10-Q 1 jun03q.txt WESTAMERICA BANCORPORATION 10-Q JUNE 30, 2003 Page 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 2003 Commission File Number: 001-9383 WESTAMERICA BANCORPORATION (Exact Name of Registrant as Specified in its Charter) CALIFORNIA 94-2156203 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1108 Fifth Avenue, San Rafael, California 94901 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code (707) 863-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the registrant classes of common stock, as of the latest practicable date: Title of Class Shares outstanding as of August 8, 2003 Common Stock, 32,705,360 No Par Value Page 2
TABLE OF CONTENTS Page --------- Forward Looking Statements 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3 Notes to Unaudited Condensed Consolidated Financial Statements 7 Financial Summary 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 25 Item 4 - Controls and Procedures 25 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 26 Item 2 - Not applicable 26 Item 3 - Not applicable 26 Item 4 - Submission of Matters to a Vote of Security Holders 26 Item 5 - Not applicable 26 Item 6 - Exhibits and Reports on Form 8-K 26 (a) - Exhibits Exhibit 11 - Computation of Earnings Per Share 30 Exhibit 31.1 - Certification of Chief Executive Officer pursuant to 31 Securities Exchange Act Rule 13a-(14)(a) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to 32 Securities Exchange Act Rule 13a-(14)(a) Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 33 Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 34 (b) - Reports on Form 8-K 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) continued weakness in the national and California economies; (2) increased economic uncertainty created by concerns regarding terrorist attacks and geopolitical risks; (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 assets and liabilities; (10) asset/liability management 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, 2002, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report. Page 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
At At June 30, December 31, -------------------------- 2003 2002 2002 --------------------------------------- Assets: Cash and cash equivalents $201,560 $183,589 $222,577 Money market assets 633 633 633 Investment securities available for sale 1,251,341 986,392 947,848 Investment securities held to maturity, with market values of: $599,484 at June 30, 2003 588,231 $287,841 at June 30, 2002 279,640 $450,771 at December 31, 2002 438,985 Loans, gross 2,406,889 2,507,968 2,494,638 Allowance for loan losses (54,159) (54,324) (54,227) --------------------------------------- Loans, net of allowance for loan losses 2,352,730 2,453,644 2,440,411 Premises and equipment, net 36,408 39,078 37,396 Interest receivable and other assets 133,789 129,526 137,017 --------------------------------------- Total Assets $4,564,692 $4,072,502 $4,224,867 ======================================= Liabilities: Deposits: Non-interest bearing $1,194,847 $1,081,967 $1,146,828 Interest bearing: Transaction 554,568 528,226 559,875 Savings 962,967 979,289 952,319 Time 741,249 725,958 635,043 --------------------------------------- Total deposits 3,453,631 3,315,440 3,294,065 Short-term borrowed funds 393,287 228,635 349,736 Federal Home Loan Bank advance 170,000 140,000 170,000 Notes Payable 21,393 24,607 24,607 Liability for interest, taxes and other expenses 169,070 43,447 44,960 --------------------------------------- Total Liabilities 4,207,381 3,752,129 3,883,368 ======================================= Shareholders' Equity: Authorized - 150,000 shares of common stock Issued and outstanding: 32,937 at June 30, 2003 219,060 33,753 at June 30, 2002 226,551 33,411 at December 31, 2002 217,198 Accumulated other comprehensive income: Unrealized gain on securities available for sale, net of tax 26,001 14,184 19,152 Retained earnings 112,250 79,638 105,149 --------------------------------------- Total Shareholders' Equity 357,311 320,373 341,499 --------------------------------------- Total Liabilities and Shareholders' Equity $4,564,692 $4,072,502 $4,224,867 ======================================= See accompanying notes to consolidated financial statements.
Page 4 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, 2003 2002 2003 2002 ---------------------------------------------------- Interest Income: Loans $39,419 $43,912 $79,832 $87,878 Money market assets and funds sold 2 4 5 4 Investment securities available for sale Taxable 8,254 8,350 15,957 16,632 Tax-exempt 3,854 3,693 7,625 7,555 Investment securities held to maturity Taxable 1,673 1,073 4,185 2,042 Tax-exempt 3,397 2,055 6,119 3,913 ---------------------------------------------------- Total interest income 56,599 59,087 113,723 118,024 ---------------------------------------------------- Interest Expense: Transaction deposits 211 413 453 820 Savings deposits 1,562 2,817 3,271 5,559 Time deposits 2,697 4,415 5,654 9,407 Short-term borrowed funds 962 895 1,812 1,921 Federal Home Loan Bank advance 1,592 1,247 3,167 2,039 Debt financing and notes payable 385 442 789 903 ---------------------------------------------------- Total interest expense 7,409 10,229 15,146 20,649 ---------------------------------------------------- Net Interest Income 49,190 48,858 98,577 97,375 ---------------------------------------------------- Provision for loan losses 900 900 1,800 1,800 ---------------------------------------------------- Net Interest Income After Provision For Loan Losses 48,290 47,958 96,777 95,575 ---------------------------------------------------- Noninterest Income: Service charges on deposit accounts 6,648 5,967 13,073 11,969 Merchant credit card 900 963 1,762 1,868 Mortgage banking 301 217 527 404 Trust fees 277 243 516 554 Financial services commissions 210 425 418 764 Securities gains (Impairment) 277 (4,260) 293 (4,278) Other 2,423 2,329 4,822 4,602 ---------------------------------------------------- Total Noninterest Income 11,036 5,884 21,411 15,883 ---------------------------------------------------- Noninterest Expense: Salaries and related benefits 13,598 14,281 27,297 28,143 Occupancy 3,044 2,898 6,039 5,829 Data processing 1,518 1,516 3,077 3,015 Equipment 1,381 1,425 2,755 2,859 Professional fees 457 443 870 815 Other 5,478 5,346 10,973 10,941 ---------------------------------------------------- Total Noninterest Expense 25,476 25,909 51,011 51,602 ---------------------------------------------------- Income Before Income Taxes 33,850 27,933 67,177 59,856 ---------------------------------------------------- Provision for income taxes 10,179 8,586 20,494 18,850 ---------------------------------------------------- Net Income $23,671 $19,347 $46,683 $41,006 ==================================================== Comprehensive Income: Change in unrealized gain on securities available for sale, net 5,591 6,122 6,849 2,284 ---------------------------------------------------- Comprehensive Income $29,262 $25,469 $53,532 $43,290 =================================================== Average Shares Outstanding 33,000 33,565 33,054 33,817 Diluted Average Shares Outstanding 33,492 34,180 33,528 34,406 Per Share Data: Basic Earnings $0.72 $0.58 $1.41 $1.21 Diluted Earnings 0.71 0.57 1.39 1.19 Dividends Paid 0.24 0.22 0.48 0.44 See accompanying notes to consolidated financial statements.
Page 5 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
Accumulated Other Compre- Common hensive Retained Stock Income Earnings Total ---------------------------------------------------- Balance, December 31, 2001 $209,074 $11,900 $93,385 $314,359 Net income for the period 41,006 41,006 Stock issued in connection with purchase of Kerman State Bank 14,620 14,620 Stock issued, including stock option tax benefits 9,737 9,737 Purchase and retirement of stock (6,880) (39,832) (46,712) Dividends (14,921) (14,921) Unrealized gain on securities available for sale, net 2,284 2,284 ---------------------------------------------------- Balance, June 30, 2002 $226,551 $14,184 $79,638 $320,373 ==================================================== Balance, December 31, 2002 $217,198 $19,152 $105,149 $341,499 Net income for the period $46,683 46,683 Stock issued, including stock option tax benefits 6,296 6,296 Purchase and retirement of stock (4,434) (23,695) (28,129) Dividends (15,887) (15,887) Unrealized gain on securities available for sale, net 6,849 6,849 ---------------------------------------------------- Balance, June 30, 2003 $219,060 $26,001 $112,250 $357,311 ==================================================== See accompanying notes to consolidated financial statements.
Page 6 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the six months ended June 30, 2003 2002 -------------------------- Operating Activities: Net income $46,683 $41,006 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 2,139 2,264 Amortization of intangibles 1,014 869 Loan loss provision 1,800 1,800 Amortization of deferred net loan (cost)/fees 117 396 Decrease (increase) in interest income receivable 362 (1,956) Decrease (increase) in other assets 57,823 (2,484) Increase (decrease) in income taxes payable 2,978 (1,484) (Decrease) in interest expense payable (382) (132) (Decrease) increase in other liabilities (53,321) 3,060 (Gain) loss on sales of investment securities (293) 18 Writedown of equipment 102 268 Originations of loans for resale (5,257) (7,028) Proceeds from sale of loans originated for resale 5,007 7,567 Net gain on sale of property acquired in satisfaction of debt (9) (107) Writedown on property acquired in satisfaction of debt 0 34 Impairment of investment securities 0 4,260 -------------------------- Net Cash Provided by Operating Activities 58,763 48,351 -------------------------- Investing Activities: Net cash obtained in mergers and acquisitions 0 5,368 Net repayments of loans 84,213 33,674 Purchases of investment securities available for sale (499,669) (777,488) Purchases of investment securities held to maturity (243,158) (68,696) Purchases of property, plant and equipment (1,750) (1,069) Proceeds from maturity of securities available for sale 257,382 741,284 Proceeds from maturity of securities held to maturity 93,912 14,849 Proceeds from sale of securities available for sale 69,305 982 Proceeds from sale of property and equipment 498 364 Proceeds from property acquired in satisfaction of debt 293 391 -------------------------- Net Cash (Used In) Investing Activities (238,974) (50,341) -------------------------- Financing Activities: Net increase (decrease) in deposits 159,565 (2,762) Net increase (decrease) in short-term borrowings 43,551 (33,001) Net increase in Federal Home Loan Bank advances 0 100,000 Repayments of notes payable (3,214) (3,214) Exercise of stock options/issuance of shares 3,308 7,007 Repurchases/retirement of stock (28,129) (46,712) Dividends paid (15,887) (14,921) -------------------------- Net Cash Provided By Financing Activities 159,194 6,397 -------------------------- Net (Decrease) Increase In Cash and Cash Equivalents (21,017) 4,407 -------------------------- Cash and Cash Equivalents at Beginning of Period 222,577 179,182 -------------------------- Cash and Cash Equivalents at End of Period $201,560 $183,589 ==========================
Page 7
For the six months ended June 30, 2003 2002 -------------------------- Supplemental Disclosure of Noncash Activities: Loans transferred to other repossessed collateral $1,800 $375 Unrealized gain on securities available for sale $6,849 $2,284 Supplemental Disclosure of Cash Flow Activity: Interest paid for the period 14,764 20,564 Income tax payments for the period 18,461 18,991 Income tax benefit from stock option exercises 1,887 1,938 The acquisition of Kerman State Bank involved the following: Common Stock issued 0 14,620 Liabilities assumed 0 85,085 Fair value of assets acquired, other than cash and cash equivalents 0 (90,170) Core deposit intangible 0 (2,500) Goodwill 0 (1,667) Net cash and cash equivalents received 0 5,368 See accompanying notes to consolidated financial statements.
Page 8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim period presented. The interim results for the six months ended June 30, 2003 and 2002 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Note 2: Critical Accounting Policies Certain accounting policies underlying the preparation of these financial statements require Management to make estimates and judgments. These estimates and judgments may affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. The most significant of these involve the Allowance for Loan Losses, which is discussed in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Note 3: Goodwill and Other Intangible Assets The Company has recorded goodwill and core deposit intangibles associated with purchase business combinations and, effective January 1, 2002, accounts for them in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer being amortized, but is periodically evaluated for impairment. During 2003, no impairment of goodwill has been recorded. Core deposit intangibles are amortized to their estimated residual values over their expected useful lives; such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. The Company determined that no such adjustments were required as of June 30, 2003. The following table summarizes the Company's goodwill and core deposit intangible assets, which are included with interest receivable and other assets in the Consolidated Balance Sheets, as of January 1, 2003 and June 30, 2003 (dollars in thousands).
January 1 June 30 (Dollar in Thousands) 2003 Additions Reductions 2003 ------------------------------------------------- Goodwill $22,968 $0 $0 $22,968 Accumulated Amortization ($3,972) $0 $0 ($3,972) ------------------------------------------------- Net $18,996 $0 $0 $18,996 ================================================= Core Deposit Intangibles $7,783 $0 $0 $7,783 Accumulated Amortization ($3,603) $0 $414 ($4,017) ------------------------------------------------- Net $4,180 $0 $414 $3,766 ================================================= At June 30, 2003, the estimated aggregate amortization of intangibles, in thousand of dollars, for the remainder of 2003 and annually through 2008 is $329, $543, $469, $427, $427 and $427, respectively. The weighted average amortization period for core deposit intangibles is 8.5 years.
Page 9 Note 4: Stock Options As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation", the Company accounts for its stock option plans using the intrinsic value method. Accordingly, compensation expense is recorded on the grant date only if the current price of the underlying stock exceeds the exercise price of the option. Had compensation cost been determined based on the fair value method established by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- (In thousands, except per share data) Compensation cost based on fair value method, net of tax effect $589 $900 $1,178 $1,800 Net income: As reported $23,671 $19,347 $46,683 $41,006 Pro forma $23,082 $18,447 $45,505 $39,206 Basic earnings per share: As reported $0.72 $0.58 $1.41 $1.21 Pro forma 0.70 0.55 1.38 1.16 Diluted earnings per share: As reported $0.71 $0.57 $1.39 $1.19 Pro forma 0.69 0.54 1.36 1.14
Page 10 WESTAMERICA BANCORPORATION Financial Summary (dollars in thousands, except per share amounts)
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Net Interest Income (FTE) $54,324 $53,096 $108,386 $105,808 Provision for loan losses (900) (900) (1,800) (1,800) Noninterest income: Noninterest income before securities 10,759 10,144 21,118 20,161 gains (impairment) Securities gains (impairment) 277 (4,260) 293 (4,278) ---------------------------------------------------- Total noninterest income 11,036 5,884 21,411 15,883 Noninterest expense (25,476) (25,909) (51,011) (51,602) Provision for income taxes (FTE) (15,313) (12,824) (30,303) (27,283) ---------------------------------------------------- Net income $23,671 $19,347 $46,683 $41,006 ==================================================== Average shares outstanding 33,000 33,565 33,054 33,817 Diluted average shares outstanding 33,492 34,180 33,528 34,406 Shares outstanding at period end 32,937 33,753 32,937 33,753 As Reported: Basic earnings per share $0.72 $0.58 $1.41 $1.21 Diluted earnings per share 0.71 0.57 1.39 1.19 Return on assets 2.21% 1.97% 2.21% 2.11% Return on equity 29.27% 26.67% 29.44% 27.94% Net interest margin 5.43% 5.82% 5.51% 5.84% Net loan losses to average loans 0.15% 0.13% 0.16% 0.13% Efficiency ratio 39.0% 43.9% 39.3% 42.4% Average Balances: Total assets $4,304,387 $3,933,274 $4,253,125 $3,922,167 Earning assets 4,007,049 3,659,033 3,956,535 3,645,189 Total loans 2,375,491 2,448,546 2,399,754 2,459,768 Total deposits 3,370,433 3,226,951 3,338,681 3,216,834 Shareholders' equity 324,350 290,960 319,741 295,987 Balances at Period End: Total assets $4,564,692 $4,072,502 Earning assets 4,247,094 3,774,633 Total loans 2,406,889 2,507,968 Total deposits 3,453,631 3,315,440 Shareholders' equity 357,311 320,373 Financial Ratios at Period End: Allowance for loan losses to loans 2.25% 2.17% Book value per share $10.85 $9.49 Equity to assets 7.83% 7.87% Total capital to risk assets 11.32% 10.65% Dividends Paid Per Share $0.24 $0.22 $0.48 $0.44 Dividend Payout Ratio 34% 39% 34% 37% The above financial summary has been derived from the Company's consolidated financial statements. This information should be read in conjunction with the consolidated financial statements, notes and the other information included elsewhere herein.
Page 11 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Westamerica Bancorporation and subsidiaries (the "Company") reported second quarter 2003 net income of $23.7 million or diluted earnings per share of $0.71. These results compare with second quarter 2002 net income of $19.3 million or $0.57 per share. The 2002 period included expenses in connection with the Kerman State Bank ("KSB") acquisition of $240 thousand after-tax and a $2.5 million after-tax securities impairment charge. On a year-to-date basis, the Company reported net income for the six months ended June 30, 2003 of $46.7 million or diluted earnings per share of $1.39, compared with $41.0 million or $1.19 per share for the same period of 2002. Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands):
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Net interest income (FTE) $54,324 $53,096 $108,386 $105,808 Provision for loan losses (900) (900) (1,800) (1,800) Noninterest income: Noninterest income before securities 10,759 10,144 21,118 20,161 gains (impairment) Securities gains (impairment) 277 (4,260) 293 (4,278) ---------------------------------------------------- Total noninterest income 11,036 5,884 21,411 15,883 Noninterest expense (25,476) (25,909) (51,011) (51,602) Provision for income taxes (FTE) (15,313) (12,824) (30,303) (27,283) ---------------------------------------------------- Net income $23,671 $19,347 $46,683 $41,006 ====================================================
Net income for the second quarter of 2003 was $4.3 million or 22.3% more than the same quarter of 2002 primarily due to higher noninterest income (up $5.2 million or 87.6%) and improved net interest income (FTE). The increase in noninterest income was attributable to a securities impairment charge in 2002 and increased fee income. Improved net interest income (FTE) (up $1.2 million or 2.3%) was largely due to higher average earning assets (up $348.0 million), partially offset by a 39 basis point ("bp") decline in the net margin. Noninterest expense in 2003 declined $433 thousand or 1.7% mostly because of lower personnel costs. The 2002 compensation expense included $400 thousand expense relating the KSB acquisition. Comparing the first six months of 2003 to the prior year, net income rose $5.7 million (13.8%). Similar to the quarter-to-quarter comparison, the increase was primarily attributable to higher noninterest income (up $5.5 million or 34.8%) resulting from a securities impairment charge in 2002, increased fee income and improved net interest income (FTE) (up $2.6 million or 2.4%). The increase in net interest income was mostly caused by higher earning assets (up $311.3 million or 8.5%), partially reduced by a 33 bp net interest margin reduction. The $591 thousand or 1.1% decrease in noninterest expense was mainly due to lower personnel costs. Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Interest and fee income $56,599 $59,087 $113,724 $118,024 Interest expense (7,409) (10,229) (15,146) (20,649) FTE adjustment 5,134 4,238 9,808 8,433 ---------------------------------------------------- Net interest income (FTE) $54,324 $53,096 $108,386 $105,808 ==================================================== Average earning assets $4,007,049 $3,659,033 $3,956,535 $3,645,189 Net interest margin (FTE) 5.43% 5.82% 5.51% 5.84%
Page 12 The Company's primary source of revenue is net interest income, or the difference between interest income earned on earning assets and interest expense paid on interest-bearing liabilities. Net interest income (FTE) during the second quarter of 2003 increased $1.2 million (2.3%) from the same period in 2002 to $54.3 million. The increase was mainly attributable to a $348.0 million increase in average earning assets, the volume component, partly reduced by the effect of the lower margin earned on those assets, the rate component. The decrease in the net interest margin was the net effect of a 77 bp drop in the asset yield, which was partially offset by a 38 bp decline in the cost of funds. Comparing the first six months of 2003 with the prior year, net interest income (FTE) increased $2.6 million or 2.4%. The increase was caused by the higher earning assets (up $311.3 million), partially offset by the effect of declining yields on earning assets. The margin reduction was the result of a 70 bp decrease in the asset yield combined with a 37 bp decline in the cost of funds. Interest and Fee Income Interest & fee income (FTE) for the second quarter of 2003 decreased $1.6 million (2.5%) from the same period in 2002. The decline was the net effect of higher average earning assets in 2003, more than offset by lower yields earned on those assets. Average earning assets grew $348.0 million (9.5%). The earning asset growth was led by expansion in the investment portfolio of $421.5 million as follows: mortgage backed securities and collateralized mortgage obligations (up $307.2 million), US Agency obligations (up $211.5 million) and municipal securities (up $119.2 million). Offsetting the increase were declines in U.S. Treasury securities (down $116.6 million) and other securities (down $99.8 million). A portion of the growth in the investment portfolio was offset by a $73.1 million reduction in loans including commercial real estate loans (down $62.6 million), commercial loans (down $22.6 million), construction loans (down $17.3 million) and direct consumer loans (down $14.2 million). The notable exceptions were increases in indirect consumer loans (up $28.0 million) and residential real estate loans (up $14.8 million). The average yield on the Company's earning assets decreased for the quarter from 6.94% in 2002 to 6.17% in 2003 (down 77 bp). This downward trend in yields was reflective of general interest rate markets during 2002 and into 2003, as evident in residential real estate loans (120 bp decline in yield), indirect consumer loans (117 bp decline) and commercial loans (31 bp decline). The average interest rate on commercial real estate loans declined by 30 bp; however, the effective yield on those loans rose by 5 bp due to higher prepayment fees. As a result, the loan portfolio yield decreased 54 bp. The investment portfolio yield declined 83 bp, the net result of declines in U.S. Treasury securities (down 188 bp), mortgage backed securities and collateralized mortgage obligations (down 143 bp), U.S. Agency obligations (down 139 bp) and municipal securities (down 30 bp), partially offset by a 155 bp increase in other securities, which was caused by an FTE adjustment to other securities. Comparing the first half of 2003 to 2002, interest and fee income (FTE) decreased by $2.9 million (2.3%). The decline was due to the combined effect of a higher volume of earning assets and the impact of lower yields. The positive volume component was caused by a $311.3 million (8.5%) increase in average earning assets, including mortgage backed securities and collateralized mortgage obligations (up $269.3 million or 338.9%), U.S. Agency obligations (up $213.2 million or 97.3%), municipal securities (up $95.5 million or 21.4%), and indirect consumer loans (up $40.3 million or 10.6%). Offsetting the growth were declines in U.S. Treasury securities (down $122.2 million or 91.0%), other securities (down $84.2 million or 27.5%), commercial real estate loans (down $50.7 million or 5.2%), commercial loans (down $20.7 million or 3.5%), construction loans (down $19.1 million or 29.4%) and direct consumer loans (down $14.4 million or 34.6%). Page 13 The average yield on earning assets for the first six months of 2003 was 6.28% compared to 6.98% in 2002. All earning asset yields fell except for an 88 bp increase in other securities due to the above-mentioned FTE adjustment to other securities. The yield on residential real estate loans was down 116 bp, indirect consumer loan yields also declined 115 bp and the yield on commercial loans decreased 29 bp. The yield on commercial real estate loans increased by 3 bp, the net result of higher prepayment fees, partially offset by a 24 bp decrease in the average interest rate on those loans. As a result, the composite loan yield declined 63 bp. The investment portfolio yield decreased 80 bp, affected primarily by lower yields on U.S. Treasury securities (down 162 bp), mortgage backed securities and collateralized mortgage obligations (down 141 bp), U.S. Agency obligations (down 133 bp) and municipal securities (down 30 bp). Interest Expense Interest expense decreased $2.8 million (27.6%) in the second quarter of 2003 compared to the year-ago period. The decrease resulted from a drop in the average rate paid on interest-bearing liabilities from 1.60% in 2002 to 1.05% in 2003. The average rate on bankers money fund dropped 88 bp, rates on CDs over $100 thousand declined an average of 113 bp, rates on retail CDs declined 78 bp, and rates on money market savings accounts were lowered 62 bp. The effect of a $255.7 million (10.0%) increase in average interest-bearing liabilities in the second quarter caused an increase in volume-related expense and partially offset the above-mentioned rate-related decline in interest expense. Short-term borrowings rose by $155.6 million and Federal Home Loan Bank ("FHLB") advances also increased by $38.2 million. Interest bearing deposits rose by $65.1 million, the net result of increases in money market savings (up $99.6 million), CDs over $100 thousand (up $28.1 million) money market checking (up $27.5 million) and regular savings (up $24.3 million), partially reduced by decreases in preferred money market savings (down $79.1 million) and retail CDs (down $24.6 million). During the first half of 2003, interest expense decreased $5.5 million (26.7%) from 2002, again due to a lower average rate paid on interest-bearing liabilities (1.09% in the first half of 2003 compared with 1.62% in 2002). All deposit categories declined including money market savings (from 1.45% in the first six months of 2002 to 0.85% in the same period of 2003), CDs over $100 thousand (from 2.48% to 1.52%) and retail CDs with maturities varying from 1 month to over 3 years (from 2.64% to 1.84%). Interest rates on short-term borrowings declined from 1.61% to 1.00%. Interest-bearing liabilities grew $212.6 million or 8.3% for the six months ended June 30, 2003 and caused a volume-related increase in interest expense, which partially offset the rate-related decline in interest expense. Increases in money market savings (up $105.0 million), short-term borrowings (up $124.3 million) and Federal Home Loan Bank advances (up $61.0 million) were partially offset by declines in preferred money market (down $66.7 million) and CDs over $100 thousand (down $29.6 million). In all periods, the Company has continuously attempted to reduce high-rate time deposits while increasing the balances of more profitable, lower-cost transaction accounts in order to minimize the effect of adverse cyclical trends. Net Interest Margin (FTE) The following summarizes the components of the Company's net interest margin for the periods indicated:
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Yield on earning assets 6.17% 6.94% 6.28% 6.98% Rate paid on interest-bearing liabilities 1.05% 1.60% 1.09% 1.62% ---------------------------------------------------- Net interest spread 5.12% 5.34% 5.19% 5.36% Impact of all other net noninterest bearing funds 0.31% 0.48% 0.32% 0.48% ---------------------------------------------------- Net interest margin 5.43% 5.82% 5.51% 5.84% ====================================================
During the second quarter of 2003, net interest margin fell 39 bp compared to the same period in 2002. Yields on earnings assets declined faster than rates paid on interest-bearing liabilities, resulting in a 22 bp decline in net interest spread. The unfavorable impact of lower rates earned on loans and the investment portfolio, triggered by market trends, was partially mitigated by decreases in rates paid on deposits and short-term funds. The decline in the net interest spread was further widened by the lower value of noninterest bearing funding sources. While the average balance of these sources increased $41 million or 6%, their value decreased 17 bp because of the lower market rates of interest at which they could be invested. Similarly, on a year-to-date basis, the net interest margin decreased 33 bp when compared to the same period in 2002. Earning asset yields decreased 70 bp and the cost of interest-bearing liabilities fell by 53 bp, resulting in a 17 bp decline in the interest spread. Noninterest bearing funding sources increased $64 million or 9% and because of lower market rates of interest their margin contribution decreased by 16 bp, with their value decreasing to 32 bp. Page 14 Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended June 30, 2003 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- Assets: Money market assets and funds sold $633 $2 1.26% Investment securities: Available for sale Taxable 778,908 8,254 4.24% Tax-exempt 306,094 5,839 7.63% Held to maturity Taxable 252,332 1,673 2.65% Tax-exempt 293,591 5,300 7.22% Loans: Commercial Taxable 367,588 5,366 5.86% Tax-exempt 203,231 3,635 7.17% Commercial real estate 915,817 18,419 8.07% Real estate construction 42,243 791 7.51% Real estate residential 338,462 4,458 5.27% Consumer 508,150 7,996 6.31% -------------------------- Total loans 2,375,491 40,665 6.86% -------------------------- Total earning assets 4,007,049 61,733 6.17% Other assets 297,338 ------------- Total assets $4,304,387 ============= Liabilities and shareholders' equity Deposits: Noninterest bearing demand $1,130,608 $-- -- Savings and interest-bearing transaction 1,537,163 1,773 0.46% Time less than $100,000 311,932 1,343 1.73% Time $100,000 or more 390,730 1,354 1.38% -------------------------- Total interest-bearing deposits 2,239,825 4,470 0.80% Short-term borrowed funds 382,677 962 1.00% Federal Home Loan Bank advance 170,000 1,592 3.72% Debt financing and notes payable 21,393 385 7.16% -------------------------- Total interest-bearing liabilities 2,813,895 7,409 1.05% Other liabilities 35,534 Shareholders' equity 324,350 ------------- Total liabilities and shareholders' equity $4,304,387 ============= Net interest spread (1) 5.12% Net interest income and interest margin (2) $54,324 5.43% ========================== (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.
Page 15
For the three months ended June 30, 2002 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- Assets: Money market assets and funds sold $1,037 $4 1.54% Investment securities: Available for sale Taxable 667,372 8,350 5.00% Tax-exempt 306,419 5,610 7.32% Held to maturity Taxable 77,340 1,073 5.55% Tax-exempt 158,319 3,121 7.89% Loans: Commercial Taxable 395,215 6,043 6.13% Tax-exempt 198,205 3,746 7.63% Commercial real estate 978,395 19,936 8.02% Real estate construction 59,573 1,105 7.31% Real estate residential 323,563 5,235 6.47% Consumer 493,595 9,102 7.40% -------------------------- Total loans 2,448,546 45,167 7.40% -------------------------- Total earning assets 3,659,033 63,325 6.94% Other assets 274,241 ------------- Total assets $3,933,274 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,052,252 $-- -- Savings and interest-bearing transaction 1,468,404 3,230 0.88% Time less than $100,000 369,762 1,817 2.31% Time $100,000 or more 336,534 2,598 2.79% -------------------------- Total interest-bearing deposits 2,174,700 7,645 1.41% Short-term borrowed funds 227,098 895 1.57% Federal Home Loan Bank advance 131,770 1,247 3.72% Debt financing and notes payable 24,607 442 7.18% --------------------------------------- Total interest-bearing liabilities 2,558,175 10,229 1.60% Other liabilities 31,887 Shareholders' equity 290,960 ------------- Total liabilities and shareholders' equity $3,933,274 ============= Net interest spread (1) 5.34% Net interest income and interest margin (2) $53,096 5.82% ==========================
Page 16
For the six months ended June 30, 2003 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- Assets: Money market assets and funds sold $633 $5 1.58% Investment securities: Available for sale Taxable 731,165 15,957 4.36% Tax-exempt 304,501 11,545 7.58% Held to maturity Taxable 260,263 4,185 3.22% Tax-exempt 260,219 9,469 7.28% Loans: Commercial Taxable 368,184 10,588 5.80% Tax-exempt 202,912 7,405 7.36% Commercial real estate 931,046 37,156 8.05% Real estate construction 45,999 1,677 7.35% Real estate residential 334,253 9,028 5.40% Consumer 517,360 16,517 6.44% -------------------------- Total loans 2,399,754 82,371 6.78% -------------------------- Total earning assets 3,956,535 123,532 6.28% Other assets 296,590 ------------- Total assets $4,253,125 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,124,087 $-- -- Savings and interest-bearing transaction 1,529,851 3,724 0.49% Time less than $100,000 314,988 2,869 1.84% Time $100,000 or more 369,755 2,785 1.52% -------------------------- Total interest-bearing deposits 2,214,594 9,378 0.85% Short-term borrowed funds 365,578 1,812 1.00% Federal Home Loan Bank advance 170,000 3,167 3.76% Debt financing and notes payable 21,911 789 7.26% -------------------------- Total interest-bearing liabilities 2,772,083 15,146 1.09% Other liabilities 37,214 Shareholders' equity 319,741 ------------- Total liabilities and shareholders' equity $4,253,125 ============= Net interest spread (1) 5.19% Net interest income and interest margin (2) $108,386 5.51% ==========================
Page 17
For the six months ended June 30, 2002 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- Assets: Money market assets and funds sold $785 $4 1.02% Investment securities: Available for sale Taxable 650,568 16,632 5.11% Tax-exempt 311,864 11,440 7.34% Held to maturity Taxable 72,528 2,042 5.63% Tax-exempt 149,676 5,925 7.92% Loans: Commercial Taxable 396,114 12,069 6.14% Tax-exempt 195,701 7,466 7.69% Commercial real estate 981,710 39,506 8.02% Real estate construction 65,148 2,407 7.24% Real estate residential 329,748 10,808 6.56% Consumer 491,347 18,158 7.45% -------------------------- Total loans 2,459,768 90,414 7.41% -------------------------- Total earning assets 3,645,189 126,457 6.98% Other assets 276,978 ------------- Total assets $3,922,167 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,032,835 $-- -- Savings and interest-bearing transaction 1,441,206 6,379 0.89% Time less than $100,000 343,459 4,501 2.64% Time $100,000 or more 399,334 4,906 2.48% -------------------------- Total interest-bearing deposits 2,183,999 15,786 1.46% Short-term borrowed funds 241,325 1,921 1.61% Federal Home Loan Bank advance 108,977 2,039 3.72% Debt financing and notes payable 25,143 903 7.18% -------------------------- Total interest-bearing liabilities 2,559,444 20,649 1.62% Other liabilities 33,901 Shareholders' equity 295,987 ------------- Total liabilities and shareholders' equity $3,922,167 ============= Net interest spread (1) 5.36% Net interest income and interest margin (2) $105,808 5.84% ==========================
Page 18 Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands).
Three months ended June 30, 2003 compared with three months ended June 30, 2002 --------------------------------------- Volume Rate Total --------------------------------------- Interest and fee income: Money market assets and funds sold ($1) ($1) ($2) Investment securities: Available for sale Taxable 1,284 (1,380) (96) Tax-exempt ($6) 235 229 Held to maturity Taxable $1,398 (798) 600 Tax-exempt $2,462 (283) 2,179 Loans: Commercial Taxable ($411) (266) (677) Tax-exempt $93 (204) (111) Commercial real estate ($1,261) (256) (1,517) Real estate construction (324) 10 (314) Real estate residential 231 (1,008) (778) Consumer 262 (1,368) (1,105) --------------------------------------- Total loans (1,410) (3,092) (4,502) --------------------------------------- Total earning assets 3,727 (5,319) (1,592) --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 145 (1,602) (1,457) Time less than $100,000 (263) (211) (474) Time $100,000 or more 364 (1,608) (1,244) --------------------------------------- Total interest-bearing deposits 246 (3,421) (3,175) --------------------------------------- Short-term borrowed funds 468 (401) 67 Federal Home Loan Bank advance 361 (16) 345 Debt financing and notes payable (57) 0 (57) --------------------------------------- Total interest-bearing liabilities 1,018 (3,838) (2,820) --------------------------------------- Increase in Net Interest Income $2,709 ($1,481) $1,228 =======================================
Page 19
Six months ended June 30, 2003 compared with six months ended June 30, 2002 --------------------------------------- Volume Rate Total --------------------------------------- Interest and fee income: Money market assets and funds sold (1) 2 $1 Investment securities: Available for sale Taxable 1,922 (2,597) (675) Tax-exempt (274) 379 105 Held to maturity Taxable 3,341 (1,198) 2,143 Tax-exempt 4,057 (513) 3,544 Loans: Commercial Taxable (824) (657) (1,481) Tax-exempt 270 (331) (61) Commercial real estate (2,024) (326) (2,350) Real estate construction (699) (31) (730) Real estate residential 144 (1,924) (1,780) Consumer 925 (2,566) (1,641) --------------------------------------- Total loans (2,208) (5,835) (8,043) --------------------------------------- Total earning assets 6,837 (9,762) (2,925) --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 371 (3,026) (2,656) Time less than $100,000 (349) (1,283) (1,632) Time $100,000 or more (341) (1,780) (2,121) --------------------------------------- Total interest-bearing deposits (319) (6,089) (6,409) --------------------------------------- Short-term borrowed funds 774 (883) (108) Federal Home Loan Bank advance 1,137 (9) 1,128 Debt financing and notes payable (116) 2 (114) --------------------------------------- Total interest-bearing liabilities 1,476 (6,979) (5,503) --------------------------------------- Increase in Net Interest Income $5,361 ($2,783) $2,578 =======================================
Page 20 Provision for Loan Losses The level of the provision for loan losses during each of the periods presented reflects the Company's continued efforts to reduce credit costs by enforcing underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The Company provided $900 thousand for loan losses in the second quarter of 2003 and 2002. Additionally, $2.1 million of reserves were acquired from Kerman State Bank in the second quarter of 2002. For the first six months of 2002 and 2003, $1.8 million was provided in each period. For further information regarding net credit losses and the allowance for loan losses, see the "Classified Loans" section of this report. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands).
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Service charges on deposit accounts $6,648 $5,967 $13,073 $11,969 Merchant credit card 900 963 1,762 1,868 ATM fees and interchange 601 617 1,161 1,134 Debit card fees 563 461 1,057 867 Other service fees 380 357 749 710 Mortgage banking income 301 217 527 404 Trust fees 277 243 516 554 Financial services commissions 210 425 418 764 Other noninterest income 879 894 1,855 1,891 Total noninterest income before ---------------------------------------------------- securities gains (impairment) 10,759 10,144 21,118 20,161 ---------------------------------------------------- Securities gains (impairment) 277 (4,260) 293 (4,278) ---------------------------------------------------- Total noninterest income $11,036 $5,884 $21,411 $15,883 ====================================================
Noninterest income for the second quarter of 2003 was $11.0 million, up $5.2 million or 87.6%, primarily due to a $4.3 million securities impairment charge in 2002, $277 thousand in securities gains in 2003 and increased fee income in 2003. Excluding the impairment charge, the largest factor contributing to higher income was service charges on deposits (up $681 thousand) mainly resulting from a new debit card overdraft program introduced in January of 2003. The second largest factor was a $102 thousand increase in debit card fees. Partially offsetting the increase was a $215 thousand decline in financial services commissions which was caused by lower sales of fixed annuities, mutual funds and life insurance. Noninterest income for the first half of 2003 was $21.4 million, up $5.5 million or 34.8% from 2002, again mainly due to the 2002 securities impairment charge and growth in fee income. Similar to the quarter-to-quarter comparison, the primary contributing factor was service charges on deposits (up $1.1 million) due to repricing of retail checking services and a new debit card overdraft program. The secondary factor was a $190 thousand growth in debit card fees due to increased usage. Mortgage banking income rose $123 thousand primarily due to higher net gains on the sales of mortgage loans ($167 million in the first half of 2003 compared with $53 million in the same period in 2002). A $346 thousand decline in financial services commissions due to lower sales of fixed annuities, mutual funds and life insurance and a $106 thousand decline in merchant credit card income due to higher interchange expense partially offset the increase in noninterest income. Page 21 Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands).
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Salaries and related benefits $13,598 $14,281 $27,296 $28,143 Occupancy 3,044 2,898 6,039 5,829 Equipment 1,381 1,425 2,755 2,859 Data processing services 1,518 1,516 3,077 3,015 Courier service 926 916 1,855 1,805 Telephone 423 421 848 830 Postage 401 397 821 802 Professional fees 457 443 870 815 Merchant credit card 316 347 658 687 Stationery and supplies 308 373 626 718 Advertising/public relations 311 290 532 579 Employee recruiting 68 71 110 181 Loan expense 380 360 656 693 Operational losses 228 191 401 422 Repossessed collateral expense 1 1 2 50 Amortization of deposit intangibles 165 201 414 402 Other noninterest expense 1,951 1,778 4,051 3,772 ---------------------------------------------------- Total $25,476 $25,909 $51,011 $51,602 ==================================================== Average full time equivalent staff 1,033 1,078 1,040 1,079 Noninterest expense to revenues (FTE) 38.98% 43.93% 39.30% 42.40%
Noninterest expense for the second quarter of 2003 was $25.5 million, $433 thousand lower than in 2002. The largest decline was in salaries and related benefits, which were down $683 thousand (4.8%), primarily due to a $569 thousand decrease in salaries as a result of a decline in the number of full time equivalent ("FTE") employees. Also, the prior year period included $366 thousand severance pay relating to the KSB acquisition. Offsetting the decline was a $146 thousand increase in occupancy expense, the net result of higher utilities, partially offset by lower costs for building maintenance and lower sublease income. Noninterest expense was $51.0 million for the first half of 2003, which was $591 thousand or 1.1% less than 2002. The largest decrease was salaries and related benefits (down $847 thousand or 3.0%) as a result of declines in salaries (down $581 thousand) due to a fewer number of FTE employees. Additionally, the 2002 period included the above-mentioned severance costs. Equipment expense fell by $104 thousand (3.6%) from 2002 primarily due to lower depreciation. An increase in employee benefits (up $219 thousand), resulting from higher costs for workers compensation, insurance and retirement plans, partially reduced the decrease. Provision for Income Tax During the second quarter of 2003, the Company recorded income tax provision of $10.2 million, $1.6 million (18.6%) higher than the second quarter of 2002; on a year-to-date basis, income tax provision was $20.5 million for 2003 compared to $18.9 million for 2002. The current quarter provision represents an effective tax rate of 30.1 percent, compared to 30.7 percent for the second quarter of 2002; for the first six months of 2003, the effective tax rate was 30.5 percent, compared to 31.5 percent recorded in 2002. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly higher revenues recognized from state and municipal securities and tax credits generated from low-income housing investments. Page 22 Classified Loans The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk and to increase diversification of earning assets into less risky investments. Loan reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Loans receiving lesser grades fall under the "classified" category, which includes all nonperforming and potential problem loans, and receive an elevated level of attention to ensure collection. Repossessed collateral is recorded at the lower of cost or market. The following is a summary of classified loans and repossessed collateral on the dates indicated (dollars in thousands):
At At June 30, December 31, -------------------------- 2003 2002 2002 --------------------------------------- Classified loans $27,324 $30,029 $34,001 Repossessed collateral 1,888 473 381 --------------------------------------- Classified loans and repossessed collateral $29,212 $30,502 $34,382 ======================================= Allowance for loan losses / classified loans 198% 181% 159%
Classified loans at June 30, 2003, decreased $2.7 million (9.0%) from June 30, 2002, reflecting the effectiveness of the Company's high underwriting standards and active workout policies. Repossessed collateral increased $1.4 million (299.2%) from June 30, 2002, due to six new foreclosures on loans with collateral recorded at $1.8 million, partially offset by sales and writedowns of properties acquired in satisfaction of debt. The $6.7 million (19.6%) decrease in classified loans from December 31, 2002, was due to payoffs, upgrades, chargeoffs and transfers to repossessed collateral, partly offset by new downgrades. The $1.5 million (395.5%) increase in repossessed collateral from December 31, 2002, was primarily due to six new foreclosures valued at $1.8 million, partially offset by sales of three foreclosed properties recorded at $293 thousand. Nonperforming Loans Nonperforming loans include nonaccrual loans and loans 90 days past due as to principal or interest and still accruing. Loans are placed on nonaccrual status when they reach 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified as "performing nonaccrual" and are included in total nonperforming loans. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Any subsequent interest received is recorded as interest income on a cash basis. The following is a summary of nonperforming loans and repossessed collateral on the dates indicated (dollars in thousands):
At At June 30, December 31, -------------------------- 2003 2002 2002 --------------------------------------- Performing nonaccrual loans $1,353 $3,279 $3,464 Nonperforming, nonaccrual loans 5,484 6,980 5,717 --------------------------------------- Total nonaccrual loans 6,837 10,259 9,181 Loans 90 days past due and still accruing 386 189 738 --------------------------------------- Total nonperforming loans 7,223 10,448 9,919 Repossessed collateral 1,888 473 381 --------------------------------------- Total nonperforming loans and repossessed collateral $9,111 $10,921 $10,300 ======================================= Allowance for loan losses / nonperforming loans 750% 520% 547%
Page 23 Performing nonaccrual loans at June 30, 2003 fell $1.9 million (58.7%) from the same period in the previous year and $2.1 million (60.9%) from December 31, 2002. The decrease from both periods was due to payoffs, chargeoffs, loans being returned to accrual status and loans being placed on nonperforming nonaccrual, offset by new loans placed on performing nonaccrual. Nonperforming nonaccrual loans at June 30, 2003 decreased $1.5 million (21.4%) from the same period a year ago and $233 thousand (4.1%) from year-end, 2002. The decreases resulted from loans being returned to full-accrual status, transfers to repossessed collateral or being charged off or paid off, partially offset by loans being added to nonperforming nonaccrual. Changes in repossessed collateral are discussed above. The amount of gross interest income that would have been recorded for nonaccrual loans for the three and six month periods ended June 30, 2003, if all such loans had performed in accordance with their original terms, was $142 thousand and $305 thousand, respectively, compared to $107 thousand and $240 thousand, respectively, for the second quarter and the first half of 2002. The amount of interest income that was recognized on nonaccrual loans from all cash payments, including those related to interest owed from prior years, made during the three and six months ended June 30, 2003, totaled $146 thousand and $217 thousand, respectively, compared to $156 thousand and $326 thousand, respectively, for the comparable periods in 2002. These cash payments represent annualized yields of 7.35% and 5.22%, respectively, for the second quarter and the first six months of 2003 compared to 8.40% and 8.89%, respectively, for the second quarter and the first half of 2002. Total cash payments received during the second quarter of 2003 which were applied against the book balance of nonaccrual loans outstanding at June 30, 2003, totaled approximately $74 thousand. Cash payments received totaled $259 thousand for the six months ended June 30, 2003. The overall credit quality of the loan portfolio continues to be strong; however, 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 considered adequate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. Page 24 A portion of the allowance is specifically allocated to impaired and other identified loans whose full collectibility is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. A second allocation is based in part on quantitative analyses of historical 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 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. Last, allocations are made to general loan categories based on relevant economic conditions and available data, including unemployment statistics, commercial office vacancy rates, mortgage loan foreclosure trends, agriculture commodity prices, and levels of government funding. Management considers the $54.2 million allowance for loan losses, which constituted 2.25% of total loans at June 30, 2003, to be adequate as a reserve against inherent losses. However, while the Company's policy is to charge off in the current period those loans on which the loss is considered probable, the risk exists of future losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future required allowance levels. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Balance, beginning of period $54,154 $52,147 $54,227 $52,086 Loan loss provision 900 900 1,800 1,800 Loans charged off (1,841) (1,353) (3,869) (2,997) Recoveries of previously charged off loans 946 580 2,001 1,386 ---------------------------------------------------- Net credit losses (895) (773) (1,868) (1,611) ---------------------------------------------------- Acquired from Kerman State Bank 0 2,050 0 2,050 Balance, end of period $54,159 $54,324 $54,159 $54,325 ==================================================== Allowance for loan losses / loans outstanding 2.25% 2.17%
Asset and Liability Management The fundamental objective of the Company's management of assets and liabilities is to maximize economic value while maintaining adequate liquidity and a conservative level of interest rate risk. The Company actively solicits loans and transaction deposit accounts. Asset and liability management techniques include adjusting the duration, liquidity, volume, rates and yields, and other attributes of its investment portfolio, time deposits, and other funding sources to achieve Company objectives. 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 rate scenario where the Fed Funds rate is made to rise evenly by 100 bp and 200 bp, and a falling rate scenario of 50 bp over the 12-month forecast interval triggering a response in the other forecasted rates. Company policy requires that such simulated changes in NII should be within certain specified ranges or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of interest rate sensitive assets and liabilities at June 30, 2003 would not result in a fluctuation of NII that would exceed the parameters established by Company policy. Liquidity The Company's principal source of asset liquidity is marketable investment securities available for sale. At June 30, 2003, investment securities available for sale totaled $1.25 billion, representing an increase of $264.9 million from June 30, 2002. In addition, at June 30, 2003, the Company had customary lines for overnight borrowings from other financial institutions totaling $660 million and a $20 million line of credit, under which $500 thousand was outstanding at June 30, 2003. Additionally, as a member of the Federal Reserve System, the Company has the ability to borrow from the Federal Reserve. The Company may also borrow from the FHLB which it collateralizes with its residential real estate loans and securities. At June 30, 2003, the Company had excess collateral providing available borrowing capacity from the FHLB of approximately $65 million. Page 25 Since January 1, 2000, the Company has reduced its long-term debt by $16.9 million, reducing its debt-to-equity ratio from 14% at January 1, 2000 to 6% at June 30, 2003. The Company's long-term debt rating from Fitch Ratings was raised from A- to A, with a stable outlook, in June 2003. Management is confident the Company could access additional long-term debt financing if desired. In addition, the Company generates significant liquidity from its operating activities. The Company's profitability during the first six months of 2003 and 2002 generated substantial cash flows, which are included in the totals provided from operations of $59.1 million and $48.3 million, respectively. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. During the first six months of 2003 financing activities provided $159.2 million in cash. This amount includes cash outflows related to the Company's stock repurchase programs and dividends paid to shareholders of $28.1 million and $15.9 million, respectively, more than offset by $159.6 million proceeds from an increase in deposits and $43.6 million proceeds from short-term borrowings. During the first six months of 2002 financing activities provided $6.4 million in cash. This amount includes cash outflows related to the Company's stock repurchase programs and dividends paid to shareholders of $46.7 million and $14.9 million, respectively, more than offset by $67.0 million net proceeds from FHLB advances and short-term borrowings. The Company had net cash outflows in its investing activities during both six month periods ended June 30. In 2003, purchases net of sales and maturities of investment securities were $322.5 million, which was in part offset by net repayments of loans of $84.1 million. The investment securities portfolio increase was generally financed by a $159.6 million increase in deposits, and a $43.6 million increase in short-term borrowings. During the first six months of 2002 the Company had net cash outflows in its investing activities. Purchases net of sales and maturities of investment securities were $89.1 million and were partially offset by net repayments of loans of $33.7 million and $5.4 million cash obtained in the KSB acquisition, resulting in net cash used of $50.3 million. The investment securities portfolio increase was primarily financed by $100 million in FHLB advances. Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company repurchases shares of its common stock in the open market with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements. In addition, other programs have been implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to these programs, the Company repurchased 689 thousand and 1.1 million shares during the first six months of 2003 and 2002, respectively. The Company's primary capital resource is shareholders' equity, which was $357.3 million at June 30, 2003. This amount represents an increase of $15.8 million (4.6%) from December 31, 2002, the net result of the issuance of stock ($6.3 million) and comprehensive income for the period ($53.5 million), partially offset by share repurchases ($28.1 million) and dividends paid ($15.9 million). Due to the net effect of an increase in equity capital combined with earnings asset growth the Company's ratio of equity to total assets declined slightly to 7.83% at June 30, 2003, from 7.87% a year ago. The equity to assets ratio was 8.08% at December 31, 2002. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated:
At At June 30, December 31, Minimum ----------------------- Regulatory 2003 2002 2002 Requirement ------------------------------------------------- Tier I Capital 10.06% 9.31% 9.71% 4.00% Total Capital 11.32% 10.65% 10.97% 8.00% Leverage ratio 7.17% 7.25% 7.27% 4.00%
The risk-based capital ratio increased at June 30, 2003, compared to the prior year primarily due to an increase in shareholders' equity as a result of increased net income, partially offset by the Company's common stock repurchases and dividends paid to shareholders. The risk-based capital ratio increased at June 30, 2003 from December 31, 2002 primarily due to the combination of an increase in shareholders' equity as a result of increased net income and a reduction in risk-weighted assets. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation 46, which clarifies the application of Accounting Research Bulletin ("ARB") 51, consolidated financial statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June 15, 2003. Given the nature of the Company's operations, management does not expect this Interpretation to have a significant impact on the consolidated financial statements. Page 26 In April 2003, the FASB issued Statement NO. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide clarification of certain terms and investment characteristics identified in Statement 133. Statement 149 is to be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The Company does not expect the adoption of the Statement to have a material impact on the consolidated financial statements. In May 2003, the FASB issued Statement No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The provisions of this Statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Given the nature of the Company's liability and equity instruments, management does not expect this Statement to have a material impact to the consolidated financial statements upon adoption of the Statement on July 1, 2003. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company's Board of Directors. Interest rate risk as discussed above is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange risk, equity price risk and commodity price risk, are not significant in the normal course of the Company's business activities. Item 4. Controls and Procedures The Company's principal executive officer and principal financial officer have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended, as of June 30, 2003. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, since the date the controls were evaluated. Page 27 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Subsidiary Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Subsidiary Bank. Item 2 - Changes in Securities None Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders Proxies for the Annual Meeting of shareholders held on April 24, 2003, were solicited pursuant Regulation 14A of the Securities Exchange Act of 1934. The Report of Inspector of election indicates that 27,676,414 shares of the Common Stock of the Company, out of 33,200,486 shares outstanding, were present, in person or by proxy, at the meeting. With the exception of item No.2, below, there were no "broker non-votes" on the following matters because they were considered "routine" and therefore, on those matters, brokers were able to vote shares for which no direction was provided by the beneficial owner. The following matters were submitted to a vote of the shareholders: 1. - Election of directors: For Withheld ---------- -------- Etta Allen 27,009,072 667,342 Louis E. Bartolini 27,331,925 344,489 Arthur C. Latno, Jr. 26,971,735 704,679 Patrick D. Lynch 26,923,332 753,082 Catherine C. MacMillan 27,437,511 238,903 Patrick J. Mon Pere 27,413,299 263,115 Ronald A. Nelson 27,147,009 529,405 Carl R. Otto 27,446,116 230,298 David L. Payne 27,481,922 194,462 Edward B. Sylvester 27,484,562 191,852 Shareholders were to cast their vote for or to withhold their vote. 2. - Ratification of amendment of stock option plan. A proposal to ratify the Amended and Restated Stock Option Plan of 1995. For : 17,417,508 Against : 9,792,204 Abstain : 437,200 Non-vote: 29,500 3. - Ratification of independent certified public accountant firm. A proposal to ratify the selection of KPMG LLP as independent certified public accountants for the Company for 2003. For : 26,472,582 Against : 971,320 Abstain : 232,512 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 Page 28 Exhibit 31.1: Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-(14)(a) Exhibit 31.2: Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-(14)(a) Exhibit 32.1: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On April 17, 2003, the Company filed a Report on Form 8-K with respect to item 12, therein, reporting first quarter, 2003 financial results. Page 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WESTAMERICA BANCORPORATION (Registrant) Date: August 12, 2003 /s/ DENNIS R. HANSEN -------------------- Dennis R. Hansen Senior Vice President and Controller (Chief Accounting Officer) Page 30 Exhibit 11 WESTAMERICA BANCORPORATION Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution
For the For the three months six months ended June 30, ended June 30, ---------------------------------------------------- (In thousands, except per share data) 2003 2002 2003 2002 ---------------------------------------------------- Weighted average number of common shares outstanding - basic 33,000 33,565 33,054 33,817 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 492 615 474 589 ---------------------------------------------------- Weighted average number of common shares outstanding - diluted 33,492 34,180 33,528 34,406 ==================================================== Net income $23,671 $19,347 $46,683 $41,006 Basic earnings per share $0.72 $0.58 $1.41 $1.21 Diluted earnings per share $0.71 $0.57 $1.39 $1.19
Page 31 Exhibit 31.1 CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, David L. Payne, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this quarterly report for the period ended June 30, 2003 on Form 10-Q of Westamerica Bancorporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ David L. Payne August 12, 2003 ---------------------- David L. Payne Chairman, President and Chief Executive Officer Page 32 Exhibit 31.2 CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, Jennifer J. Finger, Chief Financial Officer of the registrant, certify that: 1. I have reviewed this quarterly report for the period ended June 30, 2003 on Form 10-Q of Westamerica Bancorporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. August 12, 2003 /s/ Jennifer J. Finger -------------------------- Jennifer J. Finger Senior Vice President and Chief Financial Officer Page 33 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Westamerica Bancorporation (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David L. Payne, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirement of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David L. Payne -------------------- David L. Payne Chairman, President and Chief Executive Officer August 12, 2003 Page 34 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Westamerica Bancorporation (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jennifer J. Finger, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirement of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Jennifer J. Finger ----------------------- Jennifer J. Finger Senior Vice President and Chief Financial Officer August 12, 2003