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 the 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 issuer's classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of November 2, 2004
Common Stock, 31,843,961
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 Disclosure about Market Risk 26
Item 4 - Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 26
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3 - Defaults upon Senior Securities 27
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 5 - Other Information 27
Item 6 - Exhibits 27
Exhibit 11 - Computation of Earnings Per Share 29
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to 30
Securities Exchange Act Rule 13a-14(a) and 15d-14(a)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to 31
Securities Exchange Act Rule 13a-14(a) and 15d-14(a)
Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 32
Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 33
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about Westamerica
Bancorporation for which it claims the protection of the safe harbor provisions
contained in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. A number of factors,
some of which are beyond the Company's ability to predict or control, could
cause future results to differ materially from those contemplated. These
factors include but are not limited to (1) a 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
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 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 - FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
At September 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Assets:
Cash and cash equivalents $165,277 $189,269 $189,628
Money market assets 534 633 534
Investment securities available for sale 967,266 1,245,311 1,413,911
Investment securities held to maturity,
with market values of:
$1,089,568 at September 30, 2004 1,080,392
$575,862 at September 30, 2003 569,996
$542,729 at December 31, 2003 535,377
Loans, gross 2,301,991 2,364,418 2,323,330
Allowance for loan losses (54,388) (54,180) (53,910)
---------------------------------------
Loans, net of allowance for loan losses 2,247,603 2,310,238 2,269,420
Premises and equipment, net 35,267 35,566 35,748
Interest receivable and other assets 139,732 131,780 131,767
---------------------------------------
Total Assets $4,636,071 $4,482,793 $4,576,385
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,323,446 $1,213,578 $1,240,379
Interest-bearing:
Transaction 561,206 559,031 561,696
Savings 1,119,356 1,075,625 1,058,082
Time 641,798 687,895 603,834
---------------------------------------
Total deposits 3,645,806 3,536,129 3,463,991
Short-term borrowed funds 578,285 433,348 590,646
Federal Home Loan Bank advance 0 105,000 105,000
Notes Payable 21,429 9,643 24,643
Liability for interest, taxes and
other expenses 38,627 47,751 51,734
---------------------------------------
Total Liabilities 4,284,147 4,131,871 4,236,014
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
31,716 at September 30, 2004 222,344
32,723 at September 30, 2003 218,703
32,287 at December 31, 2003 218,461
Deferred compensation 2,146 1,824 1,824
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale, net of tax 8,186 16,004 13,191
Retained earnings 119,248 114,391 106,895
---------------------------------------
Total Shareholders' Equity 351,924 350,922 340,371
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,636,071 $4,482,793 $4,576,385
=======================================
See accompanying notes to unaudited consolidated financial statements.
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------------------------------------------------
Interest Income:
Loans $32,911 $37,491 $100,337 $117,324
Money market assets and funds sold 0 2 1 6
Investment securities available for sale
Taxable 7,171 8,632 26,581 25,051
Tax-exempt 3,550 3,922 11,068 11,733
Investment securities held to maturity
Taxable 5,725 697 10,325 4,235
Tax-exempt 4,547 4,216 13,275 10,335
----------------------------------------------------
Total interest income 53,904 54,960 161,587 168,684
----------------------------------------------------
Interest Expense:
Transaction deposits 163 145 399 598
Savings deposits 955 1,440 3,057 4,711
Time deposits 2,135 2,400 5,943 8,055
Short-term borrowed funds 1,473 747 3,890 2,559
Federal Home Loan Bank advance 0 1,172 897 4,339
Debt financing and notes payable 316 385 968 1,173
----------------------------------------------------
Total interest expense 5,042 6,289 15,154 21,435
----------------------------------------------------
Net Interest Income 48,862 48,671 146,433 147,249
----------------------------------------------------
Provision for loan losses 600 750 2,100 2,550
----------------------------------------------------
Net Interest Income After
Provision For Loan Losses 48,262 47,921 144,333 144,699
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 7,465 6,735 21,693 19,809
Merchant credit card 899 993 2,633 2,755
Financial services commissions 409 249 956 666
Mortgage banking 41 185 304 712
Trust fees 265 245 773 760
Securities (losses) gains (14) 2,150 2,169 2,443
Loss on extinguishment of debt 0 (2,166) (2,204) (2,166)
Other 2,723 2,622 7,990 7,445
----------------------------------------------------
Total Noninterest Income 11,788 11,013 34,314 32,424
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 13,054 13,495 39,912 40,792
Occupancy 3,022 3,076 8,913 9,116
Equipment 1,101 1,319 3,536 4,074
Data processing 1,525 1,520 4,563 4,597
Professional fees 411 529 1,332 1,400
Other 5,378 5,595 16,217 16,567
----------------------------------------------------
Total Noninterest Expense 24,491 25,534 74,473 76,546
----------------------------------------------------
Income Before Income Taxes 35,559 33,400 104,174 100,577
----------------------------------------------------
Provision for income taxes 10,464 9,327 30,121 29,822
----------------------------------------------------
Net Income $25,095 $24,073 $74,053 $70,755
====================================================
Other Comprehensive Income:
Change in unrealized gain on
securities available for sale, net 9,602 (9,998) (5,005) (3,148)
----------------------------------------------------
Other Comprehensive Income $34,697 $14,075 $69,048 $67,607
====================================================
Average Shares Outstanding 31,713 32,770 31,841 32,959
Diluted Average Shares Outstanding 32,352 33,273 32,452 33,442
Per Share Data:
Basic Earnings $0.79 $0.73 $2.33 $2.15
Diluted Earnings 0.78 0.72 2.28 2.12
Dividends Paid 0.28 0.26 0.82 0.74
See accompanying notes to unaudited consolidated financial statements.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
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 70,755 70,755
Stock issued for stock options 327 5,650 5,650
Stock option tax benefits 3,514 3,514
Restricted stock activity 24 407 552 959
Purchase and retirement of stock (1,039) (6,794) (37,080) (43,874)
Dividends (24,433) (24,433)
Unrealized loss on securities
available for sale, net (3,148) (3,148)
------------------------------------------------------------------------------
Balance, September 30, 2003 32,723 $218,703 $1,824 $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 74,053 74,053
Stock issued for stock options 237 7,084 7,084
Stock option tax benefits 2,003 2,003
Restricted stock activity 16 467 322 789
Purchase and retirement of stock (824) (5,671) (35,531) (41,202)
Dividends (26,169) (26,169)
Unrealized loss on securities
available for sale, net (5,005) (5,005)
------------------------------------------------------------------------------
Balance, September 30, 2004 31,716 $222,344 $2,146 $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)
For the nine months
ended September 30,
2004 2003
--------------------------
Operating Activities:
Net income $74,053 $70,755
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 2,885 3,105
Amortization of intangibles 1,722 1,479
Loan loss provision 2,100 2,550
(Amortization) deferral of net loan origination fees (46) 148
Decrease in interest income receivable 541 300
(Increase) decrease in other assets (4,204) 58,158
(Decrease) increase in income taxes payable (3,494) 3,266
Decrease in interest expense payable (134) (689)
Increase (decrease) in other liabilities 7,383 (51,707)
Gain on sales of investment securities (2,169) (2,443)
Loss on extinguishment of debt 2,204 2,166
Net loss on writedown of equipment 9 140
Originations of loans for resale (3,622) (7,797)
Net proceeds from sale of loans originated for resale 3,583 7,949
Net gain on sale of property acquired
in satisfaction of debt (231) (94)
Writedown on property acquired in satisfaction of debt 0 307
--------------------------
Net Cash Provided by Operating Activities 80,580 87,593
--------------------------
Investing Activities:
Net repayments of loans 19,801 125,521
Purchases of investment securities available for sale (96,027) (835,207)
Purchases of investment securities held to maturity (641,443) (365,878)
Purchases of property, plant and equipment (2,414) (3,273)
Proceeds from maturity of securities available for sale 317,231 423,784
Proceeds from maturity of securities held to maturity 89,976 197,298
Proceeds from sale of securities available for sale 209,085 153,128
Proceeds from sale of property and equipment 0 1,859
Proceeds from property acquired in satisfaction of debt 321 1,132
--------------------------
Net Cash Used In Investing Activities (103,470) (301,636)
--------------------------
Financing Activities:
Net increase in deposits 181,814 242,062
Net (decrease) increase in short-term borrowings (12,361) 83,612
Net payments to Federal Home Loan Bank (107,204) (67,166)
Repayments of notes payable (3,214) (14,964)
Exercise of stock options/issuance of shares 6,875 5,498
Repurchases/retirement of stock (41,202) (43,874)
Dividends paid (26,169) (24,433)
--------------------------
Net Cash (Used In) Provided By Financing Activities (1,461) 180,735
--------------------------
Net Decrease In Cash and Cash Equivalents (24,351) (33,308)
--------------------------
Cash and Cash Equivalents at Beginning of Period 189,628 222,577
--------------------------
Cash and Cash Equivalents at End of Period $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:
Interest paid for the period 15,019 21,122
Income tax payments for the period 30,010 27,105
Income tax benefit from stock option exercises 2,003 3,514
See accompanying notes to unaudited 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 period presented. The interim results for the three and nine
months ended September 30, 2004 and 2003 are not necessarily indicative of
the results expected for the full year. These unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes as well as other
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
Note 2: Significant Accounting Policies
Certain accounting policies underlying the preparation of these financial
statements require Management to make estimates and judgments. These
estimates and judgments may affect reported amounts of assets and
liabilities, revenues and expenses, and disclosures of contingent assets and
liabilities. The most significant of these involve the Allowance for Loan
Losses, which is discussed in Note 1 to the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
Note 3: Goodwill and Other Intangible Assets
The Company has recorded goodwill and core deposit intangibles associated with
purchase business combinations and, effective January 1, 2002, accounts for
them in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. Accordingly, goodwill is not amortized,
but is periodically evaluated for impairment. During 2004, no impairment of
goodwill has been recorded. Core deposit intangibles are amortized over their
expected useful lives; such lives are periodically reassessed to determine if
any amortization adjustments are indicated. During the third 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
September 30, 2004 (dollars in thousands).
January 1 September 30
(Dollar in Thousands) 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 $408 ($4,753)
----------------------------------------------------
Net $3,438 $0 $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.
Page 8
Note 4: Stock Options
As 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 Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
(In thousands, except per share data)
Compensation cost based on fair
value method, net of tax effect $526 $589 $1,578 $1,767
Net income:
As reported $25,095 $24,073 $74,053 $70,755
Pro forma 24,569 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 $2.28 $2.12
Pro forma $0.76 $0.71 $2.23 $2.06
Note 5: Post Retirement Benefits
The Company offers a continuation of group insurance coverage to employees
electing early retirement until age 65 and pays a portion of these early
retirees' insurance premiums, as determined at their date of retirement. The
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 nine months ended September 30.
For the nine months ended
September 30,
---------------------------------------
2004 2003 2002
---------------------------------------
(In thousands)
Service cost $139 $11 $155
Interest cost 128 127 129
Amortization of unrecognized
transition obligation 46 46 46
---------------------------------------
Net periodic cost $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
(Unaudited)
(dollars in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Net Interest Income (FTE)** $54,528 $54,264 $163,405 $162,650
Provision for loan losses (600) (750) (2,100) (2,550)
Noninterest income:
Investment 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 (24,491) (25,534) (74,473) (76,546)
Provision for income taxes (FTE)** (16,130) (14,920) (47,093) (45,223)
----------------------------------------------------
Net income $25,095 $24,073 $74,053 $70,755
====================================================
Average shares outstanding 31,713 32,770 31,841 32,959
Diluted average shares outstanding 32,352 33,273 32,452 33,442
Shares outstanding at period end 31,716 32,723 31,716 32,723
As Reported:
Basic earnings per share $0.79 $0.73 $2.33 $2.15
Diluted earnings per share 0.78 0.72 2.28 2.12
Return on assets 2.19% 2.18% 2.20% 2.20%
Return on equity 30.05% 29.25% 30.56% 29.38%
Net interest margin 5.11% 5.31% 5.20% 5.44%
Net loan losses to average loans 0.03% 0.12% 0.10% 0.15%
Efficiency ratio* 36.9% 39.1% 37.7% 39.2%
Average Balances:
Total assets $4,557,925 $4,373,156 $4,497,287 $4,293,136
Earning assets 4,260,701 4,072,793 4,198,373 3,995,287
Total loans 2,247,664 2,331,855 2,266,184 2,377,121
Total deposits 3,616,319 3,500,911 3,514,373 3,392,758
Shareholders' equity 332,219 326,529 323,723 322,003
Balances at Period End:
Total assets $4,636,071 $4,482,793
Earning assets 4,356,635 4,180,358
Total loans 2,301,991 2,364,418
Total deposits 3,645,806 3,536,129
Shareholders' equity 351,924 350,922
Financial Ratios at Period End:
Allowance for loan losses to loans 2.36% 2.29%
Book value per share $11.10 $10.72
Equity to assets 7.59% 7.83%
Total capital to risk-adjusted assets 12.29% 11.61%
Dividends Paid Per Share $0.28 $0.26 $0.82 $0.74
Dividend Payout Ratio 36% 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 such 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 $25.1 million or
diluted earnings per share of $0.78. These results compare with net income
for the third quarter 2003 of $24.1 million or $0.72 per share.
On a year-to-date basis, the Company reported net income for the nine months
ended September 30, 2004 of $74.1 million or diluted earnings per share of
$2.28, compared with $70.8 million or $2.12 per share for the same period of
2003.
Following is a summary of the components of income. 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 (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Net interest income (FTE) $54,528 $54,264 $163,405 $162,650
Provision for loan losses (600) (750) (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 11,788 11,013 34,314 32,424
Noninterest expense (24,491) (25,534) (74,473) (76,546)
Provision for income taxes (FTE) (16,130) (14,920) (47,093) (45,223)
----------------------------------------------------
Net income $25,095 $24,073 $74,053 $70,755
====================================================
Average diluted shares 32,352 33,273 32,452 33,442
Diluted earnings per share $0.78 $0.72 $2.28 $2.12
Average total assets 4,557,925 4,373,156 4,497,287 4,293,136
Net income (annualized) to average total assets 2.19% 2.18% 2.20% 2.20%
Net income for the third quarter of 2004 was $1.0 million or 4.2% more than
for the same quarter of 2003. The increase in net interest income (FTE) ($264
thousand) was attributable to the effect of higher average earning 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 primarily due to growth in deposit 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 reduced in part by higher low-income housing investment tax credits.
Comparing the first nine months of 2004 to the prior year, net income rose
$3.3 million or 4.7%. The increase was attributable to higher net interest
income (FTE), a lower loan 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 higher average earning assets (up
$203.1 million) and growth in lower interest-bearing liabilities, offset by 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 Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Interest and fee income $53,904 $54,960 $161,587 $168,684
Interest expense (5,042) (6,289) (15,154) (21,435)
FTE adjustment 5,666 5,593 16,972 15,401
----------------------------------------------------
Net interest income (FTE) $54,528 $54,264 $163,405 $162,650
====================================================
Average earning assets $4,260,701 $4,072,793 $4,198,373 $3,995,287
Net interest margin (FTE) 5.11% 5.31% 5.20% 5.44%
Net interest income (FTE) during the third quarter of 2004 increased $264
thousand or 0.5% from the same period in 2003, to $54.5 million. The increase
was attributable to higher average low rate interest-bearing liabilities and
higher average earning assets, partly offset by a lower net interest margin
and lower fee income.
Comparing the first nine months of 2004 with the prior year, net interest
income (FTE) rose $755 thousand or 0.5%. The increase was caused by the net
effect of higher average earning assets, higher average low rate
interest-bearing liabilities, one additional accrual day, and a lower loan
fee income and a declining net interest margin.
Interest and Fee Income
Interest & fee income (FTE) for the third quarter of 2004 decreased $983
thousand or 1.6% from the same period in 2003. The decline was the net effect
of higher average earning assets, more than offset by lower yields earned on
those assets and lower loan fee income. Average earning assets grew $187.9
million or 4.6%. The earning asset growth was led by expansion in the
investment portfolio of $272.1 million as follows: mortgage backed securities
and collateralized mortgage obligations (up $278.9 million), US Agency
obligations (up $38.3 million) and municipal securities (up $23.5 million).
Other securities declined $63.3 million. The growth in the investments was
diminished by an $84.2 million reduction in loans including commercial real
estate loans (down $115.0 million) and direct consumer loans (down $6.1
million), net of a $14.0 million increase in indirect consumer loans, a $13.6
million increase in residential real estate loans and a $11.1 million
increase in commercial loans.
The average yield on the Company's earning assets decreased for the third
quarter from 5.92% in 2003 to 5.58% (down 34 bp). This downward trend in
yields was reflective of a change in the earning asset mix and general
interest rate declines during 2003 and into much of 2004, as evident in
indirect consumer loans (90 bp decline in yield), residential real estate
loans (47 bp decline) and commercial real estate loans (35 bp decline). As a
result, the loan portfolio yield decreased 44 bp. The investment portfolio
yield rose 3 bp, the net result of a decline in premium write-offs from
mortgage prepayments, resulting in increases in yields on mortgage backed
securities and collateralized mortgage 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 nine months of 2004 to 2003, interest and fee income
(FTE) decreased by $5.5 million or 3.0%. The decline was the combined effect
of lower yields, lower fee income, a higher volume of earning assets and one
additional accrual day. Average earning assets increased $203.1 million or
5.1%, mainly due to increases in mortgage backed securities and
collateralized mortgage obligations (up $248.8 million), municipal securities
(up $95.4 million), U.S. Agency obligations (up $41.4 million), residential
real estate loans (up $17.7 million), commercial loans (up $11.1 million) and
indirect consumer loans (up $6.2 million). The following components
decreased: commercial real estate loans (down $130.8 million), direct
consumer loans (down $8.8 million), construction loans (down $6.3 million),
other securities (down $61.8 million) and U.S. Treasury securities (down $9.7
million).
Page 12
The average yield on earning assets for the first nine months of 2004 was
5.68% compared with 6.15% for the same period in 2003. Major decreases in
loan yields included a 95 bp decline in indirect consumer loans, a 75 bp
decrease in residential real estate loans, a 43 bp decline in the yield on
commercial real estate loans and a 20 bp decrease in the yield on commercial
loans and a 36 bp decline in personal credit lines. As a result, the
composite loan yield declined 59 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 $1.2 million or 19.8% in the third quarter of 2004
compared to the same year-ago 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 from 0.89% in 2003 to 0.69% in 2004. The average
rate on money market savings declined 27 bp while the average rate paid on
federal funds purchased rose 42 bp and the yield on public CDs rose 33 bp.
A $76.5 million or 2.7% increase in average interest-bearing liabilities in
the third quarter resulted in a decrease in volume-related expense as higher
rate interest bearing liabilities were replaced by lower rates. Federal Home
Loan Bank ("FHLB") advances with higher rates decreased from $124.1 million
to none whereas federal funds purchased increased $135.7 million and money
market savings increased $65.9 million.
During the first nine months of 2004, interest expense decreased $6.3 million
or 29.3% from 2003, again due to a lower average rate paid on
interest-bearing liabilities and a lower volume of those liabilities. The
average rate paid was 0.70% in 2004 compared with 1.03% in 2003. Most deposit
categories declined including money market savings (down 31 bp), Jumbo CDs
(down 33 bp), public CDs (down 15 bp), regular savings (down 11 bp), retail
CDs (down 31 bp), money market checking accounts (down 5 bp) and preferred
money market (down 30 bp). The rates on customer sweep accounts declined 27
bp and long term debt decreased 129 bp.
Interest-bearing liabilities grew $93.8 million or 3.4% for the nine months
ended September 30, 2004 and caused a mix-related decrease in interest
expense 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 (up $62.6
million).
In all periods, the Company has continuously attempted to reduce high-rate
time deposits while increasing the balances of more profitable, lower-cost
transaction accounts in order to minimize the effect of adverse cyclical
trends.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Yield on earning assets 5.58% 5.92% 5.68% 6.15%
Rate paid on interest-bearing
liabilities 0.69% 0.89% 0.70% 1.03%
----------------------------------------------------
Net interest spread 4.89% 5.03% 4.98% 5.12%
Impact of all other net
noninterest bearing funds 0.22% 0.28% 0.22% 0.32%
----------------------------------------------------
Net interest margin 5.11% 5.31% 5.20% 5.44%
====================================================
During the third quarter of 2004, the net interest margin declined 20 bp
compared to the same period in 2003. Yields on earning assets declined faster
than did rates paid on interest-bearing liabilities, resulting in a 14 bp
decline in net interest spread. The unfavorable impact of lower rates earned
on loans, triggered by market trends, was partially mitigated by the effect
of paydowns of FHLB advances and decreases in rates paid on deposits and
long-term debt. 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 $96.7 million or 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 24 bp
when compared to the same period in 2003. Earning asset yields decreased 47
bp and the cost of interest-bearing liabilities fell by 33 bp, resulting in a
14 bp decline in the net interest spread. Noninterest-bearing funding sources
increased $102.8 million or 13.0% and because of lower market rates of
interest their margin contribution decreased by 10 bp, with their value
decreasing to 22 bp.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information
regarding the Company's consolidated average assets, liabilities and
shareholders' equity, the amounts of interest income from average earning
assets and the resulting yields, and the amount of interest expense paid on
interest-bearing liabilities. Average loan balances include nonperforming
loans. Interest income includes proceeds from loans on nonaccrual status only
to the extent cash payments have been received and applied as interest
income. Yields on securities and certain loans have been adjusted upward to
reflect the effect of income exempt from federal income taxation at the
current statutory tax rate (dollars in thousands).
For the three months ended
September 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 712,378 7,171 4.03%
Tax-exempt 286,551 5,291 7.39%
Held to maturity
Taxable 586,377 5,725 3.91%
Tax-exempt 427,197 7,081 6.63%
Loans:
Commercial
Taxable 351,467 5,105 5.78%
Tax-exempt 238,481 4,029 6.72%
Commercial real estate 752,395 13,955 7.38%
Real estate construction 34,977 619 7.04%
Real estate residential 365,559 4,047 4.43%
Consumer 504,785 6,547 5.16%
--------------------------
Total loans 2,247,664 34,302 6.08%
--------------------------
Total earning assets 4,260,701 59,570 5.58%
Other assets 297,224
-------------
Total assets $4,557,925
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,305,840 $-- --
Savings and interest-bearing
transaction 1,696,316 1,118 0.26%
Time less than $100,000 266,584 999 1.49%
Time $100,000 or more 347,579 1,136 1.30%
--------------------------
Total interest-bearing deposits 2,310,479 3,253 0.56%
Short-term borrowed funds 550,909 1,473 1.05%
Federal Home Loan Bank advance 0 0 0.00%
Debt financing and notes payable 21,428 316 5.90%
--------------------------
Total interest-bearing liabilities 2,882,816 5,042 0.69%
Other liabilities 37,050
Shareholders' equity 332,219
-------------
Total liabilities and shareholders' equity $4,557,925
=============
Net interest spread (1) 4.89%
Net interest income and interest margin (2) $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, divided by the average balance of earning
assets.
Page 14
For the three months ended
September 30, 2003
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $633 $2 1.25%
Investment securities:
Available for sale
Taxable 863,851 8,632 4.00%
Tax-exempt 315,930 5,882 7.45%
Held to maturity
Taxable 181,909 697 1.53%
Tax-exempt 378,615 6,528 6.90%
Loans:
Commercial
Taxable 367,465 5,191 5.60%
Tax-exempt 211,364 3,842 7.21%
Commercial real estate 867,422 17,310 7.92%
Real estate construction 37,311 666 7.08%
Real estate residential 351,973 4,306 4.89%
Consumer 496,320 7,497 5.99%
--------------------------
Total loans 2,331,855 38,812 6.61%
--------------------------
Total earning assets 4,072,793 60,553 5.92%
Other assets 300,363
-------------
Total assets $4,373,156
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,203,378 $-- --
Savings and interest-bearing
transaction 1,599,917 1,585 0.39%
Time less than $100,000 303,334 1,191 1.56%
Time $100,000 or more 394,282 1,209 1.21%
--------------------------
Total interest-bearing deposits 2,297,533 3,985 0.69%
Short-term borrowed funds 363,394 747 0.81%
Federal Home Loan Bank advance 124,086 1,172 3.72%
Debt financing and notes payable 21,262 385 7.24%
--------------------------
Total interest-bearing liabilities 2,806,275 6,289 0.89%
Other liabilities 36,974
Shareholders' equity 326,529
-------------
Total liabilities and shareholders' equity $4,373,156
=============
Net interest spread (1) 5.03%
Net interest income and interest margin (2) $54,264 5.31%
==========================
Page 15
For the nine months ended
September 30, 2004
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $534 $1 0.25%
Investment securities:
Available for sale
Taxable 851,878 26,581 4.16%
Tax-exempt 297,013 16,505 7.41%
Held to maturity
Taxable 367,698 10,325 3.74%
Tax-exempt 415,066 20,685 6.64%
Loans:
Commercial
Taxable 346,449 14,709 5.67%
Tax-exempt 238,281 11,956 6.70%
Commercial real estate 779,075 43,520 7.46%
Real estate construction 36,844 1,905 6.91%
Real estate residential 357,836 12,023 4.48%
Consumer 507,699 20,349 5.35%
--------------------------
Total loans 2,266,184 104,462 6.16%
--------------------------
Total earning assets 4,198,373 178,559 5.68%
Other assets 298,914
-------------
Total assets $4,497,287
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,257,089 $-- --
Savings and interest-bearing
transaction 1,640,438 3,456 0.28%
Time less than $100,000 274,261 2,958 1.44%
Time $100,000 or more 342,585 2,985 1.16%
--------------------------
Total interest-bearing deposits 2,257,284 9,399 0.56%
Short-term borrowed funds 566,044 3,890 0.90%
Federal Home Loan Bank advance 32,204 897 3.66%
Debt financing and notes payable 21,798 968 5.92%
--------------------------
Total interest-bearing liabilities 2,877,330 15,154 0.70%
Other liabilities 39,145
Shareholders' equity 323,723
-------------
Total liabilities and shareholders' equity $4,497,287
=============
Net interest spread (1) 4.98%
Net interest income and interest margin (2) $163,405 5.20%
==========================
Page 16
For the nine months ended
September 30, 2003
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $633 $6 1.27%
Investment securities:
Available for sale
Taxable 758,691 25,151 4.42%
Tax-exempt 335,827 17,573 6.98%
Held to maturity
Taxable 222,775 4,235 2.53%
Tax-exempt 300,240 15,937 7.08%
Loans:
Commercial
Taxable 367,947 15,779 5.73%
Tax-exempt 205,727 11,247 7.31%
Commercial real estate 909,838 54,466 8.00%
Real estate construction 43,103 2,343 7.27%
Real estate residential 340,160 13,334 5.23%
Consumer 510,346 24,014 6.29%
--------------------------
Total loans 2,377,121 121,183 6.81%
--------------------------
Total earning assets 3,995,287 184,085 6.15%
Other assets 297,849
-------------
Total assets $4,293,136
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,150,518 $-- --
Savings and interest-bearing
transaction 1,553,206 5,309 0.46%
Time less than $100,000 311,104 4,062 1.75%
Time $100,000 or more 377,930 3,993 1.41%
--------------------------
Total interest-bearing deposits 2,242,240 13,364 0.80%
Short-term borrowed funds 364,850 2,559 0.93%
Federal Home Loan Bank advance 154,695 4,339 3.70%
Debt financing and notes payable 21,695 1,173 7.21%
--------------------------
Total interest-bearing liabilities 2,783,480 21,435 1.03%
Other liabilities 37,135
Shareholders' equity 322,003
-------------
Total liabilities and shareholders' equity $4,293,136
=============
Net interest spread (1) 5.12%
Net interest income and interest margin (2) $162,650 5.44%
==========================
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 from changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in
thousands).
Three months ended September 30, 2004
compared with three months
ended September 30, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($0) ($2) ($2)
Investment securities:
Available for sale
Taxable (1,546) 85 (1,461)
Tax-exempt ($543) (48) (591)
Held to maturity
Taxable $2,962 2,066 5,028
Tax-exempt $815 (262) 553
Loans:
Commercial
Taxable ($238) 152 (86)
Tax-exempt $463 (276) 187
Commercial real estate ($2,220) (1,135) (3,355)
Real estate construction (43) (4) (47)
Real estate residential 163 (422) (259)
Consumer 124 (1,074) (950)
---------------------------------------
Total loans (1,751) (2,759) (4,510)
---------------------------------------
Total earning assets (63) (920) (983)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 90 (557) (467)
Time less than $100,000 (142) (50) (192)
Time $100,000 or more (151) 78 (73)
---------------------------------------
Total interest-bearing deposits (203) (529) (732)
---------------------------------------
Short-term borrowed funds 457 269 726
Federal Home Loan Bank advance (1,172) 0 (1,172)
Debt financing and notes payable 3 (72) (69)
---------------------------------------
Total interest-bearing liabilities (915) (332) (1,247)
---------------------------------------
Increase in Net Interest Income $852 ($588) $264
=======================================
Page 18
Nine months ended September 30, 2004
compared with nine months
ended September 30, 2003
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($1) (4) ($5)
Investment securities:
Available for sale
Taxable 3,013 (1,583) $1,430
Tax-exempt ($2,090) 1,022 ($1,068)
Held to maturity
Taxable $3,536 2,554 $6,090
Tax-exempt $5,780 (1,032) $4,748
Loans:
Commercial
Taxable ($894) (176) ($1,070)
Tax-exempt $1,705 (996) $709
Commercial real estate ($7,385) (3,561) ($10,946)
Real estate construction (324) (114) ($438)
Real estate residential 695 (2,006) ($1,311)
Consumer (52) (3,613) ($3,665)
---------------------------------------
Total loans (6,255) (10,466) (16,721)
---------------------------------------
Total earning assets 3,983 (9,509) (5,526)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 295 (2,148) (1,853)
Time less than $100,000 (439) (665) (1,104)
Time $100,000 or more (342) (666) (1,008)
---------------------------------------
Total interest-bearing deposits (486) (3,479) (3,965)
---------------------------------------
Short-term borrowed funds 1,386 (55) 1,331
Federal Home Loan Bank advance (3,396) (46) (3,442)
Debt financing and notes payable 9 (214) (205)
---------------------------------------
Total interest-bearing liabilities (2,487) (3,794) (6,281)
---------------------------------------
Increase in Net Interest Income $6,470 ($5,715) $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 $600
thousand for loan losses in the third quarter of 2004 and $750 thousand in
the same quarter of 2003. For the first nine months of 2004, $2.1 million was
provided while in 2003, $2.6 million was provided. The lower provision
reflects management's assessment of credit risk in the loan 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 Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Service charges on deposit accounts $7,465 $6,735 $21,693 $19,809
Merchant credit card 899 993 2,633 2,755
ATM fees and interchange 664 644 1,889 1,805
Debit card fees 654 556 1,841 1,613
Other service fees 466 404 1,322 1,153
Mortgage banking income 41 185 304 712
Financial services commissions 409 249 956 666
Trust fees 265 245 773 760
Securities gains (losses) (14) 2,150 2,169 2,443
Loss on extinguishment of debt 0 (2,166) (2,204) (2,166)
Other noninterest income 939 1,018 2,938 2,874
----------------------------------------------------
Total noninterest income $11,788 $11,013 $34,314 $32,424
====================================================
Noninterest income for the third quarter of 2004 was $11.8 million, up $775
thousand or 7.0% compared with the same quarter of 2003. Higher income from
service charges on deposits (up $730 thousand) mainly resulted from enhanced
overdraft processing programs and repricing 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.
A $160 thousand increase in financial services commission income was largely
due to higher sales of fixed and variable annuities and mutual funds.
Mortgage banking income declined $144 thousand due to lower loan funding
activity. Losses on sales of securities of $14 thousand were recorded in the
third quarter of 2004 whereas $2.2 million gains were recorded a year ago,
which offset the $2.2 million loss on extinguishment of debt.
Noninterest income for the nine months of 2004 was $34.3 million, up $1.9
million or 5.8% from 2003, mainly due to growth in deposit fee income.
Service charges on deposit accounts rose $1.9 million or 9.5% primarily due
to enhanced overdraft processing programs and repricing of checking account
fees, partially reduced by lower income from account analysis deficit fees
and fees collected on deposited items returned. A $228 thousand or 14.1%
increase in debit card fees was attributable to increased usage. Financial
services commission income increased $290 thousand or 43.4% largely due to
higher sales of fixed and variable annuities and mutual funds. Other service
fees rose $169 thousand or 14.7% mostly due to higher income from
international money transfers in foreign currencies. Mortgage banking income
declined $408 thousand or 57.3% mainly due to less loan funding activity.
Securities gains fell from $2.4 million to $2.2 million which offset a loss
on extinguishment of debt of $2.2 million each in the respective periods.
Merchant credit card income declined $122 thousand 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 Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Salaries and related benefits $13,054 $13,495 $39,912 $40,792
Occupancy 3,022 3,076 8,913 9,116
Equipment 1,101 1,319 3,536 4,074
Data processing services 1,525 1,520 4,563 4,597
Courier service 923 941 2,695 2,796
Telephone 529 519 1,636 1,368
Postage 288 381 1,046 1,202
Professional fees 411 529 1,332 1,400
Merchant credit card 292 317 833 975
Stationery and supplies 333 331 930 957
Advertising/public relations 241 243 746 775
Employee recruiting 10 117 78 226
Loan expense 289 339 839 995
Operational losses 265 237 747 638
Repossessed collateral expense (5) 12 (5) 14
Amortization of deposit intangibles 136 165 408 578
Other noninterest expense 2,077 1,993 6,264 6,043
----------------------------------------------------
Total $24,491 $25,534 $74,473 $76,546
====================================================
Average full time equivalent staff 980 1,016 992 1,032
Noninterest expense to revenues (FTE) 36.93% 39.12% 37.67% 39.24%
Noninterest expense for the third quarter of 2004 was $24.5 million, $1.0
million or 4.1% lower than in 2003. Salaries and related benefits declined
$441 thousand or 3.3% 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-time equivalent employees,
partially offset by annual salary merit increases. Equipment expense fell
$218 thousand or 16.5% compared with 2003 mostly due to lower maintenance
costs and depreciation, and because 2003 included higher write-offs of
obsolete equipment. Professional fees declined $118 thousand or 22.3% mainly
due to lower legal costs. Employee recruiting costs fell $107 thousand or
91.5%.
Noninterest expense was $74.5 million for the nine months of 2004, which was
$2.1 million or 2.7% less than 2003. Salaries and related benefits were down
$880 thousand or 2.2% as a result of declines in salaries and wages (down
$375 thousand) due to a fewer number of full-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
$538 thousand or 13.2% from 2003 primarily due to lower depreciation and
lower repair and maintenance costs. Occupancy 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 declined
$170 thousand or 29.4% largely due to the expiration of the deposit
intangibles from a 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 fell $142 thousand or
14.6% mostly due to lower rates negotiated in October of 2003. Courier
service costs fell $101 thousand or 3.6%. Telephone expense rose $268
thousand or 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 third quarter of 2004, the Company recorded an income tax
provision (FTE) of $16.1 million, $1.2 million (8.1%) higher than the third
quarter of 2003; on a year-to-date basis, the income tax provision (FTE) was
$47.1 million for 2004 compared to $45.2 million for 2003. The current
quarter provision represents an effective tax rate (FTE) of 39.1% compared to
38.3% for the third quarter of 2003; for the first nine months of 2004, the
effective tax rate (FTE) was 38.9%, compared to 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, in particular tax credits generated from low-income
housing 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.
The following is a summary of classified loans and repossessed collateral on
the dates indicated (dollars in thousands):
At September 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Classified loans $20,868 $23,479 $23,460
Repossessed collateral 0 742 90
---------------------------------------
Classified loans and repossessed collateral $20,868 $24,221 $23,550
=======================================
Allowance for loan losses /
classified loans 261% 231% 230%
Classified loans at September 30, 2004, decreased $2.6 million (11.1%) from
September 30, 2003, reflecting the effectiveness of the Company's high
underwriting standards and active workout policies. The decrease ($2.6
million or 11.1%) in classified loans 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 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 September 30, At
--------------------------December 31,
2004 2003 2003
---------------------------------------
Performing nonaccrual loans $2,777 $2,145 $1,658
Nonperforming, nonaccrual loans 3,996 5,484 5,759
---------------------------------------
Total nonaccrual loans 6,773 7,629 7,417
Loans 90 days past due and
still accruing 182 272 199
---------------------------------------
Total nonperforming loans 6,955 7,901 7,616
Repossessed collateral 0 742 90
---------------------------------------
Total nonperforming loans and
repossessed collateral $6,955 $8,643 $7,706
=======================================
Allowance for loan losses /
nonperforming loans 782% 686% 708%
Performing nonaccrual loans at September 30, 2004 rose $632 thousand (29.5%)
from the same period in the previous year and $1.1 million (67.5%) from
December 31, 2003. The increase from both periods was due to new loans placed
on performing nonaccrual, partially offset by payoffs, chargeoffs, loans
being returned to accrual status and loans being placed on nonperforming
nonaccrual.
Nonperforming nonaccrual loans at September 30, 2004 decreased $1.5 million
or 27.1% from the same period a year ago and $1.8 million (30.6%) from
year-end, 2003. The decreases resulted from loans being returned to accrual
status, transfers to repossessed collateral or being charged off or paid off,
partially offset by loans being added to nonperforming nonaccrual.
Changes in repossessed collateral are 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 nine month periods ended September 30,
2004, if all such loans had performed in accordance with their original
terms, was $102 thousand and $332 thousand, respectively, compared to $110
thousand and $415 thousand, respectively, for the third quarter and the first
nine 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 nine months ended September 30, 2004, totaled $85
thousand and $252 thousand, respectively, compared to $299 thousand and $516
thousand, respectively, for the comparable periods in 2003. These cash
payments represent annualized yields of 5.46% and 4.99%, respectively, for
the third quarter and the first nine months of 2003 compared to 17.36% and
8.77%, respectively, for the third quarter and the first nine months of 2003.
Total cash payments received during the third quarter of 2004 which were
applied against the book balance of nonaccrual loans outstanding at September
30, 2003, totaled approximately $3 thousand, compared with none in 2003. Cash
payments received totaled approximately $101 thousand for the nine months
ended September 30, 2004, compared with approximately $283 thousand for 2003.
The overall credit quality of the loan portfolio continues to be 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 or factors particular to the borrower.
The Company expects to maintain the level of nonperforming assets; however,
the Company can give no assurance that additional increases in nonaccrual
loans will not occur in the future.
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 $54.4 million allowance for loan
losses, which constituted 2.36% of total loans at September 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 Nine months ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Balance, beginning of period $53,949 $54,159 $53,910 $54,227
Loan loss provision 600 750 2,100 2,550
Loans charged off (1,116) (1,422) (3,998) (5,291)
Recoveries of previously
charged off loans 955 693 2,376 2,694
----------------------------------------------------
Net credit losses (161) (729) (1,622) (2,597)
----------------------------------------------------
Balance, end of period $54,388 $54,180 $54,388 $54,180
====================================================
Allowance for loan losses /
loans outstanding 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
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 75 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 September
30, 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 nine months of 2004, the Company sold $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 September 30, 2004, investment securities
available for sale totaled $967 million, representing a decrease of $278
million from September 30, 2003. In addition, at September 30, 2004, the
Company had customary lines for overnight borrowings from other financial
institutions in excess of $500 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 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.
In addition, the Company generates significant liquidity from its operating
activities. The Company's profitability during the first nine months of 2004
and 2003 generated substantial cash flows, which are included in the totals
provided from operations of $80.6 million and $87.6 million, respectively.
The operating cash flow in 2004 was more than sufficient to pay for $26.2
million in shareholder dividends and $41.2 million of stock 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 had net cash outflows in its
investing activities. Purchases net of sales and maturities of investment
securities of $121.1 million were reduced 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 $181.8 million increase in deposits.
The Company had net cash outflows in its investing activities during both
nine month periods ended September 30. In 2003, purchases net of sales and
maturities of investment securities were $426.9 million, which was in part
offset by net repayments of loans of $125.5 million. The investment
securities portfolio increase was generally financed by a $242.1 million
increase in deposits, and a $83.6 million increase in short-term borrowings.
The Company anticipates that loan demand will increase moderately during 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 25
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 repurchased 824 thousand and 1.0 million shares during the first nine
months of 2004 and 2003, respectively.
The Company's primary capital resource is shareholders' equity, which was
$351.9 million at September 30, 2004. This amount represents an increase of
$11.6 million or 3.4% from December 31, 2003, the net result of the issuance
of stock ($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 an increase in equity capital
combined with earning asset growth the Company's ratio of equity to total
assets declined slightly to 7.59% at September 30, 2004, from 7.83% a year
ago. The equity to assets ratio was 7.44% at December 31, 2003.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At September 30, At Minimum
--------------------------December 31, Regulatory
2004 2003 2003 Requirement
----------------------------------------------------
Tier I Capital 10.93% 10.35% 10.13% 4.00%
Total Capital 12.29% 11.61% 11.39% 8.00%
Leverage ratio 7.09% 7.14% 6.85% 4.00%
The risk-based capital ratio increased at September 30, 2004, compared to the
prior year primarily due to an increase in shareholders' equity as a result
of increased net income, partially offset by the Company's common stock
repurchases and dividends paid to shareholders. Also, a decline in
risk-weighted assets contributed to this improvement. The risk-based capital
ratio increased at September 30, 2004 from December 31, 2003 primarily due to
the combination of an increase in shareholders' equity as a result of
increased net income and 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 September 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.
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 - Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c) 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
September 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
-----------------------------------------------------------------
July 1
through
July 31 68 $51.63 68 667
-----------------------------------------------------------------
August 1
through
August 31 22 53.05 22 2,000
-----------------------------------------------------------------
September 1
through
September 30 2 55.27 2 1,998
-----------------------------------------------------------------
Total 92 $52.04 92 1,998
=================================================================
* Includes 1 thousand, 2 thousand and 2 thousand shares purchased in July,
August and 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.
On August 28, 2003 the Board of Directors authorized a program for the
purchase of up to two 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, 2005.
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
(a) None
(b) None
Item 6 - Exhibits
Exhibit 2: Agreement and Plan of Reorganization
among the Company, Westamerica Bank,
Redwood Empire Bancorp and National
Bank of the Redwoods dated as of August
25, 2004 is incorporated by reference from
Annex A of the Company's Registration Statement
on Form 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
Page 28
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 thereunto duly
authorized.
WESTAMERICA BANCORPORATION
(Registrant)
Date: November 9, 2004
/s/ DENNIS R. HANSEN
--------------------
Dennis R. Hansen
Senior Vice President
and Controller
(Chief Accounting Officer)