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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from .....to.......
Commission File Number 1-9383
WESTAMERICA BANCORPORATION
(Exact name of the registrant as specified in its charter)
CALIFORNIA
(State of incorporation)
94-2156203
(I.R.S. Employer Identification Number)
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 257-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
YES [ x ] NO [ ]
Indicate by check mark if disclosure of delinquent files
pursuant to item 405 of Regulation S-K (Section 229.405
of this chapter) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to
the closing price of the stock, as of March 20, 1998:
$1,374,172,000
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 20, 1998
Title of Class
Common Stock, no par value
Shares Outstanding
42,652,768
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 19, 1998
for Annual Meeting of Shareholders
to be held on April 21, 1998
Incorporated into:
Part III
* Only selected portions of the documents specified are
incorporated by reference into this report, as more
particularly described herein. Except to the extent
expressly incorporated herein by reference, such documents
shall not be deemed to be filed as part of this Annual
Report on Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1 Business 2
Item 2 Description of Properties 26
Item 3 Legal Proceedings 27
Item 4 Submission of Matters to a Vote of Security Holders 27
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6 Selected Financial Data 29
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 30
Item 8 Financial Statements and Supplementary Data 56
Item 9 Changes in and Disagreements on Accounting and Financial Disclosure 99
PART III
Item 10 Directors and Executive Officers of the Registrant 99
Item 11 Executive Compensation 99
Item 12 Security Ownership of Certain Beneficial Owners and Management 99
Item 13 Certain Relationships and Related Transactions 99
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 100
PART I
ITEM I. Business
Certain statements in this Annual Report on Form 10-K
include forward-looking information within the meaning
of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, and are subject of the "safe
harbor" created by those sections. These
forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ
materially from those in the forward looking
statements. Such risks and uncertainties include, but
are not limited to, the following factors: competitive
pressure in the banking industry significantly increasing;
changes in the interest rate environment reduce margins;
general economic conditions, either nationally or
regionally, are less favorable than expected, resulting
in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses;
changes in the regulatory environment, changes in business
conditions; volatility of rate sensitive deposits;
operational risks including data processing system
failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
See also "Certain Additional Business Risks" herein and
other risk factors discussed elsewhere in this Report.
WESTAMERICA BANCORPORATION (the "Company") is a bank
holding company registered under the Bank Holding
Company Act of 1956 ("BHC"), as amended. The Company
was incorporated under the laws of the State of
California as "Independent Bankshares Corporation" on
February 11, 1972. Its principal executive offices are
located at 1108 Fifth Avenue, San Rafael, California
94901, and its telephone number is (415) 257-8000. The
Company provides a full range of banking services to
individual and corporate customers in Northern and Central
California through its subsidiary banks, Westamerica
Bank and Bank of Lake County (the "Banks"). The Banks
are subject to competition from other financial
institutions and regulations from certain agencies and
undergo periodic examinations by those regulatory
authorities. In addition, the Company also owns 100
percent of the capital stock of Westamerica Commercial
Credit, Inc., a company engaged in financing accounts
receivable and inventory lines of credit and term business
loans and 100 percent of Community Banker Services
Corporation, a company engaged in providing the Company
and its subsidiaries data processing services and other
support functions.
The Company was originally formed pursuant to a plan of
reorganization among three previously unaffiliated banks:
Bank of Marin, Bank of Sonoma County and First
National Bank of Mendocino County (formerly First National
Bank of Cloverdale). The reorganization was consummated on
December 31, 1972 and, on January 1, 1973, the Company began
operations as a bank holding company. Subsequently, the
Company acquired Bank of Lake County (a California
chartered bank) in 1974, Gold Country Bank in 1979 and
Vaca Valley Bank in 1981, in each case by the exchange of
the Company's Common Stock for the outstanding shares of
the acquired banks.
In mid-1983, the Company consolidated the six subsidiary
banks into a single subsidiary bank. The consolidation was
accomplished by the merger of the five state-chartered
banks (Bank of Marin, Bank of Sonoma County, Bank of Lake
County, Gold Country Bank and Vaca Valley Bank) into First
National Bank of Mendocino County which subsequently
changed its name to Westamerica Bank ("WAB"), a national
banking association organized and existing under the laws
of the United States.
In August, 1988, the Company formed a new bank, but
named it Bank of Lake County, National Association, and
effected the sale of WAB's assets and liabilities of
its three Lake County branches to the newly formed bank.
In August, 1988, the sale of Bank of Lake County, National
Association to Napa Valley Bancorp was consummated.
On February 28, 1992, the Company acquired John Muir
National Bank through a merger of such bank with and
into WAB in exchange for the issuance of the Company's
Common Stock for all the outstanding shares of John
Muir National Bank. The business transaction was
accounted for on a pooling-of-interests basis.
On April 15, 1993, the Company acquired Napa Valley
Bancorp, a bank holding company, whose subsidiaries
included Napa Valley Bank, 88 percent interest in Bank
of Lake County, 50 percent interest in Sonoma Valley
Bank, Suisun Valley Bank and Napa Valley Bancorp
Services Corporation, which was established to provide
data processing and other services to Napa Valley
Bancorp's subsidiaries. This business transaction was
accounted for on a pooling-of-interests basis. Shortly
after, Suisun Valley Bank was merged into Westamerica
Bank, the name of Napa Valley Bancorp Services
Corporation was changed to Community Banker Services
Corporation and the Company sold its 50 percent
interest in Sonoma Valley Bank. The Company retained
its 88 percent interest in Bank of Lake County.
In June 1993, the Company accepted from WAB a dividend in
the form of all outstanding shares of capital stock of
WAB's subsidiary, Weststar Mortgage Corporation, a
California Corporation established to conduct mortgage
banking activities. Immediately after the receipt of this
dividend, the Company contributed all of the capital stock
of Weststar Mortgage Corporation to its subsidiary,
Community Banker Services Corporation.
WAB and Bank of Lake County became state-chartered banks
in June 1993 and December 1993, respectively.
In December 1994, the Company completed the purchase of the
remaining 12 percent investment in Bank of Lake County
from outside investors, becoming the sole owner of Bank of
Lake County.
On January 31, 1995, the Company acquired PV Financial,
parent company of PV National Bank, through a merger of
such bank with and into WAB in exchange for the
issuance of shares of the Company's common stock for
all the outstanding shares of PV Financial. The
business combination was accounted for on a
pooling-of-interests basis.
On June 6, 1995, the merger of CapitolBank Sacramento with
and into WAB became effective. Under the terms of the
merger, the Company issued shares of its common stock in
exchange for all of CapitolBank Sacramento's common stock.
The business combination was accounted for on a
pooling-of-interests basis.
On July 17, 1995, the Company acquired North Bay Bancorp,
parent company of Novato National Bank. Under the terms of
the merger agreement, the Company issued shares of its common
stock in exchange for all of the outstanding shares of
common stock of North Bay Bancorp. The subsidiary bank was
merged with and into WAB. The business combination was
accounted for on a pooling-of-interests basis.
On April 12, 1996 Napa Valley Bank was merged into WAB.
In November 1996, the Company finalized the formation
of a new subsidiary, Westamerica Commercial Credit,
Inc. which engages in financing accounts receivable and
inventory lines of credit and term business loans.
On April 12, 1997, the Company acquired ValliCorp
Holdings, Inc., parent company of ValliWide Bank, the
largest independent bank holding company headquartered in
Central California. The acquisition became effective
through the issuance of shares of the Company's common
stock in exchange for all of the outstanding shares of
ValliCorp Holdings, Inc. The business combination was
accounted for on a pooling-of-interests basis. ValliWide
Bank remained as a separate subsidiary bank of the Company.
On June 20, 1997, ValliWide Bank ceased to exist as a
subsidiary of the Company, when it was merged with and
into WAB.
On January 22, 1998, the Board of Directors of the Company
authorized a three-to-one split of the Company's common
stock in which each share of the Company's common stock is
converted into three shares, with record and effective
dates of February 10 and February 25, 1998, respectively.
At December 31, 1997, the Company had consolidated assets
of approximately $3.85 billion, deposits of approximately
$3.08 billion and shareholders' equity of approximately
$407.2 million.
General
Westamerica Bancorporation is a community oriented bank
holding company headquartered in San Rafael, California.
The principal communities served are located in Northern
and Central California, from Mendocino, Lake and Nevada
Counties in the North, to Kern and San Luis Obispo
counties in the South. The Company's strategic focus is on
the banking needs of small businesses. The Company chose
this particular focus in the late 1980's as it recognized
that concentrating on a few niche markets was going to be
the key to the Company's profitable survival in the
consolidating banking business.
Certain Additional Business Risks
The Company's business, financial condition and
operating results can be impacted by a number of
factors, including but not limited to those set forth
below, any one of which could cause the Company's
actual results to vary materially from recent results
or from the Company's anticipated future results.
Shares of Company Common Stock eligible for future sale
could have a dilutive effect on the market for Company
Common Stock and could adversely affect the market
price. The Articles of Incorporation of the Company
authorize the issuance of 150,000,000 shares of common
stock (and two classes of 1,000,000 shares each,
denominated "Class B Common Stock" and "Preferred
Stock", respectively) of which approximately 42,799,020
were outstanding at December 31, 1997. Pursuant to its
stock option plans, at December 31, 1997, the Company had
exercisable options outstanding of 1,147,920. As of
December 31, 1997, 191,118 shares of Company Common Stock
remained available for grants under the Company's stock
option plans (and stock purchase plan). Sales of
substantial amounts of Company Common Stock in the public
market could adversely affect the market price of Common
Stock.
A portion of the loan portfolio of the Company is
dependent on real estate. At December 31, 1997, real
estate served as the principal source of collateral with
respect to approximately 53 percent of the Company's loan
portfolio. A worsening of current economic conditions or
rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other
collateral securing loans and the value of the
available-for-sale securities portfolio, as well as the
Company's financial condition and results of operations in
general and the market value of the Company's common
stock. Acts of nature, including earthquakes and floods,
which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also
negatively impact the Company's financial condition.
The Company is subject to certain operations risks,
including, but not limited to, data processing system
failures and errors and customers or employee fraud.
The Company maintains a system of internal controls to
mitigate against such occurrences and maintains
insurance coverage for such risks, but should such
event occur that is not prevented or detected by the
Company's internal controls, uninsured or in excess of
applicable insurance limits, it could have a significant
adverse impact on the Company's business, financial
condition or results of operations. See also the section
"Year 2000 Compliance" in the Management's Discussion and
Analysis contained in this report.
Employees
At December 31, 1997, the Company and its subsidiaries
employed 1,144 full-time equivalent staff. Employee
relations are believed to be good.
The Effect of Government Policy on Banking
The earnings and growth of the Company are affected not
only by local market area factors and general economic
conditions, but also by government monetary and fiscal
policies. For example, the Board of Governors of the
Federal Reserve System ("FRB") influences the supply of
money through its open market operations in U.S.
Government securities and adjustments to the discount
rates applicable to borrowings by depository institutions
and others. Such actions influence the growth of loans,
investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business
and earnings of the Company cannot be predicted.
Additionally, state and federal tax policies can impact
banking organizations. Effective January 1, 1997,
applicable California law and corporation tax rates were
reduced by 5% in order to keep California competitive with
other western states.
As a consequence of the extensive regulation of commercial
banking activities in the United States, the business of
the Company is particularly susceptible to being affected
by the enactment of federal and state legislation which
may have the effect of increasing or decreasing the cost
of doing business, modifying permissible activities or
enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and
prospects of the Company. In response to various business
failures in the savings and loan industry and in the
banking industry, in December 1991, Congress enacted, and
the President signed into law, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA").
FDICIA substantially revised the bank regulatory framework
and deposit insurance funding provisions of the Federal
Deposit Insurance Act and made revisions to several other
federal banking statutes.
Implementation of the various provisions of FDICIA is
subject to the adoption of regulations by the various
regulatory agencies, the manner in which the regulatory
agencies implement those regulations and certain phase-in
periods.
Regulation and Supervision of Bank Holding Companies
The Company is a bank holding company subject to the Bank
Holding Company Act of 1956, as amended ("BHCA"). The
Company reports to, registers with, and may be examined
by, the FRB. The FRB also has the authority to examine the
Company's subsidiaries. The costs of any such examination
by the FRB are payable by the Company.
The Company is a bank holding company within the meaning
of Section 3700 of the California Financial Code. As such
the Company and the Banks are subject to examination by,
and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner).
The FRB has significant supervisory and regulatory
authority over the Company and its affiliates. The FRB
requires the Company to maintain certain levels of
capital. See "Capital Standards". The FRB also has the
authority to take enforcement action against any bank
holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations or
conditions imposed in writing by the FRB. See section
entitled "Prompt Corrective Action and Other Enforcement
Mechanisms".
Under the BHCA, a company generally must obtain the prior
approval of the FRB before it exercises a controlling
influence over a bank, or acquires directly or indirectly,
more than 5% of the voting shares or substantially all of
the assets of any bank or bank holding company. Thus, the
Company is required to obtain the prior approval of the
FRB before they acquire, merge or consolidate with any
bank or bank holding company; any company seeking to
acquire, merge or consolidate with the Company also would
be required to obtain the approval of the FRB.
The Company is generally prohibited under the BHCA from
acquiring ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly
in activities other than banking, managing banks or
providing services to affiliates of the holding company. A
bank holding company, with the approval of the FRB, may
engage, or acquire the voting shares of companies engaged,
in activities that the FRB has determined to be so closely
related to banking or managing or controlling banks as to
be a proper incident thereto. A bank holding company must
demonstrate that the benefits to the public of the
proposed activity will outweigh the possible adverse
effects associated with such activity.
Pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking
and Branching Act"), a bank holding company became able to
acquire banks in states other than its home state
beginning September 29, 1995 without regard to the
permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been
organized and operating for a minimum period of time, not
to exceed five years, and the requirement that the bank
holding company, prior to or following the proposed
acquisition, controls no more than 10% of the total amount
of deposits of insured depository institutions in the
United States and no more than 30% of such deposits in
that state (or such lesser or greater amount set by law).
The Interstate Banking and Branching Act also authorizes
banks to merge across state lines, therefore creating
interstate branches, beginning June 1, 1997. Under such
legislation, each state has the opportunity to "opt out"
of this provision, thereby prohibiting interstate
branching in such states, or to "opt in" at an earlier
time, thereby allowing interstate branching within that
state prior to June 1, 1997. Furthermore, pursuant to such
act, a bank is now able to open new branches in a state in
which it does not already have banking operations, if the
laws of such state permit such de novo branching.
California "opted in" to the Interstate Banking and
Branching Act provisions regarding interstate branching by
enacting the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 ("IBBA").
Under the IBBA, (a) out-of-state banks that wish to
establish a California branch office to conduct core
banking business must first acquire an existing 5 year old
California bank or industrial loan company by merger or
purchase; (b) California state-chartered banks will be
empowered to conduct various authorized branch-like
activities on an agency basis through affiliated and
unaffiliated insured depository institutions in California
and other states and (c) the Commissioner will be
authorized to approve an interstate acquisition or merger
which would result in a deposit concentration exceeding
30% if the Commissioner finds that the transaction is
consistent with public convenience and advantage. However,
the IBBA prohibits a state bank chartered in a state other
than California from entering California by purchasing a
California branch office of a California bank or industrial
loan company without purchasing the entire entity or by
establishing a de novo California branch office. The
legislation also contains extensive provisions governing
intrastate and interstate (a) intra-industry sales,
mergers and conversions between banks and between
industrial loan companies and (b) inter-industry
transactions involving banks, savings associations and
industrial loan companies.
Proposals to change the laws and regulations governing the
banking industry are frequently introduced in Congress, in
the state legislatures and before the various bank
regulatory agencies.
The FRB generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose
undue pressure on the capital of subsidiary banks or would
be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's
financial position. The FRB's policy is that a bank
holding company should not continue its existing rate of
cash dividends on its common stock unless its net income
is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall
financial condition. See section entitled "Restrictions on
Dividends and other Distributions" for additional
restrictions.
Transactions between the Company and the Banks are subject
to a number of other restrictions. FRB policies forbid the
payment by bank subsidiaries of management fees which are
unreasonable in amount or exceed the fair market value of
the services rendered (or, if no market exists, actual
costs plus a reasonable profit). Subject to certain
limitations, depository institution subsidiaries of bank
holding companies may extend credit to, invest in
securities of, purchase assets from, or issue a guarantee,
acceptance, or letter of credit on behalf of, an
affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the
capital stock and surplus of the institution, and the
aggregate of such transactions with affiliates may not
exceed 20% of the capital stock and surplus of such
institution. The Company may only borrow from depository
institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount
in excess of the loan. Further, the Company may not sell a
low-quality asset to a depository institution subsidiary.
The FRB has adopted comprehensive amendments to Regulation
Y which became effective April 21, 1997, and are intended
to improve the competitiveness of bank holding companies
by, among other things: (i) expanding the list of
permissible nonbanking activities in which well-run bank
holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding
companies to obtain approval to engage in other nonbanking
activities and (iii) eliminating most of the anti-tying
restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides
for a streamlining and expedited review process for bank
acquisition proposals submitted by well-run bank holding
companies and eliminates certain duplicative reporting
requirements when there has been a further change in bank
control or in bank directors or officers after an earlier
approved change.
In order for a bank holding company to qualify as
well-run, both it and the insured depository institutions
that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company
must, on a consolidated basis: (i) maintain a total
risk-based capital ratio of 10% or greater; (ii) maintain
a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a
specified capital level. Its lead insured depository
institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the
applicable bank regulator, 80% of the total risk-weighted
assets held by its insured depository institutions must be
held by institutions that are well-capitalized, and none
of its insured depository institutions may be
undercapitalized.
To qualify as "well-managed": (i) the bank holding
company, its lead depository institution and its
depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at
their most recent examination or review, must have received
a composite rating, rating for management and rating for
compliance which were at least satisfactory; (ii) none of
the bank holding company's depository institutions may
have received one of the two lowest composite ratings; and
(iii) neither the bank holding company nor any of its
depository institutions during the previous 12 months may
have been subject to a formal enforcement order or action.
The permissible non-banking activities in which bank
holding companies may engage include: (i) extending credit
and servicing loans; (ii) real estate and personal
property appraising; (iii) arranging commercial real
estate equity financing; (iv) check-guaranty services; (v)
collection agency services; (vi) credit bureau services;
(vii) asset management, servicing and collection; (viii)
acquiring debt in default; (ix) real estate settlement
services; (x) leasing personal or real property; (xi)
operating nonbank depository institutions; (xii) trust
company functions; (xiii) financial and investment
advisory activities; (xiv) riskless principal
transactions; (xv) private placement services; (xvi)
foreign exchange trading for a bank holding company's own
account; (xvii) dealing and related activities in gold,
silver, platinum and palladium; (xviii) employee benefits
consulting; (xix) career counseling services; (xx)
printing and selling checks; (xxi) insurance agency and
underwriting services; (xxii) community development
activities; (xxiii) data processing; and (xxiv) money
order, savings bond and traveler's checks services. A bank
holding company's provision of these services is subject
to numerous qualifications, limitations and restrictions.
Bank Supervision and Regulation
The Banks are California chartered banks insured by the
Federal Deposit Insurance Corporation (the "FDIC"), and as
such are subject to regulation, supervision and regular
examination by the California Department of Financial
Institutions ("DFI") and the FDIC. As members of the
Federal Reserve System, the Banks' primary federal
regulator is the FRB. The regulations of these agencies
affect most aspects of the Banks' business and prescribe
permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the
permissible scope of the Banks' activities and various
other requirements. The DFI was created pursuant to AB
3351, effective July 1, 1997, and combines the State
Banking Department, the Department of Savings and Loan,
and regulatory oversight over industrial loan companies
and credit unions with the DFI. For the most part, the DFI
is merely assuming the responsibilities and authorities
previously held by the existing previous regulators.
The Banks are also subject to applicable provisions of
California law, insofar as such provisions are not in
conflict with or preempted by federal banking law. In
addition, the Banks are subject to certain regulations of
the FRB dealing primarily with check-clearing activities,
establishment of banking reserves, Truth-in-Lending
(Regulation Z), Truth in Savings (Regulation DD), and
Equal Opportunity (Regulation B).
Under California law, a state chartered bank is subject to
various restrictions on, and requirements regarding, its
operations and administration including the maintenance of
branch offices and automated teller machines, capital and
reserve requirements, deposits and borrowings, stockholder
rights and duties, and investments and lending activities.
Whenever it appears that the contributed capital of a
California bank is impaired, the Commissioner shall order
the bank to correct such impairment. If a bank is unable
to correct the impairment, such bank is required to levy
and collect an assessment upon its common shares. If such
assessment becomes delinquent, such common shares are to
be sold by the bank. During 1996 the California Interstate
Banking and Branching Cleanup Act was enacted, which
revised the DFI's assessment methodology for
state-chartered banks in order to provide a better basis
of comparison to the method used by the Office of the
Comptroller of the Currency ("OCC"). Under the revised
methodology, the average assessment for state banks will
be approximately 39% of the OCC's annual charges for
national bank supervision.
California law permits a state chartered bank to invest in
the stock and securities of other corporations, subject to
a state-chartered bank receiving either general
authorization or, depending on the amount of the proposed
investment, specific authorization from the Commissioner.
FDICIA, however, imposes limitations on the activities and
equity investments of state chartered, federally insured
banks. The limitations on equity investments were
effective December 19, 1991, and the limitations on
activities became effective December 19, 1992. The FDIC
rules on investments prohibit a state bank from acquiring
an equity investment of a type, or in an amount, not
permissible for a national bank. Non-permissible
investments must have been divested by state banks no
later than December 19, 1996. FDICIA prohibits a state
bank from engaging as a principal in any activity that is
not permissible for a national bank, unless the bank is
adequately capitalized and the FDIC approves the activity
after determining that such activity does not pose a
significant risk to the deposit insurance fund. The FDIC
rules on activities generally permit subsidiaries of
banks, without prior specific FDIC authorization, to
engage in those that have been approved by the FRB for
bank holding companies because such activities are so
closely related to banking to be a proper incident
thereto. Other activities generally require specific FDIC
prior approval, and the FDIC may impose additional
restrictions on such activities on a case-by-case basis in
approving applications to engage in otherwise
impermissible activities.
During 1996, the OCC adopted a regulation to revise and
streamline its procedures with respect to corporate
activities of national banks, to be effective December 31,
1996. These revised standards allow the OCC to approve, on
a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking,
including activities in which the parent bank is not
permitted to engage. Such a standard allows a national
bank to conduct an activity approved for a bank holding
company through a bank operating subsidiary such as acting
as an investment or financial advisor, leasing personal
property and providing financial advice to customers. In
general, these revised standards will be available to
well-capitalized or adequately-capitalized national banks.
Since state banks may only make equity investments if of a
type permissible for national banks, this revised
regulation might result in some liberalization of the
types of investments permissible for state banks.
Capital Standards
The federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of
capital adequacy that reflects the degree of risk
associated with a banking organization's operations for
both transactions reported on the balance sheet as
assets and transactions, such as letters of credit and
recourse agreements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off
balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for
assets with low credit risk, such as certain U.S.
Government securities, to 100% for assets with
relatively higher credit risk, such as certain loans.
In determining the capital level a bank is required to
maintain, the federal banking agencies do not, in all
respects, follow generally accepted accounting principles
("GAAP") and have special rules which have the effect of
reducing the amount of capital it will recognize for
purposes of determining the capital adequacy of a bank.
These rules are called Regulatory Accounting Principles
("RAP"). In December 1993, the federal banking agencies
issued an interagency policy statement on the allowance
for loan and lease losses which, among other things,
establishes certain benchmark ratios of the allowance for
loan losses to classified assets. Future changes in the
regulations or practices of the federal banking agencies
could further reduce the amount of capital recognized for
purposes of capital adequacy. Such a change could affect
the ability of the Company to grow and could restrict the
amounts of profits, if any, available for the payment of
dividends.
A banking organization's risk-based capital ratios are
obtained by dividing its qualifying capital by its total
risk-adjusted assets and off balance sheet items. The
regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum
of Tier 1 capital and limited amounts of Tier 2 capital)
and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual
preferred stock, other types of qualifying common stock
and minority interests in certain subsidiaries, less most
other intangible assets and other adjustments. Net
unrealized gains/losses on available-for-sale equity
securities with readily determinable fair values must be
deducted in determining Tier 1 capital. Additionally, as
of April 1, 1995, for Tier 1 capital purposes, deferred
tax assets that can only be realized if the institution
earns sufficient taxable income in the future will be
limited to the amount that the institution is expected to
realize within one year, or ten percent of Tier 1 capital,
whichever is less. Tier 2 capital may consist of a limited
amount of the allowance for loan losses, term preferred
stock and other types of preferred stock not qualifying as
Tier 1 capital, term subordinated debt and certain other
instruments with some characteristics of equity. The
inclusion of elements of Tier 2 capital are subject to
certain other requirements and limitations of the federal
banking agencies. Since December 31, 1992, the federal
banking agencies have required a minimum ratio of
qualifying total capital to risk-adjusted assets and off
balance sheet items of 8%, and a minimum ratio of Tier 1
capital to adjusted average risk-adjusted assets and off
balance sheet items of 4%.
On September 16, 1997, the FDIC adopted a final rule
lowering the risk-based capital requirements for certain
small business loans and leases sold with recourse. The
final rule on small business loans and leases sold with
recourse essentially makes permanent an interim
interagency rule in effect since 1995 that reduced the
minimum capital levels that institutions must maintain for
those transactions. Under the final rule, a qualifying
institution that sells small business loans and leases
with recourse must hold capital only against the amount of
recourse retained. In general, a qualifying institution is
one that is well-capitalized under the FDIC's prompt
corrective action rules. The amount of recourse that can
receive the preferential capital treatment cannot exceed
15% of the institution's total risk-based capital.
In addition to the risk-based guidelines, federal
banking regulators require banking organizations to
maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage
capital ratio. For banking organizations rated in the
highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio
of Tier 1 capital to total assets must be 3%. It is
improbable, however, that an institution with a 3%
leverage ratio would receive the highest rating by the
regulators since a strong capital position is a
significant part of the regulators' rating. For all
banking organizations not rated in the highest
category, the minimum leverage ratio must be at least
100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical
purposes, must be at least 4% or 5%. In addition to
these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum
capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios. See
Note 8 to the consolidated financial statements for
capital ratios for the Company and the Banks compared to
the standards for well-capitalized depository institutions
and for minimum capital requirements.
Banking agencies have recently adopted final regulations
which mandate that regulators take into consideration
concentrations of credit risk and risks from
non-traditional activities, as well as an institution's
ability to manage those risks, when determining the
adequacy of an institution's capital. This evaluation will
be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have recently
adopted final regulations requiring regulators to consider
interest rate risk (when the interest rate sensitivity of
an institution's assets does not match the sensitivity of
its liabilities or its off balance sheet position) in
evaluating a bank's capital adequacy. This final rule does
not codify a measurement framework for assessing the level
of a bank's interest rate risk exposure. The information
and exposure estimates collected through a new proposed
supervisory measurement process, described in the banking
agencies' joint policy statement on interest rate risk,
would be one quantitative factor used to determine the
adequacy of an individual bank's capital for interest rate
risk. The focus of that proposed process is on a bank's
economic value exposure. Other quantitative factors
include the bank's historical financial performance and
its earnings exposure to interest rate movements.
Examiners also will consider qualitative factors,
including the adequacy of the bank's internal interest
rate risk management. The banking agencies intend for this
case-by-case approach for assessing a bank's capital
adequacy for interest rate risk to be a transitional
arrangement.
The second step will consist of a proposed rule that would
establish an explicit minimum capital charge for interest
rate risk, based on the level of a bank's measured
interest rate risk exposure. The banking agencies intend
to implement this second step at some future date, after
the banking agencies and the banking industry have gained
more experience with the proposed supervisory measurement
and assessment process.
Prompt Corrective Action and Other Enforcement Mechanisms
FDICIA requires each federal banking agency to take prompt
corrective action to resolve the problems of insured
depository institutions, including but no limited to those
that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to
promulgate regulators defining the following five
categories in which an insured institution will be placed,
based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically
undercapitalized.
Under the prompt corrective action provisions of FDICIA,
an insured depository institution generally will be
classified in the following categories based on the
capital measures indicated below:
- ----------------------------------------------------------------------------------------
Total Tier 1
risk-based risk-based Leverage
capital capital ratio
- ----------------------------------------------------------------------------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized less than: 8% 4% 4%
Significantly undercapitalized less than: 6% 3% 3%
Critically undercapitalized Tangible equity/total assets less than 2%
- ----------------------------------------------------------------------------------------
An institution that, based upon its capital levels, is
classified as "well capitalized", "adequately capitalized"
or "undercapitalized" may be treated as though it were in
the next lower category if the appropriate federal banking
agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition or an
unsafe or unsound practice warrants such treatment. At
each successive lower capital category, an insured
depository institution is subject to more restrictions.
The federal banking agencies, however, may not treat an
institution as "critically undercapitalized" unless its
capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized,
it will be closely monitored by the appropriate federal
banking agency. Undercapitalized institutions must submit
an acceptable capital restoration plan with a guarantee of
performance issued by the holding company. Further
restrictions and sanctions are required to be imposed on
insured depository institutions that are critically
undercapitalized. The most important additional measure is
that the appropriate federal banking agency is required to
either appoint a receiver for the institution within 90
days, or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be
subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting
their business or for violations of any law, rule,
regulation or any condition imposed in writing by the
agency or any written agreement with the agency.
Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced,
the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money
penalties, the issuance of directives to increase capital,
the issuance of formal and informal agreements, the
issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such
actions through injunctions or restraining orders based
upon a judicial determination that the agency would be
harmed if such equitable relief was not granted.
Additionally, a holding company's inability to serve as a
source of strength to its subsidiary banking organizations
could serve as an additional basis for a regulatory action
against the holding company.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions and
required federal banking regulators to adopt overall
safety and soundness standards for depository institutions
related to internal control, loan underwriting and
documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by
undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive
officer, director, principal shareholder or related
interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for
deposits by certain employee benefits accounts.
In addition to the statutory limitations, FDICIA
originally required the federal banking agencies to
prescribe, by regulation, standards for all insured
depository institutions for such things as classified
loans and asset growth. In 1994, FDICIA was amended to (a)
authorize the agencies to establish safety and soundness
standards by regulation or by guideline for all insured
depository institutions; (b) give the agencies greater
flexibility in prescribing asset quality and earnings
standards; and eliminate the requirement that such
standards apply to depository institution holding
companies.
On July 10, 1995 the federal banking agencies published
Interagency Guidelines Establishing Standards for Safety
and Soundness. By adopting the standards as guidelines,
the agencies retained the authority to require an
institution to submit to an acceptable compliance plan as
well as the flexibility to pursue other more appropriate
or effective courses of action given the specific
circumstances and severity of an institution's
noncompliance with one or more standards.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured
depository institution to declare a cash dividend or other
distribution with respect to capital is subject to
statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the
earnings, financial condition and cash needs of the
institution, as well as general business conditions.
FDICIA prohibits insured depository institutions from
paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions,
including dividends, if, after such transaction, the
institution would be undercapitalized.
In addition to the restrictions imposed under federal law,
banks chartered under California law generally may only
pay cash dividends to the extent such payments do not
exceed the lesser of retained earnings of the bank or the
bank's net income for its last three fiscal years (less
any distributions to shareholders during that period). In
the event a bank desires to pay cash dividends in excess
of such amount, the bank may pay a cash dividend with the
prior approval of the Superintendent in an amount not
exceeding the greatest of the bank's retained earnings,
the bank's net income for its last fiscal year, or the
bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository
institution from engaging in business practices which are
considered to be unsafe or unsound, possibly including
payment of dividends or other payments under certain
circumstances even if such payments are not expressly
prohibited by statute.
Premiums for Deposit Insurance and Assessments for
Examinations
All of the bank subsidiaries of the Company have their
deposits insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. The FDIC also administers the
Savings Association Insurance Fund ("SAIF"), which insures
deposits in thrift institutions. The FDIC is authorized to
borrow up to $30 billion from the United States Treasury;
up to 90% of the fair market value of assets of
institutions acquired by the FDIC as receiver from the
Federal Financing Bank; and from depository institutions
that are members of the BIF. Any borrowings not repaid by
asset sales are to be repaid through insurance premiums
assessed to member institutions. Such premiums must be
sufficient to repay any borrowed funds within 15 years and
provide insurance fund reserves of $1.25 for each $100 of
insured deposits. FDICIA also provides authority for
special assessments against insured deposits. No assurance
can be given at this time as to what the future level of
premiums will be.
As required by FDICIA, the FDIC adopted a transitional
risk-based assessment system for deposit insurance
premiums which became effective January 1, 1993. On
November 14, 1995 the Board of Directors of the FDIC
adopted a resolution to reduce to a range of 0 to 27 basis
points the assessment rates applicable to deposits
assessable by the BIF for semiannual assessment periods
beginning January 1, 1996. The revised assessment schedule
would retain the risk based characteristics of the current
system. On November 26, 1996 the FDIC decided to continue
in effect the current BIF assessment rate schedule.
The FDIC may make limited adjustments to the above rate
schedule not to exceed an increase or decrease of 5 basis
points without public notice and comment rulemaking. The
amount of an adjustment adopted by the Board is to be
determined by the following considerations: (a) the amount
of assessment revenue necessary to maintain the reserve
ratio at the designated reserve ratio and (b) the
assessment schedule that would generate such amount of
assessment revenue considering the risk profile of BIF
members. In determining the relevant amount of assessment
revenue, the Board is to consider the BIF's expected
operating expenses, case resolution expenditures and
income, the effect of assessments on BIF members' earnings
and capital, and any other factors the Board may deem
appropriate.
In 1996 Congress enacted the Deposit Insurance Funds Act
("Funds Act") in order to raise the level of SAIF
reserves, and to reduce the possibility that bonds issued
by the Financing Corporation ("FICO") would go into
default. The FICO was a special purpose government
corporation that issued $8.2 billion in bonds to
recapitalize the Federal Savings and Loan Insurance
Corporation. Interest on the FICO bonds was paid from the
proceeds of assessment made on the deposits of SAIF
members. Because of the almost $800 million needed to pay
for the annual interest on the FICO bonds, the payments of
SAIF members were not increasing the SAIF reserve to a
sufficient level to allow the FDIC to reduce assessment
rates (as had been done for BIF deposits), and SAIF
members were employing certain strategies to either exit
the system or transfer deposits to BIF coverage.
Pursuant to the Funds Act, the FDIC imposed a special
one-time assessment on all institutions that held SAIF
assessable deposits as of March 31, 1995 of an estimated
65.7 cents per $100 of SAIF assessable deposits. Certain
discounts and exemptions from the assessment were
available. For example, BIF-member banks that had acquired
SAIF-insured deposits from thrifts were generally entitled
to a 20% discount on the special assessment if the bank
satisfied certain statutory thresholds (the bank's
acquired SAIF deposits, as adjusted, must be less than
half of its total domestic deposits). Furthermore,
beginning January 1, 1997, all FDIC-insured institutions
were to be assessed to cover the interest payments due on
FICO bonds. For calendar years 1997 through 1999, BIF
members will pay one-fifth the rate SAIF members will pay,
and beginning in 2000 both types of institutions will pay
the same rate. BIF members were required to pay a FICO
assessment of approximately 1.3 basis points for the
semiannual FICO assessment in 1997.
The Funds Act also authorized the FDIC to rebate
assessments paid by BIF members if the BIF has reserves
exceeding its designated reserve ratio of 1.25% of total
estimated insured deposits. The FDIC has expressed its
view that the long-term needs of the BIF are a factor in
setting the effective average BIF assessment rate, and
that the FDIC is uncertain whether the current favorable
conditions represent a long-term trend.
Community Reinvestment Act and Fair Lending Developments
The Banks are subject to certain fair lending requirements
and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA")
activities. The CRA generally requires the federal banking
agencies to evaluate the record of a financial institution
in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In
addition to substantive penalties and corrective measures
that may be required for a violation of certain fair
lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when
regulating and supervising other activities.
On March 8, 1994, the federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination
in lending. The policy statement describes the three
methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence
of disparate treatment, and evidence of disparate impact.
In 1996, new compliance and examination guidelines for the
CRA were promulgated by each of the federal banking
regulatory agencies, fully replacing the prior rules and
regulatory expectations with new ones, ostensibly more
performance based than before, to be fully phased in as of
July 1, 1997. The guidelines provide for streamlined
examinations of smaller institutions.
Recently Enacted Legislation
The Taxpayer Relief Act of 1997 provides for Education
Individual Retirement Accounts ("Education IRA"), a new
type of tax-free savings vehicle to pay qualified higher
education expenses. A maximum of $500 per year may be
contributed to Education IRAs for any beneficiary under
the age of 18 years, provided the contributor has adjusted
gross income for the year not exceeding $95,000 ($150,000
for joint returns). No income tax deduction is provided
for a contribution to an Education IRA. Until a
distribution is made from an Education IRA, earnings on
contributions to the account are not subject to tax. In
addition, distributions from an Education IRA are
excludable from gross income to the extent that the
distribution does not exceed qualified higher education
expenses incurred by the beneficiary during the year the
distribution is made. The trustee or custodian of an
Education IRA must be a bank or another person approved by
the Internal Revenue Service ("IRS"), including an entity
already approved by the IRS to be a nonbank trustee or
custodian of an Individual Retirement Account.
During 1996, new federal legislation amended the
Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") and the underground storage tank
provisions of the Resource Conversation and Recovery Act
("RCRA") to provide lenders and fiduciaries with greater
protections from environmental liability. The definition
of "owner or operator" under CERCLA has been amended to
exclude a lender who: (I) holds indicia of ownership in a
property primarily to protect its security interest, but
does not participate in the property's management or (ii)
forecloses on a property, or, after foreclosure, sells,
re-leases (in the case of a lease finance transaction), or
liquidates the property, maintains business activities,
winds up operations, undertakes a response under CERCLA,
or takes measures to preserve, protect or prepare property
prior to sale or disposition, so long as the lender did
not participate in the property's management prior to
sale. In order to preserve these protections, a lender who
forecloses on property must seek to sell, re-lease, or
otherwise divest itself of the property at the earliest
practicable, commercially reasonable time, and on
reasonable terms. "Participation in management" is defined
as actual participation in the management or operational
affairs of the facility, not merely having the capacity to
influence or the unexercised right to control operations.
Similar changes have been made in RCRA.
The California legislature adopted a similar bill to
provide that, subject to numerous exceptions, a lender
acting in the capacity of a lender shall not be liable
under any state or local statute, regulation or ordinance,
other than the California Hazardous Waste Control Law, to
undertake a cleanup, pay damages, penalties or fines, or
forfeit property as a result of the release of hazardous
materials at or from the property. Under this bill a
lender which had not participated in the management of the
property prior to foreclosure may take actions similar to
those set forth in the CERCLA and RCRA amendments without
losing its immunity from liability. To preserve that
immunity, after foreclosure, the lender must take
commercially reasonable steps to divest itself of the
property in a reasonably expeditious manner.
In June 1997, the U.S. Environmental Protection Agency
("EPA") issued its official policy with regard to the
liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). By way of background, in 1992 the EPA
issued its CERCLA Lender Liability Rule which was intended
to be a regulation for the enforcement of CERCLA as to
lenders. In 1994 the Lender Liability Rule was stricken by
the U.S. Court of Appeals for the District of Columbia in
Kelley v. EPA. The EPA retained the Lender Liability Rule,
characterizing it as its internal enforcement policy. The
Asset Conservation Act adopted language similar to the
EPA's Lender Liability Rule. In its June 1997
announcement, the EPA indicated that it will treat those
provisions of the Lender Liability Rule that are similar
to the Asset Conservation Act "as guidance in
interpreting" the lender liability exemption under the Act.
In 1997, California adopted the Environmental
Responsibility Acceptance Act (Cal. Civil Code Sections
850-855)(the "Act"). The main purposes of the Act are to
facilitate (I) the notification of government agencies and
potentially responsible parties (e.g., for cleanup) of the
existence of contamination and (ii) the cleanup or other
remediation of contamination by the potentially
responsible parties. The Act requires owners of sites who
have actual awareness of a release of a hazardous material
that exceeds a specified notification threshold to take
all reasonable steps to identify the potentially
responsible parties and to send a notice of potential
liability to the parties and the appropriate oversight
agency. Potentially responsible parties that receive such
notice must respond with either a "commitment statement"
to conduct certain response actions (as defined in the
Act) or a "negative response." Potentially responsible
parties who become aware of a release must provide the
owner with a report of the release and either a
"commitment statement" or a "negative response." Persons
failing to provide the requisite notice lose certain
rights to damages. Neither the failure to issue a
"commitment statement" nor its issuance is to be construed
as an admission of liability for the release. Commitment
statements that are accepted run with the land, thereby
binding future owners. The notification requirements of
the Act do not take effect until July 31, 1998. However,
the Act's notification requirements apply to past
releases, if they occurred after January 1, 1995. Notices
for such past releases must be given by December 31, 1998.
Pending Legislation and Regulations
There are pending legislative proposals to reform the
Glass-Steagall Act to allow affiliations between banks and
other firms engaged in "financial activities", including
insurance companies and securities firms.
On September 16, 1997, the FDIC proposed two new rules
governing minimum capital levels that FDIC-supervised
banks must maintain against the risks to which they are
exposed. The proposed rules were developed in consultation
with the OCC, the FRB, and the Office of Thrift
Supervision ("OTS").
The first proposed rule would make risk-based capital
standards consistent for two types of credit enhancements
(i.e., recourse arrangements and direct credit
substitutes) and would require different amounts of
capital for different risk positions in asset
securitization transactions. Similar proposals are being
considered by the other federal banking agencies as well.
Under the proposed rule, banks holding the riskiest part
of a securitization would have higher capital requirements
than those holding less risky sections.
The second proposed rule would permit limited amounts of
unrealized gains on equity securities to be recognized for
risk-based capital purposes. The proposal on equity
securities would permit institutions to include in Tier 2
capital 45% of the net unrealized pre-tax gains on
available-for-sale equity securities. The proposal would
increase the amount of regulatory capital for some
institutions.
Certain other pending legislative proposals include bills
to let banks pay interest on business checking accounts,
to cap consumer liability for stolen debit cards, and to
give judges the authority to force high-income borrowers
to repay their debts rather than cancel them through
bankruptcy.
While the effect of such proposed legislation and
regulatory reform on the business of financial
institutions cannot be accurately predicted at this time,
it seems likely that a significant amount of consolidating
in the banking industry will continue to occur throughout
the remainder of the decade.
Competition
In the past, an independent bank's principal competitors
for deposits and loans have been other banks (particularly
major banks), savings and loan associations and credit
unions. To a lesser extent, competition was also provided
by thrift and loans, mortgage brokerage companies and
insurance companies. Other institutions, such as brokerage
houses, mutual fund companies, credit card companies, and
even retail establishments have offered new investment
vehicles which also compete with banks for deposit
business. The direction of federal legislation in recent
years seems to favor competition between different types
of financial institutions and to foster new entrants into
the financial services market, and it is anticipated that
this trend will continue.
The enactment of the IBBA in 1994 as well as the
California Interstate Banking and Branching Act of 1995
will likely increase competition within California. See
the "Regulation and Supervision of Bank Holding Companies"
section discussed earlier in this report. Regulatory
reform, as well as other changes in federal and California
law will also affect competition. While the impact of
these changes, and of other proposed changes, cannot be
predicted with certainty, it is clear that the business of
banking in California will remain highly competitive.
According to information obtained by the Company through
an independent market research firm, WAB was the second
largest financial institution in terms of total deposits
in Marin County at June 30, 1997, at which date it had
approximately 12 percent of total deposits held in
federally insured depository institutions in that county.
According to the same source of information and in terms
of total deposits, as of June 30, 1997 WAB ranked fourth
in WAB's Sonoma-Mendocino counties service area, with
approximately a 9 percent share of the market, third in
the Fresno service area with approximately 11 percent of
total deposits, and was fifth in the Solano-Contra
Costa-Alameda counties service area, with a market share
of approximately 5 percent. Completion of the merger with
ValliWide bank in 1997 resulted in the formation of the
"South Valley Region" encompassing portions of Kern, San
Luis Obispo, Tulare and Kings counties. In terms of total
deposits, WAB ranked, as of June 30, 1997, fifth among all
financial institutions servicing the area with
approximately 9 percent of the market. In addition, WAB's
market share in the Sacramento-Placer-Nevada-Yolo counties
service area was approximately 6 percent, ranking sixth
among its competitors. The share of the market for
deposits and loans held by WAB in San Francisco and
Alameda Counties is not significant. According to the same
source of information, WAB ranked second in terms of total
deposits in the Napa Valley service area as of June 30,
1997, with approximately 16 percent market share. The same
source of data reports that BLC ranked third, in terms of
total deposits, in market share in the Lake County service
area with 16 percent of the total.
The Banks provide checking and savings deposit services
as well as commercial, real estate and personal loans.
In addition, most of the branches offer safe deposit
facilities, automated teller units, collection services
and other investment services.
The Banks believe that personal, prompt, professional
service and community identity are important in the
banking business. To this end, each one of the Banks
has sought to retain its community identity and has
emphasized personalized services through "big bank
resources with small bank resourcefulness".
Competitive conditions continue to intensify as various
legislative enactments have continued to dissolve
historical barriers to the financial markets.
Competition is expected to further increase in the
state of California as a result of legislation enacted
in 1994 and 1995.
Legislative changes, as well as technological and
economic factors, can be expected to have an ongoing
impact on competitive conditions within the financial
services industry. As an active participant in the
financial markets, the Company believes that it
continually adapts to these changing competitive
conditions.
ITEM 3. Legal Proceedings
Neither the Company or its subsidiaries is a party to any
material pending legal proceeding, nor is their property
the subject of any material pending legal proceeding,
except ordinary routine legal proceedings arising in the
ordinary course of the Company's business, none of which
are expected to have a material adverse impact upon the
Company's business, financial position or results of
operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the
shareholders during the fourth quarter of 1997.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is traded on the NASDAQ National
Market Exchange ("NASDAQ") under the symbol "WABC". The
following table shows the high and the low prices for
the common stock, for each quarter, as reported by NASDAQ:
(Restated for a three-to-one stock split authorized January 22,
1998 and effective February 25, 1998)
Period
1997: High Low
------- -------
First quarter $24.17 $18.83
Second quarter 25.83 19.27
Third quarter 29.33 24.58
Fourth quarter 35.00 28.54
1996:
First quarter $15.75 $14.42
Second quarter 16.75 15.33
Third quarter 17.00 15.50
Fourth quarter 19.58 16.50
As of December 31, 1997, there were 8,611 shareholders of
record of the Company's common stock.
The Company has paid cash dividends on its common stock in every
quarter since commencing operations on January 1, 1973, and it is
currently the intention of the Board of Directors of the Company to
continue payment of cash dividends on a quarterly basis. There is
no assurance, however, that any dividends will be paid since they
are dependent upon earnings, financial condition and capital
requirements of the Company and its subsidiaries. As of December
31, 1997, $98.4 million was available for payment of dividends by
the Company to its shareholders, under applicable laws and
regulations.
Additional information (required by Item 5) regarding the amount of
cash dividends declared on common stock for the two most recent
fiscal years is discussed in Note 18 to the consolidated financial
statements included in this report.
As discussed in Note 7 to the consolidated financial statements, in
December 1986, the Company declared a dividend distribution of one
common share purchase right (a "Right") for each outstanding share
of common stock. The terms of the Rights were amended and restated
on September 28, 1989. On March 23, 1995, the Board of Directors of
the Company approved a further amendment and restatement of Rights.
The Amended and Restated Rights Agreement entitles the holders of
each share of the Company Common Stock to the right (each, a
"Westamerica Right"), when exercisable, to purchase from the
Company one share of its Common Stock at a price of $21.667 per
share, subject to adjustment in certain circumstances. A
Westamerica Right is attached to each share of the Company Common
Stock. The Westamerica Rights only become exercisable and trade
separately from the Company Common Stock following the earlier of
(I) a public announcement that a person or a group of affiliated or
associated persons has become the beneficial owner of the Company
securities having 15 percent or more of the Company's voting power
(an "Acquiring Person") or (ii) 10 days following the commencement
of, or a public announcement of an intention to make, a tender or
exchange offer which would result in any person having beneficial
ownership of securities having 15 percent or more of such voting
power. Upon becoming exercisable, each holder of a Westamerica
Right (other than an Acquiring Person whose rights will become null
and void) will, for at least a 60-day period thereafter, have the
right (subject to the following sentence), upon payment of the
exercise price of $21.667, to receive upon exercise that number of
shares of the Company Common Stock having a market value of twice
the exercise price of the Westamerica Right, to the extent
available. Subject to applicable law, the Board of Directors, at
its option, may at any time after a Person becomes an Acquiring
Person (but not after the acquisition by such Person of 50 percent
or more of the outstanding Company Common Stock), exchange all or
part of the then outstanding and exercisable Westamerica Rights
(except for Westamerica Rights which have become void) for shares
of the Company Common Stock equivalent to one share of the Company
Common Stock per Westamerica Right or, alternatively, for
substitute consideration consisting of cash, securities of the
Company or other assets (or any combination thereof).
Item 6. Selected Financial Data
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
- ---------------------------------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 * 1995 * 1994 * 1993 *
- ---------------------------------------------------------------------------------------------
Year ended December 31
Interest income $270,670 $274,182 $283,704 $256,638 $237,165
Interest expense 88,054 91,700 95,627 73,321 72,251
- ---------------------------------------------------------------------------------------------
Net interest income 182,616 182,482 188,077 183,317 164,914
Provision for loan losses 7,645 12,306 15,229 11,378 13,503
Non-interest income 37,013 36,307 34,227 36,929 44,249
Non-interest expense 137,878 136,051 141,960 150,128 161,227
- ---------------------------------------------------------------------------------------------
Income before income taxes 74,106 70,432 65,115 58,740 34,433
Provision for income taxes 25,990 23,605 21,930 20,627 11,103
- ---------------------------------------------------------------------------------------------
Net income $48,116 $46,827 $43,185 $38,113 $23,330
=============================================================================================
Earnings per share: **
Basic $1.12 $1.10 $0.99 $0.87 $0.58
Diluted 1.10 1.08 0.98 0.87 0.57
Per share: **
Dividends paid $0.36 $0.30 $0.25 $0.21 $0.19
Book value at December 31 9.51 8.84 8.12 7.41 7.01
Average common shares outstanding ** 43,040 42,759 43,747 43,732 40,510
Average diluted common shares outstand ** 43,827 43,358 44,274 44,061 40,924
Shares outstanding at December 31 ** 42,799 42,889 43,228 43,351 42,879
At December 31
Loans, net $2,211,307 $2,236,319 $2,209,653 $2,220,122 $2,071,405
Total assets 3,848,444 3,866,774 3,880,299 3,793,196 3,641,984
Total deposits 3,078,501 3,228,700 3,270,907 3,249,823 3,194,395
Funds purchased 264,848 167,447 186,032 135,426 76,298
Debt financing and notes payable 52,500 58,865 40,932 51,647 37,614
Shareholders' equity 407,152 379,279 351,058 321,169 300,670
Financial Ratios:
For the year:
Return on assets 1.28% 1.24% 1.14% 1.04% 0.70%
Return on equity 12.71% 13.22% 12.73% 12.24% 8.96%
Net interest margin *** 5.63% 5.54% 5.68% 5.67% 5.59%
Net loan losses to average loans 0.35% 0.51% 0.59% 0.43% 0.56%
Non-interest expense/revenues *** 60.15% 60.08% 63.86% 68.16% 77.08%
At December 31:
Equity to assets 10.58% 9.81% 9.05% 8.47% 8.26%
Total capital to risk-adjusted as 14.76% 14.95% 14.39% 13.58% 12.99%
Loan loss reserve to loans 2.24% 2.23% 2.15% 2.05% 2.01%
* Restated on a historical basis to reflect the April 12, 1997 acquisition of
ValliCorp Holdings, Inc. on a pooling-of-interests basis
** Restated for a three-to-one stock split authorized January 22, 1998 and
effective February 25, 1998
*** Fully taxable equivalent
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include,
but are not limited to, the following factors: competitive pressure
in the banking industry increases significantly; changes in the
interest rate environment reduce margins; general economic
conditions, either nationally or regionally, are less favorable
than expected resulting in, among other things, a deterioration in
the credit quality and an in increase in the provision for possible
loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate sensitive deposits;
operational risks including data processing system failures or
fraud; asset/liability matching and liquidity risks; and changes in
the securities markets. For further information on risks and
uncertainties see also "Certain Additional Business Risks" and
other risk factors discussed elsewhere in this Report.
The following discussion addresses information pertaining to the
financial condition and results of operations of Westamerica
Bancorporation (the "Company") that may not be otherwise apparent
from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements
and notes as well as with the other information presented
throughout the report.
All financial information has been restated on a historical basis
to reflect the ValliCorp Holdings, Inc. ("ValliCorp") acquisition
on April 12, 1997 (the "Merger") using the pooling-of-interests
method of accounting.
On January 22, 1998, the Board of Directors of the Company
authorized a three-for-one stock split of the Company's Common
Stock, effective February 25, 1998, in which each share of the
Company's Common Stock is converted into three shares.
Consequently, all related information in this report has been
restated to reflect the effect of the stock split.
The Company achieved earnings of $48.1 million in 1997,
representing a 3 percent increase from the $46.8 million earned
in 1996 and 11 percent higher than 1995 earnings of $43.2
million.
COMPONENTS OF NET INCOME
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
(In millions)
Net interest income * $192.2 $190.1 $194.6
Provision for loan losses (7.6) (12.3) (15.2)
Non-interest income 37.0 36.3 34.2
Non-interest expense (137.9) (136.1) (142.0)
Taxes * (35.6) (31.2) (28.4)
- -----------------------------------------------------------------------------------------
Net income $48.1 $46.8 $43.2
=========================================================================================
Net income as a percentage of
average total assets 1.28% 1.24% 1.14%
=========================================================================================
* Fully taxable equivalent (FTE)
Basic earnings per share in 1997 were $1.12, compared to $1.10 and
$.99 in 1996 and 1995, respectively. During 1997, the Company
benefited from increased net interest income, primarily due to a
decrease in short-term borrowed funds in part offset by a reduction
in the average balance of earning assets. Also contributing to
increased earnings, the Company lowered its loan loss provision in
recognition of improved credit quality and lower net credit losses,
and benefited from increased non-interest income. Higher
non-interest expense included approximately $18.8 million ($12.8
million after tax) in charges associated with the Merger. Earnings
in 1996 were favorably affected compared to 1995 by increases in
earning asset yields, a lower loan loss provision, higher
non-interest income and expense controls, which were partially
offset by lower average balances of earning assets. The Company's
return on average total assets was 1.28 percent in 1997, compared
to 1.24 percent and 1.14 percent in 1996 and 1995, respectively.
Return on average equity in 1997 was 12.71 percent, compared to
13.22 percent and 12.73 percent, respectively, in the two previous
years.
NET INTEREST INCOME
The Company's primary source of revenue is net interest income,
which is the difference between interest income on earning assets
and interest expense on interest-bearing liabilities. Net interest
income (FTE) in 1997 increased $2.1 million from 1996 to $192.2
million. Comparing 1996 to 1995, net interest income (FTE)
decreased $4.5 million.
Components of Net Interest Income
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
(In millions)
Interest income $270.7 $274.2 $283.7
Interest expense (88.1) (91.7) (95.6)
FTE adjustment 9.6 7.6 6.5
- -----------------------------------------------------------------------------------------
Net interest income (FTE) $192.2 $190.1 $194.6
=========================================================================================
Average earning assets $3,414.6 $3,434.6 $3,426.7
Net interest margin (FTE) 5.63% 5.54% 5.68%
=========================================================================================
Interest income (FTE) decreased $1.5 million from 1996, primarily
due to a $20.0 million decrease in average earning asset balances.
Categories of earning assets that decreased included most types of
consumer loans, partially offset by increases in targeted commercial
credits. The average investment portfolio balances also decreased
from 1996, as reductions in short-term funds sold, participation
certificates and U.S. Treasury securities were in part offset by
increases in tax-free and U.S. Agency securities. Comparing 1996 to
1995, interest income (FTE) decreased $8.4 million, principally due
to a 26 basis point decrease in earning-asset yields in part offset
by a $7.9 million increase in average balances.
The revenue decrease in 1997 was more than offset by a $3.6 million
decrease in interest expense, the result of a decrease of 2 basis
points in rates paid on interest-bearing liabilities combined with
a $92.5 million decrease in average balances, and a $31.0 million
increase in the average balance of non-interest bearing demand
deposits. Comparing 1996 to 1995, the Company experienced a $3.9
million reduction in interest expense, primarily due to a $34.6
million decrease in the average balance of interest-bearing
liabilities and a 10 basis point decrease in the rates paid
combined with an increase of $29.4 million in the average balance
of non-interest bearing demand deposits.
In both periods, Company has consistently been successful at
reducing high-rate time deposits while increasing the balances of
more profitable, lower-cost transaction accounts.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated,
information regarding the consolidated average assets, liabilities
and shareholders' equity, the amounts of interest income from
average earning assets and the resulting yields, and the amount of
interest expense paid on interest-bearing liabilities.
Average loan balances include non-performing loans. Interest income
includes proceeds from loans on non-accrual status only to the
extent cash payments have been received and applied as interest
income. Yields on securities and certain loans have been adjusted
upward to reflect the effect of income thereon exempt from federal
income taxation at the current statutory tax rate.
Distribution of assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
- -----------------------------------------------------------------------------------------
Full Year 1997
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rates
Average Income/ Earned/
Balance Expense Paid
- -----------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $30,125 $1,635 5.43 %
Trading account securities -- -- --
Investment securities 1,136,415 73,888 6.50
Loans:
Commercial 1,394,425 129,473 9.29
Real estate construction 85,409 9,386 10.99
Real estate residential 350,825 27,138 7.74
Consumer 417,389 38,756 9.29
- -----------------------------------------------------------------------------
Earning assets 3,414,588 280,276 8.21
Other assets 335,063
- -----------------------------------------------------------------
Total assets $3,749,651
=================================================================
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $781,001 $-- -- %
Savings and interest-bearing
transaction 1,533,939 34,743 2.26
Time less than $100,000 479,692 24,425 5.09
Time $100,000 or more 323,840 17,096 5.28
- -----------------------------------------------------------------------------
Total interest-bearing deposits 2,337,471 76,264 3.26
Funds purchased 162,592 7,803 4.80
Debt financing and notes payable 57,483 3,987 6.94
- -----------------------------------------------------------------------------
Total interest-bearing liabilities 2,557,546 88,054 3.44
Other liabilities 32,499
Shareholders' equity 378,605
- -----------------------------------------------------------------
Total liabilities and shareholders' equity $3,749,651
=================================================================
Net interest spread (1) 4.77 %
Net interest income and interest margin (2) $192,222 5.63 %
=========================================================================================
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Distribution of assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
- -----------------------------------------------------------------------------------------
Full Year 1996
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rates
Average Income/ Earned/
Balance Expense Paid
- -----------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $94,612 $5,218 5.52 %
Trading account securities 17 1 5.88
Investment securities 1,090,422 67,923 6.23
Loans:
Commercial 1,344,626 126,582 9.41
Real estate construction 118,893 12,515 10.53
Real estate residential 320,440 26,486 8.27
Consumer 465,561 43,116 9.26
- -----------------------------------------------------------------------------
Earning assets 3,434,571 281,841 8.21
Other assets 346,613
- -----------------------------------------------------------------
Total assets $3,781,184
=================================================================
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $750,204 $-- -- %
Savings and interest-bearing
transaction 1,559,531 34,936 2.24
Time less than $100,000 520,968 26,143 5.02
Time $100,000 or more 313,050 16,506 5.27
- -----------------------------------------------------------------------------
Total interest-bearing deposits 2,393,549 77,585 3.24
Funds purchased 196,453 9,974 5.08
Debt financing and notes payable 60,045 4,141 6.90
- -----------------------------------------------------------------------------
Total interest-bearing liabilities 2,650,047 91,700 3.46
Other liabilities 26,847
Shareholders' equity 354,086
- -----------------------------------------------------------------
Total liabilities and shareholders' equity $3,781,184
=================================================================
Net interest spread (1) 4.75 %
Net interest income and interest margin (2) $190,141 5.54 %
=========================================================================================
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Distribution of assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
- -----------------------------------------------------------------------------------------
Full Year 1995
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rates
Average Income/ Earned/
Balance Expense Paid
- -----------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $65,150 $3,880 5.96 %
Trading account securities 11 1 9.09
Investment securities 1,106,547 67,432 6.09
Loans:
Commercial 1,303,319 129,090 9.90
Real estate construction 151,242 15,626 10.33
Real estate residential 295,013 26,811 9.09
Consumer 505,373 47,408 9.38
- -----------------------------------------------------------------------------
Earning assets 3,426,655 290,248 8.47
Other assets 346,673
- -----------------------------------------------------------------
Total assets $3,773,328
=================================================================
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $720,799 $-- -- %
Savings and interest-bearing
transaction 1,617,469 37,456 2.32
Time less than $100,000 567,448 29,758 5.24
Time $100,000 or more 296,109 16,218 5.48
- -----------------------------------------------------------------------------
Total interest-bearing deposits 2,481,026 83,432 3.36
Funds purchased 155,350 8,708 5.61
Debt financing and notes payable 48,241 3,487 7.23
- -----------------------------------------------------------------------------
Total interest-bearing liabilities 2,684,617 95,627 3.56
Other liabilities 28,756
Shareholders' equity 339,156
- -----------------------------------------------------------------
Total liabilities and shareholders' equity $3,773,328
=================================================================
Net interest spread (1) 4.91 %
Net interest income and interest margin (2) $194,621 5.68 %
=========================================================================================
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Rate and Volume Variances
The following table sets forth a summary of the changes in interest
income and interest expense from changes in average assets and
liability balances (volume) and changes in average interest rates
for the periods indicated. Changes not solely attributable to
volume or rates have been allocated in proportion to the
respective volume and rate components.
- -----------------------------------------------------------------------------
For the years ended
December 31,
1997 compared with 1996
- -----------------------------------------------------------------------------
Total
Increase/
Volume Rate (Decrease)
- -----------------------------------------------------------------------------
Increase (decrease) in (In thousands)
interest and fee income:
Money market assets and funds sold ($3,501) ($82) ($3,583)
Trading account securities (1) -- (1)
Investment securities (1) 2,926 3,039 5,965
Loans:
Commercial (1) 4,586 (1,695) 2,891
Real estate construction (3,709) 580 (3,129)
Real estate residential 2,014 (1,362) 652
Consumer (4,473) 113 (4,360)
- -----------------------------------------------------------------------------
Total loans (1) (1,582) (2,364) (3,946)
- -----------------------------------------------------------------------------
Total (decrease) increase in
interest and fee income (1) (2,158) 593 (1,565)
- -----------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (593) 400 (193)
Time less than $ 100,000 (2,109) 391 (1,718)
Time $ 100,000 or more 570 20 590
- -----------------------------------------------------------------------------
Total interest-bearing deposits (2,132) 811 (1,321)
Funds purchased (1,648) (523) (2,171)
Notes and mortgages payable (178) 24 (154)
- -----------------------------------------------------------------------------
Total (decrease) increase in
interest expense (3,958) 312 (3,646)
- -----------------------------------------------------------------------------
Increase in
net interest income (1) $1,800 $281 $2,081
=============================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
- -----------------------------------------------------------------------------
For the years ended
December 31,
1996 compared with 1995
- -----------------------------------------------------------------------------
Total
Increase/
Volume Rate (Decrease)
- -----------------------------------------------------------------------------
Increase (decrease) in (In thousands)
interest and fee income:
Money market assets and funds sold $1,599 ($261) $1,338
Trading account securities -- -- --
Investment securities (1) (941) 1,432 491
Loans:
Commercial (1) 4,451 (6,959) (2,508)
Real estate construction (3,411) 300 (3,111)
Real estate residential 6,480 (6,805) (325)
Consumer (3,694) (598) (4,292)
- -----------------------------------------------------------------------------
Total loans (1) 3,826 (14,062) (10,236)
- -----------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 4,484 (12,891) (8,407)
- -----------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (1,319) (1,201) (2,520)
Time less than $ 100,000 (2,369) (1,246) (3,615)
Time $ 100,000 or more 828 (540) 288
- -----------------------------------------------------------------------------
Total interest-bearing deposits (2,860) (2,987) (5,847)
Funds purchased 1,967 (701) 1,266
Notes and mortgages payable 805 (151) 654
- -----------------------------------------------------------------------------
Total decrease in
interest expense (88) (3,839) (3,927)
- -----------------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $4,572 ($9,052) ($4,480)
=============================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $7.6 million for 1997,
compared to $12.3 million in 1996 and $15.2 million in 1995. The
reductions in the provision in 1997 and 1996 reflect the results
of the Company's continuing efforts to improve loan quality by
enforcing strict underwriting and administration procedures and
aggressively pursuing collection efforts with troubled debtors and
positive economic conditions. For further information regarding net
credit losses and the reserve for loan losses, see the "Asset
Quality" section of this report.
INVESTMENT PORTFOLIO
The Company maintains a securities portfolio consisting of U.S.
Treasury, U.S. Government agencies and corporations, state and
political subdivisions, asset-backed and other securities.
Investment securities are held in safekeeping by an independent
custodian.
The objective of the investment securities held to maturity is
to strengthen the portfolio yield, and to provide collateral to
pledge for federal, state and local government deposits and
other borrowing facilities. The investments held to maturity had
an average term to maturity of 98 months at December 31, 1997
and, on the same date, those investments included $230.5 million
in fixed rate and $500 thousand in adjustable rate securities.
Investment securities available for sale are generally used to
supplement the Banks' liquidity. Unrealized net gains and losses
on these securities are recorded as an adjustment to equity, net
of taxes, and are not reflected in the current earnings of the
Company. If a security is sold, any gain or loss is recorded as
a charge to earnings and the equity adjustment is reversed. At
December 31, 1997, the Banks held $1,003.2 million classified as
investments available for sale. At December 31, 1997, an
unrealized gain of $18.4 million, net of taxes of $13.4 million,
related to these securities, was held in shareholders' equity.
The Company had no trading securities at December 31, 1997.
For more information on investment securities, see Notes 1 and 2
to the consolidated financial statements.
The following table shows the carrying amount (fair value) of the
Company's investment securities available for sale as of the dates
indicated:
- -----------------------------------------------------------------------------------------
At December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $277,790 $299,739 $296,646
U.S. Government agencies and corporations 181,124 274,468 293,354
States and political subdivisions 203,405 128,631 136,866
Asset-backed securities 184,377 94,282 80,923
Other 156,538 95,341 62,134
- -----------------------------------------------------------------------------------------
Total $1,003,234 $892,461 $869,923
=========================================================================================
The following table sets forth the relative maturities and yields
of the Company's available-for-sale securities (stated at amortized
cost) at December 31, 1997. Weighted average yields have been
computed by dividing annual interest income, adjusted for
amortization of premium and accretion of discount, by the amortized
cost value of the related security. Yields on state and political
subdivision securities have been calculated on a fully taxable
equivalent basis using the current statutory rate.
Available for sale
- -----------------------------------------------------------------------------------------------------------------------------
After One After Five
Within but Within but Within After Ten Mortgage-
One Year Five Years Ten Years Years backed Other Total
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury $90,484 $185,525 $-- $-- $-- $-- $276,009
Interest rate 6.02% 6.06% --% --% --% --% 6.05%
U.S. Government agencies
and corporations 37,608 81,903 6,280 -- -- -- 125,791
Interest rate 6.08% 6.12% --% --% --% --% 5.80%
States and political
subdivisions 8,784 37,499 44,408 106,120 -- -- 196,811
Interest rate 7.37% 7.61% 7.66% 7.55% --% --% 7.58%
Asset-backed securities 303 86,761 96,918 -- 183,982
Interest rate 5.83% 6.90% 6.15% --% --% --% 6.12%
Other securities 21,000 90,655 6,735 -- -- -- 118,390
Interest rate 6.17% 6.23% 7.13% --% --% --% 6.27%
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 158,179 482,343 154,341 106,120 -- -- 900,983
Interest rate 6.13% 6.23% 6.38% 7.55% --% --% 6.39%
Mortgage-backed -- -- -- -- 55,001 -- 55,001
Interest rate --% --% --% --% 6.14% --% 6.14%
Other securities without
set maturities -- -- -- -- -- 15,447 15,447
Interest rate --% --% --% --% --% 9.15% 9.15%
- -----------------------------------------------------------------------------------------------------------------------------
Total $158,179 $482,343 $154,341 $106,120 $55,001 $15,447 $971,431
Interest rate 6.13% 6.23% 6.38% 7.55% 6.14% 0.0915 6.42%
=============================================================================================================================
The following table shows the carrying amount (amortized cost) and
fair value of the Company's investment securities held to
maturity as of the dates indicated:
- -----------------------------------------------------------------------------------------
At December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $-- $998 $982
U.S. Government agencies and corporations 83,656 79,743 175,898
States and political subdivisions 136,965 131,343 123,582
Asset-backed securities -- 191 3,264
Other 10,339 3,157 4,095
- -----------------------------------------------------------------------------------------
Total $230,960 $215,432 $307,821
=========================================================================================
Fair value $236,896 $218,009 $310,377
=========================================================================================
The following table sets forth the relative maturities and yields
of the Company's held-to-maturity securities at December 31, 1997.
Weighted average yields have been computed by dividing annual
interest income, adjusted for amortization of premium and accretion
of discount, by the amortized value of the related security. Yields
on state and political subdivision securities have been calculated
on a fully taxable equivalent basis using the current statutory
rate.
Held to maturity
- -----------------------------------------------------------------------------------------------------------------------------
After One After Five
Within but Within but Within After Ten Mortgage-
One Year Five Years Ten Years Years backed Other Total
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government Agencies
and Corporations $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
States and Political
Subdivisions 15 14,766 76,696 45,488 -- -- 136,965
Interest rate 9.65% 8.03% 7.61% 7.81% --% --% 7.72%
Asset-backed securities $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
Other securities $-- $-- $-- 10,339 -- -- 10,339
Interest rate --% --% --% 5.53% --% --% 5.53%
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 15 14,766 76,696 55,827 -- -- 147,304
Interest rate 9.65% 8.03% 7.61% 7.39% --% --% 7.57%
Mortgage-backed -- -- -- -- 83,656 -- 83,656
Interest rate --% --% --% --% 6.05% --% 6.05%
- -----------------------------------------------------------------------------------------------------------------------------
Total $15 $14,766 $76,696 $55,827 $83,656 $0 $230,960
Interest rate 9.65% 8.03% 7.61% 7.39% 6.05% --% 7.02%
=============================================================================================================================
LOAN PORTFOLIO
The following table shows the composition of the loan portfolio of
the Company by type of loan and type of borrower, on the dates
indicated:
- -----------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Commercial and commercial real estate $1,437,118 $1,455,984 $1,260,082 $1,244,561 $1,198,089
Real estate construction 66,782 101,136 128,901 175,962 176,337
Real estate residential 361,909 276,951 378,971 333,685 313,122
Consumer 404,382 462,734 502,441 528,875 442,071
Unearned income (8,254) (9,565) (12,248) (16,381) (15,801)
- -----------------------------------------------------------------------------------------------------------------
Gross loans 2,261,937 2,287,240 2,258,147 2,266,702 2,113,818
Allowance for loan losses (50,630) (50,921) (48,494) (46,580) (42,413)
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Net loans $2,211,307 $2,236,319 $2,209,653 $2,220,122 $2,071,405
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Maturities and Sensitivities of Selected Loans to Changes in Interest Rates
The following table shows the maturity distribution and interest
rate sensitivity of commercial and real estate construction loans
at December 31, 1997. Balances exclude loans to individuals and
residential mortgages totaling $758.0 million. These types of loans
are typically paid in monthly installments over a num