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 SEPTEMBER 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 OCTOBER 31, 2001
- -------------- -----------------------------------------
Common Stock, 34,577,052
No Par Value
TABLE OF CONTENTS
Page
Forward Looking Statements 3
PART I - FINANCIAL INFORMATION 4
Item 1 - Financial Statements 4
Financial Summary 8
Item 2 - Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II - OTHER INFORMATION 31
Item 1 - Legal Proceedings 31
Item 2 - Changes in Securities 31
Item 3 - Defaults upon Senior Securities 31
Item 4 - Submission of Matters to a Vote of Security Holders 31
Item 5 - Other Information 31
Item 6 - Exhibits and Reports on Form 8-K 31
Exhibit 11 - Computation of Earnings Per Share 32
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report on Form 10Q 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 September 30, December 31,
2001 2000 2000
----------- ----------- ------------
ASSETS:
Cash and cash equivalents $ 195,575 $ 232,876 $ 286,482
Money market assets 250 250 250
Investment securities available for sale 908,337 939,672 921,275
Investment securities held to maturity,
with market values of:
$220,982 at September 30, 2001 213,215
$231,138 at September 30, 2000 231,330
$231,906 at December 31, 2000 228,035
Loans, gross 2,480,695 2,464,658 2,482,159
Allowance for loan losses (52,461) (52,182) (52,279)
----------- ----------- -----------
Loans, net of allowance for loan losses 2,428,234 2,412,476 2,429,880
Other real estate owned 547 2,017 2,065
Premises and equipment, net 41,832 42,416 42,182
Interest receivable and other assets 122,358 119,494 121,212
----------- ----------- -----------
TOTAL ASSETS $ 3,910,348 $ 3,980,531 $ 4,031,381
=========== =========== ===========
LIABILITIES:
Deposits:
Noninterest bearing $ 1,014,589 $ 974,548 $ 1,014,230
Interest bearing:
Transaction 511,252 524,550 526,178
Savings 873,423 885,973 816,635
Time 858,652 867,845 879,701
----------- ----------- -----------
Total deposits 3,257,916 3,252,916 3,236,744
Short-term borrowed funds 256,032 334,812 386,942
Liability for interest, taxes and
other expenses 45,438 30,463 38,912
Notes payable 27,821 31,036 31,036
----------- ----------- -----------
TOTAL LIABILITIES 3,587,207 3,649,227 3,693,634
=========== =========== ===========
SHAREHOLDERS' EQUITY:
Authorized - 150,000 shares of common stock
Issued and outstanding:
34,714 at September 30, 2001 211,748
36,653 at September 30, 2000 206,912
36,251 at December 31, 2000 206,952
Accumulated other comprehensive income:
Unrealized (loss) gain on securities
available for sale 16,537 (1,546) 7,169
Retained earnings 94,856 125,938 123,626
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 323,141 331,304 337,747
=========== =========== ===========
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,910,348 $ 3,980,531 $ 4,031,381
=========== =========== ===========
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
INTEREST INCOME:
Loans $ 48,098 $ 51,217 $148,344 $147,045
Money market assets and funds sold 18 9 24 14
Investment securities available for sale
Taxable 8,968 11,098 28,271 34,665
Tax-exempt 3,515 2,900 9,681 8,067
Investment securities held to maturity
Taxable 1,104 1,277 3,565 3,800
Tax-exempt 1,951 2,053 5,891 6,200
-------- -------- -------- --------
TOTAL INTEREST INCOME 63,654 68,554 195,776 199,791
-------- -------- -------- --------
INTEREST EXPENSE:
Transaction deposits 639 1,102 2,255 3,061
Savings deposits 4,476 4,848 13,222 13,741
Time deposits 8,448 11,838 31,139 33,124
Short-term borrowed funds 1,803 4,548 7,726 14,202
Debt financing and notes payable 499 582 1,516 1,953
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 15,865 22,918 55,858 66,081
-------- -------- -------- --------
NET INTEREST INCOME 47,789 45,636 139,918 133,710
-------- -------- -------- --------
PROVISION FOR LOAN LOSSES 900 905 2,700 2,775
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 46,889 44,731 137,218 130,935
-------- -------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 5,806 5,271 17,274 15,835
Merchant credit card 1,047 1,049 3,032 3,005
Financial services commissions 375 388 994 1,276
Mortgage banking 260 198 722 620
Trust fees 221 179 752 520
Other 2,881 3,672 9,095 9,924
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 10,590 10,757 31,869 31,180
-------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries and related benefits 13,471 12,942 40,040 38,144
Occupancy 3,073 2,856 8,900 8,789
Equipment 1,513 1,739 4,587 4,899
Data processing 1,502 1,503 4,577 4,551
Professional fees 370 522 1,221 1,319
Other real estate owned 18 316 159 421
Other 5,816 5,719 17,482 16,564
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSE 25,763 25,597 76,966 74,687
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 31,716 29,891 92,121 87,428
-------- -------- -------- --------
Provision for income taxes 10,391 9,746 29,613 28,390
-------- -------- -------- --------
NET INCOME $ 21,325 $ 20,145 $ 62,508 $ 59,038
======== ======== ======== ========
COMPREHENSIVE INCOME:
Change in unrealized gain on
securities available for sale, net 6,278 5,450 9,368 2,975
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 27,603 $ 25,595 $ 71,876 $ 62,013
======== ======== ======== ========
AVERAGE SHARES OUTSTANDING 35,002 36,365 35,475 36,404
DILUTED AVERAGE SHARES OUTSTANDING 35,524 36,906 36,025 36,893
PER SHARE DATA:
Basic Earnings $ 0.61 $ 0.55 $ 1.76 $ 1.62
Diluted Earnings 0.60 0.55 1.74 1.60
Dividends Paid 0.21 0.19 0.61 0.55
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 59,038 59,038
Stock issued 28,003 28,003
Purchase and retirement of stock (7,526) (31,740) (39,266)
Dividends (20,038) (20,038)
Unrealized gain on securities available
for sale, net 2,975 2,975
-------- ------- ------- --------
BALANCE, SEPTEMBER 30, 2000 $206,912 $(1,546) $125,938 $331,304
======== ======= ======== ========
BALANCE, DECEMBER 31, 2000 $206,952 $7,169 $123,626 $337,747
Net income for the period 62,508 62,508
Stock issued 17,563 17,563
Purchase and retirement of stock (12,767) (69,493) (82,260)
Dividends (21,785) (21,785)
Unrealized gain on securities available
for sale, net 9,368 9,368
-------- ------- ------- --------
BALANCE, SEPTEMBER 30, 2001 $211,748 $16,537 $94,856 $323,141
======== ======= ======== ========
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the nine months
ended September 30,
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net income $ 62,508 $ 59,038
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 3,686 3,669
Amortization of intangibles and other assets 2,584 2,204
Loan loss provision 2,700 2,775
Amortization of deferred net loan fees 796 381
Decrease (increase) in interest income receivable 4,446 (2,758)
(Increase) in other assets (8,927) (2,159)
Increase in income taxes payable 3,836 3,193
(Decrease)/increase in interest expense payable (4,372) 753
Increase in other liabilities 5,738 1,757
Write-downs of equipment 238 35
Originations of loans for resale (4,418) (1,931)
Proceeds from sale of loans originated for resale 4,417 1,696
Net loss on sale of loans originated for resale 10 18
Net gain on sale of property acquired in satisfaction of debt (155) (671)
Write-down on property acquired in satisfaction of debt 78 442
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 73,165 68,442
--------- ---------
INVESTING ACTIVITIES:
Net cash obtained in acquisitions 0 3,034
Net disbursements of loans (2,152) (78,745)
Purchases of investment securities available for sale (208,411) (48,711)
Purchases of investment securities held to maturity (3,780) (3,078)
Purchases of property, plant and equipment (3,576) (1,638)
Proceeds from maturity of securities available for sale 236,864 110,254
Proceeds from maturity of securities held to maturity 18,600 8,904
Proceeds from sale of securities available for sale 651 1,172
Proceeds from sale of property and equipment 0 20
Proceeds from property acquired in satisfaction of debt 1,898 3,382
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 40,094 (5,406)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 21,170 107,320
Net decrease in short-term borrowings (130,910) (127,933)
Repayments of notes payable (3,215) (10,464)
Exercise of stock options/issuance of shares 12,834 4,483
Repurchases/retirement of stock (82,260) (39,267)
Dividends paid (21,785) (20,037)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (204,166) (85,898)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (90,907) (22,862)
--------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 286,482 255,738
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 195,575 $ 232,876
========= =========
For the nine months
ended September 30,
2001 2000
---- ----
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Loans transferred to other real estate owned $303 $1,750
Fixed asset charge-offs and depreciation expense
applied against reserves 186
Cash and cash equivalents received in connection
with acquisition of First Counties Bank:
Common stock issued 19,723
Liabilities assumed 82,356
Fair value of assets acquired, other than cash
and cash equivalents (86,671)
Goodwill (9,577)
Core deposit intangible (2,797)
-------
Net cash and cash equivalents received $3,034
-------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY:
Interest paid for the period 52,145 64,920
Income tax payments for the period 27,181 25,938
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net Interest Income $47,789 $45,636 $139,918 $133,710
Provision for Loan Losses (900) (905) (2,700) (2,775)
Noninterest Income 10,590 10,757 31,869 31,180
Noninterest Expense (25,763) (25,597) (76,966) (74,687)
Provision for income taxes (10,391) (9,746) (29,613) (28,390)
---------- ---------- ---------- ----------
Net Income $21,325 $20,145 $62,508 $59,038
========== ========== ========== ==========
Average Shares Outstanding 35,002 36,365 35,475 36,404
Diluted Average Shares Outstanding 35,524 36,906 36,025 36,893
Shares Outstanding at Period End 34,714 36,653
Basic Earnings Per Share $0.61 $0.55 $1.76 $1.62
Diluted Earnings Per Share 0.60 0.55 1.74 1.60
Average Balances:
Total Assets $3,849,715 $3,913,365 $3,848,996 $3,858,687
Earning Assets 3,566,979 3,586,728 3,560,543 3,545,425
Total Loans 2,467,547 2,406,282 2,460,526 2,341,166
Total Deposits 3,247,687 3,195,505 3,203,475 3,122,992
Shareholders' Equity 307,889 316,913 313,072 303,453
Financial Ratios for the Period:
Return On Assets 2.20% 2.05% 2.17% 2.04%
Return On Equity 27.48% 25.29% 26.69% 25.99%
Net Interest Margin 5.78% 5.50% 5.68% 5.46%
Net Loan Losses to Average Loans 0.15% 0.31% 0.14% 0.18%
Efficiency Ratio 41.3% 42.7% 42.0% 42.6%
Balances at Period End:
Total Assets $3,910,348 $3,980,531
Earning Assets 3,550,036 3,583,728
Total Loans 2,480,695 2,464,658
Total Deposits 3,257,916 3,252,916
Shareholders' Equity 323,141 331,304
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.11% 2.12%
Book Value Per Share $9.31 $9.04
Equity to Assets 8.26% 8.32%
Total Capital to Risk Assets 10.93% 11.76%
Dividends Paid Per Share $0.21 $0.19 $0.61 $0.55
Dividend Payout Ratio 35% 35% 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 third quarter 2001 net income of $21.3
million or $.60 diluted earnings per share. These results compare to net income
of $20.1 million or $.55 diluted earnings per share for the third quarter of
2000. On a year-to-date basis, net income was $62.5 million representing $1.74
diluted earnings per share, compared to $59.0 million or $1.60 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 Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net interest income (FTE) $ 51,778 $ 49,184 $ 151,306 $ 144,119
Provision for loan losses (900) (905) (2,700) (2,775)
Noninterest income 10,590 10,757 31,869 31,180
Noninterest expense (25,763) (25,597) (76,966) (74,687)
Provision for income taxes (FTE) (14,380) (13,294) (41,001) (38,799)
----------- ----------- ----------- -----------
Net income $ 21,325 $ 20,145 $ 62,508 $ 59,038
=========== =========== =========== ===========
Average total assets $ 3,849,715 $ 3,913,365 $ 3,848,996 $ 3,858,687
Net income to average total assets 2.20% 2.05% 2.17% 2.04%
Net income for the third quarter of 2001 was $1.2 million (6%) over the same
quarter of 2000. The primary reason for the increase was higher net interest
income (FTE) (up $2.6 million or 5%), the net result of a 28 basis point (bp)
improvement in the net margin, partially offset by a lower average earning asset
base (down $20 million). Noninterest income decreased $167 thousand (2%),
partially offsetting the net interest improvement. The resulting net revenue
improvement was slightly reduced by an increase in noninterest expenses, which
were $166 thousand above the year-ago quarter. The provision for income taxes
(FTE) increased $1.1 million (8%).
Comparing the first nine months of 2001 to the prior year, net income (FTE)
increased $3.5 million (6%). Improved net interest income accounted for most of
the change, increasing $7.2 million (5%). The increase was due to both a higher
margin (up 22 bps) and higher average earning assets (up $15 million).
Noninterest income added $689 thousand to the revenue increase, which was
partially offset by higher noninterest expenses (up $2.3 million). The FTE
provision for income taxes for the 2001 period was up $2.2 million (6%),
commensurate with the increase in pretax income.
NET INTEREST INCOME
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest and fee income $ 63,654 $ 68,554 $ 195,776 $ 199,791
Interest expense (15,865) (22,918) (55,858) (66,081)
FTE adjustment 3,989 3,548 11,388 10,409
----------- ----------- ----------- -----------
Net interest income (FTE) $ 51,778 $ 49,184 $ 151,306 $ 144,119
=========== =========== =========== ===========
Average earning assets $ 3,566,979 $ 3,586,728 $ 3,560,543 $ 3,545,425
Net interest margin (FTE) 5.78% 5.50% 5.68% 5.46%
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 third quarter
of 2001 increased $2.6 million (5%) from the same period in 2000 to $51.8
million. Approximately 12% of the increase was due to the change in the level
and mix of 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 49 bp drop in the asset yield,
which was more than offset by a 78 bp drop in the cost of funds.
Comparing the first nine months of 2001 with the previous year, net interest
income (FTE) increased $7.2 million (5%), with 55% of the increase attributable
to more volume and 45% to a 22 bp increase in the margin. The margin expansion
was the result of a decrease (16 bp) in asset yields, which was more than offset
by a 38 bp lower cost of funds.
INTEREST AND FEE INCOME
Interest & fee income (FTE) for the third quarter of 2001 decreased $4.5 million
(6%) from the same period in 2000. The decrease was the combined effect of lower
average earning assets in the 2001 period and lower yields earned on those
assets. Average earning assets declined $20 million, despite expansion in
commercial real estate loans (up $68 million or 8%), construction loans (up $17
million or 32%), and indirect consumer loans (up $15 million or 4%). Much of
this growth was offset by reductions in the commercial and direct consumer loan
portfolios, which decreased by $27 million (4%) and $14 million (21%),
respectively. All other categories of loans increased by $2 million.
A net reduction of the investment portfolio provided a further source of funds,
specifically in the categories of asset-backed securities (down $65 million or
20%), US Treasury securities (down $15 million or 8%), and US Agency obligations
(down $32 million or 16%).
The average yield on the Company's earning assets decreased from 8.03% in 2000
to 7.54% in 2001 (down 49 bp). This downward direction of yields was reflective
of general interest markets during much of 2001, during which time the Federal
Funds rate declined from 6.40% to 3.07% and the 3-month Treasury rate from 5.94%
to 2.69%. This was particularly evident in variable-rate categories of loans
such as commercial (170 bp decline in yield), construction (332 bp decline) and
personal lines of credit (268 bp decline). Other categories of loans with longer
maturities and/or fixed rates of interest also declined, but by a relatively
lesser degree. These include residential real estate loans (39 bp decrease) and
indirect consumer loans (down 7 bp). The net result was that the yield on the
loan portfolio declined 71 bp to 7.94%. The investment portfolio yield decreased
9 bp, to 6.65%.
Comparing the first nine months of 2001 to 2000, interest & fee income (FTE)
decreased by $3.0 million (1%). Unlike the third quarter comparison, the change
was the net effect of a higher volume of earning assets more than offset by the
impact of lower yields.
The positive volume component of the change was caused by a $15 million (1%)
increase in average earning assets, including higher commercial real estate
loans (up $82 million or 9%), indirect consumer loans (up $38 million or 12%),
construction loans (up $20 million or 42%), and residential real estate loans
(up $15 million or 4%). Total loans increased by $119 million (5%). The
investment portfolio was reduced by $104 million (9%) to fund the loan
expansion.
The average yield on earning assets for the first nine months of 2001 was 7.77%
compared to 7.94% in 2000. Loan yields, especially those more sensitive to
market rates, declined: the yield on commercial loans was down 87 bps,
construction yields declined 227 bps, and personal lines of credit were down 138
bps. Offsetting these were lesser declines in more stable, fixed-rate loan
yields, so that the total loan yield declined only 32 bps. The investment
portfolio yield decreased 2 bps; the above-mentioned volume decline was
generally made up of lower-yielding asset-backed securities.
INTEREST EXPENSE
Interest expense decreased $7.1 million (31%) in the third 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 $109 million (4%), almost
entirely in the categories of short-term borrowed funds (down $108 million or
32%) and consumer savings accounts (down $38 million or 8%). A portion of this
decline was replaced by growth in interest-bearing transaction accounts (up $43
million or 7%).
The average rate paid on interest-bearing liabilities decreased from 3.50% in
the third quarter of 2000 to 2.53% in 2001. Rates paid on those liabilities that
move with general market conditions declined accordingly: the average rate on
Fed Funds Purchased dropped 302 bps and the rate paid on repurchase agreements
declined 248 bps. Rates on deposits were managed down as well, including those
on CDs over $100 thousand, which declined 191 bps, and on high-yield Money
Market accounts, which were lowered an average of 142 bps.
Through September 30, interest expense decreased $10.2 million (16%) in 2001
from 2000, again due to both a lower average balance of interest-bearing
liabilities and lower rates paid. Interest-bearing liabilities declined $66
million (3%), led by lower purchased funds (down $97 million or 27%) and
partially offset by higher CDs over $100 thousand (up $30 million or 12%).
Interest-bearing transaction accounts increased $57 million (10%).
Rates paid averaged 2.96% during the first nine months of 2001 compared to 3.41%
in the year-ago period. The most significant decline was on short-term funds,
which decreased from 5.15% to 3.84%. Rates on all deposit categories decreased
as well, with the average rate paid on all interest-bearing deposits dropping
from 3.05% to 2.80%.
In all periods, the Company has attempted continuously to reduce high-rate time
deposits while increasing the balances of more profitable, lower-cost
transaction accounts minimizing the effect of adverse cyclical quarterly trends.
NET INTEREST MARGIN (FTE)
The following summarizes the components of the Company's net interest margin for
the periods indicated:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
---- ---- ---- ----
Yield on earning assets 7.54% 8.03% 7.77% 7.94%
Rate paid on interest-bearing
liabilities 2.53% 3.50% 2.96% 3.41%
---- ---- ---- ----
Net interest spread 5.01% 4.53% 4.81% 4.53%
Impact of all other net
non-interest bearing funds 0.77% 0.97% 0.87% 0.93%
---- ---- ---- ----
Net interest margin 5.78% 5.50% 5.68% 5.46%
==== ==== ==== ====
During the third quarter of 2001, the Company's rapid reaction to declining
market rates resulted in a substantial increase in the net interest margin of 28
basis points compared to the third 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 48-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
$45 million (5%), their value decreased 20 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 decreased 17 bps, while the
cost of interest-bearing liabilities was managed down, partially through a
substantial reduction in higher-priced purchased funds. The interest spread
increased 28 bps as a result. Noninterest bearing funding sources increased $57
million (4%), but because of lower market rates of interest their value
decreased by 6 bps.
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 exempt from
federal income taxation at the current statutory tax rate (dollars in
thousands).
For the three months ended
September 30, 2001
------------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------- ---------- ----
Assets:
Money market assets and funds sold $ 2,759 $ 18 2.59%
Investment securities:
Available for sale
Taxable 597,555 9,171 6.09%
Tax-exempt 281,854 5,338 7.58%
Held to maturity
Taxable 73,915 901 4.84%
Tax-exempt 143,349 2,878 8.03%
Loans:
Commercial:
Taxable 401,421 8,032 7.94%
Tax-exempt 188,353 3,705 7.80%
Commercial real estate 978,748 20,064 8.12%
Real estate construction 68,954 1,575 9.06%
Real estate residential 351,639 6,009 6.84%
Consumer 478,432 9,952 8.25%
---------- ----------
Total loans 2,467,547 49,337 7.94%
---------- ----------
Total earning assets 3,566,979 67,643 7.54%
Other assets 282,736
----------
Total assets $3,849,715
==========
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,013,148 $ -- --
Savings and interest-bearing
transaction 1,378,731 5,115 1.47%
Time less than $100,000 386,732 3,954 4.06%
Time $100,000 or more 469,076 4,494 3.80%
---------- ----------
Total interest-bearing deposits 2,234,539 13,563 2.41%
Short-term borrowed funds 228,594 1,803 3.12%
Debt financing and notes payable 27,821 499 7.17%
---------- ----------
Total interest-bearing liabilities 2,490,954 15,865 2.53%
Other liabilities 37,724
Shareholders' equity 307,889
----------
Total liabilities and shareholders' equity $3,849,715
==========
Net interest spread (1) 5.01%
Net interest income and interest margin (2) $ 51,778 5.78%
========== ====
For the three months ended
September 30, 2000
-------------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------- ---------- ----
Assets:
Money market assets and funds sold $ 803 $ 9 4.46%
Investment securities:
Available for sale
Taxable 723,950 11,098 6.10%
Tax-exempt 223,571 4,317 7.68%
Held to maturity
Taxable 78,897 1,276 6.43%
Tax-exempt 153,225 3,053 7.93%
Loans:
Commercial:
Taxable 445,988 11,390 10.16%
Tax-exempt 180,640 3,469 7.64%
Commercial real estate 910,771 18,970 8.26%
Real estate construction 52,107 1,606 12.19%
Real estate residential 343,648 6,222 7.24%
Consumer 473,128 10,692 8.99%
---------- ----------
Total loans 2,406,282 52,349 8.65%
---------- ----------
Total earning assets 3,586,728 72,102 8.03%
Other assets 378,688
----------
Total assets $3,913,365
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $ 964,928 $ -- --
Savings and interest-bearing
transaction 1,371,649 5,950 1.73%
Time less than $100,000 390,339 5,094 5.19%
Time $100,000 or more 468,588 6,744 5.73%
---------- ----------
Total interest-bearing deposits 2,230,576 17,788 3.17%
Short-term borrowed funds 336,524 4,548 5.38%
Debt financing and notes payable 32,391 582 7.15%
---------- ----------
Total interest-bearing liabilities 2,599,491 22,918 3.50%
Other liabilities 32,033
Shareholders' equity 316,913
Total liabilities and shareholders' equity $3,913,365
==========
Net interest spread (1) 4.54%
Net interest income and interest margin (2) $ 49,184 5.50%
========== =====
For the nine months ended
September 30, 2001
------------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------- ---------- ----
Assets:
Money market assets and funds sold $ 1,229 $ 23 2.50%
Investment securities:
Available for sale
Taxable 619,704 28,843 6.22%
Tax-exempt 256,904 14,597 7.58%
Held to maturity
Taxable 75,419 2,988 5.30%
Tax-exempt 146,761 8,700 7.90%
Loans:
Commercial:
Taxable 400,796 26,733 8.92%
Tax-exempt 190,078 11,083 7.80%
Commercial real estate 968,897 60,171 8.29%
Real estate construction 67,702 4,979 9.68%
Real estate residential 353,253 18,487 7.00%
Consumer 479,800 30,560 8.52%
---------- ----------
Total loans 2,460,526 152,013 8.24%
---------- ----------
Total earning assets 3,560,543 207,164 7.77%
Other assets 288,453
----------
Total assets $3,848,996
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $ 980,974 $ -- --
Savings and interest-bearing
transaction 1,344,565 15,477 1.54%
Time less than $100,000 392,812 13,712 4.67%
Time $100,000 or more 485,124 17,427 4.80%
---------- ----------
Total interest-bearing deposits 2,222,501 46,616 2.80%
Short-term borrowed funds 266,928 7,726 3.84%
Debt financing and notes payable 28,178 1,516 7.17%
---------- ----------
Total interest-bearing liabilities 2,517,607 55,858 2.96%
Other liabilities 37,343
Shareholders' equity 313,072
----------
Total liabilities and shareholders' equity $3,848,996
==========
Net interest spread (1) 4.81%
Net interest income and interest margin (2) $ 151,306 5.68%
========== ====
For the nine months ended
September 30, 2000
-------------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------- ---------- ----
Assets:
Money market assets and funds sold $ 561 $ 15 3.57%
Investment securities:
Available for sale
Taxable 746,888 34,665 6.20%
Tax-exempt 221,818 12,212 7.34%
Held to maturity
Taxable 80,337 3,800 6.32%
Tax-exempt 154,654 9,181 7.92%
Loans:
Commercial:
Taxable 440,726 33,161 10.05%
Tax-exempt 170,916 9,952 7.78%
Commercial real estate 886,992 55,406 8.33%
Real estate construction 47,530 4,307 11.95%
Real estate residential 337,029 17,750 7.02%
Consumer 457,974 29,751 8.68%
---------- ----------
Total loans 2,341,167 150,327 8.56%
---------- ----------
Total earning assets 3,545,425 210,200 7.94%
Other assets 313,262
----------
Total assets $3,858,687
==========
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $ 939,535 $ -- --
Savings and interest-bearing
transaction 1,340,126 16,803 1.67%
Time less than $100,000 388,550 14,423 4.96%
Time $100,000 or more 454,782 18,700 5.49%
---------- ----------
Total interest-bearing deposits 2,183,458 49,926 3.05%
Short-term borrowed funds 364,073 14,202 5.15%
Debt financing and notes payable 36,533 1,953 7.13%
---------- ----------
Total interest-bearing liabilities 2,584,064 66,081 3.41%
Other liabilities 31,635
Shareholders' equity 303,453
----------
Total liabilities and shareholders' equity $3,858,687
==========
Net interest spread (1) 4.53%
Net interest income and interest margin (2) $ 144,119 5.46%
========== =====
(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 September 30, 2001
compared with three months
ended September 30, 2000
-----------------------------------------
Volume Rate Total
------- ------- -------
Interest and fee income:
Money market assets and funds sold $ 11 $ (2) $ 9
Investment securities:
Available for sale
Taxable (1,935) 8 (1,927)
Tax-exempt 1,103 (82) 1,021
Held to maturity
Taxable (77) (298) (375)
Tax-exempt (199) 24 (175)
Loans:
Commercial:
Taxable (1,060) (2,298) (3,358)
Tax-exempt 150 86 236
Commercial real estate 1,382 (288) 1,094
Real estate construction (127) 96 (31)
Real estate residential 144 (357) (213)
Consumer (162) (578) (740)
------- ------- -------
Total loans 327 (3,339) (3,012)
------- ------- -------
Total earning assets (769) (3,690) (4,459)
------- ------- -------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 269 (1,104) (835)
Time less than $100,000 (90) (1,050) (1,140)
Time $100,000 or more 7 (2,257) (2,250)
------- ------- -------
Total interest-bearing deposits 186 (4,411) (4,225)
------- ------- -------
Short-term borrowed funds (1,192) (1,553) (2,745)
Debt financing and notes payable (82) (1) (83)
------- ------- -------
Total interest-bearing liabilities (1,088) (5,965) (7,053)
------- ------- -------
Increase (Decrease) in Net Interest Income $ 319 $ 2,275 $ 2,594
======= ======= =======
Nine months ended September 30, 2001
compared with nine months
ended September 30, 2000
--------------------------------------------
Volume Rate Total
-------- -------- --------
Interest and fee income:
Money market assets and funds sold $ 11 $ (3) $ 8
Investment securities:
Available for sale
Taxable (5,879) 57 (5,822)
Tax-exempt 1,883 503 2,385
Held to maturity
Taxable (240) (572) (812)
Tax-exempt (469) (12) (481)
Loans:
Commercial:
Taxable (3,172) (3,256) (6,428)
Tax-exempt 1,113 18 1,131
Commercial real estate 5,235 (470) 4,765
Real estate construction 1,577 (905) 672
Real estate residential 810 (73) 737
Consumer 1,259 (450) 809
-------- -------- --------
Total loans 6,822 (5,136) 1,686
-------- -------- --------
Total earning assets 2,128 (5,164) (3,036)
-------- -------- --------
Interest expense:
Deposits:
Savings and interest-bearing
transaction 664 (1,990) (1,326)
Time less than $100,000 112 (823) (711)
Time $100,000 or more 1,133 (2,406) (1,273)
-------- -------- --------
Total interest-bearing deposits 1,909 (5,219) (3,310)
-------- -------- --------
Short-term borrowed funds (3,285) (3,191) (6,476)
Debt financing and notes payable (449) 12 (437)
-------- -------- --------
Total interest-bearing liabilities (1,825) (8,398) (10,223)
-------- -------- --------
Increase (Decrease) in Net Interest Income $ 3,953 $ 3,234 $ 7,187
======== ======== ========
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 control 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 third quarter of 2001 and $905 thousand in the 2000 period. For
the first nine months of 2001, $2.7 million was provided, representing a $75
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 Nine months ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
------- ------- ------- -------
Service charges on deposit accounts $ 5,806 $ 5,271 $17,273 $15,834
Merchant credit card fees 1,048 1,049 3,032 3,005
ATM fees and interchange 642 579 1,700 1,611
Financial services commissions 375 388 994 1,276
Debit card fees 388 267 1,076 829
Mortgage banking income 260 198 723 620
Official check sales income 260 365 902 1,068
Trust fees 221 179 752 520
Gains on sale of foreclosed property 1 339 155 672
Other noninterest income 1,589 2,122 5,262 5,745
------- ------- ------- -------
Total $10,590 $10,757 $31,869 $31,180
======= ======= ======= =======
Noninterest income for the third quarter of 2001 decreased $167 thousand (2%)
from the same period in 2000. The largest single category of change was that of
service charges on deposit accounts, specifically in the area of deficit fees
charged on analyzed accounts, which increased $569 thousand (39%). 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. Other
categories of deposit account fees decreased slightly.
The second largest component of the change was the increased usage of card-based
products. The Bank began issuing check (or debit) cards in 2000 and customer
acceptance and use has been steadily increasing. In the current quarter, fees
earned from check card use totaled $388 thousand, up $121 thousand (45%) over a
year ago. Fees derived from the Bank's system of ATM machines increased $63
thousand (11%), due to Bank customers' use of foreign machines (up $40 thousand
or 13%) and non-Bank customers accessing their accounts through Westamerica Bank
ATM's (up $23 thousand or 8%).
Decreases in three other categories offset these increases. Gains on sales of
foreclosed property were $339 thousand in the third quarter of 2000, compared to
a nominal amount in the current quarter. The year-ago gain was from the sale of
a single long-held commercial development. Income from the sale of official
checks decreased $105 thousand (29%); the revenues are based on the interest
value of the outstanding checks from the time that they are sold until they are
presented for payment, so that the current lower-rate interest rate environment
has resulted in lower revenue. The "other" category decreased $533 thousand
(25%), as the year-ago quarter included a $250 thousand gain realized on the
repurchase of long-term debt and gains on the sale of other assets.
Comparing the first nine months of 2001 to the same period in 2000, noninterest
income increased $689 thousand (2%). As with the quarter-to-quarter comparison,
the largest component of this change was service charges on deposit accounts,
which increased $1.4 million (9%). Again, the primary reason for the increase is
the current low interest rate environment: lower earnings credits are given on
compensating balances so that customers are assessed explicit fees for services.
Also included in this category are overdraft charges, which increased $166
thousand (3%), as service charge routines installed in late 1999 had not yet
taken full effect until the 2001 period. Further, service charges on savings
accounts improved $149 thousand (38%) due to the assessment of annual charges on
IRA/KEOGH accounts imposed for the first time in the first quarter of 2001.
Debit card fees were up $247 thousand (30%), as usage continues to increase.
Trust fees increased $232 thousand (45%) with intensified marketing resulting in
more trust assets under management, which increased to $339 million at September
30, 2001 from $316 million in 2000.
Decreasing from the year-ago nine month period were financial services
commissions, which were down $282 thousand (22%) because of lower sales of
mutual fund and variable annuity products, which in turn was the result of
staffing shortages early in 2001 and lower volumes of investment in equity
markets. Gains on sales of foreclosed property dropped $518 thousand (77%), as
2000 included the sale of one large property. Official check income was down
$166 thousand (16%) due to lower earnings on outstanding checks. And the "other"
category decreased $483 thousand (8%), as the year-ago period included a $250
thousand gain realized on the repurchase of long-term debt and gains on the sale
of other assets.
NONINTEREST EXPENSE
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
------- ------- ------- -------
Salaries and incentives $10,656 $10,236 $31,372 $29,913
Employee benefits 2,814 2,707 8,668 8,232
Occupancy 3,073 2,856 8,900 8,789
Equipment 1,513 1,737 4,587 4,897
Data processing services 1,502 1,504 4,577 4,552
Courier service 923 898 2,752 2,588
Telephone 480 561 1,474 1,658
Postage 415 501 1,318 1,528
Professional fees 370 521 1,222 1,319
Merchant credit card 399 412 1,123 1,196
Stationery and supplies 355 432 1,098 1,158
Advertising/public relations 319 347 1,031 932
Employee recruiting 69 26 396 166
Loan expense 296 264 823 806
Operational losses 278 139 689 639
Deposit expense 126 24 429 21
Foreclosed property expense 18 316 159 420
Amortization of deposit intangibles 367 313 1,108 821
Amortization of goodwill 297 268 879 713
Other noninterest expense 1,493 1,535 4,361 4,339
------- ------- ------- -------
Total $25,763 $25,597 $76,966 $74,687
======= ======= ======= =======
Average full time equivalent staff 1,074 1,078 1,082 1,077
Noninterest expense to revenues (FTE) 41.3% 42.7% 42.0% 42.6%
Noninterest expense increased $166 thousand (1%) in the third quarter of 2001
compared to the same period in 2000. The largest category of increase was
salaries and incentives, which were up $420 thousand (4%). A portion of the
increase is attributable to the acquisition of First Counties Bank (FCB) in
August of 2000; in addition, approximately $400 thousand is due to salary
increases granted in early 2001 to existing employees. Annualized salaries
(excluding incentives) per full time equivalent employee grew from $34,800 in
2000 to $35,400 in 2001, for an average 1.7% increase.
Occupancy costs increased $217 thousand (8%) over the third quarter of 2000,
largely because of higher utilities costs (up $81 thousand or 17%); scheduled
rent increases added $50 thousand (3%); and the two new offices added in
connection with the August, 2000 acquisition of FCB caused occupancy expense to
rise.
Other categories of year-to-year increase were operational losses (up $139
thousand or 100%) due primarily to fewer loss recoveries (which act to reduce
operational loss expense) in 2001; deposit expense increased $102 thousand over
2000, primarily because of additional costs totaling $109 thousand paid on
behalf of business clients; and the amortization of deposit intangibles (up $54
thousand or 17%) and amortization of goodwill (up $29 thousand or 11%). Both
increases resulted from the Company's acquisition of FCB in the third quarter of
2000. The transaction gave 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, that is
being currently amortized over 25 years.
Partially offsetting these increases, foreclosed property expense declined $298
thousand (94%) to a more-normal level after recording a large write-down in the
2000 period; equipment expense decreased $224 thousand (13%) due to lower
depreciation costs; professional fees were down $151 thousand (29%) primarily
because 2000 included legal fees in connection with the FCB acquisition; postage
expense decreased $86 thousand (17%), as the 2000 period included several
special mailings; and telephone expense dropped $81 thousand (15%) due to the
installation of new telephone switching equipment in late 2000.
On a year-to-date basis, noninterest expense increased $2.3 million (3%). The
major categories of increase are the same as discussed above: salaries &
incentives, deposit expense and amortization of intangibles. Salaries &
incentives increased $1.5 million (5%) primarily because of salary increases to
existing employees which became effective during the first part of 2001. Deposit
expense increased $408 thousand as a result of expenses paid on behalf of
business customers. Amortization of deposit intangibles and goodwill increased
$287 (35%) thousand and $166 thousand (23%), respectively, as a result of the
FCB acquisition. Another major category of increase was employment recruitment
expenses, up $230 thousand (139%) due to a one-time, three-month effort to
locate and hire staff for certain positions within the Company.
Partially offsetting these increases during the first nine months of the year,
foreclosed property expense declined $261 thousand (62%) due to unusually high
write-downs in 2000; postage decreased $210 thousand (14%), as the 2000 period
included some extraordinary costs; and telephone dropped $184 thousand (11%) as
a result of the installation of cost-saving switching hardware and software, and
equipment expense decreased $310 thousand (6%) due to lower depreciation costs.
PROVISION FOR INCOME TAX
During the third quarter of 2001, the Company recorded income tax expense of
$10.4 million, $645 thousand (7%) higher than the third quarter of 2000; on a
year-to-date basis, income tax expense was $29.6 million for 2001 compared to
$28.4 million for 2000 (up 4%). The current quarter provision represents an
effective tax rate of 32.8 percent, compared to 32.6 percent for the third
quarter of 2000; for the first nine months of 2001, the effective tax rate was
32.1 percent, compared to 32.5 percent recorded in 2000. The provision for
income taxes for all periods is primarily attributable to the respective levels
of earnings and revenues from tax-exempt loans and state and municipal
securities, which increased $1.1 million in the third quarter over the same
period last year and $3.0 million for the nine-month period. In addition, the
first nine months of 2001 reflected an adjustment to low-income housing tax
credits that the Company earned in the prior year. The effect of the adjustment
was to lower the 2001 year-to-date tax provision by $443 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 increase diversification of earning assets into less risky
investments. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
non-performing assets and potential problem loans, and receive an elevated level
of attention to ensure collection.
The following is a summary of classified assets on the dates indicated (dollars
in thousands):
At September 30, At
------------------------ December 31,
2001 2000 2000
------- ------- ------------
Classified loans $30,171 $37,297 $31,634
Other classified assets 547 2,017 2,065
------- ------- -------
Total classified assets $30,718 $39,314 $33,699
======= ======= =======
Allowance for loan losses /
classified loans 174% 140% 165%
Classified loans at September 30, 2001, decreased $7.1 million (19%) from
September 30, 2000, primarily reflecting the upgrading of one large and several
smaller classified commercial and commercial real estate loans. Other classified
assets decreased $1.5 million (73%) from September 30, 2000, due to sales and
write-downs of foreclosed properties partially offset by new foreclosures on
loans with real estate collateral. The overall low level of classified loans in
relation to the allowance for loan losses reflects the Company's strict credit
standards, even in a weakening economy.
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 September 30, At
------------------------ December 31,
2001 2000 2000
------- ------- ------------
Performing nonaccrual loans $ 1,350 $ 3,653 $ 3,499
Nonperforming, nonaccrual loans 7,156 5,193 4,525
------- ------- -------
Total nonaccrual loans 8,506 8,846 8,024
Loans 90 days past due and
still accruing 409 529 650
------- ------- -------
Total nonperforming loans 8,915 9,375 8,674
Other real estate owned 547 2,017 2,065
------- ------- -------
Total nonperforming assets $ 9,462 $11,392 $10,739
======= ======= =======
Allowance for loan losses /
nonperforming loans 588% 557% 603%
Performing nonaccrual loans at September 30, 2001 decreased $2.3 million (63%)
from a year ago and were essentially unchanged from year-end, 2000. The
year-to-year decrease resulted primarily from charge-offs and payoffs.
Nonperforming nonaccrual loans at September 30, 2001 increased $2.0 million
(38%) from the previous year and $2.6 million (58%) from December 31, 2000. Much
of the increase from both prior dates involves one large commercial real estate
credit that was placed on nonperforming nonaccrual status due to the borrowers'
delay in obtaining refinancing with another financial institution. The remainder
of the increases in both periods is the net result of loans being added to
non-accrual, partially offset by others being returned to full-accrual status or
being paid off.
Other real estate owned at September 30, 2001 was $1.5 million (73%) lower than
both the previous year and December 31, 2000. Much of the reduction was due to
the sale of three 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 nine months ended September 30, 2001, if all
such loans had been current in accordance with their original terms, was $152
thousand and $518 thousand, respectively, compared to $208 thousand and $373
thousand, respectively, for the three and nine months ended September 30, 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 nine months ended September 30, 2001, totaled $347 thousand
and $917 thousand, respectively, compared to $160 thousand and $368 thousand,
respectively, for the comparable periods in 2000. These cash payments represent
annualized yields of 19.35 percent and 16.07 percent, respectively, for the
third quarter and the first nine months of 2001 compared to 9.22 percent and
14.27 percent, respectively, for the three and nine months ended September 30,
2000.
Total cash payments received, including those recorded in prior years, which
were applied against the book balance of nonaccrual loans outstanding at
September 30, 2001, totaled approximately $24 thousand.
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 economic environment or factors particular to the borrower. The Company
expects the level of nonperforming assets to remain near the current level;
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, 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 2.11 percent of total loans at
September 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 Nine months ended
September 30, September 30,
--------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Balance, beginning of period $ 52,468 $ 52,121 $ 52,279 $ 51,574
Loan loss provision 900 905 2,700 2,775
Loans charged off (1,611) (2,751) (5,501) (6,126)
Recoveries of previously
charged off loans 704 870 2,983 2,922
-------- -------- -------- --------
Net credit losses (907) (1,881) (2,518) (3,204)
-------- -------- -------- --------
First Counties Bank acquisition 0 1,036 0 1,036
Balance, end of period $ 52,461 $ 52,181 $ 52,461 $ 52,181
======== ======== ======== ========
Allowance for loan losses /
loans outstanding 2.11% 2.12%
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 September 30, 2001 would not result in a fluctuation of NII that
would exceed the parameters established by Company policy.
At September 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
September 30, 2001, there were no substantial changes in the information on
market risk that was disclosed in the Company's 2000 Form 10-K.
LIQUIDITY
The Company's principal source of asset liquidity is marketable investment
securities available for sale. At September 30, 2001, investment securities
available for sale totaled $908 million, representing a decrease of $13 million
from December 31, 2000. In addition, the Company generates significant liquidity
from its operating activities. The Company's profitability during the first nine
months of 2001 and 2000 generated substantial cash flows, which are included in
the totals provided from operations of $73 million and $68 million,
respectively. Additional cash flows may be provided by financing activities,
primarily the acceptance of deposits and borrowings from banks.
The Company also realized net cash inflows from its investing activities during
the 2001 period. Sales & maturities of investment securities net of purchases
were $44 million during the nine months of 2001, which was partially offset by
net disbursements of loans of $2 million, resulting in net cash provided from
investing activities of $40 million.
Investing activities were a slight net use of cash in the nine month period
ended September 30, 2000. Net sales and maturities securities provided cash of
$69 million. However, this was more than offset by net disbursements of loans of
$79 million, resulting in net cash provided of $5 million.
Financing activities also provided cash during both nine-month periods ended
September 30. In 2001, the effect of the Company's stock repurchase programs and
dividends paid to shareholders were $82 million and $22 million, respectively.
These cash outflows, added to a $131 million reduction in short-term borrowed
funds, partially offset by a $21 million increase in deposits are included in
the net cash used in financing activities during the first nine months of 2001
of $204 million.
This compares to the first nine months of 2000, when the cash used in financing
activities totaled $86 million. This amount includes cash outflows related to
the Company's stock repurchase programs and dividends paid to shareholders of
$39 million and $20 million, respectively, plus a $128 million reduction in
short-term debt, partially offset by a $107 million increase in deposits.
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. However, due to the aftermath of the
events of September 11, 2001, there is considerable uncertainty in the general
economic environment which may impact loan demand.
CAPITAL RESOURCES
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies is reviewed regularly by Management. The
Company repurchases approximately 250 thousand of its shares of Common Stock in
the open market on a quarterly basis 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 1.35 million and 488 thousand shares during the first
nine 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 $323 million at September 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 a decrease of $8 million or
2 percent from September 30, 2000, and a decrease of $15 million, or 4 percent,
from December 31, 2000. As a consequence of the decrease in shareholders'
equity, the Company's ratio of equity to total assets decreased slightly to 8.26
percent at September 30, 2001, from 8.32 percent a year ago. The equity to
assets ratio was 8.38 percent on December 31, 2000.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At September 30, At Minimum
-------------------- December 31, Regulatory
2001 2000 2000 Requirement
----- ----- ------------ -----------
Tier I Capital 9.59% 10.35% 10.20% 4.00%
Total Capital 10.93% 11.76% 11.61% 8.00%
Leverage ratio 7.46% 8.04% 7.89% 4.00%
The risk-based capital ratios decreased at September 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 and stock option
exercises.
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 third quarter of 2001 and $268 thousand for the same period in
2000. For the nine months ended September 30, goodwill amortization was $879
thousand in 2001 and $713 thousand in 2000. The Company is in the process of
assessing the impact of the statements, including giving consideration to
current market conditions, and, as of the date of this report, does not expect
to have any transitional impairment losses to be recognized as a 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: November 2, 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
None
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