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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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from .....to.......
Commission File Number 1-9383
WESTAMERICA BANCORPORATION
(Exact name of the registrant as specified in its charter)
CALIFORNIA
(State of incorporation)
94-2156203
(I.R.S. Employer Identification Number)
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 257-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
YES [ x ] NO [ ]
Indicate by check mark if disclosure of delinquent files
pursuant to item 405 of Regulation S-K (Section 229.405
of this chapter) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to
the closing price of the stock, as of March 19, 1999:
$1,221,622,000
Number of shares outstanding of each of the registrant's
classes of common stock, as of March 25, 1999
Title of Class
Common Stock, no par value
Shares Outstanding
39,369,936
DOCUMENTS INCORPORATED BY REFERENCE
Document *
Proxy Statement dated March 17, 1999
for Annual Meeting of Shareholders
to be held on April 21, 1999
Incorporated into:
Part III
* Only selected portions of the documents specified are
incorporated by reference into this report, as more
particularly described herein. Except to the extent
expressly incorporated herein by reference, such documents
shall not be deemed to be filed as part of this Annual
Report on Form 10-K.
TABLE OF CONTENTS
- -----------------
PART I
Item 1 Business
Item 2 Description of Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements on Accounting and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART I
ITEM I. Business
- ----------------
Certain statements in this Annual Report on Form 10-K
include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject of the "safe harbor" created by
those sections. These forward-looking statements involve
certain risks and uncertainties that could cause actual
results to differ materially from those in the forward
looking statements. Such risks and uncertainties include,
but are not limited to, the following factors: competitive
pressure in the banking industry significantly increasing;
changes in the interest rate environment reducing margins;
general economic conditions, either nationally or
regionally, are less favorable than expected, resulting
in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses;
changes in the regulatory environment, changes in business
conditions; volatility of rate sensitive deposits;
operational risks including data processing system
failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
See also "Certain Additional Business Risks" herein and
other risk factors discussed elsewhere in this Report.
WESTAMERICA BANCORPORATION (the "Company") is a bank
holding company registered under the Bank Holding Company
Act of 1956 ("BHC"), as amended. The Company was
incorporated under the laws of the State of California as
"Independent Bankshares Corporation" on February 11, 1972.
Its principal executive offices are located at 1108 Fifth
Avenue, San Rafael, California 94901, and its telephone
number is (415) 257-8000. The Company provides a full
range of banking services to individual and corporate
customers in Northern and Central California through its
subsidiary banks, Westamerica Bank and Bank of Lake County
(the "Banks"). The Banks are subject to competition from
other financial institutions and regulations from certain
agencies and undergo periodic examinations by those
regulatory authorities. In addition, the Company also owns
100 percent of the capital stock of Westamerica Commercial
Credit, Inc., a company engaged in financing accounts
receivable and inventory lines of credit and term business
loans and 100 percent of Community Banker Services
Corporation, a company engaged in providing the Company
and its subsidiaries data processing services and other
support functions.
The Company was originally formed pursuant to a plan of
reorganization among three previously unaffiliated banks:
Bank of Marin, Bank of Sonoma County and First National
Bank of Mendocino County (formerly First National Bank of
Cloverdale). The reorganization was consummated on
December 31, 1972 and, on January 1, 1973, the Company
began operations as a bank holding company. Subsequently,
the Company acquired Bank of Lake County (a California
chartered bank) in 1974, Gold Country Bank in 1979 and
Vaca Valley Bank in 1981, in each case by the exchange of
the Company's Common Stock for the outstanding shares of
the acquired banks.
In mid-1983, the Company consolidated the six subsidiary
banks into a single subsidiary bank. The consolidation was
accomplished by the merger of the five state-chartered
banks (Bank of Marin, Bank of Sonoma County, Bank of Lake
County, Gold Country Bank and Vaca Valley Bank) into First
National Bank of Mendocino County which subsequently
changed its name to Westamerica Bank ("WAB"), a national
banking association organized and existing under the laws
of the United States.
In August, 1988, the Company formed a new bank, but
named it Bank of Lake County, National Association, and
effected the sale of WAB's assets and liabilities of
its three Lake County branches to the newly formed bank.
In August, 1988, the sale of Bank of Lake County, National
Association to Napa Valley Bancorp was consummated.
On February 28, 1992, the Company acquired John Muir
National Bank through a merger of such bank with and
into WAB in exchange for the issuance of the Company's
Common Stock for all the outstanding shares of John
Muir National Bank. The business transaction was
accounted for on a pooling-of-interests basis.
On April 15, 1993, the Company acquired Napa Valley
Bancorp, a bank holding company, whose subsidiaries
included Napa Valley Bank, 88 percent interest in Bank of
Lake County, 50 percent interest in Sonoma Valley Bank,
Suisun Valley Bank and Napa Valley Bancorp Services
Corporation, which was established to provide data
processing and other services to Napa Valley Bancorp's
subsidiaries. This business transaction was accounted for
on a pooling-of-interests basis. Shortly after, Suisun
Valley Bank was merged into WAB, the name of Napa Valley
Bancorp Services Corporation was changed to Community
Banker Services Corporation and the Company sold its 50
percent interest in Sonoma Valley Bank. The Company
retained its 88 percent interest in Bank of Lake County.
In June 1993, the Company accepted from WAB a dividend in
the form of all outstanding shares of capital stock of
WAB's subsidiary, Weststar Mortgage Corporation, a
California Corporation established to conduct mortgage
banking activities. Immediately after the receipt of this
dividend, the Company contributed all of the capital stock
of Weststar Mortgage Corporation to its subsidiary,
Community Banker Services Corporation.
WAB and Bank of Lake County became state-chartered banks
in June 1993 and December 1993, respectively.
In December 1994, the Company completed the purchase of the
remaining 12 percent investment in Bank of Lake County
from outside investors, becoming the sole owner of Bank of
Lake County.
On January 31, 1995, the Company acquired PV Financial,
parent company of PV National Bank, through a merger of
such bank with and into WAB in exchange for the
issuance of shares of the Company's common stock for
all the outstanding shares of PV Financial. The
business combination was accounted for on a
pooling-of-interests basis.
On June 6, 1995, the merger of CapitolBank Sacramento with
and into WAB became effective. Under the terms of the
merger, the Company issued shares of its common stock in
exchange for all of CapitolBank Sacramento's common stock.
The business combination was accounted for on a
pooling-of-interests basis.
On July 17, 1995, the Company acquired North Bay Bancorp,
parent company of Novato National Bank. Under the terms of
the merger agreement, the Company issued shares of its
common stock in exchange for all of the outstanding shares
of common stock of North Bay Bancorp. The subsidiary bank
was merged with and into WAB. The business combination was
accounted for on a pooling-of-interests basis.
On April 12, 1996 Napa Valley Bank was merged into WAB.
In November 1996, the Company finalized the formation
of a new subsidiary, Westamerica Commercial Credit,
Inc. which engages in financing accounts receivable and
inventory lines of credit and term business loans.
On April 12, 1997, the Company acquired ValliCorp
Holdings, Inc., parent company of ValliWide Bank, the
largest independent bank holding company headquartered in
Central California. The acquisition became effective
through the issuance of shares of the Company's common
stock in exchange for all of the outstanding shares of
ValliCorp Holdings, Inc. The business combination was
accounted for on a pooling-of-interests basis. ValliWide
Bank remained as a separate subsidiary bank of the Company.
On June 20, 1997, ValliWide Bank ceased to exist as a
subsidiary of the Company, when it was merged with and
into WAB.
On January 22, 1998, the Board of Directors of the Company
authorized a three-to-one split of the Company's common
stock in which each share of the Company's common stock is
converted into three shares, with record and effective
dates of February 10 and February 25, 1998, respectively.
At December 31, 1998, the Company had consolidated assets
of approximately $3.84 billion, deposits of approximately
$3.19 billion and shareholders' equity of approximately
$368.6 million.
General
- -------
Westamerica Bancorporation is a community oriented bank
holding company headquartered in San Rafael, California.
The principal communities served are located in Northern
and Central California, from Mendocino, Lake and Nevada
Counties in the North, to Kern and San Luis Obispo
counties in the South. The Company's strategic focus is on
the banking needs of small businesses. The Company chose
this particular focus in the late 1980's as it recognized
that concentrating on a few niche markets was the key to
the Company's profitable survival in the consolidating
banking business.
Certain Additional Business Risks
- ---------------------------------
The Company's business, financial condition and operating
results can be impacted by a number of factors including,
but not limited to, those set forth below, any one of
which could cause the Company's actual results to vary
materially from recent results or from the Company's
anticipated future results.
Shares of Company Common Stock eligible for future sale
could have a dilutive effect on the market for Company
Common Stock and could adversely affect the market price.
The Articles of Incorporation of the Company authorize the
issuance of 150 million shares of common stock (and two
classes of 1 million shares each, denominated "Class B
Common Stock" and "Preferred Stock", respectively) of
which approximately 39.8 million were outstanding at
December 31, 1998. Pursuant to its stock option plans, at
December 31, 1998, the Company had exercisable options
outstanding of 1.3 million. As of December 31, 1998, 815
thousand shares of Company Common Stock remained available
for grants under the Company's stock option plans (and
stock purchase plan). Sales of substantial amounts of
Company Common Stock in the public market could adversely
affect the market price of Common Stock.
A portion of the loan portfolio of the Company is
dependent on real estate. At December 31, 1998, real
estate served as the principal source of collateral with
respect to approximately 55 percent of the Company's loan
portfolio. A worsening of current economic conditions or
rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other
collateral securing loans and the value of the
available-for-sale securities portfolio, as well as the
Company's financial condition and results of operations in
general and the market value of the Company's common
stock. Acts of nature, including earthquakes and floods,
which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also
negatively impact the Company's financial condition.
The Company is subject to certain operations risks,
including, but not limited to, data processing system
failures and errors and customers or employee fraud. The
Company maintains a system of internal controls to
mitigate against such occurrences and maintains insurance
coverage for such risks, but should such an event occur
that is not prevented or detected by the Company's
internal controls, uninsured or in excess of applicable
insurance limits, it could have a significant adverse
impact on the Company's business, financial condition or
results of operations. See also the section "Year 2000
Compliance" in the Management's Discussion and Analysis
contained in this report.
Employees
- ---------
At December 31, 1998, the Company and its subsidiaries
employed 1,126 full-time equivalent staff. Employee
relations are believed to be good.
The Effect of Government Policy on Banking
- ------------------------------------------
The earnings and growth of the Company are affected not
only by local market area factors and general economic
conditions, but also by government monetary and fiscal
policies. Such policies influence the growth of loans,
investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business
and earnings of the Company cannot be predicted.
Additionally, state and federal tax policies can impact
banking organizations.
As a consequence of the extensive regulation of commercial
banking activities in the United States, the business of
the Company is particularly susceptible to being affected
by the enactment of federal and state legislation which
may have the effect of increasing or decreasing the cost
of doing business, modifying permissible activities or
enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and
prospects of the Company.
Regulation and Supervision of Bank Holding Companies
- ----------------------------------------------------
The following is not intended to be an exhaustive
description of the statutes and regulations applicable to
the Company's or the Banks' business. The description of
statutory and regulatory provisions is qualified in its
entirety by reference to the particular statutory or
regulatory provisions. Moreover, major new legislation and
other regulatory changes affecting the Company, the Banks,
banking, and the financial services industry in general
have occurred in the last several years and can be
expected to occur in the future. The nature, timing and
impact of new and amended laws and regulations cannot be
accurately predicted.
The Company is a bank holding company subject to the Bank
Holding Company Act of 1956, as amended ("BHCA"). The
Company reports to, registers with, and may be examined
by, the Board of Governors of the Federal Reserve System
("FRB"). The FRB also has the authority to examine the
Company's subsidiaries.
The Company is also a bank holding company within the
meaning of Section 3700 of the California Financial Code.
As such the Company and the Banks are subject to
examination by, and may be required to file reports with,
the California Commissioner of Financial Institutions (the
"Commissioner").
The FRB has significant supervisory and regulatory
authority over the Company and its affiliates. The FRB
requires the Company to maintain certain levels of
capital. See "Capital Standards." The FRB also has the
authority to take enforcement action against any bank
holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations or
conditions imposed in writing by the FRB. See "Prompt
Corrective Action and Other Enforcement Mechanisms."
Under the BHCA, a company generally must obtain the prior
approval of the FRB before it exercises a controlling
influence over a bank, or acquires directly or indirectly,
more than 5% of the voting shares or substantially all of
the assets of any bank or bank holding company. Thus, the
Company is required to obtain the prior approval of the
FRB before it acquires, merges or consolidates with any
bank or bank holding company; any company seeking to
acquire, merge or consolidate with the Company also would
be required to obtain the prior approval of the FRB.
The Company is generally prohibited under the BHCA from
acquiring ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly
in activities other than banking, managing banks or
providing services to affiliates of the holding company.
The FRB generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose
undue pressure on the capital of subsidiary banks or would
be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's
financial position. The FRB's policy is that a bank
holding company should not continue its existing rate of
cash dividends on its common stock unless its net income
is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall
financial condition. See the section entitled
"Restrictions on Dividends and Other Distributions" for
additional restrictions on the ability of the Company and
its subsidiary banks (the "Banks") to pay dividends.
Transactions between the Company and the Banks are subject
to a number of other restrictions. FRB policies forbid the
payment by bank subsidiaries of management fees which are
unreasonable in amount or exceed the fair market value of
the services rendered (or, if no market exists, actual
costs plus a reasonable profit). The Company may only
borrow from the Banks if the loan is secured by marketable
obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a
low-quality asset to a depository institution subsidiary.
Comprehensive amendments to federal regulation governing
bank holding companies and change in bank control
("Regulation Y") became effective in 1997, and are
intended to improve the competitiveness of bank holding
companies by, among other things: (i) expanding the list
of permissible nonbanking activities in which well-run
bank holding companies may engage without prior FRB
approval, (ii) streamlining the procedures for well-run
bank holding companies to obtain approval to engage in
other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding
companies and their nonbank subsidiaries. Amended
Regulation Y also provides for a streamlining and
expedited review process for bank acquisition proposals
submitted by well-run bank holding companies and
eliminates certain duplicative reporting requirements when
there has been a further change in bank control or in bank
directors or officers after an earlier approved change.
These changes to Regulation Y are subject to numerous
qualifications, limitations and restrictions. In order for
a bank holding company to qualify as "well-run," both it
and the insured depository institutions that it controls
must meet the "well capitalized" and "well managed"
criteria set forth in Regulation Y.
Bank Supervision and Regulation
- -------------------------------
The Banks are California chartered banks insured by the
Federal Deposit Insurance Corporation (the "FDIC"), and as
such are subject to regulation, supervision and regular
examination by the California Department of Financial
Institutions ("DFI") and the FDIC. As members of the
Federal Reserve System, the Banks' primary federal
regulator is the FRB. The regulations of these agencies
affect most aspects of the Banks' business and prescribe
permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the
permissible scope of the Banks' activities and various
other requirements.
In addition to federal banking law, the Banks are also
subject to applicable provisions of California law. Under
California law, a state chartered bank is subject to
various restrictions on, and requirements regarding, its
operations and administration including the maintenance of
branch offices and automated teller machines, capital and
reserve requirements, deposits and borrowings, stockholder
rights and duties, and investments and lending activities.
California law permits a state chartered bank to invest in
the stock and securities of other corporations, subject to
a state-chartered bank receiving either general
authorization or, depending on the amount of the proposed
investment, specific authorization from the Commissioner.
The FDIC Improvement Act ("FDICIA"), however, imposes
limitations on the activities and equity investments of
state chartered, federally insured banks. FDICIA also
prohibits a state bank from engaging as a principal in any
activity that is not permissible for a national bank,
unless the bank is adequately capitalized and the FDIC
approves the activity after determining that such activity
does not pose a significant risk to the deposit insurance
fund. The FDIC rules on activities generally permit
subsidiaries of banks, without prior specific FDIC
authorization, to engage in those that have been approved
by the FRB for bank holding companies because such
activities are so closely related to banking to be a
proper incident thereto. Other activities generally
require specific FDIC prior approval, and the FDIC may
impose additional restrictions on such activities on a
case-by-case basis in approving applications to engage in
otherwise impermissible activities.
Capital Standards
- -----------------
The federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of
capital adequacy that reflects the degree of risk
associated with a banking organization's operations for
both transactions reported on the balance sheet as assets
and transactions, such as letters of credit and recourse
agreements, which are recorded as off balance sheet items.
A banking organization's risk-based capital ratios are
obtained by dividing its qualifying capital by its total
risk-adjusted assets and off balance sheet items. The
regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum
of Tier 1 capital and limited amounts of Tier 2 capital)
and Tier 1 capital. Tier 1 capital generally consists of
common stock, retained earnings, and certain types of
qualifying preferred stock, less most other intangible
assets. Tier 2 capital may consist of a limited amount of
the allowance for loan and lease losses, certain types of
preferred stock not qualifying as Tier 1 capital, term
subordinated debt and certain other instruments with some
characteristics of equity. The federal banking agencies
require a minimum ratio of qualifying total capital to
risk-adjusted assets and off balance sheet items of 8%,
and a minimum ratio of Tier 1 capital to adjusted average
risk-adjusted assets and off balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking
regulators require banking organizations to maintain a
minimum amount of Tier 1 capital to adjusted average total
assets, referred to as the leverage capital ratio. For a
banking organization rated in the highest of the five
categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. For all banking
organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis
points above the 3% minimum. The effective minimum
leverage ratio, for all practical purposes, must be at
least 4% or 5%.
As of December 31, 1998, the Company's and the Banks'
respective ratios exceeded applicable regulatory
requirements. See Note 8 to the consolidated financial
statements for capital ratios of the Company and the
Banks, compared to the standards for well-capitalized
depository institutions and for minimum capital
requirements.
Prompt Corrective Action and Other Enforcement Mechanisms
- ---------------------------------------------------------
FDICIA requires each federal banking agency to take prompt
corrective action to resolve the problems of insured
depository institutions, including but not limited to
those that fall below one or more prescribed minimum
capital ratios. The law requires each federal banking
agency to promulgate regulations defining the following
five categories in which an insured institution will be
placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically
undercapitalized.
If an insured depository institution is undercapitalized,
it will be closely monitored by the appropriate federal
banking agency. Undercapitalized institutions must submit
an acceptable capital restoration plan with a guarantee of
performance issued by the holding company. Further
restrictions and sanctions are required to be imposed on
insured depository institutions that are critically
undercapitalized.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be
subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting
their business or for violations of any law, rule,
regulation or any condition imposed in writing by the
agency or any written agreement with the agency.
Additionally, a holding company's inability to serve as a
source of strength to its subsidiary banking organizations
could serve as an additional basis for a regulatory action
against the holding company.
Safety and Soundness Standards
- ------------------------------
FDICIA also implemented certain specific restrictions and
required federal banking regulators to adopt overall
safety and soundness standards for depository institutions
related to internal control, loan underwriting and
documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by
undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive
officer, director, principal shareholder or related
interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for
deposits by certain employee benefits accounts.
Restrictions on Dividends and Other Distributions
- -------------------------------------------------
The power of the board of directors of an insured
depository institution to declare a cash dividend or other
distribution with respect to capital is subject to
statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the
earnings, financial condition and cash needs of the
institution, as well as general business conditions.
FDICIA prohibits insured depository institutions from
paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions,
including dividends, if, after such transaction, the
institution would be undercapitalized.
In addition to the restrictions imposed under federal law,
banks chartered under California law generally may only
pay cash dividends to the extent each payment does not
exceed the lesser of retained earnings of the bank or the
bank's net income for its last three fiscal years (less
any distributions to shareholders during that period). In
the event a bank desires to pay cash dividends in excess
of such amount, the bank may pay a cash dividend with the
prior approval of the Commissioner in an amount not
exceeding the greatest of the bank's retained earnings,
the bank's net income for its last fiscal year, or the
bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository
institution from engaging in business practices which are
considered to be unsafe or unsound, possibly including
payment of dividends or other payments under certain
circumstances even if such payments are not expressly
prohibited by statute.
Premiums for Deposit Insurance and Assessments for
- --------------------------------------------------
Examinations
- ------------
All of the bank subsidiaries of the Company have their
deposits insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. The FDIC is authorized to borrow
up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are
members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed
to member institutions. Such premiums must be sufficient
to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured
deposits. FDICIA also provides authority for special
assessments against insured deposits. No assurance can be
given at this time as to what the future level of premiums
will be.
Community Reinvestment Act and Fair Lending Developments
- --------------------------------------------------------
The Banks are subject to certain fair lending requirements
and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA")
activities. The CRA generally requires the federal banking
agencies to evaluate the record of a financial institution
in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In
addition to substantive penalties and corrective measures
that may be required for a violation of certain fair
lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when
regulating and supervising other activities.
Pending Legislation and Regulations
- -----------------------------------
There are pending legislative proposals to reform the
Glass-Steagall Act to allow affiliations between banks and
other firms engaged in "financial activities", including
insurance companies and securities firms.
Certain other pending legislative proposals include bills
to let banks pay interest on business checking accounts,
to require "know your customer" policies, to cap consumer
liability for stolen debit cards, and to give judges the
authority to force high-income borrowers to repay their
debts rather than cancel them through bankruptcy.
While the effect of such proposed legislation and
regulatory reform on the business of financial
institutions cannot be accurately predicted at this time,
it seems likely that a significant amount of consolidating
in the banking industry will continue.
Competition
- -----------
In the past, an independent bank's principal competitors
for deposits and loans have been other banks (particularly
major banks), savings and loan associations and credit
unions. To a lesser extent, competition was also provided
by thrift and loans, mortgage brokerage companies and
insurance companies. Other institutions, such as brokerage
houses, mutual fund companies, credit card companies, and
even retail establishments have offered new investment
vehicles which also compete with banks for deposit
business. The direction of federal legislation in recent
years seems to favor competition between different types
of financial institutions and to foster new entrants into
the financial services market, and it is anticipated that
this trend will continue.
The enactment of the Interstate Banking and Branching Act
in 1994 and the California Interstate Banking and
Branching Act of 1995 have increased competition within
California. Regulatory reform, as well as other changes in
federal and California law will also affect competition.
While the impact of these changes, and of other proposed
changes, cannot be predicted with certainty, it is clear
that the business of banking in California will remain
highly competitive.
According to information obtained by the Company through
an independent market research firm, WAB was the third
largest financial institution in terms of total deposits
in Marin County at December 31, 1997, at which date it had
approximately 11 percent of total deposits held in
federally insured depository institutions in that county.
According to the same source of information and in terms
of total deposits, as of December 31, 1997 WAB ranked
fourth in WAB's Sonoma-Mendocino counties service area,
with approximately a 9 percent share of the market, third
in the Fresno service area with approximately 10 percent
of total deposits, and was fifth in the Solano county
service area, with a market share of approximately 9
percent. Completion of the merger with ValliWide Bank in
1997 resulted in the formation of the "South Valley
Region" encompassing portions of Kern, San Luis Obispo,
Tulare and Kings counties. In terms of total deposits, WAB
ranked, as of December 31, 1997, fifth among all financial
institutions servicing the area with approximately 8
percent of the market. In addition, WAB's market share in
the Sacramento-Placer-Nevada counties service area was
approximately 6 percent, ranking eight among its
competitors. In the Yosemite service area, encompassing
offices throughout Stanislaus, Sonora, East Sonora and
Merced counties, WAB ranked eighth among its competitors
with 5 percent of total deposits. The share of the market
for deposits and loans held by WAB in San Francisco and
Alameda Counties is not significant. According to the same
source of information, WAB ranked second in terms of total
deposits in the Napa Valley service area as of December
31, 1997, with approximately 15 percent market share. The
same source of data reports that BLC ranked third, in
terms of total deposits, in market share in the Lake
County service area with 16 percent of the total.
The Banks provide checking and savings deposit services as
well as commercial, real estate and personal loans. In
addition, most of the branches offer safe deposit
facilities, automated teller units, collection services
and other investment services.
The Banks believe that personal, prompt, professional
service and community identity are important in the
banking business. To this end, each one of the Banks has
sought to retain its community identity and has emphasized
personalized services through "big bank resources with
small bank resourcefulness".
Competitive conditions continue to intensify as various
legislative enactments have continued to dissolve
historical barriers to the financial markets. Competition
is expected to further increase in the state of California
as a result of legislation enacted in 1994 and 1995.
Legislative changes, as well as technological and economic
factors, can be expected to have an ongoing impact on
competitive conditions within the financial services
industry. As an active participant in the financial
markets, the Company believes that it continually adapts
to these changing competitive conditions.
ITEM 2. Properties
- ------------------
Branch Offices and Facilities
- -----------------------------
The Banks are engaged in the banking business through 89
offices in 22 counties in Northern and Central California
including eleven offices in Marin County, eleven in Fresno
County, nine in Sonoma County, seven in Napa County, six
in Solano County, six in Kern County, five in Stanislaus
County, five in Contra Costa County, four in Lake County,
four in San Luis Obispo County, three in Mendocino County,
three in Sacramento County, two in Nevada County, two in
Placer County, two in Tulare County, two in Tuolumne
County, one in San Francisco County, one in Kern County,
one in Madera County, one in Merced County, one in Yolo
County, one in Kings County and one in Alameda County. All
offices are constructed and equipped to meet prescribed
security requirements.
The Company owns 37 branch office locations and one
administrative building and leases 52 banking offices.
Most of the leases contain multiple renewal options and
provisions for rental increases, principally for changes
in the cost of living index, property taxes and
maintenance.
ITEM 3. Legal Proceedings
- --------------------------
Neither the Company or its subsidiaries is a party to any
material pending legal proceeding, nor is their property
the subject of any material pending legal proceeding,
except ordinary routine legal proceedings arising in the
ordinary course of the Company's business, none of which
are expected to have a material adverse impact upon the
Company's business, financial position or results of
operations.
ITEM 4. Submission of Matters to a Vote of Security
- ---------------------------------------------------
Holders
- -------
There were no matters submitted to a vote of the
shareholders during the fourth quarter of 1998.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
- ---------------------------------------------------------
Stockholder Matters
- -------------------
The Company's common stock is traded on the NASDAQ
National Market Exchange ("NASDAQ") under the symbol
"WABC". The following table shows the high and the low
prices for the common stock, for each quarter, as reported
by NASDAQ:
============================================================
1998: High Low
- ------------------------------------------------------------
First quarter $35.25 $30.67
Second quarter 36.38 28.50
Third quarter 33.63 23.63
Fourth quarter 37.25 23.88
1997:
First quarter $24.17 $18.83
Second quarter 25.83 19.27
Third quarter 29.33 24.58
Fourth quarter 35.00 28.54
============================================================
As of December 31, 1998, there were 8,754 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, 1998,
$119.9 million was available for payment of dividends by
the Company to its shareholders, under applicable laws and
regulations.
See Note 17 to the consolidated financial statements
included in this report for additional information
regarding the amount of cash dividends declared and paid
on common stock for the two most recent fiscal years.
As discussed in Note 7 to the consolidated financial
statements, in December 1986, the Company declared a
dividend distribution of one common share purchase right
(the "Right") for each outstanding share of common stock.
The terms of the Rights were amended and restated on
September 28, 1989. On March 23, 1995, the Board of
Directors of the Company approved a further amendment and
restatement of Rights. The Amended and Restated Rights
Agreement entitles the holders of each share of the
Company Common Stock to the right (each, a "Westamerica
Right"), when exercisable, to purchase from the Company
one share of its Common Stock at a price of $21.667 per
share, subject to adjustment in certain circumstances. A
Westamerica Right is attached to each share of the Company
Common Stock. The Westamerica Rights only become
exercisable and trade separately from the Company Common
Stock following the earlier of (I) a public announcement
that a person or a group of affiliated or associated
persons has become the beneficial owner of the Company
securities having 15 percent or more of the Company's
voting power (an "Acquiring Person") or (ii) 10 days
following the commencement of, or a public announcement of
an intention to make, a tender or exchange offer which
would result in any person having beneficial ownership of
securities having 15 percent or more of such voting power.
Upon becoming exercisable, each holder of a Westamerica
Right (other than an Acquiring Person whose rights will
become null and void) will, for at least a 60-day period
thereafter, have the right (subject to the following
sentence), upon payment of the exercise price of $21.667,
to receive upon exercise that number of shares of the
Company Common Stock having a market value of twice the
exercise price of the Westamerica Right, to the extent
available. Subject to applicable law, the Board of
Directors, at its option, may at any time after a Person
becomes an Acquiring Person (but not after the acquisition
by such Person of 50 percent or more of the outstanding
Company Common Stock), exchange all or part of the then
outstanding and exercisable Westamerica Rights (except for
Westamerica Rights which have become void) for shares of
the Company Common Stock equivalent to one share of the
Company Common Stock per Westamerica Right or,
alternatively, for substitute consideration consisting of
cash, securities of the Company or other assets (or any
combination thereof).
ITEM 6. Selected Financial Data
- -------------------------------
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
- -----------------
- ---------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
Year ended December 31
Interest income $266,820 $270,670 $274,182 $283,704 $256,638
Interest expense 86,665 88,054 91,700 95,627 73,321
- ---------------------------------------------------------------------------------------------
Net interest income 180,155 182,616 182,482 188,077 183,317
Provision for loan losses 5,180 7,645 12,306 15,229 11,378
- ---------------------------------------------------------------------------------------------
Non-interest income 37,805 37,013 36,307 34,227 36,929
Non-interest expense 101,408 137,878 136,051 141,960 150,128
- ---------------------------------------------------------------------------------------------
Income before income taxes 111,372 74,106 70,432 65,115 58,740
Provision for income taxes 37,976 25,990 23,605 21,930 20,627
- ---------------------------------------------------------------------------------------------
Net income $73,396 $48,116 $46,827 $43,185 $38,113
=============================================================================================
Earnings per share:
Basic $1.76 $1.12 $1.10 $0.99 $0.87
Diluted 1.73 1.10 1.08 0.98 0.87
Per share:
Dividends paid $0.52 $0.36 $0.30 $0.25 $0.21
Book value at December 31 9.25 9.51 8.84 8.12 7.41
Average common shares outstanding 41,797 43,040 42,759 43,747 43,732
Average diluted common shares outstanding 42,524 43,827 43,358 44,274 44,061
Shares outstanding at December 31 39,828 42,799 42,889 43,228 43,351
At December 31:
Loans, net $2,246,593 $2,211,307 $2,236,319 $2,204,495 $2,220,122
Total assets 3,844,298 3,848,444 3,866,774 3,880,979 3,793,196
Total deposits 3,189,005 3,078,501 3,228,700 3,270,907 3,249,823
Short-term borrowed funds 203,671 264,848 167,447 175,622 135,426
Debt financing and notes payable 47,500 52,500 58,865 40,932 51,647
Shareholders' equity 368,596 407,152 379,279 351,058 321,169
Financial Ratios:
For the year:
Return on assets 1.94% 1.28% 1.24% 1.14% 1.04%
Return on equity 19.48% 12.71% 13.22% 12.73% 12.24%
Net interest margin * 5.52% 5.63% 5.54% 5.68% 5.67%
Net loan losses to average loans 0.20% 0.35% 0.51% 0.59% 0.43%
Non-interest expense/revenues * 44.25% 60.15% 60.08% 63.86% 68.16%
At December 31:
Equity to assets 9.59% 10.58% 9.81% 9.05% 8.47%
Total capital to risk-adjusted assets 13.79% 14.76% 14.95% 14.39% 13.58%
Loan loss reserve to loans 2.23% 2.24% 2.23% 2.15% 2.05%
* Fully taxable equivalent
Item 7. Management's Discussion and Analysis of
- ----------------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the
forward-looking statements. Such risk and uncertainties include,
but are not limited to, the following factors: competitive pressure
in the banking industry increases significantly; changes in the
interest rate environment reduced margins; general economic
conditions, either nationally or regionally, are less favorable
than expected resulting in, among other things, a deterioration in
the credit quality and an increase in the provision for possible
loan losses; changes in the regulatory environment; changes in
business conditions; volatility of rate-sensitive deposits;
operational risks including data processing system failures or
fraud; asset/liability matching and liquidity risks; and changes in
the securities markets. For further information on risks and
uncertainties see also "Certain Additional Business Risks" and
other risk factors discussed elsewhere in this report.
The following discussion addresses information pertaining to the
financial condition and results of operations of Westamerica
Bancorporation and Subsidiaries (the "Company") that may not be
otherwise apparent from a review of the consolidated financial
statements and related footnotes. It should be read in conjunction
with those statements, as well as with the other information
presented throughout the report.
In addition to historical information, this discussion and other
sections contained in this annual report include certain
forward-looking statements regarding events and trends which may
affect the Company's future results. Such statements are subject to
risks and uncertainties that could cause the Company's actual
results to differ materially. Such factors include, but are not
limited to, those described in this discussion and analysis.
The Company achieved earnings of $73.4 million in 1998,
representing a 53 percent increase from the $48.1 million earned in
1997 and 57 percent higher than 1996 earnings of $46.8 million.
COMPONENTS OF NET INCOME
- ------------------------
=====================================================================================
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Net interest income * $191.4 $192.2 $190.1
Provision for loan losses (5.2) (7.6) (12.3)
Non-interest income 37.8 37.0 36.3
Non-interest expense (101.4) (137.9) (136.1)
Taxes * (49.2) (35.6) (31.2)
- -------------------------------------------------------------------------------------
Net income $73.4 $48.1 $46.8
=====================================================================================
Net income as a percentage of
average total assets 1.94% 1.28% 1.24%
=====================================================================================
Average total assets $3,778.5 $3,749.7 $3,781.2
=====================================================================================
* Fully taxable equivalent (FTE)
Basic earnings per share in 1998 were $1.76, compared to $1.12 and
$1.10 in 1997 and 1996, respectively. During 1998, the Company
benefited from lower non-interest expense reflecting continued
expense controls, a lower loan loss provision resulting from
improved credit quality and lower net credit losses, and higher
non-interest income. Prior year non-interest expense included
approximately $18.8 million ($12.8 million after tax) in charges
associated with the ValliCorp Holdings, Inc. merger (the "Merger")
effected on April 12, 1997. Lower net interest income was primarily
the result of lower earning-asset yields in part offset by a
decrease in funding costs.
Earnings in 1997 were favorably affected compared to 1996 by
increased net interest income, primarily due to a higher net
interest margin in part offset by a reduction in the average
balance of earning assets. Also contributing to increased earnings,
the Company lowered its loan loss provision in recognition of the
improvement in the credit quality of the loan portfolio, and
benefited from increased non-interest income.
The Company's return on average total assets was 1.94 percent in
1998, compared to 1.28 percent and 1.24 percent in 1997 and 1996,
respectively. Return on average equity in 1998 was 19.48 percent,
compared to 12.71 percent and 13.22 percent, respectively, in the
two previous years.
NET INTEREST INCOME
- -------------------
The Company's primary source of revenue is net interest income,
which is the difference between interest income on earning assets
and interest expense on interest-bearing liabilities. Net interest
income (FTE) in 1998 decreased $800 thousand from 1997 to $191.4
million. Comparing 1997 to 1996, net interest income (FTE)
increased $2.1 million.
Components of Net Interest Income
=====================================================================================
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Interest income $266.8 $270.7 $274.2
Interest expense (86.7) (88.1) (91.7)
FTE adjustment 11.3 9.6 7.6
- -------------------------------------------------------------------------------------
Net interest income (FTE) $191.4 $192.2 $190.1
=====================================================================================
Net interest margin (FTE) 5.52% 5.63% 5.54%
=====================================================================================
Interest income (FTE) decreased $2.2 million from 1997, primarily
due to a 34 basis point decrease in loan yields, reflecting the
general interest rate environment, partially offset by an increase
of 9 basis points in investment yields, resulting in a combined
decrease of 18 basis points in earning-asset yields. The effect of
this decline was in part offset by a $50.9 million increase in
average balances, with loans and investment securities growing
$14.1 million and $36.8 million, respectively, from 1997 levels.
The increase in loans was concentrated in targeted commercial and
residential real estate credits, and the increase in investment
balances was primarily due to increases in tax-free and corporate
securities. The decrease of interest income in 1998 was partially
offset by a $1.4 million reduction in interest expense. This
decrease was primarily due to a reduction of 13 basis points in
rates paid on deposits combined with an $11.0 million increase in
the average balance of non-interest bearing demand deposits, in
part offset by a $19.8 million increase in the average balance of
interest-bearing liabilities.
Interest income (FTE) decreased $3.5 million from 1996 to 1997,
primarily due to a $20.0 million decrease in average earning-asset
balances. Most types of consumer loans decreased, partially offset
by increases in targeted commercial credits. The average investment
portfolio balances also decreased from 1996, as reductions in
short-term funds sold, participation certificates and U.S. Treasury
securities were in part offset by increases in tax-free and U.S.
Agency securities. The revenue decrease in 1997 was more than
offset by a $3.6 million decrease in interest expense, the result
of a decrease of 2 basis points in rates paid on interest-bearing
liabilities combined with a $92.5 million decrease in average
balances, and a $31.0 million increase in the average balance of
interest-free demand deposits.
Summary of Average Balances, Yields/Rates and Interest Differential
- -------------------------------------------------------------------
The following tables present, for the periods indicated, information
regarding the consolidated average assets, liabilities and
shareholders' equity, the amounts of interest income from average
earning assets and the resulting yields, and the amount of interest
expense paid on interest-bearing liabilities.
Average loan balances include non-performing loans. Interest income
includes proceeds from loans on non-accrual status only to the extent
cash payments have been received and applied as interest income.
Yields on securities and certain loans have been adjusted upward to
reflect the effect of income thereon exempt from federal income
taxation at the current statutory tax rate.
Distribution of average assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
=====================================================================================
Full Year 1998
---------------------------------------
Interest Rates
Average Income/ Earned/
(Dollars in thousands) Balance Expense Paid
- -------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $1,003 $42 4.23 %
Trading account securities -- -- --
Investment securities
Taxable 854,315 53,699 6.29
Tax-exempt 348,040 24,889 7.15
Loans:
Commercial 1,427,788 129,258 9.05
Real estate construction 60,123 7,089 11.79
Real estate residential 386,066 27,729 7.18
Consumer 388,106 35,340 9.11
---------- ---------
Earning assets 3,465,440 278,046 8.02
Other assets 313,012
-----------
Total assets $3,778,452
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $791,952
Savings and interest-bearing
transaction 1,461,764 30,264 2.07 %
Time less than $100,000 438,052 21,840 4.99
Time $100,000 or more 381,754 19,247 5.04
---------- ---------
Total interest-bearing deposits 2,281,570 71,351 3.13
Funds purchased 243,736 11,670 4.79
Debt financing and notes payable 52,083 3,644 7.00
---------- ---------
Total interest-bearing liabilities 2,577,389 86,665 3.36
Other liabilities 32,259
Shareholders' equity 376,852
-----------
Total liabilities and shareholders' equity $3,778,452
===========
Net interest spread (1) 4.66 %
Net interest income and interest margin (2) $191,381 5.52 %
========= ======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Distribution of average assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
=====================================================================================
Full Year 1997
---------------------------------------
Interest Rates
Average Income/ Earned/
(Dollars in thousands) Balance Expense Paid
- -------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $30,125 $1,635 5.43 %
Trading account securities -- -- --
Investment securities
Taxable 849,564 51,819 6.10
Tax-exempt 286,851 22,069 7.69
Loans:
Commercial 1,394,425 129,473 9.29
Real estate construction 85,409 9,386 10.99
Real estate residential 350,825 27,138 7.74
Consumer 417,389 38,756 9.29
---------- ---------
Earning assets 3,414,588 280,276 8.21
Other assets 335,063
-----------
Total assets $3,749,651
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $781,001
Savings and interest-bearing
transaction 1,533,939 34,742 2.26 %
Time less than $100,000 479,692 24,425 5.09
Time $100,000 or more 323,840 17,097 5.28
---------- ---------
Total interest-bearing deposits 2,337,471 76,264 3.26
Funds purchased 162,592 7,803 4.80
Debt financing and notes payable 57,483 3,987 6.94
---------- ---------
Total interest-bearing liabilities 2,557,546 88,054 3.44
Other liabilities 32,499
Shareholders' equity 378,605
-----------
Total liabilities and shareholders' equity $3,749,651
===========
Net interest spread (1) 4.77 %
Net interest income and interest margin (2) $192,222 5.63 %
========= ======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Distribution of average assets, liabilities and shareholders' equity.
Yields/rates and interest margin.
=====================================================================================
Full Year 1996
---------------------------------------
Interest Rates
Average Income/ Earned/
(Dollars in thousands) Balance Expense Paid
- -------------------------------------------------------------------------------------
Assets
Money market assets and funds sold $94,612 $5,218 5.52 %
Trading account securities 17 1 4.61
Investment securities
Taxable 800,097 47,649 5.96
Tax-exempt 290,326 20,274 6.98
Loans:
Commercial 1,344,626 126,582 9.41
Real estate construction 118,893 12,515 10.53
Real estate residential 320,440 26,486 8.27
Consumer 465,561 43,116 9.26
---------- ---------
Earning assets 3,434,572 281,841 8.21
Other assets 346,613
-----------
Total assets $3,781,185
===========
Liabilities and shareholders' equity
Deposits
Non-interest bearing demand $750,204
Savings and interest-bearing
transaction 1,559,532 34,936 2.24 %
Time less than $100,000 520,968 26,143 5.02
Time $100,000 or more 313,050 16,506 5.27
---------- ---------
Total interest-bearing deposits 2,393,549 77,585 3.24
Funds purchased 196,453 9,974 5.08
Debt financing and notes payable 60,045 4,141 6.90
---------- ---------
Total interest-bearing liabilities 2,650,047 91,700 3.46
Other liabilities 26,847
Shareholders' equity 354,086
-----------
Total liabilities and shareholders' equity $3,781,184
===========
Net interest spread (1) 4.75 %
Net interest income and interest margin (2) $190,141 5.54 %
========= ======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Rate and Volume Variances
- -------------------------
The following table sets forth a summary of the changes in interest
income and interest expense from changes in average assets and
liability balances (volume) and changes in average interest rates
for the periods indicated. Changes not solely attributable to
volume or rates have been allocated in proportion to the
respective volume and rate components.
========================================================================
For the Years Ended December 31,
1998 Compared with 1997
- ------------------------------------------------------------------------
(In thousands) Volume Rate Total
- ------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
MMkt. assets and funds sold ($1,298) ($295) ($1,593)
Trading account securities -- -- --
Investment securities (1)
Taxable 291 1,589 1,880
Tax-exempt 4,212 (1,392) 2,820
Loans:
Commercial (1) 4,850 (5,065) (215)
Real estate construction (3,048) 751 (2,297)
Real estate residential 2,050 (1,459) 591
Consumer (2,678) (738) (3,416)
- ------------------------------------------------------------------------
Total loans (1) 1,174 (6,511) (5,337)
- ------------------------------------------------------------------------
Total increase (decrease) in
interest and fee income (1) 4,379 (6,609) (2,230)
- ------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (1,585) (2,893) (4,478)
Time less than $ 100,000 (2,085) (500) (2,585)
Time $ 100,000 or more 2,873 (723) 2,150
- ------------------------------------------------------------------------
Total interest-bearing (797) (4,116) (4,913)
Funds purchased 3,885 (18) 3,867
Notes and mortgages payable (378) 35 (343)
- ------------------------------------------------------------------------
Total increase (decrease) in
interest expense 2,710 (4,099) (1,389)
- ------------------------------------------------------------------------
Increase (decrease) in
net interest income (1) $1,669 ($2,510) ($841)
========================================================================
(1) Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
Rate and Volume Variances
========================================================================
For the Years Ended December 31,
1997 Compared with 1996
- ------------------------------------------------------------------------
(In thousands) Volume Rate Total
- ------------------------------------------------------------------------
Increase (decrease) in
interest and fee income:
MMkt. assets and funds sold ($3,501) ($82) ($3,583)
Trading account securities (1) -- (1)
Investment securities (1)
Taxable 2,997 1,173 4,170
Tax-exempt (239) 2,034 1,795
Loans:
Commercial (1) 4,586 (1,695) 2,891
Real estate construction (3,709) 580 (3,129)
Real estate residential 2,014 (1,362) 652
Consumer (4,473) 113 (4,360)
- ------------------------------------------------------------------------
Total loans (1) (1,582) (2,364) (3,946)
- ------------------------------------------------------------------------
Total (decrease) increase in
interest and fee income (1) (2,326) 761 (1,565)
- ------------------------------------------------------------------------
Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing (593) 399 (194)
Time less than $ 100,000 (2,109) 390 (1,719)
Time $ 100,000 or more 570 21 591
- ------------------------------------------------------------------------
Total interest-bearing (2,132) 811 (1,321)
Funds purchased (1,648) (524) (2,172)
Notes and mortgages payable (178) 25 (153)
- ------------------------------------------------------------------------
Total (decrease) increase in
interest expense (3,958) 312 (3,646)
- ------------------------------------------------------------------------
Increase in net
interest income (1) $1,632 $449 $2,081
========================================================================
(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 $5.2 million for 1998,
compared to $7.6 million in 1997 and $12.3 million in 1996. The
reductions in the provision in 1998 and 1997 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 with troubled debtors.
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, 1998
and, on the same date, those investments included $202.3 million
in fixed rate and $24.7 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, 1998, the Company held $987.7 million classified as
investments available for sale. At December 31, 1998, an
unrealized gain of $20.7 million net of taxes of $15.0 million
related to these securities, was held in shareholders' equity.
The Company had no trading securities at December 31, 1998.
For more information on investment securities, see Notes 1 and 2
to the consolidated financial statements.
The following table shows the carrying amount (fair value) of the
Company's investment securities available for sale as of the dates
indicated:
=====================================================================================
At December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $248,610 $277,790 $299,739
U.S. Government agencies and corporations 121,304 181,124 274,468
States and political subdivisions 213,315 203,405 128,631
Asset backed securities 165,398 184,377 94,282
Other 239,034 156,538 95,341
- -------------------------------------------------------------------------------------
Total $987,661 $1,003,234 $892,461
=====================================================================================
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, 1998. Weighted average yields have been
computed by dividing annual interest income, adjusted for
amortization of premium and accretion of discount, by the amortized
cost value of the related security. Yields on state and political
subdivision securities have been calculated on a fully taxable
equivalent basis using the current statutory rate.
Available for sale
==========================================================================================================================
After One After Five
Within but Within but Within After Ten Mortgage-
(Dollars in thousands) One Year Five Years Ten Years Years backed Other Total
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $171,786 $73,328 $-- $-- $-- $-- $245,114
Interest rate 6.13% 5.72% --% --% --% --% 6.00%
U.S. Government agencies
and corporations $12,000 $83,332 $121 $99 $-- $-- $95,552
Interest rate 5.89% 5.86% 8.93% 8.79% --% --% 5.87%
States and political
subdivisions $5,696 $33,807 $58,505 $107,240 $-- $-- $205,248
Interest rate 9.57% 7.03% 8.22% 7.92% --% --% 7.90%
Asset-backed $-- $115,372 $48,617 $-- $-- $-- $163,989
Interest rate --% 6.08% 5.86% --% --% --% 6.02%
Other $21,267 $171,175 $5,247 $-- $-- $-- $197,689
Interest rate 6.25% 6.15% 6.53% --% --% --% 6.17%
- --------------------------------------------------------------------------------------------------------------------------
Subtotal $210,749 $477,014 $112,490 $107,339 $-- $-- $907,592
Interest rate 6.22% 6.08% 7.12% 7.92% --% --% 6.46%
Mortgage-backed $-- $-- $-- $-- $24,493 $-- $24,493
Interest rate --% --% --% --% 5.94% --% 5.94%
Other without set maturities $-- $-- $-- $-- $-- $19,871 $19,871
Interest rate --% --% --% --% --% 8.69% 8.69%
- --------------------------------------------------------------------------------------------------------------------------
Total $210,749 $477,014 $112,490 $107,339 $24,493 $19,871 $951,956
Interest rate 6.22% 6.08% 7.12% 7.92% 5.94% 8.69% 6.49%
==========================================================================================================================
The following table shows the carrying amount (amortized cost) and
fair value of the Company's investment securities held to
maturity as of the dates indicated:
- -------------------------------------------------------------------------------------
At December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury $-- $-- $998
U.S. Government agencies and corporations 69,235 83,656 79,743
States and political subdivisions 147,118 136,965 131,343
Asset-backed -- -- 191
Other 10,640 10,339 3,157
- -------------------------------------------------------------------------------------
Total $226,993 $230,960 $215,432
=====================================================================================
Fair value $233,790 $236,896 $218,009
=====================================================================================
The following table sets forth the relative maturities and yields
of the Company's held-to-maturity securities at December 31, 1998.
Weighted average yields have been computed by dividing annual
interest income, adjusted for amortization of premium and accretion
of discount, by the amortized value of the related security. Yields
on state and political subdivision securities have been calculated
on a fully taxable equivalent basis using the current statutory
rate.
Held to maturity
- --------------------------------------------------------------------------------------------------------------------------
After One After Five
Within but Within but Within After Ten Mortgage-
(Dollars in thousands) One Year Five Years Ten Years Years backed Other Total
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
U.S. Government Agencies
and Corporations $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
States and Political
Subdivisions $2,217 $22,838 $88,547 $33,516 $-- $-- $147,118
Interest rate 6.94% 8.53% 8.12% 8.34% --% --% 8.22%
Asset-backed $-- $-- $-- $-- $-- $-- $--
Interest rate --% --% --% --% --% --% --%
Other $-- $-- $-- $10,640 $-- $-- $10,640
Interest rate --% --% --% 5.46% --% --% 5.46%
- --------------------------------------------------------------------------------------------------------------------------
Subtotal $2,217 $22,838 $88,547 $44,156 $-- $-- $157,758
Interest rate 6.94% 8.53% 8.12% 7.65% --% --% 8.03%
Mortgage-backed $-- $-- $-- $-- $69,235 $-- $69,235
Interest rate --% --% --% --% 6.05% --% 6.05%
- --------------------------------------------------------------------------------------------------------------------------
Total $2,217 $22,838 $88,547 $44,156 $69,235 $-- $226,993
Interest rate 9.65% 8.03% 7.61% 7.39% 6.05% --% 7.43%
==========================================================================================================================
LOAN PORTFOLIO
- --------------
The following table shows the composition of the loan portfolio of
the Company by type of loan and type of borrower, on the dates
indicated:
==============================================================================================================
At December 31,
----------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Commercial and commercial real estate $1,476,912 $1,437,118 $1,455,984 $1,260,082 $1,244,561
Real estate construction 57,998 66,782 101,136 128,901 175,962
Real estate residential 384,128 361,909 276,951 378,971 333,685
Consumer 385,204 404,382 462,734 502,441 528,875
Unearned income (6,345) (8,254) (9,565) (12,248) (16,381)
- --------------------------------------------------------------------------------------------------------------
Gross loans 2,297,897 2,261,937 2,287,240 2,258,147 2,266,702
Allowance for loan losses (51,304) (50,630) (50,921) (48,494) (46,580)
- --------------------------------------------------------------------------------------------------------------
Net loans $2,246,593 $2,211,307 $2,236,319 $2,209,653 $2,220,122
==============================================================================================================
Maturities and sensitivities of selected loans to changes in
- ------------------------------------------------------------
interest rates
- --------------
The following table shows the maturity distribution and interest
rate sensitivity of commercial and real estate construction loans
at December 31, 1998. Balances exclude loans to individuals and
residential mortgages totaling $763.0 million. These types of loans
are typically paid in monthly installments over a number of years.
=================================================================================================
Within One to After
(In thousands) One Year Five Years Five Years Total
- -------------------------------------------------------------------------------------------------
Commercial and commercial real estate * $881,290 $219,947 $375,675 $1,476,912
Real estate construction 57,998 -- -- 57,998
- -------------------------------------------------------------------------------------------------
Total $939,288 $219,947 $375,675 $1,534,910
=================================================================================================
Loans with fixed interest rates $272,512 $219,947 $375,675 $868,134
Loans with floating interest rates 666,776 -- -- 666,776
- -------------------------------------------------------------------------------------------------
Total $939,288 $219,947 $375,675 $1,534,910
=================================================================================================
* Includes demand loans
COMMITMENTS AND LETTERS OF CREDIT
- ---------------------------------
It is not the policy of the Company to issue formal commitments on
lines of credit except to a limited number of well established and
financially responsible local commercial enterprises. Such
commitments can be either secured or unsecured and are typically in
the form of revolving lines of credit for seasonal working capital
needs. Occasionally, such commitments are in the form of Letters of
Credit to facilitate the customers' particular business
transactions. Commitment fees generally are not charged except
where Letters of Credit are involved. Commitments and lines of
credit typically mature within one year. For further information,
see Note 12 to the consolidated financial statements.
ASSET QUALITY
- -------------
The Company closely monitors the markets in which it conducts its
lending operations and continues its strategy to control exposure
to loans with higher credit risk and increase diversification of
earning assets. Asset reviews are performed using grading standards
and criteria similar to those employed by bank regulatory agencies.
Assets receiving lesser grades fall under the "classified assets"
category, which includes all non-performing assets and potential
problem loans, and receive an elevated level of attention to ensure
collection.
The following summarizes the Company's classified assets for
the periods indicated:
========================================================================
At December 31,
(In millions) 1998 1997
- ------------------------------------------------------------------------
Classified loans $50.8 $67.5
Other classified assets 4.3 7.4
- ------------------------------------------------------------------------
Total classified assets $55.1 $74.9
========================================================================
Classified loans at December 31, 1998 decreased $16.7 million or 25
percent to $50.8 million from December 31, 1997, reflecting the
implementation of the Company's active work-out standards and
charge-offs of graded loans acquired through the Merger. Other
classified assets decreased $3.1 million from prior year, due to
sales and write-downs of properties acquired in satisfaction of
debt ("other real estate owned") partially offset by new
foreclosures on loans with real estate collateral.
Non-performing assets
- ---------------------
Non-performing assets include non-accrual loans, loans 90 or more
days past due and still accruing and other real estate owned. Loans
are placed on non-accrual status upon reaching 90 days or more
delinquent, unless the loan is well secured and in the process of
collection. Interest previously accrued on loans placed on
non-accrual status is charged against interest income. In addition,
some loans secured by real estate with temporarily impaired values
and commercial loans to borrowers experiencing financial
difficulties are placed on non-accrual status even though the
borrowers continue to repay the loans as scheduled. Such loans are
classified by Management as "performing non-accrual" and are
included in total non-performing assets. When the ability to fully
collect non-accrual loan principal is in doubt, cash 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 payments received after that
point are recorded as interest income on a cash basis. Performing
non-accrual loans are reinstated to accrual status when
improvements in credit quality eliminate the doubt as to the full
collectibility of both interest and principal.
The following table summarizes the non-performing assets of
the Company for the periods indicated:
==============================================================================================================
At December 31,
----------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Performing non-accrual loans $1.8 $1.6 $4.3 $2.4 $2.0
Non-performing non-accrual loans 6.8 16.5 12.5 25.0 15.6
- --------------------------------------------------------------------------------------------------------------
Non-accrual loans 8.6 18.1 16.8 27.4 17.6
- --------------------------------------------------------------------------------------------------------------
Restructured loans -- -- 0.2 0.3 0.6
Loans 90 or more days past due
and still accruing 0.5 1.0 1.8 1.7 4.8
Other real estate owned 4.3 7.4 9.9 7.6 11.7
- --------------------------------------------------------------------------------------------------------------
Total non-performing assets $13.4 $26.5 $28.7 $37.0 $34.7
==============================================================================================================
Allowance for loan losses as a
percentage of non-accrual loans
and loans 90 or more days past
due and still accruing 564% 265% 274% 167% 208%
Allowance for loan losses as a percentage
of total non-performing assets 383% 191% 177% 131% 134%
==============================================================================================================
Performing non-accrual loans increased $200 thousand to $1.8
million at December 31, 1998 while non-performing non-accrual loans
decreased $9.7 million to $6.8 million at December 31, 1998,
primarily due to sales, pay-offs and transfers to other real estate
owned of commercial real estate loans.
The $3.1 million decrease in other real estate owned balances from
December 31, 1997 was due to write-downs and liquidations net of
additions from non-accrual loans on loans with real estate
collateral. The decrease in other real estate owned balances at
December 31, 1997 from December 31, 1996 was also due to
write-downs and liquidations net of additions of non-accrual loans
with real estate collateral.
The amount of gross interest income that would have been recorded
for non-accrual loans for the year ended December 31, 1998, if all
such loans had been current in accordance with their original terms
while outstanding during the period, was $855 thousand and $1.6
million, each, in 1997 and 1996. The amount of interest income that
was recognized on non-accrual loans from cash payments made in
1998, 1997 and 1996 was $573 thousand, $462 thousand and $270
thousand, respectively. Cash payments received, which were applied
against the book balance of performing and non-performing
non-accrual loans outstanding at December 31, 1998, totaled
approximately $952 thousand, compared to $573 thousand and $111
thousand in 1997 and 1996, respectively.
The overall credit quality of the loan portfolio continues to be
strong; however, the total non-performing assets could fluctuate
from year to year. The performance of any individual loan can be
impacted by external factors such as the interest rate environment
or factors particular to the borrower. The Company expects to
maintain non-performing asset levels; however, the Company can give
no assurance that additional increases in non-accrual loans will
not occur in future periods.
Loan loss experience
- --------------------
The Company's allowance for loan losses is maintained at a level
estimated to be adequate to provide for losses that can be
reasonably anticipated based upon specific conditions, credit loss
experience, the amount of past due, non-performing loans and
classified loans, recommendations of regulatory authorities,
prevailing economic conditions and other factors. The allowance is
allocated to segments of the loan portfolio based in part on
quantitative analyses of historical credit loss experience, in
which criticized and classified loan balances are analyzed using a
linear regression model to determine standard allocation
percentages. The results of this analysis are applied to current
criticized and classified loan balances to allocate the allowance to
the respective segments of the loan portfolio. In addition, loans
with similar characteristics not usually criticized using
regulatory guidelines due to their small balances and numerous
accounts are analyzed based on the historical rate of net losses
and delinquency trends grouped by the number of days the payments
on those loans are delinquent. A portion of the allowance is also
allocated to impaired loans. Management considers the $51.3 million
allowance for loan losses, which constituted 2.23 percent of total
loans at December 31, 1998, to be adequate as a reserve against
inherent losses. However, while the Company's policy is to charge
off in the current period those loans on which the loss is
considered probable, the risk exists of future losses which cannot
be precisely quantified or attributed to particular loans or
classes of loans. Management continues to evaluate the loan
portfolio and assess current economic conditions that will dictate
future allowance levels.
The following table summarizes the loan loss experience of the
Company for the years indicated:
==============================================================================================================
At December 31,
----------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Total loans outstanding $2,297,897 $2,261,937 $2,287,240 $2,258,147 $2,266,702
Average loans outstanding during the period 2,262,082 2,248,048 2,249,520 2,254,946 2,105,164
==============================================================================================================
Analysis of the reserve:
Beginning balance $50,630 $50,921 $48,494 $46,580 $42,413
Additions to the reserve charged to
operating expense 5,180 7,645 12,306 15,228 11,378
Allowance acquired through merger -- -- 1,665 -- 1,755
Credit losses:
Commercial and commercial real estate (5,113) (6,825) (7,998) (7,395) (5,752)
Real estate construction -- (962) (781) (1,401) (790)
Real estate residential (97) (374) (1,862) (3,682) (2,069)
Consumer (3,358) (4,323) (5,376) (3,740) (3,207)
- --------------------------------------------------------------------------------------------------------------
Total (8,568) (12,484) (16,017) (16,218) (11,818)
Credit loss recoveries:
Commercial and commercial real estate 2,305 2,499 2,227 1,517 1,417
Real estate construction 10 160 44 3 65
Real estate residential 1 34 72 26 --
Consumer 1,746 1,855 2,130 1,358 1,370
- --------------------------------------------------------------------------------------------------------------
Total 4,062 4,548 4,473 2,904 2,852
- --------------------------------------------------------------------------------------------------------------
Net credit losses (4,506) (7,936) (11,544) (13,314) (8,966)
- --------------------------------------------------------------------------------------------------------------
Balance, end of period $51,304 $50,630 $50,921 $48,494 $46,580
==============================================================================================================
Net credit losses to average loans 0.20% 0.35% 0.51% 0.59% 0.43%
Allowance for loan losses as a percentage
of loans outstanding 2.23% 2.24% 2.23% 2.15% 2.05%
==============================================================================================================
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:
=================================================================================================
1998 1997
---------------------------------------------------
Allocation Loans as Allocation Loans as
of the Percent of the Percent
Allowance of Total Allowance of Total
(Dollars in thousands) Balance Loans Balance Loans
- -------------------------------------------------------------------------------------------------
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 of the reserve 20,439 -- 19,164 --
- -------------------------------------------------------------------------------------------------
Total $51,304 100% $50,630 100%
=================================================================================================
==========================================================================================================================
1996 1995 1994
----------------------------------------------------------------------------
Allocation Loans as Allocation Loans as Allocation Loans as
of the Percent of the Percent of the Percent
Reserve of Total Reserve of Total Reserve of Total
(Dollars in thousands) Balance Loans Balance Loans Balance Loans
- --------------------------------------------------------------------------------------------------------------------------
Commercial $22,743 64% $21,849 56% $19,202 55%
Real estate construction 3,471 4 5,683 6 3,852 8
Real estate residential 2,489 12 1,733 16 2,021 15
Consumer 6,543 20 6,401 22 6,513 22
Unallocated portion of the reserve 15,675 -- 12,828 -- 14,992 --
- --------------------------------------------------------------------------------------------------------------------------
Total $50,921 100% $48,494 100% $46,580 100%
==========================================================================================================================
The decrease in the allocation of commercial loans from December
1997 to December 1998 is primarily due to the reduction in the
balance of criticized loans and the reallocation of specific reserves
after the Merger.
The Company considers a loan to be impaired when, based on current
information and events, it is "probable" that a creditor will be
unable to collect all amounts due (principal and interest)
according to the contractual terms of the loan agreement. The
measurement of impairment may be based on (I) the present value of
the expected cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market
price of the impaired loan or (iii) the fair value of the
collateral of a collateral-dependent loan. The Company does not
apply this definition to large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment.
In measuring impairment, the Company reviews all impaired
commercial and construction loans classified "Substandard" and
"Doubtful" that meet materiality thresholds of $250 thousand and
$100 thousand, respectively. All "Loss" classified loans are fully
reserved under the Company's standard loan loss reserve
methodology. The Company considers classified loans below the
established thresholds to represent immaterial loss risk.
Commercial and construction loans that are not classified, and
large groups of smaller-balance homogeneous loans such as
installment, personal revolving credit, residential real estate and
student loans, are evaluated collectively for impairment under the
Company's standard loan loss reserve methodology. The Company
generally identifies loans to be reported as impaired when such
loans are in non-accrual status or are considered troubled debt
restructurings due to the granting of a below-market rate of
interest or a partial forgiveness of indebtedness on an existing
loan.
The following summarizes the Company's impaired loans for the
periods indicated:
========================================================================
At December 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------
Non-accrual loans $8,531 $18,146
Other 6,504 4,333
- ------------------------------------------------------------------------
Total impaired loans $15,035 $22,479
========================================================================
Specific reserves $1,255 $2,238
========================================================================
The $6.5 million balance in loans classified as impaired as of
December 31, 1998, other than non-accrual loans, is due to two
commercial real estate loans, with combined principal outstanding
balances of $5.4 million, having collateral exposure that may
preclude ultimate full repayment, and one credit classified as a
troubled debt restructuring with principal outstanding balance of
$1.1 million. Payments on these credits were current at December
31, 1998.
The average balance of the Company's impaired loans for the year
ended December 31, 1998 was $15.9 million compared to $22.0 million
in 1997. The amount of that recorded investment for which there is
no related allowance for credit losses was $0. In general, the
Company does not recognize any interest income on trouble debt
restructurings or loans that are classified as non-accrual. For
other impaired loans, interest income may be recorded as cash is
received, provided that the Company's recorded investment in such
loans is deemed collectible.
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
The fundamental objective of the Company's management of assets and
liabilities is to maximize its economic value while maintaining
adequate liquidity and a conservative level of interest rate risk.
In adjusting the Company's asset/liability position, its
management ("Management") attempts to manage interest rate risk
while enhancing net interest margins. At times, depending on the
level of general interest rates, the relationship between long- and
short-term interest rates, market conditions and competitive
factors, Management may increase the Company's interest rate risk
position in order to increase its net interest margin. The
Company's results of operations and net portfolio values remain
vulnerable to increases in interest rates and to fluctuations in
the difference between long- and short-term interest rates.
The primary analytical tool used by the Company to quantify
interest rate risk is a simulation model to project changes in net
interest income ("NII") that result from forecast changes in
interest rates. This analysis calculates the difference between a
NII forecast over a 12-month period using a flat interest rate
scenario and a NII forecast using a rising (or falling) rate
scenario, where the Federal Funds rate, serving as a "driver," is
made to rise (or fall) evenly by 200 basis points over the 12-month
forecast interval triggering a response in the other rates. Company
policy requires that such simulated changes in NII should always be
less than 10 percent or steps must be taken to reduce interest rate
risk. According to the same policy, if the simulated changes in NII
reach 7.5 percent, a closer inspection of the risk will be put in
place to determine what steps could be taken to control risk should
it grow worse. The following table summarizes the simulated change
in NII, based on the 12-month period ending December 31, 1999:
===========================================================
(Dollars in millions)
Changes in Estimated Increase
Interest (Decrease) in NII
Rates Estimated -----------------------
(Basis Points) NII Amount Amount Percent
- -----------------------------------------------------------
+200 $195.3 $2.3 1.2%
-- 193.0 -- --
- -200 189.3 (3.7) -1.9%
===========================================================
Given the Company's historical experience on interest rate
volatility, the results of the NII simulations shown in the above
table reflect the categorization of interest-bearing transaction
and savings deposits as having their repricing spread over one year
and by less than the full change in market rates, rather than
repricing fully in the first month.
The Company does not currently engage in trading activities or
use derivative instruments to control interest rate risk, even
though such activities may be permitted with the approval of
the Company's Board of Directors.
Interest rate risk is the most significant market risk affecting
the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, do not
arise in the normal course of the Company's business activities.
Interest rate sensitivity analysis
- ----------------------------------
The following table summarizes the interest rate sensitivity gaps
inherent in the Company's asset and liability portfolios at
December 31, 1998:
==========================================================================================================================
Non-
Repricing Within (days) 0-90 91-180 181-365 Over 365 Repricing Total
- --------------------------------------------------------------------------------------------------------------------------
Assets (In millions)
Investment securities $71 $84 $162 $898 $-- $1,215
Loans 918 106 140 1,134 -- 2,298
Other assets -- -- -- -- 331 331
- --------------------------------------------------------------------------------------------------------------------------
Total assets $989 $190 $302 $2,032 $331 $3,844
==========================================================================================================================
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $-- $-- $-- $-- $843 $843
Interest-bearing:
Transaction 601 -- -- -- -- 601
Money market savings 180 180 265 -- -- 625
Passbook savings 278 -- -- -- -- 278
Time 535 144 108 55 -- 842
Short-term borrowings 204 -- -- -- -- 204
Debt financing and notes payable -- -- 5 43 -- 48
Other liabilities -- -- -- -- 34 34
Shareholders' equity -- -- -- -- 369 369
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,798 $324 $378 $98 $1,246 $3,844
==========================================================================================================================
Net (liabilities) assets subject
to repricing ($809) ($134) ($76) $1,934 ($915)
- --------------------------------------------------------------------------------------------------------------
Cumulative net (liabilities) assets
subject to repricing ($809) ($943) ($1,019) $915 $--
==============================================================================================================
The repricing terms of the table above do not represent contractual
principal maturity, but rather principal cash flows available for
repricing. The interest rate sensitivity report shown above
categorizes interest-bearing transaction deposits and savings
deposits as repricing within 30 days. However, it is the
experience of Management that the historical