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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, 2000
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, 2001:
$1,171,885,580.25
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 20, 2001
Title of Class
Common Stock, no par value
Shares Outstanding
35,680,354
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 21, 2001
for Annual Meeting of Shareholders
to be held on April 26, 2001
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 19
Item 3 Legal Proceedings 19
Item 4 Submission of Matters to a Vote of Security Holders 19
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 20
Item 6 Selected Financial Data 22
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 8 Financial Statements and Supplementary Data 50
Item 9 Changes in and Disagreements on Accounting
and Financial Disclosure 87
PART III
Item 10 Directors and Executive Officers of the Registrant 87
Item 11 Executive Compensation 88
Item 12 Security Ownership of Certain Beneficial Owners
and Management 88
Item 13 Certain Relationships and Related Transactions 88
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 89
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 bank, Westamerica Bank ("WAB"). WAB is
subject to competition from other financial institutions
and regulations from certain agencies and undergoes
periodic examinations by those regulatory authorities.
In addition, the Company also owns 100 percent of
the capital stock 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.
The reorganization was consummated on December 31, 1972
and, on January 1, 1973, the Company began operations as
as a bank holding company.
In mid-1983, the Company consolidated its six subsidiary
banks into a single bank named Westamerica Bank ("WAB"),
a national banking association organized and existing
under the laws of the United States. WAB became a
state-chartered bank in June 1993.
On February 28, 1992, the Company acquired John Muir
National Bank for the issuance of the Company's Common
Stock. 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 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, the name
of Napa Valley Bancorp Services Corporation was changed to
Community Banker Services Corporation.
In 1995, the Company acquired PV Financial (parent company
of PV National Bank), Capital Bank Sacramento and North
Bay Bancorp (parent company of Novato National Bank).
Under the terms of the merger agreements, the Company
issued shares of its common stock in exchange for all of
the outstanding shares of the acquired companies. The
subsidiary banks acquired were merged with and into WAB. These
business combinations were accounted for as poolings-of-
interests.
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 was merged with and into WAB.
On January 22, 1998, the Board of Directors of the Company
authorized a three-for-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.
On August 17, 2000 the Company acquired First Counties Bank
under which each outstanding share of First Counties Bank
was exchanged for .8035 shares of the Company's common stock.
The acquisition was valued at approximately $19.7 million.
and accounted for on the purchase accounting method.
The activities and assets and liabilities of First Counties
Bank were fully merged into WAB in September 2000.
First Counties Bank had $91 million in assets and offices
in Lake, Napa, and Colusa counties.
At December 31, 2000, the Company had consolidated assets
of approximately $4.03 billion, deposits of approximately
$3.24 billion and shareholders' equity of approximately
$337.7 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, Colusa 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 36.3 million were outstanding at
December 31, 2000. Pursuant to its stock option plans, at
December 31, 2000, the Company had exercisable options
outstanding of 1.6 million. As of December 31, 2000, 1.0
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 its market price of common stock.
A portion of the loan portfolio of the Company is
dependent on real estate. At December 31, 2000, real
estate served as the principal source of collateral with
respect to approximately 55 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 customer 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.
Employees
At December 31, 2000, the Company and its subsidiaries
employed 1,095 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.
Supervision and Regulation
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 WAB's 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, WAB, 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 (the 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 costs of any examination by the FRB are
payable by the Company.
On March 11, 2000, the Gramm-Leach-Bliley Act, or the
Financial Services Act of 1999 (the "FSA"), became effective.
This Act amended certain portions of the BHCA, subject to
conditions. See "Recently Enacted Legislation" below for more
information.
The Company is a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the
Company and WAB 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. However, a bank holding
company, with the approval of the FRB, may engage, or acquire
the voting shares of companies engaged, in activities that the
FRB has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident
thereto. A bank holding company must demonstrate that the
benefits to the public of the proposed activity will outweigh
the possible adverse effects associated with such activity.
A bank holding company may acquire banks in states other than
its home state without regard to the permissibility of such
acquisitions under state law, but subject to any state
requirement that the bank has been organized and operating for
a minimum period of time, not to exceed five years, and the
requirement that the bank holding company, prior to or
following the proposed acquisition, controls no more than 10%
of the total amount of deposits of insured depository
institutions in the United States and no more than 30% of such
deposits in that state (or such lesser or greater amount set
by state law). Banks may also merge across states lines,
thereby creating interstate branches. Furthermore, a bank is
now able to open new branches in a state in which it does not
already have banking operations, if the laws of such state
permit such de novo branching.
Under California law, (a) out-of-state banks that wish to
establish a California branch office to conduct core banking
business must first acquire an existing five year old
California bank or industrial bank by merger or purchase, (b)
California state-chartered banks are empowered to conduct
various authorized branch-like activities on an agency basis
through affiliated and unaffiliated insured depository
institutions in California and other states and (c) the
Commissioner is authorized to approve an interstate
acquisition or merger that would result in a deposit
concentration exceeding 30% if the Commissioner finds that the
transaction is consistent with public convenience and
advantage. However, a state bank chartered in a state other
than California may not enter California by purchasing a
California branch office of a California bank or industrial
bank without purchasing the entire entity or by establishing a
de novo California bank.
The FRB generally prohibits a bank holding company from
declaring or paying a cash dividend that would impose undue
pressure on the capital of subsidiary banks or would be funded
only through borrowing or other arrangements which might
adversely affect a bank holding company's financial position.
Under the FRB policy, 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 WAB
to pay dividends.
Transactions between the Company and WAB 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). Subject to certain limitations,
depository institution subsidiaries of bank holding companies
may extend credit to, invest in the securities of, purchase
assets from, or issue a guarantee, acceptance, or letter of
credit on behalf of, an affiliate, provided that the aggregate
of such transactions with affiliates may not exceed 10% of the
capital stock and surplus of the institution, and the
aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such
institution. The Company may only borrow from WAB 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 regulations 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 prescribed for bank
holding companies and their nonbank subsidiaries. Amended
Regulation Y also provides for a streamlined 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 which it controls must meet the "well-
capitalized" and "well-managed" criteria set forth in
Regulation Y.
To qualify as "well-capitalized," the bank holding company
must, on a consolidated basis: (i) maintain a total risk-based
capital ratio of 10% or greater; (ii) maintain a Tier 1 risk-
based capital ratio of 6% or greater; and (iii) not be subject
to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-
capitalized as that term is defined in the capital adequacy
regulations of the applicable bank regulator, 80% of the total
risk-weighted assets held by its insured depository
institutions must be held by institutions which are well-
capitalized, and none of its insured depository institutions
may be undercapitalized.
To qualify as "well-managed": (i) each of the bank holding
company, its lead depository institution and its depository
institutions holding 80% of the total risk-weighted assets of
all its depository institutions at their most recent
examination or review must have received a composite rating,
rating for management and rating for compliance which were at
least satisfactory; (ii) none of the bank holding company's
depository institutions may have received one of the two
lowest composite ratings; and (iii) neither the bank holding
company nor any of its depository institutions during the
previous 12 months may have been subject to a formal
enforcement order or action.
Bank Regulation and Supervision
WAB is a California chartered bank insured by the Federal
Deposit Insurance Corporation (the "FDIC"), and as such is
subject to regulation, supervision and regular examination by
the California Department of Financial Institutions ("DFI")
and the FDIC. As a member of the Federal Reserve System,
WABs primary federal regulator is the FRB. The regulations
of these agencies affect most aspects of WABs business and
prescribe permissible types of loans and investments, the
amount of required reserves, requirements for branch offices,
the permissible scope of its activities and various other
requirements.
In addition to federal banking law, WAB is also subject to
applicable provisions of California law. Under California
law, WAB 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 investment
and lending activities. Whenever it appears that the
contributed capital of a California bank is impaired, the
Commissioner shall order the bank to correct such impairment.
If a bank is unable to correct the impairment, such bank is
required to levy and collect an assessment upon its common
shares. If such assessment becomes delinquent, such common
shares are to be sold by the bank.
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 Federal
Deposit Insurance Corporation 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 activities which have been
approved by the FRB for bank holding companies because such
activities are so closely related to banking as 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 arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance
sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for
assets with relatively higher credit risk, such as certain
loans.
In determining the capital level WAB is required to maintain,
the federal banking agencies do not, in all respects, follow
generally accepted accounting principles ("GAAP") and have
special rules which have the effect of reducing the amount of
capital they will recognize for purposes of determining its
capital adequacy.
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 consists of common stock, retained
earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in
certain subsidiaries, less most other intangible assets and
other adjustments. Net unrealized losses on available-for-
sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. For Tier 1
capital purposes, deferred tax assets which can only be
realized if an institution earns sufficient taxable income in
the future are limited to the amount that the institution is
expected to realize within one year, or ten percent of Tier 1
capital, whichever is less. Tier 2 capital may consist of a
limited amount of the allowance for loan and lease losses,
term preferred stock and other types of preferred stock not
qualifying as Tier 1 capital, term subordinated debt and
certain other instruments with some characteristics of equity.
The inclusion of elements of Tier 2 capital are subject to
certain other requirements and limitations of the federal
banking agencies. 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%.
On October 1, 1998, the FDIC adopted two rules governing
minimum capital levels that FDIC-supervised banks must
maintain against the risks to which they are exposed. The
first rule makes risk-based capital standards consistent for
two types of credit enhancements (i.e., recourse arrangements
and direct credit substitutes) and requires different amounts
of capital for different risk positions in asset
securitization transactions. The second rule permits limited
amounts of unrealized gains on debt and equity securities to
be recognized for risk-based capital purposes as of September
1, 1998. The FDIC rules also provide that a qualifying
institution that sells small business loans and leases with
recourse must hold capital only against the amount of recourse
retained. In general, a qualifying institution is one that is
well-capitalized under the FDIC's prompt corrective action
rules. The amount of recourse that can receive the
preferential capital treatment cannot exceed 15% of the
institution's total risk-based capital.
In addition to the risk-based guidelines, the federal banking
agencies 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
to rate banking organizations, the minimum leverage ratio of
Tier 1 capital to total assets must be 3%. It is improbable,
however, that an institution with a 3% leverage ratio would
receive the highest rating since a strong capital position is
a significant part of the regulators' rating. 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. Thus, the effective minimum leverage ratio,
for all practical purposes, must be at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and
leverage ratios which apply across the industry, the
regulators have the discretion to set individual minimum
capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
As of December 31, 2000, the Company's and WABs respective
ratios exceeded applicable regulatory requirements. See
Note 8 to the consolidated financial statements for capital
ratios of the Company and WAB, compared to the standards for
well-capitalized depository institutions and for minimum
capital requirements.
The federal banking agencies take into consideration
concentrations of credit risk and risks from non-traditional
activities, as well as an institution's ability to manage
those risks, when determining the adequacy of an institution's
capital. This evaluation is made as a part of the
institution's regular safety and soundness examination. The
federal banking agencies also consider interest rate risk
(when the interest rate sensitivity of an institution's assets
does not match the sensitivity of its liabilities or its off
balance sheet position) in evaluation of a bank's capital
adequacy.
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 required each federal banking agency to promulgate
regulations defining the following five categories in which an
insured depository institution will be placed, based on the
level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized
and critically undercapitalized.
Under the prompt corrective action provisions of FDICIA, an
insured depository institution generally will be classified in
the following categories based on the capital measures
indicated below:
Total Tier 1
Risk-Based Risk-Based Leverage
Capital Capital Ratio
Well capitalized 10.00% 6.00% 5.00%
Adequately capitalized 8.00 4.00 4.00
Undercapitalized (less than) 8.00 4.00 4.00
Significantly undercapitalized (less than) 6.00 3.00 3.00
Critically undercapitalized
Tangible equity/ total assets (less than) 2.00
An institution that, based upon its capital levels, is
classified as "well capitalized," "adequately capitalized" or
"undercapitalized" may be treated as though it were in the
next lower capital category if the appropriate federal banking
agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound
practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject
to more restrictions.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be
subject to potential enforcement actions by the federal
banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency
or any written agreement with the agency. Enforcement actions
may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the
case of a depository institution), the imposition of civil
money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the
issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such
actions through injunctions or restraining orders based upon a
judicial determination that the agency would be harmed if such
equitable relief was not granted. 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 on
transactions 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. The federal banking agencies may require an
institution to submit to an acceptable compliance plan as well
as have the flexibility to pursue other more appropriate or
effective courses of action given the specific circumstances
and severity of an institution's noncompliance with one or
more standards.
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 such payments do 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 this 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.
The federal banking agencies also have the 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
WABs deposits are insured by the Bank Insurance Fund (BIF)
administered by the FDIC. FDICIA established several
mechanisms to increase funds to protect deposits insured by
the 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 which 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 insurance premiums will be.
Community Reinvestment Act and Fair Lending Developments
WAB is 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.
Recently Enacted Legislation
On March 11, 2000, the Financial Services Act of 1999 (the
FSA) became effective. The FSA repealed provisions of the
Glass-Steagall Act, which had prohibited commercial banks and
securities firms from affiliating with each other and engaging
in each other's businesses. Thus, many of the barriers
prohibiting affiliations between commercial banks and
securities firms have been eliminated.
The BHCA was also amended by the FSA to allow new "financial
holding companies" ("FHCs") to offer banking, insurance,
securities and other financial products to consumers.
Specifically, the FSA amended section 4 of the BHCA in order
to provide for a framework for the engagement in new financial
activities. A bank holding company ("BHC") may elect to
become a FHC if all its subsidiary depository institutions are
well-capitalized and well-managed. If these requirements are
met, a BHC may file a certification to that effect with the
FRB and declare that it elects to become a FHC. After the
certification and declaration is filed, the FHC may engage
either de novo or though an acquisition in any activity that
has been determined by the FRB to be financial in nature or
incidental to such financial activity. BHCs may engage in
financial activities without prior notice to the FRB if those
activities qualify under the new list of permissible
activities in section 4(k) of the BHCA. However, notice must
be given to the FRB within 30 days after a FHC has commenced
one or more of the financial activities. The Company has not
elected to become a FHC.
Under the FSA, FDIC-insured state banks, subject to various
requirements, as well as national banks, are permitted to
engage through "financial subsidiaries" in certain financial
activities permissible for affiliates of FHCs. However, to be
able to engage in such activities the bank must also be well-
capitalized and well-managed and have received at least a
"satisfactory" rating in its most recent CRA examination.
The Company cannot be certain of the effect of the foregoing
recently enacted legislation on its business, although there
is likely to be consolidation among financial services
institutions and increased competition for the Company.
Pending Legislation and Regulations
Certain pending legislative proposals include bills to permit
banks to pay interest on business checking accounts, to cap
consumer liability for stolen debit cards, to enact privacy
rules designed to regulate the ability of financial
institutions to use or share customer information, to end
certain predatory lending practices, to allow the payment of
interest on reserves that financial institutions must keep
with FRB and to give judges the authority to force high-income
borrowers to repay their debts rather than cancel them through
bankruptcy. A proposal to merge the FDIC's two funds, the BIF
and the Savings Association Insurance Fund, is also being
discussed. The Company also expects that during 2001, the
Financial Accounting Standards Board will issue guidance as to
whether to retain the pooling-of-interests method of
accounting for business combinations and related issues,
including whether to adopt an impairment-only approach to
amortization of goodwill.
While the effect of such proposed legislation on the business
of the Company cannot be accurately predicted at this time, it
seems likely that a significant amount of consolidating in
banking industry will continue.
Competition
In the past, WAB'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
certain retail establishments have offered investment
vehicles which also compete with banks for deposit
business. Federal legislation in recent years has
encouraged competition between different types of
financial institutions and fostered 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.
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.
According to information obtained through an independent market
research firm, WAB was the seventeenth largest financial institution
in California in terms of total deposits at December 31, 1999. In the
individual markets in which it has branch offices, WAB was the fourth
largest financial institution, with a market share of approximately
7.74%. The share of individual markets within the overall market varies,
with the most dominant continuing to be in the San Rafael area of
Marin County, where WAB ranked first with 20.3 percent of the total
deposit market among federally-insured depository institutions. WAB's
share of the other markets it serves in Marin County was 19.1 percent,
ranking it third. According to the same source of information, WAB
ranked second in total deposits market share in the Lake County
service area with 16 percent of the total. WAB ranked fourth in its
Sonoma-Napa counties service area, with approximately a 9.7 percent
share of the market, and fourth in the Solano county service area,
with a market share of approximately 9 percent, and was fifth in the
Fresno service area with approximately 6.9 percent of total deposits.
WAB also ranked fifth in the markets it serves in portions of Kern,
San Luis Obispo, Tulare and Kings counties with approximately 5.5
percent of the market. WAB's market share in the Greater Sacramento
service area was approximately 5 percent, ranking sixth among its
competitors. In the service area encompassing offices throughout
Stanislaus, Sonora, and Merced counties, WAB ranked eighth
among its competitors with 4.3 percent of total deposits. WAB also
ranked eighth with 3.0 percent of the total deposit market in the
areas it serves in Contra Costa county.
ITEM 2. Properties
Branch Offices and Facilities
WAB is engaged in the banking business through 94
offices in 24 counties in Northern and Central California
including eleven offices each in Marin and Fresno
Counties, nine in Sonoma County, seven in Napa County, six
each in Solano, Kern, Stanislaus and Contra Costa
Counties, five in Lake County, four in San Luis Obispo
County, three each in Mendocino and Sacramento Counties,
two each in Nevada, Placer, Tulare and Tuolumne and
Alameda Counties, one each in San Francisco, Kings,
Madera, Merced, Yolo and Colusa Counties.
All offices are constructed and equipped to meet
prescribed security requirements.
The Company owns 38 branch office locations and one
administrative building and leases 77 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 nor any of 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 2000.
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:
============================================================
2000: High Low
- ------------------------------------------------------------
First quarter $27.75 $21.00
Second quarter $30.06 $24.38
Third quarter $33.56 $27.00
Fourth quarter $43.75 $30.69
1999:
First quarter $37.50 $31.63
Second quarter 37.13 30.00
Third quarter 36.50 28.94
Fourth quarter 35.13 26.63
============================================================
As of December 31, 2000, there were 8,747 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, 2000,
$154.8 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 most recently amended and
restated on October 28, 1999, to become effective
on November 19, 1999. 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 or its shareholders. In addition to extending the
maturity date of the plan to December 31, 2004, the
other material changes included: (1) an increase in the
exercise price to $75.00 per share; (2) a decrease in the
redemption price of each Right to $.001; and (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.
ITEM 6. Selected Financial Data
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
=========================================================================================================
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year ended December 31
Interest income $269,516 $257,656 $266,820 $270,670 $274,182
Interest expense 88,614 78,456 86,665 88,054 91,700
- ---------------------------------------------------------------------------------------------------------
Net interest income 180,902 179,200 180,155 182,616 182,482
Provision for loan losses 3,675 4,780 5,180 7,645 12,306
Non-interest income 41,130 40,174 37,805 37,013 36,307
Non-interest expense 100,198 100,133 101,408 137,878 136,051
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 118,159 114,461 111,372 74,106 70,432
Provision for income taxes 38,380 38,373 37,976 25,990 23,605
- ---------------------------------------------------------------------------------------------------------
Net income $79,779 $76,088 $73,396 $48,116 $46,827
=========================================================================================================
Earnings per share:
Basic $2.19 $1.97 $1.76 $1.12 $1.10
Diluted 2.16 1.94 1.73 1.10 1.08
Per share:
Dividends paid $0.74 $0.66 $0.52 $0.36 $0.30
Book value at December 31 9.32 8.10 9.25 9.51 8.84
Average common shares outstanding 36,410 38,588 41,797 43,040 42,759
Average diluted common shares outstanding 36,936 39,194 42,524 43,827 43,358
Shares outstanding at December 31 36,251 37,125 39,828 42,799 42,889
At December 31
Loans, net 2,429,880 2,269,272 2,246,593 2,211,307 2,236,319
Total assets 4,031,381 3,893,187 3,844,298 3,848,444 3,866,774
Total deposits 3,236,744 3,065,344 3,189,005 3,078,501 3,228,700
Short-term borrowed funds 386,942 462,345 203,671 264,848 167,447
Debt financing and notes payable 31,036 41,500 47,500 52,500 58,865
Shareholders' equity 337,747 300,592 368,596 407,152 379,279
Financial Ratios:
For the year:
Return on assets 2.06% 1.99% 1.94% 1.28% 1.24%
Return on equity 25.78% 23.31% 19.48% 12.71% 13.22%
Net interest margin * 5.48% 5.46% 5.52% 5.63% 5.54%
Net loan losses to average loans 0.17% 0.20% 0.20% 0.35% 0.51%
Efficiency ratio * 42.45% 43.19% 44.25% 60.15% 60.08%
At December 31:
Equity to assets 8.38% 7.72% 9.59% 10.58% 9.81%
Total capital to risk-adjusted assets 11.61% 11.75% 13.79% 14.76% 14.95%
Loan loss reserve to loans 2.11% 2.22% 2.23% 2.24% 2.23%
* 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 of 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: significantly increased competitive
pressure in the banking industry; changes in the interest rate
environment; less favorable general economic conditions
resulting in a deterioration in credit quality; 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 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 50
through 84, as well as with the other information presented
throughout the report.
NET INCOME
The Company achieved earnings of $79.8 million in 2000,
representing a 4.9 percent increase from the $76.1 million earned in
1999, which was up 3.7 percent over 1998 earnings of $73.4 million.
Components of Net Income
- ---------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------
(In millions)
Net interest income * $194.9 $191.6 $191.4
Provision for loan losses (3.7) (4.8) (5.2)
Noninterest income 41.1 40.2 37.8
Noninterest expense (100.2) (100.1) (101.4)
Taxes * (52.4) (50.8) (49.2)
- ---------------------------------------------------------------------------------
Net income $79.8 $76.1 $73.4
==================================================================================
Net income as a percentage of
average total assets 2.06% 1.99% 1.94%
==================================================================================
Average total assets $3,877.5 $3,828.3 $3,778.5
==================================================================================
* Fully taxable equivalent (FTE)
Diluted earnings per share in 2000 were $2.16, compared to $1.94
and $1.73 in 1999 and 1998, respectively.
Much of the improvement in current year's earnings is the result
of higher net interest income, which grew by $3.3 million or 1.7%
compared to 1999. Approximately two-thirds of that increase
was due to higher levels of earning assets and the remainder to a
a higher net interest margin. In addition the loan loss provision
was reduced by $1.1 million, noninterest income grew $900 thousand
and noninterest expense grew slightly. On August 17, 2000, the
Company completed the acquisition of First Counties Bank, an
institution with total assets of $90 million headquartered in
Clearlake, California. The acquisition was accounted for as a purchase.
Earnings in 1999 increased $2.7 million over 1998, due to increased
noninterest income, a reduction in noninterest expense reflective
of continued expense controls, a lower loan loss provision and a
slight increase in net interest income. The increase in net
interest income was due to higher average earning asset balances
offset by a lower net interest margin.
The Company's return on average total assets was 2.06 percent in
2000, compared to 1.99 percent and 1.94 percent in 1999 and 1998,
respectively. Return on average equity in 2000 was 25.79 percent,
compared to 23.31 percent and 19.48 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 2000 increased $3.3 million from 1999 to $194.9
million. Comparing 1999 to 1998, net interest income (FTE)
increased $200 thousand.
Components of Net Interest Income
- ---------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------
(In millions)
Interest income $269.5 $257.7 $266.8
Interest expense (88.6) (78.5) (86.7)
FTE adjustment 14.0 12.4 11.3
- ---------------------------------------------------------------------------------
Net interest income (FTE) $194.9 $191.6 $191.4
=================================================================================
Net interest margin (FTE) 5.48% 5.46% 5.52%
=================================================================================
Interest income (FTE) increased $13.4 million from 2000 to 1999,
primarily due to higher level of earning assets. Average loans
outstanding grew $77 million to $2.37 billion, the results of an $85
million expansion of the commercial real estate loan portfolio
plus $75 million in consumer loans, offset by decreases in commercial
and residential real estate loans which declined $70 million and $12
million respectively. Partially offsetting the growth in loans, average
investments declined $29 million. In addition to the net positive
earning asset volume variance, the average rate earned on these assets
also increased. Yields on loans grew from 8.28% in 1999 to 8.58% in
2000 while investments yields improved 16 basis points to 6.65%.
Overall, the yield on the company's earning assets increased from
7.69% in 1999 to 7.97% in 2000.
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 a 47 basis point lower yield and a 4 basis point
decrease in the investment yield. These changes were reflective of a
general decline in market rates, resulting in all categories of loan
and investment securities yields being lower than prior year.
Partially offsetting these changes, average earning asset balances
increased $47 million from 1998, with loan and investment securities
average balances increasing $30 million an $18 million, respectively
from 1998.
Interest expense increased $10.1 million or 12.9% in 2000 due to the
higher rates paid on interest-bearing liabilities. In 1999 the
average rate paid was 3.00% while in 2000 it increased to 3.42%. The
largest individual increase was the rate paid on public time deposits,
which grew by 4.67% in 1999 to 6.03% in 2000. Another large contributor
to the higher average rate was federal funds purchased, the rate on
which increased from 5.09% to 6.18%. Partially offsetting these higher
rates, the volume of interest-bearing liabilities decreased during
the year by $32 million or 1.2%. The lower interest bearing liabilities
were replaced by Noninterest bearing transaction deposits, which
grew $96 million. Interest expense decreased by $8.2 million in 1999
compared to 1998. This was the result of a decrease of 36 basis points
in rates paid on interest bearing liabilities combined with a $66 million
increase in the average balance of interest-free demand deposits, in
part offset by a $36 million increase in the interest-bearing liabilities
average balances.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present 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 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 2000
(dollars in thousands) -----------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------------------------
Assets
Money market assets and funds sold $529 $11 2.14 %
Trading account securities 0 6 0.00
Investment securities
Taxable 827,592 50,333 6.08
Tax-exempt 363,355 28,828 7.93
Loans:
Commercial 1,508,732 133,236 8.83
Real estate construction 50,560 6,132 12.13
Real estate residential 341,201 24,091 7.06
Consumer 468,572 40,909 8.73
---------- ---------
Earning assets 3,560,541 283,546 7.96
Other assets 316,920
-----------
Total assets $3,877,461
===========
Liabilities and shareholders' equity
Deposits
Noninterest bearing demand $953,667
Savings and interest-bearing
transaction 1,350,238 22,827 1.69 %
Time less than $100,000 391,500 19,761 5.05
Time $100,000 or more 462,506 25,849 5.59
---------- ---------
Total interest-bearing deposits 2,204,244 68,437 3.10
Funds purchased 341,857 17,668 5.17
Debt financing and notes payable 35,159 2,509 7.14
---------- ---------
Total interest-bearing liabilities 2,581,260 88,614 3.42
Other liabilities 33,023
Shareholders' equity 309,511
-----------
Total liabilities and shareholders' equity $3,877,461
===========
Net interest spread (1) 4.54
Net interest income and interest margin (2) $194,932 5.48
========= ======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Distribution of assets, liabilities and shareholders' equity.
Yields/rates and interest margin
- ---------------------------------------------------------------------------------
Full Year 1999
(dollars in thousands) -----------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------------------------
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
Noninterest 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
(dollars in thousands) -----------------------------------
Interest Rates
Average income/ earned/
balance expense paid
- ---------------------------------------------------------------------------------
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
Noninterest 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 $3,778,452
===========
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.
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,
(In thousands)
- ---------------------------------------------------------------------
2000 compared with 1999
- ---------------------------------------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------
Increase (decrease) in interest and fee income:
Money market assets and
funds sold $6 $1 $7
Trading account securities 7 (1) 6
Investment securities (1)
Taxable (2,823) 1,005 (1,818)
Tax-exempt 1,119 715 1,834
Loans:
Commercial (1) 513 5,784 6,297
Real estate construction (257) 567 310
Real estate residential (805) 561 (244)
Consumer 5,557 1,497 7,054
- ---------------------------------------------------------------------
Total loans (1) 5,008 8,409 13,417
- ---------------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 3,317 10,129 13,446
- ---------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (321) (210) (531)
Time less than $100,000 (874) 2,529 1,655
Time $100,000 or more 1,973 4,430 6,403
- ---------------------------------------------------------------------
Total interest-bearing 778 6,749 7,527
Funds purchased 915 2,468 3,383
Notes and mortgages payable (481) (271) (752)
- ---------------------------------------------------------------------
Total increase (decrease)
in interest expense 1,213 8,945 10,158
- ---------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $2,104 $1,184 $3,288
=====================================================================
(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,
(In thousands)
- ---------------------------------------------------------------------
1999 compared with 1998
- ---------------------------------------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------
Increase (decrease) in interest and fee income:
Money market 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.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $3.7 million for 2000, compared
to $4.8 million in 1999 and $5.2 million in 1998. The reductions in
the provision in 2000 and 1999 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 114 months at December 31, 2000
and, on the same date, those investments included $203.0 million
in fixed-rate and $25.0 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, 2000, the Company held $921.3 million classified as
investments available for sale. At December 31, 2000, an
unrealized gain of $7.2 million net of taxes of $5.6 million
related to these securities, was held in shareholders' equity.
The Company had no trading securities at December 31, 2000.
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, 2000 1999 1998
- ---------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $188,513 $183,478 $248,610
U.S. Government agencies and corporations 207,091 195,300 121,304
States and political subdivisions 241,151 234,781 213,315
Asset backed securities 76,678 143,590 165,398
Other 207,842 225,188 239,034
- ---------------------------------------------------------------------------------------
Total $921,275 $982,337 $987,661
=======================================================================================
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, 2000. 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 Mortgage-
Within but within but within After ten backed Other Total
(Dollars in thousands) one year five years ten years years
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury $55,354 $131,635 $-- $-- $-- $-- $186,989
Interest rate 5.61% 5.96% --% --% --% --% 5.86%
U.S. Government agencies
and corporations 3,500 192,521 1,500 90 -- -- 197,611
Interest rate 5.29% 6.09% 6.77% 8.20% -- -- 6.08%
States and political
subdivisions 19,263 9,239 99,320 108,055 -- -- 235,877
Interest rate 6.21% 7.98% 7.83% 7.27% -- -- 7.45%
Asset-backed -- 65,507 11,218 -- 76,725
Interest rate -- 6.12% 7.01% -- -- -- 6.25%
Other securities 63,095 114,971 100 -- -- -- 178,166
Interest rate 6.25% 6.25% 7.94% -- -- -- 6.25%
- -------------------------------------------------------------------------------------------------------------------
Subtotal 141,212 513,873 112,138 108,145 -- -- 875,368
Interest rate 5.97% 6.13% 7.73% 7.27% -- -- 6.45%
Mortgage Backed -- -- -- -- 8,951 -- 8,951
Interest rate -- -- -- -- 7.33% -- 7.33%
Other without set maturities -- -- -- -- -- 23,710 23,710
Interest rate -- -- -- -- -- 9.24% 9.24%
- -------------------------------------------------------------------------------------------------------------------
Total $141,212 $513,873 $112,138 $108,145 $8,951 $23,710 $908,029
Interest rate 5.97% 6.13% 7.73% 7.27% 7.33% 9.24% 6.53%
===================================================================================================================
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, 2000 1999 1998
- ---------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $-- $-- $--
U.S. Government agencies and corporations 64,717 70,418 69,235
States and political subdivisions 151,980 155,813 147,119
Asset backed securities -- -- --
Other 11,338 10,923 10,639
- ---------------------------------------------------------------------------------
Total $228,035 $237,154 $226,993
=================================================================================
Fair value $231,906 $235,147 $233,790
=================================================================================
The following table sets forth the relative maturities and yields
of the Company's held-to-maturity securities at December 31, 2000.
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-
(Dollars in thousands) one year five years ten years years backed Other Total
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government Agencies
and Corporations -- -- -- -- -- -- --
Interest rate -- -- -- -- -- -- --
States and Political
Subdivisions 2,693 42,604 80,278 26,405 -- -- 151,980
Interest rate 7.44% 7.59% 7.95% 7.80% -- -- 7.81%
Asset Backed -- -- -- -- -- -- --
Interest rate -- -- -- -- -- -- --
Other -- -- -- -- -- 11,338 11,338
Interest rate -- -- -- -- -- 6.50% 6.50%
- -------------------------------------------------------------------------------------------------------------------
Subtotal 2,693 42,604 80,278 26,405 -- 11,338 163,318
Interest rate 7.44% 7.59% 7.95% 7.80% --% 6.50% 7.72%
Mortgage Backed -- -- -- -- 64,717 -- 64,717
Interest rate -- -- -- -- 6.49% -- 6.49%
- -------------------------------------------------------------------------------------------------------------------
Total $2,693 $42,604 $80,278 $26,405 $64,717 $11,338 $228,035
Interest rate 7.44% 7.59% 7.95% 7.80% 6.49% 6.50% 7.37%
===================================================================================================================
Loan portfolio
The following table shows the compositions of the loan portfolio of the
Company by type of loan and type of borrower, on the dates indicated:
At December 31,
- -------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
Commercial and commercial real estate 1,562,462 1,502,237 1,476,912 1,437,118 1,455,984
Real estate construction 64,195 50,928 57,998 66,782 101,136
Real estate residential 355,488 337,002 384,128 361,909 276,951
Consumer 502,367 434,803 385,204 404,382 462,734
Unearned income (2,353) (4,124) (6,345) (8,254) (9,565)
- -------------------------------------------------------------------------------------------------------------------
Gross loans $2,482,159 $2,320,846 $2,297,897 $2,261,937 $2,287,240
Allowance for loan losses (52,279) (51,574) (51,304) (50,630) (50,921)
- -------------------------------------------------------------------------------------------------------------------
Net loans $2,429,880 $2,269,272 $2,246,593 $2,211,307 $2,236,319
===================================================================================================================
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, 2000. Balances exclude loans to individuals and
residential mortgages totaling $855.5 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 * $663,937 $473,556 $424,969 $1,562,462
Real estate construction 64,195 -- -- 64,195
- -------------------------------------------------------------------------------------------------------
Total $728,132 $473,556 $424,969 $1,626,657
=======================================================================================================
Loans with fixed interest rates $223,059 $473,556 $424,969 $1,121,584
Loans with floating interest rates 505,073 -- -- 505,073
- -------------------------------------------------------------------------------------------------------
Total $728,132 $473,556 $424,969 $1,626,657
=======================================================================================================
* 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:
- ---------------------------------------------------------------------
(In millions)
At December 31, 2000 1999
- ---------------------------------------------------------------------
Classified loans $31.6 $41.3
Other classified assets 2.1 3.3
- ---------------------------------------------------------------------
Total classified assets $33.7 $44.6
=====================================================================
Classified loans at December 31, 2000 decreased $9.7 million or 24
percent to $31.6 million from December 31, 1999, continuing to reflect
the effectiveness of the Company's high underwriting standards and
active workout policies. Other classified assets decreased $1.2 million
from prior year, due to sales and writedowns of properties acquired in
satisfaction of debt partially offset by new foreclosures on loans
with real estate collateral.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans 90 or more
days past due and still accruing and other real estate owned. Loans
are placed on nonaccrual 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
nonaccrual 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 nonaccrual status even though the
borrowers continue to repay the loans as scheduled. Such loans are
classified by Management as "performing nonaccrual" and are
included in total nonperforming assets. When the ability to fully
collect nonaccrual 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
nonaccrual 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 nonperforming assets of
the Company for the periods indicated:
- -------------------------------------------------------------------------------------------------------
(In millions)
December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Performing nonaccrual loans $3.5 $3.5 $1.8 $1.6 $4.3
Nonperforming nonaccrual loans 4.5 5.5 6.8 16.5 12.5
- -------------------------------------------------------------------------------------------------------
Nonaccrual loans 8.0 9.0 8.6 18.1 16.8
- -------------------------------------------------------------------------------------------------------
Restructured loans -- -- -- -- 0.2
Loans 90 or more days past due
and still accruing 0.6 0.5 0.5 1.0 1.8
Other real estate owned 2.1 3.3 4.3 7.4 9.9
- -------------------------------------------------------------------------------------------------------
Total nonperforming assets $10.7 $12.8 $13.4 $26.5 $28.7
=======================================================================================================
Allowance for loan losses as a
percentage of nonaccrual loans
and loans 90 or more days past
due and still accruing 601% 540% 564% 265% 271%
Allowance for loan losses as a percentage
of total nonperforming assets 487% 402% 383% 191% 177%
=======================================================================================================
Performing nonaccrual loans at December 31, 2000 were unchanged from the
prior year while nonperforming nonaccrual loans decreased $1.0 million
during the same period. Both categories were affected by extensive activity
during the year; most loans that were on nonaccrual status at December 31, 1999;
either were paid off or returned to full accrual status, while others
were added to replace them. The $1.2 million decrease in other real estate
owned balances from December 31, 1999 was due to writedowns and liquidations
net of foreclosures.
The increase in nonaccrual loans from 1998 to 1999 was primarily due to the
addition of one large group of related credits, offset by other reductions.
The decrease in other real estate owned balances at December 31 1999 from
December 31, 1998 was due to writedowns and liquidations net of foreclosures
The amount of gross interest income that would have been recorded
for nonaccrual loans if all such loans had been current in
accordance with their original terms while outstanding during the
period, was $859 thousand in 2000, $751 thousand in 1999 and $855
thousand in 1998. The amount of interest income that was recognized
on nonaccrual loans from cash payments made in 2000, 1999 and 1998
was $653 thousand, $473 thousand and $573 thousand, respectively.
Cash payments received, which were applied against the book balance
of performing and nonperforming nonaccrual loans outstanding at
December 31, 2000, totaled approximately $527 thousand, compared to
$356 thousand and $952 thousand in 1999 and 1998, respectively.
The overall credit quality of the loan portfolio continues to be
strong; however, the total nonperforming 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 nonperforming asset levels; however, no assurance can be
given that additional increases in nonaccrual 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, nonperforming 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 $52.3 million allowance
for loan losses, which constituted 2.11 percent of total loans at
December 31, 2000, to be adequate as a reserve against inherent
losses. However, while the Company's policy is to charge off in the
current period those loans on which the loss is considered
probable, the risk exists of future losses which cannot be
precisely quantified or attributed to particular loans or classes
of loans. Management continues to evaluate the loan portfolio and
assess current economic conditions that will dictate future
allowance levels.
The following table summarizes the loan loss experience of the
Company for the periods indicated:
- -------------------------------------------------------------------------------------------------------
(In thousands) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Total loans outstanding $2,482,159 $2,320,846 $2,297,897 $2,261,937 $2,287,240
Average loans outstanding during the period $2,369,065 2,292,386 2,262,082 2,248,048 2,249,520
Analysis of the reserve
Beginning balance $51,574 $51,304 $50,630 $50,921 $48,494
Additions to the reserve charged to
operating expense 3,676 4,780 5,180 7,645 12,306
Allowance acquired through merger 1,036 0 0 0 1,665
Credit losses:
Commercial and commercial real estate (4,148) (5,071) (5,113) (6,824) (7,998)
Real estate construction 0 (94) -- (962) (781)
Real estate residential (16) (18) (97) (374) (1,862)
Consumer (3,818) (2,754) (3,358) (4,323) (5,376)
- -------------------------------------------------------------------------------------------------------
Total (7,982) (7,937) (8,568) (12,483) (16,017)
Credit loss recoveries
Commercial and commercial real estate 2,332 2,052 2,305 2,498 2,227
Real estate construction 0 0 10 160 44
Real estate residential 0 0 1 34 72
Consumer 1,643 1,375 1,746 1,855 2,130
- -------------------------------------------------------------------------------------------------------
Total 3,975 3,427 4,062 4,547 4,473
- -------------------------------------------------------------------------------------------------------
Net credit losses (4,007) (4,510) (4,506) (7,936) (11,544)
- -------------------------------------------------------------------------------------------------------
Balance, end of period $52,279 $51,574 $51,304 $50,630 $50,921
=======================================================================================================
Net credit losses to average loans 0.17% 0.20% 0.20% 0.35% 0.51%
Allowance for loan losses as a percentage
of loans outstanding 2.11% 2.22% 2.23% 2.24% 2.23%
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:
- ----------------------------------------------------------------------------------------------------------------------------------
2000 Loans 1999 Loans 1998 Loans 1997 Loans 1996 Loans
Allocation as Allocation as Allocation as Allocation as Allocation as
of the Percent of the Percent of the Percent of the Percent of the Percent
Allowance of Total Allowance of Total Allowance of Total Reserve of Total Reserve of Total
Balance Loans Balance Loans Balance Loans Balance Loans Balance Loans
- ----------------------------------------------------------------------------------------------------------------------------------
( Dollars and thousands)
Commercial $21,632 63% $23,523 65% $22,240 64% $22,649 63% $22,743 64%
Real estate construction 4,344 3 2,042 2 4,055 3 4,374 3 3,471 4
Real estate residential 427 14 877 14 310 17 87 16 2,489 12
Consumer 5,648 20 4,670 19 4,260 16 4,356 18 6,543 20
Unallocated portion of
the reserve * 20,228 "-- 20,462 "-- 20,439 "-- 19,164 "-- 15,675 "--
- ----------------------------------------------------------------------------------------------------------------------------------
Total $52,279 100% $51,574 100% $51,304 100% $50,630 100% $50,921 100%
==================================================================================================================================
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 nonaccrual 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:
(In thousands)
- ---------------------------------------------------------------------
At December 31, 2000 1999
- ---------------------------------------------------------------------
Nonaccrual loans $8,024 $8,960
Other 3,704 6,146
- ---------------------------------------------------------------------
Total impaired loans $11,728 $15,106
=====================================================================
Specific reserves $1,817 $2,105
=====================================================================
The $3.7 million balance of impaired loans as of December 31, 2000,
other than nonaccrual loans, is due to one commercial real estate
loan having collateral exposure that may preclude ultimate full
repayment. Payment on this credit was current as of December 31,
2000.
The average balance of the Company's impaired loans for the year
ended December 31, 2000 was $12.5 million compared to $15.5 million
in 1999. 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 nonaccrual. 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 subject 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, 2001:
- ---------------------------------------------------------
Changes in Estimated Increase
Interest (Decrease) in NII
Rates Estimated -----------------------
(Basis Points) NII Amount Amount Percent
- ---------------------------------------------------------
(Dollars in millions)
+200 $196.6 ($4.8) -2.4%
-- 201.4 -- --
- -200 202.9 1.5 0.7
=========================================================
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, 2000:
===================================================================================================================
Repricing within (days)
- -------------------------------------------------------------------------------------------------------------------
Non-
0-90 91-180 181-365 Over 365 Repricing Total
- -------------------------------------------------------------------------------------------------------------------
Assets
Investment securities $46