UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1999
Commission File Number: 1-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-2156203
(State or other jurisdiction (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 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 November 1, 1999
Common Stock, 37,604,840
No Par Value
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
- -----------------------------------------------------------------------------------------
(Unaudited)
At September 30, At December 31,
1999 1998 1998
- -----------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $212,122 $203,423 $229,734
Money market assets 250 250 250
Investment securities available for sale 1,014,018 1,020,235 987,661
Investment securities held to maturity,
with market values of:
$239,914 at September 30, 1999
$249,694 at September 30, 1998
$233,790 at December 31, 1998 240,360 241,803 226,993
Loans, net of allowance for loan losses of:
$51,645 at September 30, 1999
$51,124 at September 30, 1998
$51,304 at December 31, 1998 2,271,240 2,244,939 2,246,593
Other real estate owned 2,189 5,247 4,315
Premises and equipment, net 44,351 45,882 45,971
Interest receivable and other assets 107,332 100,767 102,781
- -----------------------------------------------------------------------------------------
Total assets $3,891,862 $3,862,546 $3,844,298
=========================================================================================
LIABILITIES
Deposits:
Non-interest bearing $912,013 $811,040 $842,919
Interest bearing:
Transaction 461,583 537,279 600,502
Savings 876,945 896,219 903,141
Time 830,019 832,504 842,443
- -----------------------------------------------------------------------------------------
Total deposits 3,080,560 3,077,042 3,189,005
Short-term borrowed funds 416,792 302,222 203,671
Liability for interest, taxes and
other expenses 31,575 54,673 35,526
Debt financing and notes payable 46,500 52,500 47,500
- -----------------------------------------------------------------------------------------
Total liabilities 3,575,427 3,486,437 3,475,702
- -----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Authorized - 150,000 shares
Common stock, issued and outstanding:
37,770 shares at September 30, 1999
40,494 shares at September 30, 1998
39,828 shares at December 31, 1998 189,689 191,127 195,156
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale, net 1,732 23,884 20,184
Retained earnings 125,014 161,098 153,256
- -----------------------------------------------------------------------------------------
Total shareholders' equity 316,435 376,109 368,596
- -----------------------------------------------------------------------------------------
Total liabilities
and shareholders' equity $3,891,862 $3,862,546 $3,844,298
=========================================================================================
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $46,995 $49,590 $139,617 $147,662
Money market assets and cash equivalents -- 42 -- 42
Investment securities available for sale
Taxable 11,806 11,995 34,986 35,824
Tax-exempt 2,765 2,391 7,906 7,316
Investment securities held to maturity
Taxable 1,277 1,522 4,048 4,520
Tax-exempt 2,056 1,916 5,985 5,741
- --------------------------------------------------------------------------------------------------
Total interest income 64,899 67,456 192,542 201,105
INTEREST EXPENSE
Transaction deposits 930 1,662 2,867 5,005
Savings deposits 4,843 6,056 14,740 18,189
Time deposits 9,313 10,608 28,045 31,001
Funds purchased 3,893 3,200 9,986 9,568
Debt financing and notes payable 817 920 2,468 2,761
- --------------------------------------------------------------------------------------------------
Total interest expense 19,796 22,446 58,106 66,524
- --------------------------------------------------------------------------------------------------
NET INTEREST INCOME 45,103 45,010 134,436 134,581
Provision for loan losses 1,195 1,195 3,585 3,985
- --------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 43,908 43,815 130,851 130,596
NON-INTEREST INCOME
Service charges on deposit accounts 5,101 5,014 14,897 15,049
Merchant credit card 984 863 2,650 2,365
Financial services commissions 798 433 2,184 1,226
Mortgage banking 158 338 555 1,177
Trust fees 156 161 500 471
Other 2,744 2,642 7,942 7,732
- --------------------------------------------------------------------------------------------------
Total non-interest income 9,941 9,451 28,728 28,020
NON-INTEREST EXPENSE
Salaries and related benefits 12,500 12,572 37,973 38,468
Occupancy 3,040 2,915 9,003 8,626
Equipment 1,717 1,897 5,171 5,487
Data processing 1,485 1,531 4,445 4,422
Professional fees 395 583 1,138 1,704
Other real estate owned 20 53 209 138
Other 5,601 5,602 16,520 17,007
- --------------------------------------------------------------------------------------------------
Total non-interest expense 24,758 25,153 74,459 75,852
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 29,091 28,113 85,120 82,764
Provision for income taxes 9,802 9,677 28,558 28,130
- --------------------------------------------------------------------------------------------------
NET INCOME $19,289 $18,436 $56,562 $54,634
==================================================================================================
Comprehensive income:
Unrealized (loss) gain on securities
available for sale, net (4,935) 4,346 (18,452) 5,961
- --------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $14,354 $22,782 $38,110 $60,595
==================================================================================================
Average shares outstanding 38,266 41,600 38,976 42,312
Diluted average shares outstanding 38,872 42,265 39,601 43,048
PER SHARE DATA
Basic earnings $0.50 $0.44 $1.45 $1.29
Diluted earnings 0.50 0.44 1.43 1.27
Dividends paid 0.16 0.14 0.48 0.38
WESTAMERICA BANCORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------------------
(Unaudited)
For the nine months
ended September 30,
1999 1998
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $56,562 $54,634
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,265 6,557
Loan loss provision 3,585 3,985
Amortization of deferred net loan (cost)/fees 1,155 1
(Increase) decrease in interest income receivable (1,101) 37
Decrease (increase) in other assets 415 (8,983)
(Decrease) increase in income taxes payable (261) 8,596
(Decrease) increase in interest expense payable (770) 897
Increase (decrease) in other liabilities 6,497 (2,588)
Gain on sales/write-down of equipment (43) (40)
Originations of loans for resale (17,850) (7,117)
Proceeds from sale of loans originated for resale 17,133 6,560
Net gain on sale of property acquired
in satisfaction of debt (298) (851)
Write-down on property acquired in satisfaction of debt 88 376
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 71,377 62,064
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net disbursements of loans (29,184) (40,318)
Purchases of investment securities available for sale (327,557) (311,242)
Purchases of investment securities held to maturity (29,579) (42,951)
Purchases of property, plant and equipment (2,513) (2,422)
Proceeds from maturity of securities available for sale 268,788 266,795
Proceeds from maturity of securities held to maturity 16,212 32,108
Proceeds from sale of securities available for sale 572 37,731
Proceeds from sale of property and equipment 46 691
Proceeds from property acquired in satisfaction
of debt 2,850 5,866
- --------------------------------------------------------------------------------------------
Net cash used in by investing activities (100,365) (53,742)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (108,445) (1,459)
Net increase in short-term borrowings 213,121 37,374
Repayments of notes payable (1,000) --
Exercise of stock options/issuance of shares 4,139 5,141
Repurchases/retirement of stock (77,627) (80,582)
Dividends paid (18,812) (16,197)
- --------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,376 (55,723)
- --------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (17,612) (47,401)
Cash and cash equivalents at beginning of period 229,734 250,824
- --------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $212,122 $203,423
============================================================================================
Supplemental disclosure of non-cash activities:
Loans transferred to other real estate owned $514 $3,257
Depreciation of fixed assets charged against reserves 37 127
Supplemental disclosure of cash flow activity:
Unrealized (loss) gain on securities available for sale (18,452) 5,961
Interest paid for the period 58,877 66,242
Income tax payments for the period 28,790 20,807
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this discussion includes
certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company's
actual results may differ materially from those included in the
forward-looking statements. The forward-looking statements involve
risks and uncertainties which include, but are not limited to,
changes in general economic conditions; competitive conditions in
the geographic and business areas in which the Company conducts its
operations; regulatory or tax changes that affect the cost of or
demand for the Company's products; the resolution of legal
proceedings and related matters. The reader is directed to
Westamerica Bancorporation's annual report on Form 10-K for the
year ended December 31, 1998, particularly the section entitled
"Cautionary Statement," for the purpose of the Safe Harbor
provisions of the Private Securities Litigation Reform Act of 1995
for a discussion of factors which could affect the Company's
business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report.
Westamerica Bancorporation (the "Company"), parent company of
Westamerica Bank, Bank of Lake County, Community Banker Services
Corporation and Westamerica Commercial Credit Inc., reported third
quarter 1999 net income of $19.3 million or $.50 diluted earnings
per share. These results compare to net income of $18.4 million or
$.44 diluted earnings per share for the third quarter of 1998. On
a year-to-date basis, the Company reported net income of $56.6
million representing $1.43 diluted earnings per share, compared to
$54.6 million or $1.27 diluted earnings per share for the same
period of 1998.
Following is a summary of the components of net income for
the periods indicated:
- ------------------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
Net interest income* $48.3 $47.8 $143.6 $142.9
Provision for loan losses (1.2) (1.2) (3.6) (4.0)
Non-interest income 9.9 9.5 28.7 28.0
Non-interest expense (24.8) (25.2) (74.5) (75.9)
Provision for income taxes* (12.9) (12.5) (37.6) (36.4)
- ------------------------------------------------------------------------------------
Net income $19.3 $18.4 $56.6 $54.6
====================================================================================
Average total assets $3,839.0 $3,799.3 $3,810.1 $3,772.8
Net income (annualized) as
a percentage of average
total assets 1.99% 1.93% 1.98% 1.94%
====================================================================================
* Fully taxable equivalent basis (FTE)
During the third quarter of 1999, the Company's net income was
$19.3 million, $900 thousand higher than the same period in 1998.
Higher net interest income, higher non-interest income and
continuing reductions in operating costs, account for the change.
Comparing the first nine months of 1999 to the same period of 1998,
net income increased $2.0 million. Included in this change is lower
operating costs and a lower loan loss provision, combined with
increased net interest income and higher service charges and other
fee income.
Net Interest Income
Following is a summary of the components of net interest income
for the periods indicated:
- ------------------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
Interest income $64.9 $67.5 $192.5 $201.1
Interest expense (19.8) (22.4) (58.1) (66.5)
FTE adjustment 3.2 2.7 9.2 8.3
- ------------------------------------------------------------------------------------
Net interest income (FTE) $48.3 $47.8 $143.6 $142.9
====================================================================================
Net interest margin (FTE) 5.45% 5.46% 5.48% 5.51%
====================================================================================
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 third quarter of 1999 increased $500
thousand from the same period in 1998 to $48.3 million. Comparing
the first nine months of 1999 with the previous year, net interest
income (FTE) increased $700 thousand to $143.6 million.
Interest Income
During the third quarter of 1999 interest income (FTE) decreased
$2.1 million from the same period in 1998. Lower earning-asset
yields were partially offset by increased average balances. Loan
yields decreased 47 basis points from prior year. All loan
categories contributed to this unfavorable change, particularly
those tied to the prime rate which decreased, on average, 40 basis
points from the third quarter of 1998. Following the general trend
of declining market rates, investment securities yields decreased 4
basis points from the comparable period of 1998. With the exception
of securities of U.S. Agencies, all categories of securities
contributed to this change, particularly U.S. Treasury securities.
Partially offsetting these changes, earning-asset average balances
increased $37.1 million from the third quarter of 1998. Loan
balances were $12.6 million higher, as improved volume of
commercial and indirect consumer lending was partially offset by
lower construction, residential real estate and other consumer
lending. Investment securities average balances increased $27.5
million from the third quarter of 1998. Increases in corporate,
U.S. Agency and tax-free securities, were partially offset by
reductions in U.S. Treasury and participation certificates.
Comparing the first nine months of 1999 with the same period of
1998, interest income (FTE) decreased $7.7 million. The effect of a
38 basis point reduction in average earning-asset yields partially
offset by a $37.8 million increase in average balances accounts for
this year-to-year change. With the exception of U.S. Agencies, all
categories of earning-asset yields were lower than 1998, reflective
of generally declining market rates. Loan and investment
securities average volumes were $27.3 million and $11.5 million,
respectively, higher than the first nine months of 1998, partially
offsetting the unfavorable income effect of the decline in yields.
As in the 1999-1998 third quarter comparison, increased balances of
commercial and indirect consumer lending were partially offset by
declining volume of other consumer loans. The increase in
investment securities balances follows the same trend as described
in the quarter-to-quarter comparison.
Interest Expense
For the third quarter of 1999 interest expense was $2.6 million
lower than the third quarter of 1998. Following market trends
reflective of a general reduction in rates, total interest-bearing
liability rates decreased 41 basis points from the third quarter of
1998. In addition, interest-free demand deposit account average
balances increased $92.2 million from the third quarter of 1998, in
part due to the transfer of certain interest-bearing
transaction deposits into the non interest-bearing category.
Partially offsetting the resulting effect of a lower cost of funds,
interest-bearing liabilities average balances increased $5.9
million from the third quarter of 1998, comprised of a $72.3
million decrease in deposits, including the effect of the
above-mentioned interest bearing deposits transferred to
interest-free demand and a $6.0 million decrease in medium- and
long-term debt average balances, offset by an $84.2 million
increase in short-term borrowed funds.
During the first nine months of 1999, interest expense decreased
$8.4 million from the same period of 1998, as a decrease of 49
basis points on the rates paid on interest-bearing liabilities and
a $45.1 million increase in demand deposit average balances were
partially offset by a $46.5 million increase in interest-bearing
liability average balances. Reflecting market conditions, rates
paid decreased in all categories of deposits and purchased funds,
while the net increase in interest-bearing average balances
resulted primarily from a $50.0 million increase in short-term
borrowed funds, partially offset by a $5.5 million reduction in
debt financing average 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 For the nine
months ended months ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------
Yield on earning assets 7.68% 8.01% 7.70% 8.08%
Rate paid on interest-bearing
liabilities 3.02% 3.44% 2.96% 3.45%
- ------------------------------------------------------------------------------------
Net interest spread 4.66% 4.57% 4.74% 4.63%
Impact of all other net
non-interest bearing funds 0.79% 0.89% 0.74% 0.88%
- ------------------------------------------------------------------------------------
Net interest margin 5.45% 5.46% 5.48% 5.51%
====================================================================================
During the third quarter of 1999, the Company's net interest margin
was 1 basis point lower than the third quarter of 1998 as the
favorable impact of a 42 basis points decrease in the cost of funds
was offset by the effect of a 33 basis points decrease in
earning-asset yields and the unfavorable impact of lower market
rates on the Company's non-interest bearing funds
balances. The Company's share repurchase programs had a significant
impact on the third quarter 1999 average equity capital, which
decreased $54.4 million from the same period in 1998.
On a September year-to-date basis, the net interest margin was 3
basis points lower than the previous year. The adverse effect of
lower average balances of non-interest bearing funds, mostly due to
a $53.1 million decrease in average equity capital in part offset
by a $45.1 increase million in average demand deposits, was
partially offset by an 11 basis points higher net interest spread,
as a 49 basis points reduction in the rate paid on interest-bearing
liabilities more than offset the unfavorable effect of a 38 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
September 30, 1999
- ------------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- ------------------------------------------------------------------------------------
Assets
Money market assets and cash equivalents $311 $-- -- %
Investment securities:
Available for sale
Taxable 782,479 11,806 5.99
Tax-exempt 214,202 3,972 7.36
Held to maturity
Taxable 85,278 1,277 5.94
Tax-exempt 152,663 2,943 7.65
Loans:
Commercial 1,503,291 32,272 8.52
Real estate construction 51,833 1,438 11.01
Real estate residential 341,335 5,872 6.83
Consumer 397,547 8,512 8.50
- ---------------------------------------------------------------------
Earning assets 3,528,939 68,092 7.68
Other assets 310,066
- -------------------------------------------------------
Total assets $3,839,005
=======================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $888,966 $-- -- %
Savings and interest-bearing
transaction 1,380,415 5,773 1.66
Time less than $100,000 404,576 4,415 4.33
Time $100,000 or more 426,501 4,898 4.56
- ---------------------------------------------------------------------
Total interest-bearing deposits 2,211,492 15,086 2.71
Short-term borrowed funds 341,135 3,893 4.53
Debt financing and notes payable 46,500 817 6.97
- ---------------------------------------------------------------------
Total interest-bearing liabilities 2,599,127 19,796 3.02
Other liabilities 29,810
Shareholders' equity 321,102
- -------------------------------------------------------
Total liabilities and
shareholders' equity $3,839,005
=======================================================
Net interest spread (1) 4.66 %
Net interest income and interest margin (2) $48,296 5.45 %
=====================================================================================
(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
September 30, 1998
- ------------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
(Dollars in thousands)
- ------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $3,261 $42 5.11 %
Investment securities:
Available for sale
Taxable 783,073 11,995 6.08
Tax-exempt 185,774 3,452 7.37
Held to maturity
Taxable 95,867 1,522 6.30
Tax-exempt 142,445 2,714 7.56
Loans:
Commercial 1,436,690 32,824 9.06
Real estate construction 58,229 1,720 11.72
Real estate residential 399,713 7,130 7.08
Consumer 386,783 8,864 9.09
- ---------------------------------------------------------------------
Earning assets 3,491,835 70,263 8.01
Other assets 307,443
- -------------------------------------------------------
Total assets $3,799,278
=======================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $796,789 $-- -- %
Savings and interest-bearing
transaction 1,450,941 7,718 2.11
Time less than $100,000 433,089 5,454 5.00
Time $100,000 or more 399,765 5,154 5.11
- ---------------------------------------------------------------------
Total interest-bearing deposits 2,283,795 18,326 3.18
Short-term borrowed funds 256,955 3,200 4.94
Debt financing and notes payable 52,500 920 6.95
- ---------------------------------------------------------------------
Total interest-bearing liabilities 2,593,250 22,446 3.44
Other liabilities 33,714
Shareholders' equity 375,525
- -------------------------------------------------------
Total liabilities and
shareholders' equity $3,799,278
=======================================================
Net interest spread (1) 4.57 %
Net interest income and interest margin (2) $47,817 5.46 %
=====================================================================================
(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 nine months ended
September 30, 1999
- ------------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- ------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $271 $-- -- %
Investment securities:
Available for sale
Taxable 774,003 34,986 6.04
Tax-exempt 202,062 11,325 7.49
Held to maturity
Taxable 87,377 4,048 6.19
Tax-exempt 148,525 8,542 7.69
Loans:
Commercial 1,490,243 95,001 8.52
Real estate construction 53,255 4,367 10.96
Real estate residential 357,007 18,520 6.94
Consumer 385,614 24,870 8.62
- ---------------------------------------------------------------------
Earning assets 3,498,357 201,659 7.70
Other assets 311,735
- -------------------------------------------------------
Total assets $3,810,092
=======================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $826,059 $-- -- %
Savings and interest-bearing
transaction 1,426,670 17,607 1.65
Time less than $100,000 414,201 13,622 4.40
Time $100,000 or more 427,031 14,423 4.52
- ---------------------------------------------------------------------
Total interest-bearing deposits 2,267,902 45,652 2.69
Short-term borrowed funds 305,929 9,986 4.36
Debt financing and notes payable 47,032 2,468 7.02
- ---------------------------------------------------------------------
Total interest-bearing liabilities 2,620,863 58,106 2.96
Other liabilities 29,947
Shareholders' equity 333,223
- -------------------------------------------------------
Total liabilities and shareholders' equity $3,810,092
=======================================================
Net interest spread (1) 4.74 %
Net interest income and interest margin (2) $143,553 5.48 %
=====================================================================================
(1) Net interest spread represents the average yield earned 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 nine months ended
September 30, 1998
- ------------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- ------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $1,254 $42 4.48 %
Investment securities:
Available for sale
Taxable 773,563 35,824 6.19
Tax-exempt 188,502 10,501 7.45
Held to maturity
Taxable 97,435 4,520 6.20
Tax-exempt 141,031 8,112 7.69
Loans:
Commercial 1,421,642 97,387 9.16
Real estate construction 61,215 5,377 11.74
Real estate residential 385,829 20,922 7.25
Consumer 390,128 26,754 9.17
- ---------------------------------------------------------------------
Earning assets 3,460,599 209,439 8.08
Other assets 312,235
- -------------------------------------------------------
Total assets $3,772,834
=======================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $780,910 $-- -- %
Savings and interest-bearing
transaction 1,454,619 23,194 2.13
Time less than $100,000 441,308 16,661 5.05
Time $100,000 or more 370,032 14,340 5.18
- ---------------------------------------------------------------------
Total interest-bearing deposits 2,265,959 54,195 3.20
Short-term borrowed funds 255,950 9,568 5.00
Debt financing and notes payable 52,500 2,761 7.03
- ---------------------------------------------------------------------
Total interest-bearing liabilities 2,574,409 66,524 3.45
Other liabilities 31,195
Shareholders' equity 386,320
- -------------------------------------------------------
Total liabilities and shareholders' equity $3,772,834
=======================================================
Net interest spread (1) 4.63 %
Net interest income and interest margin (2) $142,915 5.51 %
=====================================================================================
(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.
- ------------------------------------------------------------------------------------
Three months ended
September 30, 1999
compared with three months
ended September 30, 1998
-------------------------------------
(In thousands) Volume Rate Total
- ------------------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and funds sold ($20) ($22) ($42)
Investment securities:
Available for sale
Taxable (9) (180) (189)
Tax-exempt 527 (7) 520
Held to maturity
Taxable (162) (83) (245)
Tax-exempt 197 32 229
Loans:
Commercial 1,825 (2,377) (552)
Real estate construction (182) (100) (282)
Real estate residential (1,012) (246) (1,258)
Consumer 259 (611) (352)
- ------------------------------------------------------------------------------------
Total increase (decrease)
in loans 890 (3,334) (2,444)
- ------------------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income 1,423 (3,594) (2,171)
- ------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (360) (1,585) (1,945)
Time less than $100,000 (343) (696) (1,039)
Time $100,000 or more 404 (660) (256)
- ------------------------------------------------------------------------------------
Total decrease in
interest-bearing deposits (299) (2,941) (3,240)
- ------------------------------------------------------------------------------------
Short-term borrowed funds 930 (237) 693
Debt financing and notes payable (105) 2 (103)
- ------------------------------------------------------------------------------------
Total increase (decrease) in
interest expense 526 (3,176) (2,650)
- ------------------------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $897 ($418) $479
====================================================================================
(1) Amounts calculated on a fully taxable equivalent basis
using the current statutory federal tax rate.
Rate and volume variances.
- ------------------------------------------------------------------------------------
Nine months ended
September 30, 1999
compared with nine months
ended September 30, 1998
-------------------------------------
(In thousands) Volume Rate Total
- ------------------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and funds sold ($18) ($24) ($42)
Investment securities:
Available for sale
Taxable 20 (858) (838)
Tax-exempt 760 64 824
Held to maturity
Taxable (466) (6) (472)
Tax-exempt 431 (1) 430
Loans:
Commercial 5,443 (7,829) (2,386)
Real estate construction (668) (342) (1,010)
Real estate residential (1,520) (882) (2,402)
Consumer (307) (1,577) (1,884)
- ------------------------------------------------------------------------------------
Total increase (decrease)
in loans 2,948 (10,630) (7,682)
- ------------------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income 3,675 (11,455) (7,780)
- ------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (438) (5,149) (5,587)
Time less than $100,000 (981) (2,058) (3,039)
Time $100,000 or more 500 (417) 83
- ------------------------------------------------------------------------------------
Total decrease in
interest-bearing deposits (919) (7,624) (8,543)
- ------------------------------------------------------------------------------------
Short-term borrowed funds 1,193 (775) 418
Debt financing and notes payable (287) (6) (293)
- ------------------------------------------------------------------------------------
Total decrease in
interest expense (13) (8,405) (8,418)
- ------------------------------------------------------------------------------------
Increase (decrease) in
net interest income $3,688 ($3,050) $638
====================================================================================
(1) Amounts calculated on a fully taxable equivalent basis
using the current statutory federal tax rate.
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 third quarter of 1999, unchanged from the same period in
1998. On a year-to-date basis, the $3.6 million 1999 provision was
$400 thousand lower than the first nine months of 1998. 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 For the nine
months ended months ended
September 30, September 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
Deposit account fees $5.10 $5.01 $14.90 $15.05
Merchant credit card 0.98 0.86 2.65 2.37
Financial services
commissions 0.80 0.43 2.18 1.23
Mortgage banking income 0.16 0.34 0.56 1.18
Trust fees 0.16 0.16 0.50 0.47
Other non-interest income 2.74 2.65 7.94 7.72
- ------------------------------------------------------------------------------------
Total $9.94 $9.45 $28.73 $28.02
====================================================================================
The $490 thousand increase in non-interest income during the third
quarter of 1999 compared to the third quarter of 1998, was
comprised primarily of the following: $370 thousand higher
financial services commissions, due to more aggressive marketing
efforts resulting in higher sales volume and increased fees
received from the agent managing certain investments of the
Company's customers; $120 thousand higher merchant credit card
income primarily due to fee restructuring; $90 thousand higher
deposit account fees, including higher overdraft and returned item
charges primarily due to higher volume and the effect of a newly
implemented program through which charges escalate following a
tiered system based on number of occurrences; and higher other
income resulting from new product offerings and increased
check-issuing up-charges. Partially offsetting these changes,
mortgage banking income was $180 thousand lower than the same
quarter in 1998, mainly due to lower net gains from loans sold in
the secondary market, lower retained mortgage servicing fees and
other fees in connection with the preparation and documentation of
related loans.
Comparing the first nine months of 1999 to the same period in 1998,
non-interest income increased $710 thousand. The largest contributor
to this change is financial services commissions, $950 thousand
higher than 1998, due to increased sales and higher share of fees
received from the agent managing certain investments of the
Company's clients. In addition, merchant credit card income was
$280 thousand higher than prior year primarily due to fee
restructuring and repricing, other was $220M higher primarily due
to increased fees from new product offerings in part offset by
lower gains on sales of properties acquired in satisfaction of
debt, and trust fees were $30 thousand higher than the first nine
months of 1998. Partially offsetting these changes, mortgage
banking income was $620 thousand lower than the first nine months
of 1998, due to lower refinancing volume, retained servicing, and
gains on the sales of loans in the secondary market, and deposit
service fees were $150 thousand lower mainly due to reduced volume
of returned items and lower charges on personal transaction
accounts, partially offset by increased account analysis charges to
business customers.
Non-interest expense
The following table summarizes the components of non-interest
expense for the periods indicated.
- ------------------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
Salaries and incentives $9.88 $9.94 $29.74 $29.88
Other personnel 2.62 2.63 8.23 8.59
Occupancy 3.04 2.92 9.00 8.63
Equipment 1.72 1.90 5.17 5.49
Data processing services 1.49 1.53 4.45 4.42
Professional fees 0.40 0.58 1.14 1.70
Courier service 0.84 0.83 2.50 2.60
Stationery and supplies 0.42 0.44 1.18 1.35
Postage 0.52 0.49 1.64 1.56
Loan expense 0.28 0.42 0.99 1.14
Advertising/public relations 0.31 0.32 0.96 1.00
Merchant credit card 0.40 0.32 1.07 0.86
Operational losses 0.28 0.18 0.83 0.73
Other real estate owned and
property held for sale 0.02 0.05 0.21 0.14
Other non-interest expense 2.54 2.60 7.35 7.76
- ------------------------------------------------------------------------------------
Total $24.76 $25.15 $74.46 $75.85
====================================================================================
Average full time
equivalent staff 1,088 1,116 1,102 1,140
Non-interest expense
to revenues
("Efficiency ratio")(FTE) 42.51% 43.92% 43.22% 44.37%
====================================================================================
Non-interest expense of $24.76 million in third quarter of 1999 was
$390 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 $180 thousand lower equipment costs,
primarily due to contract renegotiations and lower depreciation
costs; professional fees were $180 thousand lower, mainly due to
lower legal and accounting costs as lower problem credit-related
costs were partially offset by increased expenses in connection
with possible acquisitions; and loan expense was $140 thousand
lower than the third quarter of 1998 primarily due to lower
appraisal fees and lower foreclosure costs in connection with
properties acquired in satisfaction of debt. In addition, personnel
related costs were $70 thousand lower than the comparable quarter
of 1998, mainly due to reduced salaries resulting from reductions
in equivalent staff and lower incentive payouts in connection with
the Company's various incentive programs; data processing expenses
were $40 thousand lower primarily due to reduced costs from
in-house and outsourced data processing servicers; and other real
estate and stationery and supplies related costs were $30 thousand
and $20 thousand, respectively, lower than the third quarter of
1998. Partially offsetting these favorable variances, occupancy
costs were $120 thousand higher than the third quarter of 1998,
mainly due to higher general building repairs and maintenance;
operational losses were $100 thousand higher due to increased
sundry losses and write-offs of accounting differences; and
merchant credit card costs were $80 thousand higher primarily due
to contract renegotiations and reflecting higher costs from
servicers that were passed on to merchants reflected also in an
increase in related income. Completing the change from the third
quarter of 1998, postage and courier expenses were higher than
prior year by $30 thousand and $10 thousand, respectively.
Comparing the first nine months of 1999 with the same period of
1998, non-interest expense decreased $1.4 million. Professional
fees were $560 thousand lower primarily due to legal costs in
connection with problem credits; personnel related costs were $500
thousand lower, primarily due to reduced salaries and benefits
reflecting a reduction of 38 full-time equivalent employees and
decreased accruals in connection with certain compensation
programs; equipment costs were $320 thousand lower than the first
nine months of 1998 due to lower depreciation expense, rentals and
hardware lease and maintenance related costs; stationery and
supplies expenses were $170 thousand lower, primarily due to lower
purchases of inventories; and loan related expenses were $150
thousand lower than 1998 primarily due to lower appraisal fees and
repossession expenses related to properties acquired in
satisfaction of debt. In addition, courier services and
advertising/public relations expenses were $100 thousand and $40
thousand, respectively, lower than the first nine months of 1998.
Included in the $410 thousand reduction in costs in other
non-interest expense are lower state and federal agency
assessments, lower amortizations of purchase premiums due to asset
run-offs, lower telephone expenses, lower employee education
related costs and lower insurance and temporary help related
expenses. Partially offsetting these expense reductions from the
first nine months of 1998, occupancy costs were $370 thousand
higher, primarily due to rental costs net of subleased income;
merchant credit card costs were $210 thousand higher due to
increased processing costs resulting from repricing, higher volume,
and increased servicers' assessments due to contract
renegotiations; operational losses were $100 thousand higher than
the first nine months of 1998 primarily due to accounting shortages
and other write-offs inherent to the nature of the Company's
business; postage expenses were $80 thousand higher; other real
estate related costs were $70 thousand higher than the first nine
months of 1998 mainly due to lower gains recognized on sales of
properties acquired in satisfaction of debt; and data processing
services were $30 thousand higher than 1998 mainly due to increased
in-house servicer billings related to the Company's Y2K compliance
program.
Provision for Income Tax
During the third quarter of 1999, the Company recorded income tax
expense of $9.8 million compared to $9.7 million in the third
quarter of 1998. On a year-to-date basis, income tax expense was
$28.6 million for 1999 compared to $28.1 million in 1998. The
provisions recorded for both the third quarter and first nine
months of 1999 represent effective tax rates of 33.7 percent and
33.6 percent, respectively, compared to 34.4 percent and 34.0
percent, respectively, for the third quarter and first nine months
of 1998. Effective tax rates for all periods presented are
attributable to the level of net income adjusted for tax-preference
items.
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 September 30, December 31,
-------------------- -------------
(In millions) 1999 1998 1998
- ----------------------------------------------------------------------
Classified loans $45.0 $52.8 $50.8
Other classified assets 2.2 5.2 4.3
- ----------------------------------------------------------------------
Total classified assets $47.2 $58.0 $55.1
======================================================================
Allowance for loan losses
as a percentage of
classified loans 115% 97% 101%
Classified loans at September 30, 1999, decreased $7.8 million or 15
percent to $45.0 million from September 30, 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
$3.0 million from September 30, 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 $5.8 million decrease in classified loans
from December 31, 1998, was principally due to reductions in
commercial loans with real estate collateral. The $2.1 million
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 September 30, December 31,
-------------------- -------------
(In millions) 1999 1998 1998
- ----------------------------------------------------------------------
Performing non-accrual loans $3.08 $1.37 $1.80
Non-performing,
non-accrual loans 6.63 6.79 6.73
- ----------------------------------------------------------------------
Total non-accrual loans 9.71 8.16 8.53
Loans 90 days past due and
still accruing 0.51 0.52 0.52
- ----------------------------------------------------------------------
Total non-performing loans 10.22 8.68 9.05
- ----------------------------------------------------------------------
Restructured loans -- -- --
Other real estate owned 2.20 5.25 4.32
- ----------------------------------------------------------------------
Total non-performing assets $12.42 $13.93 $13.37
======================================================================
Allowance for loan losses
as a percentage of
non-performing loans 505% 589% 567%
Performing non-accrual loans increased $1.71 million to $3.08
million at September 30, 1999, from $1.37 million at September 30,
1998 and $1.28 million from $1.80 million outstanding at December
31, 1998. Increased commercial and commercial real estate loans
account for the majority of this change. Non-performing,
non-accrual loans of $6.63 million at September 30, 1999, decreased
$160 thousand from September 30, 1998, primarily due to reductions
of commercial loans, partially offset by sales, payoffs and
foreclosures of commercial real estate loans, and increased $100
thousand from December 31, 1998, mainly due additions net of
payoffs and write-offs of loans with real estate collateral and
commercial loans. The $3.05 million and $2.12 million decreases in
other real estate owned balances from September 30, 1998 and
December 31, 1998, respectively, were due to 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 and nine months ended September
30, 1999, if all such loans had been current in accordance with
their original terms, totaled $187 thousand and $538 thousand,
respectively, compared to $158 thousand and $721 thousand,
respectively, for the comparable periods in 1998.
The amount of interest income that was recognized on non-accrual
loans from cash payments made during the three and nine months
ended September 30, 1999, totaled $369 thousand and $851 thousand,
respectively, representing third quarter and year-to-date
annualized yields of 15.16 percent and 12.86 percent, respectively.
This compares to cash payments received on non-accrual loans of
$112 thousand and $390 thousand for the three and nine months ended
September 30, 1998, respectively, representing annualized yields of
5.66 percent and 4.65 percent.
Total cash payments received which were applied against the book
balance of non-accrual loans outstanding at September 30, 1999, totaled
approximately $312 thousand.
The overall credit quality of the loan portfolio continues to be
strong; 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 relating to
the existing loan portfolio. 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 $51.6 million allowance for loan losses,
which constituted 2.22 percent of total loans at September 30,
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 For the nine
months ended months ended
September 30, September 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
Balance, beginning $51.7 $50.8 $51.3 $50.6
of period
Loan loss provision 1.2 1.2 3.6 4.0
Loans charged off (2.3) (1.6) (6.1) (6.4)
Recoveries of previously
charged-off loans 1.0 0.7 2.8 2.9
- ------------------------------------------------------------------------------------
Net credit losses (1.3) (0.9) (3.3) (3.5)
- ------------------------------------------------------------------------------------
Balance, end of period $51.6 $51.1 $51.6 $51.1
====================================================================================
Net credit losses
(annualized) as a
percentage of average
loans outstanding 0.22% 0.15% 0.19% 0.21%
Allowance for loan losses
as a percentage
of loans outstanding 2.22% 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 September 30, 1999 would not
result in a fluctuation of NII that would exceed the parameters
established by Company policy.
At September 30, 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
the rule amendments of Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging
Activities", no further interim disclosure is 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 September 30, 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 September 30, 1999,
investment securities available for sale totaled $1,014.0 million,
representing a decrease of $6.2 million from September 30, 1998. In
addition, the Company generates significant liquidity from its
operating activities. The Company's profitability during the first
nine months of 1999 and 1998 generated substantial cash flows,
which are included in the total provided from operations, of $71.4
million and $62.1 million, respectively. Additional cash flows may
be provided by financing activities, primarily the acceptance of
deposits and borrowings from banks.
During the first nine months of 1999, the Company provided $11.4
million from its financing activities. This includes an increase of
$213.1 million in short-term borrowed funds and $4.1 million
provided primarily from exercises of stock options. Partially
offsetting these cash inflows, deposits decreased $108.4 million
during the first nine months of 1999, and the effect of the
Company's stock repurchase programs and dividends paid to
shareholders totaled $77.6 million and $18.8 million, respectively.
In addition, during the same period, the Company reduced by $1.0
million Westamerica Bank's subordinated long-term debt. This
compares with net cash used by the Company in financing activities
during the first nine months of 1998, totaling $55.7 million. This
total includes $80.6 million used to meet repurchase of stock
requirements, $16.2 million used to pay dividends shareholders and
a $1.5 million decline in deposit balances, partially offset by
$37.4 million provided by increasing short-term borrowings and $5.2
million resulting from the issuance of new shares of common stock,
primarily for stock option exercises.
The Company uses cash flows from operating and financing activities
primarily to invest in investment securities and loans. Purchases
of investment securities net of maturities increased $71.6 million
during the first nine months of 1999 compared to a more moderate
increase of $17.6 million during the first nine months of 1998. In
addition, and reflecting a slower demand for loans, net
disbursements during the first nine months of 1999 were $29.2
million, compared to $40.3 million during the same period in the
previous year.
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
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
During the third quarter of 1999, the Company decided to cancel a
line of credit that was established on July 31, 1998, with a
well-known financial institution. This line of credit, set up to be
used for general corporate purposes including the purchase of
stock, had 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 Company replaced this source of cash inflow with
increased cash dividend requirements from affiliates.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed
regularly by Management.
Since the beginning of 1994 and through September 30, 1999, the Board
of Directors of the Company has authorized the repurchase of
5,252,150 shares of the Company's common stock from time to time,
subject to appropriate regulatory and other accounting
requirements. The Company acquired 750,000 shares of its common
stock in the open market during the first nine months of 1999, at an
average price of approximately $34 per share. Prior years repurchases
were 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, all 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 1,750,000 of the Company's shares of common stock
(the "Program") was approved by the Board of Directors on August
26, 1999. 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 405,700 shares of its common stock at an
average price of approximately $31 per share. This Program
supercedes a prior plan in place, which was approved by the Board
of Directors on June 30, 1998 and authorized the purchase of
3,000,000 of the Company's common stock. Upon termination of this
plan, a total of 2,987,600 shares had been bought, at an average
price of approximately $31 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 $316.4 million at September 30, 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 $59.7 million
or 16 percent from September 30, 1998, and a decrease of $52.2
million, or 14 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 8.13 percent at September 30, 1999,
from 9.74 percent and 9.59 percent at September 30 and December 31,
1998, respectively. The ratio of Tier I capital to risk-adjusted
assets was 10.24 percent at September 30, 1999, compared to 12.14
percent at September 30, 1998, and 11.87 percent at December 31,
1998. Total capital to risk-adjusted assets was 12.16 percent at
September 30, 1999, compared to 14.06 percent at September 30,
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
September 30, December 31, Regulatory
-------------------- ------------- Capital
1999 1998 1998 Requirements
- ------------------------------------------------------------------------------------
Tier I Capital 10.24% 12.14% 11.87% 4.00%
Total Capital 12.16% 14.06% 13.79% 8.00%
Leverage ratio 7.96% 9.57% 9.39% 4.00%
The risk-based capital ratios decreased at September 30, 1999,
compared to September 30 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 has been 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 and testing material items that are determined not to be
Year 2000 compliant; (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. Software conversions have been
completed at September 30, 1999, and, to the extent economically
feasible, have been run through a test environment before being
implemented. Tests have been completed also to see how well the
individual systems integrate with the Company's overall data
processing environment. Final "future-date" testing of system
upgrades and replacements have been completed.
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 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 September 30,
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.
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 $4.1 million. All of this amount has
been expended through September 30, 1999, and no additional
significant costs are anticipated. 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 has been 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 has reduced 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: November 1,1999 /s/ DENNIS R. HANSEN
--------------------------
Dennis R. Hansen
Senior Vice President
and Controller
Senior 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
On August 31, 1999, the Company filed a report on Form 8-K
in connection with an open-ended stock repurchase plan
whereby the Company was authorized to repurchase, as
conditions warrant, up to an aggregate of 2,750,000
shares of its common stock through open-market and
privately negotiated transactions.