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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number 1-9383
WESTAMERICA BANCORPORATION
(Exact name of the registrant as specified in its charter)
CALIFORNIA
(State of incorporation)
94-2156203
(I.R.S. Employer Identification Number)
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 257-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ x ] NO
Indicate by check mark if disclosure of delinquent filer
pursuant to Item 405 of Regulation S-K (Section 229.405
of this chapter) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to
the closing price of the stock, as of March 21, 1997:
$592,757,000
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 21, 1997
Title of Class
Common Stock, no par value
Shares Outstanding
8,972,673
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 20, 1997
for Annual Meeting of Shareholders
to be held on April 22, 1997
Incorporated into:
Part III
* Only selected portions of the documents specified are
incorporated by reference into this report, as more
particularly described herein. Except to the extent
expressly incorporated herein by reference, such documents
shall not be deemed to be filed as part of this Annual
Report on Form 10-K.
TABLE OF CONTENTS
PART I
Page
Item 1 Business ........................................... 4
Item 2 Properties ......................................... 25
Item 3 Legal Proceedings .................................. 26
Item 4 Submission of Matters to a Vote of
Security Holders .................................. 26
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters ....................... 26
Item 6 Selected Financial Data ............................ 28
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 29
Item 8 Financial Statements and Supplementary Data ........ 56
Item 9 Changes in and Disagreements on Accounting
and Financial Disclosure .......................... 92
PART III
Item 10 Directors and Executive Officers of the Registrant . 92
Item 11 Executive Compensation ............................. 92
Item 12 Security Ownership of Certain Beneficial Owners
and Management .................................... 92
Item 13 Certain Relationships and Related Transactions ..... 92
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 93
PART I
ITEM I. Business
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the "safe
harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results
to differ materially from those in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the following
factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins;
general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a
deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets. See also "Certain Additional Business Risks" on
pages 8 through 9 herein and other risk factors discussed elsewhere
in this Report.
WESTAMERICA BANCORPORATION (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956 ("BHC"), as
amended. The Company was incorporated under the laws of the State of
California as "Independent Bankshares Corporation" on February 11, 1972.
Its principal executive offices are located at 1108 Fifth Avenue, San
Rafael, California 94901, and its telephone number is (415) 257-8000.
The Company provides a full range of banking services to individual and
corporate customers in Northern California through its subsidiary banks,
Westamerica Bank and Bank of Lake County (the "Banks"). The Banks
are subject to competition from other financial institutions and
regulations from certain agencies and undergo periodic examinations by
those regulatory authorities. In addition, the Company also owns 100
percent of the capital stock of Westamerica Commercial Credit, Inc., a
newly formed company engaged in financing account receivable and
inventory lines of credit and term business loans and 100 percent of
Community Banker Services Corporation, engaged in providing the Company
and its subsidiaries data processing services and other support
functions.
The Company was originally formed pursuant to a plan of reorganization
among three previously unaffiliated banks: Bank of Marin, Bank of Sonoma
County and First National Bank of Mendocino County (formerly First
National Bank of Cloverdale). The reorganization was consummated on
December 31, 1972 and, on January 1, 1973, the Company began operations
as a bank holding company. Subsequently, the Company acquired Bank of
Lake County (a California chartered bank) in 1974, Gold Country Bank in
1979 and Vaca Valley Bank in 1981, in each case by the exchange of
the Company's Common Stock for the outstanding shares of the acquired
banks.
In mid-1983, the Company consolidated the six subsidiary banks into a
single subsidiary bank. The consolidation was accomplished by the merger
of the five state-chartered banks (Bank of Marin, Banks of Sonoma
County, Bank of Lake County, Gold Country Bank and Vaca Valley Bank)
into First National Bank of Mendocino County which subsequently
changed its name to Westamerica Bank ("WAB"), a national banking
association organized and existing under the laws of the United States.
In August, 1988, the Company formed a new bank, but named it Bank of
Lake County, National Association, and effected the sale of WAB's assets
and liabilities of its three Lake County branches to the newly formed
bank.
In August, 1988, the sale of Bank of Lake County, National Association
to Napa Valley Bancorp was consummated.
On February 28, 1992, the Company acquired John Muir National Bank
through a merger of such bank with and into WAB in exchange for the
issuance of the Company's Common Stock for all the outstanding shares of
John Muir National Bank. The business transaction was accounted for on a
pooling-of-interests basis.
On April 15, 1993, the Company acquired Napa Valley Bancorp, a bank
holding company, whose subsidiaries included Napa Valley Bank, 88
percent interest in Bank of Lake County, 50 percent interest in Sonoma
Valley Bank, Suisun Valley Bank and Napa Valley Bancorp Services
Corporation, which was established to provide data processing and other
services to Napa Valley Bancorp's subsidiaries. This business
transaction was accounted for on a pooling-of-interests basis. Shortly
after, Suisun Valley Bank was merged into Westamerica Bank, the name of
Napa Valley Bancorp Services Corporation was changed to Community Banker
Services Corporation and the Company sold its 50 percent interest in
Sonoma Valley Bank. The Company retained its 88 percent interest in Bank
of Lake County.
In June 1993, the Company accepted from WAB a dividend in the form of
all outstanding shares of capital stock of WAB's subsidiary, Weststar
Mortgage Corporation, a California Corporation established to conduct
mortgage banking activities. Immediately after the receipt of this
dividend, the Company contributed all of the capital stock of Weststar
Mortgage Corporation to its subsidiary, Community Banker Services
Corporation.
WAB and Bank of Lake County became state-chartered banks in June 1993
and December 1993, respectively.
In December 1994, the Company completed the purchase of the remaining 12
percent investment in Bank of Lake County from outside investors,
becoming the sole owner of Bank of Lake County.
On January 31, 1995, the Company acquired PV Financial, parent company
of PV National Bank, through a merger of such bank with and into WAB in
exchange for the issuance of shares of the Company's Common Stock for
all the outstanding shares of PV Financial. The business combination was
accounted for on a pooling-of-interests basis.
On June 6, 1995, the merger of CapitolBank Sacramento with and into WAB
became effective. Under the terms of the merger, the Company issued
shares of its common stock in exchange for all of CapitolBank
Sacramento's common stock. This acquisition was accounted for on a
pooling-of-interests basis.
On July 17, 1995, the Company acquired North Bay Bancorp, parent company
of Novato National Bank. Under the terms of the merger agreement, the
Company issued shares of its common stock in exchange for all of the
outstanding shares of common stock of North Bay Bancorp. The subsidiary
bank was merged with and into WAB. The business combination was
accounted for on a pooling-of-interests basis.
On April 12, 1996 Napa Valley Bank was merged into WAB.
In November 1996, the Company finalized the formation of a new
subsidiary, Westamerica Commercial Credit, Inc., which engages in
financing account receivable and inventory lines of credit and term
business loans.
On November 11, 1996, the Company entered into an Agreement and Plan of
Reorganization with ValliCorp Holdings, Inc. ("ValliCorp") pursuant to
which ValliCorp agreed to merge with and into the Company. The merger
had not been consummated as of the date of this report.
At December 31, 1996, the Company had consolidated assets of
approximately $2.55 billion, deposits of approximately $2.08 billion and
shareholders' equity of approximately $238.9 million.
See Note 19 to the consolidated financial statements included in this
report regarding a pending acquisition.
SERVICE AREA
The Banks serve the following twelve major markets:
Marin County. Marin County is one of the most affluent counties
in California and has a population of approximately 239,500.
San Rafael and Novato are the largest communities in the
county, with populations of approximately 52,400 and 46,500,
respectively. Both are in close proximity to the city of San
Francisco. The area served by WAB is a relatively densely
populated area whose economic make-up is primarily residential,
commercial and light industrial.
Sonoma-Mendocino Counties. Of the eight San Francisco-Bay Area
counties, Sonoma County is geographically the largest. The
population of the county is approximately 421,500. The city of
Santa Rosa is the largest population center in Sonoma County
with an estimated population of 125,700. Light industry,
agriculture and food processing are the primary industries in
Sonoma County, with tourism and recreational activities growing
steadily. WAB also serves Mendocino County, population 86,230,
where the major business is agriculture.
Solano County. WAB serves all of Solano County, with an
estimated population of 373,100. Vallejo is the largest city in
the county, with a population of approximately 112,300. While
light industry and the service sector are growing steadily, the
federal government is the largest employer in the county.
Stanislaus County. Included in the counties served by WAB is
Stanislaus County, with an estimated population of 415,300. The
largest city is Modesto, with a population of approximately
178,700. The county's primary industry is agriculture.
Contra Costa County. During 1996, WAB opened one new branch in
the city of Lafayette, with a population of approximately
23,550, to serve, together with four other WAB branch
locations, Contra Costa's growing commercial and industrial
construction industry. The population of the county is
approximately 870,700.
Sacramento County. WAB has operated in Sacramento, the state
capital of California, since 1982, a presence enhanced in 1995
through the merger with CapitolBank. The county has a
population of approximately 1,123,400. Major industries include
agriculture, government, manufacturing and wholesale and retail
trade. Sacramento is also a major transportation center for the
state.
Nevada County. WAB is currently serving most of Nevada County,
an area generally known as the "Gold Country". The population
of the entire county, where tourism, agriculture and wood
product manufacturing are the major industries, is
approximately 87,000.
Placer County. WAB operates a branch in Roseville, located
approximately 15 miles east of WAB's Sacramento office, to
serve the growing area of the Sierra Nevada foothills. The
population of Placer County is approximately 206,000.
San Francisco County. WAB has operated in the financial center
of the city of San Francisco since 1987. The business of this
branch facility is focused on commercial lending and deposit
relationships in that city.
Napa County. WAB has seven office locations in Napa County. The
population of the county is approximately 119,000, with
agriculture being its major source of business, followed by
tourism.
Alameda County. During 1996, WAB opened a new branch location
in the city of Pleasanton in Alameda County. The major source
of business of the county, with an estimated population of
1,356,100, is commerce and retail businesses.
Lake County. Bank of Lake County, ("Lake County's Bank"),
("BLC") has four office locations in Lake County, which has an
estimated population of approximately 55,300. Agriculture is
the primary industry of the county, followed closely by
recreation and tourism.
Neither the Company nor any of its subsidiaries have any foreign
or international activities or operations.
All population figures contained in the previous discussion are
1996 estimates as prepared by the California Department of
Finance.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set
forth below, any one of which could cause the Company's actual results
to vary materially from recent results or from the Company's anticipated
future results.
Shares of Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could
adversely affect the market price. The Articles of Incorporation of the
Company authorize the issuance of 50,000,000 shares of common stock (and
two classes of 1,000,000 shares each, denominated "Class B Common Stock"
and "Preferred Stock", respectively) of which approximately 9,434,870
shares of common stock were outstanding at December 31, 1996. Pursuant
to its stock option plans, at December 31, 1996, the Company had
outstanding options to purchase 634,958 shares of Company Common Stock.
As of December 31, 1996 165,518 shares of Company Common Stock remained
available for grants under the Company's stock option plan. Sales of
substantial amounts of Company Common Stock in the public market or
issuance of new securities in connection with acquisitions could
adversely affect the market price of Common Stock.
A portion of the loan portfolio of the Company is dependent on real
estate. At December 31, 1996, real estate served as the principal source
of collateral with respect to approximately 55 percent of the
Company's loan portfolio. A worsening of current economic conditions or
rising interest rates could have an adverse effect on the demand for new
loans, the ability of borrowers to repay outstanding loans, the
value of real estate and other collateral securing loans and the value
of the available-for-sale investment portfolio, as well as the Company's
financial condition and results of operations in general and the market
value of the Company Common Stock. Acts of nature, including earthquakes
and floods, which may cause uninsured damage and other loss of value to
real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or
employee fraud. The Company maintains a system of internal controls to
mitigate against such occurrences and maintains insurance coverage for
such risks, but should such an event occur that is not prevented or
detected by the Company's internal controls, uninsured or in excess of
applicable insurance limits, it could have a significant adverse impact
on the Company's business, financial condition or results of operations.
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings growth of the Company's banking subsidiaries are affected
not only by local market area factors and general economic conditions,
but also by government monetary and fiscal policies. For example, the
Board of Governors of the Federal Reserve System (the "FRB") influences
the supply of money through its open market operations in U.S.
Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business and earnings
of the Company cannot be predicted. Additionally, state and federal tax
policies can impact banking organizations. Effective January 1, 1997,
applicable California law and corporation tax rates were reduced by 5%
in order to keep California competitive with other western states.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is
particularly susceptible to being affected by the enactment of federal
and state legislation which may have the effect of increasing or
decreasing the cost of doing business, modifying permissible activities
or enhancing the competitive position of other financial institutions.
Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of the Company. In response to
various business failures in the savings and loan industry and in the
banking industry, in December 1991, Congress enacted, and the President
signed into law, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). FDICIA substantially revised the bank regulatory
framework and deposit insurance funding provisions of the Federal
Deposit Insurance Act and made revisions to several other federal
banking statutes.
Implementation of the various provisions of FDICIA is subject to
the adoption of regulations by the various regulatory agencies,
the manner in which the regulatory agencies implement those
regulations and certain phase-in periods.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended (the "BHCA"). As such, the Company
reports to, registers with, and may be examined by, the FRB. The FRB
also has the authority to examine the subsidiaries of the Company. The
costs of any such examination by the FRB are payable by the applicable
parent holding company.
The FRB has significant supervisory and regulatory authority over the
Company and its affiliates. The FRB requires the Company to maintain
certain levels of capital. See "Capital Standards". The FRB also has the
authority to take enforcement action against any bank holding company
that commits any unsafe or unsound practice, or violates certain laws,
regulations or conditions imposed in writing by the FRB. See "Prompt
Corrective Action and Other Enforcement Mechanisms".
Under the BHCA, a company generally must obtain the prior
approval of the FRB before it exercises a controlling influence
over a bank, or acquires directly or indirectly, more than 5%
of the voting shares or substantially all of the assets of any
bank or bank holding company. Thus, the Company is required to
obtain the prior approval of the FRB before they acquire, merge
or consolidate with any bank or bank holding company; any company
seeking to acquire, merge or consolidate with the Company also would be
required to obtain the approval of the FRB.
A bank holding company is generally prohibited under the BHCA
from acquiring ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities
other than banking, managing banks or providing services to
affiliates of the holding company. A bank holding company, with
the approval of the FRB, may engage, or acquire the voting
shares of companies engaged, in activities that the FRB has
determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank
holding company must demonstrate that the benefits to the
public of the proposed activity will outweigh the possible
adverse effects associated with such activity.
Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching
Act"), a bank holding company became able to acquire banks in
states other than its home state beginning September 29, 1995
without regard to the permissibility of such acquisitions under
state law, but subject to any state requirement that the bank
has been organized and operating for a minimum period of time,
not to exceed five years, and the requirement that the bank
holding company, prior to or following the proposed
acquisition, controls no more than 10% of the total amount of
deposits of insured depository institutions in the United
States and no more than 30% of such deposits in that state (or
such lesser or greater amount set by law).
The Interstate Banking and Branching Act also authorizes banks
to merge across state lines, therefore creating interstate
branches, beginning June 1, 1997. Under such legislation, each
state has the opportunity to "opt out" of this provision,
thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate
branching within that state prior to June 1, 1997. Furthermore,
pursuant to such act, a bank is now able to open new branches
in a state in which it does not already have banking
operations, if the laws of such state permit such de novo
branching. California enacted legislation to "opt in" to the
Interstate Banking and Branching Act provisions regarding
interstate branching, allowing a state bank chartered in a
state other than California to acquire by merger or purchase,
at any time after effectiveness of the Caldera, Weggeland, and
Killea California Interstate Banking and Branching Act of 1995
(the "IBBA"), a California bank or industrial loan company
which is at least five (5) years old and thereby establish one
or more California branch offices. However, the IBBA prohibits
a state bank chartered in a state other than California from
entering California by purchasing a California branch office of
a California bank or industrial loan company without purchasing
the entire entity or by establishing a de novo California
branch office. See the section entitled "Recently Enacted
Legislation" for additional information.
Proposals to change the laws and regulations governing the
banking industry are frequently introduced in Congress, in the
state legislatures and before the various bank regulatory
agencies.
The FRB generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue
pressure on the capital of subsidiary banks or would be funded
only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position.
The FRB's policy is that a bank holding company should not
continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each
dividend and its prospective rate of earnings retention appears
consistent with its capital needs, asset quality and overall
financial condition.
Transactions between holding companies and any of their
subsidiary banks are subject to a number of other restrictions.
FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the
fair market value of the services rendered (or, if no market
exists, actual costs plus a reasonable profit). Subject to
certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in
securities of, purchase assets from, or issue a guarantee,
acceptance, or letter of credit on behalf of, an affiliate,
provided that the aggregate of such transactions with
affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with
affiliates may not exceed 20% of the capital stock and surplus
of such institution. A bank holding company may only borrow
from depository institution subsidiaries if the loan is secured
by marketable obligations with a value of a designated amount
in excess of the loan. Further, a bank holding company may not
sell a low-quality asset to a depository institution subsidiary.
Generally, a bank holding company and its subsidiaries are
prohibited from engaging in tie-in arrangements in connection
with the extension of credit, sale or lease of property, or
furnishing of services unless the FRB permits an exception to
the tying prohibitions pursuant to exemption authority
available to it under applicable law. The FRB, however, has
adopted a rule, effective September 2, 1994, amending the
anti-tying provisions to permit a bank or bank holding company
to offer a lower price on a loan, deposit or trust service
(traditional bank product), or on securities brokerage
services, on the condition that the customer obtain a
traditional bank product from an affiliate. Additionally, as of
January 23, 1995, a bank holding company, or a nonbank
subsidiary, may offer lower prices on any of its products or
services on the condition that a customer obtain another
product or service from such company or any of its nonbank
affiliates, provided that all products offered in the package
arrangement are separately available for purchase.
The Company is also a bank holding company within the meaning
of Section 3700 of the California Financial Code. As such, the
Company and its subsidiaries are subject to examination by, and
may be required to file reports with, the California
Superintendent of banks (the "Superintendent"). Regulations
have not yet been proposed or adopted, and no other steps have
been taken, to implement the Superintendent's powers under this
statute.
BANK SUPERVISION AND REGULATION
The Banks are California chartered banks insured by the Federal
Deposit Insurance Corporation (the "FDIC"), and as such are
subject to regulation, supervision and regular examination by
the Superintendent. As members of the Federal Reserve System,
the Banks' primary federal regulator is the FRB. The regulations of
these agencies affect most aspects of such bank subsidiaries' business
and prescribe permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the permissible
scope of the activities and various other requirements for such bank
subsidiaries. Pursuant to AB 3351, which was adopted by the California
legislature during 1996, all of the California state regulatory
authorities for state-chartered depository institutions will be
consolidated under a new state agency, the Department of Financial
Institutions ("DFI") effective July 1, 1997. The newly created DFI
combines the State Banking Department and the Department of Savings and
Loan, while regulatory oversight over industrial loan companies and
credit unions will be shifted from the Department of Corporations to the
DFI. For the most part, the DFI is merely assuming the responsibilities
and authorities previously held by the existing regulators.
Under California law, a state chartered bank is subject to various
restrictions on, and requirements regarding, its operations and
administration including the maintenance of branch offices and automated
teller machines, capital and reserve requirements, deposits and
borrowings, shareholder rights and duties, and investments and lending
activities. Whenever it appears that the contributed capital of a
California chartered bank is impaired, the Superintendent shall
order the bank to correct such impairment. If a California chartered
bank is unable to correct the impairment, such bank is required to levy
and collect an assessment upon its common shares. If such assessment
becomes delinquent, such common shares are to be sold by the bank.
During 1996 the Interstate Banking and Branching Cleanup Act was
enacted, which revised the Superintendent's assessment methodology for
state-chartered banks in order to provide a better basis of comparison
to the method used by the Office of the Comptroller of the Currency
("OCC"). Under the new methodology, the average assessment for state
banks will be approximately 39% of the OCC's annual charges for national
bank supervision.
California law permits a state chartered bank to invest in the stock and
securities of other corporations, subject to a state-chartered bank
receiving either general authorization or, depending on the amount of
the proposed investment, specific authorization from the Superintendent.
FDICIA, however, imposes limitations on the activities and equity
investments of state chartered, federally insured banks. The limitations
on equity investments were effective December 19, 1991, and the
limitations on activities became effective December 19, 1992. The FDIC
rules on investments prohibit a state bank from acquiring an equity
investment of a type, or in an amount, not permissible for a national
bank. Non-permissible investments were required to be divested by state
banks no later than December 19, 1996. FDICIA prohibits a state bank
from engaging as a principal in any activity that is not permissible for
a national bank, unless the bank is adequately capitalized and the
appropriate federal regulator approves the activity after determining
that such activity does not pose a significant risk to the deposit
insurance fund. The FDIC rules on activities generally permit
subsidiaries of banks, without prior specific FDIC authorization, to
engage in those activities that have been approved by the FRB for bank
holding companies because such activities are so closely related to
banking to be a proper incident thereto. Other activities generally
require specific FDIC prior approval, and the FDIC may impose
additional restrictions on such activities on a case-by-case basis in
approving applications to engage in otherwise impermissible activities.
The Banks are also subject to applicable provisions of California law,
insofar as such provisions are not in conflict with or preempted by
federal banking law. In addition, the Banks are subject to certain
regulations of the FRB dealing primarily with check-clearing activities,
establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity
(Regulation B).
During 1996, the OCC adopted a regulation to revise and streamline its
procedures with respect to corporate activities of national banks, to be
effective December 31, 1996. These revised standards allow the OCC to
approve, on a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking, including activities
in which the parent bank is not permitted to engage. Such a standard
allows a national bank to conduct an activity approved for a bank
holding company through a bank operating subsidiary such as acting as an
investment or financial advisor, leasing personal property and providing
financial advice to customers. In general, these new standards will be
available to well-capitalized or adequately-capitalized national banks.
Since state banks may only make equity investments if a type permissible
for national banks, this new regulation might result in some
liberalization of the types of investments permissible for state banks.
CAPITAL STANDARDS
The federal banking agencies have risk-based capital adequacy guidelines
intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for
both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse agreements, which
are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance
sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such
as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
In determining the capital level that banking organizations are required
to maintain, the federal banking agencies do not, in all respects,
follow generally accepted accounting principles ("GAAP") and
have special rules which have the effect of reducing the amount of
capital they will recognize for purposes of determining the capital
adequacy of the Company and its subsidiaries. These rules are called
regulatory accounting principles ("RAP"). In December 1993, the
federal banking agencies issued an interagency policy statement on the
allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified
assets. Future changes in the regulations or practices of the federal
banking agencies could further reduce the amount of capital recognized
for purposes of capital adequacy. Such a change could affect the
ability of the Company to grow and could restrict the amounts of
profits, if any, available for the payment of dividends.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets and
off balance sheet items. The regulators measure risk-adjusted assets and
off balance sheet items against both total qualifying capital (the sum
of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1
capital. Tier 1 capital consists of common stock, retained earnings,
noncumulative perpetual preferred stock, other types of qualifying
common stock and minority interests in certain subsidiaries, less most
other intangible assets and other adjustments. Net unrealized
gains/losses on available-for-sale equity securities with readily
determinable fair values must be deducted in determining Tier 1 capital.
Additionally, as of April 1, 1995, for Tier 1 capital purposes, deferred
tax assets that can only be realized if the institution earns sufficient
taxable income in the future will be limited to the amount that the
institution is expected to realize within one year, or ten percent of
Tier 1 capital, whichever is less. Tier 2 capital may consist of a
limited amount of the reserve for loan losses, term preferred stock and
other types of preferred stock not qualifying as Tier 1 capital, term
subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital
are subject to certain other requirements and limitations of the federal
banking agencies. Since December 31, 1992, the federal banking
agencies have required a minimum ratio of qualifying total capital to
risk-adjusted assets and off balance sheet items of 8%, and a minimum
ratio of Tier 1 capital to risk-adjusted assets and off balance sheet
items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1
capital to adjusted average total assets, referred to as the leverage
capital ratio. For banking organizations rated in the highest of the
five categories used by regulators to rate banking organizations, the
minimum leverage ratio of Tier 1 capital to total assets must be 3%. It
is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong
capital position is a significant part of the regulators' rating. For
all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3%
minimum. Thus, the effective minimum leverage ratio, for all practical
purposes, must be at least 4% or 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
The following tables present the capital ratios for the Company and its
subsidiaries, compared to the standards for well-capitalized depository
institutions, as of December 31, 1996.
Westamerica Bancorporation
- -------------------------------------------------------------------
For Capital Adequacy
Actual Purposes
(Dollars in thousands) Capital Ratio Amount Ratio
- -------------------------------------------------------------------
Leverage $230,981 9.20% $100,394 4.00%
Tier 1 Risk-based 230,981 12.61 73,269 4.00
Total Risk-based 274,026 14.96 146,538 8.00
Westamerica Bank
- -------------------------------------------------------------------
For Capital Adequacy
Actual Purposes
(Dollars in thousands) Capital Ratio Amount Ratio
- -------------------------------------------------------------------
Leverage $194,194 8.11% $95,757 4.00%
Tier 1 Risk-based 194,194 11.22 69,257 4.00
Total Risk-based 241,981 13.98 138,515 8.00
Bank of Lake County
- -------------------------------------------------------------------
For Capital Adequacy
Actual Purposes
(Dollars in thousands) Capital Ratio Amount Ratio
- -------------------------------------------------------------------
Leverage $9,721 10.79% $3,605 4.00%
Tier 1 Risk-based 9,721 16.36 2,376 4.00
Total Risk-based 10,474 17.63 4,752 8.00
Banking agencies have recently adopted final regulations which mandate
that regulators take into consideration concentrations of credit risk
and risks from non-traditional activities, as well as an institution's
ability to manage those risks, when determining the adequacy of an
institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. Banking agencies
also have recently adopted final regulations requiring regulators to
consider interest rate risk (when the interest rate sensitivity of an
institution's assets does not match the sensitivity of its liabilities
or its off-balance-sheet position) in evaluating a bank's capital
adequacy. This final rule does not codify a measurement framework for
assessing the level of a bank's interest rate risk exposure. The
information and exposure estimates collected through a new proposed
supervisory measurement process, described in the banking agencies'
joint policy statement on interest rate risk, would be one quantitative
factor used to determine the adequacy of an individual bank's capital
for interest rate risk. The focus of that proposed process is on a
bank's economic value exposure. Other quantitative factors include the
bank's historical financial performance and its earnings exposure to
interest rate movements. Examiners also will consider qualitative
factors, including the adequacy of the bank's internal interest rate
risk management. The banking agencies intend for this case-by-case
approach for assessing a bank's capital adequacy for interest rate risk
to be a transitional arrangement.
The second step will consist of a proposed rule that would establish an
explicit minimum capital charge for interest rate risk, based on the
level of a bank's measured interest rate risk exposure. The banking
agencies intend to implement this second step at some future date, after
the banking agencies and the banking industry have gained more
experience with the proposed supervisory measurement and assessment
process.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions,
including but no limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulators defining the following five categories in which an
insured institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of
FDICIA. An insured depository institution generally will be classified
in the following categories based on capital measures indicated below:
- ---------------------------------------------------------------------------------------
Total Tier 1
risk-based risk-based Leverage
capital capital ratio
- ---------------------------------------------------------------------------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized less than: 8% 4% 4%
Significantly undercapitalized less than: 6% 3% 3%
Critically undercapitalized Tangible equity/total assets less than 2%
- ---------------------------------------------------------------------------------------
An institution that, based upon its capital levels, is classified as
"well capitalized", "adequately capitalized" or "undercapitalized" may
be treated as though it were in the next lower category if the
appropriate federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an unsafe or
unsound practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as "critically undercapitalized" unless its capital
ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking
agency. Undercapitalized institutions must submit an acceptable
capital restoration plan with a guarantee of performance issued
by the holding company. Further restrictions and sanctions are
required to be imposed on insured depository institutions that
are critically undercapitalized. The most important additional
measure is that the appropriate federal banking agency is
required to either appoint a receiver for the institution
within 90 days, or obtain the concurrence of the FDIC in
another form of action.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be
subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting their
business or for violations of any law, rule, regulation or any
condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money
penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of
removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions
or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not
granted. Additionally, a holding company's inability to serve
as a source of strength to its subsidiary banking organizations
could serve as an additional basis for a regulatory action
against the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions and
required federal banking regulators to adopt overall safety and
soundness standards for depository institutions related to
internal control, loan underwriting and documentation and asset
growth. Among other things, FDICIA limits the interest rates
paid on deposits by undercapitalized institutions, restricts
the use of brokered deposits, limits the aggregate extensions
of credit by a depository institution to an executive officer,
director, principal shareholder or related interest, and
reduces deposit insurance coverage for deposits offered by
undercapitalized institutions for deposits by certain employee
benefits accounts.
In addition to the statutory limitations, FDICIA originally
required the federal banking agencies to prescribe, by
regulation, standards for all insured depository institutions
for such things as classified loans and asset growth. In 1994,
FDICIA was amended to (a) authorize the agencies to establish
safety and soundness standards by regulation or by guideline
for all insured depository institutions; (b) give the agencies
greater flexibility in prescribing asset quality and earnings
standards; and eliminate the requirement that such
standards apply to depository institution holding companies.
On July 10, 1995 the federal banking agencies published
Interagency Guidelines Establishing Standards for Safety and
Soundness. By adopting the standards as guidelines, the
agencies retained the authority to require an institution to
submit to an acceptable compliance plan as well as the
flexibility to pursue other more appropriate or effective
courses of action given the specific circumstances and severity
of an institution's noncompliance with one or more standards.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
Holders of the Company's common stock are entitled to receive
dividends as and when declared by the Board of Directors of the
Company out of funds legally available therefor under the laws
of the State of California. The GCL provides that a corporation
may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed
distribution. The GCL further provides that in the event sufficient
retained earnings are not available for the proposed distribution a
corporation may nevertheless make a contribution to its shareholders if,
after giving effect to the distribution, it meets two conditions, which
generally stated are as follows: (I) the corporation's assets must equal
at least 125% of its liabilities; and (ii) the corporation's
current assets must equal at least its current liabilities or,
if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal
years was less than the average of the corporation's interest
expense for such fiscal years, then the corporation's current
assets must equal at least 125% of its current liabilities.
The Company is also subject to certain restrictions on its ability to
pay dividends under the terms of certain of its debt agreements. In
1996, the Company issued and sold $22,500,000 aggregate principal amount
of its 7.11% Senior Notes due February 1, 2006 (the "Senior Notes"),
payable semiannually, pursuant to a Senior Note Agreement dated as of
February 1, 1996 (the "Senior Note Agreement"). The Senior Notes require
that, commencing February 1, 2000 and ending February 1, 2005,
the Company shall make principal repayments of the lesser of
$3,214,286 or the principal amount then outstanding. The Senior Note
Agreement contains covenants and other provisions usual and customary
for senior indebtedness of this type, including, but not limited to,
capital debt maintenance ratios, maintenance of specified levels of
consolidated tangible net worth, limitations on indebtedness, a fixed
charge coverage ratio and restrictions on the payment of dividends or
other distributions. The Company is in full compliance with the terms
of the Senior Note Agreement. The Senior Note Agreement does not
currently limit the payment of regular quarterly dividends.
The Company's dividends will generally be declared based on the
dividends received from its bank subsidiaries. These are state
chartered banks and are subject to provisions of state and federal law.
The limitations of such subsidiaries' ability to declare and pay
dividends could affect the Company's ability to pay dividends.
Generally, the power of the board of directors of any insured
depository institution to declare a cash dividend or other
distribution with respect to capital is subject to statutory
and regulatory restrictions which limit the amount available
for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general
business conditions. FDICIA prohibits insured depository
institutions from paying management fees to any controlling
persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to
the extent such payments do not exceed the lesser of retained earnings
of the bank or the bank's net income for its last three fiscal years
(less any distributions to shareholders during that period). In the
event a bank desires to pay cash dividends in excess of such amount, the
bank may pay a cash dividend with the prior approval of the
Superintendent in an amount not exceeding the greatest of the bank's
retained earnings, the bank's net income for its last fiscal year, or
the bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or
unsound, possibly including payment of dividends or other payments under
certain circumstances even if such payments are not expressly prohibited
by statute.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
All of the bank subsidiaries of the Company have their deposits
insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC also administers the Savings Association
Insurance Fund ("SAIF"), which insures deposits in thrift
institutions. FDICIA authorized the FDIC to borrow from the
United States Treasury (or from depository institutions that
are members of the BIF) amounts not exceeding in the aggregate
$30 billion, and to borrow from the Federal Financing Bank
amounts not greater than 90% of the fair market value of assets
of institutions acquired by the FDIC as receiver. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums
assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund
reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. No
assurance can be given at this time as to what the future level of
premiums will be.
As required by FDICIA, the FDIC adopted a transitional risk-based
assessment system for deposit insurance premiums which became effective
January 1, 1993. On November 14, 1995 the Board of Directors of the FDIC
adopted a resolution to reduce to a range of 0 to 27 basis points the
assessment rates applicable to deposits assessable by the BIF for
semiannual assessment periods beginning January 1, 1996. The new
assessment schedule would retain the risk based characteristics
of the current system. On November 26, 1996 the FDIC decided to
continue in effect the current BIF assessment rate schedule.
The FDIC may make limited adjustments to the above rate schedule not to
exceed an increase or decrease of 5 basis points without public notice
and comment rulemaking. The amount of an adjustment adopted by the Board
is to be determined by the following considerations: (a) the amount of
assessment revenue necessary to maintain the reserve ratio at the
designated reserve ratio and (b) the assessment schedule that would
generate such amount of assessment revenue considering the risk profile
of BIF members. In determining the relevant amount of assessment
revenue, the Board is to consider the BIF's expected operating expenses,
case resolution expenditures and income, the effect of assessments on
BIF members' earnings and capital, and any other factors the Board may
deem appropriate.
In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act")
in order to raise the level of SAIF reserves, and to reduce the
possibility that bonds issued by the Financing Corporation ("FICO")
would go into default. The FICO was a special purpose government
corporation that issued $8.2 billion in bonds to recapitalize the
Federal Savings and Loan Insurance Corporation. Interest on the FICO
bonds was paid from the proceeds of assessment made on the deposits of
SAIF members. Because of the almost $800 million needed to pay for the
annual interest on the FICO bonds, the payments of SAIF members were
not increasing the SAIF reserve to a sufficient level to allow the FDIC
to reduce assessment rates (as had been done for BIF deposits), and SAIF
members were employing certain strategies to either exit the system or
transfer deposits to BIF coverage.
Pursuant to the Funds Act, the FDIC imposed a special one-time
assessment on all institutions that held SAIF assessable deposits as of
March 31, 1995 of an estimated 65.7 cents per $100 of SAIF assessable
deposits. Certain discounts and exemptions from the assessment were
available. For example, BIF-member banks that had acquired SAIF-insured
deposits from thrifts were generally entitled to a 20% discount on the
special assessment if the bank satisfied certain statutory thresholds
(the bank's acquired SAIF deposits, as adjusted, must be less than half
of its total domestic deposits). Furthermore, beginning January 1, 1997,
all FDIC-insured institutions will be assessed to cover the interest
payments due on FICO bonds. For calendar years 1997 through 1999, BIF
members will pay one-fifth the rate SAIF members will pay, and beginning
in 2000 both types of institutions will pay the same rate. BIF members
will be required to pay a FICO assessment of approximately 1.3 basis
points for the semiannual FICO assessment in 1997.
The Funds Act also authorized the FDIC to rebate assessments paid by BIF
members if the BIF has reserves exceeding its designated reserve ratio
of 1.25% of total estimated insured deposits. The adjusted BIF balance
was $25.888 billion on June 30, 1996, a reserve ratio of 1.30%. The FDIC
has expressed its view that the long-term needs of the BIF are a factor
in setting the effective average BIF assessment rate, and that the
FDIC is uncertain whether the current favorable conditions represent a
long-term trend.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Company's bank subsidiaries are each subject to certain fair lending
requirements and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA") activities. The CRA
generally requires the federal banking agencies to evaluate the record
of a financial institution in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In
addition to substantive penalties and corrective measures that may be
required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account
when regulating and supervising other activities. On November 15, 1993
the FRB announced that it would not approve the application of a certain
New England bank holding company to acquire the voting shares of another
insured depository institution. The Federal Reserve issued a statement
indicating its failure to approve the application was based on incorrect
reporting of home mortgage lending data by the applicant, and the
possibility that the applicant may have engaged in discriminatory
treatment of minorities in mortgage lending in violation of the Equal
Credit Opportunity Act.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to
prove discrimination: overt evidence of discrimination, evidence of
disparate treatment, and evidence of disparate impact.
In 1996, new compliance and examination guidelines for the CRA were
promulgated by each of the federal banking regulatory agencies, fully
replacing the prior rules and regulatory expectations with new ones,
ostensibly more performance based than before, to be fully phased in as
of July 1, 1997. The guidelines provide for streamlined examinations of
smaller institutions.
RECENTLY ENACTED LEGISLATION
On September 29, 1995, the IBBA became effective. The IBBA implemented
the federal Interstate Banking and Branching Act. The main features of
this legislation are (a) out-of-state banks that wish to establish a
California branch office to conduct core banking business must first
acquire an existing 5 year old California bank of industrial loan
company by merger or purchase; (b) California state-chartered banks will
be empowered to conduct various authorized branch-like activities
on an agency basis through affiliated and unaffiliated insured
depository institutions in California and other states and the
Superintendent will be authorized to approve an interstate acquisition
or merger which would result in a deposit concentration exceeding 30% if
the Superintendent finds that the transaction is consistent with public
convenience and advantage. The legislation also contains extensive
provisions governing intrastate and interstate (a) intra-industry sales,
mergers and conversions between banks and between industrial loan
companies and (b) inter-industry transactions involving banks, savings
associations and industrial loan companies.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and
the underground storage tank provisions of the Resource Conversation and
Recovery Act ("RCRA") to provide lenders and fiduciaries with greater
protections from environmental liability. The definition of "owner or
operator" under CERCLA has been amended to exclude a lender who: (I)
holds indicia of ownership in a property primarily to protect its
security interest, but does not participate in the property's management
or (ii) forecloses on a property, or, after foreclosure, sells,
re-leases (in the case of a lease finance transaction), or liquidates
the property, maintains business activities, winds up operations,
undertakes a response under CERCLA, or takes measures to preserve,
protect or prepare property prior to sale or disposition, so long as the
lender did not participate in the property's management prior to sale.
In order to preserve these protections, a lender who forecloses on
property must seek to sell, re-lease, or otherwise divest itself of the
property at the earliest practicable, commercially reasonable time, and
on reasonable terms. "Participation in management" is defined as actual
participation in the management or operational affairs of the facility,
not merely having the capacity to influence or the unexercised right to
control operations. Similar changes have been made in RCRA.
The California legislature adopted a similar bill to provide that,
subject to numerous exceptions, a lender acting in the capacity of a
lender shall not be liable under any state or local statute, regulation
or ordinance, other than the California Hazardous Waste Control Law, to
undertake a cleanup, pay damages, penalties or fines, or forfeit
property as a result of the release of hazardous materials at or from
the property. Under this bill a lender which had not participated
in the management of the property prior to foreclosure may take actions
similar to those set forth in the CERCLA and RCRA amendments without
losing its immunity from liability. To preserve that immunity, after
foreclosure, the lender must take commercially reasonable steps to
divest itself of the property in a reasonably expeditious manner.
PENDING LEGISLATION
There are a number of pending legislative proposals to reform the
Glass-Steagall Act to allow affiliations between banks and other firms
engaged in "financial activities", including insurance companies and
securities firms. Glass-Steagall reform will likely be affected by a
bank insurance powers case decided during 1996 by the U.S. Supreme
Court, which gave national banks greater opportunities to sell
traditional insurance products, such as life, automobile, and property
and casualty policies. In a similar recent case, the Court upheld a
determination of the Office of the Comptroller of the Currency that
national banks may sell annuities.
Certain other pending legislative proposals include bills to free
withdrawals from individual retirement accounts from penalties for
first-home purchases and other purposes and eliminate most Community
Reinvestment Act reporting requirements.
While the effect of such proposed legislation and regulatory reform on
the business of financial institutions cannot be accurately predicted at
this time, it seems likely that a significant amount of consolidating in
the banking industry will continue to occur throughout the remainder of
the decade.
COMPETITION
The Banks compete with other commercial banks, savings and loan
associations, thrift and loans, credit unions, brokerage firms, money
market mutual funds, finance and insurance companies, mortgage banking
firms and even retail establishments. The direction of federal
legislation in recent years seems to favor competition between different
types of financial institutions and to foster new entrants into the
financial services markets, and it is anticipated that this trend will
continue.
According to information obtained by the Company through an independent
market research firm, WAB was the third largest financial institution in
terms of total deposits in Marin County at June 30, 1996, at which date
it had approximately 12 percent of total deposits held in federally
insured depository institutions in that county. According to the same
source of information and in terms of total deposits, as of June 30,
1996 WAB ranked third in WAB's Sonoma-Mendocino counties service area,
with approximately an 8 percent share of the market, and was third in
the Solano-Contra Costa counties service area, with a market share of
approximately 5 percent of the market. In addition, WAB's market share
in the Sacramento-Placer-Nevada counties service area was approximately
5 percent, ranking third among its competitors. The share of the market
for deposits and loans held by WAB in San Francisco and Alameda Counties
is not significant. According to the same source of information, WAB
ranked second in terms of total deposits in the Napa Valley service area
as of June 30, 1996, with approximately 17 percent market share. The
same source of data reports that BLC ranked second, in terms of total
deposits, in market share in the Lake County service area with 17
percent of the total.
The Banks provide checking and savings deposit services as well as
commercial, real estate and personal loans. In addition, most of the
branches offer safe deposit facilities, automated teller units,
collection services and other investment services.
The Banks believe that personal, prompt, professional service and
community identity are important in the banking business. To this end,
each of one the Banks has sought to retain its community identity and
has emphasized personalized services through "big bank resources with
small bank resourcefulness".
Competitive conditions continue to intensify as various legislative
enactments have continued to dissolve historical barriers to the
financial markets. Competition is expected to further increase in the
state of California as a result of legislation enacted in 1994 and 1995.
The enactment of the Interstate Banking and Branching Act in 1994 as
well as the California Interstate Banking and Branching Act of 1995 will
likely increase competition within California. See "Regulation and
Supervision of Bank Holding Companies" above. Regulatory reform, as well
as other changes in federal and California law, will also affect
competition. While the impact of these changes, and of other proposed
changes, cannot be predicted with certainty, it is clear that the
business of banking in California will remain highly competitive.
Legislative changes, as well as technological and economic factors, can
be expected to have an ongoing impact on competitive conditions within
the financial services industry. As an active participant in the
financial markets, the Company believes that it continually adapts to
these changing competitive conditions.
Employees
At December 31, 1996, the Company employed 827 full-time equivalent
staff. Employee relations are believed to be good.
ITEM 2. Properties
BRANCH OFFICES AND FACILITIES
The Banks are engaged in the banking business through fifty-seven
offices in thirteen counties in Northern California including eleven
offices in Marin County, nine in Sonoma County, seven in Napa County,
six in Solano County, five in Stanislaus County, five in Contra Costa
County, four in Lake County, three in Mendocino County, two in Nevada
County, two in Sacramento County, one in San Francisco County, one in
Placer County and one in Alameda County. All offices are constructed and
equipped to meet prescribed security requirements.
The Company owns fifteen branch office locations and two administrative
buildings, including the Company's headquarters. Forty two banking
offices are leased. Most of the leases contain multiple five-year
renewal options and provisions for rental increases, principally for
changes in the cost of living index, property taxes and maintenance.
ITEM 3. Legal Proceedings
Neither the Company or its subsidiaries is a party to any material
pending legal proceeding, nor is their property the subject of any
material pending legal proceeding, except ordinary routine legal
proceedings arising in the ordinary course of the Company's business,
none of which are expected to have a material adverse impact upon the
Company's business, financial position or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
There no matters submitted to a vote of the shareholders during
the fourth quarter of 1996.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is traded on the NASDAQ National
Market Exchange ("NASDAQ") under the symbol "WABC". The
following table shows the high and the low closing price for
the common stock, for each quarter, as reported by NASDAQ:
Period
- -----------------------------------------------------------
1996 High Low
- -----------------------------------------------------------
First quarter $47.25 $43.25
Second quarter 50.25 46.00
Third quarter 51.00 46.50
Fourth quarter 58.75 49.50
- -----------------------------------------------------------
1995 High Low
- -----------------------------------------------------------
First quarter $33.25 $29.50
Second quarter 37.50 33.00
Third quarter 38.50 36.50
Fourth quarter 43.25 38.50
As of December 31, 1996, there were 6,751 shareholders of
record of the Company's common stock.
The Company has paid cash dividends on its common stock in every quarter
since commencing operations on January 1, 1973, and it is currently the
intention of the Board of Directors of the Company to continue payment
of cash dividends on a quarterly basis. There is no assurance, however,
that any dividends will be paid since they are dependent upon earnings,
financial condition and capital requirements of the Company and its
subsidiaries. As of December 31, 1996, $74.5 million was available for
payment of dividends by the Company to its shareholders, under
applicable laws and regulations.
Additional information (required by Item 5) regarding the amount of cash
dividends declared on common stock for the two most recent fiscal years
is discussed in Note 18 to the consolidated financial statements
included in this report.
As discussed in Note 7 to the consolidated financial statements, in
December 1986, the Company declared a dividend distribution of one
common share purchase right (a "Right") for each outstanding share of
common stock. The terms of the Rights were amended and restated on
September 28, 1989. On March 23, 1995, the Board of Directors of the
Company approved a further amendment and restatement of Rights. The
Amended and Restated Rights Agreement entitles the holders of each
share of the Company Common Stock to the right (each, a "Westamerica
Right"), when exercisable, to purchase from the Company one share of its
Common Stock at a price of $65.00 per share, subject to adjustment in
certain circumstances. A Westamerica Right is attached to each share of
the Company Common Stock. The Westamerica Rights only become exercisable
and trade separately from the Company Common Stock following the
earlier of (I) a public announcement that a person or a group of
affiliated or associated persons has become the beneficial owner of the
Company securities having 15 percent or more of the Company's voting
power (an "Acquiring Person") or (ii) 10 days following the
commencement of, or a public announcement of an intention to make, a
tender or exchange offer which would result in any person having
beneficial ownership of securities having 15 percent or more of such
voting power. Upon becoming exercisable, each holder of a Westamerica
Right (other than an Acquiring Person whose rights will become null and
void) will, for at least a 60-day period thereafter, have the right
(subject to the following sentence), upon payment of the exercise
price of $65.00, to receive upon exercise that number of shares of the
Company Common Stock having a market value of twice the exercise price
of the Westamerica Right, to the extent available. Subject to applicable
law, the Board of Directors, at its option, may at any time after a
Person becomes an Acquiring Person (but not after the acquisition by
such Person of 50 percent or more of the outstanding Company Common
Stock), exchange all or part of the then outstanding and exercisable
Westamerica Rights (except for Westamerica Rights which have become
void) for shares of the Company Common Stock equivalent to one share of
the Company Common Stock per Westamerica Right or, alternatively, for
substitute consideration consisting of cash, securities of the Company
or other assets (or any combination thereof).
ITEM 6. Selected Financial Data
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
(In thousands, except per share data )
- ------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Interest income $174,265 $174,377 $166,094 $165,975 $185,060
Interest expense 60,917 58,612 49,860 51,158 69,951
- ------------------------------------------------------------------------------------------------------------
Net interest income 113,348 115,765 116,234 114,817 115,109
Provision for loan losses 4,575 5,595 7,420 10,581 8,410
Non-interest income 22,043 21,533 25,999 33,806 30,646
Non-interest expense 75,627 86,340 94,341 121,441 111,662
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 55,189 45,363 40,472 16,601 25,683
Provision for loan losses 17,449 13,979 12,810 4,507 9,642
- ------------------------------------------------------------------------------------------------------------
Net income $37,740 $31,384 $27,662 $12,094 $16,041
============================================================================================================
Net income $3.93 $3.18 $2.79 $1.22 $1.66
Dividends declared 0.95 0.77 0.64 0.57 0.51
Book value at December 31 25.33 22.87 20.67 19.03 18.18
Average common shares outstanding 9,613 9,877 9,916 9,884 9,678
Shares outstanding at December 31 9,435 9,793 9,901 9,914 9,772
At December 31
Cash and cash equivalents $149,429 $182,133 $180,957 $157,750 $198,011
Investment securities and
money market assets 894,288 862,762 826,896 807,490 654,883
Loans, net 1,409,318 1,353,732 1,354,539 1,368,923 1,424,436
Other assets 95,452 92,317 95,035 94,685 99,385
- ------------------------------------------------------------------------------------------------------------
Total assets $2,548,487 $2,490,944 $2,457,427 $2,428,848 $2,376,715
============================================================================================================
Non-interest bearing deposits $515,451 $497,489 $472,301 $462,636 $397,185
Interest bearing deposits 1,565,945 1,552,032 1,599,391 1,647,395 1,744,900
Funds purchased 161,147 175,622 135,426 76,298 19,056
Notes and mortgages payable 42,500 20,000 25,524 36,352 19,412
Other liabilities 24,498 21,864 20,124 17,523 18,522
Shareholders' equity 238,946 223,937 204,661 188,644 177,640
- ------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,548,487 $2,490,944 $2,457,427 $2,428,848 $2,376,715
============================================================================================================
Financial Ratios
For the year:
Return on assets 1.52% 1.30% 1.13% 0.51% 0.68%
Return on equity 16.79% 14.61% 14.13% 6.73% 9.49%
Net interest margin * 5.31% 5.56% 5.45% 5.50% 5.51%
Net loan losses to average loans 0.23% 0.35% 0.34% 0.65% 0.50%
Non-interest expense/revenues * 52.87% 60.02% 63.93% 80.18% 75.19%
At December 31:
Equity to assets 9.38% 8.99% 8.33% 7.77% 7.47%
Total capital to risk-adjusted assets 14.96% 15.18% 15.01% 14.13% 12.25%
Loan loss reserve to loans 2.42% 2.42% 2.34% 2.15% 2.03%
* Fully taxable equivalent
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited
to, the following factors: competitive pressure in the banking industry
increases significantly; changes in the interest rate environment reduce
margins, general economic conditions, either nationally or regionally,
are less favorable than expected, resulting in, among other things, a
deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets. See also "Certain Additional Business Risks" on
pages 8 through 9 herein and other risk factors discussed elsewhere
in this Report.
The following discussion addresses information pertaining to the
financial condition and results of operations of Westamerica
Bancorporation (the "Company") that may not be otherwise apparent from a
review of the consolidated financial statements and related footnotes.
It should be read in conjunction with those statements and notes found
on pages 57 through 91, as well as with the other information
presented throughout the report.
The Company achieved record earnings of $37.7 million in 1996,
representing a 20 percent increase from the $31.4 million earned in 1995
and 36 percent higher than 1994 earnings of $27.7 million.
Components of Net Income
- ----------------------------------------------------------------
(In millions) 1996 1995 1994
- ----------------------------------------------------------------
Net interest income * $121.0 $122.3 $121.6
Provision for loan losses (4.6) (5.6) (7.4)
Non-interest income 22.0 21.5 26.0
Non-interest expense (75.6) (86.3) (94.3)
Taxes * (25.1) (20.5) (18.2)
- ----------------------------------------------------------------
Net income $37.7 $31.4 $27.7
================================================================
Net income as a percentage of
average total assets 1.52% 1.30% 1.13%
================================================================
* Fully taxable equivalent (FTE)
On a per share basis, 1996 net income was $3.93, compared to $3.18 and
$2.79 in 1995 and 1994, respectively. During 1996, the Company benefited
from increased non-interest income, continuing expense controls and a
lower loan loss provision, which offset a decline in net interest
income, primarily due to a decrease in earning asset yields, an increase
in cost of funds, and higher income taxes. Earnings in 1995 were
favorably affected compared to 1994 by increases in earning asset yields
and expense controls, which were partially offset by increases
in cost of funds and declines in non-interest income. The Company's
return on average total assets was 1.52 percent in 1996, compared to
1.30 percent and 1.13 percent in 1995 and 1994, respectively. Return on
average equity in 1996 was 16.79 percent, compared to 14.61 percent and
14.13 percent, respectively, in the two previous years.
Net Interest Income
During 1996, the Company experienced a decline in lower-cost savings
account balances and a decrease in earning asset yields. These trends
were partially offset by an increase in average earning assets,
including an increase in the tax-free investment securities and loan
balances. The combination of these items resulted in an overall decrease
in the Company's net interest income levels from 1995.
Comparing 1995 to 1994, the Company was able to increase net interest
income levels, as increases in earning asset yields offset the decline
in average earning assets and lower-cost deposits.
Components of Net Interest Income
- ------------------------------------------------------------------
(In millions) 1996 1995 1994
- ------------------------------------------------------------------
Interest income $174.2 $174.4 $166.1
Interest expense (60.9) (58.6) (49.9)
FTE adjustment 7.7 6.5 5.4
- ------------------------------------------------------------------
Net interest income (FTE) $121.0 $122.3 $121.6
==================================================================
Average earning assets $2,279.3 $2,200.9 $2,230.1
Net interest margin (FTE) 5.31% 5.56% 5.45%
==================================================================
Net interest income (FTE) in 1996 decreased $1.3 million from 1995 to
$121.0 million. Interest income decreased $200,000 from 1995, the
combined effect of a 24 basis point decrease in earning-asset yields
partially offset by a $78.4 million increase in average balances. This
revenue increase was more than offset by a $2.3 million increase in
interest expense, the result of an increase of 5 basis points in rates
paid combined with a $37.8 million increase in the average balance
of interest-bearing liabilities. In addition, the FTE adjustment
increased $1.2 million due to increases in the average volume of
tax-free earning assets. Comparing 1995 to 1994, net interest income
increased $700,000. Interest income increased $8.3 million, the
combined effect of a 53 basis point increase in earning-asset yields
partially offset by a $29.2 million decrease in average balances. The
effect was offset by an $8.7 million increase in interest expense, the
result of an increase of 62 basis points in rates offset, in part, by a
$69.2 million decrease in the average balance on interest-bearing
liabilities. Completing the variance, the FTE adjustment increased $1.1
million in 1995 compared with 1994 due to increases in the average
volume of tax-free earning assets.
Summary of Average Balances, Yields/Rates and Interest
Differential
The following tables present, for the periods indicated, information
regarding the consolidated average assets, liabilities and shareholders'
equity, the amounts of interest income from average earning assets and
the resulting yields, and the amount of interest expense paid on
interest-bearing liabilities.
Average loan balances include non-performing loans. Interest income
includes proceeds from loans on non-accrual status only to the extent
cash payments have been received and applied as interest income. Yields
on securities and certain loans have been adjusted upward to reflect the
effect of income thereon exempt from federal income taxation at the
current statutory tax rate. Amortized loan fees, which are included in
interest and fee income on loans were $770,000 lower in 1996 than in
1995 and $1.3 million lower in 1995 than in 1994.
Distribution of Average Assets, Liabilities and Shareholders' Equity
Yields/Rates and Interest Margin
(In thousands) Full Year 1996
- -----------------------------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- -----------------------------------------------------------------
Assets
Money market assets and
funds sold $250 $-- -- %
Trading account securities 17 1 4.61
Investment securities 877,053 55,287 6.30
Loans:
Commercial 828,048 77,355 9.34
Real estate construction 45,530 5,258 11.55
Real estate residential 254,670 18,720 7.35
Consumer 273,759 25,303 9.24
- ----------------------------------------------------
Earning assets 2,279,327 181,924 7.98
Other assets 208,977
- ------------------------------------------
Total assets $2,488,304
==========================================
Liabilities and shareholders'
equity
Deposits
Non-interest bearing demand $474,436 $-- -- %
Savings and interest-bearing
transaction 1,047,584 23,419 2.24
Time less than $100,000 301,979 15,018 4.97
Time $100,000 or more 192,736 10,124 5.25
- ----------------------------------------------------
Total interest-bearing
deposits 1,542,299 48,561 3.15
Funds purchased 187,603 9,528 5.08
Notes and mortgages payable 39,397 2,828 7.18
- ----------------------------------------------------
Total interest-bearing
liabilities 1,769,299 60,917 3.44
Other liabilities 19,732
Shareholders' equity 224,837
- ------------------------------------------
Total liabilities and
shareholders' equity $2,488,304
==========================================
Net interest spread (1) 4.54 %
Net interest income and interest margin (2) $121,007 5.31 %
==================================================================
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on
interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest
income by total average earning assets.
Distribution of Average Assets, Liabilities and Shareholders' Equity
Yields/Rates and Interest Margin
(In thousands) Full Year 1995
- ---------------------------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------
Assets
Money market assets and
funds sold $4,886 $276 5.65 %
Trading account securities 11 1 6.35
Investment securities 826,329 51,289 6.21
Loans:
Commercial 806,103 79,010 9.80
Real estate construction 62,562 7,178 11.47
Real estate residential 213,967 15,919 7.44
Consumer 287,032 27,249 9.49
- -----------------------------------------------------
Earning assets 2,200,890 180,922 8.22
Other assets 215,973
- ----------------------------------------
Total assets $2,416,863
========================================
Liabilities and shareholders'
equity
Deposits
Non-interest bearing demand $451,560 $-- -- %
Savings and interest-bearing
transaction 1,087,169 24,519 2.26
Time less than $100,000 305,507 15,066 4.93
Time $100,000 or more 166,241 8,895 5.35
- ------------------------------------------------------
Total interest-bearing
deposits 1,558,917 48,480 3.11
Funds purchased 149,902 8,403 5.61
Notes and mortgages payable 22,667 1,729 7.63
- ------------------------------------------------------
Total interest-bearing
liabilities 1,731,486 58,612 3.39
Other liabilities 18,961
Shareholders' equity 214,856
- ----------------------------------------
Total liabilities and
shareholders' equity $2,416,863
========================================
Net interest spread (1) 4.83 %
Net interest income and interest margin (2) $122,310 5.56 %
================================================================
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on
interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest
income by total average earning assets.
Distribution of Average Assets, Liabilities and Shareholders' Equity
Yields/Rates and Interest Margin
(In thousands) Full Year 1994
- ------------------------------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ------------------------------------------------------------------
Money market assets and $35,514 $1,367 3.85 %
funds sold
Trading account securities 37 2 4.24
Investment securities 831,478 49,272 5.93
Loans:
Commercial 798,894 72,894 9.12
Real estate construction 76,875 7,695 10.01
Real estate residential 197,675 14,236 7.20
Consumer 292,080 25,959 8.89
- ------------------------------------------------------
Earning assets 2,232,553 171,425 7.68
Other assets 221,555
- --------------------------------------------
Total assets $2,454,108
============================================
Liabilities and shareholders'
equity
Deposits
Non-interest bearing demand $439,881 $-- -- %
Savings and interest-bearing
transaction 1,166,249 23,672 2.03
Time less than $100,000 320,915 12,533 3.91
Time $100,000 or more 153,504 5,762 3.75
- ------------------------------------------------------
Total interest-bearing deposits 1,640,668 41,967 2.56
Funds purchased 130,299 5,281 4.05
Notes and mortgages payable 29,690 2,612 8.80
- ------------------------------------------------------
Total interest-bearing
liabilities 1,800,657 49,860 2.77
Other liabilities 17,780
Shareholders' equity 195,790
- --------------------------------------------
Total liabilities and
shareholders' equity $2,454,108
============================================
Net interest spread (1) 4.91 %
Net interest income and interest margin (2) $121,565 5.45 %
================================================================
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on
interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest
income by total average earning assets.
Rate and volume variances. The following table sets forth a
summary of the changes in interest income and interest expense
from changes in average assets and liability balances (volume)
and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been
allocated in proportion to the respective volume and rate
components.
For the years
(In thousands) ended December 31,
- ----------------------------------------------------------------
1996 compared with 1995
------------------------------
Total
Increase/
Volume Rate (Decrease)
- ----------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and
funds sold ($134) ($142) ($276)
Trading account securities -- -- --
Investment securities (1) 3,188 810 3,998
Loans:
Commercial (1) 2,291 (3,946) (1,655)
Real estate construction (1,967) 47 (1,920)
Real estate residential 2,989 (188) 2,801
Consumer (1,239) (707) (1,946)
- ---------------------------------------------------------------
Total loans (1) 2,074 (4,794) (2,720)
- ---------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 5,128 (4,126) 1,002
- ---------------------------------------------------------------
Increase (decrease) in interest
expense:
Deposits:
Savings/interest-bearing (886) (214) (1,100)
Time less than $ 100,000 (180) 132 (48)
Time $ 100,000 or more 1,388 (159) 1,229
- ---------------------------------------------------------------
Total interest-bearing
deposits 322 (241) 81
Funds purchased 1,796 (671) 1,125
Notes and mortgages payable 1,194 (95) 1,099
- ---------------------------------------------------------------
Total increase (decrease) in
interest expense 3,312 (1,007) 2,305
- ---------------------------------------------------------------
Increase (decrease) in
net interest income (1) $1,816 ($3,119) ($1,303)
===============================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
For the years
(In thousands) ended December 31,
- ----------------------------------------------------------------
1995 compared with 1994
-------------------------------
Total
Increase/
Volume Rate (Decrease)
- ----------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and
funds sold ($2,386) $1,295 ($1,091)
Trading account securities (3) 2 (1)
Investment securities (1) (303) 2,320 2,017
Loans:
Commercial (1) 663 5,453 6,116
Real estate construction (2,407) 1,890 (517)
Real estate residential 1,201 482 1,683
Consumer (438) 1,728 1,290
- ----------------------------------------------------------------
Total loans (1) (981) 9,553 8,572
- ----------------------------------------------------------------
Total (decrease) increase in
interest and fee income (1) (3,673) 13,170 9,497
- ----------------------------------------------------------------
Increase (decrease) in interest
expense:
Deposits:
Savings/interest-bearing (1,326) 2,173 847
Time less than $ 100,000 (566) 3,099 2,533
Time $ 100,000 or more 511 2,622 3,133
- ----------------------------------------------------------------
Total interest-bearing
deposits (1,381) 7,894 6,513
Funds purchased 880 2,242 3,122
Notes and mortgages payable (565) (318) (883)
- ----------------------------------------------------------------
Total (decrease) increase in
interest expense (1,066) 9,818 8,752
- ----------------------------------------------------------------
Increase (decrease) in
net interest income (1) ($2,607) $3,352 $745
================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
Provision for Loan Losses
The provision for loan losses was $4.6 million for 1996, compared to
$5.6 million in 1995 and $7.4 million in 1994. The reductions in the
provision in 1996 and 1995 reflect the results of the Company's
continuing efforts to improve loan quality by enforcing strict
underwriting and administration procedures and aggressively pursuing
collection efforts with troubled debtors. For further information
regarding net credit losses and the reserve for loan losses, see the
"Asset Quality" section of this report.
Investment Portfolio
The Company maintains a securities portfolio consisting of U.S
Treasury, U.S. Government agencies and corporations, state and
political subdivisions, asset-backed and other securities.
Investment securities are held in safekeeping by an independent
custodian. In November 1995, the Financial Accounting Standards
Board issued a special report, "A Guide to Implementation of
Statement No. 115, on Accounting for Certain Investments in Debt
and Equity Securities - Questions and Answers" (the "Special
Report"). The Special Report allowed companies to reassess the
appropriateness of the classifications of all securities and
account for any reclassification at fair value. The Company
adopted the reclassification provision stated in the Special
Report prior to December 31, 1995 and transferred $329.4 million
of securities held to maturity into available for sale. The
unrealized pretax gain upon transfer was $1.1 million as of
December 31, 1995.
The objective of the investment securities held to maturity is
to strengthen the portfolio yield, and to provide collateral to
pledge for federal, state and local government deposits and
other borrowing facilities. The investments held to maturity had
an average term to maturity of 81 months at December 31, 1996
and, on the same date, those investments included $196.8 million
in fixed rate and $600,000 in adjustable rate securities.
Investment securities available for sale are generally used to
supplement the Banks' liquidity. Unrealized net gains and losses
on these securities are recorded as an adjustment to equity, net
of taxes, and are not reflected in the current earnings of the
Company. If a security is sold, any gain or loss is recorded as
a charge to earnings and the equity adjustment is reversed. At
December 31, 1996, the Banks held $696.6 million classified as
investments available for sale. At December 31, 1996, an
unrealized gain of $7.8 million, net of taxes of $5.7 million,
related to these securities was held in shareholders' equity.
The Company had no trading securities at December 31, 1996.
For more information on investment securities, see Notes 1 and 2
to the consolidated financial statements.
The following table shows the amortized cost of the Company's
investment securities as of the dates indicated:
- --------------------------------------------------------------------
At December 31, 1996 1995 1994
- --------------------------------------------------------------------
(In thousands)
U.S. Treasury $272,896 $240,832 $279,014
U.S. Government agencies and corporations 201,656 248,964 275,221
States and political subdivisions 230,224 228,068 198,135
Asset backed securities 94,336 83,636 37,162
Other securities 81,367 58,079 40,785
- --------------------------------------------------------------------
Total $880,479 $859,579 $830,317
====================================================================
The following table is a summary of the relative maturities and yields
of the Company's investment securities as of December 31, 1996. Weighted
average yields have been computed by dividing annual interest income,
adjusted for amortization of premium and accretion of discount, by the
book value of the related security. Yields on state and political
subdivision securities have been calculated on a fully taxable
equivalent basis using the current statutory rate.
Held to Maturity
- -------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After ten Mortgage-
(Dollars in thousands) one year five years ten years years backed Other Total
- -------------------------------------------------------------------------------------------------------
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government agencies
and corporations -- -- -- -- -- -- --
Interest rate --% --% --% --% --% --% --%
States and political
subdivisions 619 6,914 65,117 50,085 -- -- 122,735
Interest rate 10.69% 9.10% 8.09% 8.36% --% --% 8.27%
Asset-backed 74 117 -- -- -- -- 191
Interest rate 5.26% 4.73% --% --% --% --% 4.94%
Other securities -- -- -- 3,157 -- -- 3,157
Interest rate --% --% --% 5.86% --% --% 5.86%
- --------------------------------------------------------------------------------------------------------
Subtotal 693 7,031 65,117 53,24 -- -- 126,083
Interest rate 10.11% 9.02% 8.09% 8.22% --% --% 8.20%
Mortgage Backed -- -- -- -- 71,345 -- 71,345
Interest rate --% --% --% --% 5.40% --% 5.40%
- --------------------------------------------------------------------------------------------------------
Total $693 $7,031 $65,117 $53,242 $71,345 $-- $197,428
Interest rate 10.11% 9.02% 8.09% 8.22% 5.40% --% 7.19%
========================================================================================================
Available for Sale
- -------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After ten Mortgage-
(Dollars in thousands) one year five years ten years years backed Other Total
- -------------------------------------------------------------------------------------------------------
U.S. Treasury $99,085 $173,811 $-- $-- $-- $-- $272,896
Interest rate 5.11% 6.05% --% --% --% --% 5.71%
U.S. Government Agencies
and Corporations 22,277 29,596 -- -- -- -- 51,873
Interest rate 5.96% 5.84% --% --% --% --% 5.89%
States and Political
Subdivisions 4,143 15,487 27,953 59,906 -- -- 107,489
Interest rate 9.27% 9.12% 7.60% 8.18% --% --% 8.21%
Asset Backed 607 60,605 32,933 -- -- -- 94,145
Interest rate 5.74% 6.00% 6.09% --% --% --% 6.03%
Other 33,116 25,990 -- -- -- -- 59,106
Interest rate 6.05% 6.13% --% --% --% --% 6.08%
- -------------------------------------------------------------------------------------------------------
Subtotal 159,228 305,489 60,886 59,906 -- -- 585,509
Interest rate 5.53% 6.18% 6.79% 8.18% --% --% 6.27%
Mortgage Backed -- -- -- -- 78,438 -- 78,438
Interest rate --% --% --% --% 5.77% --% 5.77%
Other securities without
set maturities -- -- -- -- -- 19,104 19,104
Interest rate --% --% --% --% --% 8.49% 8.49%
- -------------------------------------------------------------------------------------------------------
Total $159,228 $305,489 $60,886 $59,906 $78,438 $19,104 $683,051
Interest rate 5.53% 6.18% 6.79% 8.18% 5.77% 8.49% 6.28%
=======================================================================================================
Loan portfolio
The following table shows the composition of the loan portfolio
of the Company by type of loan or type of borrower, on the dates
indicated:
- --------------------------------------------------------------------------------------------
At December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------
(In thousands)
Commercial and commercial
real estate $857,811 $816,422 $813,589 $812,630 $820,666
Real estate construction 40,090 54,181 73,492 76,330 99,924
Real estate residential 276,951 237,535 207,477 206,264 201,080
Consumer 278,950 291,350 308,812 319,545 350,919
Unearned income (9,565) (12,248) (16,381) (15,801) (18,899)
- --------------------------------------------------------------------------------------------
Gross loans $1,444,237 $1,387,240 $1,386,989 $1,398,968 $1,453,690
Reserve for loan losses (34,919) (33,508) (32,450) (30,045) (29,254)
- --------------------------------------------------------------------------------------------
Net loans $1,409,318 $1,353,732 $1,354,539 $1,368,923 $1,424,436
============================================================================================
Maturities and Sensitivities of Selected Loans to Changes in Interest
Rates
The following table shows the maturity distribution and interest
rate sensitivity of commercial and real estate construction loans
at December 31, 1996. Balances exclude loans to individuals
and residential mortgages totaling $546.3 million. These types of
loans are typically paid in monthly installments over a number of
years.
- -----------------------------------------------------------------------------
Within One to After
One Year Five Years Five Years Total
- -----------------------------------------------------------------------------
(In thousands)
Commercial and commercial
real estate * $494,886 $172,260 $190,665 $857,811
Real estate construction 37,542 2,548 -- 40,090
- -----------------------------------------------------------------------------
Total $532,428 $174,808 $190,665 $897,901
=============================================================================
Loan with fixed
interest rates $41,195 $174,808 $190,665 $406,668
Loans with floating
interest rates 491,233 -- -- 491,233
- -----------------------------------------------------------------------------
Total $532,428 $174,808 $190,665 $897,901
=============================================================================
* Includes demand loans
Commitments and Lines of Credit
It is not the policy of the Company to issue formal commitments
on lines of credit except to a limited number of well
established and financially responsible local commercial
enterprises. Such commitments can be either secured or
unsecured and are typically in the form of revolving lines of
credit for seasonal working capital needs. Occasionally, such
commitments are in the form of Letters of Credit to facilitate
the customer's particular business transactions. Commitment
fees generally are not charged except where Letters of Credit
are involved. Commitments and lines of credit typically mature
within one year. For further information, see Note 13 to the
consolidated financial statements.
Asset Quality
The Company closely monitors the markets in which it conducts
its lending operations. The Company continues its strategy to
control its exposure to loans with higher credit risk and
increase diversification of earning assets into less risky
investments. Asset reviews are performed using grading
standards and criteria similar to those employed by bank
regulatory agencies. Assets receiving lesser grades fall under
the "classified assets" category, which includes all
non-performing assets and potential problem loans, and receive
an elevated level of attention to ensure collection.
The following is a summary of classified assets on the dates
indicated:
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At December 31, 1996 1995
- -----------------------------------------------------------
(In millions)
Classified loans $32.0 $44.9
Other classified assets 6.1 5.1
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Total classified assets $38.1 $50.0
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Classified loans at December 31, 1996 decreased $12.9 million
or 29 percent to $32.0 million from December 31,1995, reflecting
improvements in the borrowers' financial condition and satisfaction of
debt. The improvement is primarily due to repayments and charge-offs of
classified loans with real estate collateral. Other classified assets
increased $1.0 million from the prior year, due to the net effect of new
foreclosures on loan collateral, and sales and write-downs of properties
acquired in satisfaction of debt ("other real estate owned").
Non-performing assets
Non-performing assets include non-accrual loans, loans 90 or more days
past due as to principal or interest and still accruing and other real
estate owned. Loans are placed on non-accrual status upon reaching 90
days or more delinquent, unless the loan is well secured and in the
process of collection. Interest previously accrued on loans placed on
non-accrual status is charged against interest income. In addition,
loans secured by real estate with temporarily impaired values and
commercial loans to borrowers experiencing financial difficulties are
placed on non-accrual status even though the borrowers continue to repay
the loans as scheduled. Such loans are classified by Management as
"performing non-accrual" and are included in the total non-performing
assets. Performing non-accrual loans are reinstated to accrual status
when improvements in credit quality eliminate Management's doubt as to
the full collectibility of both principal and interest and the loan is
brought current. When the ability to fully collect non-accrual loan
principal is in doubt, cash payments received are applied against the
principal balance of the loan until such time as full collection of the
remaining recorded balance is expected. Any additional payments
received after that point are recorded as interest income on a cash
basis.
The following summarizes the Company's non-performing assets
for the periods indicated:
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At December 31, 1996 1995 1994 1993 1992
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(In millions)
Performing non-accrual loans $4.3 $2.4 $2.0 $1.9 $1.2
Non-performing non-accrual loans 3.3 7.5 8.3 13.9 36.2
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Total non-accrual loans 7.6 9.9 10.3 15.8