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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, 2001
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: (707) 863-8000
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 7, 2002:
$1,323,895,503.32
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 7, 2002
Title of Class
Common Stock, no par value
Shares Outstanding
33,973,352
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 15, 2002
for Annual Meeting of Shareholders
to be held on April 23, 2002
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
Page
PART I
Item 1 Business 1
Item 2 Description of Properties 9
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 8 Financial Statements and Supplementary Data 33
Item 9 Changes in and Disagreements on Accounting and Financial Disclosure 61
PART III
Item 10 Directors and Executive Officers of the Registrant 61
Item 11 Executive Compensation 62
Item 12 Security Ownership of Certain Beneficial Owners and Management 62
Item 13 Certain Relationships and Related Transactions 62
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 62
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements about
Westamerica Bancorporation for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. A number of factors, some
of which are beyond the Company's ability to predict or control, could cause
future results to differ materially from those contemplated. These factors
include but are not limited to (1) a continued slowdown in the national and
California economies; (2) increased economic uncertainty created by the recent
terrorist attacks on the United States and the actions taken in response; (3)
the prospect of additional terrorist attacks in the United States and the
uncertain effect of these events on the national and regional economies; (4)
changes in the interest rate environment; (5) changes in the regulatory
environment; (6) significantly increasing competitive pressure in the banking
industry ; (7) operational risks including data processing system failures or
fraud; (8) the effect of acquisitions and integration of acquired businesses;
(9) volatility of rate sensitive deposits; (10) asset/liability matching risks
and liquidity risks; and (11) changes in the securities markets. See also
"Certain Additional Business Risks" in Item 1. and other risk factors discussed
elsewhere in this Report.
PART I
ITEM 1. BUSINESS
WESTAMERICA BANCORPORATION (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956 ("BHC"), as
amended. Its legal headquarters are located at 1108 Fifth Avenue, San
Rafael, California 94901. Principal administrative offices are
located at 4550 Mangels Boulevard in Fairfield, California 94585 and
its telephone number is (707) 863-8000. 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" or the "Bank"). The principal communities
served are located in Northern and Central California, from Mendocino,
Lake, Colusa and Nevada Counties in the North to Kern county in the
South. The Company's strategic focus is on the banking needs of small
businesses. 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 incorporated under the laws of the State of California
in 1972 as "Independent Bankshares Corporation" pursuant to a plan of
reorganization among three previously unaffiliated Northern California
banks. The Company operated as a multi-bank holding company until
mid-1983, at which time the then six subsidiary banks were merged into
a single bank named Westamerica Bank and the name of the holding
company was changed to Westamerica Bancorporation.
The Company acquired five additional banks within its immediate market
area during the early to mid 1990's. 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 institutions. The
subsidiary banks acquired were merged with and into WAB. These
business combinations were accounted for as poolings-of-interests.
In April, 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. The
business combination was accounted for as a pooling-of-interests.
ValliWide Bank was merged with and into WAB.
In August, 2000, the Company acquired First Counties Bank. The
acquisition was valued at approximately $19.7 million and was
accounted for using the purchase accounting method. The 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, 2001, the Company had consolidated assets of
approximately $3.9 billion, deposits of approximately $3.2 billion and
shareholders' equity of approximately $314 million. The Company and
its subsidiaries employed 1,066 full-time equivalent staff.
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.
A portion of the loan portfolio of the Company is dependent on real
estate. At December 31, 2001, real estate served as the principal
source of collateral with respect to approximately 56 percent of the
Company's loan portfolio. A worsening of current economic conditions,
increased economic uncertainty created by the most recent terrorist
attacks on the United States and the actions taken in response, 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 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.
The Company is also 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, is not
insured or is in excess of applicable insurance limits, it could have
a significant adverse impact on the Company's business, financial
condition or results of operations.
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 34.2 million were outstanding at December 31, 2001.
Pursuant to its stock option plans, at December 31, 2001, the Company
had exercisable options outstanding of 1.6 million. As of December 31,
2001, 1.4 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.
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 the Bank'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, the Bank, 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.
The Company is a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and the
Bank 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 the Bank to pay dividends.
Transactions between the Company and the Bank 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 the Bank
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.
On March 11, 2000, the Gramm-Leach-Bliley Act (the GLBA),
or the Financial Services Act of 1999 became effective. The GLBA
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 GLBA to allow new "financial holding
companies" ("FHCs") to offer banking, insurance, securities and other
financial products to consumers. Specifically, the GLBA 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 GLBA, Federal Reserve member 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.
Regulation and Supervision of Banks
The Bank is a California state-chartered bank, is insured by the
Federal Deposit Insurance Corporation (the "FDIC") and is a member
bank of the Federal Reserve System. As such, the Bank is subject to
regulation, supervision and regular examination by the California
Department of Financial Institutions ("DFI") and the FRB. As a member
bank of the Federal Reserve System, the Bank's primary federal
regulator is the FRB. The regulations of these agencies affect most
aspects of the Bank's 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, the Bank is also subject to
applicable provisions of California law. Under California law, the
Bank is subject to various restrictions on, and requirements
regarding, its operations and administration including the maintenance
of branch offices and automated teller machines, capital requirements,
deposits and borrowings, stockholder rights and duties, and investment
and lending activities.
California law permits a state chartered bank to invest in the stock
and securities of other corporations, subject to a state-chartered
bank receiving either general authorization or, depending on the
amount of the proposed investment, specific authorization from the
Commissioner. The 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 the Bank 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,
qualifying noncumulative perpetual 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, hybrid capital instruments and mandatory convertible
debt securities, term subordinated debt and certain other instruments
with some characteristics of equity and limited amounts of unrealized
holding gains on equity securities. 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%.
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, 2001, the Company's and the Bank's respective
ratios exceeded applicable regulatory requirements. See Note 8 to the
consolidated financial statements for capital ratios of the Company
and the Bank, 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 nontraditional 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
The Bank's 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
The Bank 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.
Financial Privacy Legislation
The GLBA, in addition to the previously described changes in permissible
nonbanking activities permitted to banks, BHCs and FHCs, also required
the federal banking agencies, among other federal regulatory agencies, to
adopt regulations governing the privacy of consumer financial
information. The FRB adopted such regulations with an effective date of
November 13, 2000, and a date of full compliance with the regulations of
July 1, 2001. The Bank is subject to the FRBs regulations.
The regulations impose three main requirements established by the GLBA.
First, a banking organization must provide initial notices to customers
about their privacy policies, describing the conditions under which they
may disclose nonpublic personal information to nonaffiliated third
parties and affiliates, such as the Company. Second, banking
organizations must provide annual notices of their privacy policies to
their current customers. Third, banking organizations must provide a
reasonable method for consumers to opt-out of disclosures to
nonaffiliated third parties.
In connection with the regulations governing the privacy of consumer
financial information, the federal banking agencies, including the FRB,
adopted guidelines for safeguarding confidential customer information,
effective on July 1, 2001. The guidelines require banking organizations
to establish an information security program to: (1) identify and assess
the risks that may threaten customer information; (2) develop a written
plan containing policies and procedures to manage and control these
risks; (3) implement and test the plan; and (4) adjust the plan on a
continuing basis to account for changes in technology, the sensitivity of
customer information, and internal or external threats. The guidelines
also outline the responsibilities of directors of banking organizations
in overseeing the protection of customer information.
Recently Enacted Legislation and Regulations
On October 26, 2001, the President signed into law the
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 or the
USA Patriot Act. Title III of the Act is the International
Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. It
includes numerous provisions for fighting international money laundering
and blocking terrorist access to the U.S. financial system. The goal of
Title III is to prevent the U.S. financial system and the U.S. clearing
mechanisms from being used by parties suspected of terrorism, terrorist
financing and money laundering.
The provisions of Title III of the USA Patriot Act which affect banking
organizations, including the Bank, are generally set forth as amendments
to the Bank Secrecy Act. These provisions relate principally to U.S.
banking organizations relationships with foreign banks and with persons
who are resident outside the United States. The USA Patriot Act does not
immediately impose any new filing or reporting obligations for banking
organizations, but does require certain additional due diligence and
recordkeeping practices. Some requirements take effect without the
issuance of regulations. Other provisions are to be implemented through
regulations that will be promulgated by the U.S. Department of the
Treasury (the Treasury), in consultation with the FRB and other
federal financial institutions regulators.
At this time, numerous provisions of Title III of the USA Patriot Act
require implementing regulations or interpretations from the Treasury.
Consequently, the effect of the USA Patriot Act on the business of the
Company and the Bank cannot be accurately predicted at this time.
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 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.
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 nineteenth largest financial institution in California
in terms of total deposits at December 31, 2000. In the individual
markets in which it has branch offices, WAB was the fourth largest
financial institution, with a market share of approximately 7.90%. 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 22.5 percent of the total deposit market
among federally-insured depository institutions. WAB's share of the other
markets it serves in Marin County was 19.2 percent, ranking it first.
ITEM 2. PROPERTIES
Branch Offices and Facilities
WAB is engaged in the banking business through 90 offices in 23 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, 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 31 branch office locations and one administrative
building and leases 69 facilities. 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 these proceedings is 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 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS 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:
=======================================================
2001: High Low
- -------------------------------------------------------
First quarter $43.00 $33.94
Second quarter $39.25 $35.83
Third quarter $41.40 $33.94
Fourth quarter $40.40 $32.77
2000:
First quarter $27.75 $21.00
Second quarter $30.06 $24.38
Third quarter $33.56 $27.00
Fourth quarter $43.75 $30.69
=======================================================
As of December 31, 2001, there were approximately 8,900 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, 2001, $158.5 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 three 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 and became 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
(In thousands, except per share data)
=======================================================================================================
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Year ended December 31
Interest income $257,056 $269,516 $257,656 $266,820 $270,670
Interest expense 68,887 88,614 78,456 86,665 88,054
- -------------------------------------------------------------------------------------------------------
Net interest income 188,169 180,902 179,200 180,155 182,616
Provision for loan losses 3,600 3,675 4,780 5,180 7,645
Noninterest income 42,655 41,130 40,174 37,805 37,013
Noninterest expense 102,651 100,198 100,133 101,408 137,878
- -------------------------------------------------------------------------------------------------------
Income before income taxes 124,573 118,159 114,461 111,372 74,106
Provision for income taxes 40,294 38,380 38,373 37,976 25,990
- -------------------------------------------------------------------------------------------------------
Net income $84,279 $79,779 $76,088 $73,396 $48,116
- -------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $2.39 $2.19 $1.97 $1.76 $1.12
Diluted 2.36 2.16 1.94 1.73 1.10
Per share:
Dividends paid $0.82 $0.74 $0.66 $0.52 $0.36
Book value at December 31 9.19 9.32 8.10 9.25 9.51
Average common shares outstanding 35,213 36,410 38,588 41,797 43,040
Average diluted common shares outstanding 35,748 36,936 39,194 42,524 43,827
Shares outstanding at December 31 34,220 36,251 37,125 39,828 42,799
At December 31
Loans, net $2,432,371 $2,429,880 $2,269,272 $2,246,593 $2,211,307
Total assets 3,927,967 4,031,381 3,893,187 3,844,298 3,848,444
Total deposits 3,234,635 3,236,744 3,065,344 3,189,005 3,078,501
Short-term borrowed funds 311,911 386,942 462,345 203,671 264,848
Debt financing and notes payable 27,821 31,036 41,500 47,500 52,500
Shareholders' equity 314,359 337,747 300,592 368,596 407,152
Financial Ratios:
For the year:
Return on assets 2.18% 2.06% 1.99% 1.94% 1.28%
Return on equity 27.17% 25.78% 23.31% 19.48% 12.71%
Net interest margin * 5.71% 5.48% 5.46% 5.52% 5.63%
Net loan losses to average loans 0.15% 0.17% 0.20% 0.20% 0.35%
Efficiency ratio * 41.67% 42.45% 43.19% 44.25% 60.15%
At December 31:
Equity to assets 8.00% 8.38% 7.72% 9.59% 10.58%
Total capital to risk-adjusted assets 10.63% 11.61% 11.75% 13.79% 14.76%
Loan loss reserve to loans 2.10% 2.11% 2.22% 2.23% 2.24%
* Fully taxable equivalent
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion addresses information pertaining to the financial
condition and results of operations of Westamerica Bancorporation and
Subsidiaries (the "Company") that may not be otherwise apparent from a
review of the consolidated financial statements and related footnotes. It
should be read in conjunction with those statements and notes found on
pages 38 through 70, as well as with the other information presented
throughout the report.
Net Income
The Company achieved earnings of $84.3 million in 2001, representing a 5.6%
increase from the $79.8 million earned in 2000, which was up 4.9% over 1999
earnings of $76.1 million.
Components of Net Income
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
(in thousands) ------------------------------------
Net interest income * $203,687 $194,933 $191,644
Provision for loan losses (3,600) (3,675) (4,780)
Noninterest income 42,655 41,130 40,174
Noninterest expense (102,651) (100,198) (100,133)
Taxes * (55,812) (52,411) (50,817)
------------------------------------
Net income $84,279 $79,779 $76,088
================================================================================
Net income per average fully-diluted share $2.36 $2.16 $1.94
Net income as a percentage of
average shareholders' equity 27.17% 25.78% 23.31%
Net income as a percentage of
average total assets 2.18% 2.06% 1.99%
=================================================================================
* Fully taxable equivalent (FTE)
Most of the improvement in 2001 earnings was the result of greater net
interest income, which increased by $8.8 million or 4.5% compared to 2000.
Approximately $6.0 million of that increase was due to a higher level of
average earning assets and the remainder to a stronger margin earned on
those assets. The loan loss provision was reduced slightly and
noninterest income grew $1.5 million or 3.7%. Partially offsetting this
higher revenue, noninterest expense expanded $2.5 million, or 2.4%.
Earnings in 2000 increased $3.7 million or 4.9% over 1999, also primarily
due to higher net interest income, which grew by $3.3 million or 1.7%.
Approximately two-thirds of that increase was due to higher levels of
earning assets and the remainder to 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.
The Company's return on average total assets was 2.18 percent in 2001,
compared to 2.06 percent and 1.99 percent in 2000 and 1999, respectively.
Return on average equity in 2001 was 27.17 percent, compared to 25.78
percent and 23.31 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)
increased $8.8 million or 4.5% from 2000, to $203.7 million in 2001.
Comparing 2000 to 1999, net interest income (FTE) increased $3.3 million or
1.7%.
Components of Net Interest Income
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
(in thousands) ------------------------------------
Interest income $257,056 $269,516 $257,656
Interest expense (68,887) (88,614) (78,456)
FTE adjustment 15,518 14,031 12,444
------------------------------------
Net interest income (FTE) $203,687 $194,933 $191,644
================================================================================
Net interest margin (FTE) 5.71% 5.48% 5.46%
================================================================================
Interest income (FTE) decreased $11.0 million or 3.9% from 2000 to 2001,
the net effect of lower earning-asset yields partially offset by a
favorable change in the mix of those assets. The total yield on earning
assets dropped from 7.96% in 2000 to 7.64% in 2001, following the trend in
overall interest markets in which Fed Funds rates were reduced a record
number of times, from a targeted rate of 6.25% on December 31, 2000 to
1.75% twelve months later. The greatest decrease was on commercial loan
yields (down from 9.45% to 8.11%, or 134 basis points), with relatively
stable consumer loan yields declining 51 basis points. The investment
portfolio yield was unchanged. The effect of lower yields was to reduce
interest income by $13.7 million. The total level of earning assets
remained unchanged, but a shift from lower-yielding investment securities
to more profitable loans resulted in a $2.8 million improvement in
interest income.
Interest expense decreased $19.7 million or 22.3% in 2001 compared to 2000,
principally due to lower rates paid. The average rate paid on
interest-bearing liabilities was 2.73% in 2001, 69 basis points or 20%
lower than in 2000. The most pronounced declines included rates paid on
shorter-term liabilities such as fed funds purchased (down from 6.18% to
4.27%) and public time deposits (down from 6.03% to 4.41%). Rates paid on
transaction deposit accounts decreased 29 basis points. This decrease had
the effect of lowering the Company's interest costs by $17.1 million. In
addition, the reduced level and changed composition of interest-bearing
liabilities caused interest expense to decline an additional $2.6 million.
Interest income (FTE) increased $13.4 million or 5.0% from 2000 to 1999,
primarily due to higher level of earning assets. Average loans outstanding
grew $77 million to $2.37 billion, while 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 expense increased $10.2 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. The average rate paid on federal funds purchased
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.
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 nonperforming loans. Interest income includes proceeds
from loans on nonaccrual 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 & Shareholders' Equity and
Yields, Rates & Interest Margin
- --------------------------------------------------------------------------------
Year ended December 31, 2001
(dollars in thousands) ------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
------------------------------------
Assets
Money market assets and funds sold $1,040 $24 2.31%
Trading account securities -- -- --
Investment securities:
Available for sale
Taxable 616,954 37,563 6.09%
Tax-exempt 268,348 20,251 7.55%
Held to maturity
Taxable 74,325 3,796 5.11%
Tax-exempt 145,269 11,592 7.98%
Loans:
Commercial
Taxable 1,370,663 113,433 8.28%
Tax-exempt 189,808 14,784 7.79%
Real estate construction 68,910 6,441 9.35%
Real estate residential 353,438 24,499 6.93%
Consumer 482,797 40,191 8.32%
---------- ---------
Earning assets 3,571,552 272,574 7.63%
Other assets 286,267
-----------
Total assets $3,857,819
===========
Liabilities and shareholders' equity
Deposits
Noninterest bearing demand $992,182 -- --
Savings and interest-bearing
transaction 1,360,978 19,896 1.46%
Time less than $100,000 387,407 16,898 4.36%
Time $100,000 or more 477,035 20,794 4.36%
---------- ---------
Total interest-bearing deposits 2,225,420 57,588 2.59%
Funds purchased 265,474 9,283 3.50%
Debt financing and notes payable 28,089 2,016 7.18%
---------- ---------
Total interest-bearing liabilities 2,518,983 68,887 2.73%
Other liabilities 36,412
Shareholders' equity 310,242
-----------
Total liabilities and shareholders' equity $3,857,819
===========
Net interest spread (1) 4.90%
Net interest income and interest margin (2) $203,687 5.71%
========= ======
(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 & Shareholders' Equity and
Yields, Rates & Interest Margin
- --------------------------------------------------------------------------------
Year ended December 31, 2000
(dollars in thousands) ------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
------------------------------------
Assets
Money market assets and funds sold $529 $17 2.14%
Trading account securities -- -- --
Investment securities:
Available for sale
Taxable 747,942 45,995 6.15%
Tax-exempt 214,527 16,325 7.61%
Held to maturity
Taxable 79,650 4,338 5.45%
Tax-exempt 148,828 12,503 8.40%
Loans:
Commercial
Taxable 1,333,131 119,565 8.97%
Tax-exempt 175,601 13,671 7.79%
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 & Shareholders' Equity and
Yields, Rates & Interest Margin
- --------------------------------------------------------------------------------
Year ended December 31, 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:
Available for sale
Taxable 776,186 47,495 6.12%
Tax-exempt 206,522 15,387 7.45%
Held to maturity
Taxable 86,403 4,656 5.39%
Tax-exempt 150,772 11,607 7.70%
Loans:
Commercial
Taxable 1,341,139 114,658 8.55%
Tax-exempt 151,906 12,281 8.08%
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.
The following table sets forth a summary of the changes in
interest income and interest expense due to 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.
Summary of Changes in Interest Income and Expense
- --------------------------------------------------------------------------------
Years ended December 31, 2001 compared with 2000
(dollars in thousands) ------------------------------------
Volume Rate Total
------------------------------------
Increase (decrease) in interest and fee income:
Money market assets and
funds sold $10 ($3) $7
Trading account securities -- -- --
Investment securities:
Available for sale
Taxable (7,982) (450) (8,432)
Tax-exempt (1) 3,866 60 3,926
Held to maturity
Taxable (281) (261) (542)
Tax-exempt (1) (294) (617) (911)
Loans:
Commercial:
Taxable 3,297 (9,429) (6,132)
Tax-exempt (1) 1,107 6 1,113
Real estate construction 1,879 (1,570) 309
Real estate residential 875 (467) 408
Consumer 890 (1,608) (718)
------------------------------------
Total loans (1) 8,048 (13,068) (5,020)
------------------------------------
Total increase (decrease) in
interest and fee income (1) 3,367 (14,339) (10,972)
------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing 918 (3,849) (2,931)
Time less than $100,000 (313) (2,550) (2,863)
Time $100,000 or more 740 (5,795) (5,055)
------------------------------------
Total interest-bearing 1,345 (12,194) (10,849)
Funds purchased (3,453) (4,932) (8,385)
Notes and mortgages payable (507) 14 (493)
------------------------------------
Total (decrease)
in interest expense (2,615) (17,112) (19,727)
------------------------------------
Increase in
net interest income (1) $5,982 $2,773 $8,755
================================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
Summary of Changes in Interest Income and Expense
- --------------------------------------------------------------------------------
Year ended December 31, 2000 compared with 1999
(dollars in thousands) ------------------------------------
Volume Rate Total
------------------------------------
Increase (decrease) in interest and fee income:
Money market assets and
funds sold $13 $0 $13
Trading account securities -- -- --
Investment securities:
Available for sale
Taxable (1,736) 236 (1,500)
Tax-exempt (1) 605 333 938
Held to maturity
Taxable (302) (16) (318)
Tax-exempt (1) 45 851 896
Loans:
Commercial:
Taxable (688) 5,595 4,907
Tax-exempt (1) 1,858 (468) 1,390
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 in
interest and fee income (1) 4,290 9,156 13,445
------------------------------------
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
in interest expense 1,213 8,945 10,158
------------------------------------
Increase 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.
Provision For Loan Losses
The provision for loan losses was $3.6 million for 2001, compared to $3.7
million in 2000 and $4.8 million in 1999. The reductions in the provision
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 109 months at December 31, 2001 and, on the same date, those
investments included $185.9 million in fixed-rate and $23.3 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, 2001, the Company held $949.0
million classified as investments available for sale. At December 31, 2001,
an unrealized gain of $11.9 million net of taxes of $9.1 million related to
these securities, was included in shareholders' equity.
The Company had no trading securities at December 31, 2001.
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:
Available for Sale Portfolio Distribution
- --------------------------------------------------------------------------------
At December 31, 2001 2000 1999
(dollars in thousands) ------------------------------------
U.S. Treasury $135,086 $188,513 $183,478
U.S. Government agencies and corporations 213,454 207,091 195,300
States and political subdivisions 303,048 241,151 234,781
Asset backed securities 33,283 76,678 143,590
Other 264,099 207,842 225,188
------------------------------------
Total $948,970 $921,275 $982,337
================================================================================
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, 2001. 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 Maturity Distribution
- -------------------------------------------------------------------------------------------------------------------
After one After five Mortgage-
Within but within but within After ten backed Other Total
At December 31, 2001 one year five years ten years years
(Dollars in thousands) ----------------------------------------------------------------------------------
U.S. Treasury $121,571 $9,926 $-- $-- $-- $-- $131,497
Interest rate 5.91% 6.20% --% --% --% --% 5.93%
U.S. Government agencies
and corporations 23,208 175,836 -- 66 -- -- 199,110
Interest rate 4.84% 5.64% -- 8.85% -- -- 5.55%
States and political
subdivisions 3,123 14,801 126,104 154,311 -- -- 298,339
Interest rate 7.52% 7.50% 7.70% 7.21% -- -- 7.44%
Asset-backed 301 9,432 23,414 -- 33,147
Interest rate 9.29% 5.73% 2.98% -- -- -- 3.82%
Other securities 88,245 131,537 -- -- -- -- 219,782
Interest rate 4.54% 5.79% -- -- -- -- 5.29%
- -------------------------------------------------------------------------------------------------------------------
Subtotal 236,448 341,532 149,518 154,377 -- -- 881,875
Interest rate 5.32% 5.80% 6.96% 7.21% -- -- 6.09%
Mortgage Backed -- -- -- -- 8,325 -- 8,325
Interest rate -- -- -- -- 5.67% -- 5.67%
Other without set maturities -- -- -- -- -- 37,359 37,359
Interest rate -- -- -- -- -- 9.34% 9.34%
- -------------------------------------------------------------------------------------------------------------------
Total $236,448 $341,532 $149,518 $154,377 $8,325 $37,359 $927,559
Interest rate 5.32% 5.80% 6.96% 7.21% 5.67% 9.34% 6.22%
===================================================================================================================
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:
Held to Maturity Portfolio Distribution
- --------------------------------------------------------------------------------
At December 31, (dollars in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
U.S. Treasury $-- $-- $--
U.S. Government agencies and corporations 55,320 64,717 70,418
States and political subdivisions 141,712 151,980 155,813
Asset backed securities -- -- --
Other 12,137 11,338 10,923
- --------------------------------------------------------------------------------
Total $209,169 $228,035 $237,154
================================================================================
Fair value $214,866 $231,906 $235,147
================================================================================
The following table sets forth the relative maturities and yields of the
Company's held to maturity securities at December 31, 2001. 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 Maturity Distribution
- -------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After ten Mortgage-
At December 31, 2001 one year five years ten years years backed Other Total
(Dollars in thousands) ----------------------------------------------------------------------------------
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government Agencies
and Corporations -- -- -- -- -- -- --
Interest rate -- -- -- -- -- -- --
States and Political
Subdivisions 5,062 54,277 61,328 21,045 -- -- 141,712
Interest rate 7.77% 7.57% 8.09% 7.99% -- -- 7.86%
Asset Backed -- -- -- -- -- -- --
Interest rate -- -- -- -- -- -- --
Other -- -- -- -- -- 12,137 12,137
Interest rate -- -- -- -- -- 5.38% 5.38%
- -------------------------------------------------------------------------------------------------------------------
Subtotal 5,062 54,277 61,328 21,045 -- 12,137 153,849
Interest rate 7.77% 7.57% 8.09% 7.99% --% 5.38% 7.66%
Mortgage Backed -- -- -- -- 55,320 -- 55,320
Interest rate -- -- -- -- 5.30% -- 5.30%
- -------------------------------------------------------------------------------------------------------------------
Total $5,062 $54,277 $61,328 $21,045 $55,320 $12,137 $209,169
Interest rate 7.77% 7.57% 8.09% 7.99% 5.30% 5.38% 7.02%
===================================================================================================================
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:
Loan Portfolio Distribution
- -------------------------------------------------------------------------------------------------------
At December 31, 2001 2000 1999 1998 1997
(dollars in thousands) -----------------------------------------------------------
(In thousands)
Commercial and commercial real estate $1,576,723 $1,562,462 $1,502,237 $1,476,912 $1,437,118
Real estate construction 69,658 64,195 50,928 57,998 66,782
Real estate residential 347,114 355,488 337,002 384,128 361,909
Consumer 491,793 502,367 434,803 385,204 404,382
Unearned income (831) (2,353) (4,124) (6,345) (8,254)
-----------------------------------------------------------
Gross loans $2,484,457 $2,482,159 $2,320,846 $2,297,897 $2,261,937
Allowance for loan losses (52,086) (52,279) (51,574) (51,304) (50,630)
-----------------------------------------------------------
Net loans $2,432,371 $2,429,880 $2,269,272 $2,246,593 $2,211,307
=======================================================================================================
The following table shows the maturity distribution and interest rate
sensitivity of commercial and real estate construction loans at December
31, 2001. Balances exclude loans to individuals and residential mortgages
totaling $838.1 million. These types of loans are typically paid in monthly
installments over a number of years.
Loan Maturity Distribution
- --------------------------------------------------------------------------------------------
Within One to After
At December 31, 2001 One Year Five Years Five Years Total
(dollars in thousands) ------------------------------------------------
Commercial and commercial real estate * $542,708 $490,773 $543,242 $1,576,723
Real estate construction 69,658 -- -- 69,658
- --------------------------------------------------------------------------------------------
Total $612,366 $490,773 $543,242 $1,646,381
============================================================================================
Loans with fixed interest rates $322,754 $519,732 $549,830 $1,392,316
Loans with floating interest rates $254,065 -- -- 254,065
- --------------------------------------------------------------------------------------------
Total $576,819 $519,732 $549,830 $1,646,381
============================================================================================
* 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 to 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 nonperforming
assets and potential problem loans. These loans receive an elevated level of
attention to ensure collection.
Classified Assets
The following summarizes the Company's classified assets for the periods
indicated:
Classified Assets
- -------------------------------------------------------------------
At December 31, 2001 2000
(dollars in thousands) -----------------------
Classified loans $22,285 $31,634
Other classified assets 523 2,065
-----------------------
Total classified assets $22,808 $33,699
===================================================================
Classified loans at December 31, 2001 decreased $9.3 million or 29% to
$22.3 million from December 31, 2000, reflecting the effectiveness of the
Company's high underwriting standards and active workout policies. Other
classified assets decreased $1.6 million from the 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 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:
Nonperforming Assets
- -------------------------------------------------------------------------------------------------------
At December 31, 2001 2000 1999 1998 1997
(dollars in thousands) -----------------------------------------------------------
Performing nonaccrual loans $3,055 $3,499 $3,460 $1,800 $1,645
Nonperforming nonaccrual loans 5,058 4,525 5,501 6,732 16,500
-----------------------------------------------------------
Nonaccrual loans 8,113 8,024 8,961 8,532 18,145
-----------------------------------------------------------
Loans 90 or more days past due
and still accruing 550 650 584 522 1,010
Other real estate owned 523 2,065 3,269 4,315 7,381
-----------------------------------------------------------
Total Nonperforming Assets $9,186 $10,739 $12,814 $13,369 $26,536
=======================================================================================================
Allowance for loan losses as a
percentage of nonaccrual loans
and loans 90 or more days past
due and still accruing 601% 603% 540% 564% 265%
Allowance for loan losses as a percentage
of total nonperforming assets 567% 487% 402% 383% 191%
=======================================================================================================
Performing nonaccrual loans at December 31, 2001 were $444 thousand below a
year earlier, while nonperforming loans increased $533 thousand. With the
exception of three relationships totaling $2.4 million, all loans on
nonaccrual status in 2000 were either paid off or brought current in 2001,
with the net result of total nonaccrual loans remaining approximately
unchanged. All foreclosed property owned in 2000 was disposed of at a small
gain during 2001; the $523 thousand owned at December 31, 2001 consists of
seven small parcels.
Performing nonaccrual loans at December 31, 2000 increased $39 thousand from the
prior year while nonperforming nonaccrual loans decreased $976 thousand 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
replaced 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 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 $673 thousand in
2001, $859 thousand in 2000 and $751 thousand in 1999. The amount of interest
income that was recognized on nonaccrual loans from cash payments made in
2001, 2000 and 1999 was $632 thousand, $653 thousand, $473 thousand,
respectively. Cash payments received, which were applied against the book
balance of performing and nonperforming nonaccrual loans outstanding at
December 31, 2001, totaled approximately $161 thousand, compared to $527
thousand in 2000 and $356 thousand in 1999.
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 assets at their
current 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 that are 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 $52.1 million allowance for loan losses, which constituted
2.10 percent of total loans at December 31, 2001, 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:
Loan Loss Allowance, Chargeoffs & Recoveries
- -------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999 1998 1997
(dollars in thousands) -----------------------------------------------------------
Total loans outstanding $2,484,457 $2,482,159 $2,320,846 $2,297,897 $2,261,937
Average loans outstanding during the period 2,465,616 $2,369,065 2,292,386 2,262,082 2,248,048
Analysis of the Allowance
Balance, beginning of period $52,279 $51,574 $51,304 $50,630 $50,921
Additions to the allowance charged to
operating expense 3,600 3,675 4,780 5,180 7,645
Allowance acquired through merger -- 1,036 -- -- --
Loans charged off:
Commercial and commercial real estate (2,475) (4,148) (5,071) (5,113) (6,824)
Real estate construction (10) -- (94) -- (962)
Real estate residential -- (16) (18) (97) (374)
Consumer (4,968) (3,818) (2,754) (3,358) (4,323)
-----------------------------------------------------------
Total chargeoffs (7,453) (7,982) (7,937) (8,568) (12,483)
-----------------------------------------------------------
Recoveries of loans previously charged off:
Commercial and commercial real estate 1,577 2,333 2,052 2,305 2,498
Real estate construction -- -- -- 10 160
Real estate residential 243 -- -- 1 34
Consumer 1,840 1,643 1,375 1,746 1,855
-----------------------------------------------------------
Total recoveries 3,660 3,976 3,427 4,062 4,547
-----------------------------------------------------------
Net loan losses (3,793) (4,007) (4,510) (4,506) (7,936)
-----------------------------------------------------------
Balance, end of period $52,086 $52,279 $51,574 $51,304 $50,630
=======================================================================================================
Net loan losses to average loans 0.15% 0.17% 0.20% 0.20% 0.35%
Allowance for loan losses as a percentage
of loans outstanding 2.10% 2.11% 2.22% 2.23% 2.24%
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:
Allocation of the Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------
At December 31, 2001 2000 1999
Allocation Loans as Allocation Loans as Allocation Loans as
of the Percent of the Percent of the Percent
Allowance of Total Allowance of Total Allowance of Total
Balance Loans Balance Loans Balance Loans
(dollars in thousands) ----------------------------------------------------------------------
Commercial $21,206 63% $21,632 63% $23,523 65%
Real estate construction 4,860 3% 4,344 3% 2,042 2%
Real estate residential 417 14% 427 14% 877 14%
Consumer 4,986 20% 5,648 20% 4,670 19%
Unallocated portion 20,617 "-- 20,228 "-- 20,462 "--
----------------------------------------------------------------------
Total $52,086 100% $52,279 100% $51,574 100%
=======================================================================================================
- --------------------------------------------------------------------------------
At December 31, 1998 1997
Allocation Loans as Allocation Loans as
of the Percent of the Percent
Allowance of Total Allowance of Total
Balance Loans Balance Loans
(dollars in thousands) -----------------------------------------------
Commercial $22,240 64% $22,649 63%
Real estate construction 4,055 3% 4,374 3%
Real estate residential 310 17% 87 16%
Consumer 4,260 16% 4,356 18%
Unallocated portion 20,439 "-- 19,164 "--
-----------------------------------------------
Total $51,304 100% $50,630 100%
================================================================================
Impaired Loans
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 smaller-balance 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 like-kind 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:
Impaired Loans
- -------------------------------------------------------------------
Year ended December 31, 2001 2000
(dollars in thousands) -----------------------
Nonaccrual loans $8,113 $8,024
Other 3,755 3,704
-----------------------
Total impaired loans $11,868 $11,728
===================================================================
Specific reserves $992 $1,817
===================================================================
The $3.8 million balance of impaired loans as of December 31, 2001, 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, 2001.
The average balance of the Company's impaired loans for the year ended
December 31, 2001 was $11.8 million compared to $12.5 million in 2000.
Portions of the Company's allowance for credit losses were allocated to
each of these impaired loans. 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 changes 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 100 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 within certain specified ranges or steps must be taken to reduce
interest rate risk.
The following table summarizes the simulated change in NII, based on the
12-month period ending December 31, 2001:
Simulated Changes to Net Interest Income
- -------------------------------------------------------
(dollars in millions)
Changes in Estimated Increase
Interest (Decrease) in NII
Rates Estimated ------------------
(Basis Points) NII Amount Amount Percent
- -------------------------------------------------------
+100 $206.0 ($2.5) (1.2%)
-- 208.5 -- --
- -100 210.6 2.1 1.0%
=======================================================
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.
The following table summarizes the interest rate sensitivity gaps inherent
in the Company's asset and liability portfolios at December 31, 2001:
Interest Rate Sensitivity Analysis
- -------------------------------------------------------------------------------------------------------------------
Repricing within (days)
(dollars in thousands) -----------------------------------------------------------------------
Non-
0-90 91-180 181-365 Over 365 Repricing Total
-----------------------------------------------------------------------
Assets
Investment securities $132,464 $37,794 $75,546 $912,335 -- $1,158,139
Loans 562,113 73,103