 10,
1998. Consequently, all earnings per share and price ranges of
common stock have been restated giving effect to the stock split.
NOTE 19: Acquisition
On April 12, 1997, the merger with ValliCorp Holdings, Inc.
("ValliCorp"), parent company of ValliWide Bank, became effective.
At that time, the Company issued approximately 5.0 million shares
of its common stock in exchange for all of the outstanding common
stock of ValliCorp. The business combination was accounted for as a
pooling-of-interests business combination and, accordingly, the
consolidated financial statements and the financial data for the
periods prior to the combination have been restated to include the
accounts and results of operations of ValliCorp.
The following presents a pro forma combined summary of operations
of the Company and ValliCorp for the quarter ended March 31, 1997
and the years ended December 31, 1996 and 1995, and it is presented
as if the Merger had been effective on January 1, 1995.
- ----------------------------------------------------------------------
Three
months ended
March 31,
1997
(In thousands) (unaudited) 1996 1995
- ----------------------------------------------------------------------
Net Interest Income:
Westamerica
Bancorporation $28,787 $113,348 $115,765
ValliCorp
Holdings, Inc. 15,648 69,179 72,312
Intercompany adjustments (12) (45) --
- ----------------------------------------------------------------------
Combined $44,423 $182,482 $188,077
======================================================================
Net Income:
Westamerica
Bancorporation $9,954 $37,740 $31,384
ValliCorp
Holdings, Inc. (580) 9,128 11,801
Intercompany adjustments (9) (41) --
- ----------------------------------------------------------------------
Combined $9,365 $46,827 $43,185
======================================================================
On March 31, 1997 and December 31, 1996, the Company owned 115.5
thousand shares of ValliCorp Common Stock with a cost basis of
approximately $1.7 million. At December 31, 1995, the Company owned
50 thousand shares with a cost basis of approximately $680
thousand. Amounts indicated have been adjusted to eliminate this
investment as a result of the Merger.
There were no other significant transactions between the Company
and ValliCorp prior to the combination. ValliWide Bank was engaged
in the sale of overnight funds to Westamerica Bank to meet
immediate funding requirements.
INDEPENDENT AUDITORS' 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, 1997 and 1996, 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, 1997.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. As discussed in Note 1 to the consolidated financial
statements, the consolidated balance sheet of the Company as of
December 31, 1996 and the related statements of income, changes
in shareholders' equity, and cash flows for the years ended
December 31, 1996 and 1995, and the related footnote disclosures
have been restated on a historical basis to reflect the April 12,
1997 acquisition of ValliCorp Holdings, Inc. on a
pooling-of-interests basis. We did not audit the financial
statements of ValliCorp Holdings, Inc. as of December 31, 1996 and
for the years ended December 31, 1996 and 1995, which statements
reflect total assets constituting 34 percent at December 31, 1996
and net income constituting 19 percent and 27 percent for the years
ended December 31, 1996 and 1995, respectively, of the related and
restated consolidated totals. Those statements included in the 1996
and 1995 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 ValliCorp
Holdings, Inc., is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the 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, 1997
and 1996, and the results of their operations and their cash flows
for each of the years in the three year period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
San Francisco, California
January 22, 1998
MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY
To the 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, 1997, 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 L. Payne
- ------------------
David L. Payne
Chairman, President and Chief Executive Officer
/s/ Jennifer J. Finger
- ----------------------
Jennifer J. Finger
Senior Vice President and Chief Financial Officer
/s/ Dennis R. Hansen
- --------------------
Dennis R. Hansen
Senior Vice President and Controller
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Westamerica
Bancorporation:
We have audited the consolidated balance sheet of ValliCorp
Holdings, Inc. (the Company) and subsidiaries as of December 31,
1996, and the related consolidated statements of income,
stockholders' equity, and cash flows (none of which are presented
herein) for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements based on our audits. The consolidated
financial statements give retroactive effect to the mergers of
ValliCorp Holdings, Inc. and El Capitan Bancshares, Inc. on
February 2, 1996, and ValliCorp Holdings, Inc. and CoBank Financial
Corporation on March 22, 1996, which have been accounted for as
poolings of interests as described in Notes A and B to the
Company's consolidated financial statements. We did not audit the
statements of earnings, stockholders' equity, and cash flows of El
Capitan Bancshares, Inc. for the year ended December 31, 1995,
which statements reflect net interest income of $6,849,000 and net
earnings of $1,044,000 for the year ended December 31, 1995. Those
statements were audited by other auditors whose report, dated
January 19, 1996, has been furnished to us, and our opinion,
insofar as it relates to the amounts included for El Capitan
Bancshares, Inc. for 1995, is based solely on the report of such
other auditors.
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 and
the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ValliCorp Holdings, Inc. and subsidiaries at December 31, 1996, and
the results of their operations and their cash flows for the years
ended December 31, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Fresno, California
January 24, 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors & Stockholders
El Capitan Bancshares, Inc.
We have audited the consolidated balance sheets of El Capitan
Bancshares, Inc. (a California Corporation) and Subsidiary
as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for
the years then ended (not presented separately herein). 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 El Capitan Bancshares, Inc. and Subsidiary as of
December 31, 1995 and 1994, and the consolidated results of their
operations and their consolidated cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
- ----------------------
Grant Thornton LLP
Stockton, California
January 19, 1996
ITEM 9. Changes in and Disagreements 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 19, 1998, 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 11 of the Company's Proxy
Statement dated March 19, 1998, 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 19, 1998, 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 19, 1998, 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
(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
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 $22,000,000 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 Deloitte & Touche LLP
23(c) Consent of Grant Thornton 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 10(b) and 10(c) are incorporated herein
by reference from Exhibits 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
None
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 R. Hansen /s/ Jennifer J. Finger
- -------------------- ----------------------
Dennis R. Hansen Jennifer J. Finger
Senior Vice President and Controller Senior Vice President and
Principal Accounting Officer Chief Financial Officer
Date: March 26, 1998
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, March 26, 1998
- ---------------------------- Director, President
David L. Payne and Chief Executive Officer
/s/ E. Joseph Bowler Senior Vice President March 26, 1998
- ---------------------------- and Treasurer
E. Joseph Bowler
/s/ Etta Allen Director March 26, 1998
- ----------------------------
Etta Allen
/s/ Louis E. Bartolini Director March 26, 1998
- ----------------------------
Louis E. Bartolini
/s/ Charles I. Daniels, Jr. Director March 26, 1998
- ----------------------------
Charles I. Daniels, Jr.
/s/ Don Emerson Director March 26, 1998
- ----------------------------
Don Emerson
/s/ Louis H. Herwaldt March 26, 1998
- ----------------------------
Louis H. Herwaldt
/s/ Arthur C. Latno Director March 26, 1998
- ----------------------------
Arthur C. Latno
/s/ Patrick D. Lynch Director March 26, 1998
- ----------------------------
Patrick D. Lynch
/s/ Catherine Cope MacMillan Director March 26, 1998
- ----------------------------
Catherine Cope MacMillan
/s/ Patrick J. Mon Pere Director March 26, 1998
- ----------------------------
Patrick J. Mon Pere
/s/ Ronald A. Nelson Director March 26, 1998
- ----------------------------
Ronald A. Nelson
/s/ Carl Otto Director March 26, 1998
- ----------------------------
Carl Otto
/s/ Michael J. Ryan, Jr. Director March 26, 1998
- ----------------------------
Michael J. Ryan, Jr.
/s/ Edward B. Sylvester Director March 26, 1998
- ----------------------------
Edward B. Sylvester