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 June 30, 2001
Commission File Number: 1-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-2156203
(state or other jurisdiction of) (I.R.S. Employer
incorporation or organization) Identification No.)
1108 Fifth Avenue, San Rafael, California 94901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (707) 863-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the registrant classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of July 31, 2001
Common Stock, 35,121,466
No Par Value
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report on Form 10-Q for
Westamerica Bancorporation ("the Company") includes certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve
risks and uncertainties which include, but are not limited to, changes in
general economic conditions; competitive conditions in the geographic and
business areas in which the Company conducts operations; regulatory or
tax changes that affect the cost of or demand for the Company's products
and services; and the resolution of legal proceedings and related
matters.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the
Company cautions that, while it believes such assumptions or bases to be
reasonable and makes them in good faith, assumed facts or bases almost
always vary from actual results, and the differences between assumed
facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, the Company,
expresses an expectation or belief as to future results, such expectation
or belief is expressed in good faith and believed to have a reasonable
basis, but there can be no assurance that the statement of expectation or
belief will result, or be achieved or accomplished.
The reader is directed to the Company's annual report on Form 10-K for
the year ended December 31, 2000, 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.
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
At
At June 30, December 31,
2001 2000 2000
---------- ---------- ----------
Assets:
Cash and cash equivalents $192,408 $248,471 $286,482
Money market assets 335 250 250
Investment securities available for sale 891,874 939,209 921,275
Investment securities held to maturity,
with market values of:
$227,084 at June 30, 2001 221,885
$231,792 at June 30, 2000 234,523
$231,906 at December 31, 2000 228,035
Loans, gross 2,462,603 2,358,393 2,482,159
Allowance for loan losses (52,468) (52,121) (52,279)
Loans, net of allowance for loan losses ---------- ---------- ----------
2,410,135 2,306,272 2,429,880
Other real estate owned 545 2,062 2,065
Premises and equipment, net 42,444 42,429 42,182
Interest receivable and other assets 144,009 105,299 121,212
---------- ---------- ----------
Total Assets $3,903,635 $3,878,515 $4,031,381
========== ========== ==========
Liabilities:
Deposits:
Non-interest bearing $996,626 $961,111 $1,014,230
Interest bearing:
Transaction 499,299 501,820 526,178
Savings 835,894 832,850 816,635
Time 865,750 838,090 879,701
---------- ---------- ----------
Total deposits 3,197,569 3,133,871 3,236,744
Short-term borrowed funds 300,649 391,875 386,942
Liability for interest, taxes and
other expenses 59,124 20,620 38,912
Notes payable 27,822 38,036 31,036
---------- ---------- ----------
Total Liabilities 3,585,164 3,584,402 3,693,634
========== ========== ==========
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
35,251 at June 30, 2001 211,966
36,011 at June 30, 2000 183,301
36,251 at December 31, 2000 206,952
Accumulated other comprehensive income:
Unrealized (loss) gain on securities
available for sale 10,260 (6,996) 7,169
Retained earnings 96,245 117,808 123,626
---------- ---------- ----------
Total Shareholders' Equity 318,471 294,113 337,747
========== ========== ==========
Total Liabilities and
Shareholders' Equity $3,903,635 $3,878,515 $4,031,381
========== ========== ==========
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
----------------------------------------------
Interest Income:
Loans $49,341 $48,601 $100,246 $95,828
Money market assets and funds sold 1 2 6 6
Investment securities available for sale
Taxable 9,300 11,385 19,353 23,034
Tax-exempt 3,173 2,847 6,116 5,699
Investment securities held to maturity
Taxable 1,221 1,274 2,461 2,519
Tax-exempt 1,949 2,082 3,940 4,151
----------------------------------------------
Total interest income 64,985 66,191 132,122 131,237
Interest Expense:
Transaction deposits 723 1,043 1,616 1,959
Savings deposits 4,284 4,390 8,746 8,893
Time deposits 10,580 10,836 22,691 21,286
Short-term borrowed funds 2,410 5,145 5,923 9,654
Debt financing and notes payable 499 679 1,017 1,371
----------------------------------------------
Total interest expense 18,496 22,093 39,993 43,163
----------------------------------------------
Net Interest Income 46,489 44,098 92,129 88,074
----------------------------------------------
Provision for loan losses 900 925 1,800 1,870
----------------------------------------------
Net Interest Income After
Provision For Loan Losses 45,589 43,173 90,329 86,204
----------------------------------------------
Noninterest Income:
Service charges on deposit accounts 5,908 5,342 11,467 10,563
Merchant credit card 1,038 1,017 1,984 1,956
Financial services commissions 377 475 619 888
Mortgage banking 242 212 462 422
Trust fees 240 179 531 341
Other 3,189 3,243 6,217 6,253
----------------------------------------------
Total Noninterest Income 10,994 10,468 21,280 20,423
----------------------------------------------
Noninterest Expense:
Salaries and related benefits 13,272 12,865 26,622 25,202
Occupancy 2,911 2,874 5,827 5,933
Equipment 1,484 1,539 3,074 3,160
Data processing 1,553 1,506 3,075 3,048
Professional fees 398 438 851 798
Other real estate owned 98 75 141 104
Other 5,910 5,371 11,613 10,845
----------------------------------------------
Total Noninterest Expense 25,626 24,668 51,203 49,090
----------------------------------------------
Income Before Income Taxes 30,957 28,973 60,406 57,537
----------------------------------------------
Provision for income taxes 10,199 9,306 19,224 18,644
----------------------------------------------
Net Income $20,758 $19,667 $41,182 $38,893
==============================================
Comprehensive Income:
Change in unrealized (loss) gain on
securities available for sale, net (2,680) (411) 3,091 (2,475)
----------------------------------------------
Comprehensive Income $18,078 $19,256 $44,273 $36,418
==============================================
Average Shares Outstanding 35,433 36,220 35,715 36,423
Diluted Average Shares Outstanding 35,957 36,714 36,279 36,886
Per Share Data:
Basic Earnings $0.59 $0.54 $1.15 $1.07
Diluted Earnings 0.58 0.54 1.14 1.05
Dividends Paid 0.21 0.18 0.40 0.36
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Compre-
Common hensive Retained
Stock Income Earnings Total
-----------------------------------------------
Balance, December 31, 1999 $186,435 ($4,521) $118,678 $300,592
Net income for the period 38,893 38,893
Stock issued 2,236 2,236
Purchase and retirement of stock (5,370) (26,584) (31,954)
Dividends (13,179) (13,179)
Unrealized (loss) on securities available
for sale, net (2,475) (2,475)
-----------------------------------------------
Balance, June 30, 2000 $183,301 ($6,996) $117,808 $294,113
===============================================
Balance, December 31, 2000 $206,952 $7,169 $123,626 $337,747
Net income for the period 41,182 41,182
Stock issued 14,836 14,836
Purchase and retirement of stock (9,822) (54,171) (63,993)
Dividends (14,392) (14,392)
Unrealized gain on securities available
for sale, net 3,091 3,091
-----------------------------------------------
Balance, June 30, 2001 $211,966 $10,260 $96,245 $318,471
===============================================
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the six months
ended June 30,
2001 2000
---------------------
Operating Activities:
Net income $41,182 $38,893
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 2,423 2,426
Amortization of intangibles 1,719 1,399
Loan loss provision 1,800 1,870
Amortization of deferred net loan (cost)/fees 389 159
Decrease (increase) in interest income receivable 2,811 (461)
(Increase)in other assets (27,667) (3,882)
Increase in income taxes payable 4,461 1,041
(Decrease)/increase in interest expense payable (2,397) 1,353
Increase/(decrease) in other liabilities 20,527 (3,516)
Write-downs of equipment 119 30
Originations of loans for resale (2,795) (1,480)
Proceeds from sale of loans originated for resale 2,268 1,480
Net loss on sale of loans originated for resale 18 8
Net gain on sale of property acquired
in satisfaction of debt (154) (333)
Write-down on property acquired in satisfaction of debt 78 64
---------------------
Net Cash Provided by Operating Activities 44,782 39,051
---------------------
Investing Activities:
Net disbursements of loans 17,822 (39,547)
Purchases of investment securities available for sale (125,406) (24,776)
Purchases of investment securities held to maturity (3,110) (1,867)
Purchases of property, plant and equipment (2,808) (890)
Proceeds from maturity of securities available for sale 159,631 62,846
Proceeds from maturity of securities held to maturity 9,260 4,498
Proceeds from sale of securities available for sale 510 788
Proceeds from sale of property and equipment 0 20
Proceeds from property acquired in satisfaction
of debt 1,857 1,994
---------------------
Net Cash Provided By Investing Activities 57,756 3,066
---------------------
Financing Activities:
Net(decrease)/increase in deposits (39,175) 68,527
Net (decrease) in short-term borrowings (86,293) (70,470)
Repayments of notes payable (3,215) (3,464)
Exercise of stock options/issuance of shares 10,353 2,236
Repurchases/retirement of stock (63,805) (33,035)
Dividends paid (14,392) (13,178)
---------------------
Net Cash Used In Financing Activities (196,527) (49,384)
---------------------
Net Decrease In Cash and Cash Equivalents (93,989) (7,267)
---------------------
Cash and Cash Equivalents at Beginning of Period 286,482 255,738
---------------------
Cash and Cash Equivalents at End of Period $192,493 $248,471
=====================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $261 $518
Supplemental Disclosure of Cash Flow Activity:
Unrealized gain(loss)on securities available for sale $3,091 ($2,475)
Interest paid for the period 38,255 41,810
Income tax payments for the period 16,010 18,350
Income tax benefit from stock option exercises $4,296 $1,080
WESTAMERICA BANCORPORATION
Financial Summary
(dollars in thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
-------------------------------------------------
Net Interest Income $46,489 $44,098 $92,129 $88,074
Provision for Loan Losses (900) (925) (1,800) (1,870)
Noninterest Income 10,994 10,468 21,280 20,423
Noninterest Expense (25,626) (24,669) (51,203) (49,090)
Provision for income taxes (10,199) (9,305) (19,224) (18,644)
-------------------------------------------------
Net Income $20,758 $19,667 $41,182 $38,893
=================================================
Average Shares Outstanding 35,433 36,220 35,715 36,423
Diluted Average Shares Outstanding 35,957 36,714 36,279 36,886
Shares Outstanding at Period End 35,109 36,011 35,109 36,011
Basic Earnings Per Share $0.59 $0.54 $1.15 $1.07
Diluted Earnings Per Share 0.58 0.54 1.14 1.05
Average Balances:
Total Assets $3,824,688 $3,840,103 $3,848,636 $3,831,347
Earning Assets 3,541,890 3,525,197 3,557,325 3,524,773
Total Loans 2,456,278 2,318,760 2,457,016 2,308,609
Total Deposits 3,187,324 3,087,062 3,181,369 3,086,736
Shareholders' Equity 311,222 298,085 315,664 296,722
Financial Ratios for the Period:
Return On Assets 2.18% 2.06% 2.16% 2.04%
Return On Equity 26.75% 26.54% 26.31% 26.36%
Net Interest Margin 5.69% 5.42% 5.63% 5.41%
Net Loan Losses to Average Loans 0.18% 0.14% 0.13% 0.12%
Efficiency Ratio 41.8% 42.5% 42.4% 42.6%
Balances at Period End:
Total Assets $3,903,635 $3,878,515
Earning Assets 3,576,697 3,532,375
Total Loans 2,462,603 2,358,393
Total Deposits 3,197,569 3,133,872
Shareholders' Equity 318,471 294,113
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.13% 2.21%
Book Value Per Share $9.07 $8.17
Equity to Assets 8.16% 7.58%
Total Capital to Risk Assets 10.93% 11.51%
Dividends Paid Per Share $0.21 $0.18 $0.40 $0.36
Dividend Payout Ratio 36% 34% 35% 34%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Westamerica Bancorporation and its subsidiaries Westamerica Bank,
Community Banker Services Corporation, Westamerica Commercial Credit
Inc., and Money Outlet Inc. (the Company) reported second quarter 2001
net income of $20.8 million or $.58 diluted earnings per share. These
results compare to net income of $19.7 million or $.54 diluted earnings
per share for the first quarter of 2000. On a year-to-date basis, net
income was $41.2 million representing $1.14 diluted earnings per share,
compared to $38.9 million or $1.05 share for the same period of 2000.
Following is a summary of the components of net income for the periods
indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------
Net interest income (FTE) $50,269 $47,571 $99,528 $94,935
Provision for loan losses (900) (925) (1,800) (1,870)
Noninterest income 10,994 10,468 21,280 20,423
Noninterest expense (25,626) (24,669) (51,203) (49,090)
Provision for income taxes (FTE) (13,979) (12,778) (26,623) (25,505)
-------------------------------------------------
Net income $20,758 $19,667 $41,182 $38,893
=================================================
Average total assets $3,824,688 $3,840,103 $3,848,636 $3,831,347
Net income to average total assets 2.18% 2.06% 2.16% 2.04%
Net income for the second quarter of 2001 was $1.1 million (6%) over the
same quarter of 2000. The primary reason for the increase was higher net
interest income (FTE)(up $2.7 million), the result of a 27 basis point
(bp) improvement in the net margin and a higher average earning asset
base (up $17 million). Noninterest income increased $500 thousand (5%) as
well. This revenue improvement was partially offset by an increase in
noninterest expenses, which were $1.0 million above the year-ago quarter.
The provision for income taxes (FTE) increased $1.2 million (9%).
Comparing the first six months of 2001 to the prior year, net income
(FTE) increased $2.3 million (6%). Improved net interest income accounted
for most of the change, increasing $4.6 million (5%). The increase was
due to both a higher margin (up 22 bps) and higher average earning assets
(up $33 million). Noninterest income added $900 thousand to the revenue
increase, which was partially offset by higher noninterest expenses (up
$2.1 million). The FTE provision for income taxes for the 2001 period was
moderated by low-income housing tax credits recorded during the first
quarter, so that the year-to-year increase was only $1.1 million (4%).
Net Interest Income
Following is a summary of the components of net interest income for the
periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------
Interest income $64,985 $66,191 $132,122 $131,237
Interest expense (18,496) (22,093) (39,993) (43,163)
FTE adjustment 3,780 3,473 7,399 6,861
-------------------------------------------------
Net interest income (FTE) $50,269 $47,571 $99,528 $94,935
=================================================
Average earning assets $3,541,890 $3,525,197 $3,557,325 $3,524,773
Net interest margin (FTE) 5.69% 5.42% 5.63% 5.41%
The Company's primary source of revenue is net interest income, or the
difference between interest income on earning assets and interest expense
on interest-bearing liabilities. Net interest income (FTE) during the
second quarter of 2001 increased $2.7 million (6%) from the same period
in 2000 to $50.3 million. Approximately 60% of the increase was due to
the $17 million increase in average earning assets (the volume
component), with the remainder due to a higher margin earned on those
assets (the rate component). The increase in the net interest margin was
the net effect of a 15 bp drop in the asset yield, which was more than
offset by a 42 bp drop in the cost of funds.
Comparing the first six months of 2001 with the previous year, net
interest income (FTE) increased $4.6 million (5%), with 70% of the
increase attributable to more volume and 30% to a 22 bp increase in the
margin. The margin expansion was the result of a slight increase (3 bp)
in asset yields combined with a 19 bp lower cost of funds.
Interest and Fee Income
Interest & fee income (FTE) for the second quarter of 2001 decreased $900
thousand (1%) from the same period in 2000. The decrease was the net
effect of higher average earning assets in the 2001 period, more than
offset by lower yields earned on those assets. Average earning assets
grew $17 million, led by expansion in commercial real estate loans (up
$81 million or 9%), indirect consumer loans (up $31 million or 10%) and
construction loans (up $27 million or 62%). All other categories of loans
decreased by $2 million. Much of this loan growth was funded by net
liquidation of the investment portfolio, specifically in the categories
of asset-backed securities (down $85 million or 24%) and US Agency
obligations (down $33 million or 17%).
Despite the reallocation of funds from lower-yielding investment
securities to loans, the average yield on the Company's earning assets
decreased from 7.93% in 2000 to 7.78% in 2001 (down 15 bp). This downward
direction of yields was reflective of general interest markets during the
current quarter, as particularly evident in variable-rate categories of
loans such as commercial (101 bp decline in yield), construction (317 bp
decline) and personal lines of credit (158 bp decline). Partially
mitigating these drops were those categories of loans with fixed rates,
including residential real estate (15 bp increase) and indirect consumer
(up 14 bp). The net result was that the yield on the loan portfolio
declined 34 bp to 8.24%. The investment portfolio yield increased 7 bp,
to 6.71%.
Comparing the first half of 2001 to 2000, interest & fee income (FTE)
increased by $1.4 million. Unlike the second quarter comparison, the
change was the combined effect of a higher volume of earning assets and
the impact of slightly higher yields; included in the yield calculations
for the first half of 2000 is the effect of one additional accrual day
(2000 was a leap year), without which the 2000 earning asset yield would
have been the same as in 2001. The positive volume component of the
change was caused by a $33 million (1%) increase in average earning
assets, including higher commercial real estate loans (up $89 million or
10%), indirect consumer loans (up $50 million or 17%) and construction
loans (up $22 million or 48%). Total loans increased by $148 million
(6%). The investment portfolio was reduced by $116 million (10%) to fund
the loan expansion.
The average yield on earning assets for the first half of 2001 was 7.89%
compared to 7.86% in 2000. Loan yields, especially those more sensitive
to market rates, declined: the yield on commercial loans was down 45 bps,
construction yields declined 167 bps, and personal lines of credit were
down 75 bps. Offsetting these were stable fixed-rate loan yields, so that
the total loan yield declined 11 bps. The investment portfolio yield
increased 10 bps; the above-mentioned volume decline was generally made
up of lower-yielding asset-backed securities.
Interest Expense
Interest expense decreased $3.6 million (16%) in the second quarter of
2001 compared to the year-ago period. The decrease was the combined
effect of a lower balance of interest-bearing liabilities and a drop in
the average rate paid. Average interest-bearing liabilities decreased $64
million (3%), with a particularly significant decrease in short-term
borrowed funds (down $122 million or 32%). Much of this decline was
replaced at lower rates of interest in certificates of deposit (CDs) over
$100 thousand, which were up $51 million (11%). CDs under $100 thousand
moved up $10 million (3%) and interest-bearing transaction account
balances increased $7 million (1%).
The average rate paid on interest-bearing liabilities decreased from
3.44% in the second quarter of 2000 to 2.95% in 2001. Rates paid on those
liabilities that move with general market conditions declined
accordingly: the average rate on Fed Funds dropped 209 bps. Rates on
deposits were managed down as well, including those on CDs over $100
thousand, which declined 70 bps, and those on Money Market accounts,
which were lowered an average of 15 bps.
Through June 30, interest expense decreased $3.2 million (7%) in 2001
from 2000, again due to both a lower average balance of interest-bearing
liabilities and lower rates paid. Interest-bearing liabilities declined
$45 million (2%), led by lower purchased funds (down $92 million or 24%)
and offset by higher CDs over $100 thousand (up $45 million or 10%).
Interest-bearing transaction accounts increased $15 million (3%).
Rates paid averaged 3.18% during the first six months of 2001 compared to
3.36% in the year-ago period. The most significant decline was on
short-term funds, which decreased from 5.07% to 4.14%. Certain deposit
categories decreased as well, but the average rate paid on all
interest-bearing deposits actually increased slightly.
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 minimizing 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 Six months ended
June 30, June 30,
---------------------------------------------
2001 2000 2001 2000
---------------------------------------------
Yield on earning assets 7.78% 7.93% 7.89% 7.86%
Rate paid on interest-bearing
liabilities 2.95% 3.44% 3.18% 3.36%
---------------------------------------------
Net interest spread 4.83% 4.49% 4.71% 4.50%
Impact of all other net
non-interest bearing funds 0.86% 0.93% 0.92% 0.91%
---------------------------------------------
Net interest margin 5.69% 5.42% 5.63% 5.41%
=============================================
During the second quarter of 2001, the Company's rapid reaction to
declining market rates resulted in a substantial increase in the net
interest margin of 27 basis points compared to the second quarter of
2000. The unfavorable impact of lower rates earned on loans and the
investment portfolio, triggered by market trends, was more than offset by
managed decreases in rates paid on deposits and short-term funds. The
result was a 34 bp increase in the interest spread. Partially offsetting
the increase in spread was the lower value of noninterest bearing funding
sources. While the average balance of these sources increased $20
million, their value decreased 7 bp because of the lower market rates of
interest at which they could be invested.
On a year-to-date basis, the net interest margin increased 22 bp when
compared to the same period in 2000. Earning asset yields increased
slightly, while the cost of interest-bearing liabilities was managed
down, mainly through a substantial reduction in the rate paid on
higher-priced purchased funds. The interest spread increased 21 bps as a
result. Noninterest bearing funding sources increased $60 million, and
combined with the increase in net interest spread, resulted in the
increase in margin of 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
non-performing loans. Interest income includes proceeds from loans on
non-accrual 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 thereon exempt
from federal income taxation at the current statutory tax rate (dollars
in thousands):
For the three months ended
June 30, 2001
-------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------------------------------
Assets:
Money market assets and funds sold $374 $1 2.09%
Investment securities:
Available for sale
Taxable 610,966 9,678 6.35%
Tax-exempt 251,460 4,266 6.79%
Held to maturity
Taxable 74,242 1,191 6.43%
Tax-exempt 148,570 3,057 8.23%
Loans:
Commercial 594,536 12,629 8.38%
Commercial real estate 967,649 20,103 8.32%
Real estate construction 70,795 1,651 9.23%
Real estate residential 348,902 6,172 7.08%
Consumer 474,396 10,017 8.47%
-----------------------
Total loans 2,456,278 50,572 8.24%
-----------------------
Total earning assets 3,541,890 68,765 7.78%
Other assets 282,798
----------
Total assets $3,824,688
==========
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $969,591 $-- --
Savings and interest-bearing
transaction 1,329,439 5,008 1.51%
Time less than $100,000 393,530 4,615 4.70%
Time $100,000 or more 494,765 5,964 4.83%
-----------------------
Total interest-bearing deposits 2,217,734 15,587 2.82%
Short-term borrowed funds 263,895 2,410 3.64%
Debt financing and notes payable 27,821 499 7.17%
-----------------------
Total interest-bearing liabilities 2,509,450 18,496 2.95%
Other liabilities 34,425
Shareholders' equity 311,222
----------
Total liabilities and shareholders' equity $3,824,688
==========
Net interest spread (1) 4.83%
Net interest income and interest margin (2) $50,269 5.69%
=====================
For the three months ended
June 30, 2000
-------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------------------------------
Assets:
Money market assets and funds sold $411 $2 2.13%
Investment securities:
Available for sale
Taxable 749,045 11,385 6.10%
Tax-exempt 221,232 4,238 7.66%
Held to maturity
Taxable 80,270 1,274 6.37%
Tax-exempt 155,479 3,096 7.97%
Loans:
Commercial 598,943 14,132 9.40%
Commercial real estate 886,315 18,513 8.38%
Real estate construction 43,705 1,381 12.39%
Real estate residential 331,997 5,750 6.93%
Consumer 457,800 9,893 8.67%
-----------------------
Total loans 2,318,760 49,669
-----------------------
Total earning assets 3,525,197 69,664 7.93%
Other assets 314,906
----------
Total assets $3,840,103
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $937,523 $-- --
Savings and interest-bearing
transaction 1,322,227 5,434 1.65%
Time less than $100,000 383,091 4,720 4.94%
Time $100,000 or more 444,221 6,115 5.52%
-----------------------
Total interest-bearing deposits 2,149,539 16,269 3.04%
Short-term borrowed funds 385,736 5,145 5.30%
Debt financing and notes payable 38,036 679 7.14%
-----------------------
Total interest-bearing liabilities 2,573,311 22,093 3.44%
Other liabilities 31,184
Shareholders' equity 298,085
----------
Total liabilities and shareholders' equity $3,840,103
==========
Net interest spread (1) 4.49%
Net interest income and interest margin (2) $47,571 5.42%
=====================
For the six months ended
June 30, 2001
-------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------------------------------
Assets:
Money market assets and funds sold $214 $5 3.58%
Investment securities:
Available for sale
Taxable 634,359 19,133 6.08%
Tax-exempt 240,837 9,382 7.79%
Held to maturity
Taxable 75,376 2,497 6.68%
Tax-exempt 149,523 5,826 7.79%
Loans:
Commercial 590,839 26,077 8.79%
Commercial real estate 963,972 40,110 8.38%
Real estate construction 67,076 3,404 10.16%
Real estate residential 352,369 12,478 7.08%
Consumer 482,760 20,609 8.61%
-----------------------
Total loans 2,457,016 102,678
-----------------------
Total earning assets 3,557,325 139,521 7.89%
Other assets 291,311
----------
Total assets $3,848,636
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $964,888 $-- --
Savings and interest-bearing
transaction 1,327,482 10,361 1.57%
Time less than $100,000 395,851 9,758 4.97%
Time $100,000 or more 493,148 12,933 5.29%
-----------------------
Total interest-bearing deposits 2,216,481 33,052 3.01%
Short-term borrowed funds 286,095 5,924 4.14%
Debt financing and notes payable 28,357 1,017 7.17%
-----------------------
Total interest-bearing liabilities 2,530,933 39,993 3.18%
Other liabilities 37,151
Shareholders' equity 315,664
----------
Total liabilities and shareholders' equity $3,848,636
==========
Net interest spread (1) 4.71%
Net interest income and interest margin (2) $99,528 5.63%
=====================
For the six months ended
June 30, 2000
-------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
-------------------------------------
Assets:
Money market assets and funds sold $439 $6 2.83%
Investment securities:
Available for sale
Taxable 758,358 23,034 6.11%
Tax-exempt 220,941 8,430 7.63%
Held to maturity
Taxable 81,057 2,519 6.25%
Tax-exempt 155,369 6,131 7.89%
Loans:
Commercial 609,149 28,254 9.24%
Commercial real estate 875,102 36,434 8.36%
Real estate construction 45,242 2,702 11.83%
Real estate residential 333,720 11,529 6.91%
Consumer 445,396 19,059 8.61%
-----------------------
Total loans 2,308,609 97,978
-----------------------
Total earning assets 3,524,773 138,098 7.86%
Other assets 306,574
----------
Total assets $3,831,347
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $926,838 $-- --
Savings and interest-bearing
transaction 1,324,363 10,852 1.65%
Time less than $100,000 387,655 9,331 4.84%
Time $100,000 or more 447,880 11,955 5.37%
-----------------------
Total interest-bearing deposits 2,159,898 32,138 2.99%
Short-term borrowed funds 377,847 9,654 5.07%
Debt financing and notes payable 38,605 1,371 7.10%
-----------------------
Total interest-bearing liabilities 2,576,350 43,163 3.36%
Other liabilities 31,437
Shareholders' equity 296,722
----------
Total liabilities and shareholders' equity $3,831,347
==========
Net interest spread (1) 4.50%
Net interest income and interest margin (2) $94,935 5.41%
=====================
(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.
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 June 30, 2001
compared with three months
ended June 30, 2000
----------------------------------
Volume Rate Total
----------------------------------
Interest and fee income:
Money market assets and funds sold ($0) ($1) ($1)
Investment securities:
Available for sale
Taxable (1,764) 58 (1,707)
Tax-exempt 171 (143) 28
Held to maturity
Taxable (97) 14 (83)
Tax-exempt (156) 117 (39)
Loans:
Commercial (101) (1,402) (1,503)
Commercial real estate 1,735 (144) 1,590
Real estate construction 688 (418) 270
Real estate residential 295 127 422
Consumer 279 (155) 124
----------------------------------
Total loans 2,896 (1,992) 903
----------------------------------
Total earning assets 1,050 (1,947) (899)
----------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 257 (683) (426)
Time less than $100,000 107 (212) (105)
Time $100,000 or more 613 (764) (151)
----------------------------------
Total interest-bearing deposits 977 (1,659) (682)
----------------------------------
Short-term borrowed funds (1,365) (1,370) (2,735)
Debt financing and notes payable (183) 3 (180)
----------------------------------
Total interest-bearing liabilities (571) (3,026) (3,597)
----------------------------------
Increase (Decrease) in Net Interest Income $1,621 $1,079 $2,698
==================================
Six months ended June 30, 2001
compared with six months
ended June 30, 2000
----------------------------------
Volume Rate Total
----------------------------------
Interest and fee income:
Money market assets and funds sold $0 ($1) ($1)
Investment securities:
Available for sale
Taxable (3,255) (646) (3,901)
Tax-exempt 766 186 952
Held to maturity
Taxable (917) 895 (22)
Tax-exempt (227) (78) (305)
Loans:
Commercial (805) (1,372) (2,177)
Commercial real estate 3,805 (129) 3,676
Real estate construction 1,145 (443) 702
Real estate residential 671 278 949
Consumer 1,407 143 1,550
----------------------------------
Total loans 6,223 (1,523) 4,700
----------------------------------
Total earning assets 2,590 (1,167) 1,423
----------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 420 (911) (491)
Time less than $100,000 199 228 427
Time $100,000 or more 1,169 (191) 978
----------------------------------
Total interest-bearing deposits 1,788 (875) 913
----------------------------------
Short-term borrowed funds (2,088) (1,642) (3,730)
Debt financing and notes payable (367) 13 (354)
----------------------------------
Total interest-bearing liabilities (667) (2,504) (3,170)
----------------------------------
Increase (Decrease) in Net Interest Income $3,257 $1,337 $4,593
==================================
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
$900 thousand for loan losses in the second quarter of 2001 and $925
thousand in the 2000 period. For the first six months of 2001, $1.8
million was provided, representing a $70 thousand decrease from 2000. For
further information regarding net credit losses and the reserve for loan
losses, see the "Asset Quality" 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 Six months ended
June 30, June 30,
----------------------------------------------
2001 2000 2001 2000
----------------------------------------------
Service charges on deposit accounts $5,908 $5,342 $11,467 $10,563
Merchant credit card 1,038 1,017 1,984 1,956
ATM fees and interchange 564 546 1,058 1,032
Other service fees 410 360 807 723
Financial services commissions 377 474 619 888
Debit card fees 375 346 688 562
Mortgage banking income 242 212 463 422
Trust fees 240 179 531 341
Other noninterest income 1,840 1,992 3,663 3,936
----------------------------------------------
Total $10,994 $10,468 $21,280 $20,423
==============================================
Noninterest income for the second quarter of 2001 increased $526 thousand
(5%) from the same period in 2000. Higher deposit account service charges
and trust fees were the main contributing factors, offset by lower
financial service fees. The increase in deposit service charges
specifically relates to account analysis deficit fees and overdrafts
fees. Deficit fees are service charges collected from business customers
that typically pay for such services with compensating balances. In the
current period of low interest rates, the earnings value of the balances
has decreased resulting in more customers being required to pay for
services with explicit fees. In addition, overdraft fees increased due
to changes in charging methodologies and in approximate proportion to the
growth in average transaction account balances. The increase in other
service fees was primarily due to $17 thousand (24%) higher stop payment
charges, a $13 thousand (14%) improvement in wire transfer fees, as well
as $37 thousand in automobile loan reconveyance fees. All were the result
of improved, automated assessment and collection procedures. Trust fees
increased $61 thousand (34%), reflecting the Company's renewed emphasis
on that line of business. Most trust fees are based on assets under
management, which increased from $325 million in 2000 to $350 million at
June 30, 2001. Other transaction-based trust fees also increased.
Mortgage banking income increased $30 thousand primarily due to
documentation fees generated in connection with a heightened number of
refinancings. Offsetting these increases, gains on sales of foreclosed
property decreased $103 thousand (52%); and financial services
commissions decreased $97 thousand due to lower commissions on mutual
fund sales earned through the Company's third-party marketing
representatives.
Comparing the first six months of 2001 to the same period in 2000,
noninterest income increased $857 thousand (4%). As with the
quarter-to-quarter comparison, the largest contributor to this change was
due to the increase in higher deposit account service charges and more
specifically account analysis deficit fees. Again, the primary reason for
the increase is the current low interest rate environment: customers
were assessed explicit fees for the value of services provided in excess
of earnings credits on compensating balances. Overdraft charges increased
$188 thousand (4%), as service charge routines installed in late 1999 had
not yet taken full effect until 2001. Activity charges on individual and
small business accounts were up $127 thousand (4%) and savings service
fees improved $126 thousand (52%) due to price increases made in late
2000. Debit card fees were up $126 thousand (22%), as usage continues to
increase. Trust fees increased $190 thousand (56%), as marketing
emphasis was intensified, resulting in more trust assets under
management. Financial services commissions decreased $268 thousand (30%)
because of lower sales of mutual fund products, which in turn was the
result of staffing shortages early in the 2001 period.
Noninterest Expense
The following table summarizes the components of noninterest expense for
the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
----------------------------------------------
Salaries and incentives $10,524 $10,106 $20,716 $19,677
Employee benefits 2,725 2,759 5,854 5,525
Occupancy 2,911 2,875 5,827 5,933
Equipment 1,484 1,539 3,074 3,160
Data processing services 1,553 1,506 3,074 3,048
Courier service 902 864 1,829 1,690
Telephone 500 549 994 1,096
Postage 401 479 903 1,027
Professional fees 398 437 851 798
Merchant credit card 364 372 724 784
Stationery and supplies 382 329 743 726
Advertising/public relations 354 297 712 585
Employee recruiting 228 79 327 140
Loan expense 301 283 527 542
Operational losses 249 207 412 500
Deposit expense 145 (2) 303 (3)
Other real estate owned 98 75 141 104
Amortization of deposit intangibles 369 249 737 498
Amortization of goodwill 297 223 581 450
Other noninterest expense 1,441 1,443 2,874 2,810
----------------------------------------------
Total $25,626 $24,669 $51,203 $49,090
==============================================
Average full time equivalent staff 1,090 1,076 1,086 1,076
Noninterest expense to revenues (FTE) 41.83% 42.50% 42.38% 42.55%
Noninterest expense increased $957 thousand (4%) in the second quarter of
2001 compared to the same period in 2000. The largest category of
increase was salaries and incentives, which were up $418 thousand (4%). A
portion of the increase is attributable to the greater number of full
time equivalent staff which is primarily the result of the acquisition of
First Counties Bank (FCB) in August of 2000; in addition, approximately
$300 thousand is due to salary increases granted in early 2001 to
existing employees. Annualized salaries per full time equivalent employee
increased from $32,200 in 2000 to almost $33,000 in 2001, which is an
average 2.5% change. A related expense category, employment recruiting,
increased $149 thousand (189%) due to a three-month effort to locate and
hire staff for certain specific positions within the Company. Deposit
expenses increase due to services provided to account analysis customers.
The third major category of increase between the two quarters is the
amortization of deposit intangibles (up $120 thousand or 48%) and
goodwill (up $74 thousand or 33%). Both increases resulted from the
Company's acquisition of FCB in the third quarter of 2000, a transaction
giving rise to a deposit-based intangible asset of $2.8 million that is
being amortized over a ten-year period, and goodwill of $9.8 million, to
be amortized over 25 years.
Partially offsetting these increases, equipment expense decreased $55
thousand (4%) due to lower depreciation costs; postage expense decreased
$78 thousand (16%), as the 2000 period included several special mailings;
and telephone expense dropped $49 thousand (9%), due to the installation
of new telephone switching equipment in late 2000.
On a year-to-date basis, noninterest expense increased $2.1 million (4%).
The three major categories of increase are the same as discussed above:
salaries & incentives, deposit expense and the amortization of
intangibles & goodwill. Salaries & incentives increased $1 million (5%)
due to a slight increase in the number of employees, but primarily
because of salary increases to existing employees which became effective
during the first part of 2001. Such increases were granted in order to
retain key experienced staff in an environment of rapidly escalating
market rates of compensation. Employment recruitment expenses increased
$188 thousand (134%). Deposit expense increased $306 thousand as a result
of the higher expenses paid on behalf of business customers. Amortization
of deposit intangibles and goodwill increased $239 thousand and $131
thousand, respectively, as a result of the FCB acquisition.
Partially offsetting these increases during the first six months of the
year, occupancy costs declined $106 thousand (2%) due to the expiration
of a high-cost lease; postage decreased $124 thousand (12%), as the 2000
period included some extraordinary costs; and telephone dropped $103
thousand (9%) as a result of the installation of cost-saving switching
hardware and software.
Provision for Income Tax
During the second quarter of 2001, the Company recorded income tax
expense of $10.2 million, $894 thousand (10%) higher than the second
quarter of 2000; on a year-to-date basis, income tax expense was $19.2
million for 2001 compared to $18.6 million for 2000. The current quarter
provision represents an effective tax rate of 32.9 percent, compared to
32.1 percent for the second quarter of 2000; for the first six months of
2001, the effective tax rate was 31.8 percent, compared to 32.4 recorded
in 2000. The provision for income taxes for all periods presented is
primarily attributable to the respective level of earnings and the
incidence of allowable deductions, particularly higher revenues
recognized from tax-exempt loans and state and municipal securities. In
addition, the first half of 2001 reflected an adjustment to low-income
housing tax credits that the Company earned. The effect of the adjustment
was to lower the 2001 year-to-date tax provision by $400 thousand.
Asset Quality
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 into
less risky investments. 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 loan"
category, which includes all non-performing and potential problem loans,
and receive an elevated level of attention to ensure collection. "Other
classified assets" are primarily other real estate owned assets, that are
recorded at the lower cost or market.
The following is a summary of classified assets on the dates indicated
(dollars in thousands):
At
At June 30, December 31,
---------------------------------
2001 2000 2000
---------------------------------
Classified loans $39,530 $38,056 $31,634
Other classified assets 545 2,062 2,065
----------------------------------
Total classified assets $40,075 $40,118 $33,699
==================================
Allowance for loan losses /
classified loans 133% 137% 165%
Classified loans at June 30, 2001, increased slightly $1.5 million (4%)
from June 30, 2001, reflecting the Company's strict credit standards,
even in a weakening economy. Other classified assets decreased $1.5
million (74%) from June 30, 2000, due to sales and write-downs of
properties acquired in satisfaction of debt ("other real estate owned")
partially offset by new foreclosures on loans with real estate
collateral. The $6.4 million increase in classified assets from December
31, 2000, was principally due to the downgrading of one large credit. The
$1.5 million reduction in other classified assets from December 31, 2000,
was mainly due to sales and write-downs of other real estate owned
properties.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans 90 days past due as
to principal or interest and still accruing, and other real estate owned.
Loans are placed on nonaccrual status when reaching 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 non-performing assets. When the ability to fully
collect non-accrual 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 assets on the dates indicated
(dollars in thousands):
At
At June 30, December 31,
--------------------------------
2001 2000 2000
--------------------------------
Performing nonaccrual loans $2,330 $6,606 $3,499
Nonperforming, nonaccrual loans 6,196 2,047 4,525
--------------------------------
Total nonaccrual loans 8,526 8,653 8,024
Loans 90 days past due and
still accruing 344 212 650
---------------------------------
Total nonperforming loans 8,870 8,865 8,674
Other real estate owned 545 2,062 2,065
--------------------------------
Total nonperforming assets $9,415 $10,927 $10,739
================================
Allowance for loan losses/
nonperforming loans 592% 588% 603%
Performing nonaccrual loans at June 30, 2001 decreased $4.2 million (65%)
from the previous year and $1.2 million (33%) from December 31, 2000.
Much of the decrease from both prior dates involves one large commercial
credit that was charged off against the allowance for loan losses. The
remainder of the reduction in both periods is the net result of loans
being returned to full-accrual status or being paid off, partially offset
by other loans being placed in non-accrual status.
Nonperforming nonaccrual loans at June 30, 2001 increased $4.1 million
(198%) from a year ago and $1.7 million (37%) from year-end, 2000. The
increases resulted primarily from the additions of several secured
commercial loans.
Other real estate owned at June 30, 2001 was $1.5 million (74%) lower
than both the previous year and December 31, 2000. Much of the reduction
was due to the sale of three large properties with a total carrying value
of $1.2 million. Other sales were partially offset by the addition of new
foreclosed property.
The amount of gross interest income that would have been recorded for
non-accrual loans for the three and six month periods ended June, 2001,
if all such loans had been current in accordance with their original
terms, was $187 thousand and $366 thousand, respectively, compared to
$211 thousand and $440 thousand, respectively, for the first three and
six months of 2000.
The amount of interest income that was recognized on non-accrual loans
from all cash payments, including those related to interest owed from
prior years, made during the three and six months ended June 30, 2001,
totaled $234 thousand and $570 thousand, respectively, compared to $252
thousand and $624 thousand, respectively, for the comparable periods in
2000. These cash payments represent annualized yields of 11.04 percent
and 14.57 percent, respectively, for the second quarter and the first six
months of 2001 compared to 12.08 percent and 15.61 percent, respectively,
for the first three and six months of 2000.
Total cash payments received, including those recorded in prior years,
which were applied against the book balance of non-accrual loans
outstanding at June 30, 2001, totaled approximately $24 thousand.
The overall credit quality of the loan portfolio continues to be strong;
however, the total non-performing 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
non-performing assets; however, the Company can give no assurance that
additional increases in non-accrual loans will not occur in the future.
Allowance for Loan Losses
The Company's allowance for loan losses is maintained at a level
estimated to be adequate to provide for losses that can be estimated
based upon specific and general conditions. These include credit loss
experience, the amount of past due, non-performing 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 reserve 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 impaired
loans. Management considers the $52.5 million allowance for loan losses,
which constituted 2.13 percent of total loans at June 30, 2001, to be
adequate as a reserve against inherent losses. However, while the
Company's policy is to charge off in the current period those loans on
which the loss is considered probable, the risk exists of future losses
which cannot be precisely quantified or attributed to particular loans or
classes of loans. Management continues to evaluate the loan portfolio and
assess current economic conditions that will dictate future required
allowance levels.
The following table summarizes the loan loss provision, net credit losses
and allowance for loan losses for the periods indicated (dollars in
thousands):
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------
2001 2000 2001 2000
-----------------------------------------------
Balance, beginning of period $52,644 $51,990 $52,279 $51,574
Loan loss provision 900 925 1,800 1,870
Loans charged off (2,283) (1,520) (3,890) (3,375)
Recoveries of previously
charged off loans 1,207 726 2,279 2,052
-----------------------------------------------
Net credit losses (1,076) (794) (1,611) (1,323)
-----------------------------------------------
Balance, end of period $52,468 $52,121 $52,468 $52,121
===============================================
Allowance for loan losses /
loans outstanding 2.13% 2.21%
Asset and Liability Management
The fundamental objective of the Company's management of assets and
liabilities is to maximize economic value while maintaining adequate
liquidity and a conservative level of interest rate risk.
The 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 or
falling rate scenario where the Fed Funds rate is made to rise or fall
evenly by 200 basis points over the 12-month forecast interval triggering
a response in the other forecasted rates. It is the policy of the Company
to require that such simulated NII changes should be always less than 10
percent or steps must be taken to reduce interest-rate risk. According to
the same policy, if the simulated changes in NII reach 7.5 percent, a
closer look at the risk will be put in place to determine what steps
could be taken to control risk should it grow worse. The results of the
model indicate that the mix of interest rate sensitive assets and
liabilities at June 30, 2001 would not result in a fluctuation of NII
that would exceed the parameters established by Company policy.
At June 30, 2001 and 2000, the Company had no derivative financial
instruments outstanding. As the Company believes that the derivative
financial instrument disclosures contained within the notes to the
financial statements of its 2000 Form 10-K substantially conform with the
accounting policy requirements of these rule amendments, no further
interim disclosure has been provided. The rule amendments that require
expanded disclosure of quantitative and qualitative information about
market risk were effective with the 1997 Form 10-K. At June 30, 2001,
there were no substantial changes in the information on market risk that
was disclosed in the Company's Form 10-Ks since 1997.
Liquidity
The Company's principal source of asset liquidity is marketable
investment securities available for sale. At June 30, 2001, investment
securities available for sale totaled $892 million, representing a
decrease of $47 million from June 30, 2000. In addition, the Company
generates significant liquidity from its operating activities. The
Company's profitability during the first six months of 2001 and 2000
generated substantial cash flows, which are included in the totals
provided from operations of $45 million and $39 million, respectively.
Additional cash flows may be provided by financing activities, primarily
the acceptance of deposits and borrowings from banks.
During the first six months of 2001, the effect of the Company's stock
repurchase programs and dividends paid to shareholders were $64 million
and $14 million, respectively. These cash outflows, added to a $86
million reduction in short-term borrowed funds, a $3 million reduction in
long-term debt, and a $39 million decrease in deposits are included in
the net cash used in financing activities during the first six months of
2001 of $197 million.
This compares to the first six months of 2000, when the cash used in
financing activities totaled $49 million. This amount includes cash
outflows related to the Company's stock repurchase programs and dividends
paid to shareholders of $33 million and $13 million, respectively, plus a
$70 million reduction in short-term debt, partially offset by a $68
million increase in deposits.
The Company uses cash flows from operating and financing activities
primarily to invest in loans and investment securities. Purchases of
investment securities net of maturities were $34 million during the first
half of 2001, compared to net purchases of $42 million during the first
six months of 2000. Net repayments of loans were $18 million in 2001,
compared to net disbursements totaling $39.5 million for the first six
months of 2000.
The Company anticipates increasing its cash level from operations through
2001 due to increased profitability and retained earnings. For the same
period, it is anticipated that demand for loans will increase,
particularly in the commercial and real estate categories. The growth in
deposit balances is expected to follow the anticipated growth in loan
balances.
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 quarterly repurchases approximately 250 thousand
of its shares of 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 to
these systematic repurchases, 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 an additional
1.18 million and 752 thousand shares during the first six months of 2001
and 2000, respectively.
The Company's capital position represents the level of capital available
to support continued operations and expansion. The Company's primary
capital resource is shareholders' equity, which was $318 million at June
30, 2001. This amount, which is reflective of the effect of common stock
repurchases and dividends paid to shareholders partially offset by the
generation of earnings and proceeds from the issuance of stock,
represents an increase of $24 million or 8 percent from June 30, 2000,
and a decrease of $19 million, or 6 percent, from December 31, 2000. As a
consequence of the increase in shareholders' equity, the Company's ratio
of equity to total assets increased to 8.16 percent at June 30, 2001,
from 7.60 percent a year ago. The equity to assets ration was 8.38
percent on December 31, 2000.
The following summarizes the ratios of capital to risk-adjusted assets
for the periods indicated:
At Minimum
At June 30, December 31, Regulatory
2001 2000 2000 Requirement
------------------------------------------------
Tier I Capital 9.52% 9.87% 10.20% 4.00%
Total Capital 10.93% 11.51% 11.61% 8.00%
Leverage ratio 7.53% 7.60% 7.89% 4.00%
The risk-based capital ratios decreased at June 30, 2001, compared to the
prior year and to December 31, 2000, primarily due to the decrease in the
total level of tangible (excluding goodwill and purchase premiums)
shareholders' equity as a result of the Company's common stock
repurchases and dividends paid to shareholders, partially offset by
increased net income.
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 future needs. As shown in the table above, all
ratios are in excess of the regulatory definition of "well capitalized".
Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable to
an assembled workforce may not be accounted for separately. Statement 142
will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement
142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite
useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to
be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria in
Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful lives
and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date
of adoption. To accomplish this the Company must identify its reporting
units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of adoption.
The Company will then have up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the
reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step,
the Company must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all
of it assets (recognized and unrecognized) and liabilities in a manner
similar to a purchase price allocation in accordance with Statement 141,
to its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any
transitional impairment loss will be recognized as the cumulative effect
of a change in accounting principle in the Company's statement of earnings.
And finally, any unamortized negative goodwill existing at the date
Statement 142 is adopted must be written off as the cumulative effect of
a change in accounting principle.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $16.3 million and unamortized identifiable
intangible assets in the amount of $2.7 million which will be subject to
the transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was $297 thousand for the second quarter of 2001 and
$223 thousand for the same period in 2000. For the six months ended June
30, goodwill amortization was $581 thousand in 2001 and $450 thousand in
2000. Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements
at the date of this report, including whether any transitional impairment
losses will be required to be recognized as the cumulative effect of a
change in accounting principle.
SIGNATURES
Pursuant to the requirements of the Securities and 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)
Date: August 14, 2001 /s/ DENNIS R. HANSEN
--------------------
Dennis R. Hansen
Senior Vice President
and Controller
Chief Accounting Officer
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Subsidiary
Banks are 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 Banks.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
Proxies for the Annual Meeting of shareholders held on April 26,
2001, were solicited pursuant Regulation 14A of the Securities
Exchange Act of 1934. The Report of Inspector of election
indicates that 29,043,517 shares of the Common Stock of the
Company, out of 36,034,608 shares outstanding, were present at the
meeting. The following matters were submitted to a vote of the
shareholders:
1.- Election of directors:
Withheld/
For Exceptions
------ ------
Etta Allen 28,752,006 291,510
Louis E. Bartolini 28,748,766 294,750
Don Emerson 28,865,519 177,998
Louis H. Herwaldt 28,866,524 176,993
Arthur C. Latno, Jr. 28,742,220 301,297
Patrick D. Lynch 28,699,492 344,024
Catherine C. MacMillan 28,754,946 288,571
Patrick J. Mon Pere 28,666,529 376,988
Ronald A. Nelson 28,843,958 199,559
Carl R. Otto 28,764,746 278,771
David L. Payne 25,865,736 3,177,781
Michael J. Ryan 28,664,652 378,865
Edward B. Sylvester 28,776,869 266,648
2.- Ratification of independent certified public accountant
firm. A proposal to ratify the selection of KPMG LLP as
independent certified public accountants for the Company
for 2001.
For : 28,847,415
Against : 104,137
Abstain : 91,964
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 11: Computation of Earnings Per Share on Common
and Common Equivalent Shares and on Common
Shares Assuming Full Dilution
(b) Reports on Form 8-K
None
Exhibit 11
WESTAMERICA BANCORPORATION
Computation of Earnings Per Share on Common and
Common Equivalent Shares and on Common Shares
Assuming Full Dilution
For the For the
three months six months
ended June 30, ended June 30,
(In thousands, except per share data) 2001 2000 2001 2000
---------------------------------------------
Weighted average number of common
shares outstanding - basic 35,433 36,220 35,715 36,423
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 524 493 564 463
----------------------------------------------
Weighted average number of common
shares outstanding - diluted 35,957 36,713 36,279 36,886
==============================================
Net income $20,758 $19,667 $41,182 $38,893
Basic earnings per share $0.59 $0.54 $1.15 $1.07
Diluted earnings per share $0.58 $0.54 $1.14 $1.05