Item 1 Business. . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2
ITEM 2. Descrpition of Property
Branch Offices and Facilities
The Banks are engaged in the banking business through 48 offices in eleven counties in Northern California, including eleven offices in Marin County, nine in Sonoma County, seven in Solano County, seven in Napa County, three in Contra Costa County, four in Lake County, two in Mendocino County, two in Nevada County, one in Sacramento County, one in San Francisco County and one in Placer County. All offices are constructed and equipped to meet prescribed security requirements.
The Banks own fifteen banking office locations and three administrative buildings, including the Company's headquarters. Thirty-three banking offices and two support facilities are leased. Substantially all of the leases contain multiple five-year renewal options and provisions for rental increase, principally for changes in the cost of living index, property taxes and maintenance.
ITEM 3.
ITEM 3. Legal Proceedings
The Company and its subsidiaries are defendants in various legal actions which, in the opinion of management based on discussions with independent legal counsel, will be resolved with no material effect on the Company's consolidated results of operations or financial position.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the shareholders during the fourth quarter of 1994.
PART II
ITEM 5.
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 low closing price for the common stock, for each quarter, as reported by NASDAQ, previously reported on the American Stock Exchange.
Period High Low -------------------------------------------------------------- First quarter ........................... $29.25 $25.88 Second quarter ........................... 32.50 27.00 Third quarter ........................... 33.25 29.25 Fourth quarter ........................... 33.25 29.00
-------------------------------------------------------------- First quarter ........................... $30.25 $22.13 Second quarter ........................... 28.75 23.88 Third quarter ........................... 28.50 25.13 Fourth quarter ........................... 28.50 25.75
As of December 31, 1994, there were 5,101 holders of record of the Company's common stock. This number does not include Napa Valley Bancorp. stockholders that as of December 31, 1994 had not yet tendered their shares for conversion to Company 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 the earnings, financial condition and capital requirements of the Company and its subsidiaries. Furthermore, the Company's ability to pay future dividends is subject to contractual restrictions under the terms of the note agreement, as discussed in Note 6 to the Consolidated Financial Statements. Under the most restrictive of these contractual provisions, $24.4 million of retained earnings was available for the payment of dividends at December 31, 1994. Limitations of the Company's ability to pay dividends is discussed in Note 15 to the Consolidated Financial Statements on page 58 of this report.
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 17 to the consolidated financial statements on page 61 of this report.
As discussed in Note 7 of the notes 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 the Rights. Among other things, the amendments approved on that date included a provision to the effect that, after an acquisition of 15 percent of the Company's common stock without the prior consent of the Company, the Board of Directors will have the power to cause each Right to be exchanged for one share of common stock of the Company.
ITEM 6.
ITEM 6. Selected Financial Data
Financial Summary (In thousands, except per share data and number of shareholders)
[FN] *Fully taxable equivalent
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion addresses information pertaining to the financial condition and results of operations of Westamerica Bancorporation (the "Company") that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes found on pages 36 through 62, as well as with the other information presented throughout the report. All data presented for 1992 include the April 15, 1993 acquisition of Napa Valley Bancorp.
The Company achieved record earnings of $24.7 million in 1994, representing a 161 percent increase from the $9.5 million earned in 1993 and 62 percent higher than 1992 earnings of $15.2 million. The reduced level of earnings in 1993 was mostly due to $10.5 million in after-tax charges resulting from the April 15, 1993 merger with Napa Valley Bancorp (the "Merger"), that were taken in the form of asset write-downs, an additional loan loss provision and other merger-related charges. The asset write-downs and the additional loan loss provision reflect the Company's plan of non-performing asset resolution.
Components of Net Income ----------------------------------------------------------------------- (Percent of average earning assets) 1994 1993 1992 ----------------------------------------------------------------------- Net interest income* 5.31% 5.48% 5.50% Provision for loan losses (.32) (.53) (.39) Non-interest income 1.05 1.34 1.33 Non-interest expense (3.84) (5.43) (5.00) Taxes* (.87) (.33) (.59) ----------------------------------------------------------------------- Net income 1.33% .53% .85% ======================================================================= Net income as a percentage of average total assets 1.21% .48% .77% ======================================================================= * Fully taxable equivalent (FTE)
On a per share basis, 1994 net income was $3.06, compared to $1.17 and $1.92 in 1993 and 1992, respectively. During 1994, the Company continued to benefit from reductions in cost of funds and expense controls which offset declines in non-interest income. Earnings in 1993 were favorably affected compared to 1992 by reductions in cost of funds, increases in service fees and other non-interest income, and expense controls. However, merger-related costs more than offset those benefits. The Company's return on average total assets was 1.21 percent in 1994, compared to .48 percent and .77 percent in 1993 and 1992, respectively. Return on average equity in 1994 was 15.59 percent, compared to 6.51 percent and 11.16 percent, respectively, in the two previous years. Net Interest Income
Due to increases in the level of average earning assets and a more favorable composition of deposits represented by increasing volumes of lower-costing demand and savings account balances and a reduction in the volumes of higher costing time deposits, the Company was able to generate higher net interest income (FTE) in 1994 when compared to 1993. However, net interest income (FTE) was still slightly lower than 1992. Continuing decreases in higher-yielding loan volumes and the growth of the lower-yielding investment securities portfolio more than offset the effect of increasing market interest rates and the Company's containment of rates paid on interest-bearing liabilities, resulting in a lower net interest margin for 1994.
Components of Net Interest Income -------------------------------------------------------------------- (In millions) 1994 1993 1992 -------------------------------------------------------------------- Interest income $ 134.2 $ 137.0 $ 154.8 Interest expense (41.1) (42.3) (58.9) FTE adjustment 5.3 2.8 2.7 -------------------------------------------------------------------- Net interest income (FTE) $ 98.4 $ 97.5 $ 98.6 ==================================================================== Average earning assets $1,851.9 $1,779.3 $1,793.8 Net interest margin (FTE) 5.31% 5.48% 5.50% ====================================================================
Net interest income (FTE) in 1994 increased $900,000 from 1993 to $98.4 million. Interest income decreased $2.8 million from 1993, as a result of the combined effect of a 32 basis point decline in earning-asset yields partially offset by a $72.6 million increase in average balances. During 1994, increases in the balance of tax-exempt municipal securities resulted in an FTE adjustment $2.5 million higher than 1993. Interest expense decreased $1.2 million from 1993, the result of a decrease of 11 basis points in rates paid partially offset by an increase of $11.8 million in the average balance of interest-bearing liabilities.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding the consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include non-performing loans. Interest income includes proceeds from loans on non-accrual status only to the extent cash payments have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate. Amortized loan fees, which are included in interest and fee income on loans were $1.2 million lower in 1994 than in 1993 and $1.5 million lower in 1993 than in 1992.
Distribution of Average Assets, Liabilities and Shareholders' equity Yield/Rates and Interest Margin ----------------------------------------------------------------------- (In thousands) 1994 ----------------------------------------------------------------------- Interest Rates Average income/ earned/ balance expense paid ----------------------------------------------------------------------- Assets Money market assets and funds sold $ 250 $ -- -- % Trading account securities 37 2 4.24 Investment securities 763,360 45,711 5.99
Loans: Commercial 593,548 52,777 8.89 Real estate construction 37,968 3,890 10.24 Real estate residential 178,946 12,566 7.02 Consumer 277,780 24,583 8.85 --------------------------------------------------------------- Earning assets 1,851,889 139,529 7.53
Other assets 187,012 ------------------------------------------------------- Total assets $2,038,901 ======================================================= Liabilities and shareholders' equity Deposits Non-interest bearing demand $ 359,768 $ -- -- % Savings and interest-bearing transaction 970,592 18,785 1.94 Time less than $100,000 282,530 11,034 3.91 Time $100,000 or more 97,928 3,545 3.62 --------------------------------------------------------------- Total interest-bearing deposits 1,351,050 33,364 2.47 Funds purchased 126,225 5,139 4.17 Notes and mortgages payable 29,690 2,612 8.80 --------------------------------------------------------------- Total interest-bearing liabilities 1,506,965 41,115 2.73 Other liabilities 13,887 Shareholders' equity 158,281 ------------------------------------------------------- Total liabilities and shareholders' equity $2,038,901 ======================================================= Net interest spread (1) 4.80 % Net interest income and interest margin (2) $98,414 5.31 % =======================================================================
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets.
Distribution of Average Assets, Liabilities and Shareholders' equity Yield/Rates and Interest Margin ---------------------------------------------------------------------- (in thousands) 1993 ----------------------------------------------------------------------- Interest Rates Average income/ earned/ balance expense paid ----------------------------------------------------------------------- Assets Money market assets and funds sold $ 4,463 $ 170 3.80 % Trading account securities 183 6 3.14 Investment securities 631,700 39,794 6.30
Loans: Commercial 615,981 53,990 8.76 Real estate construction 55,038 4,745 8.62 Real estate residential 168,379 13,322 7.91 Consumer 303,567 27,726 9.13 --------------------------------------------------------------- Earning assets 1,779,311 139,753 7.85
Other assets 200,561 ------------------------------------------------------- Total assets $1,979,872 ======================================================= Liabilities and shareholders' equity Deposits Non-interest bearing demand $ 330,867 $ -- -- % Savings and interest-bearing transaction 938,475 19,305 2.06 Time less than $100,000 340,122 14,176 4.17 Time $100,000 or more 135,505 4,837 3.57 --------------------------------------------------------------- Total interest-bearing deposits 1,414,102 38,318 2.71 Funds purchased 57,135 1,937 3.39 Notes and mortgages payable 17,959 2,016 11.22 --------------------------------------------------------------- Total interest-bearing liabilities 1,489,196 42,271 2.84 Other liabilities 14,652 Shareholders' equity 145,157 ------------------------------------------------------- Total liabilities and shareholders' equity $1,979,872 ======================================================= Net interest spread (1) 5.01 % Net interest income and interest margin (2) $97,482 5.48 % =======================================================================
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets.
Distribution of Average Assets, Liabilities and Shareholders' equity Yield/Rates and Interest Margin ------------------------------------------------------------------------ (in thousands) 1992 ------------------------------------------------------------------------ Interest Rates Average income/ earned/ balance expense paid ----------------------------------------------------------------------- Assets Money market assets and funds sold $ 42,964 $ 1,765 -- % Trading account securities 103 4 3.67 Investment securities 534,793 40,332 7.54 Loans: Commercial 646,359 60,050 9.29 Real estate construction 76,173 7,058 9.27 Real estate residential 168,030 15,314 9.11 Consumer 325,393 33,003 10.14 --------------------------------------------------------------- Earning assets 1,793,815 157,526 8.78
Other assets 175,609 ------------------------------------------------------- Total assets $1,969,424 ======================================================= Liabilities and shareholders' equity Deposits Non-interest bearing demand $ 284,366 $ -- -- % Savings and interest-bearing transaction 903,211 26,518 2.94 Time less than $100,000 406,161 20,948 5.16 Time $100,000 or more 184,799 8,365 4.53 --------------------------------------------------------------- Total interest-bearing deposits 1,494,171 55,831 3.74 Funds purchased 15,729 698 4.44 Notes and mortgages payable 20,439 2,363 11.56 --------------------------------------------------------------- Total interest-bearing liabilities 1,530,339 58,892 3.85 Other liabilities 18,263 Shareholders' equity 136,456 ------------------------------------------------------- Total liabilities and shareholders' equity $1,969,424 ======================================================= Net interest spread (1) 4.93 % Net interest income and interest margin (2) $98,634 5.50 % =======================================================================
(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.
[FN] (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
Provision for Loan Losses
The level of the provision for loan losses reflects the Company's continuing efforts to improve loan quality by enforcing strict underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The provision for loan losses was $5.9 million for 1994, compared to $9.5 million in 1993 and $7.0 million in 1992. The 1993 provision included a $3.1 million merger-related provision, reflecting an aggressive workout strategy for problem loans and properties acquired in the Merger. For further information regarding net credit losses and the reserve for loan losses, see the "Asset Quality" section of this report.
Investment Portfolio
The Company maintains a securities portfolio consisting of U.S. Treasury, U.S. Government Agencies and Corporations, State and political subdivisions, asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.115"). The statement addresses the accounting and reporting for investments in equity securities that have a readily determinable fair value and for all investments in debt securities. The statement requires that all securities be classified, at acquisition, into one of three categories: held to maturity, available for sale, and trading. In classifying securities as being held to maturity, available for sale or trading, the Banks consider their collateral needs, asset/liability management strategies, liquidity needs, interest rate sensitivity and other factors that will determine the intent and ability to hold the securities to maturity. SFAS No. 115 was effective for fiscal years beginning after December 15, 1993.
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 43 months at December 31, 1994 and, as of the same date, those investments included $594.8 million in fixed rate and $3.9 million in adjustable rate securities.
Investment securities available for sale are typically 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 the security is sold, any gain or loss is recorded as a charge to earnings and the equity adjustment is reversed. At December 31, 1994, the Banks held $160.6 million classified as investments available for sale. At December 31, 1994, a net unrealized loss of $1.8 million net of taxes of $1.2 million related to these securities was held in stockholders' equity.
The Company had no trading securities at December 31, 1994.
For more information on investment securities, see Notes 1 and 2 to the consolidated financial statements.
The following table shows the amortized cost of the Company's investment securities as of the dates indicated:
----------------------------------------------------------- December 31, (in thousands) 1994 1993 1992 ----------------------------------------------------------- U.S. Treasury $241,322 $245,586 $126,522 U.S. government agencies and corporations 256,133 254,635 237,753 States and political subdivisions (domestic) 198,135 127,302 87,031 Asset backed securities 37,162 65,433 82,270 Other securities 29,632 28,529 36,660 ----------------------------------------------------------- Total $762,384 $721,485 $570,236 ===========================================================
The following table is a summary of the relative maturities and yields of the Company's investment securities as of December 31, 1994. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the book value of the related securities. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the federal tax rate of 35 percent.
Maturities and Sensitivity 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, 1994.*
[FN]
* Excludes loans to individuals and residential mortgages totaling $471,248. These types of loans are typically paid in monthly installments over a number of years. **Includes demand loans
Commitments and Lines of Credit
It is not the policy of the Company to issue formal commitments on lines of credit except to a limited number of well established and financially responsible local commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of Letters of Credit to facilitate the customer's particular business transaction. Commitment fees generally are not charged except where Letters of Credit are involved. Commitments and lines of credit typically mature within one year. See also Note 12 of the consolidated notes to the financial statements.
Asset Quality
The Company closely monitors the markets in which it conducts its lending operations. The Company continues its strategy to control its exposure to loans with higher credit risk and increase diversification of earning assets into less risky investments. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category which includes all non-performing assets and potential problem loans. These lesser grades occur when known information about possible credit problems causes doubts about the ability of such borrowers to comply with loan repayment terms. These loans have varying degrees of uncertainty and may become non-performing assets. Classified assets receive an elevated level of attention by Management to ensure collection. Total classified assets peaked during the second quarter of 1993 as a result of the Merger but declined significantly to $63.6 million by December 31, 1993, mainly due to improvements in the Napa Valley Bank classified asset portfolio. Continuing write-downs, loan collections, real estate liquidations and restructuring reflecting the Company's workout strategy, resulted in classified assets of $46.5 million at December 31, 1994, a decrease of $17.1 million, or 27 percent, from the previous year end.
Non-Performing Assets
Non-performing assets include non-accrual loans, loans 90 or more days past due and still accruing, other real estate owned and loans classified as substantively foreclosed. Loans are placed on non-accrual status upon reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on non-accrual status is charged against interest income. Loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on non-accrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified by Management as "performing non-accrual" and are included in total non-performing assets.
Performing non-accrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal and the loan is brought current. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Any additional payments received after that point are recorded as interest income on a cash basis.
Performing non-accrual loans increased $100,000 to $2.0 million at December 31, 1994 while non-performing non-accrual loans decreased $2.1 million to $5.1 million at December 31, 1994, due to loan collections, write-downs and foreclosure of loan collateral. The amount of gross interest income that would have been recorded for non-accrual loans for the year ended December 31, 1994, if all such loans had been current in accordance with their original terms while outstanding during the period was $814,000. The amount of interest income that was recognized on non-accrual loans from cash payments made during the year ended December 31, 1994 totaled $386,000, representing an annualized yield of 4.39 percent. Cash payments received which were applied against the book balance of performing and non-performing non-accrual loans outstanding at December 31, 1994, totaled $248,000 compared to $534,000 in 1993. Of the $5.4 million loan collateral substantively foreclosed at December 31, 1993, a total of $415,000 was reclassified as non-accrual loans at December 31, 1994 and the rest was either foreclosed or liquidated. The declining OREO balance during 1994 and 1993 is due to asset write-downs and liquidations.
The Company's reserve for loan losses is maintained at a level estimated by Management to be adequate to provide for losses that can be reasonably anticipated based upon specific conditions as determined by Management, credit loss experience, the amount of past due and non-performing loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. The reserve is allocated to segments of the loan portfolio based in part on quantitative analysis of historical credit loss experience. Criticized and classified loan balances are analyzed using a linear regression model or standard allocation percentages. The results of this analysis are applied to current criticized and classified loan balances to allocate the reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines due to their small balances and numerous accounts, are analyzed based on the historical rate of net losses and delinquency trends grouped by the number of days the payments on those loans are delinquent. While these factors are essentially judgmental and may not be reduced to a mathematical formula, Management considers the $27.6 million reserve for loan losses, which constituted 2.50 percent of total loans at December 31, 1994, to be adequate as a reserve against inherent losses. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future reserve levels.
The following table summarizes the loan loss experience of the Company for the periods indicated:
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), which addresses the accounting treatment of certain impaired loans and amends FASB Statements No. 5 and No. 15. In October, 1994, the FASB issued statement No. 118, "Accounting by Creditors for Impairment of a Loan" Income Recognition and Disclosures" ("SFAS 118"), which amends the income recognition and disclosure provisions of SFAS 114. SFAS 114 and SFAS 118 are effective January 1, 1995.
Under SFAS 114, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Under SFAS 114, impairment may be measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate. Alternatively, impairment may be measured by using the loan's observable market price or the fair value of the collateral if repayment is expected to be provided solely by the underlying collateral. The Company will implement SFAS 114, as amended by SFAS 118, in January, 1995. Management believes that the adoption of this pronouncement will not significantly impact the Company's financial statements.
The following tables present the allocation of the loan loss reserve balance on the dates indicated:
Allocation of the loan loss reserve:
------------------------------------------------------------ December 31, ----------------------- ----------------------- Allocation Loans as of reserve percent of balance total loans ------- ----------- Type of loan Commercial $2,698 52.5% Real estate construction 4,360 9.5 Real estate residential 29 10.4 Consumer 1,782 27.6 Unallocated portion of the reserve 10,132 - ---------------------------------------------------------- Total $19,001 100.0% ==========================================================
The reduced allocation to commercial loans from December 31, 1993 to December 31, 1994 is primarily due to a reduction in the balance of criticized loans. The unallocated component includes Management's judgemental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors. The changes in the allocation to loan portfolio segments from December 31, 1992 to December 31, 1993 reflect changes in criticized and classified loan balances. The increased allocation to construction loans is attributable to an increase in criticized loans due to the recessionary environment. The decreased allocation to commercial and consumer loans is attributable to a higher level of recoveries.
Asset and Liability Management
The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest-rate risk. The principal sources of asset liquidity are marketable investment and money market securities available for sale. At December 31, 1994, investment securities available for sale totaled $160.6 million. As in previous years, decreased loan balances resulted in an increase in the size of the securities portfolio.
The Company generates significant liquidity from its operating activities. The Company's profitability in 1994, 1993 and 1992 generated cash flows provided from operations for such years of $27.7 million, $28.4 million and $33.4 million, respectively.
Additional cash flow may be provided by financing activities, primarily the acceptance of customer deposits and short-term borrowings from banks. Over the last three years, deposit balances have either remained flat, as in 1992, or declined, as in 1993 and 1994. The decline in 1993 was mainly due to the sale of its 50 percent interest in Sonoma Valley Bank. During 1994, the Company paid off $9.8 million in principal of its high-rate long-term debt. To compensate for decreases in deposits and long-term debt, the Company increased its short-term borrowings, which grew $64.2 million, $57.0 million and $2.5 million in 1994, 1993 and 1992, respectively. In addition, in December, 1993, Westamerica Bank issued a ten-year, $20.0 million subordinated capital note that qualifies as Tier II Capital, to be used as a source of working capital.
The Company uses cash flow from operating and financing activities to make investments in loans, money market assets and investment securities. The Company's strategy to reduce its exposure to high-risk loans is shown in the reduction of loan volumes over the past three years, when balances decreased $11.0 million, $68.1 million and $32.8 million in 1994, 1993 and 1992, respectively. The smaller decline in 1994 reflects efforts of the Company to stabilize loan volume without jeopardizing credit quality. The net repayment of loans resulted in added liquidity for the Company, which increased its investment securities portfolio by $40.9 million, $153.3 million, and $54.7 million in 1994, 1993 and 1992, respectively.
Interest rate risk is influenced by market forces. However, that risk may be controlled by monitoring and managing the repricing characteristics of interest-bearing assets and liabilities. The primary analytical tool used by Management to gauge interest-rate sensitivity is a simulation model used by many major banks and bank regulators. This industry standard model is used to simulate the effects on net interest income of changes in market interest rates that are up to 2 percent higher or 2 percent lower than current levels. The results of the model indicate that the mix of interest-rate sensitive assets and liabilities at December 31, 1994 would not, in the view of Management, expose the Company to an unacceptable level of interest-rate risk.
Capital Resources
The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company's capital position represents the level of capital available to support continuing operations and expansion. The Company's primary capital resource is shareholders' equity, which increased $13.8 million or 9 percent from the previous year end and increased $22.5 million from December 31, 1992. During 1994, the Board of Directors approved a 13 percent increase in the cash dividend on the Company's Common Stock, from 15 cents to 17 cents per share. During 1994, the Company recorded common stock dividends of $5.2 million. The ratio of total risk-based capital to risk-adjusted assets increased to 15.32 percent at December 31, 1994, from 14.40 percent at December 31, 1993. Tier I risk-based capital to risk-adjusted assets increased to 12.57 percent at December 31, 1994, from 11.11 percent at year-end 1993.
Capital to Risk-Adjusted Assets Minimum Regulatory Capital
Minimum Regulatory Capital At December 31, 1994 1993 Requirements ----------------------------------------------------------------------- Tier I Capital 12.57% 11.11% 4.00% Total Capital 15.32 14.40 8.00 Leverage ratio 8.23 7.42 3.00
The risk-based capital ratios improved in 1994 due to a more rapid growth in equity than total assets, in conjunction with the decline in loan volumes and increase in investment securities, which reduced the level of risk-adjusted assets. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. All ratios are in excess of regulatory definitions of "well capitalized".
Financial Ratios
The following table shows key financial ratios for the periods indicated:
[FN] See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME
[FN] See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
[FN] See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
[FN] See accompanying notes to consolidated financial statements.
WESTAMERICA BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Business and Accounting Policies
Westamerica Bancorporation, a registered bank holding Company, (the "Company"), provides a full range of banking services to individual and corporate customers in Northern California through its subsidiary banks (the "Banks"), Westamerica Bank and Subsidiary, Bank of Lake County and Napa Valley Bank. The Banks are subject to competition from other financial institutions and to regulations of certain agencies and undergo periodic examinations by those regulatory authorities.
Summary of Significant Accounting Policies The consolidated financial statements are prepared in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a summary of significant policies used in the preparation of the accompanying financial statements. In preparing the financial statements, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods indicated.
Principles of Consolidation The financial statements include the accounts of the Company, and all the Company's subsidiaries which include the Banks, Community Banker Services Corporation and Subsidiary and Westcore, a newly formed company which will engage in planning and servicing retirement and employee benefit programs. Significant intercompany transactions have been eliminated in consolidation. All data presented for 1992 has been restated to include the April 15, 1993 acquisition of Napa Valley Bancorp on a pooling-of-interests basis.
Cash Equivalents Cash equivalents include Due From Banks balances and Federal Funds Sold which are both readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value because of interest rate volatility.
Securities Investment securities consist of U.S. Treasury, federal agencies, state, county and municipal securities, mortgage-backed, corporate debt and equity securities. Under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company classifies its debt and marketable equity securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held to maturity are classified as available for sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses on trading securities are included in earnings.
Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary, results in a charge to earnings and the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Loans and Reserve for Loan Losses The reserve for loan losses is a combination of specific and general reserves available to absorb estimated future losses throughout the loan portfolio and is maintained at a level considered adequate to provide for such losses. Credit reviews of the loan portfolio, designed to identify problem loans and to monitor these estimates, are conducted continually, taking into consideration market conditions, current and anticipated developments applicable to the borrowers and the economy, and the results of recent examinations by regulatory agencies. Management approves the conclusions resulting from credit reviews. Ultimate losses may vary from current estimates. Adjustments to previous estimates of loan losses are charged to income in the period which they become known.
Unearned interest on discounted loans is amortized over the life of these loans, using the sum-of-the-months digits formula for which the results are not materially different from those obtained by using the interest method. For all other loans, interest is accrued daily on the outstanding balances. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on non-accrual status.
Non-refundable fees and certain costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income over the estimated respective loan lives. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an individual loan basis.
Other Real Estate Owned and Loan Collateral Substantively Foreclosed Other real estate owned includes property acquired through foreclosure or forgiveness of debt. These properties are transferred at fair value, which becomes the new cost basis of the property. Losses recognized at the time of acquiring property in full or partial satisfaction of loans are charged against the reserve for loan losses. Subsequent losses incurred due to the declines in property values as identified in annual independent property appraisals are recognized as non-interest expense. Routine holding costs, such as property taxes, insurance and maintenance, and losses from sales and dispositions are recognized as non-interest expense. In 1993, the Company had loans classified as "loan collateral substantially foreclosed" when the borrower had little or no equity in the collateral, when proceeds for repayment of the loan were expected to come only from the operation or sale of the collateral, and the debtor had either formally or effectively abandoned control of the collateral to the Company or had retained control of the collateral but, because of the current financial condition of the debtor or the economic prospects for the debtor and/or collateral in the foreseeable future, there were doubts about the ability of the debtor to rebuild equity in the collateral or otherwise repay the loan in the near term. Losses recognized at the time the loans were reclassified as substantive foreclosures were charged against the reserve for loan losses. Subsequent losses incurred due to declines in property values, were recognized as non-interest expense as were other routine holding costs. The Company had no loans classified as substantively foreclosed at December 31, 1994.
Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter. Fully depreciated and/or amortized assets are removed from the Company's balance sheet.
Interest Rate Swap Agreements The Company uses interest rate swap agreements as an asset/liability management strategy to reduce interest rate risk. These agreements are exchanges of fixed and variable interest payments based on a notional principal amount. The primary risk associated with swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. The Company controls the credit risk of these agreements through credit approvals, limits and monitoring procedures. The Company is not a dealer but an end user of these instruments and does not use them for trading purposes. As a hedging mechanism, the differential to be paid or received on such agreements is recognized as an adjustment to interest income in the period received or paid. Payments made and/or received in connection with early termination of interest rate swap agreements are recognized over the remaining original term of the swap agreement.
Earnings Per Share Earnings per share amounts are computed on the basis of the weighted average of common and common equivalent shares outstanding during each of the years.
Income Taxes The Company and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.
Other Securities and other property held by the Banks in a fiduciary or agency capacity are not included in the consolidated financial statements since such items are not assets of the Company or its subsidiaries. Certain amounts in prior years' financial statements have been reclassified to conform with the current presentation. These reclassification have no effect on previously reported income.
Note 2: Investment Securities
An analysis of available for sale investment securities portfolio as of December 31, 1994 follows:
[FN] * Includes $46.8 million in Collateralized Mortgage Obligations with the following maturities: 1 to 5 years $10.2 million; over 10 years $36.6 million. The average yield of these securities is 5.91 percent.
An analysis of held to maturity investment securities portfolio as of December 31, 1994 follows:
[FN] * Includes $155.1 million in Collateralized Mortgage Obligations with the following maturities: 1 to 5 years $16.6 million; 5 to 10 years $71.6 million; over 10 years $66.9 million. These securities have a market value of $146.6 million and an average yield of 5.28 percent.
An analysis of available for sale investment securities portfolio as of December 31, 1993 follows:
[FN] * Includes $24.6 million in Collateralized Mortgage Obligations with the following maturities: 1 year or less $9.4 million; 1 to 5 years $15.2 million. The average yield of these securities is 5.56 percent.
An analysis of held to maturity investment securities portfolio as of December 31, 1993 follows:
[FN] * Includes $162.6 million in Collateralized Mortgage Obligations with the following maturities: 1 year or less $9.9 million; 1 to 5 years $9.3 million; 5 to 10 years $71.3 million; over 10 years $72.1 million. These obligations have a market value of $162.4 million and an average yield of 5.45 percent.
As of December 31, 1994, $248.1 million of investment securities held to maturity were pledged to secure public deposits.
Note 3: Loans and Reserve for Loan Losses
Loans at December 31, consisted of the following:
---------------------------------------------------------------- (In thousands) 1994 1993 ---------------------------------------------------------------- Commercial $262,518 $266,448 Real estate-commercial 342,727 346,308 Real estate-construction 27,278 40,533 Real estate-residential 193,061 172,245 ---------------------------------------------------------------- Total real estate loans 563,066 559,086 Installment and personal 292,735 304,993 Unearned income (14,548) (15,788) ---------------------------------------------------------------- Gross loans 1,103,771 1,114,739 Loan loss reserve (27,600) (25,587) ---------------------------------------------------------------- Net loans $1,076,171 $1,089,152 ================================================================
Included in real estate-residential at December 31, 1994 and 1993 are loans held for resale of $1.9 million and $5.9 million, respectively, the cost of which approximates market value.
Changes in the loan loss reserve were: ------------------------------------------------------------------ (In thousands) 1994 1993 1992 ------------------------------------------------------------------ Balance at January 1, $25,587 $24,742 $23,853 Sale of Sonoma Valley Bank - (684) - Provision for loan losses 5,880 9,452 7,005 Credit losses (5,921) (10,091) (8,794) Credit loss recoveries 2,054 2,168 2,678 ------------------------------------------------------------------ Net chargeoffs (3,867) (7,923) (6,116) ------------------------------------------------------------------ Balance at December 31, $27,600 $25,587 $24,742 ==================================================================
Restructured loans were $4.4 million at December 31, 1994 and at December 31; 1993, they were $319,000 at December 31, 1992.
The following is a summary of interest foregone on restructured loans for the years ended December 31: ------------------------------------------------------------------------ (In thousands) 1994 1993 1992 ------------------------------------------------------------------------ Interest income that would have been recognized had the loans performed in accordance with their original terms $380 $472 $135 Less: Interest income recognized on restructured loans (264) (218) - ------------------------------------------------------------------------ Interest foregone on restructured loans $116 $254 $135 ========================================================================
There were no commitments to lend additional funds to borrowers whose loans are included above.
Note 4: Concentrations of Credit Risk
The Company's business activity is with customers in Northern California. The loan portfolio is well diversified with no industry comprising greater than ten percent of total loans outstanding as of December 31, 1994.
The Company has a significant amount of credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 3, the Company had loan commitments and stand-by letters of credit related to real estate loans of $11.8 million at December 31, 1994. The Company requires collateral on all real estate loans and generally attempts to maintain loan-to-value ratios no greater than 75 percent on commercial real estate loans and no greater than 80 percent on residential real estate loans.
Note 5: Premises and Equipment
A summary as of December 31, follows: ------------------------------------------------------------------------- Accumulated Depreciation and Net (In thousands) Cost Amortization Book Value ------------------------------------------------------------------------- Land $ 3,735 $ - $ 3,735 Buildings and improvements 19,861 (7,286) 12,575 Leasehold improvements 2,276 (1,520) 756 Furniture and equipment 13,737 (7,516) 6,221 ------------------------------------------------------------------------- Total $39,609 $(16,322) $23,287 =========================================================================
Land $ 3,735 $ - $ 3,735 Buildings and improvements 20,072 (6,876) 13,196 Leasehold improvements 2,537 (1,513) 1,024 Furniture and equipment 14,347 (6,961) 7,386 ------------------------------------------------------------------------- Total $40,691 $(15,350) $25,341 =========================================================================
Depreciation and amortization included in non-interest expense amount to $3,708,000 in 1994, $3,622,000 in 1993 and $4,198,000 in 1992.
Note 6: Borrowed Funds
Notes payable include the unsecured obligations of the Company as of December 31, 1994 and 1993, as follows: ----------------------------------------------------------------------- (In thousands) 1994 1993 ----------------------------------------------------------------------- Unsecured note dated September, 1976, interest payable semiannually at 9 7/8% and principal payments of $267,000 due annually to September 1, 1996. Note was paid off in September, 1994. $ - $ 196
Unsecured note dated May, 1984, interest payable quarterly at 12.95% and principal payments of $1,000,000 due annually beginning September 1, 1991 and ending on September 1, 1996. Note was paid off in October, 1994. - 2,100
Equity contract notes, originated in April, 1986 and maturing on April 1, 1996. Interest payable semiannually at 11 5/8% and principal payments of $2,500,000 due annually, on April 1, starting in 1993. Notes were paid off in April, 1994. - 7,500
Senior notes, originated in May, 1988 and maturing on June 30, 1995. Interest payable semiannually at 10.87% and principal payment due at maturity. 5,000 5,000
Subordinated note, issued by Westamerica Bank, originated in December, 1993 and maturing September 30, 2003. Interest of 6.99% per annum is payable semiannually on March 31 and September 30, with principal due at maturity. 20,000 20,000 ----------------------------------------------------------------------- Total notes payable $25,000 $34,796 =======================================================================
Mortgages payable of $524,000 consist of a note of Westamerica Bank secured by a deed of trust on premises having a net book value of $756,000 at December 31, 1994. The note, which has an effective interest rate of 10 percent, is scheduled to mature in April, 1995.
At December 31, 1994, the Company had unused lines of credit amounting to $2.5 million. Compensating balance arrangements are not significant to the operations of the Company.
At December 31, 1994, the Banks had $96.6 million in time deposit accounts in excess of $100,000; interest on these accounts in 1994 was $3.5 million.
Note 7: Shareholders' Equity
In April 1982, the Company adopted an Incentive Stock Option Plan and 413,866 shares were reserved for issuance. Under this plan, all options are currently exercisable and terminate 10 years from the grant. At December 31, 1994, 17,340 options were outstanding and exercisable. Under the Stock Option Plan adopted by the Company in 1985, 750,000 shares have been reserved for issuance. Stock appreciation rights, incentive stock options and non-qualified stock options are available under this plan. Options are granted at fair market value and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. The 1985 plan was amended in 1990 to provide for restricted performance shares ("RPS") grants. RPS's granted were 33,900, 24,700, and 27,450, for the years ended December 31, 1994, 1993 and 1992, respectively. The related expense for those years was $960,000, $740,000, and $315,000, respectively. An RPS grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period. At December 31, 1994, 167,209 options were available for grant under the 1985 Stock Option Plan.
Information with respect to options outstanding and options exercised under the plans is summarized in the following table:
----------------------------------------------------------------------------- Number Option Price of shares $ per share $ Total ----------------------------------------------------------------------------- Shares under option at December 31: 1994 399,741 8.50 - 28.06 8,628,494 1993 313,564 8.50 - 24.50 5,766,400 1992 278,544 6.06 - 22.00 4,249,399 Options exercised during: 1994 31,742 8.88 - 24.50 456,150 1993 51,260 8.88 - 22.00 692,157 1992 168,423 6.06 - 13.29 1,975,000
At December 31, 1994, options for 204,104 shares were exercisable.
Shareholders have authorized issuance of two new classes of 1,000,000 shares each, to be denominated "Class B Common Stock" and "Preferred Stock", respectively, in addition to the 20,000,000 shares of Common Stock presently authorized. At December 31, 1994, no shares of Class B or Preferred Stock had been issued.
In December 1986, the Company declared a dividend distribution of one common share purchase right (the "Right") for each outstanding share of common stock. The Rights are exercisable only in the event of an acquisition of, or announcement of a tender offer to acquire, 15 percent or more of the Company's stock without the prior consent of the Board of Directors. If the Rights become exercisable, the holder may purchase one share of the Company's common stock for $65. Following an acquisition of 15 percent of the Company's common stock or 50 percent or more of its assets without prior consent of the Company, each right will also entitle the holder to purchase $130 worth of common stock of the Company for $65. Under certain circumstances, the Rights may be redeemed by the Company at a price of $.05 per right prior to becoming exercisable and in certain circumstances thereafter. The Rights expire on December 31, 1999, or earlier, in connection with certain Board-approved transactions.
Note 8: Income Taxes
The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement reported amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The components of the net deferred tax assets as of December 31 are as follows: ------------------------------------------------------------------------ (In thousands) 1994 1993 ------------------------------------------------------------------------ Deferred tax asset Reserve for loan losses $11,280 $10,321 State franchise taxes 1,318 676 Securities available for sale 1,293 - Deferred compensation 998 534 Real estate owned 2,135 2,742 Other 1,187 1,037 ------------------------------------------------------------------------ 18,211 15,310 Valuation allowance - - ------------------------------------------------------------------------ Total deferred tax asset 18,211 15,310
Deferred tax liability Net deferred loan costs 452 502 Fixed assets 1,076 1,164 Securities available for sale - 1,864 Other 23 148 ------------------------------------------------------------------------ Total deferred tax liability 1,551 3,678 ------------------------------------------------------------------------ Net deferred tax asset $16,660 $11,632 ========================================================================
The Company believes a valuation allowance is not needed to reduce the deferred tax asset because it is more likely than not that the deferred tax asset will be realized through recoverable taxes or future taxable income. The provisions for federal and state income taxes consist of amounts currently payable and amounts deferred which, for the years ended December 31, are as follows:
----------------------------------------------------------------- (In thousands) 1994 1993 1992 ----------------------------------------------------------------- Current income tax expense: Federal $ 8,693 $2,501 $6,977 State 4,045 2,195 3,130 ----------------------------------------------------------------- Total current 12,738 4,696 10,107 ----------------------------------------------------------------- Deferred income tax benefit: Federal (1,590) (646) (1,758) State (280) (617) (492) ----------------------------------------------------------------- Total deferred (1,870) (1,263) (2,250)
Adjustment of net deferred tax asset for enacted changes in tax rates: Federal - (304) - State - (90) - ----------------------------------------------------------------- Provision for income taxes $10,868 $3,039 $7,857 =================================================================
The provisions for income taxes differ from the provisions computed by applying the statutory federal income tax rate to income before taxes, as follows:
----------------------------------------------------------------- (In thousands) 1994 1993 1992 ----------------------------------------------------------------- Federal income taxes due at statutory rate $12,433 $4,248 $7,846 (Reductions) increases in income taxes resulting from: Interest not taxable for federal income tax purposes (3,362) (1,895) (1,735) State franchise taxes, net of federal income tax benefit 2,447 982 1,753 Deferred benefit and other (650) (296) (7) ----------------------------------------------------------------- Provision for income taxes $10,868 $3,039 $7,857 =================================================================
Note 9: Fair Value of Financial Instruments
The following fair values of financial instruments do not represent actual amounts that may be realized upon any sale or liquidation of the related assets or liabilities. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities. The fair values presented represent the Company's best estimate of fair value using the methodologies discussed below. The fair value of financial instruments which have a relatively short period of time between their origination and their expected realization was estimated using historical cost. The estimated fair value of such financial instruments at December 31, was:
--------------------------------------------------------------------------- (In thousands) 1994 1993 --------------------------------------------------------------------------- Cash and cash equivalents $ 112,401 $ 102,618 Money market assets 250 250 Interest and taxes receivable 34,777 28,799 Non-interest bearing and interest-bearing transaction and savings deposits 1,325,941 1,313,908 Funds purchased 133,218 69,064 Interest payable 3,167 2,700
The fair value at December 31, of the following financial instruments was estimated using quoted market prices:
-------------------------------------------------------------------------- (In thousands) 1994 1993 -------------------------------------------------------------------------- Investment securities available for sale $ 160,609 $ 168,819 Investment securities held to maturity 569,684 563,563 Trading account securities - 10
Loans were separated into two groups for valuation. Variable rate loans, except for those which have reached their maximum contractual rates, which reprice frequently with changes in market rates were valued using historical data. Fixed rate loans were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the $27,600,000 reserve for loan losses was applied against the estimated fair value to recognize future defaults of contractual cash flows. The estimated fair value of loans at December 31, was:
--------------------------------------------------------------------------- (In thousands) 1994 1993 --------------------------------------------------------------------------- Loans $1,054,768 $1,096,164
The fair value of time deposits and notes and mortgages payable was estimated by discounting future cash flows related to these financial instruments using current market rates for financial instruments with similar characteristics.
The estimated fair values at December 31, were:
-------------------------------------------------------------------------- (In thousands) 1994 1993 -------------------------------------------------------------------------- Time deposits $ 362,186 $ 420,475 Notes and mortgages payable 22,898 36,014
The estimated fair value of the Company's interest rate swaps, which are determined by dealer quotes and generally represent the amount that the Company would pay to terminate its swap contracts were $1,071,000 and $593,000, respectively, at December 31, 1994 and 1993.
Note 10: Interest Rate Risk Management
The Company considers the effects of various factors in implementing interest rate risk management activities, including the utilization of interest-rate swaps. The notional amounts of interest rate swaps outstanding were:
-------------------------------------------------------------------- (In thousands) 1994 1993 1992 -------------------------------------------------------------------- Balance, January 1, $110,000 $ 50,000 $75,000 Contracts entered - 60,000 50,000 Contracts matured (50,000) - (75,000) -------------------------------------------------------------------- Balance, December 31, $ 60,000 $110,000 $50,000 -------------------------------------------------------------------- Fair value, December 31, $ (1,071) $ (593) $ - ====================================================================
Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to the notional amounts. For the $60 million of interest rate swaps outstanding at December 31, 1994, comprised of two contracts with notional amounts of $30 million each, the Company pays a floating rate, based on the three-month London Interbank Offering Rate (LIBOR), and receives a weighted average fixed rate of 4.11 percent. The LIBOR rate has averaged 4.43 percent from the date these swaps were entered into through December 31, 1994. The Company is exposed to credit-related losses in the event of non-performance by the counterparty but does not expect this event to occur, as the Company deals only with highly rated counterparties. At December 31, 1994 and 1993, due to the loss position, no credit exposure existed in connection with the interest rate swaps. These swap contracts are scheduled to mature in August, 1995.
Note 11: Lease Commitments
Fifteen banking offices and three administrative service centers are owned and thirty-three banking offices and two support facilities are leased. Substantially all the leases contain multiple renewal options and provisions for rental increases, principally for cost of living index, property taxes and maintenance. The Company also leases certain pieces of equipment. Minimum future rental payments, net of sublease income, at December 31, 1994, are as follows:
(In thousands)
Year Amount -------------------------------------- 1995 $ 3,600 1996 2,933 1997 1,772 1998 1,262 1999 825 Thereafter 2,600 -------------------------------------- Total minimum lease payments $12,992 ======================================
Total rentals for premises and equipment net of sublease income included in non-interest expense were $3,129,000 in 1994, $3,862,000 in 1993 and $3,910,000 in 1992.
Note 12: Commitments and Contingent Liabilities
Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company's normal credit policies and collateral requirements. Unfunded loan commitments were $161.8 million at December 31, 1994.
Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers' short-term financing requirements and must meet the Company's normal credit policies and collateral requirements. Standby letters of credit outstanding totaled $6.5 million and $6.4 million at December 31, 1994 and 1993, respectively. The Company, because of the nature of its business, is subject to various threatened or filed legal cases. The Company, based on the advice of the legal counsel, does not expect such cases will have a material, adverse effect on its financial position or results of operations.
Note 13: Retirement Benefit Plans
The Company sponsors a defined benefit Retirement Plan covering substantially all of its salaried employees with one or more years of service. The Company's policy is to expense costs as they accrue as determined by the Projected Unit Cost method. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes.
The following table sets forth the Retirement Plan's funded status as of December 31 and the pension cost for the years ended December 31:
-------------------------------------------------------------------------- (In thousands) 1994 1993 -------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ (8,870) $(11,245) -------------------------------------------------------------------------- Accumulated benefit obligation $(10,120) $(11,430) -------------------------------------------------------------------------- Projected benefit obligation $(10,331) $(11,612) Plan assets at fair market value 10,430 11,677 -------------------------------------------------------------------------- Funded status - projected benefit obligation less than plan assets $ 99 $ 65 ========================================================================== Comprised of: Prepaid pension cost $ 69 $ 22 Unrecognized net (loss) gain 27 (75) Unrecognized prior service cost 362 529 Unrecognized net obligation, net of amortization (359) (411) -------------------------------------------------------------------------- Total $ 99 $ 65 ========================================================================== -------------------------------------------------------------------------- (In thousands) 1994 1993 -------------------------------------------------------------------------- Net pension costs includes the following components: Service cost during the period $ 372 $ 364 Interest cost on projected benefit obligation 776 744 Actual return on plan assets (68) (1,012) Net amortization and deferral (775) 64 -------------------------------------------------------------------------- Net periodic pension cost $ 305 $ 160 ==========================================================================
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.25 percent and 4.50 percent, respectively, at December 31, 1994 and 6.75 percent and 4.50 percent, respectively, at December 31, 1993. The expected long-term rate of return on plan assets in 1994 and 1993 was 7 percent.
Effective January 1, 1992, the Company adopted a defined contribution Deferred Profit Sharing Plan covering substantially all of its salaried employees with one or more years of service. Participant deferred profit sharing account balances offset benefits accrued under the Retirement Plan which was amended effective January 1, 1992 to coordinate benefits with the Deferred Profit Sharing Plan. The coordination of benefits results in the Retirement Plan benefit formula establishing the minimum value of participant retirement benefits which, if not provided by the Deferred Profit Sharing Plan, are guaranteed by the Retirement Plan.
The costs charged to non-interest expense related to benefits provided by the Retirement Plan and the Deferred Profit Sharing Plan were $1,327,000 in 1994, $1,160,000 in 1993 and $1,037,000 in 1992.
In addition to the Retirement Plan and the Deferred Profit Sharing Plan, all salaried employees are eligible to participate in the voluntary Tax Deferred Savings/Retirement Plan (ESOP) upon completion of a 90-day introductory period. This plan allows employees to defer, on a pretax basis, a portion of their salaries as contributions to the plan. Participants may invest in five funds, including Westamerica Bancorporation Common Stock Fund. The matching contributions charged to operating expense were $477,000 in 1994, $482,000 in 1993 and $462,000 in 1992.
Effective December 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", ("SFAS No. 106"). Adoption of SFAS No. 106 required a change from the cash method to an actuarial based accrual method of accounting for postretirement benefits other than pensions. The Company offers continuation of group insurance coverage to employees electing early retirement, as defined by the Retirement Plan, for the period from the date of early retirement until age sixty five. The Company contributes an amount toward early retirees' insurance premiums which is fixed at the time of early retirement. The Company reimburses Medicare Part B premiums for all retirees over age sixty five, as defined by the Retirement Plan.
The following table sets forth the net periodic postretirement benefit cost for the years ended December 31 and the funded status of the plan at December 31:
---------------------------------------------------------------------- (In thousands) 1994 1993 ---------------------------------------------------------------------- Service cost $ - $ - Interest cost 105 107 Actual return on plan assets - - Amortization of unrecognized transition obligation 61 61 Other, net - - ---------------------------------------------------------------------- Net periodic cost $ 166 $ 168 ---------------------------------------------------------------------- Accumulated postretirement benefit obligation attributable to: Retirees $1,140 $1,130 Fully eligible participants 239 265 Other 188 158 ---------------------------------------------------------------------- Total $1,567 $1,553 ====================================================================== Fair value of plan assets $ - $ -
Accumulated postretirement benefit obligation in excess of plan assets 1,567 $1,553
Comprised of: Unrecognized prior service cost - - Unrecognized net gain (loss) - - Unrecognized transition obligation 1,407 1,471 Recognized postretirement obligation 160 82 ---------------------------------------------------------------------- Total $1,567 $1,553 ======================================================================
The discount rate used in measuring the accumulated postretirement benefit obligation was 7.25 percent at December 31, 1994 and 6.75 percent at December 31, 1993. The assumed health care cost trend rate used to measure the expected cost of benefits covered by the plan was 8 percent for 1995 and declined steadily to an ultimate trend rate of 4 percent beginning in 1999. The effect of a one percentage point increase on the assumed health care cost trend for each future year would increase the aggregate of the service cost components of the 1994 and 1993 net periodic cost by $87,000 and $73,000, respectively, and increase the accumulated postretirement benefit obligation at December 31, 1994 and 1993 by $255,000 and $204,000, respectively.
Note 14: Related Party Transactions
Certain directors and executive officers of the Company and/or its subsidiaries were loan customers of the Banks during 1994 and 1993. All such loans were made in the ordinary course of business on normal credit terms, including interest rate and collateral requirements. No related party loans represent more than normal risk of collection. Such loans were $3,108,000 and $5,238,000 at December 31, 1994 and 1993, respectively.
Note 15: Restrictions
Payment of dividends to the Company by Westamerica Bank, the largest subsidiary bank, is limited under regulations for Federal Reserve member banks. The amount that can be paid in any calendar year, without prior approval from regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits of the preceding two calendar years less dividends declared. Under this regulation, Westamerica Bank was not restricted as to the payment of $11.4 million in dividends to the Company as of December 31, 1994. During 1992 and 1993, Napa Valley Bank, a banking subsidiary, was operating under a regulatory order which disallowed payment of dividends to the Company unless it reduced the level of problem loans, liquidated or reserved adequately against the real estate investment in its subsidiary company, and strengthened its loan loss reserve. Napa Valley Bank has complied with all conditions of the regulatory order, which was removed by the regulators early in 1994. Napa Valley Bank began to pay dividends to the Company in the fourth quarter of 1994. Bank of Lake County, another subsidiary bank, started to pay dividends to the Company in the third quarter of 1994. Payment of dividends by the Company is also restricted under the terms of the note agreements as discussed in Note 6. Under the most restrictive of these agreements, $24.4 million was available for payment of dividends as of December 31, 1994. The Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of its reservable deposits. The Banks' daily average on deposit at the Federal Reserve Bank was $43.0 million in 1994 and $40.4 million in 1993.
Note 16: Westamerica Bancorporation (Parent Company Only)
Statements of Income (In thousands) ----------------------------------------------------------------------------- Years ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------- Dividends from subsidiaries $19,680 $16,671 $ 8,630 Interest from subsidiaries 101 315 61 Other income 3,752 2,781 1,158 ----------------------------------------------------------------------------- Total income 23,533 19,767 9,849 ----------------------------------------------------------------------------- Interest on borrowings 1,029 1,958 2,434 Salaries and benefits 5,529 4,526 782 Other non-interest expense 2,927 5,464 3,451 ----------------------------------------------------------------------------- Total expenses 9,485 11,948 6,667 ----------------------------------------------------------------------------- Income before income tax benefit and equity in undistributed income of subsidiaries 14,048 7,819 3,182 Income tax benefit 2,463 3,478 1,890 Equity in undistributed income (loss) of subsidiaries 8,162 (1,842) 10,150 ----------------------------------------------------------------------------- Net income $24,673 $ 9,455 $15,222 =============================================================================
Balance Sheets (In thousands) ----------------------------------------------------------------------- Years ended December 31, 1994 1993 ----------------------------------------------------------------------- Assets Cash and cash equivalents $ 4,526 $ 4,790 Investment securities held to maturity 6,750 9,250 Loans 148 149 Investment in subsidiaries 158,168 154,257 Premises and equipment 55 29 Accounts receivable from subsidiaries 156 65 Other assets 5,741 2,056 ----------------------------------------------------------------------- Total assets $175,544 $170,596 ======================================================================= Liabilities Long-term debt $ 5,000 $ 14,796 Other liabilities 4,339 3,353 ----------------------------------------------------------------------- Total liabilities 9,339 18,149 Shareholders' equity 166,205 152,447 ----------------------------------------------------------------------- Total liabilities and shareholders' equity $175,544 $170,596 =======================================================================
Statements of Cash Flows (In thousands) --------------------------------------------------------------------------- Years ended December 31, 1994 1993 1992 --------------------------------------------------------------------------- Operating Activities Net income $ 24,673 $ 9,455 $ 15,222 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 65 108 67 Undistributed earnings (loss) of affiliates (8,162) 607 (10,150) Increase in equity in affiliates - - (1,797) (Increase) decrease in receivables from affiliates (91) 197 1,020 Net change in income taxes (1,740) 60 2,633 (Increase) decrease in other assets (2,295) 1,183 (1,394) Increase in other liabilities 1,448 1,583 301 Gain on sale of Sonoma Valley Bank - (668) - Net gain on sale of land - - 43 --------------------------------------------------------------------------- Net cash provided by operating activities 13,898 12,525 5,945 --------------------------------------------------------------------------- Investing Activities Purchases of premises and equipment (92) - (2,189) Net change in land held for sale - (800) - Net change in loan balances 1 (149) - Investment in subsidiaries (140) (8,639) (485) Purchase of investment securities (4,500) (9,700) (13,991) Proceeds from maturities of investment securities 7,000 14,191 10,500 Proceeds from sale of premises and equipment - 2,369 2,149 Proceeds from sale of Sonoma Valley Bank - 2,733 - --------------------------------------------------------------------------- Net cash provided by (used in) investing activities 2,269 5 (4,016) --------------------------------------------------------------------------- Financing Activities Net decrease in short-term debt - - (656) Principal reductions of long-term debt (9,796) (6,260) (2,611) Proceeds from issuance of note payable to affiliate - - 1,368 Proceeds from exercise of stock options 1,025 1,446 2,139 Retirement of stock (2,488) - - Unrealized loss on marketable equity securities - - 9 Dividends paid (5,172) (4,655) (2,987) --------------------------------------------------------------------------- Net cash used in financing activities (16,431) (9,469) (2,738) --------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (264) 3,061 (809) Cash and cash equivalents at prior year end 4,790 1,729 2,538 --------------------------------------------------------------------------- Cash and cash equivalents at December 31, $ 4,526 $ 4,790 $ 1,729 ===========================================================================
Note 17: Quarterly Financial Information (Unaudited)