-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A6zS0JZ5J6xTimHnnXOkKlwos6LY4KjAIdnpjt9F8EMD6YbjIN9MgNPdE1PzoaeN jGK+wnS1S+I0+oFZA+zGvQ== 0000311094-04-000022.txt : 20040510 0000311094-04-000022.hdr.sgml : 20040510 20040510124546 ACCESSION NUMBER: 0000311094-04-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTAMERICA BANCORPORATION CENTRAL INDEX KEY: 0000311094 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942156203 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09383 FILM NUMBER: 04791895 BUSINESS ADDRESS: STREET 1: 1108 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: (707) 863-6000 MAIL ADDRESS: STREET 1: 4550 MANGELS BLVD STREET 2: A-2Y CITY: FAIRFIELD STATE: CA ZIP: 94585-1200 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT BANKSHARES CORP DATE OF NAME CHANGE: 19830801 10-Q 1 mar04q.txt 10-Q FOR WESTAMERICA BANCORPORATION 3/31/04 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 March 31, 2004 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) 863-8000 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 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 May 3, 2004 Common Stock, 31,746,617 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 Disclosures about Market Risk 22 Item 4 - Controls and Procedures 22 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 23 Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases Equity Securities 23 Item 3 - Defaults upon Senior Securities 23 Item 4 - Submission of Matters to a Vote of Security Holders 23 Item 5 - Other Information 23 Item 6 - Exhibits and Reports on Form 8-K 23 (a) - Exhibits Exhibit 3 (ii) By-laws, as amended (composite copy) 26 Exhibit 11 - Computation of Earnings Per Share 43 Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-(14)(a) 44 Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-(14)(a) 45 Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 46 Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 47 (b) - Reports on Form 8-K 24
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 slowdown in the national and California economies; (2) economic uncertainty created by terrorist threats and 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, 2003, 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) (unaudited)
At March 31, At --------------------------December 31, 2004 2003 2003 --------------------------------------- Assets: Cash and cash equivalents $166,649 $186,281 $189,628 Money market assets 534 633 534 Investment securities available for sale 1,219,364 1,048,386 1,413,911 Investment securities held to maturity, with market values of: $595,179 at March 31, 2004 586,171 $531,580 at March 31, 2003 520,896 $542,729 at December 31, 2003 535,377 Loans, gross 2,322,881 2,456,161 2,323,330 Allowance for loan losses (53,834) (54,154) (53,910) --------------------------------------- Loans, net of allowance for loan losses 2,269,047 2,402,007 2,269,420 Other real estate owned 80 88 90 Premises and equipment, net 35,412 36,543 35,748 Interest receivable and other assets 147,559 191,621 131,677 --------------------------------------- Total Assets $4,424,816 $4,386,455 $4,576,385 ======================================= Liabilities: Deposits: Noninterest bearing $1,210,829 $1,129,455 $1,240,379 Interest bearing: Transaction 562,369 553,105 561,696 Savings 1,049,435 980,291 1,058,082 Time 624,543 667,237 603,834 --------------------------------------- Total deposits 3,447,176 3,330,088 3,463,991 Short-term borrowed funds 491,704 416,219 590,646 Federal Home Loan Bank advance 20,000 170,000 105,000 Notes Payable 21,429 21,393 24,643 Liability for interest, taxes and other expenses 105,907 111,809 51,734 --------------------------------------- Total Liabilities 4,086,216 4,049,509 4,236,014 --------------------------------------- Shareholders' Equity: Authorized - 150,000 shares of common stock Issued and outstanding: 31,787 at March 31, 2004 217,477 32,907 at March 31, 2003 214,019 32,287 at December 31, 2003 218,461 Deferred compensation 1,824 1,272 1,824 Accumulated other comprehensive income: Unrealized gain on securities available for sale, net 21,213 20,710 13,191 Retained earnings 98,086 100,945 106,895 --------------------------------------- Total Shareholders' Equity 338,600 336,946 340,371 --------------------------------------- Total Liabilities and Shareholders' Equity $4,424,816 $4,386,455 $4,576,385 ======================================= See accompanying notes to unaudited condensed consolidated financial statements.
Page 4 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) (unaudited)
Three months ended March 31, 2004 2003 -------------------------- Interest Income: Loans $34,023 $40,413 Money market assets and funds sold 0 3 Investment securities available for sale Taxable 11,284 7,901 Tax-exempt 3,874 3,770 Investment securities held to maturity Taxable 858 2,316 Tax-exempt 4,372 2,722 -------------------------- Total interest income 54,411 57,125 -------------------------- Interest Expense: Transaction deposits 112 242 Savings deposits 1,111 1,708 Time deposits 1,930 2,957 Short-term borrowed funds 1,131 851 Federal Home Loan Bank advance 896 1,575 Debt financing and notes payable 335 404 -------------------------- Total interest expense 5,515 7,737 -------------------------- Net Interest Income 48,896 49,388 -------------------------- Provision for loan losses 750 900 -------------------------- Net Interest Income After Provision For Loan Losses 48,146 48,488 -------------------------- Noninterest Income: Service charges on deposit accounts 6,868 6,425 Merchant credit card 825 862 Trust fees 250 238 Financial services commissions 187 207 Mortgage banking 133 226 Securities gains 1,788 15 Loss on extinguishment of debt (1,814) 0 Other 2,629 2,402 -------------------------- Total Noninterest Income 10,866 10,375 -------------------------- Noninterest Expense: Salaries and related benefits 13,526 13,698 Occupancy 2,948 2,995 Data processing 1,517 1,559 Equipment 1,162 1,374 Courier service 884 929 Professional fees 409 413 Other real estate owned 2 1 Other 4,544 4,566 -------------------------- Total Noninterest Expense 24,992 25,535 -------------------------- Income Before Income Taxes 34,020 33,328 Provision for income taxes 9,706 10,316 -------------------------- Net Income $24,314 $23,012 ========================== Comprehensive Income: Change in unrealized gain on securities available for sale, net 8,022 1,558 -------------------------- Comprehensive Income $32,336 $24,570 ========================== Average Shares Outstanding 32,051 33,110 Diluted Average Shares Outstanding 32,662 33,565 Per Share Data: Basic Earnings $0.76 $0.70 Diluted Earnings 0.74 0.69 Dividends Paid 0.26 0.24 See accompanying notes to unaudited condensed consolidated financial statements.
Page 5 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (unaudited)
Accumulated Compre- Common Deferred hensive Retained Shares Stock Compensation Income Earnings Total ------------------------------------------------------------------------------ Balance, December 31, 2002 33,411 $215,926 $1,272 $19,152 $105,149 $341,499 Net income for the period 23,012 23,012 Stock issued for stock compensation 63 1,177 1,177 Stock option tax benefits 554 554 Purchase and retirement of stock (567) (3,638) (19,260) (22,898) Dividends (7,956) (7,956) Unrealized gain on securities available for sale, net 1,558 1,558 ------------------------------------------------------------------------------ Balance, March 31, 2003 32,907 $214,019 $1,272 $20,710 $100,945 $336,946 ============================================================================== Balance, December 31, 2003 32,287 $218,461 $1,824 $13,191 $106,895 $340,371 Net income for the period 24,314 24,314 Stock issued for stock compensation 74 2,515 2,515 Stock option tax benefits 445 445 Purchase and retirement of stock (574) (3,944) (24,732) (28,676) Dividends (8,391) (8,391) Unrealized gain on securities available for sale, net 8,022 8,022 ------------------------------------------------------------------------------ Balance, March 31, 2004 31,787 $217,477 $1,824 $21,213 $98,086 $338,600 ============================================================================== See accompanying notes to unaudited condensed consolidated financial statements.
Page 6 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) unaudited)
For the three months ended March 31, -------------------------- 2004 2003 -------------------------- Operating Activities: Net income $24,314 $23,012 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 956 1,079 Amortization of intangibles and other assets 574 549 Loan loss provision 750 900 Amortization of deferred net loan fees 122 295 Decrease in interest income receivable 1,797 173 Increase in other assets (4,609) (81) Increase in income taxes payable 9,558 11,164 Decrease in interest expense payable (347) (234) Increase (decrease) in other liabilities 1,190 (202) Gain on sales of investment securities (1,788) 0 Loss on extinguishment of debt 1,814 0 Originations of loans for resale (2,468) (1,737) Proceeds from sale of loans originated for resale 2,469 2,180 Net gain (loss) on sale of other real estate owned 223 (49) -------------------------- Net Cash Provided by Operating Activities 34,555 37,049 -------------------------- Investing Activities: Net (disbursements) repayments of loans (502) 36,767 Purchases of investment securities available for sale (27,063) (292,827) Purchases of investment securities held to maturity (88,315) (118,047) Purchases of property, plant and equipment (620) (723) Proceeds from maturity of securities available for sale 126,430 131,869 Proceeds from maturity of securities held to maturity 24,667 36,136 Proceeds from sale of securities available for sale 148,360 63,091 Proceeds from sale of property and equipment 0 498 Proceeds from sale of other real estate owned 10 293 -------------------------- Net Cash Provided by (Used in) Investing Activities 182,967 (142,943) -------------------------- Financing Activities: Net (decrease) increase in deposits (16,816) 36,023 Net (decrease) increase in short-term borrowings (98,942) 66,483 Repayments to the FHLB (86,814) 0 Repayments of notes payable (3,214) (3,214) Exercise of stock options 2,352 1,160 Repurchases/retirement of stock (28,676) (22,898) Dividends paid (8,391) (7,956) -------------------------- Net Cash (Used in) Provided by Financing Activities (240,501) 69,598 -------------------------- Net Decrease In Cash and Cash Equivalents (22,979) (36,296) -------------------------- Cash and Cash Equivalents at Beginning of Period 189,628 222,577 -------------------------- Cash and Cash Equivalents at End of Period $166,649 $186,281 ========================== Supplemental Disclosure of Noncash Activities: Loans transferred to other real estate owned $0 $0 Supplemental Disclosure of Cash Flow Activity: Unrealized gain on securities available for sale, net $8,022 $1,558 Interest paid for the period 5,167 7,503 Income tax benefit from stock option exercises 445 554 See accompanying notes to unaudited condensed consolidated financial statements.
Page 7 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 periods presented. The interim results for the three months ended March 31, 2004 and 2003 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, 2003. Note 2: Significant 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 Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. 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 amortized, but is periodically evaluated for impairment. The Company determined that no impairment existed as of March 31, 2004. 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. During the first quarter of 2004, no such adjustments were recorded. 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, 2004 and March 31, 2004 (dollars in thousands).
At At January 1, March 31, 2004 Additions Reductions 2004 ---------------------------------------------------- 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 (4,345) 0 (136) (4,481) ---------------------------------------------------- Net $3,438 $0 ($136) $3,302 ====================================================
At March 31, 2004, the estimated aggregate amortization of core deposit intangibles, in thousands of dollars, for the remainder of 2004 and annually through 2009 is $408, $469, $427, $427, $427, and $427, respectively. The weighted average amortization period for core deposit intangibles is 7.6 years. Page 8 Note 4: Stock Options In accordance with 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:
For the three months ended March 31, -------------------------- 2004 2003 -------------------------- (In thousands, except per share data) Compensation cost based on fair value method, net of tax effect $526 $589 Net income: As reported $24,314 $23,012 Pro forma $23,788 $22,423 Basic earnings per share: As reported $0.76 $0.70 Pro forma 0.74 0.68 Diluted earnings per share: As reported $0.74 $0.69 Pro forma 0.73 0.67
Note 5: Post Retirement Benefits The Company uses an actuarial-based accrual method of accounting for post-retirement benefits. The Company offers a continuation of group insurance coverage to employees electing early retirement until age 65. The Company pays a portion of these early retirees' insurance premium which are determined at their date of retirement. Beginning in 2004, the Company reimburses 50 percent of Medicare Part B premiums for all retirees and spouses over 65. In accordance with SFAS No.132 "Employers' Disclosures about Pensions and Other Post-Retirement Benefits", the Company provides the following interim disclosure related to its post-retirement benefit plan. The following table sets forth the net periodic post retirement benefit costs for the quarter ended March 31.
For the three months ended March 31, --------------------------------------- 2004 2003 2002 --------------------------------------- (In thousands) Service cost $46 $4 $52 Interest cost 43 42 43 Amortization of unrecognized transition obligation 15 15 15 --------------------------------------- Net periodic cost $104 $61 $110 =======================================
Page 9 WESTAMERICA BANCORPORATION Financial Summary (In thousands, except per share data)
Three months ended --------------------------------------- March 31, --------------------------December 31, 2004 2003 2003 --------------------------------------- Net Interest Income $48,896 $49,388 $49,048 Provision for Loan Losses (750) (900) (750) Noninterest Income 10,866 10,375 10,492 Noninterest Expense (24,992) (25,535) (25,158) Provision for income taxes (9,706) (10,316) (9,325) --------------------------------------- Net Income $24,314 $23,012 $24,307 ======================================= Average Shares Outstanding 32,051 33,110 32,523 Diluted Average Shares Outstanding 32,662 33,565 33,154 Shares Outstanding at Period End 31,787 32,907 32,287 Basic Earnings Per Share $0.76 $0.70 $0.74 Diluted Earnings Per Share 0.74 0.69 0.73 Dividends Paid Per Share $0.26 $0.24 $0.26 Dividend Payout Ratio 35% 35% 36% Average Balances: Total Assets $4,451,674 $4,201,864 $4,451,423 Earning Assets 4,157,061 3,906,020 4,149,994 Total Loans 2,281,900 2,424,017 2,285,717 Total Deposits 3,437,549 3,306,929 3,542,433 Shareholders' Equity 320,390 315,132 328,209 Financial Ratios for the Period: Return On Assets 2.20% 2.22% 2.17% Return On Equity 30.52% 29.61% 29.38% Net Interest Margin (FTE)** 5.27% 5.58% 5.26% Net Loan Losses to Average Loans 0.15% 0.16% 0.18% Efficiency Ratio* 38.2% 39.6% 38.6% Balances at Period End: Total Assets $4,424,816 $4,386,455 $4,576,385 Earning Assets 4,075,123 3,972,065 4,219,450 Total Loans 2,322,881 2,456,161 2,323,330 Total Deposits 3,447,176 3,330,088 3,463,991 Shareholders' Equity 338,600 336,946 340,371 Financial Ratios at Period End: Allowance for Loan Losses to Loans 2.32% 2.20% 2.32% Book Value Per Share $10.65 $10.24 $10.54 Equity to Assets 7.65% 7.68% 7.44% Total Capital to Risk Adjusted Assets 11.25% 10.71% 11.39%
The above financial summary has been derived from the Company's unaudited consolidated financial statements. This information should be read in conjunction with those statements, notes and the other information included elsewhere herein. *The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on a tax-equivalent basis and noninterest income). **Fully taxable equivalent Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Westamerica Bancorporation and subsidiaries (the "Company") reported first quarter 2004 net income of $24.3 million or $.74 diluted earnings per share. These results compare to net income of $23.0 million or $.69 diluted earnings per share and $24.3 million or $.73 diluted earnings per share, respectively, for the first and fourth quarters of 2003. Following is a summary of the components of net income for the periods indicated (dollars in thousands):
Three months ended --------------------------------------- March 31, --------------------------December 31, 2004 2003 2003 --------------------------------------- Net interest income (FTE) $54,605 $54,062 $54,757 Provision for loan losses (750) (900) (750) Noninterest income 10,866 10,375 10,492 Noninterest expense (24,992) (25,535) (25,158) Provision for income taxes (FTE) (15,415) (14,990) (15,034) --------------------------------------- Net income $24,314 $23,012 $24,307 ======================================= Average total assets $4,451,674 $4,201,864 $4,451,423 Net income (annualized) to average total assets 2.20% 2.22% 2.17%
Net income for the first quarter of 2004 was $1.3 million or 5.7% over the same quarter of 2003, primarily attributable to higher net interest income (FTE), higher noninterest income and lower noninterest expense. The increase in net interest income (FTE) (up $543 thousand or 1.0%) was the net result of lower rates paid on interest-bearing liabilities and growth of average interest-earning assets (up $251 million), partially reduced by the effect of declining yields on those assets. Noninterest income grew $491 thousand or 4.7% and noninterest expense declined $543 thousand or 2.1%. The provision for income taxes (FTE) increased $425 thousand or 2.8% due to higher pretax income, partially reduced by higher tax credits earned on low-income housing investments. Comparing the first three months of 2004 to the prior quarter, net income increased $7 thousand, the net result of an increase in noninterest income and lower noninterest expense, offset by a decline in net interest income. The $152 thousand or 0.3% decline in net interest income (FTE) was mainly caused by lower loan fee income and the effect of one less accrual day, partially mitigated by the effect of higher yields on earning assets and lower rates paid on interest-bearing liabilities. Noninterest income rose by $374 thousand or 3.6% and noninterest expense fell $166 thousand or 0.7%. The FTE provision for income taxes was up $381 thousand or 2.5%. Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
Three months ended --------------------------------------- March 31, --------------------------December 31, 2004 2003 2003 --------------------------------------- Interest and fee income $54,411 $57,125 $54,810 Interest expense (5,515) (7,737) (5,763) FTE adjustment 5,709 4,674 5,710 --------------------------------------- Net interest income (FTE) $54,605 $54,062 $54,757 ======================================= Average earning assets $4,157,061 $3,906,020 $4,149,994 Net interest margin (FTE) 5.27% 5.58% 5.26%
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 2004 increased $543 thousand or 1.0% from the same period in 2003 to $54.6 million mainly due to growth of average earning assets (up $251 million), lower rates paid on interest-bearing liabilities (down 38 bp) and the effect of an additional accrual day. Offsetting the increase were lower yields on earning assets (down 55 bp) and lower loan fee income. Comparing the first quarter of 2004 with the previous quarter, net interest income (FTE) declined $152 thousand or 0.3%, primarily due to lower loan fee income and the effect of one less accrual day, offset by an increase in income related to higher yields on earning assets (up 4 bp) and lower rates paid on interest-bearing liabilities (down 4 bp). Page 11 Interest and Fee Income Interest and fee income (FTE) for the first quarter of 2004 decreased $1.7 million or 2.7% from the same period in 2003. The decline was caused by lower loan fee income (down $340 thousand) and lower yields on average earning assets, partially offset by the positive effect of growth of such assets. The average yield on the Company's earning assets decreased from 6.38% in the first quarter of 2003 to 5.80% in the some period in 2004 (down 58 bp). This decrease in yields was reflective of general interest markets during much of 2003 and into 2004. The yields of all categories of loans declined, most notably commercial loans (26 bp decline in yield), commercial real estate loans (51 bp decrease), residential real estate loans (95 bp decrease) and indirect consumer loans (down 99 bp). The net result was that the yield on the loan portfolio declined 74 bp to 6.23%. The investment portfolio yield decreased 15 bp to 5.28%, caused by declines in U.S. Agency obligations (down 70 bp) and municipal securities (down 44 bp). Partially offsetting these decreases, the yield on other securities increased 255 bp primarily due to bond call premiums. Average earning asset expansion of $251 million for the first quarter of 2004 compared to the same period in 2003 was substantially attributable to an increase in the investment portfolio including mortgage backed securities and collateralized mortgage obligations (up $261 million), municipal securities (up $164 million) and U.S. Agency obligations (up $54 million). Other securities (down $72 million) and U.S. Treasury securities (down $14 million) decreased. Average total loans decreased $142 million for the first quarter of 2004 compared to the same period in 2003 as reduced loan demand was reflective of generally weak economic conditions. Commercial real estate loans declined $141 million, construction loans were down $11 million, and direct consumer loans declined $11 million. Residential real estate loans (up $17 million) and commercial loans (up $6 million) increased. Comparing the first quarter of 2004 with the previous quarter, interest and fee income (FTE) fell $399 thousand or 0.7%. The decrease largely resulted from lower loan fee income (down $484 thousand), the effect of one less accrual day and a change in the mix of earning assets. The average yield on earning assets excluding loan fees for the first three months of 2004 was 5.78% compared with 5.74% in the fourth quarter of 2003. The investment portfolio yield rose by 18 bp. The increase resulted mostly from higher yields on other securities (up 167 bp) due to bond call premiums, as well as yields on mortgage backed securities and collateralized mortgage obligations (up 24 bp). The loan portfolio yield excluding loan fees for the first quarter of 2004 compared with the previous quarter was lower by 7 bp, due to declines in indirect consumer loans (down 27 bp), residential real estate loans (down 10 bp), and commercial real estate loans (down 6 bp). Partially offsetting the decline was a 13 bp increase in commercial loans mainly due to interest recoveries. Average earning assets increased $7 million or 0.2% for the first quarter of 2004 compared with the previous quarter but the mix of those assets shifted to lower-yielding categories, resulting in a decline in volume-related interest income. Increases in mortgage backed securities and collateralized mortgage obligations (up $77 million) and indirect consumer loans (up $21 million) were reduced by declines in commercial real estate (down $21 million), U.S. Agency obligations (down $43 million), other securities (down $15 million) and municipal securities (down $8 million). Interest Expense Interest expense decreased $2.2 million or 28.7% in the first three months of 2004 compared with the same period in 2003. The decrease was attributable to a drop in the average rate paid on interest-bearing liabilities and the effect of a change in the mix of those liabilities. The average rate paid on interest-bearing liabilities decreased from 1.14% in the first quarter of 2003 to 0.77% in 2004. Rates paid on most liabilities moved with general market conditions: the average rate on short-term borrowings dropped 14 bp and rates on deposits declined as well, including those on CDs over $100 thousand, which declined 57 bp; on retail CDs, which dropped by 52 bp; and on high-yield money market accounts, which were lowered an average of 23 bp. Interest-bearing liabilities grew $150 million or 5.5% for the first quarter of 2004 over the same period of 2003, although the mix of those liabilities shifted to lower-rate categories, resulting in a decrease in volume-related interest expense. Short-term funds increased $185 million or 53.0%, and money market accounts grew $58 million or 4.7%. These increases were partially reduced by declines in FHLB advances (down $73 million or 43.2%), retail CDs (down $34 million or 11.1%) and CDs over $100 thousand (down $8 million or 2.4%). Page 12 Comparing the first quarter of 2004 to the previous quarter, interest expense fell $248 thousand or 4.3%, due to the effect of one less accrual day and lower rates paid on interest-bearing liabilities, partially offset by growth of such liabilities. Rates paid on liabilities averaged 0.77% during the first three months of 2004 compared to 0.80% in the fourth quarter of 2003. The most significant rate declines were money market accounts which fell 6 bp, CDs over $100 thousand which declined 7 bp, retail CDs which dropped by 6 bp, and long-term debt which declined 23 bp. Interest-bearing liabilities grew $38 million or 1.3% over the fourth quarter of 2003. Short-term funds grew $114 million or 27.3% and long-term debt increased $3 million or 13.8%. These increases were reduced by declines in money market accounts (down $54 million or 4.0%), FHLB advances (down $8 million or 8.0%), and CDs over $100 thousand (down $8 million or 2.3%). 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 cost of funds. Net Interest Margin (FTE) The following summarizes the components of the Company's net interest margin for the periods indicated:
Three months ended --------------------------------------- March 31, --------------------------December 31, 2004 2003 2003 --------------------------------------- Yield on earning assets 5.80% 6.38% 5.81% Rate paid on interest-bearing liabilities 0.77% 1.14% 0.80% --------------------------------------- Net interest spread 5.03% 5.24% 5.01% Impact of all other net noninterest bearing funds 0.24% 0.34% 0.25% --------------------------------------- Net interest margin 5.27% 5.58% 5.26% =======================================
During the first quarter of 2004, the net interest margin fell 31 bp compared to the same period in 2003. Yields on earnings assets declined faster than rates paid on interest-bearing liabilities, resulting in a 21 bp decline in net interest spread. The unfavorable impact of lower rates earned on loans and the investment portfolio was a result of market trends and 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 $84 million or 11.0%, their value decreased 10 bp because of the lower market rates of interest at which they could be invested. The net interest margin increased 1 bp when compared with the fourth quarter of 2003. Earning asset yields decreased 1 bp and the cost of interest-bearing liabilities fell by 3 bp, resulting in a 2 bp increase in the interest spread. Noninterest bearing funding sources decreased $31 million or 3.5% causing their margin contribution to decrease by 1 bp. Page 13 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 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 which is exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended March 31, 2004 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- Assets: Money market assets and funds sold $670 $0 0.00% Investment securities: Available for sale Taxable 1,048,215 11,284 4.31% Tax-exempt 308,882 5,780 7.49% Held to maturity Taxable 97,353 858 3.53% Tax-exempt 407,250 6,808 6.69% Loans: Commercial: Taxable 345,762 4,822 5.61% Tax-exempt 231,582 3,970 6.89% Commercial real estate 805,420 14,856 7.42% Real estate construction 38,766 685 7.11% Real estate residential 346,881 3,980 4.59% Consumer 513,489 7,077 5.54% -------------------------- Total loans 2,281,900 35,390 6.23% -------------------------- Total earning assets 4,144,270 60,120 5.80% Other assets 307,404 ------------- Total assets $4,451,674 ============= Liabilities and shareholders' equity Deposits: Noninterest bearing demand $1,209,299 $-- -- Savings and interest-bearing transaction 1,605,200 1,223 0.31% Time less than $100,000 282,647 1,004 1.43% Time $100,000 or more 340,403 926 1.09% -------------------------- Total interest-bearing deposits 2,228,250 3,153 0.57% Short-term borrowed funds 533,158 1,131 0.84% Federal Home Loan Bank advances 96,613 896 3.75% Debt financing and notes payable 22,537 335 5.95% -------------------------- Total interest-bearing liabilities 2,880,558 5,515 0.77% Other liabilities 41,427 Shareholders' equity 320,390 ------------- Total liabilities and shareholders' equity $4,451,674 ============= Net interest spread (1) 5.03% Net interest income and interest margin (2) $54,605 5.27% ==========================
(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. Page 14
For the three months ended March 31, 2003 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- Assets: Money market assets and funds sold $788 $3 1.54% Investment securities: Available for sale Taxable 698,668 7,901 4.52% Tax-exempt 303,011 5,807 7.67% Held to maturity Taxable 252,690 2,316 3.67% Tax-exempt 226,846 4,068 7.17% Loans: Commercial: Taxable 368,782 5,245 5.77% Tax-exempt 202,591 3,803 7.61% Commercial real estate 946,276 18,737 8.03% Real estate construction 49,756 886 7.22% Real estate residential 330,044 4,570 5.54% Consumer 526,568 8,463 6.52% -------------------------- Total loans 2,424,017 41,704 6.97% -------------------------- Total earning assets 3,906,020 61,799 6.38% Other assets 295,844 ------------- Total assets $4,201,864 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,117,566 $-- -- Savings and interest-bearing transaction 1,522,540 1,950 0.52% Time less than $100,000 318,043 1,526 1.95% Time $100,000 or more 348,780 1,431 1.66% Total interest-bearing deposits 2,189,363 4,907 0.91% Short-term borrowed funds 348,479 851 0.98% -------------------------- Federal Home Loan Bank advances 170,000 1,575 3.72% Debt financing and notes payable 22,430 404 7.18% -------------------------- Total interest-bearing liabilities 2,730,272 7,737 1.14% Other liabilities 38,894 Shareholders' equity 315,132 ------------- Total liabilities and shareholders' equity $4,201,864 ============= Net interest spread (1) 5.24% Net interest income and interest margin (2) $54,062 5.58% ==========================
(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. Page 15
For the three months ended December 31, 2003 --------------------------------------- Interest Rates Average income/ earned/ Balance expense paid --------------------------------------- Assets: Money market assets and funds sold $956 $2 0.83% Investment securities: Available for sale Taxable 1,012,155 10,156 4.01% Tax-exempt 314,104 5,856 7.46% Held to maturity Taxable 113,107 879 3.11% Tax-exempt 410,108 6,868 6.70% Loans: Commercial: Taxable 353,914 4,884 5.47% Tax-exempt 222,457 3,847 6.86% Commercial real estate 826,792 16,062 7.71% Real estate construction 40,140 706 6.98% Real estate residential 347,994 4,075 4.68% Consumer 494,420 7,185 5.77% -------------------------- Total loans 2,285,717 36,759 6.26% -------------------------- Total earning assets 4,136,147 60,520 5.81% Other assets 315,276 ------------- Total assets $4,451,423 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,243,860 $-- -- Savings and interest-bearing transaction 1,655,264 1,510 0.36% Time less than $100,000 294,904 1,087 1.46% Time $100,000 or more 348,405 1,025 1.17% -------------------------- Total interest-bearing deposits 2,298,573 3,622 0.63% Short-term borrowed funds 418,896 856 0.80% Federal Home Loan Bank advances 105,000 979 3.65% Debt financing and notes payable 19,804 306 6.18% -------------------------- Total interest-bearing liabilities 2,842,273 5,763 0.80% Other liabilities 37,081 Shareholders' equity 328,209 ------------- Total liabilities and shareholders' equity $4,451,423 ============= Net interest spread (1) 5.01% Net interest income and interest margin (2) $54,757 5.26% ==========================
(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. Page 16 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, 2004 compared with three months ended March 31, 2003 --------------------------------------- Volume Rate Total --------------------------------------- Interest and fee income: Money market assets and funds sold ($0) ($3) ($3) Investment securities: Available for sale Taxable 3,853 (470) 3,383 Tax-exempt 138 (165) (27) Held to maturity Taxable (1,354) (104) (1,458) Tax-exempt 3,034 (294) 2,740 Loans: Commercial: Taxable (276) (147) (423) Tax-exempt 551 (384) 167 Commercial real estate (2,502) (1,379) (3,881) Real estate construction (187) (14) (201) Real estate residential 251 (841) (590) Consumer (128) (1,258) (1,386) --------------------------------------- Total loans (2,291) (4,023) (6,314) --------------------------------------- Total earning assets 3,380 (5,059) (1,679) --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 114 (841) (727) Time less than $100,000 (145) (377) (522) Time $100,000 or more (23) (482) (505) --------------------------------------- Total interest-bearing deposits (54) (1,700) (1,754) --------------------------------------- Short-term borrowed funds 412 (132) 280 Federal Home Loan Bank advances (663) (16) (679) Debt financing and notes payable 6 (75) (69) --------------------------------------- Total interest-bearing liabilities (299) (1,923) (2,222) --------------------------------------- Increase (Decrease) in Net Interest Income $3,679 ($3,136) $543 =======================================
Page 17
Three months ended March 31, 2004 compared with three months ended December 31, 2003 --------------------------------------- Volume Rate Total --------------------------------------- Interest and fee income: Money market assets and funds sold $0 ($2) ($2) Investment securities: Available for sale Taxable 242 886 1,128 Tax-exempt (105) 29 (76) Held to maturity Taxable (141) 120 (21) Tax-exempt (55) (5) (60) Loans: Commercial: Taxable (174) 112 (62) Tax-exempt 105 18 123 Commercial real estate (595) (611) (1,206) Real estate construction (33) 12 (21) Real estate residential (39) (56) (95) Consumer 180 (288) (108) --------------------------------------- Total loans (556) (813) (1,369) --------------------------------------- Total earning assets (615) 215 (400) --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction (59) (228) (287) Time less than $100,000 (58) (25) (83) Time $100,000 or more (34) (65) (99) --------------------------------------- Total interest-bearing deposits (151) (318) (469) --------------------------------------- Short-term borrowed funds 229 46 275 Federal Home Loan Bank advances (88) 5 (83) Debt financing and notes payable 37 (8) 29 --------------------------------------- Total interest-bearing liabilities 27 (275) (248) --------------------------------------- Decrease in Net Interest Income ($642) $490 ($152) =======================================
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 manage credit costs by enforcing underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The Company provided $750 thousand for loan losses in the first quarter of 2004 and the fourth quarter of 2003, compared with $900 thousand in the first quarter of 2003. The provision reflects management's assessment of credit risk in the loan portfolio for each of the periods presented. 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 --------------------------------------- March 31, --------------------------December 31, 2004 2003 2003 --------------------------------------- Service charges on deposit accounts $6,868 $6,425 $6,572 Merchant credit card fees 825 862 864 ATM fees and interchange 583 560 573 Debit card fees 549 494 512 Check sale income 294 244 294 Trust fees 250 238 235 Financial services commissions 187 207 227 Mortgage banking income 133 226 139 Official check sales income 127 133 120 Gains on sale of foreclosed property 223 2 28 Securities gains 1,788 15 0 Loss on extinguishment of debt (1,814) 0 0 Other noninterest income 853 969 928 --------------------------------------- Total $10,866 $10,375 $10,492 =======================================
Noninterest income for the first quarter of 2004 rose by $491 thousand or 4.7% from the same period in 2003. Included in the current period are $1.8 million securities gains and a $1.8 million loss on the extinguishment of $85 million of FHLB advances. For details of securities gains and losses on extinguishment of FHLB advances, see the "Asset and Liability Management" section of this report below. Service charges on deposit accounts increased $443 thousand or 6.9% mostly due to repricing of checking services which became effective in Page 18 February of 2004 and an expanded debit card overdraft program which became effective in January of 2004. Gains on sale of foreclosed properties were higher by $221 thousand than in the first quarter of 2003. Other noninterest income decreased by $116 thousand or 12.0% mostly due to a $118 thousand gain on sale of the former Westamerica Kerman branch building in the first quarter of 2003. In the first quarter of 2004, noninterest income increased $374 thousand or 3.6% compared with the previous quarter. The largest positive contributor was service charges on deposit accounts, which increased $296 thousand or 4.5%. Such service charge income rose because of new pricing affecting overdraft and DDA activity charges implemented in the first quarter of 2004 and annual IRA fees collected in the first quarter of 2004. Gains on sale of foreclosed properties were higher by $195K than in the fourth quarter of 2003. The first quarter of 2004 included $1.8 million securities gains and a $1.8 million loss to retire $85 million of FHLB advances, as discussed above and elsewhere in this report. Other noninterest income declined $75 thousand or 8.1% largely due to $115 thousand proceeds received in the fourth quarter of 2003 from the demutualization of the life insurance company with which the Company has policies. 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, 2004 2003 2003 --------------------------------------- Salaries and incentives $10,362 $10,512 $10,394 Employee benefits 3,164 3,186 2,790 Occupancy 2,948 2,995 3,037 Equipment 1,162 1,374 1,290 Data processing services 1,517 1,559 1,523 Courier service 884 929 900 Telephone 572 425 530 Postage 395 420 422 Professional fees 409 413 486 Merchant credit card 272 342 207 Stationery and supplies 288 318 344 Loan expense 255 276 326 Customer checks 197 246 264 Correspondent service charges 239 243 224 Advertising/public relations 215 220 291 Operational losses 243 173 297 Employee recruiting 47 42 37 Foreclosed property expense 2 1 32 Amortization of deposit intangibles 136 249 165 Other noninterest expense 1,685 1,612 1,599 --------------------------------------- Total $24,992 $25,535 $25,158 ======================================= Average full time equivalent staff 1,001 1,047 1,007 Noninterest expense to revenues (FTE) 38.17% 39.63% 38.56%
Noninterest expense decreased $543 thousand or 2.1% in the first quarter of 2004 compared to the same period in 2003. The largest decrease was equipment expense, which was down $212 thousand or 15.4% due to a $129 thousand decrease in depreciation and lower spending on hardware and software maintenance. Salaries and incentives were down $150 thousand or 1.4% due to lower regular salaries and a decrease in incentive payments. A $96 thousand drop in regular salary was attributable to a smaller workforce, partially offset by annual merit increases in salaries. Amortization of deposit intangibles fell by $113 thousand or 45.4% due to expiration of purchase premium amortization. The largest increase in expenditures was telephone expense, which rose $147 thousand or 34.6% due to increased line charges necessitated by a major upgrade in the Company's electronic network. In the first three months of 2004, noninterest expense declined $166 thousand or 0.7% compared with the fourth quarter of 2003. Equipment expense declined $128 thousand or 9.9% primarily because the prior quarter included purchases of incidental equipment including security equipment, fraud detection devices and office furniture. Depreciation expense increased for the electronic upgrade in the first quarter of 2004. Employee benefits rose by $374 thousand largely the net result of a seasonal increase in payroll taxes. Provision for Income Tax During the first quarter of 2004, the Company recorded income tax expense (FTE) of $15.4 million, $425 thousand or 2.8% higher than the first quarter of 2003. The current quarter provision represents an effective tax rate of 38.7%, compared to 39.4% and 38.2% for the first and fourth quarters of 2003, respectively. Page 19 The change in the provision for income taxes is primarily attributable to the respective levels of earnings and tax credits earned from low-income housing investments which increased $222 thousand in the first quarter of 2004 over the same period last year and decreased $270 thousand from the fourth quarter of 2003. 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. 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 March 31, At --------------------------December 31, 2004 2003 2003 --------------------------------------- Classified loans $22,965 $32,505 $23,460 Repossessed collateral 80 88 90 Classified loans and repossessed collateral $23,045 $32,593 $23,550 ======================================= Allowance for loan losses / classified loans 234% 167% 230%
Classified loans at March 31, 2004, decreased $9.5 million or 29.3% from a year ago, primarily due to upgrades, payoffs and chargeoffs, partially reduced by new downgrades. Repossessed collateral declined $8 thousand or 9.1% from March 31, 2003, primarily the net result of additions of six properties with a total carrying value of $1.8 million, partially reduced by sales of five properties totaling $1.5 million and $299 thousand in principal reductions. A $495 thousand decline in classified loans from December 31, 2003 was mainly due to payoffs, upgrades and chargeoffs, partly offset by new downgrades. Repossessed collateral declined $10 thousand or 11.1% from December 31 due to a sale of a foreclosed property valued at $10 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 become 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 loans and OREO on the dates indicated (dollars in thousands):
At March 31, At --------------------------December 31, 2004 2003 2003 --------------------------------------- Performing nonaccrual loans $2,212 $2,471 $1,658 Nonperforming, nonaccrual loans 5,045 6,402 5,759 --------------------------------------- Total nonaccrual loans 7,257 8,873 7,417 Loans 90 days past due and still accruing 190 320 199 --------------------------------------- Total nonperforming loans 7,447 9,193 7,616 Other real estate owned 80 88 90 --------------------------------------- Total $7,527 $9,281 $7,706 ======================================= Allowance for loan losses / nonperforming loans 723% 589% 708%
Performing nonaccrual loans at March 31, 2004 decreased $259 thousand or 10.5% from a year ago as a result of charge-offs, loans being returned to accrual status and loans being placed on nonperforming nonaccrual, offset by new loans placed on nonaccrual. Performing nonaccrual loans at March 31, 2004 increased Page 20 $554 thousand or 33.4% from December 31 due to new loans placed on nonaccrual, offset by charge-offs, loans being returned to accrual status and loans being placed on nonperforming nonaccrual. Nonperforming nonaccrual loans at March 31, 2004 decreased $1.4 million or 21.2% and $714 thousand or 12.4% from the previous year and December 31, 2003, respectively. The increase was due to the net result of loans being added to nonaccrual, partially offset by others being returned to full-accrual status or being charged off or paid off. Changes in repossessed collateral are discussed above. The Company had no restructured loans as of March 31, 2004, 2003 and December 31, 2003. The amount of gross interest income that would have been recorded for nonaccrual loans for the three months ended March 31, 2004, if all such loans had been current in accordance with their original terms, was $120 thousand, compared to $163 thousand and $113 thousand, respectively, for the first and fourth quarters of 2003. 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, 2004, totaled $64 thousand, compared to $71 thousand and $78 thousand, respectively, for the first and fourth quarters of 2003. These cash payments represent annualized yields of 3.62% for first three months of 2004 compared to 3.28% and 4.54%, respectively, for the first and the fourth quarter of 2003. Total cash payments received, including those recorded in prior years, which were applied against the book balance of nonaccrual loans outstanding at March 31, 2004, totaled approximately $26 thousand, compared with $184 thousand and $47 thousand for the first and the fourth quarters of 2003, respectively. Management believes the overall credit quality of the loan portfolio continues to be strong; however, 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, economic conditions or factors particular to the borrower. No assurance can be given 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 specific impaired loans. As of the date of this report, Management considers the $53.8 million allowance for loan losses, which constituted 2.32% of total loans at March 31, 2004, 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, 2004 2003 2003 --------------------------------------- Balance, beginning of period $53,910 $54,227 $54,180 Loan loss provision 750 900 750 Loans charged off (1,558) (2,028) (1,542) Recoveries of previously charged off loans 732 1,055 522 --------------------------------------- Net credit losses (826) (973) (1,020) --------------------------------------- Balance, end of period $53,834 $54,154 $53,910 ======================================= Allowance for loan losses / loans outstanding 2.32% 2.20% 2.32%
Page 21 Asset and Liability Management The fundamental objective of the Company's management of assets and liabilities is to maximize economic value while maintaining adequate liquidity and a conservative level of interest rate risk. The 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 loan products, investment portfolios, deposit products, 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 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 March 31, 2004 would not result in a fluctuation of NII that would exceed the parameters established by Company policy. A variety of factors affect the timing and magnitude of interest rate changes such as general economic conditions, fiscal policy, monetary policy, political developments, terrorism, and a variety of other factors. Given current conditions, the Company is anticipating rising rates, although the timing of increasing rates remains uncertain. The Company generally maintains an interest rate risk position near neutral, such that changing interest rates will not cause significant changes in net interest income. During the first quarter 2004, the Company sold $144.8 million of available-for-sale securities to reduce the average duration of the securities portfolios in a rising rate environment. The Company realized securities gains of $1.8 million from these sales. Also, during the first quarter of 2004, the Company retired $85 million in FHLB advances with a weighted average interest rate of 3.63% in an effort to reduce its aggregate cost of funds. The majority of the retired FHLB advances had scheduled maturity dates prior to January 15, 2005, while others had scheduled maturity dates ranging from May to August 2005. Losses totaling $1.8 million were incurred to retire the FHLB advances prior to their scheduled maturity dates. Liquidity The Company's principal source of asset liquidity is marketable investment securities available for sale. At March 31, 2004, investment securities available for sale totaled $1,219 million, representing a decrease of $195 million from December 31, 2003. In addition, at March 31, 2004, the Company had customary lines for overnight borrowings from other financial institutions in excess of $500 million and a $10 million line of credit under which $5.9 million was outstanding. Additionally, as a member of the Federal Reserve System, the Company has access to borrowing from the Federal Reserve. The Company's short-term debt rating from Fitch Ratings is F1 with a stable outlook. Management expects the Company can access short-term debt financing if desired. The Company's long-term debt rating from Fitch Ratings is A- with a stable outlook. Management is confident the Company could access additional long-term debt financing if desired. The Company generates significant liquidity from its operating activities. The Company's profitability during the first three months of 2004 and 2003 generated substantial cash flows of $36.3 million and $37.0 million, respectively. In 2004 operating activities provided cash for $28.7 million of Company stock repurchases and $8.4 million in shareholder dividends. In 2003 operating cash flows were more than sufficient to pay shareholder dividends, repay long term obligations, and repurchase common stock collectively totaling $34 million. In 2004, the Company generated $179.4 million from its investing activities. Sales and maturities net of purchases were $180.5 million, which were used to reduce short-term borrowings by $98.9 million and to prepay $85 million FHLB advances. In 2003, purchases net of sales and maturities of investment securities were $180 million, which was in part offset by net repayments of loans of $37 million. The investment securities portfolio increase was generally financed by a $36 million increase in deposits and $66 million of new short-term borrowings. The Company anticipates that loan demand will increase moderately in 2004, consistent with economic conditions. The growth of deposit balances is expected to exceed the anticipated growth in loan demand during the period. Depending on economic conditions, interest rate levels, and a variety of other conditions, excess deposit growth will be used to purchase investment securities or to reduce short-term borrowings. Westamerica Bancorporation ("the Parent Company") is separate and apart from Westamerica Bank ("the Bank") and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends to its shareholders, and interest and principal on Page 22 outstanding senior debt. Substantially all of the Parent Company's revenues are obtained from service fees and dividends received from the Bank. Payment of such dividends to the Parent Company by the Bank is limited under regulations for Federal Reserve member banks and California law. The amount that can be paid in any calendar year, without prior approval from federal and state regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits of the preceding two calendar years less dividends paid. The Company believes that such restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations. 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 collectively repurchased 574 thousand shares in the first quarter of 2004, 568 thousand shares in the first quarter of 2003, and 530 thousand in the fourth quarter of 2003. 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 $338.6 million at March 31, 2004. This amount, which is reflective of the effect of common stock repurchases and dividends paid to shareholders offset by the generation of earnings and proceeds from the issuance of stock, represents an increase of $1.6 million or 0.5% from a year ago, and a decrease of $1.8 million or 0.5% from December 31, 2003. Despite an increase in shareholders' equity, the Company's ratio of equity to total assets fell to 7.65% at March 31, 2004, from 7.68% a year ago due to asset growth. The equity to assets ratio was 7.44% on December 31, 2003. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated:
At March 31, At Minimum --------------------------December 31, Regulatory 2004 2003 2003 Requirement ---------------------------------------------------- Tier I Capital 9.89% 9.45% 10.13% 4.00% Total Capital 11.25% 10.71% 11.39% 8.00% Leverage ratio 6.63% 7.00% 6.85% 4.00%
The risk-based capital ratios improved at March 31, 2004, compared with the prior year primarily due to an increase in the total level of tangible (excluding goodwill and purchase premiums) capital and a change in mix of risk-weighted assets. The leverage ratio fell because of asset growth. When compared with the 2003 year-end, the capital and leverage ratios declined, the net result of the effect of common stock repurchases and lower retained earnings, partially offset by the effect of lower risk-weighted assets. 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 anticipated future needs. All ratios as shown in the table above are in excess of the regulatory definition of "well capitalized". 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 March 31, 2004. 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 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings Due to the nature of the banking business, the Company's 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, Use of Proceeds and Issuer Purchases of Equity Securities (a) None (b) None (c) None (d) None (e) Issuer Purchases of Equity Securities The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended March 31, 2004 (in thousands, except per share data).
(c) (d) Total Maximum Number Number of Shares of Shares (b) Purchased that May (a) Average as Part of Yet Be Total Price Publicly Purchased Number of Paid Announced Under the Shares per Plans Plans or Period Purchased Share or Programs* Programs --------------------------------------------------------------- January 1 through January 31 151 $49.58 151 1,316 --------------------------------------------------------------- February 1 through February 29 275 50.06 275 1,041 --------------------------------------------------------------- March 1 through March 31 148 49.84 148 893 --------------------------------------------------------------- Total 574 $49.88 574 893 ===============================================================
* Includes 6, 8 and 2 shares purchased in January, February and March, respectively, by the Company in private transactions with the independent administrator of the Company's Tax Deferred Savings/Retirement Plan (ESOP). The Company includes the shares purchased in such transactions within the total number of shares authorized for purchase pursuant to the currently existing publicly announced program. The Company repurchases shares of its common stock in the open market to optimize the Company's use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements. On August 28, 2003, the Board of Directors authorized the purchase of up to two million shares of the Company's common stock from time to time prior to September 1, 2004. 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 3 (ii): By-laws, as amended (composite copy) Exhibit 11: Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution Page 24 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 of Chief Executive Officer 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 of Chief Financial Officer 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 January 26, 2004, the Company filed a Report on Form 8-K with respect to item 12, therein, reporting fourth quarter, 2003 financial results. Included in the report was a press release dated January 20, 2004. Page 25 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) May 10, 2004 /s/ DENNIS R. HANSEN - -------------- -------------------- Date Dennis R. Hansen Senior Vice President and Controller (Chief Accounting Officer) Pages 26-42 Exhibit 3 (ii) By-laws, as amended (composite copy) Page 43 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) 2004 2003 -------------------------- Weighted average number of common shares outstanding - basic 32,051 33,110 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 611 455 -------------------------- Weighted average number of common shares outstanding - diluted 32,662 33,565 ========================== Net income $24,314 $23,012 Basic earnings per share $0.76 $0.70 Diluted earnings per share $0.74 $0.69
EX-3.II 2 exh3ii.txt BYLAWS WABC 3/31/04 Page 26 Exhibit 3 (ii) By-laws, as amended COMPOSITE COPY BYLAWS OF WESTAMERICA BANCORPORATION a California corporation Last Amendment: February 26, 2004 Page 27 TABLE OF CONTENTS
Page (s) -------- ARTICLE I - OFFICES 1 Section 1.01. Principal Offices 1 Section 1.02. Other Offices 1 ARTICLE I - MEETINGS OF SHAREHOLDERS 1 Section 2.01. Place of Meetings 1 Section 2.02. Annual Meeting 1 Section 2.03. Special Meeting 2 Section 2.04. Notice of Shareholders' Meetings 2 Section 2.05. Manner of Giving Notice: Affidavit of Notice 2 Section 2.06. Quorum 2 Section 2.07. Adjourned Meeting: Notice 3 Section 2.08. Voting 3 Section 2.09. Waiver of Notice or Consent by Absent Shareholders 3 Section 2.10. Shareholder Action by Written Consent Without a Meeting 4 Section 2.11. Record Date for Shareholder Notice, Voting and Giving Consents 4 Section 2.12. Proxies 4 Section 2.13. Inspectors of Election 5 Section 2.14. Nominations for Director 5 ARTICLE III - DIRECTORS 5 Section 3.01. Powers 5 Section 3.02. Number and Qualification of Directors 6 Section 3.03. Election and Term of Office of Directors 6 Section 3.04. Vacancies 6 Section 3.05. Place of Meetings and Meetings by Telephone 7 Section 3.06. Annual Meeting 7 Section 3.07. Other Regular Meetings 7 Section 3.08. Special Meetings 7 Section 3.09. Quorum 7 Section 3.10. Waiver of Notice 7 Section 3.11. Adjournment 7 Section 3.12. Notice of Adjournment 7 Section 3.13. Action Without Meeting 8 Section 3.14. Fees and Compensation of Directors 8 Section 3.15. Committees of Directors 8 Section 3.16. Meetings and Action of Committees 8 -i- Page 28 ARTICLE IV - OFFICERS 9 Section 4.01. Officers 9 Section 4.02. Election of Officers 9 Section 4.03. Subordinate Officers 9 Section 4.04. Removal and Resignation of Officers 9 Section 4.05. Vacancies in Offices 9 Section 4.06. Chairman of the Board 9 Section 4.07. President 9 Section 4.08. Vice Presidents 9 Section 4.09. Secretary 9 Section 4.10. Chief Financial Officer 10 ARTICLE V - MISCELLANEOUS 10 Section 5.01. Indemnification Provisions 10 Section 5.02. Maintenance and Inspection of Share Register 11 Section 5.03. Maintenance and Inspection of Bylaws 11 Section 5.04. Maintenance and Inspection of Other Corporate Records 11 Section 5.05. Inspection of Books and Records by Directors 12 Section 5.06. Annual Report to Shareholders 12 Section 5.07. Financial Statements 12 Section 5.08. Record Date for Purposes Other than Notice and Voting 12 Section 5.09. Checks, Drafts 13 Section 5.10. Corporate Contracts and Instruments; How Executed 13 Section 5.11. Certificates for Shares 13 Section 5.12. Lost Certificates 13 Section 5.13. Representation of Shares of Other Corporations 13 Section 5.14. Construction and Definitions 13 ARTICLE VI - AMENDMENTS 14 Section 6.01. Amendment by Shareholders 14 Section 6.02. Amendment by Directors 14
-ii- Page 29 BYLAWS OF WESTAMERICA BANCORPORATION ARTICLE I OFFICES Section 1.01. Principal Offices. The principal executive office of the corporation shall be located at 1108 Fifth Avenue, San Rafael, California, or such other place within or outside the State of California as shall be fixed by the board of directors. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the board of directors shall fix and designate a principal business office in the State of California. Section 1.02. Other Offices. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.01. Place of Meetings. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2.02. Annual Meeting. The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. At each annual meeting directors shall be elected, and any other proper business may be transacted which shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must have been (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a shareholder's notice must be received by the secretary of the corporation at least 45 days before the anniversary of the date on which the corporation first mailed its proxy materials for the prior year's annual meeting of the shareholders; provided, however, that in the event the date for the current year's annual meeting has changed more than 30 days from the date on which the prior year's annual meeting was held, then notice must be received a reasonable time before the corporation mails its proxy materials for the current year. A shareholder's notice to the secretary of the corporation shall set forth as to each matter that the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and residence address of the shareholder proposing such business, (c) the number of shares of capital stock of the corporation that are owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.02. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.02, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. -1- Page 30 Section 2.03. Special Meeting. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.04 and 2.05 hereof, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.03 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. Section 2.04. Notice of Shareholders' Meetings. All notices of meetings of shareholders shall be sent or otherwise given to shareholders entitled to vote thereat in accordance with Section 2.05 not less than ten (10) (or if sent by third-class mail, thirty (30) nor more than sixty (60)) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an amendment of the articles of incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of that Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal. Section 2.05. Manner of Giving Notice: Affidavit of Notice. Notice of any meeting of shareholders shall be given to shareholders entitled to vote thereat either personally or by first-class mail or, in the event this corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California Corporations Code) on the record date for the shareholders meeting, by third-class mail, or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting may be executed by the secretary, assistant secretary, or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Section 2.06. Quorum. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of the shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the -2- Page 31 withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum or, if required by the General Corporation Law or the articles, the vote of a greater number or voting by classes. Section 2.07. Adjourned Meeting: Notice. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.06 hereof. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.04 and 2.05. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 2.08. Voting. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 hereof, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation, or a joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. The affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by California General Corporation Law or the articles. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 2.09. Waiver of Notice or Consent by Absent Shareholders. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice, consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.04 hereof, the waiver of notice, consent or approval shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law to be included in the notice of the meeting but not so included if that objection is expressly made at the meeting. -3- Page 32 Section 2.10. Shareholder Action by Written Consent Without a Meeting. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case-of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any-time to fill a vacancy on the board of directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 2.05 hereof. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 2.11. Record Date for Shareholder Notice, Voting and Giving Consents. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders at the close of business on the record date are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date: (a) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 2.12. Proxies. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or as to any meeting by attendance at such meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Corporations Code of California. -4- Page 33 Section 2.13. Inspectors of Election. Before any meeting of shareholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. Section 2.14. Nominations for Director. Nominations for election to the board of directors may be made by the board of directors or by any shareholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the board of directors of the corporation, shall be made in writing and shall be received by the secretary of the corporation at least 45 days before the anniversary of the date on which the corporation first mailed its proxy materials for the prior year's annual meeting of shareholders; provided, however, that in the event the date for the current year's annual meeting has changed more than 30 days from the date on which the prior year's annual meeting was held, then notice must be received a reasonable time before the corporation mails its proxy materials for the current year. Any such written nomination shall contain the following information to the extent known to the nominating shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the corporation that the shareholder expects will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may be disregarded by the chairman of the applicable meeting of shareholders called for the election of directors in his sole discretion, and upon his instructions, the inspectors of election may disregard all votes cast for each such nominee. ARTICLE III DIRECTORS Section 3.01. Powers. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) Select and remove all officers, agents, and employees of the -5- Page 34 corporation; prescribe any powers and duties for them that are consistent with law, with the articles of incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service. (b) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings. (c) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates. (d) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, or tangible or intangible property actually received. (e) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecation, and other evidences of debt and securities. Section 3.02. Number and Qualification of Directors. The number of directors of the corporation shall be not less than eight (8) nor more than fifteen (15). The exact number of directors shall be ten (10) until changed, within the limits specified above, with the approval of the board of directors or the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. Section 3.03. Election and Term of Office of Directors. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. No person shall be eligible for election to the board of directors unless nominated in the manner described by Section 2.14 of these bylaws. Section 3.04. Vacancies. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent other than to fill a vacancy created by removal shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary, or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future -6- Page 35 time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 3.05. Place of Meetings and Meetings by Telephone. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. Section 3.06. Annual Meeting. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Section 3.07. Other Regular Meetings. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice. Section 3.08. Special Meetings. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 3.09. Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.11. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Corporations Code of California (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) of that Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 3.10. Waiver of Notice. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director. Section 3.11. Adjournment. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 3.12. Notice of Adjournment. Notice of the time and place of -7- Page 36 holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 3.08, to the directors who were not present at the time of the adjournment. Section 3.13. Action Without Meeting. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Section 3.14. Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. Section 3.15. Committees of Directors. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) The approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; (b) The filling of vacancies on the board of directors or in any committee; (c) The fixing of compensation of the directors for serving on the board or on any committee; (d) The amendment or repeal of bylaws or the adoption of new bylaws; (e) The amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) The appointment of any other committees of the board of directors or the members of these committees. Section 3.16. Meetings and Action of Committees. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Sections 3.05 (place of meetings), 3.07 (regular meetings), 3.08 (special meetings and notice), 3.09 (quorum), 3.10 (waiver of notice), 3.11 (adjournment), 3.12 (notice of adjournment), and 3.13 (action without meeting) of these bylaws, with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. -8- Page 37 ARTICLE IV OFFICERS Section 4.01. Officers. The officers of the corporation shall be a chairman of the board, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more treasurers or assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 4.03. Any number of offices may be held by the same person. Section 4.02. Election of Officers. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 4.03 or 4.05 hereof, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. Section 4.03. Subordinate Officers. The board of directors may appoint, and may empower the chairman of the board to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4.04. Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting of the board of directors, or, except in the case of an officer chosen by the board of directors, by any other officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 4.05. Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. Section 4.06. Chairman of the Board. The board of directors shall appoint one of its members to be chairman of the board to serve at the pleasure of the board. Such person shall preside at all meetings of the board. The chairman of the board shall have the powers conferred by these bylaws and shall also have and may exercise such further powers and duties as from time to time may be conferred or assigned by the board of directors. Section 4.07. President. The president of the corporation shall, in the absence of the chairman of the board, preside at all meetings of shareholders and at all meetings of the board of directors. The president shall exercise and perform such duties as may be assigned to him by the board of directors or the chairman of the board or as prescribed by the bylaws. Section 4.08. Vice Presidents. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, and the president. Section 4.09. Secretary. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep, or cause to be kept, at the principal -9- Page 38 executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 4.10. Chief Financial Officer. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE V MISCELLANEOUS Section 5.01. Indemnification Provisions. Except as prohibited by law, every director of this corporation shall be entitled as a matter of right to be indemnified by the corporation against reasonable expense and any liability paid or incurred by such person in connection with any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative, investigative or other, whether brought by or in the name of the corporation or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director, officer, employee or agent of the corporation or by reason of the fact that such person is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise or was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation (such claim, action, suit or proceeding hereinafter being referred to as an "Action"); provided, however, that no such right of indemnification shall exist in favor of a director with respect to an Action brought by such director against the corporation (other than a suit for indemnification as provided below in this Section 5.01). Such indemnification shall include the right to have expenses incurred by such person in connection with an Action paid in advance by the corporation until the final disposition of the Action, subject to such conditions as may be prescribed by law. As used herein, "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement; and "expense" shall include fees and expenses of counsel subject to the terms of the following paragraph. If the corporation shall be obligated to pay the expenses of any Action against a director, the corporation, if appropriate, shall be entitled to assume the defense of such Action, with counsel approved by the director, upon the delivery to the director of written notice of its election so to do. After delivery of such notice, approval of such counsel by the director and the retention of such counsel by the corporation, the corporation will not be liable to the director under this Section 5.01 for any fees or expenses of counsel subsequently incurred by the director with respect to the same Action, provided that (i) the director shall have the right to employ his counsel in any such Action at the director's expense; and (ii) the fees and expenses of the director's counsel shall be at the expense of the corporation if (A) the employment of counsel by the director has been previously authorized by the corporation, (B) the director shall have reasonably concluded that there may be a conflict of interest between the corporation and the director in the conduct of any such defense or (C) the corporation shall not, in fact, have employed counsel to assume the defense of such Action. Notwithstanding anything contained herein to the contrary, the corporation shall have no obligation under this Section 5.01 to indemnify any director for any amounts paid in settlement of an Action unless the corporation consents to such settlement, which consent shall not be unreasonably withheld. -10- Page 39 If a claim under the two preceding paragraphs is not paid in full by the corporation within thirty (30) days after a written notice thereof has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such action that the conduct of the claimant was such that under California law the corporation would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its board) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the corporation (including the board of directors, independent legal counsel or its shareholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the action or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. The right of indemnification provided for herein (a) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, bylaw or article provision, vote of shareholders or directors or otherwise, (b) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were denominated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder, and (c) shall be applicable to actions, suits or proceedings commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the adoption of any such amendment or repeal. The corporation has full power and authority to extend any of the indemnification benefits provided for in this Section 5.01 to any officer or agent of the corporation, but the corporation is under no obligation to extend such benefits to any person who is not entitled thereto by law or pursuant to the first paragraph of this Section 5.01. Section 5.02. Maintenance and Inspection of Share Register. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 5.02 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 5.03. Maintenance and Inspection of Bylaws. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. Section 5.04. Maintenance and Inspection of Other Corporate Records. The -11- Page 40 accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 5.05. Inspection of Books and Records by Directors. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5.06. Annual Report to Shareholders. The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. This report shall be sent at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.05 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. Section 5.07. Financial Statements. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month, or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause the statements referred to above to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to any shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this Section 5.07 shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. Section 5.08. Record Date for Purposes Other than Notice and Voting. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders at the close of business on the record date are entitled to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of -12- Page 41 business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. Section 5.09. Checks, Drafts. Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 5.10. Corporate Contracts and Instruments; How Executed. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 5.11. Certificates for Shares. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or vice president and by the chief financial officer or the treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. Section 5.12. Lost Certificates. Except as provided in this Section 5.12, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 5.13. Representation of Shares of Other Corporations. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 5.14. Construction and Definitions. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. -13- Page 42 ARTICLE VI AMENDMENTS Section 6.01. Amendment by Shareholders. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 6.02. Amendment by Directors. Subject to the rights of the shareholders as provided in Section 6.01 hereof, to adopt, amend, or repeal bylaws, bylaws may be adopted, amended, or repealed by the board of directors; provided, however, that the board of directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 3.02 of these bylaws. -14- EX-31.1 3 exh31-1.txt CERTIFICATION WABC 3/31/04 Page 44 Exhibit 31.1 CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, David L. Payne, Chief Executive Officer of the Company, certify that: 1. I have reviewed this quarterly report for the period ending March 31, 2004 on Form 10-Q of Westamerica Bancorporation; 2. Based on my knowledge, this quarterly 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 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 May 10, 2004 - ------------------------ -------------------- David L. Payne Date Chairman, President and Chief Executive Officer EX-31.2 4 exh31-2.txt CERTIFICATION WABC 3/31/04 Page 45 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 ending March 31, 2004 on Form 10-Q of Westamerica Bancorporation; 2. Based on my knowledge, this quarterly 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 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/ Jennifer J. Finger May 10, 2004 - ------------------------ -------------------- Jennifer J. Finger Date Senior Vice President and Chief Financial Officer EX-32.1 5 exh32-1.txt CERTIFICATION WABC 3/31/04 Page 46 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 March 31, 2004 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 requirements of section 13(a)-14(b) or 15d-14(b) 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 results of operations of the Company. /s/ David L. Payne May 10, 2004 - ------------------------ -------------------- David L. Payne Date Chairman, President and Chief Executive Officer EX-32.2 6 exh32-2.txt CERTIFICATION WABC 3/31/04 Page 47 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 March 31, 2004 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 requirements of section 13(a)-14(b) or 15d-14(b) 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 results of operations of the Company. /s/ Jennifer J. Finger May 10, 2004 - ------------------------ -------------------- Jennifer J. Finger Date Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----