Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 94-2156203
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1108 Fifth Avenue, San Rafael, California 94901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (707) 863-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ x ] No [ x ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act (Check one):
Large Accelerated Filer [ x ] Accelerated Filer [ ]
Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ x ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Title of Class Shares Outstanding as of April 30, 2008
Common Stock, 29,017,071
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 13
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 30
Item 4 - Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 31
Item 1A - Risk Factors 31
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3 - Defaults upon Senior Securities 32
Item 4 - Submission of Matters to a Vote of Security Holders 32
Item 5 - Other Information 32
Item 6 - Exhibits 32
Signature 33
Exhibit Index 34
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 35
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 36
Exhibit 32.1 - Certification of Chief Executive Officer 37
Required by 18 U.S.C. Section 1350
Exhibit 32.2 - Certification of Chief Financial Officer 38
Required by 18 U.S.C. Section 1350
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) fluctuations in asset prices including, but not limited to,
stocks, bonds, real estate, and commodities; (3) economic uncertainty
created by terrorist threats and attacks on the United States, the actions
taken in response, 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
and investments; (10) asset/liability management risks and liquidity risks;
(11) changes in liquidity levels in capital markets; and (12) 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, 2007, 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,
2008 2007 2007
---------------------------------------
Assets:
Cash and cash equivalents $139,621 $208,413 $209,764
Money market assets 336 321 333
Investment securities available for sale 477,686 602,220 532,821
Investment securities held to maturity,
with market values of:
$1,029,937 at March 31, 2008 1,016,613
$1,142,426 at March 31, 2007 1,142,382
$1,049,422 at December 31, 2007 1,045,288
Loans, gross 2,448,320 2,519,898 2,502,976
Allowance for loan losses (52,234) (54,889) (52,506)
---------------------------------------
Loans, net of allowance for loan losses 2,396,086 2,465,009 2,450,470
Other real estate owned 954 647 613
Premises and equipment, net 28,031 29,643 28,380
Identifiable intangibles 17,571 21,108 18,429
Goodwill 121,719 121,719 121,719
Interest receivable and other assets 143,685 157,367 151,142
---------------------------------------
Total Assets $4,342,302 $4,748,829 $4,558,959
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,202,165 $1,293,920 $1,245,500
Interest bearing:
Transaction 542,468 584,026 544,411
Savings 749,471 851,800 760,006
Time 700,534 714,626 714,873
---------------------------------------
Total deposits 3,194,638 3,444,372 3,264,790
Short-term borrowed funds 635,264 776,781 798,599
Debt financing and notes payable 36,736 36,883 36,773
Liability for interest, taxes and
other expenses 76,555 70,983 64,194
---------------------------------------
Total Liabilities 3,943,193 4,329,019 4,164,356
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
28,772 at March 31, 2008 336,545
30,158 at March 31, 2007 338,990
29,018 at December 31, 2007 334,211
Deferred compensation 2,923 2,734 2,990
Accumulated other comprehensive (loss) income (3,954) 3,593 (4,520)
Retained earnings 63,595 74,493 61,922
---------------------------------------
Total Shareholders' Equity 399,109 419,810 394,603
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,342,302 $4,748,829 $4,558,959
=======================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three months ended
March 31,
--------------------------
2008 2007
--------------------------
Interest Income:
Loans $38,732 $40,167
Money market assets and funds sold 1 2
Investment securities available for sale
Taxable 3,112 4,070
Tax-exempt 2,690 3,052
Investment securities held to maturity
Taxable 5,183 6,268
Tax-exempt 5,676 5,815
--------------------------
Total Interest Income 55,394 59,374
--------------------------
Interest Expense:
Transaction deposits 452 523
Savings deposits 1,330 1,409
Time deposits 5,546 7,305
Short-term borrowed funds 4,922 8,296
Notes payable 578 578
--------------------------
Total Interest Expense 12,828 18,111
--------------------------
Net Interest Income 42,566 41,263
--------------------------
Provision for Loan Losses 600 75
--------------------------
Net Interest Income After
Provision For Loan Losses 41,966 41,188
--------------------------
Noninterest Income:
Service charges on deposit accounts 7,296 7,528
Merchant credit card 2,580 2,449
Debit card 904 895
Trust fees 303 337
Financial services commissions 230 310
Other 2,367 2,936
Life insurance proceeds 0 822
Gain on sale of Visa common stock 5,698 0
--------------------------
Total Noninterest Income 19,378 15,277
--------------------------
Noninterest Expense:
Salaries and related benefits 12,984 12,568
Occupancy 3,390 3,291
Data processing 2,120 1,524
Furniture and equipment 921 1,138
Amortization of identifiable intangibles 858 975
Courier service 829 848
Professional fees 536 495
Other 3,756 3,825
Visa litigation expense (2,338) 0
--------------------------
Total Noninterest Expense 23,056 24,664
--------------------------
Income Before Income Taxes 38,288 31,801
Provision for income taxes 11,510 8,231
--------------------------
Net Income $26,778 $23,570
==========================
Average Shares Outstanding 28,861 30,342
Diluted Average Shares Outstanding 29,210 30,824
Per Share Data:
Basic earnings $0.93 $0.78
Diluted earnings 0.92 0.76
Dividends paid 0.34 0.34
See accompanying notes to unaudited condensed consolidated financial statements.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(In thousands)
(unaudited)
Accumulated
Compre-
Common Deferred hensive Retained
Shares Stock Compensation Income(Loss) Earnings Total
-------------------------------------------------------------------------------
Balance, December 31, 2006 30,547 $341,529 $2,734 $1,850 $78,122 $424,235
Comprehensive income 23,570 23,570
Net income for the period
Other comprehensive income,
net of tax:
Net unrealized gain on securities
available for sale 1,734 1,734
Post-retirement benefit transition
obligation amortization 9 9
--------------
Total comprehensive income 25,313
Exercise of stock options 58 2,122 2,122
Stock option tax benefits 134 134
Stock based compensation 474 474
Stock awarded to employees -- 19 19
Purchase and retirement of stock (447) (5,288) (16,851) (22,139)
Dividends (10,348) (10,348)
-------------------------------------------------------------------------------
Balance, March 31, 2007 30,158 $338,990 $2,734 $3,593 $74,493 $419,810
===============================================================================
Balance, December 31, 2007 29,018 $334,211 $2,990 ($4,520) $61,922 $394,603
Comprehensive income
Net income for the period 26,778 26,778
Other comprehensive income,
net of tax:
Net unrealized gain on securities
available for sale 557 557
Post-retirement benefit transition
obligation amortization 9 9
--------------
Total comprehensive income 27,344
Exercise of stock options 176 6,528 6,528
Stock option tax benefits 224 224
Restricted stock activity 67 (67) 0
Stock based compensation 336 336
Stock awarded to employees 2 127 127
Purchase and retirement of stock (424) (4,948) (15,258) (20,206)
Dividends (9,847) (9,847)
-------------------------------------------------------------------------------
Balance, March 31, 2008 28,772 $336,545 $2,923 ($3,954) $63,595 $399,109
===============================================================================
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,
--------------------------
2008 2007
--------------------------
Operating Activities:
Net income $26,778 $23,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,273 2,521
Loan loss provision 600 75
Amortization of loan fees, net of cost 95 (380)
Decrease (increase) in interest income receivable 25 (588)
Increase in other assets (4,214) (6,140)
Increase in income taxes payable 10,910 7,630
Decrease in interest expense payable (1,000) (34)
Increase in other liabilities 1,683 2,454
Stock option compensation expense 336 474
Stock option tax benefits (224) (134)
Gain on sale of Visa common stock (5,698) 0
Writedown of property and equipment 5 4
Originations of loans for resale (877) 0
Net proceeds from sale of loans originated for resale 887 0
--------------------------
Net Cash Provided by Operating Activities 31,579 29,452
--------------------------
Investing Activities:
Net repayments of loans 53,340 11,700
Purchases of investment securities available for sale (3,836) (12,972)
Proceeds from maturity of securities available for sale 60,390 31,322
Proceeds from maturity of securities held to maturity 28,675 22,710
Purchases of FRB/FHLB* securities (38) (40)
Proceeds from sale of FRB/FHLB* stock 11,287 0
Proceeds from sale of Visa common stock 5,698 0
Purchases of property, plant and equipment (413) (375)
--------------------------
Net Cash Provided by Investing Activities 155,103 52,345
--------------------------
Financing Activities:
Net decrease in deposits (70,152) (72,362)
Net (decrease) increase in short-term borrowings (163,335) 44,804
Repayments of notes payable and debt financing (37) (37)
Exercise of stock options 6,528 2,122
Stock option tax benefits 224 134
Repurchases/retirement of stock (20,206) (22,139)
Dividends paid (9,847) (10,348)
--------------------------
Net Cash Used in Financing Activities (256,825) (57,826)
--------------------------
Net (Decrease) Increase In Cash and Cash Equivalents (70,143) 23,971
--------------------------
Cash and Cash Equivalents at Beginning of Period 209,764 184,442
--------------------------
Cash and Cash Equivalents at End of Period $139,621 $208,413
==========================
Supplemental Disclosure of Noncash Activities:
Loan collateral transferred to other real estate owned $341 $0
Unrealized gain on securities available for sale, net $557 $1,734
Supplemental Disclosure of Cash Flow Activity:
Interest paid for the period 13,828 18,078
Income tax payments for the period 600 600
See accompanying notes to unaudited condensed consolidated financial statements.
* Federal Reserve Bank/Federal Home Loan Bank ("FRB/FHLB")
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, 2008 and 2007 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, 2007.
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 Credit 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,
2007.
On January 1, 2008, the Company adopted the following new accounting
pronouncements:
- FASB Statement No. 157 ("FAS 157") - Fair Value Measurements
- FASB Statement No. 159 ("FAS 159") - The Fair Value Option for Financial
Assets and Financial Liabilities -- Including an Amendment of FASB Statement
No. 115
The adoption of FAS 157 & FAS 159 did not have any affect on the Company's
financial statements at the date of adoption. For additional information, see
Note 3.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007),
Business Combinations. This Statement replaces FASB Statement No. 141, Business
Combinations. This Statement retains the fundamental requirements in Statement
141 that the acquisition method of accounting (which Statement 141 called the
purchase method) be used for all business combinations and for an acquirer to be
identified for each business combination. This Statement also retains the
guidance in Statement 141 for identifying and recognizing intangible assets
separately from goodwill. This Statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the Statement. That replaces Statement
141's cost-allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values. Statement 141 required the acquirer to include the
costs incurred to effect the acquisition (acquisition-related costs) in the
cost of the acquisition that was allocated to the assets acquired and the
liabilities assumed. This Statement requires those costs to be recognized
separately from the acquisition. In addition, in accordance with Statement 141,
restructuring costs that the acquirer expected but was not obligated to incur
were recognized as if they were a liability assumed at the acquisition date.
This Statement requires the acquirer to recognize those costs separately from
the business combination. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
impact of this Statement on the Company's financial statements will be
contingent on the terms and conditions of future business combinations.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement
No. 133 ("FAS 161"). FAS 161 changes disclosure requirements for derivative
instruments and hedging activities. The Statement requires enhanced
disclosures about (a) how and why derivative instruments are used, (b) how
derivative and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early adoption
permitted. The Company had no derivative instruments designated as hedges as
of March 31, 2008. The Company will adopt FAS 161 on January 1, 2009.
Note 3: Fair Values of Assets and Liabilities.
On January 1, 2008, the Company adopted the provisions of FAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities -- Including an
Amendment of FASB Statement No. 115. In accordance with FAS 159, the Company,
at its option, can value assets and liabilities at fair value on an
instrument-by-instrument basis with changes in fair value recorded in earnings.
The Company elected not to value any additional assets or liabilities at fair
value in accordance with FAS 159.
Page 8
On January 1, 2008, the Company also adopted the provisions of FAS 157, Fair
Value Measurements, with the exception of the requirements that pertain to
nonfinancial assets and nonfinancial liabilities covered by FASB Staff Position
(FSP) No. FAS 157-2. FAS 157 defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure requirements for fair
value measurements. FSP FAS 157-2 delays the effective date of the FAS 157
requirements for nonfinancial assets and nonfinancial liabilities to fiscal
years beginning after November 15, 2008. Other real estate owned is an example
of a nonfinancial asset that the Company is required to measure at fair value
on a non-recurring basis in accordance with generally accepted accounting
principles.
Fair Value Hierarchy
In accordance with FAS 157 the Company groups its assets and liabilities
measured at fair value in three levels, based on the markets in which the
assets and liabilities are traded and the reliability of the assumptions used
to determine fair value. These levels are:
* Level 1 - Valuation is based upon quoted prices for identical instruments
traded in active exchange markets, such as the New York Stock Exchange. Level
1 also includes U.S. Treasury and federal agency securities, which are traded
by dealers or brokers in active markets. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or
liabilities.
* Level 2 - Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market. Level 2 securities
include mortgage-backed securities, municipal bonds and collateralized mortgage
obligations.
* Level 3 - Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable
assumptions reflect the Company's estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and similar
techniques.
The table below presents the balances of available for sale securities measured
at fair value on a recurring basis. (in thousands)
At March 31, 2008
----------------------------------------------------
Total Level 1 Level 2 Level 3
----------------------------------------------------
$477,686 $156,224 $321,462 $0
====================================================
The Company had no Level 3 assets or liabilities measured at fair value on a
recurring basis.
Note 4: Investments
The amortized cost and estimated market value of the available for sale
investment securities portfolio as of March 31, 2008 follows:
Amortized Estimated
Cost Market Value
--------------------------
Securities of U.S. Treasury and federal agencies $103,366 $103,664
Mortgage-backed securities 128,358 127,546
Obligations of States and political subdivisions 176,426 182,758
Asset-backed securities 9,999 9,229
Other securities (1) 65,757 54,489
--------------------------
Total $483,906 $477,686
==========================
(1) Other securities included FHLMC and FNMA preferred stock, and common stocks.
The amortized cost and estimated market value of the held to maturity
investment securities portfolio as of March 31, 2008 follows:
Amortized Estimated
Cost Market Value
--------------------------
Securities of U.S. federal agencies $120,000 $122,361
Mortgage-backed securities 334,956 333,651
Obligations of States and political subdivisions 561,657 573,925
--------------------------
Total $1,016,613 $1,029,937
==========================
Page 9
Note 5: Loans
A summary of the major categories of loans outstanding is shown in the
following table.
At March 31, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Commercial $516,445 $548,897 $532,650
Real Estate - commercial 848,991 895,765 856,581
Real Estate - construction 84,498 68,935 97,464
Real Estate - residential 473,525 499,505 484,549
---------------------------------------
Total Real Estate loans 1,407,014 1,464,205 1,438,594
Installment and personal 524,861 506,796 531,732
---------------------------------------
Gross loans 2,448,320 2,519,898 2,502,976
Allowance for loan losses (52,234) (54,889) (52,506)
---------------------------------------
Net loans $2,396,086 $2,465,009 $2,450,470
=======================================
There were no loans held for sale at March 31, 2008, March 31, 2007 and
December 31, 2007.
Note 6: Goodwill and Other Identifiable Intangible Assets
The Company has recorded goodwill and other identifiable intangibles associated
with purchase business combinations. Goodwill is not amortized, but is
periodically evaluated for impairment. The Company did not recognize impairment
during the three months ended March 31, 2008 and March 31, 2007. Identifiable
intangibles are amortized to their estimated residual values over their
expected useful lives. Such lives and residual values are also periodically
reassessed to determine if any amortization period adjustments are indicated.
During the three months ended March 31, 2008 and March 31, 2007, no such
adjustments were recorded.
The changes in the carrying value of goodwill were ($ in thousands):
December 31, 2006 $121,719
--
-------------
March 31, 2007 $121,719
=============
December 31, 2007 $121,719
--
-------------
March 31, 2008 $121,719
=============
The gross carrying amount of identifiable intangible assets and accumulated
amortization was ($ in thousands):
March 31,
----------------------------------------------------
2008 2007
----------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------------------
Core Deposit Intangibles $24,383 ($11,927) $24,383 ($9,806)
Merchant Draft Processing Intangible 10,300 (5,185) 10,300 (3,769)
----------------------------------------------------
Total Identifiable Intangible Assets $34,683 ($17,112) $34,683 ($13,575)
====================================================
As of March 31, 2008, the current year and estimated future amortization
expense for identifiable intangible assets was ($ in thousands):
Merchant
Core Draft
Deposit Processing
Intangibles Intangible Total
---------------------------------------
Three months ended March 31, 2008 (actual) $522 $336 $858
Estimate for year ended December 31,
2008 2,021 1,200 3,221
2009 1,859 962 2,821
2010 1,636 774 2,410
2011 1,386 624 2,010
2012 1,230 500 1,730
2013 964 400 1,364
Page 10
Note 7: Stock Options
The Company grants stock options and restricted performance shares (RPSs) to
employees in exchange for employee services, pursuant to the
shareholder-approved 1995 Stock Option Plan, which was amended and restated in
2003. Stock options are granted with an exercise price equal to the fair market
value of the related common stock on the grant date and generally become
exercisable in equal annual installments over a three-year period with each
installment vesting on the anniversary date of the grant. Each stock option has
a maximum ten-year term. A restricted performance share grant becomes vested
after three years of being awarded, provided the Company has attained its
performance goals for such three-year period.
The Company applies the Roll-Geske option pricing model (Modified Roll) to
determine grant date fair value of stock option grants. This model modifies the
Black-Scholes Model to take into account dividends and American options. The
following weighted average assumptions were used in the option pricing to value
stock options granted in the periods indicated:
For the
Three months ended
March 31,
2008 2007
--------------------------
Expected volatility*1 15% 14%
Expected life in years*2 4.0 4.0
Risk-free interest rate*3 2.66% 4.89%
Expected dividend yield 2.78% 2.82%
Fair value per award $6.77 $6.02
*1 Measured using daily price changes of the Company's stock over respective
expected term of the option and the implied volatility derived from the market
prices of the Company's stock and traded options.
*2 The number of years that the Company estimates that the options will be
outstanding prior to exercise
*3 The risk-free rate over the expected life based on the US Treasury yield
curve in effect at the time of the grant
Employee stock option grants are being expensed by the Company over the grants'
three year vesting period.
A summary of stock option activity is presented below:
2008
---------------------------------------
Weighted Weighted
Shares Average Average
(in Exercise Remaining
thousands) Price Contractual
Term
---------------------------------------
Outstanding at January 1, 2,865 $42.12
Granted 256 47.13
Exercised (176) 37.21
Forfeited or expired (24) 50.88
-------------
Outstanding at March 31, 2,921 42.78 5.1 years
=============
Exercisable at March 31, 2,470 41.78 4.4 years
=============
2007
---------------------------------------
Weighted Weighted
Shares Average Average
(in Exercise Remaining
thousands) Price Contractual
Term
---------------------------------------
Outstanding at January 1, 3,064 $41.08
Granted 242 48.39
Exercised (57) 36.33
Forfeited or expired (35) 51.25
-------------
Outstanding at March 31, 3,214 41.61 5.5 years
=============
Exercisable at March 31, 2,678 39.79 4.7 years
=============
Page 11
A summary of the Company's nonvested stock options is presented below.
2008
--------------------------
Weighted
Shares Average
(in Grant
thousands) Date
Fair Value
--------------------------
Nonvested at January 1, 484 $6.33
Granted 256 6.77
Vested (278) 6.44
Forfeited (11) 6.20
-------------
Nonvested at March 31, 451 6.52
=============
2007
--------------------------
Weighted
Shares Average
(in Grant
thousands) Date
Fair Value
--------------------------
Nonvested at January 1, 687 $6.66
Granted 242 6.02
Vested (375) 6.72
Forfeited (18) 6.59
-------------
Nonvested at March 31, 536 6.33
=============
The total remaining unrecognized compensation cost related to nonvested awards
as of March 31, 2008 is $2.6 million and the weighted average period over which
the cost is expected to be recognized is 2.2 years.
A summary of the status of the Company's restricted performance shares as of
March 31, 2008 and 2007 and changes during the quarters ended on those dates,
follows (in thousands):
2008 2007
--------------------------
Outstanding at January 1, 38 36
Granted 28 16
Exercised 0 (1)
Forfeited (2) 0
--------------------------
Outstanding at March 31, 64 51
==========================
The compensation cost that was charged against income for the Company's
restricted performance shares granted was $270 thousand and $160 thousand for
the first quarter of 2008 and 2007, respectively.
There were no stock appreciation rights or incentive stock options granted in
the first quarter of 2008 and 2007.
Note 8: Post Retirement Benefits
The Company offers a continuation of group insurance coverage to qualifying
employees electing early retirement, for the period from the date of retirement
until age 65. For eligible employees the Company pays a portion of these early
retirees' insurance premiums. The Company reimburses a portion of Medicare Part
B premiums for all qualifying retirees over age 65 and their qualified spouses.
Eligibility for post-retirement medical benefits is based on age and years of
service, and restricted to employees hired prior to February 1, 2006. The
Company uses an actuarial-based accrual method of accounting for
post-retirement benefits.
The following table sets forth the net periodic post-retirement benefit costs
(in thousands):
For the three months ended
March 31,
--------------------------
2008 2007
--------------------------
Service cost ($100) $4
Interest cost 66 66
Amortization of unrecognized
transition obligation 15 15
--------------------------
Net periodic cost ($19) $85
==========================
The Company does not fund plan assets for any post-retirement benefit plans.
Page 12
Note 9: Contingent Liabilities
In accordance with Visa's by-laws, the Company and other Visa U.S.A. member
banks are obligated to share in Visa's litigation obligations which existed at
the time of Visa's restructuring transactions. Accordingly, in the fourth
quarter 2007, the Company recorded estimated litigation liabilities and related
litigation expense related to Visa Inc. in the amount of $2,338 thousand.
During the first quarter 2008, in accordance with the determination of Visa
Inc.'s Litigation Committee, Visa Inc. funded its litigation escrow account
with $3 billion of net proceeds from the Visa Inc. initial public offering.
This escrow account will be used to make payments related to certain covered
Visa litigation. At the time of escrow funding, the Company reduced its
litigation liability with a corresponding reversal of litigation expense of
$2,338 thousand representing the Company's portion of the escrow account
limited by the amount previously recognized as an expense.
Note 10: Earnings Per Common Share
The table below shows earnings per common share and diluted earnings per common
share. Basic earnings per share are computed by dividing net income by the
average number of shares outstanding during the period. Diluted earnings per
share are computed by dividing net income by the average number of shares
outstanding during the period plus the impact of common stock equivalents.
For the
three months
ended March 31,
--------------------------
(In thousands, except per share data) 2008 2007
--------------------------
Weighted average number of common
shares outstanding - basic 28,861 30,342
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 349 482
--------------------------
Weighted average number of common
shares outstanding - diluted 29,210 30,824
==========================
Net income $26,778 $23,570
Basic earnings per share $0.93 $0.78
Diluted earnings per share $0.92 $0.76
For the three months ended March 31, 2008 and 2007, options to purchase 1.3
million and 922 thousand shares of common stock, respectively, were outstanding
but not included in the computation of diluted net income per share because the
option exercise price exceeded the fair value of the stock such that their
inclusion would have had an anti-dilutive effect.
Page 13
WESTAMERICA BANCORPORATION
Financial Summary
(In thousands, except per share data)
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2008 2007 2007
---------------------------------------
Net Interest Income (FTE)** $47,982 $46,914 $46,812
Provision for Credit Losses 600 75 475
Noninterest Income:
Gain on sale of Visa common stock 5,698 0 0
Life insurance proceeds 0 822 0
Deposit service charges and other 13,680 14,455 14,657
---------------------------------------
Total Noninterest Income 19,378 15,277 14,657
Noninterest Expense:
Visa litigation (2,338) 0 2,338
Other 25,394 24,664 24,868
---------------------------------------
Total Noninterest Expense 23,056 24,664 27,206
Provision for income taxes (FTE)** 16,926 13,882 11,956
---------------------------------------
Net Income $26,778 $23,570 $21,832
=======================================
Average Shares Outstanding 28,861 30,342 29,213
Diluted Average Shares Outstanding 29,210 30,824 29,575
Shares Outstanding at Period End 28,772 30,158 29,018
As Reported:
Basic Earnings Per Share $0.93 $0.78 $0.75
Diluted Earnings Per Share 0.92 0.76 0.74
Return On Assets 2.43% 2.03% 1.90%
Return On Equity 27.32% 23.04% 21.72%
Net Interest Margin (FTE)** 4.79% 4.41% 4.53%
Net Loan Losses to Average Loans 0.14% 0.08% 0.14%
Efficiency Ratio* 34.2% 39.7% 44.3%
Average Balances:
Total Assets $4,433,934 $4,713,173 $4,556,715
Earning Assets 4,028,221 4,287,431 4,124,196
Total Gross Loans 2,477,666 2,519,861 2,496,403
Total Deposits 3,212,347 3,427,010 3,325,154
Shareholders' Equity 394,273 414,957 398,703
Balances at Period End:
Total Assets $4,342,302 $4,748,829 $4,558,959
Earning Assets 3,942,955 4,264,821 4,081,418
Total Gross Loans 2,448,320 2,519,898 2,502,976
Total Deposits 3,194,638 3,444,372 3,264,790
Shareholders' Equity 399,109 419,810 394,603
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.13% 2.18% 2.10%
Book Value Per Share $13.87 $13.92 $13.60
Equity to Assets 9.19% 8.84% 8.66%
Total Capital to Risk Adjusted Assets 11.04% 10.96% 10.64%
Dividends Paid Per Share $0.34 $0.34 $0.34
Dividend Payout Ratio 37% 44% 46%
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. Percentages under the heading "As Reported" are annualized
with the exception of the efficiency ratio.
* The efficiency ratio is defined as noninterest expense divided by total
revenue (net interest income on a tax-equivalent basis and noninterest income).
** Yields on securities and certain loans have been adjusted upward to a "fully
taxable equivalent" ("FTE") basis in order to reflect the effect of income
which is exempt from federal income taxation at the current statutory tax rate.
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported first
quarter 2008 net income of $26.8 million or $0.92 diluted earnings per share.
These results compare to net income of $23.6 million or $0.76 diluted earnings
per share and $21.8 million or $0.74 diluted earnings per share, respectively,
for the first and fourth quarters of 2007. The first quarter of 2008 included
benefits from Visa's initial public offering which increased net income by $4.7
million and earnings per diluted share by $0.16. The first quarter of 2007
included $822 thousand in tax-exempt company owned life insurance proceeds,
representing $0.02 earnings per diluted share. The fourth quarter of 2007
included litigation expense of $2.3 million related to Westamerica's
proportionate share of Visa's litigation exposure and a $700 thousand income
tax refund which combined to reduce net income by $590 thousand or earnings per
diluted share by $0.02.
Following is a summary of the components of net income for the periods
indicated (in thousands except per share amounts):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2008 2007 2007
---------------------------------------
Net interest income (FTE) $47,982 $46,914 $46,812
Provision for loan losses (600) (75) (475)
Noninterest income 19,378 15,277 14,657
Noninterest expense (23,056) (24,664) (27,206)
Provision for income taxes (FTE) (16,926) (13,882) (11,956)
---------------------------------------
Net income $26,778 $23,570 $21,832
=======================================
Average diluted shares 29,210 30,824 29,575
Diluted earnings per share $0.92 $0.76 $0.74
Average total assets $4,433,934 $4,713,173 $4,556,715
Net income (annualized) to average total assets 2.43% 2.03% 1.90%
Net income (annualized) to average
stockholders' equity 27.32% 23.04% 21.72%
Net income for the first quarter of 2008 was $3.2 million or 13.6% more than
the same quarter of 2007, attributable to higher net interest income (FTE),
higher noninterest income, and lower noninterest expense, partially offset by
higher provision for loan losses and an increase in income tax provision (FTE).
The increase in net interest income (FTE) (up $1.1 million or 2.3%) was the net
result of lower funding costs, partially offset by lower average balances of
earning assets and lower yields on loans. The provision for loan losses
increased $525 thousand, reflecting Management's assessment of credit risk and
the level of the allowance for loan losses. Noninterest income rose $4.1
million or 26.8% mainly due to a $5.7 million gain on sale of Visa common
stock, partially offset by $822 thousand in proceeds from company-owned life
insurance recognized in the first quarter 2007. Noninterest expense decreased
$1.6 million or 6.5% mostly due to the reversal of a $2.3 million accrual for
Visa related litigation, which was reversed with the funding of a litigation
escrow as a part of the Visa IPO. The provision for income taxes (FTE)
increased $3.0 million or 21.9% primarily due to higher profitability and
because the first quarter 2007 income tax provision (FTE) was reduced due to
the tax-exempt nature of Company owned life insurance proceeds.
Comparing the first quarter of 2008 to the prior quarter, net income increased
$4.9 million or 22.7%, due to higher net interest income (FTE), higher
noninterest income and lower noninterest expense, partially offset by increases
in the provision for loan losses and income tax provision (FTE). The higher net
interest income (FTE) was mainly caused by lower funding costs, partially
offset by a lower volume of average earning assets and lower yields on loans.
The provision for loan losses increased $125 thousand to reflect Management's
assessment on credit risk and the level of the allowance for loan losses.
Noninterest income increased $4.7 million or 32.2% largely due to gains on sale
of Visa common stock. Noninterest expense declined $4.2 million or 15.3%
primarily due to a reversal of the $2.3 million Visa related litigation
accrual. The income tax provision (FTE) increased $5.0 million or 41.6%
primarily due to higher profitability and because the provision for the prior
quarter was reduced due to a $700 thousand income tax refund.
Page 15
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (in thousands):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2008 2007 2007
---------------------------------------
Interest and fee income $55,394 $59,374 $57,861
Interest expense (12,828) (18,111) (16,483)
FTE adjustment 5,416 5,651 5,434
---------------------------------------
Net interest income (FTE) $47,982 $46,914 $46,812
=======================================
Average earning assets $4,028,221 $4,287,431 $4,124,196
Net interest margin (FTE) 4.79% 4.41% 4.53%
Net interest income (FTE) increased during the first quarter of 2008 by $1.1
million or 2.3% from the same period in 2007 to $48.0 million, mainly due to
lower rates paid on interest-bearing liabilities (down 61 bp) and lower average
balances of such liabilities (down $190 million), partially offset by lower
average earning assets (down $259 million) and lower yields on loans (down 18
bp).
Comparing the first three months of 2008 with the fourth quarter of 2007, net
interest income (FTE) increased $1.2 million or 2.5%, primarily due to lower
rates paid on interest-bearing liabilities (down 45 bp) and lower average
balances of such liabilities (down $59 million), partially offset by lower
average balances of earning assets (down $96 million) and lower yields on loans
(down 10 bp).
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2008 decreased $4.2
million or 6.5% from the same period in 2007. The decrease was caused primarily
by lower average earning assets (down $259 million) and lower yields on loans
(down 18 bp).
The decrease in the average earning assets in the first quarter of 2008
compared with the same period in 2007 was substantially attributable to a $217
million decline in the average investment portfolio: mortgage backed securities
and collateralized mortgage obligations (down $111 million), U.S. government
sponsored entity obligations (down $67 million) and municipal securities (down
$34 million). Average total loans were lower by $42 million in the first
quarter of 2008 compared with the same period in 2007 primarily due to
decreases in average balances of commercial real estate loans (down $50
million), residential real estate loans (down $25 million) and tax-exempt
commercial loans (down $17 million), partially offset by increases in average
balances of consumer loans (up $32 million) and construction loans (up $22
million).
The average yield on the Company's earning assets decreased from 6.11% in the
first quarter of 2007 to 6.06% in the same period in 2008. The composite yield
on loans fell 18 bp to 6.48% due to decreases in yields on taxable commercial
loans (down 92 bp), real estate construction loans (down 159 bp), commercial
real estate loans (down 11 bp) and consumer loans (down 5 bp), partially offset
by an 8 bp increase in yields on residential real estate loans. The investment
portfolio yield increased 5 bp to 5.40%, mainly due to a 7 bp increase in the
average yield on mortgage backed securities and collateralized mortgage
obligations, partially offset by declines in U.S. government sponsored entity
obligations (down 9 bp) and corporate and other securities (down 68 bp).
Comparing the first three months of 2008 with the last three months of 2007,
interest and fee income (FTE) was down $2.5 million or 3.9%. The decrease
largely resulted from a lower volume of average earning assets and lower yields
on loans.
Average earning assets decreased $96 million or 2.3% for the first quarter of
2008 compared with the previous quarter. Average investments declined $77
million due to decreases in the average balances of U.S. government sponsored
entity obligations (down $35 million), mortgage backed securities and
collateralized mortgage obligations (down $22 million), municipal securities
(down $12 million) and corporate and other securities (down $11 million). A $19
million decline in the average balance of the loan portfolio was mostly
attributable to decreases in average balances of tax-exempt commercial loans
(down $3 million), commercial real estate loans (down $14 million) and
residential real estate loans (down $6 million), partially offset by an $8
million increase in the average balance of taxable commercial loans.
The average yield on earning assets for the first three months of 2008 was
6.06% compared with 6.11% in the fourth quarter of 2007. The loan portfolio
yield for the first three months of 2008 compared with the previous quarter was
lower by 10 bp, due to decreases in yields on taxable commercial loans (down 67
bp), construction loans (down 46 bp), consumer loans (down 8 bp) and commercial
real estate loans (down 4 bp), partially offset by a 7 bp increase in the
average yield on tax-exempt commercial loans. The investment portfolio yield
increased by 2 bp. The increase resulted mostly from higher yields on municipal
securities (up 2 bp), offset by lower yields on U.S. government sponsored
entity obligations (down 9 bp).
Page 16
Interest Expense
Interest expense in the first quarter of 2008 decreased $5.3 million or 29.2%
compared with the same period in 2007. The decrease was attributable to lower
rates paid on the interest- bearing liabilities and lower average balances of
those liabilities.
The average rate paid on interest-bearing liabilities decreased from 2.46% in
the first quarter of 2007 to 1.85% in the same quarter of 2008. Rates paid on
most interest-bearing liabilities moved with general market conditions. Rates
on deposits decreased 28 bp to 1.46% primarily due to decreases in rates paid
on preferred money market savings (down 43 bp) and CDs over $100 thousand (down
148 bp). Rates on short-term borrowings also decreased 162 bp mostly due to
lower rates on federal funds purchased (down 203 bp) and line of credit and
repurchase facilities (down 88 bp).
Average interest-bearing liabilities declined $190 million or 6.4% for the
first quarter of 2008 over the same period of 2007. Interest-bearing deposits
decreased $144 million or 6.7% primarily due to decreases in money market
savings (down $100 million), regular savings (down $33 million), money market
checking accounts (down $41 million) and CDs less than $100 thousand (down $22
million). The decline was partially offset by increases in preferred money
market savings (up $35 million) and CDs over $100 thousand (up $16 million).
Comparing the first quarter of 2008 to the fourth quarter of 2007, interest
expense declined $3.7 million or 22.2%, due to lower rates paid on
interest-bearing liabilities and a decline in such liabilities.
Rates paid on liabilities averaged 1.85% during the first three months of 2008
compared with 2.30% for the last three months of 2007. The average rate paid on
short-term borrowings declined 95 bp mainly due to lower rates on federal funds
(down 134 bp) and line of credit and repurchase facilities (down 95 bp). Rates
on interest-bearing deposits were also lower by 29 bp largely due to preferred
money market savings (down 64 bp) and CDs over $100 thousand (down 89 bp).
Average interest-bearing liabilities during the first quarter of 2008 declined
$59 million or 2.1% over the last quarter of 2007 mainly due to decreases in
money market savings (down $34 million) and CDs over $100 thousand (down $12
million). Short-term borrowings declined $5 million, mainly the net result of a
$21 million increase in federal funds purchased, partially offset by a $23
million decline in sweep accounts.
In all periods, the Company has focused its sales efforts on building the
balances of more profitable, noninterest bearing and 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,
2008 2007 2007
---------------------------------------
Yield on earning assets (FTE) 6.06% 6.11% 6.11%
Rate paid on interest-bearing
liabilities 1.85% 2.46% 2.30%
---------------------------------------
Net interest spread (FTE) 4.21% 3.65% 3.81%
Impact of all other net
noninterest bearing funds 0.58% 0.76% 0.72%
---------------------------------------
Net interest margin (FTE) 4.79% 4.41% 4.53%
=======================================
During the first quarter of 2008, the net interest margin (FTE) increased 38 bp
compared with the same period in 2007. Rates paid on interest-bearing
liabilities declined faster than yields on earning assets (FTE), resulting in a
56 bp increase in net interest spread. The increase in the net interest spread
was partially reduced by the lower net interest margin contribution of
noninterest bearing funding sources. The margin contribution of noninterest
bearing funds decreased 18 bp because of the lower market rates of interest at
which they could be invested.
Similarly, the net interest margin (FTE) in the first three months of 2008 rose
by 26 bp when compared with the fourth quarter of 2007. Earning asset yields
decreased 5 bp while the cost of interest-bearing liabilities declined by 45
bp, resulting in a 40 bp increase in the net interest spread. The 14 bp
decrease in noninterest bearing funding sources lowered the increase in the net
interest margin.
Page 17
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 (FTE) (dollars in thousands).
For the three months ended
March 31, 2008
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $892 $1 0.45%
Investment securities:
Available for sale
Taxable 299,484 3,112 4.16%
Tax-exempt (1) 218,733 3,962 7.25%
Held to maturity
Taxable 471,183 5,183 4.40%
Tax-exempt (1) 560,263 8,655 6.18%
Loans:
Commercial:
Taxable 309,177 5,858 7.62%
Tax-exempt (1) 215,145 3,465 6.48%
Commercial real estate 850,504 14,953 7.07%
Real estate construction 92,672 1,965 8.53%
Real estate residential 478,929 5,757 4.81%
Consumer 531,239 7,899 5.98%
--------------------------
Total loans (1) 2,477,666 39,897 6.48%
--------------------------
Total earning assets (1) 4,028,221 60,810 6.06%
Other assets 405,713
-------------
Total assets $4,433,934
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,199,604 $-- --
Savings and interest-bearing
transaction 1,314,860 1,782 0.55%
Time less than $100,000 196,947 1,589 3.25%
Time $100,000 or more 500,936 3,957 3.18%
--------------------------
Total interest-bearing deposits 2,012,743 7,328 1.46%
Short-term borrowed funds 722,025 4,922 2.70%
Debt financing and notes payable 36,758 578 6.29%
--------------------------
Total interest-bearing liabilities 2,771,526 12,828 1.85%
Other liabilities 68,531
Shareholders' equity 394,273
-------------
Total liabilities and shareholders' equity $4,433,934
=============
Net interest spread (1) (2) 4.21%
Net interest income and interest margin (1) (3) $47,982 4.79%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using the
current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance
of earning assets.
Page 18
For the three months ended
March 31, 2007
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $710 $2 1.14%
Investment securities:
Available for sale
Taxable 377,136 4,070 4.32%
Tax-exempt (1) 235,716 4,445 7.54%
Held to maturity
Taxable 579,589 6,268 4.33%
Tax-exempt (1) 574,419 8,842 6.16%
Loans:
Commercial:
Taxable 313,541 6,604 8.54%
Tax-exempt (1) 232,026 3,712 6.49%
Commercial real estate 900,625 15,935 7.18%
Real estate construction 70,710 1,765 10.12%
Real estate residential 503,888 5,956 4.73%
Consumer 499,071 7,426 6.03%
--------------------------
Total loans (1) 2,519,861 41,398 6.66%
--------------------------
Total earning assets (1) 4,287,431 65,025 6.11%
Other assets 425,742
-------------
Total assets $4,713,173
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,270,522 $-- --
Savings and interest-bearing
transaction 1,453,052 1,932 0.54%
Time less than $100,000 218,549 1,734 3.22%
Time $100,000 or more 484,887 5,571 4.66%
--------------------------
Total interest-bearing deposits 2,156,488 9,237 1.74%
Short-term borrowed funds 767,859 8,296 4.32%
Debt financing and notes payable 36,905 578 6.27%
--------------------------
Total interest-bearing liabilities 2,961,252 18,111 2.46%
Other liabilities 66,443
Shareholders' equity 414,956
-------------
Total liabilities and shareholders' equity $4,713,173
=============
Net interest spread (1) (2) 3.65%
Net interest income and interest margin (1) (3) $46,914 4.41%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using the
current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance
of earning assets.
Page 19
For the three months ended
December 31, 2007
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $817 $3 1.46%
Investment securities:
Available for sale
Taxable 387,536 3,747 3.87%
Tax-exempt (1) 225,315 4,077 7.24%
Held to maturity
Taxable 449,426 5,395 4.80%
Tax-exempt (1) 564,699 8,684 6.15%
Loans:
Commercial:
Taxable 301,374 6,297 8.29%
Tax-exempt (1) 218,522 3,531 6.41%
Commercial real estate 864,464 15,492 7.11%
Real estate construction 95,197 2,158 8.99%
Real estate residential 485,290 5,793 4.77%
Consumer 531,556 8,118 6.06%
--------------------------
Total loans (1) 2,496,403 41,389 6.58%
--------------------------
Total earning assets (1) 4,124,196 63,295 6.11%
Other assets 432,519
-------------
Total assets $4,556,715
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,258,496 $-- --
Savings and interest-bearing
transaction 1,351,806 2,151 0.63%
Time less than $100,000 202,242 1,716 3.37%
Time $100,000 or more 512,610 5,259 4.07%
--------------------------
Total interest-bearing deposits 2,066,658 9,126 1.75%
Short-term borrowed funds 726,783 6,779 3.65%
Debt financing and notes payable 36,794 578 6.29%
--------------------------
Total interest-bearing liabilities 2,830,235 16,483 2.30%
Other liabilities 69,281
Shareholders' equity 398,703
-------------
Total liabilities and shareholders' equity $4,556,715
=============
Net interest spread (1) (2) 3.81%
Net interest income and interest margin (1) (3) $46,812 4.53%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using the
current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance
of earning assets.
Page 20
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, 2008
compared with three months
ended March 31, 2007
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 ($1) ($1)
Investment securities:
Available for sale
Taxable (805) (153) (958)
Tax-exempt (1) (297) (186) (483)
Held to maturity
Taxable (1,184) 99 (1,085)
Tax-exempt (1) (209) 22 (187)
Loans:
Commercial:
Taxable (28) (718) (746)
Tax-exempt (1) (241) (6) (247)
Commercial real estate (743) (239) (982)
Real estate construction 510 (310) 200
Real estate residential (284) 85 (199)
Consumer 543 (70) 473
---------------------------------------
Total loans (1) (243) (1,258) (1,501)
Total decrease in interest ---------------------------------------
and fee income (1) (2,738) (1,477) (4,215)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (170) 20 (150)
Time less than $100,000 (159) 14 (145)
Time $100,000 or more 222 (1,836) (1,614)
---------------------------------------
Total interest-bearing deposits (107) (1,802) (1,909)
---------------------------------------
Short-term borrowed funds (412) (2,962) (3,374)
Debt financing and notes payable 3 (3) 0
---------------------------------------
Total decrease in interest expense (516) (4,767) (5,283)
---------------------------------------
(Decrease) increase in Net Interest Income (1) ($2,222) $3,290 $1,068
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 21
Three months ended March 31, 2008
compared with three months
ended December 31, 2007
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 ($2) ($2)
Investment securities:
Available for sale
Taxable (908) 273 (635)
Tax-exempt (1) (120) 5 (115)
Held to maturity
Taxable 219 (431) (212)
Tax-exempt (1) (87) 58 (29)
Loans:
Commercial:
Taxable 87 (526) (439)
Tax-exempt (1) (100) 34 (66)
Commercial real estate (449) (90) (539)
Real estate construction (80) (113) (193)
Real estate residential (90) 54 (36)
Consumer (103) (116) (219)
---------------------------------------
Total loans (1) (735) (757) (1,492)
Total decrease in interest ---------------------------------------
and fee income (1) (1,631) (854) (2,485)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (79) (290) (369)
Time less than $100,000 (64) (63) (127)
Time $100,000 or more (163) (1,139) (1,302)
---------------------------------------
Total interest-bearing deposits (306) (1,492) (1,798)
---------------------------------------
Short-term borrowed funds (100) (1,757) (1,857)
Debt financing and notes payable (8) 8 0
---------------------------------------
Total decrease in interest expense (414) (3,241) (3,655)
---------------------------------------
(Decrease) increase in Net Interest Income (1) ($1,217) $2,387 $1,170
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 22
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 $600 thousand, $75 thousand
and $475 thousand for loan losses in the first quarter of 2008, the first
quarter and the fourth quarter of 2007, respectively. The provision reflects
the Company's loss experience and 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
"Allowance for Credit Losses" section of this report.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (in thousands).
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2008 2007 2007
---------------------------------------
Service charges on deposit accounts $7,296 $7,528 $7,422
Merchant credit card fees 2,580 2,449 2,817
Debit card fees 904 895 972
ATM fees and interchange 718 677 709
Other service fees 486 501 569
Financial services commissions 230 310 265
Trust fees 303 337 303
Official check issuance income 90 311 209
Mortgage banking income 40 30 32
Gain on sale of Visa common stock 5,698 0 0
Life insurance proceeds 0 822 0
Other noninterest income 1,033 1,417 1,359
---------------------------------------
Total $19,378 $15,277 $14,657
=======================================
Noninterest income for the first quarter of 2008 rose by $4.1 million or 26.8%
from the same period in 2007. The increase was mostly attributable to $5.7
million in securities gains on sale of Visa common stock. Visa's initial public
offering ("IPO") occurred on March 19, 2008. As a part of the IPO, Visa
redeemed class B common stock held by Visa member banks in an amount which
reduced Visa member banks' ownership in Visa to less than 50 percent. As a
result, a portion of the shares of Visa class B common stock held by the
Company were redeemed, resulting in a gain of $5.7 million. A $131 thousand or
5.3% increase in merchant credit card fees also contributed to higher
noninterest income. Proceeds of $822 thousand from Company owned life insurance
recognized in the first quarter of 2007 partially offset the increase.
Additionally, service charges on deposit accounts decreased $232 thousand or
3.1% mainly due to declines in charges for overdrafts, returned items and
checking and savings account services. Official check issuance income fell $221
thousand or 71.1% mainly due to the lower incentive rate from the vendor, who
is in the process of terminating this line of business. The Company will issue
its own official checks in the future and realize the economic benefit as part
of its net interest income. Other noninterest income declined $384 thousand or
27.1% largely due to lower interest recoveries on charged off loans.
In the first quarter of 2008, noninterest income increased $4.7 million or
32.2% compared with the previous quarter primarily due to $5.7 million gains
from the redemption of Visa common stock. Merchant credit card income declined
$237 thousand or 8.4% primarily due to seasonally higher credit card draft
volumes in the fourth quarter 2007. Service charges on deposit accounts
decreased $126 thousand or 1.7% mostly due to a $243 thousand decline in
overdraft fees, partially offset by a $121 thousand increase in deficit fees
charged on analyzed accounts. Official check issuance income fell $119 thousand
or 56.9% mainly due to the lower incentive rate from the vendor, who is in the
process of terminating this line of business. Other noninterest income declined
$326 thousand or 24.0% largely due to a $230 thousand gain on sale of real
property recorded in the previous quarter.
Page 23
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,
2008 2007 2007
---------------------------------------
Salaries and related benefits $12,984 $12,568 $12,366
Occupancy 3,390 3,291 3,386
Data processing services 2,120 1,524 2,202
Equipment 921 1,138 934
Amortization of identifiable intangibles 858 975 893
Courier service 829 848 845
Professional fees 536 495 534
Postage 383 410 391
Telephone 335 360 343
Stationery and supplies 279 315 365
Customer checks 230 248 236
In-house meetings 193 156 185
Operational losses 184 160 234
Correspondent Service Charges 170 225 201
Loan expense 170 167 195
Advertising/public relations 177 228 193
Visa litigation expense (2,338) 0 2,338
Other noninterest expense 1,635 1,556 1,365
---------------------------------------
Total $23,056 $24,664 $27,206
=======================================
Average full time equivalent staff 886 892 868
Noninterest expense to revenues (FTE) 34.23% 39.66% 44.26%
Noninterest expense decreased $1.6 million or 6.5% in the three months ended
March 31, 2008 compared with the same period in 2007 mainly due to the reversal
of a $2.3 million accrual for Visa related litigation. A condition of Visa's
IPO was to establish and fund an escrow to provide settlement funds for Visa
litigation based in the United States existing prior to the IPO. Visa USA
former member banks were required to share in Visa's pre-IPO litigation on a
proportional basis under Visa's reciprocal responsibility plan. In the fourth
quarter 2007, the Company accrued for its estimated Visa litigation obligations
in the amount of $2.3 million, establishing a liability through a direct
expense to earnings. As a result of Visa's IPO, a portion of the shares of the
Company's holdings of Visa class B common stock were sold to fund the
litigation escrow. The Company has recognized such in its financial statements
by eliminating its liability and reversing the expense recognized in the fourth
quarter 2007. Equipment expense declined $217 thousand or 19.1% primarily due
to lower repair, maintenance and depreciation expenses. Amortization of deposit
intangibles decreased $117 thousand or 12.0%. Data processing services
increased $596 thousand or 39.1% due to conversion of the Company's item
processing function to an outside vendor in the third quarter 2007. Salaries
and related benefits increased $416 thousand or 3.3%, mainly due to higher
employee benefit costs and annual merit increases.
In the first quarter of 2008, noninterest expense declined $4.2 million or
15.3% compared with the previous quarter mainly due to the reversal of a $2.3
million accrual for the Visa's litigation and the same litigation expense
recorded in the last quarter 2007. Salaries and related benefits increased $618
thousand or 5.0% mostly due to annual merit increases, a higher staff count and
higher employee benefits including seasonally high payroll taxes. Other
noninterest expense increased $270 thousand or 19.8% primarily due to a $400
thousand credit for a reduction in the reserve for unfunded loan commitments in
the last quarter of 2007 as a result of a reduction in commitments under
construction credit facilities.
Provision for Income Tax
During the first quarter of 2008, the Company recorded income tax expense (FTE)
of $16.9 million, compared with $13.9 million and $12.0 million for the first
and fourth quarters of 2007, respectively. The current quarter provision
represents an effective tax rate (FTE) of 38.7%, compared with 37.1% and 35.4%
for the first and fourth quarters of 2007, respectively. The effective tax rate
for the first quarter 2007 was lower primarily due to the tax-exempt nature of
Company owned life insurance proceeds of $822 thousand. The effective tax rate
for the fourth quarter was reduced primarily due to a $700 thousand tax refund
and other tax items. The tax provisions and effective tax rates fluctuated due
to the relative level of tax- exempt income from municipal securities and loans
to the level of pretax income.
Page 24
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk and to increase diversification of the loan portfolio. 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. Other
real estate owned is recorded at the lower of cost or fair value less cost to
sell.
The following is a summary of classified loans and other real estate owned on
the dates indicated (dollars in thousands):
At March 31, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Classified loans $33,303 $18,439 $24,419
Other real estate owned 954 647 613
---------------------------------------
Classified loans and other real estate owned $34,257 $19,086 $25,032
=======================================
Allowance for loan losses /
classified loans 157% 298% 215%
Classified loans include loans graded "Substandard", "Doubtful" and "Loss"
using regulatory guidelines. At March 31, 2008, $32.6 million of loans are
graded "Substandard" or 98.0% of total classified loans. Such substandard loans
accounted for 1.33% of total gross loans at March 31, 2008. Classified loans at
March 31, 2008, increased $14.9 million or 80.6% from a year ago. The increase
resulted primarily from 20 downgrades, partially offset by nine loan payoffs
and four upgrades. An $8.9 million or 36.4% increase in classified loans from
December 31, 2007 was generally due to eight downgrades, partially offset by
three upgrades and three payoffs. One of the loans downgraded during the first
quarter 2008 was a construction loan relationship with $11.1 million
outstanding at March 31, 2008. The loan collateral, located north of
Sacramento, California, is comprised of land purchased for development and
construction of approximately 110 residential real estate properties and
thirteen finished and four nearly completed residential properties. Subsequent
to March 31, 2008, the borrower marketed and received purchase offers on
fourteen of the finished and nearly completed properties. These pending sales
are subject to conditions typically present in similar transactions, including
potential buyers obtaining financing. The Company is not offering financing for
these pending transactions. If all of these pending sales are successful, the
Company estimates the outstanding balance on the loan relationship will be
reduced by $4.0 million, including a loan charge-off of approximately $780
thousand. Additionally, the borrower has received an offer on a portion of the
remaining project. If such sale is completed, the outstanding balance on the
loan relationship would be reduced $1.5 million with no loan charge-off. The
Company is not offering financing for this potential transaction. Management is
aggressively pursuing collection of the entire loan relationship. The Company
anticipates an increase in non-accrual loans at June 30, 2008 due to this
lending relationship.
Other real estate owned at March 31, 2008 was $954 thousand compared with $647
thousand at March 31, 2007 and $613 thousand at December 31, 2007. The increase
was due to foreclosure on real estate collateral underlying one residential
real estate loan.
Page 25
Nonperforming Loans
Nonperforming loans include nonaccrual loans and loans 90 or more days past due
and still accruing. Loans are placed on nonaccrual status upon becoming
delinquent 90 days or more, 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, some 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 by Management as "performing nonaccrual" and are included in total
nonaccrual loans. When the ability to fully collect nonaccrual loan principal
is in doubt, payments received are applied against the principal balance of the
loans until such time as full collection of the remaining recorded balance is
expected. Any additional interest payments received after that time are
recorded as interest income on a cash basis. Nonaccrual loans are reinstated to
accrual status when improvements in credit quality eliminate the doubt as to
the full collectibility of both interest and principal.
The following is a summary of nonperforming loans and OREO on the dates
indicated (dollars in thousands):
At March 31, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Performing, nonaccrual loans $1,652 $2,459 $1,688
Nonperforming, nonaccrual loans 3,728 2,341 3,164
---------------------------------------
Total nonaccrual loans 5,380 4,800 4,852
Loans 90 days past due and
still accruing 268 82 297
---------------------------------------
Total nonperforming loans 5,648 4,882 5,149
Other real estate owned 954 647 613
---------------------------------------
Total $6,602 $5,529 $5,762
=======================================
As a percentage of total loans 0.27% 0.22% 0.23%
Nonaccrual loans increased $528 thousand during the three months ended March
31, 2008. Twenty one loans comprised the $5.4 million nonaccrual loans as of
March 31, 2008. Ten of those loans were on nonaccrual status throughout the
first three months of 2008, while the remaining eleven loans were placed on
nonaccrual status during the three months ended March 31, 2008. The Company
actively pursues full collection of nonaccrual loans.
The Company's residential real estate loan underwriting standards for first
mortgages limit the loan amount to no more than 80 percent of the appraised
value of the property at the time of origination serving as collateral for the
loan, and require verification of income of the borrower(s). The Company had no
"sub-prime" loans as of March 31, 2008, December 31, 2007 and March 31, 2007.
Of the loans 90 days past due and still accruing at March 31, 2008, $-0- and
$185 thousand were residential real estate loans and automobile loans,
respectively. Delinquent consumer loans on accrual status were as follows ($ in
thousands):
At March 31, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Residential real estate loans:
--------------------------------------
30-89 days delinquent:
Dollar amount $28 $1,863 $2,761
Percentage of total residential real estate loans 0.01% 0.37% 0.57%
90 or more days delinquent:
Dollar amount $-0- $-0- $-0-
Percentage of total residential real estate loans 0.00% 0.00% 0.00%
Automobile loans:
-------------------------
30-89 days delinquent:
Dollar amount $2,523 $1,771 $2,872
Percentage of total automobile loans 0.54% 0.40% 0.61%
90 or more days delinquent:
Dollar amount $185 $60 $253
Percentage of total automobile loans 0.04% 0.01% 0.05%
The Company had no restructured loans as of March 31, 2008, December 31, 2007
and March 31, 2007.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three months ended March 31, 2008, if all such loans
had been current in accordance with their original terms, was $105 thousand,
compared to $110 thousand and $102 thousand, respectively, for the first and
fourth quarters of 2007.
Page 26
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, 2008, totaled $61 thousand, compared to
$119 thousand and $75 thousand, respectively, for the first and fourth quarters
of 2007. These cash payments represent annualized yields of 4.41% for the first
three months of 2008 compared to 10.14% and 6.15%, respectively, for the first
and the fourth quarters of 2007.
Total cash payments received, including those recorded in prior years, which
were applied against the book balance of nonaccrual loans outstanding at March
31, 2008, totaled $0 thousand, compared with approximately $4 thousand and $9
thousand for the first and the fourth quarters of 2007, respectively.
Management believes the overall credit quality of the loan portfolio is stable;
however, nonperforming assets could fluctuate from period to period. The
performance of any individual loan can be affected 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 Credit Losses
The following table summarizes the credit loss provision, net credit losses and
allowance for credit losses for the periods indicated (dollars in thousands):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2008 2007 2007
---------------------------------------
Balance, beginning of period $55,799 $59,023 $56,631
Provision for loan losses 600 75 475
Provision for unfunded credit commitments 0 0 (400)
Loans charged off (1,537) (1,244) (1,162)
Recoveries of previously
charged off loans 665 728 255
---------------------------------------
Net loan losses (872) (516) (907)
---------------------------------------
Balance, end of period $55,527 $58,582 $55,799
=======================================
Components:
Allowance for loan losses 52,234 54,889 52,506
Reserve for unfunded credit commitments 3,293 3,693 3,293
---------------------------------------
Allowance for credit losses $55,527 $58,582 $55,799
=======================================
Allowance for loan losses /
loans outstanding 2.13% 2.18% 2.10%
The Company's allowance for credit losses is maintained at a level considered
adequate to provide for losses that can be estimated based upon specific and
general conditions. These include conditions unique to individual borrowers, as
well as overall credit loss experience, the amount of past due, nonperforming
loans and classified loans, recommendations of regulatory authorities,
prevailing economic conditions and other factors. A portion of the allowance is
specifically allocated to impaired loans whose full collectibility is
uncertain. Such allocations are determined by Management based on loan-by-loan
analyses. A second allocation is based in part on quantitative analyses of
historical credit loss experience, in which criticized and classified credit
balances identified through an independent internal credit review process are
analyzed using a linear regression model to determine standard loss rates. The
results of this analysis are applied to current criticized and classified loan
balances to allocate the reserve to the respective segments of the loan
portfolio. In addition, loans with similar characteristics not usually
criticized using regulatory guidelines are analyzed based on the historical
loss rates and delinquency trends, grouped by the number of days the payments
on these loans are delinquent. Last, allocations are made to non-criticized and
classified commercial loans and residential real estate loans based on
historical loss rates, and other statistical data. The remainder of the
allowance is considered to be unallocated. The unallocated allowance is
established to provide for probable losses that have been incurred as of the
reporting date but not reflected in the allocated allowance. It addresses
additional qualitative factors consistent with Management's analysis of the
level of risks inherent in the loan portfolio, which are related to the risks
of the Company's general lending activity. Included in the unallocated
allowance is the risk of losses that are attributable to national or
local economic or industry trends which have occurred but have not yet been
recognized in past loan charge-off history (external factors). The external
factors evaluated by the Company include: economic and business conditions,
external competitive issues, and other factors. Also included in the
unallocated allowance is the risk of losses attributable to general attributes
of the Company's loan portfolio and credit administration (internal factors).
The internal factors evaluated by the Company include: loan review system,
adequacy of lending Management and staff, loan policies and procedures, problem
loan trends, concentrations of credit, and other factors. By their nature,
these risks are not readily allocable to any specific loan category in a
statistically meaningful manner and are difficult to quantify with a specific
number. Management assigns a range of estimated risk to the qualitative risk
factors described above based on Management's judgment as to the level of risk,
and assigns a quantitative risk factor from the range of loss estimates to
determine the appropriate level of the unallocated portion of the allowance.
Management considers the $55.5 million allowance for credit losses to be
adequate as a reserve against losses as of March 31, 2008.
Page 27
The following table presents the allocation of the allowance for credit losses:
Allocation of the Allowance for Credit Losses
At March 31, At December 31,
2008 2007
----------------------------------------------------
Allocation Loans as Allocation Loans as
of the Percent of the Percent
Allowance of Total Allowance of Total
(dollars in thousands) Balance Loans Balance Loans
----------------------------------------------------
Commercial $26,263 56% $27,233 56%
Real estate construction 7,798 3% 5,403 4%
Real estate residential 379 19% 388 19%
Consumer 4,688 22% 4,626 21%
Unallocated portion 16,399 -- 18,149 --
----------------------------------------------------
Total $55,527 100% $55,799 100%
====================================================
The allocation to loan portfolio segments changed from December 31, 2007 to
March 31, 2008. The decrease in allocation for commercial loans reflects a
decrease in classified commercial loans. The increase in allocation to real
estate construction loans reflects an increase in criticized construction loans
outstanding, which receive higher allocations due to higher risk attributes,
offset in part by lower volumes of non-criticized construction loans and
construction loan commitments.
The unallocated portion of the allowance for credit losses declined $1.8
million from December 31, 2007 to March 31, 2008. The unallocated allowance is
established to provide for probable losses that have been incurred, but not
reflected in the allocated allowance. At December 31, 2007 and March 31, 2008,
Management's evaluations of the unallocated portion of the allowance for credit
losses attributed significant risk levels to developing economic and business
conditions ($4.0 million and $3.2 million, respectively), external competitive
issues ($2.0 million and $1.6 million, respectively), internal credit
administration considerations ($4.2 million and $3.5 million, respectively),
and delinquency and problem loan trends ($4.2 million and $3.4 million,
respectively). The change in the amounts allocated to the above qualitative
risk factors was based upon Management's judgment, review of trends in its loan
portfolio, levels of the allowance allocated to portfolio segments, and current
economic conditions in its marketplace. Based on Management's analysis and
judgment, the amount of the unallocated portion of the allowance for credit
losses was $18.1 million at December 31, 2007, compared to $16.4 million at
March 31, 2008.
Asset and Liability Management
The fundamental objective of the Company's management of assets and liabilities
is to maximize its economic value while maintaining adequate liquidity and a
conservative level of interest rate risk.
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk results from many factors. Assets and liabilities may mature
or reprice at different times. Assets and liabilities may reprice at the same
time but by different amounts. Short-term and long-term market interest rates
may change by different amounts. The remaining maturity of various assets or
liabilities may shorten or lengthen as interest rates change. In addition,
interest rates may have an impact on loan demand, credit losses, and other
sources of earnings such as account analysis fees on commercial deposit
accounts, official check fees and correspondent bank service charges.
In adjusting the Company's asset/liability position, Management attempts to
manage interest rate risk while enhancing net interest margin and net interest
income. At times, depending on expected increases or decreases in general
interest rates, the relationship between long and short term interest rates,
market conditions and competitive factors, Management may adjust the Company's
interest rate risk position in order to manage its net interest margin and net
interest income. The Company's results of operations and net portfolio values
remain subject to changes in interest rates and to fluctuations in the
difference between long and short term interest rates.
The Company's asset and liability position remains slightly "liability
sensitive," with a greater amount of interest-bearing liabilities subject to
immediate and near-term interest rate changes relative to earning assets. As a
result, the recent reduction in the federal funds target rate (charged for
short-term inter-bank borrowings) and the related decline in U.S. Treasury bill
rates should improve the Company's net interest margin in 2008. The lower
short-term interest rates should lower the Company's cost of funds at a more
rapid pace than its earning asset yields. The duration of the Company's earning
assets and funding has not changed by a meaningful amount during the first
three months of 2008. Management continues to monitor the interest rate
environment as well as economic conditions and other factors it deems relevant
in managing the Company's exposure to interest rate risk.
Page 28
Management assesses interest rate risk by comparing the Company's most likely
earnings plan with various earnings models using many interest rate scenarios
that differ in the direction of interest rate changes, the degree of change
over time, the speed of change and the projected shape of the yield curve. For
example, assuming a decrease of 100 bp in the federal funds rate and a decrease
of 20 bp in the 10 year Constant Maturity Treasury Bond yield during the same
period, earnings are estimated to improve 0.5% over the Company's most likely
net income plan for the twelve months ending March 31, 2009. Conversely,
assuming an increase of 100 bp in the federal funds rate and an increase of 40
bp in the 10 year Constant Maturity Treasury Bond yield during the same period,
estimated earnings at risk would be approximately 1.8% of the Company's most
likely net income plan for the twelve months ending March 31, 2009. Simulation
estimates depend on, and will change with, the size and mix of the actual and
projected balance sheet at the time of each simulation. 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.
Equity price risk can affect the Company. As an example, any preferred or
common stock holdings, as permitted by banking regulations, can fluctuate in
value. Management regularly assesses the extent and duration of any declines in
market value, the causes of such declines, the likelihood of a recovery in
market value, and its intent to hold securities until a recovery in value
occurs. Declines in value of preferred or common stock holdings that are deemed
"other than temporary" could result in loss recognition in the Company's income
statement.
Fluctuations in the Company's common stock price can impact the Company's
financial results in several ways. First, the Company has regularly repurchased
and retired its common stock; the market price paid to retire the Company's
common stock can affect the level of the Company's cash flows and shares
outstanding for purposes of computing earnings per share. Second, the Company's
common stock price impacts the number of dilutive equivalent shares used to
compute diluted earnings per share. Third, fluctuations in the Company's common
stock price can motivate holders of options to purchase Company common stock
through the exercise of such options thereby increasing the number of shares
outstanding. Finally, the amount of compensation expense associated with share
based compensation fluctuates with changes in and the volatility of the
Company's common stock price.
Other types of market risk, such as foreign currency exchange risk and
commodity price risk, are not significant in the normal course of the Company's
business activities.
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.
Liquidity
The Company's principal source of liquidity is investment securities available
for sale and principal payments from consumer and other loans. At March 31,
2008, investment securities available for sale totaled $478 million,
representing a decrease of $55.1 million from December 31, 2007. The decrease
is primarily attributable to principal payments and maturities. At March 31,
2008, indirect automobile loans totaled $469 million, which were experiencing
stable monthly principal payments of approximately $18 million during the last
three months. At March 31, 2008, $463 million in collateralized mortgage
obligations ("CMOs") and mortgage backed securities ("MBSs") were held in the
Company's investment portfolios. None of the CMOs or MBSs are backed by
sub-prime mortgages. All of the CMOs and MBSs are rated AAA based on their
subordination structures without reliance on monoline insurance. Other than
nominal amounts of FHLMC/ FNMA MBSs purchased for Community Reinvestment Act
investment purposes, the Company has not purchased a CMO or MBS since November
2005. The CMOs and MBSs have been experiencing stable principal paydowns of
approximately $7 million per month during the last three months. In addition,
at March 31, 2008, the Company had customary lines for overnight borrowings
from other financial institutions in excess of $700 million and a $35
million line of credit, under which $17.8 million was outstanding.
Additionally, the Company has access to borrowing from the Federal Reserve. The
Company's short-term debt rating from Fitch Ratings is F1. 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 quarter of 2008 and 2007 contributed
substantial operating cash flows of $31.6 million and $29.5 million,
respectively. In the first quarter of 2008, operating activities provided cash
for $9.8 million in shareholder dividends and $20.2 million utilized to
repurchase common stock. In the first quarter of 2007, operating activities
provided a substantial portion of cash for $10.3 million in shareholder
dividends and $22.1 million utilized to repurchase common stock.
Page 29
The Company's investing activities were also a net source of cash in the first
quarter of 2008. Proceeds from maturing investment securities of $89.1 million
were only partially reinvested, for a net increase in cash of $85.2 million.
This cash inflow, $53.3 million in net loan repayments, and proceeds from sale
of Federal Reserve Bank of San Francisco ("FRB") stock and Visa common stock
provided substantial cash to reduce short-term borrowings by $163.3 million.
During the first quarter 2008, the Federal Deposit Insurance Corporation
("FDIC") approved the Bank's application for continued deposit insurance
coverage upon the Bank's withdrawal from the Federal Reserve System. The Bank
terminated its membership with the Federal Reserve Bank of San Francisco and
the FRB redeemed the Bank's FRB stock. The Bank is now subject to examination
by the FDIC. The Bank also remains subject to examination by the California
Commissioner of Financial Institutions. As a bank holding company, the Company
remains subject to examination by the FRB. Customers' deposits declined $70.2
million as competition for deposits continued to be elevated in the first
quarter of 2008. In the first three months of 2007, investing activities
generated $52.3 million. Sales and maturities, net of purchases, of investment
securities were $41.0 million. A $44.8 million increase in short-term
borrowings partially offset a $72.4 million decrease in customers' deposits.
The Company anticipates maintaining its cash levels in 2008 mainly through
profitability and retained earnings. It is anticipated that loan demand will be
moderate to weak during the remainder of 2008, although such demand will be
dictated by economic and competitive conditions. The Company aggressively
solicits non-interest bearing demand deposits and money market checking
deposits, which are the least sensitive to interest rates. The growth of
deposit balances is subject to heightened competition, the success of the
Company's sales efforts, delivery of superior customer service and market
conditions. The recent series of reductions in the federal funds rate resulted
in declining short-term interest rates, which could impact deposit volumes in
the future. Depending on economic conditions, interest rate levels, and a
variety of other conditions, deposit growth may be used to fund loans, purchase
investment securities or to reduce short-term borrowings. However, due to
concerns regarding uncertainty in the general economic environment,
competition, possible terrorist attacks and political uncertainty, loan demand
and levels of customer deposits are not certain. Shareholder dividends and
share repurchases are expected to continue subject to the Board's discretion
and continuing evaluation of capital levels, earnings, asset quality, debt
retirement and other factors.
Westamerica Bancorporation ("the Parent Company") is a separate entity 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 declared for its shareholders, and
interest and principal on outstanding debt. Substantially all of the Parent
Company's revenues are obtained from subsidiary service fees and dividends.
Payment of such dividends to the Parent Company by the Bank is limited under
California law. The amount that can be paid in any calendar year, without prior
approval from the state regulatory agency, cannot exceed the net profits (as
defined) for the preceding three calendar years less dividends paid. The
Company believes that such restriction 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 are reviewed regularly by Management.
The Company repurchases its Common Stock in the open market with the intention
of supporting shareholder returns and mitigating the dilutive impact of issuing
new shares for employee stock award and option plans. These programs have been
implemented to optimize the Company's use of equity capital and enhance
shareholder value. Pursuant to these programs, the Company repurchased 424
thousand shares in the first quarter of 2008, 447 thousand shares in the first
quarter of 2007, and 491 thousand shares in the fourth quarter of 2007.
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 $399.1 million at March 31, 2008, a
decrease of $20.7 million or 4.9% from a year ago, however, an increase of $4.5
million or 1.1% from December 31, 2007. The changes are reflective of the
effect of common stock repurchases, dividends paid to shareholders and a change
in unrealized gain(loss) on securities available for sale, offset by the
generation of earnings and stock issuance in connection with employee stock
option exercises. The Company's ratio of equity to total assets increased to
9.19% at March 31, 2008, from 8.84% a year ago and 8.66% on December 31, 2007,
because total assets decreased relatively more than stockholders' equity.
The following summarizes the ratios of capital to risk-adjusted assets for the
Company on the date indicated:
Well-
Capitalized
At March 31, At Minimum by
--------------------------December 31, Regulatory Regulatory
2008 2007 2007 Requirement Definition
-----------------------------------------------------------------
Tier I Capital 9.74% 9.64% 9.33% 4.00% 6.00%
Total Capital 11.04% 10.96% 10.64% 8.00% 10.00%
Leverage ratio 6.61% 6.42% 6.32% 4.00% 5.00%
The risk-based capital ratios increased at March 31, 2008, compared with March
31, 2007, due to a decline in risk-weighted assets, partially offset by a
decrease in equity capital. The risk-based capital ratios increased at March
31, 2008, compared with December 31, 2007, due to an increase in equity capital
and a decrease in risk-weighted assets.
Page 30
The following summarizes the ratios of capital to risk-adjusted assets for the
Bank on the date indicated:
Well-
Capitalized
At March 31, At Minimum by
--------------------------December 31, Regulatory Regulatory
2008 2007 2007 Requirement Definition
-----------------------------------------------------------------
Tier I Capital 9.78% 9.80% 9.52% 4.00% 6.00%
Total Capital 11.25% 11.26% 10.98% 8.00% 10.00%
Leverage ratio 6.60% 6.49% 6.41% 4.00% 5.00%
The risk-based capital ratios declined at March 31, 2008, compared with March
31, 2007, due to a decrease in equity capital, offset in part by a decline in
risk-weighted assets. The risk-based capital ratios increased at March 31,
2008, compared with December 31, 2007, due to an increase in equity capital and
a decrease in 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 and the Bank's anticipated future needs. All ratios as shown in the
tables 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
undertaken 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-15(e) of the Securities
Exchange Act of 1934, as amended, as of March 31, 2008. Based upon their
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective.
The evaluation did not identify any change in the Company's internal control
over financial reporting that occurred during the quarter ended March 31, 2008
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Page 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; generally such actions are of a routine nature and arise in the
normal course of business of the Subsidiary Bank. The Bank is not a party to any
pending or threatened legal action that, if determined adversely to the Bank, is
likely in Management's opinion to have a material adverse effect on the Bank's
financial condition or results of operations.
Item 1A. Risk Factors
In March 2008, the Bush administration outlined a sweeping plan to streamline
financial regulation in the United States. The proposals would consolidate
regulatory agencies and revamp oversight of the financial system. Some of the
proposals would shift regulatory power from states to the federal government.
The proposals would require passage of Congressional legislation. The impact of
these proposals on the future regulation of the Company is uncertain at this
time.
There are no other material changes to the risk factors disclosed in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c) 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, 2008 (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 31 149 $45.56 149 1,224
----------------------------------------------------------------
February 1
through
February 29 269 48.81 269 955
----------------------------------------------------------------
March 1
through
March 31 6 49.42 6 949
----------------------------------------------------------------
Total 424 $47.68 424 949
================================================================
* Includes 6 thousand, 3 thousand and 6 thousand 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.
Shares were repurchased during the first quarter of 2008 pursuant to a program
approved by the Board of Directors on August 23, 2007 authorizing the purchase
of up to 2,000,000 shares of the Company's common stock from time to time prior
to September 1, 2008.
Page 32
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
(a)The exhibit list required by this item is incorporated by reference
to the Exhibit Index filed with this report.
Exhibit 31.1: Certification of Chief Executive
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-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
Page 33
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 6, 2008 /s/ JOHN "ROBERT" THORSON
----------- -------------------------
Date John "Robert" Thorson
Senior Vice President
and Chief Financial Officer
(Chief Financial and Accounting Officer)
Page 34
Exhibit Index
Exhibit 31.1: Certification of Chief Executive
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-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