10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 2000 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 required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the registrant classes of common stock, as of the latest practicable date: Title of Class Shares outstanding as of October 31, 2000 Common Stock, 36,481,659 No Par Value WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
--------------------------------------------------------------------------------------------- At September 30, At December 31, 2000 1999 1999 --------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $232,876 $212,122 $255,738 Money market assets 250 250 250 Investment securities available for sale 939,672 1,014,018 982,337 Investment securities held to maturity, with market values of: $231,138 at September 30, 2000 $239,914 at September 30, 1999 $235,147 at December 31, 1999 231,330 240,360 237,154 Loans, gross 2,464,658 2,322,885 2,320,846 Allowance for loan losses (52,182) (51,645) (51,574) --------------------------------------------------------------------------------------------- Loans, net of allowance for loan losses 2,412,476 2,271,240 2,269,272 Other real estate owned 2,017 2,189 3,269 Premises and equipment, net 42,416 44,351 44,016 Interest receivable and other assets 119,494 107,332 101,151 --------------------------------------------------------------------------------------------- Total assets $3,980,531 $3,891,862 $3,893,187 ============================================================================================= LIABILITIES Deposits: Non-interest bearing $974,548 $912,013 911,556 Interest bearing: Transaction 524,550 461,583 485,860 Savings 885,973 876,945 840,644 Time 867,845 830,019 827,284 --------------------------------------------------------------------------------------------- Total deposits 3,252,916 3,080,560 3,065,344 Short-term borrowed funds 334,812 416,792 462,345 Liability for interest, taxes and other expenses 30,463 31,575 23,406 Notes payable 31,036 46,500 41,500 --------------------------------------------------------------------------------------------- Total liabilities 3,649,227 3,575,427 3,592,595 --------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Authorized - 150,000 shares of common stock Issued and outstanding: 36,653 at September 30, 2000 37,770 at September 30, 1999 37,125 at December 31, 1999 206,912 189,689 186,435 Accumulated other comprehensive income: Unrealized (loss) gain on securities available for sale (1,546) 1,732 (4,521) Retained earnings 125,938 125,014 118,678 --------------------------------------------------------------------------------------------- Total shareholders' equity 331,304 316,435 300,592 --------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $3,980,531 $3,891,862 $3,893,187 =============================================================================================
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME In thousands, except per share data)
------------------------------------------------------------------------------------------------------------ Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans $51,217 $46,995 $147,045 $139,617 Money market assets and funds sold 9 -- 14 -- Investment securities available for sale Taxable 11,098 11,806 34,665 34,986 Tax-exempt 2,900 2,765 8,067 7,906 Investment securities held to maturity Taxable 1,277 1,277 3,800 4,048 Tax-exempt 2,053 2,056 6,200 5,985 ------------------------------------------------------------------------------------------------------------ Total interest income 68,554 64,899 199,791 192,542 INTEREST EXPENSE Transaction deposits 1,102 930 3,061 2,867 Savings deposits 4,848 4,843 13,741 14,740 Time deposits 11,838 9,313 33,124 28,045 Short-term borrowed funds 4,548 3,893 14,202 9,986 Debt financing and notes payable 582 817 1,953 2,468 ------------------------------------------------------------------------------------------------------------ Total interest expense 22,918 19,796 66,081 58,106 ------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 45,636 45,103 133,710 134,436 Provision for loan losses 905 1,195 2,775 3,585 ------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 44,731 43,908 130,935 130,851 NON-INTEREST INCOME Service charges on deposit accounts 5,271 5,101 15,835 14,897 Merchant credit card 1,049 984 3,005 2,650 Financial services commissions 388 798 1,276 2,184 Mortgage banking 198 158 620 555 Trust fees 179 156 520 500 Other 3,672 2,744 9,924 7,942 ------------------------------------------------------------------------------------------------------------ Total non-interest income 10,757 9,941 31,180 28,728 NON-INTEREST EXPENSE Salaries and related benefits 12,942 12,500 38,144 37,973 Occupancy 2,856 3,040 8,789 9,003 Equipment 1,739 1,717 4,899 5,171 Data processing 1,503 1,485 4,551 4,445 Professional fees 522 395 1,319 1,138 Other real estate owned 316 20 421 209 Other 5,719 5,601 16,564 16,520 ------------------------------------------------------------------------------------------------------------ Total non-interest expense 25,597 24,758 74,687 74,459 ------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 29,891 29,091 87,428 85,120 Provision for income taxes 9,746 9,802 28,390 28,558 ------------------------------------------------------------------------------------------------------------ NET INCOME $20,145 $19,289 $59,038 $56,562 ============================================================================================================ Comprehensive income: Change in unrealized (loss) gain on securities available for sale, net 5,450 (4,935) 2,975 (18,452) ------------------------------------------------------------------------------------------------------------ COMPREHENSIVE INCOME $25,595 $14,354 $62,013 $38,110 ============================================================================================================ Average shares outstanding 36,365 38,266 36,404 38,976 Diluted average shares outstanding 36,906 38,872 36,893 39,601 PER SHARE DATA Basic earnings $0.55 $0.50 $1.62 $1.45 Diluted earnings 0.55 0.50 1.60 1.43 Dividends paid 0.19 0.16 0.55 0.48 ============================================================================================================
WESTAMERICA BANCORPORATION STATEMENTS OF CASH FLOWS (In thousands)
--------------------------------------------------------------------------------------------- For the nine months ended September 30, 2000 1999 --------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $59,038 $56,562 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,873 6,265 Loan loss provision 2,775 3,585 Amortization of deferred net loan (cost)/fees 381 1,155 Increase in interest income receivable (2,758) (1,101) (Increase)/decrease in other assets (2,159) 415 Increase/(decrease) in income taxes payable 3,193 (261) Increase/(decrease) in interest expense payable 753 (770) (Decrease)/increase in other liabilities 1,757 6,336 Write-down/(gain on sales) of equipment 35 (43) Originations of loans for resale (1,931) (17,850) Proceeds from sale of loans originated for resale 1,696 17,133 Net loss on sale of loans originated for resale 18 161 Net gain on sale of property acquired in satisfaction of debt (671) (298) Write-down on property acquired in satisfaction of debt 442 88 --------------------------------------------------------------------------------------------- Net cash provided by operating activities 68,442 71,377 --------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net cash obtained in acquisitions 3,034 -- Net disbursements of loans (78,745) (29,184) Purchases of investment securities available for sale (48,711) (327,557) Purchases of investment securities held to maturity (3,078) (29,579) Purchases of property, plant and equipment (1,638) (2,513) Proceeds from maturity of securities available for sale 110,254 268,788 Proceeds from maturity of securities held to maturity 8,904 16,212 Proceeds from sale of securities available for sale 1,172 572 Proceeds from sale of property and equipment 20 46 Proceeds from property acquired in satisfaction of debt 3,382 2,850 --------------------------------------------------------------------------------------------- Net cash used in investing activities (5,406) (100,365) --------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase/(decrease) in deposits 107,320 (108,445) Net (decrease)/increase in short-term borrowings (127,933) 213,121 Repayments of notes payable (10,464) (1,000) Exercise of stock options/issuance of shares 4,483 4,139 Repurchases/retirement of stock (39,267) (77,627) Dividends paid (20,037) (18,812) --------------------------------------------------------------------------------------------- Net cash provided by financing activities (85,898) 11,376 --------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (22,862) (17,612) Cash and cash equivalents at beginning of period 255,738 229,734 --------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $232,876 $212,122 ============================================================================================= Supplemental disclosure of non-cash activities: Loans transferred to other real estate owned $1,750 $514 Fixed asset charge-offs and depreciation expense applied against reserves 186 37 The acquisition of First Counties Bank involved the following: Common stock issued 19,723 -- Liabilities assumed 82,356 -- Fair value of assets acquired, other than cash and cash equivalents (86,671) -- Goodwill (9,577) -- Core deposit intangible (2,797) -- --------------------------------------------------------------------------------------------- Net cash and cash equivalents received $3,034 $-- --------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow activity: Unrealized (loss) gain on securities available for sale $2,975 ($18,452) Interest paid for the period 64,920 58,877 Income tax payments for the period 25,938 28,790 Tax benefit from stock options exercised 2,910 2,029 =============================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, this discussion includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Westamerica Bancorporation (the "Company") actual results may differ materially from those included in the forward-looking statements. The forward-looking statements involve risks and uncertainties which include, but are not limited to, changes in general economic conditions; competitive conditions in the geographic and business areas in which the Company conducts its operations; regulatory or tax changes that affect the cost of or demand for the Company's products; the resolution of legal proceedings and related matters. The reader is directed to Westamerica Bancorporation's annual report on Form 10-K for the year ended December 31, 1999, particularly the section entitled "Cautionary Statement," for the purpose of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 for a discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. For further information on the subject, please refer to the "Forward-Looking Statement Disclosure" section of this report. On July 31, 2000, the Company opened for business three Money Outlet Inc., stores, a newly created subsidiary engaged in, but not limited to, the business of selling checks, drafts, or money orders, or receiving money as agent of an obligor for the purpose of paying bills of such obligor or to receive money for the purpose of forwarding it to others in payment of utility bills and other obligations. On August 17, 2000, the Company finalized the acquisition of First Counties Bank ("FCB"), a five-branch financial institution headquartered in Lake County, California. At the time of the acquisition, FCB had approximately total assets of $90 million, total loans of $70 million and total deposits of $80 million. Pursuant to the terms of the merger agreement, each outstanding share of FCB's common stock was exchanged for .8035 shares of the Company's common stock. Based on the closing price of $29.38 of the Company's common stock on August 16, 2000, the acquisition was valued at approximately $19.7 million. The acquisition was recorded under the purchase method of accounting. Under purchase accounting the Company recorded goodwill and a core deposit intangible of $9.6 million and $2.8 million, respectively. The goodwill is being amortized over a period of 25 years and the core deposit intangible is being amortized over a period that approximates the runoff of FCB's deposit base. Subsequent to the acquisition, FCB became a subsidiary of the Company. For more information on the subject, please refer to report on Form 8-K on the subject, filed by the Company on August 22, 2000. During the third quarter of 2000, the Company merged its subsidiary banks with and into Westamerica Bank, as follows: Bank of Lake County on August 18, and FCB on September 15. General Westamerica Bancorporation, parent company of Westamerica Bank, Community Banker Services Corporation, Westamerica Commercial Credit, Inc., and Money Outlet, Inc., reported third quarter 2000 net income of $20.1 million or $.55 diluted earnings per share. These results compare to net income of $19.3 million or $.50 earnings per share for the third quarter of 1999. On a year-to-date basis, the Company reported net income of $59.0 million representing $1.60 earnings per share, compared to $56.6 million or $1.43 per share for the same period of 1999. 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) 2000 1999 2000 1999 ------------------------------------------------------------------------------- Net interest income* $49.2 $48.3 $144.1 $143.6 Provision for loan losses (0.9) (1.2) (2.8) (3.6) Non-interest income 10.8 9.9 31.2 28.7 Non-interest expense (25.6) (24.8) (74.7) (74.5) Provision for income taxes* (13.4) (12.9) (38.8) (37.6) ------------------------------------------------------------------------------- Net income $20.1 $19.3 $59.0 $56.6 =============================================================================== Average total assets $3,913.4 $3,839.0 $3,858.7 $3,810.1 Net income (annualized) as a percentage of average total assets 2.05% 1.99% 2.04% 1.98% =============================================================================== * Fully taxable equivalent basis (FTE) During the third quarter of 2000, the Company's net income was $20.1 million, $800 thousand higher than the same period in 1999. Improvements in net interest income, a lower loan loss provision from continued improvements in credit quality and higher non-interest income were partially offset by an increase in non-interest expense. All of these changes include the effect of FCB's acquisition, as increases in earning assets and deposits are reflected in the improved net interest income, a larger deposit based resulted in higher service charge income, and additional personnel and facilities costs inflated non-interest expenses. One-time merger-related costs are also included in the current quarter. Comparing the first nine months of 2000 to the prior year, net income increased $2.4 million. Included in this change are higher service fees and other non-interest income, increased net interest income from increases in earning assets and low-cost deposits volume partially offset by a larger increase in the cost of funds than asset yields, and lower loan loss provision, partially offset by a small increase in non-interest expense. Higher income tax provisions in the third quarter and the first nine months of 2000 compared to the same periods in 1999 are mainly a result of higher pretax earnings. 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) 2000 1999 2000 1999 ------------------------------------------------------------------------------- Interest income 68.6 $64.9 199.8 $192.5 Interest expense (22.9) (19.8) (66.1) (58.1) FTE adjustment 3.5 3.2 10.4 9.2 ------------------------------------------------------------------------------- Net interest income (FTE) $49.2 $48.3 $144.1 $143.6 =============================================================================== Net interest margin (FTE) 5.48% 5.45% 5.43% 5.48% =============================================================================== 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 2000 increased $900 thousand from the same period in 1999 to $49.2 million. Comparing the first nine months of 2000 with the previous year, net interest income (FTE) increased $500 thousand. Interest Income During the third quarter of 2000 interest income (FTE) increased $3.7 million from the same period in 1999 resulting from the favorable impact of increased earning-asset volume combined with higher yields. rates, in part offset by increased earning-asset yields. Average earning-asset balances increased $57.8 million from the third quarter of 1999, as an increase in average loans of $112.3 million, particularly in the indirect consumer lending and commercial categories, was partially offset by a decrease of $54.5 million in average investment securities balances. Adding to the favorable impact of higher volumes, loan yields increased 35 basis points from the third quarter of 1999. All categories of loans benefited from higher market rates, particularly those carrying shorter terms and tied to the prime rate which, on average, rose 140 basis points from the third quarter of 1999. In addition, reflecting market trends, investment securities yields rose 22 basis points from 1999; however, the favorable effect of this increase was impacted unfavorably by the decline in average balances, concentrated in asset-backed and corporate securities. Comparing the first nine months of 2000 with the same period in 1999, interest income (FTE) increased $7.3 million. The effect of a 21 basis point increase in average yields combined with a $47.1 million increase in earning-assets average balances. The rising rate environment experienced during the first nine months of 2000 resulted in a 127 basis point increase in the Company's average index rate from the first nine months of 1999. Higher earning-asset average balances included a $55.1 million increase in average loan balances, particularly in commercial real estate and indirect consumer lending, partially offset by decreases in the commercial, real estate and other consumer categories. The increase in loans was in part offset by an $8.0 million net decrease in investment securities average balances, as balance run-offs in asset-backed, corporate, U.S. Treasury and participation certificates were partially offset by increases in U.S. Agencies and tax-free securities. Interest Expense For the third quarter of 2000 interest expense was $3.1 million higher than the third quarter of 1999. Following a general increase in rates paid on deposits and borrowed funds reflective of a rising market rate environment, total interest-bearing liability rates increased 48 basis points from the third quarter of 1999. A small net increase in the average balance of interest-bearing liabilities resulted from a $19.1 million increase in lower-costing interest-bearing deposits partially offset by an $18.7 million decrease in higher-costing short-term borrowings, debt financing and long-term debt. In addition, interest-free demand deposits increased $76.0 million from 1999, largely the result of the transfer, during the third quarter of 1999, of certain interest-bearing transaction deposits into the non-interest bearing category. Interest expense increased $8.0 million from the first nine months of 1999, as an increase of 44 basis points on the rates paid on interest-bearing liabilities was partially offset by a $36.8 million decrease in interest-bearing liability average balances and a $113.5 million increase in interest-free demand deposits, which includes the above-mentioned transfer of certain interest-bearing transaction deposits into the non-interest bearing category. The decrease in the average balance of interest-bearing liabilities includes a reduction of $84.4 million in deposits, a combined reduction in debt financing and long-term debt of $10.5 million in part compensated by an increase in short-term fundings of $58.1 million. Reflecting market conditions, rates paid on deposits and borrowed funds increased in almost all categories, with the exception of long-term certificates of deposits and core savings and other money market saving deposits. In all periods, the Company has attempted continuously to reduce high-rate time deposits while increasing the balances of more profitable, lower-cost transaction accounts minimizing the effect of adverse cyclical quarterly trends. Net Interest Margin (FTE) The following summarizes the components of the Company's net interest margin for the periods indicated: ------------------------------------------------------------------------------- For the three For the nine months ended months ended September 30, September 30, ------------------------------------------------- (In millions) 2000 1999 2000 1999 ------------------------------------------------------------------------------- Yield on earning assets 8.02% 7.68% 7.91% 7.70% Rate paid on interest-bearing liabilities 3.50% 3.02% 3.41% 2.96% ------------------------------------------------------------------------------- Net interest spread 4.52% 4.66% 4.50% 4.74% Impact of all other net non-interest bearing funds 0.96% 0.79% 0.93% 0.74% ------------------------------------------------------------------------------- Net interest margin 5.48% 5.45% 5.43% 5.48% =============================================================================== During the third quarter of 2000, and benefiting from a strong increase in net non-interest bearing funds, the Company's net interest margin increased 3 basis points when compared to the third quarter of 1999. The unfavorable impact of a 48 basis point increase in the average rate paid on interest bearing liabilities, triggered by market trends, was partially offset by the effect of an increase of 34 basis points in earning-asset yields. In addition, the net interest margin was favorably impacted by the effect of a 17 basis points increase resulting from higher volume of net non-interest bearing funds. This change reflects mostly a $76.0 million increase in interest-free demand deposit accounts, partially offset by the effect of a $4.2 million decrease in average equity capital from the third quarter of 1999. The decrease in equity was the net result of the Company's share repurchase programs which more than offset capital contributions resulting from FCB's acquisition and higher net income. On a year-to-date basis, the net interest margin decreased 5 basis points when compared to the same period in 1999. The net effect of a more rapid rise in the cost of funds than the yield on earning assets - a 45 basis point increase in the rates paid on interest-bearing liabilities and a 21 basis point increase in earning-asset yields - was partially offset by the favorable impact on the interest margin resulting from higher average balances of net non-interest bearing funds combined with higher market rates. 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, 2000 ------------------------------------------------------------------------------- Interest Rates Average income/ earned/ (Dollars in thousands) balance expense paid ------------------------------------------------------------------------------- Assets Money market assets and cash equivalent $803 $9 4.46 % Investment securities: Available for sale Taxable 723,950 11,098 6.10 Tax-exempt 223,571 4,317 7.68 Held to maturity Taxable 78,897 1,276 6.43 Tax-exempt 153,225 3,053 7.93 Loans: Commercial Taxable 1,346,759 30,361 8.97 Tax-exempt 180,640 3,469 7.64 Real estate construction 52,107 1,606 12.26 Real estate residential 343,648 6,222 7.20 Consumer 483,128 10,692 8.80 ----------------------------------------------------------------- Earning assets 3,586,728 72,103 8.02 Other assets 326,637 ----------------------------------------------------- Total assets $3,913,365 ===================================================== Liabilities and shareholders' equity Deposits: Non-interest bearing demand $964,928 $-- -- % Savings and interest-bearing transaction 1,371,649 5,950 1.73 Time less than $100,000 390,340 5,094 5.19 Time $100,000 or more 468,588 6,744 5.73 ----------------------------------------------------------------- Total interest-bearing deposits 2,230,577 17,788 3.17 Short-term borrowed funds 336,524 4,548 5.38 Debt financing and notes payable 32,391 582 7.15 ----------------------------------------------------------------- Total interest-bearing liabilities 2,599,492 22,918 3.50 Other liabilities 32,032 Shareholders' equity 316,913 ----------------------------------------------------- Total liabilities and shareholders' equity $3,913,365 ===================================================== Net interest spread (1) 4.52 % Net interest income and interest margin (2) $49,185 5.48 % =============================================================================== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between the weighted average yields on earning assets less the interest expense (annualized) divided by the average balance of earning assets. Distribution of assets, liabilities and shareholders' equity: ------------------------------------------------------------------------------- For the three months ended September 30, 1999 ------------------------------------------------------------------------------- Interest Rates Average income/ earned/ (Dollars in thousands) balance expense paid ------------------------------------------------------------------------------- Assets Money market assets and funds sold $311 $-- 0.00 % Investment securities: Available for sale Taxable 782,479 11,806 5.99 Tax-exempt 214,202 3,972 7.36 Held to maturity Taxable 85,278 1,277 5.94 Tax-exempt 152,663 2,943 7.65 Loans: Commercial Taxable 1,350,466 29,132 8.56 Tax-exempt 152,825 3,140 8.15 Real estate construction 51,833 1,438 11.01 Real estate residential 341,335 5,872 6.83 Consumer 397,547 8,512 8.50 ----------------------------------------------------------------- Earning assets 3,528,939 68,092 7.68 Other assets 310,066 ----------------------------------------------------- Total assets $3,839,005 ===================================================== Liabilities and shareholders' equity Deposits: Non-interest bearing demand $888,966 $-- -- % Savings and interest-bearing transaction 1,380,415 5,773 1.66 Time less than $100,000 404,576 4,415 4.33 Time $100,000 or more 426,501 4,898 4.56 ----------------------------------------------------------------- Total interest-bearing deposits 2,211,492 15,086 2.71 Short-term borrowed funds 341,135 3,893 4.53 Debt financing and notes payable 46,500 817 6.97 ----------------------------------------------------------------- Total interest-bearing liabilities 2,599,127 19,796 3.02 Other liabilities 29,810 Shareholders' equity 321,102 ----------------------------------------------------- Total liabilities and shareholders' equity $3,839,005 ===================================================== Net interest spread (1) 4.65 % Net interest income and interest margin (2) $48,296 5.45 % =============================================================================== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between the weighted average yields on earning assets less the interest expense (annualized) divided by the average balance of earning assets. Distribution of assets, liabilities and shareholders' equity: ------------------------------------------------------------------------------- For the nine months ended September 30, 2000 ------------------------------------------------------------------------------- Interest Rates Average income/ earned/ (Dollars in thousands) balance expense paid ------------------------------------------------------------------------------- Assets Money market assets and funds sold $560 $15 3.58 % Investment securities: Available for sale Taxable 746,889 34,665 6.20 Tax-exempt 221,818 12,212 7.35 Held to maturity Taxable 80,337 3,800 6.32 Tax-exempt 154,654 9,181 7.93 Loans: Commercial Taxable 1,327,718 88,567 8.91 Tax-exempt 170,916 9,952 7.78 Real estate construction 47,530 4,307 12.10 Real estate residential 337,029 17,750 7.03 Consumer 457,974 29,751 8.68 ----------------------------------------------------------------- Earning assets 3,545,425 210,200 4.20 Other assets 313,262 ----------------------------------------------------- Total assets $3,858,687 ===================================================== Liabilities and shareholders' equity Deposits: Non-interest bearing demand $939,535 $-- -- % Savings and interest-bearing transaction 1,340,125 16,802 1.67 Time less than $100,000 388,550 14,424 4.96 Time $100,000 or more 454,782 18,700 5.49 ----------------------------------------------------------------- Total interest-bearing deposits 2,183,457 49,926 3.05 Short-term borrowed funds 364,073 14,202 5.21 Debt financing and notes payable 36,534 1,953 7.14 ----------------------------------------------------------------- Total interest-bearing liabilities 2,584,064 66,081 3.41 Other liabilities 31,635 Shareholders' equity 303,453 ----------------------------------------------------- Total liabilities and shareholders' equity $3,858,687 ===================================================== Net interest spread (1) 0.79 % Net interest income and interest margin (2) $144,119 5.43 % =============================================================================== (1) Net interest spread represents the average yield earned on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between the weighted average yields on earning assets less the interest expense (annualized) divided by the average balance of earning assets. Distribution of assets, liabilities and shareholders' equity: ------------------------------------------------------------------------------- For the nine months ended September 30, 1999 ------------------------------------------------------------------------------- Interest Rates Average income/ earned/ (Dollars in thousands) balance expense paid ------------------------------------------------------------------------------- Assets Money market assets and funds sold $271 $-- 0.00 % Investment securities: Available for sale Taxable 774,003 34,986 6.04 Tax-exempt 202,062 11,325 7.49 Held to maturity Taxable 87,377 4,048 6.19 Tax-exempt 148,525 8,542 7.69 Loans: Commercial Taxable 1,341,120 86,026 8.58 Tax-exempt 149,123 8,975 8.05 Real estate construction 53,255 4,367 10.96 Real estate residential 357,007 18,520 6.94 Consumer 385,614 24,870 8.62 ----------------------------------------------------------------- Earning assets 3,498,357 201,659 4.07 Other assets 311,735 ----------------------------------------------------- Total assets $3,810,092 ===================================================== Liabilities and shareholders' equity Deposits: Non-interest bearing demand $826,059 $-- -- % Savings and interest-bearing transaction 1,426,670 17,607 1.65 Time less than $100,000 414,201 13,622 4.40 Time $100,000 or more 427,031 14,423 4.52 ----------------------------------------------------------------- Total interest-bearing deposits 2,267,902 45,652 2.69 Short-term borrowed funds 305,929 9,986 4.36 Debt financing and notes payable 47,032 2,468 7.02 ----------------------------------------------------------------- Total interest-bearing liabilities 2,620,863 58,106 2.96 Other liabilities 29,947 Shareholders' equity 333,223 ----------------------------------------------------- Total liabilities and shareholders' equity $3,810,092 ===================================================== Net interest spread (1) 1.11 % Net interest income and interest margin (2) $143,553 5.48 % =============================================================================== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between the weighted average yields on earning assets less the interest expense (annualized) divided by the average balance of earning assets. Rate and volume variances The following tables set forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components. ------------------------------------------------------------------------------- Three months ended September 30, 2000 compared with three months ended September 30, 1999 ---------------------------------------- (In thousands) Volume Rate Total ------------------------------------------------------------------------------- Increase (decrease) in interest and fee income: Money market assets and funds sold $4 $5 $9 Investment securities: Available for sale Taxable (946) 238 (708) Tax-exempt 172 173 345 Held to maturity Taxable 9 (10) (1) Tax-exempt 10 100 110 Loans: Commercial Taxable (75) 1,304 1,229 Tax-exempt 502 (173) 329 Real estate construction 7 161 168 Real estate residential 38 312 350 Consumer 1,864 316 2,180 ------------------------------------------------------------------------------- Total increase in loans 2,336 1,920 4,256 ------------------------------------------------------------------------------- Total increase in interest and fee income 1,585 2,426 4,011 ------------------------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (33) 210 177 Time less than $100,000 (146) 825 679 Time $100,000 or more 513 1,333 1,846 ------------------------------------------------------------------------------- Total decrease in interest-bearing deposits 334 2,368 2,702 ------------------------------------------------------------------------------- Short-term borrowed funds (51) 706 655 Debt financing and notes payable (257) 22 (235) ------------------------------------------------------------------------------- Total increase in interest expense 26 3,096 3,122 ------------------------------------------------------------------------------- Increase (decrease) in net interest income (1) $1,559 ($670) $889 =============================================================================== (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. Rate and volume variances. ------------------------------------------------------------------------------- Nine months ended September 30, 2000 compared with nine months ended September 30, 1999 ---------------------------------------- (In thousands) Volume Rate Total ------------------------------------------------------------------------------- Increase (decrease) in interest and fee income: Money market assets and funds sold $7 $8 $15 Investment securities: Available for sale Taxable (1,225) 904 (321) Tax-exempt 1,096 (209) 887 Held to maturity Taxable (330) 82 (248) Tax-exempt 364 275 639 Loans: Commercial Taxable (876) 3,417 2,541 Tax-exempt 1,267 (290) 977 Real estate construction (1,864) 1,804 (60) Real estate residential (1,034) 264 (770) Consumer 4,722 159 4,881 ------------------------------------------------------------------------------- Total increase in loans 2,215 5,354 7,569 ------------------------------------------------------------------------------- Total increase in interest and fee income 2,127 6,414 8,541 ------------------------------------------------------------------------------- Increase (decrease) in interest expense: Deposits: Savings/interest-bearing (1,069) 264 (805) Time less than $100,000 (755) 1,557 802 Time $100,000 or more 988 3,289 4,277 ------------------------------------------------------------------------------- Total (decrease) increase in interest-bearing deposits (836) 5,110 4,274 ------------------------------------------------------------------------------- Short-term borrowed funds 2,088 2,128 4,216 Debt financing and notes payable (560) 45 (515) ------------------------------------------------------------------------------- Total increase in interest expense 692 7,283 7,975 ------------------------------------------------------------------------------- Increase (decrease) in net interest income $1,435 ($869) $566 =============================================================================== (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. Provision for Loan Losses The level of the provision for loan losses during each of the periods presented reflects the Company's continued enforcement of underwriting and administration standards and aggressive collection efforts with troubled debtors. The Company provided $905 thousand for loan losses in the third quarter of 2000, $290 thousand lower than the same period of 1999; for the first nine months of 2000, $2.8 million were provided, representing $810 thousand less than the same period of 1999. For further information regarding net credit losses and the allowance 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) 2000 1999 2000 1999 ------------------------------------------------------------------------------- Service charges on deposit accounts $5.27 $5.10 $15.83 $14.90 Merchant credit card 1.05 0.98 3.01 2.65 Financial services commissions 0.39 0.80 1.28 2.18 Debit card fees 0.27 0.16 0.83 0.23 Mortgage banking income 0.20 0.16 0.62 0.56 Trust fees 0.18 0.16 0.52 0.50 Other non-interest income 3.40 2.58 9.09 7.71 ------------------------------------------------------------------------------- Total $10.76 $9.94 $31.18 $28.73 =============================================================================== The $820 thousand increase in non-interest income during the third quarter of 2000 compared to the third quarter of 1999, was due to increases in all non-interest income categories, with the exception of financial services commissions. The quarter year-to-year change includes $170 thousand higher service charges on deposit accounts including higher overdraft and returned item charges primarily due to the effect of a program implemented in the third quarter of 1999 through which charges escalate following a tiered system based on number of occurrences; $110 thousand in higher debit card fees as the new product, launched in the second quarter of 1999, had not yet reached full maturity during the third quarter of 1999; and $70 thousand higher merchant credit card income primarily due to increased sales volume and fee repricing. In addition, mortgage banking income increased $40 thousand from the same quarter of 1999 due to higher net gains on sales of loans in the secondary markets and trust fees were $20 thousand higher than 1999. The $820 thousand higher other non-interest income includes $315 thousand higher gains on sale of properties acquired in satisfaction of debt, a $250 thousand recorded gain realized on the repurchase of long-term indebtedness, $98 thousand higher safe deposit box fee income, $69 thousand increased fees from issuing official checks and $63 thousand higher settlement fees from ATM network servicers. Partially offsetting these changes, financial services commissions were $410 thousand lower than the third quarter of 1999, primarily due to lower sales volumes. Comparing the first nine months of 2000 to the same period in 1999, non-interest income increased $2.45 million. The largest single contributor to this change is deposit accounts service fees, $930 thousand higher than prior year, in part due to the new overdraft and returned item fee program put in effect during the third quarter of 1999. In addition, debit card fees were $600 thousand higher than 1999, as the new product was launched during the second quarter of 1999 and had not yet reached its full potential by the third quarter of 1999; merchant credit card income was $360 thousand higher than the first nine months in the prior year due to increased volume of activity and fee repricing; mortgage banking income was $60 thousand higher than 1999 mainly due to $140 thousand higher net gains on the sale of loans in the secondary markets, partially offset by $50 thousand lower retained servicing fees and $30 thousand lower mortgage banking income due to decreased refinancing volume, and trust fees were $20 thousand higher than the prior year. The $1.38 million increase in other non-interest income category includes $370 thousand higher gains on sales of properties acquired in satisfaction of debt, $300 thousand higher safe deposit fee income, a $250 thousand recorded gain realized on the repurchase of long-term indebtedness; $200 thousand higher gains on the sale of official checks due to increased commissions from changing to an outside servicer, and $200 thousand higher income from ATM servicers primarily due to increased volume of activity. Completing the changes from the first nine months of 2000 compared to the same period in 1999, financial services commissions decreased $900 thousand mainly due to reduced sales volumes. 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) 2000 1999 2000 1999 ------------------------------------------------------------------------------- Salaries and incentives $10.24 $9.88 $29.91 $29.74 Other personnel 2.71 2.62 8.23 8.23 Occupancy 2.86 3.04 8.79 9.00 Equipment 1.74 1.72 4.90 5.17 Data processing services 1.50 1.49 4.55 4.45 Courier service 0.90 0.84 2.59 2.50 Postage 0.50 0.52 1.53 1.64 Professional fees 0.52 0.40 1.32 1.14 Merchant credit card 0.41 0.40 1.20 1.07 Stationery and supplies 0.43 0.42 1.16 1.18 Advertising/public relations 0.35 0.31 0.93 0.96 Loan expense 0.26 0.28 0.81 0.99 Operational losses 0.14 0.28 0.64 0.83 Other real estate owned 0.32 0.02 0.42 0.21 Other non-interest expense 2.72 2.54 7.71 7.35 ------------------------------------------------------------------------------- Total $25.60 $24.76 $74.69 $74.46 =============================================================================== Average full time equivalent s 1,078 1,088 1,077 1,102 Non-interest expense to revenues ("efficiency ratio")(FTE) 42.70% 42.51% 42.61% 43.22% =============================================================================== Non-interest expense of $25.60 million in third quarter of 2000 was $840 thousand higher than the same quarter in 1999. Although the Company continued to control costs through efficiencies and consolidation of operations, the current quarter was impacted by one-time costs associated to the acquisition of FCB. Included in the change are $450 thousand higher employee related expenses primarily due to termination agreements; $300 thousand higher write-downs of properties acquired in satisfaction of debt to reflect current market values; $120 thousand higher professional fees, including higher legal expenses particularly concentrated around problem credit issues; $60 thousand higher courier service costs due to increased activity to service additional branches; and $40 thousand higher advertising/public relations expense primarily due to increased advertising expenses related to the Money Outlet, Inc., the Company's new subsidiary, primarily engaged in advancing cash in exchange for postdated paychecks. In addition, equipment expense was $20 thousand higher than the third quarter of 1999, primarily due to increased maintenance costs to upgrade hardware and software to accommodate the merger of bank subsidiaries partially offset by lower depreciation costs as certain assets, after the mergers, became obsolete; and data processing, merchant credit card and stationery and supplies expenses were $10 thousand, each, higher than the same quarter in the prior year primarily due to costs related to additional programming efforts, volume, and charge-offs of inventories, respectively, due to the recent subsidiary bank mergers. The $180 thousand increase in other non-interest expense includes $106 thousand higher amortization of intangibles and $64 thousand increased assessments associated with higher level of deposits: both changes are due to the acquisition of FCB. Partially offsetting these changes, occupancy expense was $180 thousand lower than the first nine months of 1999 primarily due to reduced rental of bank premises, mainly due to lease expirations, and lower depreciation expense, and operational losses were $140 thousand lower, primarily due to lower sundry losses related to fraudulent activity at the branches and write-offs of accounting differences. Completing the favorable changes from prior year, postage and loan expense were $20 thousand, each, lower than 1999. Comparing the first nine months of 2000 with 1999, non-interest expense increased $230 thousand. Costs related to properties acquired in satisfaction of debt were $210 thousand higher than prior year primarily due to higher write-downs resulting from recent appraisals to adjust to current market values; professional fees were $180 thousand higher primarily due to increased legal fees in connection with problem credits and the formation of the Company's new subsidiary, Money Outlet, Inc., and higher accounting and consulting costs associated with mergers and acquisitions; employee related costs were $170 thousand higher, in part due to increased employee benefits related to a new program implemented at the beginning of 2000 and higher salaries including termination agreements honored in 2000 associated with the acquisition of FCB, partially offset by lower bonus accruals as 1999 included an adjustment to correct prior year's underaccruals; merchant credit card costs were $130 thousand higher mainly due to higher volume and fee restructuring; data processing costs increased $100 thousand in part due to contract renegotiations with the Company's primary servicer; and courier costs were $90 thousand higher than the first nine months of 1999 including costs related to servicing higher number of branches. Included in the $360 thousand increase in the other non-interest expense category, are $210 thousand higher assessments primarily due to increased level of deposits, and $106 thousand higher amortization of intangible assets, resulting from the acquisition of FCB. Partially offsetting these changes, equipment expense was $270 thousand lower than the first nine months of 1999 primarily due to lower depreciation as assets added through prior years' mergers reached fully depreciated lives; occupancy costs were $210 thousand lower in part due to lower depreciation expense, lower rental expense due to termination of leases, and increased sublease income mainly due to applied lease cancellation charges and Management's increased efforts to sublet properties tied to strict lease agreements; operational losses were $190 thousand lower primarily due to reduced fraudulent activities at the branches and sundry losses pending resolution; and loan expense was $180 thousand lower than the first nine months of 1999 primarily due lower appraisal and foreclosure charges partially offset by higher credit report costs. Completing the year-to-date, year-to-year non-interest expense changes, postage expense was $110 thousand lower than 1999; advertising/public relations expenses were $30 thousand lower, primarily due to lower costs associated with the publication and mailing of shareholders' reports partially offset by increased advertising costs related to Money Outlet, Inc., and $20 thousand lower stationery and supplies expense primarily due to lower purchases and usage of inventories. Provision for Income Tax During the third quarter of 2000, the Company recorded income tax expense of $9.8 million, $55 thousand higher than the third quarter of 1999; on a year-to-date basis, income tax expense was $28.4 million for 2000 compared to $28.6 million in 1999. The current provision represents an effective tax rate of 32.6 percent, compared to 33.7 percent, for the third quarter of 1999; for the first nine months of 2000, the effective tax rate was 32.5 percent, compared to 33.6 recorded in 1999. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly higher revenues recognized from tax-exempt loans and state and municipal securities. Asset Quality The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk and increase diversification of earning assets into less risky investments. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all non-performing assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated: ----------------------------------------------------------------- At At September 30,December 31, ---------------------------- (In millions) 2000 1999 1999 ----------------------------------------------------------------- Classified loans $37.3 $45.0 $41.3 Other classified assets 2.0 2.2 3.3 ----------------------------------------------------------------- Total classified assets $39.3 $47.2 $44.6 ================================================================= Allowance for loan losses as a percentage of classified loans 140% 115% 125% ================================================================= Classified loans at September 30, 2000, decreased $7.7 million or 17 percent to $37.3 million from September 30, 1999, reflecting the continued enforcing of the Company's strict credit standards and a continuing stronger economy. The decrease was principally due to reductions of classified commercial and commercial real estate loans. Other classified assets decreased $200 thousand from September 30, 1999, 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 $4.0 million decrease in classified loans from December 31, 1999, was principally due to reductions in commercial and commercial real estate loans. The $1.3 million reduction in other classified assets from December 31, 1999, 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) 2000 1999 1999 ----------------------------------------------------------------- Performing non-accrual loans $3.65 $3.08 $3.46 Non-performing, non-accrual loans 5.19 6.63 5.50 ----------------------------------------------------------------- Total non-accrual loans 8.84 9.71 8.96 Loans 90 days past due and still accruing 0.53 0.52 0.58 ----------------------------------------------------------------- Total non-performing loans 9.37 10.23 9.54 ----------------------------------------------------------------- Restructured loans -- -- -- Other real estate owned 2.02 2.19 3.27 ----------------------------------------------------------------- Total non-performing assets $11.39 $12.42 $12.81 ================================================================= Allowance for loan losses as a percentage of non-performing loans 557% 505% 540% ================================================================= Performing non-accrual loans increased $570 thousand to $3.65 million at September 30, 2000, from $3.08 million at September 30, 1999, and $190 thousand from $3.46 million outstanding at December 31, 1999. Non-performing, non-accrual loans of $5.19 million at September 30, 2000, decreased $1.4 million from September 30, 1999, and $310 thousand from December 31, 1999. The increases in performing non-accrual loans from prior periods presented resulted primarily from the addition of commercial loans, while the decrease in non-performing non-accrual loans from prior year and prior quarter-end reflects payoffs and sales of commercial and commercial real estate loans. The $1.01 million and $1.21 million decreases in other real estate owned balances from September 30 and December 31, 1999, respectively, were due to write-downs and liquidations net of foreclosures of real estate properties acquired in satisfaction of debt. The amount of gross interest income that would have been recorded for non-accrual loans for the three and nine months ended September, 2000, if all such loans had been current in accordance with their original terms, was $208 thousand and $373 thousand, respectively, compared to $187 thousand and $538 thousand, respectively, for the three and nine months ended September of 1999. The amount of interest income that was recognized on non-accrual loans from all cash payments, including those related to interest owed from prior years, made during the three and nine months ended September 30, 2000, totaled $160 thousand and $368 thousand, respectively, compared to $369 thousand and $851 thousand, respectively, for the comparable periods in 1999. Total cash payments received, including those recorded in prior periods, which were applied against the book balance of non-accrual loans outstanding at September 30, 2000, totaled approximately $563 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 $52.2 million allowance for loan losses, which constituted 2.12 percent of total loans at September 30, 2000, 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) 2000 1999 2000 1999 ------------------------------------------------------------------------------- Balance, beginning of period $52.1 $51.7 $51.6 $51.3 Loan loss provision 0.9 1.2 2.8 3.6 Loans charged off (2.7) (2.3) (6.1) (6.1) Recoveries of previously charged-off loans 0.9 1.0 2.9 2.8 ------------------------------------------------------------------------------- Net credit losses (1.8) (1.3) (3.2) (3.3) FCB acquisition 1.0 -- 1.0 -- ------------------------------------------------------------------------------- Balance, end of period $52.2 $51.6 $52.2 $51.6 =============================================================================== Allowance for loan losses as a percentage of loans outstanding 2.12% 2.22% ===================================================== Asset and Liability Management The fundamental objective of the Company's management of assets and liabilities is to maximize economic value while maintaining adequate liquidity and a conservative level of interest rate risk. The primary analytical tool used by the Company to gauge interest rate risk is a simulation model to project changes in net interest income ("NII") that result from forecast changes in interest rates. The analysis calculates the difference between a NII forecast over a 12-month period using a flat interest rate scenario, and a NII forecast using a rising or falling rate scenario where the Fed Funds rate is made to rise or fall evenly by 200 basis points over the 12-month forecast interval triggering a response in the other forecasted rates. It is the policy of the Company to require that such simulated NII changes should be always less than 10 percent or steps must be taken to reduce interest-rate risk. According to the same policy, if the simulated changes in NII reach 7.5 percent, a closer look at the risk will be put in place to determine what steps could be taken to control risk should it grow worse. The results of the model indicate that the mix of interest rate sensitive assets and liabilities at September 30, 2000 would not result in a fluctuation of NII that would exceed the parameters established by Company policy. At September 30, 2000 and 1999, 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 1999 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, 2000, there were no substantial changes in the information on market risk that was disclosed in the Company's Form 10-Ks since 1997. Liquidity The Company's principal source of asset liquidity is marketable investment securities available for sale. At September 30, 2000, investment securities available for sale totaled $940 million, representing a decrease of $74.0 million from September 30, 1999. In addition, the Company generates significant liquidity from its operating activities. The Company's profitability during the first nine months of 2000 and 1999 generated substantial cash flows, which are included in the totals provided from operations of $68.4 million and $71.4 million, respectively. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. During the first nine months of 2000, the Company experienced a $107.3 million increase in deposits which, added to a $4.5 million increase resulting from the issuance of new shares of common stock primarily to meet stock option program requirements, account for cash provided by the Company's financing activities. These cash inflows were offset by decreases in short- and long-term debt of $127.9 million and $10.5 million, respectively, and the effect of stock repurchase programs and dividends paid to shareholders of $39.3 million and $20.0 million, respectively. The Company uses cash flows from operating and financing activities primarily to invest in loans and investment securities. Purchases of investment securities net of maturities decreased $68.5 million during the first nine months of 2000 compared to an increase of $71.6 million during the comparable period in 1999. The Company's more aggressive loan marketing strategies resulted in increased net loan disbursements, which totaled $78.7 million and $29.2 million for the first nine months of 2000 and 1999, respectively. The Company anticipates increasing its cash level from operations through 2000 due to increased profitability and retained earnings. For the same period, it is anticipated that demand for loans will continue to increase, particularly in the commercial and real estate categories. The growth in deposit balances is expected to follow the anticipated growth in loan balances. Line of Credit On July 31, 1998, the Company entered into an agreement with a well-established financial institution, establishing a line of credit for general corporate purposes including the repurchase of stock. The line of credit, which had a one-year term and an available commitment ranging from $60.0 million to $37.5 million, was canceled in the third quarter of 1999. The Company replaced this available source of cash inflow with increased cash dividends from its affiliates. Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. Since the beginning of 1994 and through September 30, 2000, the Board of Directors of the Company has authorized the repurchase of 8.0 million shares of the Company's common stock from time to time, subject to appropriate regulatory and other accounting requirements. The Company acquired 628,000 shares of its common stock in the open market during the first nine months of 2000, (128,000 in the third quarter) at an average price of approximately of $27 per share, 1,000,000 in 1999, 996,000 in 1998, 1,040,886 in 1997, and 1,207,800, 721,350 and 93,000 in 1996, 1995 and 1994, respectively. So far, these repurchases have been made periodically in the open market with the intention to lessen the dilutive impact of issuing new shares to meet stock performance, option plans, acquisitions and other requirements. In addition to these systematic repurchases, a new plan to repurchase up to 1,750,000 of the Company's shares of common stock (the "Program") was approved by the Board of Directors on August 24, 2000. The Company's strong capital position and healthy profitability contributed to the approval of the Program, which was being implemented to optimize the Company's use of equity capital and enhance shareholder value. The Program supercedes a similar program previously in place as approved by the Board of Directors on August 26, 1999, under which 1,507,261 shares at an average price of approximately $29 per share (40,000 for the third quarter and 710,000 for the first nine months of 2000) were purchased in open market transactions. As of September 30, 2000, there had been no market share repurchases pursuant to the Program. 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 $331.3 million at September 30, 2000. This amount reflects the issuance of approximately 671,000 shares of common stock totaling $19.7 million associated with the acquisition of FCB and the generation and retention of earnings, partially offset by the effect of stock repurchases and dividends paid to shareholders. The level of equity at September 30, 2000 represents an increase of $14.9 million or 5 percent from September 30, 1999, and an increase of $30.7 million, or 10 percent, from December 31, 1999. As a consequence of the increase in shareholders' equity, the Company's ratio of equity to total assets increased to 8.32 percent at September 30, 2000, from 8.13 percent and 7.72 percent at September 30 and December 31, 1999, respectively. The ratio of Tier I capital to risk-adjusted assets was 10.35 percent at September 30, 2000, compared to 10.24 percent at September 30, 1999, and 9.82 percent at December 31, 1999. Total capital to risk-adjusted assets was 11.76 percent at September 30, 2000, compared to 12.16 percent at September 30, 1999, and 11.75 percent at December 31, 1999. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated: ----------------------------------------------------------------- At Minimum At September 30, December 31, Regulatory ------------------ ------------- Capital 2000 1999 1999 Requirements ----------------------------------------------------------------- Tier I Capital 10.35% 10.24% 9.82% 4.00% Total Capital 11.76% 12.16% 11.75% 8.00% Leverage ratio 8.04% 7.96% 7.48% 4.00% The risk-based Tier I capital ratio increased at September 30, 2000, compared to September 30 and December 31, 1999, primarily due to the increase in the total level of shareholders' equity due to the FCB's acquisition and the generation and retention of earnings, partially offset by common stock repurchases and dividends paid to shareholders. The reduction in the Total Capital ratio from September 31, 1999, includes a reduction in the allowable portion of a subordinated capital note issued by Westamerica Bank, which is discounted, for regulatory capital purposes, as it approaches maturity. 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". Interim Periods In June, 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which amends the disclosure requirements of Statement No. 52, "Foreign Currency Translations" and of Statement No. 107, "Disclosures about Fair Value of Financial Instruments." Under the provisions of SFAS 133, the Company is required to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gain and losses) depends on the intended use of the derivative and the resulting operation. SFAS No. 133 would have been effective for all fiscal years beginning after June 15, 1999, except that SFAS No. 137 ("Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133") delayed the effective date of SFAS No. 133 for one year. The effective date is for all fiscal quarters beginning after all fiscal years after June 30, 2000. Earlier application is permitted. Certain sections of SFAS No. 133 were amended in June, 2000, when the FASB issued SFAS No. 138, an amendment of SFAS No. 133, which nullifies or modifies the consensuses reached in a number of issues addressed by the emerging issues task force. Retroactive application of SFAS No. 133 is not permitted. The Company does not believe that the adoption of SFAS 133 will have a material impact on its financial statements. On March 31, 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25." This Interpretation provides guidance for issues that have arisen in applying APB Opinion No. 25 Accounting for Stock Issued to Employees. FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricing and the definition of an employee which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards are effective for awards modified after January 12, 2000. Forward-Looking Statement Disclosure Readers are cautioned that forward-looking statements contained in this report 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." 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. 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: October 31, 2000 /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 On August 17, 2000, the Company filed a report on Form 8-K announcing that the acquisition of First Counties Bank had been finalized as of that day. The acquisition had been approved by First Counties Bank shareholders on June 22, 2000, and by the Federal Reserve Bank Board on August 2, 2000. On August 24, 2000, the Company filed a report on Form 8-K in connection with an open ended stock repurchase plan whereby the Board of Directors of the Company authorized the Company to repurchase, as conditions warrant, up to an aggregate of 2,750,000 shares of its common stock through open-market and privately negotiated transactions.