-----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, GcRAJqWfXSEIBBrLlQfKcfeo2zVjNvrLQEHbFRVd3qe5U/ATd4tht/lNYPzrtHwR ZX3lPPqE4n6rq2lb2xFgRA== 0000311094-99-000001.txt : 19990402 0000311094-99-000001.hdr.sgml : 19990402 ACCESSION NUMBER: 0000311094-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: SEC FILE NUMBER: 001-09383 FILM NUMBER: 99579568 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, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from .....to....... Commission File Number 1-9383 WESTAMERICA BANCORPORATION (Exact name of the registrant as specified in its charter) CALIFORNIA (State of incorporation) 94-2156203 (I.R.S. Employer Identification Number) 1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 257-8000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of Class: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ x ] NO [ ] Indicate by check mark if disclosure of delinquent files pursuant to item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of the stock, as of March 19, 1999: $1,221,622,000 Number of shares outstanding of each of the registrant's classes of common stock, as of March 25, 1999 Title of Class Common Stock, no par value Shares Outstanding 39,369,936 DOCUMENTS INCORPORATED BY REFERENCE Document * Proxy Statement dated March 17, 1999 for Annual Meeting of Shareholders to be held on April 21, 1999 Incorporated into: Part III * Only selected portions of the documents specified are incorporated by reference into this report, as more particularly described herein. Except to the extent expressly incorporated herein by reference, such documents shall not be deemed to be filed as part of this Annual Report on Form 10-K. TABLE OF CONTENTS - ----------------- PART I Item 1 Business Item 2 Description of Properties Item 3 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters Item 6 Selected Financial Data Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8 Financial Statements and Supplementary Data Item 9 Changes in and Disagreements on Accounting and Financial Disclosure PART III Item 10 Directors and Executive Officers of the Registrant Item 11 Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management Item 13 Certain Relationships and Related Transactions PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K PART I ITEM I. Business - ---------------- Certain statements in this Annual Report on Form 10-K include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject of the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry significantly increasing; changes in the interest rate environment reducing margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment, changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. See also "Certain Additional Business Risks" herein and other risk factors discussed elsewhere in this Report. WESTAMERICA BANCORPORATION (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956 ("BHC"), as amended. The Company was incorporated under the laws of the State of California as "Independent Bankshares Corporation" on February 11, 1972. Its principal executive offices are located at 1108 Fifth Avenue, San Rafael, California 94901, and its telephone number is (415) 257-8000. The Company provides a full range of banking services to individual and corporate customers in Northern and Central California through its subsidiary banks, Westamerica Bank and Bank of Lake County (the "Banks"). The Banks are subject to competition from other financial institutions and regulations from certain agencies and undergo periodic examinations by those regulatory authorities. In addition, the Company also owns 100 percent of the capital stock of Westamerica Commercial Credit, Inc., a company engaged in financing accounts receivable and inventory lines of credit and term business loans and 100 percent of Community Banker Services Corporation, a company engaged in providing the Company and its subsidiaries data processing services and other support functions. The Company was originally formed pursuant to a plan of reorganization among three previously unaffiliated banks: Bank of Marin, Bank of Sonoma County and First National Bank of Mendocino County (formerly First National Bank of Cloverdale). The reorganization was consummated on December 31, 1972 and, on January 1, 1973, the Company began operations as a bank holding company. Subsequently, the Company acquired Bank of Lake County (a California chartered bank) in 1974, Gold Country Bank in 1979 and Vaca Valley Bank in 1981, in each case by the exchange of the Company's Common Stock for the outstanding shares of the acquired banks. In mid-1983, the Company consolidated the six subsidiary banks into a single subsidiary bank. The consolidation was accomplished by the merger of the five state-chartered banks (Bank of Marin, Bank of Sonoma County, Bank of Lake County, Gold Country Bank and Vaca Valley Bank) into First National Bank of Mendocino County which subsequently changed its name to Westamerica Bank ("WAB"), a national banking association organized and existing under the laws of the United States. In August, 1988, the Company formed a new bank, but named it Bank of Lake County, National Association, and effected the sale of WAB's assets and liabilities of its three Lake County branches to the newly formed bank. In August, 1988, the sale of Bank of Lake County, National Association to Napa Valley Bancorp was consummated. On February 28, 1992, the Company acquired John Muir National Bank through a merger of such bank with and into WAB in exchange for the issuance of the Company's Common Stock for all the outstanding shares of John Muir National Bank. The business transaction was accounted for on a pooling-of-interests basis. On April 15, 1993, the Company acquired Napa Valley Bancorp, a bank holding company, whose subsidiaries included Napa Valley Bank, 88 percent interest in Bank of Lake County, 50 percent interest in Sonoma Valley Bank, Suisun Valley Bank and Napa Valley Bancorp Services Corporation, which was established to provide data processing and other services to Napa Valley Bancorp's subsidiaries. This business transaction was accounted for on a pooling-of-interests basis. Shortly after, Suisun Valley Bank was merged into WAB, the name of Napa Valley Bancorp Services Corporation was changed to Community Banker Services Corporation and the Company sold its 50 percent interest in Sonoma Valley Bank. The Company retained its 88 percent interest in Bank of Lake County. In June 1993, the Company accepted from WAB a dividend in the form of all outstanding shares of capital stock of WAB's subsidiary, Weststar Mortgage Corporation, a California Corporation established to conduct mortgage banking activities. Immediately after the receipt of this dividend, the Company contributed all of the capital stock of Weststar Mortgage Corporation to its subsidiary, Community Banker Services Corporation. WAB and Bank of Lake County became state-chartered banks in June 1993 and December 1993, respectively. In December 1994, the Company completed the purchase of the remaining 12 percent investment in Bank of Lake County from outside investors, becoming the sole owner of Bank of Lake County. On January 31, 1995, the Company acquired PV Financial, parent company of PV National Bank, through a merger of such bank with and into WAB in exchange for the issuance of shares of the Company's common stock for all the outstanding shares of PV Financial. The business combination was accounted for on a pooling-of-interests basis. On June 6, 1995, the merger of CapitolBank Sacramento with and into WAB became effective. Under the terms of the merger, the Company issued shares of its common stock in exchange for all of CapitolBank Sacramento's common stock. The business combination was accounted for on a pooling-of-interests basis. On July 17, 1995, the Company acquired North Bay Bancorp, parent company of Novato National Bank. Under the terms of the merger agreement, the Company issued shares of its common stock in exchange for all of the outstanding shares of common stock of North Bay Bancorp. The subsidiary bank was merged with and into WAB. The business combination was accounted for on a pooling-of-interests basis. On April 12, 1996 Napa Valley Bank was merged into WAB. In November 1996, the Company finalized the formation of a new subsidiary, Westamerica Commercial Credit, Inc. which engages in financing accounts receivable and inventory lines of credit and term business loans. On April 12, 1997, the Company acquired ValliCorp Holdings, Inc., parent company of ValliWide Bank, the largest independent bank holding company headquartered in Central California. The acquisition became effective through the issuance of shares of the Company's common stock in exchange for all of the outstanding shares of ValliCorp Holdings, Inc. The business combination was accounted for on a pooling-of-interests basis. ValliWide Bank remained as a separate subsidiary bank of the Company. On June 20, 1997, ValliWide Bank ceased to exist as a subsidiary of the Company, when it was merged with and into WAB. On January 22, 1998, the Board of Directors of the Company authorized a three-to-one split of the Company's common stock in which each share of the Company's common stock is converted into three shares, with record and effective dates of February 10 and February 25, 1998, respectively. At December 31, 1998, the Company had consolidated assets of approximately $3.84 billion, deposits of approximately $3.19 billion and shareholders' equity of approximately $368.6 million. General - ------- Westamerica Bancorporation is a community oriented bank holding company headquartered in San Rafael, California. The principal communities served are located in Northern and Central California, from Mendocino, Lake and Nevada Counties in the North, to Kern and San Luis Obispo counties in the South. The Company's strategic focus is on the banking needs of small businesses. The Company chose this particular focus in the late 1980's as it recognized that concentrating on a few niche markets was the key to the Company's profitable survival in the consolidating banking business. Certain Additional Business Risks - --------------------------------- The Company's business, financial condition and operating results can be impacted by a number of factors including, but not limited to, those set forth below, any one of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results. Shares of Company Common Stock eligible for future sale could have a dilutive effect on the market for Company Common Stock and could adversely affect the market price. The Articles of Incorporation of the Company authorize the issuance of 150 million shares of common stock (and two classes of 1 million shares each, denominated "Class B Common Stock" and "Preferred Stock", respectively) of which approximately 39.8 million were outstanding at December 31, 1998. Pursuant to its stock option plans, at December 31, 1998, the Company had exercisable options outstanding of 1.3 million. As of December 31, 1998, 815 thousand shares of Company Common Stock remained available for grants under the Company's stock option plans (and stock purchase plan). Sales of substantial amounts of Company Common Stock in the public market could adversely affect the market price of Common Stock. A portion of the loan portfolio of the Company is dependent on real estate. At December 31, 1998, real estate served as the principal source of collateral with respect to approximately 55 percent of the Company's loan portfolio. A worsening of current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available-for-sale securities portfolio, as well as the Company's financial condition and results of operations in general and the market value of the Company's common stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition. The Company is subject to certain operations risks, including, but not limited to, data processing system failures and errors and customers or employee fraud. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company's internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company's business, financial condition or results of operations. See also the section "Year 2000 Compliance" in the Management's Discussion and Analysis contained in this report. Employees - --------- At December 31, 1998, the Company and its subsidiaries employed 1,126 full-time equivalent staff. Employee relations are believed to be good. The Effect of Government Policy on Banking - ------------------------------------------ The earnings and growth of the Company are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. Such policies influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Company cannot be predicted. Additionally, state and federal tax policies can impact banking organizations. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company. Regulation and Supervision of Bank Holding Companies - ---------------------------------------------------- The following is not intended to be an exhaustive description of the statutes and regulations applicable to the Company's or the Banks' business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions. Moreover, major new legislation and other regulatory changes affecting the Company, the Banks, banking, and the financial services industry in general have occurred in the last several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted. The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended ("BHCA"). The Company reports to, registers with, and may be examined by, the Board of Governors of the Federal Reserve System ("FRB"). The FRB also has the authority to examine the Company's subsidiaries. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such the Company and the Banks are subject to examination by, and may be required to file reports with, the California Commissioner of Financial Institutions (the "Commissioner"). The FRB has significant supervisory and regulatory authority over the Company and its affiliates. The FRB requires the Company to maintain certain levels of capital. See "Capital Standards." The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. See "Prompt Corrective Action and Other Enforcement Mechanisms." Under the BHCA, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over a bank, or acquires directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company. Thus, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank or bank holding company; any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the prior approval of the FRB. The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks or providing services to affiliates of the holding company. The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The FRB's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. See the section entitled "Restrictions on Dividends and Other Distributions" for additional restrictions on the ability of the Company and its subsidiary banks (the "Banks") to pay dividends. Transactions between the Company and the Banks are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). The Company may only borrow from the Banks if the loan is secured by marketable obligations with a value of a designated amount in excess of the loan. Further, the Company may not sell a low-quality asset to a depository institution subsidiary. Comprehensive amendments to federal regulation governing bank holding companies and change in bank control ("Regulation Y") became effective in 1997, and are intended to improve the competitiveness of bank holding companies by, among other things: (i) expanding the list of permissible nonbanking activities in which well-run bank holding companies may engage without prior FRB approval, (ii) streamlining the procedures for well-run bank holding companies to obtain approval to engage in other nonbanking activities and (iii) eliminating most of the anti-tying restrictions imposed upon bank holding companies and their nonbank subsidiaries. Amended Regulation Y also provides for a streamlining and expedited review process for bank acquisition proposals submitted by well-run bank holding companies and eliminates certain duplicative reporting requirements when there has been a further change in bank control or in bank directors or officers after an earlier approved change. These changes to Regulation Y are subject to numerous qualifications, limitations and restrictions. In order for a bank holding company to qualify as "well-run," both it and the insured depository institutions that it controls must meet the "well capitalized" and "well managed" criteria set forth in Regulation Y. Bank Supervision and Regulation - ------------------------------- The Banks are California chartered banks insured by the Federal Deposit Insurance Corporation (the "FDIC"), and as such are subject to regulation, supervision and regular examination by the California Department of Financial Institutions ("DFI") and the FDIC. As members of the Federal Reserve System, the Banks' primary federal regulator is the FRB. The regulations of these agencies affect most aspects of the Banks' business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of the Banks' activities and various other requirements. In addition to federal banking law, the Banks are also subject to applicable provisions of California law. Under California law, a state chartered bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital and reserve requirements, deposits and borrowings, stockholder rights and duties, and investments and lending activities. California law permits a state chartered bank to invest in the stock and securities of other corporations, subject to a state-chartered bank receiving either general authorization or, depending on the amount of the proposed investment, specific authorization from the Commissioner. The FDIC Improvement Act ("FDICIA"), however, imposes limitations on the activities and equity investments of state chartered, federally insured banks. FDICIA also prohibits a state bank from engaging as a principal in any activity that is not permissible for a national bank, unless the bank is adequately capitalized and the FDIC approves the activity after determining that such activity does not pose a significant risk to the deposit insurance fund. The FDIC rules on activities generally permit subsidiaries of banks, without prior specific FDIC authorization, to engage in those that have been approved by the FRB for bank holding companies because such activities are so closely related to banking to be a proper incident thereto. Other activities generally require specific FDIC prior approval, and the FDIC may impose additional restrictions on such activities on a case-by-case basis in approving applications to engage in otherwise impermissible activities. Capital Standards - ----------------- The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse agreements, which are recorded as off balance sheet items. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items. The regulators measure risk-adjusted assets and off balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital generally consists of common stock, retained earnings, and certain types of qualifying preferred stock, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses, certain types of preferred stock not qualifying as Tier 1 capital, term subordinated debt and certain other instruments with some characteristics of equity. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets and off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off balance sheet items of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to adjusted average total assets, referred to as the leverage capital ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum. The effective minimum leverage ratio, for all practical purposes, must be at least 4% or 5%. As of December 31, 1998, the Company's and the Banks' respective ratios exceeded applicable regulatory requirements. See Note 8 to the consolidated financial statements for capital ratios of the Company and the Banks, compared to the standards for well-capitalized depository institutions and for minimum capital requirements. Prompt Corrective Action and Other Enforcement Mechanisms - --------------------------------------------------------- FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency. Undercapitalized institutions must submit an acceptable capital restoration plan with a guarantee of performance issued by the holding company. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their business or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company. Safety and Soundness Standards - ------------------------------ FDICIA also implemented certain specific restrictions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. Restrictions on Dividends and Other Distributions - ------------------------------------------------- The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent each payment does not exceed the lesser of retained earnings of the bank or the bank's net income for its last three fiscal years (less any distributions to shareholders during that period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner in an amount not exceeding the greatest of the bank's retained earnings, the bank's net income for its last fiscal year, or the bank's net income for its current fiscal year. Regulators also have authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. Premiums for Deposit Insurance and Assessments for - -------------------------------------------------- Examinations - ------------ All of the bank subsidiaries of the Company have their deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. No assurance can be given at this time as to what the future level of premiums will be. Community Reinvestment Act and Fair Lending Developments - -------------------------------------------------------- The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. Pending Legislation and Regulations - ----------------------------------- There are pending legislative proposals to reform the Glass-Steagall Act to allow affiliations between banks and other firms engaged in "financial activities", including insurance companies and securities firms. Certain other pending legislative proposals include bills to let banks pay interest on business checking accounts, to require "know your customer" policies, to cap consumer liability for stolen debit cards, and to give judges the authority to force high-income borrowers to repay their debts rather than cancel them through bankruptcy. While the effect of such proposed legislation and regulatory reform on the business of financial institutions cannot be accurately predicted at this time, it seems likely that a significant amount of consolidating in the banking industry will continue. Competition - ----------- In the past, an independent bank's principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and even retail establishments have offered new investment vehicles which also compete with banks for deposit business. The direction of federal legislation in recent years seems to favor competition between different types of financial institutions and to foster new entrants into the financial services market, and it is anticipated that this trend will continue. The enactment of the Interstate Banking and Branching Act in 1994 and the California Interstate Banking and Branching Act of 1995 have increased competition within California. Regulatory reform, as well as other changes in federal and California law will also affect competition. While the impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive. According to information obtained by the Company through an independent market research firm, WAB was the third largest financial institution in terms of total deposits in Marin County at December 31, 1997, at which date it had approximately 11 percent of total deposits held in federally insured depository institutions in that county. According to the same source of information and in terms of total deposits, as of December 31, 1997 WAB ranked fourth in WAB's Sonoma-Mendocino counties service area, with approximately a 9 percent share of the market, third in the Fresno service area with approximately 10 percent of total deposits, and was fifth in the Solano county service area, with a market share of approximately 9 percent. Completion of the merger with ValliWide Bank in 1997 resulted in the formation of the "South Valley Region" encompassing portions of Kern, San Luis Obispo, Tulare and Kings counties. In terms of total deposits, WAB ranked, as of December 31, 1997, fifth among all financial institutions servicing the area with approximately 8 percent of the market. In addition, WAB's market share in the Sacramento-Placer-Nevada counties service area was approximately 6 percent, ranking eight among its competitors. In the Yosemite service area, encompassing offices throughout Stanislaus, Sonora, East Sonora and Merced counties, WAB ranked eighth among its competitors with 5 percent of total deposits. The share of the market for deposits and loans held by WAB in San Francisco and Alameda Counties is not significant. According to the same source of information, WAB ranked second in terms of total deposits in the Napa Valley service area as of December 31, 1997, with approximately 15 percent market share. The same source of data reports that BLC ranked third, in terms of total deposits, in market share in the Lake County service area with 16 percent of the total. The Banks provide checking and savings deposit services as well as commercial, real estate and personal loans. In addition, most of the branches offer safe deposit facilities, automated teller units, collection services and other investment services. The Banks believe that personal, prompt, professional service and community identity are important in the banking business. To this end, each one of the Banks has sought to retain its community identity and has emphasized personalized services through "big bank resources with small bank resourcefulness". Competitive conditions continue to intensify as various legislative enactments have continued to dissolve historical barriers to the financial markets. Competition is expected to further increase in the state of California as a result of legislation enacted in 1994 and 1995. Legislative changes, as well as technological and economic factors, can be expected to have an ongoing impact on competitive conditions within the financial services industry. As an active participant in the financial markets, the Company believes that it continually adapts to these changing competitive conditions. ITEM 2. Properties - ------------------ Branch Offices and Facilities - ----------------------------- The Banks are engaged in the banking business through 89 offices in 22 counties in Northern and Central California including eleven offices in Marin County, eleven in Fresno County, nine in Sonoma County, seven in Napa County, six in Solano County, six in Kern County, five in Stanislaus County, five in Contra Costa County, four in Lake County, four in San Luis Obispo County, three in Mendocino County, three in Sacramento County, two in Nevada County, two in Placer County, two in Tulare County, two in Tuolumne County, one in San Francisco County, one in Kern County, one in Madera County, one in Merced County, one in Yolo County, one in Kings County and one in Alameda County. All offices are constructed and equipped to meet prescribed security requirements. The Company owns 37 branch office locations and one administrative building and leases 52 banking offices. Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance. ITEM 3. Legal Proceedings - -------------------------- Neither the Company or its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, except ordinary routine legal proceedings arising in the ordinary course of the Company's business, none of which are expected to have a material adverse impact upon the Company's business, financial position or results of operations. ITEM 4. Submission of Matters to a Vote of Security - --------------------------------------------------- Holders - ------- There were no matters submitted to a vote of the shareholders during the fourth quarter of 1998. PART II ITEM 5. Market for Registrant's Common Equity and Related - --------------------------------------------------------- Stockholder Matters - ------------------- The Company's common stock is traded on the NASDAQ National Market Exchange ("NASDAQ") under the symbol "WABC". The following table shows the high and the low prices for the common stock, for each quarter, as reported by NASDAQ: ============================================================ 1998: High Low - ------------------------------------------------------------ First quarter $35.25 $30.67 Second quarter 36.38 28.50 Third quarter 33.63 23.63 Fourth quarter 37.25 23.88 1997: First quarter $24.17 $18.83 Second quarter 25.83 19.27 Third quarter 29.33 24.58 Fourth quarter 35.00 28.54 ============================================================ As of December 31, 1998, there were 8,754 shareholders of record of the Company's common stock. The Company has paid cash dividends on its common stock in every quarter since its formation in 1972, and it is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and its subsidiaries. As of December 31, 1998, $119.9 million was available for payment of dividends by the Company to its shareholders, under applicable laws and regulations. See Note 17 to the consolidated financial statements included in this report for additional information regarding the amount of cash dividends declared and paid on common stock for the two most recent fiscal years. As discussed in Note 7 to the consolidated financial statements, in December 1986, the Company declared a dividend distribution of one common share purchase right (the "Right") for each outstanding share of common stock. The terms of the Rights were amended and restated on September 28, 1989. On March 23, 1995, the Board of Directors of the Company approved a further amendment and restatement of Rights. The Amended and Restated Rights Agreement entitles the holders of each share of the Company Common Stock to the right (each, a "Westamerica Right"), when exercisable, to purchase from the Company one share of its Common Stock at a price of $21.667 per share, subject to adjustment in certain circumstances. A Westamerica Right is attached to each share of the Company Common Stock. The Westamerica Rights only become exercisable and trade separately from the Company Common Stock following the earlier of (I) a public announcement that a person or a group of affiliated or associated persons has become the beneficial owner of the Company securities having 15 percent or more of the Company's voting power (an "Acquiring Person") or (ii) 10 days following the commencement of, or a public announcement of an intention to make, a tender or exchange offer which would result in any person having beneficial ownership of securities having 15 percent or more of such voting power. Upon becoming exercisable, each holder of a Westamerica Right (other than an Acquiring Person whose rights will become null and void) will, for at least a 60-day period thereafter, have the right (subject to the following sentence), upon payment of the exercise price of $21.667, to receive upon exercise that number of shares of the Company Common Stock having a market value of twice the exercise price of the Westamerica Right, to the extent available. Subject to applicable law, the Board of Directors, at its option, may at any time after a Person becomes an Acquiring Person (but not after the acquisition by such Person of 50 percent or more of the outstanding Company Common Stock), exchange all or part of the then outstanding and exercisable Westamerica Rights (except for Westamerica Rights which have become void) for shares of the Company Common Stock equivalent to one share of the Company Common Stock per Westamerica Right or, alternatively, for substitute consideration consisting of cash, securities of the Company or other assets (or any combination thereof).
ITEM 6. Selected Financial Data - ------------------------------- WESTAMERICA BANCORPORATION FINANCIAL SUMMARY - ----------------- - --------------------------------------------------------------------------------------------- (In thousands, except per share data) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------- Year ended December 31 Interest income $266,820 $270,670 $274,182 $283,704 $256,638 Interest expense 86,665 88,054 91,700 95,627 73,321 - --------------------------------------------------------------------------------------------- Net interest income 180,155 182,616 182,482 188,077 183,317 Provision for loan losses 5,180 7,645 12,306 15,229 11,378 - --------------------------------------------------------------------------------------------- Non-interest income 37,805 37,013 36,307 34,227 36,929 Non-interest expense 101,408 137,878 136,051 141,960 150,128 - --------------------------------------------------------------------------------------------- Income before income taxes 111,372 74,106 70,432 65,115 58,740 Provision for income taxes 37,976 25,990 23,605 21,930 20,627 - --------------------------------------------------------------------------------------------- Net income $73,396 $48,116 $46,827 $43,185 $38,113 ============================================================================================= Earnings per share: Basic $1.76 $1.12 $1.10 $0.99 $0.87 Diluted 1.73 1.10 1.08 0.98 0.87 Per share: Dividends paid $0.52 $0.36 $0.30 $0.25 $0.21 Book value at December 31 9.25 9.51 8.84 8.12 7.41 Average common shares outstanding 41,797 43,040 42,759 43,747 43,732 Average diluted common shares outstanding 42,524 43,827 43,358 44,274 44,061 Shares outstanding at December 31 39,828 42,799 42,889 43,228 43,351 At December 31: Loans, net $2,246,593 $2,211,307 $2,236,319 $2,204,495 $2,220,122 Total assets 3,844,298 3,848,444 3,866,774 3,880,979 3,793,196 Total deposits 3,189,005 3,078,501 3,228,700 3,270,907 3,249,823 Short-term borrowed funds 203,671 264,848 167,447 175,622 135,426 Debt financing and notes payable 47,500 52,500 58,865 40,932 51,647 Shareholders' equity 368,596 407,152 379,279 351,058 321,169 Financial Ratios: For the year: Return on assets 1.94% 1.28% 1.24% 1.14% 1.04% Return on equity 19.48% 12.71% 13.22% 12.73% 12.24% Net interest margin * 5.52% 5.63% 5.54% 5.68% 5.67% Net loan losses to average loans 0.20% 0.35% 0.51% 0.59% 0.43% Non-interest expense/revenues * 44.25% 60.15% 60.08% 63.86% 68.16% At December 31: Equity to assets 9.59% 10.58% 9.81% 9.05% 8.47% Total capital to risk-adjusted assets 13.79% 14.76% 14.95% 14.39% 13.58% Loan loss reserve to loans 2.23% 2.24% 2.23% 2.15% 2.05%
* Fully taxable equivalent Item 7. Management's Discussion and Analysis of - ---------------------------------------------- Financial Condition and Results of Operations - --------------------------------------------- Certain statements in this Annual Report on Form 10-K include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risk and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry increases significantly; changes in the interest rate environment reduced margins; general economic conditions, either nationally or regionally, are less favorable than expected resulting in, among other things, a deterioration in the credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate-sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching and liquidity risks; and changes in the securities markets. For further information on risks and uncertainties see also "Certain Additional Business Risks" and other risk factors discussed elsewhere in this report. The following discussion addresses information pertaining to the financial condition and results of operations of Westamerica Bancorporation and Subsidiaries (the "Company") that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements, as well as with the other information presented throughout the report. In addition to historical information, this discussion and other sections contained in this annual report include certain forward-looking statements regarding events and trends which may affect the Company's future results. Such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially. Such factors include, but are not limited to, those described in this discussion and analysis. The Company achieved earnings of $73.4 million in 1998, representing a 53 percent increase from the $48.1 million earned in 1997 and 57 percent higher than 1996 earnings of $46.8 million.
COMPONENTS OF NET INCOME - ------------------------ ===================================================================================== (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------------- Net interest income * $191.4 $192.2 $190.1 Provision for loan losses (5.2) (7.6) (12.3) Non-interest income 37.8 37.0 36.3 Non-interest expense (101.4) (137.9) (136.1) Taxes * (49.2) (35.6) (31.2) - ------------------------------------------------------------------------------------- Net income $73.4 $48.1 $46.8 ===================================================================================== Net income as a percentage of average total assets 1.94% 1.28% 1.24% ===================================================================================== Average total assets $3,778.5 $3,749.7 $3,781.2 ===================================================================================== * Fully taxable equivalent (FTE)
Basic earnings per share in 1998 were $1.76, compared to $1.12 and $1.10 in 1997 and 1996, respectively. During 1998, the Company benefited from lower non-interest expense reflecting continued expense controls, a lower loan loss provision resulting from improved credit quality and lower net credit losses, and higher non-interest income. Prior year non-interest expense included approximately $18.8 million ($12.8 million after tax) in charges associated with the ValliCorp Holdings, Inc. merger (the "Merger") effected on April 12, 1997. Lower net interest income was primarily the result of lower earning-asset yields in part offset by a decrease in funding costs. Earnings in 1997 were favorably affected compared to 1996 by increased net interest income, primarily due to a higher net interest margin in part offset by a reduction in the average balance of earning assets. Also contributing to increased earnings, the Company lowered its loan loss provision in recognition of the improvement in the credit quality of the loan portfolio, and benefited from increased non-interest income. The Company's return on average total assets was 1.94 percent in 1998, compared to 1.28 percent and 1.24 percent in 1997 and 1996, respectively. Return on average equity in 1998 was 19.48 percent, compared to 12.71 percent and 13.22 percent, respectively, in the two previous years. NET INTEREST INCOME - ------------------- The Company's primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) in 1998 decreased $800 thousand from 1997 to $191.4 million. Comparing 1997 to 1996, net interest income (FTE) increased $2.1 million.
Components of Net Interest Income ===================================================================================== (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------------- Interest income $266.8 $270.7 $274.2 Interest expense (86.7) (88.1) (91.7) FTE adjustment 11.3 9.6 7.6 - ------------------------------------------------------------------------------------- Net interest income (FTE) $191.4 $192.2 $190.1 ===================================================================================== Net interest margin (FTE) 5.52% 5.63% 5.54% =====================================================================================
Interest income (FTE) decreased $2.2 million from 1997, primarily due to a 34 basis point decrease in loan yields, reflecting the general interest rate environment, partially offset by an increase of 9 basis points in investment yields, resulting in a combined decrease of 18 basis points in earning-asset yields. The effect of this decline was in part offset by a $50.9 million increase in average balances, with loans and investment securities growing $14.1 million and $36.8 million, respectively, from 1997 levels. The increase in loans was concentrated in targeted commercial and residential real estate credits, and the increase in investment balances was primarily due to increases in tax-free and corporate securities. The decrease of interest income in 1998 was partially offset by a $1.4 million reduction in interest expense. This decrease was primarily due to a reduction of 13 basis points in rates paid on deposits combined with an $11.0 million increase in the average balance of non-interest bearing demand deposits, in part offset by a $19.8 million increase in the average balance of interest-bearing liabilities. Interest income (FTE) decreased $3.5 million from 1996 to 1997, primarily due to a $20.0 million decrease in average earning-asset balances. Most types of consumer loans decreased, partially offset by increases in targeted commercial credits. The average investment portfolio balances also decreased from 1996, as reductions in short-term funds sold, participation certificates and U.S. Treasury securities were in part offset by increases in tax-free and U.S. Agency securities. The revenue decrease in 1997 was more than offset by a $3.6 million decrease in interest expense, the result of a decrease of 2 basis points in rates paid on interest-bearing liabilities combined with a $92.5 million decrease in average balances, and a $31.0 million increase in the average balance of interest-free demand deposits. Summary of Average Balances, Yields/Rates and Interest Differential - ------------------------------------------------------------------- The following tables present, for the periods indicated, information regarding the consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include non-performing loans. Interest income includes proceeds from loans on non-accrual status only to the extent cash payments have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate.
Distribution of average assets, liabilities and shareholders' equity. Yields/rates and interest margin. ===================================================================================== Full Year 1998 --------------------------------------- Interest Rates Average Income/ Earned/ (Dollars in thousands) Balance Expense Paid - ------------------------------------------------------------------------------------- Assets Money market assets and funds sold $1,003 $42 4.23 % Trading account securities -- -- -- Investment securities Taxable 854,315 53,699 6.29 Tax-exempt 348,040 24,889 7.15 Loans: Commercial 1,427,788 129,258 9.05 Real estate construction 60,123 7,089 11.79 Real estate residential 386,066 27,729 7.18 Consumer 388,106 35,340 9.11 ---------- --------- Earning assets 3,465,440 278,046 8.02 Other assets 313,012 ----------- Total assets $3,778,452 =========== Liabilities and shareholders' equity Deposits Non-interest bearing demand $791,952 Savings and interest-bearing transaction 1,461,764 30,264 2.07 % Time less than $100,000 438,052 21,840 4.99 Time $100,000 or more 381,754 19,247 5.04 ---------- --------- Total interest-bearing deposits 2,281,570 71,351 3.13 Funds purchased 243,736 11,670 4.79 Debt financing and notes payable 52,083 3,644 7.00 ---------- --------- Total interest-bearing liabilities 2,577,389 86,665 3.36 Other liabilities 32,259 Shareholders' equity 376,852 ----------- Total liabilities and shareholders' equity $3,778,452 =========== Net interest spread (1) 4.66 % Net interest income and interest margin (2) $191,381 5.52 % ========= ======
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. Distribution of average assets, liabilities and shareholders' equity. Yields/rates and interest margin.
===================================================================================== Full Year 1997 --------------------------------------- Interest Rates Average Income/ Earned/ (Dollars in thousands) Balance Expense Paid - ------------------------------------------------------------------------------------- Assets Money market assets and funds sold $30,125 $1,635 5.43 % Trading account securities -- -- -- Investment securities Taxable 849,564 51,819 6.10 Tax-exempt 286,851 22,069 7.69 Loans: Commercial 1,394,425 129,473 9.29 Real estate construction 85,409 9,386 10.99 Real estate residential 350,825 27,138 7.74 Consumer 417,389 38,756 9.29 ---------- --------- Earning assets 3,414,588 280,276 8.21 Other assets 335,063 ----------- Total assets $3,749,651 =========== Liabilities and shareholders' equity Deposits Non-interest bearing demand $781,001 Savings and interest-bearing transaction 1,533,939 34,742 2.26 % Time less than $100,000 479,692 24,425 5.09 Time $100,000 or more 323,840 17,097 5.28 ---------- --------- Total interest-bearing deposits 2,337,471 76,264 3.26 Funds purchased 162,592 7,803 4.80 Debt financing and notes payable 57,483 3,987 6.94 ---------- --------- Total interest-bearing liabilities 2,557,546 88,054 3.44 Other liabilities 32,499 Shareholders' equity 378,605 ----------- Total liabilities and shareholders' equity $3,749,651 =========== Net interest spread (1) 4.77 % Net interest income and interest margin (2) $192,222 5.63 % ========= ======
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. Distribution of average assets, liabilities and shareholders' equity. Yields/rates and interest margin.
===================================================================================== Full Year 1996 --------------------------------------- Interest Rates Average Income/ Earned/ (Dollars in thousands) Balance Expense Paid - ------------------------------------------------------------------------------------- Assets Money market assets and funds sold $94,612 $5,218 5.52 % Trading account securities 17 1 4.61 Investment securities Taxable 800,097 47,649 5.96 Tax-exempt 290,326 20,274 6.98 Loans: Commercial 1,344,626 126,582 9.41 Real estate construction 118,893 12,515 10.53 Real estate residential 320,440 26,486 8.27 Consumer 465,561 43,116 9.26 ---------- --------- Earning assets 3,434,572 281,841 8.21 Other assets 346,613 ----------- Total assets $3,781,185 =========== Liabilities and shareholders' equity Deposits Non-interest bearing demand $750,204 Savings and interest-bearing transaction 1,559,532 34,936 2.24 % Time less than $100,000 520,968 26,143 5.02 Time $100,000 or more 313,050 16,506 5.27 ---------- --------- Total interest-bearing deposits 2,393,549 77,585 3.24 Funds purchased 196,453 9,974 5.08 Debt financing and notes payable 60,045 4,141 6.90 ---------- --------- Total interest-bearing liabilities 2,650,047 91,700 3.46 Other liabilities 26,847 Shareholders' equity 354,086 ----------- Total liabilities and shareholders' equity $3,781,184 =========== Net interest spread (1) 4.75 % Net interest income and interest margin (2) $190,141 5.54 % ========= ======
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. Rate and Volume Variances - ------------------------- The following table sets forth a summary of the changes in interest income and interest expense from changes in average assets and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components. ======================================================================== For the Years Ended December 31, 1998 Compared with 1997 - ------------------------------------------------------------------------ (In thousands) Volume Rate Total - ------------------------------------------------------------------------ Increase (decrease) in interest and fee income: MMkt. assets and funds sold ($1,298) ($295) ($1,593) Trading account securities -- -- -- Investment securities (1) Taxable 291 1,589 1,880 Tax-exempt 4,212 (1,392) 2,820 Loans: Commercial (1) 4,850 (5,065) (215) Real estate construction (3,048) 751 (2,297) Real estate residential 2,050 (1,459) 591 Consumer (2,678) (738) (3,416) - ------------------------------------------------------------------------ Total loans (1) 1,174 (6,511) (5,337) - ------------------------------------------------------------------------ Total increase (decrease) in interest and fee income (1) 4,379 (6,609) (2,230) - ------------------------------------------------------------------------ Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (1,585) (2,893) (4,478) Time less than $ 100,000 (2,085) (500) (2,585) Time $ 100,000 or more 2,873 (723) 2,150 - ------------------------------------------------------------------------ Total interest-bearing (797) (4,116) (4,913) Funds purchased 3,885 (18) 3,867 Notes and mortgages payable (378) 35 (343) - ------------------------------------------------------------------------ Total increase (decrease) in interest expense 2,710 (4,099) (1,389) - ------------------------------------------------------------------------ Increase (decrease) in net interest income (1) $1,669 ($2,510) ($841) ======================================================================== (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. Rate and Volume Variances ======================================================================== For the Years Ended December 31, 1997 Compared with 1996 - ------------------------------------------------------------------------ (In thousands) Volume Rate Total - ------------------------------------------------------------------------ Increase (decrease) in interest and fee income: MMkt. assets and funds sold ($3,501) ($82) ($3,583) Trading account securities (1) -- (1) Investment securities (1) Taxable 2,997 1,173 4,170 Tax-exempt (239) 2,034 1,795 Loans: Commercial (1) 4,586 (1,695) 2,891 Real estate construction (3,709) 580 (3,129) Real estate residential 2,014 (1,362) 652 Consumer (4,473) 113 (4,360) - ------------------------------------------------------------------------ Total loans (1) (1,582) (2,364) (3,946) - ------------------------------------------------------------------------ Total (decrease) increase in interest and fee income (1) (2,326) 761 (1,565) - ------------------------------------------------------------------------ Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (593) 399 (194) Time less than $ 100,000 (2,109) 390 (1,719) Time $ 100,000 or more 570 21 591 - ------------------------------------------------------------------------ Total interest-bearing (2,132) 811 (1,321) Funds purchased (1,648) (524) (2,172) Notes and mortgages payable (178) 25 (153) - ------------------------------------------------------------------------ Total (decrease) increase in interest expense (3,958) 312 (3,646) - ------------------------------------------------------------------------ Increase in net interest income (1) $1,632 $449 $2,081 ======================================================================== (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses was $5.2 million for 1998, compared to $7.6 million in 1997 and $12.3 million in 1996. The reductions in the provision in 1998 and 1997 reflect the results of the Company's continuing efforts to improve loan quality by enforcing strict underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. For further information regarding net credit losses and the reserve for loan losses, see the "Asset Quality" section of this report. INVESTMENT PORTFOLIO - -------------------- The Company maintains a securities portfolio consisting of U.S Treasury, U.S. Government agencies and corporations, state and political subdivisions, asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian. The objective of the investment securities held to maturity is to strengthen the portfolio yield, and to provide collateral to pledge for federal, state and local government deposits and other borrowing facilities. The investments held to maturity had an average term to maturity of 109 months at December 31, 1998 and, on the same date, those investments included $202.3 million in fixed rate and $24.7 million in adjustable rate securities. Investment securities available for sale are generally used to supplement the Banks' liquidity. Unrealized net gains and losses on these securities are recorded as an adjustment to equity, net of taxes, and are not reflected in the current earnings of the Company. If a security is sold, any gain or loss is recorded as a charge to earnings and the equity adjustment is reversed. At December 31, 1998, the Company held $987.7 million classified as investments available for sale. At December 31, 1998, an unrealized gain of $20.7 million net of taxes of $15.0 million related to these securities, was held in shareholders' equity. The Company had no trading securities at December 31, 1998. For more information on investment securities, see Notes 1 and 2 to the consolidated financial statements. The following table shows the carrying amount (fair value) of the Company's investment securities available for sale as of the dates indicated:
===================================================================================== At December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- (In thousands) U.S. Treasury $248,610 $277,790 $299,739 U.S. Government agencies and corporations 121,304 181,124 274,468 States and political subdivisions 213,315 203,405 128,631 Asset backed securities 165,398 184,377 94,282 Other 239,034 156,538 95,341 - ------------------------------------------------------------------------------------- Total $987,661 $1,003,234 $892,461 =====================================================================================
The following table sets forth the relative maturities and yields of the Company's available-for-sale securities (stated at amortized cost) at December 31, 1998. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the amortized cost value of the related security. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current statutory rate.
Available for sale ========================================================================================================================== After One After Five Within but Within but Within After Ten Mortgage- (Dollars in thousands) One Year Five Years Ten Years Years backed Other Total - -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $171,786 $73,328 $-- $-- $-- $-- $245,114 Interest rate 6.13% 5.72% --% --% --% --% 6.00% U.S. Government agencies and corporations $12,000 $83,332 $121 $99 $-- $-- $95,552 Interest rate 5.89% 5.86% 8.93% 8.79% --% --% 5.87% States and political subdivisions $5,696 $33,807 $58,505 $107,240 $-- $-- $205,248 Interest rate 9.57% 7.03% 8.22% 7.92% --% --% 7.90% Asset-backed $-- $115,372 $48,617 $-- $-- $-- $163,989 Interest rate --% 6.08% 5.86% --% --% --% 6.02% Other $21,267 $171,175 $5,247 $-- $-- $-- $197,689 Interest rate 6.25% 6.15% 6.53% --% --% --% 6.17% - -------------------------------------------------------------------------------------------------------------------------- Subtotal $210,749 $477,014 $112,490 $107,339 $-- $-- $907,592 Interest rate 6.22% 6.08% 7.12% 7.92% --% --% 6.46% Mortgage-backed $-- $-- $-- $-- $24,493 $-- $24,493 Interest rate --% --% --% --% 5.94% --% 5.94% Other without set maturities $-- $-- $-- $-- $-- $19,871 $19,871 Interest rate --% --% --% --% --% 8.69% 8.69% - -------------------------------------------------------------------------------------------------------------------------- Total $210,749 $477,014 $112,490 $107,339 $24,493 $19,871 $951,956 Interest rate 6.22% 6.08% 7.12% 7.92% 5.94% 8.69% 6.49% ========================================================================================================================== The following table shows the carrying amount (amortized cost) and fair value of the Company's investment securities held to maturity as of the dates indicated: - ------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- (In thousands) U.S. Treasury $-- $-- $998 U.S. Government agencies and corporations 69,235 83,656 79,743 States and political subdivisions 147,118 136,965 131,343 Asset-backed -- -- 191 Other 10,640 10,339 3,157 - ------------------------------------------------------------------------------------- Total $226,993 $230,960 $215,432 ===================================================================================== Fair value $233,790 $236,896 $218,009 =====================================================================================
The following table sets forth the relative maturities and yields of the Company's held-to-maturity securities at December 31, 1998. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the amortized value of the related security. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current statutory rate.
Held to maturity - -------------------------------------------------------------------------------------------------------------------------- After One After Five Within but Within but Within After Ten Mortgage- (Dollars in thousands) One Year Five Years Ten Years Years backed Other Total - -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $-- $-- $-- $-- $-- $-- $-- Interest rate --% --% --% --% --% --% --% U.S. Government Agencies and Corporations $-- $-- $-- $-- $-- $-- $-- Interest rate --% --% --% --% --% --% --% States and Political Subdivisions $2,217 $22,838 $88,547 $33,516 $-- $-- $147,118 Interest rate 6.94% 8.53% 8.12% 8.34% --% --% 8.22% Asset-backed $-- $-- $-- $-- $-- $-- $-- Interest rate --% --% --% --% --% --% --% Other $-- $-- $-- $10,640 $-- $-- $10,640 Interest rate --% --% --% 5.46% --% --% 5.46% - -------------------------------------------------------------------------------------------------------------------------- Subtotal $2,217 $22,838 $88,547 $44,156 $-- $-- $157,758 Interest rate 6.94% 8.53% 8.12% 7.65% --% --% 8.03% Mortgage-backed $-- $-- $-- $-- $69,235 $-- $69,235 Interest rate --% --% --% --% 6.05% --% 6.05% - -------------------------------------------------------------------------------------------------------------------------- Total $2,217 $22,838 $88,547 $44,156 $69,235 $-- $226,993 Interest rate 9.65% 8.03% 7.61% 7.39% 6.05% --% 7.43% ==========================================================================================================================
LOAN PORTFOLIO - -------------- The following table shows the composition of the loan portfolio of the Company by type of loan and type of borrower, on the dates indicated:
============================================================================================================== At December 31, ---------------------------------------------------------------- (In thousands) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Commercial and commercial real estate $1,476,912 $1,437,118 $1,455,984 $1,260,082 $1,244,561 Real estate construction 57,998 66,782 101,136 128,901 175,962 Real estate residential 384,128 361,909 276,951 378,971 333,685 Consumer 385,204 404,382 462,734 502,441 528,875 Unearned income (6,345) (8,254) (9,565) (12,248) (16,381) - -------------------------------------------------------------------------------------------------------------- Gross loans 2,297,897 2,261,937 2,287,240 2,258,147 2,266,702 Allowance for loan losses (51,304) (50,630) (50,921) (48,494) (46,580) - -------------------------------------------------------------------------------------------------------------- Net loans $2,246,593 $2,211,307 $2,236,319 $2,209,653 $2,220,122 ==============================================================================================================
Maturities and sensitivities of selected loans to changes in - ------------------------------------------------------------ interest rates - -------------- The following table shows the maturity distribution and interest rate sensitivity of commercial and real estate construction loans at December 31, 1998. Balances exclude loans to individuals and residential mortgages totaling $763.0 million. These types of loans are typically paid in monthly installments over a number of years.
================================================================================================= Within One to After (In thousands) One Year Five Years Five Years Total - ------------------------------------------------------------------------------------------------- Commercial and commercial real estate * $881,290 $219,947 $375,675 $1,476,912 Real estate construction 57,998 -- -- 57,998 - ------------------------------------------------------------------------------------------------- Total $939,288 $219,947 $375,675 $1,534,910 ================================================================================================= Loans with fixed interest rates $272,512 $219,947 $375,675 $868,134 Loans with floating interest rates 666,776 -- -- 666,776 - ------------------------------------------------------------------------------------------------- Total $939,288 $219,947 $375,675 $1,534,910 =================================================================================================
* Includes demand loans COMMITMENTS AND LETTERS OF CREDIT - --------------------------------- It is not the policy of the Company to issue formal commitments on lines of credit except to a limited number of well established and financially responsible local commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of Letters of Credit to facilitate the customers' particular business transactions. Commitment fees generally are not charged except where Letters of Credit are involved. Commitments and lines of credit typically mature within one year. For further information, see Note 12 to the consolidated financial statements. ASSET QUALITY - ------------- The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with higher credit risk and increase diversification of earning assets. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all non-performing assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following summarizes the Company's classified assets for the periods indicated: ======================================================================== At December 31, (In millions) 1998 1997 - ------------------------------------------------------------------------ Classified loans $50.8 $67.5 Other classified assets 4.3 7.4 - ------------------------------------------------------------------------ Total classified assets $55.1 $74.9 ======================================================================== Classified loans at December 31, 1998 decreased $16.7 million or 25 percent to $50.8 million from December 31, 1997, reflecting the implementation of the Company's active work-out standards and charge-offs of graded loans acquired through the Merger. Other classified assets decreased $3.1 million from prior year, due to sales and write-downs of properties acquired in satisfaction of debt ("other real estate owned") partially offset by new foreclosures on loans with real estate collateral. Non-performing assets - --------------------- Non-performing assets include non-accrual loans, loans 90 or more days past due and still accruing and other real estate owned. Loans are placed on non-accrual status upon reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on non-accrual status is charged against interest income. In addition, some loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on non-accrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified by Management as "performing non-accrual" and are included in total non-performing assets. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Any additional payments received after that point are recorded as interest income on a cash basis. Performing non-accrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal. The following table summarizes the non-performing assets of the Company for the periods indicated:
============================================================================================================== At December 31, ---------------------------------------------------------------- (In millions) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Performing non-accrual loans $1.8 $1.6 $4.3 $2.4 $2.0 Non-performing non-accrual loans 6.8 16.5 12.5 25.0 15.6 - -------------------------------------------------------------------------------------------------------------- Non-accrual loans 8.6 18.1 16.8 27.4 17.6 - -------------------------------------------------------------------------------------------------------------- Restructured loans -- -- 0.2 0.3 0.6 Loans 90 or more days past due and still accruing 0.5 1.0 1.8 1.7 4.8 Other real estate owned 4.3 7.4 9.9 7.6 11.7 - -------------------------------------------------------------------------------------------------------------- Total non-performing assets $13.4 $26.5 $28.7 $37.0 $34.7 ============================================================================================================== Allowance for loan losses as a percentage of non-accrual loans and loans 90 or more days past due and still accruing 564% 265% 274% 167% 208% Allowance for loan losses as a percentage of total non-performing assets 383% 191% 177% 131% 134% ==============================================================================================================
Performing non-accrual loans increased $200 thousand to $1.8 million at December 31, 1998 while non-performing non-accrual loans decreased $9.7 million to $6.8 million at December 31, 1998, primarily due to sales, pay-offs and transfers to other real estate owned of commercial real estate loans. The $3.1 million decrease in other real estate owned balances from December 31, 1997 was due to write-downs and liquidations net of additions from non-accrual loans on loans with real estate collateral. The decrease in other real estate owned balances at December 31, 1997 from December 31, 1996 was also due to write-downs and liquidations net of additions of non-accrual loans with real estate collateral. The amount of gross interest income that would have been recorded for non-accrual loans for the year ended December 31, 1998, if all such loans had been current in accordance with their original terms while outstanding during the period, was $855 thousand and $1.6 million, each, in 1997 and 1996. The amount of interest income that was recognized on non-accrual loans from cash payments made in 1998, 1997 and 1996 was $573 thousand, $462 thousand and $270 thousand, respectively. Cash payments received, which were applied against the book balance of performing and non-performing non-accrual loans outstanding at December 31, 1998, totaled approximately $952 thousand, compared to $573 thousand and $111 thousand in 1997 and 1996, respectively. The overall credit quality of the loan portfolio continues to be strong; however, the total non-performing assets could fluctuate from year to year. The performance of any individual loan can be impacted by external factors such as the interest rate environment or factors particular to the borrower. The Company expects to maintain non-performing asset levels; however, the Company can give no assurance that additional increases in non-accrual loans will not occur in future periods. Loan loss experience - -------------------- The Company's allowance for loan losses is maintained at a level estimated to be adequate to provide for losses that can be reasonably anticipated based upon specific conditions, credit loss experience, the amount of past due, non-performing loans and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. The allowance is allocated to segments of the loan portfolio based in part on quantitative analyses of historical credit loss experience, in which criticized and classified loan balances are analyzed using a linear regression model to determine standard allocation percentages. The results of this analysis are applied to current criticized and classified loan balances to allocate the allowance to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines due to their small balances and numerous accounts are analyzed based on the historical rate of net losses and delinquency trends grouped by the number of days the payments on those loans are delinquent. A portion of the allowance is also allocated to impaired loans. Management considers the $51.3 million allowance for loan losses, which constituted 2.23 percent of total loans at December 31, 1998, to be adequate as a reserve against inherent losses. However, while the Company's policy is to charge off in the current period those loans on which the loss is considered probable, the risk exists of future losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future allowance levels. The following table summarizes the loan loss experience of the Company for the years indicated:
============================================================================================================== At December 31, ---------------------------------------------------------------- (In thousands) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Total loans outstanding $2,297,897 $2,261,937 $2,287,240 $2,258,147 $2,266,702 Average loans outstanding during the period 2,262,082 2,248,048 2,249,520 2,254,946 2,105,164 ============================================================================================================== Analysis of the reserve: Beginning balance $50,630 $50,921 $48,494 $46,580 $42,413 Additions to the reserve charged to operating expense 5,180 7,645 12,306 15,228 11,378 Allowance acquired through merger -- -- 1,665 -- 1,755 Credit losses: Commercial and commercial real estate (5,113) (6,825) (7,998) (7,395) (5,752) Real estate construction -- (962) (781) (1,401) (790) Real estate residential (97) (374) (1,862) (3,682) (2,069) Consumer (3,358) (4,323) (5,376) (3,740) (3,207) - -------------------------------------------------------------------------------------------------------------- Total (8,568) (12,484) (16,017) (16,218) (11,818) Credit loss recoveries: Commercial and commercial real estate 2,305 2,499 2,227 1,517 1,417 Real estate construction 10 160 44 3 65 Real estate residential 1 34 72 26 -- Consumer 1,746 1,855 2,130 1,358 1,370 - -------------------------------------------------------------------------------------------------------------- Total 4,062 4,548 4,473 2,904 2,852 - -------------------------------------------------------------------------------------------------------------- Net credit losses (4,506) (7,936) (11,544) (13,314) (8,966) - -------------------------------------------------------------------------------------------------------------- Balance, end of period $51,304 $50,630 $50,921 $48,494 $46,580 ============================================================================================================== Net credit losses to average loans 0.20% 0.35% 0.51% 0.59% 0.43% Allowance for loan losses as a percentage of loans outstanding 2.23% 2.24% 2.23% 2.15% 2.05% ==============================================================================================================
Allocation of the Allowance for Loan Losses - ------------------------------------------- The following table presents the allocation of the allowance for loan losses as of December 31 for the years indicated: ================================================================================================= 1998 1997 --------------------------------------------------- Allocation Loans as Allocation Loans as of the Percent of the Percent Allowance of Total Allowance of Total (Dollars in thousands) Balance Loans Balance Loans - ------------------------------------------------------------------------------------------------- Commercial $22,240 64% $22,649 63% Real estate construction 4,055 3 4,374 3 Real estate residential 310 17 87 16 Consumer 4,260 16 4,356 18 Unallocated portion of the reserve 20,439 -- 19,164 -- - ------------------------------------------------------------------------------------------------- Total $51,304 100% $50,630 100% =================================================================================================
========================================================================================================================== 1996 1995 1994 ---------------------------------------------------------------------------- Allocation Loans as Allocation Loans as Allocation Loans as of the Percent of the Percent of the Percent Reserve of Total Reserve of Total Reserve of Total (Dollars in thousands) Balance Loans Balance Loans Balance Loans - -------------------------------------------------------------------------------------------------------------------------- Commercial $22,743 64% $21,849 56% $19,202 55% Real estate construction 3,471 4 5,683 6 3,852 8 Real estate residential 2,489 12 1,733 16 2,021 15 Consumer 6,543 20 6,401 22 6,513 22 Unallocated portion of the reserve 15,675 -- 12,828 -- 14,992 -- - -------------------------------------------------------------------------------------------------------------------------- Total $50,921 100% $48,494 100% $46,580 100% ==========================================================================================================================
The decrease in the allocation of commercial loans from December 1997 to December 1998 is primarily due to the reduction in the balance of criticized loans and the reallocation of specific reserves after the Merger. The Company considers a loan to be impaired when, based on current information and events, it is "probable" that a creditor will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (I) the present value of the expected cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. In measuring impairment, the Company reviews all impaired commercial and construction loans classified "Substandard" and "Doubtful" that meet materiality thresholds of $250 thousand and $100 thousand, respectively. All "Loss" classified loans are fully reserved under the Company's standard loan loss reserve methodology. The Company considers classified loans below the established thresholds to represent immaterial loss risk. Commercial and construction loans that are not classified, and large groups of smaller-balance homogeneous loans such as installment, personal revolving credit, residential real estate and student loans, are evaluated collectively for impairment under the Company's standard loan loss reserve methodology. The Company generally identifies loans to be reported as impaired when such loans are in non-accrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. The following summarizes the Company's impaired loans for the periods indicated: ======================================================================== At December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------ Non-accrual loans $8,531 $18,146 Other 6,504 4,333 - ------------------------------------------------------------------------ Total impaired loans $15,035 $22,479 ======================================================================== Specific reserves $1,255 $2,238 ======================================================================== The $6.5 million balance in loans classified as impaired as of December 31, 1998, other than non-accrual loans, is due to two commercial real estate loans, with combined principal outstanding balances of $5.4 million, having collateral exposure that may preclude ultimate full repayment, and one credit classified as a troubled debt restructuring with principal outstanding balance of $1.1 million. Payments on these credits were current at December 31, 1998. The average balance of the Company's impaired loans for the year ended December 31, 1998 was $15.9 million compared to $22.0 million in 1997. The amount of that recorded investment for which there is no related allowance for credit losses was $0. In general, the Company does not recognize any interest income on trouble debt restructurings or loans that are classified as non-accrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company's recorded investment in such loans is deemed collectible. ASSET AND LIABILITY MANAGEMENT - ------------------------------ The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk. In adjusting the Company's asset/liability position, its management ("Management") attempts to manage interest rate risk while enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, Management may increase the Company's interest rate risk position in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long- and short-term interest rates. The primary analytical tool used by the Company to quantify interest rate risk is a simulation model to project changes in net interest income ("NII") that result from forecast changes in interest rates. This analysis calculates the difference between a NII forecast over a 12-month period using a flat interest rate scenario and a NII forecast using a rising (or falling) rate scenario, where the Federal Funds rate, serving as a "driver," is made to rise (or fall) evenly by 200 basis points over the 12-month forecast interval triggering a response in the other rates. Company policy requires that such simulated changes in NII should always be less than 10 percent or steps must be taken to reduce interest rate risk. According to the same policy, if the simulated changes in NII reach 7.5 percent, a closer inspection of the risk will be put in place to determine what steps could be taken to control risk should it grow worse. The following table summarizes the simulated change in NII, based on the 12-month period ending December 31, 1999: =========================================================== (Dollars in millions) Changes in Estimated Increase Interest (Decrease) in NII Rates Estimated ----------------------- (Basis Points) NII Amount Amount Percent - ----------------------------------------------------------- +200 $195.3 $2.3 1.2% -- 193.0 -- -- - -200 189.3 (3.7) -1.9% =========================================================== Given the Company's historical experience on interest rate volatility, the results of the NII simulations shown in the above table reflect the categorization of interest-bearing transaction and savings deposits as having their repricing spread over one year and by less than the full change in market rates, rather than repricing fully in the first month. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company's Board of Directors. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange risk, equity price risk and commodity price risk, do not arise in the normal course of the Company's business activities. Interest rate sensitivity analysis - ---------------------------------- The following table summarizes the interest rate sensitivity gaps inherent in the Company's asset and liability portfolios at December 31, 1998:
========================================================================================================================== Non- Repricing Within (days) 0-90 91-180 181-365 Over 365 Repricing Total - -------------------------------------------------------------------------------------------------------------------------- Assets (In millions) Investment securities $71 $84 $162 $898 $-- $1,215 Loans 918 106 140 1,134 -- 2,298 Other assets -- -- -- -- 331 331 - -------------------------------------------------------------------------------------------------------------------------- Total assets $989 $190 $302 $2,032 $331 $3,844 ========================================================================================================================== Liabilities and Shareholders' Equity Deposits: Non-interest bearing $-- $-- $-- $-- $843 $843 Interest-bearing: Transaction 601 -- -- -- -- 601 Money market savings 180 180 265 -- -- 625 Passbook savings 278 -- -- -- -- 278 Time 535 144 108 55 -- 842 Short-term borrowings 204 -- -- -- -- 204 Debt financing and notes payable -- -- 5 43 -- 48 Other liabilities -- -- -- -- 34 34 Shareholders' equity -- -- -- -- 369 369 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,798 $324 $378 $98 $1,246 $3,844 ========================================================================================================================== Net (liabilities) assets subject to repricing ($809) ($134) ($76) $1,934 ($915) - -------------------------------------------------------------------------------------------------------------- Cumulative net (liabilities) assets subject to repricing ($809) ($943) ($1,019) $915 $-- ==============================================================================================================
The repricing terms of the table above do not represent contractual principal maturity, but rather principal cash flows available for repricing. The interest rate sensitivity report shown above categorizes interest-bearing transaction deposits and savings deposits as repricing within 30 days. However, it is the experience of Management that the historical interest rate volatility of these interest-bearing transaction and savings deposits can be similar to liabilities with longer repricing dates, depending on market conditions. Moreover, the degree to which these interest-bearing transaction and savings deposits respond to changes in money market rates usually is less than the response of interest rate sensitive loans. These factors cause the cumulative net liability position shown above to indicate a much greater degree of liability sensitivity than Management believes really exists based on the additional analysis previously discussed. Liquidity - --------- The principal sources of asset liquidity are marketable investment securities available for sale. At December 31, 1998, investment securities available for sale totaled $987.7 million. In addition, the Company generated significant liquidity from its operating activities. The Company's profitability in 1998, 1997 and 1996 generated substantial cash flows, included in the total provided from operations of $63.3 million, $78.7 million and $56.7 million, respectively. Additional cash flows may be provided by financing activities, primarily the acceptance of customer deposits and short- and long-term borrowings from banks. During 1998, the effect of the Company's stock repurchase program and dividends paid to shareholders of $104.8 million and $21.9 million, respectively, in addition to a $61.2 million decrease in short-term borrowings, more than offset the increase of $110.5 million in customers' deposits. During 1997 and 1996, deposits decreased $150.2 million and $108.0 million, respectively. Cash used by the Company in 1997 and 1996 for its share repurchase program and other retirement of stock activities totaled $35.6 million and $27.6 million, respectively, and dividends paid to the Company's shareholders were $13.4 million in 1997 and $15.0 million in 1996. These cash outflows exceeded a $97.4 million increase in short-term borrowings in 1997 and the issuance of $22.5 million of the Company's Senior Notes in 1996, the largest cash generators through financing activities during those years. These were the major factors in the total net cash outflows used by financing activities of $69.9 million, $91.3 million and $147.2 million, respectively, for 1998, 1997 and 1996. The Company uses cash to make investments in loans and investment securities. Net disbursements of loans were $42.4 million in 1998, compared to net repayments of loan balances of $9.1 million in 1997 and $22.3 million in 1996. As a result of the increase in loan volume in 1998, the Company reduced its investment in securities by $23.4 million in 1998. However, the intention of the Company is to increase loan volume without jeopardizing credit quality; this was the primary reason for investing excess cash flows in lower-risk investment securities in 1997, which increased $106.2 million during that year. This compares with a decrease in 1996 of $87.6 million, mostly due to pre-Merger activity. The Company anticipates increasing its cash levels through the end of 1999 mainly due to increased profitability and retained earnings. For the same period, it is anticipated that the investment securities portfolio and demand for loans will continue to moderately increase. The growth in deposit balances is expected to follow the anticipated growth in loan and investment balances through the end of 1999. Line of Credit - -------------- On July 31, 1998, the Company entered into an agreement with a well-established financial institution, establishing a line of credit for general corporate purposes including the repurchase of its stock. The line of credit has a one-year term and an available commitment amount ranging from $60 million, during the first nine months, reduced by $7.5 million during each of the following three months to $37.5 million. The interest rate of this line of credit is set by the lender based on various factors, including costs and desired return, general economic conditions and other factors. The Company may elect an optional interest rate equal to the Cayman Rate plus .33 percentage points, subject to certain specific conditions as defined in the agreement. During the third quarter of 1998, the Company drew $3.0 million on this line; the rate on the line was 5.93 percent. The rate chosen by the Company of this line of credit was the Cayman Rate plus .33 percentage points. At December 31, 1998, there were no outstanding balances drawn on this line. At December 31, 1998, the Cayman Rate plus .33 percentage points was 5.39 percent. CAPITAL RESOURCES - ----------------- The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company's capital position represents the level of capital available to support continued operations and expansion. Since the beginning of 1994 and through December 31, 1998, the Board of Directors of the Company has authorized the repurchase of 4.3 million shares of the Company's common stock from time to time, subject to appropriate regulatory and other accounting requirements. The Company acquired 996 thousand shares of its common stock in the open market during 1998, 1.0 million in 1997, and 1.2 million, 721 thousand and 93 thousand in 1996, 1995 and 1994, respectively. These repurchases were made periodically in the open market with the intention to lessen the dilutive impact of issuing new shares to meet stock performance, option plans, acquisitions and other requirements. In addition to these systematic repurchases, a new plan to repurchase 3.0 million additional shares of the Company's common stock (the "Program") was approved by the Board of Directors on June 25, 1998. The Company's strong capital position and healthy profitability contributed to the initiation of this Program, which was being implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to this Program, the Company repurchased 2.1 million shares of its common stock during the third and fourth quarters of 1998, at an average price of approximately $30 per share. The Company's primary capital resource is shareholders' equity, which decreased $38.6 million or 9 percent from the previous year end and decreased $10.7 million or 3 percent from December 31, 1996. The ratio of total risk-based capital to risk-adjusted assets was 13.79 percent at December 31, 1998, compared to 14.76 percent at December 31, 1997. Tier I risk-based capital to risk-adjusted assets was 11.87 percent at December 31, 1998, compared to 12.82 percent at December 31, 1997.
Capital to Risk-Adjusted Assets ===================================================================================== Minimum Regulatory Capital At December 31, 1998 1997 Requirements - ------------------------------------------------------------------------------------- Tier I Capital 11.87% 12.82% 4.00% Total Capital 13.79% 14.76% 8.00% Leverage ratio 9.39% 9.97% 4.00% =====================================================================================
The risk-based capital ratios declined in 1998 primarily due to reductions in equity capital resulting from share repurchase programs. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. All ratios are in excess of the regulatory definition of "well capitalized." FINANCIAL RATIOS - ---------------- The following table shows key financial ratios for the periods indicated:
================================================================================================= For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Return on average total assets 1.94% 1.28% 1.24% Return on shareholders' equity 19.48% 12.71% 13.22% Average shareholders' equity as a percentage of: Average total assets 9.97% 10.10% 9.36% Average total loans 16.66% 16.84% 15.74% Average total deposits 12.26% 12.14% 11.26% Dividend payout ratio (diluted EPS) 30.00% 33.00% 28.00% =================================================================================================
DEPOSIT CATEGORIES - ------------------ The Company primarily attracts deposits from local businesses and professionals, as well as through retail certificates of deposit, savings and checking accounts. The following table summarizes the Company's average daily amount of deposits and the rates paid for the periods indicated:
============================================================================================================== 1998 1997 -------------------------------------------------------------------------------- Percentage Percentage Average of Total Average of Total (Dollars in thousands) Balance Deposits Rate * Balance Deposits Rate * - -------------------------------------------------------------------------------------------------------------- Non-interest bearing demand $791,952 25.8% --% $781,001 25.0% --% Interest bearing: Transaction 554,834 18.0% 1.14% 548,139 17.6% 1.22% Savings 906,930 29.5% 2.64% 985,800 31.6% 2.84% Time less than $100 thousand 438,052 14.3% 4.99% 479,692 15.4% 5.09% Time $100 thousand or more 381,754 12.4% 5.04% 323,840 10.4% 5.28% - -------------------------------------------------------------------------------------------------------------- Total $3,073,522 100.00% 3.13% $3,118,472 100.00% 3.26% ==============================================================================================================
*Rate is computed based on interest-bearing deposits ======================================================================== 1996 ------------------------------------------ Percentage Average of Total (Dollars in thousands) Balance Deposits Rate * - ------------------------------------------------------------------------ Non-interest bearing demand $750,204 23.9% --% Interest bearing: Transaction 523,973 16.7% 1.23% Savings 1,035,559 32.9% 2.75% Time less than $100 thousand 520,968 16.5% 5.02% Time $100 thousand or more 313,050 10.0% 5.27% - ------------------------------------------------------------------------ Total $3,143,754 100.00% 3.24% ======================================================================== *Rate is computed based on interest-bearing deposits In 1998, total average deposits decreased 1 percent from 1997 primarily due to decreases in savings and retail certificates of deposits as a result of the anticipated runoff of business reflective of market conditions. However, to counteract this effect, time certificates of deposit of $100 thousand or more increased 18 percent, and aggressive policies in place resulted in a 1 percent increase in the average balance of non-interest bearing and transaction demand accounts. In 1997, total average deposits decreased 1 percent primarily due to decreases in savings and retail certificates of deposit as a result of the runoff of business that was anticipated after the Merger. However, aggressive policies in place contributed to the 4 percent increase in the average balance of non-interest bearing and transaction demand accounts. The following sets forth, by time remaining to maturity, the Company's domestic time deposits in amounts of $100 thousand or more: =========================================================== At December 31, (In thousands) 1998 - ----------------------------------------------------------- Three months or less $332,038 Over three through six months 40,678 Over six through twelve months 36,034 Over twelve months 9,434 - ----------------------------------------------------------- Total $418,184 =========================================================== SHORT-TERM BORROWINGS - --------------------- The following table sets forth the short-term borrowings of the Company for the periods indicated:
===================================================================================== At December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------- Federal funds purchased $50,000 $50,000 $6,300 Other borrowed funds: Retail repurchase agreements 28,693 103,346 112,594 Other 124,978 111,502 48,553 - ------------------------------------------------------------------------------------- Total other borrowed funds $153,671 $214,848 $161,147 - ------------------------------------------------------------------------------------- Total short-term borrowed funds $203,671 $264,848 $167,447 ===================================================================================== Further detail of the other borrowed funds is as follows: ===================================================================================== (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------- Outstanding: Average for the year $195,415 $153,013 $172,808 Maximum during the year 247,799 227,463 217,589 Interest rates: Average for the year 4.61% 4.73% 5.07% Average at year end 3.49% 4.76% 4.90% ===================================================================================== NON-INTEREST INCOME - ------------------- Components of Non-Interest Income ===================================================================================== (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------------- Service charges on deposit accounts $20.1 $20.6 $21.0 Merchant credit card 3.2 3.7 4.5 Financial services commissions 1.7 1.2 0.8 Mortgage banking 1.4 1.5 2.0 Trust fees 0.6 0.5 0.4 Other 10.8 9.5 7.6 - ------------------------------------------------------------------------------------- Total $37.8 $37.0 $36.3 =====================================================================================
Non-interest income was $37.8 million in 1998, $800 thousand higher than 1997. Gains realized on asset sales were $1.3 million higher than prior year. Financial services commissions were $500 thousand higher than 1997 primarily due to higher sales volume and additional products offered. Trust fees were $100 thousand higher due to the Company's continuing efforts to expand personal and retirement plan business. Unfavorable non-interest income year-to-year changes from 1997 include $500 thousand lower deposit account fees, including lower volume of account maintenance, and lower overdrafts and returned item fees, as business customers maintained larger account balances to compensate for these services. In addition, merchant credit card income was $500 thousand lower than 1997 and mortgage banking income was $100 thousand lower mainly due to declining servicing income. Non-interest income was $37.0 million in 1997, $700 thousand higher than 1996. Other non-interest income was $1.9 million higher, including higher gains on asset sales. In addition, financial services commissions were $400 thousand higher than 1996 primarily due to higher sales volume resulting from additional services and trust fees were $100 thousand higher than 1996 primarily due to increased personal and retirement plan business. Partially offsetting these changes, credit card merchant fees were $800 thousand lower than prior year, mortgage banking income was $500 thousand lower due to lower refinancing volumes resulting in lower income from sales of loans and servicing fees, and deposit account fees were $400 thousand lower due to reduced volume partially offset by higher account analysis fees assessed. NON-INTEREST EXPENSE - --------------------
Components of Non-Interest Expense ===================================================================================== (In millions, except full-time equivalent staff) 1998 1997 1996 - ------------------------------------------------------------------------------------- Salaries $40.0 $50.4 $47.6 Other personnel benefits 11.1 12.1 13.4 Occupancy 11.6 22.2 17.5 Equipment 7.4 10.8 10.1 Data processing 5.9 6.2 6.0 Professional fees 2.3 9.2 6.0 Stationery and supplies 1.8 2.5 1.5 Loan expense 1.5 1.7 1.8 Advertising and public relations 1.4 1.9 3.3 Merchant credit card 1.2 1.7 2.3 Operational losses 1.0 1.2 1.5 FDIC insurance assessment 0.4 0.4 0.1 Other real estate owned 0.3 1.0 1.0 Insurance 0.2 0.5 0.8 Other 15.3 16.1 23.2 - ------------------------------------------------------------------------------------- Total $101.4 $137.9 $136.1 ===================================================================================== Average full-time equivalent staff 1,135 1,288 1,569 Non-interest expense to revenues ("efficiency ratio")(FTE) 44.2% 60.1% 60.1% =====================================================================================
Non-interest expense of $101.4 million in 1998 was $36.5 million lower than 1997, as the Company's efficiency ratio dropped to an all-time low. The reduction reflects successful efforts to control costs through efficiencies and consolidation of operations. In addition, approximately $18.8 million in one-time costs related to the Merger were included in 1997. All non-interest expense categories decreased from 1997 levels. Occupancy and equipment costs were $14.0 million lower, mainly due to expenses related to facilities closures. Employee related expenses were $11.4 million lower due to one-time Merger related costs in 1997 and streamlining of operations in 1998, as reflected in the reduction of 153 full-time equivalent staff. In addition, professional fees were reduced $6.9 million from prior year, and stationery and supplies and other real estate owned costs decreased $700 thousand, each, from 1997 levels also due to increased Merger costs incurred in 1997. The reductions from 1997 in merchant credit card and advertising and public relations costs of $500 thousand each, data processing and insurance costs of $300 thousand each, and loan expenses and operational losses of $200 thousand each, are also mainly due to post-Merger efficiencies. Non-interest expense increased $1.8 million in 1997 compared to 1996. Major increases from 1996 relate to costs of approximately $18.8 million in connection with the Merger, which are included in employee-related expenses, occupancy and equipment, stationery and supplies, professional fees and data processing expenses. Partially offsetting these changes, other non-interest expense decreased $7.1 million, principally due to merger integration and branch restructuring costs recognized at ValliCorp Holdings, Inc. during 1996, in connection with its three acquisitions effected in February, March and September of that year, and its planned branch sales in the first and second quarters of 1997. In addition, expenses were reduced in 1997 in advertising and public relations, merchant credit card, insurance and other costs, primarily due to merger efficiencies. The ratio of average assets per full-time equivalent staff was $3.33 million in 1998 compared to $2.91 million and $2.41 million in 1997 and 1996, respectively. The reduction of the average number of full-time equivalent staff from 1,569 in 1996 to 1,288 and 1,135 in 1997 and 1998, respectively, is reflective of the Company's strategy to improve efficiency. PROVISION FOR INCOME TAX - ------------------------ The provision for income tax increased by $13.6 million in 1998 mainly as a direct result of higher pretax income partially offset by an increase in tax-exempt interest income from municipal securities and loans. The 1998 provision of $38.0 million reflects an effective tax rate of 34.1 percent compared to provisions of $26.0 million in 1997 and $23.6 million in 1996, representing effective tax rates of 35.1 percent and 33.5 percent, respectively. YEAR 2000 COMPLIANCE - -------------------- The potential impact of the Year 2000 compliance issue on the financial services industry could be material, as virtually every aspect of the industry and processing of transactions will be affected. Due to the size of the task facing the financial services industry and the interdependent nature of its transactions, the Company may be adversely affected by this problem, depending on whether it and the entities with which it does business address this issue successfully. The impact of Year 2000 issues on the Company will then depend not only on corrective actions that the Company takes, but also on the way in which Year 2000 issues are addressed by governmental agencies, businesses and other third parties that provide services or data to, or receive services or data from, the Company, or whose financial condition or operational capability is important to the Company. The Company's State of Readiness - -------------------------------- The Company engages the services of third-party software vendors and service providers for substantially all of its electronic data processing. Thus, the focus of the Company is to monitor the progress of its primary software providers toward Year 2000 compliance and prepare to test future-date sensitive data of the Company in simulated processing. The Company's Year 2000 compliance program has been divided into phases, all of them common to all sections of the process: (1) inventorying date-sensitive information technology and other business systems; (2) assigning priorities to identified items and assessing the efforts required for Year 2000 compliance of those determined to be material to the Company; (3) upgrading or replacing material items that are determined not to be Year 2000 compliant and testing material items; (4) assessing the status of third party risks; and (5) designing and implementing contingency and business continuation plans. As part of the on-going supervision of the banking industry, bank regulatory agencies are continuously surveying the Company's progression and results of each one of these phases. In the first phase, the Company conducted a thorough evaluation of current information technology systems, software and embedded technologies, resulting in the identification of 43 mission critical systems that could be affected by Year 2000 issues. Non-information technology systems such as climate control systems, elevators and vault security equipment, were also surveyed. This stage of the Year 2000 compliance process is complete. In phase two of the process, results from the inventory were assessed to determine the Year 2000 impact and what actions were required to obtain Year 2000 compliance. For the Company's internal systems, actions needed ranged from application upgrades on data processing mainframe computer services to management reporting and satellite software systems. The Company opted for a course of action that will result in upgrading or replacing all critical internal systems. This stage of the Year 2000 compliance process is complete. The third phase includes the upgrading, replacement and/or retirement of systems, and testing. This stage of the Year 2000 process is ongoing and is scheduled to be completed by the first quarter of 1999. The Company estimates that the software conversion phase was approximately 95 percent completed at December 31, 1998. Each of the upgrades and/or replacements, to the extent economically feasible, is run through a test environment before it is implemented. It is also tested to see how well it integrates with the Company's overall data processing environment. Final "future-date" testing of system upgrades and replacements is scheduled to be completed by the middle of the second quarter of 1999. The fourth phase, assessing third-party risks, includes the process of identifying and prioritizing critical suppliers and customers, as well as other material relationships with third parties, including various exchanges, clearing houses, other banks, telecommunication companies, public utilities and credit customers. Included in the credit analysis process, the Company has developed a project plan for assessing the Year 2000 readiness of its credit customers, with a target date of December 31, 1998 for its initial assessment of the response of significant customers. The evaluations undertaken to assess all third-party risks include communicating with the third parties about their plans and progress in addressing Year 2000 issues. Detailed evaluations of the most critical third parties have been initiated and, as of December 31, 1998, no significant problems have been identified. These evaluations will be followed with contingency plans, which are ongoing and scheduled to be completed in the second quarter of 1999, with follow up reviews scheduled through the remainder of 1999. Contingency Plan - ---------------- The final phase of the Company's Year 2000 compliance program relates to contingency plans. The Company maintains contingency plans in the normal course of business designed to be deployed in the event of various potential business interruptions. These plans have been expanded to address Year 2000-specific interruptions such as power and telecommunication infrastructure failures, and will continue to be supplemented if and when the results of systems integration testing identify additional business functions at risk. Such enhancements to existing plans will likely include remediation of systems, reinstallation of software, installation of third-party vendor software or some combination of alternatives. Costs - ----- As the Company relies upon third-party software vendors and service providers for substantially all of its electronic data processing, the primary cost of the Year 2000 project has been and will continue to be the reallocation of internal resources and, therefore, does not represent incremental expense to the Company. The estimated value of internal resources allocated to the Year 2000 project is approximately $3.9 million, of which $3.1 million had been expended through December 31, 1998. The priority given to Year 2000 work may result in extending the time for completing some other technology projects; these delays are not expected to have a material effect on the Company's business. The Company's total cost associated with required modifications to become Year 2000 compliant is not expected to be material to its results of operations, liquidity and capital resources. Risks - ----- Failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. The Company believes that, with the implementation of new or upgraded business systems and completion of the Year 2000 project as scheduled, the possibility of significant interruptions of normal operations due to the failure of those systems will be reduced. However, the Company is also dependent upon the power and telecommunications infrastructure within the United States, and processes large volumes of transactions through various clearing houses and correspondent banks. The most reasonably likely worst case scenario would be that the Company may experience disruption in its operations if any of these third-party suppliers reported a system failure. Although the Company's Year 2000 Project will reduce the level of uncertainty about the compliance and readiness of its material third-party providers, due to the general uncertainty over Year 2000 readiness of these third-party suppliers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact. Forward-Looking Statement Disclosure - ------------------------------------ Readers are cautioned that forward-looking statements contained in this section should be read in conjunction with the Company's disclosures under the heading "Cautionary Statement for the Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995." In addition, the preceding statements concerning Year 2000 compliance are hereby designated as Year 2000 readiness disclosures under the Year 2000 Information and Readiness Disclosure Act. CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS - ------------------------------------------------------------------- OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - ------------------------------------------------------- The Company is including the following cautionary statement to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions of bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. Taking into account the foregoing, the following are identified as important risk factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: The dates on which the Company believes the Year 2000 project will be completed are based on Management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 Project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of trained personnel, ability to locate and correct all computer related issues, timely responses to and corrections by third parties and suppliers, the availability to implement interfaces between new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties, the Company cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability. ITEM 8. Financial Statements and Supplementary Data - --------------------------------------------------- Index to Financial Statements - ----------------------------- Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Independent Auditors' Report Management's Letter of Financial Responsibility Other Independent Auditors' Report
WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------- (In thousands) ================================================================================================ Balances as of December 31, 1998 1997 - ------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents (Note 15) $229,734 $250,824 Money market assets 250 250 Investment securities available for sale (Note 2) 987,661 1,003,234 Investment securities held to maturity; market values of $233,790 in 1998 and $236,896 in 1997 (Note 2) 226,993 230,960 Loans, net of an allowance for loan losses of: $51,304 in 1998 and $50,630 in 1997 (Notes 3,4 and 14) 2,246,593 2,211,307 Other real estate owned 4,315 7,381 Premises and equipment, net (Notes 5 and 6) 45,971 48,412 Interest receivable and other assets (Note 9) 102,781 96,076 - ------------------------------------------------------------------------------------------------ Total assets $3,844,298 $3,848,444 ================================================================================================ LIABILITIES Deposits: Non-interest bearing $842,919 $852,153 Interest bearing: Transaction 600,502 554,825 Savings 903,141 902,381 Time (Notes 2 and 6) 842,443 769,142 - ------------------------------------------------------------------------------------------------ Total deposits 3,189,005 3,078,501 Short-term borrowed funds (Note 6) 203,671 264,848 Liability for interest, taxes and other expenses (Note 9) 35,526 45,443 Debt financing and notes payable (Note 6) 47,500 52,500 - ------------------------------------------------------------------------------------------------ Total liabilities 3,475,702 3,441,292 - ------------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY (Notes 7 and 15) Common Stock (no par value) Authorized - 150,000 shares Issued and outstanding - 39,828 in 1998 and 42,799 in 1997 195,156 198,517 Accumulated other comprehensive income: Unrealized gain on securities available for sale, net 20,184 17,923 Retained earnings 153,256 190,712 - ------------------------------------------------------------------------------------------------ Total shareholders' equity 368,596 407,152 - ------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $3,844,298 $3,848,444 ================================================================================================
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - ---------------------------------------------------------- (In thousands, except per share data) ================================================================================================ For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------ INTEREST INCOME Loans $195,656 $201,999 $206,887 Money market assets and funds sold 42 1,635 5,219 Investment securities: Available for sale Taxable 47,785 46,620 41,416 Tax-exempt 9,713 7,957 7,353 Held to maturity Taxable 5,914 5,199 6,233 Tax-exempt 7,710 7,260 7,074 - ------------------------------------------------------------------------------------------------ Total interest income 266,820 270,670 274,182 - ------------------------------------------------------------------------------------------------ INTEREST EXPENSE Transaction deposits 6,321 6,706 6,462 Savings deposits 23,943 28,036 28,474 Time deposits (Note 6) 41,087 41,522 42,649 Funds purchased (Note 6) 11,670 7,803 9,974 Debt financing and notes payable (Note 6) 3,644 3,987 4,141 - ------------------------------------------------------------------------------------------------ Total interest expense 86,665 88,054 91,700 - ------------------------------------------------------------------------------------------------ NET INTEREST INCOME 180,155 182,616 182,482 - ------------------------------------------------------------------------------------------------ Provision for loan losses 5,180 7,645 12,306 - ------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES (Note 3) 174,975 174,971 170,176 - ------------------------------------------------------------------------------------------------ NON-INTEREST INCOME Service charges on deposit accounts 20,052 20,624 20,984 Merchant credit card 3,229 3,737 4,549 Financial services commissions 1,676 1,153 788 Mortgage banking 1,437 1,521 1,986 Trust fees 626 504 386 Other 10,785 9,474 7,614 - ------------------------------------------------------------------------------------------------ Total non-interest income 37,805 37,013 36,307 NON-INTEREST EXPENSE Salaries and related benefits (Note 13) 51,094 62,485 61,033 Occupancy (Notes 5 and 11) 11,582 22,166 17,466 Furniture and equipment (Notes 5 and 11) 7,372 10,799 10,075 Data processing 5,940 6,234 6,029 Professional fees 2,250 9,185 5,997 Other real estate owned and property held for sale 339 1,121 955 Other 22,831 25,888 34,496 - ------------------------------------------------------------------------------------------------ Total non-interest expense 101,408 137,878 136,051 - ------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 111,372 74,106 70,432 Provision for income taxes (Note 9) 37,976 25,990 23,605 - ------------------------------------------------------------------------------------------------ NET INCOME $73,396 $48,116 $46,827 ================================================================================================ Comprehensive income, net: Change in unrealized gain on securities available for sale, net 2,261 11,904 4,864 - ------------------------------------------------------------------------------------------------ COMPREHENSIVE INCOME $75,657 $60,020 $51,691 ================================================================================================ Average shares outstanding 41,797 43,040 42,759 Diluted average shares outstanding 42,524 43,827 43,358 PER SHARE DATA (Note 7) Basic earnings $1.76 $1.12 $1.10 Diluted earnings 1.73 1.10 1.08 Dividends paid 0.52 0.36 0.30
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ---------------------------------------------------------- (In thousands) ================================================================================================ Accumulated Other Comprehensive Retained Common Stock Income Earnings Total - ------------------------------------------------------------------------------------------------ December 31, 1995 $178,374 $1,155 $170,849 $350,378 Net income for the year -- -- 46,827 46,827 Stock issued 17,892 -- -- 17,892 Purchase of treasury stock (5,253) -- -- (5,253) Purchase and retirement of stock (3,803) -- (18,505) (22,308) Dividends -- -- (13,121) (13,121) Unrealized gain on securities available for sale, net -- 4,864 -- 4,864 - ------------------------------------------------------------------------------------------------ December 31, 1996 187,210 6,019 186,050 379,279 Net income for the year -- -- 48,116 48,116 Stock issued 16,853 -- -- 16,853 Purchase and retirement of stock (5,546) -- (30,048) (35,594) Dividends -- -- (13,406) (13,406) Unrealized gain on securities available for sale, net -- 11,904 -- 11,904 - ------------------------------------------------------------------------------------------------ December 31, 1997 198,517 17,923 190,712 407,152 Net income for the year -- -- 73,396 73,396 Stock issued 12,475 -- -- 12,475 Purchase and retirement of stock (15,836) -- (88,988) (104,824) Dividends -- -- (21,864) (21,864) Unrealized gain on securities available for sale, net -- 2,261 -- 2,261 - ------------------------------------------------------------------------------------------------ December 31, 1998 $195,156 $20,184 $153,256 $368,596 ================================================================================================
See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------- (In thousands) ====================================================================================================== For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $73,396 $48,116 $46,827 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,623 9,828 9,995 Loan loss provision 5,180 7,645 12,306 Amortization of deferred net loan fees (cost) 431 (1,215) (1,105) Decrease in interest income receivable 1,533 1,460 1,586 (Increase) decrease in other assets (14,361) 940 (14,735) Increase (decrease) in income taxes payable 1,752 3,135 (1,224) Increase (decrease) in interest expense payable 401 (321) 559 Decrease in other liabilities (10,683) (5,340) (4,309) Gain on sales of branches -- (678) -- Net (gain) loss on sales/write-down of equipment (309) 7,785 212 Originations of loans for resale (23,578) (12,157) (56,988) Net proceeds from sale of loans originated for resale 21,374 19,301 62,920 Net gain on sale of property acquired in satisfaction of debt (1,043) (1,184) (173) Write-down on property acquired in satisfaction of debt 579 1,422 834 - ------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 63,295 78,737 56,705 - ------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Net cash obtained in merger -- -- 4,391 Net (disbursements) repayments of loans (42,429) 9,102 22,290 Purchases of investment securities available for sale (332,747) (441,926) (339,666) Purchases of investment securities held to maturity (54,685) (73,115) (26,448) Purchases of property, plant and equipment (4,195) (5,036) (19,158) Proceeds from maturity of securities available for sale 314,321 327,738 294,339 Proceeds from maturity of securities held to maturity 58,653 57,588 116,898 Proceeds from sale of securities available for sale 37,898 23,538 42,430 Proceeds from sale of property and equipment 1,419 4,004 1,965 Proceeds from property acquired in satisfaction of debt 7,266 6,327 5,676 - ------------------------------------------------------------------------------------------------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (14,499) (91,780) 102,717 - ------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net increase (decrease) in deposits 110,504 (150,199) (108,027) Net (decrease) increase in short-term borrowings (61,177) 97,401 (18,585) Additions net of principal payments on notes and mortgages payable -- -- (5,015) (Repayments) additions to notes payable (5,000) (6,365) 22,500 Exercise of stock options/issuance of shares 12,475 16,853 4,541 Retirement of common stock (104,824) (35,594) (27,561) Dividends paid (21,864) (13,406) (15,005) - ------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (69,886) (91,310) (147,152) - ------------------------------------------------------------------------------------------------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (21,090) (104,353) 12,270 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 250,824 355,177 342,907 - ------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $229,734 $250,824 $355,177 ====================================================================================================== SUPPLEMENTAL DISCLOSURES: Supplemental disclosure of non-cash activities Loans transferred to other real estate owned $3,736 $2,604 $8,837 Premises transferred to other real estate owned -- 1,430 -- Unrealized gain on securities available for sale, net 2,261 11,904 4,864 Supplemental disclosure of cash flow activity Interest paid for the period 86,264 88,168 89,999 Income tax payments for the period 30,902 25,297 26,086 Conversion of subordinated notes into common stock -- -- 84 Financing sales of premises and other real estate -- -- 345 Common stock issued for Auburn Bancorp merger -- -- 13,267
See accompanying notes to consolidated financial statements. WESTAMERICA BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 1: Business and Accounting Policies - ---------------------------------------- Westamerica Bancorporation, a registered bank holding Company (the "Company"), provides a full range of banking services to individual and corporate customers in Northern and Central California through its subsidiary banks, Westamerica Bank and Bank of Lake County (the "Banks"). The Banks are subject to competition from other financial institutions and to the regulations of certain agencies and undergo periodic examinations by those regulatory authorities. Summary of Significant Accounting Policies. The consolidated financial statements are prepared in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a summary of significant policies used in the preparation of the accompanying financial statements. In preparing the financial statements, Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the disclosure of income and expenses for the periods presented in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Principles of Consolidation. The consolidated financial statements include the accounts of the Company, and all the Company's subsidiaries which include the Banks, Community Banker Services Corporation and Subsidiary, Westcore and Westamerica Commercial Credit, Inc., a company engaged in financing accounts receivable and inventory lines of credit and term business loans. Significant intercompany transactions have been eliminated in consolidation. The statements of income and comprehensive income, changes in shareholders' equity and cash flows and the related footnotes herein for the year ended December 31, 1996 have been restated to reflect the merger with ValliCorp Holdings, Inc. (the "Merger") on April 12, 1997, accounted for as a pooling of interests. Business Combinations. In a business combination accounted for as a pooling of interests, the assets, liabilities and shareholders' equity of the acquired entity are carried forward at their historical amounts and its results of operations are combined with the Company's results of operations. Additionally, the Company's prior period financial statements are restated to give effect to the merger. In a business combination accounted for as a purchase, the results of operations of the acquired entity are included from the date of acquisition. Assets and liabilities of the entity acquired are recorded at fair value on the date of acquisition. Goodwill and identified intangibles are amortized over their estimated lives. Cash Equivalents. Cash equivalents include Due From Banks balances and Federal Funds Sold which are both readily convertible to known amounts of cash and are generally 90 days or less from maturity, presenting insignificant risk of changes in value because of interest rate volatility. Securities. Investment securities consist of securities of the U.S. Treasury, federal agencies, states, counties and municipalities, and mortgage-backed, corporate debt and equity securities. The Company classifies its debt and marketable equity securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Securities not included in trading or held to maturity are classified as available for sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of shareholders' equity until realized. The unrealized gains and losses included in the separate component of shareholders' equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premiums or discounts on the associated security. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary, results in a charge to earnings and the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale or held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Loans and Allowance for Loan Losses. The allowance for loan losses is a combination of specific and general reserves available to absorb estimated future losses throughout the loan portfolio and is maintained at a level considered adequate to provide for such losses. Credit reviews of the loan portfolio, designed to identify problem loans and to monitor these estimates, are conducted continually, taking into consideration market conditions, current and anticipated developments applicable to the borrowers and the economy, and the results of recent examinations by regulatory agencies. Management approves the conclusions resulting from credit reviews. Ultimate losses may vary from current estimates. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for possible loan losses. Such agencies may require the Company to recognize additions to the reserve based on their judgment of information available to them at the time of their examination. Loans are stated at the principal amount outstanding, net of unearned discount and deferred fees. Unearned interest on discounted loans is amortized over the life of these loans, using the sum-of-the-months digits formula for which the results are not materially different from those obtained by using the interest method. For all other loans, interest is accrued daily on the outstanding balances. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on non-accrual status. Non-refundable fees and certain costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income over the estimated respective loan lives. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an individual loan basis. The Company recognizes a loan as impaired when based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and some vacated bank properties. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for loan losses. Other real estate owned is recorded at the lower of the related loan balance or fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Subsequently, other real estate owned is valued at the lower of the amount recorded at the date acquired or the then current fair value less estimated disposition costs. Subsequent losses incurred due to the declines in annual independent property appraisals are recognized as non-interest expense. Routine holding costs, such as property taxes, insurance, maintenance and losses from sales and dispositions are recognized as non-interest expense. Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter. Fully depreciated or amortized assets are removed from the Company's balance sheet. Intangible assets. Intangible assets (which are included in Other Assets) aggregating $12.1 million and $14.4 million (net of accumulated amortization of $15.2 million and $12.9 million) at December 31, 1998 and 1997, respectively, are comprised of core deposit intangibles and goodwill acquired in business combinations. Core deposit intangibles are amortized over the estimated lives of the existing deposit bases (10 years) on a straight-line basis. Goodwill of $8.7 million in 1998 and $9.6 million in 1997 (net of accumulated depreciation of $4.2 million and $3.3 million, respectively) is amortized on a straight-line basis over 15 years. Management periodically reviews the balances to determine if such balances have been impaired. Impairment of Long-Lived Assets. The Company reviews for impairment of long-lived assets and certain intangibles to be held, whenever events or changes indicate that the carrying amount of an asset may not be recoverable. Income taxes. The Company and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Derivative Instruments and Hedging Activities. In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which amends the disclosure requirements of Statement No. 52, "Foreign Currency Translations" and of Statement No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS 133 supersedes Statements No. 80 "Accounting for Future Contracts", No. 105 "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk" and No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Under the provisions of SFAS 133, the Company is required to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gain and losses) depends on the intended use of the derivative and the resulting operation. SFAS 133 is effective for all fiscal quarters of fiscal years beginning June 15, 1999, with early application encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after the issuance of the statement. SFAS 133 should not be applied retroactively to financial statements of prior periods. The Company does not expect that the adoption of SFAS 133 will have a material impact on its financial condition. Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. In October, 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"), which amends the disclosure requirements of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS 134 conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise. SFAS 134 is effective for the first fiscal quarter beginning after December 15, 1998. The Company does not expect that the adoption of SFAS 134 will have a material impact on its financial condition. Other. Securities and other property held by the Banks in a fiduciary or agency capacity are not included in the financial statements since such items are not assets of the Company or its subsidiaries. Reclassifications. Certain amounts in prior years' presentations have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported income.
Note 2: Investment Securities - ----------------------------- An analysis of the available-for-sale investment securities portfolio as of December 31, 1998, follows: ================================================================================== Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------- U.S. Treasury securities $245,114 $3,496 $ -- $248,610 Securities of U.S. Government agencies and corporations 120,045 1,554 (295) 121,304 Obligations of States and political subdivisions 205,248 8,318 (251) 213,315 Asset-backed securities 163,989 1,463 (54) 165,398 Other securities 217,560 21,755 (281) 239,034 - ---------------------------------------------------------------------------------- Total $951,956 $36,586 ($881) $987,661 ================================================================================== An analysis of the held-to-maturity investment securities portfolio as of December 31, 1998, follows: ================================================================================== Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------- Securities of U.S. Government agencies and corporations $69,235 $549 ($862) $68,922 Obligations of States and political subdivisions 147,118 7,195 (85) 154,228 Other securities 10,640 10,640 - ---------------------------------------------------------------------------------- Total $226,993 $7,744 ($947) $233,790 ================================================================================== An analysis of the available-for-sale investment securities portfolio as of December 31, 1997, follows: ================================================================================== Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------- U.S. Treasury securities $276,009 $1,845 ($64) $277,790 Securities of U.S. Government agencies and corporations 180,792 963 (631) 181,124 Obligations of States and political subdivisions 196,811 6,653 (59) 203,405 Asset-backed securities 183,982 518 (123) 184,377 Other securities 133,837 22,834 (133) 156,538 - ---------------------------------------------------------------------------------- Total $971,431 $32,813 ($1,010) $1,003,234 ================================================================================== An analysis of the held-to-maturity investment securities portfolio as of December 31, 1997, follows: ================================================================================== Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------- Securities of U.S. Government agencies and corporations $83,656 $460 ($611) $83,505 Obligations of States and political subdivisions 136,965 6,126 (39) 143,052 Other securities 10,339 -- -- 10,339 - ---------------------------------------------------------------------------------- Total $230,960 $6,586 ($650) $236,896 ================================================================================== The amortized cost and estimated market value of securities at December 31, 1998, by contractual maturity, are shown in the following table: ================================================================================== Securities Available Securities Held for Sale to Maturity - ---------------------------------------------------------------------------------- Estimated Estimated Maturity in years Amortized Market Amortized Market (In thousands) Cost Value Cost Value - ---------------------------------------------------------------------------------- 1 year or less $210,749 $212,304 $2,217 $2,219 1 to 5 years 477,014 484,608 22,838 23,490 5 to 10 years 112,490 116,065 88,548 92,985 Over 10 years 107,339 111,441 33,515 35,534 - ---------------------------------------------------------------------------------- Sub-total 907,592 924,418 147,118 154,228 Mortgage-backed 24,493 25,281 69,235 68,922 Other securities 19,871 37,962 10,640 10,640 - ---------------------------------------------------------------------------------- Total $951,956 $987,661 $226,993 $233,790 ==================================================================================
Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-backed securities. At December 31, 1998 and 1997, the Company had no high-risk collateralized mortgage obligations. As of December 31, 1998, $607.1 million of investment securities were pledged to secure public deposits and short-term funding needs, compared to $515.3 million in 1997. Note 3: Loans and Allowance for Loan Losses - -------------------------------------------
Loans at December 31, consisted of the following: ================================================================================== (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- Commercial $725,677 $744,382 Real estate-commercial 751,235 692,736 Real estate-construction 57,998 66,782 Real estate-residential 384,128 361,909 - ---------------------------------------------------------------------------------- Total real estate loans 1,193,361 1,121,427 Installment and personal 385,204 404,382 Unearned income (6,345) (8,254) - ---------------------------------------------------------------------------------- Gross loans 2,297,897 2,261,937 Allowance for loan losses (51,304) (50,630) - ---------------------------------------------------------------------------------- Net loans $2,246,593 $2,211,307 ================================================================================== Included in real estate-residential at December 31, 1998 and 1997 are loans held for resale of $13.3 million and $3.3 million, respectively, the cost of which approximates market value. The following summarizes the allowance for loan losses of the Company for the periods indicated: ================================================================================== (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------- Balance at January 1, $50,630 $50,921 $48,494 Provision for loan losses 5,180 7,645 12,306 Loans charged off (8,568) (12,484) (16,017) Recoveries of loans previously previously charged off 4,062 4,548 4,473 Allowance acquired through merger -- -- 1,665 - ---------------------------------------------------------------------------------- Balance at December 31, $51,304 $50,630 $50,921 ================================================================================== The following is a summary of interest foregone on non-accrual and restructured loans for the years ended December 31: ================================================================================== (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------- Interest income that would have been recognized had the loans performed in accordance with their original terms $855 $1,632 $1,642 Less: Interest income recognized on non-accrual and restructured loans (573) (462) (270) - ---------------------------------------------------------------------------------- Interest foregone on non-accrual and restructured loans $282 $1,170 $1,372 ==================================================================================
There were no commitments to lend additional funds to borrowers whose loans are included above. At December 31, 1998, the recorded investment in loans for which impairment was recognized totaled $15.0 million compared to $22.5 million at December 31, 1997. The specific reserves at December 31, 1998 and 1997 were $1.3 million and $2.2 million, respectively. The amount of that recorded investment for which there is no related allowance for credit losses was $0. For the year ended December 31, 1998, the average recorded net investment in impaired loans was approximately $15.9 million compared to $22.0 million and $24.2 million, respectively, at December 31, 1997 and 1996. In general, the Company does not recognize any interest income on trouble debt restructurings or on loans that are classified as non-accrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company's recorded investment in such loans is deemed collectible. Note 4: Concentration of Credit Risk - ------------------------------------ The Company's business activity is with customers in Northern and Central California. The loan portfolio is well diversified with no industry comprising greater than 10 percent of total loans outstanding as of December 31, 1998 and 1997. The Company has a significant amount of credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 3, the Company had loan commitments and standby letters of credit related to real estate loans of $95.3 million and $69.8 million at December 31, 1998 and 1997, respectively. The Company requires collateral on all real estate loans and generally attempts to maintain loan-to-value ratios no greater than 75 percent on commercial real estate loans and no greater than 80 percent on residential real estate loans. Note 5: Premises and Equipment - ------------------------------
Premises and equipment as of December 31 consisted of the following: ================================================================================== Accumulated Depreciation and Net Book (In thousands) Cost Amortization Value - ---------------------------------------------------------------------------------- 1998 Land $10,360 $- $10,360 Buildings and improvements 33,729 (9,757) 23,972 Leasehold improvements 5,763 (3,616) 2,147 Furniture and equipment 17,745 (8,253) 9,492 - ---------------------------------------------------------------------------------- Total $67,597 ($21,626) $45,971 ================================================================================== 1997 Land $10,365 $- $10,365 Buildings and improvements 34,756 (9,437) 25,319 Leasehold improvements 5,864 (3,413) 2,451 Furniture and equipment 19,650 (9,373) 10,277 - ---------------------------------------------------------------------------------- Total $70,635 ($22,223) $48,412 ==================================================================================
Depreciation and amortization included in operating expenses amounted to $5.5 million in 1998, $7.5 million in 1997 and $8.5 million in 1996. Note 6: Borrowed Funds - ----------------------
Debt financing and notes payable, including the unsecured obligations of the Company, as of December 31, 1998 and 1997, were as follows: ================================================================================== (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- Federal Home Loan Bank notes in increments of $5.0 million starting in 1994 and each dated December 1. Interest payable quarterly at prime minus 2.05% to 2.32%; principal payable annually in $5.0 million increments collateralized by $30.0 million of commercial and mortgage loans. $5,000 $10,000 Subordinated note, issued by Westamerica Bank, originated in December 1993 and maturing September 30, 2003. Interest of 6.99% per annum is payable semiannually on March 31 and September 30, with principal payment due at maturity. 20,000 20,000 Senior notes, originated in February 1996 and maturing February 1, 2006. Interest of 7.11% per annum is payable semiannually on February 1 and August 1, with certain required payments commencing February 1, 2000 and the remaining principal amount due at maturity. 22,500 22,500 - ---------------------------------------------------------------------------------- Total debt financing and notes payable $47,500 $52,500 ==================================================================================
The prime rate related to all financing arrangements was 7.75% and 8.50% at December 31, 1998 and 1997, respectively. The senior notes are subject to financial covenants requiring the Company to maintain, at all times, certain minimum levels of consolidated tangible net worth and maximum levels of capital debt. The Company is currently in compliance with all of the covenants in the senior notes indenture. At December 31, 1998 and 1997, the Company had unused lines of credit amounting to $62.5 million and $2.5 million, respectively. Compensating balance arrangements are not significant to the operations of the Company. At December 31, 1998 and 1997, the Banks had $418.2 million and $311.1 million, respectively, in time deposit accounts in excess of $100 thousand. Interest on these time deposit accounts in 1998, 1997 and 1996 was $19.2 million, $17.1 million and $16.8 million, respectively. Funds purchased include federal funds purchased and securities sold with repurchase agreements. Fed funds purchased were $50.0 million at December 31, 1998 and 1997. Securities sold with repurchase agreements were $28.7 million at December 31, 1998 and $103.3 million at December 31, 1997. Securities under these repurchase agreements are held in the custody of independent securities brokers. NOTE 7: SHAREHOLDERS' EQUITY - ----------------------------- In 1995, the Company adopted the 1995 Stock Option Plan. Stock appreciation rights, restricted performance shares, incentive stock options and non-qualified stock options are available under this plan. Under the terms of this plan, 5.4 million shares were reserved for issuance over a period of ten years. Since the adoption of this plan and until its termination, on January 1 of each year 2 percent of the Company's issued and outstanding shares of common stock is to be reserved for granting. At December 31, 1998, 1997, and 1996, approximately 856 thousand, 566 thousand, and 588 thousand shares, respectively, were reserved for issuance. Options are granted at fair market value and are generally exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. A Restricted Performance Share ("RPS") grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period. Under the Stock Option Plan adopted by the Company in 1985, 2.3 million shares were reserved for issuance. Stock appreciation rights, incentive stock options and non-qualified stock options were available under this plan. Options were granted at fair market value and were generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option had a maximum ten-year term while non-qualified stock options may have had a longer term. The 1985 plan was amended in 1990 to provide for RPS grants, which became fully vested after three years of being awarded, provided that the Company had attained its performance goals for such three-year period. PV Financial, CapitolBank Sacramento, and North Bay Bancorp had separate stock option plans (the "Option Plans") whereby options were granted to certain officers, directors, and employees. Following the effective dates of the mergers, the Option Plans were terminated and all outstanding options were substituted for the Company's options, adjusted for the exchange ratios as defined in the merger agreements. ValliCorp Holdings, Inc. also had separate stock option plans whereby options were granted to certain officers, directors, and employees. Effective April 12, 1997, all ValliCorp Holdings, Inc. option plans were terminated. All outstanding options were substituted for the Company's stock options, adjusted for the exchange ratio as defined in the merger agreement. At December 31, 1996, 442,490 shares were available for issuance. There were 95,496 options granted in 1996 under these plans. Stock Options. A summary of the status of the Company's stock options as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates, follows:
============================================================================================================================= 1998 1997 1996 ------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of shares Price of shares Price of shares Price - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,094,387 $12 2,703,450 $10 2,623,974 $9 Granted 604,591 33 522,150 19 783,589 14 Exercised (326,450) 10 (1,056,165) 11 (528,281) 7 Forfeited (82,834) 15 (75,048) 16 (175,832) 13 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 2,289,694 $18 2,094,387 $12 2,703,450 $11 - ----------------------------------------------------------------------------------------------------------------------------- Options exercisable at end of year 1,251,197 1,147,920 1,322,049 ============================================================================================================================= The following table summarizes information about options outstanding at December 31, 1998 and 1997: ================================================================================================== 1998 - -------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise at 12/31/98 Life Price 12/31/98 Price - -------------------------------------------------------------------------------------------------- $ 3 - 5 89,088 2.5 years $4 89,088 $4 5 - 7 131,172 2.5 6 129,245 6 7 - 8 13,944 2.0 8 13,944 8 8 - 9 139,500 4.0 8 139,500 8 9 - 10 242,418 5.0 9 242,418 9 10 - 12 241,874 6.0 10 241,874 10 12 - 14 1,146 7.0 13 1,146 13 14 - 15 11,370 5.5 14 11,370 14 15 - 19 388,577 7.0 15 248,427 15 19 - 20 434,865 8.0 19 134,185 19 33 595,740 9.0 33 --- --- - -------------------------------------------------------------------------------------------------- $ 3 - 33 2,289,694 7.0 years $18 1,251,197 $11 ================================================================================================== ================================================================================================== 1997 - -------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise at 12/31/97 Life Price 12/31/97 Price - -------------------------------------------------------------------------------------------------- $ 3 - 5 126,894 3.5 years $4 85,017 $4 5 - 7 211,491 3 6 208,920 6 7 - 8 194,442 4.8 8 194,442 8 9 - 10 568,824 6.6 10 463,773 10 12 - 14 51,258 6.6 14 51,258 14 15 450,108 8 15 144,510 15 19 491,370 9 19 -- -- - -------------------------------------------------------------------------------------------------- $ 3 - 19 2,094,387 6.7 years $12 1,147,920 $9 ================================================================================================== Restricted Performance Shares. A summary of the status of the Company's RPSs as of December 31, 1998, 1997, and 1996, and changes during the years ended on those dates, follows: ================================================================================================== 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Outstanding at beginning of year 150,690 268,050 270,900 Granted 27,780 64,410 76,800 Exercised (59,850) (99,750) (74,100) Forfeited -- (82,020) (5,550) - -------------------------------------------------------------------------------------------------- Outstanding at end of year 118,620 150,690 268,050 ==================================================================================================
As of December 31, 1998, 1997, and 1996, the RPSs had a weighted-average contractual life of 1.1, 1.1, and 1.2 years, respectively. The Company expects that substantially all of the RPSs outstanding at December 31, 1998 will eventually vest based on projected performance. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock options. The compensation cost that had been charged against income for the Company's RPSs granted was $1.9 million, $2.6 million, and $1.6 million for 1998, 1997, and 1996, respectively. There were no stock appreciation rights or incentive stock options granted in 1998, 1997, and 1996. The fair value of each non-qualified stock option grant is estimated on the date of the grant using the Modified Roll option-pricing model with the following assumptions used for calculating weighted-average RPS grants in 1998, 1997, and 1996.
================================================================================================== 1996 ------------------------------ ValliCorp Westamerica Holdings, 1998 1997 Bancorporation Inc. - -------------------------------------------------------------------------------------------------- Dividend yield 1.64% 1.14% 1.80% 2.50% Expected volatility 20.00 21.43 17.00 37.50 Risk-free interest rate 5.43 6.35 5.40 6.20 Expected lives 6.0 years 6.0 years 6.0 years 4.5 years ==================================================================================================
The weighted-average fair values of non-qualified stock options granted during 1998, 1997, and 1996, were $8.37, $4.64, and $4.06, respectively. The fair value of each RPS is estimated on the date of the grant using the Modified Roll option-pricing model with the following assumptions used for calculating weighted-average RPS grants in 1998, 1997, and 1996.
================================================================================================== 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Dividend yield 1.64% 1.14% 1.80% Expected volatility 20.00 21.43 17.00 Risk-free interest rate 5.35 6.35 5.15 Expected lives 3.0 years 3.0 years 3.0 years ==================================================================================================
The weighted-average fair values of the RPSs granted during 1998, 1997, and 1996 were $31.67, $19.25, and $14.83 respectively. Had compensation cost for the Company's 1995 and 1985 Stock Option Plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
================================================================================== (In thousands, except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------------- Net income As reported $73,396 $48,116 $46,827 Pro forma 70,954 47,298 46,278 Weighted average shares (basic) 41,797 43,040 42,759 Weighted average shares (diluted) 42,524 43,827 43,358 Earnings per share As reported (basic) 1.76 1.12 1.10 As reported (diluted) 1.73 1.10 1.08 Pro forma (basic) 1.70 1.10 1.08 Pro forma (diluted) 1.67 1.08 1.07 ==================================================================================
A reconciliation of the diluted EPS computation to the amounts used in the basic EPS computation for the years ended December 31, are as follows:
================================================================================== Net Number of Per Share (In thousands, except per share data) Income Shares Amount - ---------------------------------------------------------------------------------- 1998 Basic EPS: Income available to common shareholders $73,396 41,797 $1.76 Effect of dilutive securities: Stock options outstanding -- 727 -- - ---------------------------------------------------------------------------------- Diluted EPS: Income available to common shareholders plus assumed conversions $73,396 42,524 $1.73 ================================================================================== 1997 Basic EPS: Income available to common shareholders $48,116 43,040 $1.12 Effect of dilutive securities: Stock options outstanding -- 787 -- - ---------------------------------------------------------------------------------- Diluted EPS: Income available to common shareholders plus assumed conversions $48,116 43,827 $1.10 ================================================================================== 1996 Basic EPS: Income available to common shareholders $46,827 42,759 $1.10 Effect of dilutive securities: Stock options outstanding -- 599 -- - ---------------------------------------------------------------------------------- Diluted EPS: Income available to common shareholders plus assumed conversions $46,827 43,358 $1.08 ==================================================================================
Shareholders have authorized two new classes of 1.0 million shares each, to be denominated "Class B Common Stock" and "Preferred Stock," respectively, in addition to the 150.0 million shares of common presently authorized. At December 31, 1998, no shares of Class B Common Stock or Preferred Stock had been issued. In December 1986, the Company declared a dividend distribution of one common share purchase right (the "Right") for each outstanding share of common stock. The Rights are exercisable only in the event of an acquisition of, or announcement of a tender offer to acquire, 15 percent or more of the Company's stock without the prior consent of the Board of Directors. If the rights become exercisable, the holder may purchase one share of the Company's common stock for $21.667. Following an acquisition of 15 percent of the Company's common stock or 50 percent or more of its assets without prior consent of the Company, each Right will also entitle the holder to purchase $43.333 worth of common stock of the Company for $21.667. Under certain circumstances, the Rights may be redeemed by the Company at $.017 per Right prior to becoming exercisable and in certain circumstances thereafter. The Rights expire on December 31, 1999 or earlier, in connection with certain Board-approved transactions. Note 8: Risk-Based Capital - -------------------------- The Company and the Banks are subject to various regulatory capital adequacy requirements administered by federal and state agencies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate discretionary actions by regulators that, if undertaken, could have a direct, material effect on the Company's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and the Banks maintain minimum ratios of capital to risk-weighted assets. There are two categories of capital under the guidelines. Tier 1 capital includes common shareholders' equity and qualifying preferred stock less goodwill and other deductions including the unrealized net gains and losses, after taxes, of available-for-sale securities. Tier 2 capital includes preferred stock not qualifying for Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Company and the allowance for loan losses, subject to limitations by the guidelines. Under the guidelines, capital is compared to the relative risk of the balance sheet, derived from applying one of four risk weights (0%, 20%, 50% and 100%) to the different balance sheet and off-balance sheet assets, primarily based on the credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. As of December 31, 1998, the Company and the Banks met all capital adequacy requirements to which they are subject. The most recent notification from the Federal Reserve Board categorized the Company and the Banks as well capitalized under the FDICIA regulatory framework for prompt corrective action. To be well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. Since that notification, there are no conditions or events that Management believes have changed the risk-based capital category of the Company or the Banks. The following table shows capital ratios for the Company and the Banks as of December 31, 1998 and 1997:
============================================================================================================================= To Be Well 1998 Capitalized Under the FDICIA For Capital Prompt Corrective (In thousands) Actual Adequacy Purposes Action Provisions: - ----------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------------------- Total Capital (to risk-weighted assets) Consolidated Company $414,141 13.79% $240,238 8.00% $300,297 10.00% Westamerica Bank 367,878 12.75% 230,737 8.00% 288,421 10.00% Bank of Lake County 8,599 13.33% 5,162 8.00% 6,452 10.00% Tier 1 Capital (to risk weighted assets) Consolidated Company 356,434 11.87% 120,119 4.00% 180,178 6.00% Westamerica Bank 305,661 10.60% 115,369 4.00% 173,053 6.00% Bank of Lake County 7,782 12.06% 2,581 4.00% 3,871 6.00% Leverage Ratio * Consolidated Company 356,434 9.39% 151,812 4.00% 189,765 5.00% Westamerica Bank 305,661 8.32% 146,996 4.00% 183,745 5.00% Bank of Lake County 7,782 8.59% 3,626 4.00% 4,532 5.00% =============================================================================================================================
============================================================================================================================= To Be Well 1997 Capitalized Under the FDICIA For Capital Prompt Corrective (In thousands) Actual Adequacy Purposes Action Provisions: - ----------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------------------- Total Capital (to risk-weighted assets) Consolidated Company $431,552 14.76% $233,919 8.00% $292,398 10.00% Westamerica Bank 383,447 13.68% 224,306 8.00% 280,383 10.00% Bank of Lake County 9,208 14.37% 5,126 8.00% 6,408 10.00% Tier 1 Capital (to risk weighted assets) Consolidated Company 374,828 12.82% 116,959 4.00% 175,439 6.00% Westamerica Bank 322,228 11.49% 112,153 4.00% 168,230 6.00% Bank of Lake County 8,398 13.11% 2,563 4.00% 3,845 6.00% Leverage Ratio * Consolidated Company 374,828 9.97% 150,312 4.00% 187,890 5.00% Westamerica Bank 322,228 8.86% 145,512 4.00% 181,890 5.00% Bank of Lake County 8,398 9.24% 3,637 4.00% 4,547 5.00% =============================================================================================================================
* The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum leverage ratio guideline is 3 percent for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Note 9: Income Taxes - -------------------- Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the amounts reported in the financial statements of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Amounts for the current year are based upon estimates and assumptions as of the date of these financial statements and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1997 are primarily as a result of adjustments to conform to tax returns as filed. The components of the net deferred tax asset as of December 31, are as follows: ==================================================================== (In thousands) 1998 1997 - -------------------------------------------------------------------- Deferred tax asset Reserve for loan losses $20,833 $20,448 State franchise taxes 3,760 2,837 Deferred compensation 2,719 2,299 Real estate owned 1,033 2,276 Interest on non-accrual loans 604 426 Reserve for long-term lease commitments 62 1,080 Other reserves 722 963 Other 1,084 821 Net operating loss carryforwards 326 584 General tax credit carryforwards 215 215 - -------------------------------------------------------------------- Subtotal deferred tax asset 31,358 31,949 Valuation allowance -- -- - -------------------------------------------------------------------- Total deferred tax asset 31,358 31,949 - -------------------------------------------------------------------- Deferred tax liability Net deferred loan costs 2,849 3,289 Fixed assets 1,992 1,634 Securities available for sale 15,164 13,523 Intangible assets 364 827 Leases 746 675 Other 118 210 - -------------------------------------------------------------------- Total deferred tax liability 21,233 20,158 - -------------------------------------------------------------------- Net deferred tax asset $10,125 $11,791 ==================================================================== The Company believes a valuation allowance is not needed to reduce the gross deferred tax asset because it is more likely than not that the gross deferred tax asset will be realized through recoverable taxes or future taxable income. The provision for federal and state income taxes consists of amounts currently payable and amounts deferred which, for the years ended December 31, are as follows:
================================================================================== (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------- Current income tax expense: Federal $26,530 $18,164 $17,311 State 11,421 8,223 7,805 - ---------------------------------------------------------------------------------- Total current 37,951 26,387 25,116 - ---------------------------------------------------------------------------------- Deferred income tax (benefit) expense: Federal (184) (594) (1,620) State 209 197 (75) - ---------------------------------------------------------------------------------- Total deferred 25 (397) (1,695) Adjustment of net deferred tax asset for enacted changes in tax rates: Federal -- -- -- State -- -- 184 - ---------------------------------------------------------------------------------- Provision for income taxes $37,976 $25,990 $23,605 ================================================================================== The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate to income before taxes, as follows: ================================================================================== (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------- Federal income taxes due at statutory rate $38,980 $25,937 $24,669 (Reductions) increases in income taxes resulting from: Interest on state and municipal securities not taxable for federal income tax purposes (7,815) (6,872) (5,906) Reduction in the valuation allowance -- (486) -- State franchise taxes, net of federal income tax benefit 7,560 5,473 5,198 Costs related to acquisitions -- 3,183 367 Other (749) (1,245) (723) - ---------------------------------------------------------------------------------- Provision for income taxes $37,976 $25,990 $23,605 ==================================================================================
At December 31, 1998, the Company had the following net operating loss and the general tax credit carryforwards for tax return purposes:
================================================================================== Net Expires December 31, Operating Loss Tax Credit (In thousands) Carryforwards Carryforwards - ---------------------------------------------------------------------------------- 2003 $-- $215 2007 918 -- 2008 14 -- - ---------------------------------------------------------------------------------- Total $932 $215 ==================================================================================
Note 10: Fair Value of Financial Instruments - -------------------------------------------- The fair value of financial instruments does not represent actual amounts that may be realized upon the sale or liquidation of the related assets or liabilities. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities. The fair values presented represent the Company's best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. Such financial instruments and their estimated fair values at December 31, were:
================================================================================== (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- Cash and cash equivalents $229,734 $250,824 Money market assets 250 250 Interest and taxes receivable 54,773 59,384 Non-interest bearing and interest-bearing transaction and savings deposits 2,346,562 2,309,359 Funds purchased 203,671 264,848 Interest payable 6,970 6,569 ================================================================================== The fair values at December 31, of the following financial instruments were estimated using quoted market prices: - ---------------------------------------------------------------------------------- (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- Investment securities available for sale $987,661 $1,003,234 Investment securities held to maturity 233,790 236,896 ==================================================================================
Loans were separated into two groups for valuation. Variable rate loans, except for those described below which reprice frequently with changes in market rates, were valued using historical data. Fixed rate loans and variable rate loans that have reached their maximum rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the $51.3 million allowance for loan losses in 1998 and $50.6 million in 1997 were applied against the estimated fair values to recognize future defaults of contractual cash flows. The estimated fair values of loans at December 31, were:
================================================================================== (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- Loans $2,254,747 $2,210,087 ==================================================================================
The fair values of time deposits and notes and mortgages payable were estimated by discounting future cash flows related to these financial instruments using current market rates for financial instruments with similar characteristics. The estimated fair values at December 31, were:
================================================================================== (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- Time deposits $844,080 $768,881 Debt financing and notes payable 47,500 52,724 ==================================================================================
The majority of the Company's commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. Note 11: Lease Commitments - -------------------------- Thirty-seven banking offices and a centralized administrative service center are owned and fifty-two banking offices are leased. Substantially all the leases contain multiple renewal options and provisions for rental increases, principally for cost of living index, property taxes and maintenance. The Company also leases certain pieces of equipment. Minimum future rental payments, net of sublease income, at December 31, 1998, are as follows: ==================================================================== (In thousands) - -------------------------------------------------------------------- 1999 $5,797 2000 3,865 2001 2,542 2002 1,863 2003 1,353 Thereafter 5,285 - -------------------------------------------------------------------- Total minimum lease payments $20,705 ==================================================================== Total rentals for premises and equipment net of sublease income included in non-interest expense were $5.2 million in 1998, $6.3 million in 1997 and $8.4 million in 1996. Note 12: Commitments and Contingent Liabilities - ----------------------------------------------- Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company's normal credit policies and collateral requirements. Unfunded loan commitments were $384.7 million and $395.9 million at December 31, 1998 and 1997, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers' short-term financing requirements and must meet the Company's normal credit policies and collateral requirements. Standby letters of credit outstanding totaled $11.9 million and $13.1 million at December 31, 1998 and 1997, respectively. The Company, because of the nature of its business, is subject to various threatened or filed legal cases. The Company, based on the advice of legal counsel, does not expect such cases will have a material, adverse effect on its financial position or results of operations. Note 13: Retirement Benefit Plans - --------------------------------- As of February 28, 1997, the Company terminated its defined benefit Retirement Plan which covered substantially all of its salaried employees with one or more years of service. Pursuant to the Retirement Plan termination, the distribution of its assets was recognized as a settlement. A settlement is defined as "a transaction that (a) is an irrevocable action, (b) relieves the employer (or the plan) of primary responsibility for a pension benefit obligation, and eliminates significant risks related to the obligation and the assets used to effect the settlement." The effect of the distribution of assets to settle all plan liabilities resulted in no net gain or loss for the year ended December 31, 1997. The Company's policy was to expense costs as they accrued as determined by the Projected Unit Cost method. The Company's funding policy was to contribute annually the maximum amount that could be deducted for federal income tax purposes. The 1997 pension expense was $143 thousand. The Company sponsors a defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. The costs charged to non-interest expense related to benefits provided by the Deferred Profit-Sharing Plan were $1.6 million in 1998. The costs charged to non-interest expense related to benefits provided by the Deferred Profit-Sharing Plan and the Retirement Plan were $1.0 million in 1997 and $1.3 million in 1996. In addition to the Deferred Profit-Sharing Plan, all salaried employees are eligible to participate in the voluntary Tax Deferred Savings/Retirement Plan (ESOP) upon completion of a 90-day introductory period. The Tax Deferred Savings/Retirement Plan allows employees to defer, on a pretax basis, a portion of their salaries as contributions to this Plan. Participants may invest in 10 funds, including one fund that invests exclusively in Westamerica Bancorporation common stock. The matching contributions charged to compensation expense were $1.6 million in 1998, $1.8 million in 1997 and $1.8 million in 1996. Effective December 15, 1997, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132"). Adoption of SFAS 132 revises the necessary disclosure requirements for pension and other postretirement benefit plans. The Company continues to use an actuarial-based accrual method of accounting for postretirement benefits. The Company offers a continuation of group insurance coverage to employees electing early retirement, for the period from the date of retirement until age 65. The Company contributes an amount toward early retirees' insurance premiums which is determined at the time of early retirement. The Company reimburses Medicare Part B premiums for all retirees over age 65. The following table sets forth the net periodic postretirement benefit cost for the years ended December 31, the funded status of the Plan and the change in the benefit obligation as of December 31: ==================================================================== (In thousands) 1998 1997 - -------------------------------------------------------------------- Periodic cost: Service cost $217 $408 Interest cost 118 127 Amortization of unrecognized transition obligation 61 61 - -------------------------------------------------------------------- Net periodic cost $396 $596 ==================================================================== Change in benefit obligation: Benefit obligation, beginning of year $2,355 $1,952 Service cost 217 408 Interest cost 118 127 Benefits paid (156) (132) - -------------------------------------------------------------------- Benefit obligation, end of year $2,534 $2,355 ==================================================================== Accumulated postretirement benefit obligation attributable to: Retirees $1,574 $1,180 Fully eligible participants 638 622 Other 322 553 - -------------------------------------------------------------------- Total 2,534 2,355 - -------------------------------------------------------------------- Fair value of plan assets -- -- - -------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets $2,534 $2,355 ==================================================================== Comprised of: Unrecognized transition obligation $1,163 $1,224 Recognized postretirement obligation 1,371 1,131 - -------------------------------------------------------------------- Total $2,534 $2,355 ==================================================================== The discount rate used in measuring the accumulated post- retirement benefit obligation was 5.0 percent and 6.5 percent at December 31, 1998 and 1997, respectively. The assumed health care cost trend rate used to measure the expected cost of benefits covered by the plan was 3 percent for 1999 and beyond. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change on the assumed health care cost trend rates would have the following effect on 1998 results: ==================================================================== One One Percentage Percentage Point Point (In thousands) Increase Decrease - -------------------------------------------------------------------- Effect on total of service and interest cost components $170 ($139) Effect on postretirement benefit obligation 382 (311) ==================================================================== Note 14: Related Party Transactions - ----------------------------------- Certain directors and executive officers of the Company and/or its subsidiaries were loan customers of the Banks during 1998 and 1997. All such loans were made in the ordinary course of business on normal credit terms, including interest rate and collateral requirements. In the opinion of Management, these credit transactions did not involve, at the time they were contracted, more than the normal risk of collectibility or present other unfavorable features. The table below reflects information concerning loans to certain directors and executive officers and/or family members during 1998 and 1997: ==================================================================== (In thousands) 1998 1997 - -------------------------------------------------------------------- Beginning balance $2,489 $5,390 Originations 1,350 816 Payoffs/principal payments (181) (1,068) Other changes * (390) (2,649) - -------------------------------------------------------------------- At December 31, $3,268 $2,489 ==================================================================== Percent of total loans outstanding 0.14% 0.11% ==================================================================== * Other changes in 1998 and 1997 include loans to former directors and executive officers who are no longer related parties. Note 15: Regulatory Matters - --------------------------- Payment of dividends to the Company by the Banks is limited under regulations for Federal Reserve member banks. The amount that can be paid in any calendar year, without prior approval from regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits of the preceding two calendar years less dividends paid. Under this regulation, Westamerica Bank (the largest subsidiary bank) sought and obtained approval to pay to the Company dividends of $8.6 million in excess of net profits. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972. As of December 31, 1998, $119.9 million was available for payment of dividends by the Company to its shareholders. The Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of its reservable deposits. The Banks' daily average on deposit at the Federal Reserve Bank was $25.8 million in 1998 and $31.5 million in 1997.
Note 16: Westamerica Bancorporation (Parent Company Only) - --------------------------------------------------------- Statements of Income and Comprehensive Income (In thousands) ================================================================================================== For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Dividends from subsidiaries $93,606 $41,538 $44,467 Interest income 1,731 1,903 1,851 Other income 6,809 5,317 4,248 - -------------------------------------------------------------------------------------------------- Total income 102,146 48,758 50,566 - -------------------------------------------------------------------------------------------------- Interest on borrowings 1,620 1,624 1,501 Salaries and benefits 6,199 6,634 5,911 Other expense 3,056 8,046 6,398 - -------------------------------------------------------------------------------------------------- Total expenses 10,875 16,304 13,810 - -------------------------------------------------------------------------------------------------- Income before taxes and equity in undistributed income of subsidiaries 91,271 32,454 36,756 Income tax benefit 1,550 2,101 2,783 (Return of) equity in undistributed income from subsidiaries (19,425) 13,561 7,288 - -------------------------------------------------------------------------------------------------- Net income $73,396 $48,116 $46,827 ================================================================================================== Comprehensive income, net: Change in unrealized gains on securities available for sale, net (2,420) 7,619 5,052 - -------------------------------------------------------------------------------------------------- Comprehensive income $70,976 $55,735 $51,879 ==================================================================================================
Balance Sheets (In thousands) ================================================================================== December 31, 1998 1997 - ---------------------------------------------------------------------------------- Assets Cash and cash equivalents $5,547 $29,897 Money market assets and investment securities available for sale 22,431 27,183 Line of credit from subsidiaries 2,896 3,776 Investment in subsidiaries 346,839 361,083 Premises and equipment, net 16,592 17,143 Accounts receivable from subsidiaries 340 1,253 Other assets 6,581 5,252 - ---------------------------------------------------------------------------------- Total assets $401,226 $445,587 ================================================================================== Liabilities Notes payable $22,500 $22,500 Other liabilities 10,130 15,935 - ---------------------------------------------------------------------------------- Total liabilities 32,630 38,435 Shareholders' equity 368,596 407,152 - ---------------------------------------------------------------------------------- Total liabilities and shareholders' equity $401,226 $445,587 ==================================================================================
Statements of Cash Flows (In thousands) ================================================================================================== For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Operating Activities Net income $73,396 $48,116 $46,827 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 813 684 450 Return of (equity in) undistributed income from subsidiaries 19,425 (13,561) (7,288) Decrease (increase) in accounts receivable from subsidiaries 913 (906) (96) Decrease in other assets 1,544 405 308 Increase (decrease) in other liabilities (6,922) (885) 1,373 Gain on sales of assets (3,216) (1,756) -- - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 85,953 32,097 41,574 - -------------------------------------------------------------------------------------------------- Investing Activities Purchases of premises and equipment (262) (1,505) (10,826) Net cash obtained in merger -- -- 218 Net change in land held for sale -- -- 721 Net change in loan balances 880 (3,776) -- Investment in subsidiaries (500) -- (500) Purchases of investment securities available for sale -- -- (756) Proceeds from sale of other assets 3,792 2,260 -- - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 3,910 (3,021) (11,143) - -------------------------------------------------------------------------------------------------- Financing Activities Net (reductions) additions in notes payable -- (677) 21,988 Exercise of stock options/issuance of shares 12,475 16,853 5,516 Retirement of common stock (104,824) (35,594) (27,561) Dividends (21,864) (13,406) (7,904) - -------------------------------------------------------------------------------------------------- Net cash used in financing activities (114,213) (32,824) (7,961) - -------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (24,350) (3,748) 22,470 Cash and cash equivalents at beginning of year 29,897 33,645 11,175 - -------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $5,547 $29,897 $33,645 ================================================================================================== Supplemental disclosure: Non-cash dividend in the form of real property from Westamerica Bank $-- $-- $3,755 Unrealized gain on securities available for sale, net 2,261 11,904 6,126 Conversion of subordinated notes into common stock -- -- 84 Issuance of common stock for acquisition -- -- 13,267
Note 17: Quarterly Financial Information (Unaudited) - ----------------------------------------------------
================================================================================================================== (In thousands, except per share data and price range of common stock) March 31, June 30, September 30, December 31, - ------------------------------------------------------------------------------------------------------------------ 1998 Interest income $66,654 $66,994 $67,457 $65,715 Net interest income 44,927 44,644 45,010 45,574 Provision for loan losses 1,395 1,395 1,195 1,195 Non-interest income 8,986 9,584 9,451 9,784 Non-interest expense 25,340 25,359 25,153 25,556 Income before taxes 27,178 27,474 28,113 28,607 Net income 18,096 18,102 18,436 18,762 Basic earnings per share 0.42 0.43 0.44 0.47 Diluted earnings per share 0.41 0.42 0.44 0.46 Dividends paid per share 0.12 0.12 0.14 0.14 Price range, common stock 30.67-35.25 28.50-36.38 23.63-33.63 23.88-37.25 - ------------------------------------------------------------------------------------------------------------------ 1997 Interest income $66,526 $67,417 $68,477 $68,250 Net interest income 44,423 45,501 46,307 46,385 Provision for loan losses 3,550 1,050 1,650 1,395 Non-interest income 9,789 9,477 8,776 8,971 Non-interest expense 36,572 49,174 26,202 25,930 Income before taxes 14,091 4,753 27,231 28,031 Net income 9,365 2,813 17,660 18,278 Basic earnings per share 0.21 0.07 0.41 0.43 Diluted earnings per share 0.21 0.07 0.40 0.42 Dividends paid per share 0.08 0.09 0.09 0.10 Price range, common stock 18.83-24.17 19.27-25.83 24.58-29.33 28.54-35.00 ==================================================================================================================
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Westamerica Bancorporation: We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation and subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. As discussed in Note 1 to the consolidated financial statements, the consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for the year ended December 31, 1996 and the related footnote disclosures have been restated on a historical basis to reflect the April 12, 1997 acquisition of ValliCorp Holdings, Inc. on a pooling-of-interests basis. We did not audit the consolidated financial statements of ValliCorp Holdings, Inc. for the year ended December 31, 1996, which statements reflect net income constituting 19 percent for the year ended December 31, 1996 of the related and restated consolidated totals. Those statements included in the 1996 restated consolidated totals were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for ValliCorp Holdings, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westamerica Bancorporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/KPMG LLP - ----------- KPMG LLP San Francisco, California January 19, 1999 MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY To Our Shareholders: The Management of Westamerica Bancorporation is responsible for the preparation, integrity, reliability and consistency of the information contained in this annual report. The consolidated financial statements, which necessarily include amounts based on judgments and estimates, were prepared in conformity with generally accepted accounting principles and prevailing practices in the banking industry. All other financial information appearing throughout this annual report is presented in a manner consistent with the consolidated financial statements. Management has established and maintains a system of internal controls that provides reasonable assurance that the underlying financial records are reliable for preparing the consolidated financial statements, and that assets are safeguarded from unauthorized use or loss. This system includes extensive written policies and operating procedures and a comprehensive internal audit function, and is supported by the careful selection and training of staff, an organizational structure providing for division of responsibility, and a Code of Ethics covering standards of personal and business conduct. Management believes that, as of December 31, 1998, the Corporation's internal control environment is adequate to provide reasonable assurance as to the integrity and reliability of the consolidated financial statements and related financial information contained in the annual report. The system of internal controls is under the general oversight of the Board of Directors acting through its Audit Committee, which is comprised entirely of outside directors. The Audit Committee monitors the effectiveness of and compliance with internal controls through a continuous program of internal audit and credit examinations. This is accomplished through periodic meetings with Management, internal auditors, loan quality examiners, regulatory examiners and independent auditors to assure that each is carrying out their responsibilities. The Corporation's consolidated financial statements have been audited by KPMG LLP, independent certified public accountants elected by the shareholders. All financial records and related data, as well as the minutes of shareholders and directors meetings, have been made available to them. Management believes that all representations made to the independent auditors during their audit were valid and appropriate. /s/ David L. Payne - ------------------ David L. Payne Chairman, President and Chief Executive Officer /s/ Jennifer J. Finger - ---------------------- Jennifer J. Finger Senior Vice President and Chief Financial Officer /s/ Dennis R. Hansen - -------------------- Dennis R. Hansen Senior Vice President and Controller REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Westamerica Bancorporation: We have audited the consolidated statements of income, stockholders' equity, and cash flows (none of which are presented herein) of ValliCorp Holdings, Inc. (the Company) and subsidiaries for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ValliCorp Holdings, Inc. and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP Fresno, California January 24, 1997 ITEM 9. Changes in and Disagreements on Accounting and Financial - ---------------------------------------------------------------- Disclosure - ---------- Not applicable PART III ITEM 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The information regarding directors of the registrant required by this Item 10 is incorporated herein by reference from the "Election of Directors" and Section 16(a) "Beneficial Ownership Reporting Compliance" sections on Pages 2,3 and 6 of the Company's Proxy Statement dated March 17, 1999, which has been filed with the Commission pursuant Regulation 14A. Executive Officers - ------------------ The executive officers of the Corporation and Westamerica Bank serve at the pleasure of the Board of Directors and are subject to annual appointment by the Board at its first meeting following the Annual Meeting of Shareholders. It is anticipated that each of the executive officers listed below will be reappointed to serve in such capacities at that meeting. Held Name of Executive Position Since - ----------------- ------------------------------------ --------- David L. Payne Mr. Payne, born in 1955, is the 1984 Chairman of the Board, President and Chief Executive Officer of the Corporation. Mr. Payne is President and Chief Executive Officer of Gibson Printing and Publishing Company and Gibson Radio and Publishing Company which are newspaper, commercial printing and real estate investment companies headquartered in Vallejo, California. E. Joseph Bowler Mr. Bowler, born in 1936, is Senior 1980 Vice President and Treasurer for the Corporation. Robert W. Entwisle Mr. Entwisle, born in 1947, is Senior 1986 Vice President in charge of the Banking Division of Westamerica Bank. Jennifer F. Finger Ms. Finger, born in 1954, is Senior 1997 Vice President and Chief Financial Officer for the Corporation. From 1993 to 1997, Ms. Finger was Senior Vice President of Corporate Development with Star Banc Corporation in Cincinnati, Ohio. Evan N. Fricker Mr. Fricker, born in 1938, is Vice 1983 President and General Auditor for the Corporation. Charles L. Fritz * Mr. Fritz, born in 1936, is Executive 1988 Vice President and Chief Credit Officer of the Corporation. Dennis R. Hansen Mr. Hansen, born in 1950, is Senior 1978 Vice President and Controller for the Corporation. Thomas S. Lenz Mr. Lenz, born in 1937, is Senior Vice 1989 President and Chief Credit Administrator of Westamerica Bank. Hans T. Y. Tjian Mr. Tjian, born in 1939, is Senior 1989 Vice President and manager of the Operations and Systems Administration of Westamerica Bank. * Mr. Fritz retired effective December 31, 1998, but pursuant to an agreement will continue to receive compensation through approximately April 1, 1999. ITEM 11. Executive Compensation - ------------------------------- The information required by this Item 11 is incorporated herein by reference from the "Executive Compensation" and "Other Arrangements" sections on Pages 7 through 10 of the Company's Proxy Statement dated March 17, 1999, which has been filed with the Commission pursuant to Regulation 14A. ITEM 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- The information required by this Item 12 is incorporated herein by reference from the "Security Ownership of Certain Beneficial Owners and Management" section on Pages 5 and 6 of the Company's Proxy Statement dated March 17, 1999, which has been filed with the Commission pursuant to Regulation 14A. ITEM 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The information required by this Item 13 is incorporated herein by reference from the "Certain Information About the Board of Directors and Certain Committees of the Board - Indebtedness of Directors and Management" section on Page 5 of the Company's Proxy Statement dated March 17, 1999, which has been filed with the Commission pursuant to Regulation 14A. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------ (a) 1. All Financial Statements See Index to Financial Statements on page (a) 2. Financial statement schedules required. None. (Information included in Financial Statements) (a) 3. Exhibits The following documents are included or incorporated by reference in this annual report on Form 10-K: Exhibit Number 2(a) Agreement and Plan of Reorganization, between and among Westamerica Bancorporation, ValliCorp Holdings, Inc., and ValliWide Bank, incorporated herein by reference to Exhibit 2.1 of Registrant's Registration Statement on Form S-4, Commission File No. 333-17335, filed with the Securities and Exchange Commission on December 5, 1996. 3(a) Restated Articles of Incorporation (composite copy), incorporated herein by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission on March 30, 1998. 3(b) By-laws, as amended (composite copy). 4(a) Amended and Restated Rights Agreement dated March 23, 1995, incorporated herein by reference to Exhibit 4.2 to the Registrant's Amendment No. 1 to Registration Statement on Form S-4, Commission File No. 333-17335, filed with the Securities and Exchange Commission on January 6, 1997. 10(a)* 1995 Stock Option Plan, incorporated herein by reference to Exhibit 10(a) to the Registrant's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on June 6, 1995. 10(b)* Employment Agreement with E. Joseph Bowler dated January 7, 1987. 10(c)* Employment Agreement with Robert W. Entwisle dated January 7, 1987. 10(d) Senior Note Agreement of Westamerica Bancorporation dated February 1, 1996, of $22,500,000 at 7.11 percent incorporated herein by reference to Exhibit 10-j of Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1995, filed with the Securities and Exchange Commission on May 1, 1996. 11 Computation of Earnings Per Share on common and common equivalent shares and on common shares assuming full dilution. 21 Subsidiaries of the registrant. 23(a) Consent of KPMG LLP 23(b) Consent of Deloitte & Touche LLP (27) Financial Data Schedule ---------------------- * Indicates management contract or compensatory plan or arrangement. The Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to the Office of the Corporate Secretary, Westamerica Bancorporation, P.O. Box 567, San Rafael, California 94915, and payment to the Company of $.25 per page. (b) 1. Report on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTAMERICA BANCORPORATION /s/ Dennis R. Hansen /s/ Jennifer J. Finger - -------------------- ---------------------- Dennis R. Hansen Jennifer J. Finger Senior Vice President and Controller Senior Vice President and Principal Accounting Officer Chief Financial Officer Date: March 22, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date - --------- ----- ---- /s/ David L. Payne Chairman of the Board, March 25, 1999 - ------------------------------Director, President, David L. Payne And Chief Executive Officer /s/ E. Joseph Bowler Senior Vice President March 25, 1999 - ------------------------------and Treasurer E. Joseph Bowler /s/ Etta Allen Director March 25, 1999 - ------------------------------ Etta Allen /s/ Louis E. Bartolini Director March 25, 1999 - ------------------------------ Louis E. Bartolini /s/ Louis H. Herwaldt Director March 25, 1999 - ------------------------------ Louis H. Herwaldt /s/ Arthur C. Latno Director March 25, 1999 - ------------------------------ Arthur C. Latno /s/ Patrick D. Lynch Director March 25, 1999 - ------------------------------ Patrick D. Lynch /s/ Catherine Cope MacMillan Director March 25, 1999 - ------------------------------ Catherine Cope MacMillan /s/ Patrick J. Mon Pere Director March 25, 1999 - ------------------------------ Patrick J. Mon Pere /s/ Michael J. Ryan, Jr. Director March 25, 1999 - ------------------------------ Michael J. Ryan, Jr. /s/ Edward B. Sylvester Director March 25, 1999 - ------------------------------ Edward B. Sylvester EX-3 2 EXHIBIT 3(b) COMPOSITE COPY BYLAWS OF WESTAMERICA BANCORPORATION a California corporation Last Amendment: February 26, 1998 TABLE OF CONTENTS ARTICLE I - OFFICES Section 1.01. Principal Offices Section 1.02. Other Offices ARTICLE I - MEETINGS OF SHAREHOLDERS Section 2.01. Place of Meetings Section 2.02. Annual Meeting Section 2.03. Special Meeting Section 2.04. Notice of Shareholders' Meetings Section 2.05. Manner of Giving Notice: Affidavit of Notice Section 2.06. Quorum Section 2.07. Adjourned Meeting: Notice Section 2.08. Voting Section 2.09. Waiver of Notice or Consent by Absent Shareholders Section 2.10. Shareholder Action by Written Consent Without a Meeting Section 2.11. Record Date for Shareholder Notice, Voting and Giving Consents Section 2.12. Proxies Section 2.13. Inspectors of Election Section 2.14. Nominations for Director ARTICLE III - DIRECTORS Section 3.01. Powers Section 3.02. Number and Qualification of Directors Section 3.03. Election and Term of Office of Directors Section 3.04. Vacancies Section 3.05. Place of Meetings and Meetings by Telephone Section 3.06. Annual Meeting Section 3.07. Other Regular Meetings Section 3.08. Special Meetings Section 3.09. Quorum Section 3.10. Waiver of Notice Section 3.11. Adjournment Section 3.12. Notice of Adjournment Section 3.13. Action Without Meeting Section 3.14. Fees and Compensation of Directors Section 3.15. Committees of Directors Section 3.16. Meetings and Action of Committees ARTICLE IV - OFFICERS Section 4.01. Officers Section 4.02. Election of Officers Section 4.03. Subordinate Officers Section 4.04. Removal and Resignation of Officers Section 4.05. Vacancies in Offices Section 4.06. Chairman of the Board Section 4.07. President Section 4.08. Vice Presidents Section 4.09. Secretary Section 4.10. Chief Financial Officer ARTICLE V - MISCELLANEOUS Section 5.01. Indemnification Provisions Section 5.02. Maintenance and Inspection of Share Register Section 5.03. Maintenance and Inspection of Bylaws Section 5.04. Maintenance and Inspection of Other Corporate Records Section 5.05. Inspection of Books and Records by Directors Section 5.06. Annual Report to Shareholders Section 5.07. Financial Statements Section 5.08. Record Date for Purposes Other than Notice and Voting Section 5.09. Checks, Drafts Section 5.10. Corporate Contracts and Instruments; How Executed Section 5.11. Certificates for Shares Section 5.12. Lost Certificates Section 5.13. Representation of Shares of Other Corporations Section 5.14. Construction and Definitions ARTICLE VI - AMENDMENTS Section 6.01. Amendment by Shareholders Section 6.02. Amendment by Directors BYLAWS OF WESTAMERICA BANCORPORATION ARTICLE I OFFICES Section 1.01. Principal Offices. The principal executive office of the corporation shall be located at 1108 Fifth Avenue, San Rafael, California, or such other place within or outside the State of California as shall be fixed by the board of directors. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the board of directors shall fix and designate a principal business office in the State of California. Section 1.02. Other Offices. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.01. Place of Meetings. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2.02. Annual Meeting. The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. At each annual meeting directors shall be elected, and any other proper business may be transacted which shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must have been (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed to the secretary of the corporation not less than 14 days nor more than 50 days prior to the meeting; provided, however, that in the event that less than 21 days' notice of the date of the meeting is given to shareholders, notice by the shareholder, to be timely, must be delivered or mailed to the secretary of the corporation not later than the close of business on the 7th day following the day on which such notice of the date of the annual meeting was mailed. A shareholder's notice to the secretary of the corporation shall set forth as to each matter that the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and residence address of the shareholder proposing such business, (c) the number of shares of capital stock of the corporation that are owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.02. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.02, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 2.03. Special Meeting. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.04 and 2.05 hereof, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.03 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. Section 2.04. Notice of Shareholders' Meetings. All notices of meetings of shareholders shall be sent or otherwise given to shareholders entitled to vote thereat in accordance with Section 2.05 not less than ten (10) (or if sent by third-class mail, thirty (30) nor more than sixty (60)) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an amendment of the articles of incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of that Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal. Section 2.05. Manner of Giving Notice: Affidavit of Notice. Notice of any meeting of shareholders shall be given to shareholders entitled to vote thereat either personally or by first-class mail or, in the event this corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California Corporations Code) on the record date for the shareholders meeting, by third-class mail, or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting may be executed by the secretary, assistant secretary, or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Section 2.06. Quorum. The presence in person or by proxy of the holders of one-third (1/3) of the shares entitled to vote at any meeting of the shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 2.07. Adjourned Meeting: Notice. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.06 hereof. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.04 and 2.05. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 2.08. Voting. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 hereof, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation, or a joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. The affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by California General Corporation Law or the articles. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 2.09. Waiver of Notice or Consent by Absent Shareholders. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice, consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.04 hereof, the waiver of notice, consent or approval shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law to be included in the notice of the meeting but not so included if that objection is expressly made at the meeting. Section 2.10. Shareholder Action by Written Consent Without a Meeting. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case-of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any-time to fill a vacancy on the board of directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 2.05 hereof. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 2.11. Record Date for Shareholder Notice, Voting and Giving Consents. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders at the close of business on the record date are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date: (a) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 2.12. Proxies. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or as to any meeting by attendance at such meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Corporations Code of California. Section 2.13. Inspectors of Election. Before any meeting of shareholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. Section 2.14. Nominations for Director. Nominations for election to the board of directors may be made by the board of directors or by any shareholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the board of directors of the corporation, shall be made in writing and shall be delivered or mailed to the secretary of the corporation not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such nominations shall be mailed or delivered to the secretary of the corporation not later than the close of business on the seventh (7th) day following the day on which the notice of the meeting was mailed. Any such written nomination shall contain the following information to the extent known to the nominating shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the corporation that the shareholder expects will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may be disregarded by the chairman of the applicable meeting of shareholders called for the election of directors in his sole discretion, and upon his instructions, the inspectors of election may disregard all votes cast for each such nominee. ARTICLE III DIRECTORS Section 3.01. Powers. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) Select and remove all officers, agents, and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the articles of incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service. (b) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings. (c) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates. (d) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, or tangible or intangible property actually received. (e) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecation, and other evidences of debt and securities. Section 3.02. Number and Qualification of Directors. The number of directors of the corporation shall be not less than eight (8) nor more than fifteen (15). The exact number of directors shall be thirteen (13) until changed, within the limits specified above, with the approval of the board of directors or the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. Section 3.03. Election and Term of Office of Directors. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. No person shall be eligible for election to the board of directors unless nominated in the manner described by Section 2.14 of these bylaws. Section 3.04. Vacancies. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent other than to fill a vacancy created by removal shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary, or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 3.05. Place of Meetings and Meetings by Telephone. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. Section 3.06. Annual Meeting. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Section 3.07. Other Regular Meetings. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice. Section 3.08. Special Meetings. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 3.09. Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.11. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Corporations Code of California (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) of that Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 3.10. Waiver of Notice. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director. Section 3.11. Adjournment. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 3.12. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 3.08, to the directors who were not present at the time of the adjournment. Section 3.13. Action Without Meeting. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Section 3.14. Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. Section 3.15. Committees of Directors. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) The approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; (b) The filling of vacancies on the board of directors or in any committee; (c) The fixing of compensation of the directors for serving on the board or on any committee; (d) The amendment or repeal of bylaws or the adoption of new bylaws; (e) The amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) The appointment of any other committees of the board of directors or the members of these committees. Section 3.16. Meetings and Action of Committees. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Sections 3.05 (place of meetings), 3.07 (regular meetings), 3.08 (special meetings and notice), 3.09 (quorum), 3.10 (waiver of notice), 3.11 (adjournment), 3.12 (notice of adjournment), and 3.13 (action without meeting) of these bylaws, with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE IV OFFICERS Section 4.01. Officers. The officers of the corporation shall be a chairman of the board, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more treasurers or assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 4.03. Any number of offices may be held by the same person. Section 4.02. Election of Officers. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 4.03 or 4.05 hereof, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. Section 4.03. Subordinate Officers. The board of directors may appoint, and may empower the chairman of the board to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4.04. Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting of the board of directors, or, except in the case of an officer chosen by the board of directors, by any other officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 4.05. Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. Section 4.06. Chairman of the Board. The board of directors shall appoint one of its members to be chairman of the board to serve at the pleasure of the board. Such person shall preside at all meetings of the board. The chairman of the board shall have the powers conferred by these bylaws and shall also have and may exercise such further powers and duties as from time to time may be conferred or assigned by the board of directors. Section 4.07. President. The president of the corporation shall, in the absence of the chairman of the board, preside at all meetings of shareholders and at all meetings of the board of directors. The president shall exercise and perform such duties as may be assigned to him by the board of directors or the chairman of the board or as prescribed by the bylaws. Section 4.08. Vice Presidents. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, and the president. Section 4.09. Secretary. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 4.10. Chief Financial Officer. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE V MISCELLANEOUS Section 5.01. Indemnification Provisions. Except as prohibited by law, every director of this corporation shall be entitled as a matter of right to be indemnified by the corporation against reasonable expense and any liability paid or incurred by such person in connection with any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative, investigative or other, whether brought by or in the name of the corporation or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director, officer, employee or agent of the corporation or by reason of the fact that such person is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise or was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation (such claim, action, suit or proceeding hereinafter being referred to as an "Action"); provided, however, that no such right of indemnification shall exist in favor of a director with respect to an Action brought by such director against the corporation (other than a suit for indemnification as provided below in this Section 5.01). Such indemnification shall include the right to have expenses incurred by such person in connection with an Action paid in advance by the corporation until the final disposition of the Action, subject to such conditions as may be prescribed by law. As used herein, "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement; and "expense" shall include fees and expenses of counsel subject to the terms of the following paragraph. If the corporation shall be obligated to pay the expenses of any Action against a director, the corporation, if appropriate, shall be entitled to assume the defense of such Action, with counsel approved by the director, upon the delivery to the director of written notice of its election so to do. After delivery of such notice, approval of such counsel by the director and the retention of such counsel by the corporation, the corporation will not be liable to the director under this Section 5.01 for any fees or expenses of counsel subsequently incurred by the director with respect to the same Action, provided that (i) the director shall have the right to employ his counsel in any such Action at the director's expense; and (ii) the fees and expenses of the director's counsel shall be at the expense of the corporation if (A) the employment of counsel by the director has been previously authorized by the corporation, (B) the director shall have reasonably concluded that there may be a conflict of interest between the corporation and the director in the conduct of any such defense or (C) the corporation shall not, in fact, have employed counsel to assume the defense of such Action. Notwithstanding anything contained herein to the contrary, the corporation shall have no obligation under this Section 5.01 to indemnify any director for any amounts paid in settlement of an Action unless the corporation consents to such settlement, which consent shall not be unreasonably withheld. If a claim under the two preceding paragraphs is not paid in full by the corporation within thirty (30) days after a written notice thereof has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such action that the conduct of the claimant was such that under California law the corporation would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its board) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the corporation (including the board of directors, independent legal counsel or its shareholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the action or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. The right of indemnification provided for herein (a) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, bylaw or article provision, vote of shareholders or directors or otherwise, (b) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were denominated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder, and (c) shall be applicable to actions, suits or proceedings commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the adoption of any such amendment or repeal. The corporation has full power and authority to extend any of the indemnification benefits provided for in this Section 5.01 to any officer or agent of the corporation, but the corporation is under no obligation to extend such benefits to any person who is not entitled thereto by law or pursuant to the first paragraph of this Section 5.01. Section 5.02. Maintenance and Inspection of Share Register. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 5.02 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 5.03. Maintenance and Inspection of Bylaws. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. Section 5.04. Maintenance and Inspection of Other Corporate Records. The accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 5.05. Inspection of Books and Records by Directors. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5.06. Annual Report to Shareholders. The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. This report shall be sent at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.05 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. Section 5.07. Financial Statements. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month, or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause the statements referred to above to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to any shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this Section 5.07 shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. Section 5.08. Record Date for Purposes Other than Notice and Voting. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders at the close of business on the record date are entitled to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. Section 5.09. Checks, Drafts. Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 5.10. Corporate Contracts and Instruments; How Executed. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 5.11. Certificates for Shares. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or vice president and by the chief financial officer or the treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. Section 5.12. Lost Certificates. Except as provided in this Section 5.12, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 5.13. Representation of Shares of Other Corporations. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 5.14. Construction and Definitions. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE VI AMENDMENTS Section 6.01. Amendment by Shareholders. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 6.02. Amendment by Directors. Subject to the rights of the shareholders as provided in Section 6.01 hereof, to adopt, amend, or repeal bylaws, bylaws may be adopted, amended, or repealed by the board of directors; provided, however, that the board of directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 3.02 of these bylaws. EX-10 3 EXHIBIT 10(b) EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of January 7, 1987 , is between WESTAMERICA BANK, NATIONAL ASSOCIATION (the "Bank"), and E. Joseph Bowler (the "Executive"). A. The Board of Directors of the Bank recognizes that the Executive's contributions as SVP & Treasurer to the growth and success of the Bank have been substantial and desires to assure the Bank of the continued services of the Executive, on its own behalf and on behalf of all existing and future Affiliated Companies (defined as any corporation or other business entity or entities that directly or indirectly controls, is controlled by, or is under common control with the Bank) including, without limitation, Westamerica Bancorporation (the "Corporation"), and the Executive desires to continue in the employment of the Bank upon the following terms and conditions. B. The Bank has spent significant time, effort, and money to develop certain Proprietary Information (as defined below), which the Bank considers vital to its business and goodwill and which will necessarily be communicated to or acquired by the Executive in the course of his employment with the Bank, and the Bank desires to ensure that it can protect its Proprietary Information and goodwill. ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS: 1. Period of Employment. The Bank hereby employs the Executive to render services to the Bank in the position and with the duties and responsibilities described in Section 2 for the period commencing on the date of this Agreement and ending on the first anniversary thereof (the "Period of Employment"). Subject to Section 4, the Executive's Period of Employment will be automatically extended for an additional one-month period (without any action by either party) on completion of each month of employment under this Agreement, unless the Bank gives the Executive written notice one year in advance that his employment is to be terminated at the end of the Period of Employment (as previously extended). 2. Position, Duties, Responsibilities. (a) Position. Executive shall serve as SVP & Treasurer of the Bank (or in such other position(s) as the Board of Directors of the Bank (the "Board") shall designate). Executive shall devote his best efforts and his full time and attention to the performance of the services customarily incident to such office and to such services as may be reasonably requested by the Board. The Bank shall retain full direction and control of the means and methods by which the Executive performs the above services and of the place(s) at which such services are to be rendered. (b) Other Activities. Except upon the prior written consent of the Board, the Executive, during the Period of Employment, will not (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be competitive with, or that might place him in a competing position to that of the Bank or any Affiliated Company. 3. Compensation, Benefits, Expenses. (a) Base Salary. In consideration of the services to be rendered hereunder, including, without limitation, services to any Affiliated Company, the Executive shall be paid an annual base salary (the "Base Salary") of Eighty Five Thousand Dollars ($85,000), payable at the time and pursuant to the procedures regularly established and as they may be amended by the Bank during the course of this Agreement. The Employee Benefits and Compensation Committee of the Corporation (the "Compensation Committee") shall annually review the Executive's Base Salary to consider whether to recommend to the Board to increase the same in light of the Executive's performance during the preceding calendar year, the performance and financial condition of the Bank and the Corporation, any increases in the cost of living and any other increases as are awarded in accordance with the Bank's regular administrative practice for giving salary increases to similarly situated employees. (b) Bonus Payments. In addition to Base Salary, the Executive shall be entitled to receive such bonus payments as the Compensation Committee or the Board may determine pursuant to any bonus plan in effect at the date of this Agreement or any amendments or modifications thereto (the "Bonus Plan"). (c) Expenses. The Executive shall be entitled to receive prompt reimbursement for all appropriate and reasonable expenses incurred by him in performing services hereunder, provided that the Executive properly accounts therefor in accordance with the Bank's policies as they may be amended from time to time during the course of this Agreement. (d) Other Benefits. The Bank shall not make any changes in any employee benefit plans or arrangements in effect on the date hereof in which the Executive participates (including, without limitation, each retirement plan, deferred compensation plan, profit sharing plan, employee stock ownership plan, stock purchase plan, stock option plan, life insurance plan, medical insurance plan, long-term disability plan, vision care plan, dental plan, or health-and-accident plan) which would adversely affect the Executive's rights or benefits thereunder, unless such change occurs pursuant to a program generally applicable to all senior executives of the Bank and does not result in a proportionately greater reduction in the rights of or benefits to the Executive as compared with other senior executives. The Executive shall be entitled to participate in and receive benefits under any employee benefit plan or arrangement made available by the Bank in the future to senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plan or arrangement. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary payable to the Executive pursuant to Section 3(a). Any payments or benefits and any bonus compensation payable to the Executive hereunder in respect of any calendar year during which the Executive is employed by the Bank for less than all of such year shall, unless otherwise provided in the applicable compensation plan or Bonus Plan, be prorated with the year-to-date results being annualized and the bonus calculated accordingly. (e) Vacations. The Executive shall be entitled to not less than 27 days ( 5.4 ) weeks vacation in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than all of such year). The Executive shall also be entitled to all paid holidays given by the Bank to its senior executive officers. (f) Services Furnished. The Bank shall furnish the Executive with office space, secretarial and clerical assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 2 hereof. (g) Automobile Allowance. The Executive shall be entitled to receive an automobile allowance of $700 per month during the Period of Employment in lieu of reimbursement for mileage expenses incurred by the Executive in performing his obligations under this Agreement. 4. Termination of Employment. (a) By Death. The Period of Employment shall terminate automatically upon the death of the Executive. The Bank shall pay to the Executive's beneficiaries or estate, as appropriate, the compensation to which he is entitled pursuant to Section 3 through the end of the month in which death occurs, unless otherwise provided in any applicable compensation plan or Bonus Plan. Thereafter, the Bank's obligations hereunder shall terminate. Nothing in this Section shall affect any entitlement of the Executive's beneficiaries to the benefits of any life insurance plan. (b) By Disability. If, in the discretion of the Board, the Executive shall be prevented from properly performing his duties hereunder by reason of any physical or mental incapacity for a period of more than one hundred eighty (180) consecutive calendar days in any twelve-month period, then, to the extent permitted by law, the Period of Employment shall terminate on and the compensation to which the Executive is entitled pursuant to Section 3 shall be paid up through the last day of the month in which the 180th consecutive day of incapacity occurs, unless otherwise provided in any applicable compensation plan or Bonus Plan. After the conclusion of his Period of Employment, the Executive shall receive a lump-sum payment equal to 67% of his Base Salary for a period of one year, less any disability payments otherwise payable by or pursuant to plans provided by the Bank or Corporation and actually paid to the Executive. Thereafter, the Bank's obligations under this section 4(b) shall terminate but the Executive shall continue to be eligible to receive benefits under the Bank's Group Disability Plan if he otherwise satisfies the requirements for such benefits. (c) By Bank For Cause. The Bank may terminate, without liability, the Period of Employment for Cause (as defined below) by delivering to the Executive thirty (30) days' advance written Notice of Termination required by Section 4(i) below. The Bank shall pay the Executive the compensation to which he is entitled pursuant to Section 3, including the Executive's maximum bonus under the Bonus Plan accrued to the date of termination, through the end of the thirty (30) day notice period, notwithstanding any other agreement between the Executive and the Bank or any Affiliated Company. Thereafter the Bank's obligations hereunder shall terminate. Termination shall be for Cause if: (i) because of any act or failure to act by the Executive which is in bad faith and to the detriment of the Bank or any Affiliated Company; (ii) the Executive refuses or fails to act in accordance with any direction or order of the Board; (iii) the Executive exhibits unfitness for service (other than disability, as provided for in Section 4(b)), unsatisfactory performance, misconduct, dishonesty, habitual neglect, or incompetence in the management of the affairs of the Bank or any Affiliated Company; (iv) the Executive is convicted of a felony; (v) because the Executive, in the discretion of the Board, breaches any term of this Agreement, provided the breach continues for a period of five (5) days after the Executive receives written notice of that breach from the Board; or (vi) the Board of Governors of the Federal Reserve System, the Comptroller of the Currency or the Board of Directors of the Federal Deposit Insurance Corporation shall have ordered the Executive removed from office pursuant to authority granted by applicable law. (d) By Executive For Good Reason. The Executive may terminate, without liability, the Period of Employment for Good Reason (as defined below) upon thirty (30) days' advance written Notice of Termination to the Bank. The Bank shall pay the Executive the compensation to which he is entitled pursuant to Section 3, including the Executive's maximum bonus under the Bonus Plan accrued to the date of termination, through the end of the thirty (30) day notice period, unless otherwise provided in any applicable compensation plan or Bonus Plan. In addition, the Executive shall be entitled to severance pay on the date of Termination in an amount equal to the sum of (i) the Executive's full Base Salary; (ii) an amount equal to the maximum bonus(es) to which the Executive would have been entitled under the Bonus Plan had the Executive remained employed for an additional one year past the date of termination; and (iii) an amount equal to the automobile allowance payable to the Executive during the one-year period immediately preceding the termination; provided, however, that such severance payment does not exceed the amount allowable as a federal income tax deduction to the Bank pursuant to Section 280G of the Internal Revenue Code. Thereafter all obligations of the Bank hereunder shall terminate. Good reason shall exist if: (i) there is an assignment to the Executive of any duties materially inconsistent with or which constitute an adverse material change in the Executive's position, duties, responsibilities, or status with the Bank, or an adverse material change in the Executive's reporting responsibilities, title, or offices; or removal of the Executive from or failure to reelect the Executive to any of such positions, except in connection with the termination of the Period of Employment for Cause, or due to disability, early or normal retirement as defined by the Bank's pension plan, death, or termination of the Period of Employment by the Executive other than for Good Reason; (ii) there is a reduction by the Bank in the Executive's annual salary then in effect other than a reduction similar in percentage to a reduction generally applicable to executives of the Bank; (iii) the Bank acts in any way that would adversely affect the Executive's participation in or materially reduce the Executive's benefit under any benefit plan of the Bank in which the Executive is participating or deprives the Executive of any material fringe benefit enjoyed by the Executive except those changes generally affecting similarly situated executives of the Bank; or (iv) the Bank reduces the number of paid vacation days to which the Executive is then entitled. (e) Termination Without Cause. If the Bank terminates the Period of Employment without cause, the Bank shall pay the Executive the compensation to which he is entitled pursuant to Section 3, including the Executives' maximum bonus under the Bonus Plan accrued to the date of termination, through the end of the thirty (30) day notice period, unless otherwise provided in any applicable compensation plan or Bonus Plan. In addition, the Executive shall be entitled to severance pay on the date of termination as though the Executive had terminated employment under Section 4(d), above, provided such severance payment does not exceed the amount allowable as a federal income tax deduction to the Bank, pursuant to Section 280G of the Internal Revenue Code. Thereafter, all obligations of the Bank shall terminate. (f) Termination Due to Bankruptcy, Receivership. The Period of Employment shall terminate and the Bank's obligation hereunder (including the obligation to pay the Executive compensation under Section 3) shall cease upon the occurrence of: (i) the appointment of a receiver, liquidator, or trustee for the Bank by decree of competent authority in connection with any adjudication or determination by such authority that the Bank is bankrupt or insolvent; (ii) the filing by the Bank of a petition in voluntary bankruptcy, the making of an assignment for the benefit of its creditors, or the entering into of a composition with its creditors; or (iii) any formal action of the Board to terminate the Bank's existence or otherwise to wind up the Bank's affairs pursuant to such bankruptcy or receivership. (g) Liquidated Damages; Requirement of Mitigation. The Bank and the Executive acknowledge that it would be impractical or extremely difficult to fix the Executive's actual damages in the case of a termination pursuant to Section 4(d) or 4(e), and, therefore, in the event of such termination and notwithstanding any other provision of this Agreement, the Bank shall pay the Executive liquidated damages in an amount equal to (i) the sum of (A) the Executive's full Base Salary; (B) an amount equal to the maximum bonus(es) to which the Executive would have been entitled under the Bonus Plan had the Executive remained employed for an additional one year past the date of termination; and (C) an amount equal to the automobile allowance payable to the Executive during the one-year period immediately preceding the termination of the Period of Employment; reduced by (ii) any severance pay received by the Executive pursuant to Section 4(d) or 4(e). The Executive shall be required to mitigate the liquidated damages payable pursuant to this paragraph. The Bank and the Executive agree that the amounts provided for in this section represent a reasonable effort by the parties to establish fair compensation for the losses that might result from such termination and are not imposed as a penalty. (h) Termination Obligations. (A) The Executive hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contracts, lists, and other documents, Proprietary Information (as defined below), and equipment furnished to or prepared by the Executive in the course of or incident to his employment, including, without limitation, records and any other materials pertaining to Invention Ideas (as defined below), belong to the Bank and shall be promptly returned to the Bank upon termination of the Period of Employment. (B) Upon termination of the Period of Employment, the Executive shall be deemed to have resigned from all offices and directorships then held with the Bank or any Affiliated Company. (C) The representations and warranties contained herein shall survive termination of the Period of Employment; the Executive's obligations under Sections 4(h), 5, 6, and 7 shall survive the expiration of this Agreement. (i) Notice of Termination. Any termination of the Executive's employment by the Bank or by the Executive, except pursuant to Section 4(a), shall be communicated by a "Notice of Termination", which for the purposes of this Agreement shall mean a written notice to the other party indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 5. Proprietary Information. (a) Defined. "Proprietary Information" is all information and any idea in whatever form, tangible or intangible, pertaining in any manner to the business of the Bank or any Affiliated Company unless: (i) the information is or becomes publicly known through lawful means; (ii) the information was rightfully in the Executive's possession or part of his general knowledge prior to his employment by the Bank; or (iii) the information is disclosed to the Executive without confidential or proprietary restriction by a third party who rightfully possesses the information (without confidential or proprietary restriction) and did not learn of it, directly or indirectly, from the Bank. (b) General Restrictions on Use. The Executive agrees to hold all Proprietary Information in confidence and not to, directly or indirectly, disclose, use, copy, publish, summarize, or remove from the Bank's premises any Proprietary Information (or remove from the premises any other property of the Bank), except (i) during the Period of Employment to the extent necessary to carry out the Executive's responsibilities under this Agreement, and (ii) after termination of the Period of Employment as specifically authorized in writing by the Board. (c) Interference with Business; Competitive Activities. The Executive acknowledges that the pursuit of the activities forbidden by this Section 5(c) would necessarily involve the use or disclosure of Proprietary Information in breach of Section 5(b), but that proof of such breach would be extremely difficult. To forestall such disclosure, use, and breach, and in consideration of the employment under this Agreement, the Executive agrees that for a period of one (1) year after termination of the Period of Employment, he shall not, for himself or any third party, directly or indirectly divert or attempt to divert from the Bank (or any Affiliated Company) any business of any kind in which it is engaged, including, without limitation, the solicitation of or interference with any of its suppliers or customers, unless the Executive can prove that any action taken in contravention of this Section 5(c) was done without the use in any way of Proprietary Information. (d) Remedies. Nothing in this Section 5 is intended to limit any remedy of the Bank under the California Uniform Trade Secrets Act (California Civil Code S 3426), or otherwise available under law. 6. Executive Inventions and Ideas. (a) Defined. The term "Invention Ideas" means any and all ideas, processes, trademarks, service marks, inventions, discoveries, patents, copyrights, and improvements to the foregoing that are conceived, developed, or crated by the Executive alone or with others during his Period of Employment (whether or not conceived, developed, or created during regular working hours) and that: (i) fall within the existing or contemplated business of the Bank or any Affiliated Company; (ii) result from work done by the Executive for or at the request of the Bank or any Affiliated Company; or (iii) result from the Executive's use of or access to any Proprietary Information or any equipment, supplies, facilities, memoranda, data, customer lists, processes or the like of the Bank or any Affiliated Company. (b) Disclosure. Executive agrees to maintain adequate and current written records on the development of all Invention Ideas and to disclose promptly to the Bank all Invention Ideas and relevant records. (c) Assignment. The Executive agrees to assign to the Bank, without further consideration, his entire right, title, and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to each Invention Idea, which shall be the sole property of the Bank, whether or not patentable. In the event any Invention Idea shall be deemed by the Bank to be patentable or otherwise registrable, the Executive shall assist the Bank (at its expense) in obtaining letters patent or other applicable registrations thereon and shall execute all documents and do all other things (including testifying at the Bank's expense) necessary or proper to obtain letters patent or other applicable registrations thereon and to vest the Bank, or any Affiliated Company specified by the Board, with full title thereto. (d) Exclusions. The Executive acknowledges that there are no ideas, processes, trademarks, service marks, inventions, discoveries, patents, copyrights, or improvements to the foregoing that he desires to exclude from the operation of this Agreement. To the best of the Executive's knowledge there is no existing contract in conflict with this Agreement or any other contract to assign ideas, processes, inventions, trademarks, service marks, discoveries, patents, or copyrights that is now in existence between the Executive and any other person, corporation, partnership, or other business or governmental entity. (e) Statutory Notice. Executive hereby acknowledges that he understands that this Section 6 does not apply to the invention that qualifies fully under Section 2870 of the California Labor Code. That Code Section reads in relevant part: Any provision in an employment agreement which provides that an employee shall assign or offer to assign any of his or her rights in an invention to his or her employer shall not apply to an invention for which no equipment, supplies, facility , or trade secret information of the employer was used and which was developed entirely on the employee's own time, and (a) which does not relate (1) to the business of the employer or (2) to the employer's actual or demonstrably anticipated research or development, or (b) which does not result from any work performed by the employee for the employer. Nothing in this Agreement is intended to expand the scope of protection provided the Executive by Sections 2870 through 2872 of the California Labor Code. 7. Assignment; Successors and Assigns. The Executive agrees that he will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement, nor shall the Executive's rights be subject to encumbrance or the claims of creditors. Any purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of the Bank with, or its merger into, any other corporation, or the sale by the Bank of all or substantially all of its properties or assets, or the assignment by the Bank of this Agreement and the performance of its obligations hereunder to any successor in interest or any Affiliated Company. Subject to the foregoing, this Agreement shall be binding upon and shall insure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those enumerated above. 8. Notices. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand or mailed, postage prepaid, by certified or registered mail, return receipt requested, and addressed to the Bank at: WESTAMERICA BANK, N.A. 1108 Fifth Avenue San Rafael, CA 94901 Attn: Kitty Jones, Corporate Secretary or to the Executive at: 12 Inman Avenue Kentfield, CA 94904 Notice of change of address shall be effective only when done in accordance with this Section. 9. Entire Agreement. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of the Executive by the Bank and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 10. Amendments; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Executive and by a duly authorized representative of the Bank other than the Executive. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform, provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. 11. Severability; Enforcement. If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. It is the intention of the parties that the covenants contained in Sections 5 and 6 shall be enforced to the greatest extent (but to no greater extent) in time, area, and degree of participation as is permitted by the law of that jurisdiction whose law is found to be applicable to any acts allegedly in breach of these covenants. It being the purpose of this Agreement to govern competition by the Executive, these covenants shall be governed by and construed according to that law (from among those jurisdictions arguably applicable to this Agreement and those in which a breach of this Agreement is alleged to have occurred or to be threatened) which best gives them effect. 12. Governing Law. Subject to Section 11, the validity, interpretation, enforceability, and performance of this Agreement shall be governed by and construed in accordance with the law of the State of California. 13. Executive Acknowledgment. The Executive acknowledges (i) that he has consulted with or has had the opportunity to consult with independent counsel of his own choice concerning this Agreement and has been advised to do so by the Bank, and (ii) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based on his own judgment. 14. Remedies. (a) Injunctive Relief. The parties agree that in the event of any breach or threatened breach of any of the covenants in Section 5 or 6, the damage or imminent damage to the value and the goodwill of the bank's business will be irreparable and extremely difficult to estimate, making any remedy at law or in damages inadequate. Accordingly, the parties agree that the Bank shall be entitled to injunctive relief against the Executive in the event of any breach or threatened breach of any such provisions by the Executive, in addition to any other relief (including damages) available to the Bank under this Agreement or under law. (b) Attorneys Fees. In any legal action, arbitration, or other proceeding (including any appeal) brought by the executive to enforce or interpret the terms of this Agreement, the executive shall be entitled to reasonable attorneys' fees and any other costs incurred in that proceeding in addition to any other relief to which the executive is entitled. (c) Exclusive. Both parties agree that this Agreement shall provide the exclusive remedies for any breach by the Bank of its terms. 15. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. The parties have duly executed this Agreement as of the date first written above. The "Bank" WESTAMERICA BANK, NATIONAL ASSOCIATION By /s/M. Kitty Jones ---------------------- Its SVP and Corporate Secretary The "Executive" /s/E. Joseph Bowler ------------------- (Executive's Name) E. Joseph Bowler, SVP & Treasurer EX-10 4 EXHIBIT 10(c) EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of January 7, 1987 , is between WESTAMERICA BANK, NATIONAL ASSOCIATION (the "Bank"), and Robert W. Entwisle (the "Executive"). A. The Board of Directors of the Bank recognizes that the Executive's contributions as Senior Vice President to the growth and success of the Bank have been substantial and desires to assure the Bank of the continued services of the Executive, on its own behalf and on behalf of all existing and future Affiliated Companies (defined as any corporation or other business entity or entities that directly or indirectly controls, is controlled by, or is under common control with the Bank) including, without limitation, Westamerica Bancorporation (the "Corporation"), and the Executive desires to continue in the employment of the Bank upon the following terms and conditions. B. The Bank has spent significant time, effort, and money to develop certain Proprietary Information (as defined below), which the Bank considers vital to its business and goodwill and which will necessarily be communicated to or acquired by the Executive in the course of his employment with the Bank, and the Bank desires to ensure that it can protect its Proprietary Information and goodwill. ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS: 1. Period of Employment. The Bank hereby employs the Executive to render services to the Bank in the position and with the duties and responsibilities described in Section 2 for the period commencing on the date of this Agreement and ending on the first anniversary thereof (the "Period of Employment"). Subject to Section 4, the Executive's Period of Employment will be automatically extended for an additional one-month period (without any action by either party) on completion of each month of employment under this Agreement, unless the Bank gives the Executive written notice one year in advance that his employment is to be terminated at the end of the Period of Employment (as previously extended). 2. Position, Duties, Responsibilities. (a) Position. Executive shall serve as Senior Vice President of the Bank (or in such other position(s) as the Board of Directors of the Bank (the "Board") shall designate). Executive shall devote his best efforts and his full time and attention to the performance of the services customarily incident to such office and to such services as may be reasonably requested by the Board. The Bank shall retain full direction and control of the means and methods by which the Executive performs the above services and of the place(s) at which such services are to be rendered. (b) Other Activities. Except upon the prior written consent of the Board, the Executive, during the Period of Employment, will not (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be competitive with, or that might place him in a competing position to that of the Bank or any Affiliated Company. 3. Compensation, Benefits, Expenses. (a) Base Salary. In consideration of the services to be rendered hereunder, including, without limitation, services to any Affiliated Company, the Executive shall be paid an annual base salary (the "Base Salary") of Eighty Thousand Dollars ($80,000), payable at the time and pursuant to the procedures regularly established and as they may be amended by the Bank during the course of this Agreement. The Employee Benefits and Compensation Committee of the Corporation (the "Compensation Committee") shall annually review the Executive's Base Salary to consider whether to recommend to the Board to increase the same in light of the Executive's performance during the preceding calendar year, the performance and financial condition of the Bank and the Corporation, any increases in the cost of living and any other increases as are awarded in accordance with the Bank's regular administrative practice for giving salary increases to similarly situated employees. (b) Bonus Payments. In addition to Base Salary, the Executive shall be entitled to receive such bonus payments as the Compensation Committee or the Board may determine pursuant to any bonus plan in effect at the date of this Agreement or any amendments or modifications thereto (the "Bonus Plan"). (c) Expenses. The Executive shall be entitled to receive prompt reimbursement for all appropriate and reasonable expenses incurred by him in performing services hereunder, provided that the Executive properly accounts therefor in accordance with the Bank's policies as they may be amended from time to time during the course of this Agreement. (d) Other Benefits. The Bank shall not make any changes in any employee benefit plans or arrangements in effect on the date hereof in which the Executive participates (including, without limitation, each retirement plan, deferred compensation plan, profit sharing plan, employee stock ownership plan, stock purchase plan, stock option plan, life insurance plan, medical insurance plan, long-term disability plan, vision care plan, dental plan, or health-and-accident plan) which would adversely affect the Executive's rights or benefits thereunder, unless such change occurs pursuant to a program generally applicable to all senior executives of the Bank and does not result in a proportionately greater reduction in the rights of or benefits to the Executive as compared with other senior executives. The Executive shall be entitled to participate in and receive benefits under any employee benefit plan or arrangement made available by the Bank in the future to senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plan or arrangement. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary payable to the Executive pursuant to Section 3(a). Any payments or benefits and any bonus compensation payable to the Executive hereunder in respect of any calendar year during which the Executive is employed by the Bank for less than all of such year shall, unless otherwise provided in the applicable compensation plan or Bonus Plan, be prorated with the year-to-date results being annualized and the bonus calculated accordingly. (e) Vacations. The Executive shall be entitled to not less than 27 days ( 5.4 ) weeks vacation in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than all of such year). The Executive shall also be entitled to all paid holidays given by the Bank to its senior executive officers. (f) Services Furnished. The Bank shall furnish the Executive with office space, secretarial and clerical assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 2 hereof. (g) Automobile Allowance. The Executive shall be entitled to receive an automobile allowance of $900 per month during the Period of Employment in lieu of reimbursement for mileage expenses incurred by the Executive in performing his obligations under this Agreement. 4. Termination of Employment. (a) By Death. The Period of Employment shall terminate automatically upon the death of the Executive. The Bank shall pay to the Executive's beneficiaries or estate, as appropriate, the compensation to which he is entitled pursuant to Section 3 through the end of the month in which death occurs, unless otherwise provided in any applicable compensation plan or Bonus Plan. Thereafter, the Bank's obligations hereunder shall terminate. Nothing in this Section shall affect any entitlement of the Executive's beneficiaries to the benefits of any life insurance plan. (b) By Disability. If, in the discretion of the Board, the Executive shall be prevented from properly performing his duties hereunder by reason of any physical or mental incapacity for a period of more than one hundred eighty (180) consecutive calendar days in any twelve-month period, then, to the extent permitted by law, the Period of Employment shall terminate on and the compensation to which the Executive is entitled pursuant to Section 3 shall be paid up through the last day of the month in which the 180th consecutive day of incapacity occurs, unless otherwise provided in any applicable compensation plan or Bonus Plan. After the conclusion of his Period of Employment, the Executive shall receive a lump-sum payment equal to 67% of his Base Salary for a period of one year, less any disability payments otherwise payable by or pursuant to plans provided by the Bank or Corporation and actually paid to the Executive. Thereafter, the Bank's obligations under this section 4(b) shall terminate but the Executive shall continue to be eligible to receive benefits under the Bank's Group Disability Plan if he otherwise satisfies the requirements for such benefits. (c) By Bank For Cause. The Bank may terminate, without liability, the Period of Employment for Cause (as defined below) by delivering to the Executive thirty (30) days' advance written Notice of Termination required by Section 4(i) below. The Bank shall pay the Executive the compensation to which he is entitled pursuant to Section 3, including the Executive's maximum bonus under the Bonus Plan accrued to the date of termination, through the end of the thirty (30) day notice period, notwithstanding any other agreement between the Executive and the Bank or any Affiliated Company. Thereafter the Bank's obligations hereunder shall terminate. Termination shall be for Cause if: (i) because of any act or failure to act by the Executive which is in bad faith and to the detriment of the Bank or any Affiliated Company; (ii) the Executive refuses or fails to act in accordance with any direction or order of the Board; (iii) the Executive exhibits unfitness for service (other than disability, as provided for in Section 4(b)), unsatisfactory performance, misconduct, dishonesty, habitual neglect, or incompetence in the management of the affairs of the Bank or any Affiliated Company; (iv) the Executive is convicted of a felony; (v) because the Executive, in the discretion of the Board, breaches any term of this Agreement, provided the breach continues for a period of five (5) days after the Executive receives written notice of that breach from the Board; or (vi) the Board of Governors of the Federal Reserve System, the Comptroller of the Currency or the Board of Directors of the Federal Deposit Insurance Corporation shall have ordered the Executive removed from office pursuant to authority granted by applicable law. (d) By Executive For Good Reason. The Executive may terminate, without liability, the Period of Employment for Good Reason (as defined below) upon thirty (30) days' advance written Notice of Termination to the Bank. The Bank shall pay the Executive the compensation to which he is entitled pursuant to Section 3, including the Executive's maximum bonus under the Bonus Plan accrued to the date of termination, through the end of the thirty (30) day notice period, unless otherwise provided in any applicable compensation plan or Bonus Plan. In addition, the Executive shall be entitled to severance pay on the date of Termination in an amount equal to the sum of (i) the Executive's full Base Salary; (ii) an amount equal to the maximum bonus(es) to which the Executive would have been entitled under the Bonus Plan had the Executive remained employed for an additional one year past the date of termination; and (iii) an amount equal to the automobile allowance payable to the Executive during the one-year period immediately preceding the termination; provided, however, that such severance payment does not exceed the amount allowable as a federal income tax deduction to the Bank pursuant to Section 280G of the Internal Revenue Code. Thereafter all obligations of the Bank hereunder shall terminate. Good reason shall exist if: (i) there is an assignment to the Executive of any duties materially inconsistent with or which constitute an adverse material change in the Executive's position, duties, responsibilities, or status with the Bank, or an adverse material change in the Executive's reporting responsibilities, title, or offices; or removal of the Executive from or failure to reelect the Executive to any of such positions, except in connection with the termination of the Period of Employment for Cause, or due to disability, early or normal retirement as defined by the Bank's pension plan, death, or termination of the Period of Employment by the Executive other than for Good Reason; (ii) there is a reduction by the Bank in the Executive's annual salary then in effect other than a reduction similar in percentage to a reduction generally applicable to executives of the Bank; (iii) the Bank acts in any way that would adversely affect the Executive's participation in or materially reduce the Executive's benefit under any benefit plan of the Bank in which the Executive is participating or deprives the Executive of any material fringe benefit enjoyed by the Executive except those changes generally affecting similarly situated executives of the Bank; or (iv) the Bank reduces the number of paid vacation days to which the Executive is then entitled. (e) Termination Without Cause. If the Bank terminates the Period of Employment without cause, the Bank shall pay the Executive the compensation to which he is entitled pursuant to Section 3, including the Executives' maximum bonus under the Bonus Plan accrued to the date of termination, through the end of the thirty (30) day notice period, unless otherwise provided in any applicable compensation plan or Bonus Plan. In addition, the Executive shall be entitled to severance pay on the date of termination as though the Executive had terminated employment under Section 4(d), above, provided such severance payment does not exceed the amount allowable as a federal income tax deduction to the Bank, pursuant to Section 280G of the Internal Revenue Code. Thereafter, all obligations of the Bank shall terminate. (f) Termination Due to Bankruptcy, Receivership. The Period of Employment shall terminate and the Bank's obligation hereunder (including the obligation to pay the Executive compensation under Section 3) shall cease upon the occurrence of: (i) the appointment of a receiver, liquidator, or trustee for the Bank by decree of competent authority in connection with any adjudication or determination by such authority that the Bank is bankrupt or insolvent; (ii) the filing by the Bank of a petition in voluntary bankruptcy, the making of an assignment for the benefit of its creditors, or the entering into of a composition with its creditors; or (iii) any formal action of the Board to terminate the Bank's existence or otherwise to wind up the Bank's affairs pursuant to such bankruptcy or receivership. (g) Liquidated Damages; Requirement of Mitigation. The Bank and the Executive acknowledge that it would be impractical or extremely difficult to fix the Executive's actual damages in the case of a termination pursuant to Section 4(d) or 4(e), and, therefore, in the event of such termination and notwithstanding any other provision of this Agreement, the Bank shall pay the Executive liquidated damages in an amount equal to (i) the sum of (A) the Executive's full Base Salary; (B) an amount equal to the maximum bonus(es) to which the Executive would have been entitled under the Bonus Plan had the Executive remained employed for an additional one year past the date of termination; and (C) an amount equal to the automobile allowance payable to the Executive during the one-year period immediately preceding the termination of the Period of Employment; reduced by (ii) any severance pay received by the Executive pursuant to Section 4(d) or 4(e). The Executive shall be required to mitigate the liquidated damages payable pursuant to this paragraph. The Bank and the Executive agree that the amounts provided for in this section represent a reasonable effort by the parties to establish fair compensation for the losses that might result from such termination and are not imposed as a penalty. (h) Termination Obligations. (A) The Executive hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contracts, lists, and other documents, Proprietary Information (as defined below), and equipment furnished to or prepared by the Executive in the course of or incident to his employment, including, without limitation, records and any other materials pertaining to Invention Ideas (as defined below), belong to the Bank and shall be promptly returned to the Bank upon termination of the Period of Employment. (B) Upon termination of the Period of Employment, the Executive shall be deemed to have resigned from all offices and directorships then held with the Bank or any Affiliated Company. (C) The representations and warranties contained herein shall survive termination of the Period of Employment; the Executive's obligations under Sections 4(h), 5, 6, and 7 shall survive the expiration of this Agreement. (i) Notice of Termination. Any termination of the Executive's employment by the Bank or by the Executive, except pursuant to Section 4(a), shall be communicated by a "Notice of Termination", which for the purposes of this Agreement shall mean a written notice to the other party indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 5. Proprietary Information. (a) Defined. "Proprietary Information" is all information and any idea in whatever form, tangible or intangible, pertaining in any manner to the business of the Bank or any Affiliated Company unless: (i) the information is or becomes publicly known through lawful means; (ii) the information was rightfully in the Executive's possession or part of his general knowledge prior to his employment by the Bank; or (iii) the information is disclosed to the Executive without confidential or proprietary restriction by a third party who rightfully possesses the information (without confidential or proprietary restriction) and did not learn of it, directly or indirectly, from the Bank. (b) General Restrictions on Use. The Executive agrees to hold all Proprietary Information in confidence and not to, directly or indirectly, disclose, use, copy, publish, summarize, or remove from the Bank's premises any Proprietary Information (or remove from the premises any other property of the Bank), except (i) during the Period of Employment to the extent necessary to carry out the Executive's responsibilities under this Agreement, and (ii) after termination of the Period of Employment as specifically authorized in writing by the Board. (c) Interference with Business; Competitive Activities. The Executive acknowledges that the pursuit of the activities forbidden by this Section 5(c) would necessarily involve the use or disclosure of Proprietary Information in breach of Section 5(b), but that proof of such breach would be extremely difficult. To forestall such disclosure, use, and breach, and in consideration of the employment under this Agreement, the Executive agrees that for a period of one (1) year after termination of the Period of Employment, he shall not, for himself or any third party, directly or indirectly divert or attempt to divert from the Bank (or any Affiliated Company) any business of any kind in which it is engaged, including, without limitation, the solicitation of or interference with any of its suppliers or customers, unless the Executive can prove that any action taken in contravention of this Section 5(c) was done without the use in any way of Proprietary Information. (d) Remedies. Nothing in this Section 5 is intended to limit any remedy of the Bank under the California Uniform Trade Secrets Act (California Civil Code S 3426), or otherwise available under law. 6. Executive Inventions and Ideas. (a) Defined. The term "Invention Ideas" means any and all ideas, processes, trademarks, service marks, inventions, discoveries, patents, copyrights, and improvements to the foregoing that are conceived, developed, or crated by the Executive alone or with others during his Period of Employment (whether or not conceived, developed, or created during regular working hours) and that: (i) fall within the existing or contemplated business of the Bank or any Affiliated Company; (ii) result from work done by the Executive for or at the request of the Bank or any Affiliated Company; or (iii) result from the Executive's use of or access to any Proprietary Information or any equipment, supplies, facilities, memoranda, data, customer lists, processes or the like of the Bank or any Affiliated Company. (b) Disclosure. Executive agrees to maintain adequate and current written records on the development of all Invention Ideas and to disclose promptly to the Bank all Invention Ideas and relevant records. (c) Assignment. The Executive agrees to assign to the Bank, without further consideration, his entire right, title, and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to each Invention Idea, which shall be the sole property of the Bank, whether or not patentable. In the event any Invention Idea shall be deemed by the Bank to be patentable or otherwise registrable, the Executive shall assist the Bank (at its expense) in obtaining letters patent or other applicable registrations thereon and shall execute all documents and do all other things (including testifying at the Bank's expense) necessary or proper to obtain letters patent or other applicable registrations thereon and to vest the Bank, or any Affiliated Company specified by the Board, with full title thereto. (d) Exclusions. The Executive acknowledges that there are no ideas, processes, trademarks, service marks, inventions, discoveries, patents, copyrights, or improvements to the foregoing that he desires to exclude from the operation of this Agreement. To the best of the Executive's knowledge there is no existing contract in conflict with this Agreement or any other contract to assign ideas, processes, inventions, trademarks, service marks, discoveries, patents, or copyrights that is now in existence between the Executive and any other person, corporation, partnership, or other business or governmental entity. (e) Statutory Notice. Executive hereby acknowledges that he understands that this Section 6 does not apply to the invention that qualifies fully under Section 2870 of the California Labor Code. That Code Section reads in relevant part: Any provision in an employment agreement which provides that an employee shall assign or offer to assign any of his or her rights in an invention to his or her employer shall not apply to an invention for which no equipment, supplies, facility , or trade secret information of the employer was used and which was developed entirely on the employee's own time, and (a) which does not relate (1) to the business of the employer or (2) to the employer's actual or demonstrably anticipated research or development, or (b) which does not result from any work performed by the employee for the employer. Nothing in this Agreement is intended to expand the scope of protection provided the Executive by Sections 2870 through 2872 of the California Labor Code. 7. Assignment; Successors and Assigns. The Executive agrees that he will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement, nor shall the Executive's rights be subject to encumbrance or the claims of creditors. Any purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of the Bank with, or its merger into, any other corporation, or the sale by the Bank of all or substantially all of its properties or assets, or the assignment by the Bank of this Agreement and the performance of its obligations hereunder to any successor in interest or any Affiliated Company. Subject to the foregoing, this Agreement shall be binding upon and shall insure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those enumerated above. 8. Notices. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand or mailed, postage prepaid, by certified or registered mail, return receipt requested, and addressed to the Bank at: WESTAMERICA BANK, N.A. 1108 Fifth Avenue San Rafael, CA 94901 Attn: Kitty Jones, Corporate Secretary or to the Executive at: 1260 Lynwood Drive Novato, CA 94947 Notice of change of address shall be effective only when done in accordance with this Section. 9. Entire Agreement. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of the Executive by the Bank and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 10. Amendments; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Executive and by a duly authorized representative of the Bank other than the Executive. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform, provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. 11. Severability; Enforcement. If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. It is the intention of the parties that the covenants contained in Sections 5 and 6 shall be enforced to the greatest extent (but to no greater extent) in time, area, and degree of participation as is permitted by the law of that jurisdiction whose law is found to be applicable to any acts allegedly in breach of these covenants. It being the purpose of this Agreement to govern competition by the Executive, these covenants shall be governed by and construed according to that law (from among those jurisdictions arguably applicable to this Agreement and those in which a breach of this Agreement is alleged to have occurred or to be threatened) which best gives them effect. 12. Governing Law. Subject to Section 11, the validity, interpretation, enforceability, and performance of this Agreement shall be governed by and construed in accordance with the law of the State of California. 13. Executive Acknowledgment. The Executive acknowledges (i) that he has consulted with or has had the opportunity to consult with independent counsel of his own choice concerning this Agreement and has been advised to do so by the Bank, and (ii) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based on his own judgment. 14. Remedies. (a) Injunctive Relief. The parties agree that in the event of any breach or threatened breach of any of the covenants in Section 5 or 6, the damage or imminent damage to the value and the goodwill of the bank's business will be irreparable and extremely difficult to estimate, making any remedy at law or in damages inadequate. Accordingly, the parties agree that the Bank shall be entitled to injunctive relief against the Executive in the event of any breach or threatened breach of any such provisions by the Executive, in addition to any other relief (including damages) available to the Bank under this Agreement or under law. (b) Attorneys Fees. In any legal action, arbitration, or other proceeding (including any appeal) brought by the executive to enforce or interpret the terms of this Agreement, the executive shall be entitled to reasonable attorneys' fees and any other costs incurred in that proceeding in addition to any other relief to which the executive is entitled. (c) Exclusive. Both parties agree that this Agreement shall provide the exclusive remedies for any breach by the Bank of its terms. 15. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. The parties have duly executed this Agreement as of the date first written above. The "Bank" WESTAMERICA BANK, NATIONAL ASSOCIATION By /s/M. Kitty Jones --------------------- Its SVP and Corporate Secretary The "Executive" /s/Robert W. Entwisle ---------------------- (Executive's Name) Robert W. Entwisle, Senior Vice President EX-11 5 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) 1998 1997 1996 - ------------------------------------------------------------------------------------ Weighted average number of common shares outstanding - basic 41,797 43,040 42,759 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 727 787 599 - ------------------------------------------------------------------------------------ Weighted average number of common shares outstanding - diluted 42,524 43,827 43,358 ==================================================================================== Net income $73,396 $48,116 $46,827 ==================================================================================== Basic earnings per share $1.76 $1.12 $1.10 Diluted earnings per share 1.73 1.10 1.08 ====================================================================================
EX-21 6 Exhibit 21 WESTAMERICA BANCORPORATION Subsidiaries as of December 31, 1998 - ------------------------------------ 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 7 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 of Westamerica Bancorporation and subsidiaries (the Company) of our report dated January 19, 1999, relating to the consolidated balance sheets of Westamerica Bancorporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Westamerica Bancorporation. On April 12, 1997, the Company acquired ValliCorp Holdings, Inc. on a pooling-of-interests basis. We did not audit the consolidated financial statements of ValliCorp Holdings, Inc. for the year ended December 31, 1996. Those statements, included in the 1996 restated consolidated totals, were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for ValliCorp Holdings, Inc., is based solely on the reports of the other auditors. /s/ KPMG Peat Marwick, LLP - -------------------------- KPMG Peat Marwick, LLP San Francisco, California March 30, 1999 EX-23 8 Exhibit 23(b) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-60003 of Westamerica Bancorporation on Form S-8 of our report dated January 24, 1997 (relating to the consolidated financial statements of ValliCorp Holdings, Inc. and subsidiaries not presented separately herein) appearing in the Annual Report on Form 10-K of Westamerica Bancorporation for the year ended December 31, 1998. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP Fresno, California March 26, 1999 EX-27 9
9 1,000 YEAR YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1996 JAN-01-1998 JAN-01-1997 JAN-01-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 229,734 250,824 263,177 0 0 0 0 0 92,000 0 0 0 987,661 1,003,234 892,461 226,993 230,960 215,432 233,790 236,896 218,009 2,297,897 2,261,937 2,287,240 51,304 50,630 50,921 3,844,298 3,848,444 3,866,774 3,189,005 3,078,501 3,228,700 203,671 264,848 167,447 35,526 45,443 32,483 47,500 52,500 58,865 0 0 0 0 0 0 195,156 198,517 187,210 173,440 208,635 192,069 3,844,298 3,844,444 3,866,774 195,656 201,999 206,887 71,122 67,036 62,076 42 1,635 5,219 266,820 270,670 274,182 71,351 76,264 77,585 86,655 88,054 91,700 180,155 182,616 182,482 5,180 7,645 12,306 0 0 0 101,408 137,878 136,051 111,372 74,106 70,432 73,396 48,116 46,827 0 0 0 0 0 0 73,396 48,116 46,827 1.76 1.12 1.10 1.73 1.01 1.08 8.02 8.21 8.21 8,532 18,146 16,835 522 1,009 1,735 0 0 224 0 0 0 50,630 50,921 48,494 8,568 12,484 16,017 4,062 4,548 4,473 51,304 50,630 50,921 16,990 31,466 35,246 0 0 0 34,314 19,164 15,675
-----END PRIVACY-ENHANCED MESSAGE-----