Item 1 Business 1 Item 2
ITEM 2. Properties
Branch Offices and Facilities
The Banks are engaged in the banking business through 90 offices in 22 counties in Northern and Central California including eleven offices in Marin County, eleven in Fresno County, nine in Sonoma County, seven in Napa County, six in Solano County, six in Kern County, five in Stanislaus County, five in Contra Costa County, four in Lake County, four in San Luis Obispo County, three in Mendocino County, three in Sacramento County, two in Nevada County, two in
Placer County, two in Tulare County, two in Tuolumne County, two in Alameda County, one in San Francisco County, one in Kern County, one in Madera County, one in Merced County, one in Yolo County and one in Kings County. All offices are constructed and equipped to meet prescribed security requirements.
The Company owns 37 branch office locations and one administrative building and leases 53 banking offices. Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance.
ITEM 3.
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.
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 1999.
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 the low prices for the common stock, for each quarter, as reported by NASDAQ: ============================================================ 1999: High Low - ------------------------------------------------------------ First quarter $37.50 $31.63 Second quarter 37.13 30.00 Third quarter 36.50 28.94 Fourth quarter 35.13 26.63
1998:
First quarter $35.25 $30.67 Second quarter 36.38 28.50 Third quarter 33.63 23.63 Fourth quarter 37.25 23.88 ============================================================
As of December 31, 1999, there were 8,710 shareholders of record of the Company's common stock.
The Company has paid cash dividends on its common stock in every quarter since its formation in 1972, and it is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and its subsidiaries. As of December 31, 1999, $136.7 million was available for payment of dividends by the Company to its shareholders, under applicable laws and regulations.
See Note 17 to the consolidated financial statements included in this report for additional information regarding the amount of cash dividends declared and paid on common stock for the two most recent fiscal years.
As discussed in Note 7 to the consolidated financial statements, in December 1986, the Company declared a dividend distribution of one common share purchase right (the "Right") for each outstanding share of common stock.
The terms of the Rights were amended and restated on September 28, 1989, on May 25, 1992 and on March 23, 1995. In addition, the Board of Directors of the Company approved a further amendment and restatement of the Shareholder Rights Plan on October 28, 1999, to become effective on November 19, 1999 and extend its maturity until December 31, 2004. The new amended plan is very similar in purpose and effect to the plan as it existed prior to this amendment, aimed at helping the Board of Directors to maximize shareholder value in the event of a change of control of the Company and otherwise resist actions that the Board considers likely to injure the Company of its shareholders. In addition to extending the maturity date of the plan an additional five years, the other material changes to be reflected in the 1999 Rights Amendment include: (1) an increase in the exercise price to $75.00 per share; (2) a decrease in the redemption price of each Right to $.001; (3) a reduction in the amount of securities required to be acquired for a person or entity to become an Acquiring Person, thus triggering the shareholders' rights from 15 percent to 10 percent; and (4) the replacement of the Rights Agent to Harris Trust and Savings Bank.
The Westamerica Rights are not exercisable until Distribution Date, defined as the earlier to occur of (I) a public announcement that, without the prior consent of the Company, a Person (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of securities having 10 percent or more of the voting power of all outstanding voting securities of the Company, or (ii) ten days (unless such date is extended by the Board of Directors) following the commencement of (or a public announcement of an intention to make) a tender offer or exchange offer which would result in any Person or group of related Persons becoming an Acquiring Person (the earlier of such dates being called the "Distribution Date"). Until the Distribution Date the Rights will be evidenced, with respect to any of the Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate together with this Amended and Restated Summary of Rights. The 1999 Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with Common Stock certificates.
ITEM 6.
ITEM 6. Selected Financial Data
WESTAMERICA BANCORPORATION FINANCIAL SUMMARY
* Fully taxable equivalent
Item 7.
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 on 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risk and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry increases significantly; changes in the interest rate environment reduces margins; general economic conditions, either nationally or regionally, are less favorable than expected resulting in, among other things, a deterioration in the credit quality and an increase in the allowance 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 risks factors discussed elsewhere in this report.
The following discussion addresses information pertaining to the financial condition and results of operations of Westamerica Bancorporation and Subsidiaries (the "Company") that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes found on pages 49 through 76, as well as with the other information presented throughout the report.
NET INCOME
The Company achieved earnings of $76.1 million in 1999, representing a 4 percent increase from the $73.4 million earned in 1998 and 58 percent higher than 1997 earnings of $48.1 million.
Components of Net Income
* Fully taxable equivalent (FTE)
Diluted earnings per share in 1999 were $1.94, compared to $1.73 and $1.10 in 1998 and 1997, respectively. Earnings in 1999 were favorably affected, compared to 1998, by increased non-interest income, a reduction in non-interest expense reflective of continued expense controls, a lower loan loss provision in recognition of improvements in the credit quality of the loan portfolio, and a slight increase in net interest income primarily due to higher average earning-asset balances partially offset by lower net interest margin. During 1998, the Company benefited from lower non-interest expense reflecting cost controls exercised after the ValliCorp Holdings, Inc. merger (the "Merger"), a lower loan loss provision resulting from improved credit quality and lower net credit losses, and higher non-interest income. Prior year non-interest expense included approximately $18.8 million ($12.8 million after tax) in charges associated with the Merger effected on April 12, 1997. Lower net interest income was primarily the result of lower earning-asset yields in part offset by a decrease in funding costs.
The Company's return on average total assets was 1.99 percent in 1999, compared to 1.94 percent and 1.28 percent in 1998 and 1997, respectively. Return on average equity in 1999 was 23.31 percent, compared to 19.48 percent and 12.71 percent 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 1999 increased $200 thousand from 1998 to $191.6 million. Comparing 1998 to 1997, net interest income (FTE) decreased $800 thousand.
Components of Net Interest Income
Interest income (FTE) decreased $8.0 million from 1998 to 1999, primarily due to a 33 basis point decrease in earning-asset yields, a combination of 47 basis points lower loan yields and a 4 basis points decrease in investments yields. These changes were reflective of a general decline in market rates, resulting in all categories of loan and investment securities yields being lower than the prior year. Partially offsetting these changes, earning-asset average balances increased $47.1 million from 1998, with loan and investment securities average balances increasing $30.3 million and $17.5 million, respectively, from 1998. The increase in loan balances was primarily concentrated in targeted commercial credits with real estate collateral and automobile dealer paper, partially offset by decreases in commercial,
residential real estate and other consumer loans, including revolving lines of credit. The increase in investment securities portfolio balances was comprised of higher U.S. agency, tax-free state and municipal securities as well as corporate securities, partially offset by decreases in U.S. Treasury and participation certificates average balances. The revenue decrease in 1999 was more than offset by a $8.2 million decrease in interest expense. This was the result of a decrease of 36 basis points in rates paid on interest-bearing liabilities combined with a $65.7 million increase in the average balance of interest-free demand deposits, in part offset by a $36.4 million increase in the interest-bearing liabilities average balances.
Interest income (FTE) in 1998 decreased $2.2 million from 1997, primarily due to a 34 basis point decrease in loan yields, reflecting the general interest rate environment, partially offset by an increase of 9 basis points in investment yields, resulting in a combined decrease of 18 basis points in earning-asset yields. The effect of this decline was in part offset by a $50.9 million increase in average balances, with loans and investment securities growing $14.1 million and $36.8 million, respectively, from 1997 levels. The increase in loans was concentrated in targeted commercial and residential real estate credits, and the increase in investment balances was primarily due to increases in tax-free and corporate securities. The decrease in interest income during 1998 was partially offset by a $1.4 million reduction in interest expense. This decrease was primarily due to a reduction of 13 basis points in rates paid on deposits combined with an $11.0 million increase in the average balance of non-interest bearing demand deposits, in part offset by a $19.8 million increase in the average balance of interest-bearing liabilities.
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
Distribution of assets, liabilities and shareholders' equity. Yields/rates and interest margin
Distribution of assets, liabilities and shareholders' equity. Yields/rates and interest margin
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, 1999 compared with 1998 - --------------------------------------------------------------------- Volume Rate Total - --------------------------------------------------------------------- (In thousands) Increase (decrease) in interest and fee income: MMkt. assets and funds sold ($19) ($19) ($38) Trading account securities 0 0 0 Investment securities (1) Taxable 527 (2,075) (1,548) Tax-exempt 674 1,431 2,105
Loans: Commercial (1) 6,992 (9,311) (2,319) Real estate construction (824) (443) (1,267) Real estate residential (2,341) (1,053) (3,394) Consumer 542 (2,027) (1,485) - --------------------------------------------------------------------- Total loans (1) 4,369 (12,834) (8,465) - --------------------------------------------------------------------- Total increase (decrease) in interest and fee income (1) 5,551 (13,497) (7,946) - --------------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (1,051) (5,855) (6,906) Time less than $ 100,000 (1,337) (2,397) (3,734) Time $ 100,000 or more 1,085 (886) 199 - --------------------------------------------------------------------- Total interest-bearing (1,303) (9,138) (10,441) Funds purchased 3,386 (771) 2,615 Notes and mortgages payable (393) 10 (383) - --------------------------------------------------------------------- Total increase (decrease) in interest expense 1,690 (9,899) (8,209) - --------------------------------------------------------------------- Increase (decrease) in net interest income (1) $3,861 ($3,598) $263 ===================================================================== (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
Rate and volume variances. - --------------------------------------------------------------------- For the years ended December 31, 1998 compared with 1997 - --------------------------------------------------------------------- Volume Rate Total - --------------------------------------------------------------------- (In thousands) Increase (decrease) in interest and fee income: MMkt. assets and funds sold ($1,298) ($295) ($1,593) Trading account securities 0 0 0 Investment securities (1) Taxable 291 1,589 1,880 Tax-exempt 4,212 (1,392) 2,820
Loans: Commercial (1) 4,850 (5,065) (215) Real estate construction (3,048) 751 (2,297) Real estate residential 2,050 (1,459) 591 Consumer (2,678) (738) (3,416) - --------------------------------------------------------------------- Total loans (1) 1,174 (6,511) (5,337) - --------------------------------------------------------------------- Total increase (decrease) in interest and fee income (1) 4,379 (6,609) (2,230) - --------------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (1,585) (2,893) (4,478) Time less than $ 100,000 (2,085) (500) (2,585) Time $ 100,000 or more 2,873 (723) 2,150 - --------------------------------------------------------------------- Total interest-bearing (797) (4,116) (4,913) Funds purchased 3,885 (18) 3,867 Notes and mortgages payable (378) 35 (343) - --------------------------------------------------------------------- Total increase (decrease) in interest expense 2,710 (4,099) (1,389) - --------------------------------------------------------------------- Increase (decrease) in net interest income (1) $1,669 ($2,510) ($841) ===================================================================== (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.8 million for 1999, compared to $5.2 million in 1998 and $7.6 million in 1997. The reductions in the provision in 1999 and 1998 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. 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 105 months at December 31, 1999 and, on the same date, those investments included $212.3 million in fixed rate and $24.8 million in adjustable rate securities.
Investment securities available for sale are generally used to supplement the Banks' liquidity. Unrealized net gains and losses on these securities are recorded as an adjustment to equity, net of taxes, and are not reflected in the current earnings of the Company. If a security is sold, any gain or loss is recorded as a charge to earnings and the equity adjustment is reversed. At December 31, 1999, the Company held $982.3 million classified as investments available for sale. At December 31, 1999, an unrealized loss of $4.0 million net of taxes of $2.9 million related to these securities, was held in shareholders' equity.
The Company had no trading securities at December 31, 1999.
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:
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, 1999. 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
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:
The following table sets forth the relative maturities and yields of the Company's held-to-maturity securities at December 31, 1999. 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
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:
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, 1999. Balances exclude loans to individuals and residential mortgages totaling $767.7 million. These types of loans are typically paid in monthly installments over a number of years.
COMMITMENTS AND LETTERS OF CREDIT
It is not the policy of the Company to issue formal commitments on lines of credit except to a limited number of well established and financially responsible local commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of Letters of Credit to facilitate the customers' particular business transactions. Commitment fees generally are not charged except where Letters of Credit are involved. Commitments and lines of credit typically mature within one year. For further information, see Note 12 to the consolidated financial statements.
ASSET QUALITY
The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with higher credit risk and increase diversification of earning assets. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all non-performing assets and potential problem loans, and receive an elevated level of attention to ensure collection.
The following summarizes the Company's classified assets for the periods indicated: - --------------------------------------------------------------------- At December 31, 1999 1998 - --------------------------------------------------------------------- (In millions) Classified loans $41.3 $50.8 Other classified assets 3.3 4.3 - --------------------------------------------------------------------- Total classified assets $44.6 $55.1 =====================================================================
Classified loans at December 31, 1999 decreased $9.5 million or 19 percent to $41.3 million from December 31, 1998, reflecting the implementation of the Company's active work-out standards and charge-offs. Other classified assets decreased $1.0 million from prior year, due to sales and write-downs of properties acquired in satisfaction of debt ("other real estate owned") partially offset by new foreclosures on loans with real estate collateral.
Non-performing assets
Non-performing assets include non-accrual loans, loans 90 or more days past due and still accruing and other real estate owned. Loans are placed on non-accrual status upon reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on non-accrual status is charged against interest income. In addition, some loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on non-accrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified by Management as "performing non-accrual" and are included in total non-performing assets. When the ability to fully collect non-accrual loan principal is in doubt, 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 interest payments received after that point are recorded as interest income on a cash basis. Performing non-accrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal.
The following table summarizes the non-performing assets of the Company for the periods indicated:
Performing non-accrual loans increased $1.7 million to $3.5 million at December 31, 1999 while non-performing non-accrual loans decreased $1.3 million to $5.5 million during the same period, primarily due to the sales, payoffs and foreclosures of commercial and commercial real estate loans. The $1.0 million decrease in other real estate owned balances from December 31, 1998 was due to write-downs and liquidations net of foreclosures on real estate property acquired in satisfaction of debt. The decrease in non-performing loans from 1997 to 1998 was primarily due to sales, payoffs and foreclosures of commercial loans with real estate collateral acquired through the Merger. The decrease in other real estate owned balances at December 31, 1998 from December 31, 1997 was also due to write-downs and liquidations net of foreclosures.
The amount of gross interest income that would have been recorded for non-accrual loans if all such loans had been current in accordance with their original terms while outstanding during the period, was $751 thousand in 1999, $855 thousand in 1998 and $1.6 million in 1997. The amount of interest income that was recognized on non-accrual loans from cash payments made in 1999, 1998 and 1997 was $473 thousand, $573 thousand and $462 thousand, respectively. Cash payments received, which were applied against the book balance of performing and non-performing non-accrual loans outstanding at December 31, 1999, totaled approximately $356 thousand, compared to $952 thousand and $573 thousand in 1998 and 1997, respectively.
The overall credit quality of the loan portfolio continues to be strong; however, the total non-performing assets could fluctuate from year to year. The performance of any individual loan can be impacted by external factors such as the interest rate environment or factors particular to the borrower. The Company expects to maintain non-performing asset levels; however, no assurance can be given that additional increases in non-accrual loans will not occur in future periods.
Loan loss experience
The Company's allowance for loan losses is maintained at a level estimated to be adequate to provide for losses that can be reasonably anticipated based upon specific conditions, credit loss experience, the amount of past due, non-performing loans and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. The allowance is allocated to segments of the loan portfolio based in part on quantitative analyses of historical credit loss experience, in which criticized and classified loan balances are analyzed using a linear regression model to determine standard allocation percentages. The results of this analysis are applied to current criticized and classified loan balances to allocate the allowance to the respective segments of the loan portfolio. Loans with similar characteristics not usually criticized using regulatory guidelines due to their small balances and numerous accounts are analyzed based on the historical rate of net losses and delinquency trends grouped by the number of days the payments on those loans are delinquent. A portion of the allowance is also allocated to impaired loans. Management considers the $51.6 million allowance for loan losses, which constituted 2.22 percent of total loans at December 31, 1999, to be adequate as a reserve against inherent losses. However, while the Company's policy is to charge off in the current period those loans on which the loss is considered probable, the risk exists of future losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future allowance levels.
The following table summarizes the loan loss experience of the Company for the periods indicated:
Allocation of the Allowance for Loan Losses
The following table presents the allocation of the allowance for loan losses as of December 31 for the years indicated:
The Company considers a loan to be impaired when, based on current information and events, it is "probable" that it will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (I) the present value of the expected cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. In measuring impairment, the Company reviews all commercial and construction loans classified "Substandard" and "Doubtful" that meet materiality thresholds of $250 thousand and $100 thousand, respectively. The Company considers classified loans below the established thresholds to represent immaterial loss risk. All loans classified as "Loss" are considered impaired. Commercial and construction loans that are not classified, and large groups of smaller-balance homogeneous loans such as installment, personal revolving credit, residential real estate and student loans, are evaluated collectively for impairment under the Company's standard loan loss reserve methodology. The Company generally identifies loans to be reported as impaired when such loans are in non-accrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan.
The following summarizes the Company's impaired loans for the periods indicated: - --------------------------------------------------------------------- At December 31, 1999 1998 - --------------------------------------------------------------------- (In thousands) Non-accrual loans $8,960 $8,532 Other 6,146 6,504 - --------------------------------------------------------------------- Total impaired loans $15,106 $15,036 ===================================================================== Specific reserves $2,105 $1,255 =====================================================================
The $6.1 million balance in loans classified as impaired as of December 31, 1999, other than non-accrual loans, is due to two commercial real estate loans, with combined principal outstanding balances of $5.1 million, having collateral exposure that may preclude ultimate full repayment, and one credit classified as a troubled debt restructuring with principal outstanding of $1.0 million. Payments on these credits were current as of December 31, 1999.
The average balance of the Company's impaired loans for the year ended December 31, 1999 was $15.5 million compared to $15.9 million in 1998. The amount of that recorded investment for which there is no related allowance for credit losses was $0. In general, the Company does not recognize any interest income on troubled debt restructurings or loans that are classified as non-accrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company's recorded investment in such loans is deemed collectible.
ASSET AND LIABILITY MANAGEMENT
The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk.
In adjusting the Company's asset/liability position, Management attempts to manage interest rate risk while enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, Management may increase the Company's interest rate risk position in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long- and short-term interest rates.
The primary analytical tool used by the Company to quantify interest rate risk is a simulation model to project changes in net interest income ("NII") that result from forecast changes in interest rates. This analysis calculates the difference between a NII forecast over a 12-month period using a flat interest rate scenario and a NII forecast using a rising (or falling) rate scenario, where the Federal Funds rate, serving as a "driver," is made to rise (or fall) evenly by 200 basis points over the 12-month forecast interval triggering a response in the other rates. Company policy requires that such simulated changes in NII should always be less than 10 percent or steps must be taken to reduce interest rate risk. According to the same policy, if the simulated changes in NII reach 7.5 percent, a closer inspection of the risk will be put in place to determine what steps could be taken to control risk.
The following table summarizes the simulated change in NII, based on the 12-month period ending December 31, 2000: - --------------------------------------------------------- Changes in Estimated Increase Interest (Decrease) in NII Rates Estimated ----------------------- (Basis Points) NII Amount Amount Percent - --------------------------------------------------------- (Dollars in millions) +200 $189.0 ($4.0) -2.1% -- 193.0 -- -- - -200 195.1 2.1 1.1% =========================================================
The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company's Board of Directors.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange risk, equity price risk and commodity price risk, do not arise in the normal course of the Company's business activities.
Interest rate sensitivity analysis
The following table summarizes the interest rate sensitivity gaps inherent in the Company's asset and liability portfolios at December 31, 1999:
The repricing terms of the table above do not represent contractual principal maturity, but rather principal cash flows available for repricing. The interest rate sensitivity report shown above categorizes interest-bearing transaction deposits and savings deposits as repricing within 30 days. However, it is the experience of Management that the historical interest rate volatility of these interest-bearing transaction and savings deposits can be similar to liabilities with longer repricing dates, depending on market conditions. Moreover, the degree to which these deposits respond to changes in money market rates usually is less than the response of interest-rate sensitivity loans. These factors cause the cumulative net liability position shown above to indicate a much greater degree of liability sensitivity than Management believes really exists based on the additional analysis previously discussed.
Liquidity
The principal sources of asset liquidity are marketable investment securities available for sale. At December 31, 1999, investment securities available for sale totaled $982.3 million. In addition, the Company generated significant liquidity from its operating activities. The Company's profitability in 1999, 1998 and 1997 generated substantial cash flows, included in the total provided from operations, of $95.9 million, $63.3 million and $78.7 million, respectively. Additional cash flows may be provided by financing activities, primarily the acceptance of customer deposits and short- and long-term borrowings from banks.
During 1999, the effect of the Company's stock repurchase program and dividends paid to shareholders of $100.2 million and $25.6 million, respectively, in addition to a $123.7 million decrease in customers' deposits and the repayment of $6.0 million in long-term debt and debt financing, was offset by an increase of $258.7 million in short-term borrowings. The combination of these factors resulted in a total of $7.8 million in net cash provided by financing activities during 1999. Conversely, during 1998, customers' deposits increased $110.5 million and stock issued primarily for stock option exercises totaled $12.5 million, but these cash inflows were offset by cash used by the Company for its share repurchase program and other retirement of stock activities, totaling $104.8 million, dividends paid to the Company's shareholders for $21.9 million and reductions in short-term borrowings and debt financing in the amounts of $61.2 million and $5.0 million, respectively. During 1997, decreases in deposits of $150.2 million, repurchases and retirements of the Company's common stock of $35.6 and dividends paid to shareholders and retirement of repayments of notes payable and debt financing of $13.4 million and $6.4 million, respectively, were partially offset by a $97.4 million increase in short-term borrowings. These were the major factors affecting net cash flows used in financing activities of $69.9 million and $91.3 million, respectively, for the years 1998 and 1997.
The Company uses cash to make investments in loans and in investment securities. Net disbursements of loans were $29.7 million in 1999 and, in addition, during 1999, the Company increased by $47.5 million its investment securities portfolio, primarily in U.S. agencies and municipal securities, partially offset by decreases in U.S. Treasury and asset-backed securities. Net disbursements of loans were $42.4 million in 1998, compared to net repayments of loan balances of $9.1 million in 1997. As a result of the increase in loan volume in 1998, the Company reduced its investment in securities by $23.4 million in 1998. However, the intention of the Company is to increase loan volume without jeopardizing credit quality; this was the primary reason for investing excess cash flows in lower-risk investment securities in 1997, which increased $106.2 million during that year.
The Company anticipates increasing its cash levels through the end of 2000 mainly due to increased profitability and retained earnings. For the same period, it is anticipated that the investment securities portfolio and demand for loans will continue to increase moderately. The growth in deposit balances is expected to follow the anticipated growth in loan and investment balances through the end of 2000.
Line of credit
On July 31, 1998, the Company entered into an agreement with a well-established financial institution, establishing a line of credit for general corporate purposes including the repurchase of its stock. The line of credit has a one-year term and an available commitment amount ranging from $60 million, during the first nine months, reduced by $7.5 million during each of the following three months to $37.5 million. The interest rate on this line of credit is set by the lender based on various factors, including costs and desired return, general economic conditions and other factors. During the third quarter of 1999, the Company elected to cancel this line of credit, replacing this available source of cash inflow with increased cash dividends from its affiliates.
CAPITAL RESOURCES
The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company's capital position represents the level of capital available to support continued operations and expansion.
Since the beginning of 1994 and through December 31, 1999, the Board of Directors of the Company has authorized the repurchase of 5.3 million shares of the Company's common stock from time to time, subject to appropriate regulatory and other accounting requirements. The Company acquired 1.0 million shares of its common stock in the open market during 1999, 996 thousand in 1998, 1.0 million in 1997, and 1.2 million, 721 thousand and 93 thousand in 1996, 1995 and 1994, respectively. These repurchases were made periodically in the open market with the intention to lessen the dilutive impact of issuing new shares to meet stock performance, option plans, acquisitions and other requirements.
In addition to these systematic repurchases, a new plan to repurchase 1.75 million additional shares of the Company's common stock was approved by the Board of Directors on August 26, 1999. This program supercedes the authorization of repurchasing 3.0 million additional shares of the Company's common stock approved by the Board of Directors on June 25, 1998. The Company's strong capital position and healthy profitability contributed to the initiation of these programs, which were being implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to these programs, the Company repurchased 1.7 million and 2.1 million shares of its common stock during 1999 and 1998, respectively. The average price of these repurchases were $33 and $30 per share, respectively, for 1999 and 1998.
The Company's primary capital resource is shareholders' equity, which decreased $68.0 million or 18 percent from the previous year end and decreased $106.6 million or 26 percent from December 31, 1997. The ratio of total risk-based capital to risk-adjusted assets was 11.75 percent at December 31, 1999, compared to 13.79 percent at December 31, 1998. Tier I risk-based capital to risk-adjusted assets was 9.82 percent at December 31, 1999, compared to 11.87 percent at December 31, 1998.
Capital to Risk-Adjusted Assets - --------------------------------------------------------------------- Minimum Regulatory Capital At December 31, 1999 1998 Requirements - --------------------------------------------------------------------- Tier I Capital 9.82% 11.87% 4.00% Total Capital 11.75% 13.79% 8.00% Leverage ratio 7.48% 9.39% 4.00% =====================================================================
The risk-based capital ratios declined in 1999 mainly due to reductions in equity capital resulting primarily from share repurchase programs. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. All ratios are in excess of the regulatory definition of "well capitalized."
FINANCIAL RATIOS
The following table shows key financial ratios for the periods indicated:
DEPOSIT CATEGORIES
The Company primarily attracts deposits from local businesses and professionals, as well as through retail certificates of deposit, savings and checking accounts.
The following table summarizes the Company's average daily amount of deposits and the rates paid for the periods indicated:
* Rate is computed based on interest-bearing deposits - --------------------------------------------------------------------- - --------------------------------------------------------------------- Percentage Average of Total Balance Deposits Rate * - --------------------------------------------------------------------- (Dollars in thousands) Non-interest bearing demand $781,001 25.0% --% Interest bearing: Transaction 548,139 17.6% 1.22% Savings 985,800 31.6% 2.84% Time less than $100 thousand 479,692 15.4% 5.09% Time $100 thousand or more 323,840 10.4% 5.28% - --------------------------------------------------------------------- Total $3,118,472 100.00% 3.26% ===================================================================== * Rate is computed based on interest-bearing deposits
In 1999, total average deposits increased $29.6 million or 1 percent from 1998 primarily due to aggressive policies in place resulting in a combined increase of $46.9 million in demand deposits and interest-bearing transaction accounts. (The increase of $65.7 million in non-interest bearing demand deposits was partially offset by a $18.8 million decrease in interest-bearing transaction accounts primarily due to the transfer, during the third quarter of 1999, of certain interest-bearing transaction deposits into the non interest-bearing category). In addition, to compensate the combined total year-to-year balance runoff of $61.6 million in savings account and retail certificates of deposit balances, time certificates of deposit of $100 thousand or more increased $44.2 million or 12 percent from 1998.
In 1998, total average deposits decreased 1 percent from 1997 primarily due to decreases in savings and retail certificates of deposits as a result of the anticipated runoff of business reflective of market conditions. However, to counteract this effect, time certificates of deposit of $100 thousand or more increased 18 percent, and aggressive policies in place resulted in a 1 percent increase in the average balance of non-interest bearing and transaction demand accounts.
The following sets forth, by time remaining to maturity, the Company's domestic time deposits in amounts of $100 thousand or more: - --------------------------------------------------------------------- At December 31, - --------------------------------------------------------------------- (In thousands) Three months or less $359,956 Over three through six months 44,275 Over six through twelve months 24,404 Over twelve months 3,285 - --------------------------------------------------------------------- Total $431,920 =====================================================================
SHORT-TERM BORROWINGS
The following table sets forth the short-term borrowings of the Company for the periods indicated:
Further detail of the other borrowed funds is as follows:
Non-interest income was $40.2 million in 1999, $2.4 million higher than 1998. Financial services commissions were $1.0 million higher than 1998 due to more aggressive marketing efforts resulting in higher sales volume on all products, including annuities, securities and life insurance. Merchant credit card income was $400 thousand higher than 1998, mainly due to fee restructuring and higher sales volume; service charges on deposit accounts were $200 thousand higher than 1998 including higher fees from overdraft and non-sufficient funds returned items, primarily due to the effect of new programs implemented in 1999 using a process of price escalators determined by volume by customer; and trust fees were $100 thousand higher than 1998. A litigation settlement of $1.5 million accounted for the majority of the increase in the other non-interest income category. Partially offsetting these increases from prior year, mortgage banking income was $600 thousand lower than 1998, due to declining servicing income, lower gains on sales of loans in the secondary market and lower banking fees due to reduced refinancing volume.
Non-interest income was $37.8 million in 1998, $800 thousand higher than 1997. Gains realized on asset sales were $1.3 million higher than prior year. Financial services commissions were $500 thousand higher than 1997 primarily due to higher sales volume and additional products offered. Trust fees were $100 thousand higher due to the Company's continuing efforts to expand personal and retirement plan business. Unfavorable non-interest income year-to-year changes from 1997 include $500 thousand lower deposit account fees, including lower volume of account maintenance, and lower overdrafts and returned item fees, as business customers maintained larger account balances to compensate for these services. In addition, merchant credit card income was $500 thousand lower than 1997 and mortgage banking income was $100 thousand lower, mainly due to declining servicing income.
NON-INTEREST EXPENSE
Components of non-interest expense
Non-interest expense decreased $1.3 million in 1999 compared to 1998. Major decreases from 1998 relate to the Company's efforts to implement new and continue to enforce existing cost-control programs. Professional fees were $600 thousand lower than 1998, including lower legal fees, primarily due to reduced problem-credit related expenses, and lower accounting costs primarily due to a reduced number of special projects, including income tax-related, undertaken in 1999; equipment expenses were $500 thousand lower than prior year primarily due to lower depreciation costs and lower lease and maintenance expenses resulting from contract renegotiations; and other personnel benefits was $400 thousand lower than 1998 primarily due to reduced expenses related to some of the Company's compensation plans. Other expense reductions from 1998 include $200 thousand lower stationery and supplies costs, mainly due to lower printing costs and purchases of inventories; $200 thousand lower loan expense primarily due to reduced appraisal fees and costs related to foreclosures on properties acquired in satisfaction of debt ("other real estate owned"); $100 thousand lower advertising and public relations expense, including decreased costs in connection with the publication of shareholders' reports, and $100 thousand lower insurance expenses resulting from more beneficial cost characteristics in connection with newly negotiated policies. Partially offsetting these favorable changes from prior year, occupancy costs were $600 thousand higher than 1998, including increased maintenance, utilities and rental costs; merchant credit card related costs were $200 thousand higher than prior year mainly due to increased processing expenses and increased assessments from credit card servicers; and operational losses were $200 thousand higher than 1998.
Non-interest expense of $101.4 million in 1998 was $36.5 million lower than 1997. The reduction reflects successful efforts to control costs through efficiencies and consolidation of operations. In addition, approximately $18.8 million in one-time costs related to the Merger were included in 1997. All non-interest expense categories decreased from 1997 levels. Occupancy and equipment costs were $14.0 million lower, mainly due to expenses related to facilities closures. Employee related expenses were $11.4 million lower due to one-time Merger related costs in 1997 and streamlining of operations in 1998, as reflected in the reduction of 153 full-time equivalent staff. In addition, professional fees were reduced $6.9 million from prior year, and stationery and supplies and other real estate owned costs decreased $700 thousand, each, from 1997 levels also due to increased Merger costs incurred in 1997. The reductions from 1997 in merchant credit card and advertising and public relations costs of $500 thousand each, data processing and insurance costs of $300 thousand each, and loan expenses and operational losses of $200 thousand each, are also mainly due to post-Merger efficiencies.
The ratio of average assets per full-time equivalent staff was $3.49 million in 1999 compared to $3.33 million and $2.91 million in 1998 and 1997, respectively. The reduction of the average number of full-time equivalent staff from 1,288 in 1997 to 1,135 and 1,098 in 1998 and 1999, respectively, is reflective of the Company's strategy to improve efficiency.
PROVISION FOR INCOME TAX
The provision for income tax (FTE) increased by $1.6 million in 1999 mainly as a result of higher pretax income partially offset by an increase in tax-exempt interest income from municipal securities and loans. The 1999 provision of $38.4 million reflects an effective tax rate of 33.5 percent compared to provisions of $38.0 million in 1998 and $26.0 million in 1997, representing effective tax rates of 34.1 percent and 35.1 percent, respectively.
YEAR 2000 COMPLIANCE
During 1999, the Company successfully completed efforts to ensure that its internal operating systems, as well as those of its major customers and suppliers, were fully capable of processing so-called Year 2000 transactions. The primary cost of the project was the reallocation of internal resources, and therefore did not represent incremental expense to the Company. The estimated value of internal resources allocated to Year 2000 compliance efforts in 1999 was approximately $800 thousand and the cost of compliance incurred prior to 1999 was approximately $3.1 million.
The Company did not experience any failures of its computerized systems resulting from Year 2000 issues, nor does it have any information that indicates any of its vendors or service providers may be unable to sell goods or services to the Company or that any customers may be unable to meet the Company's lending requirements because of Year 2000 issues.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company.
Where any such forward-looking statement includes a statement of the assumptions of bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished.
PENDING ACQUISITION
On March 15, 2000, the Company and First Counties Bank announced the signing of a Definitive Merger Agreement under which the Company will acquire all of the outstanding shares of common stock of First Counties Bank pursuant to a tax-free exchange of shares. The Agreement, which has been approved by the Boards of Directors of both companies, is subject to conditions usual and customary for merger transactions of this type, including approval by First Counties Bank shareholders, approval by regulatory authorities, and satisfaction of other terms and conditions. The merger will be accounted for under the purchase method of accounting. On March 17, 2000, the Company filed a Report on Form 8-K on the subject.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Page
Consolidated Balance Sheets as of December 31, 1999 and 1998 49
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 50
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 51
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 52
Notes to Consolidated Financial Statements 53
Independent Auditors' Report 77
Management's Letter of Financial Responsibility 78
WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS - ---------------------------
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - ----------------------------------------------------------
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ----------------------------------------------------------
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
WESTAMERICA BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Business and Accounting Policies
Westamerica Bancorporation, a registered bank holding Company (the "Company"), provides a full range of banking services to individual and corporate customers in Northern and Central California through its subsidiary banks, Westamerica Bank and Bank of Lake County (the "Banks"). The Banks are subject to competition from other financial institutions and to the regulations of certain agencies and undergo periodic examinations by those regulatory authorities.
Summary of Significant Accounting Policies
The consolidated financial statements are prepared in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a summary of significant policies used in the preparation of the accompanying financial statements. In preparing the financial statements, Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the disclosure of income and expenses for the periods presented in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company, and all the Company's subsidiaries which include the Banks, Community Banker Services Corporation and Subsidiary, Westcore and Westamerica Commercial Credit, Inc., a company engaged in financing accounts receivable and inventory lines of credit and term business loans. Significant intercompany transactions have been eliminated in consolidation.
Business Combinations. In a business combination accounted for as a pooling of interests, the assets, liabilities and shareholders' equity of the acquired entity are carried forward at their historical amounts and its results of operations are combined with the Company's results of operations. Additionally, the Company's prior period financial statements are restated to give effect to the merger. In a business combination accounted for as a purchase, the results of operations of the acquired entity are included from the date of acquisition. Assets and liabilities of the entity acquired are recorded at fair value on the date of acquisition. Goodwill and identified intangibles are amortized over their estimated lives.
Cash Equivalents. Cash equivalents include Due From Banks balances and Federal Funds Sold which are both readily convertible to known amounts of cash and are generally 90 days or less from maturity, presenting insignificant risk of changes in value because of interest rate volatility.
Securities. Investment securities consist of securities of the U.S. Treasury, federal agencies, states, counties and municipalities, and mortgage-backed, corporate debt and equity securities. The Company classifies its debt and marketable equity securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity
securities are those securities which the Company has the ability and intent to hold until maturity. Securities not included in trading or held to maturity are classified as available for sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of shareholders' equity until realized. The unrealized gains and losses included in the separate component of shareholders' equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premiums or discounts on the associated security.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary, results in a charge to earnings and the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale or held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Loans and Allowance for Loan Losses. The allowance for loan losses is a combination of specific and general reserves available to absorb estimated future losses throughout the loan portfolio and is maintained at a level considered adequate to provide for such losses. Credit reviews of the loan portfolio, designed to identify problem loans and to monitor these estimates, are conducted continually, taking into consideration market conditions, current and anticipated developments applicable to the borrowers and the economy, and the results of recent examinations by regulatory agencies. Management approves the conclusions resulting from credit reviews. Ultimate losses may vary from current estimates. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the reserve based on their judgment of information available to them at the time of their examination.
Loans are stated at the principal amount outstanding, net of unearned discount and deferred fees. Unearned interest on discounted loans is amortized over the life of these loans, using the sum-of-the-months digits formula for which the results are not materially different from those obtained by using the interest method. For all other loans, interest is accrued daily on the outstanding balances. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on non-accrual status. Non-refundable fees and certain costs associated with originating or acquiring loans are deferred
and amortized as an adjustment to interest income over the estimated respective loan lives. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an individual loan basis. The Company recognizes a loan as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement.
Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and some vacated bank properties. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for loan losses. Other real estate owned is recorded at the lower of the related loan balance or fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Subsequently, other real estate owned is valued at the lower of the amount recorded at the date acquired or the then current fair value less estimated disposition costs. Subsequent losses incurred due to the declines in annual independent property appraisals are recognized as non-interest expense. Routine holding costs, such as property taxes, insurance, maintenance and losses from sales and dispositions, are recognized as non-interest expense.
Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter. Fully depreciated or amortized assets are removed from the Company's balance sheet.
Intangible assets. Intangible assets (which are included in Other Assets) aggregating $10.2 million and $12.1 million (net of accumulated amortization of $17.1 million and $15.2 million) at December 31, 1999 and 1998, respectively, are comprised of core deposit intangibles and goodwill acquired in business combinations. Core deposit intangibles are amortized over the estimated lives of the existing deposit bases (10 years). Goodwill of $7.8 million in 1999 and $8.7 million in 1998 (net of accumulated amortization of $5.1 million and $4.2 million, respectively) is amortized on a straight-line basis over 15 years. Management periodically reviews the balances to determine if such balances have been impaired.
Impairment of Long-Lived Assets. The Company reviews for impairment of long-lived assets and certain intangibles to be held, whenever events or changes indicate that the carrying amount of an asset may not be recoverable.
Income taxes. The Company and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they
enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Derivative Instruments and Hedging Activities. In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which amends the disclosure requirements of Statement No. 52, "Foreign Currency Translations" and of Statement No. 107, "Disclosures about Fair Value of Financial Instruments." Under the provisions of SFAS 133, the Company is required to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gain and losses) depends on the intended use of the derivative and the resulting operation. SFAS No. 133 would have been effective for all fiscal years beginning after June 15, 1999, except that SFAS No. 137 ("Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133") delayed the effective date of SFAS No. 133 for one year. Earlier application is permitted as of the beginning of quarters beginning after June 30, 1999. Retroactive application of SFAS No. 133 is not permitted. The Company does not believe that the adoption of SFAS 133 will have a material impact on its financial statements.
Other. Securities and other property held by the Banks in a fiduciary or agency capacity are not included in the financial statements since such items are not assets of the Company or its subsidiaries.
Reclassifications. Certain amounts in prior years' presentations have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported net income.
Note 2: Investment Securities
An analysis of the available-for-sale investment securities portfolio as of December 31, 1999, follows:
An analysis of the held-to-maturity investment securities portfolio as of December 31, 1998, follows:
Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-backed securities. At December 31, 1999 and 1998, the Company had no high-risk collateralized mortgage obligations.
As of December 31, 1999, $767.5 million of investment securities were pledged to secure public deposits and short-term funding needs, compared to $607.1 million in 1998.
Note 3: Loans and Allowance for Loan Losses
Loans at December 31 consisted of the following:
Included in real estate-residential at December 31, 1999 and 1998 are loans originated for resale of $12.7 million and $13.3 million, respectively, the cost of which approximates market value.
The following summarizes the allowance for loan losses of the Company for the periods indicated:
There were no commitments to lend additional funds to borrowers whose loans are included above.
At December 31, 1999, the recorded investment in loans for which impairment was recognized totaled $15.1 million compared to $15.0 million at December 31, 1998. The specific reserves at December 31, 1999 and 1998 were $2.1 million and $1.3 million, respectively. The amount of that recorded investment for which there is no related allowance for credit losses was $0. For the year ended December 31, 1999, the average recorded net investment in impaired loans was approximately $15.5 million compared to $15.9 million and $22.0 million, respectively, at December 31, 1998 and 1997. In general, the Company does not recognize any interest income on troubled debt restructurings or on loans that are classified as non-accrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company's recorded investment in such loans is deemed collectible.
Note 4: Concentration of Credit Risk
The Company's business activity is with customers in Northern and Central California. The loan portfolio is well diversified with no industry comprising greater than 10 percent of total loans outstanding as of December 31, 1999 and 1998.
The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 3, the Company had loan commitments and standby letters of credit related to real estate loans of $69.6 million and $95.3 million at December 31, 1999 and 1998, respectively. The Company requires collateral on all real estate loans and generally attempts to maintain loan-to-value ratios no greater than 75 percent on commercial real estate loans and no greater than 80 percent on residential real estate loans unless covered by mortgage insurance.
Note 5: Premises and Equipment
Premises and equipment as of December 31 consisted of the following:
Depreciation and amortization included in operating expenses amounted to $5.4 million in 1999, $5.5 million in 1998 and $7.5 million in 1997.
Note 6: Borrowed Funds
Debt financing and notes payable, including the unsecured obligations of the Company, as of December 31, 1999 and 1998, were as follows:
At December 31, 1998, the prime rate related to the Federal Home Loan Bank financing arrangements was 7.75%.
The senior notes are subject to financial covenants requiring the Company to maintain, at all times, certain minimum levels of consolidated tangible net worth and maximum levels of capital debt. The Company is currently in compliance with all of the covenants in the senior notes indenture.
At December 31, 1999 and 1998, the Company had unused lines of credit amounting to $2.5 million and $62.5 million, respectively. Compensating balance arrangements are not significant to the operations of the Company. At December 31, 1999 and 1998, the Banks had $431.9 million and $418.2 million, respectively, in time deposit accounts in excess of $100 thousand. Interest on these time deposit accounts in 1999, 1998 and 1997 was $19.4 million, $19.2 million and $17.1 million, respectively.
Funds purchased include federal funds, securities sold with repurchase agreements and business customers' sweep accounts. Federal funds purchased were $254.0 million and $50.0 million, respectively, at December 31, 1999 and 1998. Securities sold with repurchase agreements were $59.5 million at December 31, 1999 and $28.7 million at December 31, 1998. Sweep accounts totaled $148.8 million and $125.0 million at December 31, 1999 and 1998, respectively. Securities under these repurchase agreements are held in the custody of independent securities brokers.
Note 7: Shareholders' Equity
In 1995, the Company adopted the 1995 Stock Option Plan. Stock appreciation rights, restricted performance shares, incentive stock options and non-qualified stock options are available under this plan. Under the terms of this plan, on January 1 of each year beginning in 1995, 2 percent of the Company's issued and outstanding shares of common stock will be reserved for granting. At December 31, 1999, 1998, and 1997, approximately 797 thousand, 856 thousand and 566 thousand shares, respectively, were reserved for issuance. Options are granted at fair market value and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. A Restricted Performance Share ("RPS") grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period.
Under the Stock Option Plan adopted by the Company in 1985, 2.3 million shares were reserved for issuance. Stock appreciation rights, incentive stock options and non-qualified stock options are available under this plan. Options are granted at fair market value and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. The 1985 plan was amended in 1990 to provide for RPS grants. An RPS grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period.
PV Financial, CapitolBank Sacramento, and North Bay Bancorp had separate stock option plans (the "Option Plans") whereby options were granted to certain officers, directors, and employees. Following the effective dates of the mergers, the Option Plans were terminated. All outstanding options were substituted for the Company's options, adjusted for the exchange ratios as defined in the merger agreements.
ValliCorp Holdings also had separate stock option plans whereby options were granted to certain officers, directors, and employees. Effective April 12, 1997, all ValliCorp Holdings option plans were terminated. All outstanding options were substituted for the Company's stock options, adjusted for the exchange ratio as defined in the merger agreement. At December 31, 1996, 442,490 shares were available for issuance. During 1997 there were no options granted, and during 1996 there were 95,496 options granted.
Stock Options. A summary of the status of the Company's stock options as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates, follows:
The following table summarizes information about options outstanding at December 31, 1999 and 1998:
Restricted Performance Shares. A summary of the status of the Company's RPSs as of December 31, 1999, 1998, and 1997, and changes during the years ended on those dates, follows:
As of December 31, 1999, 1998, and 1997, the RPSs had a weighted-average contractual life of 1.2, 1.1, and 1.1 years, respectively. The Company expects that substantially all of the RPSs outstanding at December 31, 1999 will eventually vest based on projected performance. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock options. The compensation cost that has been charged against income for the Company's RPSs granted was $1.3 million, $1.9 million, and $2.6 million for 1999, 1998, and 1997, respectively. There were no stock appreciation rights or incentive stock options granted in 1999, 1998, and 1997. The fair value of each non-qualified stock option grant is estimated on the date of the grant using the Modified Roll option pricing model (Roll-Geske Model for calls on stock with dividends), with the following assumptions used for calculating weighted-average non-qualified stock option grants in 1999, 1998, and 1997: - ----------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- Dividend yield 1.89% 1.64% 1.14% Expected volatility 37.18 20.00 21.43 Risk-free interest rate 4.57 5.43 6.35 Expected lives 6.0 years 6.0 years 6.0 years =======================================================================
The weighted-average fair values of non-qualified stock options granted during 1999, 1998, and 1997, were $10.68, $8.37, and $4.64, respectively.
The fair value of each RPS is estimated on the date of the grant using the Modified Roll option-pricing model, with the following assumptions used for calculating weighted-average RPS grants in 1999, 1998, and 1997: - ----------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- Dividend yield 1.89% 1.64% 1.14% Expected volatility 37.18 20.00 21.43 Risk-free interest rate 4.57 5.35 6.35 Expected lives 3.0 years 3.0 years 3.0 years =======================================================================
The weighted-average fair values of the RPSs granted during 1999, 1998, and 1997 were $9.10, $5.69, and $3.15 respectively.
Had compensation cost for the company's 1995 and 1985 Stock Option Plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
A reconciliation of the diluted EPS computation to the amounts used in the basic EPS computation for the years ended December 31, is as follows:
Shareholders have authorized two new classes of one million shares each, to be denominated "Class B Common Stock" and "Preferred Stock," respectively, in addition to the 150 million shares of common stock presently authorized. At December 31, 1999, no shares of Class B Common Stock or Preferred Stock had been issued.
In December 1986, the Company declared a dividend distribution of one common share purchase right (the "Right") for each outstanding share of common stock. The Rights, which have been amended and restated in 1989, 1992, 1995 and 1999, are exercisable only in the event of an acquisition of, or announcement of a tender offer to acquire, 10 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 $75.00, subject to adjustment. In the event a person or a group has acquired, or obtained the right to acquire, beneficial ownership of securities having 10 percent or more of the voting power of all outstanding voting power of the Company, proper provision shall be made so that each holder of a right will, for a 60-day period thereafter, have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right, to the extent available, and then a common stock equivalent having a market value of two times the exercise price of the Right. Under certain circumstances, the Rights may be redeemed by the Company at $.001 per Right prior to becoming exercisable and in certain circumstances thereafter. The Rights will expire on the earliest of (I) December 31, 2004, (ii) consummation of a merger transaction meeting certain characteristics or (iii) redemption of the Rights by the Company.
Note 8: Risk-Based Capital
The Company and the Banks are subject to various regulatory capital adequacy requirements administered by federal and state agencies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate discretionary actions by regulators that, if undertaken, could have a direct, material effect on the Company's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and the Banks maintain minimum ratios of capital to risk-weighted assets. There are two categories of capital under the guidelines: Tier 1 capital includes common shareholders' equity and qualifying preferred stock less goodwill and other deductions including the unrealized net gains and losses, after taxes, of available-for-sale securities. Tier 2 capital includes preferred stock not qualifying for Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Company and the allowance for loan losses, subject to limitations by the guidelines. Under the guidelines, capital is compared to the relative risk of the balance sheet, derived from applying one of four risk weights (0%, 20%, 50% and 100%) to the different balance sheet and off-balance sheet assets, primarily based on the credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
As of December 31, 1999, the Company and the Banks met all capital adequacy requirements to which they are subject.
The most recent notification from the Federal Reserve Board categorized the Company and the Banks as well capitalized under the FDICIA regulatory framework for prompt corrective action. To be well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. Since that notification, there are no conditions or events that Management believes have changed the risk-based capital category of the Company or the Banks.
The following table shows capital ratios for the Company and the Banks as of December 31, 1999 and 1998:
* The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum leverage ratio guideline is 3 percent for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations.
Note 9: Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amounts reported in the financial statements of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Amounts for the current year are based upon estimates and assumptions as of the date of these financial statements and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1998 are primarily a result of adjustments to conform to tax returns as filed. The components of the net deferred tax asset as of December 31 are as follows: - ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- (In thousands) Deferred tax asset Reserve for loan losses $21,066 $20,833 State franchise taxes 4,126 3,665 Securities available for sale 2,760 -- Deferred compensation 2,985 2,719 Real estate owned 711 1,033 Interest on non-accrual loans 101 161 Reserve for long-term lease commitments -- 62 Other reserves 685 722 Other 1,063 1,262 Net operating loss carryforwards 68 326 General tax credit carryforwards 215 215 - ----------------------------------------------------------------------- Subtotal deferred tax asset 33,780 30,998 Valuation allowance -- -- - ----------------------------------------------------------------------- Total deferred tax asset 33,780 30,998 - ----------------------------------------------------------------------- Deferred tax liability Net deferred loan costs 2,228 2,849 Fixed assets 1,745 1,992 Securities available for sale -- 15,164 Intangible assets 19 363 Leases 1,132 1,061 Other 169 170 - ----------------------------------------------------------------------- Total deferred tax liability 5,293 21,599 - ----------------------------------------------------------------------- Net deferred tax asset $28,487 $9,399 =======================================================================
The Company believes a valuation allowance is not needed to reduce the gross deferred tax asset because it is more likely than not that the gross deferred tax asset will be realized through recoverable taxes or future taxable income.
The provision for federal and state income taxes consists of amounts currently payable and amounts deferred which, for the years ended December 31, are as follows: - ----------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- (In thousands) Current income tax expense: Federal $27,132 $26,530 $18,164 State 12,406 11,421 8,223 - ----------------------------------------------------------------------- Total current 39,538 37,951 26,387 - ----------------------------------------------------------------------- Deferred income tax (benefit) expense: Federal (819) (184) (594) State (346) 209 197 - ----------------------------------------------------------------------- Total deferred (1,165) 25 (397) - ----------------------------------------------------------------------- Provision for income taxes $38,373 $37,976 $25,990 =======================================================================
The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate to income before taxes, as follows: - ----------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- (In thousands) Federal income taxes due at statutory rate $40,061 $38,980 $25,937 (Reductions) increases in income taxes resulting from: Interest on state and municipal securities not taxable for federal income tax purposes (8,477) (7,815) (6,872) Reduction in the valuation allowance -- -- (486) State franchise taxes, net of federal income tax benefit 7,839 7,560 5,473 Costs related to acquisitions -- -- 3,183 Other (1,050) (749) (1,245) - ----------------------------------------------------------------------- Provision for income taxes $38,373 $37,976 $25,990 =======================================================================
At December 31, 1999, the Company had the following net operating loss and the general tax credit carryforwards for tax return purposes: - ----------------------------------------------------------------------- Net Operating Loss Tax Credit Carryforwards Carryforwards - ----------------------------------------------------------------------- Expires December 31, (In thousands) 2003 $-- $215 2007 181 -- 2008 14 -- - ----------------------------------------------------------------------- Total $195 $215 =======================================================================
Note 10: Fair Value of Financial Instruments
The fair value of financial instruments does not represent actual amounts that may be realized upon the sale or liquidation of the related assets or liabilities. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities. The fair values presented represent the Company's best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. Such financial instruments and their estimated fair values at December 31 were:
The majority of the Company's commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower.
Note 11: Lease Commitments
Thirty-seven banking offices and a centralized administrative service center are owned and fifty-three banking offices are leased. Substantially all the leases contain multiple renewal options and provisions for rental increases, principally for cost of living index, property taxes and maintenance. The Company also leases certain pieces of equipment. Minimum future rental payments, net of sublease income, at December 31, 1999, are as follows: - ----------------------------------------------------------------------- (In thousands) 2000 $4,580 2001 3,882 2002 3,049 2003 2,295 2004 1,587 Thereafter 3,490 - ----------------------------------------------------------------------- Total minimum lease payments $18,883 =======================================================================
Total rentals for premises and equipment, net of sublease income, included in non-interest expense were $5.4 million in 1999, $5.2 million in 1998 and $6.3 million in 1997.
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 $336.7 million and $384.7 million at December 31, 1999 and 1998, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers' short-term financing requirements and must meet the Company's normal credit policies and collateral requirements. Standby letters of credit outstanding totaled $13.8 million and $11.9 million at December 31, 1999 and 1998, respectively.
The Company, because of the nature of its business, is subject to various threatened or filed legal cases. The Company, based on the advice of legal counsel, does not expect such cases will have a material, adverse effect on its financial position or results of operations.
Note 13: Retirement Benefit Plans
The Company sponsors a defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. The costs charged to non-interest expense related to benefits provided by the Deferred Profit-Sharing Plan were $1.8 million in 1999. The costs charged to non-interest expense related to benefits provided by the Deferred Profit-Sharing Plan and the Retirement Plan were $1.6 million in 1998 and $1.0 million in 1997.
In addition to the Deferred Profit-Sharing Plan, all salaried employees are eligible to participate in the voluntary Tax Deferred Savings/Retirement Plan (ESOP) upon completion of a 90-day introductory period. The Tax Deferred Savings/Retirement Plan allows employees to defer, on a pretax basis, a portion of their salaries as contributions to this Plan. Participants may invest in 10 funds, including one fund that invests exclusively in Westamerica Bancorporation common stock. The matching contributions charged to compensation expense were $1.7 million in 1999, $1.6 million in 1998 and $1.8 million in 1997.
The Company continues to use an actuarial-based accrual method of accounting for post-retirement benefits. The Company offers a continuation of group insurance coverage to employees electing early retirement, for the period from the date of retirement until age 65. The Company contributes an amount toward early retirees' insurance premiums which is determined at the time of early retirement. The Company reimburses Medicare Part B premiums for all retirees over age 65.
The following table sets forth the net periodic post-retirement benefit cost for the years ended December 31 and the funded status of the Post-retirement Benefit Plan and the change in the benefit obligation as of December 31: - ----------------------------------------------------------------------- 1999 1998 ======================================================================= (In thousands) Periodic cost: Service cost $160 $217 Interest cost 152 118 Amortization of unrecognized transition obligation 61 61 - ----------------------------------------------------------------------- Net periodic cost $373 $396 =======================================================================
Change in benefit obligation: Benefit obligation, beginning of year 2,534 2,355 Service cost 160 217 Interest cost 152 118 Benefits paid (126) (156) - ----------------------------------------------------------------------- Benefit obligation, end of year $2,720 $2,534 =======================================================================
Accumulated post-retirement benefit obligation attributable to: Retirees $1,757 $1,574 Fully eligible participants 650 638 Other 313 322 - ----------------------------------------------------------------------- Total 2,720 2,534 - ----------------------------------------------------------------------- Fair value of plan assets -- -- - ----------------------------------------------------------------------- Accumulated post-retirement benefit obligation in excess of plan assets $2,720 $2,534 ======================================================================= Comprised of: Unrecognized transition obligation $1,102 $1,163 Recognized post-retirement obligation 1,618 1,371 - ----------------------------------------------------------------------- Total $2,720 $2,534 =======================================================================
The discount rate used in measuring the accumulated post- retirement benefit obligation was 6.0 percent and 5.0 percent at December 31, 1999 and 1998, respectively. The assumed health care cost trend rate used to measure the expected cost of benefits covered by the plan was 4 percent for 2000 and beyond.
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change on the assumed health care cost trend rates would have the following effect on 1999 results: - ----------------------------------------------------------------------- One One Percentage Percentage Point Point Increase Decrease - ----------------------------------------------------------------------- (In thousands) Effect on total of service and interest cost components $168 ($138) Effect on post-retirement benefit obligation 407 (332) =======================================================================
Note 14: Related Party Transactions
Certain directors and executive officers of the Company and/or its subsidiaries were loan customers of the Banks during 1999 and 1998. All such loans were made in the ordinary course of business on normal credit terms, including interest rate and collateral requirements. In the opinion of Management, these credit transactions did not involve, at the time they were contracted, more than the normal risk of collectibility or present other unfavorable features. The table below reflects information concerning loans to certain directors and executive officers and/or family members during 1999 and 1998: - ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- (In thousands) Beginning balance $3,268 $2,489 Originations 836 1,350 Payoffs/principal payments (490) (181) Other changes * (588) (390) - ----------------------------------------------------------------------- At December 31, $3,026 $3,268 ======================================================================= Percent of total loans outstanding 0.13% 0.14%
* Other changes in 1999 and 1998 include loans to former directors and executive officers who are no longer related parties.
Note 15: Regulatory Matters
Payment of dividends to the Company by the Banks is limited under regulations for Federal Reserve member banks. The amount that can be paid in any calendar year, without prior approval from regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits of the preceding two calendar years less dividends paid. Under this regulation, Westamerica Bank (the largest subsidiary bank) sought and obtained approval to pay to the Company dividends of $56.2 million in excess of net profits. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972. As of December 31, 1999, $136.7 million was available for payment of dividends by the Company to its shareholders. The Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of its reservable deposits. The Banks' daily average on deposit at the Federal Reserve Bank was $30.1 million in 1999 and $25.8 million in 1998.
Note 16: Westamerica Bancorporation (Parent Company Only)
Statements of Income and Comprehensive Income
Statements of Cash Flows
Note 17: Quarterly Financial Information (Unaudited)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Westamerica Bancorporation:
We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation and subsidiaries (the Company) as of December 31, 1999 and 1998, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westamerica Bancorporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/KPMG LLP - ----------- KPMG LLP
San Francisco, California January 18, 2000
MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY
To Our Shareholders:
The Management of Westamerica Bancorporation is responsible for the preparation, integrity, reliability and consistency of the information contained in this annual report. The consolidated financial statements, which necessarily include amounts based on judgments and estimates, were prepared in conformity with generally accepted accounting principles and prevailing practices in the banking industry. All other financial information appearing throughout this annual report is presented in a manner consistent with the consolidated financial statements.
Management has established and maintains a system of internal controls that provides reasonable assurance that the underlying financial records are reliable for preparing the consolidated financial statements, and that assets are safeguarded from unauthorized use or loss. This system includes extensive written policies and operating procedures and a comprehensive internal audit function, and is supported by the careful selection and training of staff, an organizational structure providing for division of responsibility, and a Code of Ethics covering standards of personal and business conduct. Management believes that, as of December 31, 1999, the Corporation's internal control environment is adequate to provide reasonable assurance as to the integrity and reliability of the consolidated financial statements and related financial information contained in the annual report.
The system of internal controls is under the general oversight of the Board of Directors acting through its Audit Committee, which is comprised entirely of outside directors.
The Audit Committee monitors the effectiveness of and compliance with internal controls through a continuous program of internal audit and credit examinations. This is accomplished through periodic meetings with Management, internal auditors, loan quality examiners, regulatory examiners and independent auditors to assure that each is carrying out their responsibilities.
The Corporation's consolidated financial statements have been audited by KPMG LLP, independent certified public accountants elected by the shareholders. All financial records and related data, as well as the minutes of shareholders and directors meetings, have been made available to them. Management believes that all representations made to the independent auditors during their audit were valid and appropriate.
/s/ David L. Payne - ------------------ David L. Payne Chairman, President and Chief Executive Officer
/s/ Jennifer J. Finger - ---------------------- Jennifer J. Finger Senior Vice President and Chief Financial Officer
/s/ Dennis R. Hansen - -------------------- Dennis R. Hansen Senior Vice President and Controller
ITEM 9.
ITEM 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
The information regarding directors of the registrant required by this Item 10 is incorporated herein by reference from the "Election of Directors" and Section 16(a) "Beneficial Ownership Reporting Compliance" sections on Pages 2,3 and 6 of the Company's Proxy Statement dated March 20, 2000, which has been filed with the Commission pursuant Regulation 14A.
Executive Officers
The executive officers of the Corporation and Westamerica Bank serve at the pleasure of the Board of Directors and are subject to annual appointment by the Board at its first meeting following the Annual Meeting of Shareholders. It is anticipated that each of the executive officers listed below will be reappointed to serve in such capacities at that meeting.
Held Name of Executive Position Since - ----------------- ------------------------------------ --------- David L. Payne Mr. Payne, born in 1955, is the 1984 Chairman of the Board, President and Chief Executive Officer of the Corporation. Mr. Payne is President and Chief Executive Officer of Gibson Printing and Publishing Company and Gibson Radio and Publishing Company which are newspaper, commercial printing and real estate investment companies headquartered in Vallejo, California.
E. Joseph Bowler Mr. Bowler, born in 1936, is Senior 1980 Vice President and Treasurer for the Corporation.
Robert W. Entwisle Mr. Entwisle, born in 1947, is Senior 1986 Vice President in charge of the Banking Division of Westamerica Bank.
Jennifer F. Finger Ms. Finger, born in 1954, is Senior 1997 Vice President and Chief Financial Officer for the Corporation. From 1993 to 1997, Ms. Finger was Senior Vice President of Corporate Development with Star Banc Corporation in Cincinnati, Ohio.
Evan N. Fricker Mr. Fricker, born in 1938, is Vice 1983 President and General Auditor for the Corporation.
Dennis R. Hansen Mr. Hansen, born in 1950, is Senior 1978 Vice President and Controller for the Corporation.
Thomas S. Lenz Mr. Lenz, born in 1937, is Senior Vice 1989 President and Chief Credit Administrator of Westamerica Bank.
Hans T. Y. Tjian Mr. Tjian, born in 1939, is Senior 1989 Vice President and manager of the Operations and Systems Administration of Westamerica Bank.
ITEM 11.
ITEM 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference from the "Executive Compensation" and "Other Arrangements" sections on Pages 7 through 10 of the Company's Proxy Statement dated March 20, 2000, which has been filed with the Commission pursuant to Regulation 14A.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is incorporated herein by reference from the "Security Ownership of Certain Beneficial Owners and Management" section on Pages 5 and 6 of the Company's Proxy Statement dated March 20, 2000, which has been filed with the Commission pursuant to Regulation 14A.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
The information required by this Item 13 is incorporated herein by reference from the "Certain Information About the Board of Directors and Certain Committees of the Board - Indebtedness of Directors and Management" section on Page 5 of the Company's Proxy Statement dated March 20, 2000, which has been filed with the Commission pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. All Financial Statements
See Index to Financial Statements on page
(a) 2. Financial statement schedules required. None. (Information included in Financial Statements)
(a) 3. Exhibits The following documents are included or incorporated by reference in this annual report on Form 10-K:
Exhibit Number 2(a) Agreement and Plan of Reorganization, between and among Westamerica Bancorporation, ValliCorp Holdings, Inc., and ValliWide Bank, incorporated herein by reference to Exhibit 2.1 of Registrant's Registration Statement on Form S-4, Commission File No. 333-17335, filed with the Securities and Exchange Commission on December 5, 1996.
2(b) Agreement and Plan of Reorganization and Merger, dated March 14, 2000, by and among Westamerica Bancorporation, Westamerica Bank and First Counties Bank, incorporated herein by reference to Exhibit 2 of Registrant's Form 8-K filed with the Securities and Exchange Commission on March 17, 2000.
3(a) Restated Articles of Incorporation (composite copy), incorporated herein by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission on March 30, 1998.
3(b) By-laws, as amended (composite copy).
4(a) Amended and Restated Rights Agreement dated November 19, 1999, incorporated herein by reference to Exhibit 99 to the Registrant's Form 8-A/A, Amendment No. 3, filed with the Securities and Exchange Commission on November 19, 1999.
10(a)* 1995 Stock Option Plan, incorporated herein by reference to Exhibit 10(a) to the Registrant's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on June 6, 1995.
10(b)* Employment Agreement with E. Joseph Bowler dated January 7, 1987, incorporated herein by reference to Exhibit 10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the Securities and Exchange Commission on March 31, 1999.
10(c)* Employment Agreement with Robert W. Entwisle dated January 7, 1987, incorporated herein by reference to Exhibit 10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the Securities and Exchange Commission on March 31, 1999.
10(d) Senior Note Agreement of Westamerica Bancorporation dated February 1, 1996, of $22,000,000 at 7.11 percent incorporated herein by reference to Exhibit 10-j of Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1995, filed with the Securities and Exchange Commission on May 1, 1996.
10(e)* Westamerica Bancorporation Chief Executive Officer Deferred Compensation Agreement by and between Westamerica Bancorporation and David L. Payne, dated December 18, 1998.
11 Computation of Earnings Per Share on common and common equivalent shares and on common shares assuming full dilution.
21 Subsidiaries of the registrant.
23(a) Consent of KPMG LLP
(27) Financial Data Schedule
---------------------- * Indicates management contract or compensatory plan or arrangement.
The Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to the Office of the Corporate Secretary, Westamerica Bancorporation, P.O. Box 567, San Rafael, California 94915, and payment to the Company of $.25 per page.
(b) 1. Report on Form 8-K On November 1, 1999, the Company filed a Report on Form 8-K announcing the Board of Directors' approval of an amendment of and Restatement of the Company's Shareholder Rights Plan, as amended, dated March 23, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTAMERICA BANCORPORATION
/s/ Dennis R. Hansen /s/ Jennifer J. Finger - -------------------- ---------------------- Dennis R. Hansen Jennifer J. Finger Senior Vice President Senior Vice President and and Controller Chief Financial Officer Principal Accounting Officer
Date: March 20, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ----
/s/ David L. Payne Chairman of the Board March 23, 2000 - ---------------------------- and Director, President David L. Payne and Chief Executive Officer
/s/ E. Joseph Bowler Senior Vice President March 23, 2000 - ---------------------------- and Treasurer E. Joseph Bowler
/s/ Etta Allen Director March 23, 2000 - ---------------------------- Etta Allen
/s/ Louis E. Bartolini Director March 23, 2000 - ---------------------------- Louis E. Bartolini
/s/ Don Emerson Director March 23, 2000 - ---------------------------- Don Emerson
/s/ Louis H. Herwaldt Director March 23, 2000 - ---------------------------- Louis H. Herwaldt
/s/ Arthur C. Latno Director March 23, 2000 - ---------------------------- Arthur C. Latno
/s/ Patrick D. Lynch Director March 23, 2000 - ---------------------------- Patrick D. Lynch
/s/ Catherine Cope MacMillan Director March 23, 2000 - ---------------------------- Catherine Cope MacMillan
/s/ Patrick J. Mon Pere Director March 23, 2000 - ---------------------------- Patrick J. Mon Pere
/s/ Ronald A. Nelson Director March 23, 2000 - ---------------------------- Ronald A. Nelson
/s/ Carl Otto Director March 23, 2000 - ---------------------------- Carl Otto
/s/ Michael J. Ryan, Jr. Director March 23, 2000 - ---------------------------- Michael J. Ryan, Jr.
/s/ Edward B. Sylvester Director March 23, 2000 - ---------------------------- Edward B. Sylvester