PUBLIC DISCLOSURE. April 10, 2000 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION. Westamerica Bank

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1 PUBLIC DISCLOSURE April 10, 2000 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Westamerica Bank Mangels Boulevard Fairfield, California Federal Reserve Bank of San Francisco 101 Market Street San Francisco, California Note: This evaluation is not, nor should it be construed as, an assessment of the financial condition of this institution. The rating assigned to this institution does not represent an analysis, conclusion or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution.

2 TABLE OF CONTENTS I. General Information 1 II. Institution A. Overall Rating 2 B. Lending, Investment, Service Test Table 2 C. Description of Institution 3 D. Scope of Examination 5 E. Overall Conclusions with Respect to Performance Tests 5 F. Compliance With Fair Lending Laws and Regulations 10 III. Assessment Area Summaries Assessment areas for which a full-scope review was performed A. Marin Assessment Area 11 B. Fresno Assessment Area 21 C. Sacramento Assessment Area 30 IV. Assessment Area Summaries Assessment areas for which a limited scope review was performed 37 V. Appendix A Glossary of Terms 45

3 GENERAL INFORMATION The Community Reinvestment Act (CRA) requires each federal financial supervisory agency to use its authority when examining financial institutions subject to its supervision to assess the institution s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. Upon conclusion of such examination, the agency must prepare a written evaluation of the institution's record of meeting the credit needs of its community. This document is an evaluation of the CRA performance for Westamerica Bank prepared by the Federal Reserve Bank of San Francisco, the institution s supervisory agency, as of April 10, The agency rates the CRA performance of an institution consistent with the provisions set forth in Appendix A to CFR Part

4 INSTITUTION OVERALL RATING INSTITUTION S CRA RATING: This institution is rated satisfactory. The overall CRA performance of Westamerica Bank is satisfactory. The bank s lending record reflects an affirmative effort to meet the credit needs in its assessment areas, particularly those of small businesses. Complementing the lending record of the bank is its record of community development investments. These qualified investments primarily addressed the community development need of affordable housing present in the assessment areas of the bank and in the state of California as a whole. With regard to the Service Test, branch offices and banking services are bank reasonably accessible to essentially all portions of the various assessment areas and bank personnel have provided an acceptable level of community development services. WESTAMERICA BANK PERFORMANCE LEVELS Lending Test* PERFORMANCE TESTS Investment Test Service Test Outstanding High Satisfactory X X Low Satisfactory X Needs to Improve Substantial Noncompliance *NOTE: The lending test is weighted more heavily than the investment and service tests when arriving at an overall rating. 2

5 DESCRIPTION OF INSTITUTION Westamerica Bank, a wholly owned subsidiary of Westamerica Bancorporation, is headquartered in Fairfield, California. It began operations on July 1, 1983, and has expanded through a series of mergers and acquisitions. The last such acquisition was of Valliwide Bank located in Fresno, California, which was completed in However, on March 12, 2000, the bank announced the signing of a Definitive Merger Agreement with First Counties Bank, headquartered in Clearlake, California. As of December 31, 1999, Westamerica Bank had total assets of over $3.8 billion. The majority of those assets consisted of loans and leases, which totaled over $2.3 billion or 60 percent of total assets. The table below illustrates the distribution of these loans at both the beginning and the end of the review period. Loan Type 12/31/99 Dollar Amount ( 000s) Percent of Total 12/31/97 Dollar Amount ( 000s) Percent of Total Real Estate Secured Construction and LandDevelopment 57, ,205 3 Secured by Farmland 27, ,679 1 Secured by Single- and Multi- Family Residential Real Estate 452, , Secured by Non-farm Non-residential Real Estate 767, , Agricultural Loans and Other Loans to Farmers 49, ,292 4 Commercial and Industrial and All Other Non-Consumer Loans 439, , Consumer Loans 321, , States and Political Subdivisions 154, ,013 5 Total 2,268, ,206, As illustrated, the bank extends both consumer- and business-purpose credit. However, the major concentration is in business-purpose loans, particularly commercial real estate (i.e., loans secured by non-farm and non-residential real estate) and commercial and industrial. Together, these types of loans accounted for 53 percent and 52 percent of outstandings at year s-end 1999 and This concentration reflects the primary business strategy of the bank, which is to serve the needs of small- and middle-market businesses and professionals through the creation of on-going rather than transactionally-based banking relationships. This target market is reached through a branch and hub network. Branch loan officers actively solicit business loans by means of an off-site calling program and submit completed applications to one of the bank s commercial credit hubs for underwriting. Similarly, consumer loan applications are taken at the branches and forwarded to a centralized location for underwriting. In 1999, the bank restructured its mortgage lending function into a subsidiary of the bank, WestStar Mortgage. 3

6 The bank meets business and consumer credit needs through the following credit products: Business unsecured revolving lines of credit; revolving lines of credit secured by improved real estate and commercial assets; term loans, including term loans secured by commercial or industrial property; and Consumer - auto loans; mortgage loans; home equity loans; personal loans; loans secured by savings and certificates of deposit; unsecured credit lines; home equity credit lines; stock or bond secured credit lines; and overdraft protection accounts. In addition, the bank has a business and consumer program of Community Access Loans (CAL) targeted to lower income residents and smaller businesses in the assessment areas of the bank. The consumer program includes home loans, home equity loans, and automobile loans all with adjusted features designed to accommodate low- and moderate-income individuals. The CAL Business program provides financing to start a small business or expand an existing one. The bank operates eighty-six branches in twenty-two assessment areas in the state of California. 1 Fourteen of these assessment areas consist of entire counties Fresno, Kern, Kings, Marin, Madera, Napa, Sacramento, San Francisco, Solano, Sonoma, Stanislaus, Tulare, Tuolumne, and Yolo. The remaining eight assessment areas consist of portions of Alameda, Contra Costa, Mendocino (from which two assessment areas are drawn), Merced, Nevada, Placer, and San Luis Obispo counties. During the period of review, there were no legal or financial impediments that would have prevented the bank from meeting the credit needs of its assessment areas consistent with the bank s size, financial capacity, and assessment area economic conditions. The bank s previous Community Reinvestment Act examination was conducted as of February 23, 1998, and resulted in an overall satisfactory performance rating. 1 As of the time of writing, the bank had announced the planned opening of another branch in Emeryville, California. 4

7 SCOPE OF EXAMINATION The scope of this examination consisted of a review of the bank s record of lending, investment, and service activities performed during the calendar years of 1998 and Three assessment areas were selected for full-scope reviews - Marin, Fresno, and Sacramento. Activities in the remaining nineteen assessment areas were reviewed for their consistency with the performance in the full-scope assessment areas. Detailed below is the record of reported lending activity considered for the Lending Test. Loan Type Number and Dollar Volume (000 s) and Percentage of Loans Percentage of Loans Home Purchase , Home Refinance , Home Improvement , Multifamily Housing , Small Business 3, , Small Business Secured by Residential Real Estate , Small Farm , Motor Vehicle 9, , Total 15, ,121, Given the bank s target market of small- to medium-sized businesses, the evaluation placed greater weight on the bank s small-business lending activity than on the consumer-purpose (i.e., housing and motor vehicle) activity. The relative weight placed on small farm lending varied based on the credit needs of the different assessment areas. OVERALL CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS LENDING TEST Westamerica Bank s overall performance under the lending test is high satisfactory. Lending levels reflect good responsiveness to assessment area credit needs. During the review period, the quarterly loan-to-deposit ratio of the bank averaged 73 percent, with the lowest ratio being 70 percent for the fourth quarter of 1998 and the highest being 74 percent for the fourth quarter of The 73 percent average compares favorably to the state average of 68 percent. Primarily contributing to the overall performance of the bank was the high percentage of loans made within the bank s assessment areas, and the reasonable distribution of those loans throughout these areas. Additionally, the bank extended a high level of loans to small businesses consistent with the level of such businesses in the assessment areas. The bank has continued to extend community development credit, thereby adequately addressing the 5

8 community development needs of its assessment areas. Further, the use of flexible lending standards has enabled the bank to meet assessment area credit needs, particularly the housing credit needs of low- and moderate-income individuals. Assessment Area Concentration To determine assessment area concentration, a geographic analysis was performed of the reported loans. The results of that analysis indicated that 86 percent of the loans were extended within the bank s assessment areas, which represented 90 percent of the dollars extended during the review period. Thus, in terms of numbers and of dollars, the bank s practice during the period was to extend a substantial majority of its loans within its assessment areas. The table below illustrates the assessment area concentration for the individual loan types. Loan Type Inside Outside # % $ % # % $ % Home Purchase , ,004 4 Home Refinance , ,890 5 Home Improvement , Multifamily Housing , Small Business 3, , ,198 9 Small Business Secured by Residential Real Estate , Small Farm , , Motor Vehicle 8, , , , Total 13, ,003, , , Lending Distribution by Geography The bank s geographic distribution of loans reflects a reasonable penetration throughout the different assessment areas and does not unreasonably exclude low- or moderate-income areas. Small business lending generally reflected the concentration of small businesses in the various assessment areas. Similarly, small farm lending reflected the distribution of agricultural land throughout the different assessment areas. Housing and motor vehicle lending was also representative of the distribution of census tracts when considered in light of assessment area characteristics. For example, the housing composition of low- and moderate-income tracts in many of the bank s assessment areas limited housing-related lending opportunities in those areas, while the population level of census tracts occasionally limited the bank s motor vehicle lending opportunities. 2 In light of the comparatively small number (i.e., 12 in Marin, 28 in Fresno, and 2 in Sacramento) of small business loans secured by residential property, they have been combined with the remaining small business loans for all assessment area evaluations. Under the regulation, the benefiting location of the small business loan (rather than the location of the collateral residence) is used in reporting the loan. This is true whether the small business loan is secured or not. Hence, the combining of the two types does not compromise the analysis because the evaluation of geographic distribution incorporates the geographic distribution of potential borrowers (i.e., businesses). 6

9 Lending Distribution by Business Size and Borrower Income The bank s core lending record revealed a good penetration among small businesses. A majority (60 percent) of the small business loans extended during the period was to small businesses, often in smaller dollar amounts that addressed an identified credit need. Additionally, consumer lending levels showed an adequate penetration among borrowers of different income levels when assessment area demographics are considered. Prohibitive housing costs often limited the bank s ability to extend housing-related loans to low- and moderate-income individuals. Conversely, the level of motor vehicle lending to low- and moderate-income borrowers was generally consistent with the level of such families in the various assessment areas. Community Development Lending Westamerica Bank extended a satisfactory level of community development loans. Such loans were made in half of the twenty-two assessment areas and totaled $59 million. The majority of these loans supported the creation of affordable housing for low- and moderate-income individuals, with the remainder supporting the delivery of social services to low- and moderate-income individuals. Innovative and Flexible Loan Practices A review of the bank s loan products and underwriting practices noted products for which certain criteria have been adjusted to facilitate credit extensions to low- and moderate-income borrowers and to small businesses. Such adjustments included lower minimum loan amounts, higher advances on collateral, and longer terms to reduce payment amounts. Below is a summation of the type, number, and total dollar volume of these Community Access Loans (CAL). Type Number Total Dollars Motor Vehicle 115 $1,230,223 Mobile Home 6 163,100 Home Improvement 3 55,300 Home Equity 4 80,000 Home Purchase 38 5,039,837 Total 203 $6,568,460 INVESTMENT TEST Westamerica Bank s record under this test demonstrates a high satisfactory performance based upon the significant level of investment activity and the responsiveness of that activity to an ongoing community development need in the various assessment areas and the state as a whole. 7

10 During the period of review the bank purchased over $50 million in qualified investments, bringing its qualified investment total to over $70.6 million. In addition to the qualified investments, the bank made $104,000 in qualified grants. The investment total represents 6 percent of the bank s investment portfolio (i.e., held-to-maturity and available-for-sale securities) as of December 30, The investment total is a significant increase from the $21.6 million in qualified investments at the time of the previous examination in April Qualified investments benefited all twenty-two-assessment areas with the majority addressing affordable housing for low- and moderate-income individuals within the bank s assessment areas or a wider area encompassing these assessment areas. As its primary form of making qualified investments, the bank purchased over $40 million in targeted mortgage-backed securities, consisting of loans to low- and moderate-income individuals or in low- or moderate-income census tracts throughout all of its assessment areas. Additionally, a $5 million purchase was made of a mortgage revenue bond issued by the California Housing Finance Agency, with the proceeds to be used to facilitate mortgage loans to low- and moderate-income individuals throughout the state. The bank also purchased certificates issued by school districts serving primarily low- and moderate-income students, totaling over $2.6 million. In addition, the bank continues to fund its $8.2 million equity investment in an organization (California Corporate Tax Credit Fund) whose purpose is to acquire a diversified portfolio of affordable housing properties throughout California. According to recent records, affordable housing projects have begun in several locations throughout the state, many of which are within the bank s various assessment areas. SERVICE TEST The bank s provision of retail banking and community development services resulted in a low satisfactory record. Branch placement promoted the reasonable accessibility of bank products and services to the majority of businesses and households within the various assessment areas. However, the breadth and volume of community development services was limited. Nevertheless, what services were provided did address acknowledged needs of the bank s assessment areas, such as increasing financial literacy among low- and moderate-income individuals. Retail Banking Services The bank maintains eighty-six branches and eight stand-alone ATMs throughout its assessment areas. Eighty-five of the branches provide retail customers with access to an ATM and twentysix offer drive-up banking services. Business hours and services at the branches generally meet assessment area needs. All branches offer a full range of products and services including Economy Checking (low-cost deposit services) and Community Access Loan programs for lowand moderate-income individuals. Operating hours are generally 9:00 5:00 Monday through Thursday with extended hours of 9:00 6:00 on Friday, and twenty-two branches have 3 As of December 31, 1999 the bank s investment portfolio stood at $1.174 billion. It was $1.176 billion as of December 31, 1997 at the beginning of the period of review. 8

11 Saturday hours. Branches that do not offer Saturday hours do not have a negative impact on the accessibility of services to low- and moderate-income individuals. The table below illustrates the distribution of branches by the income of the geography. This distribution parallels the distribution of businesses and households. That is, the concentrations of branches reflect the concentrations of businesses and households. Census Tract Income Categories Distribution of Bank Offices by Income Category of the Census Tract Bank Offices by Census Tracts Businesses Households Tract Location # % # % # % # % Low , , Moderate , , Middle , ,108, Upper , , Total , * 2,193, * *Does not add to 100 due to rounding. The bank s record of opening and closing branches has not adversely affected the accessibility of its delivery systems. Since the previous examination, the bank has opened one new branch in a middle-income census tract in the city of Livermore. No branch offices have been closed since the previous examination. In addition, the bank maintains a comprehensive branch closing policy stating that any branch closure will occur only after the bank has evaluated the potential impact of that closure. Community Development Services Bank personnel performed a limited number of community development services during the review period, and in some assessment areas, no services were performed. Service activities are primarily conducted at the branch level and consisted of activities that promote affordable housing for low- and moderate-income individuals, provide community services targeted to low- and moderate-income individuals, and support the development of small businesses and small farms. During the review period the bank did create a community development service called Basic Budgeting Seminars. Basic Budgeting Seminars are presented in partnership with locally-based non-profit agencies and are designed to increase the financial literacy of seminar participants by teaching budgeting, credit management, and saving skills. Targeted participants include women re-entering the workforce, welfare-to-work trainees, low-income families, and at-risk youths receiving job training. Bank records indicate 14 classes were conducted during the review period and some 719 individuals have participated in the seminars. Additionally, in some assessment areas the bank has contracted with small business counselors. The agreement between the bank and these counselors stipulates that they shall refer applicants for the CAL Business program and provide training and consulting services to these loan applicants. This service is available to only low- and moderate-income individuals and small businesses located in low- and moderate-income geographies. 9

12 COMPLIANCE WITH FAIR LENDING LAWS AND REGULATIONS No violation of the substantive provisions of anti-discrimination laws and regulations were identified at this examination. Westamerica Bank has developed policies, procedures, training, and internal audit programs designed to ensure its lending practices comply with all governing fair lending laws and regulations. 10

13 ASSESSMENT AREA SUMMARIES For each assessment area where a full-scope review was performed using the examination procedures. MARIN ASSESSMENT AREA DESCRIPTION OF OPERATIONS IN MARIN ASSESSMENT AREA Westamerica Bank s Marin Assessment Area (henceforth, Marin) consists of the fifty-one census tracts comprising Marin County. Marin is bordered by Sonoma County to the north, by the Pacific Ocean to the west, by the San Francisco Bay to the south, and by both San Francisco Bay and San Pablo Bay to the east. The table below illustrates some of the 1990 census data associated with these census tracts. There are no low-income census tracts in Marin. Tract Categories Census Tracts Population Households Families # % # % # % # % Moderate-Income , , ,366 7 Middle-Income , , , Upper-Income , , , Total , , ,948 99* *Does not equal 100 due to rounding. As indicated, over half of Marin s population, households, and families are concentrated in the upper-income census tracts. Similarly, the majority (50 percent) of Marin s households and families are upper-income. In this regard, Marin County has traditionally had the highest per capita income in California, and as of January 1999, the median family income for the county was $72,400. While upper-income households and families predominate, middle-income households and families represent the next concentration, followed by low- and moderateincome households and families as illustrated below. Income Categories Households Families # % # % Low-Income 15, , Moderate-Income 14, , Middle-Income 17, , Upper-Income 47, , Total 95, , Although Marin is a relatively affluent community, census data indicates some poverty does exist. According to that data, 5 percent of households and 3 percent of families were living below poverty levels. 5 Further analysis of these households and families noted their geographic 4 Current estimates of county population are that, as of January 1998 and January 1999, the population was respectively 244,100 and 247, The most recent estimate by the U.S. Census Bureau is that a little over 6 percent of the county 11

14 distribution followed that of other area families and households. That is, most were in upper-, followed by middle-, and moderate-income census tracts. Nevertheless, moderate-income tracts had the highest percentage of resident households and families in poverty, respectively 10 and 11 percent. Additionally, in the moderate-income tracts, 41 percent of renters (i.e., 1,895) were devoting more than 30 percent of their income to housing expenses. According to the Department of Housing and Urban Development (HUD), housing costs are considered affordable when they require no more than 30 percent of a low-income renter s income. With some of these 1,895 renters likely to be low-income, this points to a need for affordable housing in Marin. To illustrate - fair market rent for a one-bedroom unit is $923, which, on an annual basis, represents 31 percent of a low-income of $36,200. The need for affordable housing is confirmed by the Marin Economic Commission. In a profile, the Commission states the Marin Housing Authority has seen a 25% increase between 1997 and 1999 in the number of calls for housing assistance. 6 While the number of calls have increased, the calls do not result in more families being placed in affordable housing. Instead, the result is an increased burden on government and non-profit organizations, and longer waiting lists for housing assistance. As an illustration of this unmet demand for affordable housing, the Commission mentions the Housing Authority s section 8 (i.e., a HUD subsidized housing program) waiting list is five years long. Marin s affluence affects other housing options besides renting. This affluence affects the homeownership opportunities for low-, moderate-, and middle-income residents. The census data indicated 59 percent of all occupied housing units were owner-occupied. Four percent of such units were in moderate-income tracts, 35 percent in middle-income tracts, but 61 percent were in upper-income tracts. This geographic distribution reflects the high cost of housing in Marin. In November 1999, the median sales price for a home in Marin County was $450,000, which represents a 36 percent increase over 1998 prices. 7 Under conventional mortgage underwriting guidelines, a moderate-income family with the financial resources to purchase a home could qualify for a only loan with a monthly payment of $1,351, which results in a maximum purchase price of $148, In order to afford the median home in Marin County, at a minimum, a borrower would have to have zero debt, have $67,500 available for a down payment and closing costs, and have an annual income of $136,567. Such an income is considered upper-income in this assessment area. Turning to the economics of Marin, during the review period the unemployment rate averaged 2 percent. This average compares favorably to that of the state for the same period, which was 5 percent. As of December 1998, the major employment sector was service producing, accounting for 90 percent of all employment. The remaining 10 percent was in goods producing. Within the service sector, jobs were concentrated in the three subcategories of trade (i.e., retail trade), services (i.e., business support services), and government (i.e., local population are living in poverty. 6 Source: Marin Economic Commission, Marin Profile 1999, p Source: Marin County, November Source: FNMA How Much House Can You Afford; Purchase price calculated using zero debt, 10 percent down payment, closing costs of 5 percent of sales price, and a 30-year fixedrate mortgage at 8.0 percent. 12

15 government). The same sector data are not available for December However, according to the California Department of Labor, employment in the computer programming, data processing, and other computer-related services were expected to lead employment growth in Marin through Dun & Bradstreet data regarding business formation in Marin indicate that there are approximately 14,559 business establishments. The data further reveal that 91 percent of such establishments are small businesses as defined by the regulation (i.e., have gross annual sales of $1 million or less). The geographic distribution of all businesses is depicted in the following table. This distribution mirrors that of households and families discussed earlier in that most businesses are in the upper-income tracts, followed by the middle- and moderate-income tracts. Tract Category Breakdown of Businesses by Number Gross Annual Sales of Businesses < $1 million > $1 million Small Business Percentage of Tract Businesses Moderate-income 1,395 1, Middle-income 5,931 5, Upper-income 7,233 6, Total 14,559 13,189 1, These figures, as well as information obtained form community representatives suggest that the biggest credit needs among these small businesses are for operating loans in small dollar amounts of $100,000 or less. In 1998, Marin ranked 42 nd in agricultural production among California s 58 counties. For that year, total agricultural production equaled more than $56 million, with milk production accounting for 65 percent of that value. According to a report of the U.C. Cooperative Extension, farms and ranches account for 50 percent of the land in Marin. Dun & Bradstreet data indicate that 46 percent of agricultural businesses are located in middleincome census tracts. The next geographic concentration is in upper-income tracts, which contain 41 percent of such businesses. The remaining 13 percent are located in the moderateincome tracts. Because agriculture is an intensive land use industry, most farms are located outside of the populated city centers and are located in the unincorporated areas of the county. Some idea of the competitive banking environment Westamerica Bank operates in may be obtained from a review of deposit share data. According to the survey of insured deposits performed by the Federal Deposit Insurance Corporation, as of June 30, 1998, there were 25 financial institutions operating 78 branches in Marin. Of the $4.7 billion on deposit at these institutions, Westamerica Bank held 20 percent, the largest share among the seventy-eight institutions. Ranking next in marketshare were Bank of America and Wells Fargo Bank at 16 and 13 percent respectively. For 1999, Westamerica Bank retained its top ranking with a market share of 18 percent. Again, Bank of America and Wells Fargo Bank followed 9 For 1999, employment sector data were collected in aggregate for the three west Bay Area counties, including Marin, that comprise the San Francisco MSA. The Marin data had not been disaggregated as of the writing of this public evaluation. 13

16 respectively at 17 and 15 percent. Thus, in Marin Westamerica Bank s closest competitors are institutions considerably larger. LENDING TEST As previously stated, in light of the bank s operating emphasis of meeting the banking needs of small- to medium-sized businesses, the lending test weighed the small business loan record of the bank more than the record of other loan types. That record suggested that the bank was responsive to assessment area credit needs, extending a substantial majority of its small business loans to small businesses. Additionally, the geographic distribution of these loans was in keeping with the geographic distribution of area businesses. Community development lending activity, although limited in Marin, nevertheless addresses the on-going need for affordable housing. Below is a table illustrating the Marin lending activity during the review period. Number and Percentage of Dollar Volume (000 s) and Loan Type Loans Percentage of Loans Small Business , Small Farm ,926 1 Home Purchase , Home Refinancing , Home Improvement Multifamily Motor Vehicle ,917 4 Total 1, , Lending Distribution by Geography The bank s small business lending distribution generally follows the distribution of businesses in the assessment area. Recall that the highest concentration of businesses (50 percent) are in the assessment area s upper-income tracts, with the next concentration of businesses being in middle-income tracts. The bank s distribution of small business loans mirrors this ranking, as illustrated below. Distribution of Businesses and Small Business Loans by Income Category of Census Tract Census Tract Income Businesses Small Business Loans Category # % # % Moderate-Income 1, Middle-Income 5, Upper-Income 7, Total 14, The small farm loans extended during the period totaled only fourteen. The low number is in keeping with the overall low concentration of agricultural loans in the bank s loan portfolio. 14

17 Nevertheless, the fourteen loans were evenly concentrated in the moderate- then middleincome tracts; in both such geographies five (36 percent) loans were extended. The remaining four loans were to enterprises in upper-income geographies. Although the fourteen loans are a small universe, their concentration is in keeping with the concentration of agricultural businesses, which are predominantly located first in middle-, then upper-, and finally moderate-income tracts. For the remaining loans, the geographic concentration is also in upper-income census tracts, consistent with the demographic profile of the assessment area. The distribution of the motor vehicles loans is illustrated in the following table. Distribution of Motor Vehicle Loans by Income Category of Census Tract Census Tract Income Category Families Motor Vehicle Loans # % # % Moderate-Income 4, Middle-Income 21, Upper-Income 32, Total 58, * *Does not add to 100 due to rounding. As the above illustrates, the number of loans increases as the income level of the geography increases. Ninety-four percent of these loans are in middle- and upper-income tracts, which is exactly the same as the distribution of families in these census tracts. Accordingly, the geographic distribution of the motor vehicle loans is considered reasonable. The distribution of home loans is illustrated below. Census Tract Income Category Distribution of Home Loans by Income Category of the Census Tract Homeowners Home Purchase Loans Home Refinance Loans Home Improvement Loans # % # % # % # % Moderate-Income 2, Middle-Income 20, Upper-Income 35, Total 58, As can be seen, the geographic distribution of housing-related loans generally follows the distribution of owner-occupied housing units in Marin. In moderate-income tracts, 63 percent of housing units are rental, 30 percent owner-occupied, and 7 percent vacant. Housing units in middle-income tracts are primarily (54 percent) owner-occupied, with 40 percent being rental units. Upper-income tracts have the highest percentage of owner-occupied units at 67 percent. Further, in the assessment area, 61 percent of the owner-occupied housing units are in upperincome tracts. Thus, the geographic distribution of the bank s home loans accords with Marin s distribution of owner-occupied dwellings. 15

18 Lending Distribution by Business Size and Borrower Income The small business lending record of the bank reflects a good penetration of such loans among small businesses. Of the 584 such loans extended, 65 percent went to small businesses. Similarly, 68 percent of the $97.7 million extended went to small businesses. This preponderance is in keeping with the business formation of the assessment area. According to Dun & Bradstreet data, of the 14,459 businesses in Marin, approximately 13,075 (90 percent) are small businesses. Thus, it would be expected that the majority of the small business loans of the bank would be extended to small businesses. In addition, of the loans extended to small businesses, 60 percent were in amounts of $100,000 or less directly addressing the stated credit need for small businesses. As to small farm loans, here the minority (14 percent by number, 5 percent by dollars) of such loans went to small farms. This contrasts with the high predominance of smaller (vis-à-vis sales) farms in the area. According to the most recent agricultural census, done as of 1997, of the 276 farms in Marin, 204 (74 percent) had sales of $99,000 or less. Of these 204, 105 (51 percent) had sales of less than $10,000. Further, of the 276 farm operators, 104 (38 percent) have a principal occupation other than farming. The low sales and the pursuit of income outside of farming suggest that many small farms may not have the cashflow to support a loan. Additionally, discussion with a Marin farm advisor indicated that many Marin farmers do not carry a lot of debt. If credit were sought, there are other credit sources used for farm loans. Such other sources include, the advisor stated, a farm credit co-operative and another bank, located in Sonoma County, which borders Marin to the north. The advisor indicated that certain farmers would find a bank located in the adjoining area of northern Marin and southern Sonoma County to be more convenient for seeking credit. Thus, factors of financial competition and geographic convenience may affect the ability of Westamerica Bank s Marin branches to extend credit to some small farms. 10 These same factors appear to have affected other large banks. For example, in 1998, six large banks, including Westamerica Bank, extended just 14 small-farm loans. 11 Of the 14 loans extended only four (29 percent) were to small farms, one of which was extended by Westamerica Bank. Consequently, the bank s limited extension of small farm loans to small farms is reasonable, given the bank s market emphasis on commercial lending, competition from other financial organizations, and certain characteristics of small farms in Marin. 10 Research by this Reserve Bank also highlights geographic convenience (i.e., being located in an agricultural area) as a determinant of a bank s farm lending level: see Mark E. Levonian, Explaining Differences in Farm Lending among Banks, Economic Review 1996, Number Only the 1998 aggregate CRA Data were available at the time of this examination. 16

19 Concerning the bank s residential real estate lending record, the predominant borrowers are upper-income as illustrated in the table below. Home Loan Type Borrower Income Percent Family Purchase Refinance Improvement Level Distribution # % # % # % Low-Income Moderate-Income Middle-Income Upper-Income Total The predominance of such borrowers is to be expected, given the high cost of housing in Marin. Half of Marin s families and households are upper-income. Additionally, the high median home prices preclude homeownership for many of the low-, moderate-, and middle-income residents of Marin. Therefore, the preponderance of upper-income individuals in the residential portfolio of the bank is reasonable, reflecting economic forces in Marin. The distribution of borrowers for motor vehicle loans is illustrated below. In this portfolio, the distribution of borrowers generally matches that of the distribution of families and households in Marin. Again, upper-income applicants predominate, as do such families and households in Marin. Moderate-income applicants represent the next concentration, closely followed by middle-income borrowers. Lastly, low-income borrowers represent the lowest concentration, which is in keeping with the concentration of such families and households in Marin. Thus, given the distribution of families and households in Marin, the distribution of motor vehicle borrowers is reasonable. Borrower Income Level Percent Family Motor Vehicle Loans Distribution # % Low-Income Moderate-Income Middle-Income Upper-Income Total Community Development Lending Although the bank s community development lending activity is limited, it is in keeping with available opportunities and, therefore, is considered adequate. During the period of review, the bank extended one community development loan in Marin. The loan was extended to a non-profit corporation with the primary purpose of providing affordable housing in Marin. The loan amount was over $1.3 million and secured by a multifamily dwelling. Through this refinancing, the entity obtained a decrease in operating costs (i.e., interest expense). Given the high need for affordable housing in Marin, the bank s assistance to such entities facilitates the meeting of that need. 17

20 Additionally, some of the small business loans extended have a community development impact, but due to their loan amounts are not considered community development loans. Three such loans were noted, totaling over $1.2 million. One loan was extended to a community-based housing development and financing organization for low- and moderateincome housing. Another loan was extended to a non-profit organization that provides residential and vocational programs for individuals with developmental and other cognitive disabilities that limit the individuals income potential. The third loan was extended to a nonprofit providing drug rehabilitation, remedial education, housing, and community re-entry assistance to individuals overcoming drug abuse. In other assessment areas (e.g., Fresno), the bank has developed a community development lending record by financing the construction of housing affordable to low-, moderate-, and middle-income borrowers. According to the Marin County Community Development Agency, no publicly-owned suitable sites are available for developing affordable housing and privately-owned sites were too small or have other development constraints [precluding their usage]." 12 Additionally, contact with a community representative referred to community development lending programs of larger institutions such as Bank of America and Wells Fargo Bank. Thus, given the paucity of land and the efforts of larger institutions, opportunities for greater participation may be limited for financial institutions of the size of Westamerica Bank. INVESTMENT TEST The bank s record in Marin, in the context of the bankwide record under this test, is in keeping with the overall high satisfactory rating. Relevant investment and grant activities addressed acknowledged community development needs, particularly affordable housing, and the delivery of social services to low- and moderate-income individuals. The bank s qualified investments consisted of two securities purchases totaling $1.7 million. Each purchase consisted of a loan pool of home mortgages to low- and moderate-income individuals in Marin. In all, the two pools comprised ten home mortgage loans. Such investments sustain a secondary market for the securitization and recirculation of funding for loans to low- and moderate-income individuals, thereby ensuring the availability of home mortgage credit to such individuals. For the period, the bank s qualified grants in Marin totaled $20,200. Beneficiaries included housing, childcare, and employment organizations advocating for low- and moderate-income individuals. 12 From a letter to the Marin County Board of Supervisors dated December 15, 1998, page three. 18

21 SERVICE TEST The delivery systems of the bank are reasonably accessible to essentially all portions of Marin. No changes to delivery systems have been made that would inconvenience any geographies of the assessment area, including moderate-income geographies. Products offered do not vary among branches. Although, community development services were offered, they were generally adequate in number and scope of activity. The bank s overall performance in this assessment area is consistent with the bank s overall low satisfactory rating for the Service Test. Retail Banking Services Bank branches are located in major population centers along transportation infrastructure. Such population centers include the cities of Larkspur, Mill Valley, Novato, Valley, San Anselmo, San Rafael, and Sausalito, which together account for 60 percent of Marin s population. The bank continues to operate eleven branches in Marin and no changes were made during the period of review. The distribution of these branches and tandem demographics are illustrated in the following table. Census Tract Income Category Distribution of Bank Offices by Income Category of the Census Tract Percent of Census Tracts in Percent of Area Assessment Area Area Families Businesses Bank Offices by Tract Location # % % % # % Moderate-Income Middle-Income Upper-Income Total * 11 99* * Does not total to 100 due to rounding. One of the eleven branches is located in a moderate-income tract, with two others deemed reasonably accessible to adjacent moderate-income areas. There are no material differences in the availability of products at the eleven branches. Retail services available offered include: 24-hour telephone customer service; StarConnect, which allows businesses, using a personal computer, to perform banking functions (e.g., set up bill payments to any payee, obtain balances, transfer funds); Onsite Bank, another pc-based service, allows businesses to perform cash management functions (e.g., generate cash flow reports, transfer funds); Star Fax, which allows the accountholder to get account information by facsimile transmission; and Automated teller machines. Standard deposit products are also available, such as checking, savings accounts, and certificates of deposits. 19

22 Of the six branches with Saturday hours, three are in middle-income geographies, and three are in upper-income geographies. While the one branch in a moderate-income geography of the city of San Rafael does not have Saturday hours, another branch in the same city, located less than three miles away, does have Saturday hours. The Ignacio branch, located in a middleincome geography, has Saturday hours and is reasonably convenient to one of the four moderate tracts. The closest branch to Marin City, a moderate-income area, is in Sausalito, less than two miles away. Thus, while branch hours do vary, such variance does not unreasonably inconvenience portions of the assessment area. Community Development Services During the period, the bank provided an adequate level of community development services. Services provided by bank personnel include: Serving as a director for an organization accessing childcare assistance for low- and moderate-income families, providing technical expertise to the organization; Serving on the board of a community health clinic serving low-income and needy residents of Marin; Serving on the advisory council of a housing advocacy organization and provided one-onone assistance to attendees at a homebuyer assistance program put on by the organization; Serving as a board member and treasurer of a non-profit corporation providing low-cost housing for senior citizens; Attending a conference for non-profit organizations, providing technical expertise in fundraising; Sitting on the advisory board of a non-profit providing arts education to low-income children in Marin City; Volunteering thirty-one hours at an abused women s center, providing social service referrals and screening for emergency shelter; and Advising an organization providing meals for terminally ill individuals on restructuring operating accounts and debt in order to reduce operating (i.e., interest) expenses. 20

23 FRESNO ASSESSMENT AREA DESCRIPTION OF OPERATIONS IN FRESNO ASSESSMENT AREA Westamerica Bank s Fresno Assessment Area (henceforth, Fresno) consists of the one hundred and twenty-nine census tracts comprising the county of Fresno. Fresno, part of the twelvecounty region of south-central California called the Central Valley, is bordered by the counties of Merced and Madera to its north, the counties of Kings and Tulare to its south, Inyo County to the east, and the counties of San Benito and Monterey to the west. The table below illustrates some of the 1990 Census data associated with assessment area census tracts. Census Tract Categories Tracts Population Households Families # % # % # % # % Low-Income , , ,027 4 Moderate-Income , , , Middle-Income , , , Upper-Income , , , Total * 667, * 221, , *Does not equal 100 due to rounding. The majority of Fresno s households and families are concentrated in the middle-income census tracts, followed by the upper- and moderate-income tracts. It should be noted that of the nine low-income tracts, only seven are populated. As illustrated below, the majority of Fresno s households and families are upper-income. Low-income households and families comprise the next income concentration, with middle- and moderate-income households and families following closely. As of January 1999, the median family income for Fresno was $37,200. Income Households Families Categories # % # % Low-Income 53, , Moderate-Income 35, , Middle-Income 40, , Upper-Income 90, , Total 221,133 99* 163, *Does not equal 100 due to rounding. According to the census data, a little over 16 percent of households and 17 percent of families were living below poverty levels as of The majority (41 percent) of such households resided in middle-income geographies, while the majority (43 percent) of such families resided in moderate-income geographies. However, 40 percent of households and 47 percent of families in low-income geographies were living below poverty levels. Thus, the likelihood of a household or family being poor is greatest in the low-income geographies. Additionally, in these low-income geographies, 57 percent of renters were devoting more than 30 percent of household income to rent. The percentage in moderate-income tracts was 48 percent. Keeping 21