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 Junethe quarterly period ended September 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) 863-6000
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 registrantissuer's classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of August 4,November 2, 2004
Common Stock, 31,715,54531,843,961
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 DisclosuresDisclosure about Market Risk 2426
Item 4 - Controls and Procedures 2426
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 2526
Item 2 - Changes inUnregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases
Equity Securities 2526
Item 3 - Defaults upon Senior Securities 2527
Item 4 - Submission of Matters to a Vote of Security Holders 2527
Item 5 - Other Information 2627
Item 6 - Exhibits and Reports on Form 8-K 26
(a) - Exhibits27
Exhibit 11 - Computation of Earnings Per Share 2829
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to 30
Securities Exchange Act Rule 13a-(14)(a) 2913a-14(a) and 15d-14(a)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to 31
Securities Exchange Act Rule 13a-(14)(a) 3013a-14(a) and 15d-14(a)
Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 3132
Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 32
(b) - Reports on Form 8-K 2633
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; (7) operational risks including data processing system failures or
fraud; (8) the effect of acquisitions and integration of acquired businesses;businesses
including those related to our pending acquisition of Redwood Empire Bancorp;
(9) volatility of rate sensitive deposits and assets; (10) asset/liability
matching risks and liquidity risks; (11) compliance costs associated with the
Company's internal control structure and (11)procedures for financial reporting;
and (12) 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 and Registration Statement on Form S-4 dated
October 15, 2004, 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.PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
(unaudited)
At JuneSeptember 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Assets:
Cash and cash equivalents $185,522 $201,560$165,277 $189,269 $189,628
Money market assets 534 633 534
Investment securities available for sale 1,024,798 1,251,341967,266 1,245,311 1,413,911
Investment securities held to maturity,
with market values of:
$949,257$1,089,568 at JuneSeptember 30, 2004 960,522
$599,4841,080,392
$575,862 at JuneSeptember 30, 2003 588,231569,996
$542,729 at December 31, 2003 535,377
Loans, gross 2,319,255 2,406,8892,301,991 2,364,418 2,323,330
Allowance for loan losses (53,949) (54,159)(54,388) (54,180) (53,910)
---------------------------------------
Loans, net of allowance for loan losses 2,265,306 2,352,7302,247,603 2,310,238 2,269,420
Repossessed collateral 0 1,888 90
Premises and equipment, net 35,343 36,40835,267 35,566 35,748
Interest receivable and other assets 139,786 131,901 131,677139,732 131,780 131,767
---------------------------------------
Total Assets $4,611,811 $4,564,692$4,636,071 $4,482,793 $4,576,385
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,272,278 $1,194,847$1,323,446 $1,213,578 $1,240,379
Interest bearing:Interest-bearing:
Transaction 569,575 554,568561,206 559,031 561,696
Savings 1,072,701 962,9671,119,356 1,075,625 1,058,082
Time 590,875 741,249641,798 687,895 603,834
---------------------------------------
Total deposits 3,505,429 3,453,6313,645,806 3,536,129 3,463,991
Short-term borrowed funds 712,553 393,287578,285 433,348 590,646
Federal Home Loan Bank advance 0 170,000105,000 105,000
Notes payablePayable 21,429 21,3939,643 24,643
Liability for interest, taxes and
other expenses 42,605 169,07038,627 47,751 51,734
---------------------------------------
Total Liabilities 4,282,016 4,207,3814,284,147 4,131,871 4,236,014
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
31,78431,716 at JuneSeptember 30, 2004 221,896
32,937222,344
32,723 at JuneSeptember 30, 2003 217,236218,703
32,287 at December 31, 2003 218,461
Deferred compensation 2,146 1,824 1,824
Accumulated other comprehensive income:
Unrealized (loss) gain on securities
available for sale, net (1,416) 26,001of tax 8,186 16,004 13,191
Retained earnings 107,169 112,250119,248 114,391 106,895
---------------------------------------
Total Shareholders' Equity 329,795 357,311351,924 350,922 340,371
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,611,811 $4,564,692$4,636,071 $4,482,793 $4,576,385
=======================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
(unaudited)
Three months ended SixNine months ended
JuneSeptember 30, JuneSeptember 30,
2004 2003 2004 2003
----------------------------------------------------
Interest Income:
Loans $33,403 $39,419 $67,425 $79,832$32,911 $37,491 $100,337 $117,324
Money market assets and funds sold 0 2 1 56
Investment securities available for sale
Taxable 8,035 8,521 19,410 16,5447,171 8,632 26,581 25,051
Tax-exempt 3,644 3,915 7,518 7,6863,550 3,922 11,068 11,733
Investment securities held to maturity
Taxable 3,833 1,345 4,600 3,5375,725 697 10,325 4,235
Tax-exempt 4,356 3,397 8,728 6,1194,547 4,216 13,275 10,335
----------------------------------------------------
Total interest income 53,271 56,599 107,682 113,72353,904 54,960 161,587 168,684
----------------------------------------------------
Interest Expense:
Transaction deposits 124 211 236 453163 145 399 598
Savings deposits 992 1,562 2,102 3,271955 1,440 3,057 4,711
Time deposits 1,878 2,697 3,808 5,6542,135 2,400 5,943 8,055
Short-term borrowed funds 1,285 962 2,416 1,8121,473 747 3,890 2,559
Federal Home Loan Bank advance 2 1,5920 1,172 897 3,1674,339
Debt financing and notes payable 316 385 652 789968 1,173
----------------------------------------------------
Total interest expense 4,597 7,409 10,111 15,1465,042 6,289 15,154 21,435
----------------------------------------------------
Net Interest Income 48,674 49,190 97,571 98,57748,862 48,671 146,433 147,249
----------------------------------------------------
Provision for loan losses 600 750 900 1,500 1,8002,100 2,550
----------------------------------------------------
Net Interest Income After
Provision For Loan Losses 47,924 48,290 96,071 96,77748,262 47,921 144,333 144,699
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 7,360 6,648 14,228 13,0737,465 6,735 21,693 19,809
Merchant credit card 909 900 1,735 1,762899 993 2,633 2,755
Financial services commissions 360 210 547 418
Trust income 258 277 508 516409 249 956 666
Mortgage banking 131 301 263 52741 185 304 712
Trust fees 265 245 773 760
Securities (losses) gains 395 277 2,183 293(14) 2,150 2,169 2,443
Loss on extinguishment of debt (390) 0 (2,166) (2,204) 0(2,166)
Other 2,638 2,423 5,266 4,8222,723 2,622 7,990 7,445
----------------------------------------------------
Total Noninterest Income 11,661 11,036 22,526 21,41111,788 11,013 34,314 32,424
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 13,332 13,598 26,858 27,29713,054 13,495 39,912 40,792
Occupancy 2,944 3,044 5,892 6,0393,022 3,076 8,913 9,116
Equipment 1,101 1,319 3,536 4,074
Data processing 1,521 1,518 3,038 3,077
Equipment 1,273 1,381 2,435 2,755
Courier service 888 926 1,772 1,8551,525 1,520 4,563 4,597
Professional fees 511 457 921 870411 529 1,332 1,400
Other 4,521 4,552 9,066 9,1185,378 5,595 16,217 16,567
----------------------------------------------------
Total Noninterest Expense 24,990 25,476 49,982 51,01124,491 25,534 74,473 76,546
----------------------------------------------------
Income Before Income Taxes 34,595 33,850 68,615 67,17735,559 33,400 104,174 100,577
----------------------------------------------------
Provision for income taxes 9,951 10,179 19,657 20,49410,464 9,327 30,121 29,822
----------------------------------------------------
Net Income $24,644 $23,671 $48,958 $46,683$25,095 $24,073 $74,053 $70,755
====================================================
Other Comprehensive Income:
Change in unrealized (loss) gain on
securities available for sale, net (22,629) 5,591 (14,607) 6,8499,602 (9,998) (5,005) (3,148)
----------------------------------------------------
Other Comprehensive Income $2,015 $29,262 $34,351 $53,532$34,697 $14,075 $69,048 $67,607
====================================================
Average Shares Outstanding 31,760 33,000 31,906 33,05431,713 32,770 31,841 32,959
Diluted Average Shares Outstanding 32,343 33,492 32,502 33,52832,352 33,273 32,452 33,442
Per Share Data:
Basic Earnings $0.78 $0.72 $1.53 $1.41$0.79 $0.73 $2.33 $2.15
Diluted Earnings 0.76 0.71 1.51 1.390.78 0.72 2.28 2.12
Dividends Paid 0.28 0.24 0.54 0.480.26 0.82 0.74
See accompanying notes to unaudited condensed consolidated financial statements.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
(unaudited)
Accumulated
Compre-
Common Deferred hensive Retained
Shares Stock Compensation Income/loss Earnings Total
------------------------------------------------------------------------------
Balance, December 31, 2002 33,411 $215,926 $1,272 $19,152 $105,149 $341,499
Net income for the period 46,683 46,68370,755 70,755
Stock issued for stock options 191 3,450 3,450327 5,650 5,650
Stock option tax benefits 1,887 1,8873,514 3,514
Restricted stock activity 24 407 552 959
Purchase and retirement of stock (689) (4,434) (23,695) (28,129)(1,039) (6,794) (37,080) (43,874)
Dividends (15,887) (15,887)(24,433) (24,433)
Unrealized gainloss on securities
available for sale, net 6,849 6,849(3,148) (3,148)
------------------------------------------------------------------------------
Balance, JuneSeptember 30, 2003 32,937 $217,23632,723 $218,703 $1,824 $26,001 $112,250 $357,311$16,004 $114,391 $350,922
==============================================================================
Balance, December 31, 2003 32,287 $218,461 $1,824 $13,191 $106,895 $340,371
Net income for the period 48,958 48,95874,053 74,053
Stock issued for stock options 214 6,166 6,166237 7,084 7,084
Stock option tax benefits 1,826 1,8262,003 2,003
Restricted stock activity 16 467 322 789
Purchase and retirement of stock (733) (5,024) (31,399) (36,423)(824) (5,671) (35,531) (41,202)
Dividends (17,285) (17,285)(26,169) (26,169)
Unrealized loss on securities
available for sale, net (14,607) (14,607)(5,005) (5,005)
------------------------------------------------------------------------------
Balance, JuneSeptember 30, 2004 31,784 $221,89631,716 $222,344 $2,146 ($1,416) $107,169 $329,795$8,186 $119,248 $351,924
==============================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 6
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(unaudited)
For the sixnine months
ended JuneSeptember 30,
--------------------------
2004 2003
--------------------------
Operating Activities:
Net income $48,958 $46,683$74,053 $70,755
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 1,917 2,1392,885 3,105
Amortization of intangibles and other assets 1,148 1,0141,722 1,479
Loan loss provision 1,500 1,800
Amortization2,100 2,550
(Amortization) deferral of deferred net loan origination fees 21 117(46) 148
Decrease in interest income receivable 2,401 362541 300
(Increase) decrease in other assets (4,391) 57,823
Increase (decrease)(4,204) 58,158
(Decrease) increase in income taxes payable 694 2,978(3,494) 3,266
Decrease in interest expense payable (462) (382)(134) (689)
Increase (decrease) in other liabilities 3,115 (53,321)7,383 (51,707)
Gain on sales of investment securities (2,183) (293)(2,169) (2,443)
Loss on extinguishment of debt 2,204 0
Writedown2,166
Net loss on writedown of equipment 9 102140
Originations of loans for resale (3,562) (5,257)
Proceeds(3,622) (7,797)
Net proceeds from sale of loans originated for resale 3,534 5,0073,583 7,949
Net gain on sale of other real estate ownedproperty acquired
in satisfaction of debt (231) (9)(94)
Writedown on property acquired in satisfaction of debt 0 307
--------------------------
Net Cash Provided by Operating Activities 54,672 58,76380,580 87,593
--------------------------
Investing Activities:
Net repayments of loans 2,618 84,21319,801 125,521
Purchases of investment securities available for sale (76,027) (499,669)(96,027) (835,207)
Purchases of investment securities held to maturity (494,618) (243,158)(641,443) (365,878)
Purchases of property, plant and equipment (1,521) (1,750)(2,414) (3,273)
Proceeds from maturity of securities available for sale 243,046 257,382317,231 423,784
Proceeds from maturity of securities held to maturity 63,021 93,91289,976 197,298
Proceeds from sale of securities available for sale 199,185 69,305209,085 153,128
Proceeds from sale of property and equipment 0 4981,859
Proceeds from saleproperty acquired in satisfaction of other real estate owneddebt 321 2931,132
--------------------------
Net Cash Used inIn Investing Activities (63,975) (238,974)(103,470) (301,636)
--------------------------
Financing Activities:
Net increase in deposits 41,438 159,565181,814 242,062
Net (decrease) increase in short-term borrowings 121,906 43,551
Repayments(12,361) 83,612
Net payments to the FHLBFederal Home Loan Bank (107,204) 0(67,166)
Repayments of notes payable (3,214) (3,214)(14,964)
Exercise of stock options 5,979 3,308options/issuance of shares 6,875 5,498
Repurchases/retirement of stock (36,423) (28,129)(41,202) (43,874)
Dividends paid (17,285) (15,887)(26,169) (24,433)
--------------------------
Net Cash (Used In) Provided byBy Financing Activities 5,197 159,194(1,461) 180,735
--------------------------
Net Decrease In Cash and Cash Equivalents (4,106) (21,017)(24,351) (33,308)
--------------------------
Cash and Cash Equivalents at Beginning of Period 189,628 222,577
--------------------------
Cash and Cash Equivalents at End of Period $185,522 $201,560$165,277 $189,269
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other repossessed collateral $0 $1,800
Unrealized loss on securities available for sale ($5,005) ($3,148)
Supplemental Disclosure of Cash Flow Activity:
Unrealized (loss) gain on securities available for sale, net ($14,607) 6,849
Interest paid for the period 9,649 14,76415,019 21,122
Income tax payments for the period 18,850 18,46130,010 27,105
Income tax benefit from stock option exercises 1,826 1,8872,003 3,514
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 condensed 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 periodsperiod presented. The interim results for the sixthree and nine
months ended JuneSeptember 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.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 longernot amortized,
but is periodically evaluated for impairment. During 2004, no impairment of
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 secondthird 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 Interestinterest receivable and other
assets in the Consolidated Balance Sheets, as of January 1, 2004 and
JuneSeptember 30, 2004 (dollars in thousands).
At At
January 1 JuneSeptember 30
(Dollar in Thousands) 2004 Additions Reductions 2004
----------------------------------------------------
Goodwill $22,968 $0 $0 $22,968
Accumulated Amortization (3,972) 0 0 (3,972)($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 (272) (4,617)($4,345) $0 $408 ($4,753)
----------------------------------------------------
Net $3,438 $0 ($272) $3,166$408 $3,030
====================================================
At September 30, 2004, the estimated aggregate amortization of intangibles,
in thousands of dollars, for the remainder of 2004 and annually through 2009
is $136, $469, $427, $427, $427 and $427, respectively. The weighted average
amortization period for core deposit intangibles is 7.1 years.
At 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 $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 SFASAs permitted by Statement of Financial Accounting Standards ("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:
Three months ended SixNine months ended
JuneSeptember 30, JuneSeptember 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$1,578 $1,767
Net income:
As reported $24,644 $23,671 $48,958 $46,683$25,095 $24,073 $74,053 $70,755
Pro forma $24,118 $23,082 $47,906 $45,50524,569 23,484 72,475 68,988
Basic earnings per share:
As reported $0.79 $0.73 $2.33 $2.15
Pro forma $0.77 $0.72 $2.28 $2.09
Diluted earnings per share:
As reported $0.78 $0.72 $1.53 $1.41$2.28 $2.12
Pro forma 0.76 0.70 1.50 1.38
Diluted earnings per share:
As reported $0.76 $0.71 $1.51 $1.39
Pro forma 0.75 0.69 1.47 1.36$2.23 $2.06
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 Company65 and pays a portion of these early
retirees' insurance premium which arepremiums, as determined at their date of retirement. Beginning in 2004, theThe
Company also reimburses 50 percent of Medicare Part B premiums for all
retirees and spouses over 65.
An actuarial-based accrual method is used to account for post-retirement
benefits. 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 quarternine months ended JuneSeptember 30.
For the sixnine months ended
JuneSeptember 30,
---------------------------------------
2004 2003 2002
---------------------------------------
(In thousands)
Service cost $93 $7 $104$139 $11 $155
Interest cost 86 85 86128 127 129
Amortization of unrecognized
transition obligation 31 31 3146 46 46
---------------------------------------
Net periodic cost $210 $123 $221$313 $184 $330
=======================================
Note 6: Pending Acquisition
On August 25, 2004, Westamerica signed a definitive agreement to acquire
Redwood Empire Bancorp, parent company of National Bank of the Redwoods. The
transaction is valued at approximately $148 million, of which approximately
$57 million will be paid in cash and the remainder by issuance of Westamerica
common stock. The acquisition is expected to be completed in the first
quarter of 2005.
Page 9
WESTAMERICA BANCORPORATION
Financial Summary
(In(Unaudited)
(dollars in thousands, except per share data)amounts)
Three months ended SixNine months ended
JuneSeptember 30, JuneSeptember 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Net Interest Income (FTE)** $54,271 $54,324 $108,877 $108,386$54,528 $54,264 $163,405 $162,650
Provision for loan losses (600) (750) (900) (1,500) (1,800)(2,100) (2,550)
Noninterest income:
11,661 11,036 22,526 21,411Investment securities gains (losses) (14) 2,150 2,169 2,443
Loss on extinguishment of debt 0 (2,166) (2,204) (2,166)
Other 11,802 11,029 34,349 32,147
----------------------------------------------------
Total noninterest income 11,788 11,013 34,314 32,424
Noninterest expense (24,990) (25,476) (49,982) (51,011)(24,491) (25,534) (74,473) (76,546)
Provision for income taxes (FTE)** (15,548) (15,313) (30,963) (30,303)(16,130) (14,920) (47,093) (45,223)
----------------------------------------------------
Net income $24,644 $23,671 $48,958 $46,683$25,095 $24,073 $74,053 $70,755
====================================================
Average shares outstanding 31,760 33,000 31,906 33,05431,713 32,770 31,841 32,959
Diluted average shares outstanding 32,343 33,492 32,502 33,52832,352 33,273 32,452 33,442
Shares outstanding at period end 31,784 32,937 31,784 32,93731,716 32,723 31,716 32,723
As Reported:
Basic earnings per share $0.78 $0.72 $1.53 $1.41$0.79 $0.73 $2.33 $2.15
Diluted earnings per share $0.76 $0.71 $1.51 $1.390.78 0.72 2.28 2.12
Return on assets 2.21% 2.21%2.19% 2.18% 2.20% 2.21%2.20%
Return on equity 31.11% 29.27% 30.82% 29.44%30.05% 29.25% 30.56% 29.38%
Net interest margin 5.21% 5.43% 5.24% 5.51%5.11% 5.31% 5.20% 5.44%
Net loan losses to average loans 0.11%0.03% 0.12% 0.10% 0.15% 0.13% 0.16%
Efficiency ratio* 37.9% 39.0% 38.0% 39.3%36.9% 39.1% 37.7% 39.2%
Average Balances:
Total assets $4,482,261 $4,304,387 $4,466,967 $4,253,125$4,557,925 $4,373,156 $4,497,287 $4,293,136
Earning assets 4,177,358 4,007,049 4,167,210 3,956,5354,260,701 4,072,793 4,198,373 3,995,287
Total loans 2,268,989 2,375,491 2,275,444 2,399,7542,247,664 2,331,855 2,266,184 2,377,121
Total deposits 3,489,250 3,370,433 3,463,399 3,338,6813,616,319 3,500,911 3,514,373 3,392,758
Shareholders' equity 318,560 324,350 319,475 319,741332,219 326,529 323,723 322,003
Balances at Period End:
Total assets $4,611,811 $4,564,692$4,636,071 $4,482,793
Earning assets 4,311,562 4,247,0944,356,635 4,180,358
Total loans 2,319,255 2,406,8892,301,991 2,364,418
Total deposits 3,505,429 3,453,6313,645,806 3,536,129
Shareholders' equity 329,795 357,311351,924 350,922
Financial Ratios at Period End:
Allowance for loan losses to loans 2.33% 2.25%2.36% 2.29%
Book value per share $10.38 $10.85$11.10 $10.72
Equity to assets 7.15%7.59% 7.83%
Total capital to riskrisk-adjusted assets 11.78% 11.32%12.29% 11.61%
Dividends Paid Per Share $0.28 $0.24 $0.54 $0.48$0.26 $0.82 $0.74
Dividend Payout Ratio 37% 34% 36% 34%36% 36% 35%
The above financial summary has been derived from the Company's unaudited
consolidated financial statements. This information should be read in
conjunction with thosesuch financial 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
Pending Acquisition
On August 25, 2004, Westamerica Bancorporation and subsidiaries (the
"Company") signed a definitive agreement to acquire Redwood Empire Bancorp,
parent company of National Bank of the Redwoods. The transaction is valued at
approximately $148 million, of which approximately $57 million will be paid
in cash and the remainder by issuance of the Company's common stock. It is
the intention of the Company to reduce the allocation of its operating cash
flow toward the repurchase and retirement of its common stock in order to
meet the approximate $57 million cash payment for the transaction. Further
information related to the pending acquisition, including unaudited pro forma
combined financial data, can be found in the Company's Registration Statement
on Form S-4 that was filed with the Securities and Exchange Commission on
October 15, 2004. The acquisition is expected to be completed in the first
quarter of 2005, subject to receipt of regulatory approvals and satisfaction
of other conditions set forth in the definitive agreement.
Overview of Financial Results
The Company reported third quarter 2004 net income of $24.6$25.1 million or
diluted earnings per share of $0.76 for the second quarter
of 2004.$0.78. These results compare with net income
for the third quarter 2003 of $23.7$24.1 million or $0.71$0.72 per share for the same period of 2003.share.
On a year-to-date basis, the Company reported net income for the sixnine months
ended JuneSeptember 30, 2004 of $49.0$74.1 million or diluted earnings per share of
$1.51,$2.28, compared with $46.7$70.8 million or $1.39$2.12 per share for the same period of
2003.
Following is a summary of the components of netincome. Income from certain
securities and loans is presented on a fully taxable equivalent ("FTE") basis
to reflect its exemption from federal income taxation for the periods
indicated (In thousands except per share data and ratios):(dollars in thousands).
Three months ended SixNine months ended
JuneSeptember 30, JuneSeptember 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Net interest income (FTE) $54,271 $54,324 $108,877 $108,386$54,528 $54,264 $163,405 $162,650
Provision for loan losses (600) (750) (900) (1,500) (1,800)(2,100) (2,550)
Noninterest income:
Securities gains (losses) (14) 2,150 2,169 2,443
FHLB advance prepayment fees 0 (2,166) (2,204) (2,166)
Other 11,802 11,029 34,349 32,147
----------------------------------------------------
Total noninterest income 11,661 11,036 22,526 21,41111,788 11,013 34,314 32,424
Noninterest expense (24,990) (25,476) (49,982) (51,011)(24,491) (25,534) (74,473) (76,546)
Provision for income taxes (FTE) (15,548) (15,313) (30,963) (30,303)(16,130) (14,920) (47,093) (45,223)
----------------------------------------------------
Net income $24,644 $23,671 $48,958 $46,683$25,095 $24,073 $74,053 $70,755
====================================================
Average diluted shares 32,343 33,492 32,502 33,52832,352 33,273 32,452 33,442
Diluted earnings per share $0.76 $0.71 $1.51 $1.39$0.78 $0.72 $2.28 $2.12
Average total assets 4,482,261 4,304,387 4,466,967 4,253,1254,557,925 4,373,156 4,497,287 4,293,136
Net income (annualized) to average total assets 2.21% 2.21%2.19% 2.18% 2.20% 2.21%2.20%
Net income for the secondthird quarter of 2004 was $973 thousand$1.0 million or 4.1%4.2% more than
for the same quarter of 2003. NetThe increase in net interest income (FTE) declined by $53 thousand or
0.1%, primarily the net result of declining yields on average earning assets,
lower interest expense, and($264
thousand) was attributable to the effect of higher average earning assets.assets (up
$187.9 million) and growth in lower interest-bearing liabilities, partially
offset by a 20 basis point ("bp") decline in the net interest margin. The
loan loss provision declined $150 thousand. Noninterest income increased $775
thousand or 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 contributedprimarily due to growth in netdeposit fee income. Noninterest expense
declined $1.0 million because of lower personnel and other operational costs.
The higher tax provision (up $1.2 million) was the result of increased pretax
income for the period. The
provision for income taxes (FTE) increased $235 thousand or 1.53%.reduced in part by higher low-income housing investment tax credits.
Comparing the first sixnine months of 2004 to the prior year, net income rose
$2.3$3.3 million or 4.9%4.7%. A $491 thousand or 0.5%The increase inwas attributable to higher net interest
income was
mainly attributable to(FTE), a lower costloan loss provision, higher noninterest income (up $1.9
million) and lower noninterest expense (down $2.1 million). The tax provision
increased $1.9 million on an FTE basis. The improved net interest income
(FTE) (up $755 thousand) was the result of funding and the effect of growth ofhigher average earning assets partially(up
$203.1 million) and growth in lower interest-bearing liabilities, offset by declining yields on those assets. The
provision for loan losses decreased $300 thousand or 16.7%. Noninterest income
rose $1.1 million or 5.2% and noninterest expense dropped $1.0 million or 2.0%.
The income tax provision (FTE) increased $660 thousand or 2.2%.a
24 bp decline in the net interest margin.
Page 11
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended SixNine months ended
JuneSeptember 30, JuneSeptember 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Interest and fee income $53,271 $56,599 $107,682 $113,723$53,904 $54,960 $161,587 $168,684
Interest expense (4,597) (7,409) (10,111) (15,146)(5,042) (6,289) (15,154) (21,435)
FTE adjustment 5,597 5,134 11,306 9,8095,666 5,593 16,972 15,401
----------------------------------------------------
Net interest income (FTE) $54,271 $54,324 $108,877 $108,386$54,528 $54,264 $163,405 $162,650
====================================================
Average earning assets $4,177,358 $4,007,049 $4,167,210 $3,956,535$4,260,701 $4,072,793 $4,198,373 $3,995,287
Net interest margin (FTE) 5.21% 5.43% 5.24% 5.51%5.11% 5.31% 5.20% 5.44%
The Company's primary source of revenue is net interest income, or the
difference between interest income earned on earning assets and interest
expense paid on interest-bearing liabilities.
Net interest income (FTE) during the secondthird quarter of 2004 decreased $53increased $264
thousand or 0.1% to $54.3
million0.5% from the same period in 2003.2003, to $54.5 million. The decreaseincrease
was mainly attributable to the effect of the lower margin earned on those assets (thehigher average low rate component).
The margin decrease was the net effect of a 52 bp drop in theinterest-bearing liabilities and
higher average earning asset yield, partiallyassets, partly offset by a 41 bp decline in the cost of funds.
Offsetting the decline was the effect of an increase in average earning
assets (the volume component), which grew $170.3 million or 4.3%.lower net interest margin
and lower fee income.
Comparing the first sixnine months of 2004 with the prior year, net interest
income (FTE) increased $491rose $755 thousand or 0.5%. The increase was caused by the net
effect of higher average earning assets, (up $210.7 million or 5.3%), partially offset by thehigher average low rate
interest-bearing liabilities, one additional accrual day, and a lower margin earned
on earning assets. The margin reduction was the result ofloan
fee income and a 55 bp decrease in
the average asset yield combined with a 39 bp decline in the cost of funds.
Page 11declining net interest margin.
Interest and Fee Income
Interest & fee income (FTE) for the secondthird quarter of 2004 decreased $2.9
million$983
thousand or 4.6%1.6% from the same period in 2003. The decline was the net effect
of higher average earning assets, in 2004, more than offset by lower yields earned on
those assets.assets and lower loan fee income. Average earning assets grew $170.3$187.9
million (4.3%) due toor 4.6%. The earning asset growth was led by expansion in the
investment portfolio of $276.8$272.1 million as follows: mortgage backed securities
and collateralized mortgage obligations (up $206.4$278.9 million), US Agency
obligations (up $38.3 million) and municipal securities (up $99.1 million) and U.S. Agency obligations (up $31.7$23.5 million).
Partially offsettingOther securities declined $63.3 million. The growth in the increasesinvestments was
a $50.0diminished by an $84.2 million declinereduction in other securities. Loans declined $106.5 million,loans including commercial real
estate loans (down $136.4$115.0 million) and direct consumer loans (down $8.9$6.1
million). The declines were mitigated by increases, net of a $14.0 million increase in indirect consumer loans, a $13.6
million increase in residential real estate loans (up $22.6 million) and a $11.1 million
increase in commercial loans (up $16.1 million).loans.
The average yield on the Company's earning assets decreased for the third
quarter from 6.17%5.92% in 2003 to 5.65%, down 52 bp, in 2004.5.58% (down 34 bp). This downward trend in
yields was reflective of continuing maturitiesa change in the earning asset mix and payoffs and funding of new earning
assets at lowergeneral
interest ratesrate declines during 2003 and into much of 2004, as evident in
indirect consumer loans (96(90 bp decline), commercial real estate loans (50 bp
decline)decline in yield), residential real estate
loans (84 bp decline), commercial loans (36(47 bp decline) and personal credit lines (56commercial real estate loans (35 bp decline). As a
result, the loan portfolio yield decreased 7044 bp. The investment portfolio
yield declined 11rose 3 bp,
primarily the net result of declinesa decline in premium write-offs from
mortgage prepayments, resulting in increases in yields of municipal securities (down 43
bp) and U.S. Agency obligations (down 51 bp), and a 101 bp increase inon mortgage backed
securities and collateralized mortgage obligations.obligations (up 152 bp) and other
securities (up 50 bp), partially offset by declines in U.S. Agency
obligations (down 31 bp) and municipal securities (down 24 bp).
Comparing the first halfnine months of 2004 to 2003, interest and fee income
(FTE) decreased by $4.5$5.5 million or 3.7%3.0%. The decline was due to the combined effect
of lower yields, lower fee income, a higher volume of earning assets the impact of lower yields and lower loan fee
income. The positive volume was attributable to a $210.7 million (5.3%) increase
in averageone
additional accrual day. Average earning assets includingincreased $203.1 million or
5.1%, mainly due to increases in mortgage backed securities and
collateralized mortgage obligations (up $233.7$248.8 million), municipal securities
(up $131.4$95.4 million), U.S. Agency obligations (up $43.0$41.4 million), residential
real estate loans (up $19.7$17.7 million) and, commercial loans (up $11.0$11.1 million) and
indirect consumer loans (up $6.2 million). The growth was countered by declines infollowing components
decreased: commercial real estate loans (down $138.6$130.8 million), direct
consumer loans (down 10.4$8.8 million), construction loans (down $8.2$6.3 million),
other securities (down $61.0$61.8 million) and U.S. Treasury securities (down $12.1$9.7
million).
Page 12
The average yield on earning assets for the first sixnine months of 2004 was
5.73%5.68% compared to 6.28%with 6.15% for the same period in 2003. All earning assetMajor decreases in
loan yields fell except forincluded a 13195 bp increasedecline in other securities andindirect consumer loans, a 5075 bp
increasedecrease in mortgage backed securities
and collateralized mortgage obligations. The investment portfolioresidential real estate loans, a 43 bp decline in the yield decreased 13 bp, affected primarily by lower yields on U.S. Agency obligations
(down 61 bp) and municipal securities (down 44 bp). The yield on dealer loans
was down 98 bp,
commercial real estate loans was down 55and a 20 bp residential real
estate loans was down 89 bp, commercial loans yield also declined 31 bp anddecrease in the yield on commercial
loans and a 36 bp decline in personal credit lines decreased 52 bp.lines. As a result, the
composite loan yield declined 7059 bp. The investment portfolio yield decreased
7 bp, primarily the net result of lower yields on U.S. Agency obligations
(down 49 bp) and municipal securities (down 36 bp), partially offset by
higher yields on other securities (up 115 bp), mortgage backed securities and
collateralized mortgage obligations (up 92 bp).
Interest Expense
Interest expense decreased $2.8$1.2 million or 38.0%19.8% in the secondthird quarter of 2004
compared to the same year-ago period.period due to a change in the mix of average
interest bearing liabilities and declining rates paid on those liabilities.
The decrease resulted from a drop in the average rate paid on
interest-bearing liabilities and a shift to lower-rate
liabilities. The average rate paid on interest-bearing liabilities fell from 1.05%0.89% in 2003 to 0.64%0.69% in 2004. The average
rate on bankers money fund balances
dropped 29market savings declined 27 bp rateswhile the average rate paid on
federal funds purchased decreased 23 bp, rates on CDs
over $100 thousand declined an average of 29 bp, rates on money market savings
accounts were lowered 31rose 42 bp and ratesthe yield on regular savings declined 13public CDs rose 33 bp.
AverageA $76.5 million or 2.7% increase in average interest-bearing liabilities grew $54.7 million or 1.9% in
the secondthird quarter of 2004 fromresulted in a year ago. Short-term borrowings rosedecrease in volume-related expense as higher
rate interest bearing liabilities were replaced by $231.4 million
mainly due to increases in repurchase agreements and federal funds purchased.lower rates. Federal Home
Loan Bank ("FHLB") advances which carriedwith higher interest rates
than short-term borrowings, decreased from $170$124.1 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. Moneynone whereas federal funds purchased increased $135.7 million and money
market savings gained $57.7 million, reduced by a $51.0 million decrease in
CDs over $100 thousand.increased $65.9 million.
During the first halfnine months of 2004, interest expense decreased $5.0$6.3 million
or 33.2%29.3% from 2003, again due to a lower average rate paid on
interest-bearing liabilities and growtha lower volume of lower-rate interest-bearingthose liabilities. The
average rate paid on interest-bearing liabilities declined towas 0.70% in the first half of 2004 compared with 1.10%1.03% in 2003. Average rates on allMost 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 2004)(down 31 bp), Jumbo CDs
over $100 thousand (from 1.52% to
1.09%) and(down 33 bp), public CDs (down 15 bp), regular savings (down 11 bp), retail
CDs with maturities varying from 1 month to over 3 years
(from 1.84% to 1.42%)(down 31 bp), money market checking accounts (down 5 bp) and preferred
money market (down 30 bp). InterestThe rates on short-term borrowingscustomer sweep accounts declined from
1.00% to 0.84%.
Total average interest-bearing27
bp and long term debt decreased 129 bp.
Interest-bearing liabilities grew $102.5$93.8 million or 3.7%3.4% for the sixnine months
ended JuneSeptember 30, 2004. The growth in lower-rate liabilities2004 and caused a mix-related decrease in interest
expense. Short-term borrowingsexpense as higher rate liabilities were replaced with lower rate liabilities.
FHLB advances were reduced by $122.5 million. Jumbo CDs and public CDs also
declined $23.4 million and $12.0 million, respectively. The following lower
rate categories increased: federal funds purchased (up $151.6 million),
repurchase agreements (up $49.4 million), money market savings increased $208.0 million and $61.0 million, respectively. Federal Home Loan Bank
advances and CDs over $100 thousand declined $121.7 million and $29.7 million,
respectively.
Page 12(up $62.6
million).
In all periods, the Company has continuously 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 costeffect of funds.adverse cyclical
trends.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated:
Three months ended SixNine months ended
JuneSeptember 30, JuneSeptember 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Yield on earning assets 5.65% 6.17% 5.73% 6.28%5.58% 5.92% 5.68% 6.15%
Rate paid on interest-bearing
liabilities 0.64% 1.05%0.69% 0.89% 0.70% 1.10%1.03%
----------------------------------------------------
Net interest spread 5.01%4.89% 5.03% 4.98% 5.12% 5.03% 5.18%
Impact of all other net
noninterest bearing funds 0.20% 0.31% 0.21% 0.33%0.22% 0.28% 0.22% 0.32%
----------------------------------------------------
Net interest margin 5.21% 5.43% 5.24% 5.51%5.11% 5.31% 5.20% 5.44%
====================================================
During the secondthird quarter of 2004, the net interest margin fell 22declined 20 bp
compared to the same period in 2003, as yields2003. Yields on earningsearning assets declined faster
than did rates paid on interest-bearing liabilities.liabilities, resulting in a 14 bp
decline in net interest spread. The unfavorable impact of lower rates earned
on loans, and the investment portfolio, triggered by maturities and
repricings in a low-rate interest environment,market trends, was partially mitigated by the effect
of paydowns of FHLB advances and decreases in rates paid on deposits and
short-term funds.long-term debt. The decline in the net interest spread was further widened by
the lower value of 11 bp was narrower due to a greater reliance on noninterest
bearingnoninterest-bearing funding sources. TheWhile the average
balance of these sources increased $127.9$96.7 million or 16.6%.11.5%, their value
decreased 6 bp because of the lower market rates of interest at which they
could be invested.
Page 13
Similarly, on a year-to-date basis, the net interest margin decreased 2724 bp
when compared to the same period in 2003. Earning asset yields decreased 5547
bp and the cost of interest-bearing liabilities fell by 4033 bp, resulting in a
1514 bp decline in the net interest spread. Noninterest bearingNoninterest-bearing funding sources
increased $105.9$102.8 million or 13.8%,13.0% and because of lower market rates of
interest their margin contribution decreased by 10 bp, with their value
decreasing to 2122 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 amountamounts 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
JuneSeptember 30, 2004
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $534 $0 0.00%
Investment securities:
Available for sale
Taxable 796,597 8,035712,378 7,171 4.03%
Tax-exempt 295,698 5,435 7.35%286,551 5,291 7.39%
Held to maturity
Taxable 404,923 3,833 3.79%586,377 5,725 3.91%
Tax-exempt 410,617 6,794 6.62%427,197 7,081 6.63%
Loans:
Commercial
Taxable 352,119 4,778 5.46%351,467 5,105 5.78%
Tax-exempt 234,780 3,958 6.78%238,481 4,029 6.72%
Commercial real estate 779,408 14,709 7.59%752,395 13,955 7.38%
Real estate construction 36,789 601 6.57%34,977 619 7.04%
Real estate residential 361,069 3,996365,559 4,047 4.43%
Consumer 504,824 6,729 5.36%504,785 6,547 5.16%
--------------------------
Total loans 2,268,989 34,771 6.16%2,247,664 34,302 6.08%
--------------------------
Total earning assets 4,177,358 58,868 5.65%4,260,701 59,570 5.58%
Other assets 304,903297,224
-------------
Total assets $4,482,261$4,557,925
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,256,128$1,305,840 $-- --
Savings and interest-bearing
transaction 1,619,797 1,116 0.28%1,696,316 1,118 0.26%
Time less than $100,000 273,552 956 1.41%266,584 999 1.49%
Time $100,000 or more 339,773 922 1.09%347,579 1,136 1.30%
--------------------------
Total interest-bearing deposits 2,233,122 2,994 0.54%2,310,479 3,253 0.56%
Short-term borrowed funds 614,065 1,285 0.83%550,909 1,473 1.05%
Federal Home Loan Bank advance 0 2 N/A0 0.00%
Debt financing and notes payable 21,428 316 5.90%
--------------------------
Total interest-bearing liabilities 2,868,615 4,597 0.64%2,882,816 5,042 0.69%
Other liabilities 38,95837,050
Shareholders' equity 318,560332,219
-------------
Total liabilities and shareholders' equity $4,482,261$4,557,925
=============
Net interest spread (1) 5.01%4.89%
Net interest income and interest margin (2) $54,271 5.21%$54,528 5.11%
==========================
(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
JuneSeptember 30, 2003
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $633 $2 1.26%1.25%
Investment securities:
Available for sale
Taxable 794,228 8,521 4.29%863,851 8,632 4.00%
Tax-exempt 306,094 5,900 7.71%315,930 5,882 7.45%
Held to maturity
Taxable 237,012 1,345 2.27%181,909 697 1.53%
Tax-exempt 293,591 5,300 7.22%378,615 6,528 6.90%
Loans:
Commercial
Taxable 367,588 5,366 5.86%367,465 5,191 5.60%
Tax-exempt 203,231 3,635 7.17%211,364 3,842 7.21%
Commercial real estate 915,817 18,419 8.07%867,422 17,310 7.92%
Real estate construction 42,243 791 7.51%37,311 666 7.08%
Real estate residential 338,462 4,458 5.27%351,973 4,306 4.89%
Consumer 508,150 7,996 6.31%496,320 7,497 5.99%
--------------------------
Total loans 2,375,491 40,665 6.86%2,331,855 38,812 6.61%
--------------------------
Total earning assets 4,007,049 61,733 6.17%4,072,793 60,553 5.92%
Other assets 297,338300,363
-------------
Total assets $4,304,387$4,373,156
=============
Liabilities and shareholders' equityequity:
Deposits:
Noninterest bearing demand $1,130,608$1,203,378 $-- --
Savings and interest-bearing
transaction 1,537,163 1,773 0.46%1,599,917 1,585 0.39%
Time less than $100,000 311,932 1,343 1.73%303,334 1,191 1.56%
Time $100,000 or more 390,730 1,354 1.38%394,282 1,209 1.21%
--------------------------
Total interest-bearing deposits 2,239,825 4,470 0.80%2,297,533 3,985 0.69%
Short-term borrowed funds 382,677 962 1.00%363,394 747 0.81%
Federal Home Loan Bank advance 170,000 1,592 3.71%124,086 1,172 3.72%
Debt financing and notes payable 21,39321,262 385 7.19%7.24%
--------------------------
Total interest-bearing liabilities 2,813,895 7,409 1.05%2,806,275 6,289 0.89%
Other liabilities 35,53436,974
Shareholders' equity 324,350326,529
-------------
Total liabilities and shareholders' equity $4,304,387$4,373,156
=============
Net interest spread (1) 5.12%5.03%
Net interest income and interest margin (2) $54,324 5.43%$54,264 5.31%
==========================
Page 15
For the sixnine months ended
JuneSeptember 30, 2004
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $534 $1 0.37%0.25%
Investment securities:
Available for sale
Taxable 922,406 19,410 4.21%851,878 26,581 4.16%
Tax-exempt 302,290 11,249 7.44%297,013 16,505 7.41%
Held to maturity
Taxable 257,603 4,600 3.57%367,698 10,325 3.74%
Tax-exempt 408,933 13,569415,066 20,685 6.64%
Loans:
Commercial
Taxable 348,940 9,603 5.53%346,449 14,709 5.67%
Tax-exempt 233,181 7,927 6.84%238,281 11,956 6.70%
Commercial real estate 792,414 29,565 7.50%779,075 43,520 7.46%
Real estate construction 37,778 1,286 6.85%36,844 1,905 6.91%
Real estate residential 353,975 7,976 4.51%357,836 12,023 4.48%
Consumer 509,156 13,802 5.45%507,699 20,349 5.35%
--------------------------
Total loans 2,275,444 70,159 6.20%2,266,184 104,462 6.16%
--------------------------
Total earning assets 4,167,210 118,988 5.73%4,198,373 178,559 5.68%
Other assets 299,757298,914
-------------
Total assets $4,466,967$4,497,287
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,232,714$1,257,089 $-- --
Savings and interest-bearing
transaction 1,612,498 2,338 0.29%1,640,438 3,456 0.28%
Time less than $100,000 278,099 1,959 1.42%274,261 2,958 1.44%
Time $100,000 or more 340,088 1,849 1.09%342,585 2,985 1.16%
--------------------------
Total interest-bearing deposits 2,230,685 6,146 0.55%2,257,284 9,399 0.56%
Short-term borrowed funds 573,612 2,416 0.84%566,044 3,890 0.90%
Federal Home Loan Bank advance 48,306 898 3.67%32,204 897 3.66%
Debt financing and notes payable 21,983 651 5.93%21,798 968 5.92%
--------------------------
Total interest-bearing liabilities 2,874,586 10,1112,877,330 15,154 0.70%
Other liabilities 40,19239,145
Shareholders' equity 319,475323,723
-------------
Total liabilities and shareholders' equity $4,466,967$4,497,287
=============
Net interest spread (1) 5.03%4.98%
Net interest income and interest margin (2) $108,877 5.24%$163,405 5.20%
==========================
Page 16
For the sixnine months ended
JuneSeptember 30, 2003
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $633 $5 1.58%$6 1.27%
Investment securities:
Available for sale
Taxable 745,824 16,544 4.44%758,691 25,151 4.42%
Tax-exempt 305,084 11,606 7.61%335,827 17,573 6.98%
Held to maturity
Taxable 245,021 3,537 2.89%222,775 4,235 2.53%
Tax-exempt 260,219 9,469 7.28%300,240 15,937 7.08%
Loans:
Commercial
Taxable 368,184 10,588 5.80%367,947 15,779 5.73%
Tax-exempt 202,912 7,405 7.36%205,727 11,247 7.31%
Commercial real estate 931,046 37,156 8.05%909,838 54,466 8.00%
Real estate construction 45,999 1,677 7.35%43,103 2,343 7.27%
Real estate residential 334,253 9,028 5.40%340,160 13,334 5.23%
Consumer 517,360 16,517 6.44%510,346 24,014 6.29%
--------------------------
Total loans 2,399,754 82,371 6.92%2,377,121 121,183 6.81%
--------------------------
Total earning assets 3,956,535 123,532 6.28%3,995,287 184,085 6.15%
Other assets 296,590297,849
-------------
Total assets $4,253,125$4,293,136
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,124,087$1,150,518 $-- --
Savings and interest-bearing
transaction 1,529,851 3,724 0.49%1,553,206 5,309 0.46%
Time less than $100,000 314,988 2,869 1.84%311,104 4,062 1.75%
Time $100,000 or more 369,755 2,785 1.52%377,930 3,993 1.41%
--------------------------
Total interest-bearing deposits 2,214,594 9,378 0.85%2,242,240 13,364 0.80%
Short-term borrowed funds 365,578 1,812 1.00%364,850 2,559 0.93%
Federal Home Loan Bank advance 170,000 3,167 3.76%154,695 4,339 3.70%
Debt financing and notes payable 21,911 789 7.26%21,695 1,173 7.21%
--------------------------
Total interest-bearing liabilities 2,772,083 15,146 1.10%2,783,480 21,435 1.03%
Other liabilities 37,21437,135
Shareholders' equity 319,741322,003
-------------
Total liabilities and shareholders' equity $4,253,125$4,293,136
=============
Net interest spread (1) 5.18%5.12%
Net interest income and interest margin (2) $108,386 5.51%$162,650 5.44%
==========================
(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 17
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 tofrom 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 JuneSeptember 30, 2004
compared with three months
ended JuneSeptember 30, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($0) (2)($2) ($2)
Investment securities:
Available for sale
Taxable 24 (510) (486)(1,546) 85 (1,461)
Tax-exempt ($197) (268) (465)543) (48) (591)
Held to maturity
Taxable $1,278 1,210 2,488$2,962 2,066 5,028
Tax-exempt $1,964 (470) 1,494$815 (262) 553
Loans:
Commercial
Taxable ($225) (363) (588)238) 152 (86)
Tax-exempt $533 (210) 323$463 (276) 187
Commercial real estate ($2,658) (1,052) (3,710)2,220) (1,135) (3,355)
Real estate construction (97) (93) (190)(43) (4) (47)
Real estate residential 282 (744) (462)163 (422) (259)
Consumer (53) (1,214) (1,267)124 (1,074) (950)
---------------------------------------
Total loans (2,218) (3,676) (5,894)(1,751) (2,759) (4,510)
---------------------------------------
Total earning assets 851 (3,716) (2,865)(63) (920) (983)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 90 (747) (657)(557) (467)
Time less than $100,000 (154) (233) (387)(142) (50) (192)
Time $100,000 or more (163) (269) (432)(151) 78 (73)
---------------------------------------
Total interest-bearing deposits (227) (1,249) (1,476)(203) (529) (732)
---------------------------------------
Short-term borrowed funds 503 (180) 323457 269 726
Federal Home Loan Bank advance (1,172) 0 (1,590) (1,590)(1,172)
Debt financing and notes payable 1 (70)3 (72) (69)
---------------------------------------
Total interest-bearing liabilities 277 (3,089) (2,812)(915) (332) (1,247)
---------------------------------------
Increase in Net Interest Income $574$852 ($627) ($53)588) $264
=======================================
Page 18
SixNine months ended JuneSeptember 30, 2004
compared with sixnine months
ended JuneSeptember 30, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold (1) (3) ($4)1) (4) ($5)
Investment securities:
Available for sale
Taxable 3,809 (943) 2,8663,013 (1,583) $1,430
Tax-exempt (68) (289) (357)($2,090) 1,022 ($1,068)
Held to maturity
Taxable 212 851 1,063$3,536 2,554 $6,090
Tax-exempt 4,998 (898) 4,100$5,780 (1,032) $4,748
Loans:
Commercial
Taxable (500) (485) (985)($894) (176) ($1,070)
Tax-exempt 1,081 (559) 522$1,705 (996) $709
Commercial real estate (5,162) (2,429) (7,591)($7,385) (3,561) ($10,946)
Real estate construction (280) (111) (391)(324) (114) ($438)
Real estate residential 534 (1,586) (1,052)695 (2,006) ($1,311)
Consumer (185) (2,530) (2,715)(52) (3,613) ($3,665)
---------------------------------------
Total loans (4,512) (7,700) (12,212)(6,255) (10,466) (16,721)
---------------------------------------
Total earning assets 4,438 (8,982) (4,544)3,983 (9,509) (5,526)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 204 (1,590) (1,386)295 (2,148) (1,853)
Time less than $100,000 (300) (610) (910)(439) (665) (1,104)
Time $100,000 or more (200) (736) (936)(342) (666) (1,008)
---------------------------------------
Total interest-bearing deposits (296) (2,936) (3,232)(486) (3,479) (3,965)
---------------------------------------
Short-term borrowed funds 915 (311) 6041,386 (55) 1,331
Federal Home Loan Bank advance (2,245) (24) (2,269)(3,396) (46) (3,442)
Debt financing and notes payable 6 (144) (138)9 (214) (205)
---------------------------------------
Total interest-bearing liabilities (1,620) (3,415) (5,035)(2,487) (3,794) (6,281)
---------------------------------------
Increase in Net Interest Income $6,058$6,470 ($5,567) $4915,715) $755
=======================================
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 reduce credit costs by
enforcing underwriting and administration procedures and aggressively
pursuing collection efforts with troubled debtors. The Company provided $750 thousand and $900$600
thousand for loan losses in the secondthird quarter of 2004 and 2003, respectively.$750 thousand in
the same quarter of 2003. For the first sixnine months of 2004, and$2.1 million was
provided while in 2003, $1.5$2.6 million and 1.8 million were
provided in each respective period.was provided. The lower provision
reflects management's assessment of credit risk in the loan portfolio for each of the periods
presented.portfolio. 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 SixNine months ended
JuneSeptember 30, JuneSeptember 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Service charges on deposit accounts $7,360 $6,648 $14,228 $13,073$7,465 $6,735 $21,693 $19,809
Merchant credit card fees 909 900 1,735 1,762899 993 2,633 2,755
ATM fees and interchange 643 601 1,226 1,161664 644 1,889 1,805
Debit card fees 638 563 1,187 1,057654 556 1,841 1,613
Other service fees 463 380 856 749466 404 1,322 1,153
Mortgage banking income 41 185 304 712
Financial services commissions 360 210 547 418409 249 956 666
Trust fees 258 277 508 516
Official check sales income 137 132 264 266
Mortgage banking income 131 301 263 527
Gains on sale of foreclosed property 8 7 231 10265 245 773 760
Securities gains 395 277 2,183 293(losses) (14) 2,150 2,169 2,443
Loss on extinguishment of debt (390) 0 (2,166) (2,204) 0(2,166)
Other noninterest income 749 740 1,502 1,579939 1,018 2,938 2,874
----------------------------------------------------
Total $11,661 $11,036 $22,526 $21,411noninterest income $11,788 $11,013 $34,314 $32,424
====================================================
Noninterest income for the secondthird quarter of 2004 was $11.7$11.8 million, up $625$775
thousand or 5.7% from7.0% compared with the same period inquarter of 2003. The largest contributing factor
wasHigher income from
service charges on deposits (up $712 thousand or 10.7%),$730 thousand) mainly the net
result ofresulted from enhanced
overdraft processing programs and decliningrepricing of checking account fees
(effective as of February 2004), partially reduced by lower income from
account analysis deficit fees and fees collected on deposited items returned.
The second
largest factor was a $150A $160 thousand or 71.4% increase in financial services commission income resulting fromwas largely
due to higher sales of variablefixed and fixedvariable annuities and mutual funds.
Securities gains were higher by $118 thousand or 42.6%.
Mortgage banking income declined $170$144 thousand or 56.5% largely due to losseslower loan funding
activity. Losses on mortgage loan sales. Insales of securities of $14 thousand were recorded in the
secondthird quarter of 2004 whereas $2.2 million gains were recorded a $390 thousandyear ago,
which offset the $2.2 million loss on extinguishment of debt was incurred in order to prepay $20 million in FHLB
advances, compared with none a year ago.debt.
Noninterest income for the first halfnine months of 2004 was $22.5$34.3 million, up $1.1$1.9
million or 5.2%5.8% from 2003. As2003, mainly due to growth in the quarter-to-quarter comparison, the primary
contributing factor was a $1.2deposit fee income.
Service charges on deposit accounts rose $1.9 million or 8.8% increase in service charges on
deposits, the net result of9.5% primarily due
to enhanced overdraft processing programs and repricing of retail checking services and
enhanced overdraft programs, combined withaccount
fees, partially reduced by lower income from account analysis deficit fees
and returned items. The next largest factor was a $221fees collected on deposited items returned. A $228 thousand or 14.1%
increase in gains on foreclosed properties due to a sale in the first quarter of 2004. Debitdebit card fees rose $130 thousand or 12.3% duewas attributable to increased usage. A $129Financial
services commission income increased $290 thousand or 30.9% increase in financial services income was mainly attributable43.4% largely due to
higher sales of variablefixed and fixedvariable annuities and mutual funds. Other service
fees rose $107$169 thousand or 14.3%14.7% mostly due to increases inhigher income from
wireinternational money transfers and
internet banking.in foreign currencies. Mortgage banking income
declined $264$408 thousand or 50.1%57.3% mainly due to lowerless loan activity and lossesfunding activity.
Securities gains fell from mortgage loan sales. In 2004,$2.4 million to $2.2 million in losseswhich offset a loss
on extinguishment of debt was incurred as a result of prepayment of
$105$2.2 million in FHLB advances, compared with noneeach in the same period of 2003. In
2004, $2.2 million in securities gains offset above-mentioned losses on
extinguishment of debt, compared with $293respective periods.
Merchant credit card income declined $122 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.or 4.4% primarily due to
higher interchange expense.
Page 20
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended SixNine months ended
JuneSeptember 30, JuneSeptember 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Salaries and related benefits $13,332 $13,598 $26,858 $27,296$13,054 $13,495 $39,912 $40,792
Occupancy 2,944 3,044 5,892 6,0393,022 3,076 8,913 9,116
Equipment 1,101 1,319 3,536 4,074
Data processing services 1,521 1,518 3,038 3,077
Equipment 1,273 1,381 2,435 2,7551,525 1,520 4,563 4,597
Courier service 888 926 1,772 1,855923 941 2,695 2,796
Telephone 535 423 1,107 848529 519 1,636 1,368
Postage 288 381 1,046 1,202
Professional fees 511 457 921 870
Postage 364 401 758 821411 529 1,332 1,400
Merchant credit card 292 317 833 975
Stationery and supplies 309 308 597 626333 331 930 957
Advertising/public relations 241 243 746 775
Employee recruiting 10 117 78 226
Loan expense 295 380 550 656
Advertising/public relations 290 311 505 532
Merchant credit card 268 316 541 658
Correspondent Service Charges 239 236 478 480289 339 839 995
Operational losses 238 228 481 401265 237 747 638
Repossessed collateral expense (5) 12 (5) 14
Amortization of deposit intangibles 136 165 272 414408 578
Other noninterest expense 1,847 1,784 3,777 3,6832,077 1,993 6,264 6,043
----------------------------------------------------
Total $24,990 $25,476 $49,982 $51,011$24,491 $25,534 $74,473 $76,546
====================================================
Average full time equivalent staff 995 1,033 998 1,040980 1,016 992 1,032
Noninterest expense to revenues (FTE) 37.90% 38.98% 38.04% 39.30%36.93% 39.12% 37.67% 39.24%
Noninterest expense for the secondthird quarter of 2004 was $25.0$24.5 million, $486
thousand$1.0
million or 1.9%4.1% lower than in the second quarter of 2003. The largest decline
was in salariesSalaries and related benefits which were down $266declined
$441 thousand or 2.0%. The
reduction was primarily3.3% mainly due to lower incentives and bonuses (down $322
thousand), lower costs of workers compensation insurance (down $126
thousand), lower payroll taxes and a decrease in salaries and wages as a
result of a decline in the number of full timefull-time equivalent ("FTE") employees,
partially offset by higher workers compensation expense.annual salary merit increases. Equipment expense fell
by $108$218 thousand or 7.8%16.5% compared with 2003 mostly due to lower maintenance
costs and depreciation, and maintenance costs.
Occupancy expense fell $100because 2003 included higher write-offs of
obsolete equipment. Professional fees declined $118 thousand or 3.3%22.3% mainly
due to the combined effect of lower utilitylegal costs. Employee recruiting costs a decline in maintenance expenses and an increase in rental of
bank offices. Telephone expense increased $112fell $107 thousand or
26.5% due to network
upgrades.91.5%.
Noninterest expense was $50.0$74.5 million for the first halfnine months of 2004, which was
$1.0$2.1 million or 2.0%2.7% less than in the corresponding period of 2003. The largest
decrease was salariesSalaries and related benefits (down $438were down
$880 thousand or 1.6%), the net2.2% as a result of a declinedeclines in incentives, a decrease in regular salarysalaries and wages (down
$375 thousand) due to a fewer number of FTEfull-time equivalent employees and
lower incentives and bonuses (down $746 thousand), partially offset by an
increase in workers compensation insurance costs. Equipment expense fell by
$320$538 thousand or 11.6%13.2% from 2003 mainlyprimarily due to lower depreciation and
lower repair and maintenance costs. Lower amortizationOccupancy expense declined $203 thousand
or 2.2% mainly due to lower utility expenses, partially offset by an increase
in rent payments for branches. Amortization of deposit intangibles (down $142declined
$170 thousand or 34.3%) was caused by29.4% largely due to the expiration of amortizationthe deposit
intangibles from a purchase premium recorded in 1997.prior acquisition. Postage decreased $156 thousand or
13.0%. Loan expense declined by $156 thousand or 15.7% mostly due to lower
commercial loan activity and fewer foreclosures. Employee recruiting fell by
$148 thousand or 65.5%. Merchant credit card expense declined $117fell $142 thousand or
17.8% attributable to overcharges for the period from January
through April of 2003 and14.6% mostly due to lower rates negotiated in October of 2003. Loan
expenseCourier
service costs fell $106$101 thousand or 16.2% compared with the same period of 2003.3.6%. Telephone expense increased $259rose $268
thousand or 30.5%19.6% mostly due to the cost of additional data lines installed
in connection with network upgrades. Other noninterest expense was higher by
$221 thousand or 3.7% primarily the net result of a $414 thousand increase in
limited partnership operating losses from tax-credit related low-income
housing investments, a $129 thousand increase in debit card network fees and
an increase in internet banking expense, partially reduced by a $245 thousand
decrease in life insurance costs, a $100 thousand decline in contingency
settlement costs and a decrease in customer checks.
Page 21
Provision for Income Tax
During the secondthird quarter of 2004, the Company recorded an income tax
provision (FTE) of $15.5$16.1 million, $235 thousand (1.5%$1.2 million (8.1%) higher than the secondthird
quarter of 2003; on a year-to-date basis, the income tax provision (FTE) was
$31.0$47.1 million for 2004 compared to $30.3$45.2 million for 2003. The current
quarter provision represents an effective tax rate (FTE) of 38.7%,39.1% compared to
39.3%38.3% for the secondthird quarter of 2003; for the first sixnine months of 2004, the
effective tax rate (FTE) was 38.7%38.9%, compared to 39.4%39.0% recorded in 2003. The
provision for income taxes for all periods presented is primarily
attributable to the respective level of earnings and the incidence of
allowable deductions, andin particular tax credits particularly
those generated from low-income
housing investments.investments, and for California franchise taxes, higher excludable
interest income on loans within designated enterprise zones.
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 JuneSeptember 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Classified loans $21,495 $27,324$20,868 $23,479 $23,460
Repossessed collateral 0 1,888742 90
---------------------------------------
Classified loans and repossessed collateral $21,495 $29,212$20,868 $24,221 $23,550
=======================================
Allowance for loan losses /
classified loans 251% 198%261% 231% 230%
Classified loans at JuneSeptember 30, 2004, decreased $5.8$2.6 million or 21.3%(11.1%) from
JuneSeptember 30, 2003, reflecting the effectiveness of the Company's high
underwriting standards and active workout policies. Most repossessed collateral had been sold by the
end of 2003, and one remaining parcel was soldThe decrease ($2.6
million or 11.1%) in 2004. Compared with year-end
2003, classified loans declined $2.0 million or 8.4%from December 31, 2003, was due to
payoffs, upgrades and chargeoffs, partly offset by new downgrades.
Repossessed collateral decreased to none from $742 thousand at September 30,
2003 and from $90 thousand at year-end 2003, primarily due to two foreclosed
properties totaling $662 thousand sold by the end of 2003, and two small
foreclosed properties sold in 2004, respectively.
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.loans. When the ability to fully collect
nonaccrual loan principal is in doubt, cash payments received are applied
against the principal balance of the loan until such time as full collection
of the remaining recorded balance is expected. Any subsequent interest
received is recorded as interest income on a cash basis.
Page 22
The following is a summary of nonperforming loans and repossessed collateral
on the dates indicated (dollars in thousands):
At JuneSeptember 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Performing nonaccrual loans $2,233 $1,353$2,777 $2,145 $1,658
Nonperforming, nonaccrual loans 4,6953,996 5,484 5,759
---------------------------------------
Total nonaccrual loans 6,928 6,8376,773 7,629 7,417
Loans 90 days past due and
still accruing 202 386182 272 199
---------------------------------------
Total nonperforming loans 7,130 7,2236,955 7,901 7,616
Repossessed collateral 0 1,888742 90
---------------------------------------
Total nonperforming loans and
repossessed collateral $7,130 $9,111$6,955 $8,643 $7,706
=======================================
Allowance for loan losses /
nonperforming loans 757% 750%782% 686% 708%
Performing nonaccrual loans at JuneSeptember 30, 2004 increased $880rose $632 thousand (65.0%(29.5%)
from the same dateperiod in the previous year and rose $575 thousand (34.7%$1.1 million (67.5%) from
December 31, 2003. The increase infrom both periods was due to new loans placed
inon performing nonaccrual, status, partially offset by payoffs, chargeoffs, loans
being returned to accrual status and chargeoffs.loans being placed on nonperforming
nonaccrual.
Nonperforming nonaccrual loans at JuneSeptember 30, 2004 decreased $789 thousand$1.5 million
or 14.4%27.1% from the same period a year ago and $1.1$1.8 million or 18.5%(30.6%) from
year-end, 2003. The decreasedecreases resulted from loans being returned to full-accrualaccrual
status, transfers to repossessed collateral or being charged off or paid off,
partially offset by loans being added to nonperforming nonaccrual status.nonaccrual.
Changes in repossessed collateral are discussed above.in the "Classified Loans" section.
The Company had no restructured loans as of September 30, 2004, 2003 and
December 31, 2003.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three and sixnine month periods ended JuneSeptember 30,
2004, if all such loans had performed in accordance with their original
terms, was $111$102 thousand and $231$332 thousand, respectively, compared to $142$110
thousand and $305$415 thousand, respectively, for the secondthird quarter and the first
halfnine months 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 sixnine months ended JuneSeptember 30, 2004, totaled $102$85
thousand and $167$252 thousand, respectively, compared to $146$299 thousand and $217$516
thousand, respectively, for the comparable periods in 2003. These cash
payments represent annualized yields of 5.98%5.46% and 4.78%4.99%, respectively, for
the secondthird quarter and the first sixnine months of 20042003 compared to 7.35%17.36% and
5.22%8.77%, respectively, for the secondthird quarter and the first halfnine months of 2003.
Page 22
Total cash payments received during the secondthird quarter of 2004 which were
applied against the book balance of nonaccrual loans outstanding at JuneSeptember
30, 2004,2003, totaled approximately $72 thousand.$3 thousand, compared with none in 2003. Cash
payments received totaled $98approximately $101 thousand for the sixnine months
ended JuneSeptember 30, 2004.
Management believes the2004, compared with approximately $283 thousand for 2003.
The overall credit quality of the loan portfolio continues to be strong;acceptable;
however, total nonperforming assets could fluctuate from period to period.
The performance of any individual loan can be impacted by external factors
such as the interest rate environment economic conditions or factors particular to the borrower.
NoThe Company expects to maintain the level of nonperforming assets; however,
the Company can give no assurance can be given that additional increases in nonaccrual
loans will not occur in the future.
Page 23
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 $53.9$54.4 million allowance for loan
losses, which constituted 2.33%2.36% of total loans at JuneSeptember 30, 2004, to be
adequate as an allowance against inherent losses. However, 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 SixNine months ended
JuneSeptember 30, JuneSeptember 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Balance, beginning of period $53,835 $54,154$53,949 $54,159 $53,910 $54,227
Loan loss provision 600 750 900 1,500 1,8002,100 2,550
Loans charged off (1,324) (1,841) (2,882) (3,869)(1,116) (1,422) (3,998) (5,291)
Recoveries of previously
charged off loans 688 946 1,421 2,001955 693 2,376 2,694
----------------------------------------------------
Net credit losses (636) (895) (1,461) (1,868)(161) (729) (1,622) (2,597)
----------------------------------------------------
Balance, end of period $53,949 $54,159 $53,949 $54,159$54,388 $54,180 $54,388 $54,180
====================================================
Allowance for loan losses /
loans outstanding 2.33% 2.25%2.36% 2.29%
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,portfolio, time deposits, 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 100 bp and 200 bp, and a falling
rate scenario of 5075 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 JuneSeptember
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 halfnine months of 2004, the Company sold $195.2$209.1 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 $2.2 million from these sales. Also, during the same
period, the Company retired $105 million in FHLB advances with a weighted
average interest rate of 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 $2.2 million were incurred to retire
the FHLB advances prior to their scheduled maturity dates.
Page 24
Liquidity
The Company's principal source of asset liquidity is marketable investment
securities available for sale. At JuneSeptember 30, 2004, investment securities
available for sale totaled $1,025$967 million, representing a decrease of $389$278
million from December 31,September 30, 2003. In addition, at JuneSeptember 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 no amount was
outstanding.million. 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.
Management expextsexpects the Company can access short-term debt financing if
desired. The Company's long-term debt rating from Fitch Ratings is A with a
stable outlook. Management is confident the Company could access additional
long-term debt financing if desired.
In addition, the Company generates significant liquidity from its operating
activities. The Company's profitability during the first sixnine months of 2004
and 2003 generated substantial cash flows, of $54.7 million and $58.8 million,
respectively, which are included in the totals
provided from operations.
Additional cash flows may be provided by financing activities, primarily the
acceptanceoperations of deposits$80.6 million and borrowings from banks. In the first six months of
2004, operating activities provided cash for $36.4$87.6 million, of Company stock
repurchases and $17.3 million in shareholder dividends. In the same period of
2003respectively.
The operating cash flows wereflow in 2004 was more than sufficient to pay for $26.2
million in shareholder dividends repay long term obligations, and repurchase common$41.2 million of stock collectively totaling $47.2 million.repurchases. In
2003, the operating activities provided more than sufficient to pay for $24.4
million in shareholder dividends and $43.9 million of stock repurchases.
During the first three quarters of 2004, other financing activities included
a $181.8 million increase in deposits, partially reduced by a $12.4 million
decrease in short-term borrowings and a $107.2 million payment of FHLB
advances and prepayment fees. During the first nine months of 2003, other
financing activities included the net result of a $242.1 million increase in
deposits and $83.6 million in proceeds from short-term borrowings, reduced by
a $67.2 million payment of FHLB advances and prepayment fees.
During the first nine months of 2004 the Company used $64.2 million fromhad net cash outflows in its
investing activities. Purchases
of securities, net of sales and maturities of investment
securities of $121.1 million were $65.4reduced by net repayments of loans of $19.8
million, resulting in net cash used for investing activities of $103.4
million. The investment securities portfolio increase was generally financed
by a $41.4$181.8 million increase in deposits and $121.9 million of new short-term borrowings.deposits.
The remaining
proceeds were used to repay FHLB advances.Company had net cash outflows in its investing activities during both
nine month periods ended September 30. In 2003, purchases of investment securities, net of sales and
maturities of investment securities were $322.2$426.9 million, which was in part
offset by net repayments of loans of $84.2$125.5 million. The investment
securities portfolio increase was generally financed by a $159.6$242.1 million
increase in deposits, and $43.6a $83.6 million of newincrease in short-term borrowings.
The Company anticipates that loan demand will continue to increase moderately induring the
remainder of 2004 and into 2005, 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 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. Management believes that such restrictions will not have an
impact on the Parent Company's ability to meet its ongoing cash obligations.
The Parent Company maintains a customary $10 million line of credit, under
which no amount was outstanding at September 30, 2004. Such line of credit
was renewed for a one-year term on October 29, 2004 with a new borrowing
capacity of $35 million.
Page 2425
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 732824 thousand and 1.0 million shares and 689 thousand shares induring the first sixnine
months of 2004 and 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
$329.8$351.9 million at JuneSeptember 30, 2004
compared to $357.3 million at June 30, 2003.2004. This amount which is reflectiverepresents an increase of
$11.6 million or 3.4% from December 31, 2003, the effectnet result of common stock repurchases, dividends paid to shareholders and other
comprehensive loss, offset by the generation of earnings and proceeds from the issuance
of stock represents a decrease($9.9 million) and comprehensive income for the period ($69.0
million), partially offset by share repurchases ($41.2 million) and dividends
paid ($26.2 million). Due to the net effect of $27.5 million or 7.7% from a year
ago, and a decrease of $10.6 million or 3.1% from December 31, 2003. Thean increase in equity capital
combined with earning asset growth the Company's ratio of equity to total
assets felldeclined slightly to 7.15%7.59% at JuneSeptember 30, 2004, from 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.ago. The equity to assets ratio was 7.44% onat December 31, 2003.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At JuneSeptember 30, At Minimum
--------------------------December 31, Regulatory
2004 2003 2003 Requirement
----------------------------------------------------
Tier I Capital 10.37% 10.06%10.93% 10.35% 10.13% 4.00%
Total Capital 11.78% 11.32%12.29% 11.61% 11.39% 8.00%
Leverage ratio 6.89% 7.17%7.09% 7.14% 6.85% 4.00%
The risk-based capital ratios improvedratio increased at JuneSeptember 30, 2004, compared withto the
prior year primarily due to an increase in shareholders' equity as a changeresult
of increased net income, partially offset by the Company's common stock
repurchases and dividends paid to shareholders. Also, a decline in
mix of risk-weighted assets.assets contributed to this improvement. The leverage
ratio fell mainly because of asset growth.
When compared with the 2003 year-end, the risk-based capital
ratios rose mainlyratio increased at September 30, 2004 from December 31, 2003 primarily due to
the effect of lower risk-weighted assets. The leverage ratio increased
slightly, the net resultcombination of an increase in the total levelshareholders' equity as a result of
tangible
(excluding goodwillincreased net income and purchase premiums) capital, partially offset by the
effect of asset growth.a reduction in risk-weighted assets.
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".
Page 26
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-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended, as of JuneSeptember 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 25
PART II.II - OTHER INFORMATION
Item 1.1 - 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 in2 - Unregistered Sales of Equity Securities and 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
JuneSeptember 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
-----------------------------------------------------------------
AprilJuly 1
through
April 30 128 $49.31 128 765July 31 68 $51.63 68 667
-----------------------------------------------------------------
MayAugust 1
through
MayAugust 31 27 48.20 27 73822 53.05 22 2,000
-----------------------------------------------------------------
JuneSeptember 1
through
JuneSeptember 30 3 52.61 3 7352 55.27 2 1,998
-----------------------------------------------------------------
Total 158 $49.19 158 73592 $52.04 92 1,998
=================================================================
* Includes 1 thousand, 62 thousand and 32 thousand shares purchased in April, MayJuly,
August and June,September, 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.
Page 27
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.
Shares were repurchased during the second quarter of 2004
pursuant to a program approved byOn August 28, 2003 the Board of Directors on
August 28, 2003 authorizingauthorized a program for the
purchase of up to 2two million shares of the Company's common stock from time
to time through September 1, 2004. A replacement plan was approved by the
Board of Directors on August 27, 2004 to repurchase up to two million shares
prior to September 1, 2004.2005.
Item 3.3 - Defaults upon Senior Securities
None
Item 4.4 - Submission of Matters to a Vote of Security Holders
Proxies forNone
Item 5 - Other Information
(a) None
(b) None
Item 6 - Exhibits
Exhibit 2: Agreement and Plan of Reorganization
among the Annual Meeting of shareholders held on April 22,
2004, were solicited pursuant Regulation 14ACompany, Westamerica Bank,
Redwood Empire Bancorp and National
Bank of the Securities
Exchange ActRedwoods dated as of 1934. The Report of Inspector of election
indicates that 27,683,886 sharesAugust
25, 2004 is incorporated by reference from
Annex A 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 ReportsCompany's Registration Statement
on Form 8-K
(a)S-4 dated October 15, 2004 (File No.
333-119783)
Exhibit 11: Computation of Earnings Per Share on Common
and Common Equivalent Shares and on Common
Shares Assuming Full Dilution
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 April 16, 2004, the Company filed a Report on Form 8-K
with respect to item 12, therein, reporting first quarter,
2004 financial results. Included in the report was a press
release dated April 13, 2004.
Page 2728
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 hereuntothereunto duly
authorized.
WESTAMERICA BANCORPORATION
(Registrant)
August 6,Date: November 9, 2004
/s/ DENNIS R. HANSEN
- -------------- --------------------
Date
Dennis R. Hansen
Senior Vice President
and Controller
(Chief Accounting Officer)