10-Q 1 edgar302.txt 3/31/2002 10-Q FOR WESTAMERICA BANCORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 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 registrant classes of common stock, as of the latest practicable date: Title of Class Shares outstanding as of April 25, 2002 Common Stock, 33,483,652 No Par Value TABLE OF CONTENTS Page Forward Looking Statements 1 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 2 Financial Summary 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 27 Item 4 - Submission of Matters to a Vote of Security Holders 27 Item 6 - Exhibits and Reports on Form 8-K 27 Exhibit 11 - Computation of Earnings Per Share 28 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. WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
At March 31, December 31, 2002 2001 2001 ------------------------------------ Assets: Cash and cash equivalents $173,029 $188,704 $179,182 Money market assets 534 250 534 Investment securities available for sale 975,256 890,042 948,970 Investment securities held to maturity, with market values of: $218,202 at March 31, 2002 213,343 $231,646 at March 31, 2001 225,057 $214,866 at December 31, 2001 209,169 Loans, gross 2,461,696 2,456,438 2,484,457 Allowance for loan losses (52,147) (52,644) (52,086) ---------- ---------- ---------- Loans, net of allowance for loan losses 2,409,549 2,403,794 2,432,371 Other real estate owned 834 1,866 523 Premises and equipment, net 38,893 42,567 39,821 Interest receivable and other assets 150,856 125,326 117,397 ---------- ---------- ---------- Total Assets $3,962,294 $3,877,606 $3,927,967 ========== ========== ========== Liabilities: Deposits: Noninterest bearing $1,033,063 $954,593 $1,048,458 Interest bearing: Transaction 540,131 519,957 519,324 Savings 924,731 821,285 863,523 Time 753,199 900,642 803,330 ---------- ---------- ---------- Total deposits 3,251,124 3,196,477 3,234,635 Short-term borrowed funds 185,326 275,471 271,911 Federal Home Loan Bank advance 115,000 0 40,000 Notes Payable 24,607 27,821 27,821 Liability for interest, taxes and other expenses 78,600 46,919 39,241 ----------- ---------- ---------- Total Liabilities 3,654,657 3,546,688 3,613,608 =========== ========== ========== Shareholders' Equity: Authorized - 150,000 shares of common stock Issued and outstanding: 33,831 at March 31, 2002 211,608 35,689 at March 31, 2001 213,358 34,220 at December 31, 2001 209,074 Accumulated other comprehensive income: Unrealized gain on securities available for sale 8,062 12,940 11,900 Retained earnings 87,967 104,620 93,385 ---------- ---------- ---------- Total Shareholders' Equity 307,637 330,918 314,359 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $3,962,294 $3,877,606 $3,927,967 ========== ========== ==========
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data)
Three months ended March 31, 2002 2001 --------------------- Interest Income: Loans $43,966 $50,906 Money market assets and funds sold 0 3 Investment securities available for sale Taxable 8,292 10,025 Tax-exempt 3,852 2,971 Investment securities held to maturity Taxable 970 1,240 Tax-exempt 1,858 1,992 ------- ------- Total interest income 58,938 67,137 ------- ------- Interest Expense: Transaction deposits 407 892 Savings deposits 2,742 4,462 Time deposits 4,992 12,112 Short-term borrowed funds 1,026 3,513 Federal Home Loan Bank advance 793 0 Debt financing and notes payable 461 518 ------- ------- Total interest expense 10,421 21,497 ------- ------- Net Interest Income 48,517 45,640 ------- ------- Provision for loan losses 900 900 ------- ------- Net Interest Income After Provision For Loan Losses 47,617 44,740 ------- ------- Noninterest Income: Service charges on deposit accounts 6,002 5,560 Merchant credit card 905 946 Financial services commissions 339 243 Mortgage banking 187 221 Trust fees 311 292 Other 2,255 3,024 ------- ------- Total Noninterest Income 9,999 10,286 ------- ------- Noninterest Expense: Salaries and related benefits 13,863 13,321 Occupancy 2,931 2,916 Equipment 1,434 1,590 Data processing 1,499 1,521 Professional fees 371 453 Other real estate owned 49 43 Other 5,546 5,732 ------- ------- Total Noninterest Expense 25,693 25,576 ------- ------- Income Before Income Taxes 31,923 29,450 Provision for income taxes 10,264 9,026 ------- ------- Net Income $21,659 $20,424 ======= ======= Comprehensive Income: Change in unrealized gain on securities available for sale, net (3,838) 5,771 ------- ------- Comprehensive Income $17,821 $26,195 ======= ======= Average Shares Outstanding 34,071 36,000 Diluted Average Shares Outstanding 34,634 36,605 Per Share Data: Basic Earnings $0.64 $0.57 Diluted Earnings 0.63 0.56 Dividends Paid 0.22 0.19
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
Accumulated 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 20,424 20,424 Stock issued, including stock option tax benefits 12,143 12,143 Purchase and retirement of stock (5,737) (32,539) (38,276) Dividends (6,891) (6,891) Unrealized gain on securities available for sale, net 5,771 5,771 --------- ------- --------- --------- Balance, March 31, 2001 $213,358 $12,940 $104,620 $330,918 ========= ======= ========= ========= Balance, December 31, 2001 $209,074 $11,900 $93,385 $314,359 Net income for the period 21,659 21,659 Stock issued, including stock option tax benefits 5,965 5,965 Purchase and retirement of stock (3,431) (19,539) (22,970) Dividends (7,538) (7,538) Unrealized loss on securities available for sale, net (3,838) (3,838) --------- ------- --------- --------- Balance, March 31, 2002 $211,608 $8,062 $87,967 $307,637 ========= ======= ========= =========
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the three months ended March 31, 2002 2001 ------------------------ Operating Activities: Net income $21,659 $20,424 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 1,138 1,197 Amortization of intangibles and other assets 418 854 Loan loss provision 900 900 Amortization of deferred net loan fees 250 55 (Increase) decrease in interest income receivable (83) 3,034 Increase in other assets (34,196) (7,246) Increase in income taxes payable 10,465 9,094 Decrease in interest expense payable (168) (659) Increase (decrease) in other liabilities 33,338 (2,025) Write-downs of equipment 68 17 Originations of loans for resale (3,720) (880) Proceeds from sale of loans originated for resale 4,446 547 Net loss on sale of loans originated for resale -- 12 Net gain (loss) on sale of property acquired in satisfaction of de 32 (59) Write-down on property acquired in satisfaction of debt -- 47 --------- --------- Net Cash Provided by Operating Activities 34,547 25,312 --------- --------- Investing Activities: Net repayments of loans 20,571 25,387 Purchases of investment securities available for sale (552,980) (33,566) Purchases of investment securities held to maturity (4,965) (98) Purchases of property, plant and equipment (640) (1,601) Proceeds from maturity of securities available for sale 513,876 74,540 Proceeds from maturity of securities held to maturity 6,023 3,077 Proceeds from sale of securities available for sale 962 217 Proceeds from sale of property and equipment 364 -- Proceeds from property acquired in satisfaction of debt 32 287 --------- --------- Net Cash (Used In) Provided By Investing Activities (16,757) 68,243 --------- --------- Financing Activities: Net increase (decrease) in deposits 16,489 (40,267) Net decrease in short-term borrowings (11,585) (111,471) Repayments of notes payable (3,214) (3,215) Exercise of stock options/issuance of shares 4,875 8,787 Repurchases/retirement of stock (22,970) (38,276) Dividends paid (7,538) (6,891) --------- --------- Net Cash Used In Financing Activities (23,943) (191,333) --------- --------- Net Decrease In Cash and Cash Equivalents (6,153) (97,778) --------- --------- Cash and Cash Equivalents at Beginning of Period 179,182 286,482 --------- --------- Cash and Cash Equivalents at End of Period $173,029 $188,704 ========= ========= Supplemental Disclosure of Noncash Activities: Loans transferred to other real estate owned $375 $77 Supplemental Disclosure of Cash Flow Activity: Unrealized (loss) gain on securities available for sale, net ($3,838) $5,771 Interest paid for the period 10,252 22,062 Income tax payments for the period -- -- Income tax benefit from stock option exercises 1,085 3,356
WESTAMERICA BANCORPORATION Financial Summary (dollars in thousands, except per share amounts)
Three months ended March 31, 2002 2001 ---------------------------- Net Interest Income $48,517 $45,640 Provision for Loan Losses (900) (900) Noninterest Income 9,999 10,286 Noninterest Expense (25,693) (25,576) Provision for income taxes (10,264) (9,026) ------- ------- Net Income $21,659 $20,424 ======= ======= Average Shares Outstanding 34,071 36,000 Diluted Average Shares Outstanding 34,634 36,605 Shares Outstanding at Period End 33,831 35,689 Basic Earnings Per Share $0.64 $0.57 Diluted Earnings Per Share 0.63 0.56 Average Balances: Total Assets $3,911,060 $3,872,584 Earning Assets 3,631,344 3,572,761 Total Loans 2,470,989 2,457,755 Total Deposits 3,206,717 3,175,414 Shareholders' Equity 301,014 320,105 Financial Ratios for the Period: Return On Assets 2.25% 2.14% Return On Equity 29.18% 25.88% Net Interest Margin 5.86% 5.56% Net Loan Losses to Average Loans 0.14% 0.09% Efficiency Ratio 41.0% 43.0% Balances at Period End: Total Assets $3,962,294 $3,877,606 Earning Assets 3,599,216 3,519,402 Total Loans 2,461,696 2,456,438 Total Deposits 3,251,124 3,196,477 Shareholders' Equity 307,637 330,918 Financial Ratios at Period End: Allowance for Loan Losses to Loans 2.12% 2.14% Book Value Per Share $9.09 $9.27 Equity to Assets 7.76% 8.53% Total Capital to Risk Assets 10.67% 11.39% Dividends Paid Per Share $0.22 $0.19 Dividend Payout Ratio 35% 34%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Westamerica Bancorporation and subsidiaries (the "Company") reported first quarter 2002 net income of $21.7 million or $.63 diluted earnings per share. These results compare to net income of $20.4 million or $.56 diluted earnings per share and $21.8 million or $.62 diluted earnings per share, respectively, for the first and fourth quarters of 2001. Following is a summary of the components of net income for the periods indicated (dollars in thousands):
For the three months ended March 31, December 31, 2002 2001 2001 ------------------------------------- Net interest income (FTE) $52,712 $49,259 $52,381 Provision for loan losses (900) (900) (900) Noninterest income 9,999 10,286 10,785 Noninterest expense (25,693) (25,576) (25,685) Provision for income taxes (FTE) (14,459) (12,645) (14,810) -------- -------- -------- Net income $21,659 $20,424 $21,771 ======== ======== ======== Average total assets $3,911,060 $3,872,584 $3,884,291 Net income (annualized) to average total assets 2.25% 2.14% 2.22%
Net income for the first quarter of 2002 was $1.2 million (6%) over the same quarter of 2001. The increase was primarily from net interest income (FTE) (up $3.5 million or 7%), the net result of a 30 basis point (bp) improvement in net margin, and to a lesser extent, growth of average earning assets (up $59 million). Noninterest income decreased $287 thousand (3%), partially offsetting the net interest improvement. The resulting net revenue was slightly reduced by an increase in noninterest expenses, which were $117 thousand above the year-ago quarter. The provision for income taxes (FTE) increased $1.8 million (14%), in-line with the increase in pretax income. Comparing the first three months of 2002 to the prior quarter, net income decreased $112 thousand (0.5%). Improved net interest income (up $331 thousand or 0.6%) was attributable to a higher margin (up 7 bp) and, to a lesser extent, higher average earning assets (up $27 million). This increase was partially offset by lower noninterest income (down $786 thousand). Noninterest expense remained essentially unchanged between the two quarters. The FTE provision for income taxes was down $351 thousand from the fourth quarter of 2001. Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
For the three months ended March 31 December 31, 2002 2001 2001 ------------------------------------- Interest income $58,938 $67,137 $61,280 Interest expense (10,421) (21,497) (13,029) FTE adjustment 4,195 3,619 4,130 -------- -------- -------- Net interest income (FTE) $52,712 $49,259 $52,381 ======== ======== ======== Average earning assets $3,631,344 $3,572,761 $3,604,579 Net interest margin (FTE) 5.86% 5.56% 5.79%
The Company's primary source of revenue is net interest income, or the difference between interest income earned on loans and investments and interest expense paid on interest-bearing deposits and borrowings. Net interest income (FTE) during the first quarter of 2002 increased $3.5 million (7%) from the same period in 2001 to $52.7 million. Approximately one-half of the increase was due to the growth of average earning assets (up $59 million), with the remainder due to a higher interest margin. The increase in the net interest margin was the net effect of a 98 bp drop in the asset yield, which was more than offset by a 128 bp drop in the cost of funds. Comparing the first quarter of 2002 with the previous quarter, net interest income (FTE) increased $331 thousand (0.6%), primarily due to a higher interest margin, partially offset by increases in average balances of funds purchased and Federal Home Loan Bank advances. The margin expansion was the result of a 20 bp decrease in asset yields, which was more than offset by a 27 bp lower cost of funds. Interest and Fee Income Interest & fee income (FTE) for the first quarter of 2002 decreased $7.6 million (11%) from the same period in 2001. The decrease was caused by lower yields, partially offset by the positive effect of growth of average earning assets. The average yield on the Company's earning assets decreased from 8.00% in the first quarter of 2001 to 7.02% in the 2002 period (down 98 bp). This decrease in yields was reflective of general interest markets during much of 2001 and into 2002. This was particularly evident in variable-rate categories of loans such as commercial (261 bp decline in yield), construction (392 bp decline) and personal lines of credit (392 bp decline). Except for direct consumer loans (up 11 bp), other categories of loans with longer maturities and/or fixed rates of interest also declined, but by a relatively lesser degree. These include commercial real estate loans (42 bp decrease), residential real estate loans (45 bp decrease) and indirect consumer loans (down 52 bp). The net result was that the yield on the loan portfolio declined 114 bp to 7.38%. The investment portfolio yield decreased 52 bp to 6.18%, which was mostly caused by declines in participation certificates (down 132 bp), other securities (down 135 bp) and U.S. Agency (down 56 bp). Average earning assets grew $59 million, despite reductions in residential real estate loans (down $20 million or 6%), direct consumer loans (down $19 million or 30%), and personal credit lines (down $6 million or 8%). Much of this contraction was replaced with growth in the commercial real estate and indirect consumer loan portfolios, which increased by $25 million (3%) and $23 million (6%), respectively. All other categories of loans increased by $10 million. Additionally, the investment portfolio increased: municipal securities (up $51 million or 13%), US Agency obligations (up $12 million or 7%), and other securities (up $35 million or 13%). Partially offsetting this growth were declines in US Treasury securities (down $45 million or 24%) and participation certificates (down $8 million or 11%). Comparing the first quarter of 2002 to the previous quarter, interest & fee income (FTE) fell $2.3 million (4%). Like the first quarter comparison, the decrease resulted from declining yields, partially offset by a higher volume of the investment portfolio. The average yield on earning assets for the first three months of 2002 was 7.02% compared to 7.22% in the fourth quarter of 2001. Loan yields, especially those more sensitive to market rates, declined 16 bp: the yield on commercial loans was down 47 bp, construction yields declined 66 bp, personal lines of credit fell 58bp and indirect consumer loans were down 20 bp. The investment portfolio yield decreased 24 bp: the U.S. Treasury securities yield declined 29 bp, other securities declined 68 bp, and participation certificates were were lower by 11 bp. Partially offsetting this decline was an increase in municipal securities (up 7 bp). The positive volume component of the change was caused by a $27 million (0.7%) increase in average earning assets, including higher US Agency obligations (up $13 million or 7%) and other securities (up $31 million or 11%), partially offset by a decrease in US Treasury securities (down $9 million or 6%). Total investments increased by $37 million (3%). A reduction in the loan portfolio of $10 million (0.4%) offset the investment expansion. Interest Expense Interest expense decreased $11 million (52%) in the first three months of 2002 compared to the year-ago period. The decrease was the combined effect of a more favorable mix of interest-bearing liabilities and a drop in the average rate paid. More expensive time deposits (down $110 million) were replaced with less expensive transaction accounts (up $88 million). A portion of short-term funds (down $53 million) were refinanced with Federal Home Loan Bank borrowing (up $86 million), with an average maturity of three years. The average rate paid on interest-bearing liabilities decreased from 3.41% in the first quarter of 2001 to 1.65% in 2002. Rates paid on those liabilities that move with general market conditions declined accordingly: the average rate on Fed Funds dropped 391 bp and the rate paid on repurchase agreements declined 338 bp. Rates on deposits declined as well, including those CDs over $100 thousand, which declined 323 bp, and on high-yield Money Market accounts, which were lowered an average of 283 bp. Comparing the first quarter of 2002 to the previous quarter, interest expense decreased $2.6 million (20%) in 2002 from 2001, again due to a more favorable mix of interest-bearing liabilities and lower rates paid. Rates paid averaged 1.65% during the first three months of 2002 compared to 2.05% in the fourth quarter of 2001. The most significant decline was on short-term funds, which decreased from 2.23% to 1.62%. Rates on all deposit categories decreased as well, with the average rate paid on all interest-bearing deposits dropping from 1.95% to 1.51%. Interest-bearing liabilities grew $38 million (1.5%) over the fourth quarter of 2001: increases in short-term funds (up $19 million or 8%) and Federal Home Loan Bank borrowing (up $62 million or 253%) were partially offset by a $45 million (5%) decline in time deposits. In all periods, the Company has attempted to continue to reduce high-rate time deposits while increasing the balances of more profitable, lower-cost transaction accounts in order to minimize the effect of adverse cyclical quarterly trends. Net Interest Margin (FTE) The following summarizes the components of the Company's net interest margin for for the periods indicated:
For the three months ended March 31, December 31, 2002 2001 2001 --------------------------------- Yield on earning assets 7.02% 8.00% 7.22% Rate paid on interest-bearing liabilities 1.65% 3.41% 2.05% ----- ----- ----- Net interest spread 5.37% 4.59% 5.17% Impact of all other net noninterest bearing funds 0.49% 0.97% 0.62% ----- ----- ----- Net interest margin 5.86% 5.56% 5.79% ===== ===== =====
During the first quarter of 2002, the Company's rapid reaction to declining market rates resulted in a substantial increase in the net interest margin. The margin decreased 30 basis points compared to the first 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 73 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 $30 million (2%), their value decreased 48 bp because of the lower market rates of interest at which they could be invested. The net interest margin increased 7 bp when compared to the fourth quarter of 2001. Earning asset yields decreased 20 bp, while the cost of interest-bearing liabilities was managed down. The interest spread increased 20 bp as a result. Noninterest bearing funding sources decreased $11 million (0.7%) and because of lower market rates of interest their value decreased by 13 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 amount of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on 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 on them which is exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended March 31, 2002 Interest Rates Average Income/ Earned/ Balance Expense Paid ------------------------------------- Assets: Money market assets and funds sold $819 $0 0.00% Investment securities: Available for sale Taxable 642,469 8,292 5.23% Tax-exempt 308,603 5,835 7.56% Held to maturity Taxable 67,431 970 5.83% Tax-exempt 141,033 2,816 7.99% Loans: Commercial: Taxable 397,012 6,026 6.16% Tax-exempt 193,197 3,695 7.76% Commercial real estate 985,025 19,570 8.06% Real estate construction 70,724 1,302 7.47% Real estate residential 335,933 5,573 6.64% Consumer 489,098 9,054 7.51% ---------- ------- Total loans 2,470,989 45,220 7.42% ---------- ------- Total earning assets 3,631,344 63,133 7.02% Other assets 279,716 ---------- Total assets $3,911,060 ========== Liabilities and shareholders' equity Deposits: Noninterest bearing demand $1,013,418 $-- -- Savings and interest-bearing transaction 1,414,010 3,149 0.90% Time less than $100,000 350,383 2,395 2.77% Time $100,000 or more 428,906 2,597 2.46% ---------- ------- Total interest-bearing deposits 2,193,299 8,141 1.51% Short-term borrowed funds 255,552 1,026 1.63% Federal Home Loan Bank advances 86,183 793 3.68% Debt financing and notes payable 25,678 461 7.28% ---------- -------- Total interest-bearing liabilities 2,560,712 10,421 1.65% Other liabilities 35,916 Shareholders' equity 301,014 ---------- Total liabilities and shareholders' equity $3,911,060 ========== Net interest spread (1) 5.37% Net interest income and interest margin (2) $52,712 5.86% ======= =====
For the three months ended March 31, 2001 Interest Rates Average Income/ Earned/ Balance Expense Paid ------------------------------------- Assets: Money market assets and funds sold $553 $3 2.17% Investment securities: Available for sale Taxable 657,753 10,025 6.18% Tax-exempt 230,126 4,420 7.68% Held to maturity Taxable 76,586 1,240 6.57% Tax-exempt 149,988 2,962 7.90% Loans: Commercial: Taxable 396,657 9,793 10.01% Tax-exempt 190,485 3,656 7.78% Commercial real estate 960,294 20,004 8.42% Real estate construction 63,356 1,753 11.10% Real estate residential 355,835 6,307 7.11% Consumer 491,128 10,593 8.65% ---------- ------- Total loans 2,457,755 52,106 8.55% ---------- ------- Total earning assets 3,572,761 70,756 8.02% Other assets 299,823 ---------- Total assets $3,872,584 ========== Liabilities and shareholders' equity: Deposits: Noninterest bearing demand 960,184 $-- -- Savings and interest-bearing transaction 1,325,526 5,354 1.62% Time less than $100,000 398,172 5,143 5.17% Time $100,000 or more 491,532 6,969 5.69% ---------- ------- Total interest-bearing deposits 2,215,230 17,466 3.16% Short-term borrowed funds 308,294 3,513 4.57% Federal Home Loan Bank advances 0 0 0 Debt financing and notes payable 28,893 518 7.19% ---------- ------- Total interest-bearing liabilities 2,552,417 21,497 3.41% Other liabilities 39,878 Shareholders' equity 320,105 ---------- Total liabilities and shareholders' equity $3,872,584 ========== Net interest spread (1) 4.60% Net interest income and interest margin (2) $49,259 5.56% ======= =====
For the three months ended December 31, 2001 Interest Rates Average income/ earned/ Balance expense paid -------------------------------------- Assets: Money market assets and funds sold $474 $1 0.84% Investment securities: Available for sale Taxable 608,707 8,528 5.56% Tax-exempt 302,678 5,767 7.62% Held to maturity Taxable 71,041 1,007 5.62% Tax-exempt 140,795 2,772 7.88% Loans: Commercial: Taxable 392,827 6,766 6.83% Tax-exempt 188,997 3,702 7.77% Commercial real estate 981,917 19,764 7.98% Real estate construction 72,536 1,464 8.01% Real estate residential 357,373 6,011 6.73% Consumer 487,235 9,628 7.84% ---------- ------- Total loans 2,480,885 47,335 7.57% ---------- ------- Total earning assets 3,604,580 65,410 7.22% Other assets 279,711 ---------- Total assets $3,884,291 ========== Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,025,804 $-- -- Savings and interest-bearing transaction 1,410,218 4,419 1.24% Time less than $100,000 371,515 3,187 3.40% Time $100,000 or more 452,445 3,367 2.95% ---------- ------- Total interest-bearing deposits 2,234,178 10,973 1.95% Short-term borrowed funds 236,678 1,334 2.24% Federal Home Loan Bank advances 24,435 223 3.62% Debt financing and notes payable 27,821 499 7.12% ---------- ------- Total interest-bearing liabilities 2,523,112 13,029 2.05% Other liabilities 33,622 Shareholders' equity 301,753 ---------- Total liabilities and shareholders' equity $3,884,291 ========== Net interest spread (1) 5.17% Net interest income and interest margin (2) $52,381 5.79% ======= ===== (1) Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.
Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands).
Three months ended March 31, 2002 compared with three months ended March 31, 2001 Volume Rate Total --------------------------------- Interest and fee income: Money market assets and funds sold $3 ($6) ($3) Investment securities: Available for sale Taxable (228) (1,505) (1,733) Tax-exempt 1,484 (69) 1,415 Held to maturity Taxable (141) (129) (270) Tax-exempt (178) 32 (146) Loans: Commercial: Taxable 9 (3,776) (3,767) Tax-exempt 52 (13) 39 Commercial real estate 546 (980) (434) Real estate construction 238 (689) (451) Real estate residential (347) (387) (734) Consumer (122) (1,416) (1,538) ------- ------- ------- Total loans 376 (7,261) (6,885) ------- ------- ------- Total earning assets 1,315 (8,937) (7,622) ------- ------- ------- Interest expense: Deposits: Savings and interest-bearing transaction 491 (2,696) (2,205) Time less than $100,000 (535) (2,213) (2,748) Time $100,000 or more (682) (3,690) (4,372) ------- ------- ------- Total interest-bearing deposits (726) (8,599) (9,325) ------- ------- ------- Short-term borrowed funds (537) (1,949) (2,486) Federal Home Loan Bank advances 792 1 793 Debt financing and notes payable (58) 1 (57) ------- -------- -------- Total interest-bearing liabilities (529) (10,546) (11,075) ------- -------- -------- Increase in Net Interest Income $1,844 $1,609 $3,453 ======= ======== ========
Three months ended March 31, 2002 compared with three months ended December 31, 2001 Volume Rate Total ----------------------------------- Interest and fee income: Money market assets and funds sold ($1) $0 ($1) Investment securities: Available for sale Taxable 283 (519) (236) Tax-exempt 111 (43) 68 Held to maturity Taxable (41) 4 (37) Tax-exempt 5 39 44 Loans: Commercial: Taxable (63) (677) (740) Tax-exempt 8 (15) (7) Commercial real estate 74 (268) (194) Real estate construction (34) (128) (162) Real estate residential (362) (76) (438) Consumer 17 (591) (574) ------- ------- ------- Total loans (360) (1,755) (2,115) ------- ------- ------- Total earning assets (3) (2,274) (2,277) ------- ------- ------- Interest expense: Deposits: Savings and interest-bearing transaction (1) (1,269) (1,270) Time less than $100,000 (153) (639) (792) Time $100,000 or more (167) (603) (770) ------- ------- ------- Total interest-bearing deposits (321) (2,511) (2,832) ------- ------- ------- Short-term borrowed funds 80 (388) (308) Federal Home Loan Bank advances 586 (16) 570 Debt financing and notes payable (38) 0 (38) ------- ------- ------- Total interest-bearing liabilities 307 (2,915) (2,608) ------- ------- ------- Increase (Decrease) in Net Interest Income ($310) $641 $331 ======= ======= =======
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 first quarter of 2002, unchanged from the first and the fourth quarters of 2001. For further information regarding net credit losses and the allowance for loan losses, see the "Classified Assets" section of this report. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands):
Three months ended March 31, December 31, 2002 2001 2001 ---------------------------------- Service charges on deposit accounts $6,002 $5,560 $5,841 Merchant credit card fees 905 946 961 ATM fees and interchange 517 493 582 Financial services commissions 339 243 381 Debit card fees 406 312 440 Mortgage banking income 187 221 198 Official check sales income 157 350 200 Trust fees 311 292 215 Gains on sale of foreclosed property 0 59 1 Other noninterest income 1,175 1,810 1,966 ------ ------- ------- Total $9,999 $10,286 $10,785 ====== ======= =======
Noninterest income for the first quarter of 2002 decreased $287 thousand (3%) from the same period in 2001. Service charges on deposit accounts, specifically in the area of deficit fees charged on analyzed accounts, increased $442 thousand (8%). 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. Offsetting the increase in deficit fees were declines in DDA activity (down $284 thousand or 17%) as well as overdraft and returned item charges (down $116 thousand or 5%). Increases in ATM fees and debit card fees also contributed to noninterest income. ATM fees increased $24 thousand (5%) due to increased Bank customer use of other banks' machines and non-Bank customers accessing their accounts through Westamerica Bank ATM's. In the current quarter, fees earned from check card use totaled $406 thousand, up $94 thousand (30%) over a year ago. The amount of financial services commissions was $96 thousand (40%) higher in the first quarter of 2002 compared to 2001 primarily due to higher sales volume of fixed annuities. Official check sales income declined $193 thousand (55%) mainly because declining earnings credit rates depressed sales income despite sales volume growth. Comparing the first quarter of 2002 to the previous quarter, noninterest income decreased $786 thousand (7%). The largest positive contributor was service charges on deposit accounts, which increased $161 thousand (3%). As discussed above, 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 hard-dollar fees for services. Also included in this category are overdraft and returned item charges, which declined $111 thousand (5%). The other positive factor was a $96 thousand (45%) increase in Trust fees with $52 thousand court fees received and intensified marketing. The above increases were not sufficient to offset decreases in other categories. Merchant credit card fees fell $56 thousand (6%) primarily due to seasonally high sales in the fourth quarter. ATM fees and debit card fees fell $65 thousand (11%) and $34 thousand (8%), respectively, mainly due to seasonally high transaction volume in the fourth quarter. Financial services commissions declined $42 thousand (11%) primarily because of an $80 thousand decrease in fixed annuities sales, partially offset by a $26 thousand increase in variable annuities sales. Official check sales income also fell $43 thousand (21%) due to lower earning credit rates. Other noninterest income fell $791 thousand (40%) as the previous quarter included $331 thousand excess proceeds received on a charged-off loan. Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands).
Three months ended March 31, December 31, 2002 2001 2001 --------------------------------- Salaries and incentives $10,948 $10,220 $10,568 Employee benefits 2,941 3,130 2,305 Occupancy 2,931 2,916 3,043 Equipment 1,434 1,590 1,583 Data processing services 1,499 1,521 1,456 Courier service 889 927 898 Telephone 409 494 444 Postage 405 502 393 Professional fees 371 453 403 Merchant credit card 340 361 342 Stationery and supplies 345 362 381 Advertising/public relations 289 359 374 Employee recruiting 110 100 94 Loan expense 333 226 284 Operational losses 231 163 296 Deposit expense 138 159 181 Foreclosed property expense 49 43 7 Amortization of deposit intangibles 201 365 261 Amortization of goodwill 0 288 297 Other noninterest expense 1,830 1,397 2,075 ------- ------- ------- Total $25,693 $25,576 $25,685 ======= ======= ======= Average full time equivalent staff 1,081 1,083 1,083 Noninterest expense to revenues (FTE) 40.97% 42.95% 40.66%
Noninterest expense increased $117 thousand (0.4%) in the first quarter of 2002 compared to the same period in 2001. The largest category of increase was salaries and incentives, which were up $728 thousand (7%). A major portion of the increase is attributable to a $694 thousand increase in incentive compensation expense. Other major increases are found in loan expense (up $107 thousand or 47%), operational losses (up $68 thousand or 42%) and other noninterest expense (up $434 thousand or 31%). Loan expense went up primarily due to a $26 thousand increase in the cost of obtaining credit reports and a $35 thousand increase in collateral repossession expense. Operational losses rose largely because the first quarter of 2001 benefited from $40 thousand of recoveries. Other noninterest expense rose mainly due to a $69 thousand (46%) increase in sales contest expense, a $100 thousand provision for unusual losses and a $143 thousand (126%) increase in staff relations expense. Largely offsetting these increases, employee benefits expense declined $189 thousand (6%) primarily due to a $288 thousand decrease in payroll taxes and a $43 thousand decline in workers compensation costs. Other categories of decline were a $156 thousand (10%) decrease in equipment primarily due to lower depreciation costs including the effect from sale of branches in the fourth quarter of 2001 and an $85 thousand (17%) decline in telephone expense. In addition, postage expense decreased $97 thousand (19%) due to special mailings in 2001, professional fees were down $82 thousand (18%) primarily because 2001 included legal fees in connection with loan collection efforts, and advertising/public relations fell $70 thousand (19%) primarily due to a decrease in promotional advertising. Last, the amortization of deposit intangibles declined $164 thousand (44%) primarily due to the expiration of the purchase premium incurred in connection with a 1993 acquisition and amortization of goodwill fell because of implementation of FASB No.141 and 142. Goodwill will no longer be amortized but be periodically evaluated for impairment. Comparing the first three months of 2002 with the fourth quarter of 2001, noninterest expense stayed essentially flat. Salaries and incentives rose $380 thousand (4%) primarily due to salary increases for existing employees and higher expenses recorded in connection with incentive and bonus programs. Benefits rose $636 thousand (28%) primarily due to an increase in the accrual for restricted performance shares, $109 thousand higher tax payments in the first quarter and a $43 thousand increase in group insurance. Other expenses which increased are a $43 thousand (3%) increase in data processing and a $49 thousand (17%) increase in loan expense. Foreclosed property expense rose $42 thousand (600%) primarily due to a $32 thousand writedown. Offsetting these increases were declines in occupancy (down $112 thousand or 4%) largely due to $165 thousand lower utility expense, equipment (down $149 thousand or 9%) mainly due to a $66 thousand lower depreciation expense and $67 thousand equipment writeoff of certain assets in the fourth quarter. Advertising/public relations fell $85 thousand (23%) primarily due to a $51 thousand drop in promotional advertising and a $20 thousand decrease in public relations. Operational losses declined $65 thousand (22%) mainly due to a $71 thousand decrease in sundry losses. Amortization of deposit intangibles and goodwill fell $62 thousand and $297 thousand for the same reason with the year-to-year comparison. Other noninterest declined $243 thousand primarily because the fourth quarter included $550 thousand provision for unusual losses. Provision for Income Tax During the first quarter of 2002, the Company recorded income tax expense of $10.2 million, $1.2 million (14%) higher than the first quarter of 2001. The current quarter provision represents an effective tax rate of 32.2 percent, compared to 30.6 percent and 32.9 percent for the first and fourth quarters of 2001. The provision for income taxes for all periods is primarily attributable to the respective levels of earnings and deductions from tax-exempt loans and state and municipal securities, which increased $681 thousand in the first quarter of 2002 over the same period last year and $91 thousand over the fourth quarter of 2001. Classified Assets 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 nonperforming 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 At March 31, December 31, 2002 2001 2001 ----------------------------------- Classified loans $26,687 $33,365 $22,284 Other classified assets 834 1,866 523 ------- ------- ------- Total classified assets $27,521 $35,231 $22,807 ======= ======= ======= Allowance for loan losses / classified loans 195% 158% 234%
Classified loans at March 31, 2002, decreased $6.7 million (20%) from a year ago, primarily reflecting the effectiveness of the Company's high underwriting standards and active workout policies. Other classified assets decreased $1.0 million (55%) from March 31, 2001, due to sales and write-downs of foreclosed properties, partially offset by new foreclosures on loans with real estate collateral. There was a $4.4 million increase (20%) in classified loans from December 31, 2001 mainly due to new downgrades, partially offset by payoffs. 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 nonperforming assets. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Any subsequent interest received is recorded as interest income on a cash basis. The following is a summary of nonperforming assets on the dates indicated (dollars in thousands):
At At March 31, December 31, 2002 2001 2001 ------------------------------------ Performing nonaccrual loans $3,195 $2,861 $3,055 Nonperforming, nonaccrual loans 4,395 4,204 5,058 ------ ------ ------ Total nonaccrual loans 7,590 7,065 8,113 Loans 90 days past due and still accruing 252 409 550 ------ ------ ------ Total nonperforming loans 7,842 7,474 8,663 Other real estate owned 834 1,866 523 ------- ------- ------- Total nonperforming assets $8,676 $9,340 $9,186 ======= ======= ======= Allowance for loan losses / nonperforming loans 665% 704% 601%
Performing nonaccrual loans at March 31, 2002 increased $334 thousand (12%) and $140 thousand (5%) from a year ago and from year-end, 2001, respectively. The change resulted from new loans placed on nonaccrual, offset by charge-offs, payoffs and loans being returned to accrual status. Nonperforming nonaccrual loans at March 31, 2002 increased $191 thousand (5%) from the previous year, the net result of loans being added to nonaccrual, partially offset by others being returned to full-accrual status or being paid off. The $663 thousand (13%) decrease from December 31, 2001 was primarily due to the foreclosure on one loan and subsequent transfer to other real estate owned. Other real estate owned at March 31, 2002 was $1.0 million (55%) lower than the previous year, primarily resulting from the sale of three large properties with a total carrying value of $1.2 million. Comparing to the 2001 year-end, a $311 thousand increase in other real estate owned is primarily due to an addition of a property valued at $343 thousand. The amount of gross interest income that would have been recorded for nonaccrual loans for the three months ended March 31, 2002, if all such loans had been current in accordance with their original terms, was $133 thousand, compared to $179 thousand and $157 thousand, respectively, for the first and fourth quarters 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 months ended March 31, 2002, totaled $110 thousand, compared to $336 thousand and $45 thousand, respectively, for the first and fourth quarters of 2001. These cash payments represent annualized yields of 9.39 percent for first three months of 2002 compared to 18.75 percent and 10.25 percent, respectively, for the first and the fourth quarter of 2001. Total cash payments received, including those recorded in prior years, which were applied against the book balance of nonaccrual loans outstanding at March 31, 2002, totaled approximately $188 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 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 allowance to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines due to their small balances and numerous accounts, are analyzed based on the historical rate of net losses and delinquency trends, grouped by the number of days the payments on these loans are delinquent. A portion of the allowance is also allocated to impaired loans. Management considers the $52.1 million allowance for loan losses, which constituted 2.12 percent of total loans at March 31, 2002, to be adequate as an allowance 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 March 31, December 31, 2002 2001 2001 ---------------------------------- Balance, beginning of period $52,086 $52,279 $52,461 Loan loss provision 900 900 900 Loans charged off (1,645) (1,607) (1,952) Recoveries of previously charged off loans 806 1,072 677 -------- -------- -------- Net credit losses (839) (535) (1,275) -------- -------- -------- Balance, end of period $52,147 $52,644 $52,086 ======== ======== ======== Allowance for loan losses / loans outstanding 2.12% 2.14% 2.10%
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 March 31, 2002 would not result in a fluctuation of NII that would exceed the parameters established by Company policy. At March 31, 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 March 31, 2002, there were no substantial changes in the information on market risk that was disclosed in the Company's Form 10-Ks since 1997. Liquidity The Company's principal source of asset liquidity is marketable investment securities available for sale. At March 31, 2002, investment securities available for sale totaled $975 million, representing an increase of $26 million from December 31, 2001. In addition, the Company generates significant liquidity from its operating activities. The Company's profitability during the first three months of 2002 and 2001 generated substantial cash flows which are included in the totals provided from operations of $35 million and $25 million, respectively. The Company had net cash outflows in its investing activities during the 2002 period. Purchases net of sales & maturities of investment securities were $38 million during the first three months of 2002, which was partially offset by net repayments of loans of $21 million, resulting in net cash used of $17 million. In the quarter ended March 31, 2001, investing activities provided a major source of cash. Less than 50% of proceeds from maturing investment securities of $79 million were reinvested for a net increase of cash of $44 million. Another primary source of cash was $25 million from loan repayments. Financing activities used cash during both three-month periods ended March 31. In 2002, the effect of the Company's stock repurchase programs and dividends paid to shareholders were $23 million and $8 million, respectively. These cash outflows, added to a $12 million reduction in short-term borrowed funds, partially offset by a $16 million increase in deposits, are included in the net cash used in financing activities during the first three months of 2002 of $24 million. This compares to the first three months of 2001, when the cash used in financing activities totaled $191 million. This amount includes cash outflows related to the Company's stock repurchase programs and dividends paid to shareholders of $38 million and $7 million, respectively, plus a $111 million reduction in short-term debt and a $40 million decrease in deposits. The Company anticipates increasing its cash level from operations through 2002 through increased profitability and retained earnings. For the same period, it is anticipated that deposit balances will increase. Growth in loan balances, particularly in the commercial and real estate categories, is expected to follow the anticipated growth in deposit balances. Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company quarterly repurchases approximately 250 thousand of its shares of Common Stock in the open market with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements. In addition to these systematic repurchases, other programs have been implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to these programs, the Company repurchased an additional 308 thousand shares in the first quarter of 2002, 741 thousand shares in the first quarter of 2001, and 258 thousand shares in the fourth quarter of 2001. 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 $308 million at March 31, 2002. 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 $23 million or 7 percent from a year ago, and a decrease of $7 million, or 2 percent, from December 31, 2001. As a consequence of the decrease in shareholders' equity, the Company's ratio of equity to total assets decreased to 7.76 percent at March 31, 2002, from 8.53 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 Minimum At March 31, December 31, Regulatory 2002 2001 2001 Requirement --------------------------------------------- Tier I Capital 9.33% 9.97% 9.29% 4.00% Total Capital 10.67% 11.39% 10.63% 8.00% Leverage ratio 7.18% 7.76% 7.30% 4.00%
The risk-based capital ratios decreased at March 31, 2002, compared to the prior year 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. Comparing to the 2001 year-end, the capital ratios improved slightly with an increase in retained earnings, and the leverage ratio fell affected by asset growth. 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 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 March 31, 2002. No such adjustments were made. 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 first quarter of 2002. No impairment loss was identified. As of the date of adoption, the Company had unamortized goodwill in the amount of $16.3 million and unamortized identifiable intangible assets in the amount of $2.7 million. In accordance with the Statement 142 goodwill was not amortized during the first quarter of 2002, compared to amortization expense of $288 thousand for the first quarter of 2001 and $297 thousand for the fourth quarter of 2001. Amortization of identifiable intangible assets was $201 thousand for the first quarter of 2002, and $365 thousand and $261 thousand for the first and fourth quarters of 2001. 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: April 29, 2002 /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 On March 8 2002, the Company filed a Report on Form 8-K announcing the signing of a definitive agreement on February 25, 2002 to acquire Kerman State Bank. Exhibit 11 WESTAMERICA BANCORPORATION Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution
------------------------------------------------------------------ For the three months ended March 31, (In thousands, except per share data) 2002 2001 ------------------------------------------------------------------ Weighted average number of common shares outstanding - basic 34,071 36,000 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 563 605 ------------------------------------------------------------------ Weighted average number of common shares outstanding - diluted 34,634 36,605 ================================================================== Net income $21,659 $20,424 Basic earnings per share $0.64 $0.57 Diluted earnings per share $0.63 $0.56