Page 1
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 Quarter Ended March 31,June 30, 2004
Commission File Number: 001-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-2156203
(State or other jurisdiction of (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) 863-8000863-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the registrant classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of May 3,August 4, 2004
Common Stock, 31,746,61731,715,545
No Par Value
Page 2
TABLE OF CONTENTS
Page
-------------
Forward Looking Statements 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3
Notes to Unaudited Condensed Consolidated Financial Statements 7
Financial Summary 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 2224
Item 4 - Controls and Procedures 2224
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 2325
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
Equity Securities 2325
Item 3 - Defaults upon Senior Securities 2325
Item 4 - Submission of Matters to a Vote of Security Holders 2325
Item 5 - Other Information 2326
Item 6 - Exhibits and Reports on Form 8-K 2326
(a) - Exhibits
Exhibit 3 (ii) By-laws, as amended (composite copy) 26
Exhibit 11 - Computation of Earnings Per Share 4328
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-(14)(a) 4429
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-(14)(a) 4530
Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 4631
Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 4732
(b) - Reports on Form 8-K 2426
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
slowdown in the national and California economies; (2) economic uncertainty
created by terrorist threats and 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 ;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;deposits and assets; (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, 2003, 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.
The Company undertakes no obligation to update any forward-looking
statements in this report.
Page 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
At March 31,June 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Assets:
Cash and cash equivalents $166,649 $186,281$185,522 $201,560 $189,628
Money market assets 534 633 534
Investment securities available for sale 1,219,364 1,048,3861,024,798 1,251,341 1,413,911
Investment securities held to maturity,
with market values of:
$595,179$949,257 at March 31,June 30, 2004 586,171
$531,580960,522
$599,484 at March 31,June 30, 2003 520,896588,231
$542,729 at December 31, 2003 535,377
Loans, gross 2,322,881 2,456,1612,319,255 2,406,889 2,323,330
Allowance for loan losses (53,834) (54,154)(53,949) (54,159) (53,910)
---------------------------------------
Loans, net of allowance for loan losses 2,269,047 2,402,0072,265,306 2,352,730 2,269,420
Other real estate owned 80 88Repossessed collateral 0 1,888 90
Premises and equipment, net 35,412 36,54335,343 36,408 35,748
Interest receivable and other assets 147,559 191,621139,786 131,901 131,677
---------------------------------------
Total Assets $4,424,816 $4,386,455$4,611,811 $4,564,692 $4,576,385
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,210,829 $1,129,455$1,272,278 $1,194,847 $1,240,379
Interest bearing:
Transaction 562,369 553,105569,575 554,568 561,696
Savings 1,049,435 980,2911,072,701 962,967 1,058,082
Time 624,543 667,237590,875 741,249 603,834
---------------------------------------
Total deposits 3,447,176 3,330,0883,505,429 3,453,631 3,463,991
Short-term borrowed funds 491,704 416,219712,553 393,287 590,646
Federal Home Loan Bank advance 20,0000 170,000 105,000
Notes Payablepayable 21,429 21,393 24,643
Liability for interest, taxes and
other expenses 105,907 111,80942,605 169,070 51,734
---------------------------------------
Total Liabilities 4,086,216 4,049,5094,282,016 4,207,381 4,236,014
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
31,78731,784 at March 31,June 30, 2004 217,477
32,907221,896
32,937 at March 31,June 30, 2003 214,019217,236
32,287 at December 31, 2003 218,461
Deferred compensation 2,146 1,824 1,272 1,824
Accumulated other comprehensive income:
Unrealized (loss) gain on securities
available for sale, net 21,213 20,710(1,416) 26,001 13,191
Retained earnings 98,086 100,945107,169 112,250 106,895
---------------------------------------
Total Shareholders' Equity 338,600 336,946329,795 357,311 340,371
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,424,816 $4,386,455$4,611,811 $4,564,692 $4,576,385
=======================================
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three months ended March 31,Six months ended
June 30, June 30,
2004 2003 --------------------------2004 2003
----------------------------------------------------
Interest Income:
Loans $34,023 $40,413$33,403 $39,419 $67,425 $79,832
Money market assets and funds sold 0 32 1 5
Investment securities available for sale
Taxable 11,284 7,9018,035 8,521 19,410 16,544
Tax-exempt 3,874 3,7703,644 3,915 7,518 7,686
Investment securities held to maturity
Taxable 858 2,3163,833 1,345 4,600 3,537
Tax-exempt 4,372 2,722
--------------------------4,356 3,397 8,728 6,119
----------------------------------------------------
Total interest income 54,411 57,125
--------------------------53,271 56,599 107,682 113,723
----------------------------------------------------
Interest Expense:
Transaction deposits 112 242124 211 236 453
Savings deposits 1,111 1,708992 1,562 2,102 3,271
Time deposits 1,930 2,9571,878 2,697 3,808 5,654
Short-term borrowed funds 1,131 8511,285 962 2,416 1,812
Federal Home Loan Bank advance 896 1,5752 1,592 897 3,167
Debt financing and notes payable 335 404
--------------------------316 385 652 789
----------------------------------------------------
Total interest expense 5,515 7,737
--------------------------4,597 7,409 10,111 15,146
----------------------------------------------------
Net Interest Income 48,896 49,388
--------------------------48,674 49,190 97,571 98,577
----------------------------------------------------
Provision for loan losses 750 900 --------------------------1,500 1,800
----------------------------------------------------
Net Interest Income After
Provision For Loan Losses 48,146 48,488
--------------------------47,924 48,290 96,071 96,777
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 6,868 6,4257,360 6,648 14,228 13,073
Merchant credit card 825 862
Trust fees 250 238909 900 1,735 1,762
Financial services commissions 187 207360 210 547 418
Trust income 258 277 508 516
Mortgage banking 133 226131 301 263 527
Securities gains 1,788 15395 277 2,183 293
Loss on extinguishment of debt (1,814)(390) 0 (2,204) 0
Other 2,629 2,402
--------------------------2,638 2,423 5,266 4,822
----------------------------------------------------
Total Noninterest Income 10,866 10,375
--------------------------11,661 11,036 22,526 21,411
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 13,526 13,69813,332 13,598 26,858 27,297
Occupancy 2,948 2,9952,944 3,044 5,892 6,039
Data processing 1,517 1,5591,521 1,518 3,038 3,077
Equipment 1,162 1,3741,273 1,381 2,435 2,755
Courier service 884 929888 926 1,772 1,855
Professional fees 409 413511 457 921 870
Other real estate owned 2 1
Other 4,544 4,566
--------------------------4,521 4,552 9,066 9,118
----------------------------------------------------
Total Noninterest Expense 24,992 25,535
--------------------------24,990 25,476 49,982 51,011
----------------------------------------------------
Income Before Income Taxes 34,020 33,32834,595 33,850 68,615 67,177
----------------------------------------------------
Provision for income taxes 9,706 10,316
--------------------------9,951 10,179 19,657 20,494
----------------------------------------------------
Net Income $24,314 $23,012
==========================$24,644 $23,671 $48,958 $46,683
====================================================
Other Comprehensive Income:
Change in unrealized (loss) gain on
securities available for sale, net 8,022 1,558
--------------------------(22,629) 5,591 (14,607) 6,849
----------------------------------------------------
Other Comprehensive Income $32,336 $24,570
==========================$2,015 $29,262 $34,351 $53,532
====================================================
Average Shares Outstanding 32,051 33,11031,760 33,000 31,906 33,054
Diluted Average Shares Outstanding 32,662 33,56532,343 33,492 32,502 33,528
Per Share Data:
Basic Earnings $0.76 $0.70$0.78 $0.72 $1.53 $1.41
Diluted Earnings 0.74 0.690.76 0.71 1.51 1.39
Dividends Paid 0.260.28 0.24 0.54 0.48
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(unaudited)
Accumulated
Compre-
Common Deferred hensive Retained
Shares Stock Compensation IncomeIncome/loss Earnings Total
------------------------------------------------------------------------------
Balance, December 31, 2002 33,411 $215,926 $1,272 $19,152 $105,149 $341,499
Net income for the period 23,012 23,01246,683 46,683
Stock issued for stock compensation 63 1,177 1,177options 191 3,450 3,450
Stock option tax benefits 554 5541,887 1,887
Restricted stock activity 24 407 552 959
Purchase and retirement of stock (567) (3,638) (19,260) (22,898)(689) (4,434) (23,695) (28,129)
Dividends (7,956) (7,956)(15,887) (15,887)
Unrealized gain on securities
available for sale, net 1,558 1,5586,849 6,849
------------------------------------------------------------------------------
Balance, March 31,June 30, 2003 32,907 $214,019 $1,272 $20,710 $100,945 $336,94632,937 $217,236 $1,824 $26,001 $112,250 $357,311
==============================================================================
Balance, December 31, 2003 32,287 $218,461 $1,824 $13,191 $106,895 $340,371
Net income for the period 24,314 24,31448,958 48,958
Stock issued for stock compensation 74 2,515 2,515options 214 6,166 6,166
Stock option tax benefits 445 4451,826 1,826
Restricted stock activity 16 467 322 789
Purchase and retirement of stock (574) (3,944) (24,732) (28,676)(733) (5,024) (31,399) (36,423)
Dividends (8,391) (8,391)(17,285) (17,285)
Unrealized gainloss on securities
available for sale, net 8,022 8,022(14,607) (14,607)
------------------------------------------------------------------------------
Balance, March 31,June 30, 2004 31,787 $217,477 $1,824 $21,213 $98,086 $338,60031,784 $221,896 $2,146 ($1,416) $107,169 $329,795
==============================================================================
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 6
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
unaudited)(unaudited)
For the threesix months
ended March 31,June 30,
--------------------------
2004 2003
--------------------------
Operating Activities:
Net income $24,314 $23,012$48,958 $46,683
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 956 1,0791,917 2,139
Amortization of intangibles and other assets 574 5491,148 1,014
Loan loss provision 750 9001,500 1,800
Amortization of deferred net loan fees 122 29521 117
Decrease in interest income receivable 1,797 173
Increase2,401 362
(Increase) decrease in other assets (4,609) (81)(4,391) 57,823
Increase (decrease) in income taxes payable 9,558 11,164694 2,978
Decrease in interest expense payable (347) (234)(462) (382)
Increase (decrease) in other liabilities 1,190 (202)3,115 (53,321)
Gain on sales of investment securities (1,788) 0(2,183) (293)
Loss on extinguishment of debt 1,8142,204 0
Writedown of equipment 9 102
Originations of loans for resale (2,468) (1,737)(3,562) (5,257)
Proceeds from sale of loans originated for resale 2,469 2,1803,534 5,007
Net gain (loss) on sale of other real estate owned
223 (49)in satisfaction of debt (231) (9)
--------------------------
Net Cash Provided by Operating Activities 34,555 37,04954,672 58,763
--------------------------
Investing Activities:
Net (disbursements) repayments of loans (502) 36,7672,618 84,213
Purchases of investment securities available for sale (27,063) (292,827)(76,027) (499,669)
Purchases of investment securities held to maturity (88,315) (118,047)(494,618) (243,158)
Purchases of property, plant and equipment (620) (723)(1,521) (1,750)
Proceeds from maturity of securities available for sale 126,430 131,869243,046 257,382
Proceeds from maturity of securities held to maturity 24,667 36,13663,021 93,912
Proceeds from sale of securities available for sale 148,360 63,091199,185 69,305
Proceeds from sale of property and equipment 0 498
Proceeds from sale of other real estate owned 10321 293
--------------------------
Net Cash Provided by (Used in)Used in Investing Activities 182,967 (142,943)(63,975) (238,974)
--------------------------
Financing Activities:
Net (decrease) increase in deposits (16,816) 36,02341,438 159,565
Net (decrease) increase in short-term borrowings (98,942) 66,483121,906 43,551
Repayments to the FHLB (86,814)(107,204) 0
Repayments of notes payable (3,214) (3,214)
Exercise of stock options 2,352 1,1605,979 3,308
Repurchases/retirement of stock (28,676) (22,898)(36,423) (28,129)
Dividends paid (8,391) (7,956)(17,285) (15,887)
--------------------------
Net Cash (Used in) Provided by Financing Activities (240,501) 69,5985,197 159,194
--------------------------
Net Decrease In Cash and Cash Equivalents (22,979) (36,296)(4,106) (21,017)
--------------------------
Cash and Cash Equivalents at Beginning of Period 189,628 222,577
--------------------------
Cash and Cash Equivalents at End of Period $166,649 $186,281$185,522 $201,560
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate ownedrepossessed collateral $0 $0$1,800
Supplemental Disclosure of Cash Flow Activity:
Unrealized (loss) gain on securities available for sale, net $8,022 $1,558($14,607) 6,849
Interest paid for the period 5,167 7,5039,649 14,764
Income tax payments for the period 18,850 18,461
Income tax benefit from stock option exercises 445 5541,826 1,887
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 pursuant to the rules and regulations of
the Securities and Exchange Commission. The results of operations reflect
interim adjustments, all of which are of a normal recurring nature and which,
in the opinion of Management, are necessary for a fair presentation of the
results for the interim periods presented. The interim results for the threesix
months ended March 31,June 30, 2004 and 2003 are not necessarily indicative of the
results expected for the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes as well as other information
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
Note 2: Significant Accounting Policies.
Certain accounting policies underlying the preparation of these financial
statements require Management to make estimates and judgments. These
estimates and judgments may affect reported amounts of assets and
liabilities, revenues and expenses, and disclosures of contingent assets and
liabilities. The most significant of these involve the Allowance for Loan
Losses, which is discussed in Note 1 to the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
Note 3: Goodwill and Other Intangible Assets
The Company has recorded goodwill and core deposit intangibles associated
with purchase business combinations and, effective January 1, 2002, accounts
for them in accordance with Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer
amortized, but is periodically evaluated for impairment. The Company determined thatDuring 2004, no
impairment existed as of March
31, 2004.goodwill has been recorded. Core deposit intangibles are
amortized to their estimated residual values over their expected useful
lives; such lives and residual values are also periodically reassessed to
determine if any amortization period adjustments are indicated. During the
firstsecond quarter of 2004, no such adjustments were recorded.
The following table summarizes the Company's goodwill and core deposit
intangible assets, which are included with Interest receivable and other
assets in the Consolidated Balance Sheets, as of January 1, 2004 and March
31,June 30,
2004 (dollars in thousands).
At At
January 1, March 31,June 30,
2004 Additions Reductions 2004
----------------------------------------------------
Goodwill $22,968 $0 $0 $22,968
Accumulated Amortization (3,972) 0 0 (3,972)
----------------------------------------------------
Net $18,996 $0 $0 $18,996
====================================================
Core Deposit Intangibles $7,783 $0 $0 $7,783
Accumulated Amortization (4,345) 0 (136) (4,481)(272) (4,617)
----------------------------------------------------
Net $3,438 $0 ($136) $3,302272) $3,166
====================================================
At March 31,June 30, 2004, the estimated aggregate amortization of core deposit
intangibles, in thousands of dollars, for the remainder of 2004 and annually
through 2009 is $408,$272, $469, $427, $427, $427, and $427, respectively. The
weighted average amortization period for core deposit intangibles is 7.6
years.
Page 8
Note 4: Stock Options
In accordance with SFAS No. 123 "Accounting for Stock-Based Compensation", the
Company accounts for its stock option plans using the intrinsic value method.
Accordingly, compensation expense is recorded on the grant date only if the
current price of the underlying stock exceeds the exercise price of the
option. Had compensation cost been determined based on the fair value method
established by SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
For the threeThree months ended March 31,
--------------------------Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 --------------------------2004 2003
----------------------------------------------------
(In thousands, except per share data)
Compensation cost based on fair
value method, net of tax effect $526 $589 $1,052 $1,178
Net income:
As reported $24,314 $23,012$24,644 $23,671 $48,958 $46,683
Pro forma $23,788 $22,423$24,118 $23,082 $47,906 $45,505
Basic earnings per share:
As reported $0.76 $0.70$0.78 $0.72 $1.53 $1.41
Pro forma 0.74 0.680.76 0.70 1.50 1.38
Diluted earnings per share:
As reported $0.74 $0.69$0.76 $0.71 $1.51 $1.39
Pro forma 0.73 0.670.75 0.69 1.47 1.36
Note 5: Post Retirement Benefits
The Company uses an actuarial-based accrual method of accounting for
post-retirement benefits. The Company offers a continuation of group insurance
coverage to employees electing early retirement until age 65. The Company pays
a portion of these early retirees' insurance premium which are determined at
their date of retirement. Beginning in 2004, the Company reimburses 50 percent
of Medicare Part B premiums for all retirees and spouses over 65.
In accordance with SFAS No.132 "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits", the Company provides the following interim
disclosure related to its post-retirement benefit plan.
The following table sets forth the net periodic post retirement benefit costs
for the quarter ended March 31.June 30.
For the threesix months ended
March 31,June 30,
---------------------------------------
2004 2003 2002
---------------------------------------
(In thousands)
Service cost $46 $4 $52$93 $7 $104
Interest cost 43 42 4386 85 86
Amortization of unrecognized
transition obligation 15 15 1531 31 31
---------------------------------------
Net periodic cost $104 $61 $110$210 $123 $221
=======================================
Page 9
WESTAMERICA BANCORPORATION
Financial Summary
(In thousands, except per share data)
Three months ended ---------------------------------------
March 31,
--------------------------December 31,Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------
Net Interest Income $48,896 $49,388 $49,048(FTE)** $54,271 $54,324 $108,877 $108,386
Provision for Loan Lossesloan losses (750) (900) (750)(1,500) (1,800)
Noninterest Income 10,866 10,375 10,492income: 11,661 11,036 22,526 21,411
Noninterest Expense (24,992) (25,535) (25,158)expense (24,990) (25,476) (49,982) (51,011)
Provision for income taxes (9,706) (10,316) (9,325)
---------------------------------------(FTE)** (15,548) (15,313) (30,963) (30,303)
----------------------------------------------------
Net Income $24,314 $23,012 $24,307
=======================================income $24,644 $23,671 $48,958 $46,683
====================================================
Average shares outstanding 31,760 33,000 31,906 33,054
Diluted average shares outstanding 32,343 33,492 32,502 33,528
Shares Outstanding 32,051 33,110 32,523outstanding at period end 31,784 32,937 31,784 32,937
As Reported:
Basic earnings per share $0.78 $0.72 $1.53 $1.41
Diluted Average Shares Outstanding 32,662 33,565 33,154
Shares Outstanding at Period End 31,787 32,907 32,287
Basic Earnings Per Shareearnings per share $0.76 $0.70 $0.74
Diluted Earnings Per Share 0.74 0.69 0.73
Dividends Paid Per Share $0.26 $0.24 $0.26
Dividend Payout Ratio 35% 35% 36%$0.71 $1.51 $1.39
Return on assets 2.21% 2.21% 2.20% 2.21%
Return on equity 31.11% 29.27% 30.82% 29.44%
Net interest margin 5.21% 5.43% 5.24% 5.51%
Net loan losses to average loans 0.11% 0.15% 0.13% 0.16%
Efficiency ratio* 37.9% 39.0% 38.0% 39.3%
Average Balances:
Total Assets $4,451,674 $4,201,864 $4,451,423assets $4,482,261 $4,304,387 $4,466,967 $4,253,125
Earning Assets 4,157,061 3,906,020 4,149,994assets 4,177,358 4,007,049 4,167,210 3,956,535
Total Loans 2,281,900 2,424,017 2,285,717loans 2,268,989 2,375,491 2,275,444 2,399,754
Total Deposits 3,437,549 3,306,929 3,542,433deposits 3,489,250 3,370,433 3,463,399 3,338,681
Shareholders' Equity 320,390 315,132 328,209
Financial Ratios for the Period:
Return On Assets 2.20% 2.22% 2.17%
Return On Equity 30.52% 29.61% 29.38%
Net Interest Margin (FTE)** 5.27% 5.58% 5.26%
Net Loan Losses to Average Loans 0.15% 0.16% 0.18%
Efficiency Ratio* 38.2% 39.6% 38.6%equity 318,560 324,350 319,475 319,741
Balances at Period End:
Total Assets $4,424,816 $4,386,455 $4,576,385assets $4,611,811 $4,564,692
Earning Assets 4,075,123 3,972,065 4,219,450assets 4,311,562 4,247,094
Total Loans 2,322,881 2,456,161 2,323,330loans 2,319,255 2,406,889
Total Deposits 3,447,176 3,330,088 3,463,991deposits 3,505,429 3,453,631
Shareholders' Equity 338,600 336,946 340,371equity 329,795 357,311
Financial Ratios at Period End:
Allowance for Loan Lossesloan losses to Loans 2.32% 2.20% 2.32%loans 2.33% 2.25%
Book Valuevalue per share $10.38 $10.85
Equity to assets 7.15% 7.83%
Total capital to risk assets 11.78% 11.32%
Dividends Paid Per Share $10.65 $10.24 $10.54
Equity to Assets 7.65% 7.68% 7.44%
Total Capital to Risk Adjusted Assets 11.25% 10.71% 11.39%
$0.28 $0.24 $0.54 $0.48
Dividend Payout Ratio 37% 34% 36% 34%
The above financial summary has been derived from the Company's unaudited
consolidated financial statements. This information should be read in
conjunction with those statements, notes and the other information included
elsewhere herein.
*The efficiency ratio is defined as noninterest expense divided by total
revenue (net interest income on a tax-equivalent basis and noninterest
income).
**Fully taxable equivalent
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported first
quarter 2004 net income
of $24.3$24.6 million or $.74 diluted earnings per share.
These results compare to net income of $23.0 million or $.69 diluted earnings per share and $24.3of $0.76 for the second quarter
of 2004. These results compare with net income of $23.7 million or $.73$0.71 per
share for the same period of 2003.
On a year-to-date basis, the Company reported net income for the six months
ended June 30, 2004 of $49.0 million or diluted earnings per share respectively,of $1.51,
compared with $46.7 million or $1.39 per share for the first and fourth quarterssame period of 2003.
Following is a summary of the components of net income for the periods
indicated (dollars in thousands)(In thousands except per share data and ratios):
Three months ended ---------------------------------------
March 31,
--------------------------December 31,Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------
Net interest income (FTE) $54,605 $54,062 $54,757$54,271 $54,324 $108,877 $108,386
Provision for loan losses (750) (900) (750)(1,500) (1,800)
Noninterest income 10,866 10,375 10,49211,661 11,036 22,526 21,411
Noninterest expense (24,992) (25,535) (25,158)(24,990) (25,476) (49,982) (51,011)
Provision for income taxes (FTE) (15,415) (14,990) (15,034)
---------------------------------------(15,548) (15,313) (30,963) (30,303)
----------------------------------------------------
Net income $24,314 $23,012 $24,307
=======================================$24,644 $23,671 $48,958 $46,683
====================================================
Average diluted shares 32,343 33,492 32,502 33,528
Diluted earnings per share $0.76 $0.71 $1.51 $1.39
Average total assets $4,451,674 $4,201,864 $4,451,4234,482,261 4,304,387 4,466,967 4,253,125
Net income (annualized) to average total assets 2.21% 2.21% 2.20% 2.22% 2.17%2.21%
Net income for the firstsecond quarter of 2004 was $1.3 million$973 thousand or 5.7% over4.1% more than
the same quarter of 2003, primarily attributable to higher net2003. Net interest income (FTE), higher noninterest income and lower noninterest expense. The increase
in net interest income (FTE) (up $543 declined by $53 thousand or
1.0%) was0.1%, primarily the net result of declining yields on average earning assets,
lower rates paid on interest-bearing liabilitiesinterest expense, and growth of average
interest-earning assets (up $251 million), partially reduced by the effect of declining yields on thosehigher average earning assets. Noninterest income grew $491The
loan loss provision declined $150 thousand or 4.7%16.7%, reflecting management's
assessment of the quality of the loan portfolio. The increase of $625 thousand
or 5.7% in noninterest income and a $486 thousand or 1.9% reduction of
noninterest expense declined $543 thousand or 2.1%.contributed to growth in net income for the period. The
provision for income taxes (FTE) increased $425$235 thousand or 2.8% due to higher pretax
income, partially reduced by higher tax credits earned on low-income housing
investments.1.53%.
Comparing the first threesix months of 2004 to the prior quarter,year, net income increased $7 thousand, the net result of an increase in noninterest income and
lower noninterest expense, offset by a decline in net interest income. The
$152rose $2.3
million or 4.9%. A $491 thousand or 0.3% decline0.5% increase in net interest income (FTE) was
mainly caused
byattributable to a lower loan fee incomecost of funding and the effect of one less accrual day,growth of
earning assets, partially mitigatedoffset by the effect of higherdeclining yields on earning assets and lower rates
paid on interest-bearing liabilities.those assets. The
provision for loan losses decreased $300 thousand or 16.7%. Noninterest income
rose by $374 thousand$1.1 million or 3.6%5.2% and noninterest expense fell $166dropped $1.0 million or 2.0%.
The income tax provision (FTE) increased $660 thousand or 0.7%. The FTE provision
for income taxes was up $381 thousand or 2.5%2.2%.
Net Interest Income
Following is a summary of the components of net interest income for the
periods indicated (dollars in thousands):
Three months ended ---------------------------------------
March 31,
--------------------------December 31,Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------
Interest and fee income $54,411 $57,125 $54,810$53,271 $56,599 $107,682 $113,723
Interest expense (5,515) (7,737) (5,763)(4,597) (7,409) (10,111) (15,146)
FTE adjustment 5,709 4,674 5,710
---------------------------------------5,597 5,134 11,306 9,809
----------------------------------------------------
Net interest income (FTE) $54,605 $54,062 $54,757
=======================================$54,271 $54,324 $108,877 $108,386
====================================================
Average earning assets $4,157,061 $3,906,020 $4,149,994$4,177,358 $4,007,049 $4,167,210 $3,956,535
Net interest margin (FTE) 5.27% 5.58% 5.26%5.21% 5.43% 5.24% 5.51%
The Company's primary source of revenue is net interest income, or the
difference between interest income earned on loans and investmentsearning assets and interest
expense paid on interest-bearing deposits and borrowings.liabilities. Net interest income (FTE)
during the firstsecond quarter of 2004 increased $543decreased $53 thousand or 1.0%0.1% to $54.3
million from the same period in 20032003. The decrease was mainly attributable
to $54.6 million mainly due to growththe effect of the lower margin earned on those assets (the rate component).
The margin decrease was the net effect of a 52 bp drop in the average earning
assets (up $251 million), lower rates paid on interest-bearing
liabilities (down 38 bp) andasset yield, partially offset by a 41 bp decline in the cost of funds.
Offsetting the decline was the effect of an additional accrual day.
Offsetting the increase were lower yields onin average earning
assets (down 55 bp) and
lower loan fee income.(the volume component), which grew $170.3 million or 4.3%.
Comparing the first quartersix months of 2004 with the previous quarter,prior year, net interest income
(FTE) declined $152increased $491 thousand or 0.3%, primarily due to lower loan fee
income and the effect of one less accrual day, offset0.5%. The increase was caused by an increase in income
related to higher yields on earning
assets (up 4 bp) and$210.7 million or 5.3%), partially offset by the lower rates paidmargin earned
on interest-bearing liabilities (down 4 bp).earning assets. The margin reduction was the result of a 55 bp decrease in
the average asset yield combined with a 39 bp decline in the cost of funds.
Page 11
Interest and Fee Income
Interest and& fee income (FTE) for the firstsecond quarter of 2004 decreased $1.7$2.9
million or 2.7%4.6% from the same period in 2003. The decline was caused by lower
loan fee income (down $340 thousand) and lower yields onthe net effect of
higher average earning assets partiallyin 2004, more than offset by lower yields earned
on those assets. Average earning assets grew $170.3 million (4.3%) due to
expansion in the positive effectinvestment portfolio of growth of such assets.$276.8 million as follows: mortgage
backed securities and collateralized mortgage obligations (up $206.4 million),
municipal securities (up $99.1 million) and U.S. Agency obligations (up $31.7
million). Partially offsetting the increases was a $50.0 million decline in
other securities. Loans declined $106.5 million, including commercial real
estate loans (down $136.4 million) and direct consumer loans (down $8.9
million). The declines were mitigated by increases in residential real estate
loans (up $22.6 million) and commercial loans (up $16.1 million).
The average yield on the Company's earning assets decreased for the quarter from
6.38%6.17% in the
first quarter of 2003 to 5.80%5.65%, down 52 bp, in the some period in 2004 (down 58 bp).2004. This decreasedownward trend in yields was
reflective of generalcontinuing maturities and payoffs and funding of new earning
assets at lower interest marketsrates during much of 2003 and into 2004. The yields of all categories of2004, as evident in
indirect consumer loans declined, most
notably commercial loans (26(96 bp decline in yield)decline), commercial real estate loans (51(50 bp
decrease)decline), residential real estate loans (95(84 bp decrease)decline), commercial loans (36 bp
decline) and indirect consumer loans (down 99 bp)personal credit lines (56 bp decline). The netAs a result, was that the yield on the loan
portfolio declined 74 bp to 6.23%.yield decreased 70 bp. The investment portfolio yield decreased 15declined 11 bp,
to 5.28%, caused byprimarily the net result of declines in yields of municipal securities (down 43
bp) and U.S. Agency obligations (down 7051 bp), and municipala 101 bp increase in mortgage
backed securities (down 44 bp)and collateralized mortgage obligations.
Comparing the first half of 2004 to 2003, interest and fee income (FTE)
decreased by $4.5 million or 3.7%. Partially offsetting these decreases, the yield on other securities increased
255 bp primarilyThe decline was due to bond call premiums.
Averagethe combined effect of
a higher volume of earning asset expansionassets, the impact of $251 million for the first quarter of 2004
compared to the same period in 2003lower yields and lower loan fee
income. The positive volume was substantially attributable to ana $210.7 million (5.3%) increase
in the investment portfolioaverage earning assets, including mortgage backed securities and
collateralized mortgage obligations (up $261$233.7 million), municipal securities
(up $164$131.4 million), U.S. obligations (up $43.0 million), residential real
estate loans (up $19.7 million) and U.S. Agency obligationscommercial loans (up $54$11.0 million). OtherThe
growth was countered by declines in commercial real estate loans (down $138.6
million), direct consumer loans (down 10.4 million), construction loans (down
$8.2 million), other securities (down $72$61.0 million) and U.S. Treasury
securities (down $14$12.1 million)
decreased.
Average total loans decreased $142 million for the first quarter of 2004
compared to the same period in 2003 as reduced loan demand was reflective of
generally weak economic conditions. Commercial real estate loans declined $141
million, construction loans were down $11 million, and direct consumer loans
declined $11 million. Residential real estate loans (up $17 million) and
commercial loans (up $6 million) increased.
Comparing the first quarter of 2004 with the previous quarter, interest and
fee income (FTE) fell $399 thousand or 0.7%. The decrease largely resulted
from lower loan fee income (down $484 thousand), the effect of one less
accrual day and a change in the mix of earning assets.
The average yield on earning assets excluding loan fees for the first threesix months of 2004 was 5.78%5.73%
compared with 5.74%to 6.28% in the fourth quarter of 2003. The investment portfolio yield rose by 18 bp. The increase resulted mostly
from higherAll earning asset yields on other securities (up 167 bp) due to bond call premiums,
as well as yields on mortgage backed securities and collateralized mortgage
obligations (up 24 bp).
The loan portfolio yield excluding loan feesfell except for the first quarter of 2004
compared with the previous quarter was lower by 7 bp, due to declines in
indirect consumer loans (down 27 bp), residential real estate loans (down 10
bp), and commercial real estate loans (down 6 bp). Partially offsetting the
decline was a 13131 bp
increase in commercial loans mainly due to interest
recoveries.
Average earning assets increased $7 million or 0.2% for the first quarter of
2004 compared with the previous quarter but the mix of those assets shifted to
lower-yielding categories, resulting inother securities and a decline in volume-related interest
income. Increases50 bp increase in mortgage backed securities
and collateralized mortgage obligations (up $77 million) and indirect consumer loans (up $21 million) were
reducedobligations. The investment portfolio yield
decreased 13 bp, affected primarily by declines in commercial real estate (down $21 million),lower yields on U.S. Agency obligations
(down $43 million), other securities (down $15 million)61 bp) and municipal securities (down $8 million)44 bp). The yield on dealer loans
was down 98 bp, commercial real estate loans was down 55 bp, residential real
estate loans was down 89 bp, commercial loans yield also declined 31 bp and the
yield on personal credit lines decreased 52 bp. As a result, the composite loan
yield declined 70 bp.
Interest Expense
Interest expense decreased $2.2$2.8 million or 28.7%38.0% in the first three monthssecond quarter of 2004
compared withto the same period in 2003.year-ago period. The decrease was attributable toresulted from a drop in the
average rate paid on interest-bearing liabilities and the effect
of a change in the mix of thoseshift to lower-rate
liabilities. The average rate paid on interest-bearing liabilities decreasedfell from
1.14%1.05% in
the first quarter of 2003 to 0.77%0.64% in 2004. Rates paid on most liabilities
moved with general market conditions: theThe average rate on short-term
borrowingsbankers money fund balances
dropped 1429 bp, and rates on deposits declined as well, including
thosefederal funds purchased decreased 23 bp, rates on CDs
over $100 thousand which declined 57 bp; on retail CDs, which
dropped by 52 bp; and on high-yield money market accounts, which were lowered an average of 2329 bp, rates on money market savings
accounts were lowered 31 bp, and rates on regular savings declined 13 bp.
Interest-bearingAverage interest-bearing liabilities grew $150$54.7 million or 5.5% for1.9% in the firstsecond
quarter of 2004 from a year ago. Short-term borrowings rose by $231.4 million
mainly due to increases in repurchase agreements and federal funds purchased.
Federal Home Loan Bank ("FHLB") advances, which carried higher interest rates
than short-term borrowings, decreased from $170 million to none. Interest
bearing deposits rose by $118.8 million; however, a change in mix to lower-rate
categories, resulted in a rate-related decrease in interest expense. Money
market savings gained $57.7 million, reduced by a $51.0 million decrease in
CDs over $100 thousand.
During the first half of 2004, interest expense decreased $5.0 million or 33.2%
from 2003, again due to a lower average rate paid on interest-bearing
liabilities and growth of lower-rate interest-bearing liabilities. The average
rate paid on interest-bearing liabilities declined to 0.70% in the first half of
2004 compared with 1.10% in 2003. Average rates on all deposit categories
declined including money market savings (from 0.85% in the first six months of
2003 to 0.52% in the same period of 2003, although2004), CDs over $100 thousand (from 1.52% to
1.09%) and retail CDs with maturities varying from 1 month to over 3 years
(from 1.84% to 1.42%). Interest rates on short-term borrowings declined from
1.00% to 0.84%.
Total average interest-bearing liabilities grew $102.5 million or 3.7% for the
mix of thosesix months ended June 30, 2004. The growth in lower-rate liabilities shifted to lower-rate categories, resulting incaused a
decrease in volume-related
interest expense. Short-term funds increased $185 million or 53.0%,borrowings and money market accounts grew $58savings
increased $208.0 million or 4.7%. These increases were partially
reduced by declines in FHLBand $61.0 million, respectively. Federal Home Loan Bank
advances (down $73 million or 43.2%), retail CDs
(down $34 million or 11.1%) and CDs over $100 thousand (down $8declined $121.7 million or
2.4%).and $29.7 million,
respectively.
Page 12
Comparing the first quarter of 2004 to the previous quarter, interest expense
fell $248 thousand or 4.3%, due to the effect of one less accrual day and
lower rates paid on interest-bearing liabilities, partially offset by growth
of such liabilities.
Rates paid on liabilities averaged 0.77% during the first three months of 2004
compared to 0.80% in the fourth quarter of 2003. The most significant rate
declines were money market accounts which fell 6 bp, CDs over $100 thousand
which declined 7 bp, retail CDs which dropped by 6 bp, and long-term debt
which declined 23 bp.
Interest-bearing liabilities grew $38 million or 1.3% over the fourth quarter
of 2003. Short-term funds grew $114 million or 27.3% and long-term debt
increased $3 million or 13.8%. These increases were reduced by declines in
money market accounts (down $54 million or 4.0%), FHLB advances (down $8
million or 8.0%), and CDs over $100 thousand (down $8 million or 2.3%).
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 cost of funds.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin for
the periods indicated:
Three months ended ---------------------------------------
March 31,
--------------------------December 31,Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------
Yield on earning assets 5.80% 6.38% 5.81%5.65% 6.17% 5.73% 6.28%
Rate paid on interest-bearing
liabilities 0.77% 1.14% 0.80%
---------------------------------------0.64% 1.05% 0.70% 1.10%
----------------------------------------------------
Net interest spread 5.01% 5.12% 5.03% 5.24% 5.01%5.18%
Impact of all other net
noninterest bearing funds 0.24% 0.34% 0.25%
---------------------------------------0.20% 0.31% 0.21% 0.33%
----------------------------------------------------
Net interest margin 5.27% 5.58% 5.26%
=======================================5.21% 5.43% 5.24% 5.51%
====================================================
During the firstsecond quarter of 2004, the net interest margin fell 3122 bp compared
to the same period in 2003. Yields2003, as yields on earnings assets declined faster than
rates paid on interest-bearing liabilities, resulting in a 21 bp decline in
net interest spread.liabilities. The unfavorable impact of lower
rates earned on loans and the investment portfolio, wastriggered by maturities and
repricings in a result of market trends andlow-rate interest environment, was partially mitigated by
decreases in rates paid on deposits and short-term funds. The decline in the net
interest spread of 11 bp was further widened by the lower value ofnarrower due to a greater reliance on noninterest
bearing funding sources. While theThe average balance of these sources increased $84$127.9
million or 11.0%, their value decreased 10 bp because of16.6%.
Similarly, on a year-to-date basis, the lower market rates of interest at which they could be invested.
The net interest margin increased 1decreased 27 bp when
compared withto the fourth quarter
ofsame period in 2003. Earning asset yields decreased 155 bp and
the cost of interest-bearing liabilities fell by 340 bp, resulting in a 215 bp
increasedecline in the interest spread. Noninterest bearing funding sources decreased $31increased
$105.9 million or 3.5% causing13.8%, with their margin contributionvalue decreasing to decrease by 121 bp.
Page 13
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 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 which is exempt
from federal income taxation at the current statutory tax rate (dollars in
thousands).
For the three months ended
March 31,June 30, 2004
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $670$534 $0 0.00%
Investment securities:
Available for sale
Taxable 1,048,215 11,284 4.31%796,597 8,035 4.03%
Tax-exempt 308,882 5,780 7.49%295,698 5,435 7.35%
Held to maturity
Taxable 97,353 858 3.53%404,923 3,833 3.79%
Tax-exempt 407,250 6,808 6.69%410,617 6,794 6.62%
Loans:
Commercial:Commercial
Taxable 345,762 4,822 5.61%352,119 4,778 5.46%
Tax-exempt 231,582 3,970 6.89%234,780 3,958 6.78%
Commercial real estate 805,420 14,856 7.42%779,408 14,709 7.59%
Real estate construction 38,766 685 7.11%36,789 601 6.57%
Real estate residential 346,881 3,980 4.59%361,069 3,996 4.43%
Consumer 513,489 7,077 5.54%504,824 6,729 5.36%
--------------------------
Total loans 2,281,900 35,390 6.23%2,268,989 34,771 6.16%
--------------------------
Total earning assets 4,144,270 60,120 5.80%4,177,358 58,868 5.65%
Other assets 307,404304,903
-------------
Total assets $4,451,674$4,482,261
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,209,299$1,256,128 $-- --
Savings and interest-bearing
transaction 1,605,200 1,223 0.31%1,619,797 1,116 0.28%
Time less than $100,000 282,647 1,004 1.43%273,552 956 1.41%
Time $100,000 or more 340,403 926339,773 922 1.09%
--------------------------
Total interest-bearing deposits 2,228,250 3,153 0.57%2,233,122 2,994 0.54%
Short-term borrowed funds 533,158 1,131 0.84%614,065 1,285 0.83%
Federal Home Loan Bank advances 96,613 896 3.75%advance 0 2 N/A
Debt financing and notes payable 22,537 335 5.95%21,428 316 5.90%
--------------------------
Total interest-bearing liabilities 2,880,558 5,515 0.77%2,868,615 4,597 0.64%
Other liabilities 41,42738,958
Shareholders' equity 320,390318,560
-------------
Total liabilities and shareholders' equity $4,451,674$4,482,261
=============
Net interest spread (1) 5.03%5.01%
Net interest income and interest margin (2) $54,605 5.27%$54,271 5.21%
==========================
(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.
Page 14
For the three months ended
March 31,June 30, 2003
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $788 $3 1.54%$633 $2 1.26%
Investment securities:
Available for sale
Taxable 698,668 7,901 4.52%794,228 8,521 4.29%
Tax-exempt 303,011 5,807 7.67%306,094 5,900 7.71%
Held to maturity
Taxable 252,690 2,316 3.67%237,012 1,345 2.27%
Tax-exempt 226,846 4,068293,591 5,300 7.22%
Loans:
Commercial
Taxable 367,588 5,366 5.86%
Tax-exempt 203,231 3,635 7.17%
Loans:
Commercial:
Taxable 368,782 5,245 5.77%
Tax-exempt 202,591 3,803 7.61%
Commercial real estate 946,276 18,737 8.03%915,817 18,419 8.07%
Real estate construction 49,756 886 7.22%42,243 791 7.51%
Real estate residential 330,044 4,570 5.54%338,462 4,458 5.27%
Consumer 526,568 8,463 6.52%508,150 7,996 6.31%
--------------------------
Total loans 2,424,017 41,704 6.97%2,375,491 40,665 6.86%
--------------------------
Total earning assets 3,906,020 61,799 6.38%4,007,049 61,733 6.17%
Other assets 295,844297,338
-------------
Total assets $4,201,864$4,304,387
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,130,608 $-- --
Savings and interest-bearing
transaction 1,537,163 1,773 0.46%
Time less than $100,000 311,932 1,343 1.73%
Time $100,000 or more 390,730 1,354 1.38%
--------------------------
Total interest-bearing deposits 2,239,825 4,470 0.80%
Short-term borrowed funds 382,677 962 1.00%
Federal Home Loan Bank advance 170,000 1,592 3.71%
Debt financing and notes payable 21,393 385 7.19%
--------------------------
Total interest-bearing liabilities 2,813,895 7,409 1.05%
Other liabilities 35,534
Shareholders' equity 324,350
-------------
Total liabilities and shareholders' equity $4,304,387
=============
Net interest spread (1) 5.12%
Net interest income and interest margin (2) $54,324 5.43%
==========================
Page 15
For the six months ended
June 30, 2004
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $534 $1 0.37%
Investment securities:
Available for sale
Taxable 922,406 19,410 4.21%
Tax-exempt 302,290 11,249 7.44%
Held to maturity
Taxable 257,603 4,600 3.57%
Tax-exempt 408,933 13,569 6.64%
Loans:
Commercial
Taxable 348,940 9,603 5.53%
Tax-exempt 233,181 7,927 6.84%
Commercial real estate 792,414 29,565 7.50%
Real estate construction 37,778 1,286 6.85%
Real estate residential 353,975 7,976 4.51%
Consumer 509,156 13,802 5.45%
--------------------------
Total loans 2,275,444 70,159 6.20%
--------------------------
Total earning assets 4,167,210 118,988 5.73%
Other assets 299,757
-------------
Total assets $4,466,967
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,117,566$1,232,714 $-- --
Savings and interest-bearing
transaction 1,522,540 1,950 0.52%1,612,498 2,338 0.29%
Time less than $100,000 318,043 1,526 1.95%278,099 1,959 1.42%
Time $100,000 or more 348,780 1,431 1.66%340,088 1,849 1.09%
--------------------------
Total interest-bearing deposits 2,189,363 4,907 0.91%2,230,685 6,146 0.55%
Short-term borrowed funds 348,479 851 0.98%
--------------------------573,612 2,416 0.84%
Federal Home Loan Bank advances 170,000 1,575 3.72%advance 48,306 898 3.67%
Debt financing and notes payable 22,430 404 7.18%21,983 651 5.93%
--------------------------
Total interest-bearing liabilities 2,730,272 7,737 1.14%2,874,586 10,111 0.70%
Other liabilities 38,89440,192
Shareholders' equity 315,132319,475
-------------
Total liabilities and shareholders' equity $4,201,864$4,466,967
=============
Net interest spread (1) 5.24%5.03%
Net interest income and interest margin (2) $54,062 5.58%$108,877 5.24%
==========================
Page 16
For the six months ended
June 30, 2003
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $633 $5 1.58%
Investment securities:
Available for sale
Taxable 745,824 16,544 4.44%
Tax-exempt 305,084 11,606 7.61%
Held to maturity
Taxable 245,021 3,537 2.89%
Tax-exempt 260,219 9,469 7.28%
Loans:
Commercial
Taxable 368,184 10,588 5.80%
Tax-exempt 202,912 7,405 7.36%
Commercial real estate 931,046 37,156 8.05%
Real estate construction 45,999 1,677 7.35%
Real estate residential 334,253 9,028 5.40%
Consumer 517,360 16,517 6.44%
--------------------------
Total loans 2,399,754 82,371 6.92%
--------------------------
Total earning assets 3,956,535 123,532 6.28%
Other assets 296,590
-------------
Total assets $4,253,125
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,124,087 $-- --
Savings and interest-bearing
transaction 1,529,851 3,724 0.49%
Time less than $100,000 314,988 2,869 1.84%
Time $100,000 or more 369,755 2,785 1.52%
--------------------------
Total interest-bearing deposits 2,214,594 9,378 0.85%
Short-term borrowed funds 365,578 1,812 1.00%
Federal Home Loan Bank advance 170,000 3,167 3.76%
Debt financing and notes payable 21,911 789 7.26%
--------------------------
Total interest-bearing liabilities 2,772,083 15,146 1.10%
Other liabilities 37,214
Shareholders' equity 319,741
-------------
Total liabilities and shareholders' equity $4,253,125
=============
Net interest spread (1) 5.18%
Net interest income and interest margin (2) $108,386 5.51%
==========================
(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.
Page 15
For the three months ended
December 31, 2003
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $956 $2 0.83%
Investment securities:
Available for sale
Taxable 1,012,155 10,156 4.01%
Tax-exempt 314,104 5,856 7.46%
Held to maturity
Taxable 113,107 879 3.11%
Tax-exempt 410,108 6,868 6.70%
Loans:
Commercial:
Taxable 353,914 4,884 5.47%
Tax-exempt 222,457 3,847 6.86%
Commercial real estate 826,792 16,062 7.71%
Real estate construction 40,140 706 6.98%
Real estate residential 347,994 4,075 4.68%
Consumer 494,420 7,185 5.77%
--------------------------
Total loans 2,285,717 36,759 6.26%
--------------------------
Total earning assets 4,136,147 60,520 5.81%
Other assets 315,276
-------------
Total assets $4,451,423
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,243,860 $-- --
Savings and interest-bearing
transaction 1,655,264 1,510 0.36%
Time less than $100,000 294,904 1,087 1.46%
Time $100,000 or more 348,405 1,025 1.17%
--------------------------
Total interest-bearing deposits 2,298,573 3,622 0.63%
Short-term borrowed funds 418,896 856 0.80%
Federal Home Loan Bank advances 105,000 979 3.65%
Debt financing and notes payable 19,804 306 6.18%
--------------------------
Total interest-bearing liabilities 2,842,273 5,763 0.80%
Other liabilities 37,081
Shareholders' equity 328,209
-------------
Total liabilities and shareholders' equity $4,451,423
=============
Net interest spread (1) 5.01%
Net interest income and interest margin (2) $54,757 5.26%
==========================
(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.
Page 1617
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,June 30, 2004
compared with three months
ended March 31,June 30, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($0) (2) ($3) ($3)2)
Investment securities:
Available for sale
Taxable 3,853 (470) 3,38324 (510) (486)
Tax-exempt 138 (165) (27)($197) (268) (465)
Held to maturity
Taxable (1,354) (104) (1,458)$1,278 1,210 2,488
Tax-exempt 3,034 (294) 2,740$1,964 (470) 1,494
Loans:
Commercial:Commercial
Taxable (276) (147) (423)($225) (363) (588)
Tax-exempt 551 (384) 167$533 (210) 323
Commercial real estate (2,502) (1,379) (3,881)($2,658) (1,052) (3,710)
Real estate construction (187) (14) (201)(97) (93) (190)
Real estate residential 251 (841) (590)282 (744) (462)
Consumer (128) (1,258) (1,386)(53) (1,214) (1,267)
---------------------------------------
Total loans (2,291) (4,023) (6,314)(2,218) (3,676) (5,894)
---------------------------------------
Total earning assets 3,380 (5,059) (1,679)851 (3,716) (2,865)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 114 (841) (727)90 (747) (657)
Time less than $100,000 (145) (377) (522)(154) (233) (387)
Time $100,000 or more (23) (482) (505)(163) (269) (432)
---------------------------------------
Total interest-bearing deposits (54) (1,700) (1,754)(227) (1,249) (1,476)
---------------------------------------
Short-term borrowed funds 412 (132) 280503 (180) 323
Federal Home Loan Bank advances (663) (16) (679)advance 0 (1,590) (1,590)
Debt financing and notes payable 6 (75)1 (70) (69)
---------------------------------------
Total interest-bearing liabilities (299) (1,923) (2,222)277 (3,089) (2,812)
---------------------------------------
Increase (Decrease) in Net Interest Income $3,679$574 ($3,136) $543627) ($53)
=======================================
Page 1718
ThreeSix months ended March 31,June 30, 2004
compared with threesix months
ended December 31,June 30, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0(1) (3) ($2) ($2)4)
Investment securities:
Available for sale
Taxable 242 886 1,1283,809 (943) 2,866
Tax-exempt (105) 29 (76)(68) (289) (357)
Held to maturity
Taxable (141) 120 (21)212 851 1,063
Tax-exempt (55) (5) (60)4,998 (898) 4,100
Loans:
Commercial:Commercial
Taxable (174) 112 (62)(500) (485) (985)
Tax-exempt 105 18 1231,081 (559) 522
Commercial real estate (595) (611) (1,206)(5,162) (2,429) (7,591)
Real estate construction (33) 12 (21)(280) (111) (391)
Real estate residential (39) (56) (95)534 (1,586) (1,052)
Consumer 180 (288) (108)(185) (2,530) (2,715)
---------------------------------------
Total loans (556) (813) (1,369)(4,512) (7,700) (12,212)
---------------------------------------
Total earning assets (615) 215 (400)4,438 (8,982) (4,544)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (59) (228) (287)204 (1,590) (1,386)
Time less than $100,000 (58) (25) (83)(300) (610) (910)
Time $100,000 or more (34) (65) (99)(200) (736) (936)
---------------------------------------
Total interest-bearing deposits (151) (318) (469)(296) (2,936) (3,232)
---------------------------------------
Short-term borrowed funds 229 46 275915 (311) 604
Federal Home Loan Bank advances (88) 5 (83)advance (2,245) (24) (2,269)
Debt financing and notes payable 37 (8) 296 (144) (138)
---------------------------------------
Total interest-bearing liabilities 27 (275) (248)(1,620) (3,415) (5,035)
---------------------------------------
DecreaseIncrease in Net Interest Income $6,058 ($642) $490 ($152)5,567) $491
=======================================
Page 19
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 managereduce credit costs by enforcing
underwriting and administration procedures and aggressively pursuing collection
efforts with troubled debtors. The Company provided $750 thousand and $900
thousand for loan losses in the firstsecond quarter of 2004 and the fourth quarter of 2003, compared with $900 thousand inrespectively.
For the first quartersix months of 2003.2004 and 2003, $1.5 million and 1.8 million were
provided in each respective period. The provision reflects management's
assessment of credit risk in the loan portfolio for each of the periods
presented. For further information regarding net credit losses and the allowance
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 ---------------------------------------
March 31,
--------------------------December 31,Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------
Service charges on deposit accounts $6,868 $6,425 $6,572$7,360 $6,648 $14,228 $13,073
Merchant credit card fees 825 862 864909 900 1,735 1,762
ATM fees and interchange 583 560 573643 601 1,226 1,161
Debit card fees 549 494 512
Check sale income 294 244 294
Trust638 563 1,187 1,057
Other service fees 250 238 235463 380 856 749
Financial services commissions 187 207 227
Mortgage banking income 133 226 139360 210 547 418
Trust fees 258 277 508 516
Official check sales income 127 133 120137 132 264 266
Mortgage banking income 131 301 263 527
Gains on sale of foreclosed property 223 2 288 7 231 10
Securities gains 1,788 15 0395 277 2,183 293
Loss on extinguishment of debt (1,814)(390) 0 (2,204) 0
Other noninterest income 853 969 928
---------------------------------------749 740 1,502 1,579
----------------------------------------------------
Total $10,866 $10,375 $10,492
=======================================$11,661 $11,036 $22,526 $21,411
====================================================
Noninterest income for the firstsecond quarter of 2004 rose by $491was $11.7 million, up $625
thousand or 4.7%5.7% from the same period in 2003. IncludedThe largest contributing factor
was service charges on deposits (up $712 thousand or 10.7%), mainly the net
result of enhanced overdraft programs, and declining income from account
analysis deficit fees and fees collected on deposited items returned. The second
largest factor was a $150 thousand or 71.4% increase in financial services
commission income resulting from higher sales of variable and fixed annuities
and mutual funds. Securities gains were higher by $118 thousand or 42.6%.
Mortgage banking income declined $170 thousand or 56.5% largely due to losses on
mortgage loan sales. In the second quarter of 2004, a $390 thousand loss on
extinguishment of debt was incurred in order to prepay $20 million in FHLB
advances, compared with none a year ago.
Noninterest income for the first half of 2004 was $22.5 million, up $1.1 million
or 5.2% from 2003. As in the currentquarter-to-quarter comparison, the primary
contributing factor was a $1.2 million or 8.8% increase in service charges on
deposits, the net result of repricing of retail checking services and
enhanced overdraft programs, combined with lower income from account analysis
and returned items. The next largest factor was a $221 thousand increase in
gains on foreclosed properties due to a sale in the first quarter of 2004. Debit
card fees rose $130 thousand or 12.3% due to increased usage. A $129 thousand or
30.9% increase in financial services income was mainly attributable to higher
sales of variable and fixed annuities and mutual funds. Other service fees rose
$107 thousand or 14.3% mostly due to increases in income from wire transfers and
internet banking. Mortgage banking income declined $264 thousand or 50.1% due to
lower loan activity and losses from mortgage loan sales. In 2004, $2.2 million
in losses on extinguishment of debt was incurred as a result of prepayment of
$105 million in FHLB advances, compared with none in the same period are $1.8of 2003. In
2004, $2.2 million in securities gains and a $1.8 million lossoffset above-mentioned losses on the
extinguishment of $85 million
of FHLB advances.debt, compared with $293 thousand in securities gains in
2003. For details of securities gains and losses on extinguishment of FHLB
advances, see the "Asset and Liability Management" section of this report below.
Service charges on deposit accounts increased $443 thousand or
6.9% mostly due to repricing of checking services which became effective in
Page 18
February of 2004 and an expanded debit card overdraft program which became
effective in January of 2004. Gains on sale of foreclosed properties were
higher by $221 thousand than in the first quarter of 2003. Other noninterest
income decreased by $116 thousand or 12.0% mostly due to a $118 thousand gain
on sale of the former Westamerica Kerman branch building in the first quarter
of 2003.
In the first quarter of 2004, noninterest income increased $374 thousand or
3.6% compared with the previous quarter. The largest positive contributor was
service charges on deposit accounts, which increased $296 thousand or 4.5%.
Such service charge income rose because of new pricing affecting overdraft and
DDA activity charges implemented in the first quarter of 2004 and annual IRA
fees collected in the first quarter of 2004. Gains on sale of foreclosed
properties were higher by $195K than in the fourth quarter of 2003. The first
quarter of 2004 included $1.8 million securities gains and a $1.8 million loss
to retire $85 million of FHLB advances, as discussed above and elsewhere in
this report. Other noninterest income declined $75 thousand or 8.1% largely
due to $115 thousand proceeds received in the fourth quarter of 2003 from the
demutualization of the life insurance company with which the Company has
policies.20
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,Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------
Salaries and incentives $10,362 $10,512 $10,394
Employeerelated benefits 3,164 3,186 2,790$13,332 $13,598 $26,858 $27,296
Occupancy 2,948 2,995 3,037
Equipment 1,162 1,374 1,2902,944 3,044 5,892 6,039
Data processing services 1,517 1,559 1,5231,521 1,518 3,038 3,077
Equipment 1,273 1,381 2,435 2,755
Courier service 884 929 900888 926 1,772 1,855
Telephone 572 425 530
Postage 395 420 422535 423 1,107 848
Professional fees 409 413 486511 457 921 870
Postage 364 401 758 821
Stationery and supplies 309 308 597 626
Loan expense 295 380 550 656
Advertising/public relations 290 311 505 532
Merchant credit card 272 342 207
Stationery and supplies 288 318 344
Loan expense 255 276 326
Customer checks 197 246 264268 316 541 658
Correspondent service chargesService Charges 239 243 224
Advertising/public relations 215 220 291236 478 480
Operational losses 243 173 297
Employee recruiting 47 42 37
Foreclosed property expense 2 1 32238 228 481 401
Amortization of deposit intangibles 136 249 165 272 414
Other noninterest expense 1,685 1,612 1,599
---------------------------------------1,847 1,784 3,777 3,683
----------------------------------------------------
Total $24,992 $25,535 $25,158
=======================================$24,990 $25,476 $49,982 $51,011
====================================================
Average full time equivalent staff 1,001 1,047 1,007995 1,033 998 1,040
Noninterest expense to revenues (FTE) 38.17% 39.63% 38.56%37.90% 38.98% 38.04% 39.30%
Noninterest expense decreased $543 thousand or 2.1% infor the firstsecond quarter of 2004 comparedwas $25.0 million, $486
thousand or 1.9% lower than in the second quarter of 2003. The largest decline
was in salaries and related benefits, which were down $266 thousand or 2.0%. The
reduction was primarily due to lower incentives and a decrease in salaries as a
result of a decline in the number of full time equivalent ("FTE") employees,
partially offset by higher workers compensation expense. Equipment expense fell
by $108 thousand or 7.8% due to lower depreciation and maintenance costs.
Occupancy expense fell $100 thousand or 3.3% due to the samecombined effect of lower
utility costs, a decline in maintenance expenses and an increase in rental of
bank offices. Telephone expense increased $112 thousand or 26.5% due to network
upgrades.
Noninterest expense was $50.0 million for the first half of 2004, which was $1.0
million or 2.0% less than in the corresponding period inof 2003. The largest
decrease was equipment
expense, which was down $212salaries and related benefits (down $438 thousand or 15.4% due to a $129 thousand decrease
in depreciation and lower spending on hardware and software maintenance.
Salaries and incentives were down $150 thousand or 1.4% due to lower regular
salaries and a decrease in incentive payments. A $96 thousand drop in regular
salary was attributable to a smaller workforce, partially offset by annual
merit increases in salaries. Amortization of deposit intangibles fell by $113
thousand or 45.4% due to expiration of purchase premium amortization. The
largest increase in expenditures was telephone expense, which rose $147
thousand or 34.6% due to increased line charges necessitated by a major
upgrade in the Company's electronic network.
In the first three months of 2004, noninterest expense declined $166 thousand
or 0.7% compared with the fourth quarter of 2003. Equipment expense declined
$128 thousand or 9.9% primarily because the prior quarter included purchases
of incidental equipment including security equipment, fraud detection devices
and office furniture. Depreciation expense increased for the electronic
upgrade in the first quarter of 2004. Employee benefits rose by $374 thousand
largely1.6%), the net
result of a seasonaldecline in incentives, a decrease in regular salary due to a fewer
number of FTE employees and an increase in payroll taxes.workers compensation insurance costs.
Equipment expense fell by $320 thousand or 11.6% from 2003 mainly due to lower
depreciation and maintenance costs. Lower amortization of deposit intangibles
(down $142 thousand or 34.3%) was caused by the expiration of amortization from
a purchase premium recorded in 1997. Merchant credit card expense declined $117
thousand or 17.8% attributable to overcharges for the period from January
through April of 2003 and to lower rates negotiated in October of 2003. Loan
expense fell $106 thousand or 16.2% compared with the same period of 2003.
Telephone expense increased $259 thousand or 30.5% due to network upgrades.
Provision for Income Tax
During the firstsecond quarter of 2004, the Company recorded an income tax expenseprovision
(FTE) of $15.4$15.5 million, $425$235 thousand or 2.8%(1.5%) higher than the firstsecond quarter of
2003; on a year-to-date basis, the income tax provision (FTE) was $31.0 million
for 2004 compared to $30.3 million for 2003. The current quarter provision
represents an effective tax rate of 38.7%, compared to 39.4% and 38.2%39.3% for the second
quarter of 2003; for the first and fourth quarterssix months of 2003,
respectively.
Page 192004, the effective tax rate was
38.7%, compared to 39.4% recorded in 2003. The change in the provision for income taxes for
all periods presented is primarily attributable to the respective levelslevel of
earnings and the incidence of allowable deductions and tax credits, earnedparticularly
those generated from low-income housing investments which increased $222 thousand in the first quarter of 2004 over
the same period last year and decreased $270 thousand from the fourth quarter
of 2003.investments.
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. 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. Repossessed
collateral is recorded at the lower of cost or market.
Page 21
The following is a summary of classified loans and repossessed collateral on the
dates indicated (dollars in thousands):
At March 31,June 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Classified loans $22,965 $32,505$21,495 $27,324 $23,460
Repossessed collateral 80 880 1,888 90
---------------------------------------
Classified loans and repossessed collateral $23,045 $32,593$21,495 $29,212 $23,550
=======================================
Allowance for loan losses /
classified loans 234% 167%251% 198% 230%
Classified loans at March 31,June 30, 2004, decreased $9.5$5.8 million or 29.3%21.3% from a
year ago, primarily due to upgrades, payoffsJune 30,
2003, reflecting the effectiveness of the Company's high underwriting standards
and chargeoffs, partially reducedactive workout policies. Most repossessed collateral had been sold by new downgrades. Repossessed collateral declined $8 thousand or 9.1% from
March 31,the
end of 2003, primarily the net result of additions of six propertiesand one remaining parcel was sold in 2004. Compared with a
total carrying value of $1.8 million, partially reduced by sales of five
properties totaling $1.5 million and $299 thousand in principal reductions. A
$495 thousand decline inyear-end
2003, classified loans from December 31, 2003 was mainlydeclined $2.0 million or 8.4% due to payoffs, upgrades
and chargeoffs, partly offset by new downgrades.
Repossessed collateral declined $10 thousand or 11.1% from December 31 due to
a sale of a foreclosed property valued at $10 thousand.
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 become 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 loans and OREOrepossessed collateral on
the dates indicated (dollars in thousands):
At March 31,June 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Performing nonaccrual loans $2,212 $2,471$2,233 $1,353 $1,658
Nonperforming, nonaccrual loans 5,045 6,4024,695 5,484 5,759
---------------------------------------
Total nonaccrual loans 7,257 8,8736,928 6,837 7,417
Loans 90 days past due and
still accruing 190 320202 386 199
---------------------------------------
Total nonperforming loans 7,447 9,1937,130 7,223 7,616
Other real estate owned 80 88Repossessed collateral 0 1,888 90
---------------------------------------
Total $7,527 $9,281nonperforming loans and
repossessed collateral $7,130 $9,111 $7,706
=======================================
Allowance for loan losses /
nonperforming loans 723% 589%757% 750% 708%
Performing nonaccrual loans at March 31, 2004 decreased $259 thousand or 10.5%
from a year ago as a result of charge-offs, loans being returned to accrual
status and loans being placed on nonperforming nonaccrual, offset by new loans
placed on nonaccrual. Performing nonaccrual loans at March 31,June 30, 2004 increased Page 20
$554$880 thousand or 33.4%(65.0%)
from the same date in the previous year and rose $575 thousand (34.7%) from
December 31, 2003. The increase in both periods was due to new loans placed onin
performing nonaccrual status, partially offset by charge-offs, loans being returned to accrual statuspayoffs and loans being
placed on nonperforming nonaccrual.chargeoffs.
Nonperforming nonaccrual loans at March 31,June 30, 2004 decreased $1.4$789 thousand or 14.4%
from the same period a year ago and $1.1 million or 21.2% and $714 thousand or 12.4%18.5% from the previous year and December 31, 2003,
respectively.year-end, 2003.
The increase was due to the net result ofdecrease resulted from loans being added to
nonaccrual, partially offset by others being returned to full-accrual status or being
charged off or paid off.off, partially offset by loans being added to nonperforming
nonaccrual status.
Changes in repossessed collateral are discussed above.
The Company had no restructured loans as of March 31, 2004, 2003 and December
31, 2003.
The amount of gross interest income that would have been recorded for nonaccrual
loans for the three monthsand six month periods ended March 31,June 30, 2004, if all such loans
had been currentperformed in accordance with their original terms, was $120$111 thousand and
$231 thousand, respectively, compared to $163$142 thousand and $113$305 thousand,
respectively, for the second quarter and the first and
fourth quartershalf of 2003.
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 March 31,June 30, 2004, totaled $64$102 thousand and
$167 thousand, respectively, compared to $71$146 thousand and $78$217 thousand,
respectively, for the first and fourth
quarters ofcomparable periods in 2003. These cash payments represent
annualized yields of 3.62%5.98% and 4.78%, respectively, for the second quarter and
the first threesix months of 2004 compared to 3.28%7.35% and 4.54%5.22%, respectively, for the
firstsecond quarter and the fourth quarterfirst half of 2003.
Page 22
Total cash payments received including those recorded in prior years,during the second quarter of 2004 which were
applied against the book balance of nonaccrual loans outstanding at March
31,June 30,
2004, totaled approximately $26 thousand, compared with $184 thousand and
$47$72 thousand. Cash payments received totaled $98
thousand for the first and the fourth quarters of 2003, respectively.six months ended June 30, 2004.
Management believes the overall credit quality of the loan portfolio continues
to be strong; however, 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, economic conditions or factors
particular to the borrower. No assurance can be given 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 specific impaired loans. As of the date of this report,
Management considers the $53.8$53.9 million allowance for loan losses, which
constituted 2.32%2.33% of total loans at March 31,June 30, 2004, 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,Six months ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------
Balance, beginning of period $53,835 $54,154 $53,910 $54,227 $54,180
Loan loss provision 750 900 7501,500 1,800
Loans charged off (1,558) (2,028) (1,542)(1,324) (1,841) (2,882) (3,869)
Recoveries of previously
charged off loans 732 1,055 522
---------------------------------------688 946 1,421 2,001
----------------------------------------------------
Net credit losses (826) (973) (1,020)
---------------------------------------(636) (895) (1,461) (1,868)
----------------------------------------------------
Balance, end of period $53,834 $54,154 $53,910
=======================================$53,949 $54,159 $53,949 $54,159
====================================================
Allowance for loan losses /
loans outstanding 2.32% 2.20% 2.32%2.33% 2.25%
Page 21
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 Company actively solicits loans
and transaction deposit accounts. Asset and liability management techniques
include adjusting the duration, liquidity, volume, rates and yields, and other
attributes of its loan products, investment portfolios, deposit products, and
other funding sources to achieve Company objectives.
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 rate scenario where the Fed Funds
rate is made to rise evenly by 200 bp, and a falling rate scenario of 50 bp 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,June 30, 2004 would not result in a fluctuation of NII
that would exceed the parameters established by Company policy.
Page 23
A variety of factors affect the timing and magnitude of interest rate changes
such as general economic conditions, fiscal policy, monetary policy, political
developments, terrorism, and a variety of other factors. Given current
conditions, the Company is anticipating rising rates, although the timing of
increasing rates remains uncertain. The Company generally maintains an interest
rate risk position near neutral, such that changing interest rates will not
cause significant changes in net interest income.
During the first quarterhalf of 2004, the Company sold $144.8$195.2 million of
available-for-sale securities to reduce the average duration of the securities
portfolios in a rising rate environment. The Company realized securities gains
of $1.8$2.2 million from these sales. Also, during the first quarter of 2004,same period, the Company
retired $85$105 million in FHLB advances with a weighted average interest rate of
3.63%3.67% in an effort to reduce its aggregate cost of funds. The majority of the
retired FHLB advances had scheduled maturity dates prior to January 15, 2005,
while others had scheduled maturity dates ranging from May to August 2005.
Losses totaling $1.8$2.2 million were incurred to retire the FHLB advances prior to
their scheduled maturity dates.
Liquidity
The Company's principal source of asset liquidity is marketable investment
securities available for sale. At March 31,June 30, 2004, investment securities available
for sale totaled $1,219$1,025 million, representing a decrease of $195$389 million from
December 31, 2003. In addition, at March 31,June 30, 2004, the Company had customary
lines for overnight borrowings from other financial institutions in excess of
$500 million and a $10 million line of credit under which $5.9
millionno amount was
outstanding. Additionally, as a member of the Federal Reserve System, the
Company has access to borrowing from the Federal Reserve. The Company's
short-term debt rating from Fitch Ratings is F1 with a stable
outlook.F1. Management expectsexpexts the
Company can access short-term debt financing if desired. The Company's
long-term debt rating from Fitch Ratings is A-A with a stable outlook.
Management is confident the Company could access additional long-term
debt financing if desired.
TheIn addition, the Company generates significant liquidity from its operating
activities. The Company's profitability during the first threesix months of 2004 and
2003 generated substantial cash flows of $36.3$54.7 million and $37.0$58.8 million,
respectively.respectively, which are included in the totals provided from operations.
Additional cash flows may be provided by financing activities, primarily the
acceptance of deposits and borrowings from banks. In the first six months of
2004, operating activities provided cash for $28.7$36.4 million of Company stock
repurchases and $8.4$17.3 million in shareholder dividends. In the same period of
2003 operating cash flows were more than sufficient to pay shareholder
dividends, repay long term obligations, and repurchase common stock,
collectively totaling $34$47.2 million.
In 2004, the Company generated $179.4used $64.2 million from its investing activities. SalesPurchases
of securities, net of sales and maturities, netwere $65.4 million. The investment
securities portfolio increase was generally financed by a $41.4 million increase
in deposits and $121.9 million of purchases were $180.5 million, whichnew short-term borrowings. The remaining
proceeds were used to reduce short-term borrowings by $98.9 million and to prepay $85 millionrepay FHLB advances.
In 2003, purchases of investment securities, net of sales and maturities of investment
securities were
$180$322.2 million, which was in part offset by net repayments of loans of $37$84.2
million. The investment securities portfolio increase was generally financed by
a $36$159.6 million increase in deposits and $66$43.6 million of new short-term
borrowings.
The Company anticipates that loan demand will continue to increase moderately in
2004, consistent with economic conditions. The growth of deposit balances is
expected to exceed the anticipated growth in loan demand during the period.
Depending on economic conditions, interest rate levels, and a variety of other
conditions, excess deposit growth will be used to purchase investment securities
or to reduce short-term borrowings.
Westamerica Bancorporation ("the Parent Company") is separate and apart from
Westamerica Bank ("the Bank") and must provide for its own liquidity. In
addition to its operating expenses, the Parent Company is responsible for the
payment of dividends to its shareholders, and interest and principal payments on
Page 22
outstanding senior debt. Substantially all of the Parent Company's revenues are
obtained from service fees and dividends received from the Bank. Payment of such
dividends to the Parent Company by the Bank is limited under regulations for
Federal Reserve member banks and California law. The amount that can be paid in
any calendar year, without prior approval from federal and state regulatory
agencies, cannot exceed the net profits (as defined) for that year plus the net
profits of the preceding two calendar years less dividends paid. The CompanyManagement
believes that such restrictions will not have an impact on the Parent Company's
ability to meet its ongoing cash obligations.
Page 24
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 repurchases shares of its 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, other
programs have been implemented to optimize the Company's use of equity capital
and enhance shareholder value. Pursuant to these programs, the Company
collectively repurchased 574732 thousand shares and 689 thousand shares in the
first quartersix months of 2004 568
thousand shares in the first quarter ofand 2003, and 530 thousand in the fourth
quarter of 2003.respectively.
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 $338.6$329.8 million at March 31, 2004.June 30, 2004
compared to $357.3 million at June 30, 2003. This amount, which is reflective of
the effect of common stock repurchases, and
dividends paid to shareholders and other
comprehensive loss, offset by the generation of earnings and proceeds from the
issuance of stock, represents an increasea decrease of $1.6$27.5 million or 0.5%7.7% from a year
ago, and a decrease of $1.8$10.6 million or 0.5%3.1% from December 31, 2003. Despite an increase in shareholders' equity, theThe
Company's ratio of equity to total assets fell to 7.65%7.15% at March 31,June 30, 2004, from
7.68%7.83% a year ago primarily due to lower equity which was reduced by depreciation
in the available for sale investment portfolio of $23 million, net of tax, and,
to a lesser extent, asset growth. The equity to assets ratio was 7.44% on
December 31, 2003.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At March 31,June 30, At Minimum
--------------------------December 31, Regulatory
2004 2003 2003 Requirement
----------------------------------------------------
Tier I Capital 9.89% 9.45%10.37% 10.06% 10.13% 4.00%
Total Capital 11.25% 10.71%11.78% 11.32% 11.39% 8.00%
Leverage ratio 6.63% 7.00%6.89% 7.17% 6.85% 4.00%
The risk-based capital ratios improved at March 31,June 30, 2004, compared with the prior
year primarily due to a change in mix of risk-weighted assets. The leverage
ratio fell mainly because of asset growth.
When compared with the 2003 year-end, the risk-based capital ratios rose mainly
due to the effect of lower risk-weighted assets. The leverage ratio increased
slightly, the net result of an increase in the total level of tangible
(excluding goodwill and purchase premiums) capital, and a change in mix of
risk-weighted assets. The leverage ratio fell because of asset growth.
When compared with the 2003 year-end, the capital and leverage ratios
declined, the net result of the effect of common stock repurchases and lower
retained earnings, partially offset by the
effect of lower risk-weighted
assets.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 anticipated future needs. All ratios as shown in the table above are
in excess of the regulatory definition of "well capitalized".
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk, even though such
activities may be permitted with the approval of the Company's Board of
Directors.
Interest rate risk as discussed above is the most significant market risk
affecting the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, are not
significant in the normal course of the Company's business activities.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer
have evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-14(c)13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended, as of March 31,June 30, 2004. Based upon
their evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective. There were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls,
since the date the controls were evaluated.
Page 2325
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of the banking business, the Company's
Subsidiary Bank 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 Bank.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
(a) None
(b) None
(c) None
(d) None
(e) Issuer Purchases of Equity Securities
The table below sets forth the information with respect to
purchases made by or on behalf of Westamerica Bancorporation or
any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under
the Securities Exchange Act of 1934), of common stock during the
quarter ended March 31,June 30, 2004 (in thousands, except per share
data).
(c) (d)
Total Maximum
Number Number
of Shares of Shares
(b) Purchased that May
(a) Average as Part of Yet Be
Total Price Publicly Purchased
Number of Paid Announced Under the
Shares per Plans Plans or
Period Purchased Share or Programs* Programs
--------------------------------------------------------------------------------------------------------------------------------
JanuaryApril 1
through
January 31 151 $49.58 151 1,316
---------------------------------------------------------------
FebruaryApril 30 128 $49.31 128 765
-----------------------------------------------------------------
May 1
through
February 29 275 50.06 275 1,041
---------------------------------------------------------------
MarchMay 31 27 48.20 27 738
-----------------------------------------------------------------
June 1
through
March 31 148 49.84 148 893
---------------------------------------------------------------June 30 3 52.61 3 735
-----------------------------------------------------------------
Total 574 $49.88 574 893
===============================================================158 $49.19 158 735
=================================================================
* Includes 1 thousand, 6 8thousand and 23 thousand shares purchased
in January, FebruaryApril, May and March,June, respectively, by the Company in private
transactions with the independent administrator of the Company's
Tax Deferred Savings/Retirement Plan (ESOP). The Company includes
the shares purchased in such transactions within the total number
of shares authorized for purchase pursuant to the currently
existing publicly announced program.
The Company repurchases shares of its common stock in the open
market to optimize the Company's use of equity capital and
enhance shareholder value and with the intention of lessening the
dilutive impact of issuing new shares to meet stock performance,
option plans, and other ongoing requirements.
On August 28, 2003,Shares were repurchased during the second quarter of 2004
pursuant to a program approved by the Board of Directors authorizedon
August 28, 2003 authorizing the purchase of up to two2 million
shares of the Company's common stock from time to time prior to
September 1, 2004.
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 22,
2004, were solicited pursuant Regulation 14A of the Securities
Exchange Act of 1934. The Report of Inspector of election
indicates that 27,683,886 shares of the Common Stock of the
Company, out of 33,033,165 shares outstanding on February 23,
2004 the record date, were present, in person or by proxy, at the
meeting. With the exception of item No.2, below, there were no
"broker non-votes" on the following matters because they were
considered "routine" and therefore, on those matters, brokers
were able to vote shares for which no direction was provided by
the beneficial owner. The following matters were submitted to a
vote of the shareholders:
Page 26
1. - Election of directors:
For Withheld
---------- ----------
Etta Allen 27,319,094 364,792
Louis E. Bartolini 27,237,087 446,799
E.J. Bowler 27,380,828 303,058
Arthur C. Latno, Jr. 27,321,448 362,438
Patrick D. Lynch 27,230,985 452,901
Catherine C. MacMillan 27,332,564 351,322
Ronald A. Nelson 27,375,699 308,186
Carl R. Otto 27,343,148 340,738
David L. Payne 27,316,428 367,457
Edward B. Sylvester 27,379,732 304,153
Shareholders were to cast their vote for or to withhold their
vote.
2. - Ratification of independent registered public accounting
firm.
A proposal to ratify the selection of KPMG LLP as
independent registered public accountants for the Company
for 2004.
For : 27,212,320
Against : 296,815
Abstain : 174,751
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibit 3 (ii): By-laws, as amended (composite copy) Exhibit 11: Computation of Earnings Per Share on Common
and Common Equivalent Shares and on Common
Shares Assuming Full Dilution
Page 24
Exhibit 31.1: Certification of Chief Executive
Officer pursuant to Securities
Exchange Act Rule 13a-(14)(a)
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-(14)(a)
Exhibit 32.1: Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2: Certification of Chief Financial Officer
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 January 26,April 16, 2004, the Company filed a Report on Form 8-K
with respect to item 12, therein, reporting fourthfirst quarter,
20032004 financial results. Included in the report was a press
release dated January 20,April 13, 2004.
Page 2527
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)
May 10,August 6, 2004 /s/ DENNIS R. HANSEN
- -------------- --------------------
Date Dennis R. Hansen
Senior Vice President
and Controller
(Chief Accounting Officer)
Pages 26-42
Exhibit 3 (ii)
By-laws, as amended (composite copy)
Page 43
Exhibit 11
WESTAMERICA BANCORPORATION
Computation of Earnings Per Share on Common and
Common Equivalent Shares and on Common Shares
Assuming Full Dilution
For the three months
ended March 31,
(In thousands, except per share data) 2004 2003
--------------------------
Weighted average number of common
shares outstanding - basic 32,051 33,110
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 611 455
--------------------------
Weighted average number of common
shares outstanding - diluted 32,662 33,565
==========================
Net income $24,314 $23,012
Basic earnings per share $0.76 $0.70
Diluted earnings per share $0.74 $0.69