Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 94-2156203
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1108 Fifth Avenue, San Rafael, California 94901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (707) 863-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer [ x ] Accelerated Filer [ ]
Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ x ]
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of October 24, 2007
Common Stock, 29,347,330
No Par Value
Page 2
TABLE OF CONTENTS
Page
-------------
Forward Looking Statements 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3
Notes to Unaudited Condensed Consolidated Financial Statements 7
Financial Summary 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 26
Item 4 - Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 27
Item 1A - Risk Factors 27
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3 - Defaults upon Senior Securities 27
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 5 - Other Information 27
Item 6 - Exhibits 28
Signature 29
Exhibit Index 30
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 31
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 32
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 33
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 34
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about Westamerica
Bancorporation for which it claims the protection of the safe harbor provisions
contained in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. A number of factors, some
of which are beyond the Company's ability to predict or control, could cause
future results to differ materially from those contemplated. These factors
include but are not limited to (1) a slowdown in the national and California
economies; (2) fluctuations in asset prices including, but not limited to,
stocks, bonds, real estate, and commodities; (3) economic uncertainty created
by terrorist threats and attacks on the United States, the actions taken in
response, and the uncertain effect of these events on the national and regional
economies; (4) changes in the interest rate environment; (5) changes in the
regulatory environment; (6) significantly increasing competitive pressure in
the banking industry; (7) operational risks including data processing system
failures or fraud; (8) the effect of acquisitions and integration of acquired
businesses; (9) volatility of rate sensitive deposits and investments; (10)
asset/liability management risks and liquidity risks; (11) changes in liquidity
levels in capital markets; and (12) changes in the securities markets. The
reader is directed to the Company's annual report on Form 10-K for the year
ended December 31, 2006, for further discussion of factors which could affect
the Company's business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report. The Company
undertakes no obligation to update any forward-looking statements in this
report.
Page 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
At September 30, At
--------------------------December 31,
2007 2006* 2006
---------------------------------------
Assets:
Cash and cash equivalents $219,631 $191,611 $184,442
Money market assets 329 564 567
Investment securities available for sale 570,086 617,736 615,525
Investment securities held to maturity,
with market values of:
$1,076,035 at September 30, 2007 1,081,009
$1,204,811 at September 30, 2006 1,211,589
$1,155,736 at December 31, 2006 1,165,092
Loans, gross 2,511,374 2,552,929 2,531,734
Allowance for loan losses (52,938) (55,338) (55,330)
---------------------------------------
Loans, net of allowance for loan losses 2,458,436 2,497,591 2,476,404
Other real estate owned 613 656 647
Premises and equipment, net 28,666 30,979 30,188
Identifiable intangibles 19,322 23,098 22,082
Goodwill 121,719 121,719 121,719
Interest receivable and other assets 157,205 148,573 152,669
---------------------------------------
Total Assets $4,657,016 $4,844,116 $4,769,335
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,251,572 $1,298,519 $1,341,019
Interest bearing:
Transaction 549,263 581,705 588,668
Savings 806,797 926,262 865,268
Time 732,582 744,645 721,779
---------------------------------------
Total deposits 3,340,214 3,551,131 3,516,734
Short-term borrowed funds 815,101 768,841 731,977
Debt financing and notes payable 36,809 36,956 36,920
Liability for interest, taxes and
other expenses 61,241 58,456 59,469
---------------------------------------
Total Liabilities 4,253,365 4,415,384 4,345,100
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
29,378 at September 30, 2007 334,637
30,910 at September 30, 2006 343,869
30,547 at December 31, 2006 341,529
Deferred compensation 2,990 2,734 2,734
Accumulated other comprehensive (loss) income (412) 1,805 1,850
Retained earnings 66,436 80,324 78,122
---------------------------------------
Total Shareholders' Equity 403,651 428,732 424,235
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,657,016 $4,844,116 $4,769,335
=======================================
See accompanying notes to unaudited condensed consolidated financial statements.
* Adjusted to adopt SAB No. 108
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
----------------------------------------------------
Interest Income:
Loans $41,134 $41,292 $122,027 $123,558
Money market assets and funds sold 2 1 5 3
Investment securities available for sale
Taxable 3,902 4,099 11,891 12,730
Tax-exempt 2,811 3,128 8,785 9,449
Investment securities held to maturity
Taxable 5,712 6,973 17,966 22,211
Tax-exempt 5,736 5,872 17,337 17,759
----------------------------------------------------
Total interest income 59,297 61,365 178,011 185,710
----------------------------------------------------
Interest Expense:
Transaction deposits 526 430 1,577 1,285
Savings deposits 1,649 1,173 4,509 2,995
Time deposits 7,791 7,408 22,637 19,985
Short-term borrowed funds 8,601 7,399 25,614 21,766
Notes payable 578 578 1,735 1,754
----------------------------------------------------
Total interest expense 19,145 16,988 56,072 47,785
----------------------------------------------------
Net Interest Income 40,152 44,377 121,939 137,925
----------------------------------------------------
Provision for credit losses 75 75 225 375
----------------------------------------------------
Net Interest Income After
Provision For Credit Losses 40,077 44,302 121,714 137,550
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 7,569 7,155 22,813 21,424
Merchant credit card 2,808 2,430 8,024 7,208
Debit card 969 883 2,825 2,587
Financial services commissions 383 377 1,057 1,037
Trust fees 337 298 978 867
Mortgage banking 29 36 92 134
Other 2,549 2,720 8,832 8,343
----------------------------------------------------
Total Noninterest Income 14,644 13,899 44,621 41,600
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 12,587 13,080 37,776 39,897
Occupancy 3,327 3,321 9,960 9,820
Data processing 1,800 1,503 4,866 4,568
Equipment 1,083 1,194 3,367 3,775
Amortization of intangibles 893 1,016 2,760 3,071
Courier service 854 904 2,559 2,736
Professional fees 451 532 1,355 1,823
Other 3,858 3,853 11,579 11,542
----------------------------------------------------
Total Noninterest Expense 24,853 25,403 74,222 77,232
----------------------------------------------------
Income Before Income Taxes 29,868 32,798 92,113 101,918
Provision for income taxes 7,846 8,561 24,169 27,069
----------------------------------------------------
Net Income $22,022 $24,237 $67,944 $74,849
====================================================
Average Shares Outstanding 29,532 31,070 29,935 31,372
Diluted Average Shares Outstanding 29,915 31,558 30,365 31,919
Per Share Data:
Basic Earnings $0.75 $0.78 $2.27 $2.39
Diluted Earnings 0.74 0.77 2.24 2.34
Dividends Paid 0.34 0.32 1.02 0.96
See accompanying notes to unaudited condensed consolidated financial statements.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(unaudited)
Accumulated
Compre-
Common Deferred hensive Retained
Shares Stock Compensation (Loss)Income Earnings Total
------------------------------------------------------------------------------
Balance, December 31, 2005 31,882 $343,035 $2,423 $1,882 $87,724 $435,064
Adjustment to initially apply SAB
Statement No. 108, net of tax -- -- -- -- 1,756 1,756
------------------------------------------------------------------------------
Balance at January 1, 2006 31,882 343,035 2,423 1,882 89,480 436,820
Comprehensive income
Net income for the period 74,849 74,849
Other comprehensive income,
net of tax:
Net unrealized loss on securities
available for sale (77) (77)
-----------
Total comprehensive income 74,772
Exercise of stock options 361 11,325 11,325
Stock option tax benefits 1,628 1,628
Restricted stock activity 20 727 311 1,038
Stock based compensation 1,919 1,919
Stock awarded to employees 3 138 138
Purchase and retirement of stock (1,356) (14,903) (53,809) (68,712)
Dividends (30,196) (30,196)
------------------------------------------------------------------------------
Balance, September 30, 2006 30,910 $343,869 $2,734 $1,805 $80,324 $428,732
==============================================================================
Balance, December 31, 2006 30,547 $341,529 $2,734 $1,850 $78,122 $424,235
Comprehensive income
Net income for the period 67,944 67,944
Other comprehensive income,
net of tax:
Net unrealized loss on securities
available for sale (2,290) (2,290)
Post-retirement benefit transition
obligation amortization 28 28
-----------
Total comprehensive income 65,682
Exercise of stock options 212 7,251 7,251
Stock option tax benefits 116 116
Restricted stock activity 12 302 256 558
Stock based compensation 1,389 1,389
Stock awarded to employees 3 139 139
Purchase and retirement of stock (1,396) (16,089) (48,997) (65,086)
Dividends (30,633) (30,633)
------------------------------------------------------------------------------
Balance, September 30, 2007 29,378 $334,637 $2,990 ($412) $66,436 $403,651
==============================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 6
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the nine months
ended September 30,
--------------------------
2007 2006
--------------------------
Operating Activities:
Net income $67,944 $74,849
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,194 7,705
Provision for credit losses 225 375
Amortization of loan fees, net of cost (935) (225)
Increase in interest income receivable (169) (319)
Increase in other assets (9,220) (1,339)
Stock option compensation expense 1,389 1,919
Excess tax benefits from stock-based compensation (116) (1,628)
Increase (decrease) in income taxes payable 1,357 (3,691)
Increase in interest expense payable 275 1,712
Increase in other liabilities 4,103 6,233
Net loss on writedown of equipment 50 187
Originations of loans for resale (516) (620)
Proceeds from sale of loans originated for resale 521 626
Net loss on writedown of property acquired
in satisfaction of debt 34 0
--------------------------
Net Cash Provided by Operating Activities 72,136 85,784
--------------------------
Investing Activities:
Net repayments of loans 18,673 117,968
Purchases of investment securities available for sale (30,107) (7,716)
Proceeds from maturity and paydown of securities available for sale 73,368 52,019
Proceeds from maturity and paydown of securities held to maturity 84,083 125,628
Purchases of FRB/FHLB* securities (108) (103)
Proceeds from sale of FRB/FHLB* securities 73 209
Purchases of property, plant and equipment (1,070) (869)
--------------------------
Net Cash Provided by Investing Activities 144,912 287,136
--------------------------
Financing Activities:
Net decrease in deposits (176,520) (294,970)
Net increase (decrease) in short-term borrowings 83,124 (6,332)
Repayments of notes payable (111) (3,325)
Exercise of stock options 7,251 11,325
Excess Tax benefits from stock-based compensation 116 1,628
Repurchases/retirement of stock (65,086) (68,712)
Dividends paid (30,633) (30,196)
--------------------------
Net Cash Used In Financing Activities (181,859) (390,582)
--------------------------
Net Increase (Decrease) In Cash and Cash Equivalents 35,189 (17,662)
--------------------------
Cash and Cash Equivalents at Beginning of Period 184,442 209,273
--------------------------
Cash and Cash Equivalents at End of Period $219,631 $191,611
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate/repossessed collateral $0 $656
Unrealized loss on securities available for sale ($2,290) ($77)
Supplemental Disclosure of Cash Flow Activity:
Interest paid for the period 56,348 49,497
Income tax payments for the period 22,799 29,226
See accompanying notes to unaudited condensed consolidated financial statements.
* Federal Reserve Bank/Federal Home Loan Bank ("FRB/FHLB")
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of Management, are necessary for a fair presentation of the results for
the interim periods presented. The interim results for the nine months ended
September 30, 2007 and 2006 are not necessarily indicative of the results
expected for the full year. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and accompanying notes as well as other information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
Note 2: Significant Accounting Policies.
Certain accounting policies underlying the preparation of these financial
statements require Management to make estimates and judgments. These estimates
and judgments may affect reported amounts of assets and liabilities, revenues
and expenses, and disclosures of contingent assets and liabilities. The most
significant of these involve the Allowance for Credit Losses, which is
discussed in Note 1 to the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2006.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 was
issued in order to eliminate the diversity of practice surrounding how public
companies quantify financial statement misstatements. Prior to SAB 108, the
Company had historically focused on the impact of misstatements on the income
statement, including the reversing effect of prior year misstatements. With a
focus on the income statement, the Company's analysis could lead to the
accumulation of misstatements in the balance sheet. In applying SAB 108, the
Company must also consider any accumulated misstatements in the balance sheet.
SAB 108 permitted companies to initially apply its provisions by recording the
cumulative effect of misstatements as adjustments to the balance sheet as of the
first day of the fiscal year, with an offsetting adjustment recorded to retained
earnings, net of tax. In applying SAB 108, the Company made an adjustment to
reduce other liabilities by $3 million. The $3 million overstatement of other
liabilities accumulated over seventeen years, as the liability accrued for
stock-based compensation exceeded the amount paid to employees. These
misstatements had not previously been material to the income statements for any
of those prior periods. Comparative amounts as of September 30, 2006 have been
adjusted to reflect adoption of SAB 108 as follows (in thousands):
As
Originally SAB 108 As
Reported Adjustment Adjusted
---------------------------------------
Liability for interest, taxes
and other expenses $61,456 ($3,000) $58,456
Interest receivable and
other assets 149,817 (1,244) 148,573
Retained earnings 78,568 1,756 80,324
In September 2006, the FASB issued FAS 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. FAS 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. FAS 157 is effective for the year beginning January 1,
2008. The Company is currently evaluating the effects of adopting FAS 157 on
its consolidated financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities -- Including an Amendment of
FASB Statement No. 115 ("FAS 159"). This standard permits entities to choose to
measure many financial assets and liabilities and certain other items at fair
value. An enterprise will report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent reporting
date. The fair value option may be applied on an instrument-by-instrument
basis, with several exceptions, such as those investments accounted for by the
equity method, and once elected, the option is irrevocable unless a new
election date occurs. The fair value option can be applied only to entire
instruments and not to portions thereof. FAS 159 is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
The Company is currently evaluating the effects of adopting FAS 159 on its
consolidated financial statements.
Page 8
Note 3: Goodwill and Other Intangible Assets
The Company has recorded goodwill and other identifiable intangibles associated
with purchase business combinations. Goodwill is not amortized, but is
periodically evaluated for impairment. The Company did not recognize impairment
during the nine months ended September 30, 2007 and September 30, 2006.
Identifiable intangibles are amortized to their estimated residual values over
their expected useful lives. Such lives and residual values are also
periodically reassessed to determine if any amortization period adjustments are
indicated. During the nine months ended September 30, 2007 and September 30,
2006, no such adjustments were recorded.
The changes in the carrying value of goodwill were ($ in thousands):
December 31, 2005 $121,907
Recognition of stock option tax benefits for
the exercise of options converted upon merger (193)
Fair value measurement adjustments during
post-merger allocation period 5
-------------
September 30, 2006 $121,719
=============
December 31, 2006 $121,719
--
-------------
September 30, 2007 $121,719
=============
The gross carrying amount of intangible assets and accumulated amortization was
($ in thousands):
September 30,
----------------------------------------------------
2007 2006
----------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------------------
Core Deposit Intangibles $24,383 ($10,872) $24,383 ($8,686)
Merchant Draft Processing Intangible 10,300 (4,489) 10,300 (2,899)
----------------------------------------------------
Total Intangible Assets $34,683 ($15,361) $34,683 ($11,585)
====================================================
As of September 30, 2007, the current year and estimated future amortization
expense for intangible assets was ($ in thousands):
Merchant
Core Draft
Deposit Processing
Intangibles Intangible Total
---------------------------------------
Nine months ended September 30, 2007 (actual) $1,620 $1,141 $2,761
Estimate for year ended December 31,
2007 2,153 1,500 3,653
2008 2,021 1,200 3,221
2009 1,859 962 2,821
2010 1,635 774 2,409
2011 1,386 624 2,010
2012 1,230 500 1,730
Note 4: Post Retirement Benefits
The Company uses an actuarial-based accrual method of accounting for
post-retirement benefits. The Company offers a continuation of group insurance
coverage to employees hired prior to February 1, 2006 who qualify for and elect
early retirement prior to attaining age 65. The Company pays a portion of these
early retirees' insurance premium which are determined at their date of
retirement. The Company reimburses a portion of Medicare Part B premiums for
all retirees over 65 and their qualified spouses.
The following table sets forth the net periodic post-retirement benefit costs
(in thousands):
For the nine months ended
September 30,
--------------------------
2007 2006
--------------------------
(In thousands)(In thousands)
Service cost $12 $141
Interest cost 198 159
Amortization of unrecognized
transition obligation 45 45
--------------------------
Net periodic cost $255 $345
==========================
The Company does not fund plan assets for any post-retirement benefit plans.
Page 9
Note 5: Accounting for Uncertainty in Income Taxes
The Company adopted the provisions of FASB Interpretation No.48 Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of Interpretation 48, the Company did not recognize any increase
or decrease for unrecognized tax benefits. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2007 $792
Additions for tax positions taken in the current period 0
Reductions for tax positions taken in the current period 0
Additions for tax positions taken in prior years 0
Reductions for tax positions taken in prior years 0
Decreases related to settlements with taxing authorities 0
Decreases as a result of a lapse in statue of limitations 0
-------------
Balance at September 30, 2007 $792
=============
The Company does not anticipate any significant increase or decrease in
unrecognized tax benefits during 2007. Unrecognized tax benefits at January 1,
2007 and September 30, 2007 include accrued interest and penalties of $137
thousand. If recognized, the entire amount of the unrecognized tax benefits
would affect the effective tax rate.
The Company classifies interest and penalties as a component of the provision
for income taxes. The tax years ended December 31, 2006, 2005, 2004 and 2003
remain subject to examination by the Internal Revenue Service. The tax years
ended December 31, 2006, 2005, 2004, 2003, and 2002 remain subject to
examination by the California Franchise Tax Board. Included in the balance at
January 1, 2007 is $1.6 million in tax positions for which the ultimate
deductibility is uncertain. The deductibility of these tax positions will be
determined through examination by the appropriate tax jurisdictions or the
expiration of the tax statute of limitations.
Note 6: Earnings Per Common Share
The table below shows earnings per common share and diluted earnings per common
share. Basic earnings per share are computed by dividing net income by the
average number of shares outstanding during the period. Diluted earnings per
share are computed by dividing net income by the average number of shares
outstanding during the period plus the impact of common stock equivalents.
For the For the
three months nine months
ended September 30, ended September 30,
(In thousands, except per share data) 2007 2006 2007 2006
----------------------------------------------------
Weighted average number of common
shares outstanding - basic 29,532 31,070 29,935 31,372
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 383 488 430 547
----------------------------------------------------
Weighted average number of common
shares outstanding - diluted 29,915 31,558 30,365 31,919
====================================================
Net income $22,022 $24,237 $67,944 $74,849
Basic earnings per share $0.75 $0.78 $2.27 $2.39
Diluted earnings per share $0.74 $0.77 $2.24 $2.34
For the three months ended September 30, 2007 and 2006, options to purchase 1.3
million and 715 thousand shares of common stock, respectively, were outstanding
but not included in the computation of diluted net income per share because the
option exercise price exceeded the fair value of the stock such that their
inclusion would have had an anti-dilutive effect. Similarly, for the nine
months ended September 30, 2007 and 2006, options to purchase 1.0 million and
726 thousand shares of common stock, respectively, were outstanding but not
included in the computation of diluted net income per share because they were
anti-dilutive.
Page 10
WESTAMERICA BANCORPORATION
Financial Summary
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Net Interest Income (FTE)**** $45,563 $50,198 $138,536 $155,675
Provision for Credit Losses (75) (75) (225) (375)
Noninterest Income 14,644 13,899 44,621 41,600
Noninterest Expense (24,853) (25,403) (74,222) (77,232)
Provision for income taxes (FTE)**** (13,257) (14,382) (40,766) (44,819)
----------------------------------------------------
Net Income $22,022 $24,237 $67,944 $74,849
====================================================
Average Shares Outstanding 29,532 31,070 29,935 31,372
Diluted Average Shares Outstanding 29,915 31,558 30,365 31,919
Shares Outstanding at Period End 29,378 30,910 29,378 30,910
As Reported:
Basic Earnings Per Share $0.75 $0.78 $2.27 $2.39
Diluted Earnings Per Share $0.74 $0.77 $2.24 $2.34
Return On Assets 1.89% 1.98% 1.95% 2.02%
Return On Equity 21.73% 22.75% 22.24% 23.59%
Net Interest Margin (FTE)**** 4.34% 4.54% 4.37% 4.61%
Net Loan Losses to Average Loans 0.10% 0.07% 0.14% 0.05%
Efficiency Ratio*** 41.3% 39.6% 40.5% 39.1%
Average Balances:
Total Assets $4,628,728 $4,846,286 $4,670,019 $4,949,661
Earning Assets 4,198,859 4,419,609 4,243,610 4,513,838
Total Gross Loans 2,514,685 2,555,472 2,516,939 2,586,547
Total Deposits 3,358,163 3,602,566 3,387,591 3,679,677
Shareholders' Equity 402,016 422,735 408,497 424,189
Balances at Period End:*
Total Assets $4,657,016 $4,844,116
Earning Assets 4,162,798 4,382,818
Total Gross Loans 2,511,374 2,552,929
Total Deposits 3,340,214 3,551,131
Shareholders' Equity 403,651 428,732
Financial Ratios at Period End:**
Allowance for Loan Losses to Loans 2.11% 2.18%
Book Value Per Share $13.74 $13.87
Equity to Assets 8.67% 8.85%
Total Capital to Risk Adjusted Assets 11.02%
Dividends Paid Per Share $0.34 $0.32 $1.02 $0.96
Dividend Payout Ratio 46% 42% 46% 41%
The above financial summary has been derived from the Company's unaudited
consolidated financial statements. This information should be read in
conjunction with those statements, notes and the other information included
elsewhere herein. Percentages under the heading "As Reported" are annualized.
* Balances at September 30, 2006 have been adjusted to adopt SAB No. 108.
** Book value per share and equity to assets at September 30, 2006 have been
adjusted to adopt SAB No. 108.
*** The efficiency ratio is defined as noninterest expense divided by total
revenue (net interest income on a tax-equivalent basis and noninterest income).
**** Yields on securities and certain loans have been adjusted upward to a
"fully taxable equivalent" ("FTE") basis in order to reflect the effect of
income which is exempt from federal income taxation at the current statutory
tax rate.
Page 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported third
quarter 2007 net income of $22.0 million or $0.74 diluted earnings per share.
These results compare with net income of $24.2 million or $0.77 diluted
earnings per share for the same period of 2006.
On a year-to-date basis, the Company reported net income for the nine months
ended September 30, 2007 of $67.9 million or diluted earnings per share of
$2.24, compared with $74.8 million or $2.34 diluted earnings per share for the
same period of 2006.
Following is a summary of the components of net income for the periods
indicated (in thousands except per share amounts):
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Net interest income (FTE) $45,563 $50,198 $138,536 $155,675
Provision for credit losses (75) (75) (225) (375)
Noninterest income 14,644 13,899 44,621 41,600
Noninterest expense (24,853) (25,403) (74,222) (77,232)
Provision for income taxes (FTE) (13,257) (14,382) (40,766) (44,819)
----------------------------------------------------
Net income $22,022 $24,237 $67,944 $74,849
====================================================
Average diluted shares 29,915 31,558 30,365 31,919
Diluted earnings per share $0.74 $0.77 $2.24 $2.34
Average total assets $4,628,728 $4,846,286 $4,670,019 $4,949,661
Net income (annualized) to average total assets 1.89% 1.98% 1.95% 2.02%
Net income for the third quarter of 2007 was $2.2 million or 9.1% less than the
same quarter of 2006, attributable to lower net interest income (FTE),
partially offset by higher noninterest income and decreases in noninterest
expense and income tax provision (FTE). The decrease in net interest income
(FTE) (down $4.6 million or 9.2%) was the net result of lower average
interest-earning assets and higher funding costs, partially offset by higher
yields on earning assets and higher loan fee income. The provision for credit
losses was unchanged from a year ago, reflecting Management's assessment of
credit risk for the loan portfolio. Noninterest income rose $745 thousand or
5.4% mainly due to higher service charges on deposits and merchant credit card
income. Noninterest expense decreased $550 million or 2.2% mostly due to lower
personnel costs. The provision for income taxes (FTE) decreased $1.1 million or
7.8% primarily due to lower profitability.
Comparing the first nine months of 2007 to the prior year, net income decreased
$6.9 million or 9.2%, due to lower net interest income (FTE), partially offset
by higher noninterest income and declines in the provision for credit losses,
noninterest expense and tax provision (FTE). The lower net interest income
(FTE) was mainly caused by a lower volume of average interest-earning assets
and higher funding costs, partially offset by higher yields on earnings assets.
The provision for credit losses decreased $150 thousand or 40.0% to reflect
Management's judgment on credit risk and the level of the allowance for credit
losses. Noninterest income increased $3.0 million or 7.3% largely due to higher
service charges on deposits, merchant credit card income and company-owned life
insurance proceeds. Noninterest expense declined $3.0 million or 3.9% primarily
due to lower personnel costs. The income tax provision (FTE) decreased $4.1
million or 9.0% primarily due to lower profitability.
Page 12
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (in thousands):
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Interest and fee income $59,297 $61,365 $178,011 $185,710
Interest expense (19,145) (16,988) (56,072) (47,785)
FTE adjustment 5,411 5,821 16,597 17,750
----------------------------------------------------
Net interest income (FTE) $45,563 $50,198 $138,536 $155,675
====================================================
Average earning assets $4,198,859 $4,419,609 $4,243,610 $4,513,838
Net interest margin (FTE) 4.34% 4.54% 4.37% 4.61%
During the periods presented, competition for deposits has intensified due to
rising short-term interest rates, loan growth exceeding deposit growth in the
banking industry, and other factors. Deposit competition within the banking
industry has caused deposit costs to rise, while competitive rates on
commercial loans have not changed significantly. The resulting increase in
funding costs has not been offset fully by rising yields on loans and
investments due to relatively stable intermediate and long-term interest rates.
Net interest income (FTE) decreased during the third quarter of 2007 by $4.6
million or 9.2% from the same period in 2006 to $45.6 million, mainly due to
lower average earning assets (down $221 million) and higher rates paid on
interest-bearing liabilities (up 40 basis points or "bp"), partially offset by
higher yields on earning assets (up 9 bp).
Comparing the first nine months of 2007 with the same period of 2006, net
interest income (FTE) decreased $17.1 million or 11.0%, primarily due to lower
average earning assets (down $270 million) and higher rates paid on
interest-bearing liabilities (up 51 bp), partially offset by higher yields on
earning assets (up 10 bp) and lower average balances of interest-bearing
liabilities (down $199 million).
The Company's asset and liability position remains slightly "liability
sensitive," with a greater amount of interest-bearing liabilities subject to
immediate and near-term interest rate changes relative to earning assets. As a
result, the recent reduction in the federal funds target rate (charged for
short-term inter-bank borrowings) and the related decline in U.S. Treasury bill
rates should lower the Company's cost of funds at a more rapid pace than its
earning asset yields.
Interest and Fee Income
Interest and fee income (FTE) for the third quarter of 2007 decreased $2.5
million or 3.7% from the same period in 2006. The decrease was caused primarily
by lower average earning assets (down $221 million), partially offset by higher
yields on average earning assets (up 9 bp).
The average earning asset decrease of $221 million in the third quarter of 2007
compared with the same period in 2006 was substantially attributable to a $180
million decline in the investment portfolio: mortgage backed securities and
collateralized mortgage obligations (down $122 million), municipal securities
(down $33 million), corporate and other securities (down $16 million) and U.S.
government sponsored entity obligations (down $9 million). Average total loans
were lower by $41 million in the third quarter of 2007 compared with the same
period in 2006 due to decreases in average balances of commercial real estate
loans (down $43 million), commercial loans (down $42 million) and residential
real estate loans (down $22 million) partially offset by increases in average
balances of indirect automobile loans (up $63 million) and construction loans
(up $14 million).
The average yield on the Company's earning assets increased from 6.05% in the
third quarter of 2006 to 6.14% in the same period in 2007. The composite yield
on loans rose 7 bp to 6.68% due to increases in rates earned on consumer loans
(up 22 bp), residential real estate loans (up 10 bp) and taxable commercial
loans (up 15 bp), partially offset by decreases in yields on tax-exempt
commercial loans (down 11 bp) and commercial real estate loans (down 2 bp). The
investment portfolio yield increased 4 bp to 5.32%, mainly caused by increases
in the yield on US. Government sponsored entity obligations (up 19 bp) and
mortgage backed securities and collateralized mortgage obligations (up 6 bp),
partially offset by declines in municipal securities (down 9 bp) and corporate
and other securities (down 4 bp). The decline in the yield on municipal
securities was attributable to yields on maturities, calls and serial payments
exceeding yields on securities purchased.
Comparing the first nine months of 2007 with the corresponding period a year
ago, interest and fee income (FTE) was down $8.9 million or 4.4%. The decrease
largely resulted from a lower volume of earning assets, partially offset by
higher earning asset yields.
Average earning assets decreased $270 million or 6.0% for the first nine months
of 2007 compared with the same period of 2006. Investments declined $201
million due to decreases in average balances of mortgage backed securities and
collateralized mortgage obligations (down $128 million), municipal securities
(down $34 million), corporate and other securities (down $20 million) and U.S.
government sponsored entity obligations (down $18 million). A $70 million
decline in the average balance of the loan portfolio was attributable to
decreases in average balances of commercial loans (down $53 million),
commercial real estate loans (down $32 million), residential real estate loans
(down $14 million) and consumer credit lines (down $11 million), partially
offset by a $41 million increase in the average balance of indirect automobile
loans.
Page 13
The average yield on earning assets for the first three quarters of 2007 was
6.12% compared with 6.02% in the corresponding period of 2006. The loan
portfolio yield for the first nine months of 2007 compared with the same period
of 2006 was higher by 8 bp, due to increases in yields on consumer loans (up 38
bp), construction loans (up 93 bp), taxable commercial loans (up 22 bp) and
residential real estate loans (up 11 bp), partially offset by decreases in
yields on commercial real estate loans (down 11 bp) and tax-exempt commercial
loans (down 6 bp). The investment portfolio yield rose by 7 bp. The increase
resulted mostly from higher yields on corporate and other securities (up 40 bp)
and U.S. government sponsored entity obligations (up 21 bp), partially offset
by a 6 bp decrease in the yield on municipal securities.
Interest Expense
Interest expense in the third quarter of 2007 increased $2.2 million or 12.7%
compared with the same period in 2006. The increase was attributable to higher
rates paid on the interest- bearing liabilities, partially offset by lower
average balances of interest-bearing deposits.
The average rate paid on interest-bearing liabilities increased from 2.20% in
the third quarter of 2006 to 2.60% in the same quarter of 2007. Rates paid on
most interest-bearing liabilities moved with general market conditions. Rates
on deposits increased 32 bp to 1.88% primarily due to increases in rates paid
on preferred money market savings (up 165 bp), non-public CDs over $100
thousand (up 53 bp) and CDs less than $100 thousand (up 45 bp), partially
offset by a 9 bp decline in public CDs. Rates on short-term borrowings also
increased 36 bp mostly due to higher rates on line of credit and repurchase
facilities (up 70 bp), partially offset by a 10 bp decline in the federal funds
rate. The Federal Reserve reduced the target rate for federal funds by 50 bp in
September 2007.
Interest-bearing liabilities declined $140 million or 4.6% for the third
quarter of 2007 over the same period of 2006. Interest-bearing deposits
decreased $187 million or 8.2% primarily due to decreases in money market
savings (down $134 million), regular savings (down $47 million), money market
checking accounts (down $36 million), non-public CDs over $100 thousand (down
$24 million) and CDs less than $100 thousand (down $27 million). The decline
was partially offset by increases in preferred money market savings (up $48
million) and public CDs (up $34 million).
Comparing the first nine months of 2007 to the corresponding period of 2007,
interest expense rose $8.3 million or 17.3%, due to higher rates paid on
interest-bearing liabilities, partially offset by a decline in such
liabilities.
Rates paid on liabilities averaged 2.54% during the first nine months of 2007
compared with 2.03% for the first nine months of 2006. The average rate paid on
short-term borrowings rose 52 bp mainly due to higher rates on federal funds
(up 36 bp) and line of credit and repurchase facilities (up 68 bp). Rates on
interest-bearing deposits were also higher by 43 bp largely due to preferred
money market savings (up 197 bp), non-public CDs over $100 thousand (up 80 bp),
public CDs (up 38 bp) and CDs less than $100 thousand (up 68 bp).
Interest-bearing liabilities during the first nine months of 2007 declined $199
million or 6.4% over the same period of 2006 mainly due to decreases in money
market savings (down $142 million), money market checking accounts (down $49
million), regular savings (down $46 million), non-public CDs over $100 thousand
(down $32 million) and CDs less than $100 thousand (down $31 million). The
decline was partially offset by increases in preferred money market savings (up
$45 million) and public CDs (up $27 million). Short-term borrowings rose $29
million due to an $87 million increase in federal funds purchased, partially
offset by declines in line of credit and repurchase facilities (down $41
million) and sweep accounts (down 16 million).
In all periods, the Company has focused its sales efforts on building the
balances of more profitable, noninterest bearing and lower-cost transaction
accounts in order to minimize the cost of funds.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Yield on earning assets 6.14% 6.05% 6.12% 6.02%
Rate paid on interest-bearing
liabilities 2.60% 2.20% 2.54% 2.03%
----------------------------------------------------
Net interest spread 3.54% 3.85% 3.58% 3.99%
Impact of all other net
noninterest bearing funds 0.80% 0.69% 0.79% 0.62%
----------------------------------------------------
Net interest margin 4.34% 4.54% 4.37% 4.61%
====================================================
During the third quarter of 2007, the net interest margin declined 20 bp
compared with the same period in 2006. Rates paid on interest-bearing
liabilities climbed faster than yields on earning assets, resulting in a 31 bp
decline in net interest spread. The decline in the net interest spread was
partially mitigated by the higher net interest margin contribution of
noninterest bearing funding sources. The margin contribution of noninterest
bearing funds increased 11 bp because of the higher market rates of interest at
which they could be invested.
Page 14
The net interest margin in the first nine months of 2007 declined by 24 bp when
compared with the corresponding period of 2006. Earning asset yields increased
10 bp while the cost of interest-bearing liabilities rose by 51 bp, resulting
in a 41 bp decrease in the net interest spread. Noninterest bearing funding
sources contributed an increase of 17 bp to the net interest margin.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders'
equity, the amount of interest income from average earning assets and the
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest income
includes proceeds from loans on nonaccrual status only to the extent cash
payments have been received and applied as interest income. Yields on
securities and certain loans have been adjusted upward to reflect the effect of
income which is exempt from federal income taxation at the current statutory
tax rate (FTE) (dollars in thousands).
For the three months ended
September 30, 2007
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $706 $2 1.12%
Investment securities:
Available for sale
Taxable 359,233 3,902 4.34%
Tax-exempt (1) 231,516 4,108 7.10%
Held to maturity
Taxable 525,766 5,712 4.35%
Tax-exempt (1) 566,953 8,674 6.12%
Loans:
Commercial:
Taxable 317,997 7,042 8.79%
Tax-exempt (1) 222,555 3,564 6.35%
Commercial real estate 871,225 15,602 7.10%
Real estate construction 84,938 2,113 9.87%
Real estate residential 487,573 5,792 4.75%
Consumer 530,397 8,197 6.13%
--------------------------
Total loans (1) 2,514,685 42,310 6.68%
--------------------------
Total earning assets (1) 4,198,859 64,708 6.14%
Other assets 429,869
-------------
Total assets $4,628,728
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,254,530 $-- --
Savings and interest-bearing
transaction 1,376,769 2,175 0.63%
Time less than $100,000 207,376 1,755 3.36%
Time $100,000 or more 519,488 6,036 4.61%
--------------------------
Total interest-bearing deposits 2,103,633 9,966 1.88%
Short-term borrowed funds 764,992 8,601 4.40%
Debt financing and notes payable 36,832 578 6.28%
--------------------------
Total interest-bearing liabilities 2,905,457 19,145 2.60%
Other liabilities 66,725
Shareholders' equity 402,016
-------------
Total liabilities and shareholders' equity $4,628,728
=============
Net interest spread (1) (2) 3.54%
Net interest income and interest margin (1) (3) $45,563 4.34%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using the
current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 15
For the three months ended
September 30, 2006
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $966 $1 0.41%
Investment securities:
Available for sale
Taxable 385,478 4,099 4.25%
Tax-exempt (1) 251,143 4,571 7.28%
Held to maturity
Taxable 646,991 6,973 4.31%
Tax-exempt (1) 579,559 8,954 6.18%
Loans:
Commercial:
Taxable 343,958 7,487 8.64%
Tax-exempt (1) 238,849 3,889 6.46%
Commercial real estate 913,919 16,396 7.12%
Real estate construction 71,372 1,774 9.86%
Real estate residential 509,252 5,916 4.65%
Consumer 478,122 7,126 5.91%
--------------------------
Total loans (1) 2,555,472 42,588 6.61%
--------------------------
Total earning assets (1) 4,419,609 67,186 6.05%
Other assets 426,677
-------------
Total assets $4,846,286
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,311,786 $-- --
Savings and interest-bearing
transaction 1,546,392 1,603 0.41%
Time less than $100,000 234,647 1,722 2.91%
Time $100,000 or more 509,741 5,686 4.43%
--------------------------
Total interest-bearing deposits 2,290,780 9,011 1.56%
Short-term borrowed funds 717,524 7,399 4.04%
Debt financing and notes payable 36,978 578 6.25%
--------------------------
Total interest-bearing liabilities 3,045,282 16,988 2.20%
Other liabilities 66,483
Shareholders' equity 422,735
-------------
Total liabilities and shareholders' equity $4,846,286
=============
Net interest spread (1) (2) 3.85%
Net interest income and interest margin (1) (3) $50,198 4.54%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using the
current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 16
For the nine months ended
September 30, 2007
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $622 $5 1.07%
Investment securities:
Available for sale
Taxable 367,693 11,891 4.31%
Tax-exempt (1) 234,316 12,811 7.29%
Held to maturity
Taxable 553,471 17,966 4.33%
Tax-exempt (1) 570,569 26,290 6.14%
Loans:
Commercial:
Taxable 318,827 20,639 8.65%
Tax-exempt (1) 227,611 10,938 6.43%
Commercial real estate 885,172 47,341 7.15%
Real estate construction 76,340 5,718 10.01%
Real estate residential 495,766 17,629 4.74%
Consumer 513,223 23,380 6.09%
--------------------------
Total loans (1) 2,516,939 125,645 6.67%
--------------------------
Total earning assets (1) 4,243,610 194,608 6.12%
Other assets 426,409
-------------
Total assets $4,670,019
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,264,147 $-- --
Savings and interest-bearing
transaction 1,410,389 6,086 0.58%
Time less than $100,000 212,666 5,241 3.29%
Time $100,000 or more 500,389 17,396 4.65%
--------------------------
Total interest-bearing deposits 2,123,444 28,723 1.81%
Short-term borrowed funds 770,378 25,614 4.39%
Debt financing and notes payable 36,868 1,735 6.27%
--------------------------
Total interest-bearing liabilities 2,930,690 56,072 2.54%
Other liabilities 66,685
Shareholders' equity 408,497
-------------
Total liabilities and shareholders' equity $4,670,019
=============
Net interest spread (1) (2) 3.58%
Net interest income and interest margin (1) (3) $138,536 4.37%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using the
current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 17
For the nine months ended
September 30, 2006
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $878 $3 0.46%
Investment securities:
Available for sale
Taxable 398,065 12,730 4.26%
Tax-exempt (1) 252,853 13,974 7.37%
Held to maturity
Taxable 691,468 22,211 4.28%
Tax-exempt (1) 584,027 26,980 6.16%
Loans:
Commercial:
Taxable 352,747 22,243 8.43%
Tax-exempt (1) 246,450 11,963 6.49%
Commercial real estate 917,044 49,800 7.26%
Real estate construction 75,624 5,136 9.08%
Real estate residential 509,936 17,709 4.58%
Consumer 484,746 20,711 5.71%
--------------------------
Total loans (1) 2,586,547 127,562 6.58%
--------------------------
Total earning assets (1) 4,513,838 203,460 6.02%
Other assets 435,823
-------------
Total assets $4,949,661
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,328,071 $-- --
Savings and interest-bearing
transaction 1,602,949 4,280 0.36%
Time less than $100,000 243,814 4,763 2.61%
Time $100,000 or more 504,843 15,222 4.03%
--------------------------
Total interest-bearing deposits 2,351,606 24,265 1.38%
Short-term borrowed funds 740,923 21,766 3.87%
Debt financing and notes payable 37,372 1,754 6.26%
--------------------------
Total interest-bearing liabilities 3,129,901 47,785 2.03%
Other liabilities 67,500
Shareholders' equity 424,189
-------------
Total liabilities and shareholders' equity $4,949,661
=============
Net interest spread (1) (2) 3.99%
Net interest income and interest margin (1) (3) $155,675 4.61%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using the
current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 18
Summary of Changes in Interest Income and Expense due to
Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income and
interest expense due to changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in thousands).
Three months ended September 30, 2007
compared with three months
ended September 30, 2006
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 $1 $1
Investment securities:
Available for sale
Taxable (307) 110 (197)
Tax-exempt (1) (350) (113) (463)
Held to maturity
Taxable (1,369) 108 (1,261)
Tax-exempt (1) (193) (87) (280)
Loans:
Commercial:
Taxable (573) 128 (445)
Tax-exempt (1) (262) (63) (325)
Commercial real estate (765) (29) (794)
Real estate construction 337 2 339
Real estate residential (257) 133 (124)
Consumer 801 270 1,071
---------------------------------------
Total loans (1) (719) 441 (278)
Total (decrease) increase in interest ---------------------------------------
and fee income (1) (2,938) 460 (2,478)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (192) 764 572
Time less than $100,000 (213) 246 33
Time $100,000 or more 110 240 350
---------------------------------------
Total interest-bearing deposits (295) 1,250 955
---------------------------------------
Short-term borrowed funds 508 694 1,202
Debt financing and notes payable (2) 2 0
---------------------------------------
Total (decrease) increase in interest expense 211 1,946 2,157
---------------------------------------
Decrease in Net Interest Income (1) ($3,149) ($1,486) ($4,635)
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 19
Nine months ended September 30, 2007
compared with nine months
ended September 30, 2006
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($1) $3 $2
Investment securities:
Available for sale
Taxable (949) 110 (839)
Tax-exempt (1) (1,015) (148) (1,163)
Held to maturity
Taxable (4,419) 174 (4,245)
Tax-exempt (1) (620) (70) (690)
Loans:
Commercial:
Taxable (2,183) 579 (1,604)
Tax-exempt (1) (906) (119) (1,025)
Commercial real estate (1,713) (746) (2,459)
Real estate construction 49 533 582
Real estate residential (497) 417 (80)
Consumer 1,255 1,414 2,669
---------------------------------------
Total loans (1) (3,995) 2,078 (1,917)
Total (decrease) increase in interest ---------------------------------------
and fee income (1) (10,999) 2,147 (8,852)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (566) 2,372 1,806
Time less than $100,000 (661) 1,139 478
Time $100,000 or more (135) 2,309 2,174
---------------------------------------
Total interest-bearing deposits (1,362) 5,820 4,458
---------------------------------------
Short-term borrowed funds 892 2,956 3,848
Debt financing and notes payable (24) 5 (19)
---------------------------------------
Total (decrease) increase in interest expense (494) 8,781 8,287
---------------------------------------
Decrease in Net Interest Income (1) ($10,505) ($6,634) ($17,139)
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 20
Provision for Credit Losses
The level of the provision for credit losses during each of the periods
presented reflects the Company's continued efforts to manage credit costs by
enforcing underwriting and administration procedures and aggressively pursuing
collection efforts with troubled debtors. The Company provided $75 thousand for
credit losses in the third quarter of 2007, unchanged from the third quarter of
2006. For the first nine months of 2007 and 2006, $225 thousand and $375
thousand were provided in each respective period. The provision reflects
Management's assessment of credit risk in the loan portfolio and the level of
the allowance for loan losses for each of the periods presented. For further
information regarding net credit losses and the allowance for credit losses,
see the "Classified Assets" section of this report.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (in thousands).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Service charges on deposit accounts $7,569 $7,155 $22,813 $21,424
Merchant credit card fees 2,808 2,430 8,024 7,208
Debit card fees 969 883 2,825 2,587
ATM fees and interchange 723 753 2,114 2,148
Other service fees 506 510 1,496 1,445
Financial services commissions 383 377 1,057 1,037
Trust fees 337 298 978 867
Official check sales income 279 358 904 1,064
Mortgage banking income 29 36 92 134
Life insurance gains -- -- 822 --
Other noninterest income 1,041 1,099 3,496 3,686
----------------------------------------------------
Total $14,644 $13,899 $44,621 $41,600
====================================================
Noninterest income for the third quarter of 2007 increased by $745 thousand or
5.4% from the same period in 2006. Service charges on deposit accounts
increased due to Management efforts to increase deposit accounts and minimize
service charge waivers. Such charge income rose $414 thousand or 5.8% mainly
due to a $448 thousand increase in overdraft fees, partially offset by a
decline in fees charged on retail and business checking accounts. Merchant
credit card fees increased $378 thousand or 15.6%.
In the first nine months of 2007, noninterest income increased $3.0 million or
7.3% compared with the same period of the previous year primarily due to higher
service charges on deposit accounts and $822 thousand in life insurance
proceeds. Service charges on deposit accounts increased $1.4 million or 6.5%
mainly due to a $1.8 million increase in overdraft fees due to marketing
initiatives, partially offset by declines in fees charged on retail and
business checking accounts (down $236 thousand) and deficit fees charged on
analyzed accounts (down $167 thousand). Merchant credit card fees increased
$816 thousand or 11.3%. Debit card fees increased $238 thousand or 9.2% mainly
due to increased usage. Trust fees increased $111 thousand or 12.8%. Official
check sales income declined $160 thousand or 15.0% mostly due to lower average
investable balances. Other noninterest income decreased $190 thousand or 5.2%
due to a $239 thousand gain on sale of a vacated branch facility in 2006.
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Salaries and related benefits $12,587 $13,080 $37,776 $39,897
Occupancy 3,327 3,321 9,960 9,820
Data processing services 1,800 1,503 4,866 4,568
Equipment 1,083 1,194 3,367 3,775
Amortization of deposit intangibles 893 1,016 2,760 3,071
Courier service 854 904 2,559 2,736
Professional fees 451 532 1,355 1,823
Postage 404 410 1,211 1,217
Telephone 342 371 1,055 1,269
Stationery and supplies 323 307 906 849
Customer checks 228 247 704 800
Operational losses 228 129 559 572
Correspondent Service Charges 223 212 668 602
Loan expense 217 253 555 683
Advertising/public relations 150 197 641 650
Other noninterest expense 1,743 1,727 5,280 4,900
----------------------------------------------------
Total $24,853 $25,403 $74,222 $77,232
====================================================
Average full time equivalent staff 876 901 893 915
Noninterest expense to revenues (FTE) 41.28% 39.63% 40.52% 39.15%
Page 21
Noninterest expense decreased $550 thousand or 2.2% in the three months ended
September 30, 2007 compared with the same period in 2006. Salaries and related
benefits decreased $493 thousand or 3.8%, mainly due to declines in stock based
compensation (down $195 thousand), workers compensation (down $121 thousand)
and salaries, partially offset by higher incentives. Amortization of deposit
intangibles decreased $123 thousand or 12.1%. Equipment expense declined $111
thousand or 9.3% primarily due to lower repair, maintenance and depreciation
expenses. Data processing services increased $297 thousand or 19.8%. The higher
data processing expenses and a portion of the lower personnel costs were due to
conversion of the Company's item processing function to an outside vendor.
During the third quarter 2007, the Company installed new imaging technology
under contract with an outside vendor to improve its item processing function
(which converts daily transactions from paper to electronic format in
preparation for data processing). The Company previously operated this function
in-house; all affected employees were offered and accepted positions with the
outside vendor. As a result, the Company's employee compensation, equipment and
other expenses declined while data processing costs paid to outside vendors
rose. Based on Management's projections this conversion of the Company's item
processing function will not change its expenses in the aggregate.
In the first nine months of 2007, noninterest expense declined $3.0 million or
3.9% compared with the corresponding period of 2006. Salaries and related
benefits declined $2.1 million or 5.3% mostly due to a $292 thousand decrease
in regular salary as a result of fewer employees, partially offset by annual
merit increases, and declines in stock based compensation (down $530 thousand),
workers compensation (down $464 thousand) and incentives and bonuses (down
$272 thousand). Professional fees decreased $468 thousand or 25.6% mainly due
to lower legal fees (down $398 thousand). Equipment expense declined $408
thousand or 10.8% primarily due to lower repair, maintenance and depreciation
expenses. Amortization of deposit intangibles decreased $311 thousand or 10.1%.
Telephone expense declined $214 thousand or 16.8% largely due to lower rates
contained in a new vendor contract. Courier service expense decreased $177
thousand or 6.5%. Loan expense fell $128 thousand or 18.8% largely due to lower
repossession and other expenses. Declines were partially offset by increases in
other noninterest, data processing service and occupancy expenses. Other
noninterest expense rose $380 thousand or 7.8% mostly due to increases in
expenses for travel, employee recruiting, internet banking, and amortization of
low-income housing investments as tax benefits are realized. Data processing
services increased $298 thousand or 6.5%. The higher data processing expenses
and a portion of the lower personnel costs were due to conversion of the
Company's item processing function to an outside vendor. Occupancy expense
increased $140 thousand or 1.4% primarily due to increases in building
insurance and maintenance costs and higher rent, net of sublease income, partly
offset by lower depreciation charges.
Provision for Income Tax
During the third quarter of 2007, the Company recorded income tax expense (FTE)
of $13.3 million, $1.1 million or 7.8% lower than the third quarter of 2006.
The current quarter provision represents an effective tax rate (FTE) of 37.6%,
compared with 37.2% for the third quarter of 2006. The third quarter 2007 tax
provision reflected adjustments to estimates for permanent book to tax
differences. The tax provision for both the third quarter 2007 and third
quarter 2006 included adjustments for book estimates to the filed Federal tax
returns for the respective prior years. On a year-to-date basis, the income tax
provision (FTE) was $40.8 million for 2007 compared with $44.8 million for
2006. The effective tax rate (FTE) of 37.5% for the first nine months of 2007
is unchanged from the same period of 2006.
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk and to increase diversification of the loan portfolio. Loan reviews
are performed using grading standards and criteria similar to those employed by
bank regulatory agencies. Loans receiving lesser grades fall under the
"classified" category, which includes all nonperforming and potential problem
loans, and receive an elevated level of attention to ensure collection. Other
real estate owned is recorded at the lower of cost or appraised value less
disposal cost.
The following is a summary of classified loans and other real estate owned on
the dates indicated (dollars in thousands):
At September 30, At
--------------------------December 31,
2007 2006 2006
---------------------------------------
Classified loans $21,403 $24,111 $20,180
Other real estate owned 613 656 647
---------------------------------------
Classified loans and other real estate owned $22,016 $24,767 $20,827
=======================================
Allowance for loan losses /
classified loans 247% 230% 274%
Classified loans include loans graded "substandard", "doubtful" and "loss" in
accordance with regulatory guidelines. At September 30, 2007, $21.0 million of
loans or 98.2% of total classified loans are graded "substandard". Such
substandard loans accounted for 0.84% of total gross loans at September 30,
2007. Classified loans at September 30, 2007, decreased $2.7 million or 11.2%
from a year ago primarily due to seven loan payoffs, four loan upgrades and two
chargeoffs, partially offset by 12 loan downgrades. Classified loans at
September 30, 2007, declined $1.2 million or 6.1% from December 31, 2006 mostly
due to four loan payoffs, four loan upgrades and two chargeoffs, partially
offset by 11 loan downgrades totaling $6.2 million.
Other real estate owned was $613 thousand, $647 thousand and $656 thousand at
September 30, 2007, December 31, 2006 and September 30, 2006, respectively,
representing one property. The reduction in the property's carrying value
resulted from a reduction in the carrying value based on updated appraisals,
with an offsetting charge to earnings.
Page 22
Nonperforming Loans
Nonperforming loans include nonaccrual loans and loans 90 days past due as to
principal or interest and still accruing. Loans are placed on nonaccrual status
when they become 90 days or more delinquent, unless the loan is well secured
and in the process of collection. Interest previously accrued on loans placed
on nonaccrual status is charged against interest income. In addition, loans
secured by real estate with temporarily impaired values and commercial loans
to borrowers experiencing financial difficulties are placed on nonaccrual
status even though the borrowers continue to repay the loans as scheduled. Such
loans are classified as "performing nonaccrual" and are included in total
nonperforming assets. When the ability to fully collect nonaccrual loan
principal is in doubt, cash payments received are applied against the principal
balance of the loan until such time as full collection of the remaining
recorded balance is expected. Any subsequent interest received is recorded as
interest income on a cash basis.
The following is a summary of nonperforming loans and OREO on the dates
indicated (dollars in thousands):
At September 30, At
--------------------------December 31,
2007 2006 2006
---------------------------------------
Performing nonaccrual loans $1,695 $3,889 $4,404
Nonperforming, nonaccrual loans 3,132 1,162 61
---------------------------------------
Total nonaccrual loans 4,827 5,051 4,465
Loans 90 days past due and
still accruing 251 252 65
---------------------------------------
Total nonperforming loans 5,078 5,303 4,530
Other real estate owned 613 656 647
---------------------------------------
Total $5,691 $5,959 $5,177
=======================================
As a percentage of total loans 0.23% 0.23% 0.20%
Nonaccrual loans increased $362 thousand during the nine months ended September
30, 2007. Eighteen loans comprised the $4.8 million nonaccrual loans as of
September 30, 2007. Six of those loans were on nonaccrual status throughout the
first nine months of 2007, while the remaining twelve loans were placed on
nonaccrual status during the nine months ended September 30, 2007. The Company
actively pursues full collection of nonaccrual loans.
The Company's residential real estate loan underwriting standards for first
mortgages limit the loan amount to no more than 80 percent of the appraised
value of the property serving as collateral for the loan, and require
verification of income of the borrower(s). The Company had no "sub-prime" loans
as of September 30, 2007, December 31, 2006 and September 30, 2006. Of the
loans 90 days past due and still accruing at September 30, 2007, $-0- and $207
thousand were residential real estate loans and automobile loans, respectively.
Delinquent consumer loans on accrual status were as follows ($ in thousands):
At September 30, At
--------------------------December 31,
2007 2006 2006
---------------------------------------
Residential real estate loans:
------------------------------
30-89 days delinquent:
Dollar amount $89 $323 $29
Percentage of total residential real estate loans 0.02% 0.06% 0.01%
90 or more days delinquent:
Dollar amount $-0- $-0- $-0-
Percentage of total residential real estate loans 0.00% 0.00% 0.00%
Automobile loans:
-----------------
30-89 days delinquent:
Dollar amount $2,692 $1,952 $2,095
Percentage of total automobile loans 0.57% 0.48% 0.49%
90 or more days delinquent:
Dollar amount $207 $134 $22
Percentage of total automobile loans 0.04% 0.03% 0.01%
The Company had no restructured loans as of September 30, 2007, September 30,
2006 and December 31, 2006.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three and nine month periods ended September 30, 2007,
if all such loans had performed in accordance with their original terms, was
$107 thousand and $326 thousand, respectively, compared with $122 thousand and
$384 thousand, respectively, for the third quarter and the first three quarters
of 2006.
The amount of interest income that was recognized on nonaccrual loans from all
cash payments, including those related to interest owed from prior years, made
during the three and nine months ended September 30, 2007, totaled $130
thousand and $399 thousand, respectively, compared with $164 thousand and $316
thousand, respectively, for the comparable periods in 2006. These cash payments
represent annualized yields of 10.36% and 11.02%, respectively, for the third
quarter and the first nine months of 2007 compared to 12.25% and 7.21%,
respectively, for the third quarter and the first nine months of 2006.
Page 23
Total cash payments received during the third quarter and first nine months of
2007 which were applied against the book balance of nonaccrual loans
outstanding at September 30, 2007, totaled $-0- thousand and approximately $5
thousand, respectively. Total cash payments received during the third quarter
and first nine months of 2006 which were applied against the book balance of
nonaccrual loans outstanding at September 30, 2006, totaled approximately $3
thousand and $50 thousand, respectively.
Management believes the overall credit quality of the loan portfolio is stable;
however, nonperforming assets could fluctuate from period to period. The
performance of any individual loan can be affected by external factors such as
the interest rate environment, economic conditions or factors particular to the
borrower. No assurance can be given that additional increases in nonaccrual
loans will not occur in the future.
Allowance for Credit Losses
The following table summarizes the credit loss provision, net credit losses and
allowance for credit losses for the periods indicated (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Balance, beginning of period $57,166 $59,372 $59,023 $59,537
Credit loss provision 75 75 225 375
Loans charged off (1,031) (1,011) (4,519) (2,775)
Recoveries of previously
charged off loans 421 590 1,902 1,889
----------------------------------------------------
Net credit losses (610) (421) (2,617) (886)
----------------------------------------------------
Balance, end of period $56,631 $59,026 $56,631 $59,026
====================================================
Components:
Allowance for loan losses $52,938 $55,338 $52,938 $55,338
Reserve for unfunded credit commitments 3,693 3,688 3,693 3,688
----------------------------------------------------
Allowance for credit losses $56,631 $59,026 $56,631 $59,026
====================================================
Allowance for loan losses /
loans outstanding 2.11% 2.18%
The Company's allowance for credit losses is maintained at a level considered
adequate to provide for losses that can be estimated based upon specific and
general conditions. These include conditions unique to individual borrowers, as
well as overall credit loss experience, the amount of past due, nonperforming
loans and classified loans, recommendations of regulatory authorities,
prevailing economic conditions and other factors. A portion of the allowance is
specifically allocated to impaired loans whose full collectibility is
uncertain. Such allocations are determined by Management based on loan-by-loan
analyses. A second allocation is based in part on quantitative analyses of
historical credit loss experience, in which criticized and classified credit
balances identified through an independent internal credit review process are
analyzed using a linear regression model to determine standard loss rates. The
results of this analysis are applied to current criticized and classified loan
balances to allocate the reserve to the respective segments of the loan
portfolio. In addition, loans with similar characteristics not usually
criticized using regulatory guidelines are analyzed based on the historical
loss rates and delinquency trends, grouped by the number of days the payments
on these loans are delinquent. Last, allocations are made to non-criticized and
classified commercial loans and residential real estate loans based on
historical loss rates, agriculture commodity prices, and levels of government
funding. The remainder of the allowance is considered to be unallocated. The
unallocated allowance is established to provide for probable losses that have
been incurred as of the reporting date but not reflected in the allocated
allowance. It addresses additional qualitative factors consistent with
Management's analysis of the level of risks inherent in the loan portfolio,
which are related to the risks of the Company's general lending activity.
Included in the unallocated allowance is the risk of losses that are
attributable to national or local economic or industry trends which have
occurred but have yet been recognized in past loan charge-off history (external
factors). The external factors evaluated by the Company include: economic and
business conditions, external competitive issues, and other factors. Also
included in the unallocated allowance is the risk of losses attributable to
general attributes of the Company's loan portfolio and credit administration
(internal factors). The internal factors evaluated by the Company include: loan
review system, adequacy of lending Management and staff, loan policies and
procedures, problem loan trends, concentrations of credit, and other factors.
By their nature, these risks are not readily allocable to any specific loan
category in a statistically meaningful manner and are difficult to quantify
with a specific number. Management assigns a range of estimated risk to the
qualitative risk factors described above based on Management's judgment as to
the level of risk, and assigns a quantitative risk factor from the range of
loss estimates to determine the appropriate level of the unallocated portion of
the allowance.
Page 24
The following table presents the allocation of the allowance for credit losses:
Allocation of the Allowance for Credit Losses
At September 30, 2007 2006
----------------------------------------------------
Allocation Loans as Allocation Loans as
of the Percent of the Percent
Allowance of Total Allowance of Total
(dollars in thousands) Balance Loans Balance Loans
----------------------------------------------------
Commercial $26,609 56% $24,742 58%
Real estate construction 4,647 4% 4,064 3%
Real estate residential 388 19% 1,228 20%
Consumer 4,247 21% 5,095 19%
Unallocated portion 20,740 -- 23,897 --
----------------------------------------------------
Total $56,631 100% $59,026 100%
====================================================
The allocation to loan portfolio segments changed from September 30, 2006 to
September 30, 2007. The increase in allocation for commercial loans reflects an
increase in loans "criticized" under regulatory risk grading guidelines. Such
loans are not yet "classified" at higher risk levels, but receive a higher
level of credit management attention due to their increased risk profile. The
increase in allocation to real estate construction loans reflects an increase
in criticized construction loans outstanding. The reduced allocations for
residential real estate and consumer loans reflects refinements to the
statistical model used to apply historical loss rates to delinquent loan
volumes.
At September 30, 2006 and September 30, 2007, Management's evaluations of the
unallocated portion of the allowance for credit losses attributed significant
risk levels to developing economic and business conditions ($4.3 million and
$4.4 million, respectively), external competitive issues ($2.2 million and $2.3
million, respectively), and adequacy of lending Management and staff ($5.2
million and $5.0 million, respectively). Based on Management's analysis and
judgment, the amount of the unallocated portion of the allowance for credit
losses was $23.9 million at September 30, 2006, compared to $20.7 million at
September 30, 2007.
Asset and Liability Management
The fundamental objective of the Company's management of assets and liabilities
is to maximize its economic value while maintaining adequate liquidity and a
conservative level of interest rate risk.
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk results from many factors. Assets and liabilities may mature
or reprice at different times. Assets and liabilities may reprice at the same
time but by different amounts. Short-term and long-term market interest rates
may change by different amounts. The remaining maturity of various assets or
liabilities may shorten or lengthen as interest rates change. In addition,
interest rates may have an impact on loan demand, credit losses, and other
sources of earnings such as account analysis fees on commercial deposit
accounts, official check fees and correspondent bank service charges.
The rise in short-term interest rates during the last three years affected the
volume of lower-costing deposit products, placing more reliance on higher-cost
certificates of deposit and wholesale funding. Competitive loan pricing and
loosened underwriting standards in the banking industry have limited the
opportunity to originate commercial loans that will remain profitable
throughout the duration of the loans, in Management's opinion. Recent interest
rate spreads between loan origination yields and the rates paid on deposits and
other funding sources have been very narrow. As a result, the Company has not
taken an aggressive posture relative to current loan growth. The interest rate
spread has also been very narrow in regard to bond investments. As such,
Westamerica has not been making significant additional investments in bonds
over the past several years other than continuing investments for collateral
requirements and Community Reinvestment Act purposes.
The Company's asset and liability position remains slightly "liability
sensitive," with a greater amount of interest-bearing liabilities subject to
immediate and near-term interest rate changes relative to earning assets. As a
result, the recent reduction in the federal funds target rate (charged for
short-term inter-bank borrowings) and the related decline in U.S. Treasury bill
rates should improve the Company's net interest margin during the fourth
quarter 2007. The lower short-term interest rates should lower the Company's
cost of funds at a more rapid pace than its earning asset yields. The duration
of the Company's earning assets and funding has not changed by a meaningful
amount during the first nine months of 2007. Management continues to monitor
the interest rate environment as well as economic conditions and other factors
it deems relevant in managing the Company's exposure to interest rate risk.
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. The
Company's most likely earnings plan is currently based on monetary policy
easing by the Federal Reserve in 2007. This earnings plan would be negatively
impacted if, to the contrary, monetary policy was tightened in 2007.
Page 25
Assuming a decrease of 100 bp in the federal funds rate and a corresponding
decline of 30 bp in the 10 year Constant Maturity Treasury Bond yield during
the same period, earnings are estimated to improve approximately 1.2% over the
Company's most likely net income plan over the twelve months ending September
30, 2008. Conversely, assuming a 100 bp increase in the federal funds rate and
a corresponding increase of 65 bp in the 10-year Constant Maturity Treasury
Bond yield during the same period, estimated earnings at risk would be
approximately 3.0% of the Company's most likely net income plan over the twelve
months ending September 30, 2008. 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.
Liquidity
The Company's principal source of liquidity is investment securities available
for sale and principal payments from consumer and other loans. At September 30,
2007, investment securities available for sale totaled $570 million,
representing a decrease of $45.4 million from December 31, 2006. The decrease
is primarily attributable to principal payments and maturities. At September
30, 2007, indirect automobile loans totaled $476 million, which were
experiencing stable monthly principal payments of approximately $19 million. At
September 30, 2007, $508 million in collateralized mortgage obligations
("CMOs") and mortgage backed securities ("MBSs") were held in the Company's
investment portfolios. None of the CMOs or MBSs are backed by sub-prime
mortgages. The CMOs and MBSs have been experiencing stable principal paydowns
of approximately $11 million per month during the last twelve months. In
addition, at September 30, 2007, the Company had customary lines for overnight
borrowings from other financial institutions in excess of $700 million and a
$35 million line of credit, under which $22.8 million was outstanding.
Additionally, as a member of the Federal Reserve System, the Company has access
to borrowing from the Federal Reserve. The Company's short-term debt rating
from Fitch Ratings is F1. Management expects the Company can access short-term
debt financing if desired. The Company's long-term debt rating from Fitch
Ratings is A with a stable outlook. Management is confident the Company could
access additional long-term debt financing if desired.
The Company generates significant liquidity from its operating activities. The
Company's profitability during the first nine months of 2007 and 2006
contributed substantial operating cash flows of $72.1 million and $85.8
million, respectively. In 2007, operating activities and retained earnings from
prior years provided cash for $31.0 million in shareholder dividends and $65.1
million utilized to repurchase common stock. In 2006, operating activities and
retained earnings from prior years provided cash for $68.7 million of Company
stock repurchases, $30.2 million in shareholder dividends and $3.3 million for
repayment of long term debt.
The Company's investing activities were also a net source of cash in the first
nine months of 2007. Proceeds from maturing investment securities of $157.5
million were only partially reinvested, for a net increase in cash of $127.3
million. This cash inflow and a $83.1 million increase in short-term borrowings
offset a $176.5 million decrease in customers' deposits. The Company's
investing activities were also a net source of cash in the first nine months of
2006. Proceeds from maturing investment securities of $177.6 million were only
partially reinvested, for a net increase in cash of $169.9 million. Other
investing activities included net loan repayments of $118.0 million. These cash
inflows offset a $295.0 million decrease in customers' deposits and a $6.3
million reduction in short-term borrowings.
The Company anticipates maintaining its cash levels in 2007 mainly through
profitability and retained earnings. It is anticipated that loan demand will be
moderate during the remainder of 2007, although such demand will be dictated by
economic and competitive conditions. The Company aggressively solicits
non-interest bearing demand deposits and money market checking deposits, which
are the least sensitive to interest rates. However, higher costing products,
including money market savings and certificates of deposit, have been less
stable throughout 2006 and the nine months ended September 30, 2007 due to
rising short-term interest rates. The growth of deposit balances is subject to
heightened competition, the success of the Company's sales efforts, delivery of
superior customer service and market conditions. The September 18, 2007
reduction in the federal funds rate has resulted in declining short-term
interest rates, which could impact deposit volumes in the future. Depending on
economic conditions, interest rate levels, and a variety of other conditions,
deposit growth may be used to fund loans, purchase investment securities or to
reduce short-term borrowings. However, due to concerns regarding uncertainty in
the general economic environment, competition, possible terrorist attacks and
political uncertainty, loan demand and levels of customer deposits are not
certain. Shareholder dividends and share repurchases are expected to continue
subject to the Board's discretion and continuing evaluation of capital levels,
earnings, asset quality, debt retirement and other factors.
Westamerica Bancorporation ("the Parent Company") is a separate entity and
apart from Westamerica Bank ("the Bank") and must provide for its own
liquidity. In addition to its operating expenses, the Parent Company is
responsible for the payment of dividends declared for its shareholders, and
interest and principal on outstanding debt. Substantially all of the Parent
Company's revenues are obtained from subsidiary service fees and dividends.
Payment of such dividends to the Parent Company by the Bank is limited under
regulations for Federal Reserve member banks and California law. The amount
that can be paid in any calendar year, without prior approval from federal and
state regulatory agencies, cannot exceed the net profits (as defined) for that
year plus the net profits of the preceding two calendar years less dividends
paid. The Company believes that such restrictions will not have an impact on
the Parent Company's ability to meet its ongoing cash obligations.
Page 26
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management.
The Company repurchases shares of its common stock in the open market pursuant
to stock repurchase plans approved by the Board with the intention of lessening
the dilutive impact of issuing new shares under stock option plans, returning
excess capital to shareholders, and other ongoing requirements. These programs
have been implemented to optimize the Company's use of equity capital and
enhance shareholder value. Pursuant to these programs, the Company collectively
repurchased 1.4 million shares each in the nine month period ended September
30, 2007 and 2006.
The Company's capital position represents the level of capital available to
support continued operations and expansion. The Company's primary capital
resource is shareholders' equity, which was $403.7 million at September 30,
2007, a decrease of $25.1 million or 5.9% from a year ago, and a decrease of
$20.6 million or 4.9% from December 31, 2006. These decreases are reflective of
the effect of common stock repurchases, dividends paid to shareholders and a
change in unrealized gain(loss) on securities available for sale, offset by the
generation of earnings and stock issuance in connection with employee stock
option exercises. The Company's ratio of equity to total assets decreased to
8.67% at September 30, 2007, from 8.85% a year ago and 8.90% on December 31,
2006, because shareholders' equity decreased relatively more than total assets.
The following summarizes the ratios of capital to risk-adjusted assets for the
Company on the date indicated:
Well-capitalized
At September 30, At Minimum by
--------------------------December 31, Regulatory Regulatory
2007 2006 2006 Requirement Definition
-----------------------------------------------------------------
Tier I Capital 9.38% 9.70% 9.77% 4.00% 6.00%
Total Capital 10.69% 11.02% 11.09% 8.00% 10.00%
Leverage ratio 6.31% 6.39% 6.42% 4.00% 5.00%
The risk-based capital ratios declined at September 30, 2007, compared with
September 30 and December 31 of 2006, due to a decrease in equity capital,
offset in part by a decline in risk-weighted assets.
The following summarizes the ratios of capital to risk-adjusted assets for the
Bank on the date indicated:
Well-capitalized
At September 30, At Minimum by
--------------------------December 31, Regulatory Regulatory
2007 2006 2006 Requirement Definition
-----------------------------------------------------------------
Tier I Capital 9.60% 9.83% 9.88% 4.00% 6.00%
Total Capital 11.06% 11.28% 11.34% 8.00% 10.00%
Leverage ratio 6.42% 6.44% 6.46% 4.00% 5.00%
The risk-based capital ratios declined at September 30, 2007, compared with
September 30 and December 31 of 2006, due to a decrease in equity capital,
offset in part by a decline in risk-weighted assets.
Capital ratios are reviewed by Management on a regular basis to ensure that
capital exceeds the prescribed regulatory minimums and is adequate to meet the
Company's and the Bank's anticipated future needs. All ratios as shown in the
tables above are in excess of the regulatory definition of "well capitalized".
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk, even though such activities may be
undertaken with the approval of the Company's Board of Directors.
Interest rate risk as discussed above is the most significant market risk
affecting the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, are not significant
in the normal course of the Company's business activities.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, as of September 30, 2007. 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 September 30,
2007 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Page 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of the banking business, the Bank is at times
party to various legal actions; generally such actions are of
a routine nature and arise in the normal course of business of
the Subsidiary Bank. The Bank is not a party to any pending or
threatened legal action that, if determined adversely to the
Bank, is likely in Management's opinion to have a material
adverse effect on the Bank's financial condition or results of
operations.
Item 1A. Risk Factors
There are no material changes to the risk factors disclosed in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c) Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by
or on behalf of Westamerica Bancorporation or any "affiliated purchaser" (as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of
common stock during the quarter ended September 30, 2007 (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
----------------------------------------------------------------
July 1
through
July 31 232 $42.06 232 344
----------------------------------------------------------------
August 1
through
August 31 191 44.64 191 1,933
----------------------------------------------------------------
September 1
through
September 30 69 48.01 69 1,864
----------------------------------------------------------------
Total 492 $43.90 492 1,864
================================================================
* Includes 17 thousand, 23 thousand and 12 thousand shares purchased in July,
August and September, 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 third quarter of 2007 pursuant to a program
approved by the Board of Directors on August 24, 2006 authorizing the purchase
of up to 2,000,000 shares of the Company's common stock from time to time prior
to September 1, 2007. A replacement plan was approved by the Board of Directors
on August 23, 2007 to repurchase up to 2,000,000 shares prior to September 1,
2008.
Item 3. Defaults upon Senior Securities
None
tem 4. Submission of Matters to a Vote of Security Holders
None
tem 5. Other Information
None
Page 28
Item 6. Exhibits
(a) The exhibit list required by this item is incorporated by reference
to the Exhibit Index filed with this report.
Exhibit 31.1: Certification of Chief Executive
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1: Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2: Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Page 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
WESTAMERICA BANCORPORATION
(Registrant)
November 1, 2007 /s/ JOHN "ROBERT" THORSON
---------------- -------------------------
Date John "Robert" Thorson
Senior Vice President
and Chief Financial Officer
(Chief Financial and Accounting Officer)
Page 30
Exhibit Index
Exhibit 31.1: Certification of Chief Executive
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1: Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2: Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002