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 the Quarter Ended September 30, 1998
Commission File Number: 1-9383
WESTAMERICA BANCORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of
incorporation or organization)
94-2156203
(I.R.S. Employer
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
Common Stock,
No Par Value
Shares outstanding as of November 5, 1998
40,410,136
<PAGE>
<TABLE>
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(In thousands)
<CAPTION>
- ------------------------------------------------------------------------------------------
(Unaudited)
At September 30, At December 31,
1998 1997 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $203,423 $246,485 $250,824
Money market assets 250 250 250
Investment securities available for sale 1,020,235 974,149 1,003,234
Investment securities held to maturity,
with market values of:
$249,694 at September 30, 1998
$237,497 at September 30, 1997
$236,896 at December 31, 1997 241,803 234,731 230,960
Loans, net of allowance for loan losses of:
$51,124 at September 30, 1998
$50,764 at September 30, 1997
$50,630 at December 31, 1997 2,244,939 2,205,658 2,211,307
Other real estate owned 5,247 6,019 7,381
Premises and equipment, net 45,882 53,336 48,412
Interest receivable and other assets 100,767 96,267 96,076
- ------------------------------------------------------------------------------------------
Total assets $3,862,546 $3,816,895 $3,848,444
==========================================================================================
LIABILITIES
Deposits:
Non-interest bearing $811,040 $803,040 $852,153
Interest bearing:
Transaction 537,279 531,771 554,825
Savings 896,219 962,751 902,381
Time 832,504 807,614 769,142
- ------------------------------------------------------------------------------------------
Total deposits 3,077,042 3,105,176 3,078,501
Short-term borrowed funds 302,222 205,476 264,848
Liability for interest, taxes and
other expenses 54,673 49,690 45,443
Debt financing and notes payable 52,500 57,500 52,500
- ------------------------------------------------------------------------------------------
Total liabilities 3,486,437 3,417,842 3,441,292
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Authorized - 150,000 shares of common stock
Issued and outstanding:
40,494 at September 30, 1998
43,100 at September 30, 1997
42,799 at December 31, 1997 191,127 196,994 198,517
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale, net 23,884 14,609 17,923
Retained earnings 161,098 187,450 190,712
- ------------------------------------------------------------------------------------------
Total shareholders' equity 376,109 399,053 407,152
- ------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $3,862,546 $3,816,895 $3,848,444
==========================================================================================
</TABLE>
<PAGE>
<TABLE>
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- ----------------------------------------------------------
(In thousands, except per share data)
<CAPTION>
- ----------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $49,590 $51,233 $147,662 $151,606
Money market assets and funds sold 42 27 42 1,629
Investment securities:
Available for sale
Taxable 11,995 11,791 35,824 34,453
Tax-exempt 2,391 2,107 7,316 5,626
Held to maturity
Taxable 1,522 1,553 4,520 3,661
Tax-exempt 1,916 1,766 5,741 5,444
- ----------------------------------------------------------------------------------------
Total interest income 67,456 68,477 201,105 202,419
INTEREST EXPENSE
Transaction deposits 1,662 1,670 5,005 4,974
Savings deposits 6,056 7,172 18,189 21,343
Time deposits 10,608 10,552 31,001 31,227
Short-term borrowed funds 3,200 1,771 9,568 5,633
Debt financing and notes payable 920 1,005 2,761 3,012
- ----------------------------------------------------------------------------------------
Total interest expense 22,446 22,170 66,524 66,189
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME 45,010 46,307 134,581 136,230
Provision for loan losses 1,195 1,650 3,985 6,250
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 43,815 44,657 130,596 129,980
- ----------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 5,014 4,960 15,049 15,592
Merchant credit card 863 917 2,365 2,946
Mortgage banking 338 392 1,177 1,112
Financial services commissions 433 323 1,226 787
Trust fees 161 153 471 383
Other 2,642 2,031 7,732 7,221
- ----------------------------------------------------------------------------------------
Total non-interest income 9,451 8,776 28,020 28,041
NON-INTEREST EXPENSE
Salaries and related benefits 12,572 12,562 38,468 49,779
Occupancy 2,915 3,320 8,626 19,068
Equipment 1,897 2,140 5,487 8,864
Data processing 1,531 1,383 4,422 4,794
Professional fees 583 687 1,704 8,709
Other real estate owned 53 88 138 929
Other 5,602 6,023 17,007 19,805
- ----------------------------------------------------------------------------------------
Total non-interest expense 25,153 26,203 75,852 111,948
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 28,113 27,230 82,764 46,073
Provision for income taxes 9,677 9,570 28,130 16,235
- ----------------------------------------------------------------------------------------
NET INCOME $18,436 $17,660 $54,634 $29,838
========================================================================================
Comprehensive income:
Change in unrealized gain on securities
available for sale, net 4,270 3,643 5,867 8,511
- ----------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $22,706 $21,303 $60,501 $38,349
========================================================================================
Average shares outstanding 41,600 43,171 42,312 43,064
Diluted average shares outstanding 42,265 44,008 43,048 43,829
PER SHARE DATA
Basic earnings $0.44 $0.41 $1.29 $0.69
Diluted earnings 0.44 0.40 1.27 0.68
Dividends paid 0.14 0.09 0.38 0.26
</TABLE>
<PAGE>
<TABLE>
WESTAMERICA BANCORPORATION
STATEMENTS OF CASH FLOWS
- ------------------------
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------
(Unaudited)
For the nine months
ended September 30,
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $54,634 $29,838
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,557 6,234
Provision for loan losses 3,985 6,250
Amortization of deferred net loan fees/(cost) 1 (870)
Decrease in interest income receivable 37 1,679
(Increase) decrease in other assets (8,983) 4,036
Increase in income taxes payable 8,596 3,247
Increase (decrease) in interest expense payable 897 (541)
Decrease in other liabilities (2,588) (41)
Gain on sales of investment securities (162) (136)
Net (gain) loss on sales/write-down of equipment (40) 7,627
Originations of loans for resale (7,117) (9,123)
Proceeds from sale of loans originated for resale 6,560 16,387
Net gain on sale of property acquired
in satisfaction of debt (851) (866)
Write-down on property acquired in satisfaction of debt 376 1,248
Gain on sales of branches -- (678)
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 61,902 64,291
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (disbursements) repayments of loans (40,318) 16,684
Purchases of investment securities available for sale (311,242) (337,857)
Purchases of investment securities held to maturity (42,951) (65,721)
Purchases of property, plant and equipment (2,422) (4,515)
Proceeds from maturity of securities available for sale 266,795 248,295
Proceeds from maturity of securities held to maturity 32,108 46,422
Proceeds from sale of securities available for sale 37,893 22,415
Proceeds from sale of property and equipment 691 1,696
Proceeds from sale of property acquired in
satisfaction of debt 5,866 5,112
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (53,580) (67,469)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (1,459) (123,524)
Net increase in short-term borrowings 37,374 38,029
Repayments of notes payable -- (1,365)
Exercise of stock options/issuance of shares 5,141 13,456
Retirement of stock (80,582) (23,015)
Dividends paid (16,197) (9,095)
- ----------------------------------------------------------------------------------------
Net cash used in financing activities (55,723) (105,514)
- ----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (47,401) (108,692)
Cash and cash equivalents at beginning of period 250,824 355,177
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $203,423
$246,485
========================================================================================
Supplemental disclosure of non-cash activities:
Loans transferred to other real estate owned $3,257 $1,601
Depreciation of fixed assets charged against reserves 127 --
Supplemental disclosure of cash flow activity:
Unrealized gain on securities available for sale 5,961 8,594
Interest paid for the period 66,242 66,523
Income tax payments for the period 20,807 14,305
</TABLE>
<PAGE>
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, 1997.
On January 22, 1998, the Board of Directors of the Company
authorized a three-for-one stock split of the Company's common
stock in which each share of the Company's common stock was
converted into three shares. Consequently, all related information
in this report, including exhibits, has been restated to reflect
the effect of the stock split.
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 1998 net income of $18.4 million or $.44 diluted earnings
per share. These results compare to net income of $17.7 million or
$.40 diluted earnings per share for the third quarter of 1997. On a
year-to-date basis, the Company reported net income of $54.6
million representing $1.27 diluted earnings per share, compared to
$29.8 million or $.68 diluted earnings per share for the same
period of 1997. Year-to-date 1997 income was impacted by
approximately $18.8 million pretax one-time charges ($12.8 million
after tax) resulting from the merger of the Company with ValliCorp
Holdings, Inc. (the "Merger").
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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Net interest income* $47.8 $48.8 $142.9 $143.2
Provision for loan losses (1.2) (1.7) (4.0) (6.3)
Non-interest income 9.5 8.8 28.0 28.0
Non-interest expense (25.2) (26.2) (75.9) (111.9)
Provision for income taxes* (12.5) (12.0) (36.4) (23.2)
- -------------------------------------------------------------------------------
Net income $18.4 $17.7 $54.6 $29.8
===============================================================================
Average total assets $3,799.3 $3,733.7 $3,772.8 $3,746.9
Net income (annualized) as
a percentage of average
total assets 1.93% 1.88% 1.94% 1.06%
* Fully taxable equivalent basis (FTE)
<PAGE>
During the third quarter of 1998, the Company's net income was
$18.4 million, $700 thousand higher than the same period in 1997.
Lower non-interest expense due to continued cost controls, higher
non-interest income primarily due to higher deposit fee income and
higher gains from sales of assets, and a reduced loan loss
provision, were partially offset by lower net interest income
primarily due to lower loan yields.
Comparing the first nine months of 1998 to the same period of 1997,
net income increased $24.8 million. The major component of this
change is the reduction in non-interest expense due to one-time
pre-Merger operating costs incurred during the first six months of
1997, including additions to the loan loss provision, combined with
cost reductions due to strict controls and consolidation of
operations achieved after the Merger. This reduction in
non-interest expense was partially offset by increased income taxes
due mainly to higher pretax 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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Interest income $67.5 $68.5 $201.1 $202.4
Interest expense (22.4) (22.2) (66.5) (66.2)
FTE adjustment 2.7 2.5 8.3 7.0
- -------------------------------------------------------------------------------
Net interest income (FTE) $47.8 $48.8 $142.9 $143.2
===============================================================================
Net interest margin (FTE) 5.46% 5.69% 5.51% 5.62%
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 1998 decreased $1 million
from the same period in 1997 to $47.8 million. On a year-to-date
basis, 1998 net interest income decreased $300 thousand from the
first nine months of 1997.
Interest Income
During the third quarter of 1998, interest income (FTE) decreased
$800 thousand from the same period in 1997. Higher average
investment securities and loan balances, combined with lower
funding costs, were offset by lower earning-asset yields and
increased average balances of interest-bearing liabilities.
Investment securities average balances increased $58 million as
increases in tax-free, asset-backed, corporate and other
securities, were partially offset by reductions in U.S. Agency and
Treasury securities and participation certificates. Decreases in
investment securities yields from the third quarter of 1997
occurred primarily in U.S. Agency and tax-free securities,
asset-backed and corporate securities, partially offset by an
increase in participation certificates yields.
<PAGE>
Loan average balances increased $32 million from prior year.
Increases in targeted residential real estate and indirect consumer
credits were partially offset by decreases in construction and
other consumer loans, including revolving lines of credit. Loan
yields decreased from the third quarter of 1997 in the commercial
and residential real estate categories, mainly due to competitive
pressures, partially offset by increases in revolving credit and
construction loan yields.
Comparing the first nine months of 1998 with the same period of
1997, interest income (FTE) remained unchanged at $209.4 million.
The positive effect of higher investment securities average
balances and yields and higher average loan balances was offset by
lower loan yields. The increase in the average balance of
investment securities was concentrated in asset-backed, corporate
and tax-free securities, partially offset by reductions in U.S.
Agency and Treasury securities, participation certificates and
short-term funds sold. The total yield on investment securities
increased from the first nine months of 1997, as increases in
participation certificates and U.S. Agency and Treasury securities
were partially offset by lower yields on asset-backed, corporate
and tax-free securities. Loan average balances increased from the
first nine months of 1997, as increases in targeted commercial,
residential real estate and indirect consumer loan average balances
were partially offset by decreases in direct consumer, construction
and revolving lines of credit average balances. All categories of
loan yields, with the exception of construction loans, experienced
decreases from the first nine months of 1997 mainly due to
competitive pressure.
Interest Expense
For the third quarter of 1998 interest expense was $200 thousand
higher than the third quarter of 1997. The higher interest expense
resulted from $105 million higher average balance of higher-cost
short-term borrowings to compensate for a decrease of $32 million
in the average balance of lower-cost interest-bearing deposits and
to fund the increases in the earning-assets average balances.
On a year-to-date basis, interest expense increased $300 thousand,
mainly due to a $79 million decrease in the average balance of
lower-cost interest bearing deposits and a $100 million compensating
increase in short-term borrowings, partially offset by the
favorable effect of an increase of $13 million in interest-free
demand deposit 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 trends.
<PAGE>
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,
----------------- -------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------
Yield on earning assets 8.01% 8.27% 8.08% 8.21%
Rate paid on interest-bearing
liabilities 3.44% 3.47% 3.45% 3.44%
- -------------------------------------------------------------------------------
Net interest spread 4.57% 4.80% 4.63% 4.77%
Impact of all other net
non-interest bearing funds 0.89% 0.89% 0.88% 0.85%
- -------------------------------------------------------------------------------
Net interest margin 5.46% 5.69% 5.51% 5.62%
===============================================================================
During the third quarter of 1998, the Company's net interest margin
of 5.46 percent was 23 basis points lower than the third quarter of
1997, as the unfavorable effect of a 26 basis point decline in
earning-asset yields, mostly due to a decrease in loan yields, was
partially offset by a 3 basis point reduction in the rates paid on
interest-bearing funds.
Comparing the first nine months of 1998 with the same period in the
prior year, the net interest margin decreased 11 basis points.
Earning-asset yields were 13 basis points lower, mainly due to
lower loan yields, and the rate paid on interest-bearing
liabilities increased 1 basis point as higher rates paid on
short-term borrowed funds were partially offset by a reduction in
deposit rates and the favorable impact of higher non-interest
bearing funds including higher demand deposit average balances.
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.
<PAGE>
Distribution of assets, liabilities and shareholders' equity:
- --------------------------------------------------------------------------------
For the three months ended
September 30, 1998
- --------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- --------------------------------------------------------------------------------
Assets
Money market assets and funds sold $3,261 $42 5.16 %
Investment securities:
Taxable 887,788 13,517 6.04
Tax-exempt 319,371 6,166 7.66
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 dividing net interest income
(annualized) by total average earning assets.
<PAGE>
Distribution of assets, liabilities and shareholders' equity:
- --------------------------------------------------------------------------------
For the three months ended
September 30, 1997
- --------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- --------------------------------------------------------------------------------
Assets
Money market assets and funds sold $2,250 $27 4.76 %
Investment securities:
Taxable 865,482 13,344 6.12
Tax-exempt 284,726 5,646 7.87
Loans:
Commercial 1,436,306 34,018 9.40
Real estate construction 78,705 2,255 11.37
Real estate residential 329,765 6,174 7.43
Consumer 404,853 9,469 9.28
- -----------------------------------------------------------------
Earning assets 3,402,087 70,933 8.27
Other assets 331,606
- ----------------------------------------------------
Total assets $3,733,693
====================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $785,603 $-- -- %
Savings and interest-bearing
transaction 1,523,057 8,842 2.30
Time less than $100,000 475,865 6,156 5.13
Time $100,000 or more 327,853 4,396 5.32
- -----------------------------------------------------------------
Total interest-bearing deposits 2,326,775 19,394 3.31
Short-term borrowed funds 151,995 1,771 4.62
Debt financing and notes payable 57,500 1,005 6.93
- -----------------------------------------------------------------
Total interest-bearing liabilities 2,536,270 22,170 3.47
Other liabilities 33,198
Shareholders' equity 378,622
- ----------------------------------------------------
Total liabilities and
shareholders' equity $3,733,693
====================================================
Net interest spread (1) 4.80 %
Net interest income and interest margin (2) $48,763 5.69 %
===============================================================================
(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 dividing net interest income
(annualized) by total average earning assets.
<PAGE>
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 4.52 %
Investment securities:
Taxable 879,642 40,344 6.13
Tax-exempt 320,889 18,613 7.76
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-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income
(annualized) by total average earning assets.
<PAGE>
Distribution of assets, liabilities and shareholders' equity:
- --------------------------------------------------------------------------------
For the nine months ended
September 30, 1997
- --------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- --------------------------------------------------------------------------------
Assets
Money market assets and funds sold $39,957 $1,629 5.45 %
Investment securities:
Taxable 866,073 38,114 5.88
Tax-exempt 252,817 16,020 8.47
Loans:
Commercial 1,387,306 96,324 9.28
Real estate construction 90,322 7,340 10.87
Real estate residential 348,232 20,488 7.87
Consumer 424,268 29,464 9.28
- -----------------------------------------------------------------
Earning assets 3,408,975 209,379 8.21
Other assets 337,961
- ----------------------------------------------------
Total assets $3,746,936
====================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $768,036 $-- -- %
Savings and interest-bearing
transaction 1,548,960 26,317 2.27
Time less than $100,000 484,512 18,432 5.09
Time $100,000 or more 324,032 12,795 5.28
- -----------------------------------------------------------------
Total interest-bearing deposits 2,357,504 57,544 3.26
Short-term borrowed funds 156,392 5,633 4.82
Debt financing and notes payable 58,034 3,012 6.94
- -----------------------------------------------------------------
Total interest-bearing liabilities 2,571,930 66,189 3.44
Other liabilities 30,023
Shareholders' equity 376,947
- ----------------------------------------------------
Total liabilities and
shareholders' equity $3,746,936
====================================================
Net interest spread (1) 4.77 %
Net interest income and interest margin (2) $143,190 5.62 %
===============================================================================
(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 dividing net interest income
(annualized) by total average earning assets.
<PAGE>
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. Certain amounts, as applicable, were
calculated on a fully taxable equivalent basis using the current
statutory tax rates.
- -------------------------------------------------------------------------------
Three months ended
September 30, 1998,
compared with three months
ended September 30, 1997
--------------------------------
(In thousands) Volume Rate Total
- -------------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and funds sold $13 $2 $15
Investment securities:
Taxable 335 (162) 173
Tax-exempt 664 (144) 520
Loans:
Commercial 9 (1,203) (1,194)
Real estate construction (607) 72 (535)
Real estate residential 1,230 (274) 956
Consumer (417) (188) (605)
- -------------------------------------------------------------------------------
Total increase (decrease)
in loans 215 (1,593) (1,378)
- -------------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income 1,227 (1,897) (670)
- -------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (406) (718) (1,124)
Time less than $100,000 (537) (165) (702)
Time $100,000 or more 941 (183) 758
- -------------------------------------------------------------------------------
Total decrease in
interest-bearing deposits (2) (1,066) (1,068)
- -------------------------------------------------------------------------------
Short-term borrowed funds 1,299 130 1,429
Debt financing and notes payable (88) 3 (85)
- -------------------------------------------------------------------------------
Total increase (decrease) in
interest expense 1,209 (933) 276
- -------------------------------------------------------------------------------
Increase (decrease) in
net interest income $18 ($964) ($946)
===============================================================================
<PAGE>
Rate and volume variances.
- -------------------------------------------------------------------------------
Nine months ended
September 30, 1998,
compared with nine months
ended September 30, 1997
--------------------------------
(In thousands) Volume Rate Total
- -------------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
Money market assets and funds sold ($1,350) ($237) ($1,587)
Investment securities:
Taxable 604 1,626 2,230
Tax-exempt 3,781 (1,188) 2,593
Loans:
Commercial 2,315 (1,252) 1,063
Real estate construction (2,620) 657 (1,963)
Real estate residential 1,581 (1,147) 434
Consumer (2,345) (365) (2,710)
- -------------------------------------------------------------------------------
Total decrease in loans (1,069) (2,107) (3,176)
- -------------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income 1,966 (1,906) 60
- -------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (1,554) (1,569) (3,123)
Time less than $100,000 (1,632) (139) (1,771)
Time $100,000 or more 1,778 (233) 1,545
- -------------------------------------------------------------------------------
Total decrease in
interest-bearing deposits (1,408) (1,941) (3,349)
- -------------------------------------------------------------------------------
Short-term borrowed funds 3,715 220 3,935
Debt financing and notes payable (292) 41 (251)
- -------------------------------------------------------------------------------
Total increase (decrease) in
interest expense 2,015 (1,680) 335
- -------------------------------------------------------------------------------
Decrease in net
interest income ($49) ($226) ($275)
===============================================================================
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
improve loan quality 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 1998, $500 thousand lower than the same
period of 1997 and $200 thousand lower than the previous quarter.
On a year-to-date basis, the $4.0 million 1998 provision was $2.3
million lower than the first nine months in 1997, mainly because
the 1997 provision included $2.5 million recorded by ValliCorp
prior to the Merger, conforming to upgraded credit standards and
workout strategies for loans and properties. For further
information regarding net credit losses and the reserve for loan
losses, see the "Asset Quality" section of this report.
<PAGE>
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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Deposit account fees $5.01 $4.96 $15.05 $15.59
Merchant credit card 0.86 0.92 2.37 2.95
Financial services
commissions 0.43 0.32 1.23 0.79
Mortgage banking income 0.34 0.39 1.18 1.11
Trust fees 0.16 0.15 0.47 0.38
Other non-interest income 2.65 2.04 7.72 7.22
- -------------------------------------------------------------------------------
Total $9.45 $8.78 $28.02 $28.04
===============================================================================
The $670 thousand increase in non-interest income during the third
quarter of 1998 compared to the third quarter of 1997, was
comprised primarily of higher net gains on asset sales, included in
the other non-interest income category, $110 thousand higher
financial services commissions resulting from increased sales and a
higher share of fees earned by the agent managing certain
investments of the Company's customers, $50 thousand higher deposit
account fees due to higher account analysis fees partially offset
by lower overdraft and returned item charges and $10 thousand
higher trust fees mainly due to increased personal and retirement
plan business. Partially offsetting these changes, merchant credit
card income was $60 thousand lower than prior year and mortgage
banking income was $50 thousand lower than the comparable period of
1997 due to lower refinancing volumes.
Comparing the first nine months of 1998 to the same period of 1997,
non-interest income decreased $20 thousand. The largest
contributors to this variance are $580 thousand lower merchant
credit card income and $540 thousand lower deposit account fees,
mostly due to account runoff after the Merger. Partially offsetting
these unfavorable changes, other non-interest income was $500
thousand higher than the first nine months of 1997 mainly due to
higher asset sales, and financial services commissions were $440
thousand higher than 1997 resulting from higher sales volume and
increased third-party asset management fees. In addition, mortgage
banking income was $70 thousand higher mainly due to increased
refinancing volume, and trust fees were $90 thousand higher due to
increased personal and retirement plan business and higher court
fees assigned to the Company during the first quarter of 1998.
<PAGE>
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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Salaries and employee benefits $12.57 $12.56 $38.47 $49.78
Occupancy 2.92 3.32 8.63 19.07
Equipment 1.90 2.14 5.49 8.86
Data processing services 1.53 1.38 4.42 4.79
Courier service 0.83 0.81 2.60 2.41
Professional fees 0.58 0.69 1.70 8.71
Postage 0.49 0.52 1.56 1.79
Stationery and supplies 0.44 0.53 1.35 1.91
Loan expense 0.42 0.36 1.14 1.29
Advertising/public relations 0.32 0.40 1.00 1.44
Credit card 0.32 0.37 0.86 1.36
Operational losses 0.18 0.26 0.73 0.79
Other real estate owned and
property held for sale 0.05 0.09 0.14 0.93
Other non-interest expense 2.60 2.77 7.76 8.82
- -------------------------------------------------------------------------------
Total $25.15 $26.20 $75.85 $111.95
===============================================================================
During the third quarter of 1998, non-interest expense decreased
$1.05 million from the third quarter of 1997. Continuing cost
controls account for the majority of the change, which includes
$400 thousand lower occupancy costs, as vacating premises after the
Merger and asset write-offs resulted in lower rental of bank
premises net of sublease income, lower depreciation expenses,
utilities, real estate taxes and moving expense; $240 thousand
lower equipment expense mainly due to lower depreciation expense
partially offset by increased equipment rent and $110 thousand
lower professional fees resulting from lower legal costs as prior
year included higher acquisition-related costs. In addition,
strict cost controls and efficiencies achieved through
consolidation of operations resulted in $90 thousand lower
stationery and supplies expenses, $80 thousand lower advertising
and public relations expenses, $80 thousand lower operational
losses, $50 thousand credit card-related costs and lower other real
estate owned and postage expenses, $40 thousand and $30 thousand,
respectively. Partially offsetting these changes, data processing
expenses increased $150 thousand from the second quarter of 1997,
primarily due to increased support services and other additional
requirements related to compliance with Year 2000 issues, loan expense
increased $60 thousand reflecting the Company's added emphasis on
loan volumes and $20 thousand higher courier costs.
<PAGE>
Comparing the first nine months of 1998 with the comparable period
in 1997, non-interest expense decreased $36.1 million, as the 1997
period included one-time Merger costs, and reflecting the effect of
operation consolidations, efficiencies achieved and branch closures
after the Merger. The decrease affected all categories of
non-interest expense, with the exception of a $190 thousand
increase in courier services expense to meet added demand related
to the Company's expanded geographic area. The largest variance
from the first nine months of 1997 was salaries and employee
benefits expense, $11.31 million lower, as 1997 included one-time
compensation settlements and branch restructuring costs after the
Merger combined with a reduction of 195 full-time equivalent staff
from the 1997 average. Other large variances from the same period
of 1997 include occupancy expenses, $10.44 million lower,
principally due to facilities closures after the Merger and asset
write-offs recognized by ValliCorp prior to the Merger;
professional fees, $7.01 million lower, due to reduced legal,
consultant and investment banker fees; and equipment expenses,
$3.37 million lower, mainly due to branch closures and write-offs
effected in 1997 related to the Merger. In addition, other expense
reductions from the first nine months of 1997 can be seen in other
real estate owned, stationery and supplies, credit card,
advertising and public relations, data processing services,
postage, loan expense and operational losses, primarily due to
higher costs incurred in 1997 in preparation for and as a result of
the Merger.
Provision for Income Tax
- ----------------------------
During the third quarter of 1998, the Company recorded income tax
expense of $9.7 million compared to $9.6 million in the third
quarter of 1997. On a year-to-date basis, income tax expense was
$28.1 million for 1998 compared to $16.2 million in 1997. The
provisions recorded for the third quarter and first nine months of
1998 represent effective tax rates of 34.4 percent and 34.0
percent, respectively, compared to 35.1 percent and 35.2 percent,
respectively, for the comparable periods of 1997. The provision for
income taxes for all periods presented is primarily attributable to
the respective level of earnings and the incidence of non-tax
deductible expenses in connection with mergers and acquisitions.
Actual tax rates include the effect of non-taxable interest income
and other allowable deductions.
Asset Quality
- -------------
The Company closely monitors the markets in which it conducts its
lending operations. The Company 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.
<PAGE>
The following is a summary of classified assets on the dates
indicated:
- ------------------------------------------------------------------
At
At September 30, December 31,
---------------- ------------
(In millions) 1998 1997 1997
- ------------------------------------------------------------------
Classified loans $52.8 $69.3 $67.5
Other classified assets 5.2 6.0 7.4
- ------------------------------------------------------------------
Total classified assets $58.0 $75.3 $74.9
==================================================================
Allowance for loan losses
as a percentage of
classified loans 97% 73% 75%
Classified loans at September 30, 1998, decreased $16.5 million or
24 percent to $52.8 million from September 30, 1997, reflecting the
implementation of the Company's strict standards for loans acquired
through the Merger. The decrease was principally due to reductions
of classified commercial and commercial real estate loans. Other
classified assets decreased $800 thousand from September 30, 1997,
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 $14.7
million decrease in classified loans from December 31, 1997, was
principally due to reductions in commercial loans with real estate
collateral. The $2.2 million reduction in other classified assets
from December 31, 1997, 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.
<PAGE>
The following is a summary of non-performing assets on the dates
indicated:
- ------------------------------------------------------------------
At
At September 30, December 31,
---------------- ------------
(In millions) 1998 1997 1997
- ------------------------------------------------------------------
Performing non-accrual loans $1.37 $4.68 $1.65
Non-performing,
non-accrual loans 6.78 15.64 16.50
- ------------------------------------------------------------------
Total non-accrual loans 8.15 20.32 18.15
Loans 90 days past due and
still accruing 0.52 0.75 1.01
- ------------------------------------------------------------------
Total non-performing loans 8.67 21.07 19.16
- ------------------------------------------------------------------
Restructured loans -- -- --
Other real estate owned 5.25 6.02 7.38
- ------------------------------------------------------------------
Total non-performing assets $13.92 $27.09 $26.54
==================================================================
Allowance for loan losses
as a percentage of
non-performing loans 590% 241% 264%
Performing non-accrual loans decreased $3.31 million to $1.37
million at September 30, 1998, from $4.68 million at September 30,
1997 and $280 thousand from $1.65 million outstanding at December
31, 1997. Non-performing, non-accrual loans of $6.78 million at
September 30, 1998, decreased $8.86 million and $9.72 million from
September 30 and December 31, 1997, respectively, mainly due to
payoffs and write-offs of loans with real estate collateral and
commercial loans. The $770 thousand and $2.13 million decreases in
other real estate owned balances from September 30 and December 31,
1997, respectively, were due to liquidations, write-downs and sales
net of additions of non-accrual loans with real estate collateral.
The amount of gross interest income that would have been recorded
for non-accrual loans for the three and nine months ended September
30, 1998, if all such loans had been current in accordance with
their original terms, was $158 thousand and $721 thousand,
respectively, compared to $509 thousand and $1.2 million,
respectively, for the comparable periods in 1997.
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, 1998, totaled $112 thousand and $390 thousand,
respectively, representing third quarter and year-to-date
annualized yields of 5.66 percent and 4.65 percent, respectively.
This compares to $189 thousand and $409 thousand, respectively, for
the same periods in 1997, representing annualized yields of 3.34
percent and 3.31 percent. Total cash payments received which were
applied against the book balance of non-accrual loans outstanding
at September 30, 1998, totaled approximately $803 thousand.
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.
<PAGE>
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 $51.1 million
allowance for loan losses, which constituted 2.23 percent of total
loans at September 30, 1998, 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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Balance, beginning $50.8 $50.7 $50.6 $50.9
of period
Loan loss provision 1.2 1.7 4.0 6.3
Loans charged off (1.6) (2.9) (6.4) (9.6)
Recoveries of previously
charged-off loans 0.7 1.3 2.9 3.2
- -------------------------------------------------------------------------------
Net credit losses (0.9) (1.6) (3.5) (6.4)
- -------------------------------------------------------------------------------
Balance, end of period $51.1 $50.8 $51.1 $50.8
===============================================================================
Allowance for loan losses
as a percentage
of loans outstanding 2.23% 2.25%
<PAGE>
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 sensitivity is a simulation model used by many major banks and
bank regulators. This model is used to simulate, based on the
current and projected portfolio mix, the effects on net interest
income of changes in market interest rates. Under the Company's
policy and practice, the projected amount of net interest income
over the ensuing twelve months is not allowed to fluctuate more
than 10 percent even under alternate assumed interest rate changes
of plus or minus 200 basis points. The results of the model
indicate that the mix of interest rate sensitive assets and
liabilities at September 30, 1998 would not result in a fluctuation
of net income exceeding 10 percent.
The Securities and Exchange Commission (SEC) has approved rule
amendments to clarify and expand existing disclosure requirements
for derivative financial instruments. The amendments require
enhanced disclosure of accounting policies for derivative financial
instruments in the footnotes to the financial statements. In
addition, the amendments expand existing disclosure requirements to
include quantitative and qualitative information about market risk
inherent in market risk sensitive instruments. The required
quantitative and qualitative information should be disclosed
outside the financial statements and related notes thereto. The
enhanced accounting policy disclosure requirements are effective
for filings that include financial statements for fiscal periods
ending after June 15, 1997. At September 30, 1998 and 1997, 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 1997 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
September 30, 1998, there were no substantial changes in the
information on market risk that was disclosed in the Company's 1997
Form 10-K.
<PAGE>
Liquidity
The Company's principal source of asset liquidity is marketable
investment securities available for sale. At September 30, 1998,
investment securities available for sale totaled $1.0 billion. This
represents an increase of $46.1 million or five percent from
September 30, 1997.
The Company generates significant liquidity from its operating
activities. The Company's profitability during the first nine
months of 1998 and 1997 was the main contributor to the cash flows
from operations for such periods of $61.9 million and $64.3
million, respectively.
Cash flows are provided by and used in financing activities,
primarily customer deposits, short-term borrowings from banks,
extensions of long-term debt and repurchases of the Company's
common stock. During the first nine months of 1998, $55.7 million
was used by financing activities, including $80.6 million used for
repurchasing the Company's common stock, following a strategic
management of capital program, and $16.2 million used to pay
dividends to shareholders. These uses of cash were partially offset
by $37.4 million provided by an increase in short-term borrowings
and $5.1 million resulting from the issuance of new shares of
common stock, principally for stock option exercises.
During the first nine months of 1997, cash used in financing
activities totaled $105.5 million. Deposit balances decreased
$123.5 million, repurchases of the Company's common stock were
$23.0 million and dividends paid to shareholders and repayments of
long-term debt were $9.1 million and $1.4 million, respectively.
Partially offsetting this outflow of cash, net increases in
short-term borrowings totaled $38.0 million and issuance of new
shares of common stock were $13.5 million, intended to meet stock
option exercise requirements.
The Company uses cash flows from operating and financing activities
primarily to invest in loans and investment securities. Following
the Company's strategy to increase balances in its loan portfolio,
during the first nine months of 1998 net disbursements of loans
were $40.3 million, compared to repayments of $16.7 million during
the same period in 1997. Prior year results were affected by balance
runoff after the Merger and branch closures and sales. Purchases of
investment securities net of maturities and sales increased $17.4
million during the first nine months of 1998 compared to an
increase of $86.4 million during the comparable period in 1997.
The Company anticipates increasing its cash level from operations
through the end of 1998 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.
<PAGE>
Line of Credit with Bank of America
On July 31, 1998, the Company entered into an agreement with Bank
of America National Trust and Savings Association ("BofA") with the
purpose of 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 BofA's Reference Rate,
defined as the rate set and publicly announced from time to time by
BofA as its Reference Rate. This rate is based on various factors,
including costs and desired return, general economic conditions and
other factors. The Company may elect an optional interest rate
based on the Cayman Rate plus .33 percentage points, subject to
certain specific conditions as defined in the agreement. During the
third quarter of 1998, the Company drew $3.0 million on this line;
the rate on the line was 5.93 percent. The rate chosen by the
Company on the draws of this line of credit was the Cayman Rate
plus .33 percentage points. At September 30, 1998, there were no
outstanding balances drawn on this line; at that time, the rate on
this line of credit, assuming the Cayman Rate plus .33 percentage
points, would have been 5.64 percent.
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, 1998, the
Board of Directors of the Company has authorized the repurchase of
6,252,150 shares of the Company's common stock from time to time,
subject to appropriate regulatory and other accounting
requirements. The Company acquired 746,000 shares of its common
stock in the open market during the first nine months of 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 of these systematic repurchases, a new plan to
repurchase 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 this Program, which was being implemented to
optimize the Company's use of equity capital and enhance
shareholder value. Pursuant to this Program, the Company
repurchased 1,677,300 shares of its common stock during the third
quarter of 1998, at an average price of $29.12 per share.
<PAGE>
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 $376.1 million at September 30, 1998. This amount, which is
reflective of the effect of market repurchases partially offset by
the generation and retention of earnings, represents a decrease of
$22.9 million or 6 percent from September 30, 1997, and a decrease
of $31.0 million, or 8 percent, from December 31, 1997. As a
consequence of the decrease in shareholders' equity and the
increase in the level of total assets, the Company's ratio of
equity to total assets decreased to 9.74 percent at September 30,
1998, from 10.45 percent and 10.58 percent at September 30 and
December 31, 1997, respectively. The ratio of Tier I capital to
risk-adjusted assets was 12.14 percent at September 30, 1998,
compared to 12.83 percent at September 30, 1997, and 12.82 percent
at December 31, 1997. Total capital to risk-adjusted assets was
14.06 percent at September 30, 1998, compared to 14.78 percent at
September 30, 1997, and 14.76 percent at December 31, 1997.
The following summarizes the ratios of capital to risk-adjusted
assets for the periods indicated:
- -------------------------------------------------------------------------------
Minimum
September 30, December 31, Regulatory
------------------ ------------ Capital
1998 1997 1997 Requirements
- -------------------------------------------------------------------------------
Tier I Capital 12.14% 12.83% 12.82% 4.00%
Total Capital 14.06% 14.78% 14.76% 8.00%
Leverage ratio 9.57% 9.89% 9.97% 4.00%
The risk-based capital ratios decreased at September 30, 1998,
compared to September 30 and December 31, 1997, 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. All ratios are in excess of the
regulatory definition of "well capitalized".
<PAGE>
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, all 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.
The third phase includes the upgrading, replacement and/or
retirement of systems, and testing. This stage of the Year 2000
process is ongoing and is scheduled to be completed by the first
quarter of 1999. The Company estimates that the software conversion
phase was approximately 70 percent completed at September 30, 1998,
and the remaining conversions are on schedule to be completed no
later than year-end 1998. Each of the upgrades and/or replacements,
to the extent economically feasible, is run through a test
environment before it is implemented. It is 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 first
quarter of 1999.
<PAGE>
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,
other banks, telecommunication companies, public utilities and
credit customers. Included in the credit analysis process, the
Company has developed a project plan for assessing the Year 2000
readiness of its credit customers, with a target date of December
31, 1998 for 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 initiated
and, as of September 30, 1998, no significant problems have been
identified. These evaluations will be followed with contingency
plans, which are ongoing and scheduled to be completed in the
second quarter of 1999, with follow up reviews scheduled through
the remainder of 1999.
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 $2.5 million
had been expended through September 30, 1998. 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.
<PAGE>
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.
<PAGE>
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.
Interim Periods
- ---------------
In October, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 134,
"Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" ("SFAS 134"), which amends the disclosure
requirements of Financial Accounting Standards No. 65, "Accounting
for Certain Mortgage Banking Activities." SFAS 134 conforms the
subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise
with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking
enterprise. SFAS 134 is effective for the first fiscal quarter
beginning after December 15, 1998. The Company does not expect that
the adoption of SFAS 134 will have a material impact on its
financial condition.
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 6, 1998 /s/ DENNIS R. HANSEN
--------------------
Dennis R. Hansen
Senior Vice President
and Controller
Chief Accounting Officer
<PAGE>
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
<PAGE>
Exhibit 11
<TABLE>
WESTAMERICA BANCORPORATION
Computation of Earnings Per Share on Common and
Common Equivalent Shares and on Common Shares
Assuming Full Dilution
<CAPTION>
- -----------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
(In thousands, except per share data 1998 1997 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding - basic 41,600 43,171 42,312 43,064
Add exercise of options
reduced by the number of
shares that could have
been purchased with the
proceeds of such exercise 665 837 736 765
- -----------------------------------------------------------------------------
Weighted average number of common
shares outstanding - diluted 42,265 44,008 43,048 43,829
=============================================================================
Net income $18,436 $17,660 $54,634 $29,838
Basic earnings per share $0.44 $0.41 $1.29 $0.69
Diluted earnings per share $0.44 $0.40 $1.27 $0.68
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1998 JAN-01-1998 JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1998 SEP-30-1997 SEP-30-1997
<CASH> 203,423 203,423 246,485 246,485
<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 0 0 0 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 1,020,235 1,020,235 974,149 974,149
<INVESTMENTS-CARRYING> 241,803 241,803 234,731 234,731
<INVESTMENTS-MARKET> 249,694 249,694 237,497 237,497
<LOANS> 2,296,063 2,296,063 2,256,422 2,256,422
<ALLOWANCE> 51,124 51,124 50,764 50,764
<TOTAL-ASSETS> 3,862,546 3,862,546 3,816,895 3,816,895
<DEPOSITS> 3,077,042 3,077,042 3,105,176 3,105,176
<SHORT-TERM> 302,222 302,222 205,476 205,476
<LIABILITIES-OTHER> 54,673 54,673 49,690 49,690
<LONG-TERM> 52,500 52,500 57,500 57,500
0 0 0 0
0 0 0 0
<COMMON> 191,127 191,127 196,994 196,994
<OTHER-SE> 184,982 184,982 202,059 202,059
<TOTAL-LIABILITIES-AND-EQUITY> 3,862,546 3,862,546 3,816,895 3,816,895
<INTEREST-LOAN> 49,590 147,662 51,233 151,606
<INTEREST-INVEST> 17,866 53,443 17,217 49,184
<INTEREST-OTHER> 0 0 27 1,629
<INTEREST-TOTAL> 67,456 201,105 68,477 202,419
<INTEREST-DEPOSIT> 18,326 54,195 19,394 57,544
<INTEREST-EXPENSE> 22,446 66,524 22,170 66,189
<INTEREST-INCOME-NET> 45,010 134,581 46,307 136,230
<LOAN-LOSSES> 1,195 3,985 1,650 6,250
<SECURITIES-GAINS> 133 162 0 136
<EXPENSE-OTHER> 25,153 75,852 26,203 111,948
<INCOME-PRETAX> 28,113 82,764 27,230 46,073
<INCOME-PRE-EXTRAORDINARY> 18,436 54,634 17,660 29,838
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 18,436 54,634 17,660 29,838
<EPS-PRIMARY> .44 1.29 .41 .69
<EPS-DILUTED> .44 1.27 .40 .68
<YIELD-ACTUAL> 5.46 5.51 5.69 5.62
<LOANS-NON> 8,153 8,153 20,318 20,318
<LOANS-PAST> 524 524 748 748
<LOANS-TROUBLED> 1,255 1,255 1,302 1,302
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 50,773 50,630 50,742 50,920
<CHARGE-OFFS> 1,628 6,372 2,894 9,626
<RECOVERIES> 784 2,881 1,266 3,220
<ALLOWANCE-CLOSE> 51,124 51,124 50,764 50,764
<ALLOWANCE-DOMESTIC> 28,469 28,469 32,359 32,359
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 22,655 22,655 18,405 18,405
</TABLE>
