-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OLGAWQyvEGw0N3WYjFxf7PREFwrygQ3gHLvswbLgEqCIjYl+93frJyLsNYUIRcNA a614WI+RFrYQ5eYltxlvEQ== 0000311094-98-000008.txt : 19981116 0000311094-98-000008.hdr.sgml : 19981116 ACCESSION NUMBER: 0000311094-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTAMERICA BANCORPORATION CENTRAL INDEX KEY: 0000311094 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942156203 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09383 FILM NUMBER: 98746263 BUSINESS ADDRESS: STREET 1: 1108 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4152578000 MAIL ADDRESS: STREET 1: 1108 FIFTH AVENUE CITY: SAN RAFAEL STATE: CA ZIP: 94901 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT BANKSHARES CORP DATE OF NAME CHANGE: 19830801 10-Q 1 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 WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------- (In thousands)
- ------------------------------------------------------------------------------------------ (Unaudited) At September 30, At December 31, 1998 1997 1997 - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - ---------------------------------------------------------- (In thousands, except per share data)
- ---------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Three months ended Nine months ended September 30, September 30, 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- 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
WESTAMERICA BANCORPORATION STATEMENTS OF CASH FLOWS - ------------------------ (In thousands)
- ---------------------------------------------------------------------------------------- (Unaudited) For the nine months ended September 30, 1998 1997 - ---------------------------------------------------------------------------------------- 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
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) 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. 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. 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. 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. 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. 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. 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. 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) =============================================================================== 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. 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. 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. 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. 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. 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. 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% 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. 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. 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. 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". 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. 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. Risks Failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. The Company believes that, with the implementation of new or upgraded business systems and completion of the Year 2000 project as scheduled, the possibility of significant interruptions of normal operations due to the failure of those systems will be reduced. However, the Company is also dependent upon the power and telecommunications infrastructure within the United States, and processes large volumes of transactions through various clearing houses and correspondent banks. The most reasonably likely worst case scenario would be that the Company may experience disruption in its operations if any of these third-party suppliers reported a system failure. Although the Company's Year 2000 project will reduce the level of uncertainty about the compliance and readiness of its material third-party providers, due to the general uncertainty over Year 2000 readiness of these third-party suppliers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact. Forward-Looking Statement Disclosure Readers are cautioned that forward-looking statements contained in this section should be read in conjunction with the Company's disclosures under the heading "Cautionary Statement for the Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995." In addition, the preceding statements concerning Year 2000 compliance are hereby designated as Year 2000 readiness disclosures under the Year 2000 Information and Readiness Disclosure Act. Cautionary Statement for the Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995." The Company is including the following cautionary statement to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions of bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. Taking into account the foregoing, the following are identified as important risk factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: The dates on which the Company believes the Year 2000 project will be completed are based on Management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of trained personnel, ability to locate and correct all computer related issues, timely responses to and corrections by third parties and suppliers, the availability to implement interfaces between new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties, the Company cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability. 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 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 EX-11 2 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 For the nine months ended months ended September 30, September 30, (In thousands, except per share data 1998 1997 1998 1997 - ----------------------------------------------------------------------------- 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
EX-27 3
9 1,000 3-MOS 9-MOS 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1997 JUL-01-1998 JAN-01-1998 JUL-01-1997 JAN-01-1997 SEP-30-1998 SEP-30-1998 SEP-30-1997 SEP-30-1997 203,423 203,423 246,485 246,485 0 0 0 0 0 0 0 0 0 0 0 0 1,020,235 1,020,235 974,149 974,149 241,803 241,803 234,731 234,731 249,694 249,694 237,497 237,497 2,296,063 2,296,063 2,256,422 2,256,422 51,124 51,124 50,764 50,764 3,862,546 3,862,546 3,816,895 3,816,895 3,077,042 3,077,042 3,105,176 3,105,176 302,222 302,222 205,476 205,476 54,673 54,673 49,690 49,690 52,500 52,500 57,500 57,500 0 0 0 0 0 0 0 0 191,127 191,127 196,994 196,994 184,982 184,982 202,059 202,059 3,862,546 3,862,546 3,816,895 3,816,895 49,590 147,662 51,233 151,606 17,866 53,443 17,217 49,184 0 0 27 1,629 67,456 201,105 68,477 202,419 18,326 54,195 19,394 57,544 22,446 66,524 22,170 66,189 45,010 134,581 46,307 136,230 1,195 3,985 1,650 6,250 133 162 0 136 25,153 75,852 26,203 111,948 28,113 82,764 27,230 46,073 18,436 54,634 17,660 29,838 0 0 0 0 0 0 0 0 18,436 54,634 17,660 29,838 .44 1.29 .41 .69 .44 1.27 .40 .68 5.46 5.51 5.69 5.62 8,153 8,153 20,318 20,318 524 524 748 748 1,255 1,255 1,302 1,302 0 0 0 0 50,773 50,630 50,742 50,920 1,628 6,372 2,894 9,626 784 2,881 1,266 3,220 51,124 51,124 50,764 50,764 28,469 28,469 32,359 32,359 0 0 0 0 22,655 22,655 18,405 18,405
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