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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from .....to.......
Commission File Number 1-9383
WESTAMERICA BANCORPORATION
(Exact name of the registrant as specified in its charter)
CALIFORNIA
(State of incorporation)
94-2156203
(I.R.S. Employer Identification Number)
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 257-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
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 by check mark if disclosure of delinquent files
pursuant to item 405 of Regulation S-K (Section 229.405
of this chapter) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to
the closing price of the stock, as of March 20, 2000:
$819,200,000
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 20, 2000
Title of Class
Common Stock, no par value
Shares Outstanding
36,400,279
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 20, 2000
for Annual Meeting of Shareholders
to be held on April 27, 2000
Incorporated into:
Part III
* Only selected portions of the documents specified are
incorporated by reference into this report, as more
particularly described herein. Except to the extent
expressly incorporated herein by reference, such documents
shall not be deemed to be filed as part of this Annual
Report on Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1 Business 1
Item 2 Description of Properties 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 8 Financial Statements and Supplementary Data 48
Item 9 Changes in and Disagreements on Accounting and Financial
Disclosure 79
PART III
Item 10 Directors and Executive Officers of the Registrant 79
Item 11 Executive Compensation 80
Item 12 Security Ownership of Certain Beneficial Owners and
Management 80
Item 13 Certain Relationships and Related Transactions 80
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 81
PART I
ITEM I. Business
Certain statements in this Annual Report on Form 10-K
include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject of the "safe harbor" created by
those sections. These forward-looking statements involve
certain risks and uncertainties that could cause actual
results to differ materially from those in the forward
looking statements. Such risks and uncertainties include,
but are not limited to, the following factors: competitive
pressure in the banking industry significantly increasing;
changes in the interest rate environment reducing margins;
general economic conditions, either nationally or
regionally, are less favorable than expected, resulting
in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses;
changes in the regulatory environment, changes in business
conditions; volatility of rate sensitive deposits;
operational risks including data processing system
failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
See also "Certain Additional Business Risks" herein and
other risk factors discussed elsewhere in this Report.
WESTAMERICA BANCORPORATION (the "Company") is a bank
holding company registered under the Bank Holding Company
Act of 1956 ("BHC"), as amended. The Company was
incorporated under the laws of the State of California as
"Independent Bankshares Corporation" on February 11, 1972.
Its principal executive offices are located at 1108 Fifth
Avenue, San Rafael, California 94901, and its telephone
number is (415) 257-8000. The Company provides a full
range of banking services to individual and corporate
customers in Northern and Central California through its
subsidiary banks, Westamerica Bank and Bank of Lake County
(the "Banks"). The Banks are subject to competition from
other financial institutions and regulations from certain
agencies and undergo periodic examinations by those
regulatory authorities. In addition, the Company also owns
100 percent of the capital stock of Westamerica Commercial
Credit, Inc., a company engaged in financing accounts
receivable and inventory lines of credit and term business
loans and 100 percent of Community Banker Services
Corporation, a company engaged in providing the Company
and its subsidiaries data processing services and other
support functions.
The Company was originally formed pursuant to a plan of
reorganization among three previously unaffiliated banks:
Bank of Marin, Bank of Sonoma County and First National
Bank of Mendocino County (formerly First National Bank of
Cloverdale). The reorganization was consummated on
December 31, 1972 and, on January 1, 1973, the Company
began operations as a bank holding company. Subsequently,
the Company acquired Bank of Lake County (a California
chartered bank) in 1974, Gold Country Bank in 1979 and
Vaca Valley Bank in 1981, in each case by the exchange of
the Company's Common Stock for the outstanding shares of
the acquired banks.
In mid-1983, the Company consolidated the six subsidiary
banks into a single subsidiary bank. The consolidation was
accomplished by the merger of the five state-chartered
banks (Bank of Marin, Bank of Sonoma County, Bank of Lake
County, Gold Country Bank and Vaca Valley Bank) into First
National Bank of Mendocino County which subsequently
changed its name to Westamerica Bank ("WAB"), a national
banking association organized and existing under the laws
of the United States.
In August, 1988, the Company formed a new bank, but
named it Bank of Lake County, National Association, and
effected the sale of WAB's assets and liabilities of
its three Lake County branches to the newly formed bank.
In August, 1988, the sale of Bank of Lake County, National
Association to Napa Valley Bancorp was consummated.
On February 28, 1992, the Company acquired John Muir
National Bank through a merger of such bank with and
into WAB in exchange for the issuance of the Company's
Common Stock for all the outstanding shares of John
Muir National Bank. The business transaction was
accounted for on a pooling-of-interests basis.
On April 15, 1993, the Company acquired Napa Valley
Bancorp, a bank holding company, whose subsidiaries
included Napa Valley Bank, 88 percent interest in Bank of
Lake County, 50 percent interest in Sonoma Valley Bank,
Cession Valley Bank and Napa Valley Bancorp Services
Corporation, which was established to provide data
processing and other services to Napa Valley Bancorp's
subsidiaries. This business transaction was accounted for
on a pooling-of-interests basis. Shortly after, Cession
Valley Bank was merged into WAB, the name of Napa Valley
Bancorp Services Corporation was changed to Community
Banker Services Corporation and the Company sold its 50
percent interest in Sonoma Valley Bank. The Company
retained its 88 percent interest in Bank of Lake County.
In June 1993, the Company accepted from WAB a dividend in
the form of all outstanding shares of capital stock of
WAB's subsidiary, Weststar Mortgage Corporation, a
California Corporation established to conduct mortgage
banking activities. Immediately after the receipt of this
dividend, the Company contributed all of the capital stock
of Weststar Mortgage Corporation to its subsidiary,
Community Banker Services Corporation.
WAB and Bank of Lake County became state-chartered banks
in June 1993 and December 1993, respectively.
In December 1994, the Company completed the purchase of the
remaining 12 percent investment in Bank of Lake County
from outside investors, becoming the sole owner of Bank of
Lake County.
On January 31, 1995, the Company acquired PV Financial,
parent company of PV National Bank, through a merger of
such bank with and into WAB in exchange for the
issuance of shares of the Company's common stock for
all the outstanding shares of PV Financial. The
business combination was accounted for on a
pooling-of-interests basis.
On June 6, 1995, the merger of CapitolBank Sacramento with
and into WAB became effective. Under the terms of the
merger, the Company issued shares of its common stock in
exchange for all of CapitolBank Sacramento's common stock.
The business combination was accounted for on a
pooling-of-interests basis.
On July 17, 1995, the Company acquired North Bay Bancorp,
parent company of Novato National Bank. Under the terms of
the merger agreement, the Company issued shares of its
common stock in exchange for all of the outstanding shares
of common stock of North Bay Bancorp. The subsidiary bank
was merged with and into WAB. The business combination was
accounted for on a pooling-of-interests basis.
On April 12, 1996 Napa Valley Bank was merged into WAB.
In November 1996, the Company finalized the formation
of a new subsidiary, Westamerica Commercial Credit,
Inc. which engages in financing accounts receivable and
inventory lines of credit and term business loans.
On April 12, 1997, the Company acquired ValliCorp
Holdings, Inc., parent company of ValliWide Bank, the
largest independent bank holding company headquartered in
Central California. The acquisition became effective
through the issuance of shares of the Company's common
stock in exchange for all of the outstanding shares of
ValliCorp Holdings, Inc. The business combination was
accounted for on a pooling-of-interests basis. ValliWide
Bank remained as a separate subsidiary bank of the Company.
On June 20, 1997, ValliWide Bank ceased to exist as a
subsidiary of the Company, when it was merged with and
into WAB.
On January 22, 1998, the Board of Directors of the Company
authorized a three-to-one split of the Company's common
stock in which each share of the Company's common stock is
converted into three shares, with record and effective
dates of February 10 and February 25, 1998, respectively.
At December 31, 1999, the Company had consolidated assets
of approximately $3.89 billion, deposits of approximately
$3.07 billion and shareholders' equity of approximately
$300.6 million.
General
Westamerica Bancorporation is a community oriented bank
holding company headquartered in San Rafael, California.
The principal communities served are located in Northern
and Central California, from Mendocino, Lake and Nevada
Counties in the North, to Kern and San Luis Obispo
counties in the South. The Company's strategic focus is on
the banking needs of small businesses. The Company chose
this particular focus in the late 1980's as it recognized
that concentrating on a few niche markets was the key to
the Company's profitable survival in the consolidating
banking business.
Certain Additional Business Risks
The Company's business, financial condition and operating
results can be impacted by a number of factors including,
but not limited to, those set forth below, any one of
which could cause the Company's actual results to vary
materially from recent results or from the Company's
anticipated future results.
Shares of Company Common Stock eligible for future sale
could have a dilutive effect on the market for Company
Common Stock and could adversely affect the market price.
The Articles of Incorporation of the Company authorize the
issuance of 150 million shares of common stock (and two
classes of 1 million shares each, denominated "Class B
Common Stock" and "Preferred Stock", respectively) of
which approximately 37.1 million were outstanding at
December 31, 1999. Pursuant to its stock option plans, at
December 31, 1999, the Company had exercisable options
outstanding of 1.5 million. As of December 31, 1999, 1.1
million shares of Company Common Stock remained available
for grants under the Company's stock option plans (and
stock purchase plan). Sales of substantial amounts of
Company Common Stock in the public market could adversely
affect the market price of Common Stock.
A portion of the loan portfolio of the Company is
dependent on real estate. At December 31, 1999, real
estate served as the principal source of collateral with
respect to approximately 56 percent of the Company's loan
portfolio. A worsening of current economic conditions or
rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other
collateral securing loans and the value of the
available-for-sale securities portfolio, as well as the
Company's financial condition and results of operations in
general and the market value of the Company's common
stock. Acts of nature, including earthquakes and floods,
which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also
negatively impact the Company's financial condition.
The Company is subject to certain operations risks,
including, but not limited to, data processing system
failures and errors and customers or employee fraud. The
Company maintains a system of internal controls to
mitigate against such occurrences and maintains insurance
coverage for such risks, but should such an event occur
that is not prevented or detected by the Company's
internal controls, uninsured or in excess of applicable
insurance limits, it could have a significant adverse
impact on the Company's business, financial condition or
results of operations. See also the section "Year 2000
Compliance" in the Management's Discussion and Analysis
contained in this report.
Employees
At December 31, 1999, the Company and its subsidiaries
employed 1,094 full-time equivalent staff. Employee
relations are believed to be good.
The Effect of Government Policy on Banking
The earnings and growth of the Company are affected not
only by local market area factors and general economic
conditions, but also by government monetary and fiscal
policies. Such policies influence the growth of loans,
investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business
and earnings of the Company cannot be predicted.
Additionally, state and federal tax policies can impact
banking organizations.
As a consequence of the extensive regulation of commercial
banking activities in the United States, the business of
the Company is particularly susceptible to being affected
by the enactment of federal and state legislation which
may have the effect of increasing or decreasing the cost
of doing business, modifying permissible activities or
enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and
prospects of the Company.
Regulation and Supervision of Bank Holding Companies
The following is not intended to be an exhaustive
description of the statutes and regulations applicable to
the Company's or the Banks' business. The description of
statutory and regulatory provisions is qualified in its
entirety by reference to the particular statutory or
regulatory provisions. Moreover, major new legislation and
other regulatory changes affecting the Company, the Banks,
banking, and the financial services industry in general
have occurred in the last several years and can be
expected to occur in the future. The nature, timing and
impact of new and amended laws and regulations cannot be
accurately predicted.
The Company is a bank holding company subject to the Bank
Holding Company Act of 1956, as amended ("BHCA"). The
Company reports to, registers with, and may be examined
by, the Board of Governors of the Federal Reserve System
("FRB"). The FRB also has the authority to examine the
Company's subsidiaries.
The Company is also a bank holding company within the
meaning of Section 3700 of the California Financial Code.
As such the Company and the Banks are subject to
examination by, and may be required to file reports with,
the California Commissioner of Financial Institutions (the
"Commissioner").
The FRB has significant supervisory and regulatory
authority over the Company and its affiliates. The FRB
requires the Company to maintain certain levels of
capital. See "Capital Standards." The FRB also has the
authority to take enforcement action against any bank
holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations or
conditions imposed in writing by the FRB. See "Prompt
Corrective Action and Other Enforcement Mechanisms."
Under the BHCA, a company generally must obtain the prior
approval of the FRB before it exercises a controlling
influence over a bank, or acquires directly or indirectly,
more than 5% of the voting shares or substantially all of
the assets of any bank or bank holding company. Thus, the
Company is required to obtain the prior approval of the
FRB before it acquires, merges or consolidates with any
bank or bank holding company; any company seeking to
acquire, merge or consolidate with the Company also would
be required to obtain the prior approval of the FRB.
The Company is generally prohibited under the BHCA from
acquiring ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly
in activities other than banking, managing banks or
providing services to affiliates of the holding company.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law
the Gramm-Leach-Bliley Act of 1999, also referred to as
Financial Services Modernization Act. The Financial
Services Modernization Act repeals the two affiliation
provisions of the Glass-Steagall Act: Section 20, which
restricted the affiliation of Federal Reserve Member Banks
with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer,
director or employee interlocks between a member bank and
any company or person "primarily engaged" in specified
securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly
preempt any state law restricting the establishment of
financial affiliations, primarily related to insurance.
The general effect of the law is to establish a
comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms,
and other financial services providers by revising and
expanding the BHCA framework to permit a holding company
system to engage in a full range of financial activities
through a new entity known as a Financial Holding Company.
"Financial activities" is broadly defined to include not
only banking, insurance and securities activities, but
also merchant banking and additional activities that the
Federal Reserve Board, in consultation with the Secretary
of the Treasury, determines to be financial in nature,
incidental to such financial activities or complementary
activities that do not pose a substantial risk to the
safety and soundness of depository institutions or the
financial system generally.
Generally, the Financial Services Modernization Act:
Repeals historical restrictions on, and eliminates many
federal and state law barriers to, affiliations among
banks, securities firms, insurance companies, and other
financial services providers;
Provides a uniform framework for the functional
regulation of the activities of banks, savings
institutions and their holding companies;
Broadens the activities that may be conducted by
national banks, banking subsidiaries of bank holding
companies and their financial subsidiaries;
Provides an enhanced framework for protecting the
privacy of consumer information;
Adopts a number of provisions related to the
capitalization, membership, corporate governance, and
other measures designed to modernize the Federal Home
Loan Bank system;
Modifies the laws governing the implementation of the
Community Reinvestment Act, sometimes referred to as
CRA; and
Addresses a variety of other legal and regulatory
issues affecting both day-to-day operations and
long-term activities of financial institutions.
In order for a company to take advantage of the ability to
affiliate with other financial services providers, it must
become a "Financial Holding Company" as permitted under an
amendment to the BHCA. To become a Financial Holding
Company, a company would file a declaration with the
Federal Reserve Board, electing to engage in activities
permissible for Financial Holding Companies and certifying
that the company is eligible to do so because all of its
insured depository institution subsidiaries are
well-capitalized and well-managed (see the section
"Capital Standards"). In addition. the Federal Reserve
Board must also determine that each of a holding company's
insured depository institution subsidiaries has at least a
"satisfactory" CRA rating (see the section "Community
Reinvestment Act and Fair Lending Developments").
Westamerica Bancorporation meets the requirements to make
an election to become a Financial Holding Company and
Management is examining strategic business plans to
determine whether, based upon market conditions, relative
financial condition, regulatory capital requirements,
general economic conditions, and other factors, it would
be desirable to utilize any of the expanded powers
provided in the Financial Services Modernization Act.
No such election has been made as of the date of this
Report.
The Financial Services Modernization Act also permits
national banks to engage in expanded activities through
the formation of financial subsidiaries. A national bank
may have a subsidiary engaged in any activity authorized
for national banks directly or any financial activity,
except for insurance underwriting, insurance investments,
real estate investment or development, or merchant
banking, which may only be conducted through a subsidiary
of a Financial Holding Company. Financial activities
include all activities permitted under new sections of the
BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary,
and each of its depository institution affiliates, must be
"well-capitalized" and "well-managed." The total assets of
all financial subsidiaries may not exceed the lesser of
45% of a bank's total assets, or $50 billion. A national
bank must exclude from its assets and equity all equity
investments, including retained earnings, in a financial
subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also
have policies and procedures to assess financial
subsidiary risk and to protect the bank from such risks
and potential liabilities.
Management does not believe that the Financial Services
Modernization Act will have a material adverse effect on
the Company's operations in the near-term. However, to the
extent that it permits banks, securities firms and
insurance companies to affiliate, the financial services
industry may experience further consolidation. The Act may
result in increased competition among smaller companies
offering financial products and larger ones, many of which
may have substantially more financial resources.
The FRB generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose
undue pressure on the capital of subsidiary banks or would
be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's
financial position. The FRB's policy is that a bank
holding company should not continue its existing rate of
cash dividends on its common stock unless its net income
is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall
financial condition. See the section entitled
"Restrictions on Dividends and Other Distributions" for
additional restrictions on the ability of the Company and
its subsidiary banks (the "Banks") to pay dividends.
Transactions between the Company and the Banks are subject
to a number of other restrictions. FRB policies forbid the
payment by bank subsidiaries of management fees which are
unreasonable in amount or exceed the fair market value of
the services rendered (or, if no market exists, actual
costs plus a reasonable profit). The Company may only
borrow from the Banks if the loan is secured by marketable
obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a
low-quality asset to a depository institution subsidiary.
Comprehensive amendments to federal regulation governing
bank holding companies and change in bank control
("Regulation Y") became effective in 1997, and are
intended to improve the competitiveness of bank holding
companies by, among other things: (i) expanding the list
of permissible nonbanking activities in which well-run
bank holding companies may engage without prior FRB
approval, (ii) streamlining the procedures for well-run
bank holding companies to obtain approval to engage in
other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding
companies and their nonbank subsidiaries. Amended
Regulation Y also provides for a streamlining and
expedited review process for bank acquisition proposals
submitted by well-run bank holding companies and
eliminates certain duplicative reporting requirements when
there has been a further change in bank control or in bank
directors or officers after an earlier approved change.
These changes to Regulation Y are subject to numerous
qualifications, limitations and restrictions. In order for
a bank holding company to qualify as "well-run," both it
and the insured depository institutions that it controls
must meet the "well capitalized" and "well managed"
criteria set forth in Regulation Y.
Bank Supervision and Regulation
The Banks are California chartered banks insured by the
Federal Deposit Insurance Corporation (the "FDIC"), and as
such are subject to regulation, supervision and regular
examination by the California Department of Financial
Institutions ("DFI") and the FDIC. As members of the
Federal Reserve System, the Banks' primary federal
regulator is the FRB. The regulations of these agencies
affect most aspects of the Banks' business and prescribe
permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the
permissible scope of the Banks' activities and various
other requirements.
In addition to federal banking law, the Banks are also
subject to applicable provisions of California law. Under
California law, a state chartered bank is subject to
various restrictions on, and requirements regarding, its
operations and administration including the maintenance of
branch offices and automated teller machines, capital and
reserve requirements, deposits and borrowings, stockholder
rights and duties, and investments and lending activities.
California law permits a state chartered bank to invest in
the stock and securities of other corporations, subject to
a state-chartered bank receiving either general
authorization or, depending on the amount of the proposed
investment, specific authorization from the Commissioner.
The FDIC Improvement Act ("FDICIA"), however, imposes
limitations on the activities and equity investments of
state chartered, federally insured banks. FDICIA also
prohibits a state bank from engaging as a principal in any
activity that is not permissible for a national bank,
unless the bank is adequately capitalized and the FDIC
approves the activity after determining that such activity
does not pose a significant risk to the deposit insurance
fund. The FDIC rules on activities generally permit
subsidiaries of banks, without prior specific FDIC
authorization, to engage in those that have been approved
by the FRB for bank holding companies because such
activities are so closely related to banking to be a
proper incident thereto. Other activities generally
require specific FDIC prior approval, and the FDIC may
impose additional restrictions on such activities on a
case-by-case basis in approving applications to engage in
otherwise impermissible activities.
Capital Standards
The federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of
capital adequacy that reflects the degree of risk
associated with a banking organization's operations for
both transactions reported on the balance sheet as assets
and transactions, such as letters of credit and recourse
agreements, which are recorded as off balance sheet items.
A banking organization's risk-based capital ratios are
obtained by dividing its qualifying capital by its total
risk-adjusted assets and off balance sheet items. The
regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum
of Tier 1 capital and limited amounts of Tier 2 capital)
and Tier 1 capital. Tier 1 capital generally consists of
common stock, retained earnings, and certain types of
qualifying preferred stock, less most other intangible
assets. Tier 2 capital may consist of a limited amount of
the allowance for loan and lease losses, certain types of
preferred stock not qualifying as Tier 1 capital, term
subordinated debt and certain other instruments with some
characteristics of equity. The federal banking agencies
require a minimum ratio of qualifying total capital to
risk-adjusted assets and off balance sheet items of 8%,
and a minimum ratio of Tier 1 capital to adjusted average
risk-adjusted assets and off balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking
regulators require banking organizations to maintain a
minimum amount of Tier 1 capital to adjusted average total
assets, referred to as the leverage capital ratio. For a
banking organization rated in the highest of the five
categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. For all banking
organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis
points above the 3% minimum. The effective minimum
leverage ratio, for all practical purposes, must be at
least 4% or 5%.
As of December 31, 1999, the Company's and the Banks'
respective ratios exceeded applicable regulatory
requirements. See Note 8 to the consolidated financial
statements for capital ratios of the Company and the
Banks, compared to the standards for well-capitalized
depository institutions and for minimum capital
requirements.
Prompt Corrective Action and Other Enforcement Mechanisms
FDICIA requires each federal banking agency to take prompt
corrective action to resolve the problems of insured
depository institutions, including but not limited to
those that fall below one or more prescribed minimum
capital ratios. The law requires each federal banking
agency to promulgate regulations defining the following
five categories in which an insured institution will be
placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically
undercapitalized.
If an insured depository institution is undercapitalized,
it will be closely monitored by the appropriate federal
banking agency. Undercapitalized institutions must submit
an acceptable capital restoration plan with a guarantee of
performance issued by the holding company. Further
restrictions and sanctions are required to be imposed on
insured depository institutions that are critically
undercapitalized.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be
subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting
their business or for violations of any law, rule,
regulation or any condition imposed in writing by the
agency or any written agreement with the agency.
Additionally, a holding company's inability to serve as a
source of strength to its subsidiary banking organizations
could serve as an additional basis for a regulatory action
against the holding company.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions and
required federal banking regulators to adopt overall
safety and soundness standards for depository institutions
related to internal control, loan underwriting and
documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by
undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive
officer, director, principal shareholder or related
interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for
deposits by certain employee benefits accounts.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured
depository institution to declare a cash dividend or other
distribution with respect to capital is subject to
statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the
earnings, financial condition and cash needs of the
institution, as well as general business conditions.
FDICIA prohibits insured depository institutions from
paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions,
including dividends, if, after such transaction, the
institution would be undercapitalized.
In addition to the restrictions imposed under federal law,
banks chartered under California law generally may only
pay cash dividends to the extent each payment does not
exceed the lesser of retained earnings of the bank or the
bank's net income for its last three fiscal years (less
any distributions to shareholders during that period). In
the event a bank desires to pay cash dividends in excess
of such amount, the bank may pay a cash dividend with the
prior approval of the Commissioner in an amount not
exceeding the greatest of the bank's retained earnings,
the bank's net income for its last fiscal year, or the
bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository
institution from engaging in business practices which are
considered to be unsafe or unsound, possibly including
payment of dividends or other payments under certain
circumstances even if such payments are not expressly
prohibited by statute.
Premiums for Deposit Insurance and Assessments for
Examinations
All of the bank subsidiaries of the Company have their
deposits insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. The FDIC is authorized to borrow
up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are
members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed
to member institutions. Such premiums must be sufficient
to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured
deposits. FDICIA also provides authority for special
assessments against insured deposits. No assurance can be
given at this time as to what the future level of premiums
will be.
Community Reinvestment Act and Fair Lending Developments
The Banks are subject to certain fair lending requirements
and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA")
activities. The CRA generally requires the federal banking
agencies to evaluate the record of a financial institution
in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In
addition to substantive penalties and corrective measures
that may be required for a violation of certain fair
lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when
regulating and supervising other activities.
Pending Legislation and Regulations
There are pending legislative proposals to reform the
Glass-Steagall Act to allow affiliations between banks and
other firms engaged in "financial activities", including
insurance companies and securities firms.
Certain other pending legislative proposals include bills
to let banks pay interest on business checking accounts,
to require "know your customer" policies, to cap consumer
liability for stolen debit cards, and to give judges the
authority to force high-income borrowers to repay their
debts rather than cancel them through bankruptcy.
While the effect of such proposed legislation and
regulatory reform on the business of financial
institutions cannot be accurately predicted at this time,
it seems likely that a significant amount of consolidating
in the banking industry will continue.
Competition
In the past, an independent bank's principal competitors
for deposits and loans have been other banks (particularly
major banks), savings and loan associations and credit
unions. To a lesser extent, competition was also provided
by thrift and loans, mortgage brokerage companies and
insurance companies. Other institutions, such as brokerage
houses, mutual fund companies, credit card companies, and
even retail establishments have offered new investment
vehicles which also compete with banks for deposit
business. The direction of federal legislation in recent
years seems to favor competition between different types
of financial institutions and to foster new entrants into
the financial services market, and it is anticipated that
this trend will continue.
The enactment of the Interstate Banking and Branching Act
in 1994 and the California Interstate Banking and
Branching Act of 1995 have increased competition within
California. Regulatory reform, as well as other changes in
federal and California law will also affect competition.
While the impact of these changes, and of other proposed
changes, cannot be predicted with certainty, it is clear
that the business of banking in California will remain
highly competitive.
According to information obtained by the Company through
an independent market research firm, WAB was the third
largest financial institution in terms of total deposits
in Marin County at December 31, 1998, at which date it had
approximately 12 percent of total deposits held in
federally insured depository institutions in that county.
According to the same source of information and in terms
of total deposits, as of December 31, 1998 WAB ranked
fourth in WAB's Sonoma-Mendocino counties service area,
with approximately a 9 percent share of the market, fourth
in the Fresno service area with approximately 8 percent
of total deposits, and was fourth in the Solano county
service area, with a market share of approximately 9
percent. Completion of the merger with ValliWide Bank in
1997 resulted in the formation of the "South Valley
Region" encompassing portions of Kern, San Luis Obispo,
Tulare and Kings counties. In terms of total deposits, WAB
ranked, as of December 31, 1998, sixth among all financial
institutions servicing the area with approximately 7
percent of the market. In addition, WAB's market share in
the Sacramento-Placer-Nevada counties service area was
approximately 6 percent, ranking sixth among its
competitors. In the Yosemite service area, encompassing
offices throughout Stanislaus, Sonora, East Sonora and
Merced counties, WAB ranked eighth among its competitors
with 5 percent of total deposits. The share of the market
for deposits and loans held by WAB in San Francisco and
Alameda Counties is not significant. According to the same
source of information, WAB ranked second in terms of total
deposits in the Napa Valley service area as of December
31, 1998, with approximately 14 percent market share. The
same source of data reports that BLC ranked second, in
terms of total deposits, in market share in the Lake
County service area with 16 percent of the total.
The Banks provide checking and savings deposit services as
well as commercial, real estate and personal loans. In
addition, most of the branches offer safe deposit
facilities, automated teller units, collection services
and other investment services.
The Banks believe that personal, prompt, professional
service and community identity are important in the
banking business. To this end, each one of the Banks has
sought to retain its community identity and has emphasized
personalized services through "big bank resources with
small bank resourcefulness".
Competitive conditions continue to intensify as various
legislative enactments have continued to dissolve
historical barriers to the financial markets. Competition
is expected to further increase in the state of California
as a result of legislation enacted in 1994 and 1995.
Legislative changes, as well as technological and economic
factors, can be expected to have an ongoing impact on
competitive conditions within the financial services
industry. As an active participant in the financial
markets, the Company believes that it continually adapts
to these changing competitive conditions.
ITEM 2. Properties
Branch Offices and Facilities
The Banks are engaged in the banking business through 90
offices in 22 counties in Northern and Central California
including eleven offices in Marin County, eleven in Fresno
County, nine in Sonoma County, seven in Napa County, six
in Solano County, six in Kern County, five in Stanislaus
County, five in Contra Costa County, four in Lake County,
four in San Luis Obispo County, three in Mendocino County,
three in Sacramento County, two in Nevada County, two in
Placer County, two in Tulare County, two in Tuolumne
County, two in Alameda County, one in San Francisco
County, one in Kern County, one in Madera County, one in
Merced County, one in Yolo County and one in Kings County.
All offices are constructed and equipped to meet
prescribed security requirements.
The Company owns 37 branch office locations and one
administrative building and leases 53 banking offices.
Most of the leases contain multiple renewal options and
provisions for rental increases, principally for changes
in the cost of living index, property taxes and
maintenance.
ITEM 3. Legal Proceedings
Neither the Company or its subsidiaries is a party to any
material pending legal proceeding, nor is their property
the subject of any material pending legal proceeding,
except ordinary routine legal proceedings arising in the
ordinary course of the Company's business, none of which
are expected to have a material adverse impact upon the
Company's business, financial position or results of
operations.
ITEM 4. Submission of Matters to a Vote of Security
Holders
There were no matters submitted to a vote of the
shareholders during the fourth quarter of 1999.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is traded on the NASDAQ
National Market Exchange ("NASDAQ") under the symbol
"WABC". The following table shows the high and the low
prices for the common stock, for each quarter, as reported
by NASDAQ:
============================================================
1999: High Low
- ------------------------------------------------------------
First quarter $37.50 $31.63
Second quarter 37.13 30.00
Third quarter 36.50 28.94
Fourth quarter 35.13 26.63
1998:
First quarter $35.25 $30.67
Second quarter 36.38 28.50
Third quarter 33.63 23.63
Fourth quarter 37.25 23.88
============================================================
As of December 31, 1999, there were 8,710 shareholders of
record of the Company's common stock.
The Company has paid cash dividends on its common stock in
every quarter since its formation in 1972, and it is
currently the intention of the Board of Directors of the
Company to continue payment of cash dividends on a
quarterly basis. There is no assurance, however, that any
dividends will be paid since they are dependent upon
earnings, financial condition and capital requirements of
the Company and its subsidiaries. As of December 31, 1999,
$136.7 million was available for payment of dividends by
the Company to its shareholders, under applicable laws and
regulations.
See Note 17 to the consolidated financial statements
included in this report for additional information
regarding the amount of cash dividends declared and paid
on common stock for the two most recent fiscal years.
As discussed in Note 7 to the consolidated financial
statements, in December 1986, the Company declared a
dividend distribution of one common share purchase right
(the "Right") for each outstanding share of common stock.
The terms of the Rights were amended and restated on
September 28, 1989, on May 25, 1992 and on March 23, 1995.
In addition, the Board of Directors of the Company
approved a further amendment and restatement of the
Shareholder Rights Plan on October 28, 1999, to become
effective on November 19, 1999 and extend its maturity
until December 31, 2004. The new amended plan is very
similar in purpose and effect to the plan as it existed
prior to this amendment, aimed at helping the Board of
Directors to maximize shareholder value in the event of a
change of control of the Company and otherwise resist
actions that the Board considers likely to injure the
Company of its shareholders. In addition to extending the
maturity date of the plan an additional five years, the
other material changes to be reflected in the 1999 Rights
Amendment include: (1) an increase in the exercise price
to $75.00 per share; (2) a decrease in the redemption
price of each Right to $.001; (3) a reduction in the
amount of securities required to be acquired for a person
or entity to become an Acquiring Person, thus triggering
the shareholders' rights from 15 percent to 10 percent;
and (4) the replacement of the Rights Agent to Harris
Trust and Savings Bank.
The Westamerica Rights are not exercisable until
Distribution Date, defined as the earlier to occur of (I)
a public announcement that, without the prior consent of
the Company, a Person (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial
ownership of securities having 10 percent or more of the
voting power of all outstanding voting securities of the
Company, or (ii) ten days (unless such date is extended by
the Board of Directors) following the commencement of (or
a public announcement of an intention to make) a tender
offer or exchange offer which would result in any
Person or group of related Persons becoming an Acquiring
Person (the earlier of such dates being called the
"Distribution Date"). Until the Distribution Date the
Rights will be evidenced, with respect to any of the
Common Stock certificates outstanding as of the Record
Date, by such Common Stock certificate together with this
Amended and Restated Summary of Rights. The 1999 Rights
Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with Common Stock
certificates.
ITEM 6. Selected Financial Data
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
=============================================================================================
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year ended December 31
Interest income $257,656 $266,820 $270,670 $274,182 $283,704
Interest expense 78,456 86,665 88,054 91,700 95,627
- ---------------------------------------------------------------------------------------------
Net interest income 179,200 180,155 182,616 182,482 188,077
Provision for loan losses 4,780 5,180 7,645 12,306 15,229
Non-interest income 40,174 37,805 37,013 36,307 34,227
Non-interest expense 100,133 101,408 137,878 136,051 141,960
- ---------------------------------------------------------------------------------------------
Income before income taxes 114,461 111,372 74,106 70,432 65,115
Provision for income taxes 38,373 37,976 25,990 23,605 21,930
- ---------------------------------------------------------------------------------------------
Net income $76,088 $73,396 $48,116 $46,827 $43,185
=============================================================================================
Earnings per share:
Basic $1.97 $1.76 $1.12 $1.10 $0.99
Diluted 1.94 1.73 1.10 1.08 0.98
Per share:
Dividends paid $0.66 $0.52 $0.36 $0.30 $0.25
Book value at December 31 8.10 9.25 9.51 8.84 8.12
Average common shares outstanding 38,588 41,797 43,040 42,759 43,747
Average diluted common shares outstanding 39,194 42,524 43,827 43,358 44,274
Shares outstanding at December 31 37,125 39,828 42,799 42,889 43,228
At December 31
Loans, net 2,269,272 2,246,593 2,211,307 2,236,319 2,204,495
Total assets 3,893,187 3,844,298 3,848,444 3,866,774 3,880,979
Total deposits 3,065,344 3,189,005 3,078,501 3,228,700 3,270,907
Short-term borrowed funds 462,345 203,671 264,848 167,447 175,622
Debt financing and notes payable 41,500 47,500 52,500 58,865 40,932
Shareholders' equity 300,592 368,596 407,152 379,279 351,058
Financial Ratios:
For the year:
Return on assets 1.99% 1.94% 1.28% 1.24% 1.14%
Return on equity 23.31% 19.48% 12.71% 13.22% 12.73%
Net interest margin * 5.46% 5.52% 5.63% 5.54% 5.68%
Net loan losses to average loans 0.20% 0.20% 0.35% 0.51% 0.59%
Efficiency ratio * 43.19% 44.25% 60.15% 60.08% 63.86%
At December 31:
Equity to assets 7.72% 9.59% 10.58% 9.81% 9.05%
Total capital to risk-adjusted assets 11.75% 13.79% 14.76% 14.95% 14.39%
Loan loss reserve to loans 2.22% 2.23% 2.24% 2.23% 2.15%
* Fully taxable equivalent
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of
the Securities Act on 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the
forward-looking statements. Such risk and uncertainties include,
but are not limited to, the following factors: competitive pressure
in the banking industry increases significantly; changes in the
interest rate environment reduces margins; general economic
conditions, either nationally or regionally, are less favorable
than expected resulting in, among other things, a deterioration in
the credit quality and an increase in the allowance for possible
loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate-sensitive deposits;
operational risks including data processing system failures or
fraud; asset/liability matching and liquidity risks; and changes in
the securities markets. For further information on risks and
uncertainties see also "Certain Additional Business Risks" and
other risks factors discussed elsewhere in this report.
The following discussion addresses information pertaining to the
financial condition and results of operations of Westamerica
Bancorporation and Subsidiaries (the "Company") that may not be
otherwise apparent from a review of the consolidated financial
statements and related footnotes. It should be read in conjunction
with those statements and notes found on pages 49 through 76, as
well as with the other information presented throughout the report.
NET INCOME
The Company achieved earnings of $76.1 million in 1999,
representing a 4 percent increase from the $73.4 million earned in
1998 and 58 percent higher than 1997 earnings of $48.1 million.
Components of Net Income
- ---------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
(In millions)
Net interest income * $191.6 $191.4 $192.2
Provision for loan losses (4.8) (5.2) (7.6)
Non-interest income 40.2 37.8 37.0
Non-interest expense (100.1) (101.4) (137.9)
Taxes * (50.8) (49.2) (35.6)
- ---------------------------------------------------------------------------------
Net income $76.1 $73.4 $48.1
==================================================================================
Net income as a percentage of
average total assets 1.99% 1.94% 1.28%
==================================================================================
Average total assets $3,828.3 $3,778.5 $3,749.7
==================================================================================
* Fully taxable equivalent (FTE)
Diluted earnings per share in 1999 were $1.94, compared to $1.73
and $1.10 in 1998 and 1997, respectively.
Earnings in 1999 were favorably affected, compared to 1998, by
increased non-interest income, a reduction in non-interest expense
reflective of continued expense controls, a lower loan loss provision
in recognition of improvements in the credit quality of the loan
portfolio, and a slight increase in net interest income primarily
due to higher average earning-asset balances partially offset by
lower net interest margin.
During 1998, the Company benefited from lower non-interest expense
reflecting cost controls exercised after the ValliCorp Holdings,
Inc. merger (the "Merger"), a lower loan loss provision resulting
from improved credit quality and lower net credit losses, and
higher non-interest income. Prior year non-interest expense
included approximately $18.8 million ($12.8 million after tax) in
charges associated with the Merger effected on April 12, 1997.
Lower net interest income was primarily the result of lower
earning-asset yields in part offset by a decrease in funding costs.
The Company's return on average total assets was 1.99 percent in
1999, compared to 1.94 percent and 1.28 percent in 1998 and 1997,
respectively. Return on average equity in 1999 was 23.31 percent,
compared to 19.48 percent and 12.71 percent in the two previous
years.
NET INTEREST INCOME
The Company's primary source of revenue is net interest income,
which is the difference between interest income on earning assets
and interest expense on interest-bearing liabilities. Net interest
income (FTE) in 1999 increased $200 thousand from 1998 to $191.6
million. Comparing 1998 to 1997, net interest income (FTE)
decreased $800 thousand.
Components of Net Interest Income
- ---------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
(In millions)
Interest income $257.7 $266.8 $270.7
Interest expense (78.5) (86.7) (88.1)
FTE adjustment 12.4 11.3 9.6
- ---------------------------------------------------------------------------------
Net interest income (FTE) $191.6 $191.4 $192.2
=================================================================================
Net interest margin (FTE) 5.46% 5.52% 5.63%
=================================================================================
Interest income (FTE) decreased $8.0 million from 1998 to 1999,
primarily due to a 33 basis point decrease in earning-asset yields,
a combination of 47 basis points lower loan yields and a 4 basis
points decrease in investments yields. These changes were
reflective of a general decline in market rates, resulting in all
categories of loan and investment securities yields being lower
than the prior year. Partially offsetting these changes,
earning-asset average balances increased $47.1 million from 1998,
with loan and investment securities average balances increasing
$30.3 million and $17.5 million, respectively, from 1998. The
increase in loan balances was primarily concentrated in targeted
commercial credits with real estate collateral and automobile
dealer paper, partially offset by decreases in commercial,
residential real estate and other consumer loans, including
revolving lines of credit. The increase in investment securities
portfolio balances was comprised of higher U.S. agency,
tax-free state and municipal securities as well as corporate
securities, partially offset by decreases in U.S. Treasury and
participation certificates average balances. The revenue decrease
in 1999 was more than offset by a $8.2 million decrease in interest
expense. This was the result of a decrease of 36 basis points in
rates paid on interest-bearing liabilities combined with a $65.7
million increase in the average balance of interest-free demand
deposits, in part offset by a $36.4 million increase in the
interest-bearing liabilities average balances.
Interest income (FTE) in 1998 decreased $2.2 million from 1997,
primarily due to a 34 basis point decrease in loan yields,
reflecting the general interest rate environment, partially offset
by an increase of 9 basis points in investment yields, resulting in
a combined decrease of 18 basis points in earning-asset yields. The
effect of this decline was in part offset by a $50.9 million
increase in average balances, with loans and investment securities
growing $14.1 million and $36.8 million, respectively, from 1997
levels. The increase in loans was concentrated in targeted
commercial and residential real estate credits, and the increase in
investment balances was primarily due to increases in tax-free and
corporate securities. The decrease in interest income during 1998
was partially offset by a $1.4 million reduction in interest
expense. This decrease was primarily due to a reduction of 13 basis
points in rates paid on deposits combined with an $11.0 million
increase in the average balance of non-interest bearing demand
deposits, in part offset by a $19.8 million increase in the average
balance of interest-bearing liabilities.
The following tables present, for the periods indicated, information
regarding the 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
Yields/rates and interest margin
- ---------------------------------------------------------------------------------
Full Year 1999
-----------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Money market assets and funds sold $308 $4 1.30 %
Trading account securities
Investment securities
Taxable 862,589 52,151 6.05
Tax-exempt 357,294 26,994 7.56
Loans:
Commercial 1,493,045 126,939 8.50
Real estate construction 52,825 5,822 11.02
Real estate residential 352,578 24,335 6.90
Consumer 393,938 33,855 8.59
---------- ---------
Earning assets 3,512,577 270,100 7.69
Other assets 315,673
-----------
Total assets $3,828,250
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $857,650
Savings and interest-bearing
transaction 1,409,391 23,358 1.66 %
Time less than $100,000 410,092 18,106 4.42
Time $100,000 or more 425,949 19,446 4.57
---------- ---------
Total interest-bearing deposits 2,245,432 60,910 2.71
Funds purchased 321,829 14,285 4.44
Debt financing and notes payable 46,482 3,261 7.02
---------- ---------
Total interest-bearing liabilities 2,613,743 78,456 3.00
Other liabilities 30,380
Shareholders' equity 326,477
-----------
Total liabilities and shareholders' equity $3,828,250
===========
Net interest spread (1) 4.69 %
Net interest income and interest margin (2) $191,644 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 by total
average earning assets.
Distribution of assets, liabilities and shareholders' equity.
Yields/rates and interest margin
- ---------------------------------------------------------------------------------
Full Year 1998
-----------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Money market assets and funds sold $1,003 $42 4.23 %
Trading account securities
Investment securities
Taxable 854,315 53,699 6.29
Tax-exempt 348,040 24,889 7.15
Loans:
Commercial 1,427,788 129,258 9.05
Real estate construction 60,123 7,089 11.79
Real estate residential 386,066 27,729 7.18
Consumer 388,106 35,340 9.11
---------- ---------
Earning assets 3,465,440 278,046 8.02
Other assets 313,012
-----------
Total assets $3,778,452
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $791,952
Savings and interest-bearing
transaction 1,461,764 30,264 2.07 %
Time less than $100,000 438,052 21,840 4.99
Time $100,000 or more 381,754 19,247 5.04
---------- ---------
Total interest-bearing deposits 2,281,570 71,351 3.13
Funds purchased 243,736 11,670 4.79
Debt financing and notes payable 52,083 3,644 7.00
---------- ---------
Total interest-bearing liabilities 2,577,389 86,665 3.36
Other liabilities 32,259
Shareholders' equity 376,852
-----------
Total liabilities and shareholders' equity $3,778,451
===========
Net interest spread (1) 4.66 %
Net interest income and interest margin (2) $191,381 5.52 %
========= ======
(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 by total
average earning assets.
Distribution of assets, liabilities and shareholders' equity.
Yields/rates and interest margin
- ---------------------------------------------------------------------------------
Full Year 1997
-----------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Money market assets and funds sold $30,125 $1,635 5.43 %
Trading account securities
Investment securities
Taxable 849,564 51,158 6.02
Tax-exempt 286,851 22,730 7.92
Loans:
Commercial 1,394,425 129,473 9.29
Real estate construction 85,409 9,386 10.99
Real estate residential 350,825 27,138 7.74
Consumer 417,389 38,756 9.29
---------- ---------
Earning assets 3,414,588 280,276 8.21
Other assets 335,063
-----------
Total assets $3,749,651
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $781,001
Savings and interest-bearing
transaction 1,533,939 34,742 2.26 %
Time less than $100,000 479,692 24,425 5.09
Time $100,000 or more 323,840 17,097 5.28
---------- ---------
Total interest-bearing deposits 2,337,471 76,264 3.26
Funds purchased 162,592 7,803 4.80
Debt financing and notes payable 57,483 3,987 6.94
---------- ---------
Total interest-bearing liabilities 2,557,547 88,054 3.44
Other liabilities 32,498
Shareholders' equity 378,605
-----------
Total liabilities and shareholders' equity $3,749,651
===========
Net interest spread (1) 4.77 %
Net interest income and interest margin (2) $192,222 5.63 %
========= ======
(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 by total
average earning assets.
Rate and volume variances. The following table sets forth a summary
of the changes in interest income and interest expense from changes
in average assets 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.
- ---------------------------------------------------------------------
For the years ended
December 31, 1999 compared with 1998
- ---------------------------------------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------
(In thousands)
Increase (decrease) in
interest and fee income:
MMkt. assets and funds sold ($19) ($19) ($38)
Trading account securities 0 0 0
Investment securities (1)
Taxable 527 (2,075) (1,548)
Tax-exempt 674 1,431 2,105
Loans:
Commercial (1) 6,992 (9,311) (2,319)
Real estate construction (824) (443) (1,267)
Real estate residential (2,341) (1,053) (3,394)
Consumer 542 (2,027) (1,485)
- ---------------------------------------------------------------------
Total loans (1) 4,369 (12,834) (8,465)
- ---------------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 5,551 (13,497) (7,946)
- ---------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (1,051) (5,855) (6,906)
Time less than $ 100,000 (1,337) (2,397) (3,734)
Time $ 100,000 or more 1,085 (886) 199
- ---------------------------------------------------------------------
Total interest-bearing (1,303) (9,138) (10,441)
Funds purchased 3,386 (771) 2,615
Notes and mortgages payable (393) 10 (383)
- ---------------------------------------------------------------------
Total increase (decrease)
in interest expense 1,690 (9,899) (8,209)
- ---------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $3,861 ($3,598) $263
=====================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
Rate and volume variances.
- ---------------------------------------------------------------------
For the years ended
December 31, 1998 compared with 1997
- ---------------------------------------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------
(In thousands)
Increase (decrease) in
interest and fee income:
MMkt. assets and funds sold ($1,298) ($295) ($1,593)
Trading account securities 0 0 0
Investment securities (1)
Taxable 291 1,589 1,880
Tax-exempt 4,212 (1,392) 2,820
Loans:
Commercial (1) 4,850 (5,065) (215)
Real estate construction (3,048) 751 (2,297)
Real estate residential 2,050 (1,459) 591
Consumer (2,678) (738) (3,416)
- ---------------------------------------------------------------------
Total loans (1) 1,174 (6,511) (5,337)
- ---------------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 4,379 (6,609) (2,230)
- ---------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (1,585) (2,893) (4,478)
Time less than $ 100,000 (2,085) (500) (2,585)
Time $ 100,000 or more 2,873 (723) 2,150
- ---------------------------------------------------------------------
Total interest-bearing (797) (4,116) (4,913)
Funds purchased 3,885 (18) 3,867
Notes and mortgages payable (378) 35 (343)
- ---------------------------------------------------------------------
Total increase (decrease) in
interest expense 2,710 (4,099) (1,389)
- ---------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $1,669 ($2,510) ($841)
=====================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.8 million for 1999, compared
to $5.2 million in 1998 and $7.6 million in 1997. The reductions in
the provision in 1999 and 1998 reflect the results of the Company's
continuing efforts to improve loan quality by enforcing strict
underwriting and administration procedures and aggressively
pursuing collection efforts. For further information regarding net
credit losses and the reserve for loan losses, see the "Asset
Quality" section of this report.
INVESTMENT PORTFOLIO
The Company maintains a securities portfolio consisting of U.S
Treasury, U.S. Government agencies and corporations, state and
political subdivisions, asset-backed and other securities.
Investment securities are held in safekeeping by an independent
custodian.
The objective of the investment securities held to maturity is
to strengthen the portfolio yield, and to provide collateral to
pledge for federal, state and local government deposits and
other borrowing facilities. The investments held to maturity had
an average term to maturity of 105 months at December 31, 1999
and, on the same date, those investments included $212.3 million
in fixed rate and $24.8 million in adjustable rate securities.
Investment securities available for sale are generally used to
supplement the Banks' liquidity. Unrealized net gains and losses
on these securities are recorded as an adjustment to equity, net
of taxes, and are not reflected in the current earnings of the
Company. If a security is sold, any gain or loss is recorded as
a charge to earnings and the equity adjustment is reversed. At
December 31, 1999, the Company held $982.3 million classified as
investments available for sale. At December 31, 1999, an
unrealized loss of $4.0 million net of taxes of $2.9 million
related to these securities, was held in shareholders' equity.
The Company had no trading securities at December 31, 1999.
For more information on investment securities, see Notes 1 and 2
to the consolidated financial statements.
The following table shows the carrying amount (fair value) of the
Company's investment securities available for sale as of the dates
indicated:
- ---------------------------------------------------------------------------------
At December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $183,478 $248,610 $277,790
U.S. Government agencies and corporations 195,300 121,304 181,124
States and political subdivisions 234,780 213,315 203,405
Asset backed securities 143,591 165,398 184,377
Other 225,188 239,034 156,538
- ---------------------------------------------------------------------------------
Total $982,337 $987,661 $1,003,234
=================================================================================
The following table sets forth the relative maturities and yields
of the Company's available-for-sale securities (stated at amortized
cost) at December 31, 1999. Weighted average yields have been
computed by dividing annual interest income, adjusted for
amortization of premium and accretion of discount, by the amortized
cost value of the related security. Yields on state and political
subdivision securities have been calculated on a fully taxable
equivalent basis using the current statutory rate.
Available for sale
- -------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After ten Mortgage-
one year five years ten years years backed Other Total
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury $20,133 $164,806 $-- $-- $-- $-- $184,939
Interest rate 5.07% 5.79% --% --% --% --% 5.71%
U.S. Government agencies
and corporations 11,003 178,660 110 94 -- -- 189,867
Interest rate 5.26% 5.99% 8.95% 8.81% --% --% 5.95%
States and political
subdivisions 8,363 24,855 78,821 126,611 -- -- 238,650
Interest rate 7.29% 6.74% 8.00% 7.32% --% --% 7.48%
Asset-backed $-- 138,362 5,930 -- 144,292
Interest rate --% 6.03% 6.07% --% --% --% 6.03%
Other securities 15,842 184,761 100 -- -- -- 200,703
Interest rate 5.95% 6.20% 7.94% --% --% --% 6.18%
- -------------------------------------------------------------------------------------------------------------------
Subtotal 55,341 691,444 84,961 126,705 -- -- 958,451
Interest rate 5.69% 6.03% 7.87% 7.32% --% --% 6.35%
Mortgage Backed -- -- -- -- 10,741 -- 10,741
Interest rate --% --% --% --% 6.40% --% 6.40%
Other without set maturities -- -- -- -- -- 20,069 20,069
Interest rate --% --% --% --% --% 8.82% 8.82%
- -------------------------------------------------------------------------------------------------------------------
Total $55,341 $691,444 $84,961 $126,705 $10,741 $20,069 $989,261
Interest rate 5.69% 6.03% 7.87% 7.32% 6.40% 8.82% 6.40%
===================================================================================================================
The following table shows the carrying amount (amortized cost) and
fair value of the Company's investment securities held to
maturity as of the dates indicated:
- ---------------------------------------------------------------------------------
At December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $-- $-- $--
U.S. Government agencies and corporations 70,418 69,235 83,656
States and political subdivisions 155,813 147,119 136,965
Asset backed securities -- -- --
Other 10,923 10,639 10,339
- ---------------------------------------------------------------------------------
Total $237,154 $226,993 $230,960
=================================================================================
Fair value $235,147 $233,790 $236,896
=================================================================================
The following table sets forth the relative maturities and yields
of the Company's held-to-maturity securities at December 31, 1999.
Weighted average yields have been computed by dividing annual
interest income, adjusted for amortization of premium and accretion
of discount, by the amortized value of the related security. Yields
on state and political subdivision securities have been calculated
on a fully taxable equivalent basis using the current statutory
rate.
Held to maturity
- -------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After ten Mortgage-
one year five years ten years years backed Other Total
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government Agencies
and Corporations $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
States and Political
Subdivisions 3,261 28,119 90,044 34,389 -- -- 155,813
Interest rate 10.87% 7.70% 7.86% 7.52% --% --% 7.82%
Asset Backed $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
Other $-- $-- $-- $-- -- 10,923 10,923
Interest rate --% --% --% --% --% 5.74% 5.74%
- -------------------------------------------------------------------------------------------------------------------
Subtotal 3,261 28,119 90,044 34,389 -- 10,923 166,736
Interest rate 10.87% 7.70% 7.86% 7.52% --% 5.74% 7.68%
Mortgage Backed -- -- -- -- 70,418 -- 70,418
Interest rate --% --% --% --% 6.11% --% 6.11%
- -------------------------------------------------------------------------------------------------------------------
Total $3,261 $28,119 $90,044 $34,389 $70,418 $10,923 $237,154
Interest rate 10.87% 7.70% 7.86% 7.52% 6.11% 5.74% 7.22%
===================================================================================================================
LOAN PORTFOLIO
The following table shows the composition of the loan portfolio of
the Company by type of loan and type of borrower, on the dates
indicated:
- -------------------------------------------------------------------------------------------------------------------
At December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
Commercial and commercial real estate 1,502,237 1,476,912 1,437,118 1,455,984 1,260,082
Real estate construction 50,928 57,998 66,782 101,136 128,901
Real estate residential 337,002 384,128 361,909 276,951 378,971
Consumer 434,803 385,204 404,382 462,734 502,441
Unearned income (4,124) (6,345) (8,254) (9,565) (12,248)
- -------------------------------------------------------------------------------------------------------------------
Gross loans $2,320,846 $2,297,897 $2,261,937 $2,287,240 $2,258,147
Allowance for loan losses (51,574) (51,304) (50,630) (50,921) (48,494)
- -------------------------------------------------------------------------------------------------------------------
Net loans $2,269,272 $2,246,593 $2,211,307 $2,236,319 $2,209,653
===================================================================================================================
Maturities and sensitivities of selected loans to changes in
interest rates
The following table shows the maturity distribution and interest
rate sensitivity of commercial and real estate construction loans
at December 31, 1999. Balances exclude loans to individuals and
residential mortgages totaling $767.7 million. These types of loans
are typically paid in monthly installments over a number of years.
- -------------------------------------------------------------------------------------------------------
Within One to After
One Year Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------
(In thousands)
Commercial and commercial real estate * $702,161 $397,762 $402,314 $1,502,237
Real estate construction 50,928 -- -- 50,928
- -------------------------------------------------------------------------------------------------------
Total $753,089 $397,762 $402,314 $1,553,165
=======================================================================================================
Loans with fixed interest rates $242,623 $397,762 $402,314 $1,042,699
Loans with floating interest rates 510,466 -- -- 510,466
- -------------------------------------------------------------------------------------------------------
Total $753,089 $397,762 $402,314 $1,553,165
=======================================================================================================
* Includes demand loans
COMMITMENTS AND LETTERS OF CREDIT
It is not the policy of the Company to issue formal commitments on
lines of credit except to a limited number of well established and
financially responsible local commercial enterprises. Such
commitments can be either secured or unsecured and are typically in
the form of revolving lines of credit for seasonal working capital
needs. Occasionally, such commitments are in the form of Letters of
Credit to facilitate the customers' particular business
transactions. Commitment fees generally are not charged except
where Letters of Credit are involved. Commitments and lines of
credit typically mature within one year. For further information,
see Note 12 to the consolidated financial statements.
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 higher credit risk and increase diversification of
earning assets. 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 summarizes the Company's classified assets for
the periods indicated:
- ---------------------------------------------------------------------
At December 31, 1999 1998
- ---------------------------------------------------------------------
(In millions)
Classified loans $41.3 $50.8
Other classified assets 3.3 4.3
- ---------------------------------------------------------------------
Total classified assets $44.6 $55.1
=====================================================================
Classified loans at December 31, 1999 decreased $9.5 million or 19
percent to $41.3 million from December 31, 1998, reflecting the
implementation of the Company's active work-out standards and
charge-offs. Other classified assets decreased $1.0 million from
prior year, 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.
Non-performing assets
Non-performing assets include non-accrual loans, loans 90 or more
days past due and still accruing and other real estate owned. Loans
are placed on non-accrual status upon 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,
some 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 by Management 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, payments received
are applied against the principal balance of the loans until such
time as full collection of the remaining recorded balance is
expected. Any additional interest payments received after that
point are recorded as interest income on a cash basis. Performing
non-accrual loans are reinstated to accrual status when
improvements in credit quality eliminate the doubt as to the full
collectibility of both interest and principal.
The following table summarizes the non-performing assets of
the Company for the periods indicated:
- -------------------------------------------------------------------------------------------------------
At December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(In millions)
Performing non-accrual loans $3.5 $1.8 $1.6 $4.3 $2.4
Non-performing non-accrual loans 5.5 6.8 16.5 12.5 25.0
- -------------------------------------------------------------------------------------------------------
Non-accrual loans 9.0 8.6 18.1 16.8 27.4
- -------------------------------------------------------------------------------------------------------
Restructured loans -- -- -- 0.2 0.3
Loans 90 or more days past due
and still accruing 0.5 0.5 1.0 1.8 1.7
Other real estate owned 3.3 4.3 7.4 9.9 7.6
- -------------------------------------------------------------------------------------------------------
Total non-performing assets $12.8 $13.4 $26.5 $28.7 $37.0
=======================================================================================================
Allowance for loan losses as a
percentage of non-accrual loans
and loans 90 or more days past
due and still accruing 540% 564% 265% 271% 165%
Allowance for loan losses as a percentage
of total non-performing assets 402% 383% 191% 177% 131%
=======================================================================================================
Performing non-accrual loans increased $1.7 million to $3.5 million
at December 31, 1999 while non-performing non-accrual loans
decreased $1.3 million to $5.5 million during the same period,
primarily due to the sales, payoffs and foreclosures of commercial
and commercial real estate loans. The $1.0 million decrease in
other real estate owned balances from December 31, 1998 was due to
write-downs and liquidations net of foreclosures on real estate
property acquired in satisfaction of debt. The decrease in
non-performing loans from 1997 to 1998 was primarily due to sales,
payoffs and foreclosures of commercial loans with real estate
collateral acquired through the Merger. The decrease in other real
estate owned balances at December 31, 1998 from December 31, 1997
was also due to write-downs and liquidations net of foreclosures.
The amount of gross interest income that would have been recorded
for non-accrual loans if all such loans had been current in
accordance with their original terms while outstanding during the
period, was $751 thousand in 1999, $855 thousand in 1998 and $1.6
million in 1997. The amount of interest income that was recognized
on non-accrual loans from cash payments made in 1999, 1998 and 1997
was $473 thousand, $573 thousand and $462 thousand, respectively.
Cash payments received, which were applied against the book balance
of performing and non-performing non-accrual loans outstanding at
December 31, 1999, totaled approximately $356 thousand, compared to
$952 thousand and $573 thousand in 1998 and 1997, respectively.
The overall credit quality of the loan portfolio continues to be
strong; however, the total non-performing assets could fluctuate
from year to year. 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 non-performing asset levels; however, no assurance can be
given that additional increases in non-accrual loans will not occur
in future periods.
Loan loss experience
The Company's allowance for loan losses is maintained at a level
estimated to be adequate to provide for losses that can be
reasonably anticipated based upon specific conditions, credit loss
experience, the amount of past due, non-performing loans 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 allowance to
the respective segments of the loan portfolio. 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 those loans are
delinquent. A portion of the allowance is also allocated to
impaired loans. Management considers the $51.6 million allowance
for loan losses, which constituted 2.22 percent of total loans at
December 31, 1999, to be adequate as a reserve against inherent
losses. However, while the Company's policy is to charge off in the
current period those loans on which the loss is considered
probable, the risk exists of future losses which cannot be
precisely quantified or attributed to particular loans or classes
of loans. Management continues to evaluate the loan portfolio and
assess current economic conditions that will dictate future
allowance levels.
The following table summarizes the loan loss experience of the
Company for the periods indicated:
- -------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(In thousands)
Total loans outstanding $2,320,846 $2,297,897 $2,261,937 $2,287,240 $2,258,147
Average loans outstanding during the period 2,292,386 2,262,083 2,248,048 2,249,520 2,254,946
Analysis of the reserve
Beginning balance $51,304 $50,630 $50,921 $48,494 $46,580
Additions to the reserve charged to
operating expense 4,780 5,180 7,645 12,306 15,229
Allowance acquired through merger 0 0 0 1,665 0
Credit losses:
Commercial and commercial real estate (5,071) (5,113) (6,825) (7,998) (7,395)
Real estate construction (94) -- (962) (781) (1,401)
Real estate residential (18) (97) (374) (1,862) (3,682)
Consumer (2,754) (3,358) (4,323) (5,376) (3,742)
- -------------------------------------------------------------------------------------------------------
Total (7,937) (8,568) (12,484) (16,017) (16,220)
Credit loss recoveries
Commercial and commercial real estate 2,052 2,305 2,499 2,227 1,518
Real estate construction -- 10 160 44 3
Real estate residential -- 1 34 72 26
Consumer 1,375 1,746 1,855 2,130 1,358
- -------------------------------------------------------------------------------------------------------
Total 3,427 4,062 4,548 4,473 2,905
- -------------------------------------------------------------------------------------------------------
Net credit losses (4,510) (4,506) (7,936) (11,544) (13,315)
- -------------------------------------------------------------------------------------------------------
Balance, end of period $51,574 $51,304 $50,630 $50,921 $48,494
=======================================================================================================
Net credit losses to average loans 0.20% 0.20% 0.35% 0.51% 0.59%
Allowance for loan losses as a percentage
of loans outstanding 2.22% 2.23% 2.24% 2.23% 2.15%
Allocation of the Allowance for Loan Losses
The following table presents the allocation of the allowance for loan losses
as of December 31 for the years indicated:
- -------------------------------------------------------------------------------------------------------------------
1999 Loans 1998 Loans 1997 Loans
Allocation as Allocation as Allocation as
of the Percent of the Percent of the Percent
Allowance of Total Allowance of Total Allowance of Total
Balance Loans Balance Loans Balance Loans
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial $23,523 65% $22,240 64% $22,649 63%
Real estate construction 2,042 2 4,055 3 4,374 3
Real estate residential 877 14 310 17 87 16
Consumer 4,670 19 4,260 16 4,356 18
Unallocated portion of the reserve 20,462 "-- 20,439 "-- 19,164 "--
- -------------------------------------------------------------------------------------------------------------------
Total $51,574 100% $51,304 100% $50,630 100%
===================================================================================================================
- --------------------------------------------------------------------------------------------
1996 Loans 1995 Loans
Allocation as Allocation as
of the Percent of the Percent
Reserve of Total Reserve of Total
Balance Loans Balance Loans
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial $22,743 64% $21,849 56%
Real estate construction 3,471 4 5,683 6
Real estate residential 2,489 12 1,733 16
Consumer 6,543 20 6,401 22
Unallocated portion of the reserve 15,675 "-- 12,828 "--
- --------------------------------------------------------------------------------------------
Total $50,921 100% $48,494 100%
============================================================================================
The Company considers a loan to be impaired when, based on current
information and events, it is "probable" that it will be unable to
collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. The measurement of
impairment may be based on (I) the present value of the expected
cash flows of the impaired loan discounted at the loan's original
effective interest rate, (ii) the observable market price of the
impaired loan or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company does not apply this
definition to large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment. In measuring
impairment, the Company reviews all commercial and construction
loans classified "Substandard" and "Doubtful" that meet materiality
thresholds of $250 thousand and $100 thousand, respectively. The
Company considers classified loans below the established thresholds
to represent immaterial loss risk. All loans classified as "Loss"
are considered impaired. Commercial and construction loans that are
not classified, and large groups of smaller-balance homogeneous
loans such as installment, personal revolving credit, residential
real estate and student loans, are evaluated collectively for
impairment under the Company's standard loan loss reserve
methodology. The Company generally identifies loans to be reported
as impaired when such loans are in non-accrual status or are
considered troubled debt restructurings due to the granting of a
below-market rate of interest or a partial forgiveness of
indebtedness on an existing loan.
The following summarizes the Company's impaired loans for the
periods indicated:
- ---------------------------------------------------------------------
At December 31, 1999 1998
- ---------------------------------------------------------------------
(In thousands)
Non-accrual loans $8,960 $8,532
Other 6,146 6,504
- ---------------------------------------------------------------------
Total impaired loans $15,106 $15,036
=====================================================================
Specific reserves $2,105 $1,255
=====================================================================
The $6.1 million balance in loans classified as impaired as of
December 31, 1999, other than non-accrual loans, is due to two
commercial real estate loans, with combined principal outstanding
balances of $5.1 million, having collateral exposure that may
preclude ultimate full repayment, and one credit classified as
a troubled debt restructuring with principal outstanding of $1.0
million. Payments on these credits were current as of December 31,
1999.
The average balance of the Company's impaired loans for the year
ended December 31, 1999 was $15.5 million compared to $15.9 million
in 1998. The amount of that recorded investment for which there is
no related allowance for credit losses was $0. In general, the
Company does not recognize any interest income on troubled debt
restructurings or loans that are classified as non-accrual. For
other impaired loans, interest income may be recorded as cash is
received, provided that the Company's recorded investment in such
loans is deemed collectible.
ASSET AND LIABILITY MANAGEMENT
The fundamental objective of the Company's management of
assets and liabilities is to maximize its economic value while
maintaining adequate liquidity and a conservative level of
interest rate risk.
In adjusting the Company's asset/liability position, Management
attempts to manage interest rate risk while enhancing net interest
margins. At times, depending on the level of general interest
rates, the relationship between long- and short-term interest
rates, market conditions and competitive factors, Management may
increase the Company's interest rate risk position in order to
increase its net interest margin. The Company's results of
operations and net portfolio values remain vulnerable to increases
in interest rates and to fluctuations in the difference between
long- and short-term interest rates.
The primary analytical tool used by the Company to quantify
interest rate risk is a simulation model to project changes in net
interest income ("NII") that result from forecast changes in
interest rates. This 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 Federal Funds rate, serving as a "driver," is
made to rise (or fall) evenly by 200 basis points over the 12-month
forecast interval triggering a response in the other rates. Company
policy requires that such simulated changes in NII should always be
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 inspection of the risk will be put in
place to determine what steps could be taken to control risk.
The following table summarizes the simulated change in NII, based
on the 12-month period ending December 31, 2000:
- ---------------------------------------------------------
Changes in Estimated Increase
Interest (Decrease) in NII
Rates Estimated -----------------------
(Basis Points) NII Amount Amount Percent
- ---------------------------------------------------------
(Dollars in millions)
+200 $189.0 ($4.0) -2.1%
-- 193.0 -- --
- -200 195.1 2.1 1.1%
=========================================================
The Company does not currently engage in trading activities or
use derivative instruments to control interest rate risk, even
though such activities may be permitted with the approval of
the Company's Board of Directors.
Interest rate risk is the most significant market risk affecting
the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, do not
arise in the normal course of the Company's business activities.
Interest rate sensitivity analysis
The following table summarizes the interest rate sensitivity gaps
inherent in the Company's asset and liability portfolios at
December 31, 1999:
===================================================================================================================
Repricing within (days)
- -------------------------------------------------------------------------------------------------------------------
Non-
0-90 91-180 181-365 Over 365 Repricing Total
- -------------------------------------------------------------------------------------------------------------------