UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
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 issuer's classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of August 7, 2002
Common Stock, 33,569,463
No Par Value
TABLE OF CONTENTS
Page
Forward Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Financial Summary 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 27
PART II - OTHER INFORMATION 28
Item 1 - Legal Proceedings 28
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 6 - Exhibits and Reports on Form 8-K 28
Exhibit 11 - Computation of Earnings Per Share 31
Exhibit 99.1 - Certification Required by 18 U.S.C. Section 1350 32
Exhibit 99.2 - Certification Required by 18 U.S.C. Section 1350 33
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about
Westamerica Bancorporation for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. A number of factors, some
of which are beyond the Company's ability to predict or control, could cause
future results to differ materially from those contemplated. These factors
include but are not limited to (1) a continued slowdown in the national and
California economies; (2) increased economic uncertainty created by the recent
terrorist attacks on the United States and the actions taken in response; (3)
the prospect of additional terrorist attacks in the United States and the
uncertain effect of these events on the national and regional economies; (4)
changes in the interest rate environment; (5) changes in the regulatory
environment; (6) significantly increasing competitive pressure in the banking
industry; (7) operational risks including data processing system failures or
fraud; (8) the effect of acquisitions and integration of acquired businesses;
(9) volatility of rate sensitive deposits; (10) asset/liability matching risks
and liquidity risks; and (11) changes in the securities markets.
The reader is directed to the Company's annual report on Form 10-K for the year
ended December 31, 2001, 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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
At
At June 30, December 31,
2002 2001 2001
---------------------------------------
Assets:
Cash and cash equivalents $183,589 $192,493 $179,182
Money market assets 633 250 534
Investment securities available for sale 986,392 891,874 948,970
Investment securities held to maturity,
with market values of:
$287,841 at June 30, 2002 279,640
$227,084 at June 30, 2001 221,885
$214,866 at December 31, 2001 209,169
Loans, gross 2,507,968 2,462,603 2,484,457
Allowance for loan losses (54,324) (52,468) (52,086)
---------------------------------------
Loans, net of allowance for loan losses 2,453,644 2,410,135 2,432,371
Other real estate owned 473 545 523
Premises and equipment, net 39,078 42,444 39,821
Interest receivable and other assets 129,053 144,009 117,397
---------------------------------------
Total Assets $4,072,502 $3,903,635 $3,927,967
=======================================
Liabilities:
Deposits:
Non-interest bearing $1,081,967 $996,626 $1,048,458
Interest bearing:
Transaction 528,226 499,299 519,324
Savings 979,289 835,894 863,523
Time 725,958 865,750 803,330
---------------------------------------
Total deposits 3,315,440 3,197,569 3,234,635
Short-term borrowed funds 228,635 300,649 271,911
Federal Home Loan Bank advance 140,000 0 40,000
Notes Payable 24,607 27,822 27,821
Liability for interest, taxes and
other expenses 43,447 59,124 39,241
---------------------------------------
Total Liabilities 3,752,129 3,585,164 3,613,608
=======================================
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
33,753 at June 30, 2002 226,551
35,109 at June 30, 2001 211,966
34,220 at December 31, 2001 209,074
Accumulated other comprehensive income:
Unrealized gain on securities
available for sale 14,184 10,260 11,900
Retained earnings 79,638 96,245 93,385
---------------------------------------
Total Shareholders' Equity 320,373 318,471 314,359
=======================================
Total Liabilities and
Shareholders' Equity $4,072,502 $3,903,635 $3,927,967
=======================================
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,
2002 2001 2002 2001
----------------------------------------------------
Interest Income:
Loans $43,912 $49,341 $87,878 $100,246
Money market assets and funds sold 4 1 4 6
Investment securities available for sale
Taxable 8,350 9,300 16,633 19,353
Tax-exempt 3,693 3,173 7,555 6,116
Investment securities held to maturity
Taxable 1,073 1,221 2,042 2,461
Tax-exempt 2,055 1,949 3,913 3,940
----------------------------------------------------
Total interest income 59,087 64,985 118,024 132,122
----------------------------------------------------
Interest Expense:
Transaction deposits 413 723 820 1,616
Savings deposits 2,817 4,284 5,559 8,746
Time deposits 4,415 10,580 9,407 22,691
Short-term borrowed funds 895 2,410 1,921 5,923
Federal Home Loan Bank advance 1,247 0 2,039 0
Debt financing and notes payable 442 499 903 1,017
----------------------------------------------------
Total interest expense 10,229 18,496 20,649 39,993
----------------------------------------------------
Net Interest Income 48,858 46,489 97,375 92,129
----------------------------------------------------
Provision for loan losses 900 900 1,800 1,800
----------------------------------------------------
Net Interest Income After
Provision For Loan Losses 47,958 45,589 95,575 90,329
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 5,967 5,908 11,969 11,467
Merchant credit card 963 1,038 1,868 1,984
Financial services commissions 425 377 764 619
Mortgage banking 217 242 404 462
Trust fees 243 240 554 531
Impairment of investment securities (4,260) 0 (4,260) 0
Other 2,329 3,189 4,584 6,217
----------------------------------------------------
Total Noninterest Income 5,884 10,994 15,883 21,280
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 14,281 13,249 28,143 26,570
Occupancy 2,898 2,911 5,829 5,827
Equipment 1,425 1,484 2,859 3,074
Data processing 1,516 1,553 3,015 3,075
Professional fees 443 398 815 851
Other real estate owned 1 98 50 141
Other 5,345 5,933 10,891 11,665
----------------------------------------------------
Total Noninterest Expense 25,909 25,626 51,602 51,203
----------------------------------------------------
Income Before Income Taxes 27,933 30,957 59,856 60,406
----------------------------------------------------
Provision for income taxes 8,586 10,199 18,850 19,224
----------------------------------------------------
Net Income $19,347 $20,758 $41,006 $41,182
====================================================
Comprehensive Income:
Change in unrealized gain (loss) on
securities available for sale, net 6,122 (2,680) 2,284 3,091
----------------------------------------------------
Comprehensive Income $25,469 $18,078 $43,290 $44,273
====================================================
Average Shares Outstanding 33,565 35,433 33,817 35,715
Diluted Average Shares Outstanding 34,180 35,957 34,406 36,279
Per Share Data:
Basic Earnings $0.58 $0.59 $1.21 $1.15
Diluted Earnings 0.57 0.58 1.19 1.14
Dividends Paid 0.22 0.21 0.44 0.40
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Compre-
Common hensive Retained
Stock Income Earnings Total
----------------------------------------------------
Balance, December 31, 2000 $206,952 $7,169 $123,626 $337,747
Net income for the period 41,182 41,182
Stock issued, including
stock option tax benefits 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
====================================================
Balance, December 31, 2001 $209,074 $11,900 $93,385 $314,359
Net income for the period $41,006 41,006
Stock issued in connection with
purchase of Kerman State Bank 14,620 14,620
Stock issued, including
stock option tax benefits 9,737 9,737
Purchase and retirement of stock (6,880) (39,832) (46,712)
Dividends (14,921) (14,921)
Unrealized gain on securities available
for sale, net 2,284 2,284
----------------------------------------------------
Balance, June 30, 2002 $226,551 $14,184 $79,638 $320,373
====================================================
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the six months
ended June 30,
2002 2001
--------------------------
Operating Activities:
Net income $41,006 $41,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 2,264 2,423
Amortization of intangibles 869 1,719
Loan loss provision 1,800 1,800
Amortization of deferred net loan (cost)/fees 396 389
(Increase) decrease in interest income receivable (1,956) 2,811
(Increase) in other assets (2,484) (27,667)
(Decrease) increase in income taxes payable (1,484) 4,461
(Decrease) in interest expense payable (132) (2,397)
Increase in other liabilities 3,060 20,715
Writedown of equipment 268 119
Originations of loans for resale (7,028) (2,795)
Proceeds from sale of loans originated for resale 7,594 2,268
Net (gain) loss on sale of loans originated for resale (27) 18
Net gain on sale of property acquired
in satisfaction of debt (107) (154)
Writedown on property acquired in satisfaction of debt 34 78
Impairment of investment securities 4,260 0
--------------------------
Net Cash Provided by Operating Activities 48,333 44,970
--------------------------
Investing Activities:
Net cash obtained in mergers and acquisitions 5,368 0
Net repayments of loans 33,674 17,822
Purchases of investment securities available for sale (777,488) (125,406)
Purchases of investment securities held to maturity (68,696) (3,110)
Purchases of property, plant and equipment (1,069) (2,808)
Proceeds from maturity of securities available for sale 741,284 159,631
Proceeds from maturity of securities held to maturity 14,849 9,260
Proceeds from sale of securities available for sale 1,000 510
Proceeds from sale of property and equipment 364 0
Proceeds from property acquired in satisfaction
of debt 391 1,857
--------------------------
Net Cash (Used In) Provided By Investing Activities (50,323) 57,756
--------------------------
Financing Activities:
Net decrease in deposits (2,762) (39,175)
Net (decrease) in short-term borrowings (33,001) (86,293)
Net increase (decrease) in FHLB advances 100,000 0
Repayments of notes payable (3,214) (3,215)
Exercise of stock options/issuance of shares 7,007 10,353
Repurchases/retirement of stock (46,712) (63,993)
Dividends paid (14,921) (14,392)
--------------------------
Net Cash Provided By (Used In) Financing Activities 6,397 (196,715)
--------------------------
Net Increase (Decrease) In Cash and Cash Equivalents 4,407 (93,989)
--------------------------
Cash and Cash Equivalents at Beginning of Period 179,182 286,482
--------------------------
Cash and Cash Equivalents at End of Period $183,589 $192,493
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $375 $261
Unrealized gain on securities available for sale $2,283 $3,091
Supplemental Disclosure of Cash Flow Activity:
Interest paid for the period 20,564 38,255
Income tax payments for the period 18,991 16,010
Income tax benefit from stock option exercises 1,938 $4,296
The acquisition of Kerman State Bank
involved the following:
Common Stock issued 14,620 --
Liabilities assumed 85,085 --
Fair value of assets acquired, other than cash
and cash equivalents (90,170) --
Core deposit intangible (2,500)
Goodwill (1,667) --
Net cash and cash equivalents received 5,368 --
WESTAMERICA BANCORPORATION
Financial Summary
(dollars in thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Net Interest Income (FTE) $53,096 $50,269 $105,808 $99,528
Provision for loan losses (900) (900) (1,800) (1,800)
Noninterest income:
Recurring income 10,144 10,994 20,143 21,280
Impairment of investment securities (4,260) 0 (4,260) 0
----------------------------------------------------
Total noninterest income 5,884 10,994 15,883 21,280
Noninterest expense (25,909) (25,626) (51,602) (51,203)
Provision for income taxes (FTE) (12,824) (13,979) (27,283) (26,623)
----------------------------------------------------
Net income $19,347 $20,758 $41,006 $41,182
====================================================
Average shares outstanding 33,565 35,433 33,817 35,715
Diluted average shares outstanding 34,180 35,957 34,406 36,279
Shares outstanding at period end 33,753 35,109 33,753 35,109
As Reported:
Basic earnings per share $0.58 $0.59 $1.21 $1.15
Diluted earnings per share 0.57 0.58 1.19 1.14
Return on assets 1.97% 2.18% 2.11% 2.16%
Return on equity 26.67% 26.75% 27.94% 26.31%
Net interest margin 5.82% 5.69% 5.84% 5.63%
Net loan losses to average loans 0.13% 0.18% 0.13% 0.13%
Efficiency ratio 43.9% 41.8% 42.4% 42.4%
Excluding Securities Impairment & Merger Costs:
Net income $22,046 $20,758 $43,705 $41,182
Basic earnings per share $0.66 $0.59 $1.29 $1.15
Diluted earnings per share 0.64 0.58 1.27 1.14
Return on assets 2.25% 2.18% 2.25% 2.16%
Return on equity 30.39% 26.75% 29.78% 26.31%
Net interest margin 5.82% 5.69% 5.84% 5.63%
Net loan losses to average loans 0.13% 0.18% 0.13% 0.13%
Efficiency ratio 41.6% 41.8% 41.3% 42.4%
Average Balances:
Total assets $3,933,274 $3,824,688 $3,922,167 $3,848,636
Earning assets 3,659,033 3,541,890 3,645,189 3,557,325
Total loans 2,448,546 2,456,278 2,459,768 2,457,016
Total deposits 3,226,951 3,187,324 3,216,834 3,181,369
Shareholders' equity 290,960 311,222 295,987 315,664
Balances at Period End:
Total assets $4,072,502 $3,903,635
Earning assets 3,774,001 3,576,362
Total loans 2,507,968 2,462,603
Total deposits 3,315,440 3,197,569
Shareholders' equity 320,373 318,471
Financial Ratios at Period End:
Allowance for loan losses to loans 2.17% 2.13%
Book value per share $9.49 $9.07
Equity to assets 7.87% 8.16%
Total capital to risk assets 10.65% 10.93%
Dividends Paid Per Share $0.22 $0.21 $0.44 $0.40
Dividend Payout Ratio 39% 36% 37% 35%
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 period presented. The interim results for
the six months ended June 30, 2002 and 2001 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, 2001.
Acquisition, Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("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 and specifies criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart
from goodwill. Statement 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized after 2001, but instead
be periodically evaluated for impairment. Intangible assets with definite
useful lives are required to be amortized over their respective estimated
useful lives to their estimated residual values, and also reviewed for
impairment.
The Company was required to adopt the provisions of Statement 141 and
Statement 142 effective January 1, 2002. Accordingly, any goodwill and any
intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination will not be amortized, but will
continue to be evaluated for impairment in accordance with the appropriate
accounting literature. The Company was also required to reassess the useful
lives and residual values of all such intangible assets and make any
necessary amortization period adjustments by June 30, 2002. The Company
determined that no such adjustments were required.
In addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company was required to test the intangible
asset for impairment in the second quarter of 2002. No impairment loss was
identified.
As of the date of adoption of FASB Statement 141 and 142, the Company had
goodwill and identifiable intangibles acquired in prior years purchase
business combinations. Core deposit intangibles constitute the Company's
total identifiable intangible assets.
The following table summarizes the Company's goodwill and other intangible
assets as of January 1, 2002 and June 30, 2002.
January 1 June 30
(Dollar in Thousands) 2002 Additions Reductions 2002
-------------------------------------------------
Goodwill 20,301 1,667 - 21,968
Accumulated Amortization (3,972) - - (3,972)
-------------------------------------------------
Net 16,329 1,667 - 17,996
Core Deposit Intangibles 5,283 2,500 - 7,783
Accumulated Amortization (2,599) - 402 (3,001)
-------------------------------------------------
Net 2,684 2,500 402 4,782
The KSB acquisition resulted in the addition of $1.7 million of goodwill and
$2.5 million of core deposit intangibles, in the second quarter.
At June 30, 2002, the estimated aggregate amortization of intangibles, in
thousand of dollars, for the remainder of 2002 and annually through 2007 is
$602, $743, $543, $469, $427, and $427, respectively. The weighted average
amortization period for core deposit intangibles is 8.8 years.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported second
quarter 2002 net income of $19.3 million or $0.57 diluted earnings per share.
The second quarter included the completion of the acquisition of Kerman State
Bank ("KSB"); after-tax expenses incurred to complete the acquisition totaled
$230 thousand. The second quarter also included a $2.5 million after-tax
securities impairment charge. Excluding the KSB acquisition related expenses
and securities impairment charge, the Company earned $22.0 million or $0.64
diluted earnings per share, compared with net income of $20.8 million or $0.58
diluted earnings per share for the second quarter of 2001. The Company
reported net income for the six months ended June 30, 2002 of $41.0 million or
$1.19 diluted earnings per share. On a year-to-date basis, earnings before
one-time expenses and charges were $43.7 million representing $1.27 diluted
earnings per share, compared with $41.2 million or $1.14 per share for the
same period of 2001.
The acquisition of KSB, a three-branch financial institution headquartered in
Fresno County, California, was completed on June 21, 2002. Immediately after
the acquisition, the Company merged KSB with and into Westamerica Bank. At the
time of the acquisition, KSB had total assets of $95 million, and total
deposits of $84 million. Pursuant to the terms of the merger agreement, 0.2487
shares of Westamerica common stock were issued for each outstanding share of
KSB. Based on the closing price of $41.18 of the stock on June 21, the
acquisition was valued at approximately $14.6 million. The Company recorded
goodwill and a core deposit intangible of $1.7 million and $2.5 million,
respectively, in accordance with the purchase method of accounting. One-time
expenses consisting primarily of employee severance costs charged to expenses
were $400 thousand.
The Company recognized the securities impairment writedown to reflect the
other than temporary impairment in the valuation of a debt security held in
the available for sale investment portfolio. The decision to record the
writedown was based on declines in the value of securities of the
telecommunication industry as well as alleged accounting and other
irregularities on the part of the particular issuer. The $5 million par value
bond was written down to its fair market value at quarter-end, resulting in a
charge of $4.26 million recorded as an offset to noninterest income. The
writedown reduces the Company's exposure to the telecommunications industry to
$5.5 million. The Company is diligently monitoring this remaining exposure.
Following is a summary of the components of fully taxable equivalent ("FTE")
net income for the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Net interest income (FTE) $53,096 $50,269 $105,808 $99,528
Provision for loan losses (900) (900) (1,800) (1,800)
Noninterest income:
Recurring income 10,144 10,994 20,143 21,280
Impairment of investment securities (4,260) 0 (4,260) 0
----------------------------------------------------
Total noninterest income 5,884 10,994 15,883 21,280
Noninterest expense (25,909) (25,626) (51,602) (51,203)
Provision for income taxes (FTE) (12,824) (13,979) (27,283) (26,623)
----------------------------------------------------
Net income $19,347 $20,758 $41,006 $41,182
====================================================
Net income for the second quarter of 2002 was $1.4 million (6.8%) less than
the same quarter of 2001. Improved net interest income (FTE) (up $2.8 million
or 5.6%) was more than offset by a decline (down $5.1 million or 46.5%) in
noninterest income and a slight increase in noninterest expense. The increase
in net interest income (FTE) was the combined result of a 13 basis point (bp)
improvement in the net margin and higher average earning assets (up $117.1
million). The decrease in noninterest income was caused by a $4.3 million
securities impairment charge. The increase in noninterest expense included
$400 thousand of acquisition costs. The provision for income taxes (FTE)
decreased $1.2 million (8.3%) primarily due to tax benefits of the impairment
charge.
Comparing the first six months of 2002 to the prior year, net income declined
$176 thousand (0.4%). Improved net interest income (up $6.3 million or 6.3%)
more than offset a decline (down $5.4 million or 25.4%) in noninterest income.
The increase in interest income was due to both a higher margin (up 21 bp) and
higher average earning assets (up $88 million). The decline in noninterest
income resulted from the securities impairment charge. The net revenue
improvement was not sufficient to cover a $400 thousand (0.8%) increase in
noninterest expense, which included the acquisition costs. The provision for
income taxes (FTE) increased $660 thousand (2.5%).
Net Interest Income
Following is a summary of the components of net interest income for the
periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Interest income $59,087 $64,985 $118,025 $132,122
Interest expense (10,229) (18,496) (20,650) (39,993)
FTE adjustment 4,238 3,780 8,433 7,399
----------------------------------------------------
Net interest income (FTE) $53,096 $50,269 $105,808 $99,528
====================================================
Average earning assets $3,659,033 $3,541,890 $3,645,189 $3,557,325
Net interest margin (FTE) 5.82% 5.69% 5.84% 5.63%
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 2002 increased $2.8 million (5.6%) from the same period in 2001 to
$53.1 million. (KSB accounted for approximately $100 thousand of the total net
interest income (FTE).) Approximately seventy percent of the increase was due
to the $117.1 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 an 85 bp drop in the asset yield, which was more than offset by a 97
bp drop in the cost of funds.
Comparing the first six months of 2002 with the previous year, net interest
income (FTE) increased $6.3 million (6.3%), with half of the increase
attributable to more volume and the remaining to a 21 bp increase in the
margin. The margin expansion was the result of a decrease (91 bp) in asset
yields combined with a 112 bp decline in the cost of funds.
Interest and Fee Income
Interest & fee income (FTE) for the second quarter of 2002 decreased $5.9
million (9.1%) from the same period in 2001. The decrease was the net effect
of higher average earning assets in the 2002 period, more than offset by lower
yields earned on those assets. Average earning assets grew $117.1 million
(3.3%) (which included a $7.6 million increase in connection with the KSB
acquisition). The growth was led by expansion in investments as follows: US
Agency obligations (up $78.6 million), municipal securities (up $46.1
million), commercial paper/other securities (up $29.2 million) and
participation certificates (up $22.7 million). A portion of the growth was
offset by a slight ($7.7 million) reduction in the loan portfolio including
residential real estate (down $25.3 million), direct consumer (down $19.3
million) and construction (down $11.2 million). The notable exceptions were
increases in indirect consumer loans (up $43.8 million) and commercial real
estate (up $10.7 million).
The average yield on the Company's earning assets decreased for the quarter
from 7.78% in 2001 to 6.94% in 2002 (down 85 bp). This downward trend in
yields was reflective of general interest rate markets during much of 2001 and
into 2002, as particularly evident in variable-rate categories of loans such
as commercial (190 bp decline in yield), construction (192 bp decline) and
personal lines of credit (267 bp decline). Fixed-rate loan yields are less
sensitive to market rate swings; for example, commercial real estate (down 30
bp), residential real estate (down 61 bp) and indirect consumer (down 63 bp)
loans. As a result, the loan portfolio yield decreased 88 bp. Participation
certificates and commercial paper/other securities yields declined 193 bp and
155 bp, respectively, contributing to reducing the total investment yield by
71 bp.
Comparing the first half of 2002 to 2001, interest & fee income (FTE)
decreased by $14.1 million (10.7%). Consistent with the second quarter
comparison, the decline was due to the combined effect of a higher volume of
earning assets and the impact of lower yields. The positive volume component
of the change was caused by an $87.9 million (2.5%) increase in average earning
assets, including higher commercial real estate loans (up $17.7 million or
1.8%), indirect consumer loans (up $33.2 million or 9.5%), US Agency
obligations (up $45.4 million or 26.1%), municipal securities (up $48.4
million or 12.2%) and commercial paper/other securities (up $32.1 million or
11.7%). Offsetting the growth were declines in residential real estate loans
(down $23.0 million or 6.5%), direct consumer loans (down $19.0 million or
31.3%) and US Treasury securities (down $48.8 million or 26.7%).
The average yield on earning assets for the first six months of 2002 was 6.98%
compared to 7.89% in 2001. Loan yields, especially those more sensitive to
market rates, declined: the yield on commercial loans was down 225 bp,
construction yields declined 292 bp, and personal lines of credit were down
330 bp. Much smaller declines were observed in fixed-rate loan yields, so that
the total loan yield declined 101 bp. The investment portfolio yield decreased
62 bp, affected primarily by lower yields on participation certificates (down
162 bp) and commercial paper/other securities (down 145 bp).
Interest Expense
Interest expense decreased $8.3 million (44.7%) in the second quarter of 2002
compared to the year-ago period. The decrease primarily resulted from a drop
in the average rate paid on interest-bearing liabilities from 2.95% in the
second quarter of 2001 to 1.60% in 2002. Rates paid on those liabilities that
move with general market conditions declined accordingly: the average rate on
Fed Funds dropped 249 bp, those on CDs over $100 thousand declined 247 bp, and
those on Money Market accounts were lowered an average of 97 bp.
Average interest-bearing liabilities increased $48.7 million (1.9%) in the
second quarter (of which approximately $6.8 million was from KSB). Despite the
increase, the mix of those liabilities shifted to lower-rate categories,
resulting in a $300 thousand decrease in volume-related interest expense.
Higher rate CDs, short-term borrowed funds and long-term notes payable
declined $182.0 million, $36.8 million and $3.2 million, respectively. Much of
this decline was replaced at lower rates of interest in money market accounts
(up $110.0 million), savings accounts (up $29.0 million) and Federal Home Loan
Bank ("FHLB") loans (up $131.8 million).
During the first half of 2002, interest expense decreased $19.3 million
(48.4%) in 2002 from 2001, again due to a lower average rate paid on
interest-bearing liabilities (1.62% in the first half of 2002 compared with
3.18% in the year-ago period). All deposit categories declined including
preferred money market (from 4.04% in the first six months of 2001 to 1.59% in
the same period of 2002) and CDs (from 5.15% to 2.55%). Interest rates on
short-term borrowings declined from 4.14% to 1.61%.
Similar to the quarter-to-quarter comparison, interest-bearing liabilities
grew $28.5 million (1.1%) for the six months ended June 30, 2002. However, a
change in the mix of liabilities from higher-rate to lower-rate
components resulted in reduction of volume-related interest expense by $1.0
million. Declines in CDs (down $146.2 million), short-term borrowings (down
$44.8 million) and long-term notes payable (down $3.2 million) were more than
offset by growth in money market accounts (up $88.8 million), savings accounts
(up $24.9 million) and FHLB loans (up $109.0 million).
In all periods, the Company has continuously attempted to reduce high-rate
time deposits while increasing the balances of more profitable, lower-cost
transaction accounts in order to minimize the effect of adverse cyclical
trends.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Yield on earning assets 6.94% 7.78% 6.98% 7.89%
Rate paid on interest-bearing
liabilities 1.60% 2.95% 1.62% 3.18%
----------------------------------------------------
Net interest spread 5.34% 4.83% 5.36% 4.71%
Impact of all other net
noninterest bearing funds 0.48% 0.86% 0.48% 0.92%
----------------------------------------------------
Net interest margin 5.82% 5.69% 5.84% 5.63%
====================================================
The Company's aggressive reaction to declining market rates over the past six
quarters resulted in a substantial increase in the net interest margin of 13
basis points during the second quarter of 2002 compared to the second quarter
of 2001. 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 51 bp increase in the net 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 $59.9 million during the
second quarter of 2002, their value decreased 38 bp because of the lower
market rates of interest at which they could be invested.
Similarly, on a year-to-date basis, the net interest margin increased 21 bp
when compared to the same period in 2001. Lower yields on earning assets were
more than offset by declining cost of interest-bearing liabilities, resulting
in a 65 bp improvement in the interest spread. Noninterest bearing funding
sources increased $45.0 million, with their value decreasing 44 bp.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders'
equity, the amounts of interest income from average earning assets and the
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest
income includes proceeds from loans on nonaccrual status only to the extent
cash payments have been received and applied as interest income. Yields on
securities and certain loans have been adjusted upward to reflect the effect
of income thereon exempt from federal income taxation at the current statutory
tax rate (dollars in thousands).
For the three months ended
June 30, 2002
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $1,262 $4 1.18%
Investment securities:
Available for sale
Taxable 667,372 8,350 5.02%
Tax-exempt 306,419 5,593 7.30%
Held to maturity
Taxable 77,115 1,073 5.58%
Tax-exempt 158,319 3,112 7.86%
Loans:
Commercial
Taxable 395,215 6,043 6.13%
Tax-exempt 198,205 3,771 7.63%
Commercial real estate 978,395 19,936 8.02%
Real estate construction 59,573 1,105 7.31%
Real estate residential 323,563 5,235 6.47%
Consumer 493,595 9,102 7.40%
--------------------------
Total loans 2,448,546 45,192 7.37%
--------------------------
Total earning assets 3,659,033 63,324 6.94%
Other assets 274,241
-------------
Total assets $3,933,274
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,052,252 $-- --
Savings and interest-bearing
transaction 1,468,404 3,230 0.88%
Time less than $100,000 336,533 2,106 2.51%
Time $100,000 or more 369,762 2,309 2.50%
--------------------------
Total interest-bearing deposits 2,174,699 7,645 1.41%
Short-term borrowed funds 227,098 895 1.60%
Federal Home Loan Bank advance 131,771 1,247 3.74%
Debt financing and notes payable 24,607 442 7.18%
--------------------------
Total interest-bearing liabilities 2,558,175 10,229 1.60%
Other liabilities 31,887
Shareholders' equity 290,960
-------------
Total liabilities and shareholders' equity $3,933,274
=============
Net interest spread (1) 5.34%
Net interest income and interest margin (2) $53,095 5.82%
==========================
(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.
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 9,300 6.11%
Tax-exempt 251,460 4,644 7.39%
Held to maturity
Taxable 74,242 1,221 6.60%
Tax-exempt 148,570 3,027 8.15%
Loans:
Commercial
Taxable 403,139 8,908 8.72%
Tax-exempt 191,397 3,721 7.80%
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 5,007 1.51%
Time less than $100,000 393,530 4,616 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%
Federal Home Loan Bank advance 0 0 0.00%
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 six months ended
June 30, 2002
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $1,040 $4 0.78%
Investment securities:
Available for sale
Taxable 650,568 16,633 5.16%
Tax-exempt 311,864 11,440 7.34%
Held to maturity
Taxable 72,273 2,042 5.70%
Tax-exempt 149,676 5,925 7.92%
Loans:
Commercial
Taxable 396,114 12,069 6.14%
Tax-exempt 195,701 7,466 7.69%
Commercial real estate 981,710 39,506 8.02%
Real estate construction 65,148 2,407 7.24%
Real estate residential 329,748 10,808 6.56%
Consumer 491,347 18,159 7.45%
--------------------------
Total loans 2,459,768 90,415
--------------------------
Total earning assets 3,645,189 126,459 6.98%
Other assets 276,978
-------------
Total assets $3,922,167
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,032,835 $-- --
Savings and interest-bearing
transaction 1,441,207 6,379 0.89%
Time less than $100,000 343,458 4,501 2.64%
Time $100,000 or more 399,334 4,906 2.48%
--------------------------
Total interest-bearing deposits 2,183,999 15,786 1.46%
Short-term borrowed funds 241,325 1,921 1.61%
Federal Home Loan Bank advance 108,976 2,039 3.72%
Debt financing and notes payable 25,143 903 7.18%
--------------------------
Total interest-bearing liabilities 2,559,443 20,649 1.62%
Other liabilities 33,902
Shareholders' equity 295,987
-------------
Total liabilities and shareholders' equity $3,922,167
=============
Net interest spread (1) 5.36%
Net interest income and interest margin (2) $105,810 5.84%
==========================
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 19,353 6.15%
Tax-exempt 240,837 9,162 7.61%
Held to maturity
Taxable 75,376 2,461 6.58%
Tax-exempt 149,523 5,862 7.84%
Loans:
Commercial
Taxable 399,898 18,700 9.32%
Tax-exempt 190,941 7,377 7.79%
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 10,362 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 33,053 3.01%
Short-term borrowed funds 286,095 5,923 4.14%
Federal Home Loan Bank advance 0 0 0.00%
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%
==========================
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, 2002
compared with three months
ended June 30, 2001
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $3 $0 $3
Investment securities:
Available for sale
Taxable 498 (1,448) (950)
Tax-exempt $1,000 (51) 949
Held to maturity
Taxable $50 (197) (148)
Tax-exempt $184 (99) 85
Loans:
Commercial
Taxable ($169) (2,696) (2,865)
Tax-exempt $125 (75) 50
Commercial real estate $227 (394) (167)
Real estate construction (233) (313) (546)
Real estate residential (430) (507) (937)
Consumer 277 (1,192) (915)
---------------------------------------
Total loans (203) (5,177) (5,380)
---------------------------------------
Total earning assets 1,532 (6,972) (5,441)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 629 (2,407) (1,777)
Time less than $100,000 (566) (1,943) (2,510)
Time $100,000 or more (1,261) (2,394) (3,655)
---------------------------------------
Total interest-bearing deposits (1,198) (6,744) (7,942)
---------------------------------------
Short-term borrowed funds (293) (1,222) (1,515)
Federal Home Loan Bank advance 1,247 0 1,247
Debt financing and notes payable (58) 1 (57)
---------------------------------------
Total interest-bearing liabilities (302) (7,965) (8,267)
---------------------------------------
Increase in Net Interest Income $1,834 $993 $2,826
=======================================
Six months ended June 30, 2002
compared with three months
ended June 30, 2001
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold 0 (1) ($1)
Investment securities:
Available for sale
Taxable 510 (3,230) (2,720)
Tax-exempt 2,571 (293) 2,278
Held to maturity
Taxable (98) (321) (419)
Tax-exempt 6 57 63
Loans:
Commercial
Taxable (173) (6,458) (6,631)
Tax-exempt 179 (90) 89
Commercial real estate 761 (1,365) (604)
Real estate construction (93) (904) (997)
Real estate residential (778) (892) (1,670)
Consumer 160 (2,610) (2,450)
---------------------------------------
Total loans 56 (12,319) (12,263)
---------------------------------------
Total earning assets 3,044 (16,106) (13,062)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 1,124 (5,106) (3,983)
Time less than $100,000 (1,136) (4,121) (5,257)
Time $100,000 or more (2,071) (5,956) (8,027)
---------------------------------------
Total interest-bearing deposits (2,083) (15,183) (17,267)
---------------------------------------
Short-term borrowed funds (860) (3,143) (4,002)
Federal Home Loan Bank advance 2,039 0 2,039
Debt financing and notes payable (115) 1 (114)
---------------------------------------
Total interest-bearing liabilities (1,019) (18,325) (19,344)
---------------------------------------
Increase in Net Interest Income $4,063 $2,219 $6,282
=======================================
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 quarters of 2002 and 2001. Additionally, $2.1
million of reserves were acquired from Kerman State Bank in the second quarter
of 2002. For the first six months of 2001 and 2002, $1.8 million was provided
in each period. For further information regarding net credit losses and the
reserve 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 Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Recurring income:
Service charges on deposit accounts $5,967 $5,908 $11,969 $11,467
Merchant credit card 963 1,038 1,868 1,984
ATM fees and interchange 617 564 1,134 1,058
Other service fees 357 410 710 807
Financial services commissions 425 377 764 619
Debit card fees 461 375 867 688
Mortgage banking income 217 242 404 462
Trust fees 243 240 554 531
Other noninterest income 894 1,840 1,873 3,664
----------------------------------------------------
Total recurring income 10,144 10,994 20,143 21,280
----------------------------------------------------
Impairment of Investment Securities (4,260) 0 (4,260) 0
----------------------------------------------------
Total noninterest income $5,884 $10,994 $15,883 $21,280
====================================================
Noninterest income for the second quarter of 2002 was $5.9 million. Excluding
the impairment charge, recurring income decreased $850 thousand (7.7%) from
the same period in 2001. The second quarter of 2001 benefited from an
additional $712 thousand in gains from sales of assets, causing the 2002 other
noninterest income to be lower. A $128 thousand (44.0%) decline in official
check income was caused by lower earnings on outstanding checks which also
contributed to the decline in 2002 other noninterest income. Other
declining items were merchant credit card (down $75 thousand or 7.2%) due to a
lower average discount rate of 2.16% vs. 2.19% for the same period last year,
other service charges (down $53 thousand or 13.0%) owing to lower wire
transfer fees and automobile loan reconveyance fee income.
Partially offsetting these declines are higher deposit account service charges
(up $58 thousand or 1.0%), ATM fees (up $53 thousand or 9.4%) and debit card
fees (up $86 thousand or 22.8%). Service charges on deposit accounts,
specifically in the area of deficit fees charged on analyzed accounts,
increased $314 thousand (16.2%). 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 core customers being required to pay
for services with explicit fees. Partially offsetting the increase in deficit
fees was a decline in overdrafts and returned item charges (down $226 thousand
or 9.6%). ATM fees increased due to increased Bank customer use of other
banks' machines and non-Bank customers accessing their accounts through
Westamerica Bank ATMs. Debit card fees rose with higher usage.
Noninterest income for the first half of 2002 was $15.9 million. Recurring
income for the same period decreased $1.1 million (5.3%) on a year-to-date
basis. 2001 benefited from additional $1.2 million of gains on asset sales,
$118 thousand interest on tax refund, $73 thousand excess proceeds received on
charged-off loans and $40 thousand in investment income, causing the 2002
other noninterest income to be lower. Official check income declined $321
thousand (50.1%) for the same reason as discussed above and lowered the 2002
other noninterest income. Merchant credit card income fell $116 thousand
(5.9%) due to a lower average discount rate of 2.17% compared with 2.20% a
year ago. Other service fees declined a $97 thousand (12.0%) due to decreases
in wire transfer fee income, automobile loan reconveyance fees and foreign
currency commissions. Mortgage banking income was also depressed by $59
thousand (12.7%).
The largest positive contributor to the increase in non-interest income was
service charges on deposits (up $501 thousand or 4.4%). Deficit fees were up
$1.1 million (33.6%) for the same reason mentioned above, partially offset by
declines in DDA Activity (down $296 thousand or 9.6%) and overdrafts and
returned items (down $342 thousand or 7.5%). ATM and debit card fees rose $76
thousand (7.2%) and $179 thousand (26.1%) due to higher usage. Financial
services commissions were up $145 thousand (23.4%) primarily due to higher
sales of fixed income products.
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,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Salaries and incentives $11,308 $10,524 $22,230 $20,716
Employee benefits 2,973 2,725 5,912 5,854
Occupancy 2,898 2,911 5,829 5,827
Equipment 1,425 1,484 2,859 3,074
Data processing services 1,516 1,553 3,015 3,075
Courier service 916 902 1,804 1,829
Telephone 421 500 830 994
Postage 397 401 802 903
Professional fees 443 398 815 851
Merchant credit card 347 364 687 724
Stationery and supplies 373 382 719 743
Advertising/public relations 290 354 579 712
Employee recruiting 71 228 181 327
Loan expense 360 301 694 527
Operational losses 191 249 422 412
Deposit expense 161 145 299 303
Other real estate owned 1 98 50 141
Amortization of deposit intangibles 201 369 402 739
Amortization of goodwill 0 297 0 582
Other noninterest expense 1,617 1,441 3,473 2,870
----------------------------------------------------
Total $25,909 $25,626 $51,602 $51,203
====================================================
Average full time equivalent staff 1,078 1,090 1,079 1,086
Noninterest expense to revenues (FTE) 64.50% 57.73% 127.03% 113.51%
Noninterest expense for the second quarter was $25.9 million. Excluding $398
thousand of KSB acquisition costs, noninterest expense fell $115 thousand (0.4%)
from 2001, with costs under control. Equipment expense decreased $59 thousand
(4.0%) due to lower depreciation costs; telephone expense decreased $79
thousand (15.8%), through continuing efficiency from telephone switching
equipment installed in late 2000; advertising/public relations expense fell
$64 thousand (18.1%); employment recruiting fell $157 thousand (68.7%) because
2001 included an extensive effort to locate and hire staff for certain
specific positions within the Company; operational losses declined $58
thousand (23.2%) due to $60 thousand lower sundry losses net of recoveries;
expenses on other real estate owned ("OREO") dropped $97 thousand
because 2001 had losses on property sale, writedown and maintenance
expenses. The amortization of deposit intangibles declined $168 thousand
(45.6%) primarily due to the expiration of the purchase premium incurred in
connection with a 1993 acquisition. Amortization of goodwill fell because of
implementation of FASB No. 141 and 142. Goodwill will no longer be amortized
but will instead be periodically evaluated for impairment.
The largest category of increase was salaries and incentives, which were up
$784 thousand (7.4%). A portion of the increase was attributable to $366
thousand of severance pay in connection with the KSB acquisition.
Additionally, approximately $330 thousand was due to an average salary
increase per full time equivalent employee, which increased from $32,700 in
2001 to $34,300 in 2002, an average 4.9% change. Deferred salaries fell $83
thousand primarily due to fewer loan fundings. Employee benefits rose $248
thousand (9.1%) mainly due to a $113 thousand increase in payroll taxes, a $74
thousand increase in insurance premiums and a $32 thousand accrual for taxes
on the KSB severance pay. Loan expense was $59 thousand (19.9%) higher largely
due to increases in obtaining credit reports, loan collection fees and
appraisal reports. Other noninterest expense increased $176 thousand (12.2%)
primarily due to a $70 thousand settlement of a legal dispute and a $50
thousand increase in amortization of low-income housing investments.
Noninterest expense was $51.6 million for the first half of 2002. Without the
$398 thousand acquisition expenses, noninterest expense was almost unchanged
on a year-to-date basis. Costs were managed well during the first six months
of the year with reductions as follows: Equipment costs declined $215 thousand
(7.0%) due to lower depreciation costs; telephone expense declined $164
thousand (16.5%) owing to higher efficiency through new switching equipment;
postage decreased $101 thousand (11.2%), as the 2001 period included some
extraordinary costs. The reasons mentioned in the quarter-to-quarter
comparison apply to a $133 thousand (18.7%) decline in advertising/public
relations expense, a $146 thousand (44.8%) decrease in employee recruiting
costs, a $91 thousand (64.6%) decrease in OREO expense, a $337 thousand
(45.6%) decline in amortization of deposit base intangibles and a $582
thousand drop in amortization of goodwill.
Three major categories of increase were salaries and incentives, loan expense
and employee benefits. A $1.5 million (7.3%) increase in salaries and
incentives was attributable to the $366 thousand severance pay due to the KSB
acquisition, a $707 thousand increase in incentive compensation expenses and
$493 thousand relating to annual salary increases. A $167 thousand (31.7%)
increase in loan expense was mostly due to increases in obtaining credit
reports, collateral repossession expenses and appraisal fees. Employee
benefits rose $59 thousand (1.0%), net result of increases in health insurance
premiums (up $107 thousand) and a provision for pension, partially offset by a
$86 thousand decline in workers compensation costs. Increases in other
noninterest expense included a $100 thousand provision for unusual losses, a
$156 thousand increase in staff relations, a $67 thousand increase in
amortization of low-income housing investments, a $63 thousand increase in
in-house meeting expense partly due to increased travel for the KSB
acquisition, $52K in production of ATM/VISA cards and an increase in stock
transfer fees.
Provision for Income Tax
During the second quarter of 2002, the Company recorded income tax expense of
$8.6 million, $1.6 million (15.8%) lower than the second quarter of 2001; on a
year-to-date basis, income tax expense was $18.9 million for 2002 compared to
$19.2 million for 2001. The current quarter provision represents an effective
tax rate of 30.7 percent, compared to 32.9 percent for the second quarter of
2001; for the first six months of 2002, the effective tax rate was 31.5
percent, compared to 31.8 percent recorded in 2001. 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 second quarter of 2002 reflected $1.8 million tax
benefits from the securities impairment writedown.
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 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" category, which includes all nonperforming
and potential problem loans, and receive an elevated level of attention to
ensure collection. "Other real estate owned" assets are recorded at the lower of
cost or market.
The following is a summary of classified loans and OREO on the dates indicated
(dollars in thousands):
At
At June 30, December 31,
--------------------------
2002 2001 2001
---------------------------------------
Classified loans $30,030 $39,530 $22,285
Other Real Estate Owned 473 545 523
---------------------------------------
Classified loans and OREO $30,503 $40,075 $22,808
=======================================
Allowance for loan losses /
classified loans 181% 133% 234%
Classified loans at June 30, 2002, decreased $9.5 million (24.0%) from June
30, 2001, reflecting the effectiveness of the Company's high underwriting
standards and active workout policies. Other real estate owned decreased $72
thousand (13.2%) from June 30, 2001, due to sales and writedowns of properties
acquired in satisfaction of debt, partially offset by new foreclosures on
loans with real estate collateral. The $7.7 million (34.8%) increase in
classified loans from December 31, 2001, was due to $4.1 million in classified
loans acquired through the KSB acquisition and new downgrades, partially
offset by payoffs. The $50 thousand (9.6%) reduction in other real estate
owned from December 31, 2001, was due to sales and writedowns of properties,
partially offset by newly foreclosed properties.
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 reach 90 days or more delinquent, unless the loan is well
secured and in the process of collection. Interest previously accrued on loans
placed on nonaccrual status is charged against interest income. In addition,
loans secured by real estate with temporarily impaired values and commercial
loans to borrowers experiencing financial difficulties are placed on
nonaccrual status even though the borrowers continue to repay the loans as
scheduled. Such loans are classified as "performing nonaccrual" and are
included in total nonperforming loans. When the ability to fully collect
nonaccrual loan principal is in doubt, cash payments received are applied
against the principal balance of the loan until such time as full collection
of the remaining recorded balance is expected. Any subsequent interest
received is recorded as interest income on a cash basis.
The following is a summary of nonperforming loans and other real estate owned
on the dates indicated (dollars in thousands):
At
At June 30, December 31,
--------------------------
2002 2001 2001
---------------------------------------
Performing nonaccrual loans $3,279 $2,330 $3,055
Nonperforming, nonaccrual loans 6,980 6,196 5,058
---------------------------------------
Total nonaccrual loans 10,259 8,526 8,113
Loans 90 days past due and
still accruing 189 344 550
---------------------------------------
Total nonperforming loans 10,448 8,870 8,663
Other real estate owned 473 545 523
---------------------------------------
Total nonperforming loans and OREO $10,921 $9,415 $9,186
=======================================
Allowance for loan losses /
nonperforming loans 520% 592% 601%
Performing nonaccrual loans at June 30, 2002 rose $949 thousand (40.7%) from
the same period in the previous year and $224 thousand (7.3%) from December
31, 2001. The increase from both periods was the net result of $2.0 million of
KSB loans, partially offset by other loans being removed from nonaccrual
status or being paid off.
Nonperforming nonaccrual loans at June 30, 2002 increased $784 thousand
(12.7%) from the same period a year ago and $1.9 million (38.0%) from
year-end, 2001. The increases resulted from the additions of $933 thousand
of KSB nonaccruing loans and other loans being placed in nonperforming
nonaccrual status, partially offset by other loans being removed from
nonaccrual status or being paid off.
Other real estate owned at June 30, 2002 was $72 thousand (13.2%) lower than
the previous year and $50 thousand (9.6%) from December 31, 2001, the net
result of property sales and principal reductions, partially offset by the
addition of new foreclosed property.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three and six month periods ended June 30, 2002, if all
such loans had performed in accordance with their original terms, was $107
thousand and $240 thousand, respectively, compared to $187 thousand and $366
thousand, respectively, for the second quarter and the first half of 2001.
The amount of interest income that was recognized on nonaccrual loans from
all cash payments, including those related to interest owed from prior years,
made during the three and six months ended June 30, 2002, totaled $156 thousand
and $326 thousand, respectively, compared to $234 thousand and $570 thousand,
respectively, for the comparable periods in 2001. These cash payments represent
annualized yields of 8.40 percent and 8.89 percent, respectively, for the
second quarter and the first six months of 2002 compared to 11.04 percent and
14.57 percent, respectively, for the second quarter and the first half of 2001.
Total cash payments received during the second quarter of 2002 which were
applied against the book balance of nonaccrual loans outstanding at June 30,
2002, totaled approximately $196 thousand. Cash payments received totaled
$384 thousand for the six months ended June 30, 2002.
The overall credit quality of the loan portfolio continues to be strong;
however, the total nonperforming assets could fluctuate from period to
period. The performance of any individual loan can be impacted by external
factors such as the interest rate environment or factors particular to the
borrower. The Company expects to maintain the level of nonperforming assets;
however, the Company can give no assurance that additional increases in
nonaccrual loans will not occur in the future.
Allowance for Loan Losses
The Company's allowance for loan losses is maintained at a level estimated to
be adequate to provide for losses that can be estimated based upon specific
and general conditions. These include credit loss experience, the amount of
past due, nonperforming and classified loans, recommendations of regulatory
authorities, prevailing economic conditions and other factors. The allowance
is allocated to segments of the loan portfolio based in part on quantitative
analyses of historical credit loss experience, in which criticized and
classified loan balances are analyzed using a linear regression model to
determine standard allocation percentages. The results of this analysis are
applied to current criticized and classified loan balances to allocate the
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 $54.3 million
allowance for loan losses, which constituted 2.17 percent of total loans at
June 30, 2002, 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,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Balance, beginning of period $52,147 $52,644 $52,086 $52,279
Loan loss provision 900 900 1,800 1,800
Loans charged off (1,353) (2,283) (2,998) (3,890)
Recoveries of previously
charged off loans 580 1,207 1,386 2,279
----------------------------------------------------
Net credit losses (773) (1,076) (1,612) (1,611)
----------------------------------------------------
Acquired from Kerman State Bank 2,050 0 2,050 0
Balance, end of period $54,324 $52,468 $54,324 $52,468
====================================================
Allowance for loan losses /
loans outstanding 2.17% 2.13%
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 608 thousand and 1.18 million shares during the
first six months of 2002 and 2001, respectively.
The Company's primary capital resource is shareholders' equity, which was
$320.4 million at June 30, 2002. This amount represents an increase of $6.0
million (1.9 percent) from December 31, 2001, the net result of shares issued
in connection with the KSB acquisition ($14.6 million) the net result of the
issuance of stock ($24.3 million, including $14.6 million in connection with
the KSB acquisition) and comprehensive income for the period ($43.3 million),
partially offset by share repurchases ($46.7 million) and dividends paid
($14.9 million). The slight net growth in equity capital combined with assets
acquired from KSB, the Company's ratio of equity to total assets declined to
7.87 percent at June 30, 2002, from 8.16 percent a year ago. The equity to
assets ratio was 8.00 percent on December 31, 2001.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At
At June 30, December 31, Minimum
-------------------- Regulatory
2002 2001 2001 Requirement
----------------------------------------------
Tier I Capital 9.31% 9.52% 9.29% 4.00%
Total Capital 10.65% 10.93% 10.63% 8.00%
Leverage ratio 7.25% 7.53% 7.30% 4.00%
The risk-based capital ratio decreased at June 30, 2002, compared to the prior
year due to combination of asset growth from the KSB acquisition, an increase
in intangible assets and a 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. The risk-based capital ratio
increased at June 30, 2002 from December 31, 2001 primarily due to an
increase in tangible shareholders equity from stock issued for the KSB
acquisition, partially offset by the Company's common stock repurchases,
dividends paid and asset growth from the KSB acquisition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 100 basis points
over the 12-month forecast interval triggering a response in the other
forecasted rates. Company policy requires that such simulated changes in NII
should be within certain specified ranges or steps must be taken to reduce
interest rate risk. The results of the model indicate that the mix of interest
rate sensitive assets and liabilities at June 30, 2002 would not result in a
fluctuation of NII that would exceed the parameters established by Company
policy.
At June 30, 2002 and 2001, 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 2001
Form 10-K substantially conform with accounting policy requirements, 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, 2002, there were no
substantial changes in the information on market risk that was disclosed in
the Company's Form 10-Ks dated December 31, 2001.
Liquidity
The Company's principal source of asset liquidity is marketable investment
securities available for sale. At June 30, 2002, investment securities
available for sale totaled $986.4 million, representing an increase of $94.5
million from June 30, 2001. In addition, the Company generates significant
liquidity from its operating activities. The Company's profitability during
the first six months of 2002 and 2001 generated substantial cash flows, which
are included in the totals provided from operations of $48.3 million and $45.0
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 2002 financing activities provided $6.4 million
cash. This amount includes cash outflows related to the Company's stock
repurchase programs and dividends paid to shareholders of $46.7 million and
$14.9 million, respectively, more than offset by $67.0 million proceeds from
short-term borrowings.
During the first six months of 2002 the Company had net cash outflows in its
investing activities. Purchases net of sales and maturities of investment
securities were $89.1 million and were partially offset by net repayments of
loans of $33.7 million and $5.4 million cash obtained in the KSB acquisition,
resulting in net cash used of $50.3 million.
This compares to the first six months of 2001, when the effect of the
Company's stock repurchase programs and dividends paid to shareholders were
$64.0 million and $14.4 million, respectively. These cash outflows, added to a
$86.3 million reduction in short-term borrowed funds, a $3.2 million reduction
in long-term debt, and a $39.2 million decrease in deposits are included in
the net cash used in financing activities during the first six months of 2001
of $196.7 million.
Investing activities provided $57.8 million cash in the first half of 2001.
Sales and maturities of investment securities net of purchases were $40.9
million while net repayments of loans were $17.8 million.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Subsidiary
Bank is at times party to various legal actions; all
such actions are of a routine nature and arise in the normal
course of business of the Subsidiary Bank.
Item 2 - Changes in Securities
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
23, 2002, were solicited pursuant Regulation 14A of the
Securities Exchange Act of 1934. The Report of Inspector of
election indicates that 28,799,661 shares of the Common Stock
of the Company, out of 34,325,750 shares outstanding, were
present at the meeting. There were no "broker non-votes" on
the following matters because they were considered "routine"
and therefore brokers were able to vote. The following matters
were submitted to a vote of the shareholders:
1. - Election of directors:
For Withheld
------ ------
Etta Allen 28,579,996 219,664
Louis E. Bartolini 28,496,859 302,801
Louis H. Herwaldt 28,612,594 187,066
Arthur C. Latno, Jr. 28,582,948 216,712
Patrick D. Lynch 28,496,081 303,579
Catherine C. MacMillan 28,583,900 215,761
Patrick J. Mon Pere 28,435,129 364,531
Ronald A. Nelson 28,601,049 198,611
Carl R. Otto 28,603,469 196,191
David L. Payne 28,612,476 187,184
Edward B. Sylvester 28,563,482 236,178
Shareholders were to cast their vote for or to withhold
their vote.
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 2002.
For : 28,265,856
Against : 327,483
Abstain : 206,321
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
Exhibit 99.1: Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2: Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None
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)
Date: August 13, 2002
/s/ DENNIS R. HANSEN
---------------------
Dennis R. Hansen
Senior Vice President
and Controller
Chief Accounting Officer
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) 2002 2001 2002 2001
----------------------------------------------------
Weighted average number of common
shares outstanding - basic 33,565 35,433 33,817 35,715
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 615 524 589 564
----------------------------------------------------
Weighted average number of common
shares outstanding - diluted 34,180 35,957 34,406 36,279
====================================================
Net income $19,347 $20,758 $41,006 $41,182
Basic earnings per share $0.58 $0.59 $1.21 $1.15
Diluted earnings per share $0.57 $0.58 $1.19 $1.14
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Westamerica Bancorporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
David L. Payne, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirement of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ David L. Payne
- --------------------
David L. Payne
Chairman, President and Chief Executive Officer
August 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Westamerica Bancorporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Jennifer J. Finger, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirement of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Jennifer J. Finger
- ------------------------
Jennifer J. Finger
Senior Vice President and Chief Financial Officer
August 13, 2002