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 June 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 of (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 filling 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 July 30, 1999
Common Stock, 38,384,946
No Par Value
<PAGE>
<TABLE>
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------
(Unaudited)
At June 30, At December 31,
1999 1998 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $191,760 $244,112 $229,734
Money market assets 250 250 250
Investment securities available for sale 1,012,175 982,660 987,661
Investment securities held to maturity,
with market values of:
$236,771 at June 30, 1999
$243,423 at June 30, 1998
$233,790 at December 31, 1998 236,413 238,649 226,993
Loans, net of allowance for loan losses of:
$51,720 at June 30, 1999
$50,773 at June 30, 1998
$51,304 at December 31, 1998 2,248,924 2,240,124 2,246,593
Other real estate owned 3,065 5,812 4,315
Premises and equipment, net 44,562 47,010 45,971
Interest receivable and other assets 133,123 105,403 102,781
- -----------------------------------------------------------------------------------------
Total assets $3,870,272 $3,864,020 $3,844,298
=========================================================================================
LIABILITIES
Deposits:
Non-interest bearing $814,496 $808,049 $842,919
Interest bearing:
Transaction 548,300 523,130 600,502
Savings 880,894 904,029 903,141
Time 836,803 835,750 842,443
- -----------------------------------------------------------------------------------------
Total deposits 3,080,493 3,070,958 3,189,005
Short-term borrowed funds 371,149 277,274 203,671
Liability for interest, taxes and
other expenses 32,490 45,633 35,526
Debt financing and notes payable 46,500 52,500 47,500
- -----------------------------------------------------------------------------------------
Total liabilities 3,530,632 3,446,365 3,475,702
- -----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Authorized - 150,000 shares
Common stock, issued and outstanding:
38,722 shares at June 30, 1999
42,451 shares at June 30, 1998
39,828 shares at December 31, 1998 194,128 200,140 195,156
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale, net 6,667 19,538 20,184
Retained earnings 138,845 197,977 153,256
- -----------------------------------------------------------------------------------------
Total shareholders' equity 339,640 417,655 368,596
- -----------------------------------------------------------------------------------------
Total liabilities
and shareholders' equity $3,870,272 $3,864,020 $3,844,298
=========================================================================================
</TABLE>
<PAGE>
<TABLE>
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
<CAPTION>
- --------------------------------------------------------------------------------------------------
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $46,383 $49,219 $92,622 $98,072
Investment securities available for sale
Taxable 11,683 11,881 23,181 23,829
Tax-exempt 2,625 2,471 5,140 4,925
Investment securities held to maturity
Taxable 1,340 1,511 2,772 2,998
Tax-exempt 1,978 1,912 3,928 3,825
- --------------------------------------------------------------------------------------------------
Total interest income 64,009 66,994 127,643 133,649
INTEREST EXPENSE
Transaction deposits 988 1,671 1,937 3,343
Savings deposits 4,845 5,995 9,897 12,133
Time deposits 9,271 10,417 18,732 20,393
Funds purchased 3,434 3,345 6,093 6,368
Debt financing and notes payable 822 923 1,651 1,841
- --------------------------------------------------------------------------------------------------
Total interest expense 19,360 22,351 38,310 44,078
- --------------------------------------------------------------------------------------------------
NET INTEREST INCOME 44,649 44,643 89,333 89,571
Provision for loan losses 1,195 1,395 2,390 2,790
- --------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 43,454 43,248 86,943 86,781
NON-INTEREST INCOME
Service charges on deposit accounts 4,991 5,059 9,796 10,035
Merchant credit card 822 870 1,666 1,502
Financial services commissions 821 473 1,386 793
Mortgage banking 165 389 397 839
Trust fees 171 155 344 310
Other 2,670 2,638 5,198 5,090
- --------------------------------------------------------------------------------------------------
Total non-interest income 9,640 9,584 18,787 18,569
NON-INTEREST EXPENSE
Salaries and related benefits 12,555 12,715 25,473 25,896
Occupancy 3,021 2,815 5,963 5,711
Equipment 1,713 1,740 3,454 3,590
Data processing 1,496 1,559 2,960 2,891
Professional fees 330 627 743 1,121
Other real estate owned 155 167 189 85
Other 5,457 5,736 10,918 11,405
- --------------------------------------------------------------------------------------------------
Total non-interest expense 24,727 25,359 49,700 50,699
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 28,367 27,473 56,030 54,651
Provision for income taxes 9,498 9,371 18,757 18,453
- --------------------------------------------------------------------------------------------------
NET INCOME $18,869 $18,102 $37,273 $36,198
==================================================================================================
Comprehensive income:
Unrealized (loss) gain on securities
available for sale, net (9,398) (34) (13,517) 1,598
- --------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $9,471 $18,068 $23,756 $37,796
==================================================================================================
Average shares outstanding 39,046 42,607 39,337 42,673
Diluted average shares outstanding 39,674 43,335 39,971 43,446
PER SHARE DATA
Basic earnings $0.48 $0.42 $0.95 $0.85
Diluted earnings 0.48 0.42 0.93 0.83
Dividends paid 0.16 0.12 0.32 0.24
</TABLE>
<PAGE>
<TABLE>
WESTAMERICA BANCORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------
(Unaudited)
For the six months
ended June 30,
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $37,273 $36,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,174 4,448
Loan loss provision 2,390 2,790
Amortization of deferred net loan (cost)/fees 724 (36)
(Increase) decrease in interest income receivable (767) 388
Decrease (increase) in other assets 1,081 (10,141)
Increase in income taxes payable 1,162 5,152
Increase in interest expense payable 163 897
Increase (decrease) in other liabilities 3,874 (8,097)
Gain on sales/write-down of equipment (46) (62)
Originations of loans for resale (16,569) (5,025)
Proceeds from sale of loans originated for resale 14,376 4,180
Net gain on sale of property acquired
in satisfaction of debt (274) (813)
Write-down on property acquired in satisfaction of debt 88 325
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 47,649 30,204
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net repayments of loans (3,564) (33,006)
Purchases of investment securities available for sale (238,660) (154,599)
Purchases of investment securities held to maturity (20,833) (30,920)
Purchases of property, plant and equipment (1,351) (1,576)
Proceeds from maturity of securities available for sale 190,477 172,680
Proceeds from maturity of securities held to maturity 11,413 23,231
Proceeds from sale of securities available for sale 344 5,279
Proceeds from sale of property and equipment 46 84
Proceeds from property acquired in satisfaction
of debt 1,748 4,337
- --------------------------------------------------------------------------------------------
Net cash used in by investing activities (60,380) (14,490)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (137,312) (7,543)
Net increase in short-term borrowings 167,478 12,426
Repayments of notes payable (1,000) --
Exercise of stock options/issuance of shares 3,976 4,767
Repurchases/retirement of stock (45,725) (21,801)
Dividends paid (12,660) (10,275)
- --------------------------------------------------------------------------------------------
Net cash used in financing activities (25,243) (22,426)
- --------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (37,974) (6,712)
Cash and cash equivalents at beginning of period 229,734 250,824
- --------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $191,760 $244,112
============================================================================================
Supplemental disclosure of non-cash activities:
Loans transferred to other real estate owned $312 $2,280
Depreciation of fixed assets charged against reserves 37 97
Supplemental disclosure of cash flow activity:
Unrealized (loss) gain on securities available for sale (13,517) 1,614
Interest paid for the period 38,148 43,181
Income tax payments for the period 17,596 14,483
</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, 1998.
Westamerica Bancorporation (the "Company"), parent company of
Westamerica Bank, Bank of Lake County, Community Banker Services
Corporation and Westamerica Commercial Credit Inc., reported second
quarter 1999 net income of $18.9 million or $.48 diluted earnings
per share. These results compare to net income of $18.1 million or
$.42 diluted earnings per share for the second quarter of 1998. On
a year-to-date basis, the Company reported net income of $37.3
million representing $.93 diluted earnings per share, compared to
$36.2 million or $.83 diluted earnings per share for the same
period of 1998.
<PAGE>
<TABLE>
Following is a summary of the components of net income for
the periods indicated:
<CAPTION>
- ---------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income* $47.7 $47.5 $95.3 $95.1
Provision for loan losses (1.2) (1.4) (2.4) (2.8)
Non-interest income 9.6 9.6 18.8 18.6
Non-interest expense (24.7) (25.4) (49.7) (50.7)
Provision for income taxes* (12.5) (12.2) (24.7) (24.0)
- ---------------------------------------------------------------------------------------
Net income $18.9 $18.1 $37.3 $36.2
=======================================================================================
Average total assets $3,816.8 $3,772.7 $3,795.6 $3,759.6
Net income (annualized) as
a percentage of average
total assets 1.98% 1.92% 1.98% 1.94%
=======================================================================================
</TABLE>
* Fully taxable equivalent basis (FTE)
During the second quarter of 1999, the Company's net income was
$18.9 million, $800 thousand higher than the same period in 1998.
Continuing reductions in operating costs, higher net interest
income, and a lower loan loss provision resulting from continued
improvements in credit quality, account for the change.
Comparing the first six months of 1999 to the same period of 1998,
net income increased $1.1 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.
<PAGE>
<TABLE>
Net Interest Income
- -------------------
Following is a summary of the components of net interest income
for the periods indicated:
<CAPTION>
- ---------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $64.0 $67.0 $127.6 $133.6
Interest expense (19.4) (22.4) (38.3) (44.1)
FTE adjustment 3.1 2.9 6.0 5.6
- ---------------------------------------------------------------------------------------
Net interest income (FTE) $47.7 $47.5 $95.3 $95.1
=======================================================================================
Net interest margin (FTE) 5.45% 5.49% 5.49% 5.54%
=======================================================================================
</TABLE>
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 second quarter of 1999 increased $200
thousand from the same period in 1998 to $47.7 million. Comparing
the first six months of 1999 with the previous year, net interest
income (FTE) increased $200 thousand to $95.3 million.
Interest Income
During the second quarter of 1999 interest income (FTE) decreased
$3.0 million from the same period in 1998. Lower earning-asset
yields were partially offset by increased average balances. Loan
yields decreased 55 basis points from prior year. All loan
categories contributed to this unfavorable change, particularly
those tied to the prime rate which decreased 50 basis points from
June 30, 1998. Following the general trend of declining market
rates, investment securities yields decreased 12 basis points from
the comparable period of 1998. All categories of securities
contributed to this change, particularly U.S. Treasury and other
government agency securities. Partially offsetting these changes,
earning-asset average balances increased $42.7 million from the
second quarter of 1998. Loan balances were $23.3 million higher, as
improved volume of commercial and indirect lending was partially
offset by lower construction, residential real estate and other
consumer lending. Investment securities average balances increased
$19.4 million from the second quarter of 1998. Increases in
asset-backed and corporate, U.S. Agency and tax-free securities,
were partially offset by reductions in U.S. Treasury and
participation certificates.
Comparing the first six months of 1999 with the same period of
1998, interest income (FTE) decreased $6.0 million. The effect of a
41 basis point reduction in average yields partially offset by a
$38.1 million increase in average balances accounts for this
year-to-year change. All categories of earning-asset yields were
lower than 1998, reflective of generally declining market rates.
Loan average volume, $34.7 million higher than the first six months
of 1998 accounts for most of the total earning-asset volume change.
As in the 1999-1998 second quarter comparison, increased balances
of commercial loans were partially offset by declining volume of
consumer loans. Investment securities balances increased $3.4
million from the first six months of 1998. As in the quarter
comparison, volume increases in U.S. Agency, asset-backed,
corporate and tax-free securities were partially offset by lower
U.S. Treasury and participation certificates.
<PAGE>
Interest Expense
For the second quarter of 1999 interest expense was $3.0 million
lower than the second quarter of 1998. Following market trends
reflective of a general reduction in rates, total interest-bearing
liability rates decreased 55 basis points from the second quarter
of 1998. In addition, interest-free demand deposit account average
balances increased $25.8 million from the second quarter of 1998.
Partially offsetting the resulting effect of lower cost of funds,
interest-bearing liabilities average balances increased $75.4
million from the second quarter of 1998, comprised of a $27.0
million increase in deposits and a $48.9 million increase in short-
and medium-term borrowed funds, partially offset by a $500 thousand
decrease in long-term debt average balances.
During the first six months of 1999, interest expense decreased
$5.8 million from the same period of 1998, as a decrease of 53
basis points on the rates paid on interest-bearing liabilities and
a $21.6 million increase in demand deposit average balances were
partially offset by a $66.7 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 from increases in average interest-bearing deposit
balances and other purchased funds and debt financing, $39.1
million and $28.0 million, respectively, partially offset by a $200
thousand reduction in long-term debt 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.
<PAGE>
<TABLE>
Net Interest Margin (FTE)
- -------------------------
The following summarizes the components of the Company's net
interest margin for the periods indicated:
<CAPTION>
- ---------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yield on earning assets 7.67% 8.08% 7.71% 8.12%
Rate paid on interest-bearing
liabilities 2.92% 3.47% 2.93% 3.46%
- ---------------------------------------------------------------------------------------
Net interest spread 4.75% 4.61% 4.78% 4.66%
Impact of all other net
non-interest bearing funds 0.70% 0.88% 0.71% 0.88%
- ---------------------------------------------------------------------------------------
Net interest margin 5.45% 5.49% 5.49% 5.54%
=======================================================================================
</TABLE>
During the second quarter of 1999, the Company's net interest
margin was 4 basis points lower than the second quarter of 1998 as
the favorable impact of a 55 basis points decrease in the cost of
funds was partially offset by the effect of a 41 basis points
decrease in earning-asset yields and the unfavorable impact of a
reduction in the Company's average non-interest bearing funds
balances. As a result of the Company's share repurchase programs,
second quarter 1999 average equity capital decreased $58.6 million
from the same period in 1998, partially offset by a $25.8 million
increase in average interest-free demand deposit accounts.
On a June year-to-date basis, the net interest margin was 5 basis
points lower than the previous year. The adverse effect of lower
average balances of non-interest bearing funds, mostly due to the
combined effect of a $52.4 million decrease in average equity
capital and a $21.6 increase million in average demand deposits,
was partially offset by a 12 basis points higher net interest
spread, as a 53 basis points reduction in the rate paid on
interest-bearing liabilities more than offset the unfavorable
effect of a 41 basis points decline in earning-asset yields.
<PAGE>
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.
<TABLE>
Distribution of assets, liabilities and shareholders' equity:
For the three months ended
June 30, 1999
<CAPTION>
- ---------------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Money market assets and funds sold $250 $-- -- %
Investment securities:
Available for sale
Taxable 780,858 11,683 6.00
Tax-exempt 200,448 3,759 7.52
Held to maturity
Taxable 88,014 1,340 6.11
Tax-exempt 147,333 2,823 7.69
Loans:
Commercial 1,495,161 31,673 8.50
Real estate construction 51,793 1,440 11.15
Real estate residential 356,681 6,131 6.89
Consumer 382,614 8,195 8.59
- --------------------------------------------------------------------------------------
Earning assets 3,503,152 67,044 7.67
Other assets 313,653
- ----------------------------------------------------------
Total assets $3,816,805
==========================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $794,454 $-- -- %
Savings and interest-bearing
transaction 1,448,778 5,833 1.61
Time less than $100,000 414,044 4,481 4.34
Time $100,000 or more 429,267 4,790 4.48
- --------------------------------------------------------------------------------------
Total interest-bearing deposits 2,292,089 15,104 2.64
Short-term borrowed funds 318,798 3,434 4.32
Debt financing and notes payable 47,050 822 7.01
- --------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,657,937 19,360 2.92
Other liabilities 28,717
Shareholders' equity 335,697
- ----------------------------------------------------------
Total liabilities and shareholders' equity $3,816,805
==========================================================
Net interest spread (1) 4.75 %
Net interest income and interest margin (2) $47,684 5.45 %
=======================================================================================
</TABLE>
(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.
<PAGE>
<TABLE>
Distribution of assets, liabilities and shareholders' equity:
For the three months ended
June 30, 1998
<CAPTION>
- ---------------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Money market assets and funds sold $250 $-- -- %
Investment securities:
Available for sale
Taxable 764,550 11,747 6.16
Tax-exempt 191,054 3,687 7.74
Held to maturity
Taxable 100,935 1,511 6.00
Tax-exempt 140,686 2,712 7.73
Loans:
Commercial 1,420,988 32,458 9.16
Real estate construction 60,580 1,748 11.57
Real estate residential 390,855 7,004 7.19
Consumer 390,561 8,942 9.18
- ------------------------------------------------------------------------
Earning assets 3,460,459 69,809 8.08
Other assets 312,268
- ----------------------------------------------------------
Total assets $3,772,727
==========================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $768,625 $-- -- %
Savings and interest-bearing
transaction 1,450,749 7,666 2.12
Time less than $100,000 441,214 5,578 5.07
Time $100,000 or more 373,126 4,839 5.20
- ------------------------------------------------------------------------
Total interest-bearing deposits 2,265,089 18,083 3.20
Short-term borrowed funds 264,916 3,345 5.06
Debt financing and notes payable 52,500 923 7.05
- ------------------------------------------------------------------------
Total interest-bearing liabilities 2,582,505 22,351 3.47
Other liabilities 27,326
Shareholders' equity 394,271
- ----------------------------------------------------------
Total liabilities and shareholders' equity $3,772,727
==========================================================
Net interest spread (1) 4.61 %
Net interest income and interest margin (2) $47,458 5.49 %
=======================================================================================
</TABLE>
(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.
<PAGE>
<TABLE>
Distribution of assets, liabilities and shareholders' equity:
For the six months ended
June 30, 1999
<CAPTION>
- ---------------------------------------------------------------------------------------
Interest Rates
Average income/ earned/
(Dollars in thousands) balance expense paid
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Money market assets and funds sold $250 $-- -- %
Investment securities:
Available for sale
Taxable 769,766 23,181 6.07
Tax-exempt 195,992 7,352 7.56
Held to maturity
Taxable 88,426 2,772 6.32
Tax-exempt 146,456 5,599 7.71
Loans:
Commercial 1,483,719 62,729 8.53
Real estate construction 53,967 2,929 10.94
Real estate residential 364,843 12,648 6.99
Consumer 379,647 16,357 8.69
- ------------------------------------------------------------------------
Earning assets 3,483,066 133,567 7.71
Other assets 312,570
- ----------------------------------------------------------
Total assets $3,795,636
==========================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $794,606 $-- -- %
Savings and interest-bearing
transaction 1,449,798 11,834 1.65
Time less than $100,000 419,014 9,208 4.43
Time $100,000 or more 427,296 9,524 4.49
- ------------------------------------------------------------------------
Total interest-bearing deposits 2,296,108 30,566 2.68
Short-term borrowed funds 288,326 6,093 4.26
Debt financing and notes payable 47,297 1,651 7.04
- ------------------------------------------------------------------------
Total interest-bearing liabilities 2,631,731 38,310 2.93
Other liabilities 30,016
Shareholders' equity 339,283
- ----------------------------------------------------------
Total liabilities and shareholders' equity $3,795,636
==========================================================
Net interest spread (1) 4.78 %
Net interest income and interest margin (2) $95,257 5.49 %
=======================================================================================
</TABLE>
(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.
<PAGE>
<TABLE>
Distribution of assets, liabilities and shareholders' equity:
For the six months ended
June 30, 1998
<CAPTION>
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Money market assets and funds sold $250 $-- -- %
Investment securities:
Available for sale
Taxable 768,808 23,560 6.18
Tax-exempt 189,865 7,318 7.77
Held to maturity
Taxable 98,218 2,998 6.16
Tax-exempt 140,326 5,399 7.76
Loans:
Commercial 1,414,118 64,563 9.21
Real estate construction 62,708 3,656 11.76
Real estate residential 378,887 13,791 7.34
Consumer 391,800 17,891 9.21
- ------------------------------------------------------------------------
Earning assets 3,444,980 139,176 8.12
Other assets 314,632
- ----------------------------------------------------------
Total assets $3,759,612
==========================================================
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand $772,971 $-- -- %
Savings and interest-bearing
transaction 1,456,459 15,476 2.14
Time less than $100,000 445,418 11,108 5.03
Time $100,000 or more 355,165 9,285 5.27
- ------------------------------------------------------------------------
Total interest-bearing deposits 2,257,042 35,869 3.20
Short-term borrowed funds 255,447 6,368 5.03
Debt financing and notes payable 52,500 1,841 7.07
- ------------------------------------------------------------------------
Total interest-bearing liabilities 2,564,989 44,078 3.46
Other liabilities 29,935
Shareholders' equity 391,717
- ----------------------------------------------------------
Total liabilities and shareholders' equity $3,759,612
==========================================================
Net interest spread (1) 4.66 %
Net interest income and interest margin (2) $95,098 5.54 %
=======================================================================================
</TABLE>
(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.
<PAGE>
<TABLE>
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.
<CAPTION>
- ---------------------------------------------------------------------------------------
Three months ended
June 30, 1999
compared with three months
ended June 30, 1998
------------------------------------
(In thousands) Volume Rate Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in
interest and fee income:
Money market assets and funds sold $0 $0 $0
Investment securities:
Available for sale
Taxable 279 (343) (64)
Tax-exempt 169 (97) 72
Held to maturity
Taxable (197) 26 (171)
Tax-exempt 127 (16) 111
Loans:
Commercial 2,009 (2,794) (785)
Real estate construction (246) (62) (308)
Real estate residential (595) (278) (873)
Consumer (179) (568) (747)
- ---------------------------------------------------------------------------------------
Total increase (decrease)
in loans 989 (3,702) (2,713)
- ---------------------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income 1,367 (4,132) (2,765)
- ---------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (10) (1,823) (1,833)
Time less than $100,000 (329) (768) (1,097)
Time $100,000 or more (678) 629 (49)
- ---------------------------------------------------------------------------------------
Total decrease in
interest-bearing deposits (1,017) (1,962) (2,979)
- ---------------------------------------------------------------------------------------
Short-term borrowed funds 323 (234) 89
Debt financing and notes payable (95) (6) (101)
- ---------------------------------------------------------------------------------------
Total increase (decrease) in
interest expense (789) (2,202) (2,991)
- ---------------------------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $2,156 ($1,930) $226
=======================================================================================
</TABLE>
(1) Amounts calculated on a fully taxable equivalent basis
using the current statutory federal tax rate.
<PAGE>
<TABLE>
Rate and volume variances (continued)
<CAPTION>
- ---------------------------------------------------------------------------------------
Six months ended
June 30, 1999
compared with six months
ended June 30, 1998
------------------------------------
(In thousands) Volume Rate Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in
interest and fee income:
Money market assets and funds sold $0 $0 $0
Investment securities:
Available for sale
Taxable 29 (408) (379)
Tax-exempt 199 (165) 34
Held to maturity
Taxable (310) 84 (226)
Tax-exempt 234 (34) 200
Loans:
Commercial 3,645 (5,479) (1,834)
Real estate construction (486) (241) (727)
Real estate residential (501) (642) (1,143)
Consumer (544) (990) (1,534)
- ---------------------------------------------------------------------------------------
Total decrease in loans 2,114 (7,352) (5,238)
- ---------------------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income 2,266 (7,875) (5,609)
- ---------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (70) (3,572) (3,642)
Time less than $100,000 (632) (1,268) (1,900)
Time $100,000 or more 872 (633) 239
- ---------------------------------------------------------------------------------------
Total decrease in
interest-bearing deposits 170 (5,473) (5,303)
- ---------------------------------------------------------------------------------------
Short-term borrowed funds 1,505 (1,780) (275)
Debt financing and notes payable (182) (8) (190)
- ---------------------------------------------------------------------------------------
Total increase (decrease) in
interest expense 1,493 (7,261) (5,768)
- ---------------------------------------------------------------------------------------
Increase (decrease) in
net interest income $773 ($614) $159
=======================================================================================
</TABLE>
(1) Amounts calculated on a fully taxable equivalent basis
using the current statutory federal tax rate.
<PAGE>
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 second quarter of 1999, $200 thousand lower than the same
period of 1998 and unchanged from the previous quarter. On a
year-to-date basis, the $2.4 million 1999 provision was $400
thousand lower than the first six months of 1998. For further
information regarding net credit losses and the reserve for loan
losses, see the "Asset Quality" section of this report.
<TABLE>
Non-interest Income
- -------------------
The following table summarizes the components of non-interest
income for the periods indicated.
<CAPTION>
- ---------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposit account fees $4.99 $5.06 $9.80 $10.04
Merchant credit card 0.82 0.87 1.67 1.50
Financial services
commissions 0.82 0.47 1.39 0.79
Mortgage banking income 0.17 0.39 0.40 0.84
Trust fees 0.17 0.16 0.34 0.31
Other non-interest income 2.67 2.63 5.19 5.09
- ---------------------------------------------------------------------------------------
Total $9.64 $9.58 $18.79 $18.57
=======================================================================================
</TABLE>
The $60 thousand increase in non-interest income during the second
quarter of 1999 compared to the second quarter of 1998, was
comprised primarily of the following: $350 thousand higher
financial services commissions, due to more aggressive marketing
efforts resulting in higher sales volume and a higher share of fees
received from the agent managing certain investments of the
Company's customers; and $98 thousand, $71 thousand and $15
thousand higher gains on sales of official checks, check issuing
charges and trust fees, respectively. Partially offsetting these
changes, mortgage banking income was $220 thousand lower than the
same quarter in 1998, mainly due to lower net gains from loans sold
in the secondary market, lower retained mortgage servicing fees and
other fees in connection with the preparation and documentation of
related loans; deposit account fees were $70 thousand lower than
the comparable quarter in 1998 due to lower overdraft and returned
item charges and lower activity charges on personal accounts in
part offset by higher fees on business accounts on analysis; gains
on asset sales were $130 thousand lower, including real property
and equipment; and merchant credit card fees were $50 thousand
lower than the comparable quarter in 1998.
Comparing the first six months of 1999 to the same period in 1998,
non-interest income increased $220 thousand. The largest
contributor to this change is financial services commissions, $600
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
$170 thousand higher than prior year primarily due to fee
restructuring and repricing; trust fees were $30 thousand higher;
and gains on sales of official checks were $370 thousand higher due
to new vendor set-up and fee structure. Partially offsetting these
changes, mortgage banking income was $440 thousand lower than the
first six 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 $240 thousand lower due to reduced
income on balance shortages on personal transaction accounts, in
part offset by business customers' account analysis fee income. In
addition, gains on sales of real estate acquired in satisfaction of
debt were $300 thousand lower than the first six months of 1998.
<PAGE>
<TABLE>
Non-interest expense
- --------------------
The following table summarizes the components of non-interest
expense for the periods indicated.
<CAPTION>
- ---------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and incentives $9.86 $10.03 $19.87 $19.94
Other personnel 2.69 2.69 5.60 5.96
Occupancy 3.02 2.82 5.96 5.71
Equipment 1.71 1.74 3.45 3.59
Data processing services 1.50 1.56 2.96 2.89
Professional fees 0.33 0.63 0.74 1.12
Courier service 0.80 0.88 1.66 1.77
Stationery and supplies 0.39 0.50 0.76 0.91
Postage 0.50 0.50 1.12 1.06
Loan expense 0.36 0.42 0.71 0.72
Advertising/public relations 0.36 0.39 0.66 0.68
Merchant credit card 0.36 0.29 0.67 0.54
Operational losses 0.33 0.28 0.55 0.55
Other real estate owned and
property held for sale 0.16 0.17 0.19 0.09
Other non-interest expense 2.36 2.46 4.80 5.17
- ---------------------------------------------------------------------------------------
Total $24.73 $25.36 $49.70 $50.70
=======================================================================================
Average full time
equivalent staff 1,100 1,159 1,109 1,152
Non-interest expense
to revenues
("Efficiency ratio")(FTE) 43.14% 44.46% 43.58% 44.60%
=======================================================================================
</TABLE>
Non-interest expense of $24.73 million in second quarter of 1999
was $630 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 $300 thousand lower
professional fees, primarily due to reduced legal expenses incurred
related to non-performing loans, $170 thousand lower
employee-related expenses, primarily a result of reductions in
full-time equivalent staff combined with lower incentive
compensation program payouts partially offset by lower deferrals in
connection with fewer number of loan originations; $110 thousand
lower stationery and supplies costs due to reduced printing costs
and decreased purchases and usage of inventories; $80 thousand
lower courier service costs reflecting renegotiated contracts and
improved efficiencies in the interbranch delivery system; $60
thousand lower data processing costs primarily due to reduced
outsource servicing, $60 thousand lower loan expense mainly due to
reduced costs related to repossessions, foreclosures and
appraisals, and lower advertising/public relations and equipment
expenses, $30 thousand each. Partially offsetting these changes,
occupancy expenses were $200 thousand higher than the comparable
quarter in 1998, mainly due to rental costs of properties acquired
through mergers that were previously charged against specific
reserves, merchant credit card costs were $70 thousand higher due
to increased processing expense resulting from increased volume of
activity, and operational losses were $50 thousand higher than the
second quarter of 1998 mainly due to increased miscellaneous
shortages and sundry losses.
Comparing the first six months of 1999 with the same period of
1998, non-interest expense decreased $1.0 million. Personnel
related costs were $430 thousand lower, primarily due to reduced
salaries and benefits reflecting a reduction of 43 full-time
equivalent employees and decreased accruals in connection with
certain compensation programs, professional fees were $380 thousand
lower primarily due to legal costs in connection with problem
credits, stationery and supplies expenses were $150 thousand lower,
primarily due to lower purchases of inventories, and equipment
costs were $140 thousand lower than the first six months of 1998
due to lower depreciation expense, rentals and maintenance related
costs. In addition, courier services, advertising/public relations
and loan expenses were $110 thousand, $20 thousand and $10
thousand, respectively, lower than the first half of 1998. Included
in the 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 six
months of 1998, occupancy costs were $250 thousand higher,
primarily due to rental costs of properties acquired through
mergers that were charged, in the prior year, against specific
reserves, merchant credit card costs were $130 thousand higher due
to increased processing costs, resulting from repricing, higher
volume, and increased servicers' assessments, data processing
services were $70 thousand higher than 1998 mainly due to increased
in-house servicer billings related to the Company's Y2K compliance
program, and postage expenses were $60 thousand higher than the
first six months in the prior year. Included in the other
non-interest expense change and partially offsetting the expense
reductions mentioned above, are higher correspondent bank service
charges due to a change in accounting for charges from two of the
Company's largest clearing institutions, higher employee recruiting
costs due to intensified search to fill-in open positions, and
higher settlements.
<PAGE>
Provision for Income Tax
- ------------------------
During the second quarter of 1999, the Company recorded income tax
expense of $9.5 million compared to $9.4 million in the second
quarter of 1998. On a year-to-date basis, income tax expense was
$18.8 million for 1999 compared to $18.5 million in 1998. The
provisions recorded for both the second quarter and first six
months of 1999 represent effective tax rates of 33.5 percent,
compared to 34.1 percent and 33.8 percent, respectively, for the
second quarter and first six months of 1998. Effective tax rates
for all periods presented are attributable to the level of
tax-exempt income.
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 June 30, December 31,
-------------------- -------------
(In millions) 1999 1998 1998
- -------------------------------------------------------------------------
Classified loans $45.7 $56.6 $50.8
Other classified assets 3.1 5.8 4.3
- -------------------------------------------------------------------------
Total classified assets $48.8 $62.4 $55.1
=========================================================================
Allowance for loan losses
as a percentage of
classified loans 113% 90% 101%
Classified loans at June 30, 1999, decreased $10.9 million or 19
percent to $45.7 million from June 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
$2.7 million from June 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 $5.1 million decrease in classified loans
from December 31, 1998, was principally due to reductions in
commercial loans with real estate collateral. The $1.2 million
reduction in other classified assets from December 31, 1998, was
mainly due to sales and write-downs of other real estate owned
properties.
<PAGE>
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 June 30, December 31,
-------------------- -------------
(In millions) 1999 1998 1998
- -------------------------------------------------------------------------
Performing non-accrual loans $1.93 $1.90 $1.80
Non-performing,
non-accrual loans 7.37 6.64 6.73
- -------------------------------------------------------------------------
Total non-accrual loans 9.30 8.54 8.53
Loans 90 days past due and
still accruing 0.42 0.48 0.52
- -------------------------------------------------------------------------
Total non-performing loans 9.72 9.02 9.05
- -------------------------------------------------------------------------
Restructured loans -- -- --
Other real estate owned 3.07 5.81 4.32
- -------------------------------------------------------------------------
Total non-performing assets $12.79 $14.83 $13.37
=========================================================================
Allowance for loan losses
as a percentage of
non-performing loans 532% 563% 567%
Performing non-accrual loans increased $30 thousand to $1.93
million at June 30, 1999, from $1.90 million at June 30, 1998 and
$130 thousand from $1.80 million outstanding at December 31, 1998.
Non-performing, non-accrual loans of $7.37 million at June 30,
1999, increased $730 thousand from June 30, 1998, primarily due to
additions of commercial and commercial real estate loans, partially
offset by sales, payoffs and foreclosures of commercial real estate
loans, and $640 thousand from December 31, 1998, mainly due
additions net of payoffs and write-offs of loans with real estate
collateral and commercial loans. The $274 thousand and $125
thousand decreases in other real estate owned balances from June
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 six months ended June 30,
1999, if all such loans had been current in accordance with their
original terms, totaled $199 thousand and $351 thousand,
respectively, compared to $226 thousand and $563 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 six months ended
June 30, 1999, totaled $370 thousand and $482 thousand,
respectively, representing second quarter and year-to-date
annualized yields of 15.66 percent and 11.51 percent, respectively.
This compares to cash payments received on non-accrual loans of
$130 thousand and $278 thousand for the three and six months ended
June 30, 1998, respectively, representing annualized yields of 5.34
percent and 4.35 percent.
Total cash payments received which were applied against the book
balance of non-accrual loans outstanding at June 30, 1999, totaled
approximately $1.7 million.
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.
<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 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 $51.7 million allowance for loan losses,
which constituted 2.25 percent of total loans at June 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.
<TABLE>
The following table summarizes the loan loss provision, net credit
losses and allowance for loan losses for the periods indicated:
<CAPTION>
- ---------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
-------------------- --------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning $51.7 $50.3 $51.3 $50.6
of period
Loan loss provision 1.2 1.4 2.4 2.8
Loans charged off (2.3) (1.9) (3.7) (4.7)
Recoveries of previously
charged-off loans 1.1 1.0 1.7 2.1
- ---------------------------------------------------------------------------------------
Net credit losses (1.2) (0.9) (2.0) (2.6)
- ---------------------------------------------------------------------------------------
Balance, end of period $51.7 $50.8 $51.7 $50.8
=======================================================================================
Net credit losses
(annualized) as a
percentage of average
loans outstanding 0.21% 0.16% 0.17% 0.24%
Allowance for loan losses
as a percentage
of loans outstanding 2.25% 2.22%
=======================================================================================
</TABLE>
<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 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 June 30, 1999 would not result
in a fluctuation of NII that would exceed the parameters
established by Company policy.
At June 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
these rule amendments, 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 June 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.
<PAGE>
Liquidity
- ---------
The Company's principal source of asset liquidity is marketable
investment securities available for sale. At June 30, 1999,
investment securities available for sale totaled $1,012.2 million,
representing an increase of $29.5 million from June 30, 1998. In
addition, the Company generates significant liquidity from its
operating activities. The Company's profitability during the first
six months of 1999 and 1998 generated substantial cash flows,
which are included in the total provided from operations, of $47.6
million and $30.2 million, respectively. Additional cash flows may
be provided by financing activities, primarily the acceptance of
deposits and borrowings from banks.
During the first six months of 1999, the Company used $25.2 million
in financing activities. This includes the effect of the Company's
stock repurchase programs and dividends paid to shareholders of
$45.7 million and $12.7 million, respectively. In addition, during
the same period, the Company experienced a decrease of $137.3
million in deposit balances and reduced by $1.0 million Westamerica
Bank's subordinated long-term debt. These cash outflows were
partially offset by net cash provided by other financing
activities, including an increase of $167.5 million in short-term
borrowings and an increase of $4.0 million in equity from issuance
of stock principally for exercises of stock options. This compares
with net cash used by the Company in financing activities during
the first six months of 1998, totaling $22.4 million. This total
includes $21.8 million used to meet repurchase of stock
requirements, $10.3 million used to pay dividends shareholders and
a $7.5 million decline in deposit balances, partially offset by
$12.4 million provided by increasing short-term borrowings and $4.8
million resulting form 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 $57.3 million
during the first six months of 1999 compared to a more moderate
increase of $15.7 million during the first six months of 1998. In
addition, and reflecting a slower demand for loans, net
disbursements during the first half of 1999 were $3.6 million,
compared to $33.0 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
On July 31, 1998, the Company entered into an agreement with a
well-established financial institution for a line of credit to
be used for general corporate purposes including the repurchase of
stock. The line of credit has a one-year term and an available
commitment amount ranging from $60 million, during the first nine
months, reduced by $7.5 million during each of the following three
months to $37.5 million. The interest rate of this line of credit
is set by the lender based on various factors including costs and
desired return, general economic conditions and other factors. At
June 30, 1999, there were no outstanding balances drawn on this
line. The renewal of this line is currently in process; the
renegotiated terms are expected to be similar to those agreed upon
when the line was originally established.
<PAGE>
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 June 30, 1999, the Board
of Directors of the Company has authorized the repurchase of
4,252,150 shares of the Company's common stock from time to time,
subject to appropriate regulatory and other accounting
requirements. The Company acquired 500,000 shares of its common
stock in the open market during the first six 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 3,000,000 of the Company's shares of common stock
(the "Program") was approved by the Board of Directors on June 25,
1998. The Company's strong capital position and healthy
profitability contributed to the initiation of the Program, which
was being implemented to optimize the Company's use of equity
capital and enhance shareholder value. Pursuant to the Program, the
Company repurchased 2,088,900 shares of its common stock during the
last six months of 1998, at an average price of approximately $30
per share, and 629,700 during the first six months of 1999 at an
average price of approximately $34 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 $339.6 million at June 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 $78.0 million
or 19 percent from June 30, 1998, and a decrease of $29.0 million,
or 8 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 8.78 percent at June 30, 1999, from
10.81 percent and 9.59 percent at June 30 and December 31, 1998,
respectively. The ratio of Tier I capital to risk-adjusted assets
was 10.95 percent at June 30, 1999, compared to 12.91 percent at
June 30, 1998, and 11.87 percent at December 31, 1998. Total
capital to risk-adjusted assets was 12.87 percent at June 30,
1999, compared to 14.83 percent at June 30, 1998, and 13.79
percent at December 31, 1998.
<PAGE>
The following summarizes the ratios of capital to risk-adjusted
assets for the periods indicated:
- -------------------------------------------------------------------------
Minimum
June 30, December 31, Regulatory
----------------- ------------- Capital
1999 1998 1998 Requirements
- -------------------------------------------------------------------------
Tier I Capital 10.95% 12.91% 11.87% 4.00%
Total Capital 12.87% 14.83% 13.79% 8.00%
Leverage ratio 8.61% 10.20% 9.39% 4.00%
The risk-based capital ratios decreased at June 30, 1999, compared
to June 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".
<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, each of them common to all sections of the process: (1)
inventorying date-sensitive information technology and other
business systems; (2) assigning priorities to identified items and
assessing the efforts required for Year 2000 compliance of those
determined to be material to the Company; (3) upgrading or
replacing material items that are determined not to be Year 2000
compliant and testing material items; (4) assessing the status of
third party risks; and (5) designing and implementing contingency
and business continuation plans.
As part of the on-going supervision of the banking industry, bank
regulatory agencies are continuously surveying the Company's
progression and results of each one of these phases.
In the first phase, the Company conducted a thorough evaluation of
current information technology systems, software and embedded
technologies, resulting in the identification of 43 mission
critical systems that could be affected by Year 2000 issues.
Non-information technology systems such as climate control systems,
elevators and vault security equipment, were also surveyed. This
stage of the Year 2000 process is complete.
<PAGE>
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 completed
at June 30, 1999, and to the extent economically feasible, have
been run through a test environment before being implemented. Tests
have been also completed 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 June 30,
1999, no significant problems have been identified.
<PAGE>
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. The Company
intends to test the plans during the fourth quarter.
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, of which $4.0 million
had been expended through June 30, 1999. The priority given to Year
2000 work may result in extending the time for completing some
other technology projects; these delays are not expected to have a
material effect on the Company's business. The Company's total cost
associated with required modifications to become Year 2000
compliant is not expected to be material to its results of
operations, liquidity and capital resources.
Risks
Failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business
activities or operations. The Company believes that, with the
implementation of new or upgraded business systems and completion
of the Year 2000 project as scheduled, the possibility of
significant interruptions of normal operations due to the failure
of those systems will be reduced. However, the Company is also
dependent upon the power and telecommunications infrastructure
within the United States, and processes large volumes of
transactions through various clearing houses and correspondent
banks. The most reasonably likely worst case scenario would be that
the Company may experience disruption in its operations if any of
these third-party suppliers reported a system failure. Although the
Company's Year 2000 Project will reduce the level of uncertainty
about the compliance and readiness of its material third-party
providers, due to the general uncertainty over Year 2000 readiness
of these third-party suppliers, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will
have a material impact.
<PAGE>
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.
<PAGE>
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: August 3,1999 /s/ DENNIS R. HANSEN
--------------------------
Dennis R. Hansen
Senior Vice President
and Controller
Senior 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
Proxies for the Annual Meeting of shareholders held on April 21,
1999, were solicited pursuant Regulation 14A of the Securities
Exchange Act of 1934. The Report of Inspector of election
indicates that 33,822,436 shares of the Common Stock of the
Company, out of 39,536,464 shares outstanding, were present at the
meeting. The following matters were submitted to a vote of the
shareholders:
1.- Election of directors:
Withheld/
For Exceptions
------- -----------
Etta Allen 33,650,683 171,753
Louis E. Bartolini 33,642,371 180,065
Don Emerson 33,652,166 170,270
Louis H. Herwaldt 33,187,635 634,801
Arthur C. Latno, Jr. 33,643,401 179,035
Patrick D. Lynch 33,649,833 172,603
Catherine C. MacMillan 33,410,428 412,008
Patrick J. Mon Pere 32,918,051 904,385
Ronald A. Nelson 33,661,267 161,169
Carl R. Otto 33,658,109 164,327
David L. Payne 33,664,347 158,089
Michael J. Ryan 32,919,849 902,587
Edward B. Sylvester 33,663,100 159,336
<PAGE>
2.- Ratification of independent certified public accountant firm.
A proposal to ratify the selection of KPMG LLP as independent
certified public accountants for the Company for 1999.
For : 33,522,545
Against : 30,428
Abstain : 269,463
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
WESTAMERICA BANCORPORATION
Computation of Earnings Per Share on Common and
Common Equivalent Shares and on Common Shares
Assuming Full Dilution
- -------------------------------------------------------------------------
For the three
months ended
June 30,
(In thousands, except per share data) 1999 1998
- -------------------------------------------------------------------------
Weighted average number of common
shares outstanding - basic 39,046 42,607
Add exercise of options
reduced by the number of
shares that could have
been purchased with the
proceeds of such exercise 628 728
- -------------------------------------------------------------------------
Weighted average number of common
shares outstanding - diluted 39,674 43,335
=========================================================================
Net income $18,869 $18,102
Basic earnings per share $0.48 $0.42
Diluted earnings per share $0.48 $0.42
- -------------------------------------------------------------------------
For the six
months ended
June 30,
(In thousands, except per share data) 1999 1998
- -------------------------------------------------------------------------
Weighted average number of common
shares outstanding - basic 39,337 42,673
Add exercise of options
reduced by the number of
shares that could have
been purchased with the
proceeds of such exercise 634 773
- -------------------------------------------------------------------------
Weighted average number of common
shares outstanding - diluted 39,971 43,446
=========================================================================
Net income $37,273 $36,198
Basic earnings per share $0.95 $0.85
Diluted earnings per share $0.93 $0.83
<PAGE>
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<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999 DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1999 JAN-01-1999 APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999 JUN-30-1998 JUN-30-1998
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<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 0 0 0 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 1,012,175 1,012,175 982,660 982,660
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0 0 0 0
0 0 0 0
<COMMON> 194,128 194,128 200,140 200,140
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<TOTAL-LIABILITIES-AND-EQUITY> 3,870,272 3,870,272 3,864,020 3,864,020
<INTEREST-LOAN> 46,383 92,622 49,219 98,072
<INTEREST-INVEST> 17,626 35,021 17,775 35,577
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<INTEREST-TOTAL> 64,009 127,643 66,994 133,649
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<INTEREST-INCOME-NET> 44,649 89,333 44,643 89,571
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<SECURITIES-GAINS> 0 0 29 29
<EXPENSE-OTHER> 24,727 49,700 25,359 50,699
<INCOME-PRETAX> 28,367 56,030 27,473 54,651
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