-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J4R+MX8wwoDTNO8UUaIB/1kh6IXxXpCaMcwaWWYS+XS6+S2LeIyeIkeGbG1W8H9i fvg+bALICi0RMxi/3ySfsg== 0000311094-97-000003.txt : 19970401 0000311094-97-000003.hdr.sgml : 19970401 ACCESSION NUMBER: 0000311094-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTAMERICA BANCORPORATION CENTRAL INDEX KEY: 0000311094 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942156203 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09383 FILM NUMBER: 97570532 BUSINESS ADDRESS: STREET 1: 1108 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4152578000 MAIL ADDRESS: STREET 1: 1108 FIFTH AVENUE CITY: SAN RAFAEL STATE: CA ZIP: 94901 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT BANKSHARES CORP DATE OF NAME CHANGE: 19830801 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number 1-9383 WESTAMERICA BANCORPORATION (Exact name of the registrant as specified in its charter) CALIFORNIA (State of incorporation) 94-2156203 (I.R.S. Employer Identification Number) 1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 257-8000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of Class: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ x ] NO Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of the stock, as of March 21, 1997: $592,757,000 Number of shares outstanding of each of the registrant's classes of common stock, as of March 21, 1997 Title of Class Common Stock, no par value Shares Outstanding 8,972,673 DOCUMENTS INCORPORATED BY REFERENCE Document * Proxy Statement dated March 20, 1997 for Annual Meeting of Shareholders to be held on April 22, 1997 Incorporated into: Part III * Only selected portions of the documents specified are incorporated by reference into this report, as more particularly described herein. Except to the extent expressly incorporated herein by reference, such documents shall not be deemed to be filed as part of this Annual Report on Form 10-K. TABLE OF CONTENTS PART I Page Item 1 Business ........................................... 4 Item 2 Properties ......................................... 25 Item 3 Legal Proceedings .................................. 26 Item 4 Submission of Matters to a Vote of Security Holders .................................. 26 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ....................... 26 Item 6 Selected Financial Data ............................ 28 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 29 Item 8 Financial Statements and Supplementary Data ........ 56 Item 9 Changes in and Disagreements on Accounting and Financial Disclosure .......................... 92 PART III Item 10 Directors and Executive Officers of the Registrant . 92 Item 11 Executive Compensation ............................. 92 Item 12 Security Ownership of Certain Beneficial Owners and Management .................................... 92 Item 13 Certain Relationships and Related Transactions ..... 92 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 93 PART I ITEM I. Business Certain statements in this Annual Report on Form 10-K include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry increases significantly; changes in the interest rate environment reduce margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. See also "Certain Additional Business Risks" on pages 8 through 9 herein and other risk factors discussed elsewhere in this Report. WESTAMERICA BANCORPORATION (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956 ("BHC"), as amended. The Company was incorporated under the laws of the State of California as "Independent Bankshares Corporation" on February 11, 1972. Its principal executive offices are located at 1108 Fifth Avenue, San Rafael, California 94901, and its telephone number is (415) 257-8000. The Company provides a full range of banking services to individual and corporate customers in Northern California through its subsidiary banks, Westamerica Bank and Bank of Lake County (the "Banks"). The Banks are subject to competition from other financial institutions and regulations from certain agencies and undergo periodic examinations by those regulatory authorities. In addition, the Company also owns 100 percent of the capital stock of Westamerica Commercial Credit, Inc., a newly formed company engaged in financing account receivable and inventory lines of credit and term business loans and 100 percent of Community Banker Services Corporation, engaged in providing the Company and its subsidiaries data processing services and other support functions. The Company was originally formed pursuant to a plan of reorganization among three previously unaffiliated banks: Bank of Marin, Bank of Sonoma County and First National Bank of Mendocino County (formerly First National Bank of Cloverdale). The reorganization was consummated on December 31, 1972 and, on January 1, 1973, the Company began operations as a bank holding company. Subsequently, the Company acquired Bank of Lake County (a California chartered bank) in 1974, Gold Country Bank in 1979 and Vaca Valley Bank in 1981, in each case by the exchange of the Company's Common Stock for the outstanding shares of the acquired banks. In mid-1983, the Company consolidated the six subsidiary banks into a single subsidiary bank. The consolidation was accomplished by the merger of the five state-chartered banks (Bank of Marin, Banks of Sonoma County, Bank of Lake County, Gold Country Bank and Vaca Valley Bank) into First National Bank of Mendocino County which subsequently changed its name to Westamerica Bank ("WAB"), a national banking association organized and existing under the laws of the United States. In August, 1988, the Company formed a new bank, but named it Bank of Lake County, National Association, and effected the sale of WAB's assets and liabilities of its three Lake County branches to the newly formed bank. In August, 1988, the sale of Bank of Lake County, National Association to Napa Valley Bancorp was consummated. On February 28, 1992, the Company acquired John Muir National Bank through a merger of such bank with and into WAB in exchange for the issuance of the Company's Common Stock for all the outstanding shares of John Muir National Bank. The business transaction was accounted for on a pooling-of-interests basis. On April 15, 1993, the Company acquired Napa Valley Bancorp, a bank holding company, whose subsidiaries included Napa Valley Bank, 88 percent interest in Bank of Lake County, 50 percent interest in Sonoma Valley Bank, Suisun Valley Bank and Napa Valley Bancorp Services Corporation, which was established to provide data processing and other services to Napa Valley Bancorp's subsidiaries. This business transaction was accounted for on a pooling-of-interests basis. Shortly after, Suisun Valley Bank was merged into Westamerica Bank, the name of Napa Valley Bancorp Services Corporation was changed to Community Banker Services Corporation and the Company sold its 50 percent interest in Sonoma Valley Bank. The Company retained its 88 percent interest in Bank of Lake County. In June 1993, the Company accepted from WAB a dividend in the form of all outstanding shares of capital stock of WAB's subsidiary, Weststar Mortgage Corporation, a California Corporation established to conduct mortgage banking activities. Immediately after the receipt of this dividend, the Company contributed all of the capital stock of Weststar Mortgage Corporation to its subsidiary, Community Banker Services Corporation. WAB and Bank of Lake County became state-chartered banks in June 1993 and December 1993, respectively. In December 1994, the Company completed the purchase of the remaining 12 percent investment in Bank of Lake County from outside investors, becoming the sole owner of Bank of Lake County. On January 31, 1995, the Company acquired PV Financial, parent company of PV National Bank, through a merger of such bank with and into WAB in exchange for the issuance of shares of the Company's Common Stock for all the outstanding shares of PV Financial. The business combination was accounted for on a pooling-of-interests basis. On June 6, 1995, the merger of CapitolBank Sacramento with and into WAB became effective. Under the terms of the merger, the Company issued shares of its common stock in exchange for all of CapitolBank Sacramento's common stock. This acquisition was accounted for on a pooling-of-interests basis. On July 17, 1995, the Company acquired North Bay Bancorp, parent company of Novato National Bank. Under the terms of the merger agreement, the Company issued shares of its common stock in exchange for all of the outstanding shares of common stock of North Bay Bancorp. The subsidiary bank was merged with and into WAB. The business combination was accounted for on a pooling-of-interests basis. On April 12, 1996 Napa Valley Bank was merged into WAB. In November 1996, the Company finalized the formation of a new subsidiary, Westamerica Commercial Credit, Inc., which engages in financing account receivable and inventory lines of credit and term business loans. On November 11, 1996, the Company entered into an Agreement and Plan of Reorganization with ValliCorp Holdings, Inc. ("ValliCorp") pursuant to which ValliCorp agreed to merge with and into the Company. The merger had not been consummated as of the date of this report. At December 31, 1996, the Company had consolidated assets of approximately $2.55 billion, deposits of approximately $2.08 billion and shareholders' equity of approximately $238.9 million. See Note 19 to the consolidated financial statements included in this report regarding a pending acquisition. SERVICE AREA The Banks serve the following twelve major markets: Marin County. Marin County is one of the most affluent counties in California and has a population of approximately 239,500. San Rafael and Novato are the largest communities in the county, with populations of approximately 52,400 and 46,500, respectively. Both are in close proximity to the city of San Francisco. The area served by WAB is a relatively densely populated area whose economic make-up is primarily residential, commercial and light industrial. Sonoma-Mendocino Counties. Of the eight San Francisco-Bay Area counties, Sonoma County is geographically the largest. The population of the county is approximately 421,500. The city of Santa Rosa is the largest population center in Sonoma County with an estimated population of 125,700. Light industry, agriculture and food processing are the primary industries in Sonoma County, with tourism and recreational activities growing steadily. WAB also serves Mendocino County, population 86,230, where the major business is agriculture. Solano County. WAB serves all of Solano County, with an estimated population of 373,100. Vallejo is the largest city in the county, with a population of approximately 112,300. While light industry and the service sector are growing steadily, the federal government is the largest employer in the county. Stanislaus County. Included in the counties served by WAB is Stanislaus County, with an estimated population of 415,300. The largest city is Modesto, with a population of approximately 178,700. The county's primary industry is agriculture. Contra Costa County. During 1996, WAB opened one new branch in the city of Lafayette, with a population of approximately 23,550, to serve, together with four other WAB branch locations, Contra Costa's growing commercial and industrial construction industry. The population of the county is approximately 870,700. Sacramento County. WAB has operated in Sacramento, the state capital of California, since 1982, a presence enhanced in 1995 through the merger with CapitolBank. The county has a population of approximately 1,123,400. Major industries include agriculture, government, manufacturing and wholesale and retail trade. Sacramento is also a major transportation center for the state. Nevada County. WAB is currently serving most of Nevada County, an area generally known as the "Gold Country". The population of the entire county, where tourism, agriculture and wood product manufacturing are the major industries, is approximately 87,000. Placer County. WAB operates a branch in Roseville, located approximately 15 miles east of WAB's Sacramento office, to serve the growing area of the Sierra Nevada foothills. The population of Placer County is approximately 206,000. San Francisco County. WAB has operated in the financial center of the city of San Francisco since 1987. The business of this branch facility is focused on commercial lending and deposit relationships in that city. Napa County. WAB has seven office locations in Napa County. The population of the county is approximately 119,000, with agriculture being its major source of business, followed by tourism. Alameda County. During 1996, WAB opened a new branch location in the city of Pleasanton in Alameda County. The major source of business of the county, with an estimated population of 1,356,100, is commerce and retail businesses. Lake County. Bank of Lake County, ("Lake County's Bank"), ("BLC") has four office locations in Lake County, which has an estimated population of approximately 55,300. Agriculture is the primary industry of the county, followed closely by recreation and tourism. Neither the Company nor any of its subsidiaries have any foreign or international activities or operations. All population figures contained in the previous discussion are 1996 estimates as prepared by the California Department of Finance. CERTAIN ADDITIONAL BUSINESS RISKS The Company's business, financial condition and operating results can be impacted by a number of factors, including but not limited to those set forth below, any one of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results. Shares of Company Common Stock eligible for future sale could have a dilutive effect on the market for Company Common Stock and could adversely affect the market price. The Articles of Incorporation of the Company authorize the issuance of 50,000,000 shares of common stock (and two classes of 1,000,000 shares each, denominated "Class B Common Stock" and "Preferred Stock", respectively) of which approximately 9,434,870 shares of common stock were outstanding at December 31, 1996. Pursuant to its stock option plans, at December 31, 1996, the Company had outstanding options to purchase 634,958 shares of Company Common Stock. As of December 31, 1996 165,518 shares of Company Common Stock remained available for grants under the Company's stock option plan. Sales of substantial amounts of Company Common Stock in the public market or issuance of new securities in connection with acquisitions could adversely affect the market price of Common Stock. A portion of the loan portfolio of the Company is dependent on real estate. At December 31, 1996, real estate served as the principal source of collateral with respect to approximately 55 percent of the Company's loan portfolio. A worsening of current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available-for-sale investment portfolio, as well as the Company's financial condition and results of operations in general and the market value of the Company Common Stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition. The Company is subject to certain operations risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company's internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company's business, financial condition or results of operations. THE EFFECT OF GOVERNMENT POLICY ON BANKING The earnings growth of the Company's banking subsidiaries are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. For example, the Board of Governors of the Federal Reserve System (the "FRB") influences the supply of money through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Company cannot be predicted. Additionally, state and federal tax policies can impact banking organizations. Effective January 1, 1997, applicable California law and corporation tax rates were reduced by 5% in order to keep California competitive with other western states. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company. In response to various business failures in the savings and loan industry and in the banking industry, in December 1991, Congress enacted, and the President signed into law, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA substantially revised the bank regulatory framework and deposit insurance funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Implementation of the various provisions of FDICIA is subject to the adoption of regulations by the various regulatory agencies, the manner in which the regulatory agencies implement those regulations and certain phase-in periods. REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"). As such, the Company reports to, registers with, and may be examined by, the FRB. The FRB also has the authority to examine the subsidiaries of the Company. The costs of any such examination by the FRB are payable by the applicable parent holding company. The FRB has significant supervisory and regulatory authority over the Company and its affiliates. The FRB requires the Company to maintain certain levels of capital. See "Capital Standards". The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. See "Prompt Corrective Action and Other Enforcement Mechanisms". Under the BHCA, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over a bank, or acquires directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company. Thus, the Company is required to obtain the prior approval of the FRB before they acquire, merge or consolidate with any bank or bank holding company; any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the approval of the FRB. A bank holding company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks or providing services to affiliates of the holding company. A bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995 without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and no more than 30% of such deposits in that state (or such lesser or greater amount set by law). The Interstate Banking and Branching Act also authorizes banks to merge across state lines, therefore creating interstate branches, beginning June 1, 1997. Under such legislation, each state has the opportunity to "opt out" of this provision, thereby prohibiting interstate branching in such states, or to "opt in" at an earlier time, thereby allowing interstate branching within that state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now able to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such de novo branching. California enacted legislation to "opt in" to the Interstate Banking and Branching Act provisions regarding interstate branching, allowing a state bank chartered in a state other than California to acquire by merger or purchase, at any time after effectiveness of the Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 (the "IBBA"), a California bank or industrial loan company which is at least five (5) years old and thereby establish one or more California branch offices. However, the IBBA prohibits a state bank chartered in a state other than California from entering California by purchasing a California branch office of a California bank or industrial loan company without purchasing the entire entity or by establishing a de novo California branch office. See the section entitled "Recently Enacted Legislation" for additional information. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The FRB's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Transactions between holding companies and any of their subsidiary banks are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Subject to certain limitations, depository institution subsidiaries of bank holding companies may extend credit to, invest in securities of, purchase assets from, or issue a guarantee, acceptance, or letter of credit on behalf of, an affiliate, provided that the aggregate of such transactions with affiliates may not exceed 10% of the capital stock and surplus of the institution, and the aggregate of such transactions with affiliates may not exceed 20% of the capital stock and surplus of such institution. A bank holding company may only borrow from depository institution subsidiaries if the loan is secured by marketable obligations with a value of a designated amount in excess of the loan. Further, a bank holding company may not sell a low-quality asset to a depository institution subsidiary. Generally, a bank holding company and its subsidiaries are prohibited from engaging in tie-in arrangements in connection with the extension of credit, sale or lease of property, or furnishing of services unless the FRB permits an exception to the tying prohibitions pursuant to exemption authority available to it under applicable law. The FRB, however, has adopted a rule, effective September 2, 1994, amending the anti-tying provisions to permit a bank or bank holding company to offer a lower price on a loan, deposit or trust service (traditional bank product), or on securities brokerage services, on the condition that the customer obtain a traditional bank product from an affiliate. Additionally, as of January 23, 1995, a bank holding company, or a nonbank subsidiary, may offer lower prices on any of its products or services on the condition that a customer obtain another product or service from such company or any of its nonbank affiliates, provided that all products offered in the package arrangement are separately available for purchase. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California Superintendent of banks (the "Superintendent"). Regulations have not yet been proposed or adopted, and no other steps have been taken, to implement the Superintendent's powers under this statute. BANK SUPERVISION AND REGULATION The Banks are California chartered banks insured by the Federal Deposit Insurance Corporation (the "FDIC"), and as such are subject to regulation, supervision and regular examination by the Superintendent. As members of the Federal Reserve System, the Banks' primary federal regulator is the FRB. The regulations of these agencies affect most aspects of such bank subsidiaries' business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of the activities and various other requirements for such bank subsidiaries. Pursuant to AB 3351, which was adopted by the California legislature during 1996, all of the California state regulatory authorities for state-chartered depository institutions will be consolidated under a new state agency, the Department of Financial Institutions ("DFI") effective July 1, 1997. The newly created DFI combines the State Banking Department and the Department of Savings and Loan, while regulatory oversight over industrial loan companies and credit unions will be shifted from the Department of Corporations to the DFI. For the most part, the DFI is merely assuming the responsibilities and authorities previously held by the existing regulators. Under California law, a state chartered bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital and reserve requirements, deposits and borrowings, shareholder rights and duties, and investments and lending activities. Whenever it appears that the contributed capital of a California chartered bank is impaired, the Superintendent shall order the bank to correct such impairment. If a California chartered bank is unable to correct the impairment, such bank is required to levy and collect an assessment upon its common shares. If such assessment becomes delinquent, such common shares are to be sold by the bank. During 1996 the Interstate Banking and Branching Cleanup Act was enacted, which revised the Superintendent's assessment methodology for state-chartered banks in order to provide a better basis of comparison to the method used by the Office of the Comptroller of the Currency ("OCC"). Under the new methodology, the average assessment for state banks will be approximately 39% of the OCC's annual charges for national bank supervision. California law permits a state chartered bank to invest in the stock and securities of other corporations, subject to a state-chartered bank receiving either general authorization or, depending on the amount of the proposed investment, specific authorization from the Superintendent. FDICIA, however, imposes limitations on the activities and equity investments of state chartered, federally insured banks. The limitations on equity investments were effective December 19, 1991, and the limitations on activities became effective December 19, 1992. The FDIC rules on investments prohibit a state bank from acquiring an equity investment of a type, or in an amount, not permissible for a national bank. Non-permissible investments were required to be divested by state banks no later than December 19, 1996. FDICIA prohibits a state bank from engaging as a principal in any activity that is not permissible for a national bank, unless the bank is adequately capitalized and the appropriate federal regulator approves the activity after determining that such activity does not pose a significant risk to the deposit insurance fund. The FDIC rules on activities generally permit subsidiaries of banks, without prior specific FDIC authorization, to engage in those activities that have been approved by the FRB for bank holding companies because such activities are so closely related to banking to be a proper incident thereto. Other activities generally require specific FDIC prior approval, and the FDIC may impose additional restrictions on such activities on a case-by-case basis in approving applications to engage in otherwise impermissible activities. The Banks are also subject to applicable provisions of California law, insofar as such provisions are not in conflict with or preempted by federal banking law. In addition, the Banks are subject to certain regulations of the FRB dealing primarily with check-clearing activities, establishment of banking reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B). During 1996, the OCC adopted a regulation to revise and streamline its procedures with respect to corporate activities of national banks, to be effective December 31, 1996. These revised standards allow the OCC to approve, on a case-by-case basis, the entry of bank operating subsidiaries into a business incidental to banking, including activities in which the parent bank is not permitted to engage. Such a standard allows a national bank to conduct an activity approved for a bank holding company through a bank operating subsidiary such as acting as an investment or financial advisor, leasing personal property and providing financial advice to customers. In general, these new standards will be available to well-capitalized or adequately-capitalized national banks. Since state banks may only make equity investments if a type permissible for national banks, this new regulation might result in some liberalization of the types of investments permissible for state banks. CAPITAL STANDARDS The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse agreements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. In determining the capital level that banking organizations are required to maintain, the federal banking agencies do not, in all respects, follow generally accepted accounting principles ("GAAP") and have special rules which have the effect of reducing the amount of capital they will recognize for purposes of determining the capital adequacy of the Company and its subsidiaries. These rules are called regulatory accounting principles ("RAP"). In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. Future changes in the regulations or practices of the federal banking agencies could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Company to grow and could restrict the amounts of profits, if any, available for the payment of dividends. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items. The regulators measure risk-adjusted assets and off balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock, other types of qualifying common stock and minority interests in certain subsidiaries, less most other intangible assets and other adjustments. Net unrealized gains/losses on available-for-sale equity securities with readily determinable fair values must be deducted in determining Tier 1 capital. Additionally, as of April 1, 1995, for Tier 1 capital purposes, deferred tax assets that can only be realized if the institution earns sufficient taxable income in the future will be limited to the amount that the institution is expected to realize within one year, or ten percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of a limited amount of the reserve for loan losses, term preferred stock and other types of preferred stock not qualifying as Tier 1 capital, term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off balance sheet items of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to adjusted average total assets, referred to as the leverage capital ratio. For banking organizations rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. It is improbable, however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators' rating. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, must be at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The following tables present the capital ratios for the Company and its subsidiaries, compared to the standards for well-capitalized depository institutions, as of December 31, 1996. Westamerica Bancorporation - ------------------------------------------------------------------- For Capital Adequacy Actual Purposes (Dollars in thousands) Capital Ratio Amount Ratio - ------------------------------------------------------------------- Leverage $230,981 9.20% $100,394 4.00% Tier 1 Risk-based 230,981 12.61 73,269 4.00 Total Risk-based 274,026 14.96 146,538 8.00 Westamerica Bank - ------------------------------------------------------------------- For Capital Adequacy Actual Purposes (Dollars in thousands) Capital Ratio Amount Ratio - ------------------------------------------------------------------- Leverage $194,194 8.11% $95,757 4.00% Tier 1 Risk-based 194,194 11.22 69,257 4.00 Total Risk-based 241,981 13.98 138,515 8.00 Bank of Lake County - ------------------------------------------------------------------- For Capital Adequacy Actual Purposes (Dollars in thousands) Capital Ratio Amount Ratio - ------------------------------------------------------------------- Leverage $9,721 10.79% $3,605 4.00% Tier 1 Risk-based 9,721 16.36 2,376 4.00 Total Risk-based 10,474 17.63 4,752 8.00 Banking agencies have recently adopted final regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as a part of the institution's regular safety and soundness examination. Banking agencies also have recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluating a bank's capital adequacy. This final rule does not codify a measurement framework for assessing the level of a bank's interest rate risk exposure. The information and exposure estimates collected through a new proposed supervisory measurement process, described in the banking agencies' joint policy statement on interest rate risk, would be one quantitative factor used to determine the adequacy of an individual bank's capital for interest rate risk. The focus of that proposed process is on a bank's economic value exposure. Other quantitative factors include the bank's historical financial performance and its earnings exposure to interest rate movements. Examiners also will consider qualitative factors, including the adequacy of the bank's internal interest rate risk management. The banking agencies intend for this case-by-case approach for assessing a bank's capital adequacy for interest rate risk to be a transitional arrangement. The second step will consist of a proposed rule that would establish an explicit minimum capital charge for interest rate risk, based on the level of a bank's measured interest rate risk exposure. The banking agencies intend to implement this second step at some future date, after the banking agencies and the banking industry have gained more experience with the proposed supervisory measurement and assessment process. PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but no limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulators defining the following five categories in which an insured institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of FDICIA. An insured depository institution generally will be classified in the following categories based on capital measures indicated below:
- --------------------------------------------------------------------------------------- Total Tier 1 risk-based risk-based Leverage capital capital ratio - --------------------------------------------------------------------------------------- Well capitalized 10% 6% 5% Adequately capitalized 8% 4% 4% Undercapitalized less than: 8% 4% 4% Significantly undercapitalized less than: 6% 3% 3% Critically undercapitalized Tangible equity/total assets less than 2% - ---------------------------------------------------------------------------------------
An institution that, based upon its capital levels, is classified as "well capitalized", "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency. Undercapitalized institutions must submit an acceptable capital restoration plan with a guarantee of performance issued by the holding company. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. The most important additional measure is that the appropriate federal banking agency is required to either appoint a receiver for the institution within 90 days, or obtain the concurrence of the FDIC in another form of action. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their business or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company. SAFETY AND SOUNDNESS STANDARDS FDICIA also implemented certain specific restrictions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. In addition to the statutory limitations, FDICIA originally required the federal banking agencies to prescribe, by regulation, standards for all insured depository institutions for such things as classified loans and asset growth. In 1994, FDICIA was amended to (a) authorize the agencies to establish safety and soundness standards by regulation or by guideline for all insured depository institutions; (b) give the agencies greater flexibility in prescribing asset quality and earnings standards; and eliminate the requirement that such standards apply to depository institution holding companies. On July 10, 1995 the federal banking agencies published Interagency Guidelines Establishing Standards for Safety and Soundness. By adopting the standards as guidelines, the agencies retained the authority to require an institution to submit to an acceptable compliance plan as well as the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution's noncompliance with one or more standards. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS Holders of the Company's common stock are entitled to receive dividends as and when declared by the Board of Directors of the Company out of funds legally available therefor under the laws of the State of California. The GCL provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The GCL further provides that in the event sufficient retained earnings are not available for the proposed distribution a corporation may nevertheless make a contribution to its shareholders if, after giving effect to the distribution, it meets two conditions, which generally stated are as follows: (I) the corporation's assets must equal at least 125% of its liabilities; and (ii) the corporation's current assets must equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 125% of its current liabilities. The Company is also subject to certain restrictions on its ability to pay dividends under the terms of certain of its debt agreements. In 1996, the Company issued and sold $22,500,000 aggregate principal amount of its 7.11% Senior Notes due February 1, 2006 (the "Senior Notes"), payable semiannually, pursuant to a Senior Note Agreement dated as of February 1, 1996 (the "Senior Note Agreement"). The Senior Notes require that, commencing February 1, 2000 and ending February 1, 2005, the Company shall make principal repayments of the lesser of $3,214,286 or the principal amount then outstanding. The Senior Note Agreement contains covenants and other provisions usual and customary for senior indebtedness of this type, including, but not limited to, capital debt maintenance ratios, maintenance of specified levels of consolidated tangible net worth, limitations on indebtedness, a fixed charge coverage ratio and restrictions on the payment of dividends or other distributions. The Company is in full compliance with the terms of the Senior Note Agreement. The Senior Note Agreement does not currently limit the payment of regular quarterly dividends. The Company's dividends will generally be declared based on the dividends received from its bank subsidiaries. These are state chartered banks and are subject to provisions of state and federal law. The limitations of such subsidiaries' ability to declare and pay dividends could affect the Company's ability to pay dividends. Generally, the power of the board of directors of any insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank's net income for its last three fiscal years (less any distributions to shareholders during that period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Superintendent in an amount not exceeding the greatest of the bank's retained earnings, the bank's net income for its last fiscal year, or the bank's net income for its current fiscal year. Regulators also have authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS All of the bank subsidiaries of the Company have their deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC also administers the Savings Association Insurance Fund ("SAIF"), which insures deposits in thrift institutions. FDICIA authorized the FDIC to borrow from the United States Treasury (or from depository institutions that are members of the BIF) amounts not exceeding in the aggregate $30 billion, and to borrow from the Federal Financing Bank amounts not greater than 90% of the fair market value of assets of institutions acquired by the FDIC as receiver. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. No assurance can be given at this time as to what the future level of premiums will be. As required by FDICIA, the FDIC adopted a transitional risk-based assessment system for deposit insurance premiums which became effective January 1, 1993. On November 14, 1995 the Board of Directors of the FDIC adopted a resolution to reduce to a range of 0 to 27 basis points the assessment rates applicable to deposits assessable by the BIF for semiannual assessment periods beginning January 1, 1996. The new assessment schedule would retain the risk based characteristics of the current system. On November 26, 1996 the FDIC decided to continue in effect the current BIF assessment rate schedule. The FDIC may make limited adjustments to the above rate schedule not to exceed an increase or decrease of 5 basis points without public notice and comment rulemaking. The amount of an adjustment adopted by the Board is to be determined by the following considerations: (a) the amount of assessment revenue necessary to maintain the reserve ratio at the designated reserve ratio and (b) the assessment schedule that would generate such amount of assessment revenue considering the risk profile of BIF members. In determining the relevant amount of assessment revenue, the Board is to consider the BIF's expected operating expenses, case resolution expenditures and income, the effect of assessments on BIF members' earnings and capital, and any other factors the Board may deem appropriate. In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act") in order to raise the level of SAIF reserves, and to reduce the possibility that bonds issued by the Financing Corporation ("FICO") would go into default. The FICO was a special purpose government corporation that issued $8.2 billion in bonds to recapitalize the Federal Savings and Loan Insurance Corporation. Interest on the FICO bonds was paid from the proceeds of assessment made on the deposits of SAIF members. Because of the almost $800 million needed to pay for the annual interest on the FICO bonds, the payments of SAIF members were not increasing the SAIF reserve to a sufficient level to allow the FDIC to reduce assessment rates (as had been done for BIF deposits), and SAIF members were employing certain strategies to either exit the system or transfer deposits to BIF coverage. Pursuant to the Funds Act, the FDIC imposed a special one-time assessment on all institutions that held SAIF assessable deposits as of March 31, 1995 of an estimated 65.7 cents per $100 of SAIF assessable deposits. Certain discounts and exemptions from the assessment were available. For example, BIF-member banks that had acquired SAIF-insured deposits from thrifts were generally entitled to a 20% discount on the special assessment if the bank satisfied certain statutory thresholds (the bank's acquired SAIF deposits, as adjusted, must be less than half of its total domestic deposits). Furthermore, beginning January 1, 1997, all FDIC-insured institutions will be assessed to cover the interest payments due on FICO bonds. For calendar years 1997 through 1999, BIF members will pay one-fifth the rate SAIF members will pay, and beginning in 2000 both types of institutions will pay the same rate. BIF members will be required to pay a FICO assessment of approximately 1.3 basis points for the semiannual FICO assessment in 1997. The Funds Act also authorized the FDIC to rebate assessments paid by BIF members if the BIF has reserves exceeding its designated reserve ratio of 1.25% of total estimated insured deposits. The adjusted BIF balance was $25.888 billion on June 30, 1996, a reserve ratio of 1.30%. The FDIC has expressed its view that the long-term needs of the BIF are a factor in setting the effective average BIF assessment rate, and that the FDIC is uncertain whether the current favorable conditions represent a long-term trend. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS The Company's bank subsidiaries are each subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. On November 15, 1993 the FRB announced that it would not approve the application of a certain New England bank holding company to acquire the voting shares of another insured depository institution. The Federal Reserve issued a statement indicating its failure to approve the application was based on incorrect reporting of home mortgage lending data by the applicant, and the possibility that the applicant may have engaged in discriminatory treatment of minorities in mortgage lending in violation of the Equal Credit Opportunity Act. On March 8, 1994, the federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In 1996, new compliance and examination guidelines for the CRA were promulgated by each of the federal banking regulatory agencies, fully replacing the prior rules and regulatory expectations with new ones, ostensibly more performance based than before, to be fully phased in as of July 1, 1997. The guidelines provide for streamlined examinations of smaller institutions. RECENTLY ENACTED LEGISLATION On September 29, 1995, the IBBA became effective. The IBBA implemented the federal Interstate Banking and Branching Act. The main features of this legislation are (a) out-of-state banks that wish to establish a California branch office to conduct core banking business must first acquire an existing 5 year old California bank of industrial loan company by merger or purchase; (b) California state-chartered banks will be empowered to conduct various authorized branch-like activities on an agency basis through affiliated and unaffiliated insured depository institutions in California and other states and the Superintendent will be authorized to approve an interstate acquisition or merger which would result in a deposit concentration exceeding 30% if the Superintendent finds that the transaction is consistent with public convenience and advantage. The legislation also contains extensive provisions governing intrastate and interstate (a) intra-industry sales, mergers and conversions between banks and between industrial loan companies and (b) inter-industry transactions involving banks, savings associations and industrial loan companies. During 1996, new federal legislation amended the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and the underground storage tank provisions of the Resource Conversation and Recovery Act ("RCRA") to provide lenders and fiduciaries with greater protections from environmental liability. The definition of "owner or operator" under CERCLA has been amended to exclude a lender who: (I) holds indicia of ownership in a property primarily to protect its security interest, but does not participate in the property's management or (ii) forecloses on a property, or, after foreclosure, sells, re-leases (in the case of a lease finance transaction), or liquidates the property, maintains business activities, winds up operations, undertakes a response under CERCLA, or takes measures to preserve, protect or prepare property prior to sale or disposition, so long as the lender did not participate in the property's management prior to sale. In order to preserve these protections, a lender who forecloses on property must seek to sell, re-lease, or otherwise divest itself of the property at the earliest practicable, commercially reasonable time, and on reasonable terms. "Participation in management" is defined as actual participation in the management or operational affairs of the facility, not merely having the capacity to influence or the unexercised right to control operations. Similar changes have been made in RCRA. The California legislature adopted a similar bill to provide that, subject to numerous exceptions, a lender acting in the capacity of a lender shall not be liable under any state or local statute, regulation or ordinance, other than the California Hazardous Waste Control Law, to undertake a cleanup, pay damages, penalties or fines, or forfeit property as a result of the release of hazardous materials at or from the property. Under this bill a lender which had not participated in the management of the property prior to foreclosure may take actions similar to those set forth in the CERCLA and RCRA amendments without losing its immunity from liability. To preserve that immunity, after foreclosure, the lender must take commercially reasonable steps to divest itself of the property in a reasonably expeditious manner. PENDING LEGISLATION There are a number of pending legislative proposals to reform the Glass-Steagall Act to allow affiliations between banks and other firms engaged in "financial activities", including insurance companies and securities firms. Glass-Steagall reform will likely be affected by a bank insurance powers case decided during 1996 by the U.S. Supreme Court, which gave national banks greater opportunities to sell traditional insurance products, such as life, automobile, and property and casualty policies. In a similar recent case, the Court upheld a determination of the Office of the Comptroller of the Currency that national banks may sell annuities. Certain other pending legislative proposals include bills to free withdrawals from individual retirement accounts from penalties for first-home purchases and other purposes and eliminate most Community Reinvestment Act reporting requirements. While the effect of such proposed legislation and regulatory reform on the business of financial institutions cannot be accurately predicted at this time, it seems likely that a significant amount of consolidating in the banking industry will continue to occur throughout the remainder of the decade. COMPETITION The Banks compete with other commercial banks, savings and loan associations, thrift and loans, credit unions, brokerage firms, money market mutual funds, finance and insurance companies, mortgage banking firms and even retail establishments. The direction of federal legislation in recent years seems to favor competition between different types of financial institutions and to foster new entrants into the financial services markets, and it is anticipated that this trend will continue. According to information obtained by the Company through an independent market research firm, WAB was the third largest financial institution in terms of total deposits in Marin County at June 30, 1996, at which date it had approximately 12 percent of total deposits held in federally insured depository institutions in that county. According to the same source of information and in terms of total deposits, as of June 30, 1996 WAB ranked third in WAB's Sonoma-Mendocino counties service area, with approximately an 8 percent share of the market, and was third in the Solano-Contra Costa counties service area, with a market share of approximately 5 percent of the market. In addition, WAB's market share in the Sacramento-Placer-Nevada counties service area was approximately 5 percent, ranking third among its competitors. The share of the market for deposits and loans held by WAB in San Francisco and Alameda Counties is not significant. According to the same source of information, WAB ranked second in terms of total deposits in the Napa Valley service area as of June 30, 1996, with approximately 17 percent market share. The same source of data reports that BLC ranked second, in terms of total deposits, in market share in the Lake County service area with 17 percent of the total. The Banks provide checking and savings deposit services as well as commercial, real estate and personal loans. In addition, most of the branches offer safe deposit facilities, automated teller units, collection services and other investment services. The Banks believe that personal, prompt, professional service and community identity are important in the banking business. To this end, each of one the Banks has sought to retain its community identity and has emphasized personalized services through "big bank resources with small bank resourcefulness". Competitive conditions continue to intensify as various legislative enactments have continued to dissolve historical barriers to the financial markets. Competition is expected to further increase in the state of California as a result of legislation enacted in 1994 and 1995. The enactment of the Interstate Banking and Branching Act in 1994 as well as the California Interstate Banking and Branching Act of 1995 will likely increase competition within California. See "Regulation and Supervision of Bank Holding Companies" above. Regulatory reform, as well as other changes in federal and California law, will also affect competition. While the impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive. Legislative changes, as well as technological and economic factors, can be expected to have an ongoing impact on competitive conditions within the financial services industry. As an active participant in the financial markets, the Company believes that it continually adapts to these changing competitive conditions. Employees At December 31, 1996, the Company employed 827 full-time equivalent staff. Employee relations are believed to be good. ITEM 2. Properties BRANCH OFFICES AND FACILITIES The Banks are engaged in the banking business through fifty-seven offices in thirteen counties in Northern California including eleven offices in Marin County, nine in Sonoma County, seven in Napa County, six in Solano County, five in Stanislaus County, five in Contra Costa County, four in Lake County, three in Mendocino County, two in Nevada County, two in Sacramento County, one in San Francisco County, one in Placer County and one in Alameda County. All offices are constructed and equipped to meet prescribed security requirements. The Company owns fifteen branch office locations and two administrative buildings, including the Company's headquarters. Forty two banking offices are leased. Most of the leases contain multiple five-year renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance. ITEM 3. Legal Proceedings Neither the Company or its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, except ordinary routine legal proceedings arising in the ordinary course of the Company's business, none of which are expected to have a material adverse impact upon the Company's business, financial position or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders There no matters submitted to a vote of the shareholders during the fourth quarter of 1996. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is traded on the NASDAQ National Market Exchange ("NASDAQ") under the symbol "WABC". The following table shows the high and the low closing price for the common stock, for each quarter, as reported by NASDAQ: Period - ----------------------------------------------------------- 1996 High Low - ----------------------------------------------------------- First quarter $47.25 $43.25 Second quarter 50.25 46.00 Third quarter 51.00 46.50 Fourth quarter 58.75 49.50 - ----------------------------------------------------------- 1995 High Low - ----------------------------------------------------------- First quarter $33.25 $29.50 Second quarter 37.50 33.00 Third quarter 38.50 36.50 Fourth quarter 43.25 38.50 As of December 31, 1996, there were 6,751 shareholders of record of the Company's common stock. The Company has paid cash dividends on its common stock in every quarter since commencing operations on January 1, 1973, and it is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and its subsidiaries. As of December 31, 1996, $74.5 million was available for payment of dividends by the Company to its shareholders, under applicable laws and regulations. Additional information (required by Item 5) regarding the amount of cash dividends declared on common stock for the two most recent fiscal years is discussed in Note 18 to the consolidated financial statements included in this report. As discussed in Note 7 to the consolidated financial statements, in December 1986, the Company declared a dividend distribution of one common share purchase right (a "Right") for each outstanding share of common stock. The terms of the Rights were amended and restated on September 28, 1989. On March 23, 1995, the Board of Directors of the Company approved a further amendment and restatement of Rights. The Amended and Restated Rights Agreement entitles the holders of each share of the Company Common Stock to the right (each, a "Westamerica Right"), when exercisable, to purchase from the Company one share of its Common Stock at a price of $65.00 per share, subject to adjustment in certain circumstances. A Westamerica Right is attached to each share of the Company Common Stock. The Westamerica Rights only become exercisable and trade separately from the Company Common Stock following the earlier of (I) a public announcement that a person or a group of affiliated or associated persons has become the beneficial owner of the Company securities having 15 percent or more of the Company's voting power (an "Acquiring Person") or (ii) 10 days following the commencement of, or a public announcement of an intention to make, a tender or exchange offer which would result in any person having beneficial ownership of securities having 15 percent or more of such voting power. Upon becoming exercisable, each holder of a Westamerica Right (other than an Acquiring Person whose rights will become null and void) will, for at least a 60-day period thereafter, have the right (subject to the following sentence), upon payment of the exercise price of $65.00, to receive upon exercise that number of shares of the Company Common Stock having a market value of twice the exercise price of the Westamerica Right, to the extent available. Subject to applicable law, the Board of Directors, at its option, may at any time after a Person becomes an Acquiring Person (but not after the acquisition by such Person of 50 percent or more of the outstanding Company Common Stock), exchange all or part of the then outstanding and exercisable Westamerica Rights (except for Westamerica Rights which have become void) for shares of the Company Common Stock equivalent to one share of the Company Common Stock per Westamerica Right or, alternatively, for substitute consideration consisting of cash, securities of the Company or other assets (or any combination thereof). ITEM 6. Selected Financial Data WESTAMERICA BANCORPORATION FINANCIAL SUMMARY (In thousands, except per share data )
- ------------------------------------------------------------------------------------------------------------ Years ended December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------ Interest income $174,265 $174,377 $166,094 $165,975 $185,060 Interest expense 60,917 58,612 49,860 51,158 69,951 - ------------------------------------------------------------------------------------------------------------ Net interest income 113,348 115,765 116,234 114,817 115,109 Provision for loan losses 4,575 5,595 7,420 10,581 8,410 Non-interest income 22,043 21,533 25,999 33,806 30,646 Non-interest expense 75,627 86,340 94,341 121,441 111,662 - ------------------------------------------------------------------------------------------------------------ Income before income taxes 55,189 45,363 40,472 16,601 25,683 Provision for loan losses 17,449 13,979 12,810 4,507 9,642 - ------------------------------------------------------------------------------------------------------------ Net income $37,740 $31,384 $27,662 $12,094 $16,041 ============================================================================================================ Net income $3.93 $3.18 $2.79 $1.22 $1.66 Dividends declared 0.95 0.77 0.64 0.57 0.51 Book value at December 31 25.33 22.87 20.67 19.03 18.18 Average common shares outstanding 9,613 9,877 9,916 9,884 9,678 Shares outstanding at December 31 9,435 9,793 9,901 9,914 9,772 At December 31 Cash and cash equivalents $149,429 $182,133 $180,957 $157,750 $198,011 Investment securities and money market assets 894,288 862,762 826,896 807,490 654,883 Loans, net 1,409,318 1,353,732 1,354,539 1,368,923 1,424,436 Other assets 95,452 92,317 95,035 94,685 99,385 - ------------------------------------------------------------------------------------------------------------ Total assets $2,548,487 $2,490,944 $2,457,427 $2,428,848 $2,376,715 ============================================================================================================ Non-interest bearing deposits $515,451 $497,489 $472,301 $462,636 $397,185 Interest bearing deposits 1,565,945 1,552,032 1,599,391 1,647,395 1,744,900 Funds purchased 161,147 175,622 135,426 76,298 19,056 Notes and mortgages payable 42,500 20,000 25,524 36,352 19,412 Other liabilities 24,498 21,864 20,124 17,523 18,522 Shareholders' equity 238,946 223,937 204,661 188,644 177,640 - ------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $2,548,487 $2,490,944 $2,457,427 $2,428,848 $2,376,715 ============================================================================================================ Financial Ratios For the year: Return on assets 1.52% 1.30% 1.13% 0.51% 0.68% Return on equity 16.79% 14.61% 14.13% 6.73% 9.49% Net interest margin * 5.31% 5.56% 5.45% 5.50% 5.51% Net loan losses to average loans 0.23% 0.35% 0.34% 0.65% 0.50% Non-interest expense/revenues * 52.87% 60.02% 63.93% 80.18% 75.19% At December 31: Equity to assets 9.38% 8.99% 8.33% 7.77% 7.47% Total capital to risk-adjusted assets 14.96% 15.18% 15.01% 14.13% 12.25% Loan loss reserve to loans 2.42% 2.42% 2.34% 2.15% 2.03%
* Fully taxable equivalent ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this Annual Report on Form 10-K include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry increases significantly; changes in the interest rate environment reduce margins, general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. See also "Certain Additional Business Risks" on pages 8 through 9 herein and other risk factors discussed elsewhere in this Report. The following discussion addresses information pertaining to the financial condition and results of operations of Westamerica Bancorporation (the "Company") that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes found on pages 57 through 91, as well as with the other information presented throughout the report. The Company achieved record earnings of $37.7 million in 1996, representing a 20 percent increase from the $31.4 million earned in 1995 and 36 percent higher than 1994 earnings of $27.7 million. Components of Net Income - ---------------------------------------------------------------- (In millions) 1996 1995 1994 - ---------------------------------------------------------------- Net interest income * $121.0 $122.3 $121.6 Provision for loan losses (4.6) (5.6) (7.4) Non-interest income 22.0 21.5 26.0 Non-interest expense (75.6) (86.3) (94.3) Taxes * (25.1) (20.5) (18.2) - ---------------------------------------------------------------- Net income $37.7 $31.4 $27.7 ================================================================ Net income as a percentage of average total assets 1.52% 1.30% 1.13% ================================================================ * Fully taxable equivalent (FTE) On a per share basis, 1996 net income was $3.93, compared to $3.18 and $2.79 in 1995 and 1994, respectively. During 1996, the Company benefited from increased non-interest income, continuing expense controls and a lower loan loss provision, which offset a decline in net interest income, primarily due to a decrease in earning asset yields, an increase in cost of funds, and higher income taxes. Earnings in 1995 were favorably affected compared to 1994 by increases in earning asset yields and expense controls, which were partially offset by increases in cost of funds and declines in non-interest income. The Company's return on average total assets was 1.52 percent in 1996, compared to 1.30 percent and 1.13 percent in 1995 and 1994, respectively. Return on average equity in 1996 was 16.79 percent, compared to 14.61 percent and 14.13 percent, respectively, in the two previous years. Net Interest Income During 1996, the Company experienced a decline in lower-cost savings account balances and a decrease in earning asset yields. These trends were partially offset by an increase in average earning assets, including an increase in the tax-free investment securities and loan balances. The combination of these items resulted in an overall decrease in the Company's net interest income levels from 1995. Comparing 1995 to 1994, the Company was able to increase net interest income levels, as increases in earning asset yields offset the decline in average earning assets and lower-cost deposits. Components of Net Interest Income - ------------------------------------------------------------------ (In millions) 1996 1995 1994 - ------------------------------------------------------------------ Interest income $174.2 $174.4 $166.1 Interest expense (60.9) (58.6) (49.9) FTE adjustment 7.7 6.5 5.4 - ------------------------------------------------------------------ Net interest income (FTE) $121.0 $122.3 $121.6 ================================================================== Average earning assets $2,279.3 $2,200.9 $2,230.1 Net interest margin (FTE) 5.31% 5.56% 5.45% ================================================================== Net interest income (FTE) in 1996 decreased $1.3 million from 1995 to $121.0 million. Interest income decreased $200,000 from 1995, the combined effect of a 24 basis point decrease in earning-asset yields partially offset by a $78.4 million increase in average balances. This revenue increase was more than offset by a $2.3 million increase in interest expense, the result of an increase of 5 basis points in rates paid combined with a $37.8 million increase in the average balance of interest-bearing liabilities. In addition, the FTE adjustment increased $1.2 million due to increases in the average volume of tax-free earning assets. Comparing 1995 to 1994, net interest income increased $700,000. Interest income increased $8.3 million, the combined effect of a 53 basis point increase in earning-asset yields partially offset by a $29.2 million decrease in average balances. The effect was offset by an $8.7 million increase in interest expense, the result of an increase of 62 basis points in rates offset, in part, by a $69.2 million decrease in the average balance on interest-bearing liabilities. Completing the variance, the FTE adjustment increased $1.1 million in 1995 compared with 1994 due to increases in the average volume of tax-free earning assets. Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the periods indicated, information regarding the consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include non-performing loans. Interest income includes proceeds from loans on non-accrual status only to the extent cash payments have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate. Amortized loan fees, which are included in interest and fee income on loans were $770,000 lower in 1996 than in 1995 and $1.3 million lower in 1995 than in 1994. Distribution of Average Assets, Liabilities and Shareholders' Equity Yields/Rates and Interest Margin (In thousands) Full Year 1996 - ----------------------------------------------------------------- Interest Rates Average income/ earned/ balance expense paid - ----------------------------------------------------------------- Assets Money market assets and funds sold $250 $-- -- % Trading account securities 17 1 4.61 Investment securities 877,053 55,287 6.30 Loans: Commercial 828,048 77,355 9.34 Real estate construction 45,530 5,258 11.55 Real estate residential 254,670 18,720 7.35 Consumer 273,759 25,303 9.24 - ---------------------------------------------------- Earning assets 2,279,327 181,924 7.98 Other assets 208,977 - ------------------------------------------ Total assets $2,488,304 ========================================== Liabilities and shareholders' equity Deposits Non-interest bearing demand $474,436 $-- -- % Savings and interest-bearing transaction 1,047,584 23,419 2.24 Time less than $100,000 301,979 15,018 4.97 Time $100,000 or more 192,736 10,124 5.25 - ---------------------------------------------------- Total interest-bearing deposits 1,542,299 48,561 3.15 Funds purchased 187,603 9,528 5.08 Notes and mortgages payable 39,397 2,828 7.18 - ---------------------------------------------------- Total interest-bearing liabilities 1,769,299 60,917 3.44 Other liabilities 19,732 Shareholders' equity 224,837 - ------------------------------------------ Total liabilities and shareholders' equity $2,488,304 ========================================== Net interest spread (1) 4.54 % Net interest income and interest margin (2) $121,007 5.31 % ================================================================== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. Distribution of Average Assets, Liabilities and Shareholders' Equity Yields/Rates and Interest Margin (In thousands) Full Year 1995 - --------------------------------------------------------------- Interest Rates Average income/ earned/ balance expense paid - --------------------------------------------------------------- Assets Money market assets and funds sold $4,886 $276 5.65 % Trading account securities 11 1 6.35 Investment securities 826,329 51,289 6.21 Loans: Commercial 806,103 79,010 9.80 Real estate construction 62,562 7,178 11.47 Real estate residential 213,967 15,919 7.44 Consumer 287,032 27,249 9.49 - ----------------------------------------------------- Earning assets 2,200,890 180,922 8.22 Other assets 215,973 - ---------------------------------------- Total assets $2,416,863 ======================================== Liabilities and shareholders' equity Deposits Non-interest bearing demand $451,560 $-- -- % Savings and interest-bearing transaction 1,087,169 24,519 2.26 Time less than $100,000 305,507 15,066 4.93 Time $100,000 or more 166,241 8,895 5.35 - ------------------------------------------------------ Total interest-bearing deposits 1,558,917 48,480 3.11 Funds purchased 149,902 8,403 5.61 Notes and mortgages payable 22,667 1,729 7.63 - ------------------------------------------------------ Total interest-bearing liabilities 1,731,486 58,612 3.39 Other liabilities 18,961 Shareholders' equity 214,856 - ---------------------------------------- Total liabilities and shareholders' equity $2,416,863 ======================================== Net interest spread (1) 4.83 % Net interest income and interest margin (2) $122,310 5.56 % ================================================================ (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. Distribution of Average Assets, Liabilities and Shareholders' Equity Yields/Rates and Interest Margin (In thousands) Full Year 1994 - ------------------------------------------------------------------ Interest Rates Average income/ earned/ balance expense paid - ------------------------------------------------------------------ Money market assets and $35,514 $1,367 3.85 % funds sold Trading account securities 37 2 4.24 Investment securities 831,478 49,272 5.93 Loans: Commercial 798,894 72,894 9.12 Real estate construction 76,875 7,695 10.01 Real estate residential 197,675 14,236 7.20 Consumer 292,080 25,959 8.89 - ------------------------------------------------------ Earning assets 2,232,553 171,425 7.68 Other assets 221,555 - -------------------------------------------- Total assets $2,454,108 ============================================ Liabilities and shareholders' equity Deposits Non-interest bearing demand $439,881 $-- -- % Savings and interest-bearing transaction 1,166,249 23,672 2.03 Time less than $100,000 320,915 12,533 3.91 Time $100,000 or more 153,504 5,762 3.75 - ------------------------------------------------------ Total interest-bearing deposits 1,640,668 41,967 2.56 Funds purchased 130,299 5,281 4.05 Notes and mortgages payable 29,690 2,612 8.80 - ------------------------------------------------------ Total interest-bearing liabilities 1,800,657 49,860 2.77 Other liabilities 17,780 Shareholders' equity 195,790 - -------------------------------------------- Total liabilities and shareholders' equity $2,454,108 ============================================ Net interest spread (1) 4.91 % Net interest income and interest margin (2) $121,565 5.45 % ================================================================ (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. Rate and volume variances. The following table sets forth a summary of the changes in interest income and interest expense from changes in average assets and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components. For the years (In thousands) ended December 31, - ---------------------------------------------------------------- 1996 compared with 1995 ------------------------------ Total Increase/ Volume Rate (Decrease) - ---------------------------------------------------------------- Increase (decrease) in interest and fee income: Money market assets and funds sold ($134) ($142) ($276) Trading account securities -- -- -- Investment securities (1) 3,188 810 3,998 Loans: Commercial (1) 2,291 (3,946) (1,655) Real estate construction (1,967) 47 (1,920) Real estate residential 2,989 (188) 2,801 Consumer (1,239) (707) (1,946) - --------------------------------------------------------------- Total loans (1) 2,074 (4,794) (2,720) - --------------------------------------------------------------- Total increase (decrease) in interest and fee income (1) 5,128 (4,126) 1,002 - --------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (886) (214) (1,100) Time less than $ 100,000 (180) 132 (48) Time $ 100,000 or more 1,388 (159) 1,229 - --------------------------------------------------------------- Total interest-bearing deposits 322 (241) 81 Funds purchased 1,796 (671) 1,125 Notes and mortgages payable 1,194 (95) 1,099 - --------------------------------------------------------------- Total increase (decrease) in interest expense 3,312 (1,007) 2,305 - --------------------------------------------------------------- Increase (decrease) in net interest income (1) $1,816 ($3,119) ($1,303) =============================================================== (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. For the years (In thousands) ended December 31, - ---------------------------------------------------------------- 1995 compared with 1994 ------------------------------- Total Increase/ Volume Rate (Decrease) - ---------------------------------------------------------------- Increase (decrease) in interest and fee income: Money market assets and funds sold ($2,386) $1,295 ($1,091) Trading account securities (3) 2 (1) Investment securities (1) (303) 2,320 2,017 Loans: Commercial (1) 663 5,453 6,116 Real estate construction (2,407) 1,890 (517) Real estate residential 1,201 482 1,683 Consumer (438) 1,728 1,290 - ---------------------------------------------------------------- Total loans (1) (981) 9,553 8,572 - ---------------------------------------------------------------- Total (decrease) increase in interest and fee income (1) (3,673) 13,170 9,497 - ---------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (1,326) 2,173 847 Time less than $ 100,000 (566) 3,099 2,533 Time $ 100,000 or more 511 2,622 3,133 - ---------------------------------------------------------------- Total interest-bearing deposits (1,381) 7,894 6,513 Funds purchased 880 2,242 3,122 Notes and mortgages payable (565) (318) (883) - ---------------------------------------------------------------- Total (decrease) increase in interest expense (1,066) 9,818 8,752 - ---------------------------------------------------------------- Increase (decrease) in net interest income (1) ($2,607) $3,352 $745 ================================================================ (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. Provision for Loan Losses The provision for loan losses was $4.6 million for 1996, compared to $5.6 million in 1995 and $7.4 million in 1994. The reductions in the provision in 1996 and 1995 reflect the results of the Company's continuing efforts to improve loan quality by enforcing strict underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. For further information regarding net credit losses and the reserve for loan losses, see the "Asset Quality" section of this report. Investment Portfolio The Company maintains a securities portfolio consisting of U.S Treasury, U.S. Government agencies and corporations, state and political subdivisions, asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian. In November 1995, the Financial Accounting Standards Board issued a special report, "A Guide to Implementation of Statement No. 115, on Accounting for Certain Investments in Debt and Equity Securities - Questions and Answers" (the "Special Report"). The Special Report allowed companies to reassess the appropriateness of the classifications of all securities and account for any reclassification at fair value. The Company adopted the reclassification provision stated in the Special Report prior to December 31, 1995 and transferred $329.4 million of securities held to maturity into available for sale. The unrealized pretax gain upon transfer was $1.1 million as of December 31, 1995. The objective of the investment securities held to maturity is to strengthen the portfolio yield, and to provide collateral to pledge for federal, state and local government deposits and other borrowing facilities. The investments held to maturity had an average term to maturity of 81 months at December 31, 1996 and, on the same date, those investments included $196.8 million in fixed rate and $600,000 in adjustable rate securities. Investment securities available for sale are generally used to supplement the Banks' liquidity. Unrealized net gains and losses on these securities are recorded as an adjustment to equity, net of taxes, and are not reflected in the current earnings of the Company. If a security is sold, any gain or loss is recorded as a charge to earnings and the equity adjustment is reversed. At December 31, 1996, the Banks held $696.6 million classified as investments available for sale. At December 31, 1996, an unrealized gain of $7.8 million, net of taxes of $5.7 million, related to these securities was held in shareholders' equity. The Company had no trading securities at December 31, 1996. For more information on investment securities, see Notes 1 and 2 to the consolidated financial statements. The following table shows the amortized cost of the Company's investment securities as of the dates indicated: - -------------------------------------------------------------------- At December 31, 1996 1995 1994 - -------------------------------------------------------------------- (In thousands) U.S. Treasury $272,896 $240,832 $279,014 U.S. Government agencies and corporations 201,656 248,964 275,221 States and political subdivisions 230,224 228,068 198,135 Asset backed securities 94,336 83,636 37,162 Other securities 81,367 58,079 40,785 - -------------------------------------------------------------------- Total $880,479 $859,579 $830,317 ==================================================================== The following table is a summary of the relative maturities and yields of the Company's investment securities as of December 31, 1996. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the book value of the related security. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current statutory rate. Held to Maturity
- ------------------------------------------------------------------------------------------------------- After one After five Within but within but within After ten Mortgage- (Dollars in thousands) one year five years ten years years backed Other Total - ------------------------------------------------------------------------------------------------------- U.S. Treasury $-- $-- $-- $-- $-- $-- $-- Interest rate --% --% --% --% --% --% --% U.S. Government agencies and corporations -- -- -- -- -- -- -- Interest rate --% --% --% --% --% --% --% States and political subdivisions 619 6,914 65,117 50,085 -- -- 122,735 Interest rate 10.69% 9.10% 8.09% 8.36% --% --% 8.27% Asset-backed 74 117 -- -- -- -- 191 Interest rate 5.26% 4.73% --% --% --% --% 4.94% Other securities -- -- -- 3,157 -- -- 3,157 Interest rate --% --% --% 5.86% --% --% 5.86% - -------------------------------------------------------------------------------------------------------- Subtotal 693 7,031 65,117 53,24 -- -- 126,083 Interest rate 10.11% 9.02% 8.09% 8.22% --% --% 8.20% Mortgage Backed -- -- -- -- 71,345 -- 71,345 Interest rate --% --% --% --% 5.40% --% 5.40% - -------------------------------------------------------------------------------------------------------- Total $693 $7,031 $65,117 $53,242 $71,345 $-- $197,428 Interest rate 10.11% 9.02% 8.09% 8.22% 5.40% --% 7.19% ========================================================================================================
Available for Sale
- ------------------------------------------------------------------------------------------------------- After one After five Within but within but within After ten Mortgage- (Dollars in thousands) one year five years ten years years backed Other Total - ------------------------------------------------------------------------------------------------------- U.S. Treasury $99,085 $173,811 $-- $-- $-- $-- $272,896 Interest rate 5.11% 6.05% --% --% --% --% 5.71% U.S. Government Agencies and Corporations 22,277 29,596 -- -- -- -- 51,873 Interest rate 5.96% 5.84% --% --% --% --% 5.89% States and Political Subdivisions 4,143 15,487 27,953 59,906 -- -- 107,489 Interest rate 9.27% 9.12% 7.60% 8.18% --% --% 8.21% Asset Backed 607 60,605 32,933 -- -- -- 94,145 Interest rate 5.74% 6.00% 6.09% --% --% --% 6.03% Other 33,116 25,990 -- -- -- -- 59,106 Interest rate 6.05% 6.13% --% --% --% --% 6.08% - ------------------------------------------------------------------------------------------------------- Subtotal 159,228 305,489 60,886 59,906 -- -- 585,509 Interest rate 5.53% 6.18% 6.79% 8.18% --% --% 6.27% Mortgage Backed -- -- -- -- 78,438 -- 78,438 Interest rate --% --% --% --% 5.77% --% 5.77% Other securities without set maturities -- -- -- -- -- 19,104 19,104 Interest rate --% --% --% --% --% 8.49% 8.49% - ------------------------------------------------------------------------------------------------------- Total $159,228 $305,489 $60,886 $59,906 $78,438 $19,104 $683,051 Interest rate 5.53% 6.18% 6.79% 8.18% 5.77% 8.49% 6.28% =======================================================================================================
Loan portfolio The following table shows the composition of the loan portfolio of the Company by type of loan or type of borrower, on the dates indicated:
- -------------------------------------------------------------------------------------------- At December 31, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------- (In thousands) Commercial and commercial real estate $857,811 $816,422 $813,589 $812,630 $820,666 Real estate construction 40,090 54,181 73,492 76,330 99,924 Real estate residential 276,951 237,535 207,477 206,264 201,080 Consumer 278,950 291,350 308,812 319,545 350,919 Unearned income (9,565) (12,248) (16,381) (15,801) (18,899) - -------------------------------------------------------------------------------------------- Gross loans $1,444,237 $1,387,240 $1,386,989 $1,398,968 $1,453,690 Reserve for loan losses (34,919) (33,508) (32,450) (30,045) (29,254) - -------------------------------------------------------------------------------------------- Net loans $1,409,318 $1,353,732 $1,354,539 $1,368,923 $1,424,436 ============================================================================================
Maturities and Sensitivities of Selected Loans to Changes in Interest Rates The following table shows the maturity distribution and interest rate sensitivity of commercial and real estate construction loans at December 31, 1996. Balances exclude loans to individuals and residential mortgages totaling $546.3 million. These types of loans are typically paid in monthly installments over a number of years. - ----------------------------------------------------------------------------- Within One to After One Year Five Years Five Years Total - ----------------------------------------------------------------------------- (In thousands) Commercial and commercial real estate * $494,886 $172,260 $190,665 $857,811 Real estate construction 37,542 2,548 -- 40,090 - ----------------------------------------------------------------------------- Total $532,428 $174,808 $190,665 $897,901 ============================================================================= Loan with fixed interest rates $41,195 $174,808 $190,665 $406,668 Loans with floating interest rates 491,233 -- -- 491,233 - ----------------------------------------------------------------------------- Total $532,428 $174,808 $190,665 $897,901 ============================================================================= * Includes demand loans Commitments and Lines of Credit It is not the policy of the Company to issue formal commitments on lines of credit except to a limited number of well established and financially responsible local commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of Letters of Credit to facilitate the customer's particular business transactions. Commitment fees generally are not charged except where Letters of Credit are involved. Commitments and lines of credit typically mature within one year. For further information, see Note 13 to the consolidated financial statements. Asset Quality The Company closely monitors the markets in which it conducts its lending operations. The Company continues its strategy to control its exposure to loans with higher credit risk and increase diversification of earning assets into less risky investments. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all non-performing assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated: - ----------------------------------------------------------- At December 31, 1996 1995 - ----------------------------------------------------------- (In millions) Classified loans $32.0 $44.9 Other classified assets 6.1 5.1 - ----------------------------------------------------------- Total classified assets $38.1 $50.0 =========================================================== Classified loans at December 31, 1996 decreased $12.9 million or 29 percent to $32.0 million from December 31,1995, reflecting improvements in the borrowers' financial condition and satisfaction of debt. The improvement is primarily due to repayments and charge-offs of classified loans with real estate collateral. Other classified assets increased $1.0 million from the prior year, due to the net effect of new foreclosures on loan collateral, and sales and write-downs of properties acquired in satisfaction of debt ("other real estate owned"). Non-performing assets Non-performing assets include non-accrual loans, loans 90 or more days past due as to principal or interest and still accruing and other real estate owned. Loans are placed on non-accrual status upon reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on non-accrual status is charged against interest income. In addition, loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on non-accrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified by Management as "performing non-accrual" and are included in the total non-performing assets. Performing non-accrual loans are reinstated to accrual status when improvements in credit quality eliminate Management's doubt as to the full collectibility of both principal and interest and the loan is brought current. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Any additional payments received after that point are recorded as interest income on a cash basis. The following summarizes the Company's non-performing assets for the periods indicated:
- ---------------------------------------------------------------------------------- At December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------- (In millions) Performing non-accrual loans $4.3 $2.4 $2.0 $1.9 $1.2 Non-performing non-accrual loans 3.3 7.5 8.3 13.9 36.2 - ---------------------------------------------------------------------------------- Total non-accrual loans 7.6 9.9 10.3 15.8 37.4 Loans 90 or more days past due and still accruing 0.2 0.3 1.8 1.7 0.6 - ---------------------------------------------------------------------------------- Total non-performing loans 7.8 10.2 12.1 17.5 38.0 Other real estate owned 6.1 5.1 8.0 14.0 18.6 - ---------------------------------------------------------------------------------- Total non-performing assets $13.9 $15.3 $20.1 $31.5 $56.6 ================================================================================== Reserve for loan losses as a percentage of non-performing loans 445% 329% 268% 172% 77%
Performing non-accrual loans increased $1.9 million to $4.3 million at December 31, 1996, while non-performing non-accrual loans decreased $4.2 million to $3.3 million at December 31, 1996, due to loan collections, write-downs, payoffs and sales. The increased other real estate owned balance during 1996 was due to higher foreclosure on loans with real estate collateral, net of write-downs and liquidations. The decreased other real estate owned balance during 1995 from 1994 was due to asset write-downs and liquidations. The amount of gross interest income that would have been recorded for non-accrual loans for the year ended December 31, 1996, if all such loans had been current in accordance with their original terms while outstanding during the period was $705,000, compared to $817,000 and $1.2 million in 1995 and 1994, respectively. The amount of interest income that was recognized on non-accrual loans from cash payments made in 1996, 1995 and 1994 was $270,000, $237,000 and $413,000, respectively. Cash payments received, which were applied against the book balance of performing and non-performing non-accrual loans outstanding at December 31, 1996, totaled $111,000, compared to $299,000 and $248,000 in 1995 and 1994, respectively. Summary of Non-Accrual Loans The following summarizes the Company's non-accrual loans for the periods indicated: - ---------------------------------------------------------------------------- At December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------- (In thousands) Performing non-accrual loans $4,285 $2,464 $1,943 $1,927 $1,199 Non-performing non-accrual loans 3,334 7,486 8,347 13,852 36,182 - ---------------------------------------------------------------------------- Total non-accrual loans 7,619 9,950 10,290 15,779 37,381 - ---------------------------------------------------------------------------- Performing non-accrual loans Commercial and commercial real estate 4,285 1,367 1,761 1,198 1,125 Real estate construction -- 1,097 156 729 -- Real estate residential -- -- -- -- 74 Consumer -- -- 26 -- -- - ---------------------------------------------------------------------------- Total performing non-accrual loans 4,285 2,464 1,943 1,927 1,199 - ---------------------------------------------------------------------------- Non-performing non-accrual loans Commercial and commercial real estate 2,096 3,642 4,201 9,143 22,671 Real estate construction 958 2,927 2,229 3,887 11,078 Real estate residential 114 645 1,774 197 2,142 Consumer 166 272 143 625 291 - ---------------------------------------------------------------------------- Total non-performing non-accrual loans 3,334 7,486 8,347 13,852 36,182 - ---------------------------------------------------------------------------- Total non-accrual loans $7,619 $9,950 $10,290 $15,779 $37,381 ============================================================================ Management of the Company believes that, the Company's loan loss reserve of $34.9 million at December 31, 1996 was adequate to provide for losses that could be reasonably anticipated based upon specific conditions as determined by Management, credit loss experience, the amount of past due and non-performing loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. The reserve is allocated to segments of the loan portfolio based in part on a quantitative analysis of historical credit loss experience. Criticized and classified loans balances are analyzed using a linear regression model or standard allocation percentages. The results of this analysis are applied to current criticized and classified loan balances to allocate the reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines due to their small balances and numerous accounts, are analyzed based on the historical rate of net losses and delinquency trends grouped by the number of days the payments on those loans are delinquent. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future reserve levels. Loan Loss Experience The following table summarizes the Company's loan loss experience for the periods indicated:
- ------------------------------------------------------------------------------------------------------- At December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- (In thousands) Total loans outstanding $1,444,237 $1,387,240 $1,386,989 $1,398,968 $1,453,690 Average loans outstanding during the period 1,402,007 1,369,663 1,363,109 1,410,485 1,471,777 Analysis of the reserve: Balance, beginning of period $33,508 $32,450 $30,045 $29,254 $28,111 Credit losses: Commercial and commercial real estate (3,207) (3,033) (4,004) (6,469) (5,286) Real estate construction (301) (1,292) (750) (2,274) (1,657) Real estate residential (28) (167) -- (114) (80) Consumer (2,392) (2,278) (2,663) (2,657) (3,178) - ------------------------------------------------------------------------------------------------------- Total (5,928) (6,770) (7,417) (11,514) (10,201) - ------------------------------------------------------------------------------------------------------- Credit loss recoveries: Commercial and commercial real estate 1,797 1,117 1,088 1,193 1,360 Real estate construction 44 3 65 -- -- Real estate residential -- -- -- 5 18 Consumer 923 1,113 1,249 1,210 1,556 - ------------------------------------------------------------------------------------------------------- Total 2,764 2,233 2,402 2,408 2,934 - ------------------------------------------------------------------------------------------------------- Net credit losses (3,164) (4,537) (5,015) (9,106) (7,267) Sale of Sonoma Valley Bank -- -- -- (684) -- Additions to the reserve charged to operating expense 4,575 5,595 7,420 10,581 8,410 - ------------------------------------------------------------------------------------------------------- Balance, end of period $34,919 $33,508 $32,450 $30,045 $29,254 ======================================================================================================= Net credit losses to average loans 0.23% 0.33% 0.37% 0.65% 0.49% Reserve for loans losses as a percentage of loans outstanding 2.42% 2.42% 2.34% 2.15% 2.01%
Allocation of the Loan Loss Reserve The following table presents the allocation of the loan loss reserve balance on the dates indicated: - ---------------------------------------------------------------------- At December 31, 1996 1995 - ---------------------------------------------------------------------- Allocation Loans as Allocation Loans as of Percent of of Percent of Reserve Total Reserve Total Balance Loans Balance Loans - ----------------------------------------------------------------------- Dollars in thousands) Commercial $13,629 59.4% $13,519 58.9% Real estate construction 2,326 2.8% 3,586 3.9% Real estate residential 66 19.2% 57 17.1% Consumer 3,315 18.6% 3,588 20.1% Unallocated portion of the reserve 15,583 12,758 - --------------------------------------------------------------------- Total $34,919 100.0% $33,508 100.0% ===================================================================== - --------------------------------------------------------------------- At December 31, 1994 1993 - --------------------------------------------------------------------- Allocation Loans as Allocation Loans as of Percent of of Percent of Reserve Total Reserve Total Balance Loans Balance Loans - ----------------------------------------------------------------------- Dollars in thousands) Commercial $11,596 58.6% $15,454 58.1% Real estate construction 2,108 5.3% 2,592 5.5% Real estate residential 47 15.0% 85 14.7% Consumer 3,765 21.1% 3,921 21.7% Unallocated portion of the reserve 14,934 7,993 - ---------------------------------------------------------------------- Total $32,450 100.0% $30,045 100.0% ====================================================================== - ----------------------------------------------------------------- At December 31, 1992 - ----------------------------------------------------------------- Allocation Loans as of Percent of Reserve Total (Dollars in thousands) Balance Loans - ----------------------------------------------------------------- Commercial $16,610 56.5% Real estate construction 964 6.9% Real estate residential 545 13.8% Consumer 3,872 22.8% Unallocated portion of the reserve 7,263 - ----------------------------------------------------------------- Total $29,254 100.0% ================================================================= The decrease in the allocation of construction loans from December 1995 to December 1996 is primarily due to fluctuations in the balance of criticized loans. The increase in the allocation to commercial loans from December 1994 to December 1995 is primarily due to the inclusion of reserves allocated to certain loans acquired through the Company's 1995 mergers. The unallocated component includes Management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"). Under SFAS 114, a loan is considered impaired when, based on current information and events, it is "probable" that a creditor will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (I) the present value of the expected cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair value of the collateral of a collateral-dependent loan. SFAS 114 as amended by SFAS 118 does not apply to large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. In measuring impairment, the Company reviews all impaired commercial and construction loans classified "Substandard" and "Doubtful" that meet materiality thresholds of $250,000 and $100,000, respectively. All "Loss" classified loans are fully reserved under the Company's standard loan loss reserve methodology. The Company considers classified loans below the established thresholds to represent immaterial loss risk. Commercial and construction loans that are not classified, and large groups of smaller-balance homogeneous loans such as installment, personal revolving credit, residential real estate and student loans, are evaluated collectively for impairment under the Company's standard loan loss reserve methodology and are, therefore, excluded from the provisions of SFAS 114. The Company generally identifies loans as impaired when such loans are in non-accrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. The following summarizes the Company's impaired loans for the periods indicated: - ----------------------------------------------------------- At December 31, 1996 1995 - ----------------------------------------------------------- (In thousands) Non-accrual loans $7,619 $9,950 Other 3,785 251 - ----------------------------------------------------------- Total impaired loans $11,404 $10,201 =========================================================== Specific reserves $1,184 $850 =========================================================== The $3.5 million increase in loans classified as impaired as of December 31, 1996, other than non-accrual loans, is due to the addition of two commercial real estate loans, included in classified loan balances, with collateral exposure as to which Management has doubt concerning whether the Company will be able to collect all amounts due according to the original contractual agreements. The average balances of the Company's impaired loans for the year ended December 31, 1996 was $11.0 million compared to $10.3 million in 1995. In general, the Company does not recognize any interest income on trouble debt restructurings or loans that are classified as non-accrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company's recorded investment in such loans is deemed collectible. Asset and Liability Management The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk. The primary analytical tool used by the Company to gauge interest rate sensitivity is a simulation model used by many major banks and bank regulators. This model is used to simulate, based on the current and projected portfolio mix, the effects on net interest income of changes in market interest rates. Under the Company's policy and practice, the projected amount of net interest income over the ensuing twelve months is not allowed to fluctuate more than ten percent, even under alternate assumed interest rate changes of plus or minus 200 basis points. The results of the model indicated that the mix of interest rate sensitive assets and liabilities at December 31, 1996 would not result in a fluctuation of net interest income exceeding 10 percent. The Company considers various methods of interest rate risk management including interest rate swaps, utilized to hedge the impact of interest rate fluctuations on interest-bearing assets and liabilities in the current interest rate environment. Interest rate swaps are agreements to exchange interest payments computed on notional amounts, which are used as a basis for the calculations only and do not represent exposure to risk for the Company. The risk to the Company is associated with fluctuations of interest rates and with the counterparty's ability to meet its interest payment obligations. The Company minimizes this credit risk by entering into contracts with well-capitalized money-center banks and by requiring settlement of only the net difference between the exchanged interest payments. At December 31, 1996 and 1995, no interest rate swap contracts were outstanding. During August 1995, two contracts, with notional amounts totaling $60.0 million expired. The Company paid a variable rate based on three-month LIBOR and received an average fixed rate of 4.11 percent. During 1994, the Company was engaged in four interest rate swaps, with notional amounts totaling $110.0 million. Two swaps, with notional amounts totaling $50.0 million expired in November and December, 1994. The effect of entering into these contracts resulted in reductions of net interest income of $763,000 and $604,000 in 1995 and 1994, respectively. Interest Rate Sensitivity Analysis The following table summarizes the interest sensitivity gaps inherent in the Company's asset and liability portfolios at December 31, 1996:
- ---------------------------------------------------------------------------------------------------- Repricing within: ----------------- 0-30 31-90 91-180 181-365 Over One Non- (In millions) Days Days Days Days Year Repricing Total - ---------------------------------------------------------------------------------------------------- Assets Investment securities $88 $70 $80 $92 $547 $17 $894 Loans 601 57 68 86 632 -- 1,444 Other assets -- -- -- -- -- 210 210 - ---------------------------------------------------------------------------------------------------- Total assets $689 $127 $148 $178 $1,179 $227 $2,548 - ---------------------------------------------------------------------------------------------------- Liabilities Non-interest bearing $-- $-- $-- $-- $-- $515 $515 Interest bearing: Transaction 379 -- -- -- -- -- 379 Money market savings 38 71 106 211 -- -- 426 Passbook savings 253 -- -- -- -- -- 253 Time 155 114 106 70 63 -- 508 Short-term borrowings 161 -- -- -- -- -- 161 Long-term debt -- -- -- -- 43 -- 43 Other liabilities -- -- -- -- -- 24 24 Shareholders' equity -- -- -- -- -- 239 239 - ---------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $986 $185 $212 $281 $106 $778 $2,548 - ---------------------------------------------------------------------------------------------------- Net liabilities) assets subject to repricing ($297) ($58) ($64) ($103) $1,073 ($551) - ----------------------------------------------------------------------------------------- Cumulative net (liabilities) assets subject to repricing ($297) ($355) ($419) ($522) $551 $-- =========================================================================================
The repricing terms of the table above do not represent contractual principal maturity, but rather principal cash flows available for repricing. The interest rate sensitivity report shown above categorizes interest-bearing transaction deposits and savings deposits as repricing within 30 days. However, it is the experience of Management that the historical interest rate volatility of these interest-bearing transaction and savings deposits can be similar to liabilities with longer repricing dates, depending on market conditions. Moreover, the degree to which these interest-bearing transaction and savings deposits respond to changes in money market rates usually is less than the response of interest rate sensitive loans. These factors cause the cumulative net liability position shown above to indicate a much greater degree of liability sensitivity than Management believes really exists based on the additional analysis previously discussed. Liquidity The principal sources of asset liquidity are marketable investment and money market securities available for sale. At December 31, 1996, investment securities available for sale totaled $696.6 million. Changing the pattern from the last two years, gross loan balances grew $64.6 million from 1995, compared to more moderate increases of $6.7 million and $20.7 million in 1995 and 1994, respectively. These increases were in part funded by the cash generated by financing activities represented, in 1996, by a $31.9 million increase in deposits and the issuance of $22.5 million of the Company's Senior Notes, partially offset by a decrease of $14.5 million in purchased funds. These compare with decreases in deposits of $22.2 million and $38.3 million during 1995 and 1994, respectively, and reductions of $5.5 million and $10.8 million in long-term notes payable for the same periods, offset by $40.2 million and $59.1 million increases in purchased funds for 1995 and 1994, respectively. Cash provided by financing activities was also used to fund the investment securities portfolio which increased $13.4 million in 1996 and $29.3 million and $27.4 million in 1995 and 1994, respectively. The Company generates significant liquidity from its operating activities. The Company's profitability in 1996, 1995 and 1994 generated cash flows provided by operations of $43.3 million, $40.1 million and $64.7 million, respectively. It is the intention of the Company to continue to increase loan volume without jeopardizing credit quality. Management of the Company anticipates the Company will increase its cash levels through the end of 1997 mainly through increased profitability and retained earnings, although some adverse impacton the Company's results of operations is expected to occur during the calendar quarter in which its acquisition of ValliCorp Holdings, Inc. closes due to merger related costs. For the same period, it is anticipated that the investment securities portfolio and demand for loans will continue to moderately increase. Growth in deposit balances is expected by Management to follow the anticipated growth in loan and investment balances through the end of 1997. Acquisition As discussed in Note 19 to the consolidated financial statements, on November 11, 1996, the Company entered into a definitive agreement to acquire by merger with ValliCorp Holdings, Inc. It is expected that this merger will be consummated in the second quarter of 1997 and accounted for according to the pooling-of-interests method. Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company's capital position represents the level of capital available to support continued operations and expansion. The Company's primary capital resource is shareholders' equity, which increased $15.0 million or 7 percent from the previous year end and increased $34.3 million or 17 percent from December 31, 1994. The ratio of total risk-based capital to risk-adjusted assets was 14.96 percent at December 31, 1996, compared to 15.18 percent at December 31, 1995. Tier I risk-based capital to risk-adjusted assets was 12.61 percent at December 31, 1996, compared to 12.77 percent at December 31, 1995. Capital to Risk-Adjusted Assets - ---------------------------------------------------- Minimum Regulatory Capital At December 31, 1996 1995 Requirements - --------------------------------------------------- Tier I Capital 12.61% 12.77% 4.00% Total Capital 14.96% 15.18% 8.00% Leverage ratio 9.20% 9.09% 4.00% =================================================== The risk-based capital ratios declined in 1996 as the increase in total assets outpaced the growth in equity. In addition, the level of risk-adjusted assets increased, as loan growth exceeded the growth in investment securities. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. All ratios are in excess of the regulatory definition of "well capitalized". Beginning in 1994, the the Company commenced to repurchase shares of its common stock from time to time, subject to appropriate regulatory and other accounting requirements. These purchases were made periodically in the open market and reduced the dilutive impact of issuing new shares to meet stock performance, option plans, acquisitions and other requirements. During 1996, the Company acquired a total of 402,600 shares of its common stock on the open market, compared to 240,450 in 1995 and 31,000 in 1994. Financial Ratios The following table shows key financial ratios for the periods indicated: - ----------------------------------------------------------------- At December 31, 1996 1995 1994 - ----------------------------------------------------------------- Return on average total assets 1.52% 1.30% 1.13% Return on average shareholders' equity 16.79% 14.61% 14.13% Average shareholders' equity as a percent of: Average total assets 9.04% 8.89% 7.98% Average total loans 16.04% 15.69% 14.36% Average total deposits 11.15% 10.69% 9.41% Dividend payout ratio 24.00% 24.00% 23.00% Deposit categories The following table summarizes the Company's deposit categories for the periods indicated:
- ---------------------------------------------------------------------------------------- 1996 1995 1994 ------------------ ---------------- ---------------- Percentage Percentage Percentage of total of total of total (Dollars in thousands) Amount deposits Amount deposits Amount deposits - ------------------------------------------------------------------------------------------ Non-interest bearing demand $515,451 24.8% $497,489 24.2% $472,301 22.8% Interest bearing: Transaction 379,468 18.2 356,099 17.4 357,682 17.3 Savings 678,779 32.6 716,871 35.0 784,933 37.9 Time less than $100,000 300,398 14.4 309,312 15.1 319,623 15.4 Time $100,000 or more 207,300 10.0 169,750 8.3 137,153 6.6 - --------------------------------------------------------------------------------------- Total $2,081,396 100.0% $2,049,521 100.0% $2,071,692 100.0 =======================================================================================
The decline in total deposits in 1995 compared to 1994 is due to a combination of factors including the run-off of balances after the 1995 Mergers. Due to aggressive policies in place, the Company was able to increase its deposit totals to an all-time high of $2,081 million, representing an increase of $32 million or two percent over prior year. The following table sets forth, by time remaining to maturity, the Company's domestic time deposits in amounts of $100,000 or more: - ----------------------------------------------------------- (In thousands) At December 31, 1996 - ----------------------------------------------------------- Three months or less $148,641 Over three through six months 31,143 Over six through twelve months 20,718 Over twelve months 6,798 - ----------------------------------------------------------- Total $207,300 =========================================================== Short Term Borrowings The following table sets forth the short-term borrowings of the Company for the periods indicated: - ------------------------------------------------------------------ At December 31, 1996 1995 1994 - ------------------------------------------------------------------ (In thousands) Federal funds purchased $-- $45,000 $1,300 Other borrowing funds: Retail repurchased agreements 112,594 91,622 114,340 Other 48,553 39,000 19,786 - ------------------------------------------------------------------ Total other borrowing funds 161,147 130,622 134,126 - ------------------------------------------------------------------ Total funds purchased $161,147 $175,622 $135,426 ================================================================== Further detail of the other borrowed funds are as follows: - -------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------- (In thousands) Outstanding: Average for the year $172,808 $140,083 $122,236 Maximum during the year 217,589 154,022 173,201 Interest rates: Average for the year 5.05% 5.57% 4.09% Average at period end 4.90% 5.31% 5.11% Non-Interest Income Components of Non-Interest Income - ------------------------------------------------------------------ (In millions) 1996 1995 1994 - ------------------------------------------------------------------ Deposit account fees $12.8 $12.7 $12.9 Credit card merchant fees 2.7 2.4 2.4 Mortgage banking income 1.3 1.5 4.3 Financial services commissions 0.8 0.6 0.7 Trust fees 0.4 0.6 0.8 Other income 4.0 3.7 4.9 - ------------------------------------------------------------------ Total $22.0 $21.5 $26.0 ================================================================== Non-interest income was $22.0 million in 1996, $500,000 higher than 1995. Credit card merchant fees and financial services commissions were approximately $300,000 and $200,000, respectively, higher than prior year due to increased volume of activity. Deposit account fees were $100,000 higher than 1995. Partially offsetting these increases, mortgage banking income was $200,000 lower than 1995, due to reduced servicing income and trust fees were $200,000 lower than prior year. Non-interest income was $21.5 million in 1995, $4.5 million lower than 1994. Lower mortgage banking income due to reduced refinancing volumes resulting in lower income from sales of loans, lower deposit account fees and lower trust fees, account for the majority of the decrease. Non-Interest Expense Components of Non-Interest Expense - ----------------------------------------------------------- (In millions) 1996 1995 1994 - ----------------------------------------------------------- Salaries $29.5 $32.6 $36.4 Other personnel benefits 8.7 8.6 8.7 Occupancy 10.3 10.7 10.6 Equipment 5.5 6.3 6.1 Data processing 4.0 4.2 4.5 Professional fees 2.5 3.9 4.1 FDIC insurance assessment -- 2.4 4.7 Stationery and supplies 1.6 1.6 1.7 Advertising and public relations 1.4 1.6 1.6 Loan expense 1.2 1.1 3.0 Operational losses 0.8 1.0 1.3 Merchant credit card 0.8 0.8 0.9 Insurance 0.6 1.0 0.9 Other real estate owned 0.4 0.9 0.6 Other expense 8.3 9.6 9.2 - ----------------------------------------------------------- Total $75.6 $86.3 $94.3 =========================================================== Average full-time equivalent staff 825 898 1,024 Average assets per full-time equivalent staff(In millions) $3.02 $2.69 $2.40 =========================================================== Non-interest expense decreased $10.7 million or 12 percent in 1996 compared to 1995. Lower expense in 1996 is due to one-time costs, included in 1995, related to merger activity in that year and the Company's continuing efforts to realize efficiencies through streamlining and consolidation of operations and strict cost controls. These were the major reasons for the decreases in almost all non-interest expense categories, including $3.0 million lower employee-related costs, a $1.4 million reduction in professional fees, $1.2 million lower occupancy and equipment expenses, $500,000 lower other real estate owned costs, $400,000 lower insurance expense and $200,000, each, lower data processing costs, advertising and public relations expenses and operational losses. In addition, the Company benefited from the elimination of FDIC premiums, contributing $2.4 million to the total decrease in non-interest expense from 1995. Non-interest expense decreased $8.0 million or 8 percent in 1995 compared with 1994. Lower expenses in 1995 reflect the Company's improved efficiency and exercise of cost controls, plus the effect of consolidating operations after the 1995 merger activity. The combination of these effects is the main reason for the $3.9 million decrease in personnel related expenses, $1.9 million reduction in loan related expenses, and other reductions in most non-interest expense categories. In addition, a $2.3 million reduction in FDIC insurance expense, resulting from reduced premiums, contributed to the overall year-to-year decreases. The ratio of average assets per full-time equivalent staff was $3.0 million in 1996 compared to $2.7 million and $2.4 million in 1995 and 1994, respectively. The Company's strategy to improve efficiency and consolidate operations after merger activity can be seen in the reduction of the average number of full-time equivalent staff from 1,024 in 1994 to 898 and 825 in 1995 and 1996, respectively. Provision for Income Tax The provision for income tax increased by $3.5 million in 1996 mainly as a direct result of higher pretax income partially offset by an increase in tax-exempt interest income from municipal securities. The 1996 provision of $17.4 million reflects an effective tax rate of 31.6 percent compared to provisions of $14.0 million in 1995 and $12.8 million in 1994, reflecting effective tax rates of 30.8 percent and 31.7 percent, respectively. ITEM 8. Financial Statements and Supplementary Data Index to Financial Statements Page ---- Consolidated Balance Sheets as of December 31, 1996 and 1995 57 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 58 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 59 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 60 Notes to consolidated financial statements 61 Independent Auditors' Report 90 Management's letter of Financial Responsibility 93 WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) - ------------------------------------------------------------------------ Balances as of December 31, 1996 1995 - ------------------------------------------------------------------------ ASSETS Cash and cash equivalents (Note 16) $149,429 $182,133 Money market assets 250 250 Investment securities available for sale (Note 2) 696,610 620,337 Investment securities held to maturity; market values of $199,872 in 1996 and $244,303 in 1995 (Note 2) 197,428 242,175 Loans, net of reserve for loan losses of: $34,919 in 1996 and $33,508 in 1995 (Notes 3, 4 and 15) 1,409,318 1,353,732 Other real estate owned 6,091 5,103 Premises and equipment, net (Notes 5 and 6) 34,895 26,625 Interest receivable and other assets (Note 9) 54,466 60,589 - ------------------------------------------------------------------------ Total assets $2,548,487 $2,490,944 ======================================================================== LIABILITIES Deposits: Non-interest bearing $515,451 $497,489 Interest bearing: Transaction 379,468 356,099 Savings 678,779 716,871 Time (Notes 2 and 6) 507,698 479,062 - ------------------------------------------------------------------------ Total deposits 2,081,396 2,049,521 Funds purchased (Note 6) 161,147 175,622 Liability for interest, taxes and other expenses (Note 9) 24,498 21,864 Notes and mortgages payable (Note 6) 42,500 20,000 - ------------------------------------------------------------------------ Total liabilities 2,309,541 2,267,007 - ------------------------------------------------------------------------ Commitments and contingent liabilities (Notes 4, 12 and 13) SHAREHOLDERS' EQUITY (Notes 7 and 16) Common stock (no par value) Authorized - 50,000 shares Issued and outstanding - 9,435 in 1996 and 9,793 in 1995 93,558 94,786 Unrealized gain on securities available for sale, net of taxes 7,817 1,691 Retained earnings 137,571 127,460 - ------------------------------------------------------------------------ Total shareholders' equity 238,946 223,937 - ------------------------------------------------------------------------ Total liabilities and shareholders' equity $2,548,487 $2,490,944 ======================================================================== See accompanying notes to consolidated financial statements. WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) - ------------------------------------------------------------------------- For the years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------- INTEREST INCOME Loans $124,838 $128,264 $120,115 Money market assets and funds sold -- 276 1,367 Investment securities available for sale Taxable 31,249 12,551 10,446 Non-taxable 6,253 270 174 Investment securities held to maturity Taxable 5,563 21,797 24,678 Non-taxable 6,362 11,219 9,314 - ------------------------------------------------------------------------- Total interest income 174,265 174,377 166,094 INTEREST EXPENSE Transaction deposits 4,330 3,802 3,669 Savings deposits 19,089 20,716 20,003 Time deposits (Note 6) 25,142 23,961 18,295 Funds purchased (Note 6) 9,528 8,403 5,281 Notes and mortgages payable (Note 6) 2,828 1,730 2,612 - ------------------------------------------------------------------------- Total interest expense 60,917 58,612 49,860 - ------------------------------------------------------------------------- NET INTEREST INCOME 113,348 115,765 116,234 Provision for loan losses (Note 3) 4,575 5,595 7,420 - ------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 108,773 110,170 108,814 NON-INTEREST INCOME Service charges on deposit accounts 12,847 12,734 12,948 Merchant credit card 2,657 2,422 2,401 Mortgage banking 1,290 1,479 4,270 Financial services commissions 788 611 673 Trust fees 386 615 751 Net investment securities gain (loss) 29 19 (60) Other 4,046 3,653 5,016 - ------------------------------------------------------------------------- Total non-interest income 22,043 21,533 25,999 NON-INTEREST EXPENSE Salaries and related benefits (Note 14) 38,171 41,171 45,106 Occupancy (Notes 5 and 12) 10,313 10,684 10,632 Equipment (Notes 5 and 12) 5,471 6,255 6,149 Data processing 4,027 4,239 4,466 Professional fees 2,451 3,905 4,079 FDIC insurance assessment 16 2,375 4,683 Other real estate owned 425 890 623 Other 14,753 16,821 18,603 - ------------------------------------------------------------------------- Total non-interest expense 75,627 86,340 94,341 - ------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 55,189 45,363 40,472 Provision for income taxes (Note 9) 17,449 13,979 12,810 - ------------------------------------------------------------------------- NET INCOME $37,740 $31,384 $27,662 ========================================================================= Average common shares outstanding 9,613 9,877 9,916 PER SHARE DATA (Notes 7 and 19) Net income $3.93 $3.18 $2.79 Dividends declared 0.95 0.77 0.64 See accompanying notes to consolidated financial statements. WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
- ------------------------------------------------------------------------------------- Unrealized Gain (Loss) on Securities Available Retained Common Stock for Sale Earnings Total - ------------------------------------------------------------------------------------- December 31, 1993 $92,943 $2,434 $93,267 $188,644 Net income for the year - - 27,662 27,662 Stock issued 1,242 - - 1,242 Purchase and retirement of stock (556) - (1,932) (2,488) Dividends - - (5,695) (5,695) Unrealized loss on securities available for sale - (4,704) - (4,704) - ------------------------------------------------------------------------------------ December 31, 1994 $93,629 ($2,270) $113,302 $204,661 Net income for the year - - 31,384 31,384 Stock issued 3,797 - - 3,797 Purchase and retirement of stock (2,640) - (9,701) (12,341) Dividends - - (7,489) (7,489) Cash in lieu of fractional shares - - (36) (36) Unrealized loss on securities available for sale - 3,961 - 3,961 - ------------------------------------------------------------------------------------ December 31, 1995 $94,786 $1,691 $127,460 $223,937 Net income for the year - - 37,740 37,740 Stock issued 2,575 - - 2,575 Purchase and retirement of stock (3,803) - (18,546) (22,349) Dividends - - (9,083) (9,083) Unrealized loss on securities available for sale - 6,126 - 6,126 - ------------------------------------------------------------------------------------ December 31, 1996 $93,558 $7,817 $137,571 $238,946 ====================================================================================
See accompanying notes to consolidated financial statements. WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
- ---------------------------------------------------------------------------------------------- For the years ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $37,740 $31,384 $27,662 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,062 4,731 5,231 Loan loss provision 4,575 5,595 7,420 Amortization of deferred net loan fees (1,105) (1,858) (1,143) Increase in interest income receivable (821) (1,170) (1,379) (Increase) decrease in other assets (2,053) 2,438 (1,871) Decrease in income taxes payable (1,224) (2,129) (1,228) Increase in interest expense payable 559 82 469 Increase (decrease) in other liabilities 299 (1,413) 1,428 Net (gain) loss on sales of investment securities (29) (19) 60 Loss on sales/write down of equipment 212 1,586 179 Originations of loans for resale (7,089) (8,920) (134,221) Proceeds from sale of loans originated for resale 7,905 9,254 161,887 (Gain) loss on sale of property acquired in satisfaction of debt (173) 27 175 Write down on property acquired in satisfaction of debt 454 513 3 Net purchases of trading securities -- -- 10 - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 43,312 40,101 64,682 INVESTING ACTIVITIES Net disbursements of loans (63,544) (4,878) (19,559) Purchases of investment securities available for sale (289,505) (140,160) (110,944) Purchases of investment securities held to maturity (26,448) (52,928) (412,652) Purchases of property, plant and equipment (14,225) (3,662) (3,327) Proceeds from maturity of securities available for sale 188,921 66,621 45,498 Proceeds from maturity of securities held to maturity 71,199 91,592 346,380 Proceeds from sale of securities available for sale 42,459 4,310 104,294 Proceeds from sale of securities held to maturity -- 1,316 -- Proceeds from sale of property, plant and equipment 1,681 52 -- Proceeds from property acquired in satisfaction of debt 2,403 2,380 5,815 - ---------------------------------------------------------------------------------------------- Net cash used in investing activities (87,059) (35,357) (44,495) FINANCING ACTIVITIES Net increase (decrease) in deposits 31,875 (22,171) (38,339) Net (decrease) increase in fed funds purchased (14,475) 40,196 59,128 Additions (reductions) in notes and mortgages payable 22,500 (5,524) (10,828) Issuance of shares of common stock 2,575 3,797 1,242 Cash in lieu of fractional shares -- (36) -- Retirement of common stock (22,349) (12,341) (2,488) Dividends (9,083) (7,489) (5,695) - ---------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 11,043 (3,568) 3,020 - ---------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (32,704) 1,176 23,207 Cash and cash equivalents at beginning of year 182,133 180,957 157,750 - ---------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $149,429 $182,133 $180,957 ============================================================================================== Supplemental disclosure of non-cash activities Loans transferred to other real estate owned $3,672 $4,095 $4,474 Transfer of securities from held to maturity to to available for sale -- 329,357 -- Unrealized gain (loss) on securities available for sale, net of taxes 6,126 3,961 (4,704) Supplemental disclosure of cash flow activity Interest paid for the period 58,205 58,581 50,156 Income tax payments for the period 18,286 15,394 14,016
See accompanying notes to consolidated financial statements. WESTAMERICA BANCORPORATION Note 1: Business and Accounting Policies Westamerica Bancorporation, a registered bank holding Company (the "Company"), provides a full range of banking services to individual and corporate customers in Northern California through its subsidiary banks, Westamerica Bank and Bank of Lake County (the "Banks"). The Banks are subject to competition from other financial institutions and to the regulations of certain agencies and undergo periodic examinations by those regulatory authorities. During April 1996, the Company merged one of its subsidiary banks, Napa Valley Bank with and into Westamerica Bank, its largest subsidiary. Summary of Significant Accounting Policies The consolidated financial statements are prepared in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a summary of significant policies used in the preparation of the accompanying financial statements. In preparing the financial statements, Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the disclosure of income and expenses for the periods presented in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Principles of Consolidation. The financial statements include the accounts of the Company, and all the Company's subsidiaries which include the Banks, Community Banker Services Corporation and Subsidiary, Westcore and Westamerica Commercial Credit Inc., a newly formed company which is engaged in financing accounts receivable and inventory lines of credit and term business loans. Significant intercompany transactions have been eliminated in consolidation. The statements of income, changes in shareholders' equity and cash flows and the related footnotes herein for the year ended December 31, 1994, have been restated to reflect the mergers with PV Financial on January 31, 1995, CapitolBank Sacramento on June 6, 1995 and North Bay Bancorp on July 17, 1995, all on a pooling-of-interests basis. Cash Equivalents. Cash equivalents include Due From Banks balances and Federal Funds Sold which are both readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value because of interest rate volatility. Securities. Investment securities consist of securities of the U.S. Treasury, federal agencies, states, counties and municipalities, and mortgage-backed, corporate debt and equity securities. Under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company classifies its debt and marketable equity securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Securities not included in trading or held to maturity are classified as available for sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of shareholders' equity until realized. Unrealized gains and losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of shareholders' equity. The unrealized gains and losses included in the separate component of shareholders' equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premiums or discounts on the associated security. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary, results in a charge to earnings and the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale or held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Loans and Reserve for Loan Losses. The reserve for loan losses is a combination of specific and general reserves available to absorb estimated future losses throughout the loan portfolio and is maintained at a level considered adequate to provide for such losses. Credit reviews of the loan portfolio, designed to identify problem loans and to monitor these estimates, are conducted continually, taking into consideration market conditions, current and anticipated developments applicable to the borrowers and the economy, and the results of recent examinations by regulatory agencies. Management approves the conclusions resulting from credit reviews. Ultimate losses may vary from current estimates. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's reserve for possible loan losses. Such agencies may require the Company to recognize additions to the reserve based on their judgment of information available to them at the time of their examination. Loans are stated at the principal amount outstanding, net of unearned discount and deferred fees. Unearned interest on discounted loans is amortized over the life of these loans, using the sum-of-the-months digits formula for which the results are not materially different from those obtained by using the interest method. For all other loans, interest is accrued daily on the outstanding balances. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on non-accrual status. Non-refundable fees and certain costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income over the estimated respective loan lives. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an individual loan basis. Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings or acceptances of deeds-in-lieu of foreclosure. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the reserve for loan losses. Other real estate owned is recorded at the lower of the related loan balance or fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Subsequently, other real estate owned is valued at the lower of the amount recorded at the date acquired or the then current fair value less estimated disposition costs. Subsequent losses incurred due to the declines in annual independent property appraisals are recognized as non-interest expense. Routine holding costs, such as property taxes, insurance, maintenance and losses from sales and dispositions are recognized as non-interest expense. Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter. Fully depreciated and/or amortized assets are removed from the Company's balance sheet. Impairment of Long-Lived Assets. In 1995, the Financial Accounting Standard Board ("FASB") issued the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Under the provisions of SFAS 121, long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. The Company adopted the provisions of SFAS 121 on January 1, 1996. The adoption of SFAS 121 did not have any effect on the Company's financial statements as currently presented. Interest Rate Swap Agreements. The Company uses interest rate swap agreements as an asset/liability management strategy to reduce interest rate risk. These agreements are exchanges of fixed and variable interest payments based on a notional principal amount. The primary risk associated with swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. The Company controls the credit risk of these agreements through dealing with reputable parties, credit approvals, limits and monitoring procedures. The Company is not a dealer but an end user of these instruments and does not use them for trading purposes. As a hedging mechanism, the differential to be paid or received on such agreements is recognized over the life of the agreements. Payments made and/or received in connection with early termination of interest rate swap agreements are recognized over the remaining term of the swap agreement. Earnings Per Share. Earnings per share amounts are computed on the basis of the weighted average of common and common equivalent shares outstanding during each of the years. Fully diluted earnings per share approximated primary earnings per share in each of the years in the three-year period ended December 31, 1996. Accounting for Stock-Based Compensation. Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant generally if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which permits the Company to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows the Company to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure of SFAS 123. Income Taxes. The Company and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Other. Securities and other property held by the Banks in a fiduciary or agency capacity are not included in the financial statements since such items are not assets of the Company or its subsidiaries. Certain amounts in prior years' financial statements have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported income. Note 2: Investment Securities An analysis of the available-for-sale investment securities portfolio as of December 31, 1996, follows:
- --------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------- U.S. Treasury securities $272,896 $982 ($404) $273,474 Securities of U.S. Government agencies and corporations 130,311 170 (454) 130,027 Obligations of States and political subdivisions 107,489 2,197 (463) 109,223 Asset-backed securities 94,145 189 (52) 94,282 Other securities 78,210 11,420 (26) 89,604 - ------------------------------------------------------------------------------------ Total $683,051 $14,958 ($1,399) $696,610 ====================================================================================
An analysis of the held-to-maturity investment securities portfolio as of December 31, 1996, follows:
- ------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------ U.S. Treasury securities $-- $-- $-- $-- Securities of U.S. Government agencies and corporations 71,345 371 (544) 71,172 Obligations of States and political subdivisions 122,735 3,081 (464) 125,352 Asset-backed securities 191 -- -- 191 Other securities 3,157 -- -- 3,157 - ------------------------------------------------------------------------------------ Total $197,428 $3,452 ($1,008) $199,872 ====================================================================================
An analysis of the available-for-sale investment securities portfolio as of December 31, 1995, follows:
- ------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------ U.S. Treasury securities $240,832 $992 ($595) $241,229 Securities of U.S. Government agencies and corporations 123,902 177 (762) 123,317 Obligations of States and political subdivisions 118,314 2,636 (580) 120,370 Asset-backed securities 80,372 624 (73) 80,923 Other securities 53,984 549 (35) 54,498 - ------------------------------------------------------------------------------------ Total $617,404 $4,978 ($2,045) $620,337 ====================================================================================
An analysis of the held-to-maturity investment securities portfolio as of December 31, 1995, follows:
- ------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------ U.S. Treasury securities $-- $-- $-- $-- Securities of U.S. Government agencies and corporations 125,062 508 (1,102) 124,468 Obligations of States and political subdivisions 109,754 3,330 (605) 112,479 Asset-backed securities 3,264 3 (6) 3,261 Other securities 4,095 2 (2) 4,095 - ------------------------------------------------------------------------------------ Total $242,175 $3,843 ($1,715) $244,303 ====================================================================================
The amortized cost and estimated market value of securities at December 31, 1996, by contractual maturity, are shown in the following table: - ----------------------------------------------------------------------- Securities Available Securities Held for Sale to Maturity ------------------------ ------------------------- Estimated Estimated Maturity in years Amortized Market Amortized Market (In thousands) Cost Value Cost Value - ----------------------------------------------------------------------- 1 year or less $159,228 $159,284 $693 $701 1 to 5 years 305,489 306,321 7,031 7,280 5 to 10 years 60,886 61,019 65,117 66,146 Over 10 years 59,906 61,232 53,242 54,573 - ----------------------------------------------------------------------- Sub-total 585,509 587,856 126,083 128,700 Mortgage-backed 78,438 78,302 71,345 71,172 Other securities 19,104 30,452 -- -- - ----------------------------------------------------------------------- Total $683,051 $696,610 $197,428 $199,872 ======================================================================= Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-backed securities. At December 31, 1996 and 1995, the Company had no high-risk collateralized mortgage obligations. Proceeds from sales of securities during 1996, 1995 and 1994 were $42.5 million, $5.6 million and $104.3 million, respectively. In 1996, the Company realized gains from the sale of these securities in the amount of $29,000, compared to gains of $19,000 in 1995 and losses of $60,000 in 1994. In November 1995, the FASB issued a special report, "A Guide to Implementation of Statement No. 115, on Accounting for Certain Investments in Debt and Equity Securities - Questions and Answers" (the "Special Report"). The Special Report allowed companies to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassification at fair value. Reclassifications from this one-time reassessment will not call into question the intent of an enterprise to hold other debt securities to maturity in the future, provided that it was performed by December 31, 1995. The Company adopted the reclassification provisions stated in the Special Report prior to December 31, 1995 and transferred $329.4 million of held-to-maturity securities into available-for-sale. The unrealized pretax gain upon transfer was $1.1 million as of December 31, 1995. As of December 31, 1996, $348.4 million of investment securities held to maturity were pledged to secure public deposits and short-term funding needs, compared to $321.0 million in 1995. Note 3: Loans and Reserve for Loan Losses Loans at December 31, consisted of the following: - ---------------------------------------------------------- (In thousands) 1996 1995 - ---------------------------------------------------------- Commercial $375,273 $339,142 Real estate-commercial 482,538 477,280 Real estate-construction 40,090 54,181 Real estate-residential 276,951 237,535 - ---------------------------------------------------------- Total real estate loans 799,579 768,996 Installment and personal 278,950 291,350 Unearned income (9,565) (12,248) - ---------------------------------------------------------- Gross loans 1,444,237 1,387,240 Reserve for loan losses (34,919) (33,508) - ---------------------------------------------------------- Net loans $1,409,318 $1,353,732 ========================================================== Included in real estate-residential at December 31, 1996 and 1995 are loans held for resale of $1.3 million and $2.1 million, respectively, the cost of which approximates market value. The following summarizes the reserve for loan losses of the Company for the periods indicated: - ---------------------------------------------------------------- (In thousands) 1996 1995 1994 - ---------------------------------------------------------------- Balance at January 1, $33,508 $32,450 $30,045 Provision for loan losses 4,575 5,595 7,420 Loans charged off (5,928) (6,770) (7,417) Recoveries of loans previously charged off 2,764 2,233 2,402 - --------------------------------------------------------------- Balance at December 31, $34,919 $33,508 $32,450 =============================================================== The Company had no troubled debt restructurings at December 31, 1996 and 1995 and $4.4 million at December 31, 1994. The Company had non-accrual loans of $7.6 million, $9.9 million and $10.3 million as of December 31, 1996, 1995 and 1994, respectively. The following is a summary of interest foregone on non-accrual and restructured loans for the years ended December 31: - ----------------------------------------------------------------- (In thousands) 1996 1995 1994 - ------------------------------------------------------------------ Interest income that would have recognized had the loans performed in accordance with their original terms $705 $823 $1,538 Less: Interest income recognized on non-accrual and restructured loans (270) (242) (677) - ------------------------------------------------------------------ Interest foregone on non-accrual and restructured loans $435 $581 $861 ================================================================== There were no commitments to lend additional funds to borrowers whose loans are included above. The Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118 (collectively referred to as "SFAS 114") on January 1, 1995. SFAS 114 requires entities to measure certain impaired loans based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loan's market value or the fair value of collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. If the measurement of the impaired loans is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. The adoption of SFAS 114 did not have a material effect on the Company's financial statements, as the Company's policy of measuring loan impairment was consistent with methods prescribed in these standards. At December 31, 1996, the recorded investment in loans for which impairment was recognized totaled $11.4 million compared to $10.2 million at December 31, 1995. The specific reserves at December 31, 1996 and 1995 were $1.2 million and $850,000, respectively. The amount of that recorded investment for which there is no related allowance for credit losses was $0. For the year ended December 31, 1996, the average recorded net investment in impaired loans was approximately $11.0 million compared to $10.3 million at December 31, 1995. In general, the Company does not recognize any interest income on troubled debt restructurings or loans that are classified as non-accrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company's recorded investment in such loans is deemed collectible. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), which amends Statement of Financial Accounting Standards No. 65. SFAS 122 eliminates the accounting distinction to recognize as separate assets the rights to service mortgage loans for others depending on how the servicing rights were acquired, whether by purchase of loans or by origination of loans. SFAS 122 also requires the assessment of capitalized mortgage servicing rights for impairment to be based on the current value of those rights. The Company adopted SFAS 122 on January 1, 1996 and, based on the low volume of conventional loan funding during 1996, the adoption did not have a material impact on the Company's financial condition. In June, 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishing of Liabilities" ("SFAS 125"). SFAS 125 provides guidance for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125, is effective January 1997, and is to be applied prospectively. In December 1996, the FASB issued the Financial Accounting Standard No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", which defers certain provisions of SFAS 125 for one year. Management does not expect that the adoption of these Statements will have a material impact on the Company's financial condition. Note 4: Concentration of Credit Risk The Company's business activity is with customers in Northern California. The loan portfolio is well diversified with no industry comprising greater than ten percent of total loans outstanding as of December 31, 1996 and 1995. The Company has a significant amount of credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 3, the Company had loan commitments and stand-by letters of credit related to real estate loans of $25.3 million at December 31, 1996. The Company requires collateral on all real estate loans and generally attempts to maintain loan-to-value ratios no greater than 75 percent on commercial real estate loans and no greater than 80 percent on residential real estate loans. Note 5: Premises and Equipment Premises and equipment as of December 31 consisted of the following: - ------------------------------------------------------------------ Accumulated Depreciation and Net Book (In thousands) Cost Amortization Value - ------------------------------------------------------------------ 1996 Land $8,112 $- $8,112 Buildings and improvements 26,445 (7,318) 19,127 Leasehold improvements 3,854 (2,460) 1,394 Furniture and equipment 12,067 (5,805) 6,262 - ------------------------------------------------------------------ Total $50,478 ($15,583) $34,895 ================================================================== 1995 Land $4,212 $- $4,212 Buildings and improvements 18,634 (7,061) 11,573 Leasehold improvements 4,499 (2,848) 1,651 Furniture and equipment 18,130 (8,941) 9,189 - ------------------------------------------------------------------ Total $45,475 ($18,850) $26,625 ================================================================== Depreciation and amortization included in operating expenses amount to $4.1 million in 1996, $4.7 million in 1995 and $5.2 million in 1994 . Note 6: Borrowed Funds Notes payable, including the unsecured obligations of the Company, as of December 31, 1996 and 1995, were as follows: - ----------------------------------------------------------------- (In thousands) 1996 1995 - ----------------------------------------------------------------- Subordinated note, issued by Westamerica Bank, originated in December 1993 and maturing September 30, 2003. Interest of 6.99% per annum is payable semiannually on March 31 and September 30, with principal payment due at maturity. $20,000 $20,000 Senior notes, originated in February 1996 and maturing February 1, 2006. Interest of 7.11% per annum is payable semiannually on February 1 and August 1, with certain required payments commencing February 1, 2000 and the remaining principal amount due at maturity. 22,500 -- -- - ----------------------------------------------------------------- Total notes payable $42,500 $20,000 ================================================================= The senior notes are subject to financial covenants requiring the Company to maintain, at all times, certain minimum levels of consolidated tangible net worth and maximum levels of capital debt. The Company is currently in compliance with all of the covenants in the senior notes indenture. At December 31, 1996 and 1995, the Company had unused lines of credit amounting to $2.5 million. Compensating balance arrangements are not significant to the operations of the Company. At December 31, 1996 and 1995, the Banks had $207.3 million and $169.8, respectively, in time deposit accounts in excess of $100,000; interest on these accounts in 1996, 1995 and 1994 was $10.1 million, $8.9 million and $5.8 million, respectively. Funds purchased include federal funds purchased and securities sold with repurchase agreements. Securities sold with repurchase agreements were $112.6 million at December 31, 1996 and $91.6 million at December 31, 1995. Securities under these repurchase agreements are held in the custody of independent securities brokers. Note 7: Shareholders' Equity In 1995, the Company adopted the 1995 Stock Option Plan. Stock appreciation rights, restricted performance shares, incentive stock options and non-qualified stock options are available under this plan. Under the terms of this plan, on January 1 of each year beginning in 1995, 2 percent of the Company's issued and outstanding shares of common stock will be reserved for granting. At December 31, 1996 and 1995, 195,867 and 160,951 shares, respectively, were reserved for issuance. Options are granted at fair market value and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. A Restricted Performance Share ("RPS") grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period. Under the Stock Option Plan adopted by the Company in 1985, 750,000 shares were reserved for issuance. Stock appreciation rights, incentive stock options and non-qualified stock options are available under this plan. Options are granted at fair market value and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. The 1985 plan was amended in 1990 to provide for RPS grants. An RPS grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period. PV Financial, CapitolBank Sacramento, and North Bay Bancorp had separate stock option plans (the "Option Plans") whereby options were granted to certain officers, directors, and employees. Following the effective dates of the mergers, the Option Plans were terminated. All outstanding options were substituted for the Company's options, adjusted for the exchange ratios as defined in the merger agreements. There were no options granted during 1995 or 1996. Stock Options. A summary of the status of the Company's stock options as of December 31, 1996 and 1995 and changes during the years ended on those dates, follows: - ------------------------------------------------------------------------ Weighted Weighted Number average Number average of exercise of exercise shares price shares price - ------------------------------------------------------------------------ Outstanding at beginning of year 562,764 $22 665,386 $17 Granted 165,700 46 117,050 31 Exercised (81,477) 17 (202,940) 14 Forfeited (12,029) 31 (16,732) 19 - ------------------------------------------------------------------------ Outstanding at end of year 634,958 $29 562,764 $21 Options exercisable at end of year 328,260 286,818 ======================================================================== The following table summarizes information about options outstanding at December 31, 1996 and 1995: 1996 Options outstanding Options exercisable - --------------------------------------------------------------------------- Weighted average Weighted Weighted Range of Number remaining average Number average exercise outstanding contractual exercise exercisable exercise prices at 12/31/96 life in years price at 12/31/96 price - --------------------------------------------------------------------------- $8 - 9 1,296 3.1 $9 1,296 $9 10 -14 74,443 4.4 11 44,907 11 16 -19 95,472 4.5 18 93,760 18 22 -25 82,878 5.6 24 82,878 24 28 -31 218,219 7.6 29 105,419 29 46 162,650 9.1 46 -- -- - --------------------------------------------------------------------------- $8 - 46 634,958 6.9 $29 328,260 $22 =========================================================================== 1995 Options outstanding Options exercisable - --------------------------------------------------------------------------- Weighted average Weighted Weighted Range of Number remaining average Number average exercise outstanding contractual exercise exercisable exercise prices at 12/31/95 life in years price at 12/31/95 price - --------------------------------------------------------------------------- $7 - 9 6,102 1.5 $8 5,865 $7 9 -14 115,873 4.6 11 69,091 12 16 -19 109,938 5.1 18 106,301 18 22 -25 98,234 6.7 24 67,827 24 28 -31 232,617 8.6 29 37,734 28 - --------------------------------------------------------------------------- $7 - 31 562,764 6.7 $22 286,818 $19 =========================================================================== Restricted Performance Shares. A summary of the status of the Company's RPSs as of December 31, 1996 and 1995, and changes during the years ended on those dates, follows: 1996 1995 - ------------------------------------------------------------ Number of Number of shares shares - ------------------------------------------------------------ Outstanding at beginning of year 90,300 85,400 Granted 25,600 32,350 Exercised (24,700) (27,450) Forfeited (1,850) -- - ------------------------------------------------------------ Outstanding at end of year 89,350 90,300 ============================================================ As of December 31, 1996 and 1995, the RPSs had a weighted-average contractual life of 1.2 and 1.3 years, respectively. The Company expects that substantially all of the RPSs outstanding at December 31, 1996 will eventually vest based on projected performance. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock options. The compensation cost that has been charged against income for the Company's RPSs granted was $1.6 million and $1.2 million for 1996 and 1995, respectively. There were no stock appreciation rights or incentive stock options granted in 1996 and 1995. The fair value of each non-qualified stock option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 1.8 percent for both years; expected volatility of 17 percent and 19 percent; risk-free interest rates of 5.40 percent and 5.75 percent; and expected lives of six years. The weighted-average fair value of non-qualified stock options granted during 1996 and 1995 was $10.28 and $7.41, respectively. The fair value of each RPS grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for RPS grants in 1996 and 1995, respectively: dividend yield of 1.8 percent for both years; expected volatility of 17 percent and 19 percent; risk-free interest rates of 5.15 percent and 7.60 percent; and expected lives of 3 years. The weighted-average fair value of RPSs granted during 1996 and 1995 was $44.49 and $30.14, respectively. Had compensation cost for the Company's 1995 and 1985 Stock Option Plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: - --------------------------------------------------------------- (In thousands, except per share data) 1996 1995 - --------------------------------------------------------------- Net income As Reported $37,740 $31,384 Pro forma 37,501 31,293 Earnings per share As Reported $3.93 $3.18 Pro forma 3.90 3.17 =============================================================== Shareholders have authorized issuance of two new classes of 1,000,000 shares each, to be denominated "Class B Common Stock" and "Preferred Stock", respectively, in addition to the 50,000,000 shares of Common Stock presently authorized. At December 31, 1996, no shares of Class B or Preferred Stock had been issued. In December 1986, the Company declared a dividend distribution of one common share purchase right (the "Right") for each outstanding share of common stock. The Rights are exercisable only in the event of an acquisition of, or announcement of a tender offer to acquire, 15 percent or more of the Company's stock without the prior consent of the Board of Directors. If the Rights become exercisable, the holder may purchase one share of the Company's common stock for $65. Following an acquisition of 15 percent of the Company's common stock or 50 percent or more of its assets without prior consent of the Company, each Right will also entitle the holder to purchase $130 worth of common stock of the Company for $65. Under certain circumstances, the Rights may be redeemed by the Company at a price of $.05 per Right prior to becoming exercisable and in certain circumstances thereafter. The Rights expire on December 31, 1999, or earlier, in connection with certain Board-approved transactions. Note 8: Risk-Based Capital The Company and the Banks are subject to various regulatory capital adequacy requirements administered by federal and state agencies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and the Banks maintain minimum ratios of capital to risk-weighted assets. There are two categories of capital under the guidelines. Tier 1 capital includes common shareholders' equity and qualifying preferred stock less goodwill and other deductions including the unrealized net gains and losses, after taxes, of available-for-sale securities. Tier 2 capital includes preferred stock not qualifying for Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt, certain unsecured senior debt issued by the Company and the allowance for loan losses, subject to limitations by the guidelines. Under the guidelines, capital is compared to the relative risk of the balance sheet, derived from applying one of four risk weights (0%, 20%, 50% and 100%) to the different balance sheet and off-balance sheet assets, primarily based on the credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. As of December 31, 1996, Management believes that the Company and the Banks met all capital adequacy requirements to which they are subject. The most recent notification from the Federal Reserve Board categorized the Company and the Banks as well capitalized under the FDICIA regulatory framework for prompt corrective action. To be well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. Since that notification, there are no conditions or events that Management believes have changed the risk-based capital category of the Company or the Banks. The following table shows capital ratios for the Company and the Banks as of December 31, 1996:
- ------------------------------------------------------------------------------------------- To Be Well Capitalized Under (In thousands) the FDICIA For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions: - ------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------- Total Capital (to risk-weighted assets) Consolidated Company $274,026 14.96% $146,538 8.00% $183,172 10.00% Westamerica Bank 241,981 13.98% 138,515 8.00% 173,143 10.00% Bank of Lake County 10,474 17.63% 4,752 8.00% 5,940 10.00% Tier 1 Capital (to risk weighted assets) Consolidated Company 230,981 12.61% 73,269 4.00% 109,903 6.00% Westamerica Bank 194,194 11.22% 69,257 4.00% 103,886 6.00% Bank of Lake County 9,721 16.36% 2,376 4.00% 3,564 6.00% Leverage Ratio * Consolidated Company 230,981 9.20% 100,394 4.00% 125,493 5.00% Westamerica Bank 194,194 8.11% 95,757 4.00% 119,696 5.00% Bank of Lake County 9,721 10.79% 3,605 4.00% 4,507 5.00% ===========================================================================================
[FN] * The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum leverage ratio guideline is 3 percent for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Note 9: Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the amounts reported in the financial statements of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1995 are primarily as a result of adjustments to conform to tax returns as filed. The components of the net deferred tax asset as of December 31, are as follows: - -------------------------------------------------------------- (In thousands) 1996 1995 - -------------------------------------------------------------- Deferred tax asset Reserve for loan losses $14,196 $13,706 State franchise taxes 2,220 1,694 Deferred compensation 1,908 1,533 Real estate owned 1,648 1,800 Other 1,012 1,115 Net operating loss carryfowards 842 1,100 General tax credit carryforwards 215 215 - -------------------------------------------------------------- Subtotal deferred tax asset 22,041 21,163 Valuation allowance (486) (486) - -------------------------------------------------------------- Total deferred tax asset 21,555 20,677 Deferred tax liability Net deferred loan costs 545 662 Fixed assets 639 951 Securities available for sale 5,741 1,242 Other 164 211 - -------------------------------------------------------------- Total deferred tax liability 7,089 3,066 - -------------------------------------------------------------- Net deferred tax asset $14,466 $17,611 ============================================================== A valuation allowance has been provided to reduce the deferred tax asset to an amount which is more likely than not to be realized. The valuation allowance, which relates to the deferred tax asset acquired through the merger with CapitolBank Sacramento in June 1995, remained unchanged for the year ended December 31, 1996. The provision for federal and state income taxes consists of amounts currently payable and amounts deferred which, for the years ended December 31, are as follows: - -------------------------------------------------------------------- (In thousands) 1996 1995 1994 - -------------------------------------------------------------------- Current income tax expense: Federal $12,461 $10,580 $10,087 State 6,342 5,009 4,642 - -------------------------------------------------------------------- Total current 18,803 15,589 14,729 - -------------------------------------------------------------------- Deferred income tax (benefit) expense: Federal (1,292) (1,759) (1,605) State (220) 149 (314) - -------------------------------------------------------------------- Total deferred (1,512) (1,610) (1,919) Adjustment of net deferred tax asset for enacted changes in tax rates: Federal -- -- -- State 158 -- -- - -------------------------------------------------------------------- Provision for income taxes $17,449 $13,979 $12,810 ==================================================================== The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate to income before taxes, as follows: - -------------------------------------------------------------------- (In thousands) 1996 1995 1994 - -------------------------------------------------------------------- Federal income taxes due at statutory rate $19,316 $15,877 $14,110 (Reductions) increases in income taxes resulting from: Interest on state and municipal securities not taxable for federal income tax purposes (5,371) (4,435) (3,392) Reduction in the valuation allowance -- (906) -- State franchise taxes, net of federal income tax benefit 4,082 3,353 2,791 Deferred benefit and other (578) 90 (699) - -------------------------------------------------------------------- Provision for income taxes $17,449 $13,979 $12,810 ==================================================================== At December 31, 1996, the Company had the following net operating loss and the general tax credit carryforwards for tax return purposes: - ------------------------------------------------------------ Net Expires December 31, Operating Loss Tax Credit (In thousands) Carryforwards Carryforwards - ------------------------------------------------------------ 2003 $-- $160 2007 2,345 -- 2008 14 -- - ------------------------------------------------------------- Total $2,359 $160 ============================================================= Note 10: Fair Value of Financial Instruments The fair value of financial instruments do not represent actual amounts that may be realized upon the sale or liquidation of the related assets or liabilities. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities. The fair values presented represent the Company's best estimate of fair value using the methodologies discussed below. The fair value of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. Such financial instruments and their estimated fair value at December 31, were: - ------------------------------------------------------------------ (In thousands) 1996 1995 - ------------------------------------------------------------------ Cash and cash equivalents $149,429 $182,133 Money market assets 250 250 Interest and taxes receivable 41,277 39,060 Non-interest bearing and interest-bearing transaction and savings deposits 1,573,698 1,570,459 Funds purchased 161,147 175,622 Interest payable 5,677 5,118 ================================================================== The fair value at December 31, of the following financial instruments was estimated using quoted market prices: - ------------------------------------------------------------------ (In thousands) 1996 1995 - ------------------------------------------------------------------ Investment securities available for sale $696,610 $620,337 Investment securities held to maturity 199,872 244,303 ================================================================== Loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates, were valued using historical data. Fixed rate loans and variable rate loans that have reached their maximum rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the $34.9 million reserve for loan losses was applied against the estimated fair value to recognize future defaults of contractual cash flows. The estimated fair values of loans at December 31, were: - ------------------------------------------------------------------ (In thousands) 1996 1995 - ------------------------------------------------------------------ Loans $1,402,974 $1,351,732 - ------------------------------------------------------------------ The fair value of time deposits and notes and mortgages payable was estimated by discounting future cash flows related to these financial instruments using current market rates for financial instruments with similar characteristics. The estimated fair values at December 31, were: - ------------------------------------------------------------------ (In thousands) 1996 1995 - ------------------------------------------------------------------ Time deposits $507,942 $480,401 Notes and mortgages payable 42,500 20,000 - ------------------------------------------------------------------ The majority of the Company's commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. Note 11: Interest Rate Risk Management Interest rate risk is influenced by market forces. However, that risk may be controlled by monitoring and managing the repricing characteristics of interest-bearing assets and liabilities. The primary analytical tool used by Management to gauge interest rate sensitivity is a simulation model used by many major banks and bank regulators. This industry standard model is used to simulate the effects on net interest income of changes in market interest rates that are up to 2 percent higher or 2 percent lower than current levels. The results of the model indicated that the mix of interest-rate sensitive assets and liabilities at December 31, 1996 would not result in a fluctuation of net interest income exceeding 10 percent, even under alternate assumed interest rate changes of plus or minus 200 basis points. In evaluating exposure to interest rate risk, the Company considers the effects of various factors in implementing interest rate risk management activities, including the utilization of interest rate swaps to hedge interest rates paid on deposit accounts. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to the notional amounts. There were no interest rate swaps outstanding at December 31, 1996 and 1995. In 1995, interest rate swap contracts with notional amounts totaling $60.0 million matured. For these contracts, the Company paid a floating rate, based on the three-month London Interbank Offering Rate (LIBOR), and received a weighted average fixed rate of 4.11 percent. Using interest rate swaps, the Company is exposed to credit-related losses in the event of nonperformance by the counterparty; however, according to the Company's policy, the Company deals only with highly rated counterparties. Note 12: Lease Commitments Fifteen banking offices and a centralized administrative service center are owned and forty-two banking offices are leased. Substantially all the leases contain multiple renewal options and provisions for rental increases, principally for cost of living index, property taxes and maintenance. The Company also leases certain pieces of equipment. Minimum future rental payments, net of sublease income, at December 31, 1996, are as follows: - --------------------------------------- (In thousands) - --------------------------------------- 1997 $4,137 1998 3,605 1999 3,368 2000 1,606 2001 831 Thereafter 1,676 - --------------------------------------- Total minimum lease payments $15,223 ======================================= During 1996, all administrative offices moved from six different locations, two of which were leased, to one central facility located in Fairfield, California. Total rentals for premises and equipment net of sublease income included in non-interest expense were $5.3 million in 1996, $5.6 million in 1995 and $5.5 million in 1994. Note 13: Commitments and Contingent Liabilities Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expirations dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company's normal credit policies and collateral requirements. Unfunded loan commitments were $241.7 million and $221.2 million at December 31, 1996 and 1995, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers' short-term financing requirements and must meet the Company's normal credit policies and collateral requirements. Standby letters of credit outstanding totaled $11.8 million and $7.7 million at December 31, 1996 and 1995, respectively. The Company, because of the nature of its business, is subject to various threatened or filed legal cases. The Company, based on the advice of legal counsel, does not expect such cases will have a material, adverse effect on its financial position or results of operations. Note 14: Retirement Benefit Plans The Company sponsors a defined benefit Retirement Plan covering substantially all of its salaried employees with one or more years of service. The Company's policy is to expense costs as they accrue as determined by the Projected Unit Cost method. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The following table sets forth the Retirement Plan's funded status as of December 31 and the pension cost for the years ended December 31: - ----------------------------------------------------------- (In thousands) 1996 1995 - ----------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation ($11,040) ($10,657) Non-vested benefit obligation (68) (63) - ----------------------------------------------------------- Accumulated benefit obligation (11,108) (10,720) Additional benefits related to projected salary increases (1,609) (1,231) - ----------------------------------------------------------- Projected benefit obligation (12,717) (11,951) Plan assets at fair market value 12,591 12,369 - ----------------------------------------------------------- Funded status - projected benefit obligation (in excess of) or less than plan assets ($126) $418 =========================================================== Comprised of: Prepaid pension cost $143 $-- Accrued pension liability -- 117 Unrecognized net gain 192 338 Unrecognized prior service (benefit) cost (204) 271 Unrecognized net obligation, net of amortization (257) (308) - ----------------------------------------------------------- Total ($126) $418 =========================================================== Net pension cost included in the following components: Service cost during the period $205 $117 Interest cost on projected benefit obligation 745 697 Actual return on plan assets (1,304) (2,864) Net amortization and deferral 394 2,125 - ----------------------------------------------------------- Net periodic pension cost $40 $75 =========================================================== The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.00 percent and 5.50 percent, respectively, at December 31, 1996 and 5.50 percent and 4.50 percent, respectively, at December 31, 1995. The expected long-term rate of return on plan assets in 1996 was 7.50 percent compared to 7.00 percent in 1995. The Company sponsors a defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. Participant deferred profit-sharing account balances offset benefits accrued under the Retirement Plan. The coordination of benefits of the two plans results in the Retirement Plan benefit formula establishing the minimum value of participant retirement benefits which, if not provided by the Deferred Profit-Sharing Plan, are guaranteed by the Retirement Plan. The costs charged to non-interest expense related to benefits provided by the Retirement Plan and the Deferred Profit-Sharing Plan were $1.3 million in 1996, $1.4 million in 1995 and $1.3 million in 1994. The Company intends to terminate the Retirement Plan in 1997. In addition to the Retirement Plan and the Deferred Profit-Sharing Plan, all salaried employees are eligible to participate in the voluntary Tax Deferred Savings/Retirement Plan (ESOP) upon completion of a 90-day introductory period. This Plan allows employees to defer, on a pretax basis, a portion of their salaries as contributions to the Plan. Participants may invest in ten funds, including one fund that invests exclusively in Westamerica Bancorporation common stock. The matching contributions charged to compensation expense were $1.1 million in 1996, $1.2 million in 1995 and $710,000 in 1994. Effective December 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"). Adoption of SFAS 106 required a change from the cash method to an actuarial based accrual method of accounting for postretirement benefits other than pensions. The Company offers continuation of group insurance coverage to employees electing early retirement, as defined by the Retirement Plan, for the period from the date of early retirement until age sixty-five. The Company contributes an amount toward early retirees' insurance premiums which is fixed at the time of early retirement. The Company reimburses Medicare Part B premiums for all retirees over age sixty-five, as defined by the Retirement Plan. The following table sets forth the net periodic postretirement benefit cost for the years ended December 31, and the funded status of the Plan at December 31: - -------------------------------------------------------------- (In thousands) 1996 1995 - -------------------------------------------------------------- Service cost $245 $155 Interest cost 102 86 Actual return on plan assets -- -- Amortization of unrecognized transition obligation 61 61 Other, net -- -- - -------------------------------------------------------------- Net periodic cost $408 $302 ============================================================== Accumulated postretirement benefit obligation attributable to: Retirees $1,094 $1,240 Fully eligible participants 462 307 Other 396 159 - -------------------------------------------------------------- Total $1,952 $1,706 - -------------------------------------------------------------- Fair value of plan assets -- -- - -------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets $1,952 $1,706 ============================================================== Comprised of: Unrecognized prior service cost $-- $-- Unrecognized net gain (loss) -- -- Unrecognized transition obligation 1,285 1,346 Recognized postretirement obligation 667 360 - -------------------------------------------------------------- Total $1,952 $1,706 ============================================================== The discount rate used in measuring the accumulated post- retirement benefit obligation was 6.0 percent and 5.5 percent at December 31, 1996 and 1995, respectively. The assumed health care cost trend rate used to measure the expected cost of benefits covered by the plan was 2 percent for 1997 and beyond. The effect of a one percentage point increase on the assumed health care cost trend for each future year would increase the aggregate of the service cost components of the 1996 and 1995 net periodic cost by $183,000 and $82,000, respectively, and increase the accumulated postretirement benefit obligation at December 31, 1996 and 1995 by $302,000 and $287,000, respectively. Note 15: Related Party Transactions Certain directors and executive officers of the Company and/or its subsidiaries were loan customers of the Banks during 1996 and 1995. All such loans were made in the ordinary course of business on normal credit terms, including interest rate and collateral requirements. In the opinion of Management, these credit transactions did not involve, at the time they were contracted, more than the normal risk of collectibility or present other unfavorable features. The table below reflects information concerning loans to certain directors and executive officers and/or family members during 1996 and 1995: - --------------------------------------------------------------- (In thousands) 1996 1995 - --------------------------------------------------------------- Beginning balance $4,247 $4,041 Payoffs/principal payments (1,552) (767) Originations 46 973 - --------------------------------------------------------------- At December 31, $2,741 $4,247 =============================================================== Percent of total loans outstanding 0.19% 0.31% Note 16: Regulatory Matters Payment of dividends to the Company by Westamerica Bank, the largest subsidiary bank, is limited under regulations for Federal Reserve member banks. The amount that can be paid in any calendar year, without prior approval from regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits of the preceding two calendar years less dividends declared. Under this regulation, Westamerica Bank was not restricted as to the payment of $26.5 million in dividends to the Company as of December 31, 1996. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972. As of December 31, 1996, $74.5 million was available for payment of dividends by the Company to its shareholders. The Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of its reservable deposits. The Banks' daily average on deposit at the Federal Reserve Bank was $23.9 million in 1996 and $47.3 million in 1995. Note 17: Westamerica Bancorporation (Parent Company Only) Statements of Income (In thousands) - -------------------------------------------------------------------- For the years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------- Dividends from subsidiaries $33,468 $22,262 $19,680 Interest income 1,402 381 200 Other income 4,244 4,224 4,552 - -------------------------------------------------------------------- Total income 39,114 26,867 24,432 - -------------------------------------------------------------------- Interest on borrowings 1,416 324 1,029 Salaries and benefits 5,911 5,768 5,529 Other non-interest expense 3,717 5,552 3,951 - -------------------------------------------------------------------- Total expenses 11,044 11,644 10,509 - -------------------------------------------------------------------- Income before taxes and equity in undistributed income of subsidiaries 28,070 15,223 13,923 Income tax benefit 2,382 2,663 2,386 Equity in undistributed income from subsidiaries 7,288 13,498 11,353 - -------------------------------------------------------------------- Net income $37,740 $31,384 $27,662 ==================================================================== Balance Sheets (In thousands) - -------------------------------------------------------------------- December 31, 1996 1995 - -------------------------------------------------------------------- Assets Cash and cash equivalents $18,842 $6,077 Money market assets and Investment securities available for sale 18,477 250 Investment in subsidiaries 215,451 211,605 Premises and equipment 16,322 1,972 Accounts receivable from affiliates 347 251 Other assets 3,715 10,390 - -------------------------------------------------------------------- Total assets $273,154 $230,545 ==================================================================== Liabilities Notes payable $22,500 $-- Notes payable to affiliates -- 506 Other liabilities 11,708 6,102 - -------------------------------------------------------------------- Total liabilities 34,208 6,608 Shareholders' equity 238,946 223,937 - -------------------------------------------------------------------- Total liabilities and shareholders' equity $273,154 $230,545 ====================================================================
Statements of Cash Flows (In thousands) - -------------------------------------------------------------------------------------- For the years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------- Operating Activities Net income $37,740 $31,384 $27,662 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 231 61 83 Undistributed earnings of affiliates (7,288) (13,498) (11,353) Increase in accounts receivable from affiliates (96) (95) (91) Increase in other assets (1,014) (3,565) (4,016) Increase in other liabilities 1,416 1,181 1,607 Net gain on real estate venture -- -- 22 - -------------------------------------------------------------------------------------- Net cash provided by operating activities 30,989 15,468 13,914 Investing Activities Purchases of premises and equipment (10,826) (1,978) (92) Net change in land held for sale 721 80 -- Net change in loan balances -- 148 921 Investment in subsidiaries (500) -- (140) Purchase of investment securities available for sale (756) -- (4,500) Proceeds from maturities of investment securities available -- 6,511 7,000 - -------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (11,361) 4,761 3,189 Financing Activities - -------------------------------------------------------------------------------------- Net additions (reductions) in notes payable 21,994 (4,494) (9,796) Proceeds from issuance of shares of common stock 2,575 3,797 1,242 Cash in lieu of fractional shares -- (36) -- Retirement of common stock (22,349) (12,341) (2,488) Dividends (9,083) (7,489) (5,695) - -------------------------------------------------------------------------------------- Net cash used in financing activities (6,863) (20,563) (16,737) - -------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 12,765 (334) 366 Cash and cash equivalents at beginning of year 6,077 6,411 6,045 - -------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $18,842 $6,077 $6,411 ====================================================================================== Supplemental disclosure: Non-cash dividend in the form of real property from Westamerica Bank $3,755 $ -- $ -- Unrealized gain on securities available for sale, net of taxes 6,126 -- --
Note 18: Quarterly Financial Information (Unaudited)
- ---------------------------------------------------------------------------------- (In thousands except per share data and price range of common stock) March 31, June 30, Sept. 30, Dec. 31, - ---------------------------------------------------------------------------------- 1996 Interest income $43,324 $43,146 $43,482 $44,313 Net interest income 28,217 27,928 28,069 29,134 Provision for loan losses 1,275 1,200 1,050 1,050 Non-interest income 5,352 5,287 5,642 5,762 Non-interest expense 18,866 18,442 18,988 19,331 Income before taxes 13,428 13,573 13,673 14,515 Net income 9,148 9,351 9,466 9,775 Earnings per share 0.94 0.96 1.00 1.04 Dividends declared per share 0.23 0.23 0.23 0.26 Price range, common stock 43.25-47.25 $46.00-50.25 $46.50-51.00 $49.50-58.75 - --------------------------------------------------------------------------------- 1995 Interest income $43,659 $43,662 $43,396 $43,660 Net interest income 29,660 28,977 28,363 28,765 Provision for loan losses 1,335 1,835 1,150 1,275 Non-interest income 5,119 5,434 5,537 5,443 Non-interest expense 22,404 23,730 20,386 19,820 Income before taxes 11,040 8,846 12,364 13,113 Net income 7,550 6,538 8,388 8,908 Earnings per share 0.76 0.66 0.85 0.91 Dividends declared per share 0.17 0.20 0.20 0.20 Price range, common stock $29.50-33.25 $33.00-37.50 $36.50-38.50 $38.50-43.25 =================================================================================
Note 19: Acquisition On November 11, 1996, the Company and ValliCorp Holdings, Inc. ("ValliCorp"), a bank holding company located in Fresno, California, signed a Definitive Agreement and Plan of Reorganization (the "Merger Agreement"), under which all of the outstanding shares of ValliCorp Common Stock will be exchanged for shares of the Company's Common Stock pursuant to a tax-free exchange. The Merger Agreement provides for ValliCorp shareholders to receive $21.00 in Westamerica Common Stock for each outstanding share of ValliCorp Common Stock, subject to adjustments if certain conditions in connection with the Company's average share price occur and other conditions as defined in the Merger Agreement. The following unaudited pro forma combined financial information, based on the historical financial statements of the parties, summarizes the combined results of operations of the Company and ValliCorp on a pooling-of-interests basis, as if the combination had been consummated on January 1 of each of the periods presented. Earnings per share were calculated on an assumed exchange ratio of .4098, subject to possible adjustments as described above. - ---------------------------------------------------------------- (In thousands, except per share data) (Unaudited) Years ended December 31, 1996 1995 1994 - ---------------------------------------------------------------- Total assets at year end $3,867,560 $3,880,299 $3,793,196 Net loans at year end 2,227,812 2,204,495 2,220,122 Deposits at year end 3,228,700 3,270,907 3,249,823 Shareholders' equity at year end 379,279 350,378 321,169 Net interest income 182,479 188,074 183,317 Net income 46,827 43,186 38,113 Earnings per share 3.08 2.80 2.47 ================================================================ INDEPENDENT AUDITOR'S REPORT The Board of Directors and Shareholders of Westamerica Bancorporation: We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. As discussed in Note 1 to the consolidated financial statements, the statements of income, changes in shareholders' equity, and cash flows for the year ended December 31, 1994, and the related footnote disclosures have been restated on a historical basis to reflect the January 31, 1995 acquisition of PV Financial, the June 6, 1995 acquisition of CapitolBank Sacramento, and the July 17, 1995 acquisition of North Bay Bancorp, on a pooling-of-interests basis. We did not audit the financial statements of PV Financial and North Bay Bancorp as of and for the year ended December 31, 1994, which statements reflect net income constituting 9 percent in 1994, of the restated consolidated totals. Those statements included in the 1994 restated consolidated totals were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for PV Financial and North Bay Bancorp, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westamerica Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick L.L.P. - ---------------------------- KPMG Peat Marwick L.L.P. MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY TO OUR SHAREHOLDERS: The Management of Westamerica Bancorporation is responsible for the preparation, integrity, reliability and consistency of the information contained in this annual report. The financial statements, which necessarily include amounts based on judgments and estimates, were prepared in conformity with generally accepted accounting principles and prevailing practices in the banking industry. All other financial information appearing throughout this annual report is presented in a manner consistent with the financial statements. Management has established and maintains a system of internal controls that provides reasonable assurance that the underlying financial records are reliable for preparing the financial statements, and that assets are safeguarded from unauthorized use or loss. This system includes extensive written policies and operating procedures and a comprehensive internal audit function, and is supported by the careful selection and training of staff, an organizational structure providing for division of responsibility, and a Code of Ethics covering standards of personal and business conduct. Management believes that, as of December 31, 1996 the Corporation's internal control environment is adequate to provide reasonable assurance as to the integrity and reliability of the financial statements and related financial information contained in the annual report. The system of internal controls is under the general oversight of the Board of Directors acting through its Audit Committee, which is comprised entirely of outside directors. The Audit Committee monitors the effectiveness of and compliance with internal controls through a continuous program of internal audit and credit examinations. This is accomplished through periodic meetings with Management, internal auditors, loan quality examiners, regulatory examiners and independent auditors to assure that each is carrying out their responsibilities. The Corporation's financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants elected by the shareholders. All financial records and related data, as well as the minutes of shareholders and directors meetings, have been made available to them. Management believes that all representations made to the independent auditors during their audit were valid and appropriate. /s/ David Payne - --------------- David L. Payne Chairman, President and Chief Executive Officer /s/ Dennis Hansen - ----------------- Dennis R. Hansen Senior Vice President and Controller San Francisco, California January 21, 1997 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors PV Financial We have audited the accompanying consolidated balance sheets of PV Financial and Subsidiary as of December 31, 1994 and 1993, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PV Financial and Subsidiary as of December 31, 1994 and 1993, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As described in Note 1, Securities, the Company changed its method of accounting for securities as of December 31, 1993. /s/ Grant Thornton LLP ------------------ Grant Thornton LLP Stockton, California January 13, 1995 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of North Bay Bancorp: We have audited the accompanying balance sheets of North Bay Bancorp (a California corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Bay Bancorp and Subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 10, certain arbitration and litigation matters are pending against the Bank and the outcome is uncertain at this time. Accordingly, no provisions for any liabilities that may result upon the final settlement of these matters have been made in the accompanying financial statements. /s/ Arthur Andersen LLP ------------------- Arthur Andersen LLP San Francisco, California February 17, 1995 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable PART III ITEM 10. Directors and Executive Officers of the Registrant The information required by this Item 10 is incorporated herein by reference from the "Election of Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" sections on Pages 2 through 7 of the Company's Proxy Statement dated March 20, 1997, which has been filed with the Commission pursuant Regulation 14A. ITEM 11. Executive Compensation The information required by this Item 11 is incorporated herein by reference from the "Executive Compensation" and "Other Arrangements" sections on Pages 8 through 10 of the Company's Proxy Statement dated March 20, 1997, which has been filed with the Commission pursuant to Regulation 14A. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item 12 is incorporated herein by reference from the "Security Ownership of Certain Beneficial Owners and Management" section on Pages 5 through 6 of the Company's Proxy Statement dated March 20, 1997, which has been filed with the Commission pursuant to Regulation 14A. ITEM 13. Certain Relationships and Related Transactions The information required by this Item 13 is incorporated herein by reference from the "Certain Information About the Board of Directors and Certain Committees of the Board - Indebtedness of Directors and Management" section on Page 4 of the Company's Proxy Statement dated March 20, 1997, which has been filed with the Commission pursuant to Regulation 14A. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. All Financial Statements See Index to Financial Statements on page 56 (a) 2. Financial statement schedules required. None. (Information included in Financial Statements) (a) 3. Exhibits The following documents are included or incorporated by reference in this annual report on Form 10-K: Exhibit Number 2(a) Agreement and Plan of reorganization, between and among Westamerica Bancorporation, ValliCorp Holdings, Inc., and ValliWide bank, incorporated herein by reference to Exhibit 2.1 of Registrant's Registration Statement on Form S-4, Commission File No. 333-17335, filed with the Securities and Exchange Commission on December 5, 1996. 3(a) Restated Articles of Incorporation (composite copy) *** 3(b) By-laws * 4(a) Amended and Restated Rights Agreement - March 23, 1995, incorporated herein by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-4, Amendment No. 1, Commission File No. 333-17335, filed with the Securities and Exchange Commission on January 6, 1997. 10(a)o 1995 Stock Option Plan *** 10(b)o Employment Agreement with E. Joseph Bowler dated *** January 7, 1987 (Employment) 10(c)o Employment Agreement with Robert W. Entwisle dated *** January 7, 1987 (Employment) 10(d) Senior Note Agreement of Westamerica Bancorporation dated February 1, 1996, of $22,500,000 at 7.11 percent incorporated herein by reference to Exhibit 10-j of Registrant's Annual Report of Form 10-K/A for the fiscal year ended December 31, 1995, filed with the Securities and Exchange Commission on May 1, 1996. 11 Computation of Earnings Per Share on common and common equivalent shares and on common shares assuming full dilution. 21 Subsidiaries of the registrant. 23(a) Consent of KPMG Peat Marwick LLP 23(b) Consent of Grant Thornton LLP 23(c) Consent of Arthur Andersen LLP 27 Financial Data Schedule ---------------------- * Exhibit 3(b), is incorporated by reference from Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. ** Exhibit 10(a) is incorporated herein by reference from Form S-8 dated June 6, 1995 *** Exhibits 3(a), 10(b) and 10(c) are incorporated herein by reference from Exhibits 3(a), 10(n), 10(o), and 10(q) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. o Indicates contract or compensatory plan or arrangement The Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to the Office of the Corporate Secretary, Westamerica Bancorporation, P.O. Box 567, San Rafael, California 94915, and payment to the Company of $.25 per page. (b) 1. Report on Form 8-K On November 13, 1996, the Company filed a report on Form 8-K announcing that it had entered into an Agreement and Plan of Reorganization dated November 11, 1996, with ValliCorp Holdings, Inc., and ValliWide Bank. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTAMERICA BANCORPORATION /s/ Dennis Hansen - ----------------- Dennis R. Hansen Senior Vice President and Controller Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date - --------- ----- ---- /s/ David L. Payne Chairman of the Board and - ------------------------------ Director March 27, 1997 David L. Payne President and Chief Executive Officer /s/ E. Joseph Bowler Senior Vice President and - ------------------------------ Treasurer March 27, 1997 E. Joseph Bowler /s/ Etta Allen Director March 27, 1997 - ------------------------------ Etta Allen /s/ Louis E. Bartolini Director March 27, 1997 - ------------------------------ Louis E. Bartolini /s/ Charles I. Daniels, Jr. Director March 27, 1997 - ------------------------------ Charles I. Daniels, Jr. /s/ Don Emerson Director March 27, 1997 - ------------------------------ Don Emerson /s/ Arthur C. Latno Director March 27, 1997 - ------------------------------ Arthur C. Latno /s/ Patrick D. Lynch Director March 27, 1997 - ------------------------------ Patrick D. Lynch /s/ Catherine Cope MacMillan Director March 27, 1997 - ------------------------------ Catherine Cope MacMillan /s/ Dwight H. Murray, Jr. M.D. Director March 27, 1997 - ------------------------------ Dwight H. Murray, Jr. M.D. /s/ Ronald A. Nelson Director March 27, 1997 - ------------------------------ Ronald A. Nelson /s/ Carl Otto Director March 27, 1997 - ------------------------------ Carl Otto /s/ Edward B. Sylvester Director March 27, 1997 - ------------------------------ Edward B. Sylvester EX-11 2 Exhibit 11 WESTAMERICA BANCORPORATION Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution - ------------------------------------------------------------------------------ (In thousands, except per share data) 1996 1995 1994 - ------------------------------------------------------------------------------ Weighted average number of common shares outstanding 9,613 9,877 9,916 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 177 164 83 - ------------------------------------------------------------------------------ Total 9,790 10,041 9,999 ============================================================================== Net income $37,740 $31,384 $27,662 Fully dilutive earnings per share ($) $3.85 $3.13 $2.77 Primary earnings per share ($) 3.93 3.18 2.79 EX-21 3 Exhibit 21 WESTAMERICA BANCORPORATION Subsidiaries as of December 31, 1996 State of Incorporation ---------------------- Westamerica Bank California Bank of Lake County California Community Banker Services Corporation California Westcore California Westamerica Commercial Credit, Inc. California EX-23 4 Exhibit 23(a) Consent of Independent Auditors The Board of Directors Westamerica Bancorporation We consent to the incorporation by reference in Registration Statement (No. 33-60003) on Form S-8 and in Amendment No. 1 to Registration Statement (No. 333-17335) on Form S-4 of Westamerica Bancorporation and subsidiaries (the Company) of our report dated January 21, 1997, relating to the consolidated balance sheet of Westamerica and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Westamerica Bancorporation. On January 31, 1995 and July 17, 1995, the Company acquired PV Financial and North Bay Bancorp, respectively, on a pooling-of-interests basis. We did not audit the financial statements of PV Financial and North Bay Bancorp as of and for the year ended December 31, 1994. Those statements, included in the 1994 restated consolidated totals, were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for PV Financial and North Bay Bancorp, is based solely on the reports of the other auditors. /s/ KPMG Peat Marwick, L.L.P. - ----------------------------- KPMG Peat Marwick, L.L.P. San Francisco, California March 26, 1997 EX-23 5 Exhibit 23(b) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 33-60003) and Form S-4 (File No. 333-17335), appearing in this Annual Report on Form 10-K of Westamerica Bancorporation for the year ended December 31, 1996, of our report dated January 13, 1995 with respect to the consolidated financial statements of PV Financial and Subsidiary for the years ended December 31, 1994 and 1996. /s/ Grant Thornton LLP - ---------------------- Grant Thornton LLP Stockton, California March 25, 1997 EX-23 6 Exhibit 23(c) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 17, 1995, on our audits of North Bay Bancorp's consolidated financial statements for the years ended December 31, 1994 and 1993, included (or incorporated by reference) in Westamerica Bancorporation's Form S-4 Registration Statement No. 333-17335, and to all references to our Firm included in this registration statement. It should be noted that we have performed no audit procedures subsequent to February 17, 1995, the date of our report. Furthermore, we have not audited any financial statements of North Bay Bancorp as of any date or for any period subsequent to December 31, 1994. /s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP San Francisco, California March 24, 1997 EX-27 7
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 149429 250 0 0 696610 197428 199872 1444237 34919 2548487 2081396 161147 24498 42500 0 0 93558 145388 2548487 124838 49427 0 174265 48561 60917 113348 4575 29 75627 55189 55189 0 0 37740 3.93 3.93 5.31 7619 221 0 0 33508 5928 2764 34919 19336 0 15583
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