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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, 1998
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 19, 1999:
$1,221,622,000
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 25, 1999
Title of Class
Common Stock, no par value
Shares Outstanding
39,369,936
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 17, 1999
for Annual Meeting of Shareholders
to be held on April 21, 1999
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
Item 1 Business
Item 2 Description of Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements on Accounting and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
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 reducing 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 WAB, 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, 1998, the Company had consolidated assets
of approximately $3.84 billion, deposits of approximately
$3.19 billion and shareholders' equity of approximately
$368.6 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 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 million shares of common stock (and two
classes of 1 million shares each, denominated "Class B
Common Stock" and "Preferred Stock", respectively) of
which approximately 39.8 million were outstanding at
December 31, 1998. Pursuant to its stock option plans, at
December 31, 1998, the Company had exercisable options
outstanding of 1.3 million. As of December 31, 1998, 815
thousand 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, 1998, real
estate served as the principal source of collateral with
respect to approximately 55 percent of the Company's loan
portfolio. A worsening of current economic conditions or
rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other
collateral securing loans and the value of the
available-for-sale 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 an event occur
that is not prevented or detected by the Company's
internal controls, uninsured or in excess of applicable
insurance limits, it could have a significant adverse
impact on the Company's business, financial condition or
results of operations. See also the section "Year 2000
Compliance" in the Management's Discussion and Analysis
contained in this report.
Employees
- ---------
At December 31, 1998, the Company and its subsidiaries
employed 1,126 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. Such policies 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.
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.
Regulation and Supervision of Bank Holding Companies
- ----------------------------------------------------
The following is not intended to be an exhaustive
description of the statutes and regulations applicable to
the Company's or the Banks' business. The description of
statutory and regulatory provisions is qualified in its
entirety by reference to the particular statutory or
regulatory provisions. Moreover, major new legislation and
other regulatory changes affecting the Company, the Banks,
banking, and the financial services industry in general
have occurred in the last several years and can be
expected to occur in the future. The nature, timing and
impact of new and amended laws and regulations cannot be
accurately predicted.
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 Board of Governors of the Federal Reserve System
("FRB"). The FRB also has the authority to examine the
Company's subsidiaries.
The Company is also 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 "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 it acquires, merges or consolidates 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 prior 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.
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 the section entitled
"Restrictions on Dividends and Other Distributions" for
additional restrictions on the ability of the Company and
its subsidiary banks (the "Banks") to pay dividends.
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). The Company may only
borrow from the Banks 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.
Comprehensive amendments to federal regulation governing
bank holding companies and change in bank control
("Regulation Y") became effective in 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.
These changes to Regulation Y are subject to numerous
qualifications, limitations and restrictions. 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.
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.
In addition to federal banking law, the Banks are also
subject to applicable provisions of California law. 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.
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.
The FDIC Improvement Act ("FDICIA"), however, imposes
limitations on the activities and equity investments of
state chartered, federally insured banks. FDICIA also
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.
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.
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 generally consists of
common stock, retained earnings, and certain types of
qualifying preferred stock, less most other intangible
assets. Tier 2 capital may consist of a limited amount of
the allowance for loan and lease losses, certain types of
preferred stock not qualifying as Tier 1 capital, term
subordinated debt and certain other instruments with some
characteristics of equity. The federal banking agencies
require 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%.
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 a
banking organization rated in the highest of the five
categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. 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. The effective minimum
leverage ratio, for all practical purposes, must be at
least 4% or 5%.
As of December 31, 1998, the Company's and the Banks'
respective ratios exceeded applicable regulatory
requirements. See Note 8 to the consolidated financial
statements for capital ratios of the Company and the
Banks, compared to the standards for well-capitalized
depository institutions and for minimum capital
requirements.
Prompt Corrective Action and Other Enforcement Mechanisms
- ---------------------------------------------------------
FDICIA requires each federal banking agency to take prompt
corrective action to resolve the problems of insured
depository institutions, including but not limited to
those that fall below one or more prescribed minimum
capital ratios. The law requires each federal banking
agency to promulgate regulations 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.
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.
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.
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.
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 each payment does 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 Commissioner 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 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.
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.
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.
Certain other pending legislative proposals include bills
to let banks pay interest on business checking accounts,
to require "know your customer" policies, 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.
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 Interstate Banking and Branching Act
in 1994 and the California Interstate Banking and
Branching Act of 1995 have increased competition within
California. 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 third
largest financial institution in terms of total deposits
in Marin County at December 31, 1997, at which date it had
approximately 11 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 December 31, 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 10 percent
of total deposits, and was fifth in the Solano county
service area, with a market share of approximately 9
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 December 31, 1997, fifth among all financial
institutions servicing the area with approximately 8
percent of the market. In addition, WAB's market share in
the Sacramento-Placer-Nevada counties service area was
approximately 6 percent, ranking eight among its
competitors. In the Yosemite service area, encompassing
offices throughout Stanislaus, Sonora, East Sonora and
Merced counties, WAB ranked eighth among its competitors
with 5 percent of total deposits. 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 December
31, 1997, with approximately 15 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 2. Properties
- ------------------
Branch Offices and Facilities
- -----------------------------
The Banks are engaged in the banking business through 89
offices in 22 counties in Northern and Central California
including eleven offices in Marin County, eleven in Fresno
County, nine in Sonoma County, seven in Napa County, six
in Solano County, six in Kern County, five in Stanislaus
County, five in Contra Costa County, four in Lake County,
four in San Luis Obispo County, three in Mendocino County,
three in Sacramento County, two in Nevada County, two in
Placer County, two in Tulare County, two in Tuolumne
County, one in San Francisco County, one in Kern County,
one in Madera County, one in Merced County, one in Yolo
County, one in Kings County and one in Alameda County. All
offices are constructed and equipped to meet prescribed
security requirements.
The Company owns 37 branch office locations and one
administrative building and leases 52 banking offices.
Most of the leases contain multiple renewal options and
provisions for rental increases, principally for changes
in the cost of living index, property taxes and
maintenance.
ITEM 3. Legal Proceedings
- --------------------------
Neither the Company or its subsidiaries is a party to any
material pending legal proceeding, nor is their property
the subject of any material pending legal proceeding,
except ordinary routine legal proceedings arising in the
ordinary course of the Company's business, none of which
are expected to have a material adverse impact upon the
Company's business, financial position or results of
operations.
ITEM 4. Submission of Matters to a Vote of Security
- ---------------------------------------------------
Holders
- -------
There were no matters submitted to a vote of the
shareholders during the fourth quarter of 1998.
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:
============================================================
1998: High Low
- ------------------------------------------------------------
First quarter $35.25 $30.67
Second quarter 36.38 28.50
Third quarter 33.63 23.63
Fourth quarter 37.25 23.88
1997:
First quarter $24.17 $18.83
Second quarter 25.83 19.27
Third quarter 29.33 24.58
Fourth quarter 35.00 28.54
============================================================
As of December 31, 1998, there were 8,754 shareholders of
record of the Company's common stock.
The Company has paid cash dividends on its common stock in
every quarter since its formation in 1972, 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, 1998,
$119.9 million was available for payment of dividends by
the Company to its shareholders, under applicable laws and
regulations.
See Note 17 to the consolidated financial statements
included in this report for additional information
regarding the amount of cash dividends declared and paid
on common stock for the two most recent fiscal years.
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
(the "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) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
Year ended December 31
Interest income $266,820 $270,670 $274,182 $283,704 $256,638
Interest expense 86,665 88,054 91,700 95,627 73,321
- ---------------------------------------------------------------------------------------------
Net interest income 180,155 182,616 182,482 188,077 183,317
Provision for loan losses 5,180 7,645 12,306 15,229 11,378
- ---------------------------------------------------------------------------------------------
Non-interest income 37,805 37,013 36,307 34,227 36,929
Non-interest expense 101,408 137,878 136,051 141,960 150,128
- ---------------------------------------------------------------------------------------------
Income before income taxes 111,372 74,106 70,432 65,115 58,740
Provision for income taxes 37,976 25,990 23,605 21,930 20,627
- ---------------------------------------------------------------------------------------------
Net income $73,396 $48,116 $46,827 $43,185 $38,113
=============================================================================================
Earnings per share:
Basic $1.76 $1.12 $1.10 $0.99 $0.87
Diluted 1.73 1.10 1.08 0.98 0.87
Per share:
Dividends paid $0.52 $0.36 $0.30 $0.25 $0.21
Book value at December 31 9.25 9.51 8.84 8.12 7.41
Average common shares outstanding 41,797 43,040 42,759 43,747 43,732
Average diluted common shares outstanding 42,524 43,827 43,358 44,274 44,061
Shares outstanding at December 31 39,828 42,799 42,889 43,228 43,351
At December 31:
Loans, net $2,246,593 $2,211,307 $2,236,319 $2,204,495 $2,220,122
Total assets 3,844,298 3,848,444 3,866,774 3,880,979 3,793,196
Total deposits 3,189,005 3,078,501 3,228,700 3,270,907 3,249,823
Short-term borrowed funds 203,671 264,848 167,447 175,622 135,426
Debt financing and notes payable 47,500 52,500 58,865 40,932 51,647
Shareholders' equity 368,596 407,152 379,279 351,058 321,169
Financial Ratios:
For the year:
Return on assets 1.94% 1.28% 1.24% 1.14% 1.04%
Return on equity 19.48% 12.71% 13.22% 12.73% 12.24%
Net interest margin * 5.52% 5.63% 5.54% 5.68% 5.67%
Net loan losses to average loans 0.20% 0.35% 0.51% 0.59% 0.43%
Non-interest expense/revenues * 44.25% 60.15% 60.08% 63.86% 68.16%
At December 31:
Equity to assets 9.59% 10.58% 9.81% 9.05% 8.47%
Total capital to risk-adjusted assets 13.79% 14.76% 14.95% 14.39% 13.58%
Loan loss reserve to loans 2.23% 2.24% 2.23% 2.15% 2.05%
* 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 risk 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 reduced 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 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 and Subsidiaries (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, as well as with the other information
presented throughout the report.
In addition to historical information, this discussion and other
sections contained in this annual report include certain
forward-looking statements regarding events and trends which may
affect the Company's future results. Such statements are subject to
risks and uncertainties that could cause the Company's actual
results to differ materially. Such factors include, but are not
limited to, those described in this discussion and analysis.
The Company achieved earnings of $73.4 million in 1998,
representing a 53 percent increase from the $48.1 million earned in
1997 and 57 percent higher than 1996 earnings of $46.8 million.
COMPONENTS OF NET INCOME
- ------------------------
=====================================================================================
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Net interest income * $191.4 $192.2 $190.1
Provision for loan losses (5.2) (7.6) (12.3)
Non-interest income 37.8 37.0 36.3
Non-interest expense (101.4) (137.9) (136.1)
Taxes * (49.2) (35.6) (31.2)
- -------------------------------------------------------------------------------------
Net income $73.4 $48.1 $46.8
=====================================================================================
Net income as a percentage of
average total assets 1.94% 1.28% 1.24%
=====================================================================================
Average total assets $3,778.5 $3,749.7 $3,781.2
=====================================================================================
* Fully taxable equivalent (FTE)
Basic earnings per share in 1998 were $1.76, compared to $1.12 and
$1.10 in 1997 and 1996, respectively. During 1998, the Company
benefited from lower non-interest expense reflecting continued
expense controls, a lower loan loss provision resulting from
improved credit quality and lower net credit losses, and higher
non-interest income. Prior year non-interest expense included
approximately $18.8 million ($12.8 million after tax) in charges
associated with the ValliCorp Holdings, Inc. merger (the "Merger")
effected on April 12, 1997. Lower net interest income was primarily
the result of lower earning-asset yields in part offset by a
decrease in funding costs.
Earnings in 1997 were favorably affected compared to 1996 by
increased net interest income, primarily due to a higher net
interest margin 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 the
improvement in the credit quality of the loan portfolio, and
benefited from increased non-interest income.
The Company's return on average total assets was 1.94 percent in
1998, compared to 1.28 percent and 1.24 percent in 1997 and 1996,
respectively. Return on average equity in 1998 was 19.48 percent,
compared to 12.71 percent and 13.22 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 1998 decreased $800 thousand from 1997 to $191.4
million. Comparing 1997 to 1996, net interest income (FTE)
increased $2.1 million.
Components of Net Interest Income
=====================================================================================
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Interest income $266.8 $270.7 $274.2
Interest expense (86.7) (88.1) (91.7)
FTE adjustment 11.3 9.6 7.6
- -------------------------------------------------------------------------------------
Net interest income (FTE) $191.4 $192.2 $190.1
=====================================================================================
Net interest margin (FTE) 5.52% 5.63% 5.54%
=====================================================================================
Interest income (FTE) decreased $2.2 million from 1997, primarily
due to a 34 basis point decrease in loan yields, reflecting the
general interest rate environment, partially offset by an increase
of 9 basis points in investment yields, resulting in a combined
decrease of 18 basis points in earning-asset yields. The effect of
this decline was in part offset by a $50.9 million increase in
average balances, with loans and investment securities growing
$14.1 million and $36.8 million, respectively, from 1997 levels.
The increase in loans was concentrated in targeted commercial and
residential real estate credits, and the increase in investment
balances was primarily due to increases in tax-free and corporate
securities. The decrease of interest income in 1998 was partially
offset by a $1.4 million reduction in interest expense. This
decrease was primarily due to a reduction of 13 basis points in
rates paid on deposits combined with an $11.0 million increase in
the average balance of non-interest bearing demand deposits, in
part offset by a $19.8 million increase in the average balance of
interest-bearing liabilities.
Interest income (FTE) decreased $3.5 million from 1996 to 1997,
primarily due to a $20.0 million decrease in average earning-asset
balances. Most types of consumer loans decreased, 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. 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
interest-free demand deposits.
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 average assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
=====================================================================================
Full Year 1998
---------------------------------------
Interest Rates
Average Income/ Earned/
(Dollars in thousands) Balance Expense Paid
- -------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $1,003 $42 4.23 %
Trading account securities -- -- --
Investment securities
Taxable 854,315 53,699 6.29
Tax-exempt 348,040 24,889 7.15
Loans:
Commercial 1,427,788 129,258 9.05
Real estate construction 60,123 7,089 11.79
Real estate residential 386,066 27,729 7.18
Consumer 388,106 35,340 9.11
---------- ---------
Earning assets 3,465,440 278,046 8.02
Other assets 313,012
-----------
Total assets $3,778,452
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $791,952
Savings and interest-bearing
transaction 1,461,764 30,264 2.07 %
Time less than $100,000 438,052 21,840 4.99
Time $100,000 or more 381,754 19,247 5.04
---------- ---------
Total interest-bearing deposits 2,281,570 71,351 3.13
Funds purchased 243,736 11,670 4.79
Debt financing and notes payable 52,083 3,644 7.00
---------- ---------
Total interest-bearing liabilities 2,577,389 86,665 3.36
Other liabilities 32,259
Shareholders' equity 376,852
-----------
Total liabilities and shareholders' equity $3,778,452
===========
Net interest spread (1) 4.66 %
Net interest income and interest margin (2) $191,381 5.52 %
========= ======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Distribution of average assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
=====================================================================================
Full Year 1997
---------------------------------------
Interest Rates
Average Income/ Earned/
(Dollars in thousands) Balance Expense Paid
- -------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $30,125 $1,635 5.43 %
Trading account securities -- -- --
Investment securities
Taxable 849,564 51,819 6.10
Tax-exempt 286,851 22,069 7.69
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 34,742 2.26 %
Time less than $100,000 479,692 24,425 5.09
Time $100,000 or more 323,840 17,097 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 average assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
=====================================================================================
Full Year 1996
---------------------------------------
Interest Rates
Average Income/ Earned/
(Dollars in thousands) Balance Expense Paid
- -------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $94,612 $5,218 5.52 %
Trading account securities 17 1 4.61
Investment securities
Taxable 800,097 47,649 5.96
Tax-exempt 290,326 20,274 6.98
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 3,434,572 281,841 8.21
Other assets 346,613
-----------
Total assets $3,781,185
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $750,204
Savings and interest-bearing
transaction 1,559,532 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.
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,
1998 Compared with 1997
- ------------------------------------------------------------------------
(In thousands) Volume Rate Total
- ------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
MMkt. assets and funds sold ($1,298) ($295) ($1,593)
Trading account securities -- -- --
Investment securities (1)
Taxable 291 1,589 1,880
Tax-exempt 4,212 (1,392) 2,820
Loans:
Commercial (1) 4,850 (5,065) (215)
Real estate construction (3,048) 751 (2,297)
Real estate residential 2,050 (1,459) 591
Consumer (2,678) (738) (3,416)
- ------------------------------------------------------------------------
Total loans (1) 1,174 (6,511) (5,337)
- ------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 4,379 (6,609) (2,230)
- ------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (1,585) (2,893) (4,478)
Time less than $ 100,000 (2,085) (500) (2,585)
Time $ 100,000 or more 2,873 (723) 2,150
- ------------------------------------------------------------------------
Total interest-bearing (797) (4,116) (4,913)
Funds purchased 3,885 (18) 3,867
Notes and mortgages payable (378) 35 (343)
- ------------------------------------------------------------------------
Total increase (decrease) in
interest expense 2,710 (4,099) (1,389)
- ------------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $1,669 ($2,510) ($841)
========================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
Rate and Volume Variances
========================================================================
For the Years Ended December 31,
1997 Compared with 1996
- ------------------------------------------------------------------------
(In thousands) Volume Rate Total
- ------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
MMkt. assets and funds sold ($3,501) ($82) ($3,583)
Trading account securities (1) -- (1)
Investment securities (1)
Taxable 2,997 1,173 4,170
Tax-exempt (239) 2,034 1,795
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) (2,326) 761 (1,565)
- ------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (593) 399 (194)
Time less than $ 100,000 (2,109) 390 (1,719)
Time $ 100,000 or more 570 21 591
- ------------------------------------------------------------------------
Total interest-bearing (2,132) 811 (1,321)
Funds purchased (1,648) (524) (2,172)
Notes and mortgages payable (178) 25 (153)
- ------------------------------------------------------------------------
Total (decrease) increase in
interest expense (3,958) 312 (3,646)
- ------------------------------------------------------------------------
Increase in net
interest income (1) $1,632 $449 $2,081
========================================================================
(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 $5.2 million for 1998,
compared to $7.6 million in 1997 and $12.3 million in 1996. The
reductions in the provision in 1998 and 1997 reflect the results
of the Company's continuing efforts to improve loan quality by
enforcing strict underwriting and administration procedures and
aggressively pursuing collection efforts with troubled debtors.
For further information regarding net credit losses and the
reserve for loan losses, see the "Asset Quality" section of this
report.
INVESTMENT PORTFOLIO
- --------------------
The Company maintains a securities portfolio consisting of U.S
Treasury, U.S. Government agencies and corporations, state and
political subdivisions, asset-backed and other securities.
Investment securities are held in safekeeping by an independent
custodian.
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 109 months at December 31, 1998
and, on the same date, those investments included $202.3 million
in fixed rate and $24.7 million 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, 1998, the Company held $987.7 million classified as
investments available for sale. At December 31, 1998, an
unrealized gain of $20.7 million net of taxes of $15.0 million
related to these securities, was held in shareholders' equity.
The Company had no trading securities at December 31, 1998.
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, 1998 1997 1996
- -------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $248,610 $277,790 $299,739
U.S. Government agencies and corporations 121,304 181,124 274,468
States and political subdivisions 213,315 203,405 128,631
Asset backed securities 165,398 184,377 94,282
Other 239,034 156,538 95,341
- -------------------------------------------------------------------------------------
Total $987,661 $1,003,234 $892,461
=====================================================================================
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, 1998. 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-
(Dollars in thousands) One Year Five Years Ten Years Years backed Other Total
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $171,786 $73,328 $-- $-- $-- $-- $245,114
Interest rate 6.13% 5.72% --% --% --% --% 6.00%
U.S. Government agencies
and corporations $12,000 $83,332 $121 $99 $-- $-- $95,552
Interest rate 5.89% 5.86% 8.93% 8.79% --% --% 5.87%
States and political
subdivisions $5,696 $33,807 $58,505 $107,240 $-- $-- $205,248
Interest rate 9.57% 7.03% 8.22% 7.92% --% --% 7.90%
Asset-backed $-- $115,372 $48,617 $-- $-- $-- $163,989
Interest rate --% 6.08% 5.86% --% --% --% 6.02%
Other $21,267 $171,175 $5,247 $-- $-- $-- $197,689
Interest rate 6.25% 6.15% 6.53% --% --% --% 6.17%
- --------------------------------------------------------------------------------------------------------------------------
Subtotal $210,749 $477,014 $112,490 $107,339 $-- $-- $907,592
Interest rate 6.22% 6.08% 7.12% 7.92% --% --% 6.46%
Mortgage-backed $-- $-- $-- $-- $24,493 $-- $24,493
Interest rate --% --% --% --% 5.94% --% 5.94%
Other without set maturities $-- $-- $-- $-- $-- $19,871 $19,871
Interest rate --% --% --% --% --% 8.69% 8.69%
- --------------------------------------------------------------------------------------------------------------------------
Total $210,749 $477,014 $112,490 $107,339 $24,493 $19,871 $951,956
Interest rate 6.22% 6.08% 7.12% 7.92% 5.94% 8.69% 6.49%
==========================================================================================================================
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, 1998 1997 1996
- -------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $-- $-- $998
U.S. Government agencies and corporations 69,235 83,656 79,743
States and political subdivisions 147,118 136,965 131,343
Asset-backed -- -- 191
Other 10,640 10,339 3,157
- -------------------------------------------------------------------------------------
Total $226,993 $230,960 $215,432
=====================================================================================
Fair value $233,790 $236,896 $218,009
=====================================================================================
The following table sets forth the relative maturities and yields
of the Company's held-to-maturity securities at December 31, 1998.
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-
(Dollars in thousands) One Year Five Years Ten Years Years backed Other Total
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government Agencies
and Corporations $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
States and Political
Subdivisions $2,217 $22,838 $88,547 $33,516 $-- $-- $147,118
Interest rate 6.94% 8.53% 8.12% 8.34% --% --% 8.22%
Asset-backed $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
Other $-- $-- $-- $10,640 $-- $-- $10,640
Interest rate --% --% --% 5.46% --% --% 5.46%
- --------------------------------------------------------------------------------------------------------------------------
Subtotal $2,217 $22,838 $88,547 $44,156 $-- $-- $157,758
Interest rate 6.94% 8.53% 8.12% 7.65% --% --% 8.03%
Mortgage-backed $-- $-- $-- $-- $69,235 $-- $69,235
Interest rate --% --% --% --% 6.05% --% 6.05%
- --------------------------------------------------------------------------------------------------------------------------
Total $2,217 $22,838 $88,547 $44,156 $69,235 $-- $226,993
Interest rate 9.65% 8.03% 7.61% 7.39% 6.05% --% 7.43%
==========================================================================================================================
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,
----------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Commercial and commercial real estate $1,476,912 $1,437,118 $1,455,984 $1,260,082 $1,244,561
Real estate construction 57,998 66,782 101,136 128,901 175,962
Real estate residential 384,128 361,909 276,951 378,971 333,685
Consumer 385,204 404,382 462,734 502,441 528,875
Unearned income (6,345) (8,254) (9,565) (12,248) (16,381)
- --------------------------------------------------------------------------------------------------------------
Gross loans 2,297,897 2,261,937 2,287,240 2,258,147 2,266,702
Allowance for loan losses (51,304) (50,630) (50,921) (48,494) (46,580)
- --------------------------------------------------------------------------------------------------------------
Net loans $2,246,593 $2,211,307 $2,236,319 $2,209,653 $2,220,122
==============================================================================================================
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, 1998. Balances exclude loans to individuals and
residential mortgages totaling $763.0 million. These types of loans
are typically paid in monthly installments over a number of years.
=================================================================================================
Within One to After
(In thousands) One Year Five Years Five Years Total
- -------------------------------------------------------------------------------------------------
Commercial and commercial real estate * $881,290 $219,947 $375,675 $1,476,912
Real estate construction 57,998 -- -- 57,998
- -------------------------------------------------------------------------------------------------
Total $939,288 $219,947 $375,675 $1,534,910
=================================================================================================
Loans with fixed interest rates $272,512 $219,947 $375,675 $868,134
Loans with floating interest rates 666,776 -- -- 666,776
- -------------------------------------------------------------------------------------------------
Total $939,288 $219,947 $375,675 $1,534,910
=================================================================================================
* 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 12 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,
(In millions) 1998 1997
- ------------------------------------------------------------------------
Classified loans $50.8 $67.5
Other classified assets 4.3 7.4
- ------------------------------------------------------------------------
Total classified assets $55.1 $74.9
========================================================================
Classified loans at December 31, 1998 decreased $16.7 million or 25
percent to $50.8 million from December 31, 1997, reflecting the
implementation of the Company's active work-out standards and
charge-offs of graded loans acquired through the Merger. Other
classified assets decreased $3.1 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:
==============================================================================================================
At December 31,
----------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Performing non-accrual loans $1.8 $1.6 $4.3 $2.4 $2.0
Non-performing non-accrual loans 6.8 16.5 12.5 25.0 15.6
- --------------------------------------------------------------------------------------------------------------
Non-accrual loans 8.6 18.1 16.8 27.4 17.6
- --------------------------------------------------------------------------------------------------------------
Restructured loans -- -- 0.2 0.3 0.6
Loans 90 or more days past due
and still accruing 0.5 1.0 1.8 1.7 4.8
Other real estate owned 4.3 7.4 9.9 7.6 11.7
- --------------------------------------------------------------------------------------------------------------
Total non-performing assets $13.4 $26.5 $28.7 $37.0 $34.7
==============================================================================================================
Allowance for loan losses as a
percentage of non-accrual loans
and loans 90 or more days past
due and still accruing 564% 265% 274% 167% 208%
Allowance for loan losses as a percentage
of total non-performing assets 383% 191% 177% 131% 134%
==============================================================================================================
Performing non-accrual loans increased $200 thousand to $1.8
million at December 31, 1998 while non-performing non-accrual loans
decreased $9.7 million to $6.8 million at December 31, 1998,
primarily due to sales, pay-offs and transfers to other real estate
owned of commercial real estate loans.
The $3.1 million decrease in other real estate owned balances from
December 31, 1997 was due to write-downs and liquidations net of
additions from non-accrual loans on loans with real estate
collateral. The decrease in other real estate owned balances at
December 31, 1997 from December 31, 1996 was also due to
write-downs and liquidations net of additions of non-accrual loans
with real estate collateral.
The amount of gross interest income that would have been recorded
for non-accrual loans for the year ended December 31, 1998, if all
such loans had been current in accordance with their original terms
while outstanding during the period, was $855 thousand and $1.6
million, each, in 1997 and 1996. The amount of interest income that
was recognized on non-accrual loans from cash payments made in
1998, 1997 and 1996 was $573 thousand, $462 thousand and $270
thousand, respectively. Cash payments received, which were applied
against the book balance of performing and non-performing
non-accrual loans outstanding at December 31, 1998, totaled
approximately $952 thousand, compared to $573 thousand and $111
thousand in 1997 and 1996, 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
maintain non-performing asset levels; 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 $51.3 million
allowance for loan losses, which constituted 2.23 percent of total
loans at December 31, 1998, 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 years indicated:
==============================================================================================================
At December 31,
----------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Total loans outstanding $2,297,897 $2,261,937 $2,287,240 $2,258,147 $2,266,702
Average loans outstanding during the period 2,262,082 2,248,048 2,249,520 2,254,946 2,105,164
==============================================================================================================
Analysis of the reserve:
Beginning balance $50,630 $50,921 $48,494 $46,580 $42,413
Additions to the reserve charged to
operating expense 5,180 7,645 12,306 15,228 11,378
Allowance acquired through merger -- -- 1,665 -- 1,755
Credit losses:
Commercial and commercial real estate (5,113) (6,825) (7,998) (7,395) (5,752)
Real estate construction -- (962) (781) (1,401) (790)
Real estate residential (97) (374) (1,862) (3,682) (2,069)
Consumer (3,358) (4,323) (5,376) (3,740) (3,207)
- --------------------------------------------------------------------------------------------------------------
Total (8,568) (12,484) (16,017) (16,218) (11,818)
Credit loss recoveries:
Commercial and commercial real estate 2,305 2,499 2,227 1,517 1,417
Real estate construction 10 160 44 3 65
Real estate residential 1 34 72 26 --
Consumer 1,746 1,855 2,130 1,358 1,370
- --------------------------------------------------------------------------------------------------------------
Total 4,062 4,548 4,473 2,904 2,852
- --------------------------------------------------------------------------------------------------------------
Net credit losses (4,506) (7,936) (11,544) (13,314) (8,966)
- --------------------------------------------------------------------------------------------------------------
Balance, end of period $51,304 $50,630 $50,921 $48,494 $46,580
==============================================================================================================
Net credit losses to average loans 0.20% 0.35% 0.51% 0.59% 0.43%
Allowance for loan losses as a percentage
of loans outstanding 2.23% 2.24% 2.23% 2.15% 2.05%
==============================================================================================================
Allocation of the Allowance for Loan Losses
- -------------------------------------------
The following table presents the allocation of the allowance for loan losses
as of December 31 for the years indicated:
=================================================================================================
1998 1997
---------------------------------------------------
Allocation Loans as Allocation Loans as
of the Percent of the Percent
Allowance of Total Allowance of Total
(Dollars in thousands) Balance Loans Balance Loans
- -------------------------------------------------------------------------------------------------
Commercial $22,240 64% $22,649 63%
Real estate construction 4,055 3 4,374 3
Real estate residential 310 17 87 16
Consumer 4,260 16 4,356 18
Unallocated portion of the reserve 20,439 -- 19,164 --
- -------------------------------------------------------------------------------------------------
Total $51,304 100% $50,630 100%
=================================================================================================
==========================================================================================================================
1996 1995 1994
----------------------------------------------------------------------------
Allocation Loans as Allocation Loans as Allocation Loans as
of the Percent of the Percent of the Percent
Reserve of Total Reserve of Total Reserve of Total
(Dollars in thousands) Balance Loans Balance Loans Balance Loans
- --------------------------------------------------------------------------------------------------------------------------
Commercial $22,743 64% $21,849 56% $19,202 55%
Real estate construction 3,471 4 5,683 6 3,852 8
Real estate residential 2,489 12 1,733 16 2,021 15
Consumer 6,543 20 6,401 22 6,513 22
Unallocated portion of the reserve 15,675 -- 12,828 -- 14,992 --
- --------------------------------------------------------------------------------------------------------------------------
Total $50,921 100% $48,494 100% $46,580 100%
==========================================================================================================================
The decrease in the allocation of commercial loans from December
1997 to December 1998 is primarily due to the reduction in the
balance of criticized loans and the reallocation of specific reserves
after 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,
(In thousands) 1998 1997
- ------------------------------------------------------------------------
Non-accrual loans $8,531 $18,146
Other 6,504 4,333
- ------------------------------------------------------------------------
Total impaired loans $15,035 $22,479
========================================================================
Specific reserves $1,255 $2,238
========================================================================
The $6.5 million balance in loans classified as impaired as of
December 31, 1998, other than non-accrual loans, is due to two
commercial real estate loans, with combined principal outstanding
balances of $5.4 million, having collateral exposure that may
preclude ultimate full repayment, and one credit classified as a
troubled debt restructuring with principal outstanding balance of
$1.1 million. Payments on these credits were current at December
31, 1998.
The average balance of the Company's impaired loans for the year
ended December 31, 1998 was $15.9 million compared to $22.0 million
in 1997. 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.
In adjusting the Company's asset/liability position, its
management ("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 increase the Company's interest rate risk
position 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.
The primary analytical tool used by the Company to quantify
interest rate risk is 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 Federal 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. Company
policy requires that such 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. The following table summarizes the simulated change
in NII, based on the 12-month period ending December 31, 1999:
===========================================================
(Dollars in millions)
Changes in Estimated Increase
Interest (Decrease) in NII
Rates Estimated -----------------------
(Basis Points) NII Amount Amount Percent
- -----------------------------------------------------------
+200 $195.3 $2.3 1.2%
-- 193.0 -- --
- -200 189.3 (3.7) -1.9%
===========================================================
Given the Company's historical experience on interest rate
volatility, the results of the NII simulations shown in the above
table reflect the categorization of interest-bearing transaction
and savings deposits as having their repricing spread over one year
and by less than the full change in market rates, rather than
repricing fully in the first month.
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, 1998:
==========================================================================================================================
Non-
Repricing Within (days) 0-90 91-180 181-365 Over 365 Repricing Total
- --------------------------------------------------------------------------------------------------------------------------
Assets (In millions)
Investment securities $71 $84 $162 $898 $-- $1,215
Loans 918 106 140 1,134 -- 2,298
Other assets -- -- -- -- 331 331
- --------------------------------------------------------------------------------------------------------------------------
Total assets $989 $190 $302 $2,032 $331 $3,844
==========================================================================================================================
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $-- $-- $-- $-- $843 $843
Interest-bearing:
Transaction 601 -- -- -- -- 601
Money market savings 180 180 265 -- -- 625
Passbook savings 278 -- -- -- -- 278
Time 535 144 108 55 -- 842
Short-term borrowings 204 -- -- -- -- 204
Debt financing and notes payable -- -- 5 43 -- 48
Other liabilities -- -- -- -- 34 34
Shareholders' equity -- -- -- -- 369 369
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,798 $324 $378 $98 $1,246 $3,844
==========================================================================================================================
Net (liabilities) assets subject
to repricing ($809) ($134) ($76) $1,934 ($915)
- --------------------------------------------------------------------------------------------------------------
Cumulative net (liabilities) assets
subject to repricing ($809) ($943) ($1,019) $915 $--
==============================================================================================================
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, 1998, investment
securities available for sale totaled $987.7 million. In addition,
the Company generated significant liquidity from its operating
activities. The Company's profitability in 1998, 1997 and 1996
generated substantial cash flows, included in the total provided
from operations of $63.3 million, $78.7 million and $56.7 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 1998, the effect of the Company's stock repurchase program
and dividends paid to shareholders of $104.8 million and $21.9
million, respectively, in addition to a $61.2 million decrease in
short-term borrowings, more than offset the increase of $110.5
million in customers' deposits. During 1997 and 1996, deposits
decreased $150.2 million and $108.0 million, respectively. Cash
used by the Company in 1997 and 1996 for its share repurchase
program and other retirement of stock activities totaled $35.6
million and $27.6 million, respectively, and dividends paid to the
Company's shareholders were $13.4 million in 1997 and $15.0 million
in 1996. These cash outflows 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, the largest cash generators
through financing activities during those years. These were the
major factors in the total net cash outflows used by financing
activities of $69.9 million, $91.3 million and $147.2 million,
respectively, for 1998, 1997 and 1996.
The Company uses cash to make investments in loans and investment
securities. Net disbursements of loans were $42.4 million in 1998,
compared to net repayments of loan balances of $9.1 million in 1997
and $22.3 million in 1996. As a result of the increase in loan
volume in 1998, the Company reduced its investment in securities by
$23.4 million in 1998. However, the intention of the Company is to
increase loan volume without jeopardizing credit quality; this was
the primary reason for investing excess cash flows in lower-risk
investment securities in 1997, which increased $106.2 million
during that year. This compares with a decrease in 1996 of $87.6
million, mostly due to pre-Merger activity.
The Company anticipates increasing its cash levels through the end
of 1999 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 1999.
Line of Credit
- --------------
On July 31, 1998, the Company entered into an agreement with a
well-established financial institution, establishing a line of
credit for general corporate purposes including the repurchase of
its stock. The line of credit has a one-year term and an available
commitment amount ranging from $60 million, during the first nine
months, reduced by $7.5 million during each of the following three
months to $37.5 million. The interest rate of this line of credit
is set by the lender based on various factors, including costs and
desired return, general economic conditions and other factors. The
Company may elect an optional interest rate equal to the Cayman
Rate plus .33 percentage points, subject to certain specific
conditions as defined in the agreement. During the third quarter of
1998, the Company drew $3.0 million on this line; the rate on the
line was 5.93 percent. The rate chosen by the Company of this line
of credit was the Cayman Rate plus .33 percentage points. At
December 31, 1998, there were no outstanding balances drawn on this
line. At December 31, 1998, the Cayman Rate plus .33 percentage
points was 5.39 percent.
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.
Since the beginning of 1994 and through December 31, 1998, the
Board of Directors of the Company has authorized the repurchase of
4.3 million shares of the Company's common stock from time to time,
subject to appropriate regulatory and other accounting
requirements. The Company acquired 996 thousand shares of its
common stock in the open market during 1998, 1.0 million in 1997,
and 1.2 million, 721 thousand and 93 thousand in 1996, 1995 and
1994, respectively. These repurchases were made periodically in the
open market with the intention to lessen the dilutive impact of
issuing new shares to meet stock performance, option plans,
acquisitions and other requirements.
In addition to these systematic repurchases, a new plan to
repurchase 3.0 million additional shares of the Company's common
stock (the "Program") was approved by the Board of Directors on
June 25, 1998. The Company's strong capital position and healthy
profitability contributed to the initiation of this Program, which
was being implemented to optimize the Company's use of equity
capital and enhance shareholder value. Pursuant to this Program,
the Company repurchased 2.1 million shares of its common stock
during the third and fourth quarters of 1998, at an average price
of approximately $30 per share.
The Company's primary capital resource is shareholders' equity,
which decreased $38.6 million or 9 percent from the previous year
end and decreased $10.7 million or 3 percent from December 31,
1996. The ratio of total risk-based capital to risk-adjusted assets
was 13.79 percent at December 31, 1998, compared to 14.76 percent
at December 31, 1997. Tier I risk-based capital to risk-adjusted
assets was 11.87 percent at December 31, 1998, compared to 12.82
percent at December 31, 1997.
Capital to Risk-Adjusted Assets
=====================================================================================
Minimum
Regulatory
Capital
At December 31, 1998 1997 Requirements
- -------------------------------------------------------------------------------------
Tier I Capital 11.87% 12.82% 4.00%
Total Capital 13.79% 14.76% 8.00%
Leverage ratio 9.39% 9.97% 4.00%
=====================================================================================
The risk-based capital ratios declined in 1998 primarily due to
reductions in equity capital resulting from share repurchase
programs. 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."
FINANCIAL RATIOS
- ----------------
The following table shows key financial ratios for the periods indicated:
=================================================================================================
For the years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Return on average total assets 1.94% 1.28% 1.24%
Return on shareholders' equity 19.48% 12.71% 13.22%
Average shareholders' equity as a percentage of:
Average total assets 9.97% 10.10% 9.36%
Average total loans 16.66% 16.84% 15.74%
Average total deposits 12.26% 12.14% 11.26%
Dividend payout ratio (diluted EPS) 30.00% 33.00% 28.00%
=================================================================================================
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:
==============================================================================================================
1998 1997
--------------------------------------------------------------------------------
Percentage Percentage
Average of Total Average of Total
(Dollars in thousands) Balance Deposits Rate * Balance Deposits Rate *
- --------------------------------------------------------------------------------------------------------------
Non-interest bearing demand $791,952 25.8% --% $781,001 25.0% --%
Interest bearing:
Transaction 554,834 18.0% 1.14% 548,139 17.6% 1.22%
Savings 906,930 29.5% 2.64% 985,800 31.6% 2.84%
Time less than $100 thousand 438,052 14.3% 4.99% 479,692 15.4% 5.09%
Time $100 thousand or more 381,754 12.4% 5.04% 323,840 10.4% 5.28%
- --------------------------------------------------------------------------------------------------------------
Total $3,073,522 100.00% 3.13% $3,118,472 100.00% 3.26%
==============================================================================================================
*Rate is computed based on interest-bearing deposits
========================================================================
1996
------------------------------------------
Percentage
Average of Total
(Dollars in thousands) Balance Deposits Rate *
- ------------------------------------------------------------------------
Non-interest bearing demand $750,204 23.9% --%
Interest bearing:
Transaction 523,973 16.7% 1.23%
Savings 1,035,559 32.9% 2.75%
Time less than $100 thousand 520,968 16.5% 5.02%
Time $100 thousand or more 313,050 10.0% 5.27%
- ------------------------------------------------------------------------
Total $3,143,754 100.00% 3.24%
========================================================================
*Rate is computed based on interest-bearing deposits
In 1998, total average deposits decreased 1 percent from 1997
primarily due to decreases in savings and retail certificates of
deposits as a result of the anticipated runoff of business
reflective of market conditions. However, to counteract this
effect, time certificates of deposit of $100 thousand or more
increased 18 percent, and aggressive policies in place resulted in a
1 percent increase in the average balance of non-interest bearing
and transaction demand accounts.
In 1997, total average deposits decreased 1 percent primarily due
to decreases in savings and retail certificates of deposit as a
result of the runoff of business that was anticipated after the
Merger. However, aggressive policies in place contributed to the 4
percent increase in the average balance of non-interest bearing and
transaction demand accounts.
The following sets forth, by time remaining to maturity, the Company's
domestic time deposits in amounts of $100 thousand or more:
===========================================================
At December 31,
(In thousands) 1998
- -----------------------------------------------------------
Three months or less $332,038
Over three through six months 40,678
Over six through twelve months 36,034
Over twelve months 9,434
- -----------------------------------------------------------
Total $418,184
===========================================================
SHORT-TERM BORROWINGS
- ---------------------
The following table sets forth the short-term borrowings of the Company
for the periods indicated:
=====================================================================================
At December 31,
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------
Federal funds purchased $50,000 $50,000 $6,300
Other borrowed funds:
Retail repurchase agreements 28,693 103,346 112,594
Other 124,978 111,502 48,553
- -------------------------------------------------------------------------------------
Total other borrowed funds $153,671 $214,848 $161,147
- -------------------------------------------------------------------------------------
Total short-term borrowed funds $203,671 $264,848 $167,447
=====================================================================================
Further detail of the other borrowed funds is as follows:
=====================================================================================
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------
Outstanding:
Average for the year $195,415 $153,013 $172,808
Maximum during the year 247,799 227,463 217,589
Interest rates:
Average for the year 4.61% 4.73% 5.07%
Average at year end 3.49% 4.76% 4.90%
=====================================================================================
NON-INTEREST INCOME
- -------------------
Components of Non-Interest Income
=====================================================================================
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Service charges on deposit accounts $20.1 $20.6 $21.0
Merchant credit card 3.2 3.7 4.5
Financial services commissions 1.7 1.2 0.8
Mortgage banking 1.4 1.5 2.0
Trust fees 0.6 0.5 0.4
Other 10.8 9.5 7.6
- -------------------------------------------------------------------------------------
Total $37.8 $37.0 $36.3
=====================================================================================
Non-interest income was $37.8 million in 1998, $800 thousand higher
than 1997. Gains realized on asset sales were $1.3 million higher
than prior year. Financial services commissions were $500 thousand
higher than 1997 primarily due to higher sales volume and
additional products offered. Trust fees were $100 thousand
higher due to the Company's continuing efforts to expand personal
and retirement plan business. Unfavorable non-interest income
year-to-year changes from 1997 include $500 thousand lower deposit
account fees, including lower volume of account maintenance, and
lower overdrafts and returned item fees, as business customers
maintained larger account balances to compensate for these
services. In addition, merchant credit card income was $500
thousand lower than 1997 and mortgage banking income was $100
thousand lower mainly due to declining servicing income.
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 higher sales volume resulting from additional services and
trust fees were $100 thousand higher than 1996 primarily due to
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 EXPENSE
- --------------------
Components of Non-Interest Expense
=====================================================================================
(In millions, except full-time
equivalent staff) 1998 1997 1996
- -------------------------------------------------------------------------------------
Salaries $40.0 $50.4 $47.6
Other personnel benefits 11.1 12.1 13.4
Occupancy 11.6 22.2 17.5
Equipment 7.4 10.8 10.1
Data processing 5.9 6.2 6.0
Professional fees 2.3 9.2 6.0
Stationery and supplies 1.8 2.5 1.5
Loan expense 1.5 1.7 1.8
Advertising and public relations 1.4 1.9 3.3
Merchant credit card 1.2 1.7 2.3
Operational losses 1.0 1.2 1.5
FDIC insurance assessment 0.4 0.4 0.1
Other real estate owned 0.3 1.0 1.0
Insurance 0.2 0.5 0.8
Other 15.3 16.1 23.2
- -------------------------------------------------------------------------------------
Total $101.4 $137.9 $136.1
=====================================================================================
Average full-time equivalent staff 1,135 1,288 1,569
Non-interest expense to
revenues ("efficiency ratio")(FTE) 44.2% 60.1% 60.1%
=====================================================================================
Non-interest expense of $101.4 million in 1998 was $36.5 million
lower than 1997, as the Company's efficiency ratio dropped to an
all-time low. The reduction reflects successful efforts to control
costs through efficiencies and consolidation of operations. In
addition, approximately $18.8 million in one-time costs related to
the Merger were included in 1997. All non-interest expense
categories decreased from 1997 levels. Occupancy and equipment
costs were $14.0 million lower, mainly due to expenses related to
facilities closures. Employee related expenses were $11.4 million
lower due to one-time Merger related costs in 1997 and streamlining
of operations in 1998, as reflected in the reduction of 153
full-time equivalent staff. In addition, professional fees were
reduced $6.9 million from prior year, and stationery and supplies
and other real estate owned costs decreased $700 thousand, each,
from 1997 levels also due to increased Merger costs incurred in
1997. The reductions from 1997 in merchant credit card and
advertising and public relations costs of $500 thousand each, data
processing and insurance costs of $300 thousand each, and loan
expenses and operational losses of $200 thousand each, are also
mainly due to post-Merger efficiencies.
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 Holdings, Inc. 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. In addition,
expenses were reduced in 1997 in advertising and public relations,
merchant credit card, insurance and other costs, primarily due to
merger efficiencies.
The ratio of average assets per full-time equivalent staff was
$3.33 million in 1998 compared to $2.91 million and $2.41 million
in 1997 and 1996, respectively. The reduction of the average number
of full-time equivalent staff from 1,569 in 1996 to 1,288 and 1,135
in 1997 and 1998, respectively, is reflective of the Company's
strategy to improve efficiency.
PROVISION FOR INCOME TAX
- ------------------------
The provision for income tax increased by $13.6 million in 1998
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 1998 provision of $38.0 million reflects
an effective tax rate of 34.1 percent compared to provisions of
$26.0 million in 1997 and $23.6 million in 1996, representing
effective tax rates of 35.1 percent and 33.5 percent, respectively.
YEAR 2000 COMPLIANCE
- --------------------
The potential impact of the Year 2000 compliance issue on the
financial services industry could be material, as virtually every
aspect of the industry and processing of transactions will be
affected. Due to the size of the task facing the financial services
industry and the interdependent nature of its transactions, the
Company may be adversely affected by this problem, depending on
whether it and the entities with which it does business address
this issue successfully. The impact of Year 2000 issues on the
Company will then depend not only on corrective actions that the
Company takes, but also on the way in which Year 2000 issues are
addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or
data from, the Company, or whose financial condition or operational
capability is important to the Company.
The Company's State of Readiness
- --------------------------------
The Company engages the services of third-party software vendors
and service providers for substantially all of its electronic data
processing. Thus, the focus of the Company is to monitor the
progress of its primary software providers toward Year 2000
compliance and prepare to test future-date sensitive data of the
Company in simulated processing.
The Company's Year 2000 compliance program has been divided into
phases, all of them common to all sections of the process: (1)
inventorying date-sensitive information technology and other
business systems; (2) assigning priorities to identified items and
assessing the efforts required for Year 2000 compliance of those
determined to be material to the Company; (3) upgrading or
replacing material items that are determined not to be Year 2000
compliant and testing material items; (4) assessing the status of
third party risks; and (5) designing and implementing contingency
and business continuation plans.
As part of the on-going supervision of the banking industry, bank
regulatory agencies are continuously surveying the Company's
progression and results of each one of these phases.
In the first phase, the Company conducted a thorough evaluation of
current information technology systems, software and embedded
technologies, resulting in the identification of 43 mission
critical systems that could be affected by Year 2000 issues.
Non-information technology systems such as climate control systems,
elevators and vault security equipment, were also surveyed. This
stage of the Year 2000 compliance process is complete.
In phase two of the process, results from the inventory were
assessed to determine the Year 2000 impact and what actions were
required to obtain Year 2000 compliance. For the Company's internal
systems, actions needed ranged from application upgrades on data
processing mainframe computer services to management reporting and
satellite software systems. The Company opted for a course of
action that will result in upgrading or replacing all critical
internal systems. This stage of the Year 2000 compliance process
is complete.
The third phase includes the upgrading, replacement and/or
retirement of systems, and testing. This stage of the Year 2000
process is ongoing and is scheduled to be completed by the first
quarter of 1999. The Company estimates that the software conversion
phase was approximately 95 percent completed at December 31, 1998.
Each of the upgrades and/or replacements, to the extent
economically feasible, is run through a test environment before it
is implemented. It is also tested to see how well it integrates
with the Company's overall data processing environment. Final
"future-date" testing of system upgrades and replacements is
scheduled to be completed by the middle of the second quarter of
1999.
The fourth phase, assessing third-party risks, includes the process
of identifying and prioritizing critical suppliers and customers,
as well as other material relationships with third parties,
including various exchanges, clearing houses, other banks,
telecommunication companies, public utilities and credit customers.
Included in the credit analysis process, the Company has developed
a project plan for assessing the Year 2000 readiness of its credit
customers, with a target date of December 31, 1998 for its initial
assessment of the response of significant customers. The
evaluations undertaken to assess all third-party risks include
communicating with the third parties about their plans and progress
in addressing Year 2000 issues. Detailed evaluations of the most
critical third parties have been initiated and, as of December 31,
1998, no significant problems have been identified. These
evaluations will be followed with contingency plans, which are
ongoing and scheduled to be completed in the second quarter of
1999, with follow up reviews scheduled through the remainder of
1999.
Contingency Plan
- ----------------
The final phase of the Company's Year 2000 compliance program
relates to contingency plans. The Company maintains contingency
plans in the normal course of business designed to be deployed in
the event of various potential business interruptions. These plans
have been expanded to address Year 2000-specific interruptions such
as power and telecommunication infrastructure failures, and will
continue to be supplemented if and when the results of systems
integration testing identify additional business functions at risk.
Such enhancements to existing plans will likely include remediation
of systems, reinstallation of software, installation of third-party
vendor software or some combination of alternatives.
Costs
- -----
As the Company relies upon third-party software vendors and service
providers for substantially all of its electronic data processing,
the primary cost of the Year 2000 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 the Year
2000 project is approximately $3.9 million, of which $3.1 million
had been expended through December 31, 1998. The priority given to
Year 2000 work may result in extending the time for completing some
other technology projects; these delays are not expected to have a
material effect on the Company's business. The Company's total
cost associated with required modifications to become Year 2000
compliant is not expected to be material to its results of
operations, liquidity and capital resources.
Risks
- -----
Failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business
activities or operations. The Company believes that, with the
implementation of new or upgraded business systems and completion
of the Year 2000 project as scheduled, the possibility of
significant interruptions of normal operations due to the failure
of those systems will be reduced. However, the Company is also
dependent upon the power and telecommunications infrastructure
within the United States, and processes large volumes of
transactions through various clearing houses and correspondent
banks. The most reasonably likely worst case scenario would be that
the Company may experience disruption in its operations if any of
these third-party suppliers reported a system failure. Although the
Company's Year 2000 Project will reduce the level of uncertainty
about the compliance and readiness of its material third-party
providers, due to the general uncertainty over Year 2000 readiness
of these third-party suppliers, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will
have a material impact.
Forward-Looking Statement Disclosure
- ------------------------------------
Readers are cautioned that forward-looking statements contained in
this section should be read in conjunction with the Company's
disclosures under the heading "Cautionary Statement for the
Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995." In addition, the preceding
statements concerning Year 2000 compliance are hereby designated as
Year 2000 readiness disclosures under the Year 2000 Information and
Readiness Disclosure Act.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS
- -------------------------------------------------------------------
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- -------------------------------------------------------
The Company is including the following cautionary statement to take
advantage of the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. The factors
identified in this cautionary statement are important factors (but
not necessarily all important factors) that could cause actual
results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.
Where any such forward-looking statement includes a statement of
the assumptions of bases underlying such forward-looking statement,
the Company cautions that, while it believes such assumptions or
bases to be reasonable and makes them in good faith, assumed facts
or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking
statement, the Company, expresses an expectation or belief as to
future results, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will result,
or be achieved or accomplished.
Taking into account the foregoing, the following are identified as
important risk factors that could cause actual results to differ
materially from those expressed in any forward-looking statement
made by, or on behalf of, the Company:
The dates on which the Company believes the Year 2000 project will
be completed are based on Management's best estimates, which were
derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will
not be a delay in, or increased costs associated with, the
implementation of the Year 2000 Project. Specific factors that might
cause differences between the estimates and actual results include,
but are not limited to, the availability and cost of trained
personnel, ability to locate and correct all computer related
issues, timely responses to and corrections by third parties and
suppliers, the availability to implement interfaces between new
systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year
2000 readiness of third parties, the Company cannot ensure its
ability to timely and cost-effectively resolve problems associated
with the Year 2000 issue that may affect its operations and
business, or expose it to third-party liability.
ITEM 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
Index to Financial Statements
- -----------------------------
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income and Comprehensive Income for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Management's Letter of Financial Responsibility
Other Independent Auditors' Report
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(In thousands)
================================================================================================
Balances as of December 31, 1998 1997
- ------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents (Note 15) $229,734 $250,824
Money market assets 250 250
Investment securities available for sale (Note 2) 987,661 1,003,234
Investment securities held to maturity; market values of
$233,790 in 1998 and $236,896 in 1997 (Note 2) 226,993 230,960
Loans, net of an allowance for loan losses of:
$51,304 in 1998 and $50,630 in 1997 (Notes 3,4 and 14) 2,246,593 2,211,307
Other real estate owned 4,315 7,381
Premises and equipment, net (Notes 5 and 6) 45,971 48,412
Interest receivable and other assets (Note 9) 102,781 96,076
- ------------------------------------------------------------------------------------------------
Total assets $3,844,298 $3,848,444
================================================================================================
LIABILITIES
Deposits:
Non-interest bearing $842,919 $852,153
Interest bearing:
Transaction 600,502 554,825
Savings 903,141 902,381
Time (Notes 2 and 6) 842,443 769,142
- ------------------------------------------------------------------------------------------------
Total deposits 3,189,005 3,078,501
Short-term borrowed funds (Note 6) 203,671 264,848
Liability for interest, taxes and
other expenses (Note 9) 35,526 45,443
Debt financing and notes payable (Note 6) 47,500 52,500
- ------------------------------------------------------------------------------------------------
Total liabilities 3,475,702 3,441,292
- ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 7 and 15)
Common Stock (no par value)
Authorized - 150,000 shares
Issued and outstanding - 39,828 in 1998 and 42,799 in 1997 195,156 198,517
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net 20,184 17,923
Retained earnings 153,256 190,712
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 368,596 407,152
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,844,298 $3,848,444
================================================================================================
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- ----------------------------------------------------------
(In thousands, except per share data)
================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $195,656 $201,999 $206,887
Money market assets and funds sold 42 1,635 5,219
Investment securities:
Available for sale
Taxable 47,785 46,620 41,416
Tax-exempt 9,713 7,957 7,353
Held to maturity
Taxable 5,914 5,199 6,233
Tax-exempt 7,710 7,260 7,074
- ------------------------------------------------------------------------------------------------
Total interest income 266,820 270,670 274,182
- ------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Transaction deposits 6,321 6,706 6,462
Savings deposits 23,943 28,036 28,474
Time deposits (Note 6) 41,087 41,522 42,649
Funds purchased (Note 6) 11,670 7,803 9,974
Debt financing and notes payable (Note 6) 3,644 3,987 4,141
- ------------------------------------------------------------------------------------------------
Total interest expense 86,665 88,054 91,700
- ------------------------------------------------------------------------------------------------
NET INTEREST INCOME 180,155 182,616 182,482
- ------------------------------------------------------------------------------------------------
Provision for loan losses 5,180 7,645 12,306
- ------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES (Note 3) 174,975 174,971 170,176
- ------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 20,052 20,624 20,984
Merchant credit card 3,229 3,737 4,549
Financial services commissions 1,676 1,153 788
Mortgage banking 1,437 1,521 1,986
Trust fees 626 504 386
Other 10,785 9,474 7,614
- ------------------------------------------------------------------------------------------------
Total non-interest income 37,805 37,013 36,307
NON-INTEREST EXPENSE
Salaries and related benefits (Note 13) 51,094 62,485 61,033
Occupancy (Notes 5 and 11) 11,582 22,166 17,466
Furniture and equipment (Notes 5 and 11) 7,372 10,799 10,075
Data processing 5,940 6,234 6,029
Professional fees 2,250 9,185 5,997
Other real estate owned and property held for sale 339 1,121 955
Other 22,831 25,888 34,496
- ------------------------------------------------------------------------------------------------
Total non-interest expense 101,408 137,878 136,051
- ------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 111,372 74,106 70,432
Provision for income taxes (Note 9) 37,976 25,990 23,605
- ------------------------------------------------------------------------------------------------
NET INCOME $73,396 $48,116 $46,827
================================================================================================
Comprehensive income, net:
Change in unrealized gain on securities
available for sale, net 2,261 11,904 4,864
- ------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $75,657 $60,020 $51,691
================================================================================================
Average shares outstanding 41,797 43,040 42,759
Diluted average shares outstanding 42,524 43,827 43,358
PER SHARE DATA (Note 7)
Basic earnings $1.76 $1.12 $1.10
Diluted earnings 1.73 1.10 1.08
Dividends paid 0.52 0.36 0.30
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------
(In thousands)
================================================================================================
Accumulated
Other
Comprehensive Retained
Common Stock Income Earnings Total
- ------------------------------------------------------------------------------------------------
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
Net income for the year -- -- 73,396 73,396
Stock issued 12,475 -- -- 12,475
Purchase and retirement of stock (15,836) -- (88,988) (104,824)
Dividends -- -- (21,864) (21,864)
Unrealized gain on securities
available for sale, net -- 2,261 -- 2,261
- ------------------------------------------------------------------------------------------------
December 31, 1998 $195,156 $20,184 $153,256 $368,596
================================================================================================
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(In thousands)
======================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $73,396 $48,116 $46,827
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,623 9,828 9,995
Loan loss provision 5,180 7,645 12,306
Amortization of deferred net loan fees (cost) 431 (1,215) (1,105)
Decrease in interest income receivable 1,533 1,460 1,586
(Increase) decrease in other assets (14,361) 940 (14,735)
Increase (decrease) in income taxes payable 1,752 3,135 (1,224)
Increase (decrease) in interest expense payable 401 (321) 559
Decrease in other liabilities (10,683) (5,340) (4,309)
Gain on sales of branches -- (678) --
Net (gain) loss on sales/write-down of equipment (309) 7,785 212
Originations of loans for resale (23,578) (12,157) (56,988)
Net proceeds from sale of loans originated for resale 21,374 19,301 62,920
Net gain on sale of property acquired in satisfaction of debt (1,043) (1,184) (173)
Write-down on property acquired in satisfaction of debt 579 1,422 834
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 63,295 78,737 56,705
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash obtained in merger -- -- 4,391
Net (disbursements) repayments of loans (42,429) 9,102 22,290
Purchases of investment securities available for sale (332,747) (441,926) (339,666)
Purchases of investment securities held to maturity (54,685) (73,115) (26,448)
Purchases of property, plant and equipment (4,195) (5,036) (19,158)
Proceeds from maturity of securities available for sale 314,321 327,738 294,339
Proceeds from maturity of securities held to maturity 58,653 57,588 116,898
Proceeds from sale of securities available for sale 37,898 23,538 42,430
Proceeds from sale of property and equipment 1,419 4,004 1,965
Proceeds from property acquired in satisfaction
of debt 7,266 6,327 5,676
- ------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (14,499) (91,780) 102,717
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 110,504 (150,199) (108,027)
Net (decrease) increase in short-term borrowings (61,177) 97,401 (18,585)
Additions net of principal payments on notes and mortgages payable -- -- (5,015)
(Repayments) additions to notes payable (5,000) (6,365) 22,500
Exercise of stock options/issuance of shares 12,475 16,853 4,541
Retirement of common stock (104,824) (35,594) (27,561)
Dividends paid (21,864) (13,406) (15,005)
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (69,886) (91,310) (147,152)
- ------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (21,090) (104,353) 12,270
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 250,824 355,177 342,907
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $229,734 $250,824 $355,177
======================================================================================================
SUPPLEMENTAL DISCLOSURES:
Supplemental disclosure of non-cash activities
Loans transferred to other real estate owned $3,736 $2,604 $8,837
Premises transferred to other real estate owned -- 1,430 --
Unrealized gain on securities available for sale, net 2,261 11,904 4,864
Supplemental disclosure of cash flow activity
Interest paid for the period 86,264 88,168 89,999
Income tax payments for the period 30,902 25,297 26,086
Conversion of subordinated notes into common stock -- -- 84
Financing sales of premises and other real estate -- -- 345
Common stock issued for Auburn Bancorp merger -- -- 13,267
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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 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 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 consolidated 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.
The statements of income and comprehensive income, changes in
shareholders' equity and cash flows and the related footnotes
herein for the year ended December 31, 1996 have been restated to
reflect the merger with ValliCorp Holdings, Inc. (the "Merger") on
April 12, 1997, accounted for as a pooling of interests.
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 generally 90 days or less from maturity,
presenting 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. 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 $12.1 million and $14.4 million (net of
accumulated amortization of $15.2 million and $12.9 million) at
December 31, 1998 and 1997, 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 $8.7 million in 1998 and $9.6 million in 1997 (net of
accumulated depreciation of $4.2 million and $3.3 million,
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.
Derivative Instruments and Hedging Activities. In June, 1998, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which amends the disclosure
requirements of Statement No. 52, "Foreign Currency Translations"
and of Statement No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 133 supersedes Statements No. 80
"Accounting for Future Contracts", No. 105 "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk
and Financial Instruments with Concentrations of Credit Risk" and
No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments." Under the provisions of SFAS
133, the Company is required to recognize all derivatives as either
assets or liabilities in the statement of financial condition and
measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of
the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair
value of a derivative (that is, gain and losses) depends on the
intended use of the derivative and the resulting operation. SFAS
133 is effective for all fiscal quarters of fiscal years beginning
June 15, 1999, with early application encouraged, but it is
permitted only as of the beginning of any fiscal quarter that
begins after the issuance of the statement. SFAS 133 should not be
applied retroactively to financial statements of prior periods.
The Company does not expect that the adoption of SFAS 133 will have
a material impact on its financial condition.
Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. In
October, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 134,
"Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" ("SFAS 134"), which amends the disclosure
requirements of Financial Accounting Standards No. 65, "Accounting
for Certain Mortgage Banking Activities." SFAS 134 conforms the
subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise
with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking
enterprise. SFAS 134 is effective for the first fiscal quarter
beginning after December 15, 1998. The Company does not expect that
the adoption of SFAS 134 will have a material impact on its
financial condition.
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' presentations
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, 1998, follows:
==================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------
U.S. Treasury securities $245,114 $3,496 $ -- $248,610
Securities of U.S. Government
agencies and corporations 120,045 1,554 (295) 121,304
Obligations of States and
political subdivisions 205,248 8,318 (251) 213,315
Asset-backed securities 163,989 1,463 (54) 165,398
Other securities 217,560 21,755 (281) 239,034
- ----------------------------------------------------------------------------------
Total $951,956 $36,586 ($881) $987,661
==================================================================================
An analysis of the held-to-maturity investment securities portfolio
as of December 31, 1998, follows:
==================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------
Securities of U.S. Government
agencies and corporations $69,235 $549 ($862) $68,922
Obligations of States and
political subdivisions 147,118 7,195 (85) 154,228
Other securities 10,640 10,640
- ----------------------------------------------------------------------------------
Total $226,993 $7,744 ($947) $233,790
==================================================================================
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
==================================================================================
The amortized cost and estimated market value of securities at
December 31, 1998, 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 $210,749 $212,304 $2,217 $2,219
1 to 5 years 477,014 484,608 22,838 23,490
5 to 10 years 112,490 116,065 88,548 92,985
Over 10 years 107,339 111,441 33,515 35,534
- ----------------------------------------------------------------------------------
Sub-total 907,592 924,418 147,118 154,228
Mortgage-backed 24,493 25,281 69,235 68,922
Other securities 19,871 37,962 10,640 10,640
- ----------------------------------------------------------------------------------
Total $951,956 $987,661 $226,993 $233,790
==================================================================================
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, 1998 and 1997, the Company had no high-risk
collateralized mortgage obligations. As of December 31, 1998,
$607.1 million of investment securities were pledged to secure
public deposits and short-term funding needs, compared to $515.3
million in 1997.
Note 3: Loans and Allowance for Loan Losses
- -------------------------------------------
Loans at December 31, consisted of the following:
==================================================================================
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------
Commercial $725,677 $744,382
Real estate-commercial 751,235 692,736
Real estate-construction 57,998 66,782
Real estate-residential 384,128 361,909
- ----------------------------------------------------------------------------------
Total real estate loans 1,193,361 1,121,427
Installment and personal 385,204 404,382
Unearned income (6,345) (8,254)
- ----------------------------------------------------------------------------------
Gross loans 2,297,897 2,261,937
Allowance for loan losses (51,304) (50,630)
- ----------------------------------------------------------------------------------
Net loans $2,246,593 $2,211,307
==================================================================================
Included in real estate-residential at December 31, 1998 and 1997
are loans held for resale of $13.3 million and $3.3 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) 1998 1997 1996
- ----------------------------------------------------------------------------------
Balance at January 1, $50,630 $50,921 $48,494
Provision for loan losses 5,180 7,645 12,306
Loans charged off (8,568) (12,484) (16,017)
Recoveries of loans previously
previously charged off 4,062 4,548 4,473
Allowance acquired through merger -- -- 1,665
- ----------------------------------------------------------------------------------
Balance at December 31, $51,304 $50,630 $50,921
==================================================================================
The following is a summary of interest foregone on non-accrual
and restructured loans for the years ended December 31:
==================================================================================
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
Interest income that would have been
recognized had the loans performed
in accordance with their original terms $855 $1,632 $1,642
Less: Interest income recognized on
non-accrual and restructured loans (573) (462) (270)
- ----------------------------------------------------------------------------------
Interest foregone on non-accrual
and restructured loans $282 $1,170 $1,372
==================================================================================
There were no commitments to lend additional funds to borrowers
whose loans are included above.
At December 31, 1998, the recorded investment in loans for which
impairment was recognized totaled $15.0 million compared to $22.5
million at December 31, 1997. The specific reserves at December 31,
1998 and 1997 were $1.3 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,
1998, the average recorded net investment in impaired loans was
approximately $15.9 million compared to $22.0 million and $24.2
million, respectively, at December 31, 1997 and 1996. In general,
the Company does not recognize any interest income on trouble debt
restructurings or on 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, 1998 and 1997.
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 $95.3 million and $69.8 million at December 31, 1998 and
1997, respectively. The Company requires collateral on all real
estate loans and generally attempts to maintain loan-to-value
ratios no greater than 75 percent on commercial real estate loans
and no greater than 80 percent on residential real estate loans.
Note 5: Premises and Equipment
- ------------------------------
Premises and equipment as of December 31 consisted of the
following:
==================================================================================
Accumulated
Depreciation
and Net Book
(In thousands) Cost Amortization Value
- ----------------------------------------------------------------------------------
1998
Land $10,360 $- $10,360
Buildings and improvements 33,729 (9,757) 23,972
Leasehold improvements 5,763 (3,616) 2,147
Furniture and equipment 17,745 (8,253) 9,492
- ----------------------------------------------------------------------------------
Total $67,597 ($21,626) $45,971
==================================================================================
1997
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
==================================================================================
Depreciation and amortization included in operating expenses
amounted to $5.5 million in 1998, $7.5 million in 1997 and $8.5
million in 1996.
Note 6: Borrowed Funds
- ----------------------
Debt financing and notes payable, including the unsecured
obligations of the Company, as of December 31, 1998 and 1997, were
as follows:
==================================================================================
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------
Federal Home Loan Bank notes in increments
of $5.0 million starting in 1994 and each
dated December 1. Interest payable quarterly
at prime minus 2.05% to 2.32%; principal
payable annually in $5.0 million increments
collateralized by $30.0 million of commercial
and mortgage loans. $5,000 $10,000
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
- ----------------------------------------------------------------------------------
Total debt financing and notes payable $47,500 $52,500
==================================================================================
The prime rate related to all financing arrangements was 7.75% and
8.50% at December 31, 1998 and 1997, 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, 1998 and 1997, the Company had unused lines of
credit amounting to $62.5 million and $2.5 million, respectively.
Compensating balance arrangements are not significant to the
operations of the Company. At December 31, 1998 and 1997, the Banks
had $418.2 million and $311.1 million, respectively, in time
deposit accounts in excess of $100 thousand. Interest on these time
deposit accounts in 1998, 1997 and 1996 was $19.2 million, $17.1
million and $16.8 million, respectively.
Funds purchased include federal funds purchased and securities sold
with repurchase agreements. Fed funds purchased were $50.0 million
at December 31, 1998 and 1997. Securities sold with repurchase
agreements were $28.7 million at December 31, 1998 and $103.3
million at December 31, 1997. 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, 5.4 million shares were
reserved for issuance over a period of ten years. Since the
adoption of this plan and until its termination, on January 1 of
each year 2 percent of the Company's issued and outstanding shares
of common stock is to be reserved for granting. At December 31,
1998, 1997, and 1996, approximately 856 thousand, 566 thousand, and
588 thousand shares, respectively, were reserved for issuance.
Options are granted at fair market value and are generally
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, 2.3
million shares were reserved for issuance. Stock appreciation
rights, incentive stock options and non-qualified stock options
were available under this plan. Options were granted at fair market
value and were 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 had a
maximum ten-year term while non-qualified stock options may have
had a longer term. The 1985 plan was amended in 1990 to provide for
RPS grants, which became fully vested after three years of being
awarded, provided that the Company had attained its performance
goals for such three-year period.
PV Financial, CapitolBank Sacramento, and North Bay Bancorp had
separate stock option plans (the "Option Plans") whereby options
were granted to certain officers, directors, and employees.
Following the effective dates of the mergers, the Option Plans were
terminated and all outstanding options were substituted for the
Company's options, adjusted for the exchange ratios as defined in
the merger agreements.
ValliCorp Holdings, Inc. also had separate stock option plans
whereby options were granted to certain officers, directors, and
employees. Effective April 12, 1997, all ValliCorp Holdings, Inc.
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, 442,490 shares were available for issuance. There were 95,496
options granted in 1996 under these plans.
Stock Options. A summary of the status of the Company's stock
options as of December 31, 1998, 1997 and 1996 and changes during
the years ended on those dates, follows:
=============================================================================================================================
1998 1997 1996
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of shares Price of shares Price of shares Price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,094,387 $12 2,703,450 $10 2,623,974 $9
Granted 604,591 33 522,150 19 783,589 14
Exercised (326,450) 10 (1,056,165) 11 (528,281) 7
Forfeited (82,834) 15 (75,048) 16 (175,832) 13
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,289,694 $18 2,094,387 $12 2,703,450 $11
- -----------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 1,251,197 1,147,920 1,322,049
=============================================================================================================================
The following table summarizes information about options
outstanding at December 31, 1998 and 1997:
==================================================================================================
1998
- --------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
at 12/31/98 Life Price 12/31/98 Price
- --------------------------------------------------------------------------------------------------
$ 3 - 5 89,088 2.5 years $4 89,088 $4
5 - 7 131,172 2.5 6 129,245 6
7 - 8 13,944 2.0 8 13,944 8
8 - 9 139,500 4.0 8 139,500 8
9 - 10 242,418 5.0 9 242,418 9
10 - 12 241,874 6.0 10 241,874 10
12 - 14 1,146 7.0 13 1,146 13
14 - 15 11,370 5.5 14 11,370 14
15 - 19 388,577 7.0 15 248,427 15
19 - 20 434,865 8.0 19 134,185 19
33 595,740 9.0 33 --- ---
- --------------------------------------------------------------------------------------------------
$ 3 - 33 2,289,694 7.0 years $18 1,251,197 $11
==================================================================================================
==================================================================================================
1997
- --------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
at 12/31/97 Life Price 12/31/97 Price
- --------------------------------------------------------------------------------------------------
$ 3 - 5 126,894 3.5 years $4 85,017 $4
5 - 7 211,491 3 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 15 144,510 15
19 491,370 9 19 -- --
- --------------------------------------------------------------------------------------------------
$ 3 - 19 2,094,387 6.7 years $12 1,147,920 $9
==================================================================================================
Restricted Performance Shares. A summary of the status of the
Company's RPSs as of December 31, 1998, 1997, and 1996, and changes
during the years ended on those dates, follows:
==================================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 150,690 268,050 270,900
Granted 27,780 64,410 76,800
Exercised (59,850) (99,750) (74,100)
Forfeited -- (82,020) (5,550)
- --------------------------------------------------------------------------------------------------
Outstanding at end of year 118,620 150,690 268,050
==================================================================================================
As of December 31, 1998, 1997, and 1996, the RPSs had a
weighted-average contractual life of 1.1, 1.1, and 1.2 years,
respectively. The Company expects that substantially all of the
RPSs outstanding at December 31, 1998 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
plan. Accordingly, no compensation cost has been recognized for its
stock options. The compensation cost that had been charged against
income for the Company's RPSs granted was $1.9 million, $2.6
million, and $1.6 million for 1998, 1997, and 1996, respectively.
There were no stock appreciation rights or incentive stock options
granted in 1998, 1997, and 1996.
The fair value of each non-qualified stock option grant is
estimated on the date of the grant using the Modified Roll
option-pricing model with the following assumptions used for
calculating weighted-average RPS grants in 1998, 1997, and 1996.
==================================================================================================
1996
------------------------------
ValliCorp
Westamerica Holdings,
1998 1997 Bancorporation Inc.
- --------------------------------------------------------------------------------------------------
Dividend yield 1.64% 1.14% 1.80% 2.50%
Expected volatility 20.00 21.43 17.00 37.50
Risk-free interest rate 5.43 6.35 5.40 6.20
Expected lives 6.0 years 6.0 years 6.0 years 4.5 years
==================================================================================================
The weighted-average fair values of non-qualified stock options
granted during 1998, 1997, and 1996, were $8.37, $4.64, and $4.06,
respectively.
The fair value of each RPS is estimated on the date of the grant
using the Modified Roll option-pricing model with the following
assumptions used for calculating weighted-average RPS grants in
1998, 1997, and 1996.
==================================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------------------------
Dividend yield 1.64% 1.14% 1.80%
Expected volatility 20.00 21.43 17.00
Risk-free interest rate 5.35 6.35 5.15
Expected lives 3.0 years 3.0 years 3.0 years
==================================================================================================
The weighted-average fair values of the RPSs granted during 1998,
1997, and 1996 were $31.67, $19.25, and $14.83 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) 1998 1997 1996
- ----------------------------------------------------------------------------------
Net income
As reported $73,396 $48,116 $46,827
Pro forma 70,954 47,298 46,278
Weighted average shares (basic) 41,797 43,040 42,759
Weighted average shares (diluted) 42,524 43,827 43,358
Earnings per share
As reported (basic) 1.76 1.12 1.10
As reported (diluted) 1.73 1.10 1.08
Pro forma (basic) 1.70 1.10 1.08
Pro forma (diluted) 1.67 1.08 1.07
==================================================================================
A reconciliation of the diluted EPS computation to the amounts used
in the basic EPS computation for the years ended December 31, are
as follows:
==================================================================================
Net Number of Per Share
(In thousands, except per share data) Income Shares Amount
- ----------------------------------------------------------------------------------
1998
Basic EPS:
Income available to
common shareholders $73,396 41,797 $1.76
Effect of dilutive securities:
Stock options outstanding -- 727 --
- ----------------------------------------------------------------------------------
Diluted EPS:
Income available to common
shareholders plus assumed
conversions $73,396 42,524 $1.73
==================================================================================
1997
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
==================================================================================
1996
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
==================================================================================
Shareholders have authorized two new classes of 1.0 million shares
each, to be denominated "Class B Common Stock" and "Preferred
Stock," respectively, in addition to the 150.0 million shares of
common presently authorized. At December 31, 1998, 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 $.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, 1998, 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, 1998 and 1997:
=============================================================================================================================
To Be Well
1998 Capitalized Under
the FDICIA
For Capital Prompt Corrective
(In thousands) Actual Adequacy Purposes Action Provisions:
- -----------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------
Total Capital (to risk-weighted assets)
Consolidated Company $414,141 13.79% $240,238 8.00% $300,297 10.00%
Westamerica Bank 367,878 12.75% 230,737 8.00% 288,421 10.00%
Bank of Lake County 8,599 13.33% 5,162 8.00% 6,452 10.00%
Tier 1 Capital (to risk weighted assets)
Consolidated Company 356,434 11.87% 120,119 4.00% 180,178 6.00%
Westamerica Bank 305,661 10.60% 115,369 4.00% 173,053 6.00%
Bank of Lake County 7,782 12.06% 2,581 4.00% 3,871 6.00%
Leverage Ratio *
Consolidated Company 356,434 9.39% 151,812 4.00% 189,765 5.00%
Westamerica Bank 305,661 8.32% 146,996 4.00% 183,745 5.00%
Bank of Lake County 7,782 8.59% 3,626 4.00% 4,532 5.00%
=============================================================================================================================
=============================================================================================================================
To Be Well
1997 Capitalized Under
the FDICIA
For Capital Prompt Corrective
(In thousands) Actual Adequacy Purposes Action Provisions:
- -----------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------
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%
=============================================================================================================================
* 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 these
financial statements and could vary significantly from amounts
shown on the tax returns as filed. Accordingly, the variances from
the amounts previously reported for 1997 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) 1998 1997
- --------------------------------------------------------------------
Deferred tax asset
Reserve for loan losses $20,833 $20,448
State franchise taxes 3,760 2,837
Deferred compensation 2,719 2,299
Real estate owned 1,033 2,276
Interest on non-accrual loans 604 426
Reserve for long-term
lease commitments 62 1,080
Other reserves 722 963
Other 1,084 821
Net operating loss carryforwards 326 584
General tax credit carryforwards 215 215
- --------------------------------------------------------------------
Subtotal deferred tax asset 31,358 31,949
Valuation allowance -- --
- --------------------------------------------------------------------
Total deferred tax asset 31,358 31,949
- --------------------------------------------------------------------
Deferred tax liability
Net deferred loan costs 2,849 3,289
Fixed assets 1,992 1,634
Securities available for sale 15,164 13,523
Intangible assets 364 827
Leases 746 675
Other 118 210
- --------------------------------------------------------------------
Total deferred tax liability 21,233 20,158
- --------------------------------------------------------------------
Net deferred tax asset $10,125 $11,791
====================================================================
The Company believes a valuation allowance is not needed to reduce
the gross deferred tax asset because it is more likely than not
that the gross deferred tax asset will be realized through
recoverable taxes or future taxable income.
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) 1998 1997 1996
- ----------------------------------------------------------------------------------
Current income tax expense:
Federal $26,530 $18,164 $17,311
State 11,421 8,223 7,805
- ----------------------------------------------------------------------------------
Total current 37,951 26,387 25,116
- ----------------------------------------------------------------------------------
Deferred income tax (benefit) expense:
Federal (184) (594) (1,620)
State 209 197 (75)
- ----------------------------------------------------------------------------------
Total deferred 25 (397) (1,695)
Adjustment of net deferred tax asset
for enacted changes in tax rates:
Federal -- -- --
State -- -- 184
- ----------------------------------------------------------------------------------
Provision for income taxes $37,976 $25,990 $23,605
==================================================================================
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) 1998 1997 1996
- ----------------------------------------------------------------------------------
Federal income taxes due at
statutory rate $38,980 $25,937 $24,669
(Reductions) increases in income
taxes resulting from:
Interest on state and municipal
securities not taxable for
federal income tax purposes (7,815) (6,872) (5,906)
Reduction in the valuation
allowance -- (486) --
State franchise taxes, net of
federal income tax benefit 7,560 5,473 5,198
Costs related to acquisitions -- 3,183 367
Other (749) (1,245) (723)
- ----------------------------------------------------------------------------------
Provision for income taxes $37,976 $25,990 $23,605
==================================================================================
At December 31, 1998, 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 918 --
2008 14 --
- ----------------------------------------------------------------------------------
Total $932 $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) 1998 1997
- ----------------------------------------------------------------------------------
Cash and cash equivalents $229,734 $250,824
Money market assets 250 250
Interest and taxes receivable 54,773 59,384
Non-interest bearing and interest-bearing
transaction and savings deposits 2,346,562 2,309,359
Funds purchased 203,671 264,848
Interest payable 6,970 6,569
==================================================================================
The fair values at December 31, of the following financial
instruments were estimated using quoted market prices:
- ----------------------------------------------------------------------------------
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------
Investment securities available for sale $987,661 $1,003,234
Investment securities held to maturity 233,790 236,896
==================================================================================
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
$51.3 million allowance for loan losses in 1998 and $50.6 million
in 1997 were applied against the estimated fair values to recognize
future defaults of contractual cash flows. The estimated fair
values of loans at December 31, were:
==================================================================================
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------
Loans $2,254,747 $2,210,087
==================================================================================
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) 1998 1997
- ----------------------------------------------------------------------------------
Time deposits $844,080 $768,881
Debt financing and notes payable 47,500 52,724
==================================================================================
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: Lease Commitments
- --------------------------
Thirty-seven banking offices and a centralized administrative
service center are owned and fifty-two banking offices are leased.
Substantially all the leases contain multiple renewal options and
provisions for rental increases, principally for cost of living
index, property taxes and maintenance. The Company also leases
certain pieces of equipment.
Minimum future rental payments, net of sublease income, at December
31, 1998, are as follows:
====================================================================
(In thousands)
- --------------------------------------------------------------------
1999 $5,797
2000 3,865
2001 2,542
2002 1,863
2003 1,353
Thereafter 5,285
- --------------------------------------------------------------------
Total minimum lease payments $20,705
====================================================================
Total rentals for premises and equipment net of sublease income
included in non-interest expense were $5.2 million in 1998, $6.3
million in 1997 and $8.4 million in 1996.
Note 12: 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 $384.7 million and $395.9 million at December 31, 1998 and
1997, respectively. Standby letters of credit commit the Company to
make payments on behalf of customers when certain specified future
events occur. Standby letters of credit are primarily issued to
support customers' short-term financing requirements and must meet
the Company's normal credit policies and collateral requirements.
Standby letters of credit outstanding totaled $11.9 million and
$13.1 million at December 31, 1998 and 1997, 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 13: 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 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 1997 pension expense
was $143 thousand.
The Company sponsors a defined contribution Deferred Profit-Sharing
Plan covering substantially all of its salaried employees with one
or more years of service. The costs charged to non-interest expense
related to benefits provided by the Deferred Profit-Sharing Plan
were $1.6 million in 1998. The costs charged to non-interest
expense related to benefits provided by the Deferred Profit-Sharing
Plan and the Retirement Plan were $1.0 million in 1997 and $1.3
million in 1996.
In addition to 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 $1.6 million in 1998, $1.8
million in 1997 and $1.8 million in 1996.
Effective December 15, 1997, the Company adopted Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Post Retirement Benefits" ("SFAS 132").
Adoption of SFAS 132 revises the necessary disclosure requirements
for pension and other postretirement benefit plans.
The Company continues to use an actuarial-based accrual method of
accounting for postretirement benefits. The Company offers a
continuation of group insurance coverage to employees electing
early retirement, for the period from the date of retirement until
age 65. The Company contributes an amount toward early retirees'
insurance premiums which is determined at the time of early
retirement. The Company reimburses Medicare Part B premiums for all
retirees over age 65.
The following table sets forth the net periodic postretirement
benefit cost for the years ended December 31, the funded status of
the Plan and the change in the benefit obligation as of December 31:
====================================================================
(In thousands) 1998 1997
- --------------------------------------------------------------------
Periodic cost:
Service cost $217 $408
Interest cost 118 127
Amortization of unrecognized
transition obligation 61 61
- --------------------------------------------------------------------
Net periodic cost $396 $596
====================================================================
Change in benefit obligation:
Benefit obligation, beginning of year $2,355 $1,952
Service cost 217 408
Interest cost 118 127
Benefits paid (156) (132)
- --------------------------------------------------------------------
Benefit obligation, end of year $2,534 $2,355
====================================================================
Accumulated postretirement benefit obligation
attributable to:
Retirees $1,574 $1,180
Fully eligible participants 638 622
Other 322 553
- --------------------------------------------------------------------
Total 2,534 2,355
- --------------------------------------------------------------------
Fair value of plan assets -- --
- --------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets $2,534 $2,355
====================================================================
Comprised of:
Unrecognized transition obligation $1,163 $1,224
Recognized postretirement obligation 1,371 1,131
- --------------------------------------------------------------------
Total $2,534 $2,355
====================================================================
The discount rate used in measuring the accumulated post-
retirement benefit obligation was 5.0 percent and 6.5 percent at
December 31, 1998 and 1997, respectively. The assumed health care
cost trend rate used to measure the expected cost of benefits
covered by the plan was 3 percent for 1999 and beyond.
Assumed health care cost trend rates have a significant effect on
the amounts reported for health care plans. A one percentage point
change on the assumed health care cost trend rates would have the
following effect on 1998 results:
====================================================================
One One
Percentage Percentage
Point Point
(In thousands) Increase Decrease
- --------------------------------------------------------------------
Effect on total of service and
interest cost components $170 ($139)
Effect on postretirement benefit
obligation 382 (311)
====================================================================
Note 14: Related Party Transactions
- -----------------------------------
Certain directors and executive officers of the Company and/or its
subsidiaries were loan customers of the Banks during 1998 and 1997.
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 1998 and 1997:
====================================================================
(In thousands) 1998 1997
- --------------------------------------------------------------------
Beginning balance $2,489 $5,390
Originations 1,350 816
Payoffs/principal payments (181) (1,068)
Other changes * (390) (2,649)
- --------------------------------------------------------------------
At December 31, $3,268 $2,489
====================================================================
Percent of total loans outstanding 0.14% 0.11%
====================================================================
* Other changes in 1998 and 1997 include loans to former
directors and executive officers who are no longer related
parties.
Note 15: Regulatory Matters
- ---------------------------
Payment of dividends to the Company by the Banks 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 paid. Under this regulation, Westamerica Bank (the
largest subsidiary bank) sought and obtained approval to pay to the
Company dividends of $8.6 million in excess of net profits. The
Company consistently has paid quarterly dividends to its
shareholders since its formation in 1972. As of December 31, 1998,
$119.9 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 $25.8 million in 1998 and $31.5 million in
1997.
Note 16: Westamerica Bancorporation (Parent Company Only)
- ---------------------------------------------------------
Statements of Income and Comprehensive Income (In thousands)
==================================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
Dividends from subsidiaries $93,606 $41,538 $44,467
Interest income 1,731 1,903 1,851
Other income 6,809 5,317 4,248
- --------------------------------------------------------------------------------------------------
Total income 102,146 48,758 50,566
- --------------------------------------------------------------------------------------------------
Interest on borrowings 1,620 1,624 1,501
Salaries and benefits 6,199 6,634 5,911
Other expense 3,056 8,046 6,398
- --------------------------------------------------------------------------------------------------
Total expenses 10,875 16,304 13,810
- --------------------------------------------------------------------------------------------------
Income before taxes and equity in
undistributed income of subsidiaries 91,271 32,454 36,756
Income tax benefit 1,550 2,101 2,783
(Return of) equity in undistributed
income from subsidiaries (19,425) 13,561 7,288
- --------------------------------------------------------------------------------------------------
Net income $73,396 $48,116 $46,827
==================================================================================================
Comprehensive income, net:
Change in unrealized gains on securities
available for sale, net (2,420) 7,619 5,052
- --------------------------------------------------------------------------------------------------
Comprehensive income $70,976 $55,735 $51,879
==================================================================================================
Balance Sheets (In thousands)
==================================================================================
December 31, 1998 1997
- ----------------------------------------------------------------------------------
Assets
Cash and cash equivalents $5,547 $29,897
Money market assets and investment
securities available for sale 22,431 27,183
Line of credit from subsidiaries 2,896 3,776
Investment in subsidiaries 346,839 361,083
Premises and equipment, net 16,592 17,143
Accounts receivable from subsidiaries 340 1,253
Other assets 6,581 5,252
- ----------------------------------------------------------------------------------
Total assets $401,226 $445,587
==================================================================================
Liabilities
Notes payable $22,500 $22,500
Other liabilities 10,130 15,935
- ----------------------------------------------------------------------------------
Total liabilities 32,630 38,435
Shareholders' equity 368,596 407,152
- ----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $401,226 $445,587
==================================================================================
Statements of Cash Flows (In thousands)
==================================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
Operating Activities
Net income $73,396 $48,116 $46,827
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 813 684 450
Return of (equity in) undistributed
income from subsidiaries 19,425 (13,561) (7,288)
Decrease (increase) in accounts
receivable from subsidiaries 913 (906) (96)
Decrease in other assets 1,544 405 308
Increase (decrease) in other liabilities (6,922) (885) 1,373
Gain on sales of assets (3,216) (1,756) --
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 85,953 32,097 41,574
- --------------------------------------------------------------------------------------------------
Investing Activities
Purchases of premises and equipment (262) (1,505) (10,826)
Net cash obtained in merger -- -- 218
Net change in land held for sale -- -- 721
Net change in loan balances 880 (3,776) --
Investment in subsidiaries (500) -- (500)
Purchases of investment securities
available for sale -- -- (756)
Proceeds from sale of other assets 3,792 2,260 --
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,910 (3,021) (11,143)
- --------------------------------------------------------------------------------------------------
Financing Activities
Net (reductions) additions in notes payable -- (677) 21,988
Exercise of stock options/issuance of shares 12,475 16,853 5,516
Retirement of common stock (104,824) (35,594) (27,561)
Dividends (21,864) (13,406) (7,904)
- --------------------------------------------------------------------------------------------------
Net cash used in financing activities (114,213) (32,824) (7,961)
- --------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (24,350) (3,748) 22,470
Cash and cash equivalents at beginning of year 29,897 33,645 11,175
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $5,547 $29,897 $33,645
==================================================================================================
Supplemental disclosure:
Non-cash dividend in the form of real property
from Westamerica Bank $-- $-- $3,755
Unrealized gain on securities available
for sale, net 2,261 11,904 6,126
Conversion of subordinated notes into common stock -- -- 84
Issuance of common stock for acquisition -- -- 13,267
Note 17: Quarterly Financial Information (Unaudited)
- ----------------------------------------------------
==================================================================================================================
(In thousands, except per share data and
price range of common stock) March 31, June 30, September 30, December 31,
- ------------------------------------------------------------------------------------------------------------------
1998
Interest income $66,654 $66,994 $67,457 $65,715
Net interest income 44,927 44,644 45,010 45,574
Provision for loan losses 1,395 1,395 1,195 1,195
Non-interest income 8,986 9,584 9,451 9,784
Non-interest expense 25,340 25,359 25,153 25,556
Income before taxes 27,178 27,474 28,113 28,607
Net income 18,096 18,102 18,436 18,762
Basic earnings per share 0.42 0.43 0.44 0.47
Diluted earnings per share 0.41 0.42 0.44 0.46
Dividends paid per share 0.12 0.12 0.14 0.14
Price range, common stock 30.67-35.25 28.50-36.38 23.63-33.63 23.88-37.25
- ------------------------------------------------------------------------------------------------------------------
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 14,091 4,753 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
==================================================================================================================
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, 1998 and 1997, and the related consolidated statements
of income and comprehensive income, changes in shareholders'
equity, and cash flows for each of the years in the three year
period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits. As discussed in Note 1 to
the consolidated financial statements, the consolidated statements
of income and comprehensive income, changes in shareholders'
equity, and cash flows for the year ended December 31, 1996 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 consolidated financial statements of ValliCorp Holdings, Inc.
for the year ended December 31, 1996, which statements reflect net
income constituting 19 percent for the year ended December 31, 1996
of the related and restated consolidated totals. Those statements
included in the 1996 restated consolidated totals were audited by
other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for
ValliCorp Holdings, Inc., is based solely on the report 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
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
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 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
Westamerica Bancorporation and subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flows
for each of the years in the three year period ended December 31,
1998 in conformity with generally accepted accounting principles.
/s/KPMG LLP
- -----------
KPMG LLP
San Francisco, California
January 19, 1999
MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY
To Our Shareholders:
The Management of Westamerica Bancorporation is responsible for the
preparation, integrity, reliability and consistency of the
information contained in this annual report. The consolidated
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 consolidated 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 consolidated
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, 1998, the Corporation's internal control environment
is adequate to provide reasonable assurance as to the integrity and
reliability of the consolidated 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 consolidated financial statements have been
audited by KPMG 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 statements of income,
stockholders' equity, and cash flows (none of which are
presented herein) of ValliCorp Holdings, Inc. (the
Company) and subsidiaries for the year ended December 31,
1996. 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 audit.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audit and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the results of operations and cash flows of
ValliCorp Holdings, Inc. and subsidiaries for the year
ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Fresno, California
January 24, 1997
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 regarding directors of the registrant required by
this Item 10 is incorporated herein by reference from the "Election
of Directors" and Section 16(a) "Beneficial Ownership Reporting
Compliance" sections on Pages 2,3 and 6 of the Company's Proxy
Statement dated March 17, 1999, which has been filed with the
Commission pursuant Regulation 14A.
Executive Officers
- ------------------
The executive officers of the Corporation and Westamerica Bank
serve at the pleasure of the Board of Directors and are subject to
annual appointment by the Board at its first meeting following the
Annual Meeting of Shareholders. It is anticipated that each of the
executive officers listed below will be reappointed to serve in
such capacities at that meeting.
Held
Name of Executive Position Since
- ----------------- ------------------------------------ ---------
David L. Payne Mr. Payne, born in 1955, is the 1984
Chairman of the Board, President and
Chief Executive Officer of the
Corporation. Mr. Payne is President
and Chief Executive Officer of Gibson
Printing and Publishing Company and
Gibson Radio and Publishing Company
which are newspaper, commercial
printing and real estate investment
companies headquartered in Vallejo,
California.
E. Joseph Bowler Mr. Bowler, born in 1936, is Senior 1980
Vice President and Treasurer for the
Corporation.
Robert W. Entwisle Mr. Entwisle, born in 1947, is Senior 1986
Vice President in charge of the
Banking Division of Westamerica Bank.
Jennifer F. Finger Ms. Finger, born in 1954, is Senior 1997
Vice President and Chief Financial
Officer for the Corporation. From 1993
to 1997, Ms. Finger was Senior Vice
President of Corporate Development
with Star Banc Corporation in
Cincinnati, Ohio.
Evan N. Fricker Mr. Fricker, born in 1938, is Vice 1983
President and General Auditor for
the Corporation.
Charles L. Fritz * Mr. Fritz, born in 1936, is Executive 1988
Vice President and Chief Credit
Officer of the Corporation.
Dennis R. Hansen Mr. Hansen, born in 1950, is Senior 1978
Vice President and Controller for the
Corporation.
Thomas S. Lenz Mr. Lenz, born in 1937, is Senior Vice 1989
President and Chief Credit
Administrator of Westamerica Bank.
Hans T. Y. Tjian Mr. Tjian, born in 1939, is Senior 1989
Vice President and manager of the
Operations and Systems Administration
of Westamerica Bank.
* Mr. Fritz retired effective December 31, 1998, but pursuant to an
agreement will continue to receive compensation through approximately
April 1, 1999.
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 7 through 10 of the Company's Proxy
Statement dated March 17, 1999, 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 and 6 of the Company's Proxy
Statement dated March 17, 1999, 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 5 of the Company's Proxy
Statement dated March 17, 1999, 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),
incorporated herein by reference to Exhibit 3(a) to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 30, 1998.
3(b) By-laws, as amended (composite copy).
4(a) Amended and Restated Rights Agreement dated March 23,
1995, incorporated herein by reference to Exhibit 4.2
to the Registrant's Amendment No. 1 to Registration
Statement on Form S-4, Commission File No. 333-17335,
filed with the Securities and Exchange Commission on
January 6, 1997.
10(a)* 1995 Stock Option Plan, incorporated herein by reference
to Exhibit 10(a) to the Registrant's Registration
Statement on Form S-8, filed with the Securities and
Exchange Commission on June 6, 1995.
10(b)* Employment Agreement with E. Joseph Bowler dated
January 7, 1987.
10(c)* Employment Agreement with Robert W. Entwisle dated
January 7, 1987.
10(d) Senior Note Agreement of Westamerica Bancorporation
dated February 1, 1996, of $22,500,000 at 7.11 percent
incorporated herein by reference to Exhibit 10-j of
Registrant's Annual Report on 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 LLP
23(b) Consent of Deloitte & Touche LLP
(27) Financial Data Schedule
----------------------
* Indicates management 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 22, 1999
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 25, 1999
- ------------------------------Director, President,
David L. Payne And Chief Executive Officer
/s/ E. Joseph Bowler Senior Vice President March 25, 1999
- ------------------------------and Treasurer
E. Joseph Bowler
/s/ Etta Allen Director March 25, 1999
- ------------------------------
Etta Allen
/s/ Louis E. Bartolini Director March 25, 1999
- ------------------------------
Louis E. Bartolini
/s/ Louis H. Herwaldt Director March 25, 1999
- ------------------------------
Louis H. Herwaldt
/s/ Arthur C. Latno Director March 25, 1999
- ------------------------------
Arthur C. Latno
/s/ Patrick D. Lynch Director March 25, 1999
- ------------------------------
Patrick D. Lynch
/s/ Catherine Cope MacMillan Director March 25, 1999
- ------------------------------
Catherine Cope MacMillan
/s/ Patrick J. Mon Pere Director March 25, 1999
- ------------------------------
Patrick J. Mon Pere
/s/ Michael J. Ryan, Jr. Director March 25, 1999
- ------------------------------
Michael J. Ryan, Jr.
/s/ Edward B. Sylvester Director March 25, 1999
- ------------------------------
Edward B. Sylvester