-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HGnPrDHPLftCX4f4JT/f25wmtx9pHgnQTWQ9QbVNT9dSosMIeeEWKJiN59M7TbQM EQ4F0GqEtlDJBP46QODgfg== 0000311094-03-000023.txt : 20031114 0000311094-03-000023.hdr.sgml : 20031114 20031113180746 ACCESSION NUMBER: 0000311094-03-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTAMERICA BANCORPORATION CENTRAL INDEX KEY: 0000311094 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942156203 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09383 FILM NUMBER: 03999644 BUSINESS ADDRESS: STREET 1: 1108 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: (707) 863-6000 MAIL ADDRESS: STREET 1: 4550 MANGELS BLVD STREET 2: A-2Y CITY: FAIRFIELD STATE: CA ZIP: 94585-1200 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT BANKSHARES CORP DATE OF NAME CHANGE: 19830801 10-Q 1 sep03q.txt WESTAMERICA BANCORPORATION 10-Q 9-30-2003 Page 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 2003 Commission File Number: 001-9383 WESTAMERICA BANCORPORATION (Exact Name of Registrant as Specified in its Charter) CALIFORNIA 94-2156203 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1108 Fifth Avenue, San Rafael, California 94901 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code (707) 863-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the registrant classes of common stock, as of the latest practicable date: Title of Class Shares outstanding as of November 6, 2003 Common Stock, 32,653,021 No Par Value Page 2
TABLE OF CONTENTS Page ---------- Forward Looking Statements 3 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 4 Notes to Unaudited Condensed Consolidated Financial Statements 9 Financial Summary 11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 27 Item 4 - Controls and Procedures 27 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 28 Item 2 - Not applicable 28 Item 3 - Not applicable 28 Item 4 - Not applicable 28 Item 5 - Not applicable 28 Item 6 - Exhibits and Reports on Form 8-K 28 (a) - Exhibits Exhibit 3 (ii) - By-laws, as amended (composite copy) 30 Exhibit 4 - Note Purchase Agreement by and between the Company and 47 The Northwestern Mutual Life Insurance Company dated as of October 30, 2003 pursuant to which registrant issued its 5.31% Senior Notes due October 31, 2013 in the principal amount of $15 million and form of 5.31% Senior Note due October 31, 2013 Exhibit 11 - Computation of Earnings Per Share 102 Exhibit 31.1 - Certification of Chief Executive Officer pursuant to 103 Securities Exchange Act Rule 13a-(14)(a) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to 104 Securities Exchange Act Rule 13a-(14)(a) Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 105 Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 106 (b) - Reports on Form 8-K 28
Page 3 FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management's current knowledge and belief and include information concerning the Company's possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company's ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) continued weakness in the national and California economies; (2) increased economic uncertainty created by concerns regarding terrorist attacks and geopolitical risks; (3) the prospect of additional terrorist attacks in the United States and the uncertain effect of these events on the national and regional economies; (4) changes in the interest rate environment; (5) changes in the regulatory environment; (6) significantly increasing competitive pressure in the banking industry; (7) operational risks including data processing system failures or fraud; (8) the effect of acquisitions and integration of acquired businesses; (9) volatility of rate sensitive assets and liabilities; (10) asset/liability management risks and liquidity risks; and (11) changes in the securities markets. The reader is directed to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report. Page 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
At At September December 31, --------------------- 2003 2002 2002 --------------------------------- Assets: Cash and cash equivalents $189,269 $175,666 $222,577 Money market assets 633 633 633 Investment securities available for sale 1,245,311 1,003,200 947,848 Investment securities held to maturity, with market values of: $575,862 at September 30, 2003 569,996 $414,978 at September 30, 2002 399,735 $450,771 at December 31, 2002 438,985 Loans, gross 2,364,418 2,508,272 2,494,638 Allowance for loan losses (54,180) (54,447) (54,227) ---------------------------------- Loans, net of allowance for loan losses 2,310,238 2,453,825 2,440,411 Premises and equipment, net 35,566 38,054 37,396 Interest receivable and other assets 131,780 139,451 137,017 ---------------------------------- Total Assets $4,482,793 $4,210,564 $4,224,867 ================================== Liabilities: Deposits: Noninterest bearing $1,213,577 $1,105,313 $1,146,828 Interest-bearing: Transaction 559,031 521,417 559,875 Savings 1,039,406 1,008,847 952,319 Time 724,115 650,325 635,043 ---------------------------------- Total deposits 3,536,129 3,285,902 3,294,065 Short-term borrowed funds 433,348 335,989 349,736 Federal Home Loan Bank advance 105,000 170,000 170,000 Notes Payable 9,643 24,607 24,607 Liability for interest, taxes and other expenses 47,751 58,626 44,960 ---------------------------------- Total Liabilities 4,131,871 3,875,124 3,883,368 ---------------------------------- Shareholders' Equity: Authorized - 150,000 shares of common stock Issued and outstanding: 32,723 at September 30, 2003 220,527 33,601 at September 30, 2002 222,493 33,411 at December 31, 2002 217,198 Accumulated other comprehensive income: Unrealized gain on securities available for sale, net of tax 16,004 19,797 19,152 Retained earnings 114,391 93,150 105,149 ---------------------------------- Total Shareholders' Equity 350,922 335,440 341,499 ---------------------------------- Total Liabilities and Shareholders' Equity $4,482,793 $4,210,564 $4,224,867 ================================== See accompanying notes to unaudited consolidated financial statements.
Page 5 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) (In thousands, except per share data)
Three months Nine months ended September 30, September 30, 2003 2002 2003 2002 -------------------------------------------- Interest Income: Loans $37,491 $44,145 $117,324 $132,023 Money market assets and funds sold 2 6 6 10 Investment securities available for sale Taxable 8,390 8,191 24,346 24,813 Tax-exempt 3,825 3,653 11,450 11,218 Investment securities held to maturity Taxable 1,035 2,238 5,222 4,282 Tax-exempt 4,216 2,323 10,334 6,235 --------------------------------------------- Total interest income 54,959 60,556 168,682 178,581 --------------------------------------------- Interest Expense: Transaction deposits 145 395 598 1,215 Savings deposits 1,439 2,761 4,710 8,320 Time deposits 2,400 3,937 8,054 13,345 Short-term borrowed funds 747 887 2,559 2,808 Federal Home Loan Bank advance 1,172 1,576 4,339 3,615 Debt financing and notes payable 385 443 1,173 1,345 --------------------------------------------- Total interest expense 6,288 9,999 21,433 30,648 --------------------------------------------- Net Interest Income 48,671 50,557 147,249 147,933 --------------------------------------------- Provision for loan losses 750 900 2,550 2,700 --------------------------------------------- Net Interest Income After Provision For Loan Losses 47,921 49,657 144,699 145,233 --------------------------------------------- Noninterest Income: Service charges on deposit accounts 6,735 6,294 19,809 18,262 Merchant credit card 993 971 2,755 2,839 Financial services commissions 249 284 666 1,048 Mortgage banking 185 303 712 707 Trust fees 245 220 760 774 Securities gains (Impairment) 2,150 0 2,443 (4,278) FHLB advance prepayment fees (2,166) 0 (2,166) 0 Other 2,622 2,383 7,445 6,986 --------------------------------------------- Total Noninterest Income 11,013 10,455 32,424 26,338 --------------------------------------------- Noninterest Expense: Salaries and related benefits 13,495 13,844 40,792 41,987 Occupancy 3,076 3,074 9,116 8,903 Equipment 1,319 1,479 4,074 4,339 Data processing 1,520 1,529 4,597 4,543 Professional fees 529 501 1,400 1,316 Other 5,595 5,537 16,567 16,479 --------------------------------------------- Total Noninterest Expense 25,534 25,964 76,546 77,567 --------------------------------------------- Income Before Income Taxes 33,400 34,148 100,577 94,004 --------------------------------------------- Provision for income taxes 9,327 11,271 29,822 30,121 --------------------------------------------- Net Income $24,073 $22,877 $70,755 $63,883 ============================================= Other Comprehensive Income: Change in unrealized gain on securities available for sale, net (9,997) 5,614 (3,148) 7,897 --------------------------------------------- Other Comprehensive Income $14,076 $28,491 $67,607 $71,780 ============================================= Average Shares Outstanding 32,770 33,621 32,959 33,751 Diluted Average Shares Outstanding 33,273 34,118 33,442 34,309 Per Share Data: Basic Earnings $0.73 $0.68 $2.15 $1.89 Diluted Earnings 0.72 0.67 2.12 1.86 Dividends Paid 0.26 0.22 0.74 0.66 See accompanying notes to unaudited consolidated financial statements.
Page 6 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (In thousands)
Accumulated Other Compre- Common hensive Retained Stock Income Earnings Total -------------------------------------------- Balance, December 31, 2001 $209,074 $11,900 $93,385 $314,359 Net income for the period 63,883 63,883 Stock issued in connection with purchase of Kerman State Bank 14,620 14,620 Stock issued, including stock option tax benefits 10,761 10,761 Purchase and retirement of stock (11,962) (41,935) (53,897) Dividends (22,183) (22,183) Unrealized gain on securities available for sale, net 7,897 7,897 --------------------------------------------- Balance, September 30, 2002 $222,493 $19,797 $93,150 $335,440 ============================================= Balance, December 31, 2002 $217,198 $19,152 $105,149 $341,499 Net income for the period $70,755 70,755 Stock issued, including stock option tax benefits 10,123 10,123 Purchase and retirement of stock (6,794) (37,080) (43,874) Dividends (24,433) (24,433) Unrealized gain on securities available for sale, net (3,148) (3,148) --------------------------------------------- Balance, September 30, 2003 $220,527 $16,004 $114,391 $350,922 ============================================= See accompanying notes to unaudited consolidated financial statements.
Page 7 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the nine months ended September 30, 2003 2002 ----------------------- Operating Activities: Net income $70,755 $63,883 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 3,105 3,396 Amortization of intangibles 1,479 1,429 Loan loss provision 2,550 2,700 Amortization of deferred net loan fees 148 375 Decrease in interest income receivable 300 445 Decrease (increase) in other assets 58,158 (12,169) Increase (decrease) in income taxes payable 3,266 (1,863) Decrease in interest expense payable (689) (1,376) (Decrease) increase in other liabilities (51,707) 13,049 (Gain) loss on sales of investment securities (2,443) 18 Federal Home Loan Bank advance prepayment fee 2,166 0 Writedown of equipment 140 470 Originations of loans for resale (7,797) (9,494) Proceeds from sale of loans originated for resale 7,949 9,883 Net gain on sale of property acquired in satisfaction of debt (94) (108) Writedown on property acquired in satisfaction of debt 307 37 Impairment of investment securities 0 4,260 ----------------------- Net Cash Provided by Operating Activities 87,593 74,935 ----------------------- Investing Activities: Net cash obtained in mergers and acquisitions 0 5,368 Net repayments of loans 125,521 32,692 Purchases of investment securities available for sale (835,207)(1,555,621) Purchases of investment securities held to maturity (365,878) (204,805) Purchases of property, plant and equipment (3,273) (1,562) Proceeds from maturity of securities available for sale 423,784 1,512,295 Proceeds from maturity of securities held to maturity 197,298 30,864 Proceeds from sale of securities available for sale 153,128 982 Proceeds from sale of property and equipment 1,859 548 Proceeds from property acquired in satisfaction of debt 1,132 391 ----------------------- Net Cash Used In Investing Activities (301,636) (178,848) ----------------------- Financing Activities: Net increase (decrease) in deposits 242,062 (32,300) Net increase in short-term borrowings 83,612 74,353 Net (payments to) advances from Federal Home Loan Bank (67,166) 130,000 Repayments of notes payable (14,964) (3,214) Exercise of stock options/issuance of shares 5,498 7,638 Repurchases/retirement of stock (43,874) (53,897) Dividends paid (24,433) (22,183) ----------------------- Net Cash Provided By Financing Activities 180,735 100,397 ----------------------- Net Decrease In Cash and Cash Equivalents (33,308) (3,516) ----------------------- Cash and Cash Equivalents at Beginning of Period 222,577 179,182 ----------------------- Cash and Cash Equivalents at End of Period $189,269 $175,666 ======================= Page 8 Supplemental Disclosure of Noncash Activities: Loans transferred to other repossessed collateral $1,800 $375 Unrealized (loss) gain on securities available for sale ($3,148) $7,897 Supplemental Disclosure of Cash Flow Activity: Interest paid for the period 21,122 29,319 Income tax payments for the period 27,105 30,638 Income tax benefit from stock option exercises 3,514 2,182 The acquisition of Kerman State Bank involved the following: Common Stock issued - 14,620 Liabilities assumed - 85,085 Fair value of assets acquired, other than cash - and cash equivalents - (90,170) Core deposit intangible - (2,500) Goodwill - (1,667) Net cash and cash equivalents received - 5,368 See accompanying notes to unaudited consolidated financial statements.
Page 9 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim period presented. The interim results for the three and nine months ended September 30, 2003 and 2002 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Note 2: Significant Accounting Policies Certain accounting policies underlying the preparation of these financial statements require Management to make estimates and judgments. These estimates and judgments may affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. The most significant of these involve the Allowance for Loan Losses, which is discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Note 3: Goodwill and Other Intangible Assets The Company has recorded goodwill and core deposit intangibles associated with purchase business combinations and, effective January 1, 2002, accounts for them in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer being amortized, but is periodically evaluated for impairment. During 2003, no impairment of goodwill has been recorded. Core deposit intangibles are amortized to their estimated residual values over their expected useful lives; such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. The Company determined that no such adjustments were required as of September 30, 2003. The following table summarizes the Company's goodwill and core deposit intangible assets, which are included with interest receivable and other assets in the Consolidated Balance Sheets, as of January 1, 2003 and September 30, 2003 (dollars in thousands).
January 1 September 30 (Dollar in Thousands) 2003 Additions Reductions 2003 --------------------------------------------- Goodwill $22,968 $0 $0 $22,968 Accumulated Amortization ($3,972) $0 $0 ($3,972) --------------------------------------------- Net $18,996 $0 $0 $18,996 ============================================= Core Deposit Intangibles $7,783 $0 $0 $7,783 Accumulated Amortization ($3,603) $0 $578 ($4,181) --------------------------------------------- Net $4,180 $0 $578 $3,602 =============================================
At September 30, 2003, the estimated aggregate amortization of intangibles, in thousand of dollars, for the remainder of 2003 and annually through 2008 is $165, $543, $469, $427, $427 and $427, respectively. The weighted average amortization period for core deposit intangibles is 8.5 years. Page 10 Note 4: Stock Options As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation", the Company accounts for its stock option plans using the intrinsic value method. Accordingly, compensation expense is recorded on the grant date only if the current price of the underlying stock exceeds the exercise price of the option. Had compensation cost been determined based on the fair value method established by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Three months ended Nine months ended September 30, September 30, ------------------------------------------- 2003 2002 2003 2002 ------------------------------------------- (In thousands, except per share data) Compensation cost based on fair value method, net of tax effect $589 $900 $1,767 $2,700 Net income: As reported $24,073 $22,877 $70,755 $63,883 Pro forma 23,484 21,977 68,988 61,183 Basic earnings per share: As reported $0.73 $0.68 $2.15 $1.89 Pro forma $0.72 $0.65 $2.09 $1.81 Diluted earnings per share: As reported $0.72 $0.67 $2.12 $1.86 Pro forma $0.71 $0.64 $2.06 $1.78
Page 11 WESTAMERICA BANCORPORATION Financial Summary (Unaudited) (dollars in thousands, except per share amounts)
Three months ended Nine months ended September 30, September 30, -------------------------------------------- 2003 2002 2003 2002 -------------------------------------------- Net Interest Income (FTE) $54,264 $54,914 $162,650 $160,723 Provision for loan losses (750) (900) (2,550) (2,700) Noninterest income: Investment securities gains (impairment) 2,150 0 2,443 (4,278) FHLB advance prepayment fees (2,166) 0 (2,166) 0 Other 11,029 10,455 32,147 30,616 --------------------------------------------- Total noninterest income 11,013 10,455 32,424 26,338 Noninterest expense (25,534) (25,964) (76,546) (77,567) Provision for income taxes (FTE) (14,920) (15,628) (45,223) (42,911) --------------------------------------------- Net income $24,073 $22,877 $70,755 $63,883 ============================================= Average shares outstanding 32,770 33,621 32,959 33,751 Diluted average shares outstanding 33,273 34,118 33,442 34,309 Shares outstanding at period end 32,723 33,601 32,723 33,601 As Reported: Basic earnings per share $0.73 $0.68 $2.15 $1.89 Diluted earnings per share 0.72 0.67 2.12 1.86 Return on assets 2.18% 2.20% 2.20% 2.14% Return on equity 29.25% 29.59% 29.38% 28.51% Net interest margin 5.31% 5.71% 5.44% 5.79% Net loan losses to average loans 0.12% 0.12% 0.15% 0.13% Efficiency ratio* 39.1% 39.7% 39.2% 41.5% Average Balances: Total assets $4,373,156 $4,117,310 $4,293,136 $3,987,215 Earning assets 4,072,793 3,828,919 3,995,287 3,706,432 Total loans 2,331,855 2,492,030 2,377,121 2,470,522 Total deposits 3,500,911 3,333,300 3,392,758 3,255,656 Shareholders' equity 326,529 306,685 322,003 299,553 Balances at Period End: Total assets $4,482,793 $4,210,564 Earning assets 4,180,358 3,911,840 Total loans 2,364,418 2,508,272 Total deposits 3,536,129 3,285,902 Shareholders' equity 350,922 335,440 Financial Ratios at Period End: Allowance for loan losses to loans 2.29% 2.17% Book value per share $10.72 $9.98 Equity to assets 7.83% 7.97% Total capital to risk assets 11.61% 10.73% Dividends Paid Per Share $0.26 $0.22 $0.74 $0.66 Dividend Payout Ratio 36% 33% 35% 35% The above financial summary has been derived from the Company's unaudited consolidated financial statements. This information should be read in conjunction with such financial statements, notes and the other information included elsewhere herein. *The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on a tax-equivalent basis and noninterest income).
Page 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Westamerica Bancorporation and subsidiaries (the "Company") reported third quarter 2003 net income of $24.1 million or diluted earnings per share of $0.72. These results compare with third quarter 2002 net income of $22.9 million or $0.67 per share. On a year-to-date basis, the Company reported net income for the nine months ended September 30, 2003 of $70.8 million or diluted earnings per share of $2.12, compared with $63.9 million or $1.86 per share for the same period of 2002. The year-to-date results in 2002 included after-tax expenses in connection with the acquisition of Kerman State Bank ("KSB") ($230 thousand) and after-tax securities impairment charge ($2.5 million) incurred in the second quarter of 2002. Following is a summary of the components of income from certain securities and loans is presented on a fully taxable equivalent ("FTE") basis to reflect its exemption from federal income taxation for the periods indicated (dollars in thousands).
Three months ended Nine months ended September 30, September 30, --------------------------------------------- 2003 2002 2003 2002 --------------------------------------------- Net interest income (FTE) $54,264 $54,914 $162,650 $160,723 Provision for loan losses (750) (900) (2,550) (2,700) Noninterest income: Securities gains (impairment) 2,150 0 2,443 (4,278) FHLB advance prepayment fees (2,166) 0 (2,166) 0 Other 11,029 10,455 32,147 30,616 --------------------------------------------- Total noninterest income 11,013 10,455 32,424 26,338 Noninterest expense (25,534) (25,964) (76,546) (77,567) Provision for income taxes (FTE) (14,920) (15,628) (45,223) (42,911) --------------------------------------------- Net income $24,073 $22,877 $70,755 $63,883 =============================================
Net income for the third quarter of 2003 was $1.2 million or 5.2% more than the same quarter of 2002 primarily due to lower net interest income (down $650 thousand), higher noninterest income (up $558 thousand or 5.3%), a decline in noninterest expense of $430 thousand or 1.7% and lower income taxes which were down $708 thousand or 4.5% on an FTE basis. The decrease in net interest income (FTE) was attributable to a 40 basis point ("bp") decline in the net interest margin, partially offset by the effect of higher average earning assets which were up $243.9 million. Noninterest income increased primarily due to growth in fee income, and included $2.2 million securities gains, neutralized by $2.2 million FHLB advance prepayment fees. Noninterest expense declined mostly because of lower personnel costs. The lower tax provision was the result of higher low-income housing investments and other tax credits. Comparing the first nine months of 2003 to the prior year, net income rose $6.9 million or 10.8%. The increase was primarily attributable to higher noninterest income (up $6.1 million or 23.2%) resulting from a securities impairment charge in 2002, and increased deposit fee income, improved net interest income (FTE) (up $1.9 million or 1.2%) and $1.0 million savings from noninterest expense, partially reduced by higher taxes (up $2.3 million or 5.4% on an FTE basis). The increase in net interest income was mostly caused by higher average earning assets (up $288.9 million or 7.8%), partially reduced by a 35 bp net interest margin reduction. The decrease in noninterest expense was mainly due to lower personnel costs. Noninterest expense in 2002 included a $400 thousand expense relating to the KSB acquisition. Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
Three months ended Nine months ended September 30, September 30, -------------------------------------------- 2003 2002 2003 2002 -------------------------------------------- Interest and fee income $54,959 $60,556 $168,682 $178,581 Interest expense (6,288) (9,999) (21,433) (30,648) FTE adjustment 5,593 4,357 15,401 12,790 --------------------------------------------- Net interest income (FTE) $54,264 $54,914 $162,650 $160,723 ============================================= Average earning assets $4,072,793 $3,828,919 $3,995,287 $3,706,432 Net interest margin (FTE) 5.31% 5.71% 5.44% 5.79%
Page 13 Net interest income (FTE) during the third quarter of 2003 decreased $650 thousand (1.2%) from the same period in 2002, to $54.3 million. The decrease was mainly attributable to the effect of a lower net interest margin earned (the rate component), partially offset by a $243.9 million increase in average earning assets (the volume component). The decrease in the net interest margin was the net effect of an 82 bp drop in the asset yield, which was partly recovered by a 59 bp decline in the cost of funds. Comparing the first nine months of 2003 with the prior year, net interest income (FTE) rose $1.9 million or 1.2%. The increase was caused by the net effect of higher average earning assets (up $288.9 million) and a declining margin. The margin reduction was the result of a 74 bp decrease in the asset yield reduced by a 55 bp decline in the cost of funds. Interest and Fee Income Interest & fee income (FTE) for the third quarter of 2003 decreased $4.4 million (6.7%) from the same period in 2002. The decline was the net effect of higher average earning assets in 2003, more than offset by lower yields earned on those assets. Average earning assets grew $243.9 million (6.4%). The earning asset growth was led by expansion in the investment portfolio of $404.0 million as follows: mortgage backed securities and collateralized mortgage obligations (up $204.4 million), US Agency obligations (up $185.5 million) and municipal securities (up $184.1 million). Offsetting the increase were declines in U.S. Treasury securities (down $85.4 million) and other securities (down $83.7 million). The growth in the earning assets was diminished by a $160.2 million reduction in loans including commercial real estate loans (down $116.9 million), commercial loans (down $32.0 million), direct consumer loans (down $15.9 million) and construction loans (down $11.9 million). The exception to the lower loan amount was an increase in residential real estate loans (up $17.0 million). The average yield on the Company's earning assets decreased for the third quarter from 6.74% in 2002 to 5.92% in 2003 (down 82 bp). This downward trend in yields was reflective of a change in the earning asset mix and general interest rate declines during 2002 and into 2003, as evident in residential real estate loans (121 bp decline in yield), indirect consumer loans (115 bp decline) and commercial loans (44 bp decline). As a result, the loan portfolio yield decreased 63 bp. The investment portfolio yield also declined 84 bp, the net result of declines in U.S. Treasury securities (down 175 bp), mortgage backed securities and collateralized mortgage obligations (down 178 bp), U.S. Agency obligations (down 121 bp) and municipal securities (down 55 bp). Comparing the first nine months of 2003 to 2002, interest and fee income (FTE) decreased by $7.3 million (3.8%). The decline was due to the net effect of a higher volume of earning assets and the impact of lower yields. The positive volume component was the result of a $288.9 million (7.8%) increase in average earning assets, including mortgage backed securities and collateralized mortgage obligations (up $247.6 million ), U.S. Agency obligations (up $204.0 million), municipal securities (up $125.0 million), indirect consumer loans (up $27.1 million) and residential real estate loans (up $8.7 million). The following components decreased: U.S. Treasury securities (down $109.9 million), other securities (down $84.0 million), commercial real estate loans (down $72.7 million), commercial loans (down $24.5 million), construction loans (down $16.7 million) and direct consumer loans (down $14.9 million). The average yield on earning assets for the first nine months of 2003 was 6.15% compared to 6.89% in 2002. Major decreases in loan yields were a 117 bp decline in residential real estate loans, a 34 bp decline in the yield on commercial loans and a 106 bp decrease in the yield on consumer loans. As a result, the composite loan yield declined 70 bp. The investment portfolio yield decreased 81 bp, affected primarily by lower yields on U.S. Treasury securities (down 152 bp), mortgage backed securities and collateralized mortgage obligations (down 148 bp), U.S. Agency obligations (down 126 bp) and municipal securities (down 40 bp). Interest Expense Interest expense decreased $3.7 million (37.1%) in the third quarter of 2003 compared to the same year-ago period. The decrease resulted from a drop in the average rate paid on interest-bearing liabilities from 1.48% in 2002 to 0.89% in 2003. The average rate on short-term borrowings dropped 56 bp, rates on CDs over $100 thousand declined an average of 102 bp, rates on retail CDs declined 80 bp, and rates on money market savings accounts were lowered 59 bp. The effect of a $133.2 million (5.0%) increase in average interest-bearing liabilities in the third quarter caused an increase in volume-related expense and partially offset the above-mentioned rate-related decline in interest expense. Short-term borrowings rose by $111.3 million whereas Federal Home Loan Bank ("FHLB") advances decreased by $42.4 million. Interest-bearing deposits rose by $67.7 million, the net result of increases in money market savings (up $95.4 million), CDs over $100 thousand (up $51.7 million) money market checking (up $32.5 million) and regular savings (up $18.8 million), partially reduced by decreases in preferred money market savings (down $94.0 million) and retail CDs (down $33.9 million). Page 14 During the first nine months of 2003, interest expense decreased $9.2 million (30.1%) from 2002, again due to a lower average rate paid on interest-bearing liabilities (1.03% in 2003 compared with 1.58% in the same period in 2002). All deposit categories declined including money market savings (from 1.40% in the first nine months of 2002 to 0.80% in the same period of 2003), CDs over $100 thousand (from 2.41% to 1.42%) and retail CDs with maturities varying from one month to over three years (from 2.56% to 1.75%). Interest rates on short-term borrowings declined from 1.53% to 0.93%. Interest-bearing liabilities grew $186.2 million or 7.2% for the nine months ended September 30, 2003 and caused a volume-related increase in interest expense, which partially offset the rate-related decline in interest expense. Increases in money market savings (up $101.8 million), money market checking (up $31.7 million), short-term borrowings (up $120.0 million) and FHLB advances (up $26.5 million) were partially offset by declines in preferred money market savings (down $75.8 million) and retail CDs (down $30.3 million). In all periods, the Company has continuously attempted to reduce high-rate time deposits while increasing the balances of more profitable, lower-cost transaction accounts in order to minimize the effect of adverse cyclical trends. Net Interest Margin (FTE) The following summarizes the components of the Company's net interest margin for the periods indicated:
Three months ended Nine months ended September 30, September 30, --------------------------------------------- 2003 2002 2003 2002 --------------------------------------------- Yield on earning assets 5.92% 6.74% 6.15% 6.89% Rate paid on interest-bearing liabilities 0.89% 1.48% 1.03% 1.58% --------------------------------------------- Net interest spread 5.03% 5.26% 5.12% 5.31% Impact of all other net noninterest bearing funds 0.28% 0.45% 0.32% 0.48% --------------------------------------------- Net interest margin 5.31% 5.71% 5.44% 5.79% =============================================
During the third quarter of 2003, the net interest margin fell 40 bp compared to the same period in 2002. Yields on earning assets declined faster than rates paid on interest-bearing liabilities, resulting in a 23 bp decline in net interest spread. The unfavorable impact of lower rates earned on loans and the investment portfolio, triggered by market trends, were partially mitigated by decreases in rates paid on deposits and short-term funds. The decline in the net interest spread was further widened by the lower value of noninterest-bearing funding sources. While the average balance of these sources increased $77.3 million or 10.1%, their value decreased 17 bp because of the lower market rates of interest at which they could be invested. Similarly, on a year-to-date basis, the net interest margin decreased 35 bp when compared to the same period in 2002. Earning asset yields decreased 74 bp and the cost of interest-bearing liabilities fell by 55 bp, resulting in a 19 bp decline in the interest spread. Noninterest-bearing funding sources increased $68.6 million or 9.5% and because of lower market rates of interest their margin contribution decreased by 16 bp, with their value decreasing to 32 bp. Page 15 Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the periods indicated, information regarding the Company's 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 nonperforming loans. Interest income includes proceeds from loans on nonaccrual 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 exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended September 30, 2003 ---------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid ---------------------------------- Assets: Money market assets and funds sold $937 $2 0.85% Investment securities: Available for sale Taxable 853,547 8,390 3.93% Tax-exempt 310,816 5,785 7.44% Held to maturity Taxable 197,023 1,035 2.10% Tax-exempt 378,615 6,527 6.90% Loans: Commercial Taxable 367,465 5,191 5.60% Tax-exempt 211,364 3,842 7.21% Commercial real estate 867,422 17,310 7.92% Real estate construction 37,311 667 7.09% Real estate residential 351,973 4,306 4.89% Consumer 496,320 7,497 5.99% ----------------------- Total loans 2,331,855 38,813 6.61% ----------------------- Total earning assets 4,072,793 60,552 5.92% Other assets 300,363 ------------ Total assets $4,373,156 ============ Liabilities and shareholders' equity Deposits: Noninterest bearing demand $1,203,378 $-- -- Savings and interest-bearing transaction 1,599,917 1,584 0.39% Time less than $100,000 303,334 1,191 1.56% Time $100,000 or more 394,282 1,209 1.21% ----------------------- Total interest-bearing deposits 2,297,533 3,984 0.69% Short-term borrowed funds 363,394 747 0.81% Federal Home Loan Bank advance 124,086 1,172 3.72% Debt financing and notes payable 21,262 385 7.24% ----------------------- Total interest-bearing liabilities 2,806,275 6,288 0.89% Other liabilities 36,974 Shareholders' equity 326,529 ------------ Total liabilities and shareholders' equity $4,373,156 ============ Net interest spread (1) 5.03% Net interest income and interest margin (2) $54,264 5.31% ======================= (1) Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets.
Page 16
For the three months ended September 30, 2002 ---------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid ---------------------------------- Assets: Money market assets and funds sold $1,716 $6 1.39% Investment securities: Available for sale Taxable 680,305 8,191 4.82% Tax-exempt 303,685 5,545 7.30% Held to maturity Taxable 174,272 2,238 5.14% Tax-exempt 176,911 3,522 7.96% Loans: Commercial Taxable 413,196 6,454 6.20% Tax-exempt 197,600 3,723 7.47% Commercial real estate 984,278 19,984 8.06% Real estate construction 49,176 927 7.48% Real estate residential 335,007 5,107 6.10% Consumer 512,773 9,216 7.13% ----------------------- Total loans 2,492,030 45,411 7.24% ----------------------- Total earning assets 3,828,919 64,913 6.74% Other assets 288,391 ------------ Total assets $4,117,310 ============ Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,103,431 $-- -- Savings and interest-bearing transaction 1,550,071 3,156 0.81% Time less than $100,000 337,192 2,009 2.36% Time $100,000 or more 342,606 1,928 2.23% ----------------------- Total interest-bearing deposits 2,229,869 7,093 1.26% Short-term borrowed funds 252,045 887 1.37% Federal Home Loan Bank advance 166,505 1,576 3.72% Debt financing and notes payable 24,607 443 7.18% ----------------------- Total interest-bearing liabilities 2,673,026 9,999 1.48% Other liabilities 34,168 Shareholders' equity 306,685 ------------ Total liabilities and shareholders' equity $4,117,310 ============ Net interest spread (1) 5.26% Net interest income and interest margin (2) $54,914 5.71% =======================
Page 17
For the nine months ended September 30, 2003 ---------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid ---------------------------------- Assets: Money market assets and funds sold $848 $6 0.95% Investment securities: Available for sale Taxable 771,838 24,346 4.21% Tax-exempt 306,634 17,390 7.56% Held to maturity Taxable 238,606 5,222 2.92% Tax-exempt 300,240 15,936 7.08% Loans: Commercial Taxable 367,945 15,780 5.76% Tax-exempt 205,729 11,246 7.34% Commercial real estate 909,838 54,466 8.03% Real estate construction 43,103 2,343 7.29% Real estate residential 340,160 13,334 5.23% Consumer 510,346 24,014 6.31% ----------------------- Total loans 2,377,121 121,183 6.68% ----------------------- Total earning assets 3,995,287 184,083 6.15% Other assets 297,849 ------------ Total assets $4,293,136 ============ Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,150,518 $-- -- Savings and interest-bearing transaction 1,553,206 5,308 0.46% Time less than $100,000 311,104 4,061 1.75% Time $100,000 or more 377,930 3,993 1.42% ----------------------- Total interest-bearing deposits 2,242,240 13,362 0.80% Short-term borrowed funds 364,850 2,559 0.94% Federal Home Loan Bank advance 154,695 4,339 3.76% Debt financing and notes payable 21,695 1,173 7.26% ----------------------- Total interest-bearing liabilities 2,783,480 21,433 1.03% Other liabilities 37,135 Shareholders' equity 322,003 ------------ Total liabilities and shareholders' equity $4,293,136 ============ Net interest spread (1) 5.12% Net interest income and interest margin (2) $162,650 5.44% =======================
Page 18
For the nine months ended September 30, 2002 ---------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid ---------------------------------- Assets: Money market assets and funds sold $1,266 $10 1.06% Investment securities: Available for sale Taxable 660,480 24,813 5.01% Tax-exempt 309,138 17,112 7.38% Held to maturity Taxable 106,272 4,282 5.37% Tax-exempt 158,754 9,328 7.83% Loans: Commercial Taxable 401,807 18,522 6.19% Tax-exempt 196,334 11,190 7.65% Commercial real estate 982,566 59,490 8.12% Real estate construction 59,824 3,333 7.48% Real estate residential 331,501 15,915 6.40% Consumer 498,490 27,376 7.37% ----------------------- Total loans 2,470,522 135,826 7.38% ----------------------- Total earning assets 3,706,432 191,371 6.89% Other assets 280,783 ------------ Total assets $3,987,215 ============ Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,056,367 $-- -- Savings and interest-bearing transaction 1,477,495 9,535 0.87% Time less than $100,000 341,370 6,511 2.56% Time $100,000 or more 380,424 6,834 2.41% ----------------------- Total interest-bearing deposits 2,199,289 22,880 1.39% Short-term borrowed funds 244,898 2,808 1.54% Federal Home Loan Bank advance 128,153 3,615 3.72% Debt financing and notes payable 24,964 1,345 7.18% ----------------------- Total interest-bearing liabilities 2,597,304 30,648 1.58% Other liabilities 33,990 Shareholders' equity 299,554 ------------ Total liabilities and shareholders' equity $3,987,215 ============ Net interest spread (1) 5.31% Net interest income and interest margin (2) $160,723 5.79% =======================
Page 19 Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income and interest expense from changes in average asset 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 (dollars in thousands).
Three months ended September 30, 2003 compared with three months ended September 30, 2002 ---------------------------------- Volume Rate Total ---------------------------------- Interest and fee income: Money market assets and funds sold ($2) ($2) ($4) Investment securities: Available for sale Taxable 1,863 (1,664) 199 Tax-exempt $132 108 240 Held to maturity Taxable $261 (1,464) (1,203) Tax-exempt $3,534 (529) 3,005 Loans: Commercial Taxable ($678) (585) (1,263) Tax-exempt $253 (134) 119 Commercial real estate ($2,337) (337) (2,674) Real estate construction (214) (46) (260) Real estate residential 252 (1,053) (801) Consumer (288) (1,431) (1,719) ---------------------------------- Total loans (3,012) (3,586) (6,598) ---------------------------------- Total earning assets 2,776 (7,137) (4,361) ---------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 98 (1,670) (1,572) Time less than $100,000 (186) (632) (818) Time $100,000 or more 258 (977) (719) ---------------------------------- Total interest-bearing deposits 170 (3,279) (3,109) ---------------------------------- Short-term borrowed funds 308 (448) (140) Federal Home Loan Bank advance (401) (3) (404) Debt financing and notes payable (61) 3 (58) ---------------------------------- Total interest-bearing liabilities 16 (3,727) (3,711) ---------------------------------- Increase in Net Interest Income $2,760 ($3,410) ($650) ==================================
Page 20
Nine months ended September 30, 2003 compared with nine months ended September 30, 2002 ---------------------------------- Volume Rate Total ---------------------------------- Interest and fee income: Money market assets and funds sold (3) (1) ($4) Investment securities: Available for sale Taxable 3,840 (4,307) (467) Tax-exempt (139) 417 278 Held to maturity Taxable 3,550 (2,610) 940 Tax-exempt 7,588 (980) 6,608 Loans: Commercial Taxable (1,501) (1,241) (2,742) Tax-exempt 524 (468) 56 Commercial real estate (4,360) (664) (5,024) Real estate construction (911) (79) (990) Real estate residential 404 (2,985) (2,581) Consumer 638 (4,000) (3,362) ---------------------------------- Total loans (5,206) (9,437) (14,643) ---------------------------------- Total earning assets 9,630 (16,918) (7,288) ---------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 466 (4,693) (4,227) Time less than $100,000 (537) (1,914) (2,451) Time $100,000 or more (45) (2,795) (2,840) ---------------------------------- Total interest-bearing deposits (116) (9,402) (9,518) ---------------------------------- Short-term borrowed funds 1,061 (1,310) (249) Federal Home Loan Bank advance 744 (20) 724 Debt financing and notes payable (177) 5 (172) ---------------------------------- Total interest-bearing liabilities 1,512 (10,727) (9,215) ---------------------------------- Increase in Net Interest Income $8,118 ($6,191) $1,927 ==================================
Page 21 Provision for Loan Losses The level of the provision for loan losses during each of the periods presented reflects the Company's continued efforts to reduce credit costs by enforcing underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The Company provided $750 thousand for loan losses in the third quarter of 2003 and $900 thousand in the same quarter of 2002. For the first nine months of 2003, $2.6 million was provided while in 2002, $2.7 million was provided. The lower provision reflects management's assessment of credit risk in the loan portfolio. Additionally, $2.1 million of reserves were acquired in connection with the KSB acquisition in the second quarter of 2002. For further information regarding net credit losses and the allowance for loan losses, see the "Classified Loans" section of this report. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands).
Three months ended Nine months ended September 30, September 30, --------------------------------------------- 2003 2002 2003 2002 --------------------------------------------- Service charges on deposit accounts $6,735 $6,294 $19,809 $18,262 Merchant credit card 993 971 2,755 2,839 ATM fees and interchange 644 686 1,805 1,820 Debit card fees 556 470 1,613 1,337 Other service fees 404 387 1,153 1,097 Mortgage banking income 185 303 712 707 Trust fees 245 220 760 774 Financial services commissions 249 284 666 1,048 Securities gains (impairment) 2,150 0 2,443 (4,278) FHLB advance prepayment fees (2,166) 0 (2,166) 0 Other noninterest income 1,018 840 2,874 2,732 --------------------------------------------- Total noninterest income $11,013 $10,455 $32,424 $26,338 =============================================
Noninterest income for the third quarter of 2003 was $11.0 million, up $558 thousand or 5.3% compared with the same quarter of 2002. During this period $2.2 million securities gains were recorded and $2.2 million in prepayment fees were paid to retire $65 million of FHLB advances. The largest factor contributing to higher income was service charges on deposits (up $441 thousand) mainly resulting from a new debit card overdraft program introduced in January of 2003. The second largest factor was a $178 thousand increase in other noninterest income largely due to higher income from foreclosed property sales and letter-of-credit fees, partially offset by lower income earned on outstanding official checks and interest recoveries from charged-off loans. Mortgage banking income declined $118 thousand due to less refinancing activity and lower gains on loan sales. Noninterest income for the nine months of 2003 was $32.4 million, up $6.1 million or 23.1% from 2002, mainly due to the 2002 securities impairment charge and growth in fee income. In 2003 $2.4 million in gains on sale of securities were recorded, partially offsetting the $2.2 million prepayment penalty paid to reduce FHLB advances by $65 million. Similar to the quarter-to-quarter comparison, service charges on deposits represent the largest increase. (up $1.5 million) due to a new debit card overdraft program. Another factor was a $276 thousand growth in debit card fees due to increased usage offset by lower debit card processing rates. Other noninterest income was $142 thousand more than the previous year due to gains on asset sales and higher letter-of-credit fees, partly reduced by lower official check income and interest recoveries on charged-off loans. Decreases in noninterest income included a $382 thousand decline in financial services commissions due to lower sales of fixed annuities, mutual funds and life insurance. Page 22 Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands).
Three months ended Nine months ended September 30, September 30, --------------------------------------------- 2003 2002 2003 2002 --------------------------------------------- Salaries and related benefits $13,495 $13,844 $40,792 $41,987 Occupancy 3,076 3,074 9,116 8,903 Equipment 1,319 1,479 4,074 4,339 Data processing services 1,520 1,529 4,597 4,543 Courier service 941 909 2,796 2,714 Telephone 519 428 1,368 1,258 Postage 381 397 1,202 1,199 Professional fees 529 501 1,400 1,316 Merchant credit card 317 373 975 1,059 Stationery and supplies 331 350 957 1,069 Advertising/public relations 243 321 775 900 Employee recruiting 117 112 226 292 Loan expense 339 307 995 1,000 Operational losses 237 210 638 632 Repossessed collateral expense 12 2 14 52 Amortization of deposit intangibles 165 301 578 702 Other noninterest expense 1,993 1,827 6,043 5,602 --------------------------------------------- Total $25,534 $25,964 $76,546 $77,567 ============================================= Average full time equivalent staff 1,016 1,067 1,032 1,075 Noninterest expense to revenues (FTE) 39.12% 39.72% 39.24% 41.47%
Noninterest expense for the third quarter of 2003 was $25.5 million, $430 thousand or 1.7% lower than in 2002. The largest decline was in salaries and related benefits, which were down $349 thousand (2.5%), primarily due to a $297 thousand decrease in salaries as a result of a decline in the number of full-time equivalent employees and lower performance-related incentives. Higher costs of workers compensation (up $155 thousand) partially offset the decline. Equipment expense fell $160 thousand compared with 2002 mostly due to lower depreciation. Amortization of deposit intangibles declined $136 thousand primarily due to the expiration of the deposit intangible in connection with a 1996 acquisition. Other noninterest expense increased $166 thousand largely due to increases in charges from the Company's two main correspondent banks. Noninterest expense was $76.5 million for the nine months of 2003, which was $1.0 million or 1.3% less than 2002. The largest decrease was salaries and related benefits (down $1.2 million or 2.9%) as a result of declines in salaries (down $878 thousand) due to a fewer number of full-time equivalent employees and lower incentives (down $489 thousand). Additionally, the 2002 period included $366 thousand severance pay relating to the KSB acquisition. A $264 thousand increase in workers compensation expense reduced the effect of savings in salaries and other benefits. Equipment expense fell by $265 thousand from 2002 primarily due to lower depreciation. Advertising and public relations expense fell by $125 thousand primarily due to lower spending on marketing research and overall business development. Amortization of deposit intangibles declined $124 thousand largely due to the expiration of the deposit intangibles from a prior acquisition. Other discretionary spendings fell including a $112 thousand decline in stationery and supplies expense. Other noninterest expense rose $441 thousand largely due to the combined effect of a $172 thousand increase in low-income housing operating losses, a $139 thousand increase in charges from the Company's two main correspondent banks, and a $125 thousand decline in settlement expense. Occupancy expense rose $213 thousand mainly due to a $120 thousand increase in utilities and increases in insurance and property taxes. Telephone expense rose $110 thousand mostly due to installation of new data lines. Provision for Income Tax During the third quarter of 2003, the Company recorded income tax expense of $9.3 million, $1.9 million (17.2%) lower than the third quarter of 2002; on a year-to-date basis, the income tax provision was $29.8 million for 2003 compared to $30.1 million for 2002. The current quarter provision represents an effective tax rate of 27.9%, compared to 33.0% for the third quarter of 2002; for the first nine months of 2003, the effective tax rate was 29.7%, compared to 32.0% recorded in 2002. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, in particular higher revenues recognized from state and municipal securities and tax credits generated from low-income housing investments, and for California franchise taxes, higher excludable interest income on loans within enterprise zones. Page 23 Classified Loans The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk and to increase diversification of earning assets. Loan reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Loans receiving lesser grades fall under the "classified" category, which includes all nonperforming and potential problem loans, and receive an elevated level of attention to ensure collection. Repossessed collateral is recorded at the lower of cost or market. The following is a summary of classified loans and repossessed collateral on the dates indicated (dollars in thousands):
At At September 30, December 31, --------------------- 2003 2002 2002 ---------------------------------- Classified loans $23,479 $33,743 $34,001 Repossessed collateral 742 470 381 ---------------------------------- Classified loans and repossessed collateral $24,221 $34,213 $34,382 ================================== Allowance for loan losses / classified loans 231% 161% 159%
Classified loans at September 30, 2003, decreased $10.3 million (30.4%) from September 30, 2002, reflecting the effectiveness of the Company's high underwriting standards and active workout policies. Repossessed collateral increased $272 thousand or 57.9% from September 30, 2002, due to five new foreclosures on loans totaling $1.5 million, partially offset by sales, principal reductions and writedowns of properties acquired in satisfaction of debt. A $10.5 million (30.9%) decrease in classified loans from December 31, 2002, was due to payoffs, upgrades, chargeoffs and transfers to repossessed collateral, partly offset by new downgrades. The $361 thousand (94.8%) increase in repossessed collateral from December 31, 2002, was primarily due to five new foreclosures valued at $1.5 million, partially offset by sales, principal reductions and writedowns of foreclosed properties. Nonperforming Loans Nonperforming loans include nonaccrual loans and loans 90 days past due as to principal or interest and still accruing. Loans are placed on nonaccrual status when they reach 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified as "performing nonaccrual" and are included in total nonperforming loans. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Any subsequent interest received is recorded as interest income on a cash basis. Page 24 The following is a summary of nonperforming loans and repossessed collateral on the dates indicated (dollars in thousands):
At At September 30, December 31, --------------------- 2003 2002 2002 ---------------------------------- Performing nonaccrual loans $2,145 $3,845 $3,464 Nonperforming, nonaccrual loans 5,484 5,827 5,717 ---------------------------------- Total nonaccrual loans 7,629 9,672 9,181 Loans 90 days past due and still accruing 272 257 738 ---------------------------------- Total nonperforming loans 7,901 9,929 9,919 Repossessed collateral 742 470 381 ---------------------------------- Total nonperforming loans and repossessed collateral $8,643 $10,399 $10,300 ================================== Allowance for loan losses / nonperforming loans 686% 548% 547%
Performing nonaccrual loans at September 30, 2003 fell $1.7 million (44.2%) from the same period in the previous year and $1.3 million (38.1%) from December 31, 2002. The decrease from both periods was due to payoffs, chargeoffs, loans being returned to accrual status and loans being placed on nonperforming nonaccrual, offset by new loans placed on performing nonaccrual. Nonperforming nonaccrual loans at September 30, 2003 decreased $343 thousand (5.9%) from the same period a year ago and $233 thousand (4.1%) from year-end, 2002. The decreases resulted from loans being returned to full-accrual status, transfers to repossessed collateral or being charged off or paid off, partially offset by loans being added to nonperforming nonaccrual. Changes in repossessed collateral are discussed above. The Company had no restructured loans as of September 30, 2003, 2002 and December 31, 2002. The amount of gross interest income that would have been recorded for nonaccrual loans for the three and nine month periods ended September 30, 2003, if all such loans had performed in accordance with their original terms, was $110 thousand and $415 thousand, respectively, compared to $183 thousand and $445 thousand, respectively, for the third quarter and the first nine months of 2002. The amount of interest income that was recognized on nonaccrual loans from all cash payments, including those related to interest owed from prior years, made during the three and nine months ended September 30, 2003, totaled $299 thousand and $516 thousand, respectively, compared to $50 thousand and $376 thousand, respectively, for the comparable periods in 2002. These cash payments represent annualized yields of 17.36% and 8.77%, respectively, for the third quarter and the first nine months of 2003 compared to 2.15% and 6.28%, respectively, for the third quarter and the first nine months of 2002. Total cash payments received during the third quarter of 2003 which were applied against the book balance of nonaccrual loans outstanding at September 30, 2003, totaled zero, compared with approximately $85 thousand in 2002. Cash payments received totaled $283 thousand for the nine months ended September 30, 2003, compared with approximately $211 thousand for 2002. The overall credit quality of the loan portfolio continues to be strong; however, total nonperforming assets could fluctuate from period to period. 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 the level of nonperforming assets; however, the Company can give no assurance that additional increases in nonaccrual loans will not occur in the future. Allowance for Loan Losses The Company's allowance for loan losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. Page 25 A portion of the allowance is specifically allocated to impaired and other identified loans whose full collectibility is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. A second allocation is 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 reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines are analyzed based on the historical rate of net losses and delinquency trends, grouped by the number of days the payments on these loans are delinquent. Last, allocations are made to general loan categories based on relevant economic conditions and available data, including unemployment statistics, commercial office vacancy rates, mortgage loan foreclosure trends, agriculture commodity prices, and levels of government funding. Management considers the $54.2 million allowance for loan losses, which constituted 2.29% of total loans at September 30, 2003, 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 required allowance levels. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended Nine months ended September 30, September 30, --------------------------------------------- 2003 2002 2003 2002 --------------------------------------------- Balance, beginning of period $54,159 $54,324 $54,227 $52,086 Loan loss provision 750 900 2,550 2,700 Loans charged off (1,422) (1,635) (5,291) (4,632) Recoveries of previously charged off loans 693 858 2,694 2,243 --------------------------------------------- Net credit losses (729) (777) (2,597) (2,389) --------------------------------------------- Acquired from Kerman State Bank 0 0 0 2,050 Balance, end of period $54,180 $54,447 $54,180 $54,447 ============================================= Allowance for loan losses / loans outstanding 2.29% 2.17%
Asset and Liability Management The fundamental objective of the Company's management of assets and liabilities is to maximize economic value while maintaining adequate liquidity and a conservative level of interest rate risk. The Company actively solicits loans and transaction deposit accounts. Asset and liability management techniques include adjusting the duration, liquidity, volume, rates and yields, and other attributes of its loan products, investment portfolio, time deposits, and other funding sources to achieve Company objectives. The primary analytical tool used by the Company to gauge interest rate risk is a simulation model to project changes in net interest income ("NII") that result from forecast changes in interest rates. The 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 rate scenario where the Fed Funds rate is made to rise evenly by 100 bp and 200 bp, and a falling rate scenario of 50 bp over the 12-month forecast interval triggering a response in the other forecasted rates. Company policy requires that such simulated changes in NII should be within certain specified ranges or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of interest rate sensitive assets and liabilities at September 30, 2003 would not result in a fluctuation of NII that would exceed the parameters established by Company policy. Liquidity The Company's principal source of asset liquidity is marketable investment securities available for sale. At September 30, 2003, investment securities available for sale totaled $1.2 billion, Page 26 representing an increase of $242 million from September 30, 2002. In addition, at September 30, 2003, the Company had customary lines for overnight borrowings from other financial institutions in excess of $500 million and a $20 million line of credit, under which no amount was outstanding at September 30, 2003. Additionally, as a member of the Federal Reserve System, the Company has the ability to borrow from the Federal Reserve. The Company may also borrow from the FHLB which it collateralizes with its residential real estate loans and securities. At September 30, 2003, the Company had excess collateral providing available borrowing capacity from the FHLB of approximately $138 million. Since January 1, 2000, the Company has reduced its long-term debt by $31.9 million, reducing its debt-to-equity ratio from 14% at January 1, 2000 to 3% at September 30, 2003. The Company's long-term debt rating from Fitch Ratings was raised from A- to A, with a stable outlook, in June 2003. On October 31, 2003, the Company issued in a private placement a $15 million senior note at a fixed rate of 5.31% over a ten-year term. The note is due in full on October 31, 2013. Management is confident the Company could access additional long-term debt financing if desired. In addition, the Company generates significant liquidity from its operating activities. The Company's profitability during the first nine months of 2003 and 2002 generated substantial cash flows, which are included in the totals provided from operations of $87.6 million and $74.9 million, respectively. The operating cash flow in 2003 was more than sufficient to pay for $24.4 million in shareholder dividends and $43.9 million of stock repurchases. In 2002, the operating activities provided a substantial portion of cash for $22.2 million in shareholder dividends and $53.9 million for the Company's stock repurchase programs. During the first nine months of 2003, other financing activities included the net result of a $242.1 million increase in deposits and $83.6 million proceeds from short-term borrowings, reduced by a $67.2 million payment of FHLB advances and prepayment fees. During the first three quarters of 2002, other financing activities included $74.4 million proceeds from short-term borrowings and $130.0 million from FHLB advances, reduced by a $32.3 million decrease in deposits. The Company had net cash outflows in its investing activities during both nine month periods ended September 30. In 2003, purchases net of sales and maturities of investment securities were $426.9 million, which was in part offset by net repayments of loans of $125.5 million. The investment securities portfolio increase was generally financed by a $242.1 million increase in deposits, and a $83.6 million increase in short-term borrowings. During the first nine months of 2002 the Company had net cash outflows in its investing activities. Purchases net of sales and maturities of investment securities of $216.3 million were reduced by net repayments of loans of $32.7 million and $5.4 million cash obtained in the KSB acquisition, resulting in net cash used of $178.8 million. At September 30, 2002, investment securities available for sale totaled $1,003.2 million, representing an increase of $54.2 million from December 31, 2001. 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 repurchases shares of its common stock in the open market with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements. In addition, other programs have been implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to these programs, the Company repurchased 1.0 million and 1.3 million shares during the first nine months of 2003 and 2002, respectively. The Company's primary capital resource is shareholders' equity, which was $350.9 million at September 30, 2003. This amount represents an increase of $9.4 million (2.8%) from December 31, 2002, the net result of the issuance of stock ($10.1 million) and comprehensive income for the period ($67.6 million), partially offset by share repurchases ($43.9 million) and dividends paid ($24.4 million). Due to the net effect of an increase in equity capital combined with earning asset growth the Company's ratio of equity to total assets declined slightly to 7.83% at September 30, 2003, from 7.97% a year ago. The equity to assets ratio was 8.08% at December 31, 2002. Page 27 The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated:
At At September 30, December 31 Minimum ---------------------- Regulatory 2003 2002 2002 Requirement --------------------------------------------- Tier I Capital 10.35% 9.47% 9.71% 4.00% Total Capital 11.61% 10.73% 10.97% 8.00% Leverage ratio 7.14% 7.12% 7.27% 4.00%
The risk-based capital ratio increased at September 30, 2003, compared to the prior year primarily due to an increase in shareholders' equity as a result of increased net income, partially offset by the Company's common stock repurchases and dividends paid to shareholders. Also, a decline in risk-weighted assets contributed to this improvement. The risk-based capital ratio increased at September 30, 2003 from December 31, 2002 primarily due to the combination of an increase in shareholders' equity as a result of increased net income and a reduction in risk-weighted assets. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation 46 ("FIN 46"), which clarifies the application of Accounting Research Bulletin ("ARB") 51, consolidated financial statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of the standard apply to all variable interest entities created after January 31, 2003. In addition, for variable interest entities that existed prior to February 1, 2003 and remain in existence, a recent FASB staff position on FIN 46 indicates that public companies must apply the consolidation requirements as of the end of the first interim or annual period ending after December 15, 2003. Given the nature of the Company's operations, management does not expect this Interpretation to have a significant impact on the consolidated financial statements. In April 2003, the FASB issued Statement No.149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide clarification of certain terms and investment characteristics identified in Statement 133. Statement 149 is to be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The adoption of the Statement did not have a material impact on the consolidated financial statements. In May 2003, the FASB issued Statement No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The provisions of this Statement are generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise are generally effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Given the nature of the Company's liability and equity instruments, adoption of this Statement did not have a material impact on the consolidated financial statements upon adoption of the Statement on July 1, 2003. Item 3. Quantitative and Qualitative Disclosures about Market Risk 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 as discussed above 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, are not significant in the normal course of the Company's business activities. Item 4. Controls and Procedures The Company's principal executive officer and principal financial officer have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended, as of September 30, 2003. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, since the date the controls were evaluated. Page 28 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Company's Subsidiary Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Subsidiary Bank. Item 2 - Changes in Securities None Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 3 (ii): By-laws, as amended (composite copy) Exhibit 4: Note Purchase Agreement by and between the Company and The Northwestern Mutual Life Insurance Company dated as of October 30, 2003 pursuant to which registrant issued its 5.31% Senior Notes due October 31, 2013 in the principal amount of $15 million and form of 5.31% Senior Note due October 31, 2013 Exhibit 11:Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution Exhibit 31.1: Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-(14)(a) Exhibit 31.2: Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-(14)(a) Exhibit 32.1: Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2: Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On July 18, 2003, the Company filed a Report on Form 8-K with respect to item 12, therein, reporting second quarter, 2003 financial results. Included in the report was a press release dated July 15, 2003. Page 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WESTAMERICA BANCORPORATION (Registrant) Date: November 13, 2003 /s/ Dennis R. Hansen --------------------- Dennis R. Hansen Senior Vice President and Controller (Chief Accounting Officer) Pages 30-46 See Exhibit 3 (ii) Pages 47-101 See Exhibit 4 Page 102 Exhibit 11 WESTAMERICA BANCORPORATION Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution
For the For the three months nine months ended September 30, ended September 30, (In thousands, except per share data) 2003 2002 2003 2002 --------------------------------------------- Weighted average number of common shares outstanding - basic 32,770 33,621 32,959 33,751 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 503 497 483 558 --------------------------------------------- Weighted average number of common shares outstanding - diluted 33,273 34,118 33,442 34,309 ============================================= Net income $24,073 $22,877 $70,755 $63,883 Basic earnings per share $0.73 $0.68 $2.15 $1.89 Diluted earnings per share $0.72 $0.67 $2.12 $1.86
Page 103 Exhibit 31.1 CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, David L. Payne, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this quarterly report for the period ended September 30, 2003 on Form 10-Q of Westamerica Bancorporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ David L. Payne November 13, 2003 -------------------- David L. Payne Chairman, President and Chief Executive Officer Page 104 Exhibit 31.2 CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, Jennifer J. Finger, Chief Financial Officer of the registrant, certify that: 1. I have reviewed this quarterly report for the period ended September 30, 2003 on Form 10-Q of Westamerica Bancorporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 13, 2003 /s/ Jennifer J. Finger ------------------------ Jennifer J. Finger Senior Vice President and Chief Financial Officer Page 105 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Westamerica Bancorporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David L. Payne, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirement of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David L. Payne - -------------------- David L. Payne Chairman, President and Chief Executive Officer November 13, 2003 Page 106 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Westamerica Bancorporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jennifer J. Finger, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirement of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Jennifer J. Finger - ----------------------- Jennifer J. Finger Senior Vice President and Chief Financial Officer November 13, 2003 EX-3 3 bylaws09.txt WESTAMERICA BANCORPORATION EXHIBIT 3 (II) Page 30 Exhibit 3 (ii) By-laws, as amended COMPOSITE COPY BYLAWS OF WESTAMERICA BANCORPORATION a California corporation Last Amendment: October 30, 2003 Page 31 TABLE OF CONTENTS
Page (s) -------- ARTICLE I - OFFICES 1 Section 1.01. Principal Offices 1 Section 1.02. Other Offices 1 ARTICLE I - MEETINGS OF SHAREHOLDERS 1 Section 2.01. Place of Meetings 1 Section 2.02. Annual Meeting 1 Section 2.03. Special Meeting 2 Section 2.04. Notice of Shareholders' Meetings 2 Section 2.05. Manner of Giving Notice: Affidavit of Notice 2 Section 2.06. Quorum 2 Section 2.07. Adjourned Meeting: Notice 3 Section 2.08. Voting 3 Section 2.09. Waiver of Notice or Consent by Absent Shareholders 3 Section 2.10. Shareholder Action by Written Consent Without a Meeting 4 Section 2.11. Record Date for Shareholder Notice, Voting and Giving Consents 4 Section 2.12. Proxies 4 Section 2.13. Inspectors of Election 5 Section 2.14. Nominations for Director 5 ARTICLE III - DIRECTORS 5 Section 3.01. Powers 5 Section 3.02. Number and Qualification of Directors 6 Section 3.03. Election and Term of Office of Directors 6 Section 3.04. Vacancies 6 Section 3.05. Place of Meetings and Meetings by Telephone 7 Section 3.06. Annual Meeting 7 Section 3.07. Other Regular Meetings 7 Section 3.08. Special Meetings 7 Section 3.09. Quorum 7 Section 3.10. Waiver of Notice 7 Section 3.11. Adjournment 7 Section 3.12. Notice of Adjournment 7 Section 3.13. Action Without Meeting 8 Section 3.14. Fees and Compensation of Directors 8 Section 3.15. Committees of Directors 8 Section 3.16. Meetings and Action of Committees 8 -i- Page 32 ARTICLE IV - OFFICERS 9 Section 4.01. Officers 9 Section 4.02. Election of Officers 9 Section 4.03. Subordinate Officers 9 Section 4.04. Removal and Resignation of Officers 9 Section 4.05. Vacancies in Offices 9 Section 4.06. Chairman of the Board 9 Section 4.07. President 9 Section 4.08. Vice Presidents 9 Section 4.09. Secretary 9 Section 4.10. Chief Financial Officer 10 ARTICLE V - MISCELLANEOUS 10 Section 5.01. Indemnification Provisions 10 Section 5.02. Maintenance and Inspection of Share Register 11 Section 5.03. Maintenance and Inspection of Bylaws 11 Section 5.04. Maintenance and Inspection of Other Corporate Records 11 Section 5.05. Inspection of Books and Records by Directors 12 Section 5.06. Annual Report to Shareholders 12 Section 5.07. Financial Statements 12 Section 5.08. Record Date for Purposes Other than Notice and Voting 12 Section 5.09. Checks, Drafts 13 Section 5.10. Corporate Contracts and Instruments; How Executed 13 Section 5.11. Certificates for Shares 13 Section 5.12. Lost Certificates 13 Section 5.13. Representation of Shares of Other Corporations 13 Section 5.14. Construction and Definitions 13 ARTICLE VI - AMENDMENTS 14 Section 6.01. Amendment by Shareholders 14 Section 6.02. Amendment by Directors 14
-ii- Page 33 BYLAWS OF WESTAMERICA BANCORPORATION ARTICLE I OFFICES Section 1.01. Principal Offices. The principal executive office of the corporation shall be located at 1108 Fifth Avenue, San Rafael, California, or such other place within or outside the State of California as shall be fixed by the board of directors. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the board of directors shall fix and designate a principal business office in the State of California. Section 1.02. Other Offices. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.01. Place of Meetings. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2.02. Annual Meeting. The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. At each annual meeting directors shall be elected, and any other proper business may be transacted which shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must have been (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a shareholder's notice must be received by the secretary of the corporation at least 45 days before the anniversary of the date on which the corporation first mailed its proxy materials for the prior year's annual meeting of the shareholders; provided, however, that in the event the date for the current year's annual meeting has changed more than 30 days from the date on which the prior year's annual meeting was held, then notice must be received a reasonable time before the corporation mails its proxy materials for the current year. A shareholder's notice to the secretary of the corporation shall set forth as to each matter that the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and residence address of the shareholder proposing such business, (c) the number of shares of capital stock of the corporation that are owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.02. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.02, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. -1- Page 34 Section 2.03. Special Meeting. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.04 and 2.05 hereof, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.03 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. Section 2.04. Notice of Shareholders' Meetings. All notices of meetings of shareholders shall be sent or otherwise given to shareholders entitled to vote thereat in accordance with Section 2.05 not less than ten (10) (or if sent by third-class mail, thirty (30) nor more than sixty (60)) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an amendment of the articles of incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of that Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal. Section 2.05. Manner of Giving Notice: Affidavit of Notice. Notice of any meeting of shareholders shall be given to shareholders entitled to vote thereat either personally or by first-class mail or, in the event this corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California Corporations Code) on the record date for the shareholders meeting, by third-class mail, or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting may be executed by the secretary, assistant secretary, or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Section 2.06. Quorum. The presence in person or by proxy of the holders of one-third (1/3) of the shares entitled to vote at any meeting of the shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the -2- Page 35 withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 2.07. Adjourned Meeting: Notice. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.06 hereof. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.04 and 2.05. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 2.08. Voting. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 hereof, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation, or a joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. The affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by California General Corporation Law or the articles. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 2.09. Waiver of Notice or Consent by Absent Shareholders. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice, consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.04 hereof, the waiver of notice, consent or approval shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law to be included in the notice of the meeting but not so included if that objection is expressly made at the meeting. -3- Page 36 Section 2.10. Shareholder Action by Written Consent Without a Meeting. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case-of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any-time to fill a vacancy on the board of directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 2.05 hereof. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 2.11. Record Date for Shareholder Notice, Voting and Giving Consents. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders at the close of business on the record date are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date: (a) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 2.12. Proxies. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or as to any meeting by attendance at such meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Corporations Code of California. -4- Page 37 Section 2.13. Inspectors of Election. Before any meeting of shareholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. Section 2.14. Nominations for Director. Nominations for election to the board of directors may be made by the board of directors or by any shareholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the board of directors of the corporation, shall be made in writing and shall be received by the secretary of the corporation at least 45 days before the anniversary of the date on which the corporation first mailed its proxy materials for the prior year's annual meeting of shareholders; provided, however, that in the event the date for the current year's annual meeting has changed more than 30 days from the date on which the prior year's annual meeting was held, then notice must be received a reasonable time before the corporation mails its proxy materials for the current year. Any such written nomination shall contain the following information to the extent known to the nominating shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the corporation that the shareholder expects will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may be disregarded by the chairman of the applicable meeting of shareholders called for the election of directors in his sole discretion, and upon his instructions, the inspectors of election may disregard all votes cast for each such nominee. ARTICLE III DIRECTORS Section 3.01. Powers. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) Select and remove all officers, agents, and employees of the -5- Page 38 corporation; prescribe any powers and duties for them that are consistent with law, with the articles of incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service. (b) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings. (c) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates. (d) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, or tangible or intangible property actually received. (e) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecation, and other evidences of debt and securities. Section 3.02. Number and Qualification of Directors. The number of directors of the corporation shall be not less than eight (8) nor more than fifteen (15). The exact number of directors shall be ten (10) until changed, within the limits specified above, with the approval of the board of directors or the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. Section 3.03. Election and Term of Office of Directors. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. No person shall be eligible for election to the board of directors unless nominated in the manner described by Section 2.14 of these bylaws. Section 3.04. Vacancies. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent other than to fill a vacancy created by removal shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary, or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future -6- Page 39 time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 3.05. Place of Meetings and Meetings by Telephone. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. Section 3.06. Annual Meeting. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Section 3.07. Other Regular Meetings. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice. Section 3.08. Special Meetings. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 3.09. Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.11. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Corporations Code of California (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) of that Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 3.10. Waiver of Notice. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director. Section 3.11. Adjournment. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 3.12. Notice of Adjournment. Notice of the time and place of -7- Page 40 holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 3.08, to the directors who were not present at the time of the adjournment. Section 3.13. Action Without Meeting. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Section 3.14. Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. Section 3.15. Committees of Directors. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) The approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; (b) The filling of vacancies on the board of directors or in any committee; (c) The fixing of compensation of the directors for serving on the board or on any committee; (d) The amendment or repeal of bylaws or the adoption of new bylaws; (e) The amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) The appointment of any other committees of the board of directors or the members of these committees. Section 3.16. Meetings and Action of Committees. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Sections 3.05 (place of meetings), 3.07 (regular meetings), 3.08 (special meetings and notice), 3.09 (quorum), 3.10 (waiver of notice), 3.11 (adjournment), 3.12 (notice of adjournment), and 3.13 (action without meeting) of these bylaws, with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. -8- Page 41 ARTICLE IV OFFICERS Section 4.01. Officers. The officers of the corporation shall be a chairman of the board, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more treasurers or assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 4.03. Any number of offices may be held by the same person. Section 4.02. Election of Officers. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 4.03 or 4.05 hereof, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. Section 4.03. Subordinate Officers. The board of directors may appoint, and may empower the chairman of the board to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4.04. Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting of the board of directors, or, except in the case of an officer chosen by the board of directors, by any other officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 4.05. Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. Section 4.06. Chairman of the Board. The board of directors shall appoint one of its members to be chairman of the board to serve at the pleasure of the board. Such person shall preside at all meetings of the board. The chairman of the board shall have the powers conferred by these bylaws and shall also have and may exercise such further powers and duties as from time to time may be conferred or assigned by the board of directors. Section 4.07. President. The president of the corporation shall, in the absence of the chairman of the board, preside at all meetings of shareholders and at all meetings of the board of directors. The president shall exercise and perform such duties as may be assigned to him by the board of directors or the chairman of the board or as prescribed by the bylaws. Section 4.08. Vice Presidents. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, and the president. Section 4.09. Secretary. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep, or cause to be kept, at the principal -9- Page 42 executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 4.10. Chief Financial Officer. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE V MISCELLANEOUS Section 5.01. Indemnification Provisions. Except as prohibited by law, every director of this corporation shall be entitled as a matter of right to be indemnified by the corporation against reasonable expense and any liability paid or incurred by such person in connection with any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative, investigative or other, whether brought by or in the name of the corporation or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director, officer, employee or agent of the corporation or by reason of the fact that such person is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise or was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation (such claim, action, suit or proceeding hereinafter being referred to as an "Action"); provided, however, that no such right of indemnification shall exist in favor of a director with respect to an Action brought by such director against the corporation (other than a suit for indemnification as provided below in this Section 5.01). Such indemnification shall include the right to have expenses incurred by such person in connection with an Action paid in advance by the corporation until the final disposition of the Action, subject to such conditions as may be prescribed by law. As used herein, "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement; and "expense" shall include fees and expenses of counsel subject to the terms of the following paragraph. If the corporation shall be obligated to pay the expenses of any Action against a director, the corporation, if appropriate, shall be entitled to assume the defense of such Action, with counsel approved by the director, upon the delivery to the director of written notice of its election so to do. After delivery of such notice, approval of such counsel by the director and the retention of such counsel by the corporation, the corporation will not be liable to the director under this Section 5.01 for any fees or expenses of counsel subsequently incurred by the director with respect to the same Action, provided that (i) the director shall have the right to employ his counsel in any such Action at the director's expense; and (ii) the fees and expenses of the director's counsel shall be at the expense of the corporation if (A) the employment of counsel by the director has been previously authorized by the corporation, (B) the director shall have reasonably concluded that there may be a conflict of interest between the corporation and the director in the conduct of any such defense or (C) the corporation shall not, in fact, have employed counsel to assume the defense of such Action. Notwithstanding anything contained herein to the contrary, the corporation shall have no obligation under this Section 5.01 to indemnify any director for any amounts paid in settlement of an Action unless the corporation consents to such settlement, which consent shall not be unreasonably withheld. -10- Page 43 If a claim under the two preceding paragraphs is not paid in full by the corporation within thirty (30) days after a written notice thereof has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such action that the conduct of the claimant was such that under California law the corporation would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its board) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the corporation (including the board of directors, independent legal counsel or its shareholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the action or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. The right of indemnification provided for herein (a) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, bylaw or article provision, vote of shareholders or directors or otherwise, (b) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were denominated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder, and (c) shall be applicable to actions, suits or proceedings commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the adoption of any such amendment or repeal. The corporation has full power and authority to extend any of the indemnification benefits provided for in this Section 5.01 to any officer or agent of the corporation, but the corporation is under no obligation to extend such benefits to any person who is not entitled thereto by law or pursuant to the first paragraph of this Section 5.01. Section 5.02. Maintenance and Inspection of Share Register. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 5.02 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 5.03. Maintenance and Inspection of Bylaws. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. Section 5.04. Maintenance and Inspection of Other Corporate Records. The -11- Page 44 accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 5.05. Inspection of Books and Records by Directors. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5.06. Annual Report to Shareholders. The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. This report shall be sent at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.05 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. Section 5.07. Financial Statements. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month, or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause the statements referred to above to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to any shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this Section 5.07 shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. Section 5.08. Record Date for Purposes Other than Notice and Voting. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders at the close of business on the record date are entitled to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of -12- Page 45 business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. Section 5.09. Checks, Drafts. Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 5.10. Corporate Contracts and Instruments; How Executed. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 5.11. Certificates for Shares. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or vice president and by the chief financial officer or the treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. Section 5.12. Lost Certificates. Except as provided in this Section 5.12, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 5.13. Representation of Shares of Other Corporations. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 5.14. Construction and Definitions. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. -13- Page 46 ARTICLE VI AMENDMENTS Section 6.01. Amendment by Shareholders. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 6.02. Amendment by Directors. Subject to the rights of the shareholders as provided in Section 6.01 hereof, to adopt, amend, or repeal bylaws, bylaws may be adopted, amended, or repealed by the board of directors; provided, however, that the board of directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 3.02 of these bylaws. -14- EX-4 4 note.txt WESTAMERICA BANCORPORATION EXHIBIT 4 Page 47 WESTAMERICA BANCORPORATION $15,000,000 5.31% Senior Notes Due October 31, 2013 NOTE PURCHASE AGREEMENT Dated October 30, 2003 Page 48 TABLE OF CONTENTS
Section Page - ------- ---- 1. AUTHORIZATION OF NOTES. 1 2. SALE AND PURCHASE OF NOTES. 1 3. CLOSING. 1 4. CONDITIONS TO CLOSING. 2 4.1 Representations and Warranties. 2 4.2 Performance; No Default. 2 4.3 Compliance Certificates. 2 4.4 Opinions of Counsel. 2 4.5 Purchase Permitted By Applicable Law, etc. 3 4.6 Payment of Special Counsel Fees. 3 4.7 Private Placement Number. 3 4.8 Changes in Corporate Structure. 3 4.9 Proceedings and Documents. 3 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. 3 5.1 Organization; Power and Authority. 4 5.2 Authorization, etc. 4 5.3 Disclosure. 4 5.4 Organization and Ownership of Shares of Subsidiaries; Affiliates. 4 5.5 Financial Statements. 5 5.6 Compliance with Laws, Other Instruments, etc. 5 5.7 Governmental Authorizations, etc. 6 5.8 Litigation; Observance of Agreements, Statutes and Orders. 6 5.9 Taxes. 6 5.10 Title to Property; Leases. 7 5.11 Licenses, Permits, etc. 7 5.12 Compliance with ERISA. 7 5.13 Private Offering by the Company. 8 5.14 Use of Proceeds; Margin Regulations. 8 5.15 Status of the Notes. 9 5.16 Existing Indebtedness; Future Liens. 9 5.17 Foreign Assets Control Regulations, etc. 9 5.18 Status under Certain Statutes. 10 5.19 Environmental Matters. 10 6. REPRESENTATIONS OF THE PURCHASER. 10 6.1 Purchase for Investment. 10 6.2 Source of Funds. 11 7. INFORMATION AS TO COMPANY. 12 7.1 Financial and Business Information. 12 i Page 49 TABLE OF CONTENTS (continued) Section Page - ------- ---- 7.2 Officer's Certificate. 15 7.3 Inspection. 16 8. PREPAYMENT OF THE NOTES. 16 8.1 Prepayments Upon Change of Control. 16 8.2 No Required Principal Prepayments; Payment at Maturity. 18 8.3 Optional Prepayments with Make-Whole Amount. 18 8.4 Allocation of Partial Prepayments. 18 8.5 Maturity; Surrender, etc. 18 8.6 Purchase of Notes. 19 8.7 Make-Whole Amount. 19 9. AFFIRMATIVE COVENANTS. 20 9.1 Compliance with Law. 20 9.2 Insurance. 20 9.3 Maintenance of Properties. 21 9.4 Payment of Taxes and Claims. 21 9.5 Corporate Existence, etc. 21 9.6 Notes Pari Passu. 22 10. NEGATIVE COVENANTS. 22 10.1 Transactions with Affiliates. 22 10.2 Merger, Consolidation and Sale of Assets. 22 10.3 Liens. 23 10.4 Capitalization. 25 10.5 Nature Of Business. 25 10.6 Consolidated Tangible Net Worth. 25 10.7 Non-Performing Assets. 25 10.8 Limitations on Senior Indebtedness. 25 10.9 Limitations on Consolidated Indebtedness. 25 10.10 Limitations on Double Leverage. 26 11. EVENTS OF DEFAULT. 26 12. REMEDIES ON DEFAULT, ETC. 28 12.1 Acceleration. 28 12.2 Other Remedies. 28 12.3 Rescission. 29 12.4 No Waivers or Election of Remedies, Expenses, etc. 29 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. 29 13.1 Registration of Notes. 29 13.2 Transfer and Exchange of Notes. 30 13.3 Replacement of Notes. 30 ii Page 50 TABLE OF CONTENTS (continued) Section Page - ------- ---- 14. PAYMENTS ON NOTES. 31 14.1 Place of Payment. 31 14.2 Home Office Payment. 31 15. EXPENSES, ETC. 31 15.1 Transaction Expenses. 31 15.2 Survival. 32 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. 32 17. AMENDMENT AND WAIVER. 32 17.1 Requirements. 32 17.2 Solicitation of Holders of Notes. 33 17.3 Binding Effect, etc. 33 17.4 Notes held by Company, etc. 33 18. NOTICES. 33 19. REPRODUCTION OF DOCUMENTS. 34 20. CONFIDENTIAL INFORMATION. 34 21. SUBSTITUTION OF PURCHASER. 35 22. MISCELLANEOUS. 36 22.1 Successors and Assigns. 36 22.2 Payments Due on Non-Business Days. 36 22.3 Severability. 36 22.4 Construction. 36 22.5 Counterparts. 36 22.6 Governing Law. 37
iii Page 51 TABLE OF CONTENTS (continued) SCHEDULE A Information Relating to Purchaser SCHEDULE B Defined Terms EXHIBIT 1 Form of 5.31% Senior Note due October 31, 2013 EXHIBIT 4.4(a) Form of Opinion of Special Counsel for the Company EXHIBIT 4.4(b) Form of Opinion of Special Counsel for the Purchaser Page 52 WESTAMERICA BANCORPORATION 1108 Fifth Avenue San Rafael, California 94901 5.31% Senior Notes due October 31, 2013 October 30, 2003 The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Ladies and Gentlemen: Westamerica Bancorporation, a California corporation (the "Company"), agrees with you as follows: 1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of $15,000,000 aggregate principal amount of its 5.31% Senior Notes due October 31, 2013 (the "Notes", such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement). The Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement; and references to a "Section" are, unless otherwise specified, references to a Section in this Agreement. 2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, the Notes in the principal amount specified opposite your name in Schedule A at the purchase price of 100% of the principal amount thereof. 3. CLOSING. The sale and purchase of the Notes to be purchased by you shall occur at the offices of Sidley Austin Brown & Wood LLP, Bank One Plaza, 10 South Dearborn Street, Chicago, Illinois 60603, at 11:00 a.m., CST time, at a closing (the "Closing") on October 31, 2003. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $100,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order 1 Page 53 of immediately available funds in the amount $15,000,000 by wire transfer of immediately available funds for the account of the Company to Westamerica Bank, San Rafael, California, ABA# 0501-00358-6, Account# 1211-40218. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. CONDITIONS TO CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. 4.2 Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14) no Default or Event of Default shall have occurred and be continuing. 4.3 Compliance Certificates. (a) Officer's Certificate. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.8 have been fulfilled. (b) Secretary's Certificate. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and the Agreement. 4.4 Opinions of Counsel. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Bingham McCutchen LLP, counsel for the Company, substantially in the form set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you) and (b) from Sidley Austin Brown & Wood LLP, your special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to the transactions contemplated hereby as you may reasonably request. 2 Page 54 4.5 Purchase Permitted By Applicable Law, etc. On the date of the Closing your purchase of Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. 4.6 Payment of Special Counsel Fees. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the reasonable fees and expenses of your special counsel referred to in Section 4.4(b) to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. 4.7 Private Placement Number. A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. 4.8 Changes in Corporate Structure. Except as specified in Schedule 4.8, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. 4.9 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you that: 3 Page 55 5.1 Organization; Power and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is a registered bank holding company under the Bank Holding Company Act, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof. 5.2 Authorization, etc. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3 Disclosure. Except as disclosed in Schedule 5.3, this Agreement, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since December 31, 2002, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. 5.4 Organization and Ownership of Shares of Subsidiaries; Affiliates. (a) Schedule 5.4 contains complete and correct lists (i) of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) of the Company's Affiliates, other than Subsidiaries, and (iii) of the Company's directors and executive officers. 4 Page 56 (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4). (c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. Each of the Insured Subsidiaries identified on Schedule 5.4 as such, is a member in good standing with the Federal Reserve System or duly registered with the State of California, as so noted on Schedule 5.4, and each Insured Subsidiary's deposit accounts are insured by the Federal Deposit Insurance Corporation and no proceedings for the termination of the revocation of such insurance are pending or, to the best of the Company's knowledge, threatened. (d) No Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 5.4 and statutory limitations imposed by corporate law statutes or any Bank Regulatory Authority) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary. 5.5 Financial Statements. The Company has delivered to you copies of the consolidated financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said consolidated financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). 5.6 Compliance with Laws, Other Instruments, etc. The execution, delivery and performance by the Company of this Agreement and the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of 5 Page 57 any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. 5.7 Governmental Authorizations, etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes, except the filing of an executed copy of this Agreement as an exhibit to the Company's periodic reports filed under Section 13(a) of the Exchange Act. 5.8 Litigation; Observance of Agreements, Statutes and Orders. (a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 5.9 Taxes. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its Subsidiaries have been paid for all fiscal years up to and including the fiscal year ended December 31, 2002. 5.10 Title to Property; Leases. The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such 6 Page 58 properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. 5.11 Licenses, Permits, etc. Except as disclosed in Schedule 5.11, (a) the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others; (b) to the best knowledge of the Company, no product of the Company infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries. 5.12 Compliance with ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "benefit liabilities" has the meaning specified in section 4001 of ERISA and the terms "current value" and "present value" have the meaning specified in section 3 of ERISA. 7 Page 59 (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to (i) the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you and (ii) the assumption, made solely for the purpose of making such representation, that Department of Labor Interpretive Bulletin 75-2 with respect to prohibited transactions remains valid in the circumstances of the transactions contemplated herein. (f) Schedule 5.12 sets forth all ERISA Affiliates and all "employee benefit plans" maintained by the Company (or any "affiliate" thereof) or in respect of which the Notes could constitute an "employer security" ("employee benefit plan" has the meaning specified in Section 3 of ERISA, "affiliate" has the meaning specified in Section V of the Department of Labor Prohibited Transaction Exemption 95-60 (60 FR 35925, July 12, 1995) and "employer Security" has the meaning specified in Section 407(d) of ERISA). 5.13 Private Offering by the Company. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you and not more than three other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 5.14 Use of Proceeds; Margin Regulations. The Company will use the proceeds of the sale of the Notes for general corporate purposes. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 25% of the value of the consolidated assets of the Company and its 8 Page 60 Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 25% of the value of such assets. As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation U. 5.15 Status of the Notes. The Notes rank pari passu in right of payment with the Company's other unsecured Indebtedness which is not expressed to be subordinate or junior in rank to any other unsecured Indebtedness of the Company. 5.16 Existing Indebtedness; Future Liens. (a) Except as described therein, Schedule 5.16 sets forth a complete and correct list of all Indebtedness of the Company and its Subsidiaries to be outstanding as of the closing. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Except as disclosed in Schedule 5.16, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 10.3. 5.17 Foreign Assets Control Regulations, etc. (a) Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. (b) Neither the Company nor any of its Subsidiaries has violated the provisions of United States Executive Order 13224 of September 24, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (Exec. Order No. 13,224, 66 Fed. Reg. 49,079 (2001)) or the provisions of Public Law 107-56 (USA Patriot Act). 5.18 Status under Certain Statutes. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 9 Page 61 5.19 Environmental Matters. Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing; (a) neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (c) all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. 6. REPRESENTATIONS OF THE PURCHASER. 6.1 Purchase for Investment. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. 6.2 Source of Funds. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) the Source is an "insurance company general account" as defined in United States Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (60 FR 35925, July 12, 1995) and in respect thereof you represent that 10 Page 62 there is no "employee benefit plan" with respect to which the amount of the general account reserves and liabilities of all contracts held by or on behalf of such plan exceeds 10% of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the National Association of Insurance Commissioners' Annual Statement filed with your state of domicile; or (b) if you are an insurance company, the Source does not include assets allocated to any separate account maintained by you in which any employee benefit plan (or its related trust) has any interest, other than a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to such plan and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account; or (c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (d) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (e) the Source is a governmental plan; or (f) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (f); or (g) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 6.2, the terms "employee benefit plan", "governmental Plan", "party in interest" and "separate account" shall have the respective meanings assigned to such terms in section 3 of ERISA. 11 Page 63 7. INFORMATION AS TO COMPANY. 7.1 Financial and Business Information. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) Quarterly Statements - within 60 days after the end of each of the first three fiscal quarters in each fiscal year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, (iii) Call Reports filed by each of the Company's Subsidiaries with its banking regulators for such fiscal quarter, and (iv) parent company only financial statements submitted to the Federal Reserve System on Form FR Y-9LP, setting forth in the case of (i) and (ii) above, in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly consolidated financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their consolidated results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a) (i) and (ii); (b) Annual Statements - within 120 days after the end of each fiscal year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, and (iii) Call Reports filed by each of the Company's Subsidiaries with its banking regulators for the last fiscal quarter of such fiscal year, 12 Page 64 setting forth in the case of (i) and (ii) above, in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by (A) an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year prepared in accordance with applicable requirements and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 7.1(b) (i) and (ii); (c) SEC and Other Reports - promptly upon their becoming available, one copy of (i) each financial statement, annual report (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act), notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder and except for registration statements for compensatory or incentive plans), and each prospectus and all amendments thereto (except for such that relate to registration statements for compensatory or incentive plans) filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; (d) Notice of Default or Event of Default - promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice 13 Page 65 specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA Matters - promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date of the closing; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; (f) Notices from Governmental Authority - promptly, and in any event within 30 days of receipt thereof, copies of any notice (other than a report of examination or similar document whose disclosure is prohibited by law) to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; (g) Rule 144A - with reasonable promptness, upon the request of any holder of the Notes, any financial or other information as may reasonably be necessary to be delivered to a "qualified institutional buyer" (as defined in Rule 144A of the Securities Act) in order to permit compliance with the requirements of Rule 144A(d)(4) of the Securities Act; and (h) Requested Information - with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. 14 Page 66 7.2 Officer's Certificate. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) Covenant Compliance - the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 10.2 through 10.4 and Sections 10.6 through 10.9 hereof, in each case inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); (b) Event of Default - a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto; and (c) New Subsidiaries - a statement as to whether or not any Subsidiary has been formed or acquired during the applicable period and describing such newly formed or acquired Subsidiary (including, whether such Subsidiary is a member of the Federal Reserve System or registered with the United States Office of Thrift Supervision and/or the State of California Department of Financial Institutions, and if such Subsidiary's deposit accounts are insured by the Federal Deposit Insurance Corporation). 7.3 Inspection. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) No Default - if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) Default - if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of 15 Page 67 account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. 8. PREPAYMENT OF THE NOTES. 8.1 Prepayments Upon Change of Control. (a) Notice of Change of Control - The Company will, within two Business Days after any Responsible Officer has knowledge of the occurrence of any Change of Control, give written notice of such Change of Control to each holder of Notes unless notice in respect of such Change of Control shall have been given pursuant to subparagraph (b) of this Section 8.1. If a Change of Control has occurred, such notice shall contain and constitute an offer to prepay Notes as described in subparagraph (c) of this Section 8.1 and shall be accompanied by the certificate described in subparagraph (g) of this Section 8.1. (b) Condition to Company Action - The Company will not take any action that consummates or finalizes a Change of Control unless (i) at least fifteen days prior to such action it shall have given to each holder of Notes written notice containing and constituting an offer to prepay Notes as described in subparagraph (c) of this Section 8.1, accompanied by the certificate described in subparagraph (g) of this Section 8.1, and (ii) contemporaneously with such action, it prepays all Notes required to be prepaid in accordance with this Section 8.1. (c) Offer to Prepay Notes - The offer to prepay Notes contemplated by subparagraphs (a) and (b) of this Section 8.1 shall be an offer to prepay, in accordance with and subject to this Section 8.1, all, but not less than all, the Notes held by each holder (in this case only, "holder" in respect of any Note registered in the name of a nominee for a disclosed beneficial owner shall mean such beneficial owner) on a date specified in such offer (the "Proposed Prepayment Date"). If such Proposed Prepayment Date is in connection with an offer contemplated by subparagraph (a) of this Section 8.1, such date shall be not less than five days and not more than fifteen days after the date of such offer (if the Proposed Prepayment Date shall not be specified in such offer, the Proposed Prepayment Date shall be the fifth day after the date of such offer). (d) Acceptance - A holder of Notes may accept the offer to prepay made pursuant to this Section 8.1 by causing a notice of such acceptance to be delivered to the Company at least two days prior to the Proposed Prepayment Date. A failure by a holder of Notes to respond to an offer to prepay made pursuant to this Section 8.1 shall be deemed to constitute an acceptance of such offer by such holder. (e) Prepayment - Prepayment of the Notes to be prepaid pursuant to this Section 8.1 shall be at 100% of the principal amount of such Notes, plus the Make-Whole Amount determined for the date of prepayment with respect to such principal amount, together with interest on such Notes accrued to the date of prepayment. On the Business Day preceding the date of prepayment, the Company shall deliver to each holder of Notes being prepaid a statement 16 Page 68 showing the Make-Whole Amount due in connection with such prepayment and setting forth the details of the computation of such amount. The prepayment shall be made on the Proposed Prepayment Date except as provided in subparagraph (f) of this Section 8.1. (f) Deferral Pending Change of Control - The obligation of the Company to prepay Notes pursuant to the offers required by subparagraph (b) and accepted in accordance with subparagraph (d) of this Section 8.1 is subject to the occurrence of the Change of Control in respect of which such offers and acceptances shall have been made. In the event that such Change of Control does not occur on the Proposed Prepayment Date in respect thereof, the prepayment shall be deferred until and shall be made on the date on which such Change of Control occurs. The Company shall keep each holder of Notes reasonably and timely informed of (i) any such deferral of the date of prepayment, (ii) the date on which such Change of Control and the prepayment are expected to occur, and (iii) any determination by the Company that efforts to effect such Change of Control have ceased or been abandoned (in which case the offers and acceptances made pursuant to this Section 8.1 in respect of such Change of Control shall be deemed rescinded). (g) Officer's Certificate - Each offer to prepay the Notes pursuant to this Section 8.1 shall be accompanied by a certificate, executed by a Senior Financial Officer of the Company and dated the date of such offer, specifying: (i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this Section 8.1; (iii) the principal amount of each Note offered to be prepaid; (iv) the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation; (v) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; (vi) that the conditions of this Section 8.1 have been fulfilled; and (vii) in reasonable detail, the nature and date or proposed date of the Change of Control. (h) Effect on Required Payments - The amount of each payment of the principal of the Notes made pursuant to this Section 8.1 shall be applied against and reduce each of the then remaining principal payments due pursuant to Section 8.1 by a percentage equal to the aggregate principal amount of the Notes so paid divided by the aggregate principal amount of the Notes outstanding immediately prior to such payment. 8.2 No Required Principal Prepayments; Payment at Maturity. Other than as set forth in Sections 8.1 and 12.1, there are no required prepayments of principal in respect of the Notes. The entire principal amount of the Notes outstanding on October 31, 2013, together with all accrued and unpaid interest thereon, shall be due and payable on such date. 8.3 Optional Prepayments with Make-Whole Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes (but if in part, in an amount not less than $2,000,000 or such lesser amount as shall then be outstanding) at 100% of the principal amount so prepaid, together with accrued unpaid interest on such amount, plus the Make-Whole Amount 17 Page 69 determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.3 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.4), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. 8.4 Allocation of Partial Prepayments. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. 8.5 Maturity; Surrender, etc. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.6 Purchase of Notes. The Company will not and will not permit any Subsidiary or Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Subsidiary or Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. 8.7 Make-Whole Amount. The term "Make-Whole Amount" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: 18 Page 70 "Called Principal" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.1 or 8.3 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "Discounted Value" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of any Note, the sum of 0.50% per annum plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page PX1" on the Bloomberg Financial Market Service (or such other display as may replace Page PX1 on Bloomberg Financial Market Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount 19 Page 71 of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.1, 8.3 or 12.1. "Settlement Date" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.1 or 8.3 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. 9. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 9.1 Compliance with Law. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.2 Insurance. The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. 9.3 Maintenance of Properties. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.4 Payment of Taxes and Claims. The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all 20 Page 72 other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes, assessments, governmental charges or levies have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes, assessments, governmental charges and levies in the aggregate would not reasonably be expected to have a Material Adverse Effect. 9.5 Corporate Existence, etc. The Company will at all times remain registered as a "bank holding company" under the Bank Holding Company Act and preserve and keep in full force and effect its corporate existence. Subject to Section 10.2, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries including without limitation, such Subsidiaries' membership in the Federal Reserve System and registration with any applicable Bank Regulatory Authority unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. 9.6 Notes Pari Passu. The Company will cause the Notes, at all times, to rank at least pari passu against the assets of the Company with all other present and future unsecured Indebtedness (actual or contingent) of the Company which is not expressed to be subordinate or junior in rank to any other unsecured Indebtedness of the Company. 10. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 10.1 Transactions with Affiliates. The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate or Subsidiary, except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate or Subsidiary. 21 Page 73 10.2 Merger, Consolidation and Sale of Assets. The Company will not, and will not permit any Subsidiary to, directly or indirectly, consolidate with, or merge into, any other Person or permit any other Person to consolidate with, or merge into, it or any Subsidiary, or sell, transfer or lease a "substantial part" of its assets in a single transaction or series of transactions to any Person, except that: (a) any Subsidiary may consolidate with, or merge into, the Company or another Subsidiary if, immediately after, and after giving effect to, such transaction, the Company is the surviving entity; (b) any Subsidiary may consolidate with, or merge into, any other Person, or allow any other Person to consolidate with, or merge into, it, if immediately after, and after giving effect to such transaction, the surviving entity is, or becomes a Subsidiary; (c) the Company may merge with any other Person, if (i) the Company is the surviving corporation, or if the Company is not the surviving corporation, the surviving corporation (the "Successor Corporation") shall be a solvent corporation organized under the laws of the United States of America or any state thereof and shall assume all obligations of the Company, (ii) the Successor Corporation, if not the Company, shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of the obligations of the Company under this Agreement and the Notes, including, without limitation, all covenants herein contained, and the Successor Corporation shall cause to be delivered to each holder of a Note an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms, and comply with the terms hereof, and (iii) immediately after, and after giving effect to, such merger, (A) no Default or Event of Default shall have occurred and be continuing, (B) the Successor Corporation would be permitted to incur at least $1.00 of additional Senior Indebtedness by the provisions of Section 10.8, and (C) the Successor Corporation has outstanding long-term, unsecured indebtedness rated "A" or its equivalent or better by any of Fitch, Inc., Moody's Investors Service, Inc. or Standard and Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc.; and (d) any Subsidiary may sell, transfer, lease or otherwise dispose of any part of its assets to the Company or any Subsidiary. 22 Page 74 A sale, transfer, lease or other disposition will be deemed to involve a "substantial part" of the Company's assets if the aggregate Net Proceeds Amount of all such sales, transfers, leases or other dispositions in any one year exceeds 10% of Consolidated Assets of the Company, or the aggregate Net Proceeds Amount of all such sales, transfers, leases or other dispositions since the Closing exceeds 30% of Consolidated Assets of the Company, as determined at December 31, 2002. 10.3 Liens. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any property or asset (including, without limitation, any document or instrument in respect of goods or accounts receivable) of the Company or any such Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, except: (a) Liens securing Excluded Indebtedness of the Company and its Subsidiaries; (b) Liens for taxes, assessments, governmental charges or levies which are not yet due and payable or the payment of which is not at the time required by Section 9.4; (c) any attachment or judgment Lien, to the extent such Liens would not result in an Event of Default; (d) Liens securing obligations (other than for Indebtedness for borrowed money) created in the ordinary course of the banking or financial service business; (e) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business (i) in connection with workers' compensation, unemployment insurance and other types of social security or retirement benefits, (ii) to secure (or to obtain letters of credit that secure) the performance of tenders, statutory obligations, surety bonds, appeal bonds, bids, leases (other than Capitalized Lease Obligations), performance bonds, purchase, construction or sales contracts and other similar obligations, or (iii) liens of landlords, carriers, warehousemen, mechanics, materialsmen and other similar Liens, in each case not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property; (f) any Lien existing on property of a Person immediately prior to its being consolidated with or merged into the Company or a Subsidiary or its becoming a Subsidiary, or any Lien existing on any property acquired by the Company or any Subsidiary at the time such property is so acquired (whether or not the Indebtedness secured thereby shall have been assumed), provided that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Subsidiary or such acquisition of property, and (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by the terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such acquired property; 23 Page 75 (g) leases or subleases granted to others, easements, rights-of-way, restrictions and other similar charges or encumbrances, in each case incidental to, and not interfering with, the ordinary conduct of the business of the Company or any of its Subsidiaries, provided that such Liens do not, in the aggregate, materially detract from the value of such property; (h) any Lien created to secure all or any part of the purchase price, or to secure Indebtedness incurred or assumed to pay all or any part of the purchase price or cost of construction, of tangible property (or any improvement thereon) acquired or constructed by the Company or a Subsidiary after the date of the Closing, provided that (i) any such Lien shall extend solely to the item or items of such property (or improvement thereon) so acquired or constructed and, if required by the terms of the instrument originally creating such Lien, other property (or improvement thereon) which is an improvement to or is acquired for specific use in connection with such acquired or constructed property (or improvement thereon) or which is real property being improved by such acquired or constructed property (or improvement thereon), (ii) the principal amount of the Indebtedness secured by any such Lien shall at no time exceed an amount equal to 80% (but 100% in the case of property (or improvement thereon) the acquisition of which is financed through a Capitalized Lease Obligation) of the lesser of (A) the cost to the Company or such Subsidiary of the property (or improvement thereon) so acquired or constructed and (B) the Fair Market Value (as determined in good faith by the board of directors of the Company) of such property (or improvement thereon) at the time of such acquisition or construction, and (iii) any such Lien shall be created contemporaneously with, or within thirty days after, the acquisition or construction of such property; and (i) other Liens not otherwise permitted by paragraphs (a) through (h), provided that the Indebtedness secured by such other Liens does not exceed $5,000,000. 10.4 Capitalization. The Company will not, at any time, have capital levels less than that necessary to be "well-capitalized", as that term is defined in 12 C.F.R. Sec. 225.2(r), as may be modified or amended, or any successor regulation of the Board of Governors of the Federal Reserve System. 10.5 Nature Of Business. The Company will not engage, and will not permit any of its Subsidiaries to engage, to any substantial extent in any business other than the businesses in which the Company and its Subsidiaries are engaged on the date of Closing and businesses reasonably related thereto or in furtherance thereof. 10.6 Consolidated Tangible Net Worth. The Company will not permit, at any time, Consolidated Tangible Net Worth to be less than $270,000,000. 10.7 Non-Performing Assets. The Company will not permit, at any time, Non-Performing Assets to exceed 2.00% of the sum of Loans Outstanding plus Other Real Estate Owned. 24 Page 76 10.8 Limitations on Senior Indebtedness. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, guarantee, or otherwise become directly or indirectly liable with respect to, any Senior Indebtedness, unless on the date the Company or such Subsidiary becomes liable with respect to any such Senior Indebtedness and immediately after giving effect thereto and the concurrent retirement of any other Indebtedness, (a) no Default or Event of Default exists, and (b) Senior Indebtedness does not exceed 20% of Total Capitalization as of the then most recently ended fiscal quarter of the Company. 10.9 Limitations on Consolidated Indebtedness. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, guarantee, or otherwise become directly or indirectly liable with respect to, any Indebtedness, unless on the date the Company or such Subsidiary becomes liable with respect to any such Indebtedness and immediately after giving effect thereto and the concurrent retirement of any other Indebtedness, (a) no Default or Event of Default exists, and (b) Consolidated Indebtedness does not exceed 30% of Total Capitalization as of the then most recently ended fiscal quarter of the Company. 10.10 Limitations on Double Leverage. The Company will not make any equity Investment in one or more Subsidiaries or any Person that concurrently with such equity Investment becomes a Subsidiary unless immediately after giving effect to such action, (a) the aggregate book value of all such Investments of the Company and its Subsidiaries (valued immediately after such action) would not exceed 125% of Consolidated Net Worth for the then most recently ended fiscal quarter of the Company and (b) no Default or Event of Default would exist. 11. EVENTS OF DEFAULT. An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make- Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest, fees or other amounts on any Note for more than five Business Days after the same becomes due and payable; or (c) the Company defaults in the performance or compliance with any term contained in Sections 10.2, 10.3, 10.4, 10.6, 10.7, 10.8 or 10.9; or (d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Senior Financial Officer obtaining actual 25 Page 77 knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (f) (i) the Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or make- whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $5,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Subsidiary is in default in the performance of or compliance with any term (other than the Excepted Condition) of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $5,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests and other than the Excepted Condition), (x) the Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $5,000,000, (y) one or more Persons have the currently effective right to require the Company or any Subsidiary so to purchase or repay such Indebtedness, or (z) in the case of voluntary prepayments at the instance of the Company, the Company fails to fulfill any obligation to make prepayment on the date such prepayment becomes due; or (g) the Company or any Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or any such petition shall be filed 26 Page 78 against the Company or any of its Subsidiaries and such petition shall not be dismissed within 60 days; or (i) a final judgment or judgments for the payment of money aggregating in excess of $5,000,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (j) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings or (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $5,000,000; and any such event or events described in clauses (i) through (iii) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or (k) any Insured Subsidiary shall (i) cease accepting deposits or making commercial loans on the instruction of any Bank Regulatory Authority with authority to give such instruction other than pursuant to an instruction generally applicable to banks organized under the jurisdiction of organization of such Insured Subsidiary, (ii) cease to be an insured bank under the Federal Deposit Insurance Act, as amended, and the rules and regulations promulgated thereunder or (iii) be required to submit a capital restoration plan of the type referred to in 12 U.S.C. Sec. 1831(b)(2)(C), as amended, re-enacted or redesignated from time to time. 12. REMEDIES ON DEFAULT, ETC. 12.1 Acceleration. (a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 50% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. 27 Page 79 Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon and (y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. 12.2 Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. 12.3 Rescission. At any time after any Notes have been declared due and payable other than pursuant to paragraph (a) of Section 12.1, the holders of not less than 50% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. 12.4 No Waivers or Election of Remedies, Expenses, etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs 28 Page 80 and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. 13.1 Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. 13.2 Transfer and Exchange of Notes. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6. 13.3 Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, an original purchaser or another holder of a Note 29 Page 81 with a minimum net worth of at least $50,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 14. PAYMENTS ON NOTES. 14.1 Place of Payment. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in San Rafael, California at the principal office of the Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. 14.2 Home Office Payment. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2. 15. EXPENSES, ETC. 15.1 Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you or holder of a Note in connection 30 Page 82 with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the fees and costs of any holder of Notes for filing both initially and subsequently annually thereafter, the Agreement and related financial information with the Securities Valuation Office of the National Association of Insurance Commissioners, or any successor entity. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). 15.2 Survival. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 17. AMENDMENT AND WAIVER. 17.1 Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or 31 Page 83 rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 14.2, 17 or 20. 17.2 Solicitation of Holders of Notes. (a) Solicitation. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 17.3 Binding Effect, etc. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 17.4 Notes held by Company, etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Subsidiaries or Affiliates shall be deemed not to be outstanding. 32 Page 84 18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of Treasurer, Westamerica Bancorporation, 4550 Mangels Blvd., Fairfield, California 94585, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section 18 will be deemed given only when actually received. 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "Confidential Information" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently 33 Page 85 becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, trustees, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. Notwithstanding anything to the contrary set forth herein or in any other written or oral understanding or agreement to which the parties hereto are parties or by which they are bound, the parties acknowledge and agree that (i) any obligations of confidentiality contained herein and therein do not apply and have not applied from the commencement of discussions between the parties to the tax treatment and tax structure of the Notes (and any related transactions or arrangements), and (ii) each party (and each of its employees, representatives, or other agents) may disclose to any and all Persons, without limitation of any kind, the tax treatment and tax structure of the Notes and all materials of any kind (including opinions or other tax analyses) that are provided to such party relating to such tax treatment and tax structure, all within the meaning of Treasury Regulations Section 1.6011- 4. 21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the 34 Page 86 accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. 22. MISCELLANEOUS. 22.1 Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. 22.2 Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day, except in the case of a payment on the final maturity date which shall include such additional days in such computation. 22.3 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 22.4 Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 22.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, 35 Page 87 Each signed by less than all, but together signed by all, of the parties hereto. 22.6 Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of California excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, WESTAMERICA BANCORPORATION By: ___________________________ Name: David L. Payne Title: Chairman, President and Chief Executive Officer The foregoing is hereby agreed to as of the date thereof. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ___________________ Name: ___________________ Title: ___________________ 36 Page 88 SCHEDULE A INFORMATION RELATING TO THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Principal Amount of Name and Address of Purchaser Notes to be Purchased THE NORTHWESTERN MUTUAL $15,000,000 LIFE INSURANCE COMPANY (1) All payments by wire transfer of immediately available funds to: Deutsche Bank Trust Company Americas 16 Wall Street Insurance Unit - 4th Floor New York, NY 10005 ABA #0210-0103-3 For the account of: The Northwestern Mutual Life Insurance Company Account No. 00-000-027 with sufficient information to identify the source of the transfer, the amount of interest, principal or premium, the series of Notes and the PPN (2) All notices of payments and written confirmations of such wire transfers: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Attention: Investment Operations Facsimile: (414) 665-6998 1 Schedule A Page 89 (3) All other communications: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Attention: Securities Department Facsimile: (414) 665-7124 (4) Address for delivery of Notes: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Attention: Christopher J. Menting Tax Identification Number: 39-0509570 2 Schedule A Page 90 SCHEDULE B DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "Affiliate" means any Person (other than a Subsidiary) (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company, (ii) which beneficially owns or holds 5% or more of any class of the voting stock of the Company or (iii) 5% or more of any class of the voting stock (or in the case of a person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by the Company or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. "Bank Holding Company Act" means the Bank Holding Company Act of 1956, as amended. "Bank Regulatory Authority" means with respect to any Person, the Board of Governors of the Federal Reserve System of the United States, the United States Comptroller of the Currency, the Federal Deposit Insurance Corporation, the State of California Department of Financial Institutions and all other bank or financial institution regulatory authorities (including, without, relevant state bank regulatory authorities) having jurisdiction over such Person. "Business Day" means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City or San Francisco are required or authorized to be closed. "Call Reports" mean the Consolidated Reports of Condition and Income required to be filed quarterly by the Subsidiaries with their banking regulators. "Capitalized Lease Obligation" means the amount of aggregate payments due and to become due under all leases required to be capitalized by GAAP. "Change of Control" means the acquisition by any person (as such term is used in Section 13(d) and Section 14(d)(2) of the Exchange Act as in effect on the date of the Closing) or related persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act as in effect on the date of the Closing) of the power to elect, appoint or cause the election or appointment of at least a majority of the members of the board of directors of the Company, through beneficial ownership of the capital stock of the Company or otherwise. "Closing" is defined in Section 3. 1 Schedule B Page 91 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Company" is defined in the first paragraph hereof. "Confidential Information" is defined in Section 20. "Consolidated Assets" means, at any time, the total assets of the Company and its Subsidiaries which would be shown as assets on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP, after eliminating all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries. "Consolidated Indebtedness" means, as of any date of determination, the total of all Indebtedness of the Company and its Subsidiaries outstanding on such date, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP. "Consolidated Net Income" means, with reference to any period, the after-tax net income (or loss) of the Company and its Subsidiaries for such period (taken as a cumulative whole), as determined in accordance with GAAP, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP. "Consolidated Net Worth" means, at any time, (a) the total assets of the Company and its Subsidiaries which would be shown as assets on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP, after eliminating all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries, minus (b) the total liabilities of the Company and its Subsidiaries which would be shown as liabilities on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP. "Consolidated Tangible Net Worth" means, at any time, the difference between (a) Consolidated Net Worth at such time, and (b) the net book amount of all assets of the Company and its Subsidiaries (after deducting any reserves applicable thereto) which would be shown as intangible assets and any "accumulated other comprehensive income" on the consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP. "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but 2 Schedule B Page 92 not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "Event of Default" is defined in Section 11. "Excepted Condition" means the Company's failure to comply with Section 5.7(b) of that certain Note Agreement dated February 1, 1996 between the Company and the "Purchasers" party thereto with respect to the issuance of the Company's $22,500,000 7.11% Senior Notes due 2006. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Indebtedness" means, with respect to the Company or any of its Subsidiaries, as of any date of determination, without duplication, any obligation incurred in the ordinary course of its Subsidiaries' business outstanding on such date with respect to (a) (i) any deposits, (ii) any banker's acceptance or letter of credit, (iii) any check, note, certificate of deposit, draft or bill or exchange, in each case issued for the account of any customer and (b) any discount with, borrowing from, or other obligation to, any Federal Reserve Bank or Federal Home Loan Bank obtained in the ordinary course of business, and not in conjunction with any Rescue Loan, (c) any agreement, made by it to purchase or repurchase securities or loans, or to participate in loans, (d) any transaction in the nature of an extension of credit, whether in the form of a commitment, guaranty or otherwise, undertaken for the account of a third party with the application by it of the same banking considerations and legal lending limits that would be applicable if the transaction were a loan to such party, (e) any transaction in which such Person acts solely in a fiduciary or agency capacity, (f) any transaction in which a Subsidiary borrows funds in the Federal funds market or (g) other obligations to its customers as such which do not represent obligations with respect to borrowed money. "Fair Market Value" means, at any time and with respect to any property, the sale value of such property that would be realized in an arm's- length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell). "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Governmental Authority" means (a) the government of 3 Schedule B Page 93 (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "Hazardous Material" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polycholorinated biphenyls). "holder" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "Indebtedness" with respect to any Person means, at any time, without duplication, (a) obligations for borrowed money, (b) obligations, contingent or otherwise, relative to the face amount of letters of credit, whether or not drawn, and banker's acceptances; (c) Capitalized Lease Obligations; (d) other items which would be classified as liabilities, in accordance with GAAP, including liabilities for the deferred purchase price for property (except for trade payables in the ordinary course of business); (e) obligations to pay the deferred purchase price of property or services, and indebtedness secured by a Lien on property owned or being acquired (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (f) obligations to purchase property or services under "take or pay contracts;" (g) obligations with respect to interest rate or currency swaps; and (h) other obligations of a similar character for which such Person has contingent liability as obligor, guarantor, surety, or in respect of which such Person assures a creditor against loss. 4 Schedule B Page 94 Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (h) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. Indebtedness shall not include Excluded Indebtedness. "Institutional Investor" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than 5% of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "Insured Subsidiary" means a subsidiary of the Company which is an "insured depositary institution" within the meaning of 12 U.S.C. Section 1813(c), as amended, re-enacted or redesignated from time to time. "Investment" means any investment, made in cash or by delivery of property, by the Company or any of its Subsidiaries (i) in any Person, whether by acquisition of stock, indebtedness or other obligation or security, or by loan, guaranty, advance, capital contribution or otherwise, or (ii) in any property. "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or capital lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Loans Outstanding" means the sum of loans and direct lease financings, net of unearned income, by the Company and its Subsidiaries on a consolidated basis. "Make-Whole Amount" is defined in Section 8.7. "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (b) the validity or enforceability of this Agreement or the Notes. "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Net Proceeds Amount" means, with respect to any sale, transfer, lease or other disposition of property, an amount equal to the difference of (i) the aggregate amount of the consideration (valued at the Fair Market Value of such consideration at the time of the consummation of such sale, transfer, lease or other disposition) received by such 5 Schedule B Page 95 Person in respect of such sale, transfer, lease or other disposition, minus (b) all ordinary and reasonable out-of-pocket costs and expenses actually incurred by such Person in connection with such sale, transfer, lease or other disposition. "Non-Performing Assets" means (i) Loans Outstanding that are not accruing interest or have been classified as renegotiated pursuant to the guidelines established by the Federal Financial Institutions Examinations Council, as reported on quarterly financial statements of the Company and its Subsidiaries, plus (ii) Other Real Estate Owned. "Notes" is defined in Section 1. "Officer's Certificate" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "Other Real Estate Owned" means "other real estate owned" as shown on the consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "property" or "properties" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "QPAM Exemption" means Prohibited Transaction Class Exemption 84- 14 issued by the United States Department of Labor. "Required Holders" means, at any time, the holders of at least 50% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or its Subsidiaries or any of its Affiliates). "Rescue Loan" means, in the case of any Federal Home Loan bank, an advance made pursuant to 12 CFR Section 950.13, and in the case of any Federal Reserve bank, an advance to (a) an undercapitalized insured depository institution (as defined in 12 CFR Section 201.2) to the extent outstanding for a period exceeding the period set forth in 12 CFR Section 201.3(d)(1)(i) or (ii), or (b) a critically undercapitalized insured depository institution (as defined in 12 CFR Section 201.2) to the extent outstanding for a period exceeding the period set forth in 12 CFR Section 201.3(d)(2). 6 Schedule B Page 96 "Responsible Officer" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Senior Financial Officer" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Senior Indebtedness" means Consolidated Indebtedness other than Subordinated Indebtedness. "Subordinated Indebtedness" means, as of any date of determination, all unsecured Indebtedness of the Company outstanding on such date that is subordinated in right of payment to the Indebtedness evidenced by the Notes pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance satisfactory to the Required Holders. "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Total Capitalization" means the sum of Consolidated Net Worth and Consolidated Indebtedness. 7 Schedule B Page 97 EXHIBIT 1 FORM OF NOTE WESTAMERICA BANCORPORATION 5.31% Senior Note Due October 31, 2013 No. 1 October 31, 2003 $15,000,000 PPN 957090 B* 3 FOR VALUE RECEIVED, the undersigned, Westamerica Bancorporation (herein called the "Company"), a corporation organized and existing under the laws of the State of California, hereby promises to pay to The Northwestern Mutual Life Insurance Company, or registered assigns, the principal sum of FIFTEEN MILLION DOLLARS on October 31, 2013, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 5.31% per annum from the date hereof, payable semiannually, on the last day of April and October in each year, commencing on April 30, 2004, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 7.31% or (ii) 2% over the rate of interest publicly announced by Citibank, N.A. from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America as provided in the Note Purchase Agreement referred to below. This Note is one of the Senior Notes (herein called the "Notes") issued pursuant to a Note Purchase Agreement, dated as of October 30, 2003 (as from time to time amended, the "Note Purchase Agreement"), between the Company and The Northwestern Mutual Life Insurance Company and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representations set forth in Section 6 of the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's 1 Exhibit 1 Page 98 attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note and the Note Agreement are governed by, and construed in accordance with, the law of the State of California, excluding choice-of- law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. WESTAMERICA BANCORPORATION By: ________________________ Name: ________________________ Title:________________________ 2 Exhibit 1 Page 99 EXHIBIT 4.4(a) FORM OF OPINION OF SPECIAL COUNSEL TO THE COMPANY 1. The Company is a corporation duly incorporated, validly existing and in corporate good standing under the laws of California. 2. The execution and delivery by the Company of the Note Agreement and the Note, and the performance by the Company of its obligations under the Note Agreement and the Note, are within the Company's corporate powers and have been duly authorized by all requisite corporate action on the part of the Company. The Company has duly executed and delivered the Note Agreement and the Note. 3. Each of the Note Agreement and the Note constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. 4. The execution and delivery by the Company of the Note Documents, and compliance by the Company with the provisions thereof: (i) will not, to the best of our knowledge, result in a breach or default (or give rise to any right of termination, cancellation or acceleration) under any material agreement binding upon the Company; (ii) will not violate any of the provisions of the Company's Charter or the Company's By-Laws or any law, statute, rule or regulation of the State of California or the laws of the United States of America, or, to the best of our knowledge, any judgment, order, writ, injunction or decree of any court or other tribunal located in the State of California applicable to the Company; and (iii) to the best of our knowledge, will not result in the creation or imposition of any Lien on any asset of the Company. No consent or approval by, or any notification of or filing with, any Governmental Authority of the State of California or the United States of America is required to be obtained or effected by the Company in connection with the execution, delivery and performance by the Company of the Note Documents or the issuance or sale of the Note, except for the filing of an executed copy of the Note Agreement as an exhibit to the Company's periodic reports filed under Section 13(a) of the Exchange Act. 1 Exhibit 4.4(a) Page 100 Form of Closing Opinion of Special Counsel for the Company Page ii 5. Based upon the representations set forth in Section 5 of the Note Agreement, the accuracy of which we have not independently verified or investigated, the issuance, sale and delivery of the Note under the circumstances contemplated by the Note Agreement do not, under existing law, require the registration of the Note or the filing of any notice under the "blue sky laws" of California, the registration of the Note under the Securities Act, or the qualification of the Note Agreement or an indenture under the Trust Indenture Act of 1939, as amended. 6. To the best of our knowledge, but without having investigated any governmental records or court dockets, and without having made any other independent investigation except for the review of our firm's internal docket system and discussions with officers of the Company, there is no action, suit or proceeding pending against the Company before any court or arbitrator or any governmental body, agency or official, which, in the event of an adverse decision, could reasonably be expected to have a Material Adverse Effect. 7. The issuance of the Note and the use of the proceeds of the sale of the Note in accordance with the provisions of and as contemplated by the Note Agreement (including, without limitation, the representations and warranties set forth in the Note Agreement) do not violate or conflict with Regulation T, U or X of the Board of Governors of the Federal Reserve System. 8. The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and Regulation Y (12 C.F.R., Part 225), as amended. 9. The Company is not required to be registered as an "investment company" under the Investment Company Act of 1940, as amended. 2 Exhibit 4.4(a) Page 101 EXHIBIT 4.4(b) FORM OF OPINION OF SPECIAL COUNSEL TO THE PURCHASER 1. The Company is duly incorporated, validly existing and in good standing under the laws of the State of California. 2. The Company has the corporate power to execute and deliver the Note Purchase Agreement, to issue and sell the Note and to perform its obligations set forth in the Note Documents. 3. The Note Documents have been duly authorized, executed and delivered by the Company and constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance of injunctive relief, regardless of whether enforceability is considered in a proceeding in equity or at law. 4. Assuming the accuracy of (i) the Company's representations in Section 5.13 of the Note Purchase Agreement and (ii) your representations in Section 6.1 of the Note Purchase Agreement, it is not necessary in connection with the execution and delivery of the Note under the circumstances contemplated by the Note Purchase Agreement to register the Note under the Securities Act of 1933, as amended, or to qualify an indenture in respect thereof under the Trust Indenture Act of 1939, as amended. 5. Neither the extension of credit nor the use of proceeds provided in the Note Purchase Agreement will violate Regulations T, U or X of the Board of Governors of the Federal Reserve System. 1 Exhibit 4.4(b) -----END PRIVACY-ENHANCED MESSAGE-----