UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterthe Quarterly Period Ended March 31,June 30, 2002
Commission File Number: 1-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-2156203
(State(state or other jurisdiction ofof) (I.R.S. Employer
incorporation or organization) Identification No.)
1108 Fifth Avenue, San Rafael, California 94901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (707) 863-8000
Indicate by check mark whether the registrant (1) has filed all reports
requiredRequired to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the registrantissuer's classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of April 25,August 7, 2002
Common Stock, 33,483,65233,569,463
No Par Value
TABLE OF CONTENTS
Page
Forward Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Financial Summary 67
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
7Item 3 - Quantitative and Qualitative Disclosure about Market Risk 27
PART II - OTHER INFORMATION 28
Item 1 - Legal Proceedings 2728
Item 4 - Submission of Matters to a Vote of Security Holders 2728
Item 6 - Exhibits and Reports on Form 8-K 2728
Exhibit 11 - Computation of Earnings Per Share 2831
Exhibit 99.1 - Certification Required by 18 U.S.C. Section 1350 32
Exhibit 99.2 - Certification Required by 18 U.S.C. Section 1350 33
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about
Westamerica Bancorporation for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. A number of factors, some
of which are beyond the Company's ability to predict or control, could cause
future results to differ materially from those contemplated. These factors
include but are not limited to (1) a continued slowdown in the national and
California economies; (2) increased economic uncertainty created by the recent
terrorist attacks on the United States and the actions taken in response; (3)
the prospect of additional terrorist attacks in the United States and the
uncertain effect of these events on the national and regional economies; (4)
changes in the interest rate environment; (5) changes in the regulatory
environment; (6) significantly increasing competitive pressure in the banking
industry; (7) operational risks including data processing system failures or
fraud; (8) the effect of acquisitions and integration of acquired businesses;
(9) volatility of rate sensitive deposits; (10) asset/liability matching risks
and liquidity risks; and (11) changes in the securities markets.
The reader is directed to the Company's annual report on Form 10-K for the year
ended December 31, 2001, for further discussion of factors which could affect
the Company's business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
At
March 31,At June 30, December 31,
2002 2001 2001
------------------------------------
---------------------------------------
Assets:
Assets:
Cash and cash equivalents $173,029 $188,704$183,589 $192,493 $179,182
Money market assets 534633 250 534
Investment securities available for sale 975,256 890,042986,392 891,874 948,970
Investment securities held to maturity,
with market values of:
$218,202$287,841 at March 31,June 30, 2002 213,343
$231,646279,640
$227,084 at March 31,June 30, 2001 225,057221,885
$214,866 at December 31, 2001 209,169
Loans, gross 2,461,696 2,456,4382,507,968 2,462,603 2,484,457
Allowance for loan losses (52,147) (52,644)(54,324) (52,468) (52,086)
---------- ---------- -------------------------------------------------
Loans, net of allowance for loan losses 2,409,549 2,403,7942,453,644 2,410,135 2,432,371
Other real estate owned 834 1,866473 545 523
Premises and equipment, net 38,893 42,56739,078 42,444 39,821
Interest receivable and other assets 150,856 125,326129,053 144,009 117,397
---------- ---------- -------------------------------------------------
Total Assets $3,962,294 $3,877,606$4,072,502 $3,903,635 $3,927,967
========== ========== =================================================
Liabilities:
Deposits:
NoninterestNon-interest bearing $1,033,063 $954,593$1,081,967 $996,626 $1,048,458
Interest bearing:
Transaction 540,131 519,957528,226 499,299 519,324
Savings 924,731 821,285979,289 835,894 863,523
Time 753,199 900,642725,958 865,750 803,330
---------- ---------- -------------------------------------------------
Total deposits 3,251,124 3,196,4773,315,440 3,197,569 3,234,635
Short-term borrowed funds 185,326 275,471228,635 300,649 271,911
Federal Home Loan Bank advance 115,000140,000 0 40,000
Notes Payable 24,607 27,82127,822 27,821
Liability for interest, taxes and
other expenses 78,600 46,91943,447 59,124 39,241
----------- ---------- -------------------------------------------------
Total Liabilities 3,654,657 3,546,6883,752,129 3,585,164 3,613,608
=========== ========== =================================================
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
33,83133,753 at March 31,June 30, 2002 211,608
35,689226,551
35,109 at March 31,June 30, 2001 213,358211,966
34,220 at December 31, 2001 209,074
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale 8,062 12,94014,184 10,260 11,900
Retained earnings 87,967 104,62079,638 96,245 93,385
---------- ---------- -------------------------------------------------
Total Shareholders' Equity 307,637 330,918320,373 318,471 314,359
---------- ---------- ----------=======================================
Total Liabilities and
Shareholders' Equity $3,962,294 $3,877,606$4,072,502 $3,903,635 $3,927,967
========== ========== =================================================
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Three months ended March 31,Six months ended
June 30, June 30,
2002 2001 ---------------------
2002 2001
----------------------------------------------------
Interest Income:
Interest Income:
Loans $43,966 $50,906$43,912 $49,341 $87,878 $100,246
Money market assets and funds sold 0 34 1 4 6
Investment securities available for sale
Taxable 8,292 10,0258,350 9,300 16,633 19,353
Tax-exempt 3,852 2,9713,693 3,173 7,555 6,116
Investment securities held to maturity
Taxable 970 1,2401,073 1,221 2,042 2,461
Tax-exempt 1,858 1,992
------- -------2,055 1,949 3,913 3,940
----------------------------------------------------
Total interest income 58,938 67,137
------- -------59,087 64,985 118,024 132,122
----------------------------------------------------
Interest Expense:
Transaction deposits 407 892413 723 820 1,616
Savings deposits 2,742 4,4622,817 4,284 5,559 8,746
Time deposits 4,992 12,1124,415 10,580 9,407 22,691
Short-term borrowed funds 1,026 3,513895 2,410 1,921 5,923
Federal Home Loan Bank advance 7931,247 0 2,039 0
Debt financing and notes payable 461 518
------- -------442 499 903 1,017
----------------------------------------------------
Total interest expense 10,421 21,497
------- -------10,229 18,496 20,649 39,993
----------------------------------------------------
Net Interest Income 48,517 45,640
------- -------48,858 46,489 97,375 92,129
----------------------------------------------------
Provision for loan losses 900 900 ------- -------1,800 1,800
----------------------------------------------------
Net Interest Income After
Provision For Loan Losses 47,617 44,740
------- -------47,958 45,589 95,575 90,329
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 6,002 5,5605,967 5,908 11,969 11,467
Merchant credit card 905 946963 1,038 1,868 1,984
Financial services commissions 339 243425 377 764 619
Mortgage banking 187 221217 242 404 462
Trust fees 311 292243 240 554 531
Impairment of investment securities (4,260) 0 (4,260) 0
Other 2,255 3,024
------- -------2,329 3,189 4,584 6,217
----------------------------------------------------
Total Noninterest Income 9,999 10,286
------- -------5,884 10,994 15,883 21,280
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 13,863 13,32114,281 13,249 28,143 26,570
Occupancy 2,931 2,9162,898 2,911 5,829 5,827
Equipment 1,434 1,5901,425 1,484 2,859 3,074
Data processing 1,499 1,5211,516 1,553 3,015 3,075
Professional fees 371 453443 398 815 851
Other real estate owned 49 431 98 50 141
Other 5,546 5,732
------- -------5,345 5,933 10,891 11,665
----------------------------------------------------
Total Noninterest Expense 25,693 25,576
------- -------25,909 25,626 51,602 51,203
----------------------------------------------------
Income Before Income Taxes 31,923 29,45027,933 30,957 59,856 60,406
----------------------------------------------------
Provision for income taxes 10,264 9,026
------- -------8,586 10,199 18,850 19,224
----------------------------------------------------
Net Income $21,659 $20,424
======= =======$19,347 $20,758 $41,006 $41,182
====================================================
Comprehensive Income:
Change in unrealized gain (loss) on
securities available for sale, net (3,838) 5,771
------- -------6,122 (2,680) 2,284 3,091
----------------------------------------------------
Comprehensive Income $17,821 $26,195
======= =======$25,469 $18,078 $43,290 $44,273
====================================================
Average Shares Outstanding 34,071 36,00033,565 35,433 33,817 35,715
Diluted Average Shares Outstanding 34,634 36,60534,180 35,957 34,406 36,279
Per Share Data:
Basic Earnings $0.64 $0.57$0.58 $0.59 $1.21 $1.15
Diluted Earnings 0.63 0.560.57 0.58 1.19 1.14
Dividends Paid 0.22 0.190.21 0.44 0.40
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Compre-
Common hensive Retained
Stock Income Earnings Total
-----------------------------------------------
----------------------------------------------------
Balance, December 31, 2000 $206,952 $7,169 $123,626 $337,747
Net income for the period 20,424 20,42441,182 41,182
Stock issued, including
stock option tax benefits 12,143 12,14314,836 14,836
Purchase and retirement of stock (5,737) (32,539) (38,276)(9,822) (54,171) (63,993)
Dividends (6,891) (6,891)(14,392) (14,392)
Unrealized gain on securities available
for sale, net 5,771 5,771
--------- ------- --------- ---------3,091 3,091
----------------------------------------------------
Balance, March 31,June 30, 2001 $213,358 $12,940 $104,620 $330,918
========= ======= ========= =========$211,966 $10,260 $96,245 $318,471
====================================================
Balance, December 31, 2001 $209,074 $11,900 $93,385 $314,359
Net income for the period 21,659 21,659$41,006 41,006
Stock issued in connection with
purchase of Kerman State Bank 14,620 14,620
Stock issued, including
stock option tax benefits 5,965 5,9659,737 9,737
Purchase and retirement of stock (3,431) (19,539) (22,970)(6,880) (39,832) (46,712)
Dividends (7,538) (7,538)(14,921) (14,921)
Unrealized lossgain on securities available
for sale, net (3,838) (3,838)
--------- ------- --------- ---------2,284 2,284
----------------------------------------------------
Balance, March 31,June 30, 2002 $211,608 $8,062 $87,967 $307,637
========= ======= ========= =========$226,551 $14,184 $79,638 $320,373
====================================================
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the threesix months
ended March 31,June 30,
2002 2001
------------------------
--------------------------
Operating Activities:
Operating Activities:
Net income $21,659 $20,424$41,006 $41,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 1,138 1,1972,264 2,423
Amortization of intangibles and other assets 418 854869 1,719
Loan loss provision 900 9001,800 1,800
Amortization of deferred net loan (cost)/fees 250 55396 389
(Increase) decrease in interest income receivable (83) 3,034
Increase(1,956) 2,811
(Increase) in other assets (34,196) (7,246)
Increase(2,484) (27,667)
(Decrease) increase in income taxes payable 10,465 9,094
Decrease(1,484) 4,461
(Decrease) in interest expense payable (168) (659)(132) (2,397)
Increase (decrease) in other liabilities 33,338 (2,025)
Write-downs3,060 20,715
Writedown of equipment 68 17268 119
Originations of loans for resale (3,720) (880)(7,028) (2,795)
Proceeds from sale of loans originated for resale 4,446 5477,594 2,268
Net (gain) loss on sale of loans originated for resale -- 12(27) 18
Net gain (loss) on sale of property acquired
in satisfaction of de 32 (59)
Write-downdebt (107) (154)
Writedown on property acquired in satisfaction of debt -- 47
--------- ---------34 78
Impairment of investment securities 4,260 0
--------------------------
Net Cash Provided by Operating Activities 34,547 25,312
--------- ---------48,333 44,970
--------------------------
Investing Activities:
Net cash obtained in mergers and acquisitions 5,368 0
Net repayments of loans 20,571 25,38733,674 17,822
Purchases of investment securities available for sale (552,980) (33,566)(777,488) (125,406)
Purchases of investment securities held to maturity (4,965) (98)(68,696) (3,110)
Purchases of property, plant and equipment (640) (1,601)(1,069) (2,808)
Proceeds from maturity of securities available for sale 513,876 74,540741,284 159,631
Proceeds from maturity of securities held to maturity 6,023 3,07714,849 9,260
Proceeds from sale of securities available for sale 962 2171,000 510
Proceeds from sale of property and equipment 364 --0
Proceeds from property acquired in satisfaction
of debt 32 287
--------- ---------391 1,857
--------------------------
Net Cash (Used In) Provided By Investing Activities (16,757) 68,243
--------- ---------(50,323) 57,756
--------------------------
Financing Activities:
Net decrease in deposits (2,762) (39,175)
Net (decrease) in short-term borrowings (33,001) (86,293)
Net increase (decrease) in deposits 16,489 (40,267)
Net decrease in short-term borrowings (11,585) (111,471)FHLB advances 100,000 0
Repayments of notes payable (3,214) (3,215)
Exercise of stock options/issuance of shares 4,875 8,7877,007 10,353
Repurchases/retirement of stock (22,970) (38,276)(46,712) (63,993)
Dividends paid (7,538) (6,891)
--------- ---------(14,921) (14,392)
--------------------------
Net Cash Used InProvided By (Used In) Financing Activities (23,943) (191,333)
--------- ---------6,397 (196,715)
--------------------------
Net DecreaseIncrease (Decrease) In Cash and Cash Equivalents (6,153) (97,778)
--------- ---------4,407 (93,989)
--------------------------
Cash and Cash Equivalents at Beginning of Period 179,182 286,482
--------- -----------------------------------
Cash and Cash Equivalents at End of Period $173,029 $188,704
========= =========$183,589 $192,493
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $375 $77$261
Unrealized gain on securities available for sale $2,283 $3,091
Supplemental Disclosure of Cash Flow Activity:
Unrealized (loss) gain on securities available for sale, net ($3,838) $5,771
Interest paid for the period 10,252 22,06220,564 38,255
Income tax payments for the period -- --18,991 16,010
Income tax benefit from stock option exercises 1,085 3,3561,938 $4,296
The acquisition of Kerman State Bank
involved the following:
Common Stock issued 14,620 --
Liabilities assumed 85,085 --
Fair value of assets acquired, other than cash
and cash equivalents (90,170) --
Core deposit intangible (2,500)
Goodwill (1,667) --
Net cash and cash equivalents received 5,368 --
WESTAMERICA BANCORPORATION
Financial Summary
(dollars in thousands, except per share amounts)
Three months ended March 31,Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 ----------------------------
2002 2001
----------------------------------------------------
Net Interest Income $48,517 $45,640(FTE) $53,096 $50,269 $105,808 $99,528
Provision for Loan Lossesloan losses (900) (900) (1,800) (1,800)
Noninterest Income 9,999 10,286income:
Recurring income 10,144 10,994 20,143 21,280
Impairment of investment securities (4,260) 0 (4,260) 0
----------------------------------------------------
Total noninterest income 5,884 10,994 15,883 21,280
Noninterest Expense (25,693) (25,576)expense (25,909) (25,626) (51,602) (51,203)
Provision for income taxes (10,264) (9,026)
------- -------(FTE) (12,824) (13,979) (27,283) (26,623)
----------------------------------------------------
Net Income $21,659 $20,424
======= =======income $19,347 $20,758 $41,006 $41,182
====================================================
Average shares outstanding 33,565 35,433 33,817 35,715
Diluted average shares outstanding 34,180 35,957 34,406 36,279
Shares Outstanding 34,071 36,000outstanding at period end 33,753 35,109 33,753 35,109
As Reported:
Basic earnings per share $0.58 $0.59 $1.21 $1.15
Diluted Average Shares Outstanding 34,634 36,605
Shares Outstanding at Period End 33,831 35,689earnings per share 0.57 0.58 1.19 1.14
Return on assets 1.97% 2.18% 2.11% 2.16%
Return on equity 26.67% 26.75% 27.94% 26.31%
Net interest margin 5.82% 5.69% 5.84% 5.63%
Net loan losses to average loans 0.13% 0.18% 0.13% 0.13%
Efficiency ratio 43.9% 41.8% 42.4% 42.4%
Excluding Securities Impairment & Merger Costs:
Net income $22,046 $20,758 $43,705 $41,182
Basic Earnings Per Share $0.64 $0.57earnings per share $0.66 $0.59 $1.29 $1.15
Diluted Earnings Per Share 0.63 0.56earnings per share 0.64 0.58 1.27 1.14
Return on assets 2.25% 2.18% 2.25% 2.16%
Return on equity 30.39% 26.75% 29.78% 26.31%
Net interest margin 5.82% 5.69% 5.84% 5.63%
Net loan losses to average loans 0.13% 0.18% 0.13% 0.13%
Efficiency ratio 41.6% 41.8% 41.3% 42.4%
Average Balances:
Total Assets $3,911,060 $3,872,584assets $3,933,274 $3,824,688 $3,922,167 $3,848,636
Earning Assets 3,631,344 3,572,761assets 3,659,033 3,541,890 3,645,189 3,557,325
Total Loans 2,470,989 2,457,755loans 2,448,546 2,456,278 2,459,768 2,457,016
Total Deposits 3,206,717 3,175,414deposits 3,226,951 3,187,324 3,216,834 3,181,369
Shareholders' Equity 301,014 320,105
Financial Ratios for the Period:
Return On Assets 2.25% 2.14%
Return On Equity 29.18% 25.88%
Net Interest Margin 5.86% 5.56%
Net Loan Losses to Average Loans 0.14% 0.09%
Efficiency Ratio 41.0% 43.0%equity 290,960 311,222 295,987 315,664
Balances at Period End:
Total Assets $3,962,294 $3,877,606assets $4,072,502 $3,903,635
Earning Assets 3,599,216 3,519,402assets 3,774,001 3,576,362
Total Loans 2,461,696 2,456,438loans 2,507,968 2,462,603
Total Deposits 3,251,124 3,196,477deposits 3,315,440 3,197,569
Shareholders' Equity 307,637 330,918equity 320,373 318,471
Financial Ratios at Period End:
Allowance for Loan Lossesloan losses to Loans 2.12% 2.14%loans 2.17% 2.13%
Book Value Per Share $9.09 $9.27value per share $9.49 $9.07
Equity to Assets 7.76% 8.53%assets 7.87% 8.16%
Total Capitalcapital to Risk Assets 10.67% 11.39%risk assets 10.65% 10.93%
Dividends Paid Per Share $0.22 $0.19$0.21 $0.44 $0.40
Dividend Payout Ratio 39% 36% 37% 35% 34%
MANAGEMENT'S DISCUSSION AND ANALYSIS OFNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Westamerica BancorporationSTATEMENTS
Note 1:
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and subsidiaries (the "Company") reported first
quarter 2002 net incomepursuant to the rules and regulations of
$21.7 million or $.63 diluted earnings per share.
Thesethe Securities and Exchange Commission. The results compare to net income of $20.4 million or $.56 diluted earnings
per shareoperations reflect
interim adjustments, all of which are of a normal recurring nature and
$21.8 million or $.62 diluted earnings per share, respectively,which, in the opinion of management, are necessary for a fair presentation
of the results for the firstinterim period presented. The interim results for
the six months ended June 30, 2002 and fourth quarters of 2001.
Following is a summary2001 are not necessarily indicative
of the components of net incomeresults expected for the periods indicated
(dollarsfull year. These unaudited consolidated
financial statements should be read in thousands):
For the three months ended
March 31, December 31,
2002 2001 2001
-------------------------------------
Net interest income (FTE) $52,712 $49,259 $52,381
Provision for loan losses (900) (900) (900)
Noninterest income 9,999 10,286 10,785
Noninterest expense (25,693) (25,576) (25,685)
Provision for income taxes (FTE) (14,459) (12,645) (14,810)
-------- -------- --------
Net income $21,659 $20,424 $21,771
======== ======== ========
Average total assets $3,911,060 $3,872,584 $3,884,291
Net income (annualized) to average total assets 2.25% 2.14% 2.22%
Net income for the first quarter of 2002 was $1.2 million (6%) over the same
quarter of 2001. The increase was primarily from net interest income (FTE)
(up $3.5 million or 7%), the net result of a 30 basis point (bp) improvement
in net margin, and to a lesser extent, growth of average earning assets
(up $59 million). Noninterest income decreased $287 thousand (3%), partially
offsetting the net interest improvement. The resulting net revenue was
slightly reduced by an increase in noninterest expenses, which were $117
thousand above the year-ago quarter. The provision for income taxes (FTE)
increased $1.8 million (14%), in-lineconjunction with the increase in pretax income.
Comparing the first three months of 2002 to the prior quarter, net income
decreased $112 thousand (0.5%). Improved net interest income (up $331
thousand or 0.6%) was attributable to a higher margin (up 7 bp)audited
consolidated financial statements and to a lesser extent, higher average earning assets (up $27 million).
This increase was partially offset by lower noninterest income (down $786
thousand). Noninterest expense remained essentially unchanged between the
two quarters. The FTE provision for income taxes was down $351 thousand
from the fourth quarter of 2001.
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
For the three months ended
March 31 December 31,
2002 2001 2001
-------------------------------------
Interest income $58,938 $67,137 $61,280
Interest expense (10,421) (21,497) (13,029)
FTE adjustment 4,195 3,619 4,130
-------- -------- --------
Net interest income (FTE) $52,712 $49,259 $52,381
======== ======== ========
Average earning assets $3,631,344 $3,572,761 $3,604,579
Net interest margin (FTE) 5.86% 5.56% 5.79%
The Company's primary source of revenue is net interest income, or the
difference between interest income earned on loans and investments and
interest expense paid on interest-bearing deposits and borrowings. Net
interest income (FTE) during the first quarter of 2002 increased $3.5
million (7%) from the same period in 2001 to $52.7 million. Approximately
one-half of the increase was due to the growth of average earning assets
(up $59 million), with the remainder due to a higher interest margin. The
increase in the net interest margin was the net effect of a 98 bp drop in
the asset yield, which was more than offset by a 128 bp drop in the cost of
funds.
Comparing the first quarter of 2002 with the previous quarter, net interest
income (FTE) increased $331 thousand (0.6%), primarily due to a higher
interest margin, partially offset by increases in average balances of funds
purchased and Federal Home Loan Bank advances. The margin expansion was the
result of a 20 bp decrease in asset yields, which was more than offset by a
27 bp lower cost of funds.
Interest and Fee Income
Interest & fee income (FTE) for the first quarter of 2002 decreased $7.6
million (11%) from the same period in 2001. The decrease was caused by
lower yields, partially offset by the positive effect of growth of
average earning assets.
The average yield on the Company's earning assets decreased from 8.00% in the
first quarter of 2001 to 7.02% in the 2002 period (down 98 bp). This decrease
in yields was reflective of general interest markets during much of 2001 and
into 2002. This was particularly evident in variable-rate categories of loans
such as commercial (261 bp decline in yield), construction (392 bp decline) and
personal lines of credit (392 bp decline). Except for direct consumer loans
(up 11 bp), other categories of loans with longer maturities and/or fixed rates
of interest also declined, but by a relatively lesser degree. These include
commercial real estate loans (42 bp decrease), residential real estate loans
(45 bp decrease) and indirect consumer loans (down 52 bp). The net result was
that the yield on the loan portfolio declined 114 bp to 7.38%.
The investment portfolio yield decreased 52 bp to 6.18%, which was mostly caused
by declines in participation certificates (down 132 bp), other securities (down
135 bp) and U.S. Agency (down 56 bp).
Average earning assets grew $59 million, despite reductions in residential real
estate loans (down $20 million or 6%), direct consumer loans (down $19 million
or 30%), and personal credit lines (down $6 million or 8%). Much of this
contraction was replaced with growth in the commercial real estate and indirect
consumer loan portfolios, which increased by $25 million (3%) and $23 million
(6%), respectively. All other categories of loans increased by $10 million.
Additionally, the investment portfolio increased: municipal securities (up $51
million or 13%), US Agency obligations (up $12 million or 7%), and other
securities (up $35 million or 13%). Partially offsetting this growth were
declines in US Treasury securities (down $45 million or 24%) and
participation certificates (down $8 million or 11%).
Comparing the first quarter of 2002 to the previous quarter, interest & fee
income (FTE) fell $2.3 million (4%). Like the first quarter comparison, the
decrease resulted from declining yields, partially offset by a higher volume
of the investment portfolio.
The average yield on earning assets for the first three months of 2002 was
7.02% compared to 7.22% in the fourth quarter of 2001. Loan yields, especially
those more sensitive to market rates, declined 16 bp: the yield on commercial
loans was down 47 bp, construction yields declined 66 bp, personal lines of
credit fell 58bp and indirect consumer loans were down 20 bp.
The investment portfolio yield decreased 24 bp: the U.S. Treasury securities
yield declined 29 bp, other securities declined 68 bp, and participation
certificates were were lower by 11 bp. Partially offsetting this decline
was an increase in municipal securities (up 7 bp).
The positive volume component of the change was caused by a $27 million (0.7%)
increase in average earning assets, including higher US Agency obligations (up
$13 million or 7%) and other securities (up $31 million or 11%), partially
offset by a decrease in US Treasury securities (down $9 million or 6%).
Total investments increased by $37 million (3%). A reduction in the loan
portfolio of $10 million (0.4%) offset the investment expansion.
Interest Expense
Interest expense decreased $11 million (52%) in the first three months of 2002
compared to the year-ago period. The decrease was the combined effect of a more
favorable mix of interest-bearing liabilities and a drop in the average rate
paid. More expensive time deposits (down $110 million) were replaced with less
expensive transaction accounts (up $88 million). A portion of short-term funds
(down $53 million) were refinanced with Federal Home Loan Bank borrowing
(up $86 million), with an average maturity of three years.
The average rate paid on interest-bearing liabilities decreased from 3.41% in
the first quarter of 2001 to 1.65% in 2002. Rates paid on those liabilities that
move with general market conditions declined accordingly: the average rate on
Fed Funds dropped 391 bp and the rate paid on repurchase agreements declined
338 bp. Rates on deposits declined as well, including those CDs over $100
thousand, which declined 323 bp, and on high-yield Money Market accounts,
which were lowered an average of 283 bp.
Comparing the first quarter of 2002 to the previous quarter, interest expense
decreased $2.6 million (20%) in 2002 from 2001, again due to a more favorable
mix of interest-bearing liabilities and lower rates paid.
Rates paid averaged 1.65% during the first three months of 2002 compared to
2.05% in the fourth quarter of 2001. The most significant decline was on
short-term funds, which decreased from 2.23% to 1.62%. Rates on all deposit
categories decreased as well, with the average rate paid on all interest-bearing
deposits dropping from 1.95% to 1.51%.
Interest-bearing liabilities grew $38 million (1.5%) over the fourth quarter of
2001: increases in short-term funds (up $19 million or 8%) and Federal Home Loan
Bank borrowing (up $62 million or 253%) were partially offset by a $45 million
(5%) decline in time deposits.
In all periods, the Company has attempted to continue to reduce high-rate time
deposits while increasing the balances of more profitable, lower-cost
transaction accounts in order to minimize the effect of adverse cyclical
quarterly trends.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin for
for the periods indicated:
For the three months ended
March 31, December 31,
2002 2001 2001
---------------------------------
Yield on earning assets 7.02% 8.00% 7.22%
Rate paid on interest-bearing
liabilities 1.65% 3.41% 2.05%
----- ----- -----
Net interest spread 5.37% 4.59% 5.17%
Impact of all other net
noninterest bearing funds 0.49% 0.97% 0.62%
----- ----- -----
Net interest margin 5.86% 5.56% 5.79%
===== ===== =====
During the first quarter of 2002, the Company's rapid reaction to declining
market rates resulted in a substantial increase in the net interest margin.
The margin decreased 30 basis points compared to the first quarter of 2001.
The unfavorable impact of lower rates earned on loans and the investment
portfolio, triggered by market trends, was more than offset by managed decreases
in rates paid on deposits and short-term funds. The result was a 73 bp increase
in the net interest spread. Partially offsetting the increase in spread was
the lower value of noninterest bearing funding sources. While the average
balance of these sources increased $30 million (2%), their value decreased
48 bp because of the lower market rates of interest at which they could be
invested.
The net interest margin increased 7 bp when compared to the fourth quarter of
2001. Earning asset yields decreased 20 bp, while the cost of interest-bearing
liabilities was managed down. The interest spread increased 20 bp as a result.
Noninterest bearing funding sources decreased $11 million (0.7%) and because of
lower market rates of interest their value decreased by 13 bp.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amount of interest income from average earning assets and the resulting
yields, and the amount of interest expense paid on interest-bearing liabilities.
Average loan balances include nonperforming loans. Interest income includes
proceeds from loans on 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 on
them which is exempt from federal income taxation at the current statutory
tax rate (dollars in thousands).
For the three months ended
March 31, 2002
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------------------------------
Assets:
Money market assets and funds sold $819 $0 0.00%
Investment securities:
Available for sale
Taxable 642,469 8,292 5.23%
Tax-exempt 308,603 5,835 7.56%
Held to maturity
Taxable 67,431 970 5.83%
Tax-exempt 141,033 2,816 7.99%
Loans:
Commercial:
Taxable 397,012 6,026 6.16%
Tax-exempt 193,197 3,695 7.76%
Commercial real estate 985,025 19,570 8.06%
Real estate construction 70,724 1,302 7.47%
Real estate residential 335,933 5,573 6.64%
Consumer 489,098 9,054 7.51%
---------- -------
Total loans 2,470,989 45,220 7.42%
---------- -------
Total earning assets 3,631,344 63,133 7.02%
Other assets 279,716
----------
Total assets $3,911,060
==========
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,013,418 $-- --
Savings and interest-bearing
transaction 1,414,010 3,149 0.90%
Time less than $100,000 350,383 2,395 2.77%
Time $100,000 or more 428,906 2,597 2.46%
---------- -------
Total interest-bearing deposits 2,193,299 8,141 1.51%
Short-term borrowed funds 255,552 1,026 1.63%
Federal Home Loan Bank advances 86,183 793 3.68%
Debt financing andaccompanying notes payable 25,678 461 7.28%
---------- --------
Total interest-bearing liabilities 2,560,712 10,421 1.65%
Other liabilities 35,916
Shareholders' equity 301,014
----------
Total liabilities and shareholders' equity $3,911,060
==========
Net interest spread (1) 5.37%
Net interest income and interest margin (2) $52,712 5.86%
======= =====
For the three months ended
March 31, 2001
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------------------------------
Assets:
Money market assets and funds sold $553 $3 2.17%
Investment securities:
Available for sale
Taxable 657,753 10,025 6.18%
Tax-exempt 230,126 4,420 7.68%
Held to maturity
Taxable 76,586 1,240 6.57%
Tax-exempt 149,988 2,962 7.90%
Loans:
Commercial:
Taxable 396,657 9,793 10.01%
Tax-exempt 190,485 3,656 7.78%
Commercial real estate 960,294 20,004 8.42%
Real estate construction 63,356 1,753 11.10%
Real estate residential 355,835 6,307 7.11%
Consumer 491,128 10,593 8.65%
---------- -------
Total loans 2,457,755 52,106 8.55%
---------- -------
Total earning assets 3,572,761 70,756 8.02%
Other assets 299,823
----------
Total assets $3,872,584
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand 960,184 $-- --
Savings and interest-bearing
transaction 1,325,526 5,354 1.62%
Time less than $100,000 398,172 5,143 5.17%
Time $100,000 or more 491,532 6,969 5.69%
---------- -------
Total interest-bearing deposits 2,215,230 17,466 3.16%
Short-term borrowed funds 308,294 3,513 4.57%
Federal Home Loan Bank advances 0 0 0
Debt financing and notes payable 28,893 518 7.19%
---------- -------
Total interest-bearing liabilities 2,552,417 21,497 3.41%
Other liabilities 39,878
Shareholders' equity 320,105
----------
Total liabilities and shareholders' equity $3,872,584
==========
Net interest spread (1) 4.60%
Net interest income and interest margin (2) $49,259 5.56%
======= =====
For the three months ended
December 31, 2001
Interest Rates
Average income/ earned/
Balance expense paid
--------------------------------------
Assets:
Money market assets and funds sold $474 $1 0.84%
Investment securities:
Available for sale
Taxable 608,707 8,528 5.56%
Tax-exempt 302,678 5,767 7.62%
Held to maturity
Taxable 71,041 1,007 5.62%
Tax-exempt 140,795 2,772 7.88%
Loans:
Commercial:
Taxable 392,827 6,766 6.83%
Tax-exempt 188,997 3,702 7.77%
Commercial real estate 981,917 19,764 7.98%
Real estate construction 72,536 1,464 8.01%
Real estate residential 357,373 6,011 6.73%
Consumer 487,235 9,628 7.84%
---------- -------
Total loans 2,480,885 47,335 7.57%
---------- -------
Total earning assets 3,604,580 65,410 7.22%
Other assets 279,711
----------
Total assets $3,884,291
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,025,804 $-- --
Savings and interest-bearing
transaction 1,410,218 4,419 1.24%
Time less than $100,000 371,515 3,187 3.40%
Time $100,000 or more 452,445 3,367 2.95%
---------- -------
Total interest-bearing deposits 2,234,178 10,973 1.95%
Short-term borrowed funds 236,678 1,334 2.24%
Federal Home Loan Bank advances 24,435 223 3.62%
Debt financing and notes payable 27,821 499 7.12%
---------- -------
Total interest-bearing liabilities 2,523,112 13,029 2.05%
Other liabilities 33,622
Shareholders' equity 301,753
----------
Total liabilities and shareholders' equity $3,884,291
==========
Net interest spread (1) 5.17%
Net interest income and interest margin (2) $52,381 5.79%
======= =====
(1) Net interest spread represents the average yield earned on earning assets minus the
average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of earning
assets.
Summary of Changes in Interest Income and Expense due to
Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income and
interest expense due to changes in average asset and liability balances (volume)
and changes in average interest rates for the periods indicated. Changes not
solely attributable to volume or rates have been allocated in proportion to
the respective volume and rate components (dollars in thousands).
Three months ended March 31, 2002
compared with three months
ended March 31, 2001
Volume Rate Total
---------------------------------
Interest and fee income:
Money market assets and funds sold $3 ($6) ($3)
Investment securities:
Available for sale
Taxable (228) (1,505) (1,733)
Tax-exempt 1,484 (69) 1,415
Held to maturity
Taxable (141) (129) (270)
Tax-exempt (178) 32 (146)
Loans:
Commercial:
Taxable 9 (3,776) (3,767)
Tax-exempt 52 (13) 39
Commercial real estate 546 (980) (434)
Real estate construction 238 (689) (451)
Real estate residential (347) (387) (734)
Consumer (122) (1,416) (1,538)
------- ------- -------
Total loans 376 (7,261) (6,885)
------- ------- -------
Total earning assets 1,315 (8,937) (7,622)
------- ------- -------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 491 (2,696) (2,205)
Time less than $100,000 (535) (2,213) (2,748)
Time $100,000 or more (682) (3,690) (4,372)
------- ------- -------
Total interest-bearing deposits (726) (8,599) (9,325)
------- ------- -------
Short-term borrowed funds (537) (1,949) (2,486)
Federal Home Loan Bank advances 792 1 793
Debt financing and notes payable (58) 1 (57)
------- -------- --------
Total interest-bearing liabilities (529) (10,546) (11,075)
------- -------- --------
Increase in Net Interest Income $1,844 $1,609 $3,453
======= ======== ========
Three months ended March 31, 2002
compared with three months
ended December 31, 2001
Volume Rate Total
-----------------------------------
Interest and fee income:
Money market assets and funds sold ($1) $0 ($1)
Investment securities:
Available for sale
Taxable 283 (519) (236)
Tax-exempt 111 (43) 68
Held to maturity
Taxable (41) 4 (37)
Tax-exempt 5 39 44
Loans:
Commercial:
Taxable (63) (677) (740)
Tax-exempt 8 (15) (7)
Commercial real estate 74 (268) (194)
Real estate construction (34) (128) (162)
Real estate residential (362) (76) (438)
Consumer 17 (591) (574)
------- ------- -------
Total loans (360) (1,755) (2,115)
------- ------- -------
Total earning assets (3) (2,274) (2,277)
------- ------- -------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (1) (1,269) (1,270)
Time less than $100,000 (153) (639) (792)
Time $100,000 or more (167) (603) (770)
------- ------- -------
Total interest-bearing deposits (321) (2,511) (2,832)
------- ------- -------
Short-term borrowed funds 80 (388) (308)
Federal Home Loan Bank advances 586 (16) 570
Debt financing and notes payable (38) 0 (38)
------- ------- -------
Total interest-bearing liabilities 307 (2,915) (2,608)
------- ------- -------
Increase (Decrease) in Net Interest Income ($310) $641 $331
======= ======= =======
Provision for Loan Losses
The level of the provision for loan losses during each of the periods presented
reflects the Company's continued efforts to reduce credit costs by enforcing
underwriting and administration procedures and aggressively pursuing collection
efforts with troubled debtors. The Company provided $900 thousand for loan
losses in the first quarter of 2002, unchanged from the first and the fourth
quarters of 2001.
For further information regarding net credit losses and the allowance for loan
losses, see the "Classified Assets" section of this report.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands):
Three months ended
March 31, December 31,
2002 2001 2001
----------------------------------
Service charges on deposit accounts $6,002 $5,560 $5,841
Merchant credit card fees 905 946 961
ATM fees and interchange 517 493 582
Financial services commissions 339 243 381
Debit card fees 406 312 440
Mortgage banking income 187 221 198
Official check sales income 157 350 200
Trust fees 311 292 215
Gains on sale of foreclosed property 0 59 1
Other noninterest income 1,175 1,810 1,966
------ ------- -------
Total $9,999 $10,286 $10,785
====== ======= =======
Noninterest income for the first quarter of 2002 decreased $287 thousand (3%)
from the same period in 2001. Service charges on deposit accounts, specifically
in the area of deficit fees charged on analyzed accounts, increased $442
thousand (8%). Deficit fees are service charges collected from business
customers that typically pay for such services with compensating balances.
In the current period of low interest rates, the earnings value of the balances
has decreased resulting in more customers being required to pay for services
with explicit fees. Offsetting the increase in deficit fees were declines in DDA
activity (down $284 thousand or 17%) as well as overdraft and returned item
charges (down $116 thousand or 5%).
Increases in ATM fees and debit card fees also contributed to noninterest
income. ATM fees increased $24 thousand (5%) due to increased Bank customer
use of other
banks' machines and non-Bank customers accessing their accounts
through Westamerica Bank ATM's. In the current quarter, fees earned from check
card use totaled $406 thousand, up $94 thousand (30%) over a year ago.
The amount of financial services commissions was $96 thousand (40%) higher in
the first quarter of 2002 compared to 2001 primarily due to higher sales volume
of fixed annuities. Official check sales income declined $193 thousand (55%)
mainly because declining earnings credit rates depressed sales income despite
sales volume growth.
Comparing the first quarter of 2002 to the previous quarter, noninterest income
decreased $786 thousand (7%). The largest positive contributor was service
charges on deposit accounts, which increased $161 thousand (3%). As discussed
above, the primary reason for the increase is the current low interest rate
environment: lower earnings credits are given on compensating balances so that
customers are assessed hard-dollar fees for services. Alsoinformation included in this
category are overdraft and returned item charges, which declined $111
thousand (5%).
The other positive factor was a $96 thousand (45%) increase in Trust fees with
$52 thousand court fees received and intensified marketing. The above increases
were not sufficient to offset decreases in other categories.
Merchant credit card fees fell $56 thousand (6%) primarily due to seasonally
high sales in the fourth quarter. ATM fees and debit card fees fell $65
thousand (11%) and $34 thousand (8%), respectively, mainly due to seasonally
high transaction volume in the fourth quarter.
Financial services commissions declined $42 thousand (11%) primarily because
of an $80 thousand decrease in fixed annuities sales, partially offset by a
$26 thousand increase in variable annuities sales.
Official check sales income also fell $43 thousand (21%) due to lower earning
credit rates. Other noninterest income fell $791 thousand (40%) as the previous
quarter included $331 thousand excess proceeds received on a charged-off loan.
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended
March 31, December 31,
2002 2001 2001
---------------------------------
Salaries and incentives $10,948 $10,220 $10,568
Employee benefits 2,941 3,130 2,305
Occupancy 2,931 2,916 3,043
Equipment 1,434 1,590 1,583
Data processing services 1,499 1,521 1,456
Courier service 889 927 898
Telephone 409 494 444
Postage 405 502 393
Professional fees 371 453 403
Merchant credit card 340 361 342
Stationery and supplies 345 362 381
Advertising/public relations 289 359 374
Employee recruiting 110 100 94
Loan expense 333 226 284
Operational losses 231 163 296
Deposit expense 138 159 181
Foreclosed property expense 49 43 7
Amortization of deposit intangibles 201 365 261
Amortization of goodwill 0 288 297
Other noninterest expense 1,830 1,397 2,075
------- ------- -------
Total $25,693 $25,576 $25,685
======= ======= =======
Average full time equivalent staff 1,081 1,083 1,083
Noninterest expense to revenues (FTE) 40.97% 42.95% 40.66%
Noninterest expense increased $117 thousand (0.4%) in the first quarter of 2002
compared to the same period in 2001. The largest category of increase was
salaries and incentives, which were up $728 thousand (7%). A major portion
of the increase is attributable to a $694 thousand increase in incentive
compensation expense.
Other major increases are found in loan expense (up $107 thousand or 47%),
operational losses (up $68 thousand or 42%) and other noninterest expense
(up $434 thousand or 31%). Loan expense went up primarily due to a $26
thousand increase in the cost of obtaining credit reports and a $35 thousand
increase in collateral repossession expense. Operational losses rose largely
because the first quarter of 2001 benefited from $40 thousand of recoveries.
Other noninterest expense rose mainly due to a $69 thousand (46%) increase
in sales contest expense, a $100 thousand provision for unusual losses and
a $143 thousand (126%) increase in staff relations expense.
Largely offsetting these increases, employee benefits expense declined $189
thousand (6%) primarily due to a $288 thousand decrease in payroll taxes and
a $43 thousand decline in workers compensation costs.
Other categories of decline were a $156 thousand (10%) decrease in equipment
primarily due to lower depreciation costs including the effect from sale of
branches in the fourth quarter of 2001 and an $85 thousand (17%) decline in
telephone expense. In addition, postage expense decreased $97 thousand (19%)
due to special mailings in 2001, professional fees were down $82 thousand
(18%) primarily because 2001 included legal fees in connection with loan
collection efforts, and advertising/public relations fell $70 thousand (19%)
primarily due to a decrease in promotional advertising. Last, the amortization
of deposit intangibles declined $164 thousand (44%) primarily due to the
expiration of the purchase premium incurred in connection with a 1993
acquisition and amortization of goodwill fell because of implementation of
FASB No.141 and 142. Goodwill will no longer be amortized but be periodically
evaluated for impairment.
Comparing the first three months of 2002 with the fourth quarter of 2001,
noninterest expense stayed essentially flat. Salaries and incentives rose
$380 thousand (4%) primarily due to salary increases for existing employees
and higher expenses recorded in connection with incentive and bonus programs.
Benefits rose $636 thousand (28%) primarily due to an increase in the accrual
for restricted performance shares, $109 thousand higher tax payments in the
first quarter and a $43 thousand increase in group insurance.
Other expenses which increased are a $43 thousand (3%) increase in data
processing and a $49 thousand (17%) increase in loan expense. Foreclosed
property expense rose $42 thousand (600%) primarily due to a $32 thousand
writedown.
Offsetting these increases were declines in occupancy (down $112 thousand or 4%)
largely due to $165 thousand lower utility expense, equipment (down $149
thousand or 9%) mainly due to a $66 thousand lower depreciation expense and $67
thousand equipment writeoff of certain assets in the fourth quarter.
Advertising/public relations fell $85 thousand (23%) primarily due to a $51
thousand drop in promotional advertising and a $20 thousand decrease in public
relations. Operational losses declined $65 thousand (22%) mainly due to a $71
thousand decrease in sundry losses. Amortization of deposit intangibles and
goodwill fell $62 thousand and $297 thousand for the same reason with the
year-to-year comparison. Other noninterest declined $243 thousand primarily
because the fourth quarter included $550 thousand provision for unusual losses.
Provision for Income Tax
During the first quarter of 2002, the Company recorded income tax expense of
$10.2 million, $1.2 million (14%) higher than the first quarter of 2001.
The current quarter provision represents an effective tax rate of 32.2 percent,
compared to 30.6 percent and 32.9 percent for the first and fourth quarters
of 2001.
The provision for income taxes for all periods is primarily attributable to the
respective levels of earnings and deductions from tax-exempt loans and state
and municipal securities, which increased $681 thousand in the first quarter
of 2002 over the same period last year and $91 thousand over the fourth quarter
of 2001.
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk and increase diversification of earning assets into less risky
investments. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention to ensure collection.
The following is a summary of classified assets on the dates indicated
(dollars in thousands):
At
At March 31, December 31,
2002 2001 2001
-----------------------------------
Classified loans $26,687 $33,365 $22,284
Other classified assets 834 1,866 523
------- ------- -------
Total classified assets $27,521 $35,231 $22,807
======= ======= =======
Allowance for loan losses /
classified loans 195% 158% 234%
Classified loans at March 31, 2002, decreased $6.7 million (20%) from a year
ago, primarily reflecting the effectiveness of the Company's high underwriting
standards and active workout policies. Other classified assets decreased $1.0
million (55%) from March 31, 2001, due to sales and write-downs of foreclosed
properties, partially offset by new foreclosures on loans with real estate
collateral. There was a $4.4 million increase (20%) in classified loans from
December 31, 2001 mainly due to new downgrades, partially offset by payoffs.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans 90 days past due as to
principal or interest and still accruing, and other real estate owned. Loans
are placed on nonaccrual status when reaching 90 days or more delinquent,
unless the loan is well secured and in the process of collection. Interest
previously accrued on loans placed on nonaccrual status is charged against
interest income. In addition, loans secured by real estate with temporarily
impaired values and commercial loans to borrowers experiencing financial
difficulties are placed on nonaccrual status even though the borrowers
continue to repay the loans as scheduled. Such loans are classified as
"performing nonaccrual" and are included in total nonperforming assets.
When the ability to fully collect nonaccrual loan principal is in doubt,
cash payments received are applied against the principal balance of the
loan until such time as full collection of the remaining recorded balance
is expected. Any subsequent interest received is recorded as interest income
on a cash basis.
The following is a summary of nonperforming assets on the dates indicated
(dollars in thousands):
At
At March 31, December 31,
2002 2001 2001
------------------------------------
Performing nonaccrual loans $3,195 $2,861 $3,055
Nonperforming, nonaccrual loans 4,395 4,204 5,058
------ ------ ------
Total nonaccrual loans 7,590 7,065 8,113
Loans 90 days past due and
still accruing 252 409 550
------ ------ ------
Total nonperforming loans 7,842 7,474 8,663
Other real estate owned 834 1,866 523
------- ------- -------
Total nonperforming assets $8,676 $9,340 $9,186
======= ======= =======
Allowance for loan losses /
nonperforming loans 665% 704% 601%
Performing nonaccrual loans at March 31, 2002 increased $334 thousand (12%) and
$140 thousand (5%) from a year ago and from year-end, 2001, respectively. The
change resulted from new loans placed on nonaccrual, offset by charge-offs,
payoffs and loans being returned to accrual status.
Nonperforming nonaccrual loans at March 31, 2002 increased $191 thousand (5%)
from the previous year, the net result of loans being added to nonaccrual,
partially offset by others being returned to full-accrual status or being
paid off. The $663 thousand (13%) decrease from December 31, 2001 was primarily
due to the foreclosure on one loan and subsequent transfer to other real estate
owned.
Other real estate owned at March 31, 2002 was $1.0 million (55%) lower
than the previous year, primarily resulting from the sale of three large
properties with a total carrying value of $1.2 million. Comparing to the
2001 year-end, a $311 thousand increase in other real estate owned is
primarily due to an addition of a property valued at $343 thousand.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three months ended March 31, 2002, if all such
loans had been current in accordance with their original terms, was
$133 thousand, compared to $179 thousand and $157 thousand, respectively,
for the first and fourth quarters of 2001.
The amount of interest income that was recognized on nonaccrual loans from
all cash payments, including those related to interest owed from prior
years, made during the three months ended March 31, 2002, totaled $110
thousand, compared to $336 thousand and $45 thousand, respectively, for
the first and fourth quarters of 2001. These cash payments represent
annualized yields of 9.39 percent for first three months of 2002
compared to 18.75 percent and 10.25 percent, respectively, for the
first and the fourth quarter of 2001.
Total cash payments received, including those recorded in prior years, which
were applied against the book balance of nonaccrual loans outstanding at
March 31, 2002, totaled approximately $188 thousand.
The overall credit quality of the loan portfolio continues to be strong;
however, the total nonperforming assets could fluctuate from period to period.
The performance of any individual loan can be impacted by external factors
such as the interest rate environment or factors particular to the borrower.
The Company expects to maintain the level of nonperforming assets; however,
the Company can give no assurance that additional increases in nonaccrual
loans will not occur in the future.
Allowance for Loan Losses
The Company's allowance for loan losses is maintained at a level
estimated to be adequate to provide for losses that can be estimated
based upon specific and general conditions. These include credit
loss experience, the amount of past due, nonperforming 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 these loans are delinquent. A portion of the allowance is also
allocated to impaired loans. Management considers the $52.1 million
allowance for loan losses, which constituted 2.12 percent of total loans
at March 31, 2002, to be adequate as an allowance against inherent
losses. However, while the Company's policy is to charge off in the
current period those loans on which the loss is considered probable,
the risk exists of future losses which cannot be precisely quantified
or attributed to particular loans or classes of loans. Management
continues to evaluate the loan portfolio and assess current economic
conditions that will dictate future required allowance levels.
The following table summarizes the loan loss provision, net credit losses
and allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended
March 31, December 31,
2002 2001 2001
----------------------------------
Balance, beginning of period $52,086 $52,279 $52,461
Loan loss provision 900 900 900
Loans charged off (1,645) (1,607) (1,952)
Recoveries of previously
charged off loans 806 1,072 677
-------- -------- --------
Net credit losses (839) (535) (1,275)
-------- -------- --------
Balance, end of period $52,147 $52,644 $52,086
======== ======== ========
Allowance for loan losses /
loans outstanding 2.12% 2.14% 2.10%
Asset and Liability Management
The fundamental objective of the Company's management of assets and
liabilities is to maximize economic value while maintaining adequate
liquidity and a conservative level of interest rate risk.
The primary analytical tool used by the Company to gauge interest rate risk is
a simulation model to project changes in net interest income ("NII") that
result from forecast changes in interest rates. The analysis calculates the
difference between a NII forecast over a 12-month period using a flat interest
rate scenario, and a NII forecast using a rising or falling rate scenario where
the Fed Funds rate is made to rise or fall evenly by 100 basis points over the
12-month forecast interval triggering a response in the other forecasted rates.
Company policy requires that such simulated changes in NII should be within
certain specified ranges or steps must be taken to reduce interest rate risk.
The results of the model indicate that the mix of interest rate sensitive
assets and liabilities at March 31, 2002 would not result in a fluctuation
of NII that would exceed the parameters established by Company policy.
At March 31, 2002 and 2001, the Company had no derivative financial
instruments outstanding. As the Company believes that the derivative
financial instrument disclosures contained within the notes to the
financial statements of its 2001 Form 10-K substantially conform
with accounting policy requirements, no further interim disclosure
has been provided. The rule amendments that require expanded
disclosure of quantitative and qualitative information about market
risk were effective with the 1997 Form 10-K. At March 31, 2002,
there were no substantial changes in the information on market risk
that was disclosed in the Company's Annual Report on Form 10-Ks since 1997.
Liquidity
The Company's principal source of asset liquidity is marketable
investment securities available10-K for sale. At March 31, 2002,
investment securities available for sale totaled $975 million,
representing an increase of $26 million fromthe
year ended December 31, 2001.
In addition, the Company generates significant liquidity from its
operating activities. The Company's profitability during the first
three months of 2002Acquisition, Goodwill and 2001 generated substantial cash flows
which are included in the totals provided from operations of $35
million and $25 million, respectively.
The Company had net cash outflows in its investing activities during
the 2002 period. Purchases net of sales & maturities of investment
securities were $38 million during the first three months of 2002,
which was partially offset by net repayments of loans of $21
million, resulting in net cash used of $17 million.
In the quarter ended March 31, 2001, investing activities provided a
major source of cash. Less than 50% of proceeds from maturing
investment securities of $79 million were reinvested for a net
increase of cash of $44 million. Another primary source of cash was
$25 million from loan repayments.
Financing activities used cash during both three-month periods ended
March 31. In 2002, the effect of the Company's stock repurchase
programs and dividends paid to shareholders were $23 million and
$8 million, respectively. These cash outflows, added to a $12 million
reduction in short-term borrowed funds, partially offset by a $16
million increase in deposits, are included in the net cash used in
financing activities during the first three months of 2002 of $24
million.
This compares to the first three months of 2001, when the cash used in
financing activities totaled $191 million. This amount includes cash
outflows related to the Company's stock repurchase programs and dividends
paid to shareholders of $38 million and $7 million, respectively, plus a
$111 million reduction in short-term debt and a $40 million decrease
in deposits.
The Company anticipates increasing its cash level from operations through 2002
through increased profitability and retained earnings. For the same period,
it is anticipated that deposit balances will increase. Growth in loan balances,
particularly in the commercial and real estate categories, is expected to
follow the anticipated growth in deposit balances.
Capital Resources
The current and projected capital position of the Company and the impact
of capital plans and long-term strategies is reviewed regularly by
Management. The Company quarterly repurchases approximately 250 thousand
of its shares of Common Stock in the open market with the intention of
lessening the dilutive impact of issuing new shares to meet stock
performance, option plans, and other ongoing requirements. In addition
to these systematic repurchases, other programs have been implemented
to optimize the Company's use of equity capital and enhance shareholder
value. Pursuant to these programs, the Company repurchased an additional
308 thousand shares in the first quarter of 2002, 741 thousand shares in
the first quarter of 2001, and 258 thousand shares in the fourth quarter
of 2001.
The Company's capital position represents the level of capital available to
support continued operations and expansion. The Company's primary capital
resource is shareholders' equity, which was $308 million at March 31, 2002.
This amount, which is reflective of the effect of common stock repurchases
and dividends paid to shareholders partially offset by the generation of
earnings and proceeds from the issuance of stock, represents a decrease
of $23 million or 7 percent from a year ago, and a decrease of $7 million,
or 2 percent, from December 31, 2001. As a consequence of the decrease in
shareholders' equity, the Company's ratio of equity to total assets decreased
to 7.76 percent at March 31, 2002, from 8.53 percent a year ago. The equity
to assets ratio was 8.00 percent on December 31, 2001.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At Minimum
At March 31, December 31, Regulatory
2002 2001 2001 Requirement
---------------------------------------------
Tier I Capital 9.33% 9.97% 9.29% 4.00%
Total Capital 10.67% 11.39% 10.63% 8.00%
Leverage ratio 7.18% 7.76% 7.30% 4.00%
The risk-based capital ratios decreased at March 31, 2002, compared
to the prior year primarily due to the decrease in the total level
of tangible (excluding goodwill and purchase premiums) shareholders'
equity as a result of the Company's common stock repurchases and
dividends paid to shareholders, partially offset by increased net income.
Comparing to the 2001 year-end, the capital ratios improved slightly with
an increase in retained earnings, and the leverage ratio fell affected
by asset growth.
Capital ratios are reviewed by Management on a regular basis to ensure
that capital exceeds the prescribed regulatory minimums and is adequate
to meet the Company's future needs. As shown in the table above, all
ratios are in excess of the regulatory definition of "well capitalized".
Impact of Recently Issued Accounting StandardsOther Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill
and Other Intangible Assets. Statement 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001 and specifies criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart
from goodwill. Statement 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized after 2001, but instead
be periodically evaluated for impairment. Intangible assets with definite
useful lives are required to be amortized over their respective estimated
useful lives to their estimated residual values, and also reviewed for
impairment.
The Company was required to adopt the provisions of Statement 141 and
Statement 142 effective January 1, 2002. Accordingly, any goodwill and any
intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination will not be amortized, but will
continue to be evaluated for impairment in accordance with the appropriate
accounting literature. The Company was also required to reassess the useful
lives and residual values of all such intangible assets and make any
necessary amortization period adjustments by March 31,June 30, 2002. NoThe Company
determined that no such adjustments were made.required.
In addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company was required to test the intangible
asset for impairment in the firstsecond quarter of 2002. No impairment loss was
identified.
As of the date of adoption of FASB Statement 141 and 142, the Company had
unamortized goodwill and identifiable intangibles acquired in prior years purchase
business combinations. Core deposit intangibles constitute the Company's
total identifiable intangible assets.
The following table summarizes the Company's goodwill and other intangible
assets as of January 1, 2002 and June 30, 2002.
January 1 June 30
(Dollar in Thousands) 2002 Additions Reductions 2002
-------------------------------------------------
Goodwill 20,301 1,667 - 21,968
Accumulated Amortization (3,972) - - (3,972)
-------------------------------------------------
Net 16,329 1,667 - 17,996
Core Deposit Intangibles 5,283 2,500 - 7,783
Accumulated Amortization (2,599) - 402 (3,001)
-------------------------------------------------
Net 2,684 2,500 402 4,782
The KSB acquisition resulted in the amountaddition of $16.3$1.7 million of goodwill and
$2.5 million of core deposit intangibles, in the second quarter.
At June 30, 2002, the estimated aggregate amortization of intangibles, in
thousand of dollars, for the remainder of 2002 and annually through 2007 is
$602, $743, $543, $469, $427, and $427, respectively. The weighted average
amortization period for core deposit intangibles is 8.8 years.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported second
quarter 2002 net income of $19.3 million or $0.57 diluted earnings per share.
The second quarter included the completion of the acquisition of Kerman State
Bank ("KSB"); after-tax expenses incurred to complete the acquisition totaled
$230 thousand. The second quarter also included a $2.5 million after-tax
securities impairment charge. Excluding the KSB acquisition related expenses
and securities impairment charge, the Company earned $22.0 million or $0.64
diluted earnings per share, compared with net income of $20.8 million or $0.58
diluted earnings per share for the second quarter of 2001. The Company
reported net income for the six months ended June 30, 2002 of $41.0 million or
$1.19 diluted earnings per share. On a year-to-date basis, earnings before
one-time expenses and charges were $43.7 million representing $1.27 diluted
earnings per share, compared with $41.2 million or $1.14 per share for the
same period of 2001.
The acquisition of KSB, a three-branch financial institution headquartered in
Fresno County, California, was completed on June 21, 2002. Immediately after
the acquisition, the Company merged KSB with and into Westamerica Bank. At the
time of the acquisition, KSB had total assets of $95 million, and unamortized identifiabletotal
deposits of $84 million. Pursuant to the terms of the merger agreement, 0.2487
shares of Westamerica common stock were issued for each outstanding share of
KSB. Based on the closing price of $41.18 of the stock on June 21, the
acquisition was valued at approximately $14.6 million. The Company recorded
goodwill and a core deposit intangible of $1.7 million and $2.5 million,
respectively, in accordance with the purchase method of accounting. One-time
expenses consisting primarily of employee severance costs charged to expenses
were $400 thousand.
The Company recognized the securities impairment writedown to reflect the
other than temporary impairment in the valuation of a debt security held in
the available for sale investment portfolio. The decision to record the
writedown was based on declines in the value of securities of the
telecommunication industry as well as alleged accounting and other
irregularities on the part of the particular issuer. The $5 million par value
bond was written down to its fair market value at quarter-end, resulting in a
charge of $4.26 million recorded as an offset to noninterest income. The
writedown reduces the Company's exposure to the telecommunications industry to
$5.5 million. The Company is diligently monitoring this remaining exposure.
Following is a summary of the components of fully taxable equivalent ("FTE")
net income for the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Net interest income (FTE) $53,096 $50,269 $105,808 $99,528
Provision for loan losses (900) (900) (1,800) (1,800)
Noninterest income:
Recurring income 10,144 10,994 20,143 21,280
Impairment of investment securities (4,260) 0 (4,260) 0
----------------------------------------------------
Total noninterest income 5,884 10,994 15,883 21,280
Noninterest expense (25,909) (25,626) (51,602) (51,203)
Provision for income taxes (FTE) (12,824) (13,979) (27,283) (26,623)
----------------------------------------------------
Net income $19,347 $20,758 $41,006 $41,182
====================================================
Net income for the second quarter of 2002 was $1.4 million (6.8%) less than
the same quarter of 2001. Improved net interest income (FTE) (up $2.8 million
or 5.6%) was more than offset by a decline (down $5.1 million or 46.5%) in
noninterest income and a slight increase in noninterest expense. The increase
in net interest income (FTE) was the combined result of a 13 basis point (bp)
improvement in the net margin and higher average earning assets (up $117.1
million). The decrease in noninterest income was caused by a $4.3 million
securities impairment charge. The increase in noninterest expense included
$400 thousand of acquisition costs. The provision for income taxes (FTE)
decreased $1.2 million (8.3%) primarily due to tax benefits of the impairment
charge.
Comparing the first six months of 2002 to the prior year, net income declined
$176 thousand (0.4%). Improved net interest income (up $6.3 million or 6.3%)
more than offset a decline (down $5.4 million or 25.4%) in noninterest income.
The increase in interest income was due to both a higher margin (up 21 bp) and
higher average earning assets (up $88 million). The decline in noninterest
income resulted from the securities impairment charge. The net revenue
improvement was not sufficient to cover a $400 thousand (0.8%) increase in
noninterest expense, which included the acquisition costs. The provision for
income taxes (FTE) increased $660 thousand (2.5%).
Net Interest Income
Following is a summary of the components of net interest income for the
periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Interest income $59,087 $64,985 $118,025 $132,122
Interest expense (10,229) (18,496) (20,650) (39,993)
FTE adjustment 4,238 3,780 8,433 7,399
----------------------------------------------------
Net interest income (FTE) $53,096 $50,269 $105,808 $99,528
====================================================
Average earning assets $3,659,033 $3,541,890 $3,645,189 $3,557,325
Net interest margin (FTE) 5.82% 5.69% 5.84% 5.63%
The Company's primary source of revenue is net interest income, or the
difference between interest income on earning assets and interest expense on
interest-bearing liabilities. Net interest income (FTE) during the second
quarter of 2002 increased $2.8 million (5.6%) from the same period in 2001 to
$53.1 million. (KSB accounted for approximately $100 thousand of the total net
interest income (FTE).) Approximately seventy percent of the increase was due
to the $117.1 million increase in average earning assets (the volume
component), with the remainder due to a higher margin earned on those assets
(the rate component). The increase in the net interest margin was the net
effect of an 85 bp drop in the asset yield, which was more than offset by a 97
bp drop in the cost of funds.
Comparing the first six months of 2002 with the previous year, net interest
income (FTE) increased $6.3 million (6.3%), with half of the increase
attributable to more volume and the remaining to a 21 bp increase in the
margin. The margin expansion was the result of a decrease (91 bp) in asset
yields combined with a 112 bp decline in the cost of funds.
Interest and Fee Income
Interest & fee income (FTE) for the second quarter of 2002 decreased $5.9
million (9.1%) from the same period in 2001. The decrease was the net effect
of higher average earning assets in the amount
of $2.7 million. In accordance2002 period, more than offset by lower
yields earned on those assets. Average earning assets grew $117.1 million
(3.3%) (which included a $7.6 million increase in connection with the Statement 142 goodwillKSB
acquisition). The growth was not amortizedled by expansion in investments as follows: US
Agency obligations (up $78.6 million), municipal securities (up $46.1
million), commercial paper/other securities (up $29.2 million) and
participation certificates (up $22.7 million). A portion of the growth was
offset by a slight ($7.7 million) reduction in the loan portfolio including
residential real estate (down $25.3 million), direct consumer (down $19.3
million) and construction (down $11.2 million). The notable exceptions were
increases in indirect consumer loans (up $43.8 million) and commercial real
estate (up $10.7 million).
The average yield on the Company's earning assets decreased for the quarter
from 7.78% in 2001 to 6.94% in 2002 (down 85 bp). This downward trend in
yields was reflective of general interest rate markets during much of 2001 and
into 2002, as particularly evident in variable-rate categories of loans such
as commercial (190 bp decline in yield), construction (192 bp decline) and
personal lines of credit (267 bp decline). Fixed-rate loan yields are less
sensitive to market rate swings; for example, commercial real estate (down 30
bp), residential real estate (down 61 bp) and indirect consumer (down 63 bp)
loans. As a result, the loan portfolio yield decreased 88 bp. Participation
certificates and commercial paper/other securities yields declined 193 bp and
155 bp, respectively, contributing to reducing the total investment yield by
71 bp.
Comparing the first half of 2002 to 2001, interest & fee income (FTE)
decreased by $14.1 million (10.7%). Consistent with the second quarter
comparison, the decline was due to the combined effect of a higher volume of
earning assets and the impact of lower yields. The positive volume component
of the change was caused by an $87.9 million (2.5%) increase in average earning
assets, including higher commercial real estate loans (up $17.7 million or
1.8%), indirect consumer loans (up $33.2 million or 9.5%), US Agency
obligations (up $45.4 million or 26.1%), municipal securities (up $48.4
million or 12.2%) and commercial paper/other securities (up $32.1 million or
11.7%). Offsetting the growth were declines in residential real estate loans
(down $23.0 million or 6.5%), direct consumer loans (down $19.0 million or
31.3%) and US Treasury securities (down $48.8 million or 26.7%).
The average yield on earning assets for the first six months of 2002 was 6.98%
compared to 7.89% in 2001. Loan yields, especially those more sensitive to
market rates, declined: the yield on commercial loans was down 225 bp,
construction yields declined 292 bp, and personal lines of credit were down
330 bp. Much smaller declines were observed in fixed-rate loan yields, so that
the total loan yield declined 101 bp. The investment portfolio yield decreased
62 bp, affected primarily by lower yields on participation certificates (down
162 bp) and commercial paper/other securities (down 145 bp).
Interest Expense
Interest expense decreased $8.3 million (44.7%) in the second quarter of 2002
compared to the year-ago period. The decrease primarily resulted from a drop
in the average rate paid on interest-bearing liabilities from 2.95% in the
second quarter of 2001 to 1.60% in 2002. Rates paid on those liabilities that
move with general market conditions declined accordingly: the average rate on
Fed Funds dropped 249 bp, those on CDs over $100 thousand declined 247 bp, and
those on Money Market accounts were lowered an average of 97 bp.
Average interest-bearing liabilities increased $48.7 million (1.9%) in the
second quarter (of which approximately $6.8 million was from KSB). Despite the
increase, the mix of those liabilities shifted to lower-rate categories,
resulting in a $300 thousand decrease in volume-related interest expense.
Higher rate CDs, short-term borrowed funds and long-term notes payable
declined $182.0 million, $36.8 million and $3.2 million, respectively. Much of
this decline was replaced at lower rates of interest in money market accounts
(up $110.0 million), savings accounts (up $29.0 million) and Federal Home Loan
Bank ("FHLB") loans (up $131.8 million).
During the first half of 2002, interest expense decreased $19.3 million
(48.4%) in 2002 from 2001, again due to a lower average rate paid on
interest-bearing liabilities (1.62% in the first half of 2002 compared with
3.18% in the year-ago period). All deposit categories declined including
preferred money market (from 4.04% in the first six months of 2001 to 1.59% in
the same period of 2002) and CDs (from 5.15% to 2.55%). Interest rates on
short-term borrowings declined from 4.14% to 1.61%.
Similar to the quarter-to-quarter comparison, interest-bearing liabilities
grew $28.5 million (1.1%) for the six months ended June 30, 2002. However, a
change in the mix of liabilities from higher-rate to lower-rate
components resulted in reduction of volume-related interest expense by $1.0
million. Declines in CDs (down $146.2 million), short-term borrowings (down
$44.8 million) and long-term notes payable (down $3.2 million) were more than
offset by growth in money market accounts (up $88.8 million), savings accounts
(up $24.9 million) and FHLB loans (up $109.0 million).
In all periods, the Company has continuously attempted to reduce high-rate
time deposits while increasing the balances of more profitable, lower-cost
transaction accounts in order to minimize the effect of adverse cyclical
trends.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Yield on earning assets 6.94% 7.78% 6.98% 7.89%
Rate paid on interest-bearing
liabilities 1.60% 2.95% 1.62% 3.18%
----------------------------------------------------
Net interest spread 5.34% 4.83% 5.36% 4.71%
Impact of all other net
noninterest bearing funds 0.48% 0.86% 0.48% 0.92%
----------------------------------------------------
Net interest margin 5.82% 5.69% 5.84% 5.63%
====================================================
The Company's aggressive reaction to declining market rates over the past six
quarters resulted in a substantial increase in the net interest margin of 13
basis points during the second quarter of 2002 compared to the second quarter
of 2001. The unfavorable impact of lower rates earned on loans and the
investment portfolio, triggered by market trends, was more than offset by
managed decreases in rates paid on deposits and short-term funds. The result
was a 51 bp increase in the net interest spread. Partially offsetting the
increase in spread was the lower value of noninterest bearing funding sources.
While the average balance of these sources increased $59.9 million during the
second quarter of 2002, their value decreased 38 bp because of the lower
market rates of interest at which they could be invested.
Similarly, on a year-to-date basis, the net interest margin increased 21 bp
when compared to the same period in 2001. Lower yields on earning assets were
more than offset by declining cost of interest-bearing liabilities, resulting
in a 65 bp improvement in the interest spread. Noninterest bearing funding
sources increased $45.0 million, with their value decreasing 44 bp.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders'
equity, the amounts of interest income from average earning assets and the
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest
income includes proceeds from loans on nonaccrual status only to the extent
cash payments have been received and applied as interest income. Yields on
securities and certain loans have been adjusted upward to reflect the effect
of income thereon exempt from federal income taxation at the current statutory
tax rate (dollars in thousands).
For the three months ended
June 30, 2002
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $1,262 $4 1.18%
Investment securities:
Available for sale
Taxable 667,372 8,350 5.02%
Tax-exempt 306,419 5,593 7.30%
Held to maturity
Taxable 77,115 1,073 5.58%
Tax-exempt 158,319 3,112 7.86%
Loans:
Commercial
Taxable 395,215 6,043 6.13%
Tax-exempt 198,205 3,771 7.63%
Commercial real estate 978,395 19,936 8.02%
Real estate construction 59,573 1,105 7.31%
Real estate residential 323,563 5,235 6.47%
Consumer 493,595 9,102 7.40%
--------------------------
Total loans 2,448,546 45,192 7.37%
--------------------------
Total earning assets 3,659,033 63,324 6.94%
Other assets 274,241
-------------
Total assets $3,933,274
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,052,252 $-- --
Savings and interest-bearing
transaction 1,468,404 3,230 0.88%
Time less than $100,000 336,533 2,106 2.51%
Time $100,000 or more 369,762 2,309 2.50%
--------------------------
Total interest-bearing deposits 2,174,699 7,645 1.41%
Short-term borrowed funds 227,098 895 1.60%
Federal Home Loan Bank advance 131,771 1,247 3.74%
Debt financing and notes payable 24,607 442 7.18%
--------------------------
Total interest-bearing liabilities 2,558,175 10,229 1.60%
Other liabilities 31,887
Shareholders' equity 290,960
-------------
Total liabilities and shareholders' equity $3,933,274
=============
Net interest spread (1) 5.34%
Net interest income and interest margin (2) $53,095 5.82%
==========================
(1) Net interest spread represents the average yield earned on earning assets minus the
average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of earning assets.
For the three months ended
June 30, 2001
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $374 $1 2.09%
Investment securities:
Available for sale
Taxable 610,966 9,300 6.11%
Tax-exempt 251,460 4,644 7.39%
Held to maturity
Taxable 74,242 1,221 6.60%
Tax-exempt 148,570 3,027 8.15%
Loans:
Commercial
Taxable 403,139 8,908 8.72%
Tax-exempt 191,397 3,721 7.80%
Commercial real estate 967,649 20,103 8.32%
Real estate construction 70,795 1,651 9.23%
Real estate residential 348,902 6,172 7.08%
Consumer 474,396 10,017 8.47%
--------------------------
Total loans 2,456,278 50,572 8.24%
--------------------------
Total earning assets 3,541,890 68,765 7.78%
Other assets 282,798
-------------
Total assets $3,824,688
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $969,591 $-- --
Savings and interest-bearing
transaction 1,329,439 5,007 1.51%
Time less than $100,000 393,530 4,616 4.70%
Time $100,000 or more 494,765 5,964 4.83%
--------------------------
Total interest-bearing deposits 2,217,734 15,587 2.82%
Short-term borrowed funds 263,895 2,410 3.64%
Federal Home Loan Bank advance 0 0 0.00%
Debt financing and notes payable 27,821 499 7.17%
--------------------------
Total interest-bearing liabilities 2,509,450 18,496 2.95%
Other liabilities 34,425
Shareholders' equity 311,222
-------------
Total liabilities and shareholders' equity $3,824,688
=============
Net interest spread (1) 4.83%
Net interest income and interest margin (2) $50,269 5.69%
==========================
For the six months ended
June 30, 2002
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $1,040 $4 0.78%
Investment securities:
Available for sale
Taxable 650,568 16,633 5.16%
Tax-exempt 311,864 11,440 7.34%
Held to maturity
Taxable 72,273 2,042 5.70%
Tax-exempt 149,676 5,925 7.92%
Loans:
Commercial
Taxable 396,114 12,069 6.14%
Tax-exempt 195,701 7,466 7.69%
Commercial real estate 981,710 39,506 8.02%
Real estate construction 65,148 2,407 7.24%
Real estate residential 329,748 10,808 6.56%
Consumer 491,347 18,159 7.45%
--------------------------
Total loans 2,459,768 90,415
--------------------------
Total earning assets 3,645,189 126,459 6.98%
Other assets 276,978
-------------
Total assets $3,922,167
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,032,835 $-- --
Savings and interest-bearing
transaction 1,441,207 6,379 0.89%
Time less than $100,000 343,458 4,501 2.64%
Time $100,000 or more 399,334 4,906 2.48%
--------------------------
Total interest-bearing deposits 2,183,999 15,786 1.46%
Short-term borrowed funds 241,325 1,921 1.61%
Federal Home Loan Bank advance 108,976 2,039 3.72%
Debt financing and notes payable 25,143 903 7.18%
--------------------------
Total interest-bearing liabilities 2,559,443 20,649 1.62%
Other liabilities 33,902
Shareholders' equity 295,987
-------------
Total liabilities and shareholders' equity $3,922,167
=============
Net interest spread (1) 5.36%
Net interest income and interest margin (2) $105,810 5.84%
==========================
For the six months ended
June 30, 2001
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $214 $5 3.58%
Investment securities:
Available for sale
Taxable 634,359 19,353 6.15%
Tax-exempt 240,837 9,162 7.61%
Held to maturity
Taxable 75,376 2,461 6.58%
Tax-exempt 149,523 5,862 7.84%
Loans:
Commercial
Taxable 399,898 18,700 9.32%
Tax-exempt 190,941 7,377 7.79%
Commercial real estate 963,972 40,110 8.38%
Real estate construction 67,076 3,404 10.16%
Real estate residential 352,369 12,478 7.08%
Consumer 482,760 20,609 8.61%
--------------------------
Total loans 2,457,016 102,678
--------------------------
Total earning assets 3,557,325 139,521 7.89%
Other assets 291,311
-------------
Total assets $3,848,636
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $964,888 $-- --
Savings and interest-bearing
transaction 1,327,482 10,362 1.57%
Time less than $100,000 395,851 9,758 4.97%
Time $100,000 or more 493,148 12,933 5.29%
--------------------------
Total interest-bearing deposits 2,216,481 33,053 3.01%
Short-term borrowed funds 286,095 5,923 4.14%
Federal Home Loan Bank advance 0 0 0.00%
Debt financing and notes payable 28,357 1,017 7.17%
--------------------------
Total interest-bearing liabilities 2,530,933 39,993 3.18%
Other liabilities 37,151
Shareholders' equity 315,664
-------------
Total liabilities and shareholders' equity $3,848,636
=============
Net interest spread (1) 4.71%
Net interest income and interest margin (2) $99,528 5.63%
==========================
Summary of Changes in Interest Income and Expense due to
Changes in Average Asset & Liability Balances and
Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income
and interest expense from changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in
thousands).
Three months ended June 30, 2002
compared with three months
ended June 30, 2001
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $3 $0 $3
Investment securities:
Available for sale
Taxable 498 (1,448) (950)
Tax-exempt $1,000 (51) 949
Held to maturity
Taxable $50 (197) (148)
Tax-exempt $184 (99) 85
Loans:
Commercial
Taxable ($169) (2,696) (2,865)
Tax-exempt $125 (75) 50
Commercial real estate $227 (394) (167)
Real estate construction (233) (313) (546)
Real estate residential (430) (507) (937)
Consumer 277 (1,192) (915)
---------------------------------------
Total loans (203) (5,177) (5,380)
---------------------------------------
Total earning assets 1,532 (6,972) (5,441)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 629 (2,407) (1,777)
Time less than $100,000 (566) (1,943) (2,510)
Time $100,000 or more (1,261) (2,394) (3,655)
---------------------------------------
Total interest-bearing deposits (1,198) (6,744) (7,942)
---------------------------------------
Short-term borrowed funds (293) (1,222) (1,515)
Federal Home Loan Bank advance 1,247 0 1,247
Debt financing and notes payable (58) 1 (57)
---------------------------------------
Total interest-bearing liabilities (302) (7,965) (8,267)
---------------------------------------
Increase in Net Interest Income $1,834 $993 $2,826
=======================================
Six months ended June 30, 2002
compared with three months
ended June 30, 2001
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold 0 (1) ($1)
Investment securities:
Available for sale
Taxable 510 (3,230) (2,720)
Tax-exempt 2,571 (293) 2,278
Held to maturity
Taxable (98) (321) (419)
Tax-exempt 6 57 63
Loans:
Commercial
Taxable (173) (6,458) (6,631)
Tax-exempt 179 (90) 89
Commercial real estate 761 (1,365) (604)
Real estate construction (93) (904) (997)
Real estate residential (778) (892) (1,670)
Consumer 160 (2,610) (2,450)
---------------------------------------
Total loans 56 (12,319) (12,263)
---------------------------------------
Total earning assets 3,044 (16,106) (13,062)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 1,124 (5,106) (3,983)
Time less than $100,000 (1,136) (4,121) (5,257)
Time $100,000 or more (2,071) (5,956) (8,027)
---------------------------------------
Total interest-bearing deposits (2,083) (15,183) (17,267)
---------------------------------------
Short-term borrowed funds (860) (3,143) (4,002)
Federal Home Loan Bank advance 2,039 0 2,039
Debt financing and notes payable (115) 1 (114)
---------------------------------------
Total interest-bearing liabilities (1,019) (18,325) (19,344)
---------------------------------------
Increase in Net Interest Income $4,063 $2,219 $6,282
=======================================
Provision for Loan Losses
The level of the provision for loan losses during each of the periods
presented reflects the Company's continued efforts to reduce credit costs by
enforcing underwriting and administration procedures and aggressively pursuing
collection efforts with troubled debtors. The Company provided $900 thousand
for loan losses in the second quarters of 2002 and 2001. Additionally, $2.1
million of reserves were acquired from Kerman State Bank in the second quarter
of 2002. For the first six months of 2001 and 2002, $1.8 million was provided
in each period. For further information regarding net credit losses and the
reserve for loan losses, see the "Classified Loans" section of this report.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Recurring income:
Service charges on deposit accounts $5,967 $5,908 $11,969 $11,467
Merchant credit card 963 1,038 1,868 1,984
ATM fees and interchange 617 564 1,134 1,058
Other service fees 357 410 710 807
Financial services commissions 425 377 764 619
Debit card fees 461 375 867 688
Mortgage banking income 217 242 404 462
Trust fees 243 240 554 531
Other noninterest income 894 1,840 1,873 3,664
----------------------------------------------------
Total recurring income 10,144 10,994 20,143 21,280
----------------------------------------------------
Impairment of Investment Securities (4,260) 0 (4,260) 0
----------------------------------------------------
Total noninterest income $5,884 $10,994 $15,883 $21,280
====================================================
Noninterest income for the second quarter of 2002 was $5.9 million. Excluding
the impairment charge, recurring income decreased $850 thousand (7.7%) from
the same period in 2001. The second quarter of 2001 benefited from an
additional $712 thousand in gains from sales of assets, causing the 2002 other
noninterest income to be lower. A $128 thousand (44.0%) decline in official
check income was caused by lower earnings on outstanding checks which also
contributed to the decline in 2002 other noninterest income. Other
declining items were merchant credit card (down $75 thousand or 7.2%) due to a
lower average discount rate of 2.16% vs. 2.19% for the same period last year,
other service charges (down $53 thousand or 13.0%) owing to lower wire
transfer fees and automobile loan reconveyance fee income.
Partially offsetting these declines are higher deposit account service charges
(up $58 thousand or 1.0%), ATM fees (up $53 thousand or 9.4%) and debit card
fees (up $86 thousand or 22.8%). Service charges on deposit accounts,
specifically in the area of deficit fees charged on analyzed accounts,
increased $314 thousand (16.2%). Deficit fees are service charges collected
from business customers that typically pay for such services with compensating
balances. In the current period of low interest rates, the earnings value of
the balances has decreased resulting in core customers being required to pay
for services with explicit fees. Partially offsetting the increase in deficit
fees was a decline in overdrafts and returned item charges (down $226 thousand
or 9.6%). ATM fees increased due to increased Bank customer use of other
banks' machines and non-Bank customers accessing their accounts through
Westamerica Bank ATMs. Debit card fees rose with higher usage.
Noninterest income for the first half of 2002 was $15.9 million. Recurring
income for the same period decreased $1.1 million (5.3%) on a year-to-date
basis. 2001 benefited from additional $1.2 million of gains on asset sales,
$118 thousand interest on tax refund, $73 thousand excess proceeds received on
charged-off loans and $40 thousand in investment income, causing the 2002
other noninterest income to be lower. Official check income declined $321
thousand (50.1%) for the same reason as discussed above and lowered the 2002
other noninterest income. Merchant credit card income fell $116 thousand
(5.9%) due to a lower average discount rate of 2.17% compared with 2.20% a
year ago. Other service fees declined a $97 thousand (12.0%) due to decreases
in wire transfer fee income, automobile loan reconveyance fees and foreign
currency commissions. Mortgage banking income was also depressed by $59
thousand (12.7%).
The largest positive contributor to the increase in non-interest income was
service charges on deposits (up $501 thousand or 4.4%). Deficit fees were up
$1.1 million (33.6%) for the same reason mentioned above, partially offset by
declines in DDA Activity (down $296 thousand or 9.6%) and overdrafts and
returned items (down $342 thousand or 7.5%). ATM and debit card fees rose $76
thousand (7.2%) and $179 thousand (26.1%) due to higher usage. Financial
services commissions were up $145 thousand (23.4%) primarily due to higher
sales of fixed income products.
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Salaries and incentives $11,308 $10,524 $22,230 $20,716
Employee benefits 2,973 2,725 5,912 5,854
Occupancy 2,898 2,911 5,829 5,827
Equipment 1,425 1,484 2,859 3,074
Data processing services 1,516 1,553 3,015 3,075
Courier service 916 902 1,804 1,829
Telephone 421 500 830 994
Postage 397 401 802 903
Professional fees 443 398 815 851
Merchant credit card 347 364 687 724
Stationery and supplies 373 382 719 743
Advertising/public relations 290 354 579 712
Employee recruiting 71 228 181 327
Loan expense 360 301 694 527
Operational losses 191 249 422 412
Deposit expense 161 145 299 303
Other real estate owned 1 98 50 141
Amortization of deposit intangibles 201 369 402 739
Amortization of goodwill 0 297 0 582
Other noninterest expense 1,617 1,441 3,473 2,870
----------------------------------------------------
Total $25,909 $25,626 $51,602 $51,203
====================================================
Average full time equivalent staff 1,078 1,090 1,079 1,086
Noninterest expense to revenues (FTE) 64.50% 57.73% 127.03% 113.51%
Noninterest expense for the second quarter was $25.9 million. Excluding $398
thousand of KSB acquisition costs, noninterest expense fell $115 thousand (0.4%)
from 2001, with costs under control. Equipment expense decreased $59 thousand
(4.0%) due to lower depreciation costs; telephone expense decreased $79
thousand (15.8%), through continuing efficiency from telephone switching
equipment installed in late 2000; advertising/public relations expense fell
$64 thousand (18.1%); employment recruiting fell $157 thousand (68.7%) because
2001 included an extensive effort to locate and hire staff for certain
specific positions within the Company; operational losses declined $58
thousand (23.2%) due to $60 thousand lower sundry losses net of recoveries;
expenses on other real estate owned ("OREO") dropped $97 thousand
because 2001 had losses on property sale, writedown and maintenance
expenses. The amortization of deposit intangibles declined $168 thousand
(45.6%) primarily due to the expiration of the purchase premium incurred in
connection with a 1993 acquisition. Amortization of goodwill fell because of
implementation of FASB No. 141 and 142. Goodwill will no longer be amortized
but will instead be periodically evaluated for impairment.
The largest category of increase was salaries and incentives, which were up
$784 thousand (7.4%). A portion of the increase was attributable to $366
thousand of severance pay in connection with the KSB acquisition.
Additionally, approximately $330 thousand was due to an average salary
increase per full time equivalent employee, which increased from $32,700 in
2001 to $34,300 in 2002, an average 4.9% change. Deferred salaries fell $83
thousand primarily due to fewer loan fundings. Employee benefits rose $248
thousand (9.1%) mainly due to a $113 thousand increase in payroll taxes, a $74
thousand increase in insurance premiums and a $32 thousand accrual for taxes
on the KSB severance pay. Loan expense was $59 thousand (19.9%) higher largely
due to increases in obtaining credit reports, loan collection fees and
appraisal reports. Other noninterest expense increased $176 thousand (12.2%)
primarily due to a $70 thousand settlement of a legal dispute and a $50
thousand increase in amortization of low-income housing investments.
Noninterest expense was $51.6 million for the first half of 2002. Without the
$398 thousand acquisition expenses, noninterest expense was almost unchanged
on a year-to-date basis. Costs were managed well during the first six months
of the year with reductions as follows: Equipment costs declined $215 thousand
(7.0%) due to lower depreciation costs; telephone expense declined $164
thousand (16.5%) owing to higher efficiency through new switching equipment;
postage decreased $101 thousand (11.2%), as the 2001 period included some
extraordinary costs. The reasons mentioned in the quarter-to-quarter
comparison apply to a $133 thousand (18.7%) decline in advertising/public
relations expense, a $146 thousand (44.8%) decrease in employee recruiting
costs, a $91 thousand (64.6%) decrease in OREO expense, a $337 thousand
(45.6%) decline in amortization of deposit base intangibles and a $582
thousand drop in amortization of goodwill.
Three major categories of increase were salaries and incentives, loan expense
and employee benefits. A $1.5 million (7.3%) increase in salaries and
incentives was attributable to the $366 thousand severance pay due to the KSB
acquisition, a $707 thousand increase in incentive compensation expenses and
$493 thousand relating to annual salary increases. A $167 thousand (31.7%)
increase in loan expense was mostly due to increases in obtaining credit
reports, collateral repossession expenses and appraisal fees. Employee
benefits rose $59 thousand (1.0%), net result of increases in health insurance
premiums (up $107 thousand) and a provision for pension, partially offset by a
$86 thousand decline in workers compensation costs. Increases in other
noninterest expense included a $100 thousand provision for unusual losses, a
$156 thousand increase in staff relations, a $67 thousand increase in
amortization of low-income housing investments, a $63 thousand increase in
in-house meeting expense partly due to increased travel for the KSB
acquisition, $52K in production of ATM/VISA cards and an increase in stock
transfer fees.
Provision for Income Tax
During the second quarter of 2002, the Company recorded income tax expense of
$288$8.6 million, $1.6 million (15.8%) lower than the second quarter of 2001; on a
year-to-date basis, income tax expense was $18.9 million for 2002 compared to
$19.2 million for 2001. The current quarter provision represents an effective
tax rate of 30.7 percent, compared to 32.9 percent for the second quarter of
2001; for the first six months of 2002, the effective tax rate was 31.5
percent, compared to 31.8 percent recorded in 2001. The provision for income
taxes for all periods presented is primarily attributable to the respective
level of earnings and the incidence of allowable deductions, particularly
higher revenues recognized from tax-exempt loans and state and municipal
securities. In addition, the second quarter of 2002 reflected $1.8 million tax
benefits from the securities impairment writedown.
Classified Loans
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk and to increase diversification of earning assets into less risky
investments. Loan reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Loans receiving lesser
grades fall under the "classified" category, which includes all nonperforming
and potential problem loans, and receive an elevated level of attention to
ensure collection. "Other real estate owned" assets are recorded at the lower of
cost or market.
The following is a summary of classified loans and OREO on the dates indicated
(dollars in thousands):
At
At June 30, December 31,
--------------------------
2002 2001 2001
---------------------------------------
Classified loans $30,030 $39,530 $22,285
Other Real Estate Owned 473 545 523
---------------------------------------
Classified loans and OREO $30,503 $40,075 $22,808
=======================================
Allowance for loan losses /
classified loans 181% 133% 234%
Classified loans at June 30, 2002, decreased $9.5 million (24.0%) from June
30, 2001, reflecting the effectiveness of the Company's high underwriting
standards and active workout policies. Other real estate owned decreased $72
thousand (13.2%) from June 30, 2001, due to sales and writedowns of properties
acquired in satisfaction of debt, partially offset by new foreclosures on
loans with real estate collateral. The $7.7 million (34.8%) increase in
classified loans from December 31, 2001, was due to $4.1 million in classified
loans acquired through the KSB acquisition and new downgrades, partially
offset by payoffs. The $50 thousand (9.6%) reduction in other real estate
owned from December 31, 2001, was due to sales and writedowns of properties,
partially offset by newly foreclosed properties.
Nonperforming Loans
Nonperforming loans include nonaccrual loans and loans 90 days past due as to
principal or interest and still accruing. Loans are placed on nonaccrual
status when they reach 90 days or more delinquent, unless the loan is well
secured and in the process of collection. Interest previously accrued on loans
placed on nonaccrual status is charged against interest income. In addition,
loans secured by real estate with temporarily impaired values and commercial
loans to borrowers experiencing financial difficulties are placed on
nonaccrual status even though the borrowers continue to repay the loans as
scheduled. Such loans are classified as "performing nonaccrual" and are
included in total nonperforming loans. When the ability to fully collect
nonaccrual loan principal is in doubt, cash payments received are applied
against the principal balance of the loan until such time as full collection
of the remaining recorded balance is expected. Any subsequent interest
received is recorded as interest income on a cash basis.
The following is a summary of nonperforming loans and other real estate owned
on the dates indicated (dollars in thousands):
At
At June 30, December 31,
--------------------------
2002 2001 2001
---------------------------------------
Performing nonaccrual loans $3,279 $2,330 $3,055
Nonperforming, nonaccrual loans 6,980 6,196 5,058
---------------------------------------
Total nonaccrual loans 10,259 8,526 8,113
Loans 90 days past due and
still accruing 189 344 550
---------------------------------------
Total nonperforming loans 10,448 8,870 8,663
Other real estate owned 473 545 523
---------------------------------------
Total nonperforming loans and OREO $10,921 $9,415 $9,186
=======================================
Allowance for loan losses /
nonperforming loans 520% 592% 601%
Performing nonaccrual loans at June 30, 2002 rose $949 thousand (40.7%) from
the same period in the previous year and $224 thousand (7.3%) from December
31, 2001. The increase from both periods was the net result of $2.0 million of
KSB loans, partially offset by other loans being removed from nonaccrual
status or being paid off.
Nonperforming nonaccrual loans at June 30, 2002 increased $784 thousand
(12.7%) from the same period a year ago and $1.9 million (38.0%) from
year-end, 2001. The increases resulted from the additions of $933 thousand
of KSB nonaccruing loans and other loans being placed in nonperforming
nonaccrual status, partially offset by other loans being removed from
nonaccrual status or being paid off.
Other real estate owned at June 30, 2002 was $72 thousand (13.2%) lower than
the previous year and $50 thousand (9.6%) from December 31, 2001, the net
result of property sales and principal reductions, partially offset by the
addition of new foreclosed property.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three and six month periods ended June 30, 2002, if all
such loans had performed in accordance with their original terms, was $107
thousand and $240 thousand, respectively, compared to $187 thousand and $366
thousand, respectively, for the second quarter and the first half of 2001.
The amount of interest income that was recognized on nonaccrual loans from
all cash payments, including those related to interest owed from prior years,
made during the three and six months ended June 30, 2002, totaled $156 thousand
and $326 thousand, respectively, compared to $234 thousand and $570 thousand,
respectively, for the comparable periods in 2001. These cash payments represent
annualized yields of 8.40 percent and 8.89 percent, respectively, for the
second quarter and the first six months of 2002 compared to 11.04 percent and
14.57 percent, respectively, for the second quarter and the first half of 2001.
Total cash payments received during the second quarter of 2002 which were
applied against the book balance of nonaccrual loans outstanding at June 30,
2002, totaled approximately $196 thousand. Cash payments received totaled
$384 thousand for the first quartersix months ended June 30, 2002.
The overall credit quality of 2001the loan portfolio continues to be strong;
however, the total nonperforming assets could fluctuate from period to
period. The performance of any individual loan can be impacted by external
factors such as the interest rate environment or factors particular to the
borrower. The Company expects to maintain the level of nonperforming assets;
however, the Company can give no assurance that additional increases in
nonaccrual loans will not occur in the future.
Allowance for Loan Losses
The Company's allowance for loan losses is maintained at a level estimated to
be adequate to provide for losses that can be estimated based upon specific
and $297 thousandgeneral conditions. These include credit loss experience, the amount of
past due, nonperforming and classified loans, recommendations of regulatory
authorities, prevailing economic conditions and other factors. The allowance
is allocated to segments of the loan portfolio based in part on quantitative
analyses of historical credit loss experience, in which criticized and
classified loan balances are analyzed using a linear regression model to
determine standard allocation percentages. The results of this analysis are
applied to current criticized and classified loan balances to allocate the
reserve to the respective segments of the loan portfolio. In addition, loans
with similar characteristics not usually criticized using regulatory guidelines
due to their small balances and numerous accounts, are analyzed based on the
historical rate of net losses and delinquency trends, grouped by the number of
days the payments on these loans are delinquent. A portion of the allowance is
also allocated to impaired loans. Management considers the $54.3 million
allowance for loan losses, which constituted 2.17 percent of total loans at
June 30, 2002, to be adequate as a reserve against inherent losses. However,
while the Company's policy is to charge off in the current period those loans
on which the loss is considered probable, the risk exists of future losses
which cannot be precisely quantified or attributed to particular loans or
classes of loans. Management continues to evaluate the loan portfolio and
assess current economic conditions that will dictate future required allowance
levels.
The following table summarizes the loan loss provision, net credit losses and
allowance for loan losses for the fourth quarterperiods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Balance, beginning of period $52,147 $52,644 $52,086 $52,279
Loan loss provision 900 900 1,800 1,800
Loans charged off (1,353) (2,283) (2,998) (3,890)
Recoveries of previously
charged off loans 580 1,207 1,386 2,279
----------------------------------------------------
Net credit losses (773) (1,076) (1,612) (1,611)
----------------------------------------------------
Acquired from Kerman State Bank 2,050 0 2,050 0
Balance, end of period $54,324 $52,468 $54,324 $52,468
====================================================
Allowance for loan losses /
loans outstanding 2.17% 2.13%
Capital Resources
The current and projected capital position of 2001. Amortizationthe Company and the impact of
identifiable intangible assets was $201capital plans and long-term strategies is reviewed regularly by Management.
The Company quarterly repurchases approximately 250 thousand forof its shares of
Common Stock in the open market with the intention of lessening the dilutive
impact of issuing new shares to meet stock performance, option plans, and
other ongoing requirements. In addition to these systematic repurchases, other
programs have been implemented to optimize the Company's use of equity capital
and enhance shareholder value. Pursuant to these programs, the Company
repurchased an additional 608 thousand and 1.18 million shares during the
first quartersix months of 2002 and $365 thousand2001, respectively.
The Company's primary capital resource is shareholders' equity, which was
$320.4 million at June 30, 2002. This amount represents an increase of $6.0
million (1.9 percent) from December 31, 2001, the net result of shares issued
in connection with the KSB acquisition ($14.6 million) the net result of the
issuance of stock ($24.3 million, including $14.6 million in connection with
the KSB acquisition) and $261 thousandcomprehensive income for the period ($43.3 million),
partially offset by share repurchases ($46.7 million) and dividends paid
($14.9 million). The slight net growth in equity capital combined with assets
acquired from KSB, the Company's ratio of equity to total assets declined to
7.87 percent at June 30, 2002, from 8.16 percent a year ago. The equity to
assets ratio was 8.00 percent on December 31, 2001.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At
At June 30, December 31, Minimum
-------------------- Regulatory
2002 2001 2001 Requirement
----------------------------------------------
Tier I Capital 9.31% 9.52% 9.29% 4.00%
Total Capital 10.65% 10.93% 10.63% 8.00%
Leverage ratio 7.25% 7.53% 7.30% 4.00%
The risk-based capital ratio decreased at June 30, 2002, compared to the prior
year due to combination of asset growth from the KSB acquisition, an increase
in intangible assets and a decrease in the total level of tangible (excluding
goodwill and purchase premiums) shareholders' equity as a result of the
Company's common stock repurchases and dividends paid to shareholders,
partially offset by increased net income. The risk-based capital ratio
increased at June 30, 2002 from December 31, 2001 primarily due to an
increase in tangible shareholders equity from stock issued for the KSB
acquisition, partially offset by the Company's common stock repurchases,
dividends paid and asset growth from the KSB acquisition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The fundamental objective of the Company's management of assets and
liabilities is to maximize economic value while maintaining adequate liquidity
and a conservative level of interest rate risk.
The primary analytical tool used by the Company to gauge interest rate risk is
a simulation model to project changes in net interest income ("NII") that
result from forecast changes in interest rates. The analysis calculates the
difference between a NII forecast over a 12-month period using a flat interest
rate scenario, and a NII forecast using a rising or falling rate scenario
where the Fed Funds rate is made to rise or fall evenly by 100 basis points
over the 12-month forecast interval triggering a response in the other
forecasted rates. Company policy requires that such simulated changes in NII
should be within certain specified ranges or steps must be taken to reduce
interest rate risk. The results of the model indicate that the mix of interest
rate sensitive assets and liabilities at June 30, 2002 would not result in a
fluctuation of NII that would exceed the parameters established by Company
policy.
At June 30, 2002 and 2001, the Company had no derivative financial instruments
outstanding. As the Company believes that the derivative financial instrument
disclosures contained within the notes to the financial statements of its 2001
Form 10-K substantially conform with accounting policy requirements, no
further interim disclosure has been provided. The rule amendments that require
expanded disclosure of quantitative and qualitative information about market
risk were effective with the 1997 Form 10-K. At June 30, 2002, there were no
substantial changes in the information on market risk that was disclosed in
the Company's Form 10-Ks dated December 31, 2001.
Liquidity
The Company's principal source of asset liquidity is marketable investment
securities available for sale. At June 30, 2002, investment securities
available for sale totaled $986.4 million, representing an increase of $94.5
million from June 30, 2001. In addition, the Company generates significant
liquidity from its operating activities. The Company's profitability during
the first six months of 2002 and fourth quarters2001 generated substantial cash flows, which
are included in the totals provided from operations of $48.3 million and $45.0
million, respectively. Additional cash flows may be provided by financing
activities, primarily the acceptance of deposits and borrowings from banks.
During the first six months of 2002 financing activities provided $6.4 million
cash. This amount includes cash outflows related to the Company's stock
repurchase programs and dividends paid to shareholders of $46.7 million and
$14.9 million, respectively, more than offset by $67.0 million proceeds from
short-term borrowings.
During the first six months of 2002 the Company had net cash outflows in its
investing activities. Purchases net of sales and maturities of investment
securities were $89.1 million and were partially offset by net repayments of
loans of $33.7 million and $5.4 million cash obtained in the KSB acquisition,
resulting in net cash used of $50.3 million.
This compares to the first six months of 2001, when the effect of the
Company's stock repurchase programs and dividends paid to shareholders were
$64.0 million and $14.4 million, respectively. These cash outflows, added to a
$86.3 million reduction in short-term borrowed funds, a $3.2 million reduction
in long-term debt, and a $39.2 million decrease in deposits are included in
the net cash used in financing activities during the first six months of 2001
of $196.7 million.
Investing activities provided $57.8 million cash in the first half of 2001.
SIGNATURES
Pursuant to the requirementsSales and maturities of the Securities and Exchange
Actinvestment securities net of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
WESTAMERICA BANCORPORATION
(Registrant)
Date: April 29, 2002 /s/ DENNIS R. HANSEN
----------------------------------
Dennis R. Hansen
Senior Vice President
and Controller
Chief Accounting Officerpurchases were $40.9
million while net repayments of loans were $17.8 million.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Subsidiary
Banks areBank is at times party to various legal actions; all
such actions are of a routine nature and arise in the normal
course of business of the Subsidiary Banks.Bank.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
NoneProxies for the Annual Meeting of shareholders held on April
23, 2002, were solicited pursuant Regulation 14A of the
Securities Exchange Act of 1934. The Report of Inspector of
election indicates that 28,799,661 shares of the Common Stock
of the Company, out of 34,325,750 shares outstanding, were
present at the meeting. There were no "broker non-votes" on
the following matters because they were considered "routine"
and therefore brokers were able to vote. The following matters
were submitted to a vote of the shareholders:
1. - Election of directors:
For Withheld
------ ------
Etta Allen 28,579,996 219,664
Louis E. Bartolini 28,496,859 302,801
Louis H. Herwaldt 28,612,594 187,066
Arthur C. Latno, Jr. 28,582,948 216,712
Patrick D. Lynch 28,496,081 303,579
Catherine C. MacMillan 28,583,900 215,761
Patrick J. Mon Pere 28,435,129 364,531
Ronald A. Nelson 28,601,049 198,611
Carl R. Otto 28,603,469 196,191
David L. Payne 28,612,476 187,184
Edward B. Sylvester 28,563,482 236,178
Shareholders were to cast their vote for or to withhold
their vote.
2. - Ratification of independent certified public
accountant firm.
A proposal to ratify the selection of KPMG LLP as independent
certified public accountants for the Company for 2002.
For : 28,265,856
Against : 327,483
Abstain : 206,321
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 11: Computation of Earnings Per Share on Common
and Common Equivalent Shares and on Common
Shares Assuming Full Dilution
Exhibit 99.1: Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2: Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
On March 8None
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
WESTAMERICA BANCORPORATION
(Registrant)
Date: August 13, 2002
the Company filed a Report on Form 8-K
announcing the signing of a definitive agreement on February
25, 2002 to acquire Kerman State Bank./s/ DENNIS R. HANSEN
---------------------
Dennis R. Hansen
Senior Vice President
and Controller
Chief Accounting Officer
Exhibit 11
WESTAMERICA BANCORPORATION
Computation of Earnings Per Share on Common and
Common Equivalent Shares and on Common Shares
Assuming Full Dilution
- ------------------------------------------------------------------
For the For the
three months six months
ended March 31,June 30, ended June 30,
(In thousands, except per share data) 2002 2001 - ------------------------------------------------------------------
2002 2001
----------------------------------------------------
Weighted average number of common
shares outstanding - basic 34,071 36,00033,565 35,433 33,817 35,715
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 563 605
- ------------------------------------------------------------------615 524 589 564
----------------------------------------------------
Weighted average number of common
shares outstanding - diluted 34,634 36,605
==================================================================34,180 35,957 34,406 36,279
====================================================
Net income $21,659 $20,424$19,347 $20,758 $41,006 $41,182
Basic earnings per share $0.64 $0.57$0.58 $0.59 $1.21 $1.15
Diluted earnings per share $0.63 $0.56$0.57 $0.58 $1.19 $1.14
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Westamerica Bancorporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
David L. Payne, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirement of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ David L. Payne
- --------------------
David L. Payne
Chairman, President and Chief Executive Officer
August 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Westamerica Bancorporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Jennifer J. Finger, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirement of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Jennifer J. Finger
- ------------------------
Jennifer J. Finger
Senior Vice President and Chief Financial Officer
August 13, 2002