e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
| |
|
|
| þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
or
| |
|
|
| o |
|
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 the registrant as specified in its charter)
| |
|
|
CALIFORNIA
(State of incorporation)
|
|
94-2156203
(I.R.S. Employer
Identification Number) |
| |
|
|
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of principal executive offices and zip code)
|
Registrant’s telephone number, including area code: (707) 863-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
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 þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
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 þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June
30, 2005 as reported on the NASDAQ National Market System, was approximately $1,666,027,391.50.
Shares of Common Stock held by each officer and director and by each person who owns 5% or more of
the outstanding Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares outstanding of each of the registrant’s classes of common stock, as of the close
of business on March 2, 2006
31,578,136 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement relating to registrant’s Annual Meeting of Stockholders,
to be held on April 27, 2006, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part
III to the extent described therein.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements about Westamerica
Bancorporation for which it claims the protection of the safe harbor provisions contained in the
Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on
Management’s current knowledge and belief and include information concerning the Company’s possible
or assumed future financial condition and results of operations. A number of factors,
some of which are beyond the Company’s ability to predict or control, could cause future results to
differ materially from those contemplated. These factors include but are not limited to (1) a
slowdown in the national and California economies; (2) economic uncertainty created by terrorist
threats and attacks on the United States and the actions taken in response; (3) the prospect of
additional terrorist attacks in the United States and the uncertain effect of these events on the
national and regional economies; (4) changes in the interest rate environment; (5) changes in the
regulatory environment; (6) 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
loans; (10) asset/liability matching risks and liquidity risks; and (11) changes in the securities
markets. The Company undertakes no obligation to update any forward-looking statements in this
report. See also “Certain Additional Business Risks” in Item 1, “Risk Factors” in Item 1A and other
risk factors discussed elsewhere in this Report.
PART I
ITEM 1. BUSINESS
WESTAMERICA BANCORPORATION (the “Company”) is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (“BHC”). Its legal headquarters are located at 1108 Fifth
Avenue, San Rafael, California 94901. Principal administrative offices are located at 4550 Mangels
Boulevard in Fairfield, California 94534 and its telephone number is (707) 863-6000. The Company
provides a full range of banking services to individual and corporate customers in Northern and
Central California through its subsidiary bank, Westamerica Bank (“WAB” or the “Bank”). The
principal communities served are located in Northern and Central California, from Mendocino, Lake
and Nevada Counties in the North to Kern County in the South. The Company’s strategic focus is on
the banking needs of small businesses. In addition, the Company also owns 100% of the capital stock
of Community Banker Services Corporation, a company engaged in providing the Company and its
subsidiaries data processing services and other support functions.
The Company was incorporated under the laws of the State of California in 1972 as “Independent
Bankshares Corporation” pursuant to a plan of reorganization among three previously unaffiliated
Northern California banks. The Company operated as a multi-bank holding company until mid-1983, at
which time the then six subsidiary banks were merged into a single bank named Westamerica Bank and
the name of the holding company was changed to Westamerica Bancorporation.
The Company acquired five additional banks within its immediate market area during the early to mid
1990’s. In April, 1997, the Company acquired ValliCorp Holdings, Inc., parent company of ValliWide
Bank, the largest independent bank holding company headquartered in Central California. Under the
terms of all of the merger agreements, the Company issued shares of its common stock in exchange
for all of the outstanding shares of the acquired institutions. The subsidiary banks acquired were
merged with and into WAB. These business combinations were accounted for as poolings-of-interests.
In August, 2000, the Company acquired First Counties Bank. The acquisition was valued at
approximately $19.7 million and was accounted for using the purchase accounting method. The assets
and liabilities of First Counties Bank were fully merged into WAB in September 2000. First Counties
Bank had $91 million in assets and offices in Lake, Napa, and Colusa counties.
In June of 2002 the Company acquired Kerman State Bank. The acquisition was valued at
- 2 -
approximately $14.6 million and was accounted for using the purchase accounting method. The assets
and liabilities of Kerman State Bank were fully merged into WAB immediately upon consummation of
the merger. Kerman State Bank had $95 million in assets and three offices in Fresno county.
On March 1, 2005, the Company acquired Santa Rosa based Redwood Empire Bancorp, the parent company
of National Bank of the Redwoods (NBR). The acquisition was valued at approximately $153 million
and was accounted for using the purchase accounting method. The assets and liabilities of NBR were
fully merged into WAB as of close of business day on March 11, 2005. As of March 1, 2005, Redwood
Empire had approximately $440 million in loans and $370 million in deposits.
At December 31, 2005, the Company had consolidated assets of approximately $5.1 billion, deposits
of approximately $3.8 billion and shareholders’ equity of approximately $426.7 million. The
Company and its subsidiaries employed approximately 950 full-time equivalent staff as of December
31, 2005.
The Company makes available free of charge its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as beneficial
ownership reports on Forms 3, 4 and 5 as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange Commission (“SEC”) through
its website (http://www.westamerica.com). Such documents are also available through the SEC’s
website (http://www.sec.gov). Requests for the Form 10-K annual report, as well as the Company’s
employee Code of Conduct and Ethics, can also be submitted to:
Westamerica Bancorporation
Corporate Secretary A-2M
Post Office Box 1200
Suisun City, California 94585-1200
Supervision and Regulation
The following is not intended to be an exhaustive description of the statutes and regulations
applicable to the Company’s or the Bank’s business. The description of statutory and regulatory
provisions is qualified in its entirety by reference to the particular statutory or regulatory
provisions. Moreover, major new legislation and other regulatory changes affecting the Company,
the Bank, banking, and the financial services industry in general have occurred in the last
several years and can be expected to occur in the future. The nature, timing and impact of new and
amended laws and regulations cannot be accurately predicted.
Regulation and Supervision of Bank Holding Companies
The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended
(the “BHCA”). The Company reports to, is registered with, and may be examined by, the Board of
Governors of the Federal Reserve System (“FRB”). The FRB also has the authority to examine the
Company’s subsidiaries. The costs of any examination by the FRB are payable by the Company. The
Company is a bank holding company within the meaning of Section 3700 of the California Financial
Code. As such, the Company and the Bank are subject to examination by, and may be required to file
reports with, the California Commissioner of Financial Institutions (the “Commissioner”).
The FRB has significant supervisory and regulatory authority over the Company and its affiliates.
The FRB requires the Company to maintain certain levels of capital. See “Capital Standards.” The
FRB also has the authority to take enforcement action against any bank holding company that
commits any unsafe or unsound practice, or violates certain laws, regulations or conditions
imposed in writing by the FRB. Under the BHCA, the Company is required to obtain the prior
approval of the FRB before it acquires, merges or consolidates with any bank or bank holding
company. Any company seeking to acquire, merge or consolidate with the Company also would be
required to obtain the prior approval of the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership or control of more
than 5% of any class of voting shares of any company that is not a bank or bank holding company
and from engaging directly or indirectly in activities other than banking, managing banks, or
providing services to affiliates of the holding company. However, a bank holding company, with the
approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities
that the FRB has determined to be closely related to banking or managing or controlling banks. A
bank holding company must demonstrate that the benefits to the public of the proposed activity
will outweigh the possible adverse effects associated with such activity.
The FRB generally prohibits a bank holding company from declaring or paying a cash dividend that
would impose undue pressure on the capital of subsidiary banks or would be funded only through
borrowing or other arrangements which might adversely affect a bank holding company’s financial
position. Under the FRB policy, a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully fund each dividend
and its prospective rate of earnings retention appears consistent with its capital needs, asset
quality and overall financial condition. See the section entitled “Restrictions on Dividends and
Other Distributions” for additional restrictions on the ability of the Company and the Bank to pay
dividends.
Transactions between the Company and the Bank are restricted under Regulation W, which became
effective on April 1, 2003. The regulation codifies prior interpretations of the FRB and its staff
under Sections 23A and 23B of the Federal Reserve Act. In general, subject to certain specified
exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered
transactions” with affiliates: (a) to an amount equal to 10% of the bank’s capital and surplus, in
the case of covered transactions with any one affiliate; and (b) to an amount equal to 20% of the
bank’s capital and surplus, in the case of covered transactions with all affiliates. The Company
is considered to be an affiliate of the Bank.
A “covered transaction” includes, among other things, a loan or extension of credit to an
affiliate; a purchase of securities issued by an affiliate; a purchase of assets from an
affiliate, with some exceptions; and the issuance of a guarantee, acceptance or letter of credit
on behalf of an affiliate.
Federal regulations governing bank holding companies and change in bank control (Regulation Y)
provide for a streamlined and expedited review process for bank acquisition proposals submitted by
well-run bank holding companies. These provisions of Regulation Y are subject to numerous
qualifications, limitations and restrictions. In order for a bank holding company to qualify as
“well-run,” both it and the insured depository institutions which it controls must meet the “well
capitalized” and “well managed” criteria set forth in Regulation Y.
On March 11, 2000, the Gramm-Leach-Bliley Act (the “GLBA”), or the Financial Services Act of 1999
became effective. The GLBA repealed provisions of the Glass-Steagall Act, which had prohibited
commercial banks and securities firms from affiliating with each other and engaging in each
other’s businesses. Thus, many of the barriers prohibiting affiliations between commercial banks
and securities firms have been eliminated.
The BHCA was also amended by the GLBA to allow new “financial holding companies” (“FHCs”) to offer
banking, insurance, securities and other financial products to consumers. Specifically, the GLBA
amended section 4 of the BHCA in order to provide for a framework for the engagement in new
financial activities. A bank holding company (“BHC”) may elect to become a FHC if all its
subsidiary depository institutions are well capitalized and well managed. If these requirements
are met, a BHC may file a certification to that effect with the FRB and declare that it elects to
become a FHC. After the certification and declaration is filed, the FHC may engage either de novo
or though an acquisition in any activity that has been determined by the FRB to be financial in
nature or incidental to such financial activity. BHCs may engage in financial activities without
prior notice to the FRB if those activities qualify under the new list of permissible activities
in section 4(k) of the BHCA. However, notice must be given to the FRB within 30 days after a FHC
has commenced one or more of the financial activities. The Company has not elected to become a
FHC.
Under the GLBA, Federal Reserve member banks, subject to various requirements, as well as national
banks, are permitted to engage through “financial subsidiaries” in certain financial activities
permissible for affiliates of FHCs. However, to be able to engage in such activities the Bank must
also be well capitalized and well managed and have received at least a “satisfactory” rating in
its most recent Community Reinvestment Act examination. The Company cannot be certain of the
effect of the foregoing recently enacted legislation on its business, although there is likely to
be consolidation among financial services institutions and increased competition for the Company.
Regulation and Supervision of Banks
The Bank is a California state-chartered bank, is insured by the Federal Deposit Insurance
Corporation (the “FDIC”) and is a member bank of the Federal Reserve System. As such, the Bank is
subject to regulation, supervision and regular examination by the California Department of
Financial Institutions (“DFI”) and the FRB. As a member bank of the Federal Reserve System, the
Bank’s primary federal regulator is the FRB. The regulations of these agencies affect most aspects
of the Bank’s business and prescribe permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the permissible scope of its activities and
various other requirements.
In addition to federal banking law, the Bank is also subject to applicable provisions of
California law. Under California law, the Bank is subject to various restrictions on, and
requirements regarding, its operations and administration including the maintenance of branch
offices and automated teller machines, capital requirements, deposits and borrowings, stockholder
rights and duties, and investment and lending activities.
California law permits a state chartered bank to invest in the stock and securities of other
corporations, subject to a state-chartered bank receiving either general authorization or,
depending on the amount of the proposed investment, specific authorization from the Commissioner.
However, because the Bank is a member of the Federal Reserve System, its investment authority is
limited by regulations promulgated by the FRB. In addition, the Federal Deposit Insurance
Corporation Improvement Act (“FDICIA”) imposes limitations on the activities and equity
investments of state chartered, federally insured banks. FDICIA also prohibits a state bank from
making an investment or engaging in any activity as a principal that is not permissible for a
national bank, unless the Bank is adequately capitalized and the FDIC approves the investment or
activity after determining that such investment or activity does not pose a significant risk to
the deposit insurance fund.
Capital Standards
The federal banking agencies have risk-based capital adequacy guidelines intended to provide a
measure of capital adequacy that reflects the degree of risk associated with a banking
organization’s operations for both transactions reported on the balance sheet as assets, and
transactions such as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as certain U.S. government
securities, to 100% for assets with relatively higher credit risk, such as certain loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital
by its total risk-adjusted assets and off balance sheet items.
The federal banking agencies take into consideration concentrations of credit risk and risks from
nontraditional activities, as well as an institution’s ability to manage those risks, when
determining the adequacy of an institution’s capital. This evaluation is made as a part of the
institution’s regular safety and soundness examination. The federal banking agencies also consider
interest rate risk (related to the interest rate sensitivity of an institution’s assets and
liabilities, and its off balance sheet financial instruments) in evaluation of a bank’s capital
adequacy.
As of December 31, 2005, the Company’s and the Bank’s respective ratios exceeded applicable
regulatory requirements. See Note 8 to the consolidated financial statements for capital ratios of
the Company and the Bank, compared to the standards for well capitalized depository institutions
and for minimum capital requirements.
Prompt Corrective Action and Other Enforcement Mechanisms
FDICIA requires each federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions, including but not limited to those that fall below
one or more prescribed minimum capital ratios.
An institution that, based upon its capital levels, is classified as “well capitalized,”
“adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower
capital category if the appropriate federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository institution is
subject to more restrictions. In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential enforcement actions by
the federal banking agencies for unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and required federal banking
regulators to adopt overall safety and soundness standards for depository institutions related to
internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of credit by a depository institution to an
executive officer, director, principal shareholder or related interest, and reduces deposit
insurance coverage for deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts. The federal banking agencies may require an institution to submit to
an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or
effective courses of action given the specific circumstances and severity of an institution’s
noncompliance with one or more standards.
Federal banking agencies require banks to maintain adequate valuation allowances for potential
credit losses. The Company has an internal staff that continually reviews loan quality and
ultimately reports to the Board of Directors. This analysis includes a detailed review of the
classification and categorization of problem loans, assessment of the overall quality and
collectibility of the loan portfolio, consideration of loan loss experience, trends in problem
loans, concentration of credit risk, and current economic conditions, particularly in the Bank’s
market areas. Based on this analysis, management, with the review and approval of the Board,
determines the adequate level of allowance required. The allowance is allocated to different
segments of the loan portfolio, but the entire allowance is available for the loan portfolio in
its entirety.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to declare a cash
dividend or other distribution with respect to capital is subject to statutory and regulatory
restrictions which limit the amount available for such distribution depending upon the earnings,
financial condition and cash needs of the institution, as well as general business conditions.
FDICIA prohibits insured depository institutions from paying management fees to any controlling
persons or, with certain limited exceptions, making capital distributions, including dividends,
if, after such transaction, the institution would be undercapitalized.
In addition to the restrictions imposed under federal law, banks chartered under California law
generally may only pay cash dividends to the extent such payments do not exceed the lesser of
retained earnings of the bank or the bank’s net income for its last three fiscal years (less any
distributions to shareholders during this period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of
the Commissioner in an amount not exceeding the greatest of the bank’s retained earnings, the
bank’s net income for its last fiscal year or the bank’s net income for its current fiscal year.
The federal banking agencies also have the authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or unsound, possibly including
payment of dividends or other payments under certain circumstances even if such payments are not
expressly prohibited by statute.
Premiums for Deposit Insurance and Assessments for Examinations
The Bank’s deposits are insured by the Bank Insurance Fund (BIF) administered by the FDIC. FDICIA
established several mechanisms to increase funds to protect deposits insured by the BIF
administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United
States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC
as receiver from the Federal Financing Bank; and from depository institutions which are members of
the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums
assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits.
FDICIA also provides authority for special assessments against insured deposits.
Congress adopted the Federal Deposit Insurance Reform Act of 2005 as part of the Deficit Reduction
Act of 2005 and President Bush signed it on February 8, 2006 and a companion bill, the Federal
Deposit Insurance Reform Conforming Amendments Act of 2005, on February 15, 2006. This
legislation provides for:
- merging the BIF and SAIF deposit insurance funds;
- annually adjusting the minimum insurance fund reserve ratio between $1.15 and $1.50 per $100 of
insured deposits;
- increasing deposit coverage for retirement accounts to $250,000,
- indexing the insurance level for inflation, with any increases approved by the FDIC and National
Credit Union Administration on a five-year cycle beginning in 2010 after review of the state of
the deposit insurance fund and related factors;
- credits of up to $4.7 billion to offset premiums for banks that capitalized the FDIC by 1996;
and
- an historical basis concept for distributing credits and dividends to reflect past contributions
to the insurance funds.
The FDIC is required to adopt implementing regulations to take effect within 270 days of enactment
or by November 2006. No assurance can be given at this time as to what the future level of
insurance premiums will be.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income neighborhoods. In
addition to substantive penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities.
Financial Privacy Legislation
The GLBA, in addition to the previously described changes in permissible nonbanking activities
permitted to banks, BHCs and FHCs, also required the federal banking agencies, among other federal
regulatory agencies, to adopt regulations governing the privacy of consumer financial information.
The FRB adopted such regulations with an effective date of November 13, 2000, and a date of full
compliance with the regulations on July 1, 2001. The Bank is subject to the FRB’s regulations.
Customer Information Security
The federal bank regulatory agencies have established standards for safeguarding nonpublic
personal information about customers that implement provisions of the GLBA (the “Guidelines”).
Among other things, the Guidelines require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop,
implement and maintain a comprehensive written information security program designed to ensure the
security and confidentiality of customer information, to protect against any anticipated threats
or hazards to the security or integrity of such information, and to protect against unauthorized
access to or use of such information that could result in substantial harm or inconvenience to any
customer.
U.S.A. PATRIOT Act
On October 26, 2001, the President signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 or the “USA
Patriot Act.” Title III of the Act is the International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001. It includes numerous provisions for fighting international
money laundering and blocking terrorist access to the U.S. financial system. The goal of Title III
is to prevent the U.S. financial system and the U.S. clearing mechanisms from being used by
parties suspected of terrorism, terrorist financing and money laundering.
The provisions of Title III of the USA Patriot Act which affect banking organizations, including
the Bank, are generally set forth as amendments to the Bank Secrecy Act. These provisions relate
principally to U.S. banking organizations’ relationships with foreign banks and with persons who
are resident outside the United States. The USA Patriot Act does not immediately impose any new
filing or reporting obligations for banking organizations, but does require certain additional due
diligence and recordkeeping practices. Some requirements take effect without the issuance of
regulations. Other provisions were implemented through regulations promulgated by the U.S.
Department of the Treasury, in consultation with the FRB and other federal financial institutions
regulators.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). The
stated goals of Sarbanes-Oxley are to increase corporate responsibility, to provide for enhanced
penalties for accounting and auditing improprieties at publicly traded companies and to protect
investors by improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. Sarbanes-Oxley generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports under the Securities Exchange Act of 1934 (the
“Exchange Act”).
Sarbanes-Oxley includes very specific additional disclosure requirements and new corporate
governance rules, requires the SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules and mandates further studies of certain
issues. Sarbanes-Oxley represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession, and to state
corporate law, such as the relationship between a board of directors and management and between a
board of directors and its committees and public company shareholders.
Sarbanes-Oxley addresses, among other matters: (i) independent audit committees for reporting
companies whose securities are listed on national exchanges or automated quotation systems (the
“Exchanges”) and expanded duties and responsibilities for audit committees; (ii) certification of
financial statements by the chief executive officer and the chief financial officer; (iii) the
forfeiture of bonuses or other incentive-based compensation and profits from the sale of an
issuer’s securities by directors and senior officers in the twelve month period following initial
publication of any financial statements that later require restatement; (iv) a prohibition on
insider trading during pension plan black out periods; (v) disclosure of off-balance sheet
transactions; (vi) a prohibition on personal loans to directors and officers under most
circumstances with exceptions for certain normal course transactions by regulated financial
institutions; (vii) expedited electronic filing requirements related to trading by insiders in an
issuer’s securities on Form 4; (viii) disclosure of a code of ethics and filing a Form 8-K for a
change or waiver of such code; (ix) accelerated filing of periodic reports; (x) the formation of
the Public Company Accounting Oversight Board (“PCAOB”) to oversee public accounting firms and the
audit of public companies that are subject to the securities laws; (xi) auditor independence;
(xii) internal control evaluation and reporting; and (xiii) various increased criminal penalties
for violations of securities laws.
Given the extensive role of the SEC, the PCAOB and the Exchanges in implementing rules relating to
Sarbanes-Oxley’s new requirements, the federalization of certain elements traditionally within the
sphere of state corporate law, the impact of Sarbanes-Oxley on reporting companies have been and
will continue to be significant.
Pending Legislation
Changes to state laws and regulations (including changes in interpretation or enforcement) can
affect the operating environment of bank holding companies and their subsidiaries in substantial
and unpredictable ways. From time to time, various legislative and regulatory proposals are
introduced. These proposals, if codified, may change banking statutes and regulations and the
Company’s operating environment in substantial and unpredictable ways. If codified, these
proposals could increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks, savings associations, credit unions and
other financial institutions. The Company cannot accurately predict whether those changes in laws
and regulations will occur, and, if those changes occur, the ultimate effect they would have upon
our financial condition or results of operations. It is likely, however, that the current high
level of enforcement and compliance-related activities of federal and state authorities will
continue and potentially increase.
Competition
In the past, WAB’s principal competitors for deposits and loans have been other banks
(particularly major banks), savings and loan associations and credit unions. To a lesser extent,
competition was also provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, mutual fund companies, credit card
companies, and certain retail establishments have offered investment vehicles which also compete
with banks for deposit business. Federal legislation in recent years has encouraged competition
between different types of financial institutions and fostered new entrants into the financial
services market, and it is anticipated that this trend will continue.
The enactment of the Interstate Banking and Branching Act in 1994 and the California Interstate
Banking and Branching Act of 1995 have increased competition within California. Regulatory reform,
as well as other changes in federal and California law will also affect competition. While the
impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is
clear that the business of banking in California will remain highly competitive.
Legislative changes, as well as technological and economic factors, can be expected to have an
ongoing impact on competitive conditions within the financial services industry. As an active
participant in the financial markets, the Company believes that it continually adapts to these
changing competitive conditions.
ITEM 1A. RISK FACTORS
Readers and prospective investors in the Company’s securities should carefully consider the
following risk factors as well as the other information contained or incorporated by reference in
this report.
The risks and uncertainties described below are not the only ones facing the Company. Additional
risks and uncertainties that management is not aware of or focused on or that management currently
deems immaterial may also impair the Company’s business operations. This report is qualified in
its entirety by these risk factors.
If any of the following risks actually occur, the Company’s financial condition and results of
operations could be materially and adversely affected. If this were to happen, the value of the
company’s securities could decline significantly, and investors could lose all or part of their
investment in the Company’s common stock.
Market and Interest Rate Risk
Changes in interest rates could reduce income and cash flow.
The discussion in this report under “Item 7 Management’s Discussion and Analysis — Asset and
Liability Management” and “Item 7A Quantitative and Qualitative Disclosures About Market Risk” is
incorporated by reference in this paragraph. The Bank’s income and cash flow depend to a great
extent on the difference between the interest earned on loans and investment securities, and the
interest paid on deposits and other borrowings. The Company cannot control or prevent changes in
the level of interest rates. They fluctuate in response to general economic conditions and the
policies of various governmental and regulatory agencies, in particular, the Federal Reserve
Board. Changes in monetary policy, including changes in interest rates, will influence the
origination of loans, the purchase of investments, the generation of deposits and the rates
received on loans and investment securities and paid on deposits and other liabilities.
Risks Related to the Nature and Geographical Location of the Company’s Business
The Bank invests in loans that contain inherent credit risks that may cause the Company to
incur losses.
The Company closely monitors the markets in which it conducts its lending operations and adjusts
its strategy to control exposure to loans with higher credit risk. Asset reviews are performed
using grading standards and criteria similar to those employed by bank regulatory agencies. The
Company can provide no assurance that the credit quality of the loan portfolio will not
deteriorate in the future and that such deterioration will not adversely affect the Company.
The Company’s operations are concentrated geographically in California, and poor economic
conditions may cause the Company to incur losses.
Substantially all of the Bank’s business is located in California. A portion of the loan portfolio
of the Company is dependent on real estate. At December 31, 2005, real estate served as the
principal source of collateral with respect to approximately 56% of the Bank’s loan portfolio. The
Bank’s financial condition and operating results will be subject to changes in economic conditions
in California. In the early to mid-1990s, California experienced a significant and prolonged
downturn in its economy, which adversely affected financial institutions. Economic conditions in
California are subject to various uncertainties at this time, including the decline in the
technology sector, the California state government’s budgetary difficulties and continuing fiscal
difficulties. The Company can provide no assurance that conditions in the California economy will
not deteriorate in the future and that such deterioration will not adversely effect the Bank.
The markets in which the Company operates are subject to the risk of earthquakes and other natural
disasters.
Most of the properties of the Company are located in California. Also most of the real and personal
properties which currently secure some of the Bank’s loans are located in California. California
is a state which is prone to earthquakes, brush fires, flooding and other natural disasters. In
addition to possibly sustaining damage to its own properties, if there is a major earthquake,
flood, fire or other natural disaster, the Bank faces the risk that many of its borrowers may
experience uninsured property losses, or sustained job interruption and/or loss which may
materially impair their ability to meet the terms of their loan obligations. A major earthquake,
flood, fire or other natural disaster in California could have a material adverse effect on the
Bank’s business, financial condition, results of operations and cash flows.
Regulatory Risks
Restrictions on dividends and other distributions could limit amounts payable to the Company.
As a holding company, a substantial portion of the Company’s cash flow typically comes from
dividends paid by its bank and nonbank subsidiaries. Various statutory provisions restrict the
amount of dividends the Company’s subsidiaries can pay to the Company without regulatory approval.
In addition, if any of the Company’s subsidiaries were to liquidate, that subsidiary’s creditors
will be entitled to receive distributions from the assets of that subsidiary to satisfy their
claims against it before the Company, as a holder of an equity interest in the subsidiary, will be
entitled to receive any of the assets of the subsidiary.
Adverse effects of changes in banking or other laws and regulations or governmental fiscal or
monetary policies could adversely affect the Company.
The Company is subject to significant federal and state regulation and supervision, which is
primarily for the benefit and protection of the Bank’s customers and not for the benefit of
investors. In the past, the Bank’s business has been materially affected by these regulations.
This trend is likely to continue in the future. Laws, regulations or policies, including
accounting standards and interpretations currently affecting the Company and the Company’s
subsidiaries, may change at any time. Regulatory authorities may also change their interpretation
of these statutes and regulations. Therefore, the Company’s business may be adversely affected by
any future changes in laws, regulations, policies or interpretations or regulatory approaches to
compliance and enforcement, including legislative and regulatory reactions to the terrorist attack
on September 11, 2001 and future acts of terrorism, and major U.S. corporate bankruptcies and
reports of accounting irregularities at U.S. public companies.
Additionally, the Bank’s business is affected significantly by the fiscal and monetary policies of
the federal government and its agencies. The Company is particularly affected by the policies of
the Federal Reserve Board, which regulates the supply of money and credit in the United States of
America. Under long- standing policy of the Federal Reserve Board, a bank holding company is
expected to act as a source of financial strength for its subsidiary banks. As a result of that
policy, the Company may be required to commit financial and other resources to its subsidiary bank
in circumstances where the Company might not otherwise do so. Among the instruments of monetary
policy available to the Federal Reserve Board are (a) conducting open market operations in U.S.
government securities, (b) changing the discount rates of borrowings by depository institutions,
and (c) imposing or changing reserve requirements against certain borrowings by banks and their
affiliates. These methods are used in varying degrees and combinations to directly affect the
availability of bank loans and deposits, as well as the interest rates charged on loans and paid
on deposits. The policies of the Federal Reserve Board may have a material effect on the Company’s
business, results of operations and financial condition.
Systems, Accounting and Internal Control Risks
The accuracy of the Company’s judgments and estimates about financial and accounting matters will
impact operating results and financial condition.
The discussion under “Critical Accounting Policies” in this report and the information referred to
in that discussion is incorporated by reference in this paragraph. The Company makes certain
estimates and judgments in preparing its financial statements. The quality and accuracy of those
estimates and judgments will have an impact on the Company’s operating results and financial
condition.
The Company’s information systems may experience an interruption or breach in security.
The Company relies heavily on communications and information systems to conduct its business. Any
failure, interruption or breach in security of these systems could result in failures or
disruptions in the Company’s customer relationship management and systems. There can be no
assurance that any such failures, interruptions or security breaches will not occur or, if they do
occur, that they will be adequately corrected by the Company. The occurrence of any such failures,
interruptions or security breaches could damage the Company’s reputation, result in a loss of
customer business, subject the Company to additional regulatory scrutiny, or expose the Company to
litigation and possible financial liability, any of which could have a material adverse effect on
the Company’s financial condition and results of operations.
The Company’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company’s internal control over financial reporting,
disclosure controls and procedures, and corporate governance policies and procedures. The Company
maintains controls and procedures to mitigate against risks such as processing system failures and
errors, and customer or employee fraud, and maintains insurance coverage for certain of these
risks. Any system of controls and procedures, however well designed and operated, is based in part
on certain assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Events could occur which are not prevented or detected by the
Company’s internal controls or are not insured against or are in excess of the Company’s insurance
limits. Any failure or circumvention of the Company’s controls and procedures or failure to comply
with regulations related to controls and procedures could have a material adverse effect on the
Company’s business, results of operations and financial condition.
Shares of Company common stock eligible for future sale could have a dilutive effect on the market
for Company common stock and could adversely affect the market price.
The Articles of Incorporation of the Company authorize the issuance of 150 million shares of
common stock (and two additional classes of 1 million shares each, denominated “Class B Common
Stock” and “Preferred Stock”, respectively) of which approximately 31.9 million were outstanding
at December 31, 2005. Pursuant to its stock option plans, at December 31, 2005, the Company had
exercisable options outstanding of 2.3 million. As of December 31, 2005, 1.8 million shares of
Company common stock remained available for grants under the Company’s stock option plans (and
stock purchase plan). Sales of substantial amounts of Company common stock in the public market
could adversely affect the market price of its common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Branch Offices and Facilities
WAB is engaged in the banking business through 87 offices in 21 counties in Northern and Central
California including thirteen offices in Fresno County, eleven each in Marin and Sonoma Counties,
seven in Napa County, five each in Stanislaus, Lake, Kern, Contra Costa and Solano Counties, three
each in Alameda and Sacramento Counties, two each in Mendocino, Nevada, Placer and Tulare
Counties, and one each in Merced, San Francisco, Tuolumne, Kings, Madera, and Yolo Counties. WAB
believes all of its offices are constructed and equipped to meet prescribed security requirements.
The Company owns 28 branch office locations and one administrative facility and leases 69
facilities. Most of the leases contain multiple renewal options and provisions for rental
increases, principally for changes in the cost of living index, property taxes and maintenance.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any material pending legal
proceeding, nor is their property the subject of any material pending legal proceeding, except
ordinary routine legal proceedings arising in the ordinary course of the Company’s business. None
of these proceedings is expected to have a material adverse impact upon the Company’s business,
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
There were no matters submitted to a vote of the shareholders during the fourth quarter of 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the NASDAQ National Market System (“NASDAQ”) (to be
renamed NASDAQ Global Market in 2006) under the symbol “WABC”. The following table shows the high
and the low bid prices for the common stock, for each quarter, as reported by NASDAQ:
| |
|
|
|
|
|
|
|
|
2005: |
|
High |
|
|
Low |
|
| |
First quarter |
|
$ |
58.44 |
|
|
$ |
50.82 |
|
Second quarter |
|
|
54.11 |
|
|
|
48.48 |
|
Third quarter |
|
|
56.25 |
|
|
|
49.90 |
|
Fourth quarter |
|
|
55.48 |
|
|
|
47.33 |
|
|
|
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
51.63 |
|
|
$ |
47.85 |
|
Second quarter |
|
|
52.99 |
|
|
|
47.58 |
|
Third quarter |
|
|
55.80 |
|
|
|
49.04 |
|
Fourth quarter |
|
|
61.05 |
|
|
|
54.43 |
|
| |
As of February 6, 2006, there were approximately 8,600 shareholders of record of the Company’s
common stock.
The Company has paid cash dividends on its common stock in every quarter since its formation in
1972, and it is currently the intention of the Board of Directors of the Company to continue
payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends
will be paid since they are dependent upon earnings, financial condition and capital requirements
of the Company and its subsidiaries as well as policies of the Federal Reserve Board pursuant to
the BHCA. See Item 1, “Business — Supervision and Regulation.” As of December 31, 2005, $190.4
million was available for payment of dividends by the Company to its shareholders, under
applicable laws and regulations.
See Note 17 to the consolidated financial statements included in this report for additional
information regarding the amount of cash dividends declared and paid on common stock for the three
most recent fiscal years.
As discussed in Note 7 to the consolidated financial statements, in December 1986, the Company
declared a dividend distribution of one common share purchase right (the “Right”) for each
outstanding share of common stock. The terms of the Rights were most recently amended and restated
in 2004. The new amended plan is very similar in purpose and effect to the plan as it existed
prior to this amendment, aimed at helping the Board of Directors to maximize shareholder value in
the event of a change of control of the Company and otherwise resist actions that the Board
considers likely to injure the Company or its shareholders.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes the status of the Company’s equity compensation plans as of December
31, 2005 (in thousands, except exercise price):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of securities |
| |
|
|
|
|
|
remaining available for |
| |
|
Number of securities |
|
|
|
future issuance under |
| |
|
to be issued upon |
|
Weighted-average |
|
equity compensation |
| |
|
exercise of outstanding |
|
exercise price of |
|
plans (excluding |
| |
|
options, warrants |
|
outstanding options, |
|
securities reflected |
| Plan category |
|
and rights |
|
warrants and rights |
|
in column (a)) |
| |
|
|
|
(a |
) |
|
|
(b |
) |
|
|
(c |
) |
| |
Equity compensation
plans approved by security holders |
|
|
3,269 |
|
|
$ |
39 |
|
|
|
1,786 |
* |
Equity compensation
plans not approved by security holders |
|
|
0 |
|
|
|
N/A |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,269 |
|
|
$ |
39 |
|
|
|
1,786 |
|
| |
|
|
|
| * |
|
The Amended and Restated Stock Option Plan, Article III, provides that the number of shares
reserved for Awards under the plan may increase on the first day of each fiscal year by an amount equal to the
least of 1) 2% of the shares outstanding as of the last day of the prior fiscal year, 2) 675,000 shares, or 3)
such lesser amount as determined by the Board. |
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 December 31, 2005
(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 |
| |
October 1
through
October 31 |
|
|
209 |
|
|
$ |
51.61 |
|
|
|
209 |
|
|
|
1,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1
through
November 30 |
|
|
199 |
|
|
|
53.91 |
|
|
|
199 |
|
|
|
1,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1
through
December 31 |
|
|
92 |
|
|
|
53.73 |
|
|
|
92 |
|
|
|
1,481 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
500 |
|
|
$ |
52.91 |
|
|
|
500 |
|
|
|
1,481 |
|
| |
|
|
|
| * |
|
Includes 7 thousand, 3 thousand and 8 thousand shares purchased in October, November and
December, 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 fourth quarter of 2005 pursuant to a program approved by the
Board of Directors on August 25, 2005 authorizing the purchase of up to 2 million shares of the
Company’s common stock from time to time prior to September 1, 2006.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December 31,
2005 has been derived
from the Company’s Consolidated Financial Statements. This
information should be read in
conjunction with the Consolidated Financial Statements and related
notes thereto included
elsewhere herein.
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
| |
Year ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
242,797 |
|
|
$ |
216,337 |
|
|
$ |
223,493 |
|
|
$ |
237,633 |
|
|
$ |
257,056 |
|
Interest expense |
|
|
43,649 |
|
|
|
21,106 |
|
|
|
27,197 |
|
|
|
39,182 |
|
|
|
68,887 |
|
| |
Net interest income |
|
|
199,148 |
|
|
|
195,231 |
|
|
|
196,296 |
|
|
|
198,451 |
|
|
|
188,169 |
|
Provision for credit losses |
|
|
900 |
|
|
|
2,700 |
|
|
|
3,300 |
|
|
|
3,600 |
|
|
|
3,600 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities (losses) gains, net |
|
|
(4,903 |
) |
|
|
(5,011 |
) |
|
|
2,443 |
|
|
|
(4,278 |
) |
|
|
0 |
|
Loss on extinguishment of debt |
|
|
0 |
|
|
|
(2,204 |
) |
|
|
(2,166 |
) |
|
|
0 |
|
|
|
0 |
|
Deposit service charges and other |
|
|
59,443 |
|
|
|
45,798 |
|
|
|
42,639 |
|
|
|
40,829 |
|
|
|
42,655 |
|
Total noninterest income |
|
|
54,540 |
|
|
|
38,583 |
|
|
|
42,916 |
|
|
|
36,551 |
|
|
|
42,655 |
|
Noninterest expense |
|
|
104,856 |
|
|
|
98,751 |
|
|
|
101,703 |
|
|
|
103,323 |
|
|
|
102,651 |
|
| |
Income before income taxes |
|
|
147,932 |
|
|
|
132,363 |
|
|
|
134,209 |
|
|
|
128,079 |
|
|
|
124,573 |
|
Provision for income taxes |
|
|
40,491 |
|
|
|
37,145 |
|
|
|
39,146 |
|
|
|
40,941 |
|
|
|
40,294 |
|
| |
Net income |
|
$ |
107,441 |
|
|
$ |
95,218 |
|
|
$ |
95,063 |
|
|
$ |
87,138 |
|
|
$ |
84,279 |
|
| |
| |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.33 |
|
|
$ |
2.99 |
|
|
$ |
2.89 |
|
|
$ |
2.59 |
|
|
$ |
2.39 |
|
Diluted |
|
|
3.27 |
|
|
|
2.93 |
|
|
|
2.85 |
|
|
|
2.55 |
|
|
|
2.36 |
|
Per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
$ |
1.22 |
|
|
$ |
1.10 |
|
|
$ |
1.00 |
|
|
$ |
0.90 |
|
|
$ |
0.82 |
|
Book value at December 31 |
|
|
13.38 |
|
|
|
11.33 |
|
|
|
10.54 |
|
|
|
10.22 |
|
|
|
9.19 |
|
Average common shares outstanding |
|
|
32,291 |
|
|
|
31,821 |
|
|
|
32,849 |
|
|
|
33,686 |
|
|
|
35,213 |
|
Average diluted common shares outstanding |
|
|
32,897 |
|
|
|
32,461 |
|
|
|
33,369 |
|
|
|
34,225 |
|
|
|
35,748 |
|
Shares outstanding at December 31 |
|
|
31,882 |
|
|
|
31,640 |
|
|
|
32,287 |
|
|
|
33,411 |
|
|
|
34,220 |
|
| |
At December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
2,616,372 |
|
|
$ |
2,246,078 |
|
|
$ |
2,269,420 |
|
|
$ |
2,440,411 |
|
|
$ |
2,432,371 |
|
Investments |
|
|
1,999,604 |
|
|
|
2,192,542 |
|
|
|
1,949,288 |
|
|
|
1,386,833 |
|
|
|
1,158,139 |
|
Intangible assets |
|
|
148,077 |
|
|
|
21,890 |
|
|
|
22,433 |
|
|
|
23,176 |
|
|
|
19,013 |
|
Total assets |
|
|
5,149,209 |
|
|
|
4,737,268 |
|
|
|
4,576,385 |
|
|
|
4,224,867 |
|
|
|
3,927,967 |
|
Total deposits |
|
|
3,846,101 |
|
|
|
3,583,619 |
|
|
|
3,463,991 |
|
|
|
3,294,065 |
|
|
|
3,234,635 |
|
Short-term borrowed funds |
|
|
775,173 |
|
|
|
735,423 |
|
|
|
590,646 |
|
|
|
349,736 |
|
|
|
271,911 |
|
Federal Home Loan Bank advances |
|
|
0 |
|
|
|
0 |
|
|
|
105,000 |
|
|
|
170,000 |
|
|
|
40,000 |
|
Debt financing and notes payable |
|
|
40,281 |
|
|
|
21,429 |
|
|
|
24,643 |
|
|
|
24,607 |
|
|
|
27,821 |
|
Shareholders’ equity |
|
|
426,714 |
|
|
|
358,609 |
|
|
|
340,371 |
|
|
|
341,499 |
|
|
|
314,359 |
|
| |
Financial Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
For the year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets |
|
|
2.12 |
% |
|
|
2.10 |
% |
|
|
2.19 |
% |
|
|
2.17 |
% |
|
|
2.18 |
% |
Return on equity |
|
|
26.04 |
% |
|
|
28.83 |
% |
|
|
29.38 |
% |
|
|
28.70 |
% |
|
|
27.17 |
% |
Net interest margin * |
|
|
4.82 |
% |
|
|
5.14 |
% |
|
|
5.39 |
% |
|
|
5.76 |
% |
|
|
5.71 |
% |
Net loan losses to average loans |
|
|
0.03 |
% |
|
|
0.11 |
% |
|
|
0.15 |
% |
|
|
0.14 |
% |
|
|
0.15 |
% |
Efficiency ratio * |
|
|
37.66 |
% |
|
|
38.49 |
% |
|
|
39.07 |
% |
|
|
40.96 |
% |
|
|
41.67 |
% |
At December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets |
|
|
8.29 |
% |
|
|
7.57 |
% |
|
|
7.44 |
% |
|
|
8.08 |
% |
|
|
8.00 |
% |
Total capital to risk-adjusted
assets |
|
|
10.40 |
% |
|
|
12.46 |
% |
|
|
11.39 |
% |
|
|
10.97 |
% |
|
|
10.63 |
% |
Allowance for loan losses to loans |
|
|
2.09 |
% |
|
|
2.35 |
% |
|
|
2.32 |
% |
|
|
2.17 |
% |
|
|
2.10 |
% |
| |
* Fully taxable equivalent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 11 -
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion addresses information pertaining to the financial
condition and results
of operations of Westamerica Bancorporation and Subsidiaries (the
“Company”) that may not be
otherwise apparent from a review of the consolidated financial statements and
related footnotes.
It should be read in conjunction with those statements and notes
found on pages 34
through 57, as
well as with the other information
presented throughout the Report.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in
accordance with accounting
principles generally accepted in the United States and follow general practices
within the banking
industry. Application of these principles requires management to
make certain estimates,
assumptions, and judgments that affect the amounts reported in the
financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available
as of the date of the financial statements; accordingly, as this
information changes, the
financial statements could reflect different estimates,
assumptions, and judgments. Certain
policies inherently have a greater reliance on the use of estimates, assumptions
and judgments and
as such have a greater possibility of producing results that could be materially
different than
originally reported. Estimates, assumptions and judgments are
necessary when assets and
liabilities are required to be recorded at fair value, when a decline in the value
of an asset not
carried on the financial statements at fair value warrants an impairment writedown
or valuation
reserve to be established, or when an asset or liability needs to be recorded
contingent upon a
future event. Carrying assets and liabilities at fair value inherently results in
more financial
statement volatility. The fair values and the information used to record valuation
adjustments for
certain assets and liabilities are based either on quoted market prices or are
provided by other
third-party sources, when available. When third-party information is not
available, valuation
adjustments are estimated in good faith
by management.
The most significant accounting policies followed by the Company are presented in
Note 1 to the
consolidated financial statements. These policies, along with the disclosures
presented in the
other financial statement notes and in this discussion, provide information on how
significant
assets and liabilities are valued in the financial statements and how those values
are determined.
Based on the valuation techniques used and the sensitivity of financial statement
amounts to the
methods, assumptions, and estimates underlying those amounts,
management has identified the
Allowance for Loan Losses to be the accounting area that requires the most
subjective or complex
judgments, and as such could be most subject to revision as new information
becomes available.
The Allowance for Loan Losses represents management’s estimate of
the amount of loss in
the loan portfolio that can be reasonably estimated as of the balance sheet date.
Determining the
amount of the Allowance for Loan Losses is considered a critical accounting
estimate because it
requires significant judgment and the use of estimates related to
the amount and timing of
expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based
on historical loss experience, and consideration of current economic trends,
uncertainties and
conditions, all of which may be susceptible to significant change. A discussion of
the factors
driving changes in the amount of the Allowance for Loan losses is included in the
“Credit Quality”
discussion below.
Effective March 1, 2005, the Company acquired Redwood Empire Bancorp (“REBC”),
parent company of
National Bank of the Redwoods. The REBC acquisition was accounted for using the
“purchase method”
of accounting for business combinations which requires valuing assets and
liabilities which do not
have quoted market prices. In determining fair values for assets and liabilities
without quoted
market prices for the REBC acquisition, management engaged an independent
consultant to determine
such fair values. Critical assumptions used in the valuation included prevailing
market interest
rates on similar financial products, future cash flows, maturity
structures and durations of
similar financial products, the cost of processing deposit products, the interest
rate structure
for similar funding sources over the estimated duration of acquired deposits, the
duration of
customer relationships, and other
critical assumptions.
OVERVIEW OF FINANCIAL RESULTS
Operating results following the REBC acquisition include
additional net interest income from
REBC’s earning assets and interest-bearing liabilities and higher merchant credit
card income due
to the REBC’s card processing unit. Additionally, 2005 results included a $3.7
million gain on
sale of real estate, $945 thousand in tax-exempt life insurance proceeds, and $4.9
million in
securities losses.
ACQUISITION
The acquisition of REBC was completed on March 1, 2005, followed by a divestiture
of a former REBC
branch in Lake County in the second quarter. After adjusting for the divestiture
the transaction
was valued at approximately $150 million, including approximately
$57 million paid in cash,
issuance of approximately 1.6 million shares of the Company’s common stock, and
conversion of
Redwood Empire stock options into Company stock options based on an average stock
price of $51.84.
REBC, on March 1, 2005, had approximately $440 million loans, $370 million
deposits, $20 million
“trust preferred” subordinated debt, and $30 million shareholders’
equity. Goodwill of $103
million and identifiable intangibles of $27 million were recorded in accordance
with the purchase
method of accounting for business combinations. During the second quarter of 2005,
the Company
sold a former REBC branch with approximately $34 million in deposits, as required
by the Federal
Reserve in connection with its approval of the REBC acquisition. A premium of $2.0
million on the
sale of the branch was recorded as a reduction of goodwill associated with the
purchase of REBC.
Net Income
The Company reported net income for 2005 of $107.4 million or $3.27 diluted
earnings per share, an
increase of $12.2 million over net income for 2004 of $95.2 million, or $2.93
diluted earnings per
share. Results for 2005 include a $3.7 million gain on sale of
real estate, $945 thousand in
tax-exempt life insurance proceeds, and $4.9 million in securities losses which,
on a combined
basis, increased net income $247 thousand. Results for 2004 included a $7.2 million asset
impairment writedown in the value of FNMA and FHLMC preferred stock, a $2.2 million loss on
extinguishment of debt, and $2.2 million realized losses on the
sale of securities.
Components of Net Income
- 12 -
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
|
| ($ in thousands except per share amounts) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
Net interest and fee income * |
|
$ |
223,866 |
|
|
$ |
217,993 |
|
|
$ |
217,407 |
|
Provision for loan losses |
|
|
(900 |
) |
|
|
(2,700 |
) |
|
|
(3,300 |
) |
Noninterest income |
|
|
54,540 |
|
|
|
38,583 |
|
|
|
42,916 |
|
Noninterest expense |
|
|
(104,856 |
) |
|
|
(98,751 |
) |
|
|
(101,703 |
) |
Taxes * |
|
|
(65,209 |
) |
|
|
(59,907 |
) |
|
|
(60,257 |
) |
| |
|
|
| |
Net income |
|
$ |
107,441 |
|
|
$ |
95,218 |
|
|
$ |
95,063 |
|
| |
Net income per average fully-diluted
share |
|
$ |
3.27 |
|
|
$ |
2.93 |
|
|
$ |
2.85 |
|
Net income as a percentage of
average shareholders’ equity |
|
|
26.04 |
% |
|
|
28.83 |
% |
|
|
29.38 |
% |
Net income as a percentage of
average total assets |
|
|
2.12 |
% |
|
|
2.10 |
% |
|
|
2.19 |
% |
| |
|
|
|
| * |
|
Fully taxable equivalent (FTE) |
Net income for 2005 increased $12.2
million, or 12.8%, over net income for
2004. Net interest
income (FTE) increased $5.9 million,
mainly due to earning asset growth,
partially offset by a
reduced net in interest margin resulting
from rates paid on interest-bearing
liabilities rising
faster than yields on earning assets. The loan loss provision declined $1.8
million, year over
year, in accordance with Management’s assessment of credit risk
for the loan portfolio.
Noninterest income increased $16.0 million primarily due to a $5.6 million
increase in merchant
credit card income, a $3.7 million gain on sale of real estate and $945 thousand
in life insurance
proceeds, partially reduced by $4.9 million in realized securities losses.
Furthermore, 2004
results included a $7.2 million securities impairment writedown, a
$2.2 million loss on
extinguishment of debt, and $2.2 million in realized investment securities gains.
Noninterest
expense increased mostly due to an increase in salaries and
related benefits, occupancy and
equipment expense and amortization of intangibles relating to the REBC
acquisition. Income tax
provision (FTE) increased due to higher pretax income, partially offset by the
tax-exempt nature
of life insurance proceeds.
Net income in 2004 was $155 thousand or 0.2% higher than in 2003, after including
a $4.2 million
after-tax securities impairment writedown in 2004. Net interest
income (FTE) increased $586
thousand, the net result of higher average earning assets and a reduced net
interest margin. The
reduced net interest margin resulted from lower funding costs offset by declining
earning asset
yields and lower fee income. The loan loss provision declined $600 thousand, year
over year, in
accordance with Management’s assessment
of credit risk for the loan portfolio.
Noninterest income
fell $4.3 million primarily due to the
impairment charge, partially offset by
growth in deposit
fee income. Noninterest expense declined
$2.9 million because of lower personnel
and other
operational costs. The lower tax
provision (FTE) (down $350 thousand) was
due to a $3.0 million
tax benefit from the impairment charge
and higher low-income housing investment
tax credits,
offset in part by increased pretax
income.
The Company’s return on average total
assets was 2.12% in 2005, compared to
2.10% and 2.19% in
2004 and 2003, respectively. Return on
average equity in 2005 was 26.04%,
compared to 28.83% and
29.38% in 2004 and 2003, respectively.
- 13 -
Net Interest Income
The Company’s primary source of revenue
is net interest income, or the
difference between
interest income on earning assets and
interest expense on interest-bearing
liabilities. Net
interest income (FTE) in 2005 increased
$5.9 million or 2.7% from 2004, to
$223.9 million. Comparing 2004 to 2003, net interest income (FTE) increased $586 thousand or 0.3%.
Components of Net Interest Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
Interest and fee income |
|
$ |
242,797 |
|
|
$ |
216,337 |
|
|
$ |
223,493 |
|
Interest expense |
|
|
(43,649 |
) |
|
|
(21,106 |
) |
|
|
(27,197 |
) |
FTE adjustment |
|
|
24,718 |
|
|
|
22,762 |
|
|
|
21,111 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE) |
|
$ |
223,866 |
|
|
$ |
217,993 |
|
|
$ |
217,407 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (FTE) |
|
|
4.82 |
% |
|
|
5.14 |
% |
|
|
5.39 |
% |
| |
Interest and fee income (FTE) increased in 2005 by $28.4 million
or 11.9% from 2004, the net
result of growth of average earning assets, primarily due to the REBC acquisition,
and higher
yields on earning assets, partially offset by the effect of one less accrual day.
Average earning
assets grew $406.4 million, with loans and investments increasing
$317.9 million and $88.5
million, respectively. Most growth in average loans was concentrated in
commercial, construction,
commercial real estate and residential real estate credits, which
increased $41 million, $31
million, $137 million and $118 million, respectively. The increase in average
investment balances
was due to growth in municipal securities (up $131 million) and mortgage backed
securities and
collateralized mortgage obligations (up $114 million), partially
offset by declines in U.S.
government sponsored entity obligations
(down $124 million) and corporate and
other securities
(down $31 million). The yield on earning
assets, excluding loan fee income, rose
from 5.61% in
2004 to 5.73% in 2005. The composite
yield on loans, excluding loan fee
income, increased 12 basis
points (“bp”) to 6.19% in 2005. Yield
increases on commercial loans (up 76 bp)
and personal credit
lines (up 141 bp) were partially reduced
by declining yields on commercial real
estate loans (down
20 bp) and indirect consumer loans (down
38 bp). The yield on the investment
portfolio increased 8
bp mainly due to a 16 bp increase in mortgage backed securities
and collateralized mortgage
obligations, partially offset by a 33 bp decline in municipal
securities.
Interest expense increased in 2005 to $43.6 million, due to rising rates paid on
interest-bearing
liabilities and higher volume of those
liabilities, partially offset by the
effect of one less
accrual day. The average rate paid on
interest-bearing liabilities rose 63 bp
to 1.36% in 2005.
Rates paid on most liabilities moved
with general market conditions. The
average rate on
short-term borrowings rose 159 bp. Rates
on deposits increased as well, including
those on
certificates of deposit (“CDs”) with
balances over $100 thousand, which rose
131 bp, on retail
CDs, which went up by 54 bp, and on
money market checking accounts, which
rose 12 bp. Average
interest-bearing liability balances grew
$331.9 million or 11.5% for 2005 over
2004. Average
short-term borrowings increased $161
million. Average long-term debt
increased $15.3 million, due
to the assumption of REBC’s debt,
reduced by an annual principal
repayment. Most categories of
deposits grew including non-interest
bearing demand deposits (up $103.1
million), money market
checking (up $55.6 million), passbook
savings (up $30.2 million), and CDs over
$100 thousand (up
$94.5 million).
Interest and fee income (FTE) declined
$5.5 million or 2.3% from 2003 to 2004,
the net result of
declining yields on earning assets and
lower loan fee income, partially offset
by the effect of
higher volume of earning assets and one
additional accrual day. The total yield
on earning assets,
excluding loan fee income, declined from
5.99% in 2003 to 5.61% in 2004,
following the general
trend in interest rates within capital
markets. The most significant yield
declines in the loan
portfolio were indirect consumer loans
(down 92 bp), commercial real estate
loans (down 37 bp) and
residential real estate loans (down 64
bp). Loan fee income, primarily
prepayment fees, declined
from $3.1 million in 2003 to $1.6
million in 2004, lowering the total
earning asset yield an
additional 4 bp from 2003. The
investment portfolio yield declined 9 bp
to 5.07% with declines
occurring in U.S. government sponsored
entity obligations (down from 3.83% to
3.41%, or 42 bp) and
municipal securities (down from 7.14% to
6.80%, or 34 bp). The decline in
investment yields was
partly mitigated by increases in yields
on collateralized mortgage obligations
(up 79 bp) and
other securities (up 101 bp). The lower
yields caused interest income (excluding
fees) to decline
by $9.2 million, which was offset by the
$5.2 million increase in interest income
from growth in
average earning assets (up $202.9
million to $4,236.9 million in 2004).
The average investment
portfolio increased by $298.7 million,
primarily the net result of increases in
average
collateralized mortgage obligations (up
$247.4 million), average municipal
securities (up $80.1
million) and average U.S. government
sponsored entity obligations (up $39.1
million), partially
offset by a $60.5 million decline in
average corporate and other securities.
The average loan
portfolio balance was reduced by $95.8
million with the largest decrease
occurring in average
commercial real estate loans (down
$119.5 million).
Interest expense fell $6.1 million or
22.4% from 2003 to 2004 due to declining
rates paid on
average interest-bearing liabilities and
a change in mix of those liabilities.
The average rate
paid on interest-bearing liabilities
dropped 24 bp to 0.73%. Notable
decreases were on money
market saving accounts (down 30 bp), CDs
with balances over $100 thousand (down 8
bp), retail CDs
(down 19 bp) and customer sweep accounts
(down 25 bp). Yields on overnight funds
purchased
increased 26 bp after a series of
increases in the target rate for federal
funds in the second
half of 2004. Interest-bearing
liabilities shifted from higher-rate to
lower-rate categories.
Federal Home Loan Bank (“FHLB”) advances
were paid off entirely during 2004,
reducing the average
balance by $118.1 million. Average
balances of retail CDs and CDs with
balances over $100 thousand
fell by $35.8 million and $20.1 million,
respectively. Average overnight funds
purchased and money
market accounts rose by $138.5 million
and $60.0 million, respectively. A
$107.5 million increase
in average noninterest-bearing balances
resulted in the reduction of interest
expense by $1.3
million.
The following tables present information regarding the consolidated average
assets, liabilities
and shareholders’ equity, the amounts of interest income from
average earning assets and the
resulting yields, and the amount of interest expense paid on average
interest-bearing liabilities
and the resulting rates paid. Average
loan balances include nonperforming
loans. Interest income
includes proceeds from loans on
nonaccrual status only to the extent
cash payments have been
received and applied as interest income.
Yields on securities and certain loans
have been adjusted
upward to reflect the effect of income
exempt from federal income taxation at
the current statutory tax rate.
- 14 -
Distribution
of Assets, Liabilities & Shareholders’ Equity and Yeilds, Rates & Interest Margin
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2005 |
|
| |
|
|
|
|
|
Interest |
|
|
Rates |
|
| |
|
Average |
|
|
Income/ |
|
|
Earned/ |
|
| (dollars in thousands) |
|
Balance |
|
|
Expense |
|
|
Paid |
|
| |
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market assets and funds sold |
|
$ |
775 |
|
|
$ |
3 |
|
|
|
0.39 |
% |
Trading account securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
464,530 |
|
|
|
19,699 |
|
|
|
4.24 |
% |
Tax-exempt |
|
|
264,119 |
|
|
|
19,385 |
|
|
|
7.34 |
% |
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
751,840 |
|
|
|
30,557 |
|
|
|
4.06 |
% |
Tax-exempt |
|
|
585,679 |
|
|
|
36,820 |
|
|
|
6.29 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,283,779 |
|
|
|
92,201 |
|
|
|
7.18 |
% |
Tax-exempt |
|
|
249,052 |
|
|
|
16,396 |
|
|
|
6.58 |
% |
Real estate construction |
|
|
67,696 |
|
|
|
5,074 |
|
|
|
7.50 |
% |
Real estate residential |
|
|
477,667 |
|
|
|
21,411 |
|
|
|
4.48 |
% |
Consumer |
|
|
498,169 |
|
|
|
25,969 |
|
|
|
5.21 |
% |
| |
|
|
|
|
|
|
| |
Earning assets |
|
|
4,643,306 |
|
|
|
267,515 |
|
|
|
5.76 |
% |
Other assets |
|
|
423,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets |
|
$ |
5,066,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
$ |
1,384,483 |
|
|
|
— |
|
|
|
— |
|
Savings and interest-bearing
transaction |
|
|
1,738,560 |
|
|
|
5,204 |
|
|
|
0.30 |
% |
Time less than $100,000 |
|
|
280,770 |
|
|
|
5,687 |
|
|
|
2.03 |
% |
Time $100,000 or more |
|
|
444,862 |
|
|
|
11,473 |
|
|
|
2.58 |
% |
| |
|
|
|
|
|
|
| |
Total interest-bearing deposits |
|
|
2,464,192 |
|
|
|
22,364 |
|
|
|
0.91 |
% |
Short-term borrowed funds |
|
|
716,984 |
|
|
|
18,941 |
|
|
|
2.64 |
% |
Federal Home Loan Bank advances |
|
|
0 |
|
|
|
0 |
|
|
|
— |
|
Debt financing and notes payable |
|
|
36,975 |
|
|
|
2,344 |
|
|
|
6.34 |
% |
| |
|
|
|
|
|
|
| |
Total interest-bearing liabilities |
|
|
3,218,151 |
|
|
|
43,649 |
|
|
|
1.36 |
% |
Other liabilities |
|
|
51,158 |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
412,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total liabilities and shareholders’
equity |
|
$ |
5,066,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest spread (1) |
|
|
|
|
|
|
|
|
|
|
4.40 |
% |
Net interest income and interest margin
(2) |
|
|
|
|
|
$ |
223,866 |
|
|
|
4.82 |
% |
| |
|
|
|
|
|
|
|
|
|
| (1) |
|
Net interest spread represents the
average yield earned on interest-earning
assets less the average rate paid on
interest-bearing liabilities. |
| |
| (2) |
|
Net interest margin is computed by
dividing net interest income by total
average earning assets. |
- 15 -
Distribution of Assets, Liabilities & Shareholders’ Equity and
Yields, Rates & Interest Margin
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2004 |
|
| |
|
|
|
|
|
Interest |
|
|
Rates |
|
| |
|
Average |
|
|
Income/ |
|
|
Earned/ |
|
| (dollars in thousands) |
|
Balance |
|
|
Expense |
|
|
Paid |
|
| |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Money market assets and funds sold |
|
$ |
784 |
|
|
$ |
1 |
|
|
|
0.13 |
% |
Trading account securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
803,722 |
|
|
|
33,230 |
|
|
|
4.13 |
% |
Tax-exempt |
|
|
293,067 |
|
|
|
21,619 |
|
|
|
7.38 |
% |
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
451,635 |
|
|
|
17,209 |
|
|
|
3.81 |
% |
Tax-exempt |
|
|
429,213 |
|
|
|
28,281 |
|
|
|
6.59 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,115,148 |
|
|
|
77,278 |
|
|
|
6.93 |
% |
Tax-exempt |
|
|
239,495 |
|
|
|
16,045 |
|
|
|
6.70 |
% |
Real estate construction |
|
|
36,148 |
|
|
|
2,517 |
|
|
|
6.96 |
% |
Real estate residential |
|
|
360,208 |
|
|
|
16,049 |
|
|
|
4.46 |
% |
Consumer |
|
|
507,483 |
|
|
|
26,870 |
|
|
|
5.29 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets |
|
|
4,236,903 |
|
|
|
239,099 |
|
|
|
5.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
299,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,536,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
$ |
1,281,349 |
|
|
|
— |
|
|
|
— |
|
Savings and interest-bearing
transaction |
|
|
1,662,347 |
|
|
|
4,543 |
|
|
|
0.27 |
% |
Time less than $100,000 |
|
|
271,212 |
|
|
|
4,038 |
|
|
|
1.49 |
% |
Time $100,000 or more |
|
|
350,400 |
|
|
|
4,466 |
|
|
|
1.27 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
2,283,959 |
|
|
|
13,047 |
|
|
|
0.57 |
% |
Short-term borrowed funds |
|
|
556,415 |
|
|
|
5,878 |
|
|
|
1.06 |
% |
Federal Home Loan Bank advances |
|
|
24,153 |
|
|
|
897 |
|
|
|
3.65 |
% |
Debt financing and notes payable |
|
|
21,706 |
|
|
|
1,284 |
|
|
|
5.91 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,886,233 |
|
|
|
21,106 |
|
|
|
0.73 |
% |
Other liabilities |
|
|
38,540 |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
330,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
4,536,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (1) |
|
|
|
|
|
|
|
|
|
|
4.91 |
% |
Net interest income and interest margin (2) |
|
|
|
|
|
$ |
217,993 |
|
|
|
5.14 |
% |
| |
|
|
|
|
|
|
|
|
|
| (1) |
|
Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities. |
| |
| (2) |
|
Net interest margin is computed by dividing net interest income by total
average earning assets. |
Distribution of Assets, Liabilities & Shareholders’ Equity and
Yields, Rates & Interest Margin
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2003 |
|
| |
|
|
|
|
|
Interest |
|
|
Rates |
|
| |
|
Average |
|
|
Income/ |
|
|
Earned/ |
|
| (dollars in thousands) |
|
Balance |
|
|
Expense |
|
|
Paid |
|
| |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Money market assets and funds sold |
|
$ |
875 |
|
|
$ |
8 |
|
|
|
0.91 |
% |
Trading account securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
842,729 |
|
|
|
35,385 |
|
|
|
4.20 |
% |
Tax-exempt |
|
|
310,200 |
|
|
|
23,415 |
|
|
|
7.55 |
% |
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
197,957 |
|
|
|
5,038 |
|
|
|
2.54 |
% |
Tax-exempt |
|
|
327,933 |
|
|
|
22,814 |
|
|
|
6.96 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,253,514 |
|
|
|
91,191 |
|
|
|
7.27 |
% |
Tax-exempt |
|
|
209,911 |
|
|
|
15,095 |
|
|
|
7.19 |
% |
Real estate construction |
|
|
42,362 |
|
|
|
3,049 |
|
|
|
7.20 |
% |
Real estate residential |
|
|
342,118 |
|
|
|
17,409 |
|
|
|
5.09 |
% |
Consumer |
|
|
506,365 |
|
|
|
31,200 |
|
|
|
6.16 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets |
|
|
4,033,964 |
|
|
|
244,604 |
|
|
|
6.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
298,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets |
|
$ |
4,332,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
$ |
1,173,853 |
|
|
|
— |
|
|
|
— |
|
Savings and interest-bearing
transaction |
|
|
1,578,721 |
|
|
|
6,818 |
|
|
|
0.43 |
% |
Time less than $100,000 |
|
|
307,054 |
|
|
|
5,147 |
|
|
|
1.68 |
% |
Time $100,000 or more |
|
|
370,549 |
|
|
|
5,020 |
|
|
|
1.35 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
2,256,324 |
|
|
|
16,985 |
|
|
|
0.75 |
% |
Short-term borrowed funds |
|
|
378,362 |
|
|
|
3,415 |
|
|
|
0.90 |
% |
Federal Home Loan Bank advances |
|
|
142,271 |
|
|
|
5,318 |
|
|
|
3.74 |
% |
Debt financing and notes payable |
|
|
21,222 |
|
|
|
1,479 |
|
|
|
6.97 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
2,798,179 |
|
|
|
27,197 |
|
|
|
0.97 |
% |
Shareholders’ equity |
|
|
37,120 |
|
|
|
|
|
|
|
|
|
|
|
|
323,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total liabilities and shareholders’ equity
|
|
$ |
4,332,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest margin (2) |
|
|
|
|
|
|
|
|
|
|
5.09 |
% |
|
|
|
|
|
|
$ |
217,407 |
|
|
|
5.39 |
% |
| |
|
|
|
|
|
|
|
|
|
| (1) |
|
Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities. |
| |
| (2) |
|
Net interest margin is computed by dividing net interest income by total
average earning assets. |
The following table sets forth a summary of the changes in interest income and interest expense
due to changes in average assets 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.
Summary of Changes in Interest Income and Expense
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| Years Ended December 31, |
|
2005 Compared with 2004 |
|
| (dollars in thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
| |
|
|
Increase (decrease) in interest and fee income: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market assets and
funds sold |
|
$ |
0 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Trading account securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(14,366 |
) |
|
|
835 |
|
|
|
(13,531 |
) |
Tax-exempt (1) |
|
|
(2,128 |
) |
|
|
(106 |
) |
|
|
(2,234 |
) |
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
12,125 |
|
|
|
1,223 |
|
|
|
13,348 |
|
Tax-exempt (1) |
|
|
9,878 |
|
|
|
(1,339 |
) |
|
|
8,539 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
11,763 |
|
|
|
3,160 |
|
|
|
14,923 |
|
Tax-exempt (1) |
|
|
619 |
|
|
|
(268 |
) |
|
|
351 |
|
Real estate construction |
|
|
2,350 |
|
|
|
207 |
|
|
|
2,557 |
|
Real estate residential |
|
|
5,263 |
|
|
|
99 |
|
|
|
5,362 |
|
Consumer |
|
|
(519 |
) |
|
|
(382 |
) |
|
|
(901 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (1) |
|
|
19,476 |
|
|
|
2,816 |
|
|
|
22,292 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in
interest and fee income (1) |
|
|
24,985 |
|
|
|
3,431 |
|
|
|
28,416 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Savings/interest-bearing |
|
|
206 |
|
|
|
455 |
|
|
|
661 |
|
Time less than $100,000 |
|
|
133 |
|
|
|
1,516 |
|
|
|
1,649 |
|
Time $100,000 or more |
|
|
1,441 |
|
|
|
5,566 |
|
|
|
7,007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing |
|
|
1,780 |
|
|
|
7,537 |
|
|
|
9,317 |
|
Short-term borrowed funds |
|
|
2,074 |
|
|
|
10,989 |
|
|
|
13,063 |
|
Federal Home Loan Bank advances |
|
|
(897 |
) |
|
|
0 |
|
|
|
(897 |
) |
Notes and mortgages payable |
|
|
961 |
|
|
|
99 |
|
|
|
1,060 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase
in interest expense |
|
|
3,918 |
|
|
|
18,625 |
|
|
|
22,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in
net interest income (1) |
|
$ |
21,067 |
|
|
|
($15,194 |
) |
|
$ |
5,873 |
|
| |
| (1) |
|
Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate. |
Summary of Changes in Interest Income and Expense
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| Years Ended December 31, |
|
2004 Compared with 2003 |
|
| (dollars in thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
| |
|
|
Increase (decrease) in interest and fee income: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market assets and
funds sold |
|
($ |
1 |
) |
|
($ |
6 |
) |
|
($ |
7 |
) |
Trading account securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(1,597 |
) |
|
|
(558 |
) |
|
|
(2,155 |
) |
Tax-exempt (1) |
|
|
(1,255 |
) |
|
|
(541 |
) |
|
|
(1,796 |
) |
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
8,787 |
|
|
|
3,384 |
|
|
|
12,171 |
|
Tax-exempt (1) |
|
|
6,739 |
|
|
|
(1,272 |
) |
|
|
5,467 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(10,102 |
) |
|
|
(3,811 |
) |
|
|
(13,913 |
) |
Tax-exempt (1) |
|
|
2,043 |
|
|
|
(1,093 |
) |
|
|
950 |
|
Real estate construction |
|
|
(434 |
) |
|
|
(98 |
) |
|
|
(532 |
) |
Real estate residential |
|
|
916 |
|
|
|
(2,276 |
) |
|
|
(1,360 |
) |
Consumer |
|
|
140 |
|
|
|
(4,470 |
) |
|
|
(4,330 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (1) |
|
|
(7,437 |
) |
|
|
(11,748 |
) |
|
|
(19,185 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in
interest and fee income (1) |
|
|
5,236 |
|
|
|
(10,741 |
) |
|
|
(5,505 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Savings/interest-bearing |
|
|
355 |
|
|
|
(2,630 |
) |
|
|
(2,275 |
) |
Time less than $100,000 |
|
|
(561 |
) |
|
|
(548 |
) |
|
|
(1,109 |
) |
Time $100,000 or more |
|
|
(259 |
) |
|
|
(295 |
) |
|
|
(554 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing |
|
|
(465 |
) |
|
|
(3,473 |
) |
|
|
(3,938 |
) |
Short-term borrowed funds |
|
|
1,813 |
|
|
|
650 |
|
|
|
2,463 |
|
Federal Home Loan Bank advances |
|
|
(4,372 |
) |
|
|
(49 |
) |
|
|
(4,421 |
) |
Notes and mortgages payable |
|
|
36 |
|
|
|
(231 |
) |
|
|
(195 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease
in interest expense |
|
|
(2,988 |
) |
|
|
(3,103 |
) |
|
|
(6,091 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in
net interest income (1) |
|
$ |
8,224 |
|
|
($ |
7,638 |
) |
|
$ |
586 |
|
| |
| (1) |
|
Amounts calculated on a fully taxable equivalent basis using
the current statutory federal tax rate. |
Provision for Credit Losses
The provision for credit losses was $900 thousand for 2005, compared with $2.7 million for 2004
and $3.3 million for 2003. The reductions in the provision reflect Management’s view of credit
risk in the loan portfolio and the results of the Company’s continuing efforts to improve loan
quality by enforcing relatively conservative underwriting and administration procedures and
aggressively pursuing collection efforts. For further information regarding net credit losses and
the allowance for credit losses, see the “Credit Quality” section of this report.
Investment Portfolio
The Company maintains a securities portfolio consisting of U.S. Government sponsored entities,
state and political subdivisions, asset-backed and other securities. Investment securities are
held in safekeeping by an independent custodian.
The objective of the held to maturity portfolio is to maintain a prudent yield, provide liquidity
from maturities and paydowns, and provide collateral to pledge for federal, state and local
government deposits and other borrowing facilities. The held to maturity investment portfolio had
a duration of 4.2 years at December 31, 2005 and, on the same date, those investments included
$1,218.5 million in fixed-rate and $118.7 million in adjustable-rate securities.
Investment securities available for sale are generally used to supplement the Company’s liquidity,
provide a prudent yield, and provide collateral for public deposits. Unrealized net gains and
losses on these securities are recorded as an adjustment to equity, net of taxes, but are not
reflected in the current earnings of the Company. If a security is sold, any gain or loss is
recorded as a credit or charge to earnings and the equity adjustment is reversed. At December 31,
2005, the Company held $662.4 million in securities classified as investments available for sale
with a duration of 3.2 years. At December 31, 2005, an unrealized gain of $1.9 million, net of
taxes of $1.4 million, related to these securities, was included in shareholders’ equity.
The Company had no trading securities at December 31, 2005, 2004 and 2003.
For more information on investment securities, see Notes 1 and 2 to the consolidated financial
statements.
The following table shows the fair value carrying amount of the Company’s investment securities
available for sale as of the dates indicated:
Available for Sale Portfolio
| |
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
|
|
|
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
U.S. Treasury |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
U.S. Government sponsored entities |
|
|
331,174 |
|
|
|
557,057 |
|
|
|
961,727 |
|
States and political subdivisions |
|
|
222,504 |
|
|
|
247,731 |
|
|
|
278,393 |
|
Mortgage-backed securities |
|
|
11,256 |
|
|
|
3,257 |
|
|
|
12,990 |
|
Corporate securities |
|
|
25,130 |
|
|
|
48,658 |
|
|
|
73,425 |
|
Other |
|
|
72,324 |
|
|
|
75,007 |
|
|
|
87,376 |
|
| |
|
|
| |
Total |
|
$ |
662,388 |
|
|
$ |
931,710 |
|
|
$ |
1,413,911 |
|
| |
The following table sets forth the relative maturities and yields of the Company’s available for
sale securities (stated at amortized cost) at December 31, 2005. Weighted average yields have been
computed by dividing annual interest income, adjusted for amortization of premium and accretion of
discount, by the amortized cost value of the related security. Yields on state and political
subdivision securities have been calculated on a fully taxable equivalent basis using the current
federal statutory rate.
Available for Sale Maturity Distribution
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
After one |
|
|
After five |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, 2005 |
|
Within |
|
|
but within |
|
|
but within |
|
|
After ten |
|
|
Mortgage- |
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
one year |
|
|
five years |
|
|
ten years |
|
|
years |
|
|
backed |
|
|
Other |
|
|
Total |
|
| |
|
|
U.S. Government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored entities |
|
$ |
— |
|
|
$ |
133,877 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
133,877 |
|
Interest rate |
|
|
— |
% |
|
|
3.43 |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
3.43 |
% |
States and political |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions |
|
|
5,000 |
|
|
|
42,562 |
|
|
|
140,528 |
|
|
|
26,207 |
|
|
|
— |
|
|
|
— |
|
|
|
214,297 |
|
Interest rate (FTE) |
|
|
7.61 |
% |
|
|
7.56 |
% |
|
|
7.25 |
% |
|
|
6.88 |
% |
|
|
— |
|
|
|
— |
|
|
|
7.27 |
% |
Asset-backed securities |
|
|
— |
|
|
|
1,308 |
|
|
|
— |
|
|
|
9,998 |
|
|
|
— |
|
|
|
— |
|
|
|
11,306 |
|
Interest rate |
|
|
— |
|
|
|
2.46 |
% |
|
|
— |
|
|
|
4.67 |
% |
|
|
— |
|
|
|
— |
|
|
|
4.42 |
% |
Corporate securities |
|
|
25,151 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,151 |
|
Interest rate |
|
|
6.54 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6.54 |
% |
| |
Subtotal |
|
|
30,151 |
|
|
|
177,747 |
|
|
|
140,528 |
|
|
|
36,205 |
|
|
|
— |
|
|
|
— |
|
|
|
384,631 |
|
Interest rate |
|
|
6.72 |
% |
|
|
4.41 |
% |
|
|
7.25 |
% |
|
|
6.27 |
% |
|
|
— |
|
|
|
— |
|
|
|
5.80 |
% |
Mortgage backed securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
207,382 |
|
|
|
— |
|
|
|
207,382 |
|
Interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.19 |
% |
|
|
— |
|
|
|
4.19 |
% |
Other without set maturities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
67,128 |
|
|
|
67,128 |
|
Interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7.88 |
% |
|
|
7.88 |
% |
| |
Total |
|
$ |
30,151 |
|
|
$ |
177,747 |
|
|
$ |
140,528 |
|
|
$ |
36,205 |
|
|
$ |
207,382 |
|
|
$ |
67,128 |
|
|
$ |
659,141 |
|
Interest rate |
|
|
6.72 |
% |
|
|
4.41 |
% |
|
|
7.25 |
% |
|
|
6.27 |
% |
|
|
4.19 |
% |
|
|
7.88 |
% |
|
|
5.51 |
% |
| |
The following table shows the carrying amount (amortized cost) and fair value of the Company’s
investment securities held to maturity as of the dates indicated:
Held to Maturity Portfolio
| |
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
U.S. Government sponsored entities |
|
$ |
740,891 |
|
|
$ |
736,137 |
|
|
$ |
98,287 |
|
States and political subdivisions |
|
|
596,325 |
|
|
|
524,695 |
|
|
|
417,984 |
|
Asset backed securities |
|
|
0 |
|
|
|
0 |
|
|
|
6,322 |
|
Other |
|
|
0 |
|
|
|
0 |
|
|
|
12,784 |
|
| |
|
|
Total |
|
$ |
1,337,216 |
|
|
$ |
1,260,832 |
|
|
$ |
535,377 |
|
| |
Fair value |
|
$ |
1,323,782 |
|
|
$ |
1,265,986 |
|
|
$ |
542,729 |
|
| |
- 21 -
The following table sets forth the relative maturities and yields of the Company’s held to
maturity securities at December 31, 2005. Weighted average yields have been computed by dividing
annual interest income, adjusted for amortization of premium and accretion of discount, by the
amortized value of the related security. Yields on state and political subdivision securities have
been calculated on a fully taxable equivalent basis using the current federal statutory rate.
Held to Maturity Maturity Distribution
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
After one |
|
|
After five |
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, 2005 |
|
Within |
|
|
but within |
|
|
but within |
|
|
After ten |
|
|
Mortgage- |
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
one year |
|
|
five years |
|
|
ten years |
|
|
years |
|
|
backed |
|
|
Other |
|
|
Total |
|
| |
|
|
U.S. Government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored entities |
|
$ |
10,000 |
|
|
$ |
200,006 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
210,006 |
|
Interest rate |
|
|
3.25 |
% |
|
|
3.74 |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
3.71 |
% |
States and political |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions |
|
|
12,517 |
|
|
|
33,201 |
|
|
|
117,970 |
|
|
|
432,637 |
|
|
|
— |
|
|
|
— |
|
|
|
596,325 |
|
Interest rate (FTE) |
|
|
6.29 |
% |
|
|
6.70 |
% |
|
|
6.03 |
% |
|
|
6.04 |
% |
|
|
— |
|
|
|
— |
|
|
|
6.08 |
% |
| |
Subtotal |
|
|
22,517 |
|
|
|
233,207 |
|
|
|
117,970 |
|
|
|
432,637 |
|
|
|
— |
|
|
|
— |
|
|
|
806,331 |
|
Interest rate |
|
|
4.94 |
% |
|
|
4.16 |
% |
|
|
6.03 |
% |
|
|
6.04 |
% |
|
|
— |
|
|
|
— |
|
|
|
5.46 |
% |
Mortgage backed |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
530,885 |
|
|
|
— |
|
|
|
530,885 |
|
Interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.46 |
% |
|
|
— |
|
|
|
4.46 |
% |
| |
Total |
|
$ |
22,517 |
|
|
$ |
233,207 |
|
|
$ |
117,970 |
|
|
$ |
432,637 |
|
|
$ |
530,885 |
|
|
$ |
— |
|
|
$ |
1,337,216 |
|
Interest rate |
|
|
4.94 |
% |
|
|
4.16 |
% |
|
|
6.03 |
% |
|
|
6.04 |
% |
|
|
4.46 |
% |
|
|
— |
% |
|
|
5.07 |
% |
| |
Loan Portfolio
The following table shows the composition of the loan portfolio of the Company by type of loan and
type of borrower, on the dates indicated:
Loan Portfolio Distribution
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
| |
|
|
Commercial and commercial real estate |
|
$ |
1,594,925 |
|
|
$ |
1,388,639 |
|
|
$ |
1,429,645 |
|
|
$ |
1,588,803 |
|
|
$ |
1,576,723 |
|
Real estate construction |
|
|
72,095 |
|
|
|
29,724 |
|
|
|
38,019 |
|
|
|
45,547 |
|
|
|
69,658 |
|
Real estate residential |
|
|
508,174 |
|
|
|
375,532 |
|
|
|
347,794 |
|
|
|
330,460 |
|
|
|
347,114 |
|
Consumer |
|
|
497,027 |
|
|
|
506,338 |
|
|
|
507,911 |
|
|
|
530,054 |
|
|
|
491,793 |
|
Unearned income |
|
|
0 |
|
|
|
(3 |
) |
|
|
(39 |
) |
|
|
(226 |
) |
|
|
(831 |
) |
| |
|
|
Total loans |
|
$ |
2,672,221 |
|
|
$ |
2,300,230 |
|
|
$ |
2,323,330 |
|
|
$ |
2,494,638 |
|
|
$ |
2,484,457 |
|
| |
The following table shows the maturity distribution and interest rate sensitivity of commercial,
commercial real estate, and construction loans at December 31, 2005. Balances exclude loans to
individuals and residential mortgages totaling $1,005.2 million. These types of loans are typically
paid in monthly installments over a number of years.
Loan Maturity Distribution
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, 2005 |
|
Within |
|
|
One to |
|
|
After |
|
|
|
|
| (dollars in thousands) |
|
One Year |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
| |
|
|
Commercial and commercial real estate * |
|
$ |
392,194 |
|
|
$ |
524,756 |
|
|
$ |
677,975 |
|
|
$ |
1,594,925 |
|
Real estate construction |
|
|
72,095 |
|
|
|
0 |
|
|
|
0 |
|
|
|
72,095 |
|
| |
Total |
|
$ |
464,289 |
|
|
$ |
524,756 |
|
|
$ |
677,975 |
|
|
$ |
1,667,020 |
|
| |
Loans with fixed interest rates |
|
$ |
90,601 |
|
|
$ |
328,840 |
|
|
$ |
185,398 |
|
|
$ |
604,839 |
|
Loans with floating or adjustable interest rates |
|
|
373,688 |
|
|
|
195,916 |
|
|
|
492,577 |
|
|
|
1,062,181 |
|
| |
Total |
|
$ |
464,289 |
|
|
$ |
524,756 |
|
|
$ |
677,975 |
|
|
$ |
1,667,020 |
|
| |
Commitments and Letters of Credit
It is not the policy of the Company to issue formal commitments on lines of credit except to a
limited number of well-established and financially responsible local commercial enterprises. Such
commitments can be either secured or unsecured and are typically in the form of revolving lines of
credit for seasonal working capital needs. Occasionally, such commitments are in the form of
letters of credit to facilitate the customers’ particular business transactions. Commitment fees
generally are not charged except where letters of credit are involved. Commitments and lines of
credit typically mature within one year. For further information, see Note 12 to the consolidated
financial statements.
Credit Quality
The Company closely monitors the markets in which it conducts its lending operations and continues
its strategy to control exposure to loans with higher credit risk and to increase diversification
of the loan portfolio. Credit reviews are performed using grading standards and criteria similar
to those employed by bank regulatory agencies. Loans receiving lesser grades fall under the
“classified loans” category, which includes all nonperforming and potential problem loans, and
receive an elevated level of Management attention to ensure collection.
- 22 -
Classified Loans and Other Real Estate Owned
The following summarizes the Company’s classified loans for the periods indicated:
Classified Loans and OREO
| |
|
|
|
|
|
|
|
|
| At December 31, |
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
|
2004 |
|
| |
|
|
Classified loans |
|
$ |
29,997 |
|
|
$ |
19,225 |
|
Other real estate owned |
|
|
0 |
|
|
|
0 |
|
| |
|
|
Total |
|
$ |
29,997 |
|
|
$ |
19,225 |
|
| |
Classified loans at December 31, 2005 increased $10.8 million or 56.0% to $30.0 million from
December 31, 2004, mainly due to the classified loans totaling $16.1 million acquired from REBC,
partially reduced by subsequent improvements in credit quality and loan payoffs. Other real estate
owned was zero, unchanged from the prior year.
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 table summarizes the nonperforming assets of the Company for the periods indicated:
Nonperforming Loans and OREO
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
| |
|
|
Performing nonaccrual loans |
|
$ |
4,256 |
|
|
$ |
4,072 |
|
|
$ |
1,658 |
|
|
$ |
3,464 |
|
|
$ |
3,055 |
|
Nonperforming nonaccrual loans |
|
|
2,068 |
|
|
|
2,970 |
|
|
|
5,759 |
|
|
|
5,717 |
|
|
|
5,058 |
|
| |
|
|
Nonaccrual loans |
|
|
6,324 |
|
|
|
7,042 |
|
|
|
7,417 |
|
|
|
9,181 |
|
|
|
8,113 |
|
| |
|
|
Loans 90 or more days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and still accruing |
|
|
162 |
|
|
|
10 |
|
|
|
199 |
|
|
|
738 |
|
|
|
550 |
|
Other real estate owned |
|
|
0 |
|
|
|
0 |
|
|
|
90 |
|
|
|
381 |
|
|
|
523 |
|
| |
|
|
Total Nonperforming loans and OREO |
|
$ |
6,486 |
|
|
$ |
7,052 |
|
|
$ |
7,706 |
|
|
$ |
10,300 |
|
|
$ |
9,186 |
|
| |
|
|
As a percentage of total loans |
|
|
0.24 |
% |
|
|
0.31 |
% |
|
|
0.33 |
% |
|
|
0.41 |
% |
|
|
0.37 |
% |
| |
Performing nonaccrual loans at December 31, 2005 were $184 thousand higher than the previous year,
as a result of the $4.0 million performing nonaccrual loans acquired from REBC and new loans
being
placed on nonaccrual status, less charge-offs, loans being returned to accrual status and loans
being placed on nonperforming nonaccrual status. Except one relationship totaling $666 thousand,
performing nonaccrual loans at December 31, 2004 were either paid off, charged off or brought
current in 2005. Nonperforming nonaccrual loans at December 31, 2005 declined $902 thousand
compared with a year ago, attributable to loans being returned to accrual status, transfers to
repossessed collateral or being charged off or paid off, partially offset by loans being added to
nonperforming nonaccrual status. With the exception of three relationships totaling $1.4 million,
all loans on nonperforming nonaccrual status at December 31, 2004 were either paid off, charged
off or brought current in 2005. There was no other real estate owned (“OREO”) at December 31, 2005
since one property foreclosed during 2005 was disposed of at a small gain.
Performing nonaccrual loans at December 31, 2004 were $2.4 million higher than the previous
year-end, due to new loans placed on performing nonaccrual status, partially offset by payoffs,
chargeoffs, loans being returned to accrual status and loans being placed on nonperforming
nonaccrual status. Nonperforming nonaccrual loans at December 31, 2004 decreased $2.8 million from
a year ago, attributable to loans being returned to accrual status, transfers to repossessed
collateral, or being charged off or paid off, partially offset by loans being added to
nonperforming nonaccrual status. There was no OREO at December 31, 2004.
The Company had no restructured loans as of December 31, 2005, 2004 and 2003.
The amount of gross interest income that would have been recorded if all nonaccrual loans had been
current in accordance with their original terms while outstanding during the period was $556
thousand in 2005, $462 thousand in 2004 and $527 thousand in 2003. The amount of interest income
that was recognized on nonaccrual loans from cash payments made in 2005, 2004 and 2003 was $353
thousand, $439 thousand and $592 thousand, respectively. Cash payments received, which were
applied against the book balance of performing and nonperforming nonaccrual loans outstanding at
December 31, 2005, totaled approximately $452 thousand, compared with $135 thousand and $330
thousand at December 31, 2004 and 2003, respectively.
Management believes the overall credit quality of the loan portfolio continues to be strong;
however, total nonperforming assets could fluctuate in the future. The performance of any
individual loan can be impacted by external factors such as the interest rate environment or
factors particular to the borrower. The Company expects to maintain nonperforming loans and OREO
at their current levels; however, no assurance can be given that increases in nonaccrual loans
will not occur in future periods.
Allowance for Credit Losses
- 23 -
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 and other identified loans whose full collectibility is uncertain. Such
allocations are determined by Management based on loan-by-loan analyses. A second allocation is
based in part on quantitative analyses of historical credit loss experience, in which criticized
and classified credit balances identified through an 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 general loan categories based on commercial office vacancy rates,
mortgage loan foreclosure trends, agriculture commodity prices, and levels of government funding.
The remainder of the reserve is considered to be unallocated and is established at a level
considered necessary based on relevant economic conditions and available data, including
unemployment statistics, unidentified economic and business conditions, the quality of lending
management and staff, credit quality trends, concentrations of credit, and changing underwriting
standards due to external competitive factors. Management considers the $59.5 million allowance
for credit losses to be adequate as a reserve against losses as of December 31, 2005.
During 2003, Management refined its allowance methodology for commercial real estate loans,
agricultural loans and certain municipal loans. This refinement had the effect of increasing the
allowance allocation for commercial loans with a corresponding decrease in the unallocated
allowance as of December 31, 2003.
The following table summarizes the loan loss experience of the Company for the periods indicated:
Allowance For Credit Losses, Chargeoffs & Recoveries
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
| |
|
|
Total loans outstanding |
|
$ |
2,672,221 |
|
|
$ |
2,300,230 |
|
|
$ |
2,323,330 |
|
|
$ |
2,494,638 |
|
|
$ |
2,484,457 |
|
Average loans outstanding during the period |
|
|
2,576,363 |
|
|
|
2,258,482 |
|
|
|
2,354,270 |
|
|
|
2,465,876 |
|
|
|
2,465,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of the Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
54,152 |
|
|
$ |
53,910 |
|
|
$ |
54,227 |
|
|
$ |
52,086 |
|
|
$ |
52,279 |
|
Additions to the allowance charged to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating expense |
|
|
900 |
|
|
|
2,700 |
|
|
|
3,300 |
|
|
|
3,600 |
|
|
|
3,600 |
|
Allowance acquired through merger |
|
|
5,213 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,050 |
|
|
|
0 |
|
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate |
|
|
(673 |
) |
|
|
(2,154 |
) |
|
|
(2,455 |
) |
|
|
(1,885 |
) |
|
|
(2,475 |
) |
Real estate construction |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(10 |
) |
Real estate residential |
|
|
0 |
|
|
|
0 |
|
|
|
(26 |
) |
|
|
0 |
|
|
|
0 |
|
Consumer |
|
|
(2,065 |
) |
|
|
(3,439 |
) |
|
|
(4,352 |
) |
|
|
(4,340 |
) |
|
|
(4,968 |
) |
| |
|
|
| |
Total chargeoffs |
|
|
(2,738 |
) |
|
|
(5,593 |
) |
|
|
(6,833 |
) |
|
|
(6,225 |
) |
|
|
(7,453 |
) |
| |
|
|
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate |
|
|
864 |
|
|
|
1,623 |
|
|
|
1,234 |
|
|
|
950 |
|
|
|
1,577 |
|
Real estate construction |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Real estate residential |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
243 |
|
Consumer |
|
|
1,146 |
|
|
|
1,512 |
|
|
|
1,982 |
|
|
|
1,766 |
|
|
|
1,840 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
2,010 |
|
|
|
3,135 |
|
|
|
3,216 |
|
|
|
2,716 |
|
|
|
3,660 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan losses |
|
|
(728 |
) |
|
|
(2,458 |
) |
|
|
(3,617 |
) |
|
|
(3,509 |
) |
|
|
(3,793 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
59,537 |
|
|
$ |
54,152 |
|
|
$ |
53,910 |
|
|
$ |
54,227 |
|
|
$ |
52,086 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
55,849 |
|
|
$ |
54,152 |
|
|
$ |
53,910 |
|
|
$ |
54,227 |
|
|
$ |
52,086 |
|
Reserve for unfunded credit commitments (1) |
|
|
3,688 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Allowance for credit losses |
|
$ |
59,537 |
|
|
$ |
54,152 |
|
|
$ |
53,910 |
|
|
$ |
54,227 |
|
|
$ |
52,086 |
|
| |
|
|
Net loan losses to average loans |
|
|
0.03 |
% |
|
|
0.11 |
% |
|
|
0.15 |
% |
|
|
0.14 |
% |
|
|
0.15 |
% |
Allowance for loan losses as a percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of loans outstanding |
|
|
2.09 |
% |
|
|
2.35 |
% |
|
|
2.32 |
% |
|
|
2.17 |
% |
|
|
2.10 |
% |
Allowance for credit losses as a percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of loans outstanding |
|
|
2.23 |
% |
|
|
2.35 |
% |
|
|
2.32 |
% |
|
|
2.17 |
% |
|
|
2.10 |
% |
| |
|
|
|
| (1) |
|
Effective December 31, 2005, the Company transferred the portion of the allowance for credit
losses related to lending commitments and letters of credit to other liabilities. |
- 24 -
Allocation of the Allowance for Credit Losses
The following table presents the allocation of the allowance for credit losses as of December 31 for
the years indicated:
Allocation of the Allowance for Credit Losses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
2001 |
|
| |
|
|
| |
|
Allocation |
|
|
Loans as |
|
|
Allocation |
|
|
Loans as |
|
|
Allocation |
|
|
Loans as |
|
|
Allocation |
|
|
Loans as |
|
|
Allocation |
|
|
Loans as |
|
| |
|
of the |
|
|
Percent |
|
|
of the |
|
|
Percent |
|
|
of the |
|
|
Percent |
|
|
of the |
|
|
Percent |
|
|
of the |
|
|
Percent |
|
| |
|
Allowance |
|
|
of Total |
|
|
Allowance |
|
|
of Total |
|
|
Allowance |
|
|
of Total |
|
|
Allowance |
|
|
of Total |
|
|
Allowance |
|
|
of Total |
|
| (dollars in thousands) |
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Loans |
|
| |
|
|
Commercial |
|
$ |
30,438 |
|
|
|
60 |
% |
|
$ |
29,857 |
|
|
|
60 |
% |
|
$ |
31,875 |
|
|
|
61 |
% |
|
$ |
23,692 |
|
|
|
64 |
% |
|
$ |
21,206 |
|
|
|
63 |
% |
Real estate construction |
|
|
3,346 |
|
|
|
3 |
% |
|
|
1,441 |
|
|
|
1 |
% |
|
|
1,827 |
|
|
|
2 |
% |
|
|
2,370 |
|
|
|
2 |
% |
|
|
4,860 |
|
|
|
3 |
% |
Real estate residential |
|
|
1,230 |
|
|
|
19 |
% |
|
|
917 |
|
|
|
16 |
% |
|
|
870 |
|
|
|
15 |
% |
|
|
893 |
|
|
|
13 |
% |
|
|
417 |
|
|
|
14 |
% |
Consumer |
|
|
5,291 |
|
|
|
18 |
% |
|
|
5,140 |
|
|
|
22 |
% |
|
|
6,423 |
|
|
|
22 |
% |
|
|
7,862 |
|
|
|
21 |
% |
|
|
4,986 |
|
|
|
20 |
% |
Unallocated portion |
|
|
19,232 |
|
|
|
— |
|
|
|
16,797 |
|
|
|
— |
|
|
|
12,915 |
|
|
|
— |
|
|
|
19,410 |
|
|
|
— |
|
|
|
20,617 |
|
|
|
— |
|
| |
|
|
Total |
|
$ |
59,537 |
|
|
|
100 |
% |
|
$ |
54,152 |
|
|
|
100 |
% |
|
$ |
53,910 |
|
|
|
100 |
% |
|
$ |
54,227 |
|
|
|
100 |
% |
|
$ |
52,086 |
|
|
|
100 |
% |
| |
- 25 -
Impaired Loans
The Company considers a loan to be impaired when, based on current information and events, it
is
probable that it will be unable to collect all amounts due (principal and interest) according to
the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the
present value of the expected cash flows of the impaired loan discounted at the loan’s original
effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair
value of the collateral of a collateral-dependent loan. The Company does not apply this definition
to smaller-balance loans that are collectively evaluated for impairment. In measuring impairment,
the Company reviews all commercial and construction loans classified “Substandard” and “Doubtful”
that meet materiality thresholds of $250 thousand and $100 thousand, respectively. All loans
classified as “Loss” are considered impaired.
Commercial and construction loans that are not classified, and large groups of smaller-balance
homogeneous loans such as installment, personal revolving credit, residential real estate and
student loans, are evaluated collectively for impairment under the Company’s standard loan loss
reserve methodology. The Company generally identifies loans to be reported as impaired when such
loans are placed on nonaccrual status or are considered troubled debt restructurings due to the
granting of a below-market rate of interest or a partial forgiveness of indebtedness on an
existing loan.
The following summarizes the Company’s impaired loans for the dates indicated:
Impaired Loans
| |
|
|
|
|
|
|
|
|
| At December 31, |
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
2004 |
| |
|
|
Total impaired loans |
|
$ |
117 |
|
|
$ |
0 |
|
| |
|
|
|
|
|
|
|
|
|
Specific reserves |
|
$ |
117 |
|
|
$ |
0 |
|
| |
The average balance of the Company’s impaired loans for the year ended December 31, 2005 was $29
thousand compared with $731 thousand and $1.8 million in 2004 and 2003, respectively. Portions of
the Company’s allowance for loan losses were allocated to each of these impaired loans. In
general, the Company does not recognize any interest income on troubled debt restructuring or
loans that are classified as nonaccrual. However, interest income may be recorded as cash is
received, provided that the Company’s recorded investment in such loans is deemed collectible.
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 indirect 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.
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 an increase of 200 bp in the federal funds rate and an
increase of 156 bp in the 10 year Constant Maturity Treasury Bond yield during the same period,
estimated earnings at risk would be approximately 4.7% of the Company’s most likely net income plan
for 2006. 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.
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.
During 2005 as the Company reviewed its interest rate risk position to include the acquisition of
REBC, in Management’s judgment, the Company’s interest rate risk exposure would be reduced
through the sale of investment securities available for sale, with the proceeds from sale applied
to reduce short-term borrowed funds. As a result, the Company sold $170.0 million of investment
securities available for sale with a duration of 3.2 years and book yield of 3.29% at a realized
loss of $4.9 million.
Liquidity
The Company’s principal source of asset liquidity is investment securities available for sale and
principal payments from consumer loans. At December 31, 2005, investment securities available for
sale totaled $662 million. At December 31, 2005, residential real estate loans and indirect auto
loans totaled $923 million, which were experiencing stable monthly principal payments of
approximately $20 million. In addition, at December 31, 2005, the Company had customary lines for
overnight borrowings from other financial institutions in excess of $500 million and a $35 million
line of credit, under which $14.3 million was outstanding at December 31, 2005. As a member of the
Federal Reserve System, the Company also has the ability to borrow from the Federal Reserve. The
- 26 -
Company’s short-term debt rating from Fitch Ratings is F1 with a stable outlook. Management
expects the Company can access short-term debt financing if desired. The Company’s long-term debt
rating from Fitch Ratings is A with a stable outlook. Management expects the Company can access
additional long-term debt financing if desired.
The Company generates significant liquidity from its operating activities. The Company’s
profitability during 2005, 2004 and 2003 resulted in operating cash flows of $119.6 million,
$113.5 million and $115.4 million, respectively. In 2005, operating activities provided a
substantial portion of cash for $39.3 million in shareholder dividends and $95.4 million used to
purchase and retire company stock. The operating cash flows in 2004 was more than sufficient to
pay $35.1 million in shareholder dividends and retire $55.4 million of the Company’s common stock.
In
2003, operating activities provided a substantial portion of cash for $32.9 million in shareholder
dividends and $70.8 million of share repurchase activity.
During 2005, the Company financed its acquisition of REBC by issuing approximately 1.6 million
shares of common stock and approximately $57 million to REBC shareholders. The cash consideration
was accumulated in the second half of 2004 and early 2005 as the Company reduced its share
repurchase activity. The acquisition of REBC increased the loan portfolio by approximately $440
million, deposits by approximately $370 million, and subordinated debt by approximately $20
million. Other investing activities included sale and maturity of investment securities, net of
purchases, of approximately $215.1 million. The Company sold approximately $170 million of
available for sale investment securities to manage the interest rate risk posture of its assets
and liabilities subsequent to the REBC acquisition. The Company also experienced net loan
repayments of $66.9 million. The proceeds from liquidating investment securities were applied to
reduce short-term borrowings by $47.6 million. The Company also experienced a $107.5 million
decrease in deposit balances as interest-sensitive CDs and money market products declined while
short-term interest rates rose throughout 2005.
In 2004, purchases, net of sales and maturities, of investment securities were $270.7 million,
which was generally financed by a $119.6 million increase in deposits and a $144.8 million
increase in short-term borrowings. In 2003, purchases, net of maturities, of investment securities
were $560.4 million. The investment securities portfolio increase was generally financed by net
repayments of loans of $164.5 million, a $169.9 million increase in deposits, and a $240.9 million
increase in short-term borrowings.
The Company anticipates maintaining its cash levels through the end of 2006 mainly due to
increased profitability and retained earnings. It is anticipated that loan demand will increase
moderately, although such demand will be dictated by economic conditions. The growth of deposit
balances is expected to exceed the anticipated growth in loan demand through the end of 2006,
resulting in a reduction of higher cost fundings, an increase in the investment securities
portfolio, or a combination of both. However, due to concerns regarding consumer spending,
possible terrorist attacks, and uncertainty in the general economic environment, loan demand and
levels of customer deposits are not certain. Shareholder dividends and share repurchases are
expected to continue in 2006.
The Parent Company’s primary source of liquidity is dividends from Westamerica Bank (the “Bank”).
Dividends from the Bank are subject to certain regulatory limitations. During 2005, 2004 and 2003,
the Bank declared dividends to the Company of $122, $95 and $88 million, respectively. See Note 15
to the consolidated financial statements.
The following table sets forth the known contractual obligations of the Company at December 31,
2005:
Contractual Obligations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, 2005 |
|
Within |
|
|
One to |
|
|
Three to |
|
|
After |
|
|
|
| (dollars in thousands) |
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
| |
|
|
|
Long-Term Debt Obligations |
|
$ |
3,214 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
37,067 |
|
|
$ |
40,281 |
|
Operating Lease Obligations |
|
|
5,906 |
|
|
|
9,238 |
|
|
|
6,325 |
|
|
|
9,506 |
|
|
|
30,975 |
|
Purchase Obligations |
|
|
5,562 |
|
|
|
5,562 |
|
|
|
0 |
|
|
|
0 |
|
|
|
11,124 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,682 |
|
|
$ |
14,800 |
|
|
$ |
6,325 |
|
|
$ |
46,573 |
|
|
$ |
82,380 |
|
| |
|
Long-Term Debt Obligations and Operating Lease Obligations are discussed in the consolidated
financial statements at Notes 6 and 11, respectively. The Purchase Obligation consists of the
Company’s minimum liability under a contract with a third-party automated services provider.
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’s capital position
represents the level of capital available to support continued operations and expansion.
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. Pursuant to these programs, the Company repurchased 1.8 million shares in
2005, 1.1 million shares in 2004 and 1.6 million shares in 2003.
The Company’s primary capital resource is shareholders’ equity, which increased $68.1 million or
19.0% in 2005 from the previous year, the net result of $107.4 million in profits earned during
the year, $89.5 million in stock issued in connection with the REBC acquisition and $12.4 million
in issuance of stock in connection with exercises of employee stock options, substantially reduced
by $39.3 million in dividends paid, $95.4 million in stock repurchases, and a $7.8 million net of
tax decline in unrealized gains on securities available-for-sale.
The ratio of total risk-based capital to risk-adjusted assets increased in late 2004 as reduced
share repurchase activity provided cash for the REBC acquisition. Following the acquisition, total
capital ratios declined from 12.46% at the end of 2004 to 10.40% at the end of 2005. Tier 1 and
Total Capital were reduced after the REBC acquisition on March 1, 2005, due to the net effect of a
$126 million increase in goodwill and other intangibles, partially offset by an $86 million
increase in common equity and the assumption of $20 million subordinated debt which qualifies as
regulatory capital. Similarly, Tier I risk-based capital to risk-adjusted assets also declined to
9.08% at December 31, 2005 from 11.09% at December 31, 2004.
- 27 -
Capital to Risk-Adjusted Assets
The following table summarizes the Company’s capital ratios for the dates indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Minimum |
| |
|
|
|
|
|
|
|
|
|
Regulatory |
| At December 31, |
|
2005 |
|
2004 |
|
Requirement |
| |
|
|
Tier I Capital |
|
|
9.08 |
% |
|
|
11.09 |
% |
|
|
4.00 |
% |
Total Capital |
|
|
10.40 |
% |
|
|
12.46 |
% |
|
|
8.00 |
% |
Leverage ratio |
|
|
6.01 |
% |
|
|
7.06 |
% |
|
|
4.00 |
% |
| |
Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed
regulatory minimums and is adequate to meet the Company’s future needs. All ratios are in excess
of the regulatory definition of “well capitalized,” which the Company intends to meet.
Financial Ratios
The following table shows key financial ratios for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
|
2005 |
|
2004 |
|
2003 |
| |
|
|
Return on average total assets |
|
|
2.12 |
% |
|
|
2.10 |
% |
|
|
2.19 |
% |
Return on average shareholders’ equity |
|
|
26.04 |
% |
|
|
28.83 |
% |
|
|
29.38 |
% |
Average shareholders’ equity as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets |
|
|
8.14 |
% |
|
|
7.28 |
% |
|
|
7.47 |
% |
Average total loans |
|
|
16.01 |
% |
|
|
14.63 |
% |
|
|
13.74 |
% |
Average total deposits |
|
|
10.72 |
% |
|
|
9.27 |
% |
|
|
9.43 |
% |
Dividend payout ratio (diluted EPS) |
|
|
37 |
% |
|
|
38 |
% |
|
|
35 |
% |
- 28 -
Deposit categories
The Company primarily attracts deposits from local businesses and professionals, as well as
through retail certificates of deposit, savings and checking accounts.
The following table summarizes the Company’s average daily amount of deposits and the rates paid
for the periods indicated:
Deposit Distribution and Average Rates Paid
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
Percentage |
|
|
| Years Ended December 31, |
|
Average |
|
|
of Total |
|
|
|
|
|
Average |
|
|
of Total |
|
|
|
|
|
Average |
|
|
of Total |
|
|
| (Dollars in thousands) |
|
Balance |
|
|
Deposits |
|
Rate * |
|
Balance |
|
|
Deposits |
|
Rate * |
|
Balance |
|
|
Deposits |
|
Rate * |
| |
|
|
Noninterest bearing demand |
|
$ |
1,384,483 |
|
|
|
36.0 |
% |
|
|
— |
% |
|
$ |
1,281,349 |
|
|
|
35.9 |
% |
|
|
— |
% |
|
$ |
1,173,853 |
|
|
|
34.2 |
% |
|
|
— |
% |
Interest bearing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
632,896 |
|
|
|
16.4 |
% |
|
|
0.23 |
% |
|
|
577,296 |
|
|
|
16.2 |
% |
|
|
0.11 |
% |
|
|
563,022 |
|
|
|
16.4 |
% |
|
|
0.13 |
% |
Savings |
|
|
1,105,664 |
|
|
|
28.7 |
% |
|
|
0.34 |
% |
|
|
1,085,051 |
|
|
|
30.4 |
% |
|
|
0.36 |
% |
|
|
1,015,699 |
|
|
|
29.6 |
% |
|
|
0.60 |
% |
Time less than $100 thousand |
|
|
280,770 |
|
|
|
7.3 |
% |
|
|
2.03 |
% |
|
|
271,212 |
|
|
|
7.6 |
% |
|
|
1.49 |
% |
|
|
307,054 |
|
|
|
9.0 |
% |
|
|
1.68 |
% |
Time $100 thousand or more |
|
|
444,862 |
|
|
|
11.6 |
% |
|
|
2.58 |
% |
|
|
350,400 |
|
|
|
9.8 |
% |
|
|
1.27 |
% |
|
|
370,549 |
|
|
|
10.8 |
% |
|
|
1.35 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,848,675 |
|
|
|
100.0 |
% |
|
|
0.91 |
% |
|
$ |
3,565,308 |
|
|
|
100.0 |
% |
|
|
0.57 |
% |
|
$ |
3,430,177 |
|
|
|
100.0 |
% |
|
|
0.75 |
% |
| |
|
|
|
| * |
|
Rate is computed based on interest-bearing deposits |
- 29 -
During 2005, total average deposits increased by $283.4 million or 7.9% from 2004 primarily due to
the REBC acquisition. Average deposit categories increased $103 million for noninterest bearing
deposits, plus a $76 million increase in interest bearing demand and savings deposits. Also, time
deposits in excess of $100 thousand increased by $94 million.
During 2004, total average deposits increased by $135.1 million or 3.9% from 2003 due to an inflow
of $107.5 million of noninterest bearing deposits, a $14.3 million increase in interest bearing
demand deposits and a $69.4 million increase in savings deposits, partially offset by declines in
consumer CDs (down $35.8 million) and public and jumbo CDs (down $20.1 million).
The following sets forth, by time remaining to maturity, the Company’s domestic time deposits in
amounts of $100 thousand or more:
Deposits Over $100,000 Maturity Distribution
| |
|
|
|
|
| |
|
December 31, |
|
| (In thousands) |
|
2005 |
|
| |
|
|
|
Three months or less |
|
$ |
397,524 |
|
Over three through six months |
|
|
36,398 |
|
Over six through twelve months |
|
|
29,725 |
|
Over twelve months |
|
|
22,422 |
|
| |
|
|
|
|
|
|
|
|
Total |
|
$ |
486,069 |
|
| |
|
Short-term Borrowings
The following table sets forth the short-term borrowings of the Company for the dates indicated:
Short-Term Borrowings Distribution
| |
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
|
|
|
|
|
|
| (In thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
Federal funds purchased |
|
$ |
575,925 |
|
|
$ |
568,275 |
|
|
$ |
438,500 |
|
Other borrowed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
Sweep accounts |
|
|
158,153 |
|
|
|
163,439 |
|
|
|
149,479 |
|
Securities sold under repurchase agreements |
|
|
26,825 |
|
|
|
3,709 |
|
|
|
2,667 |
|
Line of credit |
|
|
14,270 |
|
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term borrowings |
|
$ |
775,173 |
|
|
$ |
735,423 |
|
|
$ |
590,646 |
|
| |
|
Further detail of other borrowed funds is as follows:
Other Borrowed Funds Balances and Rates Paid
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
|
|
Outstanding amount: |
|
|
|
|
|
|
|
|
|
|
|
|
Average for the year |
|
$ |
166,461 |
|
|
$ |
195,118 |
|
|
$ |
156,137 |
|
Maximum during the year |
|
|
209,547 |
|
|
|
400,372 |
|
|
|
199,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates: |
|
|
|
|
|
|
|
|
|
|
|
|
Average for the year |
|
|
0.66 |
% |
|
|
0.45 |
% |
|
|
0.58 |
% |
Average at period end |
|
|
1.03 |
% |
|
|
0.27 |
% |
|
|
0.43 |
% |
Noninterest Income
Components of Noninterest Income
| |
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
Service charges on deposit accounts |
|
$ |
29,106 |
|
|
$ |
28,621 |
|
|
$ |
26,381 |
|
Merchant credit card fees |
|
|
9,097 |
|
|
|
3,509 |
|
|
|
3,619 |
|
ATM fees and interchange |
|
|
2,711 |
|
|
|
2,487 |
|
|
|
2,378 |
|
Debit card fees |
|
|
3,207 |
|
|
|
2,541 |
|
|
|
2,125 |
|
Trust fees |
|
|
1,181 |
|
|
|
1,027 |
|
|
|
995 |
|
Financial services commissions |
|
|
1,387 |
|
|
|
1,250 |
|
|
|
893 |
|
Mortgage banking income |
|
|
292 |
|
|
|
386 |
|
|
|
851 |
|
Official check fees |
|
|
1,110 |
|
|
|
631 |
|
|
|
505 |
|
Gains on sale of foreclosed property |
|
|
24 |
|
|
|
231 |
|
|
|
122 |
|
Gain on sales of real property |
|
|
3,700 |
|
|
|
0 |
|
|
|
0 |
|
Investment securities gains (losses) |
|
|
(4,903 |
) |
|
|
2,169 |
|
|
|
2,443 |
|
Loss on extinguishment of debt |
|
|
0 |
|
|
|
(2,204 |
) |
|
|
(2,166 |
) |
Investment securities impairment |
|
|
0 |
|
|
|
(7,180 |
) |
|
|
0 |
|
Other noninterest income |
|
|
7,628 |
|
|
|
5,115 |
|
|
|
4,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,540 |
|
|
$ |
38,583 |
|
|
$ |
42,916 |
|
| |
|
Noninterest income for 2005 was $16.0 million or 41.4% higher than 2004 mainly because 2005
included a $5.6 million increase in merchant credit card income primarily due to the REBC
acquisition, a $3.7 million gain on sale of real estate and $945 thousand in life insurance
proceeds, partially reduced by $4.9 million in realized securities losses. Furthermore, 2004
noninterest income was reduced by $7.2 million in securities impairment writedowns and a $2.2
million loss on extinguishment of debt, which was offset by $2.2 million in realized investment
securities gains. Debit card fees increased $666 thousand or 26.2% primarily due to increased
usage. Service charges on deposit accounts increased $485 thousand or 1.7% primarily due to an
increase in overdraft fees, an increase in the number of accounts and product repricing in
February of 2005. A decrease in account analysis income, due to a higher earnings credit rate,
partially offset the overdraft fee increase. Official check sales fees increased mostly due to a
higher earnings credit rate on outstanding balances. A $224 thousand or 9.0% increase in ATM fees
- 30 -
and interchange income was mostly attributable to product repricing in February of 2005. Trust
fees were higher by $154 thousand or 15.0% mainly due to more customers, product repricing and
increases in court fees. Financial services commissions also increased $137 thousand or 11.0%
mainly due to higher sales of variable annuities, partially offset by lower sales of fixed
annuities. Other noninterest income increased $2.5 million due, in part, to $945 thousand in life
insurance proceeds.
Noninterest income for 2004 was $4.3 million or 10.1% lower than 2003 mainly due to the $7.2
million impairment writedown of securities and loss on extinguishment of debt to repay FHLB
advances, partially mitigated by $2.2 million in realized gains on sale of securities and growth
in deposit fee income. Higher deposit service charge income was attributable to higher service
fees on transaction accounts and repricing of checking account fees (effective in February 2004),
partially reduced by lower income from account analysis deficit fees and a reduction in fees
collected on returned deposits. Debit card fees rose $416 thousand due to increased usage. A $357
thousand increase in financial services commission income was largely due to higher sales of fixed
and variable annuities and mutual funds. Other noninterest income was higher by $345 thousand
mostly due to an increase in wire service fee income (up $270 thousand). Mortgage banking service
fee income declined $465 thousand due to reduced mortgage loan activity, lower investor loan fees
and net losses on sale of those loans. Merchant credit card income fell $110 thousand mostly due
to higher interchange costs.
Noninterest Expense
Components of Noninterest Expense
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
|
|
| (dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
Salaries and related benefits |
|
$ |
53,460 |
|
|
$ |
52,507 |
|
|
$ |
53,974 |
|
Occupancy |
|
|
12,579 |
|
|
|
11,935 |
|
|
|
12,152 |
|
Data processing |
|
|
6,156 |
|
|
|
6,057 |
|
|
|
6,121 |
|
Equipment |
|
|
5,212 |
|
|
|
4,794 |
|
|
|
5,364 |
|
Courier Service |
|
|
3,831 |
|
|
|
3,605 |
|
|
|
3,695 |
|
Telephone |
|
|
2,115 |
|
|
|
2,112 |
|
|
|
1,898 |
|
Professional fees |
|
|
2,420 |
|
|
|
1,869 |
|
|
|
1,886 |
|
Postage |
|
|
1,615 |
|
|
|
1,407 |
|
|
|
1,624 |
|
Loan expenses |
|
|
945 |
|
|
|
1,077 |
|
|
|
1,322 |
|
Stationery and supplies |
|
|
1,264 |
|
|
|
1,280 |
|
|
|
1,301 |
|
Merchant credit card processing |
|
|
1,035 |
|
|
|
1,104 |
|
|
|
1,183 |
|
Advertising and public relations |
|
|
965 |
|
|
|
1,037 |
|
|
|
1,066 |
|
Operational losses |
|
|
915 |
|
|
|
964 |
|
|
|
936 |
|
Amortization of deposit intangibles |
|
|
3,625 |
|
|
|
543 |
|
|
|
743 |
|
Other |
|
|
8,719 |
|
|
|
8,460 |
|
|
|
8,438 |
|
| |
|
|
Total |
|
$ |
104,856 |
|
|
$ |
98,751 |
|
|
$ |
101,703 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense to
revenues (“efficiency ratio”)(FTE) |
|
|
37.7 |
% |
|
|
38.5 |
% |
|
|
39.1 |
% |
Average full-time equivalent staff |
|
|
959 |
|
|
|
984 |
|
|
|
1,026 |
|
Total average assets per full-time staff |
|
$ |
5,283 |
|
|
$ |
4,610 |
|
|
$ |
4,223 |
|
| |
Noninterest expense increased $6.1 million or 6.2% in 2005 compared with 2004 largely due to an
increase in amortization of deposit intangibles from the REBC acquisition. Occupancy increased
$644 thousand or 5.4% largely due to a $342 thousand increase in rent, net of sublease income,
increases in repair and maintenance and moving expense and higher utility costs. Professional fees
increased $551 thousand or 29.5% due to an increase in audit and accounting costs primarily due to
additional charges from the company’s independent auditor in connection with new audit
requirements promulgated by the Public Company Accounting Oversight Board and higher legal fees
for the REBC acquisition. A $418 thousand or 8.7% increase in equipment expense was mainly a $220
thousand increase in depreciation and a $146 thousand increase in equipment repair and maintenance
expense. Salaries and related benefits rose by $953 thousand or 1.8% primarily attributable to
higher employee benefit costs, annual merit increases to continuing staff, partially offset by the
effect of a smaller workforce, and lower expenses for incentives. Courier service costs increased
$226 thousand or 6.3%. Postage increased $208 thousand or 14.8%. Other noninterest expense
increased $259 thousand or 3.1% largely due to a $305 thousand increase in limited partnership
losses from investment in low-income housing properties and higher internet banking expense,
partially offset by reduced insurance costs. Loan expenses declined $132 thousand or 12.3% mainly
due to a decrease in repossession related expenses.
Noninterest expense decreased by $3.0 million in 2004 compared to 2003, primarily due to a $1.5
million decline in personnel-related costs. The decrease was largely due to a $353 thousand
decline in salaries resulting from a fewer number of employees, partly offset by merit increases
granted to continuing staff, a reduction in executive bonus costs and a decline in accruals for
restricted performance shares. Equipment expense dropped $570 thousand, with lower depreciation
and repair and maintenance costs. Occupancy expense fell $217 thousand mainly due to lower utility
costs. Loan expense decreased $245 thousand due to lower loan activity. Postage declined $217
thousand from lower usage and a refund received in connection with changing mail handling vendors.
Amortization of intangible assets decreased $200 thousand. Telephone expense rose $214 thousand
mostly due to costs associated with the new branch network system.
The ratio of average assets per full-time equivalent staff was $5.28 million in 2005 compared with
$4.61 million and $4.22 million in 2004 and 2003, respectively.
- 31 -
Provision for Income Tax
The income tax provision (FTE) increased by $5.3 million or 8.9% in 2005 compared to 2004,
primarily as a result of higher earnings and $2.0 million higher FTE adjustment for increased
earnings on tax-advantaged investments and loans. The 2005 provision (FTE) of $65.2 million
reflects an effective tax rate of 37.8% compared to a provision of $59.9 million in 2004,
representing an effective tax rate of 38.6%. The nominal tax rate declined from 28.1% for 2004 to
27.4% for 2005 primarily attributable to income tax credits on low income housing investment and
tax-exempt interest.
The income tax provision (FTE) decreased by $350 thousand or 0.6% in 2004 compared to 2003,
primarily as a result of the $3.0 million tax benefit resulting from the securities impairment
charge, partially offset by $1.7 million higher FTE adjustment for increased earnings on
tax-advantaged investments and loans. The 2004 provision (FTE) of $59.9 million reflects an
effective tax rate of 38.6% compared to a provision of $60.3 million in 2003, representing an
effective tax rate of 38.8%. The nominal tax rate declined from 29.2% for 2003 to 28.1% for 2004
primarily attributable to income tax credits on low income housing investments and tax-exempt
interest.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently engage in trading activities or use derivative instruments to
control interest rate risk, even though such activities may be permitted with the approval of the
Company’s Board of Directors.
Interest rate risk as discussed above is the most significant market risk affecting the Company,
as described in the preceding sections regarding “Asset and Liability Management” and “Liquidity.”
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page |
|
|
32 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
57 |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Westamerica Bancorporation and Subsidiaries (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal control over financial reporting as of
December 31, 2005. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. The Company’s system of internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of
Management and Directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2005 based upon criteria in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on this assessment, Management determined that the Company’s internal control over financial
reporting was effective as of December 31, 2005 based on the criteria in Internal Control -
Integrated Framework issued by COSO.
The Company’s independent registered public accounting firm have issued an attestation report
on Management’s assessment of the Company’s internal control over financial reporting. This
report is included below.
Dated March 6, 2006
- 32 -
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Westamerica Bancorporation:
We have audited management’s assessment, included in the accompanying (Management’s Report on
Internal Control Over Financial Reporting), that Westamerica Bancorporation and Subsidiaries (the
Company) maintained effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December
31, 2005 and 2004, and the related consolidated statements of income and comprehensive income,
changes in shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated March 6, 2006 expressed an unqualified
opinion on those consolidated financial statements.
| |
|
|
|
|
|
|
|
|
San Francisco, California |
|
|
March 6, 2006 |
|
|
- 33 -
CONSOLIDATED BALANCE SHEETS
(In thousands)
| |
|
|
|
|
|
|
|
|
| Balances as of December 31, |
|
2005 |
|
2004 |
| |
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 15) |
|
$ |
209,273 |
|
|
$ |
126,153 |
|
Money market assets |
|
|
534 |
|
|
|
534 |
|
Investment securities available for sale (Note 2) |
|
|
662,388 |
|
|
|
931,710 |
|
Investment securities held to maturity; market values of
$1,323,782 in 2005 and $1,265,986 in 2004 (Note 2) |
|
|
1,337,216 |
|
|
|
1,260,832 |
|
Loans, net of an allowance for loan losses of: |
|
|
|
|
|
|
|
|
$55,849 in 2005 and $54,152 in 2004 (Notes 3,4 and 14) |
|
|
2,616,372 |
|
|
|
2,246,078 |
|
Other real estate owned |
|
|
0 |
|
|
|
0 |
|
Premises and equipment, net (Note 5) |
|
|
33,221 |
|
|
|
35,223 |
|
Identifiable intangibles |
|
|
26,170 |
|
|
|
2,894 |
|
Goodwill |
|
|
121,907 |
|
|
|
18,996 |
|
Interest receivable and other assets (Note 9) |
|
|
142,128 |
|
|
|
114,848 |
|
| |
Total Assets |
|
$ |
5,149,209 |
|
|
$ |
4,737,268 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest bearing |
|
$ |
1,419,313 |
|
|
$ |
1,273,825 |
|
Interest bearing: |
|
|
|
|
|
|
|
|
Transaction |
|
|
658,667 |
|
|
|
591,593 |
|
Savings |
|
|
1,022,645 |
|
|
|
1,091,981 |
|
Time (Notes 2 and 6) |
|
|
745,476 |
|
|
|
626,220 |
|
| |
Total deposits |
|
|
3,846,101 |
|
|
|
3,583,619 |
|
| |
Short-term borrowed funds (Notes 2 and 6) |
|
|
775,173 |
|
|
|
735,423 |
|
Debt financing and notes payable (Note 6) |
|
|
40,281 |
|
|
|
21,429 |
|
Liability for interest, taxes and other expenses (Note 9) |
|
|
60,940 |
|
|
|
38,188 |
|
| |
Total Liabilities |
|
|
4,722,495 |
|
|
|
4,378,659 |
|
| |
|
|
|
|
|
|
|
|
|
Shareholders’ Equity (Notes 7, 8 and 15) |
|
|
|
|
|
|
|
|
Common Stock (no par value) |
|
|
|
|
|
|
|
|
Authorized - 150,000 shares |
|
|
|
|
|
|
|
|
Issued and outstanding - 31,882 in 2005 and 31,640 in 2004 |
|
|
313,959 |
|
|
|
227,829 |
|
Deferred compensation |
|
|
2,423 |
|
|
|
2,146 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain on securities available for sale, net |
|
|
1,882 |
|
|
|
9,638 |
|
Retained earnings |
|
|
108,450 |
|
|
|
118,996 |
|
| |
Total Shareholders’ Equity |
|
|
426,714 |
|
|
|
358,609 |
|
| |
Total Liabilities and Shareholders’ Equity |
|
$ |
5,149,209 |
|
|
$ |
4,737,268 |
|
| |
See accompanying notes to consolidated financial statements.
- 34 -
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For the years ended December 31, |
|
2005 |
|
2004 |
|
2003 |
| |
Interest and Fee Income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
155,476 |
|
|
$ |
133,226 |
|
|
$ |
152,758 |
|
Money market assets and funds sold |
|
|
3 |
|
|
|
1 |
|
|
|
8 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
19,699 |
|
|
|
33,230 |
|
|
|
35,385 |
|
Tax-exempt |
|
|
13,186 |
|
|
|
14,514 |
|
|
|
15,563 |
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
30,557 |
|
|
|
17,209 |
|
|
|
5,038 |
|
Tax-exempt |
|
|
23,876 |
|
|
|
18,157 |
|
|
|
14,741 |
|
| |
Total Interest and fee Income |
|
|
242,797 |
|
|
|
216,337 |
|
|
|
223,493 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Transaction deposits |
|
|
1,460 |
|
|
|
612 |
|
|
|
727 |
|
Savings deposits |
|
|
3,744 |
|
|
|
3,931 |
|
|
|
6,091 |
|
Time deposits (Note 6) |
|
|
17,160 |
|
|
|
8,504 |
|
|
|
10,167 |
|
Short-term borrowed funds (Note 6) |
|
|
18,941 |
|
|
|
5,878 |
|
|
|
3,415 |
|
Federal Home Loan Bank advances |
|
|
0 |
|
|
|
897 |
|
|
|
5,318 |
|
Debt financing and notes payable (Note 6) |
|
|
2,344 |
|
|
|
1,284 |
|
|
|
1,479 |
|
| |
Total Interest Expense |
|
|
43,649 |
|
|
|
21,106 |
|
|
|
27,197 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
199,148 |
|
|
|
195,231 |
|
|
|
196,296 |
|
Provision for Credit Losses (Note 3) |
|
|
900 |
|
|
|
2,700 |
|
|
|
3,300 |
|
| |
| |
Net Interest Income After
Provision for Credit Losses |
|
|
198,248 |
|
|
|
192,531 |
|
|
|
192,996 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
29,106 |
|
|
|
28,621 |
|
|
|
26,381 |
|
Merchant credit card |
|
|
9,097 |
|
|
|
3,509 |
|
|
|
3,619 |
|
Financial services commissions |
|
|
1,387 |
|
|
|
1,250 |
|
|
|
893 |
|
Trust fees |
|
|
1,181 |
|
|
|
1,027 |
|
|
|
995 |
|
Mortgage banking |
|
|
292 |
|
|
|
386 |
|
|
|
851 |
|
Securities (losses) gains, net |
|
|
(4,903 |
) |
|
|
2,169 |
|
|
|
2,443 |
|
Loss on extinguishment of debt |
|
|
0 |
|
|
|
(2,204 |
) |
|
|
(2,166 |
) |
Securities impairment |
|
|
0 |
|
|
|
(7,180 |
) |
|
|
0 |
|
Sale of real estate |
|
|
3,700 |
|
|
|
0 |
|
|
|
0 |
|
Other |
|
|
14,680 |
|
|
|
11,005 |
|
|
|
9,900 |
|
| |
Total Noninterest Income |
|
|
54,540 |
|
|
|
38,583 |
|
|
|
42,916 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits (Note 13) |
|
|
53,460 |
|
|
|
52,507 |
|
|
|
53,974 |
|
Occupancy (Notes 5 and 11) |
|
|
12,579 |
|
|
|
11,935 |
|
|
|
12,152 |
|
Data processing |
|
|
6,156 |
|
|
|
6,057 |
|
|
|
6,121 |
|
Furniture and equipment (Notes 5 and 11) |
|
|
5,212 |
|
|
|
4,794 |
|
|
|
5,364 |
|
Courier Service |
|
|
3,831 |
|
|
|
3,605 |
|
|
|
3,695 |
|
Amortization of intangibles |
|
|
3,625 |
|
|
|
543 |
|
|
|
743 |
|
Professional fees |
|
|
2,420 |
|
|
|
1,869 |
|
|
|
1,886 |
|
Other real estate owned |
|
|
4 |
|
|
|
(7 |
) |
|
|
46 |
|
Other |
|
|
17,569 |
|
|
|
17,448 |
|
|
|
17,722 |
|
| |
Total Noninterest Expense |
|
|
104,856 |
|
|
|
98,751 |
|
|
|
101,703 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
147,932 |
|
|
|
132,363 |
|
|
|
134,209 |
|
Provision for income taxes (Note 9) |
|
|
40,491 |
|
|
|
37,145 |
|
|
|
39,146 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
107,441 |
|
|
$ |
95,218 |
|
|
$ |
95,063 |
|
| |
Other comprehensive Income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities available for sale |
|
|
(10,600 |
) |
|
|
(6,459 |
) |
|
|
(4,544 |
) |
Securities losses/impairment (gains) included in net income |
|
|
2,844 |
|
|
|
2,906 |
|
|
|
(1,417 |
) |
| |
Comprehensive Income |
|
$ |
99,685 |
|
|
$ |
91,665 |
|
|
$ |
89,102 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding |
|
|
32,291 |
|
|
|
31,821 |
|
|
|
32,849 |
|
Diluted Average Shares Outstanding |
|
|
32,897 |
|
|
|
32,461 |
|
|
|
33,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data (Note 7) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings |
|
$ |
3.33 |
|
|
$ |
2.99 |
|
|
$ |
2.89 |
|
Diluted earnings |
|
|
3.27 |
|
|
|
2.93 |
|
|
|
2.85 |
|
Dividends paid |
|
|
1.22 |
|
|
|
1.10 |
|
|
|
1.00 |
|
See accompanying notes to consolidated financial statements.
- 35 -
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
|
|
|
|
Common |
|
Deferred |
|
Comprehensive |
|
Retained |
|
|
| |
|
Shares |
|
Stock |
|
Compensation |
|
Income (Loss) |
|
Earnings |
|
Total |
| |
December 31, 2002 |
|
|
33,411 |
|
|
|
215,926 |
|
|
|
1,272 |
|
|
|
19,152 |
|
|
|
105,149 |
|
|
|
341,499 |
|
Net income for the year 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,063 |
|
|
|
95,063 |
|
Stock issued for stock options |
|
|
425 |
|
|
|
8,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,353 |
|
Stock option tax benefits |
|
|
|
|
|
|
4,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,162 |
|
Restricted stock activity |
|
|
24 |
|
|
|
407 |
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
959 |
|
Purchase and retirement of stock |
|
|
(1,573 |
) |
|
|
(10,387 |
) |
|
|
|
|
|
|
|
|
|
|
(60,382 |
) |
|
|
(70,769 |
) |
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,935 |
) |
|
|
(32,935 |
) |
Unrealized gain on securities
available for sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,961 |
) |
|
|
|
|
|
|
(5,961 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
32,287 |
|
|
|
218,461 |
|
|
|
1,824 |
|
|
|
13,191 |
|
|
|
106,895 |
|
|
|
340,371 |
|
Net income for the year 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,218 |
|
|
|
95,218 |
|
Stock issued for stock options |
|
|
403 |
|
|
|
12,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,810 |
|
Stock option tax benefits |
|
|
|
|
|
|
3,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,508 |
|
Restricted stock activity |
|
|
16 |
|
|
|
467 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
789 |
|
Purchase and retirement of stock |
|
|
(1,066 |
) |
|
|
(7,417 |
) |
|
|
|
|
|
|
|
|
|
|
(48,027 |
) |
|
|
(55,444 |
) |
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,090 |
) |
|
|
(35,090 |
) |
Unrealized loss on securities
available for sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,553 |
) |
|
|
|
|
|
|
(3,553 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
31,640 |
|
|
|
227,829 |
|
|
|
2,146 |
|
|
|
9,638 |
|
|
|
118,996 |
|
|
|
358,609 |
|
Net income for the year 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,441 |
|
|
|
107,441 |
|
Stock issued in connection with
purchase of Redwood Empire Bancorp |
|
|
1,639 |
|
|
|
89,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,538 |
|
Stock issued for stock options |
|
|
381 |
|
|
|
10,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,026 |
|
Stock option tax benefits |
|
|
|
|
|
|
2,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,455 |
|
Restricted stock activity |
|
|
21 |
|
|
|
797 |
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
1,074 |
|
Purchase and retirement of stock |
|
|
(1,799 |
) |
|
|
(16,686 |
) |
|
|
|
|
|
|
|
|
|
|
(78,665 |
) |
|
|
(95,351 |
) |
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,322 |
) |
|
|
(39,322 |
) |
Unrealized loss on securities
available for sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,756 |
) |
|
|
|
|
|
|
(7,756 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
31,882 |
|
|
$ |
313,959 |
|
|
$ |
2,423 |
|
|
$ |
1,882 |
|
|
$ |
108,450 |
|
|
$ |
426,714 |
|
| |
See accompanying notes to consolidated financial statements.
- 36 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For the years ended December 31, |
|
2005 |
|
2004 |
|
2003 |
| |
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
107,441 |
|
|
$ |
95,218 |
|
|
$ |
95,063 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets |
|
|
4,128 |
|
|
|
3,867 |
|
|
|
3,993 |
|
Amortization of intangibles and other assets |
|
|
5,682 |
|
|
|
2,296 |
|
|
|
1,944 |
|
Loan loss provision |
|
|
900 |
|
|
|
2,700 |
|
|
|
3,300 |
|
Net (amortization) deferral of loan fees, net of cost |
|
|
(51 |
) |
|
|
(105 |
) |
|
|
249 |
|
(Increase) decrease in interest income receivable |
|
|
(1,007 |
) |
|
|
1,217 |
|
|
|
(269 |
) |
(Increase) decrease in other assets |
|
|
(2,967 |
) |
|
|
(1,547 |
) |
|
|
57,671 |
|
Increase (decrease) in income taxes payable |
|
|
(1,331 |
) |
|
|
(3,779 |
) |
|
|
6,550 |
|
Increase (decrease) in interest expense payable |
|
|
2,067 |
|
|
|
43 |
|
|
|
(1,027 |
) |
Increase (decrease) in other liabilities |
|
|
3,472 |
|
|
|
7,020 |
|
|
|
(53,279 |
) |
Impairment of investment securities |
|
|
0 |
|
|
|
7,180 |
|
|
|
0 |
|
Loss (gain) on sale of securities |
|
|
4,903 |
|
|
|
(2,169 |
) |
|
|
(2,443 |
) |
Loss on extinguishment of debt |
|
|
0 |
|
|
|
2,204 |
|
|
|
2,166 |
|
Gain on sale of real estate |
|
|
(3,700 |
) |
|
|
0 |
|
|
|
0 |
|
Gain on sale of other assets |
|
|
0 |
|
|
|
(402 |
) |
|
|
0 |
|
Net loss on sales/write-down of fixed assets |
|
|
39 |
|
|
|
47 |
|
|
|
142 |
|
Originations of loans for resale |
|
|
(484 |
) |
|
|
(3,988 |
) |
|
|
(9,113 |
) |
Net proceeds from sale of loans originated for resale |
|
|
483 |
|
|
|
3,955 |
|
|
|
10,233 |
|
Net gain on sale of property acquired in satisfaction of debt |
|
|
(24 |
) |
|
|
(231 |
) |
|
|
(122 |
) |
Write-downs of other real estate owned |
|
|
0 |
|
|
|
0 |
|
|
|
307 |
|
| |
Net Cash Provided by Operating Activities |
|
|
119,551 |
|
|
|
113,526 |
|
|
|
115,365 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash issued in mergers and acquisitions |
|
|
(35,210 |
) |
|
|
0 |
|
|
|
0 |
|
Net repayments of loans |
|
|
66,942 |
|
|
|
20,778 |
|
|
|
164,521 |
|
Purchases of investment securities available for sale |
|
|
(19,208 |
) |
|
|
(96,027 |
) |
|
|
(1,072,090 |
) |
Proceeds from maturity/calls of securities available for sale |
|
|
104,832 |
|
|
|
348,027 |
|
|
|
496,011 |
|
Proceeds from sale of securities available for sale |
|
|
196,216 |
|
|
|
209,173 |
|
|
|
153,128 |
|
Purchases of investment securities held to maturity |
|
|
(232,203 |
) |
|
|
(890,836 |
) |
|
|
(371,037 |
) |
Proceeds from maturity/calls of securities held to maturity |
|
|
165,447 |
|
|
|
158,929 |
|
|
|
233,580 |
|
Purchases of property, plant and equipment |
|
|
(1,655 |
) |
|
|
(3,390 |
) |
|
|
(4,345 |
) |
Proceeds from maturity/sale of money market assets |
|
|
6 |
|
|
|
0 |
|
|
|
0 |
|
Purchases of FRB/FHLB securities |
|
|
(4,414 |
) |
|
|
0 |
|
|
|
0 |
|
Proceeds from sale of FRB/FHLB securities |
|
|
1,547 |
|
|
|
0 |
|
|
|
0 |
|
Proceeds from sale of property and equipment |
|
|
4,533 |
|
|
|
0 |
|
|
|
1,859 |
|
Proceeds from sale of other real estate owned |
|
|
64 |
|
|
|
321 |
|
|
|
1,882 |
|
| |
Net Cash Provided (Used) In Investing Activities |
|
|
246,897 |
|
|
|
(253,025 |
) |
|
|
(396,491 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(107,498 |
) |
|
|
119,628 |
|
|
|
169,925 |
|
Net (decrease) increase in short-term borrowings |
|
|
(47,649 |
) |
|
|
144,776 |
|
|
|
240,910 |
|
Repayments to the Federal Home Loan Bank |
|
|
0 |
|
|
|
(107,204 |
) |
|
|
(67,166 |
) |
(Repayments) advances of notes payable |
|
|
(3,338 |
) |
|
|
(3,214 |
) |
|
|
36 |
|
Exercise of stock options/issuance of shares |
|
|
9,830 |
|
|
|
12,572 |
|
|
|
8,176 |
|
Retirement of common stock including repurchases |
|
|
(95,351 |
) |
|
|
(55,444 |
) |
|
|
(70,769 |
) |
Dividends paid |
|
|
(39,322 |
) |
|
|
(35,090 |
) |
|
|
(32,935 |
) |
| |
Net Cash (Used) Provided By Financing Activities |
|
|
(283,328 |
) |
|
|
76,024 |
|
|
|
248,177 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) In Cash and Cash Equivalents |
|
|
83,120 |
|
|
|
(63,475 |
) |
|
|
(32,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Year |
|
|
126,153 |
|
|
|
189,628 |
|
|
|
222,577 |
|
| |
Cash and Cash Equivalents at End of Year |
|
$ |
209,273 |
|
|
$ |
126,153 |
|
|
$ |
189,628 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned |
|
$ |
40 |
|
|
$ |
0 |
|
|
$ |
1,800 |
|
Unrealized loss on securities available for sale, net |
|
|
(7,756 |
) |
|
|
(3,553 |
) |
|
|
(5,961 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The acquisition of Redwood Empire Bancorp involved the following: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash issued |
|
|
57,128 |
|
|
|
— |
|
|
|
— |
|
Common stock issued |
|
|
89,538 |
|
|
|
— |
|
|
|
— |
|
Fair value of liabilities assumed |
|
|
500,659 |
|
|
|
— |
|
|
|
— |
|
Fair value of assets acquired, other than cash and cash equivalents |
|
|
(495,596 |
) |
|
|
— |
|
|
|
— |
|
Core deposit intangible |
|
|
(16,600 |
) |
|
|
— |
|
|
|
— |
|
Customer based intangible — merchant draft processing |
|
|
(10,300 |
) |
|
|
— |
|
|
|
— |
|
Goodwill |
|
|
(102,911 |
) |
|
|
— |
|
|
|
— |
|
Net Cash and Cash Equivalents Received |
|
|
21,918 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow activity: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid for the period |
|
|
46,325 |
|
|
|
21,149 |
|
|
|
26,547 |
|
Income tax payments for the period |
|
|
39,414 |
|
|
|
37,432 |
|
|
|
33,146 |
|
Tax benefit from stock option exercises |
|
|
2,455 |
|
|
|
3,508 |
|
|
|
4,162 |
|
See accompanying notes to consolidated financial statements.
- 37 -
WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Business and Accounting Policies
Westamerica Bancorporation, a registered bank holding company (the “Company”), provides a full
range of banking services to corporate and individual customers in Northern and Central California
through its subsidiary bank, Westamerica Bank (the “Bank”). The Bank is subject to competition
from both financial and nonfinancial institutions and to the regulations of certain agencies and
undergoes periodic examinations by those regulatory authorities.
Summary of Significant Accounting Policies
The consolidated financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. The following is a summary of significant
policies used in the preparation of the accompanying financial statements.
Accounting Estimates. Certain accounting policies underlying the preparation of these financial
statements require management to make estimates and judgments. These estimates and judgments may
affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of
contingent assets and liabilities. The most significant of these involve the Allowance for Loan
Losses, as discussed below under “Allowance for Credit Losses.”
Principles of Consolidation. The consolidated financial statements include the accounts of the
Company and all the Company’s subsidiaries. Significant intercompany transactions have been
eliminated in consolidation. The Company does not maintain or conduct transactions with any
unconsolidated special purpose entities other than low income housing partnerships sponsored by
third parties.
Business Combinations. In a business combination, the results of operations of the acquired entity
are included in the consolidated financial statements from the date of acquisition. Assets and
liabilities of the entity acquired are recorded at fair value on the date of acquisition and
goodwill is recorded as the excess of the purchase price over the fair value of the net assets
(including identifiable intangibles such as core deposits) acquired. See “Intangible Assets” below.
Acquisition of Redwood Empire Bancorp
The Company acquired Redwood Empire Bancorp, parent company of National Bank of the Redwoods, on
March 1, 2005, in order to increase the Company’s market share in Northern California. The cash
and stock acquisition was accounted for under the purchase method of accounting. The transaction
was valued at approximately $150 million.
The following supplemental pro forma information discloses selected financial information for the
periods indicated as though the acquisition had been completed at the beginning of each year
presented (unaudited):
| |
|
|
|
|
|
|
|
|
| |
|
Years ended |
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(In thousands, except per share data) |
|
Earnings as reported: |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
253,688 |
|
|
$ |
233,814 |
|
Net income |
|
|
107,441 |
|
|
|
95,218 |
|
Basic EPS |
|
$ |
3.33 |
|
|
$ |
2.99 |
|
Diluted EPS |
|
|
3.27 |
|
|
|
2.93 |
|
Pro forma merger adjustments: |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
5,509 |
|
|
$ |
30,592 |
|
Net income |
|
|
1,007 |
|
|
|
5,219 |
|
Pro forma earnings after merger
adjustments: |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
259,197 |
|
|
$ |
264,406 |
|
Net income |
|
|
108,448 |
|
|
|
100,437 |
|
Basic EPS |
|
$ |
3.33 |
|
|
$ |
3.00 |
|
Diluted EPS |
|
|
3.27 |
|
|
|
2.95 |
|
The estimated fair value of assets acquired and liabilities assumed are as follows (unaudited):
| |
|
|
|
|
| |
|
2005 |
|
| Balances as of March 1, |
|
(In thousands) |
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
$ |
21,918 |
|
Investment securities held to maturity |
|
|
14,063 |
|
Investment securities available for sale |
|
|
31,392 |
|
Loans |
|
|
438,910 |
|
Allowance for loan losses |
|
|
(5,213 |
) |
Identifiable intangibles |
|
|
26,900 |
|
Goodwill |
|
|
102,911 |
|
Other assets |
|
|
18,500 |
|
|
|
|
|
Total assets acquired |
|
$ |
649,381 |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
Deposits |
|
$ |
368,689 |
|
Subordinated debt |
|
|
22,189 |
|
Other liabilities |
|
|
109,781 |
|
|
|
|
|
Total liabilities assumed |
|
$ |
500,659 |
|
|
|
|
|
|
|
|
|
|
Purchase price: |
|
|
|
|
Cash issued |
|
$ |
57,128 |
|
Common stock issued |
|
|
89,538 |
|
Capitalized acquisition costs |
|
|
2,056 |
|
|
|
|
|
Total purchase price |
|
$ |
148,722 |
|
|
|
|
|
Cash Equivalents. Cash equivalents include Due From Banks balances and Federal Funds Sold which
are both readily convertible to known amounts of cash and are generally 90 days or less from
maturity at the time of purchase, presenting insignificant risk of changes in value due to
interest rate changes.
Securities. Investment securities consist of debt securities of the U.S. Treasury, government
sponsored entities, states, counties and municipalities, corporations, mortgage-backed securities,
- 38 -
and equity securities. The Company classifies its debt and marketable equity securities in one of
three categories: trading, available for sale or held to maturity. Securities transactions are
recorded on a trade date basis. Trading securities are bought and held principally for the purpose
of selling them in the near term. Held to maturity securities are those debt securities which the
Company has the ability and intent to hold until maturity. Securities not included in trading or
held to maturity are classified as available for sale. Trading and available for sale securities
are recorded at fair value. Held to maturity securities are recorded at amortized cost, adjusted
for the amortization of premiums or accretion of discounts. Unrealized gains and losses on trading
securities are included in earnings. Unrealized gains and losses, net of the related tax effect,
on available for sale securities are reported as a separate component of shareholders’ equity
until realized.
A decline in the market value of any available for sale or held to maturity security below cost
that is deemed other than temporary results in a charge to earnings and the establishment of a new
cost basis for the security. Unrealized investment securities losses are evaluated at least
quarterly on pools of securities with similar attributes to determine whether such declines in
value should be considered “other than temporary” and therefore be subject to immediate loss
recognition in income. Although these evaluations involve significant judgment, an unrealized loss
in the fair value of a debt security is generally deemed to be temporary when the fair value of
the security is below the carrying value primarily due to changes in interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company has the
intent and ability to hold the security for a sufficient time to recover the carrying value. An
unrealized loss in the value of an equity security is generally considered temporary when the fair
value of the security is below the carrying value primarily due to current market conditions and
not deterioration in the financial condition of the issuer, and the Company has the intent and
ability to hold the security for a sufficient time to recover the carrying value. Other factors
that may be considered in determining whether a decline in the value of either a debt or an equity
security is “other than temporary” include ratings by recognized rating agencies, actions of
commercial banks or other lenders relative to the continued extension of credit facilities to the
issuer of the security, the financial condition, capital strength and near-term prospects of the
issuer, and recommendations of investment advisors or market analysts.
Purchase premiums are amortized and purchase discounts are accreted over the estimated life of the
related investment security as an adjustment to yield using the effective interest method.
Unamortized premiums, unaccreted discounts, and early payment premiums are recognized in interest
income upon disposition of the related security. Interest and dividend income are recognized when
earned. Realized gains and losses from the sale of available for sale securities are included in
earnings using the specific identification method.
Loans. Loans are stated at the principal amount outstanding, net of unearned discount and deferred
fees (costs). Interest is accrued daily on the outstanding balances. Loans which are more than 90
days delinquent with respect to interest or principal, unless they are well secured and in the
process of collection, and other loans on which full recovery of principal or interest is in
doubt, are placed on nonaccrual status. 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 (“performing nonaccrual loans”) even though the borrowers continue
to repay the loans as scheduled. 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. Performing 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. Certain consumer loans or auto
receivables are charged to the allowance when they become 120 days past due. The Company
recognizes a loan as impaired when, based on current information and events, it is probable that
it will be unable to collect all amounts due according to the contractual terms of the loan
agreement. All amounts due according to the contractual terms means that both the contractual
interest payments and the contractual principal payments of a loan will be collected as scheduled
in the loan agreement. Income recognition on impaired loans conforms to that used on nonaccrual
loans.
Nonrefundable fees and certain costs associated with originating or acquiring loans are deferred
and amortized as an adjustment to interest income over the contractual loan lives. Upon
prepayment, unamortized loan fees are immediately recognized in interest income. Other fees,
including those collected upon principal prepayments, are included in interest income when
received. Loans held for sale are identified upon origination and are reported at the lower of
cost or market value on an aggregate loan basis.
Allowance for Credit Losses. The allowance for credit losses is established through provisions for
credit losses charged to income. Losses on loans, including impaired loans, are charged to the
allowance for credit losses when all or a portion of a loan is deemed to be uncollectible.
Recoveries of loans previously charged off are credited to the allowance when realized. 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 and classified loans, recommendations of regulatory authorities, prevailing economic
conditions and other factors. A portion of the allowance is specifically allocated to impaired and
other identified loans whose full collectibility is uncertain. Such allocations are determined by
Management based on loan-by-loan analyses. A second allocation is based in part on quantitative
analyses of historical credit loss experience, in which criticized and classified loan balances
identified through an internal loan 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 general loan
categories based on commercial office vacancy rates, mortgage loan foreclosure trends, agriculture
commodity prices, and levels of government funding. The remainder of the reserve is considered to
be unallocated and is established at a level considered necessary based on relevant economic
conditions and available data, including unemployment statistics, unidentified economic and
business conditions, the quality of lending management and staff, credit quality trends,
concentrations of credit, and changing underwriting standards due to external competitive factors.
Other Real Estate Owned. Other real estate owned is comprised of property acquired through
foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and some vacated bank
properties. Losses recognized at the time of acquiring property in full or partial satisfaction of
debt are charged against the allowance for credit losses. Other real estate owned is recorded at
the
- 39 -
lower of the related loan balance or fair value of the collateral, generally based upon an
independent property appraisal, less estimated disposition costs. Subsequently, other real estate
owned is valued at the lower of the amount recorded at the date acquired or the then current fair
value less estimated disposition costs. Subsequent losses incurred due to any decline in annual
independent property appraisals are recognized as noninterest expense. Routine holding costs, such
as property taxes, insurance, maintenance and losses from sales and dispositions, are recognized
as noninterest expense.
Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed substantially on the straight-line method over the
estimated useful life of each type of asset. Estimated useful lives of premises and equipment
range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are
amortized over the terms of the lease or their estimated useful life, whichever is shorter.
Intangible assets. Intangible assets are comprised of goodwill, core deposit intangibles and other
identifiable intangibles acquired in business combinations. Intangible assets with definite useful
lives are amortized over their respective estimated useful lives to their estimated residual
values. If an event occurs that indicates the carrying amount of an intangible asset may not be
recoverable, Management reviews the asset for impairment. Any goodwill and any intangible asset
determined to have an indefinite useful life acquired in a purchase business combination is not
amortized, but is annually evaluated for impairment.
The following table summarizes the Company’s goodwill and identifiable intangible assets as of
January 1 and December 31 for 2005 and 2004. In connection with the acquisition of REBC in the
first quarter of 2005, the Company recorded goodwill of $109 million and identifiable intangibles
of $27 million in accordance with the purchase method of accounting. Goodwill relating to the REBC
acquisition was subsequently reduced by $6 million, of which $2 million related to the premium
received on the required divestiture of a former REBC branch office and $4 million related to
purchase accounting adjustments for stock options and taxes.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At |
|
|
|
|
|
|
|
|
|
|
At |
|
| |
|
January 1, |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
| (In thousands) |
|
2005 |
|
|
Additions |
|
|
Reductions |
|
|
2005 |
|
Goodwill |
|
$ |
22,968 |
|
|
$ |
108,507 |
|
|
($ |
5,596 |
) |
|
$ |
125,879 |
|
Accumulated Amortization |
|
|
(3,972 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(3,972 |
) |
| |
|
|
| |
Net |
|
$ |
18,996 |
|
|
$ |
108,507 |
|
|
($ |
5,596 |
) |
|
$ |
121,907 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Deposit Intangibles |
|
$ |
7,783 |
|
|
$ |
16,600 |
|
|
$ |
0 |
|
|
$ |
24,383 |
|
Accumulated Amortization |
|
|
(4,889 |
) |
|
|
0 |
|
|
|
(2,083 |
) |
|
|
(6,972 |
) |
Merchant Draft Processing Intangible |
|
|
0 |
|
|
|
10,300 |
|
|
|
0 |
|
|
|
10,300 |
|
Accumulated Amortization |
|
|
0 |
|
|
|
0 |
|
|
|
(1,541 |
) |
|
|
(1,541 |
) |
| |
|
|
| |
Net |
|
$ |
2,894 |
|
|
$ |
26,900 |
|
|
($ |
3,624 |
) |
|
$ |
26,170 |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At |
|
|
|
|
|
|
|
|
|
|
At |
|
| |
|
January 1, |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
| (In thousands) |
|
2004 |
|
|
Additions |
|
|
Reductions |
|
|
2004 |
|
Goodwill |
|
$ |
22,968 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
22,968 |
|
Accumulated
Amortization |
|
|
(3,972 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(3,972 |
) |
| |
|
|
| |
Net |
|
$ |
18,996 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
18,996 |
|
| |
|
|
Core Deposit
Intangibles |
|
$ |
7,783 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
7,783 |
|
Accumulated
Amortization |
|
|
(4,345 |
) |
|
|
0 |
|
|
|
(544 |
) |
|
|
(4,889 |
) |
| |
|
|
| |
Net |
|
$ |
3,438 |
|
|
$ |
0 |
|
|
($ |
544 |
) |
|
$ |
2,894 |
|
| |
|
|
At December 31, 2005, the estimated amortization of core deposit intangibles, in thousands of
dollars, annually through 2010 is $2,279, $2,153, $2,021, $1,859 and $1,636, respectively. The
weighted average amortization period for core deposit intangibles is 13 years. At December 31,
2005, the estimated amortization of merchant draft processing intangible, in thousands of dollars,
annually through 2010 is $1,808, $1,500, $1,200, $962 and $774, respectively. The merchant draft
processing intangibles’ estimated amortization period is 12 years.
Impairment of Long-Lived Assets. The Company reviews its long-lived assets and certain intangibles
for impairment whenever events or changes indicate that the carrying amount of an asset may not be
recoverable. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Income taxes. The Company and its subsidiaries file consolidated tax returns. For financial
reporting purposes, the income tax effects of transactions are recognized in the year in which
they enter into the determination of recorded income, regardless of when they are recognized for
income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements
of income include charges or credits for deferred income taxes relating to temporary differences
between the tax basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are reflected at currently enacted income tax
rates in the period in which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Derivative Instruments and Hedging Activities. The Company’s accounting for derivative
instruments, including certain derivative instruments embedded in other contracts, requires the
Company to recognize those items as assets or liabilities in the statement of financial position
and measure them at fair value.
- 40 -
Stock Options. As permitted by SFAS No. 123 “Accounting for Stock-Based Compensation,” the Company
accounts for its stock option plans using the intrinsic value method. Accordingly, compensation
expense is recorded on the grant date only if the current price of the underlying stock exceeds
the exercise price of the option. If compensation cost had been determined based on the fair value
method established by SFAS 123, the Company’s net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
| |
|
(In thousands, except per share data) |
|
Compensation cost based on fair
value method, net of tax effect |
|
$ |
1,948 |
|
|
$ |
2,105 |
|
|
$ |
2,388 |
|
| |
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
107,441 |
|
|
$ |
95,218 |
|
|
$ |
95,063 |
|
Pro forma |
|
|
105,493 |
|
|
|
93,113 |
|
|
|
92,675 |
|
| |
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
3.33 |
|
|
$ |
2.99 |
|
|
$ |
2.89 |
|
Pro forma |
|
|
3.27 |
|
|
|
2.93 |
|
|
|
2.82 |
|
| |
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
3.27 |
|
|
$ |
2.93 |
|
|
$ |
2.85 |
|
Pro forma |
|
|
3.21 |
|
|
|
2.87 |
|
|
|
2.78 |
|
| |
SFAS 123 was revised in December, 2004 to require that, effective for periods beginning after
June 15, 2005, the Company begin using the fair market value method for valuing and accounting
for stock options. On April 14, 2005 the Securities and Exchange Commission announced the
adoption of SFAS 123R that amended the compliance dates, requiring implementation by companies
at the beginning of their next fiscal year. The Company expects to apply the new requirements in
2006 on a modified retrospective basis, in which prior period financial statements will be
adjusted to give effect to the fair-value-based method consistent with the above pro-forma
amounts. Management expects that the effect of implementation will be to increase annual
compensation expense in 2006 by approximately $2.9 million and decrease annual net income by
approximately $1.7 million.
Earnings Per Share. Basic earnings per share are computed by dividing net income by the average
number of shares outstanding during the year. Diluted earnings per share are computed by dividing
net income by the average number of shares outstanding during the year plus the impact of dilutive
common stock equivalents.
Extinguishment of Debt. Gains and losses, including fees, incurred in connection with the early
extinguishment of debt are charged to current earnings as reductions in noninterest income.
Other. Securities and other property held by the Bank in a fiduciary or agency capacity are not
included in the financial statements since such items are not assets of the Company or its
subsidiaries.
Note 2: Investment Securities
The amortized cost, unrealized gains and losses, and estimated market value of the available for
sale investment securities portfolio as of December 31, 2005, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
| |
|
(In thousands) |
|
Securities of U.S.
Government
sponsored entities |
|
$ |
341,259 |
|
|
$ |
6 |
|
|
|
($10,091 |
) |
|
$ |
331,174 |
|
Obligations of States
and
political
subdivisions |
|
|
214,297 |
|
|
|
8,251 |
|
|
|
(44 |
) |
|
|
222,504 |
|
Asset-backed securities |
|
|
11,306 |
|
|
|
0 |
|
|
|
(50 |
) |
|
|
11,256 |
|
Corporate bonds |
|
|
25,151 |
|
|
|
126 |
|
|
|
(147 |
) |
|
|
25,130 |
|
Other securities |
|
|
67,128 |
|
|
|
5,764 |
|
|
|
(568 |
) |
|
|
72,324 |
|
| |
Total |
|
$ |
659,141 |
|
|
$ |
14,147 |
|
|
|
($10,900 |
) |
|
$ |
662,388 |
|
| |
The amortized cost, unrealized gains and losses, and estimated market value of the held to
maturity investment securities portfolio as of December 31, 2005, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
| |
|
(In thousands) |
|
Securities of U.S.
Government
sponsored entities |
|
$ |
740,891 |
|
|
$ |
210 |
|
|
|
($15,430 |
) |
|
$ |
725,671 |
|
Obligations of States
and
political
subdivisions |
|
|
596,325 |
|
|
|
6,857 |
|
|
|
(5,071 |
) |
|
|
598,111 |
|
| |
Total |
|
$ |
1,337,216 |
|
|
$ |
7,067 |
|
|
|
($20,501 |
) |
|
$ |
1,323,782 |
|
| |
- 41 -
The amortized cost, unrealized gains and losses, and estimated market value of the available for
sale investment securities portfolio as of December 31, 2004, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
| |
|
(In thousands) |
|
Securities of U.S.
Government
sponsored entities |
|
$ |
562,842 |
|
|
$ |
783 |
|
|
|
($6,568 |
) |
|
|
557,057 |
|
Obligations of States
and
political
subdivisions |
|
|
234,123 |
|
|
|
13,622 |
|
|
|
(14 |
) |
|
|
247,731 |
|
Asset-backed securities |
|
|
3,256 |
|
|
|
1 |
|
|
|
0 |
|
|
|
3,257 |
|
Corporate bonds |
|
|
47,316 |
|
|
|
1,342 |
|
|
|
0 |
|
|
|
48,658 |
|
Other securities |
|
|
67,541 |
|
|
|
7,493 |
|
|
|
(27 |
) |
|
|
75,007 |
|
| |
Total |
|
$ |
915,078 |
|
|
$ |
23,241 |
|
|
|
($6,609 |
) |
|
$ |
931,710 |
|
| |
The amortized cost, unrealized gains and losses, and estimated market value of the held to
maturity investment securities portfolio as of December 31, 2004, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
| |
|
(In thousands) |
|
Securities of U.S.
Government
sponsored entities |
|
$ |
736,137 |
|
|
$ |
1,593 |
|
|
|
($4,627 |
) |
|
$ |
733,103 |
|
Obligations of States
and
political
subdivisions |
|
|
524,695 |
|
|
|
10,840 |
|
|
|
(2,652 |
) |
|
|
532,883 |
|
| |
Total |
|
$ |
1,260,832 |
|
|
$ |
12,433 |
|
|
|
($7,279 |
) |
|
$ |
1,265,986 |
|
| |
The amortized cost and estimated market value of securities at December 31, 2005, by contractual
maturity, are shown in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Securities Available |
|
|
Securities Held |
|
| |
|
For Sale |
|
|
to Maturity |
|
| |
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
| |
|
Amortized |
|
|
Market |
|
|
Amortized |
|
|
Market |
|
| |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
| |
|
| |
|
(In thousands) |
|
Maturity in years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year or less |
|
$ |
30,151 |
|
|
$ |
30,186 |
|
|
$ |
22,517 |
|
|
$ |
22,476 |
|
1 to 5 years |
|
|
177,747 |
|
|
|
174,192 |
|
|
|
233,207 |
|
|
|
230,024 |
|
5 to 10 years |
|
|
140,528 |
|
|
|
146,319 |
|
|
|
117,970 |
|
|
|
119,756 |
|
Over 10 years |
|
|
36,205 |
|
|
|
37,352 |
|
|
|
432,637 |
|
|
|
432,118 |
|
| |
| |
Subtotal |
|
|
384,631 |
|
|
|
388,049 |
|
|
|
806,331 |
|
|
|
804,374 |
|
Mortgage-backed |
|
|
207,382 |
|
|
|
202,015 |
|
|
|
530,885 |
|
|
|
519,408 |
|
Other securities |
|
|
67,128 |
|
|
|
72,324 |
|
|
|
0 |
|
|
|
0 |
|
| |
| |
Total |
|
$ |
659,141 |
|
|
$ |
662,388 |
|
|
$ |
1,337,216 |
|
|
$ |
1,323,782 |
|
| |
Expected maturities of mortgage-backed securities can differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call or prepayment
penalties. In addition, such factors as prepayments and interest rates may affect the yield on the
carrying value of mortgage-backed securities. At December 31, 2005 and 2004, the Company had no
high-risk collateralized mortgage obligations as defined by regulatory guidelines.
An analysis of gross unrealized losses of the available for sale investment securities portfolio
as of December 31, 2005, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
| |
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
| |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
| |
|
| |
|
(In thousands) |
|
Securities of U.S.
Government
sponsored entities |
|
$ |
80,651 |
|
|
|
($1,479 |
) |
|
$ |
249,547 |
|
|
|
($8,613 |
) |
|
$ |
330,198 |
|
|
|
($10,092 |
) |
Obligations of States
and
political
subdivisions |
|
|
3,205 |
|
|
|
(20 |
) |
|
|
2,708 |
|
|
|
(23 |
) |
|
|
5,913 |
|
|
|
(43 |
) |
Asset-backed securities |
|
|
9,948 |
|
|
|
(50 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
9,948 |
|
|
|
(50 |
) |
Corporate bonds |
|
|
4,857 |
|
|
|
(147 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
4,857 |
|
|
|
(147 |
) |
Other securities |
|
|
24,287 |
|
|
|
(568 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
24,287 |
|
|
|
(568 |
) |
| |
| |
Total |
|
|
122,948 |
|
|
|
(2,264 |
) |
|
|
252,255 |
|
|
|
(8,636 |
) |
|
|
375,203 |
|
|
|
(10,900 |
) |
| |
- 42 -
An analysis of gross unrealized losses of the held to maturity investment securities portfolio as
of December 31, 2005, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 months |
|
12 months or longer |
|
Total |
| |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
| |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
| |
|
(In thousands) |
|
|
|
|
|
|
|
|
Securities of U.S. Government
sponsored entities |
|
$ |
322,727 |
|
|
|
($4,679 |
) |
|
$ |
383,572 |
|
|
|
($10,751 |
) |
|
$ |
706,299 |
|
|
|
($15,430 |
) |
Obligations of States and
political subdivisions |
|
|
236,116 |
|
|
|
(2,969 |
) |
|
|
66,273 |
|
|
|
(2,102 |
) |
|
|
302,389 |
|
|
|
(5,071 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
558,843 |
|
|
|
(7,648 |
) |
|
|
449,845 |
|
|
|
(12,853 |
) |
|
|
1,008,688 |
|
|
|
(20,501 |
) |
| |
An analysis of gross unrealized losses of the available for sale investment securities portfolio
as of December 31, 2004, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 months |
|
12 months or longer |
|
Total |
| |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
| |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
| |
|
(In thousands) |
|
|
|
|
|
|
|
|
Securities of U.S. Government
sponsored entities |
|
$ |
418,488 |
|
|
|
($5,413 |
) |
|
$ |
20,058 |
|
|
|
($1,155 |
) |
|
$ |
438,546 |
|
|
|
($6,568 |
) |
Obligations of States and
political subdivisions |
|
|
703 |
|
|
|
(2 |
) |
|
|
2,015 |
|
|
|
(12 |
) |
|
|
2,718 |
|
|
|
(14 |
) |
Other securities |
|
|
1,974 |
|
|
|
(27 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
1,974 |
|
|
|
(27 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
421,165 |
|
|
|
(5,442 |
) |
|
|
22,073 |
|
|
|
(1,167 |
) |
|
|
443,238 |
|
|
|
(6,609 |
) |
| |
An analysis of gross unrealized losses of the held to maturity investment securities portfolio as
of December 31, 2004, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 months |
|
12 months or longer |
|
Total |
| |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
| |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
| |
|
(In thousands) |
|
|
|
|
|
|
|
|
Securities of U.S. Government
sponsored entities |
|
$ |
449,345 |
|
|
|
($4,010 |
) |
|
$ |
23,018 |
|
|
|
($617 |
) |
|
$ |
472,363 |
|
|
|
($4,627 |
) |
Obligations of States and
political subdivisions |
|
|
67,763 |
|
|
|
(548 |
) |
|
|
101,554 |
|
|
|
(2,104 |
) |
|
|
169,317 |
|
|
|
(2,652 |
) |
| |
Total |
|
|
517,108 |
|
|
|
(4,558 |
) |
|
|
124,572 |
|
|
|
(2,721 |
) |
|
|
641,680 |
|
|
|
(7,279 |
) |
| |
Substantially all of the securities set forth in the two preceding tables are investment-grade debt
securities which have experienced a decline in fair value due to changes in market interest rates,
not in estimated cash flows. Since the Company has the intent and ability to retain its investment
in these securities for a period of time to allow for any anticipated recovery in market value, no
other than temporary impairment was recorded on these securities during 2005.
In the fourth quarter of 2004, the Company recognized a $7.2 million securities impairment
writedown to market value of certain issues of Federal National Mortgage Association (“FNMA”) and
Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock held in the available for sale
investment portfolio. The writedown was recorded as a reduction to noninterest income. The
after-tax effect was $4.2 million, net of tax benefits of $3.0 million. At December 31, 2005, the
Company continued to hold FNMA and FHLMC preferred stock with a cost basis of $63.9 million and a
tax-equivalent dividend yield of 7.65%.
As of December 31, 2005, $842.3 million of investment securities were pledged to secure public
deposits and short-term funding needs, compared to $814.8 million in 2004. The Bank is a member of
the Federal Reserve Bank (“FRB”) and held Federal Reserve Bank stock stated at cost of $11.3
million at December 31, 2005 and $6.3 million at December 31, 2004.
Note 3: Loans and Allowance for Credit Losses
Loans at December 31 consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(In thousands) |
|
Commercial |
|
$ |
678,168 |
|
|
$ |
647,462 |
|
|
|
|
|
|
|
|
|
|
Real estate-commercial |
|
|
916,757 |
|
|
|
741,177 |
|
Real estate-construction |
|
|
72,095 |
|
|
|
29,724 |
|
Real estate-residential |
|
|
508,174 |
|
|
|
375,532 |
|
| |
Total real estate loans |
|
|
1,497,026 |
|
|
|
1,146,433 |
|
|
|
|
|
|
|
|
|
|
Installment and personal |
|
|
497,027 |
|
|
|
506,338 |
|
Unearned income |
|
|
0 |
|
|
|
(3 |
) |
| |
Gross loans |
|
|
2,672,221 |
|
|
|
2,300,230 |
|
Allowance for loan losses |
|
|
(55,849 |
) |
|
|
(54,152 |
) |
| |
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
2,616,372 |
|
|
$ |
2,246,078 |
|
| |
There were no loans originated for resale at December 31, 2005 and 2004.
- 43 -
The following summarizes the allowance for credit losses of the Company for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(In thousands) |
|
Balance at January 1, |
|
$ |
54,152 |
|
|
$ |
53,910 |
|
|
$ |
54,227 |
|
Provision for loan losses |
|
|
900 |
|
|
|
2,700 |
|
|
|
3,300 |
|
Loans charged off |
|
|
(2,738 |
) |
|
|
(5,593 |
) |
|
|
(6,833 |
) |
Recoveries of loans
previously charged off |
|
|
2,010 |
|
|
|
3,135 |
|
|
|
3,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
5,213 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
59,537 |
|
|
$ |
54,152 |
|
|
$ |
53,910 |
|
| |
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
55,849 |
|
|
$ |
54,152 |
|
|
$ |
53,910 |
|
Reserve for unfunded credit commitments (1) |
|
|
3,688 |
|
|
|
— |
|
|
|
— |
|
| |
Allowance for credit losses |
|
$ |
59,537 |
|
|
$ |
54,152 |
|
|
$ |
53,910 |
|
| |
(1) Effective December 31, 2005, the Company transferred the portion of the allowance for loan
losses related to lending commitments and letters of credit to other liabilities.
At December 31, specific impaired loans in 2005 were $117 thousand compared with none in 2004.
Total reserves allocated to these loans were $117 thousand for 2005 and none for 2004. For the year
ended December 31, 2005, the average recorded net investment in impaired loans was approximately
$29 thousand compared with $731 thousand and $1.8 million, for the years ended December 31, 2004
and 2003, respectively. In general, the Company does not recognize any interest income on troubled
debt restructuring or on loans that are classified as nonaccrual. The Company had no troubled debt
restructurings at December 31, 2005. For other impaired loans, interest income may be recorded as
cash is received, provided that the Company’s recorded investment in such loans is deemed
collectible.
Nonaccrual loans at December 31, 2005 and 2004 were $6.3 million and $7.0 million, respectively.
The following is a summary of the effect of nonaccrual loans on interest income for the years ended
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(In thousands) |
|
Interest income that would have been
recognized had the loans performed
in accordance with their original terms |
|
$ |
556 |
|
|
$ |
462 |
|
|
$ |
527 |
|
Less: Interest income recognized on
nonaccrual loans |
|
|
(353 |
) |
|
|
(439 |
) |
|
|
(592 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reduction (increase) of interest income |
|
$ |
203 |
|
|
$ |
23 |
|
|
($ |
65 |
) |
| |
There were no commitments to lend additional funds to borrowers whose loans are included above.
Note 4: Concentration of Credit Risk
The Company’s business activity is with customers in Northern and Central California. The loan
portfolio is well diversified, although the Company has significant credit arrangements that are
secured by real estate collateral. In addition to real estate loans outstanding as disclosed in
Note 3, the Company had loan commitments and standby letters of credit related to real estate loans
of $62.4 million and $30.6 million at December 31, 2005 and 2004, respectively. The Company
requires collateral on all real estate loans and generally attempts to maintain loan-to-value
ratios no greater than 75% on commercial real estate loans and no greater than 80% percent on
residential real estate loans unless covered by mortgage insurance.
Note 5: Premises and Equipment
Premises and equipment as of December 31 consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
Depreciation |
|
|
|
|
| |
|
|
|
|
|
and |
|
|
Net Book |
|
| |
|
Cost |
|
|
Amortization |
|
|
Value |
|
| |
|
(In thousands) |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
8,858 |
|
|
$ |
— |
|
|
$ |
8,858 |
|
Buildings and improvements |
|
|
33,640 |
|
|
|
(16,533 |
) |
|
|
17,107 |
|
Leasehold improvements |
|
|
5,599 |
|
|
|
(3,926 |
) |
|
|
1,673 |
|
Furniture and equipment |
|
|
14,166 |
|
|
|
(8,583 |
) |
|
|
5,583 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
62,263 |
|
|
($ |
29,042 |
) |
|
$ |
33,221 |
|
| |
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
8,834 |
|
|
$ |
— |
|
|
$ |
8,834 |
|
Buildings and improvements |
|
|
33,875 |
|
|
|
(15,340 |
) |
|
|
18,535 |
|
Leasehold improvements |
|
|
4,565 |
|
|
|
(2,840 |
) |
|
|
1,725 |
|
Furniture and equipment |
|
|
11,715 |
|
|
|
(5,586 |
) |
|
|
6,129 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58,989 |
|
|
($ |
23,766 |
) |
|
$ |
35,223 |
|
| |
Depreciation and amortization included in noninterest expense amounted to $4.1 million in 2005,
$3.9 million in 2004, and $4.0 million in 2003.
- 44 -
Note 6: Deposits and Borrowed Funds
Debt financing and notes payable, including the unsecured obligations of the Company, as of
December 31, 2005 and 2004, were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(In thousands) |
|
Senior note, issued by Westamerica
Bancorporation, originated in October 2003 and
maturing October 31, 2013. Interest of
5.31% per annum is payable semiannually on
April 30 and October 31, with original
principal payment due at maturity. |
|
$ |
15,000 |
|
|
$ |
15,000 |
|
|
|
|
|
|
|
|
|
|
Senior notes, issued by Westamerica Bancorporation,
originated in February 1996 and maturing February 1,
2006. Interest of 7.11% per annum is payable
semiannually on February 1 and August 1, with annual
principal payments commencing February 1, 2000 and
the remaining principal amount due at maturity. |
|
|
3,214 |
|
|
|
6,429 |
|
| |
|
|
Subtotal |
|
|
18,214 |
|
|
|
21,429 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt |
|
|
22,067 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total debt financing and notes payable |
|
$ |
40,281 |
|
|
$ |
21,429 |
|
| |
The senior notes are subject to financial covenants requiring the Company to maintain, at all
times, certain minimum levels of consolidated tangible net worth and maximum levels of capital
debt. The Company is in compliance with all of the covenants in the senior notes indenture as of
December 31, 2005.
On March 1, 2005 the Company assumed subordinated debt as described below from REBC. The debt was
originally established by Redwood Statutory Trust I (“RSTI”), a then wholly owned subsidiary of
REBC, which closed a pooled offering of 10,000 Capital Securities with a liquidation amount of
$1,000 per security on February 22, 2001. The proceeds of the offering were loaned to REBC in
exchange for junior subordinated debentures with terms similar to the RSTI Capital Securities. Upon
acquisition of REBC on March 1, 2005, RSTI became a wholly owned subsidiary of the Company. The
sole assets of RSTI are the junior subordinated debentures of the Company and payments thereunder.
The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full
and unconditional guarantee by the Company of the obligations of RSTI under the RSTI Capital
Securities. As of December 31, 2005, the outstanding principal balance of the RSTI Capital
Securities was $12 million including a premium applied in accounting for the REBC acquisition.
Distributions on the RSTI Capital Securities are payable semi-annually at the annual rate of 10.2%
and are included in interest expense, net of premium amortization, in the consolidated financial
statements. The junior subordinated debentures are subject to mandatory redemption, in whole or in
part, upon repayment of the RSTI Capital Securities at maturity or their earlier redemption at the
liquidation amount. Subject to the Company having received prior approval of the Federal Reserve
Board (“FRB”), if then required, the RSTI Capital Securities are redeemable prior to the maturity
date of February 22, 2031, at the option of the Company; on or after February 22, 2021 at par; on
or after February 22, 2011 at a premium; or upon occurrence of specific events defined within the
trust indenture. The Company has the option to defer distributions on the RSTI Capital Securities
from time to time for a period not to exceed 10 consecutive semi-annual periods.
The other portion of subordinated debt the Company assumed from REBC was originated on July 22,
2003, by Redwood Statutory Trust II (“RSTII”), a then wholly owned subsidiary of REBC, which closed
a financing of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The
proceeds of the financing were loaned to REBC in exchange for junior subordinated debentures with
terms similar to the RSTII Capital Securities. RSTII became a wholly owned subsidiary of the Company upon acquisition of REBC on March 1, 2005. The sole assets
of RSTII are the junior subordinated debentures of the Company and payments thereunder. The junior
subordinated debentures and the back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by the Company of the obligations of RSTII under the RSTII Capital
Securities. As of December 31, 2005, the outstanding principal balance of the RSTII Capital
Securities was $10 million including a premium applied in accounting for the REBC acquisition.
Distributions on the RSTII Capital Securities, which are payable quarterly at the annual rate of
6.35% for the first five years and then reset to the three month LIBOR plus 3.1% per annum, are
included in interest expense, net of premium amortization, in the consolidated financial
statements. The junior subordinated debentures are subject to mandatory redemption, in whole or in
part, upon repayment of the RSTII Capital Securities at maturity or their earlier redemption at the
liquidation amount. Subject to the Company having received prior approval of the FRB, if then
required, the RSTII Capital Securities are redeemable prior to the maturity date of July 22, 2033,
at the option of the Company; on or after July 22, 2008 at par; or upon occurrence of specific
events set forth in the trust indenture. The Company has the option to defer distributions on the
RSTII Capital Securities from time to time for a period not to exceed 10 consecutive semi-annual
periods.
- 45 -
Short-term borrowed funds include federal funds purchased, business customers’ sweep accounts,
outstanding amounts under a $35 million unsecured line of credit, and securities sold with
repurchase agreements which are held in the custody of independent securities brokers. Interest
paid on time deposits with balances in excess of $100 thousand was $11.6 million in 2005 and $4.5
million in 2004. The following table summarizes deposits and borrowed funds of the Company for the
periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
| |
|
Balance |
|
|
|
|
|
Weighted |
|
Balance |
|
|
|
|
|
Weighted |
| |
|
At |
|
Average |
|
Average |
|
At |
|
Average |
|
Average |
| |
|
December 31, |
|
Balance |
|
Rate |
|
December 31, |
|
Balance |
|
Rate |
| |
|
(In thousands) |
|
|
|
|
|
(In thousands) |
|
|
|
|
Federal funds purchased |
|
$ |
575,925 |
|
|
$ |
550,523 |
|
|
|
3.24 |
% |
|
$ |
568,275 |
|
|
$ |
360,771 |
|
|
|
1.38 |
% |
Sweep accounts |
|
|
158,153 |
|
|
|
140,362 |
|
|
|
0.25 |
|
|
|
163,439 |
|
|
|
152,299 |
|
|
|
0.31 |
|
Securities sold
under repurchase agreements |
|
|
26,825 |
|
|
|
13,429 |
|
|
|
2.30 |
|
|
|
3,709 |
|
|
|
42,820 |
|
|
|
0.95 |
|
Line of credit |
|
|
14,270 |
|
|
|
12,670 |
|
|
|
3.50 |
|
|
|
0 |
|
|
|
526 |
|
|
|
2.72 |
|
FHLB advances |
|
|
0 |
|
|
|
0 |
|
|
|
— |
|
|
|
0 |
|
|
|
24,153 |
|
|
|
3.65 |
|
Time deposits
Over $100 thousand |
|
|
486,069 |
|
|
|
444,862 |
|
|
|
2.58 |
|
|
|
365,299 |
|
|
|
350,400 |
|
|
|
1.27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Note 7: Shareholders’ Equity
In 1995, the Company adopted the 1995 Stock Option Plan, which was amended and restated in 2003.
Stock appreciation rights, restricted performance shares, incentive stock options and non-qualified
stock options are available under this plan. Under the terms of the plan, on January 1 of each year
beginning in 1995, 2% of the Company’s issued and outstanding shares of common stock will be added
to the number of shares available for granting. At December 31, 2005, 2004, and 2003, approximately
1.8 million, 1.7 million and 1.6 million shares, respectively, were available for issuance. Options
are granted with an exercise price equal to the fair market value of the related common stock and
are generally 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 (“RPS”) grant becomes vested after three years of being
awarded, provided that the Company has attained its performance goals for such three-year period.
Under the Stock Option Plan adopted by the Company in 1985, 2.3 million shares were reserved for
issuance. Stock appreciation rights, incentive stock options and non-qualified stock options are
available under this plan. Options are granted with an exercise price equal to fair market value of
the related common stock and are generally exercisable in equal annual installments over a
three-year period with each installment vesting on the anniversary date of the grant. Each
incentive stock option has a maximum ten-year term. The 1985 plan was amended in 1990 to provide
for RPS grants. An RPS grant becomes fully vested after three years of being awarded, provided that
the Company has attained its performance goals for such three-year period.
Separate stock option plans maintained by acquired companies were terminated following the effective dates of the mergers. All
outstanding options were substituted for the Company’s options, adjusted for the exchange ratios as
defined in the merger agreements.
Stock Options. A summary of the status of the Company’s stock options as of December 31, 2005,
2004 and 2003, and changes during the years ended on those dates, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
Number |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
| |
|
of shares |
|
|
Price |
|
|
of shares |
|
|
Price |
|
| |
Outstanding at beginning of year |
|
|
3,057,530 |
|
|
$ |
36 |
|
|
|
2,972,517 |
|
|
$ |
33 |
|
Granted |
|
|
559,700 |
|
|
|
53 |
|
|
|
539,780 |
|
|
|
50 |
|
Acquisitions converted |
|
|
175,142 |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(374,317 |
) |
|
|
26 |
|
|
|
(398,877 |
) |
|
|
32 |
|
Forfeited |
|
|
(148,969 |
) |
|
|
51 |
|
|
|
(55,890 |
) |
|
|
42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
3,269,086 |
|
|
$ |
39 |
|
|
|
3,057,530 |
|
|
$ |
36 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year |
|
|
2,301,139 |
|
|
$ |
35 |
|
|
|
1,998,611 |
|
|
$ |
32 |
|
| |
- 46 -
| |
|
|
|
|
|
|
|
|
| |
|
2003 |
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number |
|
|
Exercise |
|
| |
|
of shares |
|
|
Price |
|
| |
Outstanding at beginning of year |
|
|
2,812,127 |
|
|
$ |
30 |
|
Granted |
|
|
577,880 |
|
|
|
41 |
|
Acquisitions converted |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(417,112 |
) |
|
|
20 |
|
Forfeited |
|
|
(378 |
) |
|
|
56 |
|
| |
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
2,972,517 |
|
|
$ |
33 |
|
| |
|
|
|
|
|
|
|
|
|
Options exercisable at end of year |
|
|
1,900,330 |
|
|
$ |
30 |
|
| |
The following table summarizes information about options outstanding at December
31, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2005 |
|
Options Outstanding |
|
|
|
|
|
Options Exercisable |
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
Weighted |
| Range of |
|
Number |
|
Remaining |
|
Average |
|
Number |
|
Average |
| Exercise |
|
Outstanding |
|
Contractual |
|
Exercise |
|
Exercisable |
|
Exercise |
| Price |
|
at 12/31/2005 |
|
Life (yrs) |
|
Price |
|
at 12/31/2005 |
|
Price |
| |
$ 10 – 15
|
|
|
17,103 |
|
|
|
2.0 |
|
|
$ |
12 |
|
|
|
17,103 |
|
|
$ |
12 |
|
15 – 19
|
|
|
6,863 |
|
|
|
2.4 |
|
|
|
17 |
|
|
|
6,863 |
|
|
|
17 |
|
19 – 20
|
|
|
116,800 |
|
|
|
1.1 |
|
|
|
19 |
|
|
|
116,800 |
|
|
|
19 |
|
20 – 24
|
|
|
417,039 |
|
|
|
4.1 |
|
|
|
24 |
|
|
|
417,039 |
|
|
|
24 |
|
32 – 33
|
|
|
244,650 |
|
|
|
2.1 |
|
|
|
33 |
|
|
|
244,650 |
|
|
|
33 |
|
33 – 35
|
|
|
301,130 |
|
|
|
3.1 |
|
|
|
35 |
|
|
|
301,130 |
|
|
|
35 |
|
35 – 40
|
|
|
720,256 |
|
|
|
5.6 |
|
|
|
39 |
|
|
|
720,256 |
|
|
|
39 |
|
40 – 45
|
|
|
487,573 |
|
|
|
7.0 |
|
|
|
41 |
|
|
|
318,895 |
|
|
|
41 |
|
45 – 50
|
|
|
469,772 |
|
|
|
8.0 |
|
|
|
50 |
|
|
|
158,403 |
|
|
|
50 |
|
50 – 55
|
|
|
487,900 |
|
|
|
9.0 |
|
|
|
53 |
|
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 10 – 55
|
|
|
3,269,086 |
|
|
|
5.8 |
|
|
$ |
39 |
|
|
|
2,301,139 |
|
|
$ |
35 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2004 |
|
Options Outstanding |
|
|
|
|
|
Options Exercisable |
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
Weighted |
| Range of |
|
Number |
|
Remaining |
|
Average |
|
Number |
|
Average |
| Exercise |
|
Outstanding |
|
Contractual |
|
Exercise |
|
Exercisable |
|
Exercise |
| Price |
|
at 12/31/2004 |
|
Life (yrs) |
|
Price |
|
at 12/31/2004 |
|
Price |
| |
$ 10 – 15
|
|
|
11,237 |
|
|
|
3.3 |
|
|
$ |
13 |
|
|
|
11,237 |
|
|
$ |
13 |
|
15 – 19
|
|
|
79,650 |
|
|
|
1.1 |
|
|
|
15 |
|
|
|
79,650 |
|
|
|
15 |
|
19 – 20
|
|
|
132,150 |
|
|
|
2.1 |
|
|
|
19 |
|
|
|
132,150 |
|
|
|
19 |
|
20 – 24
|
|
|
429,196 |
|
|
|
5.1 |
|
|
|
24 |
|
|
|
429,196 |
|
|
|
24 |
|
32 – 33
|
|
|
257,760 |
|
|
|
3.1 |
|
|
|
33 |
|
|
|
257,760 |
|
|
|
33 |
|
33 – 35
|
|
|
336,120 |
|
|
|
4.1 |
|
|
|
35 |
|
|
|
336,120 |
|
|
|
35 |
|
35 – 40
|
|
|
763,939 |
|
|
|
6.6 |
|
|
|
39 |
|
|
|
591,960 |
|
|
|
39 |
|
40 – 45
|
|
|
780,988 |
|
|
|
8.4 |
|
|
|
44 |
|
|
|
160,538 |
|
|
|
41 |
|
45 – 50
|
|
|
266,490 |
|
|
|
9.1 |
|
|
|
50 |
|
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10 – 55
|
|
|
3,057,530 |
|
|
|
6.1 |
|
|
$ |
36 |
|
|
|
1,998,611 |
|
|
$ |
32 |
|
| |
- 47 -
Restricted Performance Shares. A summary of the status of the Company’s RPSs as of December 31,
2005, 2004, and 2003, and changes during the years ended on those dates, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
| |
Outstanding at beginning of year |
|
|
57,750 |
|
|
|
53,900 |
|
|
|
57,550 |
|
Granted |
|
|
20,740 |
|
|
|
19,610 |
|
|
|
20,720 |
|
Exercised |
|
|
(20,637 |
) |
|
|
(15,760 |
) |
|
|
(24,370 |
) |
Forfeited |
|
|
(14,271 |
) |
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
43,582 |
|
|
|
57,750 |
|
|
|
53,900 |
|
| |
As of December 31, 2005, 2004, and 2003, the RPSs had a weighted-average
contractual life of 1.2, 1.3, and 1.3 years, respectively. The compensation cost
that was charged against income for the Company’s RPSs granted was $525
thousand, $1.2 million, and $1.8 million for 2005, 2004, and 2003, respectively.
There were no stock appreciation rights or incentive stock options granted in 2005,
2004, and 2003.
No compensation cost has been recognized for stock options. However, the fair value of each
non-qualified stock option grant is estimated on the date of the grant using an option pricing
model with the following assumptions used for calculating weighted-average non-qualified stock
option grants in 2005, 2004, and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
| |
Expected dividend yield |
|
|
2.47 |
% |
|
|
2.25 |
% |
|
|
2.46 |
% |
Expected volatility |
|
|
15 |
|
|
|
15 |
|
|
|
17 |
|
Risk-free interest rate |
|
|
3.91 |
% |
|
|
3.41 |
% |
|
|
3.30 |
% |
Expected lives |
|
7.0 years |
|
7.0 years |
|
7.0 years |
| |
The weighted-average grant date fair values of non-qualified stock options granted
during 2005, 2004, and 2003, were $6.61, $6.93, and $5.79, respectively.
A reconciliation of the number of shares used in the basic EPS computation to the amounts used in
the diluted EPS computation for the years ended December 31, is as follows:
2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Net |
|
|
|
Number |
|
|
|
Per Share |
|
| |
|
|
Income |
|
|
|
of Shares |
|
|
|
Amount |
|
| |
| |
|
(In thousands, except per share data) |
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders |
|
$ |
107,441 |
|
|
|
32,291 |
|
|
$ |
3.33 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
— |
|
|
|
606 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders plus assumed
conversions |
|
$ |
107,441 |
|
|
|
32,897 |
|
|
$ |
3.27 |
|
2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Net |
|
|
|
Number |
|
|
|
Per Share |
|
| |
|
|
Income |
|
|
|
of Shares |
|
|
|
Amount |
|
| |
| |
|
(In thousands, except per share data) |
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders |
|
$ |
95,218 |
|
|
|
31,821 |
|
|
$ |
2.99 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
— |
|
|
|
640 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders plus assumed
conversions |
|
$ |
95,218 |
|
|
|
32,461 |
|
|
$ |
2.93 |
|
- 48 -
2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Net |
|
|
Number |
|
Per Share |
| |
|
Income |
|
of Shares |
|
|
Amount |
|
| |
| |
|
(In thousands, except per share data) |
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders |
|
$ |
95,063 |
|
|
|
32,849 |
|
|
$ |
2.89 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
— |
|
|
|
520 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders plus assumed
conversions |
|
$ |
95,063 |
|
|
|
33,369 |
|
|
$ |
2.85 |
|
Shareholders have authorized two additional classes of stock of one million shares each, to be
denominated “Class B Common Stock” and “Preferred Stock,” respectively, in addition to the 150
million shares of common stock presently authorized. At December 31, 2005, no shares of Class B
Common Stock or Preferred Stock had been issued.
In December 1986, the Company declared a dividend distribution of one common share purchase right
(the “Right”) for each outstanding share of common stock. The Rights, which have been amended and
restated in 1989, 1992, 1995, 1999 and 2004, are exercisable only in the event of an acquisition
of, or announcement of a tender offer to acquire, 10 percent or more of the Company’s stock
without the prior consent of the Board of Directors. If the Rights become exercisable, the holder
may purchase one share of the Company’s common stock for $110.00, subject to adjustment. In the
event a person or a group has acquired, or obtained the right to acquire, beneficial ownership of
securities having 10 percent or more of the voting power of all outstanding voting power of the
Company, proper provision shall be made so that each holder of a Right will, for a 60-day period
thereafter, have the right to receive upon exercise that number of shares of common stock having a
market value of two times the exercise price of the Right, to the extent available, and then a
common stock equivalent having a market value of two times the exercise price of the Right. Under
certain circumstances, the Rights may be redeemed by the Company at $.001 per Right prior to
becoming exercisable and in certain circumstances thereafter. The Rights will expire on the
earliest of (i) December 31, 2009, (ii) consummation of a merger transaction meeting certain
characteristics or (iii) redemption of the Rights by the Company.
Note
8: Risk-Based Capital
The Company and the Bank are subject to various regulatory capital adequacy requirements
administered by federal and state agencies. The Federal Deposit Insurance Corporation Improvement
Act of 1991 (“FDICIA”) required that regulatory agencies adopt regulations defining five capital
tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can
initiate discretionary actions by regulators that, if undertaken, could have a direct, material
effect on the Company’s financial statements. Quantitative measures, established by the regulators
to ensure capital adequacy, require that the Company and the Bank maintain minimum ratios of
capital to risk-weighted assets. There are two categories of capital under the guidelines. Tier 1
capital includes common shareholders’ equity and qualifying preferred stock less goodwill and
other deductions including the unrealized net gains and losses, after taxes, of available for sale
securities. Tier 2 capital includes preferred stock not qualifying for Tier 1 capital, mandatory
convertible debt, subordinated debt, certain unsecured senior debt issued by the Company and the
allowance for loan losses, subject to limitations by the guidelines. Under the guidelines, capital
is compared to the relative risk of the balance sheet, derived from applying one of four risk
weights (0%, 20%, 50% and 100%) to various categories of balance sheet assets and unfunded
commitments to extend credit, primarily based on the credit risk of the counterparty. The capital
amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors.
As of December 31, 2005, the Company and the Bank met all capital adequacy requirements to which
they are subject.
The most recent notification from the Federal Reserve Board categorized the Company and the Bank
as well capitalized under the FDICIA regulatory framework for prompt corrective action. To be well
capitalized, the institution must maintain a total risk-based capital ratio as set forth in the
following table and not be subject to a capital directive order. Since that notification, there
are no conditions or events that Management believes have changed the risk-based capital category
of the Company or the Bank.
- 49 -
The following table shows capital ratios for the Company and the Bank as of December 31, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the FDICIA |
| |
|
|
|
|
|
|
|
|
|
For Capital |
|
Prompt Corrective |
| December 31, 2005 |
|
|
|
|
|
|
|
|
|
Adequacy Purposes |
|
Action Provisions |
| |
| |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |
| |
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Company |
|
$ |
339,881 |
|
|
|
10.40 |
% |
|
$ |
261,378 |
|
|
|
8.00 |
% |
|
$ |
326,723 |
|
|
|
10.00 |
% |
Westamerica Bank |
|
|
351,842 |
|
|
|
10.88 |
% |
|
|
258,708 |
|
|
|
8.00 |
% |
|
|
323,385 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Company |
|
|
296,746 |
|
|
|
9.08 |
% |
|
|
130,689 |
|
|
|
4.00 |
% |
|
|
196,034 |
|
|
|
6.00 |
% |
Westamerica Bank |
|
|
305,138 |
|
|
|
9.44 |
% |
|
|
129,354 |
|
|
|
4.00 |
% |
|
|
194,031 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Company |
|
|
296,746 |
|
|
|
6.01 |
% |
|
|
197,640 |
|
|
|
4.00 |
% |
|
|
247,050 |
|
|
|
5.00 |
% |
Westamerica Bank |
|
|
305,138 |
|
|
|
6.22 |
% |
|
|
196,368 |
|
|
|
4.00 |
% |
|
|
245,460 |
|
|
|
5.00 |
% |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the FDICIA |
| |
|
|
|
|
|
|
|
|
|
For Capital |
|
Prompt Corrective |
| December 31, 2004 |
|
|
|
|
|
|
|
|
|
Adequacy Purposes |
|
Action Provisions |
| |
| |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |
| |
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Company |
|
$ |
367,333 |
|
|
|
12.46 |
% |
|
$ |
235,904 |
|
|
|
8.00 |
% |
|
$ |
294,880 |
|
|
|
10.00 |
% |
Westamerica Bank |
|
|
330,288 |
|
|
|
11.32 |
% |
|
|
233,380 |
|
|
|
8.00 |
% |
|
|
291,725 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Company |
|
|
327,070 |
|
|
|
11.09 |
% |
|
|
117,952 |
|
|
|
4.00 |
% |
|
|
176,928 |
|
|
|
6.00 |
% |
Westamerica Bank |
|
|
287,497 |
|
|
|
9.86 |
% |
|
|
116,690 |
|
|
|
4.00 |
% |
|
|
175,035 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Company |
|
|
327,070 |
|
|
|
7.06 |
% |
|
|
185,282 |
|
|
|
4.00 |
% |
|
|
231,602 |
|
|
|
5.00 |
% |
Westamerica Bank |
|
|
287,497 |
|
|
|
6.25 |
% |
|
|
184,039 |
|
|
|
4.00 |
% |
|
|
230,049 |
|
|
|
5.00 |
% |
| |
| |
|
|
| * |
|
The leverage ratio consists of Tier 1 capital divided by quarterly average assets excluding
certain intangible assets. The minimum leverage ratio guideline is 3.00% for banking organizations
that do not anticipate significant growth and that have well-diversified risk, excellent asset
quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking
organizations. |
Note
9: Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributable to
differences between the amounts reported in the financial statements of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. Amounts for the current year are based upon estimates and assumptions as of the date of
these financial statements and could vary significantly from amounts shown on the tax returns as
filed.
The components of the net deferred tax asset as of December 31 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
2005 |
|
|
|
2004 |
|
| |
| |
|
(In thousands) |
Deferred tax asset |
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
25,033 |
|
|
$ |
22,737 |
|
State franchise taxes |
|
|
4,964 |
|
|
|
4,700 |
|
Deferred compensation |
|
|
8,354 |
|
|
|
7,649 |
|
Net operating loss carryforwards |
|
|
0 |
|
|
|
29 |
|
Interest on nonaccrual loans |
|
|
147 |
|
|
|
68 |
|
Post retirement benefits |
|
|
1,443 |
|
|
|
1,299 |
|
Other reserves |
|
|
820 |
|
|
|
516 |
|
Impaired asset writedown |
|
|
3,019 |
|
|
|
3,019 |
|
Other |
|
|
1,401 |
|
|
|
206 |
|
| |
|
|
|
|
|
|
|
|
|
Subtotal deferred tax asset |
|
|
45,181 |
|
|
|
40,223 |
|
Valuation allowance |
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
|
45,181 |
|
|
|
40,223 |
|
| |
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
|
|
|
|
|
|
Net deferred loan costs |
|
|
195 |
|
|
|
306 |
|
Fixed assets |
|
|
484 |
|
|
|
496 |
|
Intangible assets |
|
|
11,047 |
|
|
|
928 |
|
Securities available for sale |
|
|
1,365 |
|
|
|
6,993 |
|
Leases |
|
|
531 |
|
|
|
1,422 |
|
Other |
|
|
417 |
|
|
|
398 |
|
| |
|
|
|
|
|
|
|
|
|
Total deferred tax liability |
|
|
14,039 |
|
|
|
10,543 |
|
| |
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
31,142 |
|
|
$ |
29,680 |
|
| |
Based on Management’s judgment, a valuation allowance is not needed to reduce the gross deferred
tax asset because it is more likely than not that the gross deferred tax asset will be realized
through recoverable taxes or future taxable income. Net deferred tax assets are included with
- 50 -
Interest Receivable and Other Assets in the Consolidated Balance Sheets.
The provision for federal and state income taxes consists of amounts currently payable and amounts
deferred which, for the years ended December 31, are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
| |
| |
|
(In thousands) |
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
28,604 |
|
|
$ |
28,619 |
|
|
$ |
26,182 |
|
State |
|
|
13,358 |
|
|
|
14,191 |
|
|
|
13,517 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
41,962 |
|
|
|
42,810 |
|
|
|
39,699 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax (benefit) expense: |
|
|
|
|
|
|
|
|
Federal |
|
|
(1,058 |
) |
|
|
(4,526 |
) |
|
|
(542 |
) |
State |
|
|
(413 |
) |
|
|
(1,139 |
) |
|
|
(11 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
(1,471 |
) |
|
|
(5,665 |
) |
|
|
(553 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
40,491 |
|
|
$ |
37,145 |
|
|
$ |
39,146 |
|
| |
The provision for income taxes differs from the provision computed by applying the statutory
federal income tax rate of 35% to income before taxes, as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
| |
| |
|
(In thousands) |
Federal income taxes
due at statutory rate |
|
$ |
51,776 |
|
|
$ |
46,327 |
|
|
$ |
46,973 |
|
(Reductions) increases in income
taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on state and municipal
securities not taxable for federal
income tax
purposes |
|
|
(15,282 |
) |
|
|
(13,981 |
) |
|
|
(12,921 |
) |
State franchise taxes, net of
federal
income tax
benefit |
|
|
8,414 |
|
|
|
8,483 |
|
|
|
8,779 |
|
Costs related to
acquisitions |
|
|
70 |
|
|
|
49 |
|
|
|
— |
|
Low income
housing tax
credits |
|
|
(2,299 |
) |
|
|
(1,925 |
) |
|
|
(1,749 |
) |
Other |
|
|
(2,188 |
) |
|
|
(1,808 |
) |
|
|
(1,936 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes |
|
$ |
40,491 |
|
|
$ |
37,145 |
|
|
$ |
39,146 |
|
| |
At December 31, 2005, the company had no net operating loss and general tax credit
carryforwards for tax return purposes.
- 51 -
Note 10: Fair Value of Financial Instruments
The fair values presented represent the Company’s best estimate of fair value using the
methodologies discussed below. The fair values of financial instruments which have a relatively
short period of time between their origination and their expected realization were valued using
historical cost. The values assigned do not necessarily represent amounts which ultimately may be
realized. In addition, these values do not give effect to discounts to fair value which may occur
when financial instruments are sold in larger quantities. Such financial instruments and their
estimated fair values at December 31 were:
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
| |
|
(In thousands) |
Cash and cash equivalents |
|
$ |
209,273 |
|
|
$ |
126,153 |
|
Money market assets |
|
|
534 |
|
|
|
534 |
|
Interest and taxes receivable |
|
|
60,733 |
|
|
|
60,437 |
|
Noninterest bearing and interest-bearing
transaction and savings deposits |
|
|
3,100,625 |
|
|
|
2,957,399 |
|
Short-term borrowed funds |
|
|
775,173 |
|
|
|
735,423 |
|
Interest payable |
|
|
4,793 |
|
|
|
2,117 |
|
| |
The fair values at December 31 of the following financial instruments were estimated using quoted
market prices:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
| |
|
Book Value |
|
Fair Value |
|
Book Value |
|
Fair Value |
| |
|
(In thousands) |
Investment securities available for sale |
|
$ |
662,388 |
|
|
$ |
662,388 |
|
|
$ |
931,710 |
|
|
$ |
931,710 |
|
Investment securities held to maturity |
|
|
1,337,216 |
|
|
|
1,323,782 |
|
|
|
1,260,832 |
|
|
|
1,265,986 |
|
| |
Loans were separated into two groups for valuation. Variable rate loans, except for those
described below, which reprice frequently with changes in market rates were valued using
historical cost. Fixed rate loans and variable rate loans that have reached their maximum
contractual interest rates were valued by discounting the future cash flows expected to be
received from the loans using current interest rates charged on loans with similar
characteristics. Additionally, the $55.8 million allowance for loan losses in 2005 and $54.2
million in 2004 were applied against the estimated fair values to recognize estimated future
defaults of contractual cash flows. The book values and the estimated fair values of loans at
December 31 were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
| |
|
Book Value |
|
Fair Value |
|
Book Value |
|
Fair Value |
| |
|
(In thousands) |
Loans |
|
$ |
2,616,372 |
|
|
$ |
2,597,931 |
|
|
$ |
2,246,078 |
|
|
$ |
2,253,939 |
|
| |
The fair values of time deposits and notes payable were estimated by discounting future cash flows
related to these financial instruments using current market rates for financial instruments with
similar characteristics. The book values and the estimated fair values at December 31 were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
| |
|
Book Value |
|
Fair Value |
|
Book Value |
|
Fair Value |
| |
|
(In thousands) |
Time deposits |
|
$ |
745,476 |
|
|
$ |
741,127 |
|
|
$ |
626,220 |
|
|
$ |
626,737 |
|
Senior notes payable |
|
|
18,214 |
|
|
|
17,089 |
|
|
|
21,429 |
|
|
|
21,927 |
|
Subordinated notes |
|
|
22,067 |
|
|
|
21,485 |
|
|
|
— |
|
|
|
— |
|
| |
The majority of the Company’s standby letters of credit and other commitments to extend credit
carry current market interest rates if converted to loans. No premium or discount was ascribed to
these commitments because virtually all funding would be at current market rates.
Note 11: Lease Commitments
Twenty-eight banking offices and a centralized administrative service center are owned and
sixty-nine facilities are leased. Substantially all the leases contain multiple renewal options and
provisions for rental increases, principally for cost of living index, property taxes and
maintenance. The Company also leases certain pieces of equipment.
Minimum future rental payments, net of sublease income, at December 31, 2005, are as follows:
| |
|
|
|
|
| |
|
(In thousands) |
2006 |
|
$ |
5,906 |
|
2007 |
|
|
5,023 |
|
2008 |
|
|
4,215 |
|
2009 |
|
|
3,387 |
|
2010 |
|
|
2,938 |
|
Thereafter |
|
|
9,506 |
|
| |
|
|
|
|
|
Total minimum lease payments |
|
$ |
30,975 |
|
| |
Total rentals for premises and equipment, net of sublease income, included in noninterest expense
were $5.1 million in 2005, $4.8 million in 2004 and $4.5 million in 2003.
Note 12: Commitments and Contingent Liabilities
Loan commitments are agreements to lend to a customer provided there is no violation of any
condition established in the agreement. Commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future funding requirements. Loan
commitments are subject to the Company’s normal credit policies and collateral requirements.
Unfunded loan commitments were $491.1 million and $410.0 million at December 31, 2005 and 2004,
respectively. Standby letters of credit commit the Company to make payments on behalf of customers
when certain specified future events occur. Standby letters of credit are primarily issued to
support customers’ short-term financing requirements and must meet the Company’s normal credit
policies and collateral requirements. Standby letters of credit outstanding totaled $30.1 million and
$22.5 million at December 31, 2005 and 2004, respectively.
Due to the nature of its business, the Company is subject to various threatened or filed legal
cases. Based on the advice of legal counsel, the Company does not expect such cases will have a
material, adverse effect on its financial position or results of operations.
Note 13: Retirement Benefit Plans
The Company sponsors a defined contribution Deferred Profit-Sharing Plan covering substantially
all of its salaried employees with one or more years of service. Eligible employees become vested in
account balances subject to a five-year cliff vesting schedule. Company contributions charged to
noninterest expense were $1.6 million in 2005, 2004 and 2003.
In addition to the Deferred Profit-Sharing Plan, all salaried employees are eligible to
participate in the Tax Deferred Savings/Retirement Plan (ESOP) upon completion of a 90-day
introductory period. The Tax Deferred Savings/ Retirement Plan (ESOP) allows employees to defer,
on a pretax basis, a portion of their salaries as contributions to this Plan. Participants may
invest in several funds, including one fund that invests exclusively in Westamerica Bancorporation
common stock. The matching contributions by the Company vest immediately; such contributions
charged to compensation expense were $1.5 million in 2005, 2004 and 2003.
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. The Company pays a
portion of these early retirees’ insurance premiums which are determined at their date of
retirement. The Company had also reimbursed Medicare Part B premiums for all qualifying retirees
over age 65 and their spouses. In 2004 the Company started to reimburse 50 percent of Medicare
Part B premiums for all retirees and spouses over age 65. The Company uses an actuarial-based
accrual method of accounting for post-retirement benefits. The Company uses a September 30
measurement date for determining post-retirement benefit calculations.
The following table sets forth the net periodic post-retirement benefit cost for the years ended
December 31 and the funded status of the post-retirement benefit plan and the change in the
benefit obligation as of December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
Service cost |
|
$ |
189 |
|
|
$ |
190 |
|
|
$ |
243 |
|
Interest cost |
|
|
211 |
|
|
|
196 |
|
|
|
181 |
|
Amortization of unrecognized
transition obligation |
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
| |
Net periodic cost |
|
$ |
461 |
|
|
$ |
447 |
|
|
$ |
485 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
4,016 |
|
|
$ |
3,736 |
|
|
$ |
3,455 |
|
Service cost |
|
|
189 |
|
|
|
190 |
|
|
|
243 |
|
Interest cost |
|
|
211 |
|
|
|
196 |
|
|
|
181 |
|
Benefits paid |
|
|
(119 |
) |
|
|
(106 |
) |
|
|
(143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at end of year |
|
$ |
4,297 |
|
|
$ |
4,016 |
|
|
$ |
3,736 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated post retirement benefit
obligation attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
Retirees |
|
$ |
2,933 |
|
|
$ |
2,686 |
|
|
$ |
2,536 |
|
Fully eligible participants |
|
|
1,116 |
|
|
|
1,067 |
|
|
|
931 |
|
Other |
|
|
248 |
|
|
|
263 |
|
|
|
269 |
|
| |
Total |
|
$ |
4,297 |
|
|
$ |
4,016 |
|
|
$ |
3,736 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated post retirement benefit
obligation in excess of plan assets |
|
$ |
4,297 |
|
|
$ |
4,016 |
|
|
$ |
3,736 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprised of: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized transition obligation |
|
$ |
734 |
|
|
$ |
795 |
|
|
$ |
857 |
|
Recognized post-retirement obligation |
|
|
3,563 |
|
|
|
3,221 |
|
|
|
2,879 |
|
| |
Total |
|
$ |
4,297 |
|
|
$ |
4,016 |
|
|
$ |
3,736 |
|
| |
Additional Information
Assumptions
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
| |
Weighted-average assumptions used to
determine benefit obligations and net periodic
benefit cost at December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.50 |
% |
|
|
5.25 |
% |
|
|
5.25 |
% |
The above discount rate is based on the Corporate A 10-year bond rate, the term of which
approximates the term of the benefit obligations. The Company reserves the right to terminate or
alter post-employment health benefits, which is considered in estimating the increase in the cost
of providing such benefits. The assumed annual average rate of inflation used to measure the
expected cost of benefits covered by the plan was 6.50 percent for 2006 and beyond.
Assumed benefit inflation rates have a significant effect on the amounts reported for health care
plans. A one percentage point change in the assumed benefit inflation rate would have the
following effect on 2005 results:
| |
|
|
|
|
|
|
|
|
| |
|
One Percentage |
|
One Percentage |
| (in thousands) |
|
Point Increase |
|
Point Decrease |
| |
Effect on total service and
and interest cost components |
|
$ |
216 |
|
|
|
($180 |
) |
|
|
|
|
|
|
|
|
|
Effect on post-retirement
benefit obligation |
|
|
653 |
|
|
|
(651 |
) |
Note 14: Related Party Transactions
Certain directors and executive officers of the Company and/or its subsidiaries were loan
customers of the Bank during 2005 and 2004. All such loans were made in the ordinary course of
business on normal credit terms, including interest rate and collateral requirements. In the
opinion of Management, these credit transactions did not involve, at the time they were
contracted, more than the normal risk of collectibility or present other unfavorable features. The
table below reflects information concerning loans to certain directors and executive officers
and/or family members during 2005 and 2004:
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
| |
|
(In thousands) |
Beginning balance |
|
$ |
2,332 |
|
|
$ |
2,331 |
|
Originations |
|
|
0 |
|
|
|
55 |
|
Payoffs/principal payments |
|
|
(51 |
) |
|
|
(54 |
) |
Other changes* |
|
|
(947 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
At December 31, |
|
$ |
1,334 |
|
|
$ |
2,332 |
|
| |
| |
Percent of total loans outstanding |
|
|
0.05 |
% |
|
|
0.10 |
% |
|
|
|
| * |
|
Other changes in 2005 include loans to former directors and executive officers who are no longer
related parties. |
Note 15: Regulatory Matters
Payment of dividends to the Company by the Bank is limited under regulations for Federal Reserve
member banks. The amount that can be paid in any calendar year, without prior approval from
regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits
of the preceding two calendar years less dividends paid. Under this regulation, Westamerica Bank
sought and obtained approval during 2005 to pay to the Company dividends of $122.0 million in
excess of net profits as defined. The Company consistently has paid quarterly dividends to its
shareholders since its formation in 1972. As of December 31, 2005, $190.4 million was available
for payment of dividends by the Company to its shareholders.
The Bank is required to maintain reserves with the Federal Reserve Bank equal to a percentage of
its reservable deposits. The Bank’s daily average on deposit at the Federal Reserve Bank was $17.5
million in 2005 and $22.5 million in 2004.
Note 16: Westamerica Bancorporation (Parent Company Only)
Statements of Income and Comprehensive Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For the years ended December 31, |
|
2005 |
|
2004 |
|
2003 |
| |
|
(In thousands) |
Dividends from subsidiaries |
|
$ |
126,464 |
|
|
$ |
98,436 |
|
|
$ |
91,390 |
|
Interest income |
|
|
350 |
|
|
|
394 |
|
|
|
289 |
|
Other income |
|
|
8,379 |
|
|
|
5,758 |
|
|
|
5,660 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
135,193 |
|
|
|
104,588 |
|
|
|
97,339 |
|
| |
| |
Interest on borrowings |
|
|
2,787 |
|
|
|
1,298 |
|
|
|
892 |
|
Salaries and benefits |
|
|
5,952 |
|
|
|
5,850 |
|
|
|
6,790 |
|
Other expense |
|
|
2,815 |
|
|
|
2,365 |
|
|
|
2,394 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
11,554 |
|
|
|
9,513 |
|
|
|
10,076 |
|
| |
| |
Income before taxes and equity in
undistributed income of subsidiaries |
|
|
123,639 |
|
|
|
95,075 |
|
|
|
87,263 |
|
Income tax benefit |
|
|
2,423 |
|
|
|
2,321 |
|
|
|
2,787 |
|
Earnings of subsidiaries (less)
greater than subsidiary dividends |
|
|
(18,621 |
) |
|
|
(2,178 |
) |
|
|
5,013 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
107,441 |
|
|
$ |
95,218 |
|
|
$ |
95,063 |
|
| |
| |
Comprehensive income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (loss) on securities
available for sale, net |
|
|
(7,756 |
) |
|
|
(3,553 |
) |
|
|
(5,961 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
99,685 |
|
|
$ |
91,665 |
|
|
$ |
89,102 |
|
| |
Balance Sheets
| |
|
|
|
|
|
|
|
|
| Balances as of December 31, |
|
2005 |
|
2004 |
| |
|
(In thousands) |
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,196 |
|
|
$ |
37,909 |
|
Money market assets and investment
securities available for sale |
|
|
7,213 |
|
|
|
10,004 |
|
Investment in subsidiaries |
|
|
462,608 |
|
|
|
324,346 |
|
Premises and equipment, net |
|
|
12,185 |
|
|
|
12,198 |
|
Accounts receivable from subsidiaries |
|
|
482 |
|
|
|
586 |
|
Other assets |
|
|
15,656 |
|
|
|
12,612 |
|
| |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
499,340 |
|
|
$ |
397,655 |
|
| |
| |
Liabilities |
|
|
|
|
|
|
|
|
Debt financing and notes payable |
|
$ |
40,901 |
|
|
$ |
21,429 |
|
Other liabilities |
|
|
31,725 |
|
|
|
17,617 |
|
| |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
72,626 |
|
|
|
39,046 |
|
Shareholders’ equity |
|
|
426,714 |
|
|
|
358,609 |
|
| |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
499,340 |
|
|
$ |
397,655 |
|
| |
Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For the years ended December 31, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
| |
|
(In thousands) |
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
107,441 |
|
|
$ |
95,218 |
|
|
$ |
95,063 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
351 |
|
|
|
321 |
|
|
|
536 |
|
Decrease in accounts
receivable from affiliates |
|
|
99 |
|
|
|
(39 |
) |
|
|
25 |
|
Decrease (increase) in other assets |
|
|
(171 |
) |
|
|
(275 |
) |
|
|
(1,804 |
) |
Provision for deferred income tax |
|
|
4,902 |
|
|
|
8,251 |
|
|
|
2,226 |
|
(Decrease) increase in other liabilities |
|
|
(109 |
) |
|
|
2,973 |
|
|
|
3,085 |
|
Earnings of subsidiaries less
(greater) than subsidiary dividends |
|
|
18,621 |
|
|
|
2,178 |
|
|
|
(5,013 |
) |
Gain on sales of real estate |
|
|
(1,331 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
129,803 |
|
|
|
108,627 |
|
|
|
94,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in merger and acquisition |
|
|
(54,032 |
) |
|
|
0 |
|
|
|
0 |
|
(Purchases) sales of premises and equipment |
|
|
(339 |
) |
|
|
(146 |
) |
|
|
376 |
|
Net decrease (increase) in short term investments |
|
|
15 |
|
|
|
(4 |
) |
|
|
(5 |
) |
Proceeds from sale of real estate |
|
|
1,752 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by investing activities |
|
|
(52,604 |
) |
|
|
(150 |
) |
|
|
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in short-term debt |
|
|
14,269 |
|
|
|
0 |
|
|
|
(1,800 |
) |
Net (reductions) increases in notes payable and
long-term borrowings |
|
|
(3,338 |
) |
|
|
(3,214 |
) |
|
|
11,786 |
|
Exercise of stock options/issuance of shares |
|
|
9,830 |
|
|
|
12,572 |
|
|
|
8,176 |
|
Retirement of common stock including repurchases |
|
|
(95,351 |
) |
|
|
(55,444 |
) |
|
|
(70,769 |
) |
Dividends |
|
|
(39,322 |
) |
|
|
(35,090 |
) |
|
|
(32,935 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(113,912 |
) |
|
|
(81,176 |
) |
|
|
(85,542 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents |
|
|
(36,713 |
) |
|
|
27,301 |
|
|
|
8,947 |
|
Cash and cash equivalents at beginning of year |
|
|
37,909 |
|
|
|
10,608 |
|
|
|
1,661 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,196 |
|
|
$ |
37,909 |
|
|
$ |
10,608 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
available for sale, net
|
|
$ |
(7,756 |
) |
|
$ |
(3,553 |
) |
|
$ |
(5,961 |
) |
Issuance of common stock in connection with
acquisitions
|
|
|
89,538 |
|
|
|
— |
|
|
|
— |
|
- 56 -
| |
Note 17: Quarterly Financial Information (Unaudited) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
| |
| |
|
(In thousands, except per share data and |
|
| |
|
price range of common stock) |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income (FTE) |
|
$ |
63,376 |
|
|
$ |
67,769 |
|
|
$ |
68,021 |
|
|
$ |
68,349 |
|
Net interest income (FTE) |
|
|
55,019 |
|
|
|
57,023 |
|
|
|
55,993 |
|
|
|
55,830 |
|
Provision for loan losses |
|
|
300 |
|
|
|
300 |
|
|
|
150 |
|
|
|
150 |
|
Noninterest income |
|
|
7,195 |
|
|
|
15,479 |
|
|
|
17,440 |
|
|
|
14,427 |
|
Noninterest expense |
|
|
25,140 |
|
|
|
26,757 |
|
|
|
26,791 |
|
|
|
26,168 |
|
Income before taxes (FTE) |
|
|
36,774 |
|
|
|
45,445 |
|
|
|
46,492 |
|
|
|
43,939 |
|
Net income |
|
|
22,733 |
|
|
|
27,914 |
|
|
|
29,194 |
|
|
|
27,599 |
|
Basic earnings per share |
|
|
0.71 |
|
|
|
0.85 |
|
|
|
0.90 |
|
|
|
0.86 |
|
Diluted earnings per share |
|
|
0.70 |
|
|
|
0.84 |
|
|
|
0.89 |
|
|
|
0.85 |
|
Dividends paid per share |
|
|
0.30 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
|
0.32 |
|
Price range, common stock |
|
|
50.82-58.44 |
|
|
|
48.48-54.11 |
|
|
|
49.90-56.25 |
|
|
|
47.33-55.48 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income (FTE) |
|
$ |
60,120 |
|
|
$ |
58,868 |
|
|
$ |
59,570 |
|
|
$ |
60,542 |
|
Net interest income (FTE) |
|
|
54,605 |
|
|
|
54,271 |
|
|
|
54,528 |
|
|
|
54,589 |
|
Provision for loan losses |
|
|
750 |
|
|
|
750 |
|
|
|
600 |
|
|
|
600 |
|
Noninterest income |
|
|
10,866 |
|
|
|
11,661 |
|
|
|
11,788 |
|
|
|
4,268 |
|
Noninterest expense |
|
|
24,992 |
|
|
|
24,990 |
|
|
|
24,491 |
|
|
|
24,278 |
|
Income before taxes (FTE) |
|
|
39,729 |
|
|
|
40,192 |
|
|
|
41,225 |
|
|
|
33,979 |
|
Net income |
|
|
24,314 |
|
|
|
24,644 |
|
|
|
25,095 |
|
|
|
21,165 |
|
Basic earnings per share |
|
|
0.76 |
|
|
|
0.78 |
|
|
|
0.79 |
|
|
|
0.66 |
|
Diluted earnings per share |
|
|
0.74 |
|
|
|
0.76 |
|
|
|
0.78 |
|
|
|
0.65 |
|
Dividends paid per share |
|
|
0.26 |
|
|
|
0.28 |
|
|
|
0.28 |
|
|
|
0.28 |
|
Price range, common stock |
|
|
47.85-51.63 |
|
|
|
47.58-52.99 |
|
|
|
49.04-55.80 |
|
|
|
54.43-61.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income (FTE) |
|
$ |
61,799 |
|
|
$ |
61,733 |
|
|
$ |
60,552 |
|
|
$ |
60,520 |
|
Net interest income (FTE) |
|
|
54,062 |
|
|
|
54,324 |
|
|
|
54,264 |
|
|
|
54,757 |
|
Provision for loan losses |
|
|
900 |
|
|
|
900 |
|
|
|
750 |
|
|
|
750 |
|
Noninterest income |
|
|
10,375 |
|
|
|
11,036 |
|
|
|
11,013 |
|
|
|
10,492 |
|
Noninterest expense |
|
|
25,535 |
|
|
|
25,476 |
|
|
|
25,534 |
|
|
|
25,158 |
|
Income before taxes (FTE) |
|
|
38,002 |
|
|
|
38,984 |
|
|
|
38,993 |
|
|
|
39,341 |
|
Net income |
|
|
23,012 |
|
|
|
23,671 |
|
|
|
24,073 |
|
|
|
24,307 |
|
Basic earnings per share |
|
|
0.70 |
|
|
|
0.72 |
|
|
|
0.73 |
|
|
|
0.74 |
|
Diluted earnings per share |
|
|
0.69 |
|
|
|
0.71 |
|
|
|
0.72 |
|
|
|
0.73 |
|
Dividends paid per share |
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.26 |
|
|
|
0.26 |
|
Price range, common stock |
|
|
38.07-41.94 |
|
|
|
39.24-44.66 |
|
|
|
42.67-45.76 |
|
|
|
44.45-53.55 |
|
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Westamerica Bancorporation:
We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation and
Subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated
statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Westamerica Bancorporation and Subsidiaries as of
December 31, 2005 and 2004, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)”,
and our report dated March 6, 2006 expressed an unqualified opinion on management’s assessment of,
and the effective operation of, internal control over financial reporting.
| |
|
|
/s/KPMG LLP |
|
|
|
|
|
|
|
|
San Francisco, California |
|
|
March 6, 2006 |
|
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 57 -
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s principal executive officer and the person performing the functions of the Company’s
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 December 31, 2005. 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 December 31, 2005 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting. Management’s Report on Internal Control Over Financial Reporting and the
attestation Report of Independent Registered Public Accounting Firm
are found on pages 32-33,
immediately preceding the financial statements.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors of the Registrant and compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this Item 10 of this Annual Report on Form 10-K is
incorporated by reference from the information contained under the captions “Board of Directors
and Committees”, “Proposal 1 — Election of Directors” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Company’s Proxy Statement for its 2006 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.
Executive Officers
The executive officers of the Corporation and Westamerica Bank
serve at the pleasure of the Board of Directors and are subject to
annual appointment by the Board at its first meeting following the
Annual Meeting of Shareholders. It is anticipated that each of the
executive officers listed below will be reappointed to serve in
such capacities at that meeting.
| |
|
|
|
|
|
|
| |
|
|
|
Held |
| Name of Executive |
|
Position |
|
Since |
David L. Payne
|
|
Mr. Payne, born in 1955, is the
Chairman of the Board, President and
Chief Executive Officer of the
Corporation. Mr. Payne is President
and Chief Executive Officer of Gibson
Printing and Publishing Company and
Gibson Radio and Publishing Company
which are newspaper, commercial
printing and real estate investment
companies headquartered in Vallejo,
California.
|
|
|
1984 |
|
|
|
|
|
|
|
|
John “Robert” Thorson
|
|
Mr. Thorson, born in 1960, is Senior Vice
President and Chief Financial Officer for the
Corporation. Mr. Thorson joined Westamerica
Bancorporation in 1989, was Vice President
and Manager of Human Resources from 1995
until 2001 and was Senior Vice President and
and Treasurer from 2002 until 2005.
|
|
|
2005 |
|
|
|
|
|
|
|
|
Jennifer J. Finger
|
|
Ms. Finger, born in 1954, is Senior
Vice President and Treasurer for
the Corporation. Ms. Finger joined
Westamerica Corporation in 1997, was
Senior Vice President and Chief
Financial Officer until 2005.
|
|
|
2005 |
|
|
|
|
|
|
|
|
Dennis R. Hansen
|
|
Mr. Hansen, born in 1950, is Senior
Vice President and manager of the
Operations and Systems Administration
of Westamerica Bank. Mr. Hansen joined
Westamerica Bancorporation in 1978 and was
Senior Vice President and Controller for
the Corporation until 2005.
|
|
|
2006 |
|
|
|
|
|
|
|
|
Frank R. Zbacnik
|
|
Mr. Zbacnik, born in 1947, is Senior Vice
President and Chief Credit Administrator
of Westamerica Bank. Mr. Zbacnik joined
Westamerica Bank in 1984 and was Vice
President and Manager of Consumer Credit
from 1995 until 2000.
|
|
|
2001 |
|
The Company has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K
of the Securities Act of 1933) that is applicable to its senior financial officers
including its chief executive officer, chief financial officer, and principal
accounting officer & controller. This Code of Ethics has been filed as Exhibit 14
to this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- 58 -
The information required by this Item 11 of this Annual Report on Form 10-K is
incorporated by reference from the information contained under the captions
“Executive Compensation” in the Company’s Proxy Statement for its 2006 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 of this Annual Report on Form 10-K is
incorporated by reference from the information contained under the caption “Stock
Ownership” in the Company’s Proxy Statement for its 2006 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 of this Annual Report on Form 10-K is
incorporated by reference from the information contained under the caption
“Corporation Transactions with Directors and Management” in the Company’s Proxy
Statement for its 2006 Annual Meeting of Shareholders which will be filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 of this Annual Report on Form 10-K is
incorporated by reference from the information contained under the caption “Independent
Auditors” in the Company’s Proxy Statement for its 2006 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A of the Securities Exchange Act of
1934.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
|
|
(a) 1.
|
|
Financial Statements: |
|
|
|
|
|
See Index to Financial Statements
on page 32. The financial
statements included in Item 8 are filed as part of this report. |
|
|
|
(a) 2.
|
|
Financial statement schedules required. No financial statement
schedules are filed as part of this report since the required
information is included in the consolidated financial statements,
including the notes thereto, or the circumstances requiring
inclusion of such schedules are not present. |
|
|
|
(a) 3.
|
|
Exhibits: |
|
|
The exhibit list required by this item is incorporated by reference
to the Exhibit Index filed with this report. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WESTAMERICA BANCORPORATION
| |
|
|
/s/ John “Robert” Thorson
|
|
|
|
|
|
John “Robert” Thorson |
|
|
Senior Vice President |
|
|
and Chief Financial Officer |
|
|
(Chief Financial and Accounting Officer) |
|
|
|
|
|
Date: March 10, 2006 |
|
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the
Registrant and in the capacities and on the date
indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
/s/ David L. Payne
|
|
Chairman of the Board and Director
|
|
March 10, 2006 |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
/s/ John “Robert” Thorson
|
|
Senior Vice President and Chief Financial Officer
|
|
March 10, 2006 |
|
|
(Chief Financial and Accounting Officer) |
|
|
- 59 -
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
/s/ Etta Allen
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Louis E. Bartolini
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ E. Joseph Bowler
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Arthur C. Latno, Jr.
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Patrick D. Lynch
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Catherine C. MacMillan
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Ronald A. Nelson
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Carl R. Otto
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Edward B. Sylvester
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
| |
|
|
| Exhibit |
|
|
| Number |
|
|
2(d)
|
|
Agreement and Plan of Reorganization, dated August 25,
2004, among Westamerica Bancorporation, Westamerica Bank
and Redwood Empire Bancorp and National Bank of the
Redwoods, incorporated by reference to Exhibit 2.1 of
Registrant’s Form 8-K filed with the Securities and
Exchange Commission on August 27, 2004. |
|
|
|
3(a)
|
|
Restated Articles of Incorporation (composite copy),
incorporated by reference to Exhibit 3(a) to
the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 30, 1998. |
|
|
|
3(b)
|
|
By-laws, as amended (composite copy), incorporated
by reference to Exhibit 3(i) to the
Registrant’s Quarterly Report on Form 10-Q for the
third quarter ended September 30, 2003, filed with the
Securities and Exchange Commission on November 13, 2003. |
|
|
|
4(a)
|
|
Amended and Restated Rights Agreement dated December 31,
2004, incorporated by reference to Exhibit 99
to the Registrant’s Form 8-A/A, Amendment No. 4,
filed with the Securities and Exchange Commission on
December 22, 2004. |
|
|
|
10(a)*
|
|
Amended and Restated Stock Option Plan of 1995,
incorporated by reference to Exhibit A to the
Registrant’s definitive Proxy Statement pursuant to
Regulation 14(a) filed with the Securities and Exchange
Commission on March 17, 2003. |
|
|
|
10(c)
|
|
Note Purchase Agreement by and between Westamerica
Bancorporation and The Northwestern Mutual Life Insurance
Company dated as of October 30, 2003, pursuant to which
registrant issued its 5.31% Senior Notes due October 31,
2013 in the principal amount of $15 million and form of
5.31% Senior Note due October 31, 2013 incorporated
by reference to Exhibit 4 of Registrant’s Quarterly Report
on Form 10-Q for the third quarter ended September 30,
2003, filed with the Securities and Exchange Commission on
November 13, 2003. |
|
|
|
10(d)*
|
|
Westamerica Bancorporation Chief Executive Officer
Deferred Compensation Agreement by and between
Westamerica Bancorporation and David L. Payne,
dated December 18, 1998 incorporated by
reference to Exhibit 10(e) to the Registrant’s
Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, filed with the Securities
and Exchange Commission on March 29, 2000. |
|
|
|
10(e)*
|
|
Description of Executive Cash Bonus Program
incorporated by reference to Exhibit 10(e)
to Exhibit 2.1 of Registrant’s Form 8-K |
- 60 -
| |
|
|
| Exhibit |
|
|
| Number |
|
|
|
|
filed with the Securities and Exchange
Commission on March 11, 2005. |
|
|
|
10(f)*
|
|
Non-Qualified Annuity Performance Agreement with
David L. Payne dated November 19, 1997 incorporated by
reference to Exhibit 10(f) to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2004, filed with the Securities and Exchange Commission on
March 15, 2005. |
|
|
|
10(g)*
|
|
Amended and Restated Westamerica Bancorporation Stock
Option Plan of 1995 Nonstatutory Stock Option Agreement
Form incorporated by reference to Exhibit 10(g) to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, filed with the Securities
and Exchange Commission on March 15, 2005. |
|
|
|
10(h)*
|
|
Amended and Restated Westamerica Bancorporation Stock
Option Plan of 1995 Restricted Performance Share Grant
Agreement Form incorporated by reference to Exhibit 10(h)
to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2004, filed with the
Securities and Exchange Commission on March 15, 2005. |
|
|
|
10(i)*
|
|
Westamerica Bancorporation and Subsidiaries
Deferred Compensation Plan |
|
|
|
10(j)*
|
|
Westamerica Bancorporation Deferral Plan
(Adopted October 26, 1995) |
|
|
|
10(k)*
|
|
Form of Restricted Performance Share Deferral Election
pursuant to the Westamerica Bancorporation Deferral Plan |
|
|
|
11
|
|
Computation of Earnings Per Share on common and common
equivalent shares and on common shares assuming full
dilution. |
|
|
|
14
|
|
Code of Ethics
incorporated by reference to Exhibit 14
to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2003,
filed with the Securities and Exchange Commission
on March 10, 2004. |
|
|
|
21
|
|
Subsidiaries of the registrant. |
|
|
|
23(a)
|
|
Consent of KPMG LLP |
|
|
|
31.1
|
|
Certification of Chief Executive Officer
pursuant to Securities Exchange Act
Rule 13a-14(a)/15d-14(a) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer
pursuant to Securities Exchange Act
Rule 13a-14(a)/15d-14(a) |
|
|
|
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 |
|
|
|
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 |
|
|
|
| * |
|
Indicates management contract or compensatory plan or arrangement.
|
| |
| The Company will furnish to shareholders a copy of any
exhibit listed above, but not contained herein, upon
written request to the Office of the Corporate
Secretary A-2M, Westamerica Bancorporation, P.O. Box 1200,
Suisun City, California 94585-1200, and payment to the
Company of $.25 per page. |
- 61 -