Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 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) 863-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the registrant classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of May 3, 2004
Common Stock, 31,746,617
No Par Value
Page 2
TABLE OF CONTENTS
Page
-------------
Forward Looking Statements 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3
Notes to Unaudited Condensed Consolidated Financial Statements 7
Financial Summary 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 22
Item 4 - Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
Equity Securities 23
Item 3 - Defaults upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
(a) - Exhibits
Exhibit 3 (ii) By-laws, as amended (composite copy) 26
Exhibit 11 - Computation of Earnings Per Share 43
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-(14)(a) 44
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-(14)(a) 45
Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 46
Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 47
(b) - Reports on Form 8-K 24
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; (9) volatility of
rate sensitive deposits; (10) asset/liability matching risks and
liquidity risks; and (11) changes in the securities markets.
The reader is directed to the Company's annual report on Form 10-K for
the year ended December 31, 2003, for further discussion of factors which
could affect the Company's business and cause actual results to differ
materially from those expressed in any forward-looking statement made in
this report. The Company undertakes no obligation to update any
forward-looking statements in this report.
Page 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
At March 31, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Assets:
Cash and cash equivalents $166,649 $186,281 $189,628
Money market assets 534 633 534
Investment securities available for sale 1,219,364 1,048,386 1,413,911
Investment securities held to maturity,
with market values of:
$595,179 at March 31, 2004 586,171
$531,580 at March 31, 2003 520,896
$542,729 at December 31, 2003 535,377
Loans, gross 2,322,881 2,456,161 2,323,330
Allowance for loan losses (53,834) (54,154) (53,910)
---------------------------------------
Loans, net of allowance for loan losses 2,269,047 2,402,007 2,269,420
Other real estate owned 80 88 90
Premises and equipment, net 35,412 36,543 35,748
Interest receivable and other assets 147,559 191,621 131,677
---------------------------------------
Total Assets $4,424,816 $4,386,455 $4,576,385
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,210,829 $1,129,455 $1,240,379
Interest bearing:
Transaction 562,369 553,105 561,696
Savings 1,049,435 980,291 1,058,082
Time 624,543 667,237 603,834
---------------------------------------
Total deposits 3,447,176 3,330,088 3,463,991
Short-term borrowed funds 491,704 416,219 590,646
Federal Home Loan Bank advance 20,000 170,000 105,000
Notes Payable 21,429 21,393 24,643
Liability for interest, taxes and
other expenses 105,907 111,809 51,734
---------------------------------------
Total Liabilities 4,086,216 4,049,509 4,236,014
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
31,787 at March 31, 2004 217,477
32,907 at March 31, 2003 214,019
32,287 at December 31, 2003 218,461
Deferred compensation 1,824 1,272 1,824
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale, net 21,213 20,710 13,191
Retained earnings 98,086 100,945 106,895
---------------------------------------
Total Shareholders' Equity 338,600 336,946 340,371
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,424,816 $4,386,455 $4,576,385
=======================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three months ended
March 31,
2004 2003
--------------------------
Interest Income:
Loans $34,023 $40,413
Money market assets and funds sold 0 3
Investment securities available for sale
Taxable 11,284 7,901
Tax-exempt 3,874 3,770
Investment securities held to maturity
Taxable 858 2,316
Tax-exempt 4,372 2,722
--------------------------
Total interest income 54,411 57,125
--------------------------
Interest Expense:
Transaction deposits 112 242
Savings deposits 1,111 1,708
Time deposits 1,930 2,957
Short-term borrowed funds 1,131 851
Federal Home Loan Bank advance 896 1,575
Debt financing and notes payable 335 404
--------------------------
Total interest expense 5,515 7,737
--------------------------
Net Interest Income 48,896 49,388
--------------------------
Provision for loan losses 750 900
--------------------------
Net Interest Income After
Provision For Loan Losses 48,146 48,488
--------------------------
Noninterest Income:
Service charges on deposit accounts 6,868 6,425
Merchant credit card 825 862
Trust fees 250 238
Financial services commissions 187 207
Mortgage banking 133 226
Securities gains 1,788 15
Loss on extinguishment of debt (1,814) 0
Other 2,629 2,402
--------------------------
Total Noninterest Income 10,866 10,375
--------------------------
Noninterest Expense:
Salaries and related benefits 13,526 13,698
Occupancy 2,948 2,995
Data processing 1,517 1,559
Equipment 1,162 1,374
Courier service 884 929
Professional fees 409 413
Other real estate owned 2 1
Other 4,544 4,566
--------------------------
Total Noninterest Expense 24,992 25,535
--------------------------
Income Before Income Taxes 34,020 33,328
Provision for income taxes 9,706 10,316
--------------------------
Net Income $24,314 $23,012
==========================
Comprehensive Income:
Change in unrealized gain on
securities available for sale, net 8,022 1,558
--------------------------
Comprehensive Income $32,336 $24,570
==========================
Average Shares Outstanding 32,051 33,110
Diluted Average Shares Outstanding 32,662 33,565
Per Share Data:
Basic Earnings $0.76 $0.70
Diluted Earnings 0.74 0.69
Dividends Paid 0.26 0.24
See accompanying notes to unaudited condensed consolidated financial statements.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(unaudited)
Accumulated
Compre-
Common Deferred hensive Retained
Shares Stock Compensation Income Earnings Total
------------------------------------------------------------------------------
Balance, December 31, 2002 33,411 $215,926 $1,272 $19,152 $105,149 $341,499
Net income for the period 23,012 23,012
Stock issued for stock
compensation 63 1,177 1,177
Stock option tax benefits 554 554
Purchase and retirement of stock (567) (3,638) (19,260) (22,898)
Dividends (7,956) (7,956)
Unrealized gain on securities
available for sale, net 1,558 1,558
------------------------------------------------------------------------------
Balance, March 31, 2003 32,907 $214,019 $1,272 $20,710 $100,945 $336,946
==============================================================================
Balance, December 31, 2003 32,287 $218,461 $1,824 $13,191 $106,895 $340,371
Net income for the period 24,314 24,314
Stock issued for stock
compensation 74 2,515 2,515
Stock option tax benefits 445 445
Purchase and retirement of stock (574) (3,944) (24,732) (28,676)
Dividends (8,391) (8,391)
Unrealized gain on securities
available for sale, net 8,022 8,022
------------------------------------------------------------------------------
Balance, March 31, 2004 31,787 $217,477 $1,824 $21,213 $98,086 $338,600
==============================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 6
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
unaudited)
For the three months
ended March 31,
--------------------------
2004 2003
--------------------------
Operating Activities:
Net income $24,314 $23,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 956 1,079
Amortization of intangibles and other assets 574 549
Loan loss provision 750 900
Amortization of deferred net loan fees 122 295
Decrease in interest income receivable 1,797 173
Increase in other assets (4,609) (81)
Increase in income taxes payable 9,558 11,164
Decrease in interest expense payable (347) (234)
Increase (decrease) in other liabilities 1,190 (202)
Gain on sales of investment securities (1,788) 0
Loss on extinguishment of debt 1,814 0
Originations of loans for resale (2,468) (1,737)
Proceeds from sale of loans originated for resale 2,469 2,180
Net gain (loss) on sale of other real estate owned 223 (49)
--------------------------
Net Cash Provided by Operating Activities 34,555 37,049
--------------------------
Investing Activities:
Net (disbursements) repayments of loans (502) 36,767
Purchases of investment securities available for sale (27,063) (292,827)
Purchases of investment securities held to maturity (88,315) (118,047)
Purchases of property, plant and equipment (620) (723)
Proceeds from maturity of securities available for sale 126,430 131,869
Proceeds from maturity of securities held to maturity 24,667 36,136
Proceeds from sale of securities available for sale 148,360 63,091
Proceeds from sale of property and equipment 0 498
Proceeds from sale of other real estate owned 10 293
--------------------------
Net Cash Provided by (Used in) Investing Activities 182,967 (142,943)
--------------------------
Financing Activities:
Net (decrease) increase in deposits (16,816) 36,023
Net (decrease) increase in short-term borrowings (98,942) 66,483
Repayments to the FHLB (86,814) 0
Repayments of notes payable (3,214) (3,214)
Exercise of stock options 2,352 1,160
Repurchases/retirement of stock (28,676) (22,898)
Dividends paid (8,391) (7,956)
--------------------------
Net Cash (Used in) Provided by Financing Activities (240,501) 69,598
--------------------------
Net Decrease In Cash and Cash Equivalents (22,979) (36,296)
--------------------------
Cash and Cash Equivalents at Beginning of Period 189,628 222,577
--------------------------
Cash and Cash Equivalents at End of Period $166,649 $186,281
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $0 $0
Supplemental Disclosure of Cash Flow Activity:
Unrealized gain on securities available for sale, net $8,022 $1,558
Interest paid for the period 5,167 7,503
Income tax benefit from stock option exercises 445 554
See accompanying notes to unaudited condensed consolidated financial statements.
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. The results of operations reflect
interim adjustments, all of which are of a normal recurring nature and
which, in the opinion of Management, are necessary for a fair presentation
of the results for the interim periods presented. The interim results for
the three months ended March 31, 2004 and 2003 are not necessarily
indicative of the results expected for the full year. These unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and accompanying notes as well as
other information included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
Note 2: Significant Accounting Policies.
Certain accounting policies underlying the preparation of these financial
statements require Management to make estimates and judgments. These
estimates and judgments may affect reported amounts of assets and
liabilities, revenues and expenses, and disclosures of contingent assets
and liabilities. The most significant of these involve the Allowance for
Loan Losses, which is discussed in Note 1 to the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
Note 3: Goodwill and Other Intangible Assets
The Company has recorded goodwill and core deposit intangibles associated
with purchase business combinations and, effective January 1, 2002,
accounts for them in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. Accordingly,
goodwill is no longer amortized, but is periodically evaluated for
impairment. The Company determined that no impairment existed as of March
31, 2004. 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 first quarter of 2004, no such
adjustments were recorded.
The following table summarizes the Company's goodwill and core deposit
intangible assets, which are included with Interest receivable and other
assets in the Consolidated Balance Sheets, as of January 1, 2004 and March
31, 2004 (dollars in thousands).
At At
January 1, March 31,
2004 Additions Reductions 2004
----------------------------------------------------
Goodwill $22,968 $0 $0 $22,968
Accumulated Amortization (3,972) 0 0 (3,972)
----------------------------------------------------
Net $18,996 $0 $0 $18,996
====================================================
Core Deposit Intangibles $7,783 $0 $0 $7,783
Accumulated Amortization (4,345) 0 (136) (4,481)
----------------------------------------------------
Net $3,438 $0 ($136) $3,302
====================================================
At March 31, 2004, the estimated aggregate amortization of core deposit
intangibles, in thousands of dollars, for the remainder of 2004 and
annually through 2009 is $408, $469, $427, $427, $427, and $427,
respectively. The weighted average amortization period for core deposit
intangibles is 7.6 years.
Page 8
Note 4: Stock Options
In accordance with SFAS No. 123 "Accounting for Stock-Based Compensation", the
Company accounts for its stock option plans using the intrinsic value method.
Accordingly, compensation expense is recorded on the grant date only if the
current price of the underlying stock exceeds the exercise price of the
option. Had compensation cost been determined based on the fair value method
established by SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
For the three months ended
March 31,
--------------------------
2004 2003
--------------------------
(In thousands, except per share data)
Compensation cost based on fair
value method, net of tax effect $526 $589
Net income:
As reported $24,314 $23,012
Pro forma $23,788 $22,423
Basic earnings per share:
As reported $0.76 $0.70
Pro forma 0.74 0.68
Diluted earnings per share:
As reported $0.74 $0.69
Pro forma 0.73 0.67
Note 5: Post Retirement Benefits
The Company uses an actuarial-based accrual method of accounting for
post-retirement benefits. The Company offers a continuation of group insurance
coverage to employees electing early retirement until age 65. The Company pays
a portion of these early retirees' insurance premium which are determined at
their date of retirement. Beginning in 2004, the Company reimburses 50 percent
of Medicare Part B premiums for all retirees and spouses over 65.
In accordance with SFAS No.132 "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits", the Company provides the following interim
disclosure related to its post-retirement benefit plan.
The following table sets forth the net periodic post retirement benefit costs
for the quarter ended March 31.
For the three months ended
March 31,
---------------------------------------
2004 2003 2002
---------------------------------------
(In thousands)
Service cost $46 $4 $52
Interest cost 43 42 43
Amortization of unrecognized
transition obligation 15 15 15
---------------------------------------
Net periodic cost $104 $61 $110
=======================================
Page 9
WESTAMERICA BANCORPORATION
Financial Summary
(In thousands, except per share data)
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2004 2003 2003
---------------------------------------
Net Interest Income $48,896 $49,388 $49,048
Provision for Loan Losses (750) (900) (750)
Noninterest Income 10,866 10,375 10,492
Noninterest Expense (24,992) (25,535) (25,158)
Provision for income taxes (9,706) (10,316) (9,325)
---------------------------------------
Net Income $24,314 $23,012 $24,307
=======================================
Average Shares Outstanding 32,051 33,110 32,523
Diluted Average Shares Outstanding 32,662 33,565 33,154
Shares Outstanding at Period End 31,787 32,907 32,287
Basic Earnings Per Share $0.76 $0.70 $0.74
Diluted Earnings Per Share 0.74 0.69 0.73
Dividends Paid Per Share $0.26 $0.24 $0.26
Dividend Payout Ratio 35% 35% 36%
Average Balances:
Total Assets $4,451,674 $4,201,864 $4,451,423
Earning Assets 4,157,061 3,906,020 4,149,994
Total Loans 2,281,900 2,424,017 2,285,717
Total Deposits 3,437,549 3,306,929 3,542,433
Shareholders' Equity 320,390 315,132 328,209
Financial Ratios for the Period:
Return On Assets 2.20% 2.22% 2.17%
Return On Equity 30.52% 29.61% 29.38%
Net Interest Margin (FTE)** 5.27% 5.58% 5.26%
Net Loan Losses to Average Loans 0.15% 0.16% 0.18%
Efficiency Ratio* 38.2% 39.6% 38.6%
Balances at Period End:
Total Assets $4,424,816 $4,386,455 $4,576,385
Earning Assets 4,075,123 3,972,065 4,219,450
Total Loans 2,322,881 2,456,161 2,323,330
Total Deposits 3,447,176 3,330,088 3,463,991
Shareholders' Equity 338,600 336,946 340,371
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.32% 2.20% 2.32%
Book Value Per Share $10.65 $10.24 $10.54
Equity to Assets 7.65% 7.68% 7.44%
Total Capital to Risk Adjusted Assets 11.25% 10.71% 11.39%
The above financial summary has been derived from the Company's unaudited
consolidated financial statements. This information should be read in
conjunction with those statements, notes and the other information included
elsewhere herein.
*The efficiency ratio is defined as noninterest expense divided by total revenue
(net interest income on a tax-equivalent basis and noninterest income).
**Fully taxable equivalent
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported first
quarter 2004 net income of $24.3 million or $.74 diluted earnings per share.
These results compare to net income of $23.0 million or $.69 diluted earnings
per share and $24.3 million or $.73 diluted earnings per share, respectively,
for the first and fourth quarters of 2003.
Following is a summary of the components of net income for the periods indicated
(dollars in thousands):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2004 2003 2003
---------------------------------------
Net interest income (FTE) $54,605 $54,062 $54,757
Provision for loan losses (750) (900) (750)
Noninterest income 10,866 10,375 10,492
Noninterest expense (24,992) (25,535) (25,158)
Provision for income taxes (FTE) (15,415) (14,990) (15,034)
---------------------------------------
Net income $24,314 $23,012 $24,307
=======================================
Average total assets $4,451,674 $4,201,864 $4,451,423
Net income (annualized) to average total assets 2.20% 2.22% 2.17%
Net income for the first quarter of 2004 was $1.3 million or 5.7% over the
same quarter of 2003, primarily attributable to higher net interest income
(FTE), higher noninterest income and lower noninterest expense. The increase
in net interest income (FTE) (up $543 thousand or 1.0%) was the net result of
lower rates paid on interest-bearing liabilities and growth of average
interest-earning assets (up $251 million), partially reduced by the effect of
declining yields on those assets. Noninterest income grew $491 thousand or
4.7% and noninterest expense declined $543 thousand or 2.1%. The provision for
income taxes (FTE) increased $425 thousand or 2.8% due to higher pretax
income, partially reduced by higher tax credits earned on low-income housing
investments.
Comparing the first three months of 2004 to the prior quarter, net income
increased $7 thousand, the net result of an increase in noninterest income and
lower noninterest expense, offset by a decline in net interest income. The
$152 thousand or 0.3% decline in net interest income (FTE) was mainly caused
by lower loan fee income and the effect of one less accrual day, partially
mitigated by the effect of higher yields on earning assets and lower rates
paid on interest-bearing liabilities. Noninterest income rose by $374 thousand
or 3.6% and noninterest expense fell $166 thousand or 0.7%. The FTE provision
for income taxes was up $381 thousand or 2.5%.
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2004 2003 2003
---------------------------------------
Interest and fee income $54,411 $57,125 $54,810
Interest expense (5,515) (7,737) (5,763)
FTE adjustment 5,709 4,674 5,710
---------------------------------------
Net interest income (FTE) $54,605 $54,062 $54,757
=======================================
Average earning assets $4,157,061 $3,906,020 $4,149,994
Net interest margin (FTE) 5.27% 5.58% 5.26%
The Company's primary source of revenue is net interest income, or the
difference between interest income earned on loans and investments and
interest expense paid on interest-bearing deposits and borrowings. Net
interest income (FTE) during the first quarter of 2004 increased $543 thousand
or 1.0% from the same period in 2003 to $54.6 million mainly due to growth of
average earning assets (up $251 million), lower rates paid on interest-bearing
liabilities (down 38 bp) and the effect of an additional accrual day.
Offsetting the increase were lower yields on earning assets (down 55 bp) and
lower loan fee income.
Comparing the first quarter of 2004 with the previous quarter, net interest
income (FTE) declined $152 thousand or 0.3%, primarily due to lower loan fee
income and the effect of one less accrual day, offset by an increase in income
related to higher yields on earning assets (up 4 bp) and lower rates paid on
interest-bearing liabilities (down 4 bp).
Page 11
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2004 decreased $1.7
million or 2.7% from the same period in 2003. The decline was caused by lower
loan fee income (down $340 thousand) and lower yields on average earning
assets, partially offset by the positive effect of growth of such assets.
The average yield on the Company's earning assets decreased from 6.38% in the
first quarter of 2003 to 5.80% in the some period in 2004 (down 58 bp). This
decrease in yields was reflective of general interest markets during much of
2003 and into 2004. The yields of all categories of loans declined, most
notably commercial loans (26 bp decline in yield), commercial real estate
loans (51 bp decrease), residential real estate loans (95 bp decrease) and
indirect consumer loans (down 99 bp). The net result was that the yield on the
loan portfolio declined 74 bp to 6.23%.
The investment portfolio yield decreased 15 bp to 5.28%, caused by declines in
U.S. Agency obligations (down 70 bp) and municipal securities (down 44 bp).
Partially offsetting these decreases, the yield on other securities increased
255 bp primarily due to bond call premiums.
Average earning asset expansion of $251 million for the first quarter of 2004
compared to the same period in 2003 was substantially attributable to an
increase in the investment portfolio including mortgage backed securities and
collateralized mortgage obligations (up $261 million), municipal securities
(up $164 million) and U.S. Agency obligations (up $54 million). Other
securities (down $72 million) and U.S. Treasury securities (down $14 million)
decreased.
Average total loans decreased $142 million for the first quarter of 2004
compared to the same period in 2003 as reduced loan demand was reflective of
generally weak economic conditions. Commercial real estate loans declined $141
million, construction loans were down $11 million, and direct consumer loans
declined $11 million. Residential real estate loans (up $17 million) and
commercial loans (up $6 million) increased.
Comparing the first quarter of 2004 with the previous quarter, interest and
fee income (FTE) fell $399 thousand or 0.7%. The decrease largely resulted
from lower loan fee income (down $484 thousand), the effect of one less
accrual day and a change in the mix of earning assets.
The average yield on earning assets excluding loan fees for the first three
months of 2004 was 5.78% compared with 5.74% in the fourth quarter of 2003.
The investment portfolio yield rose by 18 bp. The increase resulted mostly
from higher yields on other securities (up 167 bp) due to bond call premiums,
as well as yields on mortgage backed securities and collateralized mortgage
obligations (up 24 bp).
The loan portfolio yield excluding loan fees for the first quarter of 2004
compared with the previous quarter was lower by 7 bp, due to declines in
indirect consumer loans (down 27 bp), residential real estate loans (down 10
bp), and commercial real estate loans (down 6 bp). Partially offsetting the
decline was a 13 bp increase in commercial loans mainly due to interest
recoveries.
Average earning assets increased $7 million or 0.2% for the first quarter of
2004 compared with the previous quarter but the mix of those assets shifted to
lower-yielding categories, resulting in a decline in volume-related interest
income. Increases in mortgage backed securities and collateralized mortgage
obligations (up $77 million) and indirect consumer loans (up $21 million) were
reduced by declines in commercial real estate (down $21 million), U.S. Agency
obligations (down $43 million), other securities (down $15 million) and
municipal securities (down $8 million).
Interest Expense
Interest expense decreased $2.2 million or 28.7% in the first three months of
2004 compared with the same period in 2003. The decrease was attributable to a
drop in the average rate paid on interest-bearing liabilities and the effect
of a change in the mix of those liabilities.
The average rate paid on interest-bearing liabilities decreased from 1.14% in
the first quarter of 2003 to 0.77% in 2004. Rates paid on most liabilities
moved with general market conditions: the average rate on short-term
borrowings dropped 14 bp and rates on deposits declined as well, including
those on CDs over $100 thousand, which declined 57 bp; on retail CDs, which
dropped by 52 bp; and on high-yield money market accounts, which were lowered
an average of 23 bp.
Interest-bearing liabilities grew $150 million or 5.5% for the first quarter
of 2004 over the same period of 2003, although the mix of those liabilities
shifted to lower-rate categories, resulting in a decrease in volume-related
interest expense. Short-term funds increased $185 million or 53.0%, and money
market accounts grew $58 million or 4.7%. These increases were partially
reduced by declines in FHLB advances (down $73 million or 43.2%), retail CDs
(down $34 million or 11.1%) and CDs over $100 thousand (down $8 million or
2.4%).
Page 12
Comparing the first quarter of 2004 to the previous quarter, interest expense
fell $248 thousand or 4.3%, due to the effect of one less accrual day and
lower rates paid on interest-bearing liabilities, partially offset by growth
of such liabilities.
Rates paid on liabilities averaged 0.77% during the first three months of 2004
compared to 0.80% in the fourth quarter of 2003. The most significant rate
declines were money market accounts which fell 6 bp, CDs over $100 thousand
which declined 7 bp, retail CDs which dropped by 6 bp, and long-term debt
which declined 23 bp.
Interest-bearing liabilities grew $38 million or 1.3% over the fourth quarter
of 2003. Short-term funds grew $114 million or 27.3% and long-term debt
increased $3 million or 13.8%. These increases were reduced by declines in
money market accounts (down $54 million or 4.0%), FHLB advances (down $8
million or 8.0%), and CDs over $100 thousand (down $8 million or 2.3%).
In all periods, the Company has attempted to continue to reduce high-rate time
deposits while increasing the balances of more profitable, lower-cost
transaction accounts in order to minimize the cost of funds.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated:
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2004 2003 2003
---------------------------------------
Yield on earning assets 5.80% 6.38% 5.81%
Rate paid on interest-bearing
liabilities 0.77% 1.14% 0.80%
---------------------------------------
Net interest spread 5.03% 5.24% 5.01%
Impact of all other net
noninterest bearing funds 0.24% 0.34% 0.25%
---------------------------------------
Net interest margin 5.27% 5.58% 5.26%
=======================================
During the first quarter of 2004, the net interest margin fell 31 bp compared
to the same period in 2003. Yields on earnings assets declined faster than
rates paid on interest-bearing liabilities, resulting in a 21 bp decline in
net interest spread. The unfavorable impact of lower rates earned on loans and
the investment portfolio was a result of market trends and was partially
mitigated by decreases in rates paid on deposits and short-term funds. The
decline in the net interest spread was further widened by the lower value of
noninterest bearing funding sources. While the average balance of these
sources increased $84 million or 11.0%, their value decreased 10 bp because of
the lower market rates of interest at which they could be invested.
The net interest margin increased 1 bp when compared with the fourth quarter
of 2003. Earning asset yields decreased 1 bp and the cost of interest-bearing
liabilities fell by 3 bp, resulting in a 2 bp increase in the interest spread.
Noninterest bearing funding sources decreased $31 million or 3.5% causing
their margin contribution to decrease by 1 bp.
Page 13
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders'
equity, the amount of interest income from average earning assets and the
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest
income includes proceeds from loans on nonaccrual status only to the extent
cash payments have been received and applied as interest income. Yields on
securities and certain loans have been adjusted upward to reflect the effect
of income which is exempt from federal income taxation at the current
statutory tax rate (dollars in thousands).
For the three months ended
March 31, 2004
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $670 $0 0.00%
Investment securities:
Available for sale
Taxable 1,048,215 11,284 4.31%
Tax-exempt 308,882 5,780 7.49%
Held to maturity
Taxable 97,353 858 3.53%
Tax-exempt 407,250 6,808 6.69%
Loans:
Commercial:
Taxable 345,762 4,822 5.61%
Tax-exempt 231,582 3,970 6.89%
Commercial real estate 805,420 14,856 7.42%
Real estate construction 38,766 685 7.11%
Real estate residential 346,881 3,980 4.59%
Consumer 513,489 7,077 5.54%
--------------------------
Total loans 2,281,900 35,390 6.23%
--------------------------
Total earning assets 4,144,270 60,120 5.80%
Other assets 307,404
-------------
Total assets $4,451,674
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,209,299 $-- --
Savings and interest-bearing
transaction 1,605,200 1,223 0.31%
Time less than $100,000 282,647 1,004 1.43%
Time $100,000 or more 340,403 926 1.09%
--------------------------
Total interest-bearing deposits 2,228,250 3,153 0.57%
Short-term borrowed funds 533,158 1,131 0.84%
Federal Home Loan Bank advances 96,613 896 3.75%
Debt financing and notes payable 22,537 335 5.95%
--------------------------
Total interest-bearing liabilities 2,880,558 5,515 0.77%
Other liabilities 41,427
Shareholders' equity 320,390
-------------
Total liabilities and shareholders' equity $4,451,674
=============
Net interest spread (1) 5.03%
Net interest income and interest margin (2) $54,605 5.27%
==========================
(1) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance
of earning assets.
Page 14
For the three months ended
March 31, 2003
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $788 $3 1.54%
Investment securities:
Available for sale
Taxable 698,668 7,901 4.52%
Tax-exempt 303,011 5,807 7.67%
Held to maturity
Taxable 252,690 2,316 3.67%
Tax-exempt 226,846 4,068 7.17%
Loans:
Commercial:
Taxable 368,782 5,245 5.77%
Tax-exempt 202,591 3,803 7.61%
Commercial real estate 946,276 18,737 8.03%
Real estate construction 49,756 886 7.22%
Real estate residential 330,044 4,570 5.54%
Consumer 526,568 8,463 6.52%
--------------------------
Total loans 2,424,017 41,704 6.97%
--------------------------
Total earning assets 3,906,020 61,799 6.38%
Other assets 295,844
-------------
Total assets $4,201,864
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,117,566 $-- --
Savings and interest-bearing
transaction 1,522,540 1,950 0.52%
Time less than $100,000 318,043 1,526 1.95%
Time $100,000 or more 348,780 1,431 1.66%
Total interest-bearing deposits 2,189,363 4,907 0.91%
Short-term borrowed funds 348,479 851 0.98%
--------------------------
Federal Home Loan Bank advances 170,000 1,575 3.72%
Debt financing and notes payable 22,430 404 7.18%
--------------------------
Total interest-bearing liabilities 2,730,272 7,737 1.14%
Other liabilities 38,894
Shareholders' equity 315,132
-------------
Total liabilities and shareholders' equity $4,201,864
=============
Net interest spread (1) 5.24%
Net interest income and interest margin (2) $54,062 5.58%
==========================
(1) Net interest spread represents the average yield earned on earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average
balance of earning assets.
Page 15
For the three months ended
December 31, 2003
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $956 $2 0.83%
Investment securities:
Available for sale
Taxable 1,012,155 10,156 4.01%
Tax-exempt 314,104 5,856 7.46%
Held to maturity
Taxable 113,107 879 3.11%
Tax-exempt 410,108 6,868 6.70%
Loans:
Commercial:
Taxable 353,914 4,884 5.47%
Tax-exempt 222,457 3,847 6.86%
Commercial real estate 826,792 16,062 7.71%
Real estate construction 40,140 706 6.98%
Real estate residential 347,994 4,075 4.68%
Consumer 494,420 7,185 5.77%
--------------------------
Total loans 2,285,717 36,759 6.26%
--------------------------
Total earning assets 4,136,147 60,520 5.81%
Other assets 315,276
-------------
Total assets $4,451,423
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,243,860 $-- --
Savings and interest-bearing
transaction 1,655,264 1,510 0.36%
Time less than $100,000 294,904 1,087 1.46%
Time $100,000 or more 348,405 1,025 1.17%
--------------------------
Total interest-bearing deposits 2,298,573 3,622 0.63%
Short-term borrowed funds 418,896 856 0.80%
Federal Home Loan Bank advances 105,000 979 3.65%
Debt financing and notes payable 19,804 306 6.18%
--------------------------
Total interest-bearing liabilities 2,842,273 5,763 0.80%
Other liabilities 37,081
Shareholders' equity 328,209
-------------
Total liabilities and shareholders' equity $4,451,423
=============
Net interest spread (1) 5.01%
Net interest income and interest margin (2) $54,757 5.26%
==========================
(1) Net interest spread represents the average yield earned on earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average
balance of earning assets.
Page 16
Summary of Changes in Interest Income and Expense due to
Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income and
interest expense due to changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in
thousands).
Three months ended March 31, 2004
compared with three months
ended March 31, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($0) ($3) ($3)
Investment securities:
Available for sale
Taxable 3,853 (470) 3,383
Tax-exempt 138 (165) (27)
Held to maturity
Taxable (1,354) (104) (1,458)
Tax-exempt 3,034 (294) 2,740
Loans:
Commercial:
Taxable (276) (147) (423)
Tax-exempt 551 (384) 167
Commercial real estate (2,502) (1,379) (3,881)
Real estate construction (187) (14) (201)
Real estate residential 251 (841) (590)
Consumer (128) (1,258) (1,386)
---------------------------------------
Total loans (2,291) (4,023) (6,314)
---------------------------------------
Total earning assets 3,380 (5,059) (1,679)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 114 (841) (727)
Time less than $100,000 (145) (377) (522)
Time $100,000 or more (23) (482) (505)
---------------------------------------
Total interest-bearing deposits (54) (1,700) (1,754)
---------------------------------------
Short-term borrowed funds 412 (132) 280
Federal Home Loan Bank advances (663) (16) (679)
Debt financing and notes payable 6 (75) (69)
---------------------------------------
Total interest-bearing liabilities (299) (1,923) (2,222)
---------------------------------------
Increase (Decrease) in Net Interest Income $3,679 ($3,136) $543
=======================================
Page 17
Three months ended March 31, 2004
compared with three months
ended December 31, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 ($2) ($2)
Investment securities:
Available for sale
Taxable 242 886 1,128
Tax-exempt (105) 29 (76)
Held to maturity
Taxable (141) 120 (21)
Tax-exempt (55) (5) (60)
Loans:
Commercial:
Taxable (174) 112 (62)
Tax-exempt 105 18 123
Commercial real estate (595) (611) (1,206)
Real estate construction (33) 12 (21)
Real estate residential (39) (56) (95)
Consumer 180 (288) (108)
---------------------------------------
Total loans (556) (813) (1,369)
---------------------------------------
Total earning assets (615) 215 (400)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (59) (228) (287)
Time less than $100,000 (58) (25) (83)
Time $100,000 or more (34) (65) (99)
---------------------------------------
Total interest-bearing deposits (151) (318) (469)
---------------------------------------
Short-term borrowed funds 229 46 275
Federal Home Loan Bank advances (88) 5 (83)
Debt financing and notes payable 37 (8) 29
---------------------------------------
Total interest-bearing liabilities 27 (275) (248)
---------------------------------------
Decrease in Net Interest Income ($642) $490 ($152)
=======================================
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 manage credit costs by
enforcing underwriting and administration procedures and aggressively pursuing
collection efforts with troubled debtors. The Company provided $750 thousand
for loan losses in the first quarter of 2004 and the fourth quarter of 2003,
compared with $900 thousand in the first quarter of 2003. The provision
reflects management's assessment of credit risk in the loan portfolio for each
of the periods presented. For further information regarding net credit losses
and the allowance for loan losses, see the "Classified Loans" section of this
report.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2004 2003 2003
---------------------------------------
Service charges on deposit accounts $6,868 $6,425 $6,572
Merchant credit card fees 825 862 864
ATM fees and interchange 583 560 573
Debit card fees 549 494 512
Check sale income 294 244 294
Trust fees 250 238 235
Financial services commissions 187 207 227
Mortgage banking income 133 226 139
Official check sales income 127 133 120
Gains on sale of foreclosed property 223 2 28
Securities gains 1,788 15 0
Loss on extinguishment of debt (1,814) 0 0
Other noninterest income 853 969 928
---------------------------------------
Total $10,866 $10,375 $10,492
=======================================
Noninterest income for the first quarter of 2004 rose by $491 thousand or 4.7%
from the same period in 2003. Included in the current period are $1.8 million
securities gains and a $1.8 million loss on the extinguishment of $85 million
of FHLB advances. For details of securities gains and losses on extinguishment
of FHLB advances, see the "Asset and Liability Management" section of this
report below. Service charges on deposit accounts increased $443 thousand or
6.9% mostly due to repricing of checking services which became effective in
Page 18
February of 2004 and an expanded debit card overdraft program which became
effective in January of 2004. Gains on sale of foreclosed properties were
higher by $221 thousand than in the first quarter of 2003. Other noninterest
income decreased by $116 thousand or 12.0% mostly due to a $118 thousand gain
on sale of the former Westamerica Kerman branch building in the first quarter
of 2003.
In the first quarter of 2004, noninterest income increased $374 thousand or
3.6% compared with the previous quarter. The largest positive contributor was
service charges on deposit accounts, which increased $296 thousand or 4.5%.
Such service charge income rose because of new pricing affecting overdraft and
DDA activity charges implemented in the first quarter of 2004 and annual IRA
fees collected in the first quarter of 2004. Gains on sale of foreclosed
properties were higher by $195K than in the fourth quarter of 2003. The first
quarter of 2004 included $1.8 million securities gains and a $1.8 million loss
to retire $85 million of FHLB advances, as discussed above and elsewhere in
this report. Other noninterest income declined $75 thousand or 8.1% largely
due to $115 thousand proceeds received in the fourth quarter of 2003 from the
demutualization of the life insurance company with which the Company has
policies.
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2004 2003 2003
---------------------------------------
Salaries and incentives $10,362 $10,512 $10,394
Employee benefits 3,164 3,186 2,790
Occupancy 2,948 2,995 3,037
Equipment 1,162 1,374 1,290
Data processing services 1,517 1,559 1,523
Courier service 884 929 900
Telephone 572 425 530
Postage 395 420 422
Professional fees 409 413 486
Merchant credit card 272 342 207
Stationery and supplies 288 318 344
Loan expense 255 276 326
Customer checks 197 246 264
Correspondent service charges 239 243 224
Advertising/public relations 215 220 291
Operational losses 243 173 297
Employee recruiting 47 42 37
Foreclosed property expense 2 1 32
Amortization of deposit intangibles 136 249 165
Other noninterest expense 1,685 1,612 1,599
---------------------------------------
Total $24,992 $25,535 $25,158
=======================================
Average full time equivalent staff 1,001 1,047 1,007
Noninterest expense to revenues (FTE) 38.17% 39.63% 38.56%
Noninterest expense decreased $543 thousand or 2.1% in the first quarter of
2004 compared to the same period in 2003. The largest decrease was equipment
expense, which was down $212 thousand or 15.4% due to a $129 thousand decrease
in depreciation and lower spending on hardware and software maintenance.
Salaries and incentives were down $150 thousand or 1.4% due to lower regular
salaries and a decrease in incentive payments. A $96 thousand drop in regular
salary was attributable to a smaller workforce, partially offset by annual
merit increases in salaries. Amortization of deposit intangibles fell by $113
thousand or 45.4% due to expiration of purchase premium amortization. The
largest increase in expenditures was telephone expense, which rose $147
thousand or 34.6% due to increased line charges necessitated by a major
upgrade in the Company's electronic network.
In the first three months of 2004, noninterest expense declined $166 thousand
or 0.7% compared with the fourth quarter of 2003. Equipment expense declined
$128 thousand or 9.9% primarily because the prior quarter included purchases
of incidental equipment including security equipment, fraud detection devices
and office furniture. Depreciation expense increased for the electronic
upgrade in the first quarter of 2004. Employee benefits rose by $374 thousand
largely the net result of a seasonal increase in payroll taxes.
Provision for Income Tax
During the first quarter of 2004, the Company recorded income tax expense
(FTE) of $15.4 million, $425 thousand or 2.8% higher than the first quarter of
2003. The current quarter provision represents an effective tax rate of 38.7%,
compared to 39.4% and 38.2% for the first and fourth quarters of 2003,
respectively.
Page 19
The change in the provision for income taxes is primarily attributable to the
respective levels of earnings and tax credits earned from low-income housing
investments which increased $222 thousand in the first quarter of 2004 over
the same period last year and decreased $270 thousand from the fourth quarter
of 2003.
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.
The following is a summary of classified loans and repossessed collateral on
the dates indicated (dollars in thousands):
At March 31, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Classified loans $22,965 $32,505 $23,460
Repossessed collateral 80 88 90
Classified loans and repossessed collateral $23,045 $32,593 $23,550
=======================================
Allowance for loan losses /
classified loans 234% 167% 230%
Classified loans at March 31, 2004, decreased $9.5 million or 29.3% from a
year ago, primarily due to upgrades, payoffs and chargeoffs, partially reduced
by new downgrades. Repossessed collateral declined $8 thousand or 9.1% from
March 31, 2003, primarily the net result of additions of six properties with a
total carrying value of $1.8 million, partially reduced by sales of five
properties totaling $1.5 million and $299 thousand in principal reductions. A
$495 thousand decline in classified loans from December 31, 2003 was mainly
due to payoffs, upgrades and chargeoffs, partly offset by new downgrades.
Repossessed collateral declined $10 thousand or 11.1% from December 31 due to
a sale of a foreclosed property valued at $10 thousand.
Nonperforming Loans
Nonperforming loans include nonaccrual loans and loans 90 days past due as to
principal or interest and still accruing. Loans are placed on nonaccrual
status when they become 90 days or more delinquent, unless the loan is well
secured and in the process of collection. Interest previously accrued on loans
placed on nonaccrual status is charged against interest income. In addition,
loans secured by real estate with temporarily impaired values and commercial
loans to borrowers experiencing financial difficulties are placed on
nonaccrual status even though the borrowers continue to repay the loans as
scheduled. Such loans are classified as "performing nonaccrual" and are
included in total nonperforming assets. When the ability to fully collect
nonaccrual loan principal is in doubt, cash payments received are applied
against the principal balance of the loan until such time as full collection
of the remaining recorded balance is expected. Any subsequent interest
received is recorded as interest income on a cash basis.
The following is a summary of nonperforming loans and OREO on the dates
indicated (dollars in thousands):
At March 31, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Performing nonaccrual loans $2,212 $2,471 $1,658
Nonperforming, nonaccrual loans 5,045 6,402 5,759
---------------------------------------
Total nonaccrual loans 7,257 8,873 7,417
Loans 90 days past due and
still accruing 190 320 199
---------------------------------------
Total nonperforming loans 7,447 9,193 7,616
Other real estate owned 80 88 90
---------------------------------------
Total $7,527 $9,281 $7,706
=======================================
Allowance for loan losses /
nonperforming loans 723% 589% 708%
Performing nonaccrual loans at March 31, 2004 decreased $259 thousand or 10.5%
from a year ago as a result of charge-offs, loans being returned to accrual
status and loans being placed on nonperforming nonaccrual, offset by new loans
placed on nonaccrual. Performing nonaccrual loans at March 31, 2004 increased
Page 20
$554 thousand or 33.4% from December 31 due to new loans placed on nonaccrual,
offset by charge-offs, loans being returned to accrual status and loans being
placed on nonperforming nonaccrual.
Nonperforming nonaccrual loans at March 31, 2004 decreased $1.4 million or
21.2% and $714 thousand or 12.4% from the previous year and December 31, 2003,
respectively. The increase was due to the net result of loans being added to
nonaccrual, partially offset by others being returned to full-accrual status
or being charged off or paid off.
Changes in repossessed collateral are discussed above.
The Company had no restructured loans as of March 31, 2004, 2003 and December
31, 2003.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three months ended March 31, 2004, if all such loans
had been current in accordance with their original terms, was $120 thousand,
compared to $163 thousand and $113 thousand, respectively, for the first and
fourth quarters 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 months ended March 31, 2004, totaled $64 thousand, compared
to $71 thousand and $78 thousand, respectively, for the first and fourth
quarters of 2003. These cash payments represent annualized yields of 3.62% for
first three months of 2004 compared to 3.28% and 4.54%, respectively, for the
first and the fourth quarter of 2003.
Total cash payments received, including those recorded in prior years, which
were applied against the book balance of nonaccrual loans outstanding at March
31, 2004, totaled approximately $26 thousand, compared with $184 thousand and
$47 thousand for the first and the fourth quarters of 2003, respectively.
Management believes the overall credit quality of the loan portfolio continues
to be strong; however, nonperforming assets could fluctuate from period to
period. The performance of any individual loan can be impacted by external
factors such as the interest rate environment, economic conditions or factors
particular to the borrower. No assurance can be given that additional
increases in nonaccrual loans will not occur in the future.
Allowance for Loan Losses
The Company's allowance for loan losses is maintained at a level estimated to
be adequate to provide for losses that can be estimated based upon specific
and general conditions. These include credit loss experience, the amount of
past due, nonperforming and classified loans, recommendations of regulatory
authorities, prevailing economic conditions and other factors. The allowance
is allocated to segments of the loan portfolio based in part on quantitative
analyses of historical credit loss experience, in which criticized and
classified loan balances are analyzed using a linear regression model to
determine standard allocation percentages. The results of this analysis are
applied to current criticized and classified loan balances to allocate the
allowance to the respective segments of the loan portfolio. In addition, loans
with similar characteristics not usually criticized using regulatory
guidelines due to their small balances and numerous accounts, are analyzed
based on the historical rate of net losses and delinquency trends, grouped by
the number of days the payments on these loans are delinquent. A portion of
the allowance is also allocated to specific impaired loans. As of the date of
this report, Management considers the $53.8 million allowance for loan losses,
which constituted 2.32% of total loans at March 31, 2004, to be adequate as an
allowance against inherent losses. However, while the Company's policy is to
charge off in the current period those loans on which the loss is considered
probable, the risk exists of future losses which cannot be precisely
quantified or attributed to particular loans or classes of loans. Management
continues to evaluate the loan portfolio and assess current economic
conditions that will dictate future required allowance levels.
The following table summarizes the loan loss provision, net credit losses and
allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2004 2003 2003
---------------------------------------
Balance, beginning of period $53,910 $54,227 $54,180
Loan loss provision 750 900 750
Loans charged off (1,558) (2,028) (1,542)
Recoveries of previously
charged off loans 732 1,055 522
---------------------------------------
Net credit losses (826) (973) (1,020)
---------------------------------------
Balance, end of period $53,834 $54,154 $53,910
=======================================
Allowance for loan losses /
loans outstanding 2.32% 2.20% 2.32%
Page 21
Asset and Liability Management
The fundamental objective of the Company's management of assets and
liabilities is to maximize economic value while maintaining adequate liquidity
and a conservative level of interest rate risk. The Company actively solicits
loans and transaction deposit accounts. Asset and liability management
techniques include adjusting the duration, liquidity, volume, rates and
yields, and other attributes of its loan products, investment portfolios,
deposit products, and other funding sources to achieve Company objectives.
The primary analytical tool used by the Company to gauge interest rate risk is
a simulation model to project changes in net interest income ("NII") that
result from forecast changes in interest rates. The analysis calculates the
difference between a NII forecast over a 12-month period using a flat interest
rate scenario, and a NII forecast using a rising rate scenario where the Fed
Funds rate is made to rise evenly by 200 bp, and a falling rate scenario of 50
bp over the 12-month forecast interval triggering a response in the other
forecasted rates. Company policy requires that such simulated changes in NII
should be within certain specified ranges or steps must be taken to reduce
interest rate risk. The results of the model indicate that the mix of interest
rate sensitive assets and liabilities at March 31, 2004 would not result in a
fluctuation of NII that would exceed the parameters established by Company
policy.
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 quarter 2004, the Company sold $144.8 million of
available-for-sale securities to reduce the average duration of the securities
portfolios in a rising rate environment. The Company realized securities gains
of $1.8 million from these sales. Also, during the first quarter of 2004, the
Company retired $85 million in FHLB advances with a weighted average interest
rate of 3.63% in an effort to reduce its aggregate cost of funds. The majority
of the retired FHLB advances had scheduled maturity dates prior to January 15,
2005, while others had scheduled maturity dates ranging from May to August
2005. Losses totaling $1.8 million were incurred to retire the FHLB advances
prior to their scheduled maturity dates.
Liquidity
The Company's principal source of asset liquidity is marketable investment
securities available for sale. At March 31, 2004, investment securities
available for sale totaled $1,219 million, representing a decrease of $195
million from December 31, 2003. In addition, at March 31, 2004, the Company
had customary lines for overnight borrowings from other financial institutions
in excess of $500 million and a $10 million line of credit under which $5.9
million was outstanding. Additionally, as a member of the Federal Reserve
System, the Company has access to borrowing from the Federal Reserve. The
Company's short-term debt rating from Fitch Ratings is F1 with a stable
outlook. Management expects 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.
The Company generates significant liquidity from its operating activities. The
Company's profitability during the first three months of 2004 and 2003
generated substantial cash flows of $36.3 million and $37.0 million,
respectively. In 2004 operating activities provided cash for $28.7 million of
Company stock repurchases and $8.4 million in shareholder dividends. In 2003
operating cash flows were more than sufficient to pay shareholder dividends,
repay long term obligations, and repurchase common stock collectively totaling
$34 million.
In 2004, the Company generated $179.4 million from its investing activities.
Sales and maturities net of purchases were $180.5 million, which were used to
reduce short-term borrowings by $98.9 million and to prepay $85 million FHLB
advances. In 2003, purchases net of sales and maturities of investment
securities were $180 million, which was in part offset by net repayments of
loans of $37 million. The investment securities portfolio increase was
generally financed by a $36 million increase in deposits and $66 million of
new short-term borrowings.
The Company anticipates that loan demand will increase moderately in 2004,
consistent with economic conditions. The growth of deposit balances is
expected to exceed the anticipated growth in loan demand during the period.
Depending on economic conditions, interest rate levels, and a variety of other
conditions, excess deposit growth will be used to purchase investment
securities or to reduce short-term borrowings.
Westamerica Bancorporation ("the Parent Company") is separate and apart from
Westamerica Bank ("the Bank") and must provide for its own liquidity. In
addition to its operating expenses, the Parent Company is responsible for the
payment of dividends to its shareholders, and interest and principal on
Page 22
outstanding senior debt. Substantially all of the Parent Company's revenues
are obtained from service fees and dividends received from the Bank. Payment
of such dividends to the Parent Company by the Bank is limited under
regulations for Federal Reserve member banks and California law. The amount
that can be paid in any calendar year, without prior approval from federal and
state regulatory agencies, cannot exceed the net profits (as defined) for that
year plus the net profits of the preceding two calendar years less dividends
paid. The Company believes that such restrictions will not have an impact on
the Parent Company's ability to meet its ongoing cash obligations.
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 574 thousand shares in the first quarter of 2004, 568
thousand shares in the first quarter of 2003, and 530 thousand in the fourth
quarter of 2003.
The Company's capital position represents the level of capital available to
support continued operations and expansion. The Company's primary capital
resource is shareholders' equity, which was $338.6 million at March 31, 2004.
This amount, which is reflective of the effect of common stock repurchases and
dividends paid to shareholders offset by the generation of earnings and
proceeds from the issuance of stock, represents an increase of $1.6 million or
0.5% from a year ago, and a decrease of $1.8 million or 0.5% from December 31,
2003. Despite an increase in shareholders' equity, the Company's ratio of
equity to total assets fell to 7.65% at March 31, 2004, from 7.68% a year ago
due to asset growth. The equity to assets ratio was 7.44% on December 31,
2003.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At March 31, At Minimum
--------------------------December 31, Regulatory
2004 2003 2003 Requirement
----------------------------------------------------
Tier I Capital 9.89% 9.45% 10.13% 4.00%
Total Capital 11.25% 10.71% 11.39% 8.00%
Leverage ratio 6.63% 7.00% 6.85% 4.00%
The risk-based capital ratios improved at March 31, 2004, compared with the
prior year primarily due to an increase in the total level of tangible
(excluding goodwill and purchase premiums) capital and a change in mix of
risk-weighted assets. The leverage ratio fell because of asset growth.
When compared with the 2003 year-end, the capital and leverage ratios
declined, the net result of the effect of common stock repurchases and lower
retained earnings, partially offset by the effect of lower risk-weighted
assets.
Capital ratios are reviewed by Management on a regular basis to ensure that
capital exceeds the prescribed regulatory minimums and is adequate to meet the
Company's anticipated future needs. All ratios as shown in the table above are
in excess of the regulatory definition of "well capitalized".
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk, even though such activities may be
permitted with the approval of the Company's Board of Directors.
Interest rate risk as discussed above is the most significant market risk
affecting the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, are not significant
in the normal course of the Company's business activities.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-14(c) of the Securities
Exchange Act of 1934, as amended, as of March 31, 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 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of the banking business, the Company's Subsidiary Bank is at
times party to various legal actions; all such actions are of a routine nature
and arise in the normal course of business of the Subsidiary Bank.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) None
(b) None
(c) None
(d) None
(e) Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by
or on behalf of Westamerica Bancorporation or any "affiliated purchaser" (as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of
common stock during the quarter ended March 31, 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
---------------------------------------------------------------
January 1
through
January 31 151 $49.58 151 1,316
---------------------------------------------------------------
February 1
through
February 29 275 50.06 275 1,041
---------------------------------------------------------------
March 1
through
March 31 148 49.84 148 893
---------------------------------------------------------------
Total 574 $49.88 574 893
===============================================================
* Includes 6, 8 and 2 shares purchased in January, February and March,
respectively, by the Company in private transactions with the independent
administrator of the Company's Tax Deferred Savings/Retirement Plan (ESOP).
The Company includes the shares purchased in such transactions within the
total number of shares authorized for purchase pursuant to the currently
existing publicly announced program.
The Company repurchases shares of its common stock in the open market to
optimize the Company's use of equity capital and enhance shareholder value and
with the intention of lessening the dilutive impact of issuing new shares to
meet stock performance, option plans, and other ongoing requirements.
On August 28, 2003, the Board of Directors authorized the purchase of up to
two million shares of the Company's common stock from time to time prior to
September 1, 2004.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibit 3 (ii): By-laws, as amended (composite copy)
Exhibit 11: Computation of Earnings Per Share on Common
and Common Equivalent Shares and on Common
Shares Assuming Full Dilution
Page 24
Exhibit 31.1: Certification of Chief Executive
Officer pursuant to Securities
Exchange Act Rule 13a-(14)(a)
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-(14)(a)
Exhibit 32.1: Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2: Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b)Reports on Form 8-K
On January 26, 2004, the Company filed a Report on Form 8-K
with respect to item 12, therein, reporting fourth quarter,
2003 financial results. Included in the report was a press
release dated January 20, 2004.
Page 25
SIGNATURES
- ------------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
WESTAMERICA BANCORPORATION
(Registrant)
May 10, 2004 /s/ DENNIS R. HANSEN
- -------------- --------------------
Date Dennis R. Hansen
Senior Vice President
and Controller
(Chief Accounting Officer)
Pages 26-42
Exhibit 3 (ii)
By-laws, as amended (composite copy)
Page 43
Exhibit 11
WESTAMERICA BANCORPORATION
Computation of Earnings Per Share on Common and
Common Equivalent Shares and on Common Shares
Assuming Full Dilution
For the three months
ended March 31,
(In thousands, except per share data) 2004 2003
--------------------------
Weighted average number of common
shares outstanding - basic 32,051 33,110
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 611 455
--------------------------
Weighted average number of common
shares outstanding - diluted 32,662 33,565
==========================
Net income $24,314 $23,012
Basic earnings per share $0.76 $0.70
Diluted earnings per share $0.74 $0.69