-----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, GrP3PLChrLkYKVxxJWRW/8gojFUOt9afq1jBd0ecO1rPzgcHQaYfuF1btJWQKiC5 dTOCZmlIof/GA+lSok9MGw== 0000950149-01-501804.txt : 20020410 0000950149-01-501804.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950149-01-501804 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1787065 BUSINESS ADDRESS: STREET 1: 1108 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 7078636038 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 f77272e10-q.txt WESTAMERICA BANCORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR QUARTER ENDED SEPTEMBER 30, 2001 Commission File Number: 1-9383 WESTAMERICA BANCORPORATION (Exact Name of Registrant as Specified in its Charter) CALIFORNIA 94-2156203 (state or other jurisdiction of) (I.R.S. Employer incorporation or organization) Identification No.) 1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code (707) 863-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the registrant classes of common stock, as of the latest practicable date:
TITLE OF CLASS SHARES OUTSTANDING AS OF OCTOBER 31, 2001 - -------------- ----------------------------------------- Common Stock, 34,577,052 No Par Value
TABLE OF CONTENTS
Page Forward Looking Statements 3 PART I - FINANCIAL INFORMATION 4 Item 1 - Financial Statements 4 Financial Summary 8 Item 2 - Management's Discussion and Analysis of Financial Condition 9 and Results of Operations PART II - OTHER INFORMATION 31 Item 1 - Legal Proceedings 31 Item 2 - Changes in Securities 31 Item 3 - Defaults upon Senior Securities 31 Item 4 - Submission of Matters to a Vote of Security Holders 31 Item 5 - Other Information 31 Item 6 - Exhibits and Reports on Form 8-K 31 Exhibit 11 - Computation of Earnings Per Share 32
FORWARD-LOOKING STATEMENTS In addition to historical information, this report on Form 10Q for Westamerica Bancorporation ("the Company") includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties which include, but are not limited to, changes in general economic conditions; competitive conditions in the geographic and business areas in which the Company conducts operations; regulatory or tax changes that affect the cost of or demand for the Company's products and services; and the resolution of legal proceedings and related matters. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2000, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
At September 30, December 31, 2001 2000 2000 ----------- ----------- ------------ ASSETS: Cash and cash equivalents $ 195,575 $ 232,876 $ 286,482 Money market assets 250 250 250 Investment securities available for sale 908,337 939,672 921,275 Investment securities held to maturity, with market values of: $220,982 at September 30, 2001 213,215 $231,138 at September 30, 2000 231,330 $231,906 at December 31, 2000 228,035 Loans, gross 2,480,695 2,464,658 2,482,159 Allowance for loan losses (52,461) (52,182) (52,279) ----------- ----------- ----------- Loans, net of allowance for loan losses 2,428,234 2,412,476 2,429,880 Other real estate owned 547 2,017 2,065 Premises and equipment, net 41,832 42,416 42,182 Interest receivable and other assets 122,358 119,494 121,212 ----------- ----------- ----------- TOTAL ASSETS $ 3,910,348 $ 3,980,531 $ 4,031,381 =========== =========== =========== LIABILITIES: Deposits: Noninterest bearing $ 1,014,589 $ 974,548 $ 1,014,230 Interest bearing: Transaction 511,252 524,550 526,178 Savings 873,423 885,973 816,635 Time 858,652 867,845 879,701 ----------- ----------- ----------- Total deposits 3,257,916 3,252,916 3,236,744 Short-term borrowed funds 256,032 334,812 386,942 Liability for interest, taxes and other expenses 45,438 30,463 38,912 Notes payable 27,821 31,036 31,036 ----------- ----------- ----------- TOTAL LIABILITIES 3,587,207 3,649,227 3,693,634 =========== =========== =========== SHAREHOLDERS' EQUITY: Authorized - 150,000 shares of common stock Issued and outstanding: 34,714 at September 30, 2001 211,748 36,653 at September 30, 2000 206,912 36,251 at December 31, 2000 206,952 Accumulated other comprehensive income: Unrealized (loss) gain on securities available for sale 16,537 (1,546) 7,169 Retained earnings 94,856 125,938 123,626 ----------- ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 323,141 331,304 337,747 =========== =========== =========== TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,910,348 $ 3,980,531 $ 4,031,381 =========== =========== ===========
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, 2001 2000 2001 2000 -------- -------- -------- -------- INTEREST INCOME: Loans $ 48,098 $ 51,217 $148,344 $147,045 Money market assets and funds sold 18 9 24 14 Investment securities available for sale Taxable 8,968 11,098 28,271 34,665 Tax-exempt 3,515 2,900 9,681 8,067 Investment securities held to maturity Taxable 1,104 1,277 3,565 3,800 Tax-exempt 1,951 2,053 5,891 6,200 -------- -------- -------- -------- TOTAL INTEREST INCOME 63,654 68,554 195,776 199,791 -------- -------- -------- -------- INTEREST EXPENSE: Transaction deposits 639 1,102 2,255 3,061 Savings deposits 4,476 4,848 13,222 13,741 Time deposits 8,448 11,838 31,139 33,124 Short-term borrowed funds 1,803 4,548 7,726 14,202 Debt financing and notes payable 499 582 1,516 1,953 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 15,865 22,918 55,858 66,081 -------- -------- -------- -------- NET INTEREST INCOME 47,789 45,636 139,918 133,710 -------- -------- -------- -------- PROVISION FOR LOAN LOSSES 900 905 2,700 2,775 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 46,889 44,731 137,218 130,935 -------- -------- -------- -------- NONINTEREST INCOME: Service charges on deposit accounts 5,806 5,271 17,274 15,835 Merchant credit card 1,047 1,049 3,032 3,005 Financial services commissions 375 388 994 1,276 Mortgage banking 260 198 722 620 Trust fees 221 179 752 520 Other 2,881 3,672 9,095 9,924 -------- -------- -------- -------- TOTAL NONINTEREST INCOME 10,590 10,757 31,869 31,180 -------- -------- -------- -------- NONINTEREST EXPENSE: Salaries and related benefits 13,471 12,942 40,040 38,144 Occupancy 3,073 2,856 8,900 8,789 Equipment 1,513 1,739 4,587 4,899 Data processing 1,502 1,503 4,577 4,551 Professional fees 370 522 1,221 1,319 Other real estate owned 18 316 159 421 Other 5,816 5,719 17,482 16,564 -------- -------- -------- -------- TOTAL NONINTEREST EXPENSE 25,763 25,597 76,966 74,687 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 31,716 29,891 92,121 87,428 -------- -------- -------- -------- Provision for income taxes 10,391 9,746 29,613 28,390 -------- -------- -------- -------- NET INCOME $ 21,325 $ 20,145 $ 62,508 $ 59,038 ======== ======== ======== ======== COMPREHENSIVE INCOME: Change in unrealized gain on securities available for sale, net 6,278 5,450 9,368 2,975 -------- -------- -------- -------- COMPREHENSIVE INCOME $ 27,603 $ 25,595 $ 71,876 $ 62,013 ======== ======== ======== ======== AVERAGE SHARES OUTSTANDING 35,002 36,365 35,475 36,404 DILUTED AVERAGE SHARES OUTSTANDING 35,524 36,906 36,025 36,893 PER SHARE DATA: Basic Earnings $ 0.61 $ 0.55 $ 1.76 $ 1.62 Diluted Earnings 0.60 0.55 1.74 1.60 Dividends Paid 0.21 0.19 0.61 0.55
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
Compre- Common hensive Retained Stock Income Earnings Total ----- ------ -------- ----- BALANCE, DECEMBER 31, 1999 $186,435 $(4,521) $118,678 $300,592 Net income for the period 59,038 59,038 Stock issued 28,003 28,003 Purchase and retirement of stock (7,526) (31,740) (39,266) Dividends (20,038) (20,038) Unrealized gain on securities available for sale, net 2,975 2,975 -------- ------- ------- -------- BALANCE, SEPTEMBER 30, 2000 $206,912 $(1,546) $125,938 $331,304 ======== ======= ======== ======== BALANCE, DECEMBER 31, 2000 $206,952 $7,169 $123,626 $337,747 Net income for the period 62,508 62,508 Stock issued 17,563 17,563 Purchase and retirement of stock (12,767) (69,493) (82,260) Dividends (21,785) (21,785) Unrealized gain on securities available for sale, net 9,368 9,368 -------- ------- ------- -------- BALANCE, SEPTEMBER 30, 2001 $211,748 $16,537 $94,856 $323,141 ======== ======= ======== ========
WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the nine months ended September 30, 2001 2000 --------- --------- OPERATING ACTIVITIES: Net income $ 62,508 $ 59,038 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 3,686 3,669 Amortization of intangibles and other assets 2,584 2,204 Loan loss provision 2,700 2,775 Amortization of deferred net loan fees 796 381 Decrease (increase) in interest income receivable 4,446 (2,758) (Increase) in other assets (8,927) (2,159) Increase in income taxes payable 3,836 3,193 (Decrease)/increase in interest expense payable (4,372) 753 Increase in other liabilities 5,738 1,757 Write-downs of equipment 238 35 Originations of loans for resale (4,418) (1,931) Proceeds from sale of loans originated for resale 4,417 1,696 Net loss on sale of loans originated for resale 10 18 Net gain on sale of property acquired in satisfaction of debt (155) (671) Write-down on property acquired in satisfaction of debt 78 442 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 73,165 68,442 --------- --------- INVESTING ACTIVITIES: Net cash obtained in acquisitions 0 3,034 Net disbursements of loans (2,152) (78,745) Purchases of investment securities available for sale (208,411) (48,711) Purchases of investment securities held to maturity (3,780) (3,078) Purchases of property, plant and equipment (3,576) (1,638) Proceeds from maturity of securities available for sale 236,864 110,254 Proceeds from maturity of securities held to maturity 18,600 8,904 Proceeds from sale of securities available for sale 651 1,172 Proceeds from sale of property and equipment 0 20 Proceeds from property acquired in satisfaction of debt 1,898 3,382 --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 40,094 (5,406) --------- --------- FINANCING ACTIVITIES: Net increase in deposits 21,170 107,320 Net decrease in short-term borrowings (130,910) (127,933) Repayments of notes payable (3,215) (10,464) Exercise of stock options/issuance of shares 12,834 4,483 Repurchases/retirement of stock (82,260) (39,267) Dividends paid (21,785) (20,037) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (204,166) (85,898) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (90,907) (22,862) --------- --------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 286,482 255,738 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 195,575 $ 232,876 ========= =========
For the nine months ended September 30, 2001 2000 ---- ---- SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Loans transferred to other real estate owned $303 $1,750 Fixed asset charge-offs and depreciation expense applied against reserves 186 Cash and cash equivalents received in connection with acquisition of First Counties Bank: Common stock issued 19,723 Liabilities assumed 82,356 Fair value of assets acquired, other than cash and cash equivalents (86,671) Goodwill (9,577) Core deposit intangible (2,797) ------- Net cash and cash equivalents received $3,034 ------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY: Interest paid for the period 52,145 64,920 Income tax payments for the period 27,181 25,938
WESTAMERICA BANCORPORATION FINANCIAL SUMMARY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Nine months ended September 30, September 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net Interest Income $47,789 $45,636 $139,918 $133,710 Provision for Loan Losses (900) (905) (2,700) (2,775) Noninterest Income 10,590 10,757 31,869 31,180 Noninterest Expense (25,763) (25,597) (76,966) (74,687) Provision for income taxes (10,391) (9,746) (29,613) (28,390) ---------- ---------- ---------- ---------- Net Income $21,325 $20,145 $62,508 $59,038 ========== ========== ========== ========== Average Shares Outstanding 35,002 36,365 35,475 36,404 Diluted Average Shares Outstanding 35,524 36,906 36,025 36,893 Shares Outstanding at Period End 34,714 36,653 Basic Earnings Per Share $0.61 $0.55 $1.76 $1.62 Diluted Earnings Per Share 0.60 0.55 1.74 1.60 Average Balances: Total Assets $3,849,715 $3,913,365 $3,848,996 $3,858,687 Earning Assets 3,566,979 3,586,728 3,560,543 3,545,425 Total Loans 2,467,547 2,406,282 2,460,526 2,341,166 Total Deposits 3,247,687 3,195,505 3,203,475 3,122,992 Shareholders' Equity 307,889 316,913 313,072 303,453 Financial Ratios for the Period: Return On Assets 2.20% 2.05% 2.17% 2.04% Return On Equity 27.48% 25.29% 26.69% 25.99% Net Interest Margin 5.78% 5.50% 5.68% 5.46% Net Loan Losses to Average Loans 0.15% 0.31% 0.14% 0.18% Efficiency Ratio 41.3% 42.7% 42.0% 42.6% Balances at Period End: Total Assets $3,910,348 $3,980,531 Earning Assets 3,550,036 3,583,728 Total Loans 2,480,695 2,464,658 Total Deposits 3,257,916 3,252,916 Shareholders' Equity 323,141 331,304 Financial Ratios at Period End: Allowance for Loan Losses to Loans 2.11% 2.12% Book Value Per Share $9.31 $9.04 Equity to Assets 8.26% 8.32% Total Capital to Risk Assets 10.93% 11.76% Dividends Paid Per Share $0.21 $0.19 $0.61 $0.55 Dividend Payout Ratio 35% 35% 35% 34%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Westamerica Bancorporation and its subsidiaries Westamerica Bank, Community Banker Services Corporation, Westamerica Commercial Credit Inc., and Money Outlet Inc. (the Company) reported third quarter 2001 net income of $21.3 million or $.60 diluted earnings per share. These results compare to net income of $20.1 million or $.55 diluted earnings per share for the third quarter of 2000. On a year-to-date basis, net income was $62.5 million representing $1.74 diluted earnings per share, compared to $59.0 million or $1.60 share for the same period of 2000. Following is a summary of the components of net income for the periods indicated (dollars in thousands):
Three months ended Nine months ended September 30, September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net interest income (FTE) $ 51,778 $ 49,184 $ 151,306 $ 144,119 Provision for loan losses (900) (905) (2,700) (2,775) Noninterest income 10,590 10,757 31,869 31,180 Noninterest expense (25,763) (25,597) (76,966) (74,687) Provision for income taxes (FTE) (14,380) (13,294) (41,001) (38,799) ----------- ----------- ----------- ----------- Net income $ 21,325 $ 20,145 $ 62,508 $ 59,038 =========== =========== =========== =========== Average total assets $ 3,849,715 $ 3,913,365 $ 3,848,996 $ 3,858,687 Net income to average total assets 2.20% 2.05% 2.17% 2.04%
Net income for the third quarter of 2001 was $1.2 million (6%) over the same quarter of 2000. The primary reason for the increase was higher net interest income (FTE) (up $2.6 million or 5%), the net result of a 28 basis point (bp) improvement in the net margin, partially offset by a lower average earning asset base (down $20 million). Noninterest income decreased $167 thousand (2%), partially offsetting the net interest improvement. The resulting net revenue improvement was slightly reduced by an increase in noninterest expenses, which were $166 thousand above the year-ago quarter. The provision for income taxes (FTE) increased $1.1 million (8%). Comparing the first nine months of 2001 to the prior year, net income (FTE) increased $3.5 million (6%). Improved net interest income accounted for most of the change, increasing $7.2 million (5%). The increase was due to both a higher margin (up 22 bps) and higher average earning assets (up $15 million). Noninterest income added $689 thousand to the revenue increase, which was partially offset by higher noninterest expenses (up $2.3 million). The FTE provision for income taxes for the 2001 period was up $2.2 million (6%), commensurate with the increase in pretax income. NET INTEREST INCOME Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
Three months ended Nine months ended September 30, September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Interest and fee income $ 63,654 $ 68,554 $ 195,776 $ 199,791 Interest expense (15,865) (22,918) (55,858) (66,081) FTE adjustment 3,989 3,548 11,388 10,409 ----------- ----------- ----------- ----------- Net interest income (FTE) $ 51,778 $ 49,184 $ 151,306 $ 144,119 =========== =========== =========== =========== Average earning assets $ 3,566,979 $ 3,586,728 $ 3,560,543 $ 3,545,425 Net interest margin (FTE) 5.78% 5.50% 5.68% 5.46%
The Company's primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) during the third quarter of 2001 increased $2.6 million (5%) from the same period in 2000 to $51.8 million. Approximately 12% of the increase was due to the change in the level and mix of average earning assets (the volume component), with the remainder due to a higher margin earned on those assets (the rate component). The increase in the net interest margin was the net effect of a 49 bp drop in the asset yield, which was more than offset by a 78 bp drop in the cost of funds. Comparing the first nine months of 2001 with the previous year, net interest income (FTE) increased $7.2 million (5%), with 55% of the increase attributable to more volume and 45% to a 22 bp increase in the margin. The margin expansion was the result of a decrease (16 bp) in asset yields, which was more than offset by a 38 bp lower cost of funds. INTEREST AND FEE INCOME Interest & fee income (FTE) for the third quarter of 2001 decreased $4.5 million (6%) from the same period in 2000. The decrease was the combined effect of lower average earning assets in the 2001 period and lower yields earned on those assets. Average earning assets declined $20 million, despite expansion in commercial real estate loans (up $68 million or 8%), construction loans (up $17 million or 32%), and indirect consumer loans (up $15 million or 4%). Much of this growth was offset by reductions in the commercial and direct consumer loan portfolios, which decreased by $27 million (4%) and $14 million (21%), respectively. All other categories of loans increased by $2 million. A net reduction of the investment portfolio provided a further source of funds, specifically in the categories of asset-backed securities (down $65 million or 20%), US Treasury securities (down $15 million or 8%), and US Agency obligations (down $32 million or 16%). The average yield on the Company's earning assets decreased from 8.03% in 2000 to 7.54% in 2001 (down 49 bp). This downward direction of yields was reflective of general interest markets during much of 2001, during which time the Federal Funds rate declined from 6.40% to 3.07% and the 3-month Treasury rate from 5.94% to 2.69%. This was particularly evident in variable-rate categories of loans such as commercial (170 bp decline in yield), construction (332 bp decline) and personal lines of credit (268 bp decline). Other categories of loans with longer maturities and/or fixed rates of interest also declined, but by a relatively lesser degree. These include residential real estate loans (39 bp decrease) and indirect consumer loans (down 7 bp). The net result was that the yield on the loan portfolio declined 71 bp to 7.94%. The investment portfolio yield decreased 9 bp, to 6.65%. Comparing the first nine months of 2001 to 2000, interest & fee income (FTE) decreased by $3.0 million (1%). Unlike the third quarter comparison, the change was the net effect of a higher volume of earning assets more than offset by the impact of lower yields. The positive volume component of the change was caused by a $15 million (1%) increase in average earning assets, including higher commercial real estate loans (up $82 million or 9%), indirect consumer loans (up $38 million or 12%), construction loans (up $20 million or 42%), and residential real estate loans (up $15 million or 4%). Total loans increased by $119 million (5%). The investment portfolio was reduced by $104 million (9%) to fund the loan expansion. The average yield on earning assets for the first nine months of 2001 was 7.77% compared to 7.94% in 2000. Loan yields, especially those more sensitive to market rates, declined: the yield on commercial loans was down 87 bps, construction yields declined 227 bps, and personal lines of credit were down 138 bps. Offsetting these were lesser declines in more stable, fixed-rate loan yields, so that the total loan yield declined only 32 bps. The investment portfolio yield decreased 2 bps; the above-mentioned volume decline was generally made up of lower-yielding asset-backed securities. INTEREST EXPENSE Interest expense decreased $7.1 million (31%) in the third quarter of 2001 compared to the year-ago period. The decrease was the combined effect of a lower balance of interest-bearing liabilities and a drop in the average rate paid. Average interest-bearing liabilities decreased $109 million (4%), almost entirely in the categories of short-term borrowed funds (down $108 million or 32%) and consumer savings accounts (down $38 million or 8%). A portion of this decline was replaced by growth in interest-bearing transaction accounts (up $43 million or 7%). The average rate paid on interest-bearing liabilities decreased from 3.50% in the third quarter of 2000 to 2.53% in 2001. Rates paid on those liabilities that move with general market conditions declined accordingly: the average rate on Fed Funds Purchased dropped 302 bps and the rate paid on repurchase agreements declined 248 bps. Rates on deposits were managed down as well, including those on CDs over $100 thousand, which declined 191 bps, and on high-yield Money Market accounts, which were lowered an average of 142 bps. Through September 30, interest expense decreased $10.2 million (16%) in 2001 from 2000, again due to both a lower average balance of interest-bearing liabilities and lower rates paid. Interest-bearing liabilities declined $66 million (3%), led by lower purchased funds (down $97 million or 27%) and partially offset by higher CDs over $100 thousand (up $30 million or 12%). Interest-bearing transaction accounts increased $57 million (10%). Rates paid averaged 2.96% during the first nine months of 2001 compared to 3.41% in the year-ago period. The most significant decline was on short-term funds, which decreased from 5.15% to 3.84%. Rates on all deposit categories decreased as well, with the average rate paid on all interest-bearing deposits dropping from 3.05% to 2.80%. In all periods, the Company has attempted continuously to reduce high-rate time deposits while increasing the balances of more profitable, lower-cost transaction accounts minimizing the effect of adverse cyclical quarterly trends. NET INTEREST MARGIN (FTE) The following summarizes the components of the Company's net interest margin for the periods indicated:
Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Yield on earning assets 7.54% 8.03% 7.77% 7.94% Rate paid on interest-bearing liabilities 2.53% 3.50% 2.96% 3.41% ---- ---- ---- ---- Net interest spread 5.01% 4.53% 4.81% 4.53% Impact of all other net non-interest bearing funds 0.77% 0.97% 0.87% 0.93% ---- ---- ---- ---- Net interest margin 5.78% 5.50% 5.68% 5.46% ==== ==== ==== ====
During the third quarter of 2001, the Company's rapid reaction to declining market rates resulted in a substantial increase in the net interest margin of 28 basis points compared to the third quarter of 2000. The unfavorable impact of lower rates earned on loans and the investment portfolio, triggered by market trends, was more than offset by managed decreases in rates paid on deposits and short-term funds. The result was a 48-bp increase in the interest spread. Partially offsetting the increase in spread was the lower value of noninterest bearing funding sources. While the average balance of these sources increased $45 million (5%), their value decreased 20 bp because of the lower market rates of interest at which they could be invested. On a year-to-date basis, the net interest margin increased 22 bp when compared to the same period in 2000. Earning asset yields decreased 17 bps, while the cost of interest-bearing liabilities was managed down, partially through a substantial reduction in higher-priced purchased funds. The interest spread increased 28 bps as a result. Noninterest bearing funding sources increased $57 million (4%), but because of lower market rates of interest their value decreased by 6 bps. SUMMARY OF AVERAGE BALANCES, YIELDS/RATES AND INTEREST DIFFERENTIAL The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include non-performing loans. Interest income includes proceeds from loans on non-accrual status only to the extent cash payments have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended September 30, 2001 ------------------------------------------ Interest Rates Average Income/ Earned/ Balance Expense Paid ---------- ---------- ---- Assets: Money market assets and funds sold $ 2,759 $ 18 2.59% Investment securities: Available for sale Taxable 597,555 9,171 6.09% Tax-exempt 281,854 5,338 7.58% Held to maturity Taxable 73,915 901 4.84% Tax-exempt 143,349 2,878 8.03% Loans: Commercial: Taxable 401,421 8,032 7.94% Tax-exempt 188,353 3,705 7.80% Commercial real estate 978,748 20,064 8.12% Real estate construction 68,954 1,575 9.06% Real estate residential 351,639 6,009 6.84% Consumer 478,432 9,952 8.25% ---------- ---------- Total loans 2,467,547 49,337 7.94% ---------- ---------- Total earning assets 3,566,979 67,643 7.54% Other assets 282,736 ---------- Total assets $3,849,715 ========== Liabilities and shareholders' equity Deposits: Noninterest bearing demand $1,013,148 $ -- -- Savings and interest-bearing transaction 1,378,731 5,115 1.47% Time less than $100,000 386,732 3,954 4.06% Time $100,000 or more 469,076 4,494 3.80% ---------- ---------- Total interest-bearing deposits 2,234,539 13,563 2.41% Short-term borrowed funds 228,594 1,803 3.12% Debt financing and notes payable 27,821 499 7.17% ---------- ---------- Total interest-bearing liabilities 2,490,954 15,865 2.53% Other liabilities 37,724 Shareholders' equity 307,889 ---------- Total liabilities and shareholders' equity $3,849,715 ========== Net interest spread (1) 5.01% Net interest income and interest margin (2) $ 51,778 5.78% ========== ====
For the three months ended September 30, 2000 ------------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid ---------- ---------- ---- Assets: Money market assets and funds sold $ 803 $ 9 4.46% Investment securities: Available for sale Taxable 723,950 11,098 6.10% Tax-exempt 223,571 4,317 7.68% Held to maturity Taxable 78,897 1,276 6.43% Tax-exempt 153,225 3,053 7.93% Loans: Commercial: Taxable 445,988 11,390 10.16% Tax-exempt 180,640 3,469 7.64% Commercial real estate 910,771 18,970 8.26% Real estate construction 52,107 1,606 12.19% Real estate residential 343,648 6,222 7.24% Consumer 473,128 10,692 8.99% ---------- ---------- Total loans 2,406,282 52,349 8.65% ---------- ---------- Total earning assets 3,586,728 72,102 8.03% Other assets 378,688 ---------- Total assets $3,913,365 ========== Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $ 964,928 $ -- -- Savings and interest-bearing transaction 1,371,649 5,950 1.73% Time less than $100,000 390,339 5,094 5.19% Time $100,000 or more 468,588 6,744 5.73% ---------- ---------- Total interest-bearing deposits 2,230,576 17,788 3.17% Short-term borrowed funds 336,524 4,548 5.38% Debt financing and notes payable 32,391 582 7.15% ---------- ---------- Total interest-bearing liabilities 2,599,491 22,918 3.50% Other liabilities 32,033 Shareholders' equity 316,913 Total liabilities and shareholders' equity $3,913,365 ========== Net interest spread (1) 4.54% Net interest income and interest margin (2) $ 49,184 5.50% ========== =====
For the nine months ended September 30, 2001 ------------------------------------------ Interest Rates Average income/ earned/ Balance expense paid ---------- ---------- ---- Assets: Money market assets and funds sold $ 1,229 $ 23 2.50% Investment securities: Available for sale Taxable 619,704 28,843 6.22% Tax-exempt 256,904 14,597 7.58% Held to maturity Taxable 75,419 2,988 5.30% Tax-exempt 146,761 8,700 7.90% Loans: Commercial: Taxable 400,796 26,733 8.92% Tax-exempt 190,078 11,083 7.80% Commercial real estate 968,897 60,171 8.29% Real estate construction 67,702 4,979 9.68% Real estate residential 353,253 18,487 7.00% Consumer 479,800 30,560 8.52% ---------- ---------- Total loans 2,460,526 152,013 8.24% ---------- ---------- Total earning assets 3,560,543 207,164 7.77% Other assets 288,453 ---------- Total assets $3,848,996 ========== Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $ 980,974 $ -- -- Savings and interest-bearing transaction 1,344,565 15,477 1.54% Time less than $100,000 392,812 13,712 4.67% Time $100,000 or more 485,124 17,427 4.80% ---------- ---------- Total interest-bearing deposits 2,222,501 46,616 2.80% Short-term borrowed funds 266,928 7,726 3.84% Debt financing and notes payable 28,178 1,516 7.17% ---------- ---------- Total interest-bearing liabilities 2,517,607 55,858 2.96% Other liabilities 37,343 Shareholders' equity 313,072 ---------- Total liabilities and shareholders' equity $3,848,996 ========== Net interest spread (1) 4.81% Net interest income and interest margin (2) $ 151,306 5.68% ========== ====
For the nine months ended September 30, 2000 ------------------------------------------- Interest Rates Average income/ earned/ Balance expense paid ---------- ---------- ---- Assets: Money market assets and funds sold $ 561 $ 15 3.57% Investment securities: Available for sale Taxable 746,888 34,665 6.20% Tax-exempt 221,818 12,212 7.34% Held to maturity Taxable 80,337 3,800 6.32% Tax-exempt 154,654 9,181 7.92% Loans: Commercial: Taxable 440,726 33,161 10.05% Tax-exempt 170,916 9,952 7.78% Commercial real estate 886,992 55,406 8.33% Real estate construction 47,530 4,307 11.95% Real estate residential 337,029 17,750 7.02% Consumer 457,974 29,751 8.68% ---------- ---------- Total loans 2,341,167 150,327 8.56% ---------- ---------- Total earning assets 3,545,425 210,200 7.94% Other assets 313,262 ---------- Total assets $3,858,687 ========== Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $ 939,535 $ -- -- Savings and interest-bearing transaction 1,340,126 16,803 1.67% Time less than $100,000 388,550 14,423 4.96% Time $100,000 or more 454,782 18,700 5.49% ---------- ---------- Total interest-bearing deposits 2,183,458 49,926 3.05% Short-term borrowed funds 364,073 14,202 5.15% Debt financing and notes payable 36,533 1,953 7.13% ---------- ---------- Total interest-bearing liabilities 2,584,064 66,081 3.41% Other liabilities 31,635 Shareholders' equity 303,453 ---------- Total liabilities and shareholders' equity $3,858,687 ========== Net interest spread (1) 4.53% Net interest income and interest margin (2) $ 144,119 5.46% ========== =====
(1) Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets. SUMMARY OF CHANGES IN INTEREST INCOME AND EXPENSE DUE TO CHANGES IN AVERAGE ASSET & LIABILITY BALANCES AND YIELDS EARNED & RATES PAID The following tables set forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands).
Three months ended September 30, 2001 compared with three months ended September 30, 2000 ----------------------------------------- Volume Rate Total ------- ------- ------- Interest and fee income: Money market assets and funds sold $ 11 $ (2) $ 9 Investment securities: Available for sale Taxable (1,935) 8 (1,927) Tax-exempt 1,103 (82) 1,021 Held to maturity Taxable (77) (298) (375) Tax-exempt (199) 24 (175) Loans: Commercial: Taxable (1,060) (2,298) (3,358) Tax-exempt 150 86 236 Commercial real estate 1,382 (288) 1,094 Real estate construction (127) 96 (31) Real estate residential 144 (357) (213) Consumer (162) (578) (740) ------- ------- ------- Total loans 327 (3,339) (3,012) ------- ------- ------- Total earning assets (769) (3,690) (4,459) ------- ------- ------- Interest expense: Deposits: Savings and interest-bearing transaction 269 (1,104) (835) Time less than $100,000 (90) (1,050) (1,140) Time $100,000 or more 7 (2,257) (2,250) ------- ------- ------- Total interest-bearing deposits 186 (4,411) (4,225) ------- ------- ------- Short-term borrowed funds (1,192) (1,553) (2,745) Debt financing and notes payable (82) (1) (83) ------- ------- ------- Total interest-bearing liabilities (1,088) (5,965) (7,053) ------- ------- ------- Increase (Decrease) in Net Interest Income $ 319 $ 2,275 $ 2,594 ======= ======= =======
Nine months ended September 30, 2001 compared with nine months ended September 30, 2000 -------------------------------------------- Volume Rate Total -------- -------- -------- Interest and fee income: Money market assets and funds sold $ 11 $ (3) $ 8 Investment securities: Available for sale Taxable (5,879) 57 (5,822) Tax-exempt 1,883 503 2,385 Held to maturity Taxable (240) (572) (812) Tax-exempt (469) (12) (481) Loans: Commercial: Taxable (3,172) (3,256) (6,428) Tax-exempt 1,113 18 1,131 Commercial real estate 5,235 (470) 4,765 Real estate construction 1,577 (905) 672 Real estate residential 810 (73) 737 Consumer 1,259 (450) 809 -------- -------- -------- Total loans 6,822 (5,136) 1,686 -------- -------- -------- Total earning assets 2,128 (5,164) (3,036) -------- -------- -------- Interest expense: Deposits: Savings and interest-bearing transaction 664 (1,990) (1,326) Time less than $100,000 112 (823) (711) Time $100,000 or more 1,133 (2,406) (1,273) -------- -------- -------- Total interest-bearing deposits 1,909 (5,219) (3,310) -------- -------- -------- Short-term borrowed funds (3,285) (3,191) (6,476) Debt financing and notes payable (449) 12 (437) -------- -------- -------- Total interest-bearing liabilities (1,825) (8,398) (10,223) -------- -------- -------- Increase (Decrease) in Net Interest Income $ 3,953 $ 3,234 $ 7,187 ======== ======== ========
PROVISION FOR LOAN LOSSES The level of the provision for loan losses during each of the periods presented reflects the Company's continued efforts to control credit costs by enforcing underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The Company provided $900 thousand for loan losses in the third quarter of 2001 and $905 thousand in the 2000 period. For the first nine months of 2001, $2.7 million was provided, representing a $75 thousand decrease from 2000. For further information regarding net credit losses and the reserve for loan losses, see the "Asset Quality" section of this report. NONINTEREST INCOME The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands).
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Service charges on deposit accounts $ 5,806 $ 5,271 $17,273 $15,834 Merchant credit card fees 1,048 1,049 3,032 3,005 ATM fees and interchange 642 579 1,700 1,611 Financial services commissions 375 388 994 1,276 Debit card fees 388 267 1,076 829 Mortgage banking income 260 198 723 620 Official check sales income 260 365 902 1,068 Trust fees 221 179 752 520 Gains on sale of foreclosed property 1 339 155 672 Other noninterest income 1,589 2,122 5,262 5,745 ------- ------- ------- ------- Total $10,590 $10,757 $31,869 $31,180 ======= ======= ======= =======
Noninterest income for the third quarter of 2001 decreased $167 thousand (2%) from the same period in 2000. The largest single category of change was that of service charges on deposit accounts, specifically in the area of deficit fees charged on analyzed accounts, which increased $569 thousand (39%). Deficit fees are service charges collected from business customers that typically pay for such services with compensating balances. In the current period of low interest rates, the earnings value of the balances has decreased resulting in more customers being required to pay for services with explicit fees. Other categories of deposit account fees decreased slightly. The second largest component of the change was the increased usage of card-based products. The Bank began issuing check (or debit) cards in 2000 and customer acceptance and use has been steadily increasing. In the current quarter, fees earned from check card use totaled $388 thousand, up $121 thousand (45%) over a year ago. Fees derived from the Bank's system of ATM machines increased $63 thousand (11%), due to Bank customers' use of foreign machines (up $40 thousand or 13%) and non-Bank customers accessing their accounts through Westamerica Bank ATM's (up $23 thousand or 8%). Decreases in three other categories offset these increases. Gains on sales of foreclosed property were $339 thousand in the third quarter of 2000, compared to a nominal amount in the current quarter. The year-ago gain was from the sale of a single long-held commercial development. Income from the sale of official checks decreased $105 thousand (29%); the revenues are based on the interest value of the outstanding checks from the time that they are sold until they are presented for payment, so that the current lower-rate interest rate environment has resulted in lower revenue. The "other" category decreased $533 thousand (25%), as the year-ago quarter included a $250 thousand gain realized on the repurchase of long-term debt and gains on the sale of other assets. Comparing the first nine months of 2001 to the same period in 2000, noninterest income increased $689 thousand (2%). As with the quarter-to-quarter comparison, the largest component of this change was service charges on deposit accounts, which increased $1.4 million (9%). Again, the primary reason for the increase is the current low interest rate environment: lower earnings credits are given on compensating balances so that customers are assessed explicit fees for services. Also included in this category are overdraft charges, which increased $166 thousand (3%), as service charge routines installed in late 1999 had not yet taken full effect until the 2001 period. Further, service charges on savings accounts improved $149 thousand (38%) due to the assessment of annual charges on IRA/KEOGH accounts imposed for the first time in the first quarter of 2001. Debit card fees were up $247 thousand (30%), as usage continues to increase. Trust fees increased $232 thousand (45%) with intensified marketing resulting in more trust assets under management, which increased to $339 million at September 30, 2001 from $316 million in 2000. Decreasing from the year-ago nine month period were financial services commissions, which were down $282 thousand (22%) because of lower sales of mutual fund and variable annuity products, which in turn was the result of staffing shortages early in 2001 and lower volumes of investment in equity markets. Gains on sales of foreclosed property dropped $518 thousand (77%), as 2000 included the sale of one large property. Official check income was down $166 thousand (16%) due to lower earnings on outstanding checks. And the "other" category decreased $483 thousand (8%), as the year-ago period included a $250 thousand gain realized on the repurchase of long-term debt and gains on the sale of other assets. NONINTEREST EXPENSE The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands).
Three months ended Nine months ended September 30, September 30, ------------------------ ------------------------ 2001 2000 2001 2000 ------- ------- ------- ------- Salaries and incentives $10,656 $10,236 $31,372 $29,913 Employee benefits 2,814 2,707 8,668 8,232 Occupancy 3,073 2,856 8,900 8,789 Equipment 1,513 1,737 4,587 4,897 Data processing services 1,502 1,504 4,577 4,552 Courier service 923 898 2,752 2,588 Telephone 480 561 1,474 1,658 Postage 415 501 1,318 1,528 Professional fees 370 521 1,222 1,319 Merchant credit card 399 412 1,123 1,196 Stationery and supplies 355 432 1,098 1,158 Advertising/public relations 319 347 1,031 932 Employee recruiting 69 26 396 166 Loan expense 296 264 823 806 Operational losses 278 139 689 639 Deposit expense 126 24 429 21 Foreclosed property expense 18 316 159 420 Amortization of deposit intangibles 367 313 1,108 821 Amortization of goodwill 297 268 879 713 Other noninterest expense 1,493 1,535 4,361 4,339 ------- ------- ------- ------- Total $25,763 $25,597 $76,966 $74,687 ======= ======= ======= ======= Average full time equivalent staff 1,074 1,078 1,082 1,077 Noninterest expense to revenues (FTE) 41.3% 42.7% 42.0% 42.6%
Noninterest expense increased $166 thousand (1%) in the third quarter of 2001 compared to the same period in 2000. The largest category of increase was salaries and incentives, which were up $420 thousand (4%). A portion of the increase is attributable to the acquisition of First Counties Bank (FCB) in August of 2000; in addition, approximately $400 thousand is due to salary increases granted in early 2001 to existing employees. Annualized salaries (excluding incentives) per full time equivalent employee grew from $34,800 in 2000 to $35,400 in 2001, for an average 1.7% increase. Occupancy costs increased $217 thousand (8%) over the third quarter of 2000, largely because of higher utilities costs (up $81 thousand or 17%); scheduled rent increases added $50 thousand (3%); and the two new offices added in connection with the August, 2000 acquisition of FCB caused occupancy expense to rise. Other categories of year-to-year increase were operational losses (up $139 thousand or 100%) due primarily to fewer loss recoveries (which act to reduce operational loss expense) in 2001; deposit expense increased $102 thousand over 2000, primarily because of additional costs totaling $109 thousand paid on behalf of business clients; and the amortization of deposit intangibles (up $54 thousand or 17%) and amortization of goodwill (up $29 thousand or 11%). Both increases resulted from the Company's acquisition of FCB in the third quarter of 2000. The transaction gave rise to a deposit-based intangible asset of $2.8 million that is being amortized over a ten-year period, and goodwill of $9.8 million, that is being currently amortized over 25 years. Partially offsetting these increases, foreclosed property expense declined $298 thousand (94%) to a more-normal level after recording a large write-down in the 2000 period; equipment expense decreased $224 thousand (13%) due to lower depreciation costs; professional fees were down $151 thousand (29%) primarily because 2000 included legal fees in connection with the FCB acquisition; postage expense decreased $86 thousand (17%), as the 2000 period included several special mailings; and telephone expense dropped $81 thousand (15%) due to the installation of new telephone switching equipment in late 2000. On a year-to-date basis, noninterest expense increased $2.3 million (3%). The major categories of increase are the same as discussed above: salaries & incentives, deposit expense and amortization of intangibles. Salaries & incentives increased $1.5 million (5%) primarily because of salary increases to existing employees which became effective during the first part of 2001. Deposit expense increased $408 thousand as a result of expenses paid on behalf of business customers. Amortization of deposit intangibles and goodwill increased $287 (35%) thousand and $166 thousand (23%), respectively, as a result of the FCB acquisition. Another major category of increase was employment recruitment expenses, up $230 thousand (139%) due to a one-time, three-month effort to locate and hire staff for certain positions within the Company. Partially offsetting these increases during the first nine months of the year, foreclosed property expense declined $261 thousand (62%) due to unusually high write-downs in 2000; postage decreased $210 thousand (14%), as the 2000 period included some extraordinary costs; and telephone dropped $184 thousand (11%) as a result of the installation of cost-saving switching hardware and software, and equipment expense decreased $310 thousand (6%) due to lower depreciation costs. PROVISION FOR INCOME TAX During the third quarter of 2001, the Company recorded income tax expense of $10.4 million, $645 thousand (7%) higher than the third quarter of 2000; on a year-to-date basis, income tax expense was $29.6 million for 2001 compared to $28.4 million for 2000 (up 4%). The current quarter provision represents an effective tax rate of 32.8 percent, compared to 32.6 percent for the third quarter of 2000; for the first nine months of 2001, the effective tax rate was 32.1 percent, compared to 32.5 percent recorded in 2000. The provision for income taxes for all periods is primarily attributable to the respective levels of earnings and revenues from tax-exempt loans and state and municipal securities, which increased $1.1 million in the third quarter over the same period last year and $3.0 million for the nine-month period. In addition, the first nine months of 2001 reflected an adjustment to low-income housing tax credits that the Company earned in the prior year. The effect of the adjustment was to lower the 2001 year-to-date tax provision by $443 thousand. ASSET QUALITY The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk and increase diversification of earning assets into less risky investments. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all non-performing assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated (dollars in thousands):
At September 30, At ------------------------ December 31, 2001 2000 2000 ------- ------- ------------ Classified loans $30,171 $37,297 $31,634 Other classified assets 547 2,017 2,065 ------- ------- ------- Total classified assets $30,718 $39,314 $33,699 ======= ======= ======= Allowance for loan losses / classified loans 174% 140% 165%
Classified loans at September 30, 2001, decreased $7.1 million (19%) from September 30, 2000, primarily reflecting the upgrading of one large and several smaller classified commercial and commercial real estate loans. Other classified assets decreased $1.5 million (73%) from September 30, 2000, due to sales and write-downs of foreclosed properties partially offset by new foreclosures on loans with real estate collateral. The overall low level of classified loans in relation to the allowance for loan losses reflects the Company's strict credit standards, even in a weakening economy. NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans, loans 90 days past due as to principal or interest and still accruing, and other real estate owned. Loans are placed on nonaccrual status when reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified as "performing nonaccrual" and are included in total non-performing assets. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Any subsequent interest received is recorded as interest income on a cash basis. The following is a summary of nonperforming assets on the dates indicated (dollars in thousands):
At September 30, At ------------------------ December 31, 2001 2000 2000 ------- ------- ------------ Performing nonaccrual loans $ 1,350 $ 3,653 $ 3,499 Nonperforming, nonaccrual loans 7,156 5,193 4,525 ------- ------- ------- Total nonaccrual loans 8,506 8,846 8,024 Loans 90 days past due and still accruing 409 529 650 ------- ------- ------- Total nonperforming loans 8,915 9,375 8,674 Other real estate owned 547 2,017 2,065 ------- ------- ------- Total nonperforming assets $ 9,462 $11,392 $10,739 ======= ======= ======= Allowance for loan losses / nonperforming loans 588% 557% 603%
Performing nonaccrual loans at September 30, 2001 decreased $2.3 million (63%) from a year ago and were essentially unchanged from year-end, 2000. The year-to-year decrease resulted primarily from charge-offs and payoffs. Nonperforming nonaccrual loans at September 30, 2001 increased $2.0 million (38%) from the previous year and $2.6 million (58%) from December 31, 2000. Much of the increase from both prior dates involves one large commercial real estate credit that was placed on nonperforming nonaccrual status due to the borrowers' delay in obtaining refinancing with another financial institution. The remainder of the increases in both periods is the net result of loans being added to non-accrual, partially offset by others being returned to full-accrual status or being paid off. Other real estate owned at September 30, 2001 was $1.5 million (73%) lower than both the previous year and December 31, 2000. Much of the reduction was due to the sale of three properties with a total carrying value of $1.2 million. Other sales were partially offset by the addition of new foreclosed property. The amount of gross interest income that would have been recorded for non-accrual loans for the three and nine months ended September 30, 2001, if all such loans had been current in accordance with their original terms, was $152 thousand and $518 thousand, respectively, compared to $208 thousand and $373 thousand, respectively, for the three and nine months ended September 30, 2000. The amount of interest income that was recognized on non-accrual loans from all cash payments, including those related to interest owed from prior years, made during the three and nine months ended September 30, 2001, totaled $347 thousand and $917 thousand, respectively, compared to $160 thousand and $368 thousand, respectively, for the comparable periods in 2000. These cash payments represent annualized yields of 19.35 percent and 16.07 percent, respectively, for the third quarter and the first nine months of 2001 compared to 9.22 percent and 14.27 percent, respectively, for the three and nine months ended September 30, 2000. Total cash payments received, including those recorded in prior years, which were applied against the book balance of nonaccrual loans outstanding at September 30, 2001, totaled approximately $24 thousand. The overall credit quality of the loan portfolio continues to be strong; however, the total nonperforming assets could fluctuate from period to period. The performance of any individual loan can be impacted by external factors such as the economic environment or factors particular to the borrower. The Company expects the level of nonperforming assets to remain near the current level; however, the Company can give no assurance that additional increases in nonaccrual loans will not occur in the future. ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses is maintained at a level estimated to be adequate to provide for losses that can be estimated based upon specific and general conditions. These include credit loss experience, the amount of past due, non-performing and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. The allowance is allocated to segments of the loan portfolio based in part on quantitative analyses of historical credit loss experience, in which criticized and classified loan balances are analyzed using a linear regression model to determine standard allocation percentages. The results of this analysis are applied to current criticized and classified loan balances to allocate the reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines due to their small balances and numerous accounts, are analyzed based on the historical rate of net losses and delinquency trends, grouped by the number of days the payments on these loans are delinquent. A portion of the allowance is also allocated to impaired loans. Management considers the $52.5 million allowance for loan losses, which constituted 2.11 percent of total loans at September 30, 2001, to be adequate as a reserve against inherent losses. However, while the Company's policy is to charge off in the current period those loans on which the loss is considered probable, the risk exists of future losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future required allowance levels. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended Nine months ended September 30, September 30, --------------------------- -------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Balance, beginning of period $ 52,468 $ 52,121 $ 52,279 $ 51,574 Loan loss provision 900 905 2,700 2,775 Loans charged off (1,611) (2,751) (5,501) (6,126) Recoveries of previously charged off loans 704 870 2,983 2,922 -------- -------- -------- -------- Net credit losses (907) (1,881) (2,518) (3,204) -------- -------- -------- -------- First Counties Bank acquisition 0 1,036 0 1,036 Balance, end of period $ 52,461 $ 52,181 $ 52,461 $ 52,181 ======== ======== ======== ======== Allowance for loan losses / loans outstanding 2.11% 2.12%
ASSET AND LIABILITY MANAGEMENT The fundamental objective of the Company's management of assets and liabilities is to maximize economic value while maintaining adequate liquidity and a conservative level of interest rate risk. The primary analytical tool used by the Company to gauge interest rate risk is a simulation model to project changes in net interest income ("NII") that result from forecast changes in interest rates. The analysis calculates the difference between a NII forecast over a 12-month period using a flat interest rate scenario, and a NII forecast using a rising or falling rate scenario where the Fed Funds rate is made to rise or fall evenly by 200 basis points over the 12-month forecast interval triggering a response in the other forecasted rates. It is the policy of the Company to require that such simulated NII changes should be always less than 10 percent or steps must be taken to reduce interest-rate risk. According to the same policy, if the simulated changes in NII reach 7.5 percent, a closer look at the risk will be put in place to determine what steps could be taken to control risk should it grow worse. The results of the model indicate that the mix of interest rate sensitive assets and liabilities at September 30, 2001 would not result in a fluctuation of NII that would exceed the parameters established by Company policy. At September 30, 2001 and 2000, the Company had no derivative financial instruments outstanding. As the Company believes that the derivative financial instrument disclosures contained within the notes to the financial statements of its 2000 Form 10-K substantially conform with the accounting policy requirements of these rule amendments, no further interim disclosure has been provided. The rule amendments that require expanded disclosure of quantitative and qualitative information about market risk were effective with the 1997 Form 10-K. At September 30, 2001, there were no substantial changes in the information on market risk that was disclosed in the Company's 2000 Form 10-K. LIQUIDITY The Company's principal source of asset liquidity is marketable investment securities available for sale. At September 30, 2001, investment securities available for sale totaled $908 million, representing a decrease of $13 million from December 31, 2000. In addition, the Company generates significant liquidity from its operating activities. The Company's profitability during the first nine months of 2001 and 2000 generated substantial cash flows, which are included in the totals provided from operations of $73 million and $68 million, respectively. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. The Company also realized net cash inflows from its investing activities during the 2001 period. Sales & maturities of investment securities net of purchases were $44 million during the nine months of 2001, which was partially offset by net disbursements of loans of $2 million, resulting in net cash provided from investing activities of $40 million. Investing activities were a slight net use of cash in the nine month period ended September 30, 2000. Net sales and maturities securities provided cash of $69 million. However, this was more than offset by net disbursements of loans of $79 million, resulting in net cash provided of $5 million. Financing activities also provided cash during both nine-month periods ended September 30. In 2001, the effect of the Company's stock repurchase programs and dividends paid to shareholders were $82 million and $22 million, respectively. These cash outflows, added to a $131 million reduction in short-term borrowed funds, partially offset by a $21 million increase in deposits are included in the net cash used in financing activities during the first nine months of 2001 of $204 million. This compares to the first nine months of 2000, when the cash used in financing activities totaled $86 million. This amount includes cash outflows related to the Company's stock repurchase programs and dividends paid to shareholders of $39 million and $20 million, respectively, plus a $128 million reduction in short-term debt, partially offset by a $107 million increase in deposits. The Company anticipates increasing its cash level from operations through 2001 due to increased profitability and retained earnings. For the same period, it is anticipated that demand for loans will increase, particularly in the commercial and real estate categories. The growth in deposit balances is expected to follow the anticipated growth in loan balances. However, due to the aftermath of the events of September 11, 2001, there is considerable uncertainty in the general economic environment which may impact loan demand. CAPITAL RESOURCES The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company repurchases approximately 250 thousand of its shares of Common Stock in the open market on a quarterly basis with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements. In addition to these systematic repurchases, other programs have been implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to these programs, the Company repurchased an additional 1.35 million and 488 thousand shares during the first nine months of 2001 and 2000, respectively. The Company's capital position represents the level of capital available to support continued operations and expansion. The Company's primary capital resource is shareholders' equity, which was $323 million at September 30, 2001. This amount, which is reflective of the effect of common stock repurchases and dividends paid to shareholders partially offset by the generation of earnings and proceeds from the issuance of stock, represents a decrease of $8 million or 2 percent from September 30, 2000, and a decrease of $15 million, or 4 percent, from December 31, 2000. As a consequence of the decrease in shareholders' equity, the Company's ratio of equity to total assets decreased slightly to 8.26 percent at September 30, 2001, from 8.32 percent a year ago. The equity to assets ratio was 8.38 percent on December 31, 2000. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated:
At September 30, At Minimum -------------------- December 31, Regulatory 2001 2000 2000 Requirement ----- ----- ------------ ----------- Tier I Capital 9.59% 10.35% 10.20% 4.00% Total Capital 10.93% 11.76% 11.61% 8.00% Leverage ratio 7.46% 8.04% 7.89% 4.00%
The risk-based capital ratios decreased at September 30, 2001, compared to the prior year and to December 31, 2000, primarily due to the decrease in the total level of tangible (excluding goodwill and purchase premiums) shareholders' equity as a result of the Company's common stock repurchases and dividends paid to shareholders, partially offset by increased net income and stock option exercises. Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. As shown in the table above, all ratios are in excess of the regulatory definition of "well capitalized". IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. And finally, any unamortized negative goodwill existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $16.3 million and unamortized identifiable intangible assets in the amount of $2.7 million which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $297 thousand for the third quarter of 2001 and $268 thousand for the same period in 2000. For the nine months ended September 30, goodwill amortization was $879 thousand in 2001 and $713 thousand in 2000. The Company is in the process of assessing the impact of the statements, including giving consideration to current market conditions, and, as of the date of this report, does not expect to have any transitional impairment losses to be recognized as a cumulative effect of a change in accounting principle. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WESTAMERICA BANCORPORATION (Registrant) Date: November 2, 2001 /s/ DENNIS R. HANSEN ------------------------------------ Dennis R. Hansen Senior Vice President and Controller Chief Accounting Officer PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Subsidiary Banks are at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Subsidiary Banks. Item 2 - Changes in Securities None Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 11: Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution (b) Reports on Form 8-K None EX-11 3 f77272ex11.txt EXHIBIT 11 Exhibit 11 WESTAMERICA BANCORPORATION COMPUTATION OF EARNINGS PER SHARE ON COMMON AND COMMON EQUIVALENT SHARES AND ON COMMON SHARES ASSUMING FULL DILUTION
For the For the three months nine months ended September 30, ended September 30, (In thousands, except per share data) 2001 2000 2001 2000 ------- ------- ------- ------- Weighted average number of common shares outstanding - basic 35,002 36,365 35,475 36,404 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 522 541 550 489 ------- ------- ------- ------- Weighted average number of common shares outstanding - diluted 35,524 36,906 36,025 36,893 ======= ======= ======= ======= Net income $21,325 $20,145 $62,508 $59,038 Basic earnings per share $ 0.61 $ 0.55 $ 1.76 $ 1.62 Diluted earnings per share $ 0.60 $ 0.55 $ 1.74 $ 1.60
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