Release Date: March 19, 1997

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Competitive Considerations Section 3 of the BHC Act prohibits the Board from approving any proposal that would result in a monopoly, or that would substantially lessen competition for banking services in any relevant banking market unless the Board finds that the anticompetitive effects are clearly outweighed in the public interest by the effect of the proposal on the convenience and needs of the community to be served. Westamerica and Vallicorp compete directly in the Grass Valley, Modesto, and Sacramento banking markets, all in California.3 After consummation of this proposal, none of these banking markets would be highly concentrated as measured by the Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"),4 and numerous competitors would remain in each market. The United States Attorney General has advised the Board that consummation of the proposal is not likely to have a significantly adverse effect on competition in any relevant banking market. Based on all the facts of record, the Board concludes that consummation of this proposal would not have a significantly adverse effect on competition or on the concentration of banking resources in the Grass Valley, Modesto, and Sacramento banking markets or any other relevant banking market. Other Factors Under the BHC Act The BHC Act also requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved, the convenience and needs of the community to be served, and certain other supervisory factors. A. Financial, Managerial and other Supervisory Factors The Board has carefully considered the financial and managerial resources and future prospects of Westamerica, Vallicorp, and their respective subsidiaries, and other supervisory factors in light of all the facts of record. The facts of record include supervisory reports of examination assessing the financial and managerial resources of the organizations and confidential financial information provided by Westamerica. Based on these and all other facts of record, the Board concludes that all the supervisory factors under the BHC Act, including financial and managerial resources, weigh in favor of approval of the proposal. Return to top B. Convenience and Needs Factor The Board also has carefully considered the effect of the proposal on the convenience and needs of the communities to be served in light of all the facts of record. As part of that review, the Board has considered submissions from several commenters contending that Vallicorp's plans to close five�branches, which were announced before this proposal, would have an adverse effect on the communities served by the branches.5 One commenter also maintained that Westamerica's and Vallicorp's 1995 Home Mortgage Disclosure Act (12�U.S.C. § 2801 et seq.) ("HMDA") data indicate that Westamerica and Vallicorp made few loans to minorities and that the outreach and marketing efforts of the institutions were ineffective. In addition, a commenter noted that some individuals had expressed concern that the proposal would have an adverse effect on communities in the San Joaquin and Sacramento Valleys, both in California.

The Board has long held that consideration of the convenience and needs factor includes a review of the records of the relevant depository institutions under the Community Reinvestment Act (12 U.S.C. § 2901 et seq.) ("CRA"). As provided in the CRA, the Board evaluates this factor in light of examinations by the primary federal supervisor of the CRA performance records of the relevant institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the applications process because it represents a detailed on-site evaluation of the institution's overall record of performance under the CRA by its primary federal supervisor.6 Westamerica Bank, Westamerica's lead subsidiary bank, received an "outstanding" rating at the most recent examination of its CRA performance by the Federal Reserve Bank of San Francisco ("Reserve Bank"), as of May 13, 1996 ("Westamerica Examination"). The other bank controlled by Westamerica, Lake County Bank, received a "satisfactory" rating at the most recent examination of its CRA performance by the Federal Deposit Insurance Corporation, as of January 12, 1994. Valliwide Bank received an "outstanding" rating for CRA performance at its most recent examination by the Reserve Bank, as of January 22, 1996 ("Valliwide Examination").

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Branches Vallicorp provided notice to the California State Banking Department from September 1996 to January�1997, before this merger proposal, that it might close or divest a number of branches. The California Superintendent of Banks ("Superintendent") approved those possible closures after reviewing the potential effect on the public convenience in the areas served by the branches.7 The Superintendent specifically approved Vallicorp's proposal to close five branches identified by commenters.8 After receipt of the comments, however, Vallicorp entered into agreements to sell four of the five branches to another depository institution. Bank branches would, therefore, continue to be operated at these locations. If Vallicorp closed the fifth branch, in Twain Harte, alternative banking services would remain available nearby because two other depository institutions maintain branches within two miles of that Vallicorp branch. In addition, Vallicorp has represented that prior to determining to close that branch, it would consider whether closing the branch would have an adverse impact on the community served and the actions that should be taken to minimize any adverse impact. In the Valliwide Examination, examiners noted that in the past Vallicorp had assessed the potential impact of branch closings on its continued ability to offer services throughout the communities served. The Board also has reviewed Westamerica's branch closing policy. Under this policy, before making a decision to close a branch, Westamerica considers whether the closing would have an adverse impact on the community served and the alternatives for banking services in the area affected by closing the branch. Examiners reviewed this policy and found it to be effective. In addition, any proposed closings also would be reviewed by the Superintendent and subject to prior notice under section 42 of the Federal Deposit Insurance Act. The Westamerica Examination noted that Westamerica branches were accessible to all segments of the community and that the bank had a strong record of offering services that helped meet the banking needs of its delineated community, including low- to moderate-income ("LMI") neighborhoods.

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Lending Performance Westamerica Bank and Valliwide Bank are primarily small business lenders with a secondary focus on mortgage lending. According to the Westamerica Examination, as of March 31, 1996, commercial lending represented 48 percent and residential lending represented 19.3 percent of Westamerica Bank's loan portfolio. In 1996, Westamerica Bank originated 1,386 small business loans for a total of approximately $196 million. According to the Valliwide Examination, 46 percent of Valliwide Bank's loan portfolio consists of commercial loans and 40 percent consists of real estate loans. In 1996, Valliwide Bank originated 5,044 small business loans for a total of approximately $509 million. Lending Activities Commenters maintain that the lending levels exhibited in the 1995 HMDA data of Westamerica Bank and Valliwide Bank raise concerns about the lending, marketing and outreach efforts to minorities by those banks. The Board notes, however, that the CRA does not require a bank to extend any particular type of credit, such as loans secured by residential housing that are reported under HMDA. Westamerica asserts that the proposal would improve the variety of affordable housing, business development and community development loans that would be available, because Westamerica plans to introduce many of its Community Access Loan ("CAL") products in the communities currently served by Valliwide. Those programs are designed for low-income borrowers and include the Community Access Loan Program, ("CAL Program") which provides home equity loans, automobile loans, and home improvement loans with lower monthly payments; the CAL PAL Loan program, which provides residential mortgage loans with flexible underwriting criteria, lower down payments, and no private mortgage insurance; and the CAL Business Loan Program, which offers "microenterprise" or "incubator" business loans to minorities and women through local agencies, that also provide technical support to the borrowers. In 1996, Westamerica Bank originated 33�CAL PAL loans for a total of approximately $4.2 million, and 60 CAL Business Loans for nearly $1 million. Westamerica also plans to offer community development loans within Valliwide Bank's delineated community and to continue offering Small Business Administration ("SBA") loans in the community served by Valliwide Bank. Valliwide Bank is a preferred SBA lender.

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Westamerica Bank currently finances several affordable housing and community development projects within its community. From October 31, 1994, through May 13, 1996, Westamerica Bank extended a $6 million commitment to finance the construction of 80 units of low-income housing for senior citizens and low-income families; approximately $1 million to localities to finance the construction of a fire and police station; approximately $1.2 million to local school districts for the purchase of equipment, construction of permanent and portable classrooms, and school buses; and a total of approximately $1.5 million to one organization that provides food, shelter, clothing, and literacy classes for the homeless and another that provides services to the disabled. The record in the Valliwide Examination demonstrates that Valliwide Bank provides funding for affordable housing projects, community development projects, and the credit needs of low- to moderate-income individuals in its community. According to the Valliwide Examination, in 1995, Valliwide Bank committed $26 million for the construction of 17 affordable housing projects and, between November 28, 1994, and January 22, 1996, the bank extended 2,644 community development loans for a total of approximately $84 million for the purposes of start-up business and business expansion financing. In addition, Valliwide Bank's Community Loan Program originated 335 consumer loans to low- to moderate-income individuals or in low- to moderate-income areas for a total of approximately $1.2 million in 1995. Other aspects of CRA performance The Board has reviewed HMDA data for 1994 and 1995, and preliminary data for 1996, filed by Westamerica and Vallicorp in light of the comments received on the proposal. In reviewing HMDA data, the Board considered that Westamerica is primarily a small business lender and that Valliwide Bank did not offer home mortgage-related loans before 1994. In the Westamerica Examination, examiners found that in 1995, 353 people applied for HMDA loans and 251 HMDA loans were originated for an origination rate of 71 percent. Fifty-four of these applications were from individuals in LMI census tracts. The 1995 HMDA origination rates of Westamerica for LMI census tracts was 70 percent, which exceeded the average origination rate for other lenders in the market in LMI tracts in 1995, which was 54.3 percent. Return to top The Board has reviewed carefully other information, particularly examination reports that provide an on-site evaluation of compliance by Westamerica and Vallicorp with fair lending laws. The examinations of Westamerica Bank and Valliwide Bank found no evidence of prohibitive discrimination or other illegal credit practices at the institutions. Examiners also found no evidence at either of the institutions of any practices to discourage applications for the types of credit listed in the CRA statements of the banks. In addition, the Westamerica and Valliwide Examinations noted that both banks solicited credit from all segments of their community, including LMI neighborhoods. The Westamerica Examination noted the bank's strong performance in ascertaining community credit needs. Westamerica Bank primarily relied on a call program to contact an extensive network of governmental, business, and community-based organizations throughout its community. Credit needs were documented in Community Needs Assessment Reports that were reviewed by senior managers. Those efforts resulted in more funding for small businesses, affordable housing, and neighborhood improvement projects. Westamerica also engaged in a print media advertising campaign in local newspapers, newsletters, and minority papers and directories. Westamerica has stated that it would continue to assist in meeting the credit needs of communities in the San Joaquin and Sacramento Valleys after consummation of the proposal. Westamerica has indicated, for example, that it would continue the community development activities of Vallicorp in these areas, and expand outreach efforts throughout the San Joaquin Valley. In addition, Westamerica would continue its representation on the Greater Sacramento Community Lending Consortium, which provides affordable housing loans in Sacramento County. Westamerica also participates with the Valley Sierra Small Business Development Center and the Greater Sacramento Certified Development Corporation, which provide technical support to applicants under Westamerica's Women and Minority Microenterprise Loan Program.

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Conclusion on Convenience and Needs Factor In considering the convenience and needs factor, the Board has carefully reviewed all the facts of record including information provided by commenters on the proposal, responses by Westamerica and Vallicorp, and the results of the relevant CRA performance evaluations. Based on this review, and for the reasons discussed above, the Board concludes that considerations relating to the convenience and needs of the communities served, including the CRA performance records of the institutions involved, are consistent with approval. Conclusion Based on the foregoing and all other facts of record, including all the commitments made in connection with this proposal, the Board has determined that the application should be, and hereby is, approved. The Board's approval is expressly conditioned on compliance by Westamerica and Vallicorp with all the commitments made in connection with this proposal and with the conditions referred to in this order. For purposes of this action, the commitments and conditions relied on by the Board in reaching this decision are deemed to be conditions imposed in writing and, as such, may be enforced in proceedings under applicable law. This proposal shall not be consummated before the fifteenth calendar day following the effective date of this order or later than three months following the effective date of this order, unless such period is extended for good cause by the Board or by the Reserve Bank, acting pursuant to delegated authority.

By order of the Board of Governors,9 effective March 19, 1997. (signed) Jennifer J. Johnson Jennifer J. Johnson Deputy Secretary of the Board

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Footnotes 1Westamerica also has requested the Board's approval for an option to purchase up to 19.9 percent of the voting shares of Vallicorp if certain events occur. The option would expire on consummation of the proposal. 2 Asset data are as of September 30, 1996. Deposit data are as of June 30, 1996, and incorporate structural changes through January 1997. 3 The Grass Valley banking market includes the cities of Glenbrook, Grass Valley, Nevada City, and Penn Valley; the Modesto banking market includes the Modesto RMA, and the following cities, Escalon, Hughson, Oakdale, and Ripon, and the Sacramento banking market includes the Sacramento RMA and Lincoln City. 4 The HHI would increase by 113 points to 1643 in the Grass Valley banking market, 10 points to 1183 in the Modesto banking market, and 1 point to 1419 in the Sacramento banking market. Under the DOJ Guidelines, 49�Federal Register 26,823 (June 29, 1984), a market in which the post-merger HHI is between 1000 and 1800 is considered moderately concentrated. The Justice Department has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI is at least 1800 and the merger increases the HHI by more than 200 points. The Justice Department has stated that the higher than normal threshold for an increase in the HHI when screening bank mergers and acquisitions for anticompetitive effects implicitly recognizes the competitive effects of limited-purpose lenders and other non-depository financial entities. 5 Commenters included a California state senator, the California Reinvestment Committee, Amador-Tuolumne Community Action Agency, and six small businesses in areas where Vallicorp would close branches. 6 See Statement of the Federal Financial Supervisory Agencies Regarding the Community Reinvestment Act. 54 Federal Register 13,742, 13,745 (1989). 7 Vallicorp also provided notice of the branch closures to the public and to the Reserve Bank pursuant to section 42 of the Federal Deposit Insurance Corporation Act ("section 42"), as implemented by the Joint Policy Statement Regarding Branch Closings. See 12 U.S.C. § 1831r-1; 58 Federal Register 49,083 (1993). Section 42 requires that a bank provide the public with at least 30 days notice and the primary federal supervisor with at least 90 days notice before the date of the proposed branch closing. The bank is also required to provide reasons and other supporting data for the closure, consistent with the institution's written policy for branch closings. 8 Those towns are Altaville, Arnold, Columbia, Groveland, and Twain Harte in Tuolumne and Calaveras Counties, California. 9 Voting for this action: Vice Chair Rivlin and Governors Kelley, Phillips and Meyer. Absent and not voting: Chairman Greenspan.

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