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 March 31, 1999 Commission File Number: 1-9383 WESTAMERICA BANCORPORATION (Exact Name of Registrant as Specified in its Charter) CALIFORNIA 94-2156203 (State or other jurisdiction o (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 (415) 257-8000 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 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 April 30, 1999 Common Stock, 39,183,994 No Par Value WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) - ----------------------------------------------------------------------------------------- (Unaudited) At March 31, At December 31, 1999 1998 1998 - ----------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $194,609 $212,616 $229,734 Money market assets 250 250 250 Investment securities available for sale 996,076 986,181 987,661 Investment securities held to maturity, with market values of: $241,281 at March 31, 1999 $249,718 at March 31, 1998 $233,790 at December 31, 1998 235,527 244,387 226,993 Loans, net of allowance for loan losses of: $51,703 at March 31, 1999 $50,289 at March 31, 1998 $51,304 at December 31, 1998 2,236,982 2,202,594 2,246,593 Other real estate owned 3,862 6,392 4,315 Premises and equipment, net 45,305 47,293 45,971 Interest receivable and other assets 114,466 102,957 102,781 - ----------------------------------------------------------------------------------------- Total assets $3,827,077 $3,802,670 $3,844,298 ========================================================================================= LIABILITIES Deposits: Non-interest bearing $801,035 $813,319 $842,919 Interest bearing: Transaction 565,040 543,724 600,502 Savings 874,909 943,542 903,141 Time 855,777 789,173 842,443 - ----------------------------------------------------------------------------------------- Total deposits 3,096,761 3,089,758 3,189,005 Short-term borrowed funds 265,656 200,616 203,671 Liability for interest, taxes and other expenses 59,851 45,004 35,526 Debt financing and notes payable 47,600 52,500 47,500 - ----------------------------------------------------------------------------------------- Total liabilities 3,469,868 3,387,878 3,475,702 - ----------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Authorized - 150,000 shares Common stock, issued and outstanding: 39,313 shares at March 31, 1999 42,707 shares at March 31, 1998 39,828 shares at December 31, 1998 196,915 200,463 195,156 Accumulated other comprehensive income: Unrealized gain on securities available for sale, net 16,065 19,555 20,184 Retained earnings 144,229 194,774 153,256 - ----------------------------------------------------------------------------------------- Total shareholders' equity 357,209 414,792 368,596 - ----------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $3,827,077 $3,802,670 $3,844,298 ========================================================================================= WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) [CAPTION] - ---------------------------------------------------------------------------------- (Unaudited) Three months ended March 31, 1999 1998 - ---------------------------------------------------------------------------------- INTEREST INCOME Loans $46,239 $48,853 Investment securities available for sale Taxable 11,499 12,010 Tax-exempt 2,514 2,392 Investment securities held to maturity Taxable 1,431 1,513 Tax-exempt 1,951 1,887 - ---------------------------------------------------------------------------------- Total interest income 63,634 66,655 INTEREST EXPENSE Transaction deposits 949 1,672 Savings deposits 5,052 6,138 Time deposits 9,461 9,976 Funds purchased 2,659 3,023 Debt financing and notes payable 829 918 - ---------------------------------------------------------------------------------- Total interest expense 18,950 21,727 - ---------------------------------------------------------------------------------- NET INTEREST INCOME 44,684 44,928 Provision for loan losses 1,195 1,395 - ---------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 43,489 43,533 NON-INTEREST INCOME Service charges on deposit accounts 4,805 4,976 Merchant credit card 844 632 Mortgage banking 232 450 Financial services commissions 565 320 Trust fees 173 155 Other 2,528 2,452 - ---------------------------------------------------------------------------------- Total non-interest income 9,147 8,985 NON-INTEREST EXPENSE Salaries and related benefits 12,918 13,181 Occupancy 2,942 2,896 Equipment 1,741 1,850 Professional fees 413 494 Data processing 1,464 1,332 Other real estate owned 34 (82) Other 5,461 5,669 - ---------------------------------------------------------------------------------- Total non-interest expense 24,973 25,340 - ---------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 27,663 27,178 Provision for income taxes 9,258 9,083 - ---------------------------------------------------------------------------------- NET INCOME $18,405 $18,095 ================================================================================== Comprehensive income: Unrealized (loss) gain on securities available for sale, net (4,119) 1,632 - ---------------------------------------------------------------------------------- COMPREHENSIVE INCOME $14,286 $19,727 ================================================================================== Average shares outstanding 39,632 42,741 Diluted average shares outstanding 40,272 43,559 PER SHARE DATA Basic earnings $0.46 $0.42 Diluted earnings 0.46 0.42 Dividends paid 0.16 0.12 WESTAMERICA BANCORPORATION STATEMENTS OF CASH FLOWS (In thousands) - -------------------------------------------------------------------------------------------- (Unaudited) For the three months ended March 31, 1999 1998 - -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $18,405 $18,095 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,066 2,268 Loan loss provision 1,195 1,395 Amortization of deferred net loan (cost)/fees 568 (30) (Increase) decrease in interest income receivable (552) 514 Decrease (increase) in other assets 107 (10,812) Increase in income taxes payable 7,564 10,263 Decrease in interest expense payable (390) (156) Increase (decrease) in other liabilities 8,208 (9,070) Gain on sales/write down of equipment (46) (58) Originations of loans for resale (7,554) (2,944) Proceeds from sale of loans originated for resale 7,228 2,380 Net gain on sale of property acquired in satisfaction of debt (105) (437) Write down on property acquired in satisfaction of debt -- 51 - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 36,694 11,459 - -------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net repayments of loans 7,916 5,989 Purchases of investment securities available for sale (116,585) (90,675) Purchases of investment securities held to maturity (14,158) (23,618) Purchases of property, plant and equipment (707) (411) Proceeds from maturity of securities available for sale 100,879 110,422 Proceeds from maturity of securities held to maturity 5,624 10,190 Proceeds from sale of securities available for sale 182 120 Proceeds from sale of property and equipment 46 80 Proceeds from property acquired in satisfaction of debt 816 3,298 - -------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (15,987) 15,395 - -------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net (decrease) increase in deposits (92,244) 11,257 Net increase (decrease) in short-term borrowings 61,985 (64,232) Additions to notes payable 100 -- Exercise of stock options/issuance of shares 5,378 3,415 Retirement of stock (24,675) (10,359) Dividends paid (6,376) (5,143) - -------------------------------------------------------------------------------------------- Net cash used in financing activities (55,832) (65,062) - -------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (35,125) (38,208) Cash and cash equivalents at beginning of period 229,734 250,824 - -------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $194,609 $212,616 ============================================================================================ Supplemental disclosure of non-cash activities: Loans transferred to other real estate owned $258 $1,923 Depreciation of fixed assets charged against reserves 37 35 Supplemental disclosure of cash flow activity: Unrealized (loss) gain on securities available for sale (4,119) 1,632 Interest paid for the period 19,340 21,884 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, this discussion includes certain forward-looking statements regarding events and trends which may affect the Company's future results. Such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially. Such factors include, but are not limited to, those described in this discussion and analysis. This report, which includes consolidated financial statements prepared in conformity with generally accepted accounting principles, should be read in conjunction with Westamerica Bancorporation's annual report on Form 10-K for the year ended December 31, 1998. Westamerica Bancorporation (the "Company"), parent company of Westamerica Bank, Bank of Lake County, Community Banker Services Corporation and Westamerica Commercial Credit Inc., reported first quarter 1999 net income of $18.4 million or $.46 diluted earnings per share. These results compare to net income of $18.1 million or $.42 diluted earnings per share and $18.8 million or $.46 diluted earnings per share, respectively, for the first and fourth quarters of 1998. Following is a summary of the components of net income for the periods indicated: - -------------------------------------------------------------------------- For the three months ended March 31, December 31, --------------------- ------------ (In millions) 1999 1998 1998 - -------------------------------------------------------------------------- Net interest income* $47.6 $47.6 $48.5 Provision for loan losses (1.2) (1.4) (1.2) Non-interest income 9.1 9.0 9.8 Non-interest expense (25.0) (25.3) (25.6) Provision for income taxes* (12.1) (11.8) (12.7) - -------------------------------------------------------------------------- Net income $18.4 $18.1 $18.8 ========================================================================== Average total assets $3,774.5 $3,746.5 $3,795.3 Net income (annualized) as a percentage of average total assets 1.98% 1.96% 1.96% ========================================================================== * Fully taxable equivalent basis (FTE) During the first three months of 1999, the Company's net income was $18.4 million, $300 thousand higher than the same period in 1998. A lower loan loss provision resulting from continued improvements in credit quality, improvements in non-interest income and reduced operating costs account for the change. Net interest income remained unchanged from prior year, as higher average earning-asset balances, higher demand deposit average balances and lower cost of funds were offset by lower earning-asset yields and higher interest-bearing liabilities average balances. Comparing the first quarter of 1999 to the prior quarter, net income decreased $400 thousand. Included in this change is lower net interest income, principally due to lower earning-asset average balances and yields, higher interest bearing liabilities average balances and lower interest-free demand deposits, partially offset by lower non-interest expense. In addition, service and fee income, lower than the prior quarter, was partially offset by lower non-interest expense. Net Interest Income Following is a summary of the components of net interest income for the periods indicated: - -------------------------------------------------------------------------- For the three months ended March 31, December 31, --------------------- ------------ (In millions) 1999 1998 1998 - -------------------------------------------------------------------------- Interest income $63.6 $66.7 $65.7 Interest expense (18.9) (21.7) (20.1) FTE adjustment 2.9 2.6 2.9 - -------------------------------------------------------------------------- Net interest income (FTE) $47.6 $47.6 $48.5 ========================================================================== Average earning assets $3,463.0 $3,429.5 $3,480.0 Net interest margin (FTE) 5.53% 5.59% 5.55% The Company's primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) during the first quarter of 1999 remained unchanged from the same period in 1998 at $47.6 million. Comparing the first quarter of 1999 with the previous quarter, net interest income (FTE) decreased $900 thousand. Interest Income During the first quarter of 1999 interest income (FTE) decreased $3.1 million from the same period in 1998. Lower earning-asset yields and lower investment securities average balances were partially offset by increased loan balances and fees. Loan yields decreased 64 basis points from prior year, mostly in categories where loans are tied to the prime rate. Partially offsetting this change, loan average balances increased $46.1 million, particularly in the commercial category in part offset by lower consumer loans. This increase in loan balances was partially offset by a decrease of $12.6 million in the average balances of investment securities, including lower U.S Treasury securities and participation certificates, partially offset by higher corporate and tax-free securities. Comparing the first quarter of 1999 and the fourth quarter of 1998, interest income (FTE) decreased $2.1 million. The effect of $17.0 million lower earning-assets average balances, combined with a 10 basis point reduction in average yields accounts for this quarter-to-quarter change. Lower earning-asset average balances were comprised of a $23.2 million decrease in investment securities, particularly U.S. Treasury and participation certificates, in part offset by a $6.2 million increase in loans, for the most part in the commercial category. All categories of loan yields decreased from prior quarter for a combined total of 18 basis points, while investment yields increased by 4 basis points from the same period mainly in the participation certificates and corporate securities categories. Interest Expense For the first quarter of 1999 interest expense was $2.8 million lower than the first quarter of 1998. Following market trends reflective of a general reduction in rates paid on deposits and borrowed funds, total interest-bearing liability rates decreased 51 basis points from the first quarter of 1998. In addition, interest-free demand deposit account average balances increased $17.4 million from the first quarter of 1998. Partially offsetting the resulting effect of lower cost of funds, interest-bearing liabilities average balances increased $58.1 million from the first quarter of 1998, comprised of a $51.2 million increase in deposits and a $6.9 million increase in other short- and medium-term borrowed funds. Interest expense decreased $1.2 million from the fourth quarter of 1998, as a decrease of 14 basis points on the rates paid on interest-bearing liabilities and a $30.3 million decrease in demand deposit average balances were partially offset by a $19.2 million increase in interest-bearing liability average balances. Reflecting market conditions, rates paid decreased in all categories with the exception of public certificates of deposit and overnight borrowed funds; the net increase in average balances resulted from a $47.5 million increase in short- and medium-term borrowed funds partially offset by a $28.3 million decrease in average interest-bearing deposit balances, primarily money market and regular savings account balances. In all periods, the Company has attempted continuously to reduce high-rate time deposits while increasing the balances of more profitable, lower-cost transaction accounts minimizing the effect of adverse cyclical quarterly trends. Net Interest Margin (FTE) The following summarizes the components of the Company's net interest margin for the periods indicated: - -------------------------------------------------------------------------- For the three months ended March 31, December 31, --------------------- ------------ 1999 1998 1998 - -------------------------------------------------------------------------- Yield on earning assets 7.75% 8.16% 7.85% Rate paid on interest-bearing liabilities 2.95% 3.46% 3.09% - -------------------------------------------------------------------------- Net interest spread 4.80% 4.70% 4.76% Impact of all other net non-interest bearing funds 0.73% 0.89% 0.79% - -------------------------------------------------------------------------- Net interest margin 5.53% 5.59% 5.55% ========================================================================== During the first quarter of 1999, the Company's net interest margin was 6 basis points lower than the first quarter of 1998 as the favorable impact of a decrease in the cost of funds was more than offset by the effect of a larger decrease in earning-asset yields and the unfavorable impact of a reduction in the Company's average non-interest bearing funds balances. As a result of the Company's share repurchase programs, average equity capital decreased $46.3 million, partially offset by a $17.4 million increase in interest-free demand deposit accounts. The net interest margin was 2 basis points lower than the previous quarter, due to the adverse effect of lower average balances of non-interest bearing funds, partially offset by a higher net interest spread, as a 14 basis points reduction in the rate paid on interest-bearing liabilities more than offset the unfavorable effect of a 10 basis points decline in earning asset yields. 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 non-performing loans. Interest income includes proceeds from loans on non-accrual status only to the extent cash payments have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate. Distribution of assets, liabilities and shareholders' equity: - ---------------------------------------------------------------------------------------- For the three months ended March 31, 1999 - ---------------------------------------------------------------------------------------- Interest Rates Average income/ earned/ (Dollars in thousands) balance expense paid - ---------------------------------------------------------------------------------------- Assets Money market assets and funds sold $250 $-- -- % Investment securities: Available for sale Taxable 758,674 11,499 6.15 Tax-exempt 191,536 3,593 7.61 Held to maturity Taxable 88,839 1,431 6.53 Tax-exempt 145,579 2,776 7.73 Loans: Commercial 1,472,275 31,055 8.55 Real estate construction 56,140 1,489 10.76 Real estate residential 373,006 6,517 7.09 Consumer 376,680 8,162 8.79 - -------------------------------------------------------------------------- Earning assets 3,462,979 66,522 7.75 Other assets 311,487 - ------------------------------------------------------------ Total assets $3,774,466 ============================================================ Liabilities and shareholders' equity Deposits: Non-interest bearing demand $794,758 $-- -- % Savings and interest-bearing transaction 1,450,817 6,001 1.68 Time less than $100,000 423,983 4,727 4.52 Time $100,000 or more 425,325 4,734 4.51 - -------------------------------------------------------------------------- Total interest-bearing deposits 2,300,125 15,462 2.73 Funds purchased 257,855 2,659 4.18 Debt financing and notes payable 47,545 829 7.07 - -------------------------------------------------------------------------- Total interest-bearing liabilities 2,605,525 18,950 2.95 Other liabilities 31,314 Shareholders' equity 342,869 - ------------------------------------------------------------ Total liabilities and shareholders' equity $3,774,466 ============================================================ Net interest spread (1) 4.80 % Net interest income and interest margin (2) $47,572 5.53 % ======================================================================================== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between the weighted average yields on earning assets less the interest expense (annualized) divided by the average balance of earning assets. Distribution of assets, liabilities and shareholders' equity: - ---------------------------------------------------------------------------------------- For the three months ended March 31, 1998 - ---------------------------------------------------------------------------------------- Interest Rates Average income/ earned/ (Dollars in thousands) balance expense paid - ---------------------------------------------------------------------------------------- Assets Money market assets and funds sold $250 $-- -- % Investment securities: Available for sale Taxable 780,303 12,010 6.24 Tax-exempt 181,440 3,385 7.57 Held to maturity Taxable 96,802 1,513 6.34 Tax-exempt 138,665 2,710 7.93 Loans: Commercial 1,407,249 32,105 9.25 Real estate construction 64,836 1,908 11.93 Real estate residential 366,919 6,788 7.50 Consumer 393,038 8,948 9.23 - -------------------------------------------------------------------------- Earning assets 3,429,502 69,367 8.16 Other assets 316,996 - ------------------------------------------------------------ Total assets $3,746,498 ============================================================ Liabilities and shareholders' equity Deposits: Non-interest bearing demand $777,318 $-- -- % Savings and interest-bearing transaction 1,462,168 7,810 2.17 Time less than $100,000 449,622 5,629 5.08 Time $100,000 or more 337,204 4,347 5.23 - -------------------------------------------------------------------------- Total interest-bearing deposits 2,248,994 17,786 3.21 Funds purchased 245,978 3,023 4.98 Debt financing and notes payable 52,500 918 7.09 - -------------------------------------------------------------------------- Total interest-bearing liabilities 2,547,472 21,727 3.46 Other liabilities 32,544 Shareholders' equity 389,164 - ------------------------------------------------------------ Total liabilities and shareholders' equity $3,746,498 ============================================================ Net interest spread (1) 4.70 % Net interest income and interest margin (2) $47,640 5.59 % ======================================================================================== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between the weighted average yields on earning assets less the interest expense (annualized) divided by the average balance of earning assets. Distribution of assets, liabilities and shareholders' equity: - ---------------------------------------------------------------------------------------- For the three months ended December 31, 1998 - ---------------------------------------------------------------------------------------- Interest Rates Average income/ earned/ (Dollars in thousands) balance expense paid - ---------------------------------------------------------------------------------------- Assets Money market assets and funds sold $250 $-- 0.00 % Investment securities: Available for sale Taxable 777,292 11,961 6.11 Tax-exempt 191,194 3,485 7.23 Held to maturity Taxable 93,553 1,394 5.91 Tax-exempt 145,787 2,791 7.60 Loans: Commercial 1,446,224 31,870 8.74 Real estate construction 56,845 1,713 11.96 Real estate residential 386,778 6,807 6.98 Consumer 382,040 8,586 8.92 - -------------------------------------------------------------------------- Earning assets 3,479,963 68,607 7.85 Other assets 315,340 - ------------------------------------------------------------ Total assets $3,795,303 ============================================================ Liabilities and shareholders' equity Deposits: Non-interest bearing demand $825,076 $-- -- % Savings and interest-bearing transaction 1,483,198 7,069 1.89 Time less than $100,000 428,285 5,179 4.80 Time $100,000 or more 416,920 4,907 4.67 - -------------------------------------------------------------------------- Total interest-bearing deposits 2,328,403 17,155 2.92 Funds purchased 207,094 2,102 4.03 Debt financing and notes payable 50,833 884 6.90 - -------------------------------------------------------------------------- Total interest-bearing liabilities 2,586,330 20,141 3.09 Other liabilities 35,449 Shareholders' equity 348,448 - ------------------------------------------------------------ Total liabilities and shareholders' equity $3,795,303 ============================================================ Net interest spread (1) 4.76 % Net interest income and interest margin (2) $48,466 5.55 % ======================================================================================== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between the weighted average yields on earning assets less the interest expense (annualized) divided by the average balance of earning assets. Rate and volume variances. 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. As previously stated, appropriate amounts are calculated on a fully taxable equivalent basis using the current statutory federal tax rate. - ---------------------------------------------------------------------------------------- Three months ended March 31, 1999 compared with three months ended March 31, 1998 ------------------------------------------- (In thousands) Volume Rate Total - ---------------------------------------------------------------------------------------- Increase (decrease) in interest and fee income: Investment securities: Available for sale Taxable ($330) ($181) ($511) Tax-exempt 189 19 208 Held to maturity Taxable (131) 49 (82) Tax-exempt 129 (63) 66 Loans: Commercial 1,660 (2,710) (1,050) Real estate construction (241) (178) (419) Real estate residential 115 (386) (271) Consumer (364) (422) (786) - ---------------------------------------------------------------------------------------- Total increase (decrease) in loans 1,170 (3,696) (2,526) - ---------------------------------------------------------------------------------------- Total increase (decrease) in interest and fee income 1,027 (3,872) (2,845) - ---------------------------------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (60) (1,749) (1,809) Time less than $ 100,000 (309) (593) (902) Time $ 100,000 or more 811 (424) 387 - ---------------------------------------------------------------------------------------- Total increase (decrease) in interest-bearing deposits 442 (2,766) (2,324) Funds purchased 156 (520) (364) Debt financing and notes payable (86) (3) (89) - ---------------------------------------------------------------------------------------- Total increase (decrease) in interest expense 512 (3,289) (2,777) - ---------------------------------------------------------------------------------------- Increase (decrease) in net interest income $515 ($583) ($68) ======================================================================================== Rate and volume variances. - ---------------------------------------------------------------------------------------- Three months ended March 31, 1999 compared with three months ended December 31, 1998 ------------------------------------------- (In thousands) Volume Rate Total - ---------------------------------------------------------------------------------------- Increase (decrease) in interest and fee income: Investment securities: Available for sale Taxable ($645) $183 ($462) Tax-exempt 4 104 108 Held to maturity Taxable (34) 71 37 Tax-exempt 1 (16) (15) Loans: Commercial 4,152 (4,967) (815) Real estate construction (25) (199) (224) Real estate residential (496) 206 (290) Consumer (209) (215) (424) - ---------------------------------------------------------------------------------------- Total increase (decrease) in loans 3,422 (5,175) (1,753) - ---------------------------------------------------------------------------------------- Total increase (decrease) in interest and fee income 2,748 (4,833) (2,085) - ---------------------------------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (173) (895) (1,068) Time less than $ 100,000 (67) (385) (452) Time $ 100,000 or more 265 (438) (173) - ---------------------------------------------------------------------------------------- Total increase (decrease) in interest-bearing deposits 25 (1,718) (1,693) Funds purchased 482 75 557 Debt financing and notes payable (89) 34 (55) - ---------------------------------------------------------------------------------------- Total increase (decrease) in interest expense 418 (1,609) (1,191) - ---------------------------------------------------------------------------------------- Increase (decrease) in net interest income $2,330 ($3,224) ($894) ======================================================================================== 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 $1.2 million for loan losses in the first quarter of 1999, $200 thousand lower than the same period of 1998 and unchanged from the previous quarter. For further information regarding net credit losses and the reserve for loan losses, see the "Asset Quality" section of this report. Non-interest Income The following table summarizes the components of non-interest income for the periods indicated. - -------------------------------------------------------------------------- For the three months ended March 31, December 31, ------------------- ----------- (In millions) 1999 1998 1998 - -------------------------------------------------------------------------- Deposit account fees $4.81 $4.98 $5.02 Merchant credit card 0.84 0.63 0.86 Financial services commissions 0.57 0.32 0.45 Mortgage banking income 0.23 0.45 0.26 Trust fees 0.17 0.16 0.16 Other non-interest income 2.53 2.45 3.03 - -------------------------------------------------------------------------- Total $9.15 $8.99 $9.78 ========================================================================== The $160 thousand increase in non-interest income during the first quarter of 1999 compared to the first quarter of 1998, was comprised primarily of $250 thousand higher financial services commissions, due to more aggressive marketing efforts resulting in higher sales volume; $210 thousand higher merchant credit card income resulting from fee repricing and increased volume; and $244 thousand higher commissions related to the sales of official checks. Partially offsetting these changes, mortgage banking income was $220 thousand lower than the same quarter in 1998, mainly due to lower net gains from loans sold in the secondary market and lower related retained servicing fees; deposit account fees were $170 thousand lower than the comparable quarter in 1998 due to lower overdraft and returned item charges and lower activity charges on personal accounts in part offset by higher fees on business accounts on analysis; and $186 thousand lower gains on asset sales, including real property and equipment. Comparing the first three months of 1999 to the fourth quarter of 1998, non-interest income decreased $630 thousand. The largest contributors to this change are lower gains on sales of real property; a refund on prior years income tax returns received during the fourth quarter of 1998; and lower deposit account fees due to lower volume of overdraft and returned item charges and lower fees assessed on demand deposit accounts on analysis. In addition, mortgage banking income was $30 thousand lower than the prior quarter, due to lower gains on sales of loans in the secondary market and lower retained servicing fees; and merchant credit card income was $20 thousand lower due to seasonal lower volume of activity. Partially offsetting these changes, financial services commissions were $120 thousand higher than the prior quarter, primarily due to increased sales volume; and trust fees also increased from the fourth quarter of 1998. Non-interest expense The following table summarizes the components of non-interest expense for the periods indicated. - -------------------------------------------------------------------------- For the three months ended March 31, December 31, ------------------- ----------- (In millions) 1999 1998 1998 - -------------------------------------------------------------------------- Salaries and incentives $10.01 $9.91 $10.09 Other personnel 2.91 3.27 2.54 Occupancy 2.94 2.90 2.96 Equipment 1.74 1.85 1.88 Data processing services 1.46 1.33 1.52 Professional fees 0.41 0.49 0.55 Courier service 0.87 0.89 0.93 Stationery and supplies 0.37 0.41 0.48 Postage 0.62 0.56 0.52 Loan expense 0.36 0.31 0.31 Advertising/public relations 0.32 0.29 0.38 Merchant credit card 0.31 0.25 0.30 Operational losses 0.22 0.27 0.28 Other real estate owned and property held for sale 0.03 (0.08) 0.20 Other non-interest expense 2.40 2.69 2.62 - -------------------------------------------------------------------------- Total $24.97 $25.34 $25.56 ========================================================================== Average full time equivalent staff 1,119 1,146 1,121 Non-interest expense to revenues ("efficiency ratio")(FTE) 44.03% 44.75% 43.87% ========================================================================== Non-interest expense of $24.97 million in first quarter of 1999 was $370 thousand lower than the same quarter in 1998, as the Company continued to control costs through efficiencies and consolidation of operations, reflected in the reduction of its efficiency ratio. Included in this change are $260 thousand lower employee-related expenses, a result of reductions in full-time equivalent staff partially offset by increased incentive compensation program expenses; $110 thousand lower equipment costs, mainly due to lower expenses related to assets reaching fully depreciated lives; and $80 thousand lower professional fees, primarily legal, in connection with lower costs related to non-performing loans. In addition, operational losses were $50 thousand lower than the first quarter of 1998 and stationery and supplies and courier service costs were $40 thousand and $20 thousand, respectively, lower than prior year. Partially offsetting these changes, data processing services were $130 thousand higher than the comparable quarter in 1998, mainly due to increased costs related to the implementation of the Year 2000 compliance program; $110 thousand higher costs in connection with properties acquired in satisfaction of debt; $60 thousand higher merchant credit card related costs primarily due to increased volume; $60 thousand higher postage expense; $50 thousand higher loan expense; $30 thousand higher occupancy costs due to lower rental income from subleased properties and escalating building repairs and maintenance costs; and $30 thousand higher advertising and public relation expenses due to increased marketing research and business development costs. The change in other non-interest expense includes lower regulatory agency assessments and telephone costs, and higher rebates received from vendors related to the sale of checks, partially offset by higher correspondent service charges and recruiting costs. Comparing the first quarter of 1999 with the fourth quarter of 1998, non-interest expense decreased $590 thousand. Costs related to properties acquired in satisfaction of debt were $170 thousand lower, mainly due to reduced write-downs; professional fees, primarily legal costs in connection with problem credits, were $140 thousand lower; and equipment expenses were $140 thousand lower than the prior quarter primarily due to reduced costs related to lease and maintenance contracts. In addition, stationery and supplies costs were $110 thousand lower than the fourth quarter of 1998 due to seasonal lower purchases of inventories; data processing costs were $60 thousand lower mainly due to reduced costs related to standard processing; and operational losses and courier services were, each, $60 thousand lower than the prior quarter. Included in the change in other non-interest expense are lower check printing costs and lower litigation settlement costs. Partially offsetting these expense reductions from the prior quarter, employee related expenses were $290 thousand higher, primarily due to increased payroll taxes and matching contributions to the Company's pension plans; postage expense was $100 thousand higher due to increased seasonal volume; and loan expenses were $50 thousand higher primarily due to costs incurred on behalf of loan customers that may not be recoverable. Provision for Income Tax During the first quarter of 1999, the Company recorded income tax expense of $9.3 million compared to $9.1 million and $9.8 million, respectively, in the first and fourth quarters of 1998. The 1999 provision represents an effective tax rate of 33.5 percent, compared to 33.4 percent and 34.4 percent, respectively, for the first and fourth quarters of 1998. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions. Asset Quality The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk and increase diversification of earning assets into less risky investments. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all non-performing assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated: - -------------------------------------------------------------------------- At At March 31, December 31, ------------------- ------------ (In millions) 1999 1998 1998 - -------------------------------------------------------------------------- Classified loans $52.0 $67.8 $67.5 Other classified assets 3.9 6.4 4.3 - -------------------------------------------------------------------------- Total classified assets $55.9 $74.2 $55.1 ========================================================================== Allowance for loan losses as a percentage of classified loans 99% 74% 76% Classified loans at March 31, 1999, decreased $15.8 million or 23 percent to $52.0 million from March 31, 1998, reflecting the continued enforcing of the Company's strict credit standards. The decrease was principally due to reductions of classified commercial and commercial real estate loans. Other classified assets decreased $2.5 million from March 31, 1998, due to sales and write-downs of properties acquired in satisfaction of debt ("other real estate owned") partially offset by new foreclosures on loans with real estate collateral. The $15.5 million decrease in classified loans from December 31, 1998, was principally due to reductions in commercial loans with real estate collateral. The $400 thousand reduction in other classified assets from December 31, 1998, was mainly due to sales and write-downs of other real estate owned properties. Non-performing Assets Non-performing assets include non-accrual loans, loans 90 days past due as to principal or interest and still accruing, and other real estate owned. Loans are placed on non-accrual status when reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on non-accrual status is charged against interest income. In addition, loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on non-accrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified as "performing non-accrual" and are included in total non-performing assets. When the ability to fully collect non-accrual loan principal is in doubt, 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. The following is a summary of non-performing assets on the dates indicated: - -------------------------------------------------------------------------- At At March 31, December 31, ------------------- ------------ (In millions) 1999 1998 1998 - -------------------------------------------------------------------------- Performing non-accrual loans $2.28 $1.40 $1.80 Non-performing, non-accrual loans 6.21 13.68 6.73 - -------------------------------------------------------------------------- Total non-accrual loans 8.49 15.08 8.53 Loans 90 days past due and still accruing 0.30 0.66 0.52 - -------------------------------------------------------------------------- Total non-performing loans 8.79 15.74 9.05 - -------------------------------------------------------------------------- Restructured loans -- -- -- Other real estate owned 3.86 6.39 4.32 - -------------------------------------------------------------------------- Total non-performing assets $12.65 $22.13 $13.37 ========================================================================== Allowance for loan losses as a percentage of non-performing loans 588% 319% 567% Performing non-accrual loans increased $880 thousand to $2.28 million at March 31, 1999, from $1.40 million at March 31, 1998 and $480 thousand from $1.80 million outstanding at December 31, 1998. Non-performing, non-accrual loans of $6.21 million at March 31, 1999, decreased $7.47 million from March 31, 1998, primarily due to sales, payoffs and foreclosures of commercial real estate loans, and $520 thousand from December 31, 1998, mainly due to payoffs and write-offs of loans with real estate collateral and commercial loans. The $2.53 million and $460 thousand decreases in other real estate owned balances from March 31 and December 31, 1998, respectively, were due to liquidations, write-downs and liquidations net of foreclosures of properties acquired in satisfaction of debt. The amount of gross interest income that would have been recorded for non-accrual loans for the three months ended March 31, 1999, if all such loans had been current in accordance with their original terms, was $152 thousand, compared to $337 thousand and $134 thousand, respectively, for the first and fourth quarters of 1998. The amount of interest income that was recognized on non-accrual loans from cash payments made during the three months ended March 31, 1999, totaled $112 thousand, compared to $148 thousand for the comparable period in 1998 and $183 thousand for the fourth quarter of 1998. These cash payments represent annualized yields of 6.13 percent for the first quarter of 1999 compared to 3.74 percent and 9.09 percent, respectively, for the first and fourth quarters of 1998. Total cash payments received which were applied against the book balance of non-accrual loans outstanding at March 31, 1999, totaled approximately $1.2 million. The overall credit quality of the loan portfolio continues to be strong and improving; however, the total non-performing 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 non-performing assets; however, the Company can give no assurance that additional increases in non-accrual loans will not occur in the future. Allowance for Loan Losses The Company's allowance for loan losses is maintained at a level estimated to be adequate to provide for losses that can be estimated based upon specific and general conditions. These include credit loss experience, the amount of past due, non-performing and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. The allowance is allocated to segments of the loan portfolio based in part on quantitative analyses of historical credit loss experience, in which criticized and classified loan balances are analyzed using a linear regression model to determine standard allocation percentages. The results of this analysis are applied to current criticized and classified loan balances to allocate the reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines due to their small balances and numerous accounts, are analyzed based on the historical rate of net losses and delinquency trends, grouped by the number of days the payments on these loans are delinquent. A portion of the allowance is also allocated to impaired loans. Management considers the $51.7 million allowance for loan losses, which constituted 2.26 percent of total loans at March 31, 1999, to be adequate as a reserve against inherent losses. However, while the Company's policy is to charge off in the current period those loans on which the loss is considered probable, the risk exists of future losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future required allowance levels. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated: - -------------------------------------------------------------------------- For the three months ended March 31, December 31, ------------------- ------------ (In millions) 1999 1998 1998 - -------------------------------------------------------------------------- Balance, beginning of period $51.3 $50.6 $51.1 Loan loss provision 1.2 1.4 1.2 Loans charged off (1.5) (2.9) (2.2) Recoveries of previously charged-off loans 0.7 1.2 1.2 - -------------------------------------------------------------------------- Net credit losses (0.8) (1.7) (1.0) - -------------------------------------------------------------------------- Balance, end of period $51.7 $50.3 $51.3 ========================================================================== Allowance for loan losses as a percentage of loans outstanding 2.26% 2.23% 2.23% ========================================================================== 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 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 or falling rate scenario where the Fed Funds rate is made to rise or fall evenly by 200 basis points over the 12-month forecast interval triggering a response in the other forecasted rates. It is the policy of the Company to require that such simulated NII changes should be always less than 10 percent or steps must be taken to reduce interest-rate risk. According to the same policy, if the simulated changes in NII reach 7.5 percent, a closer look at the risk will be put in place to determine what steps could be taken to control risk should it grow worse. The results of the model indicate that the mix of interest rate sensitive assets and liabilities at March 31, 1999 would not result in a fluctuation of NII that would exceed the parameters established by Company policy. At March 31, 1999 and 1998, the Company had no derivative financial instruments outstanding. As the Company believes that the derivative financial instrument disclosures contained within the notes to the financial statements of its 1998 Form 10-K substantially conform with the accounting policy requirements of these rule amendments, no further interim disclosure has been provided. The rule amendments that require expanded disclosure of quantitative and qualitative information about market risk were effective with the 1997 Form 10-K. At March 31, 1999, there were no substantial changes in the information on market risk that was disclosed in the Company's 1998 and 1997 Form 10-Ks. Liquidity - --------- The Company's principal source of asset liquidity is marketable investment securities available for sale. At March 31, 1999, investment securities available for sale totaled $996 million, representing an increase of $9.9 million from March 31, 1998. In addition, the Company generates significant liquidity from its operating activities. The Company's profitability during the first three months of 1999 and 1998 generated substantial cash flows, which are included in the total provided from operations of $36.7 million and $11.5 million, respectively. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. During 1999, the effect of the Company's stock repurchase programs and dividends paid to shareholders were $24.7 million and $6.4 million, respectively. These cash outflows were combined with other net cash used in financing activities totaling $24.7 million, which include lower deposit balances partially offset by an increase in short-term borrowings and an increase in equity from issuance of stock. This compares with cash used by the Company during the first three months of 1998 for its share repurchase programs and dividends paid to shareholders of $10.4 million and $5.1 million, respectively. These first quarter of 1998 cash outflows, added to a $64.2 million decrease in short-term borrowed funds more than offset a $11.3 million increase in deposit balances and a $3.4 million increase in equity from issuance of stock. These were the factors affecting the total cash outflows used in financing activities for the first quarters of 1999 and 1998 of $55.8 million and $65.1 million, respectively. The Company uses cash flows from operating and financing activities primarily to invest in loans and investment securities. Purchases of investment securities net of maturities increased $24.1 million during the first three months of 1999 compared to a decrease of $6.4 million during the comparable period in 1998. Proceeds from net repayments of loans totaled $7.9 million and $6.0 million for the first three months of 1999 and 1998, respectively. The Company anticipates increasing its cash level from operations through 1999 due to increased profitability and retained earnings. For the same period, it is anticipated that demand for loans will continue to increase, particularly in the commercial and real estate categories. The growth in deposit balances is expected to follow the anticipated growth in loan balances. Line of Credit On July 31, 1998, the Company entered into an agreement with a well-established financial institution establishing a line of credit for general corporate purposes including the repurchase of its stock. The line of credit has a one-year term and an available commitment amount ranging from $60 million, during the first nine months, reduced by $7.5 million during each of the following three months to $37.5 million. The interest rate of this line of credit is set by the lender based on various factors including costs and desired return, general economic conditions and other factors. At March 31, 1999, there were no outstanding balances drawn on this line. 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. Since the beginning of 1994 and through March 31, 1999, the Board of Directors of the Company has authorized the repurchase of 4,252,150 shares of the Company's common stock from time to time, subject to appropriate regulatory and other accounting requirements. The Company acquired 250,000 shares of its common stock in the open market during the first three months of 1999, 996,000 in 1998, 1,040,886 in 1997, and 1,207,800, 721,350 and 93,000 in 1996, 1995 and 1994, respectively. So far, these repurchases have been made periodically in the open market with the intention to lessen the dilutive impact of issuing new shares to meet stock performance, option plans, acquisitions and other requirements. In addition to these systematic repurchases, a new plan to repurchase up to 3,000,000 of the Company's shares of common stock (the "Program") was approved by the Board of Directors on June 25, 1998. The Company's strong capital position and healthy profitability contributed to the initiation of the Program, which was being implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to the Program, the Company repurchased 2,088,900 shares of its common stock during the last six months of 1998, at an average price of approximately $30 per share, and 326,700 during the first quarter of 1999 at an average price of approximately $33 per share. The Company's capital position represents the level of capital available to support continued operations and expansion. The Company's primary capital resource is shareholders' equity, which was $357.2 million at March 31, 1999. This amount, which is reflective of the effect of common stock market repurchases and dividends paid to shareholders partially offset by the generation and retention of earnings, represents a decrease of $57.6 million or 14 percent from March 31, 1998, and a decrease of $11.4 million, or 3 percent, from December 31, 1998. As a consequence of the decrease in shareholders' equity, the Company's ratio of equity to total assets decreased to 9.33 percent at March 31, 1999, from 10.91 percent and 9.59 percent at March 31 and December 31, 1998, respectively. The ratio of Tier I capital to risk-adjusted assets was 11.69 percent at March 31, 1999, compared to 13.03 percent at March 31, 1998, and 11.87 percent at December 31, 1998. Total capital to risk-adjusted assets was 13.62 percent at March 31, 1999, compared to 14.97 percent at March 31, 1998, and 13.79 percent at December 31, 1998. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated: - -------------------------------------------------------------------------- Minimum March 31, December 31, Regulatory -------------------- ------------- Capital 1999 1998 1998 Requirements - -------------------------------------------------------------------------- Tier I Capital 11.69% 13.03% 11.87% 4.00% Total Capital 13.62% 14.97% 13.79% 8.00% Leverage ratio 9.16% 10.18% 9.39% 4.00% The risk-based capital ratios decreased at March 31, 1999, compared to March 31 and December 31, 1998, primarily due to the decrease in the total level of shareholders' equity. Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. As shown in the table above, all ratios are in excess of the regulatory definition of "well capitalized". Year 2000 Compliance The potential impact of the Year 2000 compliance issue on the financial services industry could be material, as virtually every aspect of the industry and processing of transactions will be affected. Due to the size of the task facing the financial services industry and the interdependent nature of its transactions, the Company may be adversely affected by this problem, depending on whether it and the entities with which it does business address this issue successfully. The impact of Year 2000 issues on the Company will then depend not only on corrective actions that the Company takes, but also on the way in which Year 2000 issues are addressed by governmental agencies, businesses and other third parties that provide services or data to, or receive services or data from, the Company, or whose financial condition or operational capability is important to the Company. The Company's State of Readiness The Company engages the services of third-party software vendors and service providers for substantially all of its electronic data processing. Thus, the focus of the Company is to monitor the progress of its primary software providers toward Year 2000 compliance and prepare to test future-date sensitive data of the Company in simulated processing. The Company's Year 2000 compliance program has been divided into phases, each of them common to all sections of the process: (1) inventorying date-sensitive information technology and other business systems; (2) assigning priorities to identified items and assessing the efforts required for Year 2000 compliance of those determined to be material to the Company; (3) upgrading or replacing material items that are determined not to be Year 2000 compliant and testing material items; (4) assessing the status of third party risks; and (5) designing and implementing contingency and business continuation plans. As part of the on-going supervision of the banking industry, bank regulatory agencies are continuously surveying the Company's progression and results of each one of these phases. In the first phase, the Company conducted a thorough evaluation of current information technology systems, software and embedded technologies, resulting in the identification of 43 mission critical systems that could be affected by Year 2000 issues. Non-information technology systems such as climate control systems, elevators and vault security equipment, were also surveyed. This stage of the Year 2000 process is complete. In phase two of the process, results from the inventory were assessed to determine the Year 2000 impact and what actions were required to obtain Year 2000 compliance. For the Company's internal systems, actions needed ranged from application upgrades on data processing mainframe computer services to management reporting and satellite software systems. The Company opted for a course of action that will result in upgrading or replacing all critical internal systems. This stage of the Year 2000 compliance process is complete. The third phase includes the upgrading, replacement and/or retirement of systems, and testing. This stage of the Year 2000 process is ongoing; the Company estimates that the software conversion phase was approximately 98 percent completed at March 31, 1999. Each of the upgrades and/or replacements, to the extent economically feasible, has been run through a test environment before being implemented, and has been also tested to see how well it integrates with the Company's overall data processing environment. Final "future-date" testing of system upgrades and replacements is scheduled to be completed by the end of the second quarter of 1999. The fourth phase, assessing third-party risks, includes the process of identifying and prioritizing critical suppliers and customers at the direct interface level, as well as other material relationships with third parties, including various exchanges, clearing houses, correspondent other banks, telecommunication companies, public utilities and credit customers. Included in the credit analysis process, the Company has implemented a project plan for assessing the Year 2000 readiness of its credit customers, and has completed its initial assessment of the response of significant customers. The evaluations undertaken to assess all third-party risks include communicating with the third parties about their plans and progress in addressing Year 2000 issues. Detailed evaluations of the most critical third parties have been completed and, as of March 31, 1999, no significant problems have been identified. Contingency Plan The final phase of the Company's Year 2000 compliance program relates to contingency plans. The Company maintains contingency plans in the normal course of business designed to be deployed in the event of various potential business interruptions. These plans have been expanded to address Year 2000-specific interruptions such as power and telecommunication infrastructure failures, and will continue to be supplemented if and when the results of systems integration testing identify additional business functions at risk. Such enhancements to existing plans will likely include remediation of systems, reinstallation of software, installation of third-party vendor software or some combination of alternatives. Costs As the Company relies upon third-party software vendors and service providers for substantially all of its electronic data processing, the primary cost of the Year 2000 project has been and will continue to be the reallocation of internal resources and, therefore, does not represent incremental expense to the Company. The estimated value of internal resources allocated to the Year 2000 project is approximately $3.9 million, of which $3.5 million had been expended through March 31, 1999. The priority given to Year 2000 work may result in extending the time for completing some other technology projects; these delays are not expected to have a material effect on the Company's business. The Company's total cost associated with required modifications to become Year 2000 compliant is not expected to be material to its results of operations, liquidity and capital resources. Risks Failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. The Company believes that, with the implementation of new or upgraded business systems and completion of the Year 2000 project as scheduled, the possibility of significant interruptions of normal operations due to the failure of those systems will be reduced. However, the Company is also dependent upon the power and telecommunications infrastructure within the United States, and processes large volumes of transactions through various clearing houses and correspondent banks. The most reasonably likely worst case scenario would be that the Company may experience disruption in its operations if any of these third-party suppliers reported a system failure. Although the Company's Year 2000 Project will reduce the level of uncertainty about the compliance and readiness of its material third-party providers, due to the general uncertainty over Year 2000 readiness of these third-party suppliers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact. Forward-Looking Statement Disclosure Readers are cautioned that forward-looking statements contained in this section should be read in conjunction with the Company's disclosures under the heading "Cautionary Statement for the Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995." In addition, the preceding statements concerning Year 2000 compliance are hereby designated as Year 2000 readiness disclosures under the Year 2000 Information and Readiness Disclosure Act. Cautionary Statement for the Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995." The Company is including the following cautionary statement to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions of bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. Taking into account the foregoing, the following are identified as important risk factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: The dates on which the Company believes the Year 2000 project will be completed are based on Management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 Project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of trained personnel, ability to locate and correct all computer related issues, timely responses to and corrections by third parties and suppliers, the availability to implement interfaces between new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties, the Company cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability. SIGNATURES Pursuant to the requirements of the Securities and 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: May 4, 1999 /s/ DENNIS R. HANSEN -------------------- Dennis R. Hansen Senior Vice President and Controller Chief Accounting Officer PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Subsidiary Banks are 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 Banks. 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 11: Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution (b) Exhibit 27: Financial Data Schedule (c) Reports on Form 8-K None