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