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, 2005
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 registrant's classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of May 5, 2005
Common Stock, 32,794,774
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 23
Item 4 - Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 2 - Unregistered Sales of Equity Securities and Use of proceeds 24
Item 3 - Defaults upon Senior Securities 24
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 5 - Other Information 24
Item 6 - Exhibits 24
Exhibit 11 - Computation of Earnings Per Share 27
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 28
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 29
Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 30
Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 31
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 and investments; (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, 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
(In thousands)
(unaudited)
At March 31, At
--------------------------December 31,
2005 2004 2004
---------------------------------------
Assets:
Cash and cash equivalents $168,341 $166,649 $126,153
Money market assets 540 534 534
Investment securities available for sale 719,097 1,219,364 931,710
Investment securities held to maturity,
with market values of:
$1,318,206 at March 31, 2005 1,331,870
$595,179 at March 31, 2004 586,171
$1,265,986 at December 31, 2004 1,260,832
Loans, gross 2,708,052 2,322,881 2,300,230
Allowance for loan losses (59,859) (53,834) (54,152)
---------------------------------------
Loans, net of allowance for loan losses 2,648,193 2,269,047 2,246,078
Other real estate owned 0 80 0
Premises and equipment, net 35,586 35,412 35,223
Identifiable intangibles 29,389 3,302 2,894
Goodwill 127,503 18,996 18,996
Interest receivable and other assets 131,592 125,261 114,848
---------------------------------------
Total Assets $5,192,111 $4,424,816 $4,737,268
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,371,819 $1,210,829 $1,273,825
Interest bearing:
Transaction 626,693 562,369 591,593
Savings 1,166,858 1,049,435 1,091,981
Time 773,473 624,543 626,220
---------------------------------------
Total deposits 3,938,843 3,447,176 3,583,619
Short-term borrowed funds 710,530 491,704 735,423
Federal Home Loan Bank advance 0 20,000 0
Debt financing and notes payable 40,391 21,429 21,429
Liability for interest, taxes and
other expenses 64,772 105,907 38,188
---------------------------------------
Total Liabilities 4,754,536 4,086,216 4,378,659
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
32,939 at March 31, 2005 317,292
31,787 at March 31, 2004 217,477
31,640 at December 31, 2004 227,829
Deferred compensation 2,146 1,824 2,146
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale, net 3,511 21,213 9,638
Retained earnings 114,626 98,086 118,996
---------------------------------------
Total Shareholders' Equity 437,575 338,600 358,609
---------------------------------------
Total Liabilities and
Shareholders' Equity $5,192,111 $4,424,816 $4,737,268
=======================================
See accompanying notes to unaudited condensed consolidated financial statements.
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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three months ended
March 31,
--------------------------
2005 2004
--------------------------
Interest Income:
Loans $34,933 $34,023
Money market assets and funds sold 0 0
Investment securities available for sale
Taxable 6,117 11,374
Tax-exempt 3,352 3,874
Investment securities held to maturity
Taxable 7,290 768
Tax-exempt 5,611 4,372
--------------------------
Total interest income 57,303 54,411
--------------------------
Interest Expense:
Transaction deposits 263 112
Savings deposits 863 1,111
Time deposits 3,231 1,930
Short-term borrowed funds 3,570 1,131
Federal Home Loan Bank advance 0 896
Notes payable 430 335
--------------------------
Total interest expense 8,357 5,515
--------------------------
Net Interest Income 48,946 48,896
--------------------------
Provision for loan losses 300 750
--------------------------
Net Interest Income After
Provision For Loan Losses 48,646 48,146
--------------------------
Noninterest Income:
Service charges on deposit accounts 6,927 6,868
Merchant credit card 1,298 825
Trust fees 273 250
Financial services commissions 279 187
Mortgage banking 100 133
Securities (losses) gains (4,903) 1,788
Loss on extinguishment of debt 0 (1,814)
Other 3,221 2,629
--------------------------
Total Noninterest Income 7,195 10,866
--------------------------
Noninterest Expense:
Salaries and related benefits 13,160 13,526
Occupancy 2,952 2,948
Data processing 1,548 1,517
Equipment 1,230 1,162
Courier service 926 884
Professional fees 720 409
Other real estate owned 0 2
Other 4,604 4,544
--------------------------
Total Noninterest Expense 25,140 24,992
--------------------------
Income Before Income Taxes 30,701 34,020
Provision for income taxes 7,968 9,706
--------------------------
Net Income $22,733 $24,314
--------------------------
Comprehensive Income:
Change in unrealized gain on
securities available for sale, net (6,127) 8,022
--------------------------
Comprehensive Income $16,606 $32,336
==========================
Average Shares Outstanding 32,022 32,051
Diluted Average Shares Outstanding 32,680 32,662
Per Share Data:
Basic Earnings $0.71 $0.76
Diluted Earnings 0.70 0.74
Dividends Paid 0.30 0.26
See accompanying notes to unaudited condensed consolidated financial statements.
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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, 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 options 74 2,515 2,515
Stock option tax benefits 445 445
Restricted stock activity
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
==============================================================================
Balance, December 31, 2004 31,640 $227,829 $2,146 $9,638 $118,996 $358,609
Net income for the period 22,733 22,733
Stock issued and stock options assumed for
acquisition of Redwood Empire Banco 1,639 90,892 90,892
Stock issued for stock options 32 1,149 1,149
Stock option tax benefits 131 131
Restricted stock activity
Purchase and retirement of stock (372) (2,709) (17,645) (20,354)
Dividends (9,458) (9,458)
Unrealized loss on securities
available for sale, net (6,127) (6,127)
------------------------------------------------------------------------------
Balance, March 31, 2005 32,939 $317,292 $2,146 $3,511 $114,626 $437,575
==============================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the three months
ended March 31,
--------------------------
2005 2004
--------------------------
Operating Activities:
Net income $22,733 $24,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 1,008 956
Amortization of intangibles and other assets 832 574
Loan loss provision 300 750
Amortization of deferred net loan (cost) fees (86) 122
(Increase) decrease in interest income receivable (2,069) 1,797
Decrease (increase) in other assets 1,895 (4,609)
Increase in income taxes payable 6,132 9,558
Increase (decrease) in interest expense payable 828 (347)
(Decrease) increase in other liabilities (3,525) 1,190
Loss (gain) on sales of investment securities 4,903 (1,788)
Gain on sales of other assets (401) 0
Loss on extinguishment of debt 0 1,814
Writedown of property and equipment 7 0
Originations of loans for resale (65) (2,468)
Proceeds from sale of loans originated for resale 61 2,469
Net loss on sale of other real estate owned 0 223
--------------------------
Net Cash Provided by Operating Activities 32,553 34,555
--------------------------
Investing Activities:
Net cash used in mergers and acquisitions (35,210) 0
Net repayments (disbursements) of loans 32,111 (502)
Purchases of investment securities available for sale 0 (27,063)
Purchases of investment securities held to maturity (81,939) (88,315)
Purchases of property, plant and equipment (351) (620)
Proceeds from maturity of securities available for sale 31,938 126,430
Proceeds from maturity of securities held to maturity 26,039 24,667
Proceeds from sale of securities available for sale 196,004 148,360
Proceeds from sale of property and equipment 0 0
Proceeds from sale of other real estate owned 0 10
--------------------------
Net Cash Provided by Investing Activities 168,592 182,967
--------------------------
Financing Activities:
Net decrease in deposits (14,756) (16,816)
Net decrease in short-term borrowings (112,291) (98,942)
Repayments to the Federal Home Loan Bank 0 (86,814)
Repayments of notes payable (3,227) (3,214)
Exercise of stock options 1,129 2,352
Repurchases/retirement of stock (20,354) (28,676)
Dividends paid (9,458) (8,391)
--------------------------
Net Cash Used in Financing Activities (158,957) (240,501)
--------------------------
Net Increase (Decrease) In Cash and Cash Equivalents 42,188 (22,979)
--------------------------
Cash and Cash Equivalents at Beginning of Period 126,153 189,628
--------------------------
Cash and Cash Equivalents at End of Period $168,341 $166,649
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $0 $0
Supplemental Disclosure of Cash Flow Activity:
Unrealized (loss) gain on securities available for sale, net ($6,127) $8,022
Interest paid for the period 9,793 5,167
Income tax benefit from stock option exercises 131 445
The acquisition of Redwood Empire Bancorp involved
the following:
Cash issued 57,128 --
Common stock issued 90,892 --
Liabilities assumed 504,901 --
Fair value of assets acquired, other than cash and cash equivalents (495,596) --
Core deposit intangible (16,600) --
Customer based intangible - Redwoods Merchant Services (10,300) --
Goodwill (108,507) --
Net cash and cash equivalent received 21,918 --
See accompanying notes to unaudited condensed consolidated financial statements.
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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, 2005 and 2004 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, 2004.
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, 2004.
Note 3: Goodwill and Other Intangible Assets
The Company has recorded goodwill and core deposit intangibles associated with
purchase business combinations. Goodwill is not amortized, but is periodically
evaluated for impairment. The Company did not recognize impairment during the
quarter ended March 31, 2005. 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
2005, no such adjustments were recorded.
In connection with the acquisition of Redwood Empire Bancorp ("REBC") in the
first quarter of 2005, the Company recorded goodwill and identifiable
intangibles of $109 million and $27 million, respectively, in accordance with
the purchase method of accounting. The following table summarizes the
Company's goodwill and identifiable intangible assets, as of January 1 and
March 31 for 2005 and 2004 (dollars in thousands).
At At
January 1, March 31,
----------------------------------------------------
2005 Additions Reductions 2005
----------------------------------------------------
Goodwill $22,968 $108,507 $0 $131,475
Accumulated Amortization (3,972) 0 0 (3,972)
----------------------------------------------------
Net $18,996 $108,507 $0 $127,503
====================================================
Core Deposit Intangibles $7,783 $16,600 $0 $24,383
Merchant Draft Processing Intangible 0 10,300 0 10,300
Accumulated Amortization (4,889) 0 (405) (5,294)
----------------------------------------------------
Net $2,894 $26,900 ($405) $29,389
====================================================
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, 2005, the estimated aggregate amortization of core deposit
intangibles, in thousands of dollars, for the remainder of 2005 and annually
through 2010 is $1,801, $2,279, $2,153, $2,021, $1,859, and $1,638,
respectively. The weighted average amortization period for core deposit
intangibles is 13.29 years.
At March 31, 2005, the estimated aggregate amortization of merchant draft
processing intangible, in thousands of dollars, for the remainder of 2005 and
annually through 2010 is $1,414, $1,808, $1,500, $1,200, $962, and $774,
respectively. The amortization period for merchant draft processing intangibles
is 12.92 years.
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Note 4: Stock Options
As permitted by 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:
(In thousands, except per share data)
For the three months ended
March 31,
--------------------------
2005 2004
--------------------------
Compensation cost based on fair
value method, net of tax effect $487 $526
Net income:
As reported $22,733 $24,314
Pro forma $22,246 $23,788
Basic earnings per share:
As reported $0.71 $0.76
Pro forma 0.69 0.74
Diluted earnings per share:
As reported $0.70 $0.74
Pro forma 0.68 0.73
SFAS 123 was revised in December, 2004 to require that, effective for periods
beginning after June 15, 2005, the Company begin using the fair market value
method for valuing and accounting for stock options. As allowed by SFAS 123
(revised), the Company expects to apply the new requirements on a modified
retrospective basis, in which prior period financial statements will be
adjusted to give effect to the fair-value-based method consistent with the
above pro-forma amounts. On April 14, 2005 the Securities and Exchange
Commission announced the adoption of a new rule that amends the compliance
dates and allows companies to implement Statement No. 123R at the beginning of
their next fiscal year, instead of the next reporting period that begins after
June 15, 2005. The Company expects to apply the new requirements in 2006 on a
modified retrospective basis, in which prior period financial statements will
be adjusted to give effect to the fair-value-based method consistent with the
above pro-forma amounts. It is expected that the effect of implementation will
be to increase future annual compensation expense by approximately $3.4
million and decrease future annual net income by approximately $2.0 million.
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. In 2004, the Company started to reimburse 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,
---------------------------------------
2005 2004 2003
---------------------------------------
(In thousands)
Service cost $70 $48 $61
Interest cost 53 49 45
Amortization of unrecognized
transition obligation 15 15 15
---------------------------------------
Net periodic cost $138 $112 $121
=======================================
The Company does not contribute to any post-retirement benefit plans.
Note 6: Acquisition
On March 1, 2005 the Company completed its acquisition of Redwood Empire
Bancorp ("REBC"), parent company of National Bank of the Redwoods ("NBR").
Pursuant to the Merger Agreement between the Company and REBC, and after
adjustment in connection with the disposition of certain NBR deposits in Lake
County, each share of REBC Common Stock outstanding at the merger closing was
converted into 0.3263 shares of WABC Common Stock and cash of $11.37 per
share. Approximately 1.6 million shares of Company stock were issued at a
value of approximately $85 million and outstanding REBC stock options were
converted into stock options of the Company with fair value of approximately
$6 million. In addition, REBC shareholders were paid cash totaling
approximately $57 million. Including certain costs to complete the acquisition
the total cost was approximately $153 million. The acquisition was accounted
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for under the purchase method of accounting in accordance with SFAS No. 141.
Under this method of accounting, the purchase price was allocated to assets
acquired and liabilities assumed based on their fair values at the acquisition
date. The Company recorded goodwill and identifiable intangibles of $109
million and $27 million, respectively. At March 1, 2005 REBC had loans of
approximately $440 million, deposits of $370 million and shareholders' equity
of $30 million.
Page 10
WESTAMERICA BANCORPORATION
Financial Summary
(In thousands, except per share data)
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2005 2004 2004
---------------------------------------
Net Interest Income (FTE)** $55,019 $54,605 $54,589
Provision for Loan Losses 300 750 600
Noninterest Income:
Securities (losses) gains (4,903) 1,788 0
Securities impairment 0 0 (7,180)
Loss on extinguishment of debt 0 (1,814) 0
Deposit service charges and other 12,098 10,892 11,448
---------------------------------------
Total noninterest income 7,195 10,866 4,268
Noninterest Expense 25,140 24,992 24,278
Provision for income taxes (FTE)** 14,041 15,415 12,814
---------------------------------------
Net Income $22,733 $24,314 $21,165
=======================================
Average Shares Outstanding 32,022 32,051 31,761
Diluted Average Shares Outstanding 32,680 32,662 32,487
Shares Outstanding at Period End 32,939 31,787 31,640
As Reported:
Basic Earnings Per Share $0.71 $0.76 $0.67
Diluted Earnings Per Share 0.70 0.74 0.65
Return On Assets 1.90% 2.20% 1.81%
Return On Equity 24.68% 30.52% 24.05%
Net Interest Margin (FTE)** 4.90% 5.27% 5.01%
Net Loan (Recoveries) Losses to Average Loans (0.03%) 0.15% 0.15%
Efficiency Ratio* 40.4% 38.2% 41.2%
Average Balances:
Total Assets $4,864,633 $4,451,674 $4,653,950
Earning Assets 4,518,930 4,157,061 4,352,493
Total Gross Loans 2,374,710 2,281,900 2,235,375
Total Deposits 3,716,553 3,437,549 3,718,114
Shareholders' Equity 373,627 320,390 350,151
Balances at Period End:
Total Assets $5,192,111 $4,424,816 $4,737,268
Earning Assets 4,770,982 4,141,804 4,499,758
Total Gross Loans 2,708,052 2,322,881 2,300,230
Total Deposits 3,938,843 3,447,176 3,583,619
Shareholders' Equity 437,575 338,600 358,609
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.21% 2.32% 2.35%
Book Value Per Share $13.28 $10.65 $11.33
Equity to Assets 8.43% 7.65% 7.57%
Total Capital to Risk Adjusted Assets 10.28% 11.25% 12.46%
Dividends Paid Per Share $0.30 $0.26 $0.28
Dividend Payout Ratio 43% 35% 43%
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 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported first
quarter 2005 net income of $22.7 million or $.70 diluted earnings per share.
These results compare to net income of $24.3 million or $.74 diluted earnings
per share and $21.2 million or $.65 diluted earnings per share, respectively,
for the first and fourth quarters of 2004. First quarter 2005 results include
one month of operating results of Redwood Empire Bancorp ("REBC"), parent
company of National Bank of the Redwoods, which was acquired on March 1, 2005.
First quarter 2005 also included a loss on sale of available-for-sale
investment securities totaling $2.8 million, net of tax, or $0.09 per diluted
share outstanding.
Consideration paid in connection with the REBC acquisition included
approximately $57 million in cash, issuance of approximately 1.6 million
shares of Westamerica Bancorporation common stock, and assumption of converted
REBC stock options. At March 1, 2005 REBC had loans of approximately $440
million, deposits of $370 million and shareholders' equity of $30 million. The
acquisition was valued at approximately $150 million based on an average price
of the Company stock of $51.84. The premium paid on the transaction including
certain capitalized costs was approximately $120 million. The Company recorded
goodwill and identifiable intangibles of $109 million and $27 million,
respectively, in accordance with the purchase method of accounting. Three
duplicative branches were consolidated in March, and the Company intends to
complete its branch consolidations in the second quarter of 2005. The Company
also entered an agreement to sell one branch located in Lake County with
approximately $40 million in deposits, and anticipates completion of this
transaction late in the second quarter of 2005.
Following is a summary of the components of net income for the periods
indicated (dollars in thousands):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2005 2004 2004
---------------------------------------
Net interest income (FTE) $55,019 $54,605 $54,587
Provision for loan losses (300) (750) (600)
Noninterest income 7,195 10,866 4,269
Noninterest expense (25,140) (24,992) (24,277)
Provision for income taxes (FTE) (14,041) (15,415) (12,814)
---------------------------------------
Net income $22,733 $24,314 $21,165
=======================================
Average total assets $4,864,633 $4,451,674 $4,653,950
Net income (annualized) to average total assets 1.90% 2.20% 1.81%
Net income for the first quarter of 2005 was $1.6 million or 6.5% less than
the same quarter of 2004, primarily attributable to $4.9 million securities
losses, partially offset by higher net interest income (FTE) and lower
provision for loan losses and lower income tax provision. The increase in net
interest income (FTE) (up $414 thousand or 0.8%) was the net result of growth
of average interest-earning assets including the REBC acquisition and higher
loan fee income, partially reduced by the effect of declining yields on those
assets, the effect of one less accrual day and higher funding costs. The loan
loss provision decreased $450 thousand or 60.0% from a year ago, reflecting
Management's assessment of credit risk for the loan portfolio. Noninterest
income declined $3.7 million or 33.8% mainly due to the $4.9 million
securities losses. Noninterest expense increased $148 thousand or 0.6%. The
provision for income taxes (FTE) fell $1.4 million or 8.9% largely due to the
effect of the above securities losses.
Comparing the first three months of 2005 to the prior quarter, net income
increased $1.6 million or 7.4%, due to securities losses being less than
securities write-down in the previous quarter, higher net interest income
(FTE) and lower loan loss provision, offset by increases in tax provision and
noninterest expense. The higher net interest income (FTE) was mainly caused by
growth of average interest-earning assets including the REBC acquisition,
higher yields on those assets and higher loan fee income, partially offset by
the effect of two less accrual days and higher funding costs. The loan loss
provision decreased $300 thousand or 50.0% to reflect Management's view on
credit risk. Noninterest income increased $2.9 million or 68.5% primarily
because $4.9 million securities losses in the current period were less than
$7.2 million securities writedown in the prior period. Noninterest expense
rose $862 thousand or 3.6% mainly due to acquisition related expenses. The
income tax provision (FTE) increased mainly because tax benefits of securities
losses were less than those of securities writedown.
Page 12
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,
2005 2004 2004
---------------------------------------
Interest and fee income $57,303 $54,411 $54,750
Interest expense (8,357) (5,515) (5,953)
FTE adjustment 6,073 5,709 5,790
---------------------------------------
Net interest income (FTE) $55,019 $54,605 $54,587
=======================================
Average earning assets $4,518,930 $4,157,061 $4,352,493
Net interest margin (FTE) 4.90% 5.27% 5.01%
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 2005 increased $414 thousand
or 0.8% from the same period in 2004 to $55.0 million, mainly due to growth of
average earning assets (up $362 million), including the REBC acquisition, and
higher loan fee income (up $271 thousand), partially offset by higher rates
paid on interest-bearing liabilities (up 31 bp), lower yields on average
earning assets and the effect of one less accrual day.
Comparing the first quarter of 2005 with the previous quarter, net interest
income (FTE) increased $432 thousand or 0.8%, primarily due to higher average
earning assets including the acquisition (up $166 million), higher yields on
those assets (up 8 bp) and an increase in loan fee income (up $124 thousand),
offset by the effect of two less accrual days and a higher volume of
interest-bearing liabilities (up $219 million) and higher rates paid on those
liabilities (up 27 bp).
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2005, including revenue
from the earning assets acquired from REBC, rose $3.3 million or 5.4% from the
same period in 2004. The increase was caused by higher average earning assets
(up $362 million), of which more than one third was due to the REBC
acquisition, and higher loan fee income (up $271 thousand), partially offset
by lower yields on average earning assets (down 18 bp) and the effect of one
less accrual day.
The average yield on the Company's earning assets, excluding loan fee income,
decreased from 5.78% in the first quarter of 2004 to 5.60% in the same period
in 2005 (down 18 bp). The composite yield on loans, excluding loan fees,
declined 8 bp to 6.11%. Decreases in indirect consumer loans (down 68 bp),
residential real estate loans (down 23 bp) and commercial real estate loans
(down 11 bp) were partially offset by increases on commercial loans (up 46 bp)
and personal credit lines (up 106 bp).
The investment portfolio yield declined 23 bp to 5.04%, caused by declines in
municipal securities (down 40 bp), U.S. government sponsored entity
obligations (down 18 bp) and other securities (down 39 bp). Partially
offsetting these decreases was a 25 bp increase in the yield on mortgage
backed securities and collateralized mortgage obligations.
Average earning asset expansion of $362 million for the first quarter of 2005
compared to the same period in 2004 was substantially attributable to an
increase in the investment portfolio including mortgage backed securities and
collateralized mortgage obligations (up $192 million), municipal securities
(up $112 million) and U.S. government sponsored entity obligations (up $14
million). Other securities decreased $50 million.
Average total loans grew $93 million for the first quarter of 2005 compared to
the same period in 2004 primarily due to loans acquired from REBC, partially
offset by payoffs. Residential real estate loans rose by $75 million.
Commercial loans were up $19 million and construction loans were also up $7
million. A $14 million decline in indirect consumer loans partially offset
these increases.
Comparing the first quarter of 2005 with the previous quarter, interest and
fee income (FTE) was up $2.8 million or 4.7%. The increase largely resulted
from a higher volume of earning assets, rising yields on those assets and
higher loan fee income (up $124 thousand), partially offset by the effect of
two less accrual days.
The average yield on earning assets excluding loan fees for the first three
months of 2005 was 5.60% compared with 5.51% in the fourth quarter of 2004.
The investment portfolio yield rose by 9 bp. The increase resulted mostly from
higher yields on other securities (up 75 bp) due to bond call premiums, as
well as yields on U.S. government sponsored entity obligations (up 4 bp).
Municipal securities yields declined 12 bp.
The loan portfolio yield excluding loan fees for the first quarter of 2005
Page 13
compared with the previous quarter was higher by 7 bp, due to increases in
commercial loans (up 24 bp) and personal credit lines (up 48 bp), partially
offset by lower yields on indirect consumer loans (down 11 bp).
Average earning assets increased $166 million or 3.8% for the first quarter of
2005 compared with the previous quarter primarily due to loan growth from the
REBC acquisition. The loan portfolio grew $139 million, the net result of
increases in commercial real estate loans (up $69 million), residential real
estate loans (up $54 million), construction loans (up $12 million), commercial
loans (up $10 million), and a $8 million decline in indirect consumer loans.
Investments rose $27 million due to growth in mortgage backed securities and
collateralized mortgage obligations (up $27 million) and municipal securities
(up $70 million), partially offset by decreases in U.S. government sponsored
entity obligations (down $61 million) and other securities (down $8 million).
Interest Expense
Interest expense in the first quarter of 2005, including expense of
liabilities acquired from REBC, increased $2.8 million or 51.5% compared with
the same period in 2004. The increase was attributable to growth in the
interest-bearing liabilities and higher rates paid on those liabilities,
partially offset by the effect of one less accrual day.
The average rate paid on interest-bearing liabilities increased from 0.77% in
the first quarter of 2004 to 1.08% in 2005. Rates paid on most liabilities
moved with general market conditions: the average rate on federal funds
purchased rose 148 bp and rates on deposits increased as well, including those
on CDs over $100 thousand, which rose 90 bp; on retail CDs, which went up by
42 bp; and on money market checking accounts, which were raised an average of
9 bp. A 19 bp decline in money market saving accounts partially offset the
increase.
Interest-bearing liabilities grew $252 million or 8.7% for the first quarter
of 2005 over the same period of 2004. Federal funds purchases increased $152
million. Long-term debt increased $4.3 million, the net result of assumption
of REBC's $20 million subordinated debentures and an annual principal
repayment. Most categories of deposits grew including CDs over $100 thousand
(up $66 million) and money market savings (up $60 million). These increases
were partially reduced by a $97 million payoff of Federal Home Loan Bank
("FHLB") advances.
Comparing the first quarter of 2005 to the previous quarter, interest expense
rose $2.4 million or 40.4%, due to higher rates paid on interest-bearing
liabilities and growth of such liabilities, partially offset by the effect of
two less accrual days.
Rates paid on liabilities averaged 1.08% during the first three months of 2005
compared to 0.81% in the fourth quarter of 2004. The most significant rate
increases were federal funds purchased which rose 49 bp, long-term debt which
increased 50 bp, CDs over $100 thousand which rose 41 bp and retail CDs which
increased by 21 bp.
Interest-bearing liabilities grew $219 million or 7.5% over the fourth quarter
of 2004. Federal funds purchased grew $181 million and long-term debt
increased $5 million. CDs over $100 thousand and retail CDs increased $32
million and $9 million, respectively.
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,
2005 2004 2004
---------------------------------------
Yield on earning assets 5.65% 5.80% 5.55%
Rate paid on interest-bearing
liabilities 1.08% 0.77% 0.81%
---------------------------------------
Net interest spread 4.57% 5.03% 4.74%
Impact of all other net
noninterest bearing funds 0.33% 0.24% 0.27%
---------------------------------------
Net interest margin 4.90% 5.27% 5.01%
=======================================
During the first quarter of 2005, the net interest margin fell 37 bp compared
to the same period in 2004. Yields on earning assets declined while rates paid
on interest-bearing liabilities increased, resulting in a 47 bp decline in net
interest spread. The decline in the net interest spread was mitigated by the
higher value of noninterest bearing funding sources. While the average balance
Page 14
of these sources increased $49 million or 5.8%, their value increased 10 bp
because of the higher market rates of interest at which they could be
invested.
The net interest margin fell by 11 bp when compared with the fourth quarter of
2004. Earning asset yields increased 9 bp and the cost of interest-bearing
liabilities rose by 27 bp, resulting in an 18 bp decrease in the interest
spread. Although noninterest bearing funding sources decreased $70 million or
7.3%, their margin contribution increased by 7 bp.
Page 15
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, 2005
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $709 $0 0.00%
Investment securities:
Available for sale
Taxable 584,174 6,117 4.19%
Tax-exempt 270,411 4,950 7.32%
Held to maturity
Taxable 739,906 7,290 3.94%
Tax-exempt 549,020 8,683 6.33%
Loans:
Commercial:
Taxable 349,171 5,701 6.62%
Tax-exempt 247,553 4,100 6.72%
Commercial real estate 809,807 14,754 7.39%
Real estate construction 45,737 810 7.18%
Real estate residential 421,723 4,606 4.37%
Consumer 500,719 6,365 5.16%
--------------------------
Total loans 2,374,710 36,336 6.16%
--------------------------
Total earning assets 4,518,930 63,376 5.65%
Other assets 345,703
-------------
Total assets $4,864,633
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,314,485 $-- --
Savings and interest-bearing
transaction 1,724,574 1,126 0.26%
Time less than $100,000 271,461 1,238 1.85%
Time $100,000 or more 406,034 1,993 1.99%
--------------------------
Total interest-bearing deposits 2,402,069 4,357 0.74%
Short-term borrowed funds 703,468 3,570 2.03%
Federal Home Loan Bank advances 0 0 0.00%
Debt financing and notes payable 26,881 430 6.40%
--------------------------
Total interest-bearing liabilities 3,132,418 8,357 1.08%
Other liabilities 44,103
Shareholders' equity 373,627
-------------
Total liabilities and shareholders' equity $4,864,633
=============
Net interest spread (1) 4.57%
Net interest income and interest margin (2) $55,019 4.90%
==========================
(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
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 11,374 4.34%
Tax-exempt 308,882 5,805 7.52%
Held to maturity
Taxable 110,144 768 2.79%
Tax-exempt 407,250 6,782 6.66%
Loans:
Commercial:
Taxable 345,762 4,823 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 35,391 6.23%
--------------------------
Total earning assets 4,157,061 60,120 5.80%
Other assets 294,613
-------------
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 17
For the three months ended
December 31, 2004
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $853 $0 0.00%
Investment securities:
Available for sale
Taxable 660,313 6,649 4.03%
Tax-exempt 281,301 4,974 7.07%
Held to maturity
Taxable 703,302 6,883 3.91%
Tax-exempt 471,349 7,737 6.57%
Loans:
Commercial:
Taxable 343,112 5,257 6.10%
Tax-exempt 243,136 4,089 6.69%
Commercial real estate 740,909 13,792 7.41%
Real estate construction 34,061 612 7.15%
Real estate residential 367,325 4,026 4.38%
Consumer 506,832 6,521 5.12%
--------------------------
Total loans 2,235,375 34,297 6.08%
--------------------------
Total earning assets 4,352,493 60,540 5.55%
Other assets 301,457
-------------
Total assets $4,653,950
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,354,129 $-- --
Savings and interest-bearing
transaction 1,728,075 1,088 0.25%
Time less than $100,000 262,064 1,080 1.64%
Time $100,000 or more 373,846 1,481 1.58%
--------------------------
Total interest-bearing deposits 2,363,985 3,649 0.61%
Short-term borrowed funds 527,529 1,988 1.48%
Federal Home Loan Bank advances 0 0 0.00%
Debt financing and notes payable 21,429 316 5.90%
--------------------------
Total interest-bearing liabilities 2,912,943 5,953 0.81%
Other liabilities 36,727
Shareholders' equity 350,151
-------------
Total liabilities and shareholders' equity $4,653,950
=============
Net interest spread (1) 4.74%
Net interest income and interest margin (2) $54,587 5.01%
==========================
(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 18
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, 2005
compared with three months
ended March 31, 2004
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 $0 $0
Investment securities:
Available for sale
Taxable (4,962) (295) (5,257)
Tax-exempt (717) (138) (855)
Held to maturity
Taxable 6,071 451 6,522
Tax-exempt 2,239 (338) 1,901
Loans:
Commercial:
Taxable (12) 890 878
Tax-exempt 231 (101) 130
Commercial real estate (51) (51) (102)
Real estate construction 118 7 125
Real estate residential 813 (187) 626
Consumer (238) (474) (712)
---------------------------------------
Total loans 861 84 945
---------------------------------------
Total earning assets 3,492 (236) 3,256
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 74 (171) (97)
Time less than $100,000 (54) 288 234
Time $100,000 or more 190 877 1,067
---------------------------------------
Total interest-bearing deposits 210 994 1,204
---------------------------------------
Short-term borrowed funds 429 2,010 2,439
Federal Home Loan Bank advances 0 (896) (896)
Debt financing and notes payable 65 30 95
---------------------------------------
Total interest-bearing liabilities 704 2,138 2,842
---------------------------------------
Increase (Decrease) in Net Interest Income $2,788 ($2,374) $414
=======================================
Page 19
Three months ended March 31, 2005
compared with three months
ended December 31, 2004
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 $0 $0
Investment securities:
Available for sale
Taxable (847) 315 (532)
Tax-exempt (217) 193 (24)
Held to maturity
Taxable 299 108 407
Tax-exempt 1,216 (270) 946
Loans:
Commercial:
Taxable 37 407 444
Tax-exempt 37 (26) 11
Commercial real estate 1,139 (177) 962
Real estate construction 202 (4) 198
Real estate residential 593 (13) 580
Consumer (134) (22) (156)
---------------------------------------
Total loans 1,874 165 2,039
---------------------------------------
Total earning assets 2,325 511 2,836
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (14) 52 38
Time less than $100,000 28 130 158
Time $100,000 or more 117 395 512
---------------------------------------
Total interest-bearing deposits 131 577 708
---------------------------------------
Short-term borrowed funds 750 832 1,582
Federal Home Loan Bank advances 0 0 0
Debt financing and notes payable 82 32 114
---------------------------------------
Total interest-bearing liabilities 963 1,441 2,404
---------------------------------------
Decrease in Net Interest Income $1,362 ($930) $432
=======================================
Page 20
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 $300 thousand
for loan losses in the first quarter of 2005, compared with $600 thousand in
the fourth quarter and $750 thousand in the first quarter of 2004.
Additionally, $5.2 million of allowance was acquired from REBC in the first
quarter of 2005. 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,
2005 2004 2004
---------------------------------------
Service charges on deposit accounts $6,927 $6,868 $6,928
Merchant credit card fees 1,298 825 875
ATM fees and interchange 624 583 597
Debit card fees 697 549 700
Check sale income 289 294 282
Trust fees 273 250 254
Financial services commissions 279 187 294
Mortgage banking income 100 133 82
Official check sales income 225 127 193
Gains on sale of foreclosed property 0 223 0
Securities (losses) gains (4,903) 1,788 0
Securities writedown 0 0 (7,180)
Loss on extinguishment of debt 0 (1,814) 0
Other noninterest income 1,386 853 1,244
---------------------------------------
Total $7,195 $10,866 $4,269
=======================================
Noninterest income for the first quarter of 2005 fell by $3.7 million or 33.8%
from the same period in 2004, primarily due to $4.9 million in securities
losses arising from sales of investment securities available for sale. The
first quarter of 2004 included $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, see the "Asset and Liability
Management" section of this report below. The REBC acquisition contributed to
the first quarter of 2005 income, including $474 thousand from REBC's merchant
card processing unit. Debit card fees rose $148 thousand or 27.0% largely due
to increased usage. Other noninterest income increased $533 thousand or 62.5%
mostly due to $401 thousand gains on sales of other assets and higher
letter-of-credit fee income. The prior year benefited from $223 thousand in
gains on foreclosed property.
In the first quarter of 2005, noninterest income increased $2.9 million or
68.5% compared with the previous quarter mainly because $4.9 million
securities losses were less than the prior quarter's $7.2 million securities
impairment writedown to market value of Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock
held in the available for sale investment portfolio. The writedown was
recorded as a reduction in noninterest income. Merchant credit card fees
increased $423 thousand or 48.3% due to income from the REBC's merchant credit
card processing unit. Other noninterest income increased $142 thousand or
11.4%.
Page 21
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,
2005 2004 2004
---------------------------------------
Salaries and incentives $9,957 $10,362 $9,958
Employee benefits 3,203 3,164 2,636
Occupancy 2,952 2,948 3,022
Equipment 1,230 1,162 1,259
Data processing services 1,548 1,517 1,494
Courier service 926 884 910
Telephone 528 572 476
Postage 422 395 361
Professional fees 720 409 537
Merchant credit card 258 272 270
Stationery and supplies 348 288 351
Loan expense 204 255 237
Customer checks 231 197 232
Correspondent service charges 250 239 226
Advertising/public relations 206 215 292
Operational losses 190 243 217
Foreclosed property expense 0 2 (3)
Amortization of identifiable intangibles 405 136 136
Other noninterest expense 1,562 1,732 1,666
---------------------------------------
Total $25,140 $24,992 $24,277
=======================================
Average full time equivalent staff 963 1,001 960
Noninterest expense to revenues (FTE) 40.41% 38.17% 41.25%
Noninterest expense increased $148 thousand or 0.6% in the first quarter of
2005 compared to the same period in 2004. The largest increase was
professional fees, which was up $311 thousand or 76.0% due to a $209 thousand
increase in audit and accounting costs primarily due to additional charges
from the Company's independent auditor in connection with new audit
requirements promulgated by the Public Company Accounting Oversight Board and
increased legal fees for the acquisition. The increase in amortization of
identifiable intangibles was attributable to the REBC acquisition. Salaries
and incentives were down $405 thousand or 3.9% from the same period of 2004,
the net result of a decline in executive bonus accruals, lower other
incentives and higher regular salaries. The increase in regular salary was
attributable to payment to non-continuing REBC employees and annual merit
increases to continuing staff, partially offset by the effect of a smaller
workforce. Other noninterest expense declined $170 thousand or 9.8% largely
due to a decrease in staff relations expense.
In the first three months of 2005, noninterest expense rose $863 thousand or
3.6% compared with the fourth quarter of 2004. Employee benefits rose $567
thousand or 21.5% due to seasonal increases in payroll taxes (up $389
thousand) and higher expenses for group insurance and retirement plan
expenses. In 2005, amortization of identifiable intangibles increased $269
thousand due to the REBC acquisition. Professional fees were higher by $183
thousand or 34.1% due to higher audit and accounting fees and legal fees
associated with the REBC acquisition. Other noninterest expense declined $104
thousand or 6.2% due to an increase in cash surrender value and declines in
employee recruiting and settlement expenses.
Provision for Income Tax
During the first quarter of 2005, the Company recorded income tax expense
(FTE) of $14.0 million, $1.4 million or 8.9% lower than the first quarter of
2004. The current quarter provision represents an effective tax rate of 38.2%,
compared to 38.8% and 37.7% for the first and fourth quarters of 2004,
respectively.
The change from prior quarter in the provision for income taxes is primarily
attributable to the effect of the $2.8 million securities losses, net of tax
benefits of $2.1 million. The increase in the tax provision from the 2004
year-end is because of the larger impact of the $4.2 million writedown of
securities, net of tax benefits of $3.0 million.
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. Other
real estate owned is recorded at the lower of cost or market.
Page 22
The following is a summary of classified loans and other real estate owned on
the dates indicated (dollars in thousands):
At March 31, At
--------------------------December 31,
2005 2004 2004
---------------------------------------
Classified loans $35,258 $22,965 $19,225
Other real estate owned 0 80 0
---------------------------------------
Classified loans and other real estate owned $35,258 $23,045 $19,225
=======================================
Allowance for loan losses /
classified loans 170% 234% 282%
Classified loans at March 31, 2005, increased $12.3 million or 53.5% from a
year ago, primarily due to the classified loans totaling $16.1 million
acquired from REBC and new downgrades, partially reduced by upgrades,
charge-offs and payoffs. Other real estate owned declined to none from $80
thousand at March 31, 2004, as a result of sale of a property in the second
quarter of 2004. A $16.0 million or 83.4% increase in classified loans from
December 31, 2004 was also largely due to the classified loans acquired from
REBC and new downgrades, partially offset by payoffs, upgrades and chargeoffs.
Other real estate owned remained zero, unchanged from December 31, 2004.
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,
2005 2004 2004
---------------------------------------
Performing nonaccrual loans $6,550 $2,212 $4,071
Nonperforming, nonaccrual loans 1,766 5,045 2,970
---------------------------------------
Total nonaccrual loans 8,316 7,257 7,041
Loans 90 days past due and
still accruing 107 190 10
---------------------------------------
Total nonperforming loans 8,423 7,447 7,051
Other real estate owned 0 80 0
---------------------------------------
Total $8,423 $7,527 $7,051
=======================================
Allowance for loan losses /
nonperforming loans 711% 723% 768%
Performing nonaccrual loans at March 31, 2005 increased $4.3 million or 196.1%
and $2.5 million or 60.9% from a year ago and December 31, 2004, respectively
as a result of the $4.0 million performing nonaccrual loans acquired from REBC
and new loans being placed on nonaccrual, partially reduced by charge-offs,
loans being returned to accrual status and loans being placed on nonperforming
nonaccrual.
Nonperforming nonaccrual loans at March 31, 2005 decreased $3.3 million or
65.0% and $1.2 million or 40.5% from the previous year and December 31, 2004,
respectively. The increase was due to the net result of loans being returned
to accrual status or being charged off or paid off, partially offset by others
being added to nonaccrual.
Changes in other real estate owned are discussed above under "Classified
Assets".
The Company had no restructured loans as of March 31, 2005, 2004 and December
31, 2004.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three months ended March 31, 2005, if all such loans
had been current in accordance with their original terms, was $124 thousand,
compared to $120 thousand and $130 thousand, respectively, for the first and
fourth quarters of 2004.
Page 23
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, 2005, totaled $165 thousand, compared
to $64 thousand and $187 thousand, respectively, for the first and fourth
quarters of 2004. These cash payments represent annualized yields of 10.15%
for first three months of 2005 compared to 3.62% and 10.28%, respectively, for
the first and the fourth quarter of 2004.
Total cash payments received, including those recorded in prior years, which
were applied against the book balance of nonaccrual loans outstanding at March
31, 2005, totaled approximately $151 thousand, compared with $26 thousand and
$34 thousand for the first and the fourth quarters of 2004, 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 considered
adequate to provide for losses that can be estimated based upon specific and
general conditions. These include conditions unique to individual borrowers,
as well as overall loan loss experience, the amount of past due, nonperforming
loans and classified loans, recommendations of regulatory authorities,
prevailing economic conditions and other factors. A portion of the allowance
is specifically allocated to impaired and other identified loans whose full
collectibility is uncertain. Such allocations are determined by Management
based on loan-by-loan analyses. A second allocation is based in part on
quantitative analyses of historical loan loss experience, in which criticized
and classified loan balances identified through an internal loan review
process are analyzed using a linear regression model to determine standard
loss rates. The results of this analysis are applied to current criticized and
classified loan balances to allocate the reserve to the respective segments of
the loan portfolio. In addition, loans with similar characteristics not
usually criticized using regulatory guidelines are analyzed based on the
historical loss rates and delinquency trends, grouped by the number of days
the payments on these loans are delinquent. Last, allocations are made to
general loan categories based on commercial office vacancy rates, mortgage
loan foreclosure trends, agriculture commodity prices, and levels of
government funding. The remainder of the reserve is considered to be
unallocated and is established at a level considered necessary based on
relevant economic conditions and available data, including unemployment
statistics, unidentified economic and business conditions; the quality of
lending management and staff; credit quality trends; concentrations of credit;
and changing underwriting standards due to external competitive factors.
Management considers the $59.9 million allowance for loan losses, which is
equivalent to 2.21% of total loans at March 31, 2005, to be adequate as a
reserve against losses as of Mach 31, 2005.
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,
2005 2004 2004
---------------------------------------
Balance, beginning of period $54,152 $53,910 $54,388
Loan loss provision 300 750 600
Allowance acquired through merger 5,213 0 0
Loans charged off (599) (1,558) (1,596)
Recoveries of previously
charged off loans 793 732 760
---------------------------------------
Net credit recoveries (losses) 194 (826) (836)
---------------------------------------
Balance, end of period $59,859 $53,834 $54,152
=======================================
Allowance for loan losses /
loans outstanding 2.21% 2.32% 2.35%
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 quantify interest rate risk
is a simulation model to project changes in net interest income ("NII") that
Page 24
result from forecast changes in interest rates. This analysis calculated the
difference between a NII forecast over a 12-month period using a stable
interest rate scenario and a NII forecast using a rising or falling interest
rate scenario with the Federal Funds rate serving as a "primary indicator."
Based on economic conditions, interest rate levels, anticipated monetary
policy and Management's judgment, at March 31, 2005, simulations were
conducted with the Federal Funds rate rising by 200 basis points or declining
by 100 basis points over the 12-month forecast interval triggering a response
in the other 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.
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 and
extent 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.
Management reviewed its interest rate risk position, taking into account the
acquisition of Redwood Empire Bancorp. In Management's judgment, the Company's
interest rate risk exposure would be reduced through the sale of investment
securities available for sale, with the proceeds from sale applied to reduce
short-term borrowed funds. During the first quarter 2005, the Company sold
$170.0 million of investment securities available for sale with a duration of
3.2 years and book yield of 3.29% at a realized loss of $4.9 million.
The following table summarizes the simulated change in NII (FTE), based on the
12-month period ending March 31, 2006 incorporating the acquisition of Redwood
Empire Bancorp and the sale of investment securities described above:
Simulated Changes to Net Interest Income
Estimated Increase
(Decrease) in NII
---------------------------------------
Twelve months ended March 31, 2006 Estimated
Changes in Interest Rates (Basis Points) NII Amount Amount Percent
(Dollars in millions) ---------------------------------------
+200 $232.1 ($6.7) (2.8%)
No change 238.8 -- --
- -100 239.3 0.5 0.2%
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 investment securities
available for sale and principal payments from consumer loans. At March 31,
2005, investment securities available for sale totaled $719 million,
representing a decrease of $213 million from December 31, 2004. The decrease
is primarily attributable to the sale of investment securities available for
sale, as described above. At March 31, 2005, residential real estate loans and
indirect auto loans totaled $905 million, which were experiencing stable
monthly principal payments of approximately $25 million. In addition, at March
31, 2005, the Company had customary lines for overnight borrowings from other
financial institutions in excess of $500 million and a $35 million line of
credit, under which $25.3 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. 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 2005 and 2004
contributed to substantial operating cash flows of $32.6 million and $34.6
million, respectively. In 2005, operating activities provided a substantial
portion of cash for $9.5 million in shareholder dividends, $3.2 million for
repayment of long term debt and $20.4 million utilized to repurchase common
stock. In 2004, operating activities provided a substantial portion of cash
for $28.7 million of Company stock repurchases and $8.4 million in shareholder
dividends.
In the first three months of 2005, investing activities generated $168.6
million, compared with $183.0 million in the same period of 2004. In the first
quarter of 2005, the Company used net cash of $35.2 million for the REBC
acquisition, which use had been largely facilitated in 2004 by reducing the
allocation of operating cash flow used to repurchase and retire common stock.
Page 25
In 2005, sales and maturities, net of purchases, of investment securities were
$172.0 million, which were used to reduce short-term borrowings by $112.3
million. In 2004, the Company generated $183.0 million from its investing
activities. Sales and maturities, net of purchases, of investment securities
were $184.1 million, which were used to reduce short-term borrowings by $98.9
million and to prepay $85 million FHLB advances.
The Company anticipates maintaining its cash levels in 2005 mainly through
increased profitability and retained earnings. It is anticipated that loan
demand will increase moderately in 2005, although such demand will be dictated
by economic conditions. The growth of deposit balances is expected to exceed
the anticipated growth in loan demand through the end of 2005. Depending on
economic conditions, interest rate levels, and a variety of other conditions,
excess deposit growth may be used to purchase investment securities or to
reduce short-term borrowings. However, due to concerns regarding consumer
confidence, possible terrorist attacks, the war in Iraq, and uncertainty in
the general economic environment, loan demand and levels of customer deposits
are not certain. Shareholder dividends and share repurchases are expected to
continue in 2005.
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
outstanding 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 pursuant
to stock repurchase plans approved by the Board with the intention of
lessening the dilutive impact of issuing new shares under stock 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 372 thousand shares in the first quarter of 2005, 574 thousand
shares in the first quarter of 2004, and 242 thousand in the fourth quarter of
2004.
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 $437.6 million at March 31, 2005.
This amount, which is reflective of the effect of proceeds of $90.9 million
from the issuance of stock in connection of the REBC acquisition and the
generation of earnings, offset by common stock repurchases and dividends paid
to shareholders, represents an increase of $99.0 million or 29.2% from a year
ago, and an increase of $79.0 million or 22.0% from December 31, 2004. Due to
an increase in shareholders' equity, the Company's ratio of equity to total
assets rose to 8.43% at March 31, 2005, from 7.65% a year ago and 7.57% on
December 31, 2004.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At March 31, At Minimum
--------------------------December 31, Regulatory
2005 2004 2004 Requirement
----------------------------------------------------
Tier I Capital 8.94% 9.89% 11.09% 4.00%
Total Capital 10.28% 11.25% 12.46% 8.00%
Leverage ratio 6.12% 6.63% 7.03% 4.00%
The risk-based capital ratios declined at March 31, 2005, compared with the
first and fourth quarters of 2004, due to the REBC acquisition. Equity issued
in the acquisition of $90.9 million was more than offset by the intangible
assets that were recorded, thereby decreasing Tier I and Total Capital.
Conversely, risk-weighted assets increased, resulting in lower capital ratios.
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.
Page 26
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 the person performing the
functions of the Company's 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) of the Securities Exchange Act of 1934, as
amended, as of March 31, 2005. Based upon their evaluation, the principal
executive officer and principal financial officer concluded that the Company's
disclosure controls and procedures are effective. The evaluation did not
identify any change in the Company's internal control over financial reporting
that occurred during the quarter ended March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Page 27
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 March 31, 2005 (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 31 127 $57.42 128 1,628
--------------------------------------------------------------
February 1
through
February 28 1 52.99 1 1,627
--------------------------------------------------------------
March 1
through
March 31 244 53.13 243 1,383
--------------------------------------------------------------
Total 372 $54.60 372 1,383
==============================================================
* Includes 3, 1 and 6 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.
Shares were repurchased during the first quarter of 2005 pursuant to a program
approved by the Board of Directors on August 27, 2004 authorizing the purchase
of up to 2,000,000 shares of the Company's common stock from time to time
prior to September 1, 2005. The 2004 approved amount included 645,429 remaining
shares available to be repurchased under the 2003 plan.
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
(aExhibit 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)/15d-14(a)
Page 28
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-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 29
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, 2005 /s/ DENNIS R. HANSEN
- ------------ --------------------
Date Dennis R. Hansen
Senior Vice President
and Controller
(Chief Accounting Officer)