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