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 June 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 July 25, 2007
Common Stock, 29,606,194
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 27
Item 4 - Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 1A - Risk Factors 28
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3 - Defaults upon Senior Securities 28
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 5 - Other Information 29
Item 6 - Exhibits 29
Signature 30
Exhibit Index 31
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 32
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 33
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 34
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 35
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 June 30, At
--------------------------December 31,
2007 2006* 2006
---------------------------------------
Assets:
Cash and cash equivalents $164,065 $188,670 $184,442
Money market assets 325 534 567
Investment securities available for sale 582,959 620,294 615,525
Investment securities held to maturity,
with market values of:
$1,085,464 at June 30, 2007 1,104,132
$1,210,561 at June 30, 2006 1,243,936
$1,155,736 at December 31, 2006 1,165,092
Loans, gross 2,521,738 2,580,612 2,531,734
Allowance for loan losses (53,473) (55,684) (55,330)
---------------------------------------
Loans, net of allowance for loan losses 2,468,265 2,524,928 2,476,404
Other real estate owned 613 656 647
Premises and equipment, net 29,169 31,785 30,188
Identifiable intangibles 20,215 24,114 22,082
Goodwill 121,719 121,719 121,719
Interest receivable and other assets 155,607 149,006 152,669
---------------------------------------
Total Assets $4,647,069 $4,905,642 $4,769,335
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,266,941 $1,330,280 $1,341,019
Interest bearing:
Transaction 554,036 606,633 588,668
Savings 809,791 951,819 865,268
Time 704,264 758,315 721,779
---------------------------------------
Total deposits 3,335,032 3,647,047 3,516,734
Short-term borrowed funds 809,261 746,517 731,977
Debt financing and notes payable 36,846 36,993 36,920
Liability for interest, taxes and
other expenses 57,948 51,598 59,469
---------------------------------------
Total Liabilities 4,239,087 4,482,155 4,345,100
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
29,732 at June 30, 2007 335,300
31,201 at June 30, 2006 343,490
30,547 at December 31, 2006 341,529
Deferred compensation 2,990 2,734 2,734
Accumulated other comprehensive (loss) income (777) (4,771) 1,850
Retained earnings 70,469 82,034 78,122
---------------------------------------
Total Shareholders' Equity 407,982 423,487 424,235
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,647,069 $4,905,642 $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
(In thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------
Interest Income:
Loans $40,727 $41,160 $80,894 $82,266
Money market assets and funds sold 2 2 3 2
Investment securities available for sale
Taxable 3,919 4,227 7,989 8,631
Tax-exempt 2,922 3,150 5,974 6,321
Investment securities held to maturity
Taxable 5,987 7,407 12,255 15,236
Tax-exempt 5,784 5,931 11,599 11,888
----------------------------------------------------
Total interest income 59,341 61,877 118,714 124,344
----------------------------------------------------
Interest Expense:
Transaction deposits 528 427 1,051 855
Savings deposits 1,452 924 2,861 1,822
Time deposits 7,540 6,661 14,845 12,577
Short-term borrowed funds 8,718 7,695 17,014 14,366
Notes payable 578 578 1,156 1,176
----------------------------------------------------
Total interest expense 18,816 16,285 36,927 30,796
----------------------------------------------------
Net Interest Income 40,525 45,592 81,787 93,548
----------------------------------------------------
Provision for credit losses 75 150 150 300
----------------------------------------------------
Net Interest Income After
Provision For Credit Losses 40,450 45,442 81,637 93,248
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 7,716 7,186 15,244 14,269
Merchant credit card 2,768 2,392 5,217 4,778
Debit card 960 876 1,856 1,704
Financial services commissions 363 363 673 661
Trust fees 304 287 641 569
Mortgage banking 33 49 62 99
Other 2,556 2,908 6,285 5,621
----------------------------------------------------
Total Noninterest Income 14,700 14,061 29,978 27,701
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 12,622 13,559 25,189 26,816
Occupancy 3,342 3,267 6,633 6,499
Data processing 1,543 1,531 3,066 3,065
Equipment 1,147 1,315 2,284 2,581
Amortization of intangibles 893 1,016 1,868 2,056
Courier service 857 909 1,705 1,831
Professional fees 409 833 904 1,291
Other 3,893 3,915 7,721 7,690
----------------------------------------------------
Total Noninterest Expense 24,706 26,345 49,370 51,829
----------------------------------------------------
Income Before Income Taxes 30,444 33,158 62,245 69,120
Provision for income taxes 8,093 8,664 16,324 18,509
----------------------------------------------------
Net Income $22,351 $24,494 $45,921 $50,611
====================================================
Average Shares Outstanding 29,938 31,364 30,139 31,525
Diluted Average Shares Outstanding 30,365 31,932 30,593 32,103
Per Share Data:
Basic Earnings $0.75 $0.78 $1.52 $1.61
Diluted Earnings 0.74 0.77 1.50 1.58
Dividends Paid 0.34 0.32 0.68 0.64
See accompanying notes to unaudited condensed consolidated financial statements.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands)
(unaudited)
Accumulated
Compre-
Common Deferred hensive Retained
Shares Stock Compensation Income 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 50,611 50,611
Other comprehensive income,
net of tax:
Net unrealized loss on securities
available for sale (6,653) (6,653)
-------------
Total comprehensive income 43,958
Exercise of stock options 217 7,754 7,754
Stock option tax benefits 617 617
Restricted stock activity 20 727 311 1,038
Stock based compensation 1,274 1,274
Stock awarded to employees 2 126 126
Purchase and retirement of stock (920) (10,043) (37,770) (47,813)
Dividends (20,287) (20,287)
------------------------------------------------------------------------------
Balance, June 30, 2006 31,201 $343,490 $2,734 ($4,771) $82,034 $423,487
==============================================================================
Balance, December 31, 2006 30,547 $341,529 $2,734 $1,850 $78,122 $424,235
Comprehensive income
Net income for the period 45,921 45,921
Other comprehensive income,
net of tax:
Net unrealized loss on securities
available for sale (2,646) (2,646)
Post-retirement benefit transition
obligation amortization 19 19
-------------
Total comprehensive income 43,294
Exercise of stock options 74 2,716 2,716
Stock option tax benefits 140 140
Restricted stock activity 12 316 256 572
Stock based compensation 939 939
Stock awarded to employees 3 126 126
Purchase and retirement of stock (904) (10,466) (33,012) (43,478)
Dividends (20,562) (20,562)
------------------------------------------------------------------------------
Balance, June 30, 2007 29,732 $335,300 $2,990 ($777) $70,469 $407,982
==============================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 6
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the six months
ended June 30,
--------------------------
2007 2006
--------------------------
Operating Activities:
Net income $45,921 $50,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,892 5,152
Provision for credit losses 150 300
Net amortization of loan fees, net of cost (741) (258)
Decrease in interest income receivable 762 2,284
Increase in other assets (6,667) (3,928)
Decrease in income taxes payable (953) (1,655)
Increase in interest expense payable 27 1,384
Increase in other liabilities 3,120 1,571
Stock option compensation expense 939 1,274
Stock option tax benefits (140) (617)
Writedown of equipment 7 186
Originations of loans for resale (271) (500)
Proceeds from sale of loans originated for resale 212 505
Writedown on property acquired in satisfaction of debt 34 0
Net Cash Provided by Operating Activities 47,292 56,309
--------------------------
Investing Activities:
Net repayments of loans 8,788 90,740
Purchases of investment securities available for sale (26,178) (5,020)
Proceeds from maturity of securities available for sale 55,189 35,448
Purchases of investment securities held to maturity 0 0
Proceeds from maturity of securities held to maturity 60,960 93,281
Purchases of FRB/FHLB stock (73) (67)
Proceeds from sales of FRB/FHLB stock 73 139
Purchases of property, plant and equipment (752) (706)
Net Cash Provided by Investing Activities 98,007 213,815
--------------------------
Financing Activities:
Net decrease in deposits (181,702) (199,054)
Net increase (decrease) in short-term borrowings 77,284 (28,656)
Repayments of notes payable (74) (3,288)
Exercise of stock options 2,716 7,754
Stock option tax benefits 140 617
Purchase and retirement of stock (43,478) (47,813)
Dividends paid (20,562) (20,287)
--------------------------
Net Cash Used in Financing Activities (165,676) (290,727)
--------------------------
Net Decrease In Cash and Cash Equivalents (20,377) (20,603)
Cash and Cash Equivalents at Beginning of Period 184,442 209,273
--------------------------
Cash and Cash Equivalents at End of Period $164,065 $188,670
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $0 $656
Unrealized loss on securities available for sale, net (2,646) (6,653)
Supplemental Disclosure of Cash Flow Activity:
Interest paid for the period $36,955 $32,181
Income tax payments for the period 17,263 20,860
See accompanying notes to unaudited condensed consolidated financial statements.
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of Management, are necessary for a fair presentation of the results
for the interim periods presented. The interim results for the six months
ended June 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 June 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 $54,598 ($3,000) $51,598
Interest receivable and
other assets 150,250 (1,244) 149,006
Retained earnings 80,278 1,756 82,034
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.
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 six months ended June 30, 2007 and June 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 second quarter of 2007 and second quarter of 2006,
no such adjustments were recorded.
Page 8
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
-------------
June 30, 2006 $121,719
=============
December 31, 2006 $121,719
--
-------------
June 30, 2007 $121,719
=============
The gross carrying amount of intangible assets and accumulated amortization was
($ in thousands):
June 30,
----------------------------------------------------
2007 2006
----------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------------------
Core Deposit Intangibles $24,383 ($10,339) $24,383 ($8,120)
Merchant Draft Processing Intangible 10,300 (4,129) 10,300 (2,449)
----------------------------------------------------
Total Intangible Assets $34,683 ($14,468) $34,683 ($10,569)
====================================================
As of June 30, 2007, the current year and estimated future amortization expense
for intangible assets was ($ in thousands):
Merchant
Core Draft
Deposit Processing
Intangibles Intangible Total
---------------------------------------
Six months ended June 30, 2007 (actual) $1,087 $781 $1,868
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 eligible employees electing early retirement until age 65. The
Company pays a portion of these eligible early retirees' insurance premiums
which are determined at their date of retirement. The Company reimburses a
portion of Medicare Part B premiums for all eligible retirees and spouses over
age 65.
The following table sets forth the net periodic post-retirement benefit costs
(in thousands):
For the six months ended
June 30,
--------------------------
2007 2006
--------------------------
Service cost $8 $94
Interest cost 132 106
Amortization of unrecognized
transition obligation 30 30
--------------------------
Net periodic cost $170 $230
==========================
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 June 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 June 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 six months
ended June 30, ended June 30,
(In thousands, except per share data) 2007 2006 2007 2006
----------------------------------------------------
Weighted average number of common
shares outstanding - basic 29,938 31,364 30,139 31,525
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 427 568 454 578
----------------------------------------------------
Weighted average number of common
shares outstanding - diluted 30,365 31,932 30,593 32,103
====================================================
Net income $22,351 $24,494 $45,921 $50,611
Basic earnings per share $0.75 $0.78 $1.52 $1.61
Diluted earnings per share $0.74 $0.77 $1.50 $1.58
For the three months ended June 30, 2007 and 2006, options to purchase 901
thousand and 727 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 six
months ended June 30, 2007 and 2006, options to purchase 911 thousand and 732
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
(Dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Net Interest Income (FTE)*** $46,059 $51,503 $92,973 $105,477
Provision for Loan Losses (75) (150) (150) (300)
Noninterest Income 14,700 14,061 29,978 27,701
Noninterest Expense (24,706) (26,345) (49,370) (51,829)
Provision for Income Taxes (FTE)*** (13,627) (14,575) (27,510) (30,438)
----------------------------------------------------
Net Income $22,351 $24,494 $45,921 $50,611
====================================================
Average Shares Outstanding 29,938 31,364 30,139 31,525
Diluted Average Shares Outstanding 30,365 31,932 30,593 32,103
Shares Outstanding at Period End 29,732 31,201 29,732 31,201
As Reported:
Basic Earnings Per Share $0.75 $0.78 $1.52 $1.61
Diluted Earnings Per Share $0.74 $0.77 $1.50 $1.58
Return On Assets 1.92% 1.99% 1.97% 2.04%
Return On Equity 21.94% 23.12% 22.49% 24.02%
Net Interest Margin (FTE)*** 4.36% 4.58% 4.38% 4.65%
Net Loan Losses to Average Loans 0.24% 0.04% 0.16% 0.04%
Efficiency Ratio** 40.7% 40.2% 40.2% 38.9%
Average Balances:
Total Assets $4,668,627 $4,948,443 $4,691,007 $5,001,349
Earning Assets 4,245,342 4,515,728 4,266,357 4,560,953
Total Loans, Gross 2,516,114 2,588,220 2,518,085 2,602,085
Total Deposits 3,377,413 3,652,030 3,402,548 3,718,233
Shareholders' Equity 408,564 424,999 411,791 424,916
Balances at Period End:*
Total Assets $4,647,069 $4,905,642
Earning Assets 4,209,154 4,445,376
Total Loans, Gross 2,521,738 2,580,612
Total Deposits 3,335,032 3,647,047
Shareholders' Equity 407,982 423,487
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.12% 2.16%
Book Value Per Share $13.72 $13.57
Equity to Assets 8.78% 8.63%
Total Capital to Risk Adjusted Assets 10.83% 10.93%
Dividends Paid Per Share $0.34 $0.32 $0.68 $0.64
Dividend Payout Ratio 46% 42% 45% 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 June 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 second
quarter 2007 net income of $22.4 million or $0.74 diluted earnings per share.
These results compare to net income of $24.5 million or $0.77 per share for
the same period of 2006.
On a year-to-date basis, the Company reported net income for the six months
ended June 30, 2007 of $45.9 million or diluted earnings per share of $1.50,
compared with $50.6 million or $1.58 per share for the same period of 2006.
Following is a summary of the components of net income for the periods
indicated (dollars in thousands except per share data):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Net interest income (FTE) $46,059 $51,503 $92,973 $105,477
Provision for loan losses (75) (150) (150) (300)
Noninterest income 14,700 14,061 29,978 27,701
Noninterest expense (24,706) (26,345) (49,370) (51,829)
Provision for income taxes (FTE) (13,627) (14,575) (27,510) (30,438)
----------------------------------------------------
Net income $22,351 $24,494 $45,921 $50,611
====================================================
Average diluted shares 30,365 31,932 30,593 32,103
Diluted earnings per share $0.74 $0.77 $1.50 $1.58
Average total assets $4,668,627 $4,948,443 $4,691,007 $5,001,349
Net income (annualized) to average total assets 1.92% 1.99% 1.97% 2.04%
Net income for the second quarter of 2007 was $2.1 million or 8.8% less than
the same quarter of 2006, attributable to lower net interest income (FTE),
partially offset by higher noninterest income and decreases in provision for
loan losses, noninterest expense and income tax provision (FTE). The decrease
in net interest income (FTE) (down $5.4 million or 10.6%) was the net result
of lower average interest-earning assets, higher funding costs and lower loan
fee income, partially offset by higher yields on earning assets. The provision
for loan losses decreased $75 thousand or 50.0% from a year ago, reflecting
Management's assessment of credit risk for the loan portfolio. Noninterest
income rose $639 thousand or 4.5% mainly due to higher service charges on
deposits and merchant credit card income. Noninterest expense decreased $1.6
million or 6.2% mostly due to lower personnel costs. The provision for income
taxes (FTE) decreased $948 thousand or 6.5% primarily due to lower
profitability.
Comparing the first six months of 2007 to the prior year, net income decreased
$4.7 million or 9.3%, due to lower net interest income (FTE), partially offset
by higher noninterest income and declines in provision for loan losses,
noninterest expense and lower 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 loan losses decreased $150 thousand or 50.0% to
reflect Management's view on credit risk. Noninterest income increased $2.3
million or 8.2% largely due to higher service charges on deposits, merchant
credit card income and company-owned life insurance proceeds. Noninterest
expense declined $2.5 million or 4.7% primarily due to lower personnel costs.
The income tax provision (FTE) decreased $2.9 million or 9.6% primarily due to
lower profitability.
Page 12
Net Interest Income
The Company's primary source of revenue is net interest income, or the
difference between interest income earned on loans and investments and
interest expense paid on interest-bearing deposits and borrowings. Following
is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Interest and fee income $59,341 $61,877 $118,714 $124,344
Interest expense (18,816) (16,285) (36,927) (30,796)
FTE adjustment 5,534 5,911 11,186 11,929
----------------------------------------------------
Net interest income (FTE) $46,059 $51,503 $92,973 $105,477
====================================================
Average earning assets $4,245,342 $4,515,728 $4,266,357 $4,560,953
Net interest margin (FTE) 4.36% 4.58% 4.38% 4.65%
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 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 second quarter of 2007 by $5.4 million or
10.6% from the same period in 2006 to $46.1 million, mainly due to lower
average earning assets (down $270 million), higher rates paid on
interest-bearing liabilities (up 49 basis points or "bp") and lower loan fee
income (down $185 thousand), partially offset by higher yields on earning
assets (up 11 bp) and a lower volume of interest-bearing liabilities (down
$213 million).
Comparing the first six months of 2007 with the same period of 2006, net
interest income (FTE) decreased $12.5 million or 11.9%, primarily due to lower
average earning assets (down $295 million) and higher rates paid on
interest-bearing liabilities (up 57 bp), partially offset by higher yields on
earning assets (up 12 bp) and lower average balances of interest-bearing
liabilities (down $229 million).
Interest and Fee Income
Interest and fee income (FTE) for the second quarter of 2007 decreased $2.9
million or 4.3% from the same period in 2006. The decline was caused by lower
average balances of earning assets and lower loan fees (down $185 thousand),
partially offset by higher yields on loans.
The average earning asset decrease of $270 million for the second quarter of
2007 compared to the same period in 2006 was due to declines in most earning
asset categories except for growth in indirect automobile loans (up $40
million). The loan portfolio declined $72 million mostly due to decreases in
commercial loans (down $49 million), commercial real estate loans (down $30
million), residential real estate loans (down $16 million) and personal credit
lines (down $12 million). Competitive loan pricing and loosened underwriting
standards in the banking industry are limiting the opportunity to originate
commercial loans which will remain profitable throughout the duration of the
loans, in Management's opinion. Current interest rate spreads between loan
origination yields and the rates paid on deposits and other funding sources
are very narrow. Such interest rate spreads could be pressured in the
near-term as funding costs rise while many loan yields are generally fixed in
nature. As a result, the Company has not taken an aggressive posture relative
to current loan and investment portfolio growth.
The Company has allowed the investment portfolio to decline due to the current
interest rate environment, which has very narrow spreads between current
interest rates on similar securities and on incremental funding sources.
Average total investments decreased $198 million for the second quarter of
2007 compared with the same period in 2006, due to paydowns, calls, and
maturities 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 $16 million).
The average yield on the Company's earning assets increased from 6.01% in the
second quarter of 2006 to 6.12% in the same period in 2007. The composite
yield on loans rose 11 bp to 6.69% primarily due to increases in yields on
construction loans (up 139 bp), taxable commercial loans (up 30 bp), consumer
loans (up 31 bp) and residential real estate loans (up 13 bp), partially
offset by an 11 bp decline in yields on commercial real estate loans.
The investment portfolio yield rose 6 bp to 5.31%, mainly attributable to
higher yields on U.S. government sponsored entity obligations (up 18 bp) and
corporate and other securities (up 17 bp), partially offset by lower yields on
municipal securities (down 5 bp). As investment portfolio volumes have
declined over the past year, municipal security volumes have declined at a
slower rate than the remainder of the investment portfolio. As a result,
municipal securities represented 44 percent of total average investment
security volumes during the second quarter 2007, compared to 42 percent during
the second quarter 2006. This migration in the composition of the investment
portfolio has improved the overall yield of the investment portfolio since
municipal security yields exceed the yield of the overall investment
portfolio.
Comparing the first half of 2007 with the corresponding period a year ago,
interest and fee income (FTE) was down $6.4 million or 4.7%. The decrease
largely resulted from lower average balances of earning assets and low loan
fee income (down $88 thousand), partially offset by higher yields on earning
assets.
Page 13
Average earning assets decreased $295 million or 6.5% for the first half of
2007 compared with the same period of 2006, due to a $211 million decline in
the investment portfolio and a $84 million decrease in the loan portfolio.
Lower average investment balances were attributable to mortgage backed
securities and collateralized mortgage obligations (down $131 million),
municipal securities (down $34 million), corporate and other securities (down
$23 million) and U.S. government sponsored obligations (down $23 million).
The loan portfolio decline was primarily due to decreases in average balances
of commercial loans (down $58 million), commercial real estate loans (down $26
million), personal credit lines (down $12 million) and residential real estate
loans (down $10 million), partly offset by a $31 million increase in the
average balance of indirect automobile loans.
The average yield on earning assets for the first half of 2007 was 6.12%
compared with 6.00% in the corresponding period of 2006. The loan portfolio
yield for the first half of 2007 compared with the same period of 2006 was
higher by 9 bp, primarily due to increases in yields on construction loans (up
138 bp), consumer loans (up 46 bp), taxable commercial loans (up 26 bp) and
residential real estate loans (up 12 bp), partially offset by a 16 bp decline
in the average yield on commercial real estate loans.
The investment portfolio yield rose by 9 bp. The increase resulted mostly from
higher yields on U.S. government sponsored obligation (up 21 bp) and corporate
and other securities (up 63 bp).
Interest Expense
Interest expense in the second quarter of 2007 increased $2.5 million or 15.5%
compared with the same period in 2006. The increase was attributable to higher
rates paid on the interest-bearing liabilities, partially offset by a lower
average volume of those liabilities.
The average rate paid on interest-bearing liabilities increased from 2.07% in
the second quarter of 2006 to 2.56% in the same quarter of 2007, reflecting
trends in short-term interest rates. The average rate on federal funds
purchased rose 32 bp while the average rate on line of credit and repurchase
facilities increased 85 bp. Rates on deposits increased as well, including
those on CDs over $100 thousand (up 63 bp), on retail CDs (up 70 bp) and on
preferred money market savings (up 219 bp).
Interest-bearing liabilities declined $213 million or 6.8% for the second
quarter of 2007 over the same period of 2006. Most categories of deposits
declined including money market savings (down $139 million), retail CDs (down
$31 million), regular savings (down $46 million) and money market checking
accounts (down $46 million). The decline was partially offset by a $45 million
increase in preferred money market savings and a $76 million increase in
federal funds purchased.
Comparing the first half of 2007 to the corresponding period of 2006, interest
expense rose $6.1 million or 19.9%, due to higher rates paid on
interest-bearing liabilities, partially offset by a decline in such
liabilities.
Rates paid on liabilities averaged 2.51% during the first six months of 2007
compared to 1.94% in the first six months of 2006. The average rate paid on
federal funds purchased rose 56 bp. Rates on deposits were also higher. CDs
over $100 thousand rose 84 bp and retail CDs increased by 79 bp. Preferred
money market savings increased 219 bp.
Interest-bearing liabilities declined $229 million or 7.2% over the first half
of 2006 mainly due to decreases in money market savings (down $145 million),
money market checking accounts (down $56 million), regular savings (down $46
million) and retail CDs (down $33 million). The decline was partially offset
by increases in preferred money market savings (up $43 million) and short-term
borrowed funds purchased (up $20 million).
In all periods, the Company has attempted to increase the balances of more
profitable, lower-cost transaction accounts in order to minimize the cost of
funds.
Page 14
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Yield on earning assets (FTE) 6.12% 6.01% 6.12% 6.00%
Rate paid on interest-bearing
liabilities 2.56% 2.07% 2.51% 1.94%
----------------------------------------------------
Net interest spread (FTE) 3.56% 3.94% 3.61% 4.06%
Impact of all other net
noninterest bearing funds 0.80% 0.64% 0.77% 0.59%
----------------------------------------------------
Net interest margin (FTE) 4.36% 4.58% 4.38% 4.65%
====================================================
During the second quarter of 2007, the net interest margin declined 22 bp
compared to the same period in 2006. Rates paid on interest-bearing
liabilities climbed faster than yields on earning assets, resulting in a 38 bp
decline in net interest spread. The decline in the net interest spread was
partially mitigated by the higher net interest margin contribution from
noninterest bearing funding sources. While the average balance of these
sources decreased $50 million or 3.8%, their margin contribution increased 16
bp because of the higher market rates of interest at which they could be
invested.
The net interest margin in the first half of 2007 declined by 27 bp when
compared with the corresponding period of 2006. Earning asset yields increased
12 bp and the cost of interest-bearing liabilities rose by 57 bp, resulting in
a 45 bp decrease in the interest spread. Noninterest bearing funding sources
declined $67 million or 5.0%, their margin contribution increased by 18 bp.
Page 15
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
June 30, 2007
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $459 $2 1.75%
Investment securities:
Available for sale
Taxable 366,904 3,919 4.27%
Tax-exempt (1) 235,763 4,259 7.23%
Held to maturity
Taxable 555,685 5,987 4.31%
Tax-exempt (1) 570,417 8,770 6.15%
Loans:
Commercial:
Taxable 324,720 6,993 8.64%
Tax-exempt (1) 228,344 3,662 6.43%
Commercial real estate 883,942 15,804 7.17%
Real estate construction 73,206 1,841 10.09%
Real estate residential 496,012 5,881 4.74%
Consumer 509,890 7,757 6.10%
--------------------------
Total loans (1) 2,516,114 41,938 6.69%
--------------------------
Total earning assets (1) 4,245,342 64,875 6.12%
Other assets 423,285
-------------
Total assets $4,668,627
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,267,032 $-- --
Savings and interest-bearing
transaction 1,401,854 1,980 0.57%
Time less than $100,000 212,189 1,751 3.31%
Time $100,000 or more 496,338 5,789 4.68%
--------------------------
Total interest-bearing deposits 2,110,381 9,520 1.81%
Short-term borrowed funds 778,841 8,718 4.43%
Debt financing and notes payable 36,868 578 6.27%
--------------------------
Total interest-bearing liabilities 2,926,090 18,816 2.56%
Other liabilities 66,941
Shareholders' equity 408,564
-------------
Total liabilities and shareholders' equity $4,668,627
=============
Net interest spread (1) (2) 3.56%
Net interest income and interest margin (1) (3) $46,059 4.36%
==========================
(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 three months ended
June 30, 2006
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $848 $2 0.95%
Investment securities:
Available for sale
Taxable 398,032 4,227 4.25%
Tax-exempt (1) 252,617 4,605 7.29%
Held to maturity
Taxable 691,209 7,407 4.29%
Tax-exempt (1) 584,802 9,057 6.19%
Loans:
Commercial:
Taxable 355,136 7,386 8.34%
Tax-exempt (1) 247,225 3,978 6.45%
Commercial real estate 914,373 16,590 7.28%
Real estate construction 77,151 1,674 8.70%
Real estate residential 511,521 5,898 4.61%
Consumer 482,814 6,964 5.79%
--------------------------
Total loans (1) 2,588,220 42,490 6.58%
--------------------------
Total earning assets (1) 4,515,728 67,788 6.01%
Other assets 432,715
-------------
Total assets $4,948,443
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,316,927 $-- --
Savings and interest-bearing
transaction 1,588,822 1,351 0.34%
Time less than $100,000 242,793 1,581 2.61%
Time $100,000 or more 503,488 5,080 4.05%
--------------------------
Total interest-bearing deposits 2,335,103 8,012 1.38%
Short-term borrowed funds 766,936 7,695 3.97%
Debt financing and notes payable 37,015 578 6.25%
--------------------------
Total interest-bearing liabilities 3,139,054 16,285 2.07%
Other liabilities 67,463
Shareholders' equity 424,999
-------------
Total liabilities and shareholders' equity $4,948,443
=============
Net interest spread (1) (2) 3.94%
Net interest income and interest margin (1) (3) $51,503 4.58%
==========================
(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 six months ended
June 30, 2007
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $580 $3 1.04%
Investment securities:
Available for sale
Taxable 371,992 7,989 4.30%
Tax-exempt (1) 235,740 8,704 7.38%
Held to maturity
Taxable 567,553 12,255 4.32%
Tax-exempt (1) 572,407 17,613 6.15%
Loans:
Commercial:
Taxable 319,249 13,597 8.59%
Tax-exempt (1) 230,181 7,374 6.46%
Commercial real estate 892,261 31,739 7.17%
Real estate construction 71,970 3,606 10.10%
Real estate residential 499,931 11,837 4.74%
Consumer 504,493 15,183 6.07%
--------------------------
Total loans (1) 2,518,085 83,336 6.67%
--------------------------
Total earning assets (1) 4,266,357 129,900 6.12%
Other assets 424,650
-------------
Total assets $4,691,007
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,269,036 $-- --
Savings and interest-bearing
transaction 1,427,477 3,912 0.55%
Time less than $100,000 215,355 3,485 3.26%
Time $100,000 or more 490,680 11,360 4.67%
--------------------------
Total interest-bearing deposits 2,133,512 18,757 1.77%
Short-term borrowed funds 773,116 17,014 4.38%
Debt financing and notes payable 36,887 1,156 6.27%
--------------------------
Total interest-bearing liabilities 2,943,515 36,927 2.51%
Other liabilities 66,665
Shareholders' equity 411,791
-------------
Total liabilities and shareholders' equity $4,691,007
=============
Net interest spread (1)(2) 3.61%
Net interest income and interest margin (1) (3) $92,973 4.38%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 18
For the six months ended
June 30, 2006
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $835 $2 0.48%
Investment securities:
Available for sale
Taxable 404,534 8,631 4.27%
Tax-exempt (1) 253,722 9,249 7.29%
Held to maturity
Taxable 713,479 15,236 4.27%
Tax-exempt (1) 586,298 18,182 6.20%
Loans:
Commercial:
Taxable 357,142 14,757 8.33%
Tax-exempt (1) 250,250 8,073 6.51%
Commercial real estate 918,606 33,404 7.33%
Real estate construction 77,750 3,361 8.72%
Real estate residential 510,279 11,793 4.62%
Consumer 488,058 13,585 5.61%
--------------------------
Total loans (1) 2,602,085 84,973 6.58%
--------------------------
Total earning assets (1) 4,560,953 136,273 6.00%
Other assets 440,396
-------------
Total assets $5,001,349
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,336,214 $-- --
Savings and interest-bearing
transaction 1,631,228 2,677 0.33%
Time less than $100,000 248,398 3,041 2.47%
Time $100,000 or more 502,393 9,536 3.83%
--------------------------
Total interest-bearing deposits 2,382,019 15,254 1.29%
Short-term borrowed funds 752,622 14,366 3.80%
Debt financing and notes payable 37,569 1,176 6.26%
--------------------------
Total interest-bearing liabilities 3,172,210 30,796 1.94%
Other liabilities 68,009
Shareholders' equity 424,916
-------------
Total liabilities and shareholders' equity $5,001,349
=============
Net interest spread (1)(2) 4.06%
Net interest income and interest margin (1) (3) $105,477 4.65%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 19
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 June 30, 2007
compared with three months
ended June 30, 2006
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($1) $1 $0
Investment securities:
Available for sale
Taxable (321) 13 (308)
Tax-exempt (1) (305) (41) (346)
Held to maturity
Taxable (1,440) 20 (1,420)
Tax-exempt (1) (222) (65) (287)
Loans:
Commercial:
Taxable (648) 255 (393)
Tax-exempt (1) (303) (13) (316)
Commercial real estate (547) (239) (786)
Real estate construction (89) 256 167
Real estate residential (181) 164 (17)
Consumer 401 392 793
---------------------------------------
Total loans (1) (1,367) 815 (552)
Total (decrease) increase in interest ---------------------------------------
and fee income (1) (3,656) 743 (2,913)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (175) 804 629
Time less than $100,000 (216) 386 170
Time $100,000 or more (73) 782 709
---------------------------------------
Total interest-bearing deposits (464) 1,972 1,508
---------------------------------------
Short-term borrowed funds 121 902 1,023
Debt financing and notes payable (2) 2 0
---------------------------------------
Total (decrease) increase in interest expense (345) 2,876 2,531
---------------------------------------
Decrease in Net Interest Income (1) ($3,311) ($2,133) ($5,444)
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 20
Six months ended June 30, 2006
compared with six months
ended June 30, 2005
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold ($1) $2 $1
Investment securities:
Available for sale
Taxable (629) (13) ($642)
Tax-exempt (1) (661) 116 ($545)
Held to maturity
Taxable (3,026) 45 ($2,981)
Tax-exempt (1) (428) (141) ($569)
Loans:
Commercial:
Taxable (1,603) 443 ($1,160)
Tax-exempt (1) (643) (56) ($699)
Commercial real estate (946) (719) ($1,665)
Real estate construction (263) 508 $245
Real estate residential (240) 284 $44
Consumer 468 1,130 $1,598
---------------------------------------
Total loans (1) (3,227) 1,590 (1,637)
Total (decrease) increase in interest ---------------------------------------
and fee income (1) (7,972) 1,599 (6,373)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (370) 1,605 $1,235
Time less than $100,000 (443) 887 $444
Time $100,000 or more (227) 2,051 $1,824
---------------------------------------
Total interest-bearing deposits (1,040) 4,543 3,503
---------------------------------------
Short-term borrowed funds 400 2,248 $2,648
Debt financing and notes payable (21) 1 ($20)
---------------------------------------
Total (decrease) increase in interest expense (661) 6,792 6,131
---------------------------------------
Decrease in Net Interest Income (1) ($7,311) ($5,193) ($12,504)
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 21
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 loan losses in the second quarter of 2007, compared with $150 thousand in
the second quarter of 2006. For the first six months of 2007 and 2006, $150
thousand and $300 thousand were provided in each respective period. The
provision reflects management's assessment of credit risk in the loan
portfolio for each of the periods presented. For further information regarding
net credit losses and the allowance for 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 (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Service charges on deposit accounts $7,716 $7,186 $15,244 $14,269
Merchant credit card fees 2,768 2,392 5,217 4,778
Debit card fees 960 876 1,856 1,704
ATM fees and interchange 714 717 1,391 1,395
Other service fees 489 488 989 934
Financial services commissions 363 363 673 661
Official check issuance income 314 373 625 706
Trust fees 304 287 641 569
Mortgage banking income 33 49 62 99
Life insurance gains -- -- 822 --
Other noninterest income 1,039 1,330 2,458 2,586
----------------------------------------------------
Total $14,700 $14,061 $29,978 $27,701
====================================================
Noninterest income for the second quarter of 2007 increased by $639 thousand
or 4.5% 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 $530 thousand or 7.4% mainly
due to a $682 thousand increase in overdraft fees, partially offset by
declines in deficit fees charged on analyzed accounts and retail and business
checking account service fees. Merchant credit card fees increased $376
thousand or 15.7%. Other noninterest income declined $291 thousand or 21.9%
primarily because the 2006 period included a $239 thousand gain on sale of a
vacated branch facility.
In the first half of 2007, noninterest income increased $2.3 million or 8.2%
compared with the same period of the previous year. Service charges on deposit
accounts increased $975 thousand or 6.8% mainly due to a $1.4 million increase
in overdraft fees, partially offset by declines in deficit fees charged on
analyzed accounts (down $203 thousand) and retail and business checking
account service fees (down $144 thousand). Merchant credit card fees increased
$439 thousand or 9.2%. Debit card fees increased $152 thousand or 8.9% mainly
due to increased usage. Other noninterest income increased $694 thousand or
26.8% primarily due to $822 thousand in life insurance proceeds and a $169
thousand increase in interest recoveries on charged off loans, partially
offset by the effect of a $239 thousand gain on sale of a vacated branch
facility in the first half of 2006.
Page 22
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Salaries and related benefits $12,622 $13,559 $25,189 $26,816
Occupancy 3,342 3,267 6,633 6,499
Data processing services 1,543 1,531 3,066 3,065
Equipment 1,147 1,315 2,284 2,581
Amortization of deposit intangibles 893 1,016 1,868 2,056
Courier service 857 909 1,705 1,831
Professional fees 409 833 904 1,291
Postage 396 397 806 807
Telephone 354 466 714 898
Stationery and supplies 269 272 583 542
Customer checks 228 263 476 553
Operational losses 171 255 331 443
Loan expense 171 236 338 430
Advertising/public relations 264 219 491 453
Correspondent Service Charges 220 207 445 390
Other noninterest expense 1,820 1,600 3,537 3,174
----------------------------------------------------
Total $24,706 $26,345 $49,370 $51,829
====================================================
Average full time equivalent staff 910 904 901 922
Noninterest expense to revenues (FTE) 40.66% 40.18% 40.15% 38.92%
Noninterest expense decreased $1.6 million or 6.2% in the second quarter of
2007 compared with the same period in 2006. Salaries and related benefits
decreased $937 thousand or 6.9%, mainly due to declines in stock based
compensation (down $379 thousand), incentive and bonuses (down $326 thousand)
and workers compensation (down $221 thousand). Professional fees decreased
$424 thousand or 50.9% mostly due to a $374 thousand decline in legal fees.
Equipment expense declined $168 thousand or 12.8% primarily due to lower
repair, maintenance and depreciation expenses. Amortization of deposit
intangibles decreased $123 thousand or 12.1%. Telephone expense declined $112
thousand or 24.0% largely due to lower rates contained in a new vendor
contract. Other noninterest expense rose $220 thousand or 13.8% mostly due to
increases in expenses for travel, employee recruiting, public relations and
internet banking, and amortization of low-income housing investments as tax
benefits are realized.
In the first six months of 2007, noninterest expense declined $2.5 million or
4.7% compared with the corresponding period of 2006. Salaries and related
benefits declined $1.6 million or 6.1% mostly due to a $303 thousand decrease
in regular salary as a result of fewer employees, partially offset by annual
merit increases, and declines in stock based compensation (down $558
thousand), incentives and bonuses (down $360 thousand) and workers
compensation (down $342 thousand). Professional fees decreased $387 thousand
or 29.9% mainly due to lower legal fees (down $331 thousand). Equipment
expense declined $297 thousand or 11.5% primarily due to lower repair,
maintenance and depreciation expenses. Amortization of deposit intangibles
decreased $188 thousand or 9.1%. Telephone expense declined $184 thousand or
20.5% largely due to lower rates contained in a new vendor contract. Courier
service expense decreased $126 thousand or 6.9%. A $112 thousand or 25.4%
decline in operational losses was mainly attributable to a $141 thousand
decrease in sundry losses. Declines were partially offset by increases in
other noninterest and occupancy expenses. Other noninterest expense rose $363
thousand or 11.4% mostly due to increases in expenses for travel, employee
recruiting, public relations and internet banking, and amortization of
low-income housing investments as tax benefits are realized. Occupancy expense
increased $134 thousand or 2.1% primarily due to lower depreciation charges.
Provision for Income Tax
During the second quarter of 2007, the Company recorded income tax expense
(FTE) of $13.6 million, $948 thousand or 6.5% lower than the second quarter of
2006. The current quarter provision represents an effective tax rate of 37.9%,
compared to 37.3% for the second quarter of 2006 largely because the second
quarter of 2006 reflected tax reserve adjustments due to state tax refunds. On
a year-to-date basis, the income tax provision (FTE) was $27.5 million for
2007 compared with $30.4 million for 2006. The effective tax rate of 37.5% for
the first half of 2007 is lower than the 37.6% for the same period of 2006.
The tax provision in 2007 reflected the tax-free nature of $822 thousand in
life insurance proceeds, higher dividend received deductions and lower
non-deductible life insurance premiums. The tax provision in 2006 reflected
tax reserve adjustments upon the conclusion of a state tax audit.
Page 23
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 earning assets. Loan reviews
are performed using grading standards and criteria similar to those employed
by bank regulatory agencies. Loans receiving lesser grades fall under the
"classified" category, which includes all nonperforming and potential problem
loans, and receive an elevated level of attention to ensure collection. Other
real estate owned is recorded at the lower of cost or market value less
estimated disposition costs.
The following is a summary of classified loans and other real estate owned on
the dates indicated (dollars in thousands):
At June 30, At
--------------------------December 31,
2007 2006 2006
---------------------------------------
Classified loans $22,498 $25,682 $20,180
Other real estate owned 613 656 647
---------------------------------------
Classified loans and other real estate owned $23,111 $26,338 $20,827
=======================================
Allowance for loan losses /
classified loans 238% 217% 274%
Classified loans include loans graded "substandard", "doubtful" and "loss"
using regulatory guidelines. At June 30, 2007, $22.0 million of loans or 97.6%
of total classified loans are graded "substandard". Such substandard loans
accounted for 0.87% of total gross loans at June 30, 2007. Classified loans at
June 30, 2007, decreased $3.2 million or 12.4% from a year ago. The decline
resulted from 13 loan payoffs totaling $6.1 million, four upgrades totaling
$4.8 million and three charge-offs, partially offset by 17 downgrades totaling
$10.0 million. A $2.3 million or 11.5% increase in classified loans from
December 31, 2006 was generally due to 10 downgrades totaling $5.8 million,
partially offset by three upgrades, four payoffs and two chargeoffs. Other
real estate owned was $613 thousand, $647 thousand and $656 thousand at June
30, 2007, December 31, 2006 and June 30, 2006, respectively. The reduction in
OREO resulted from a reduction in the carrying value based on an updated
appraisal, with an offsetting charge to earnings.
Nonperforming Loans and Other Real Estate Owned
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 other real estate owned
on the dates indicated (dollars in thousands):
At June 30, At
--------------------------December 31,
2007 2006 2006
---------------------------------------
Performing nonaccrual loans $1,898 $3,899 $4,404
Nonperforming nonaccrual loans 3,140 1,613 61
---------------------------------------
Total nonaccrual loans 5,038 5,512 4,465
Loans 90 days past due and
still accruing 179 114 65
---------------------------------------
Total nonperforming loans 5,217 5,626 4,530
Other real estate owned 613 656 647
---------------------------------------
Total $5,830 $6,282 $5,177
=======================================
As a percentage of total loans 0.23% 0.24% 0.20%
Nonaccrual loans decreased $474 thousand during the six months ended June 30,
2007. Eighteen loans comprised the $5.0 million nonaccrual loans as of June
30, 2007. Six of those loans were on nonaccrual status throughout the first
half 2007, while twelve of the loans were placed on nonaccrual status during
the six months ended June 30, 2007. The Company actively pursues full
collection of nonaccrual loans.
The Company had no "sub-prime" loans as of June 30, 2007, December 31, 2006
and June 30, 2006. Of the loans 90 days past due and still accruing at June
30, 2007, $-0- and $106 thousand were residential real estate loans and
automobile loans, respectively.
Changes in other real estate owned are discussed above under "Classified
Assets".
Page 24
The Company had no restructured loans as of June 30, 2007, June 30, 2006 and
December 31, 2006.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three and six month periods ended June 30, 2007, if
all such loans had performed in accordance with their original terms, was $109
thousand and $219 thousand, respectively, compared to $143 thousand and $262
thousand, respectively, for the second quarter and the first half 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 six months ended June 30, 2007, totaled $150 thousand and
$269 thousand, respectively, compared to $93 thousand and $153 thousand,
respectively, for the comparable periods in 2006. These cash payments
represent annualized yields of 12.60% and 11.38%, respectively, for the second
quarter and the first six months of 2007 compared to 5.78% and 5.01%,
respectively, for the second quarter and the first half of 2006.
Total cash payments received during the second quarter of 2007 which were
applied against the book balance of nonaccrual loans outstanding at June 30,
2007, totaled approximately $-0- thousand compared with $15 thousand for the
same period in 2006. Cash payments received totaled $4 thousand for the six
months ended June 30, 2007 compared with $47 thousand for the corresponding
period in 2006.
Management believes the overall credit quality of the loan portfolio continues
to be sound; however, nonperforming assets could fluctuate from period to
period. The performance of any individual loan can be affected by external
factors such as collateral values, the interest rate environment, economic
conditions or factors particular to the borrower. No assurance can be given
that additional increases in nonperforming loans and other real estate owned
will not occur in the future.
Allowance for Credit Losses
The Company's allowance for credit losses is maintained at a level considered
adequate to provide for losses that can be estimated based upon specific and
general conditions. These include conditions unique to individual borrowers,
as well as overall credit loss experience, the amount of past due,
nonperforming loans and classified loans, recommendations of regulatory
authorities, prevailing economic conditions and other factors. A portion of
the allowance is specifically allocated to impaired and other identified loans
whose full collectibility is uncertain. Such allocations are determined by
Management based on loan-by-loan analyses. A second allocation is based in
part on quantitative analyses of historical credit loss experience, in which
criticized and classified credit balances identified through an internal
credit review process are analyzed using a linear regression model to
determine standard loss rates. The results of this analysis are applied to
current criticized and classified loan balances to allocate the reserve to the
respective segments of the loan portfolio. In addition, loans with similar
characteristics not usually criticized using regulatory guidelines are
analyzed based on the historical loss rates and delinquency trends, grouped by
the number of days the payments on these loans are delinquent. Last,
allocations are made to general loan categories based on commercial office
vacancy rates, mortgage loan foreclosure trends, agriculture commodity prices,
and levels of government funding. The remainder of the reserve is considered
to be unallocated and is established at a level considered necessary based on
relevant economic conditions and available data, including unemployment
statistics, unidentified economic and business conditions, the quality of
lending management and staff, credit quality trends, concentrations of credit,
and changing underwriting standards due to external competitive factors.
Management considers the $57.2 million allowance for credit losses to be
adequate as a reserve against losses as of June 30, 2007.
Page 25
The following table summarizes the provision for credit losses, net credit
losses and allowance for credit losses for the periods indicated (dollars in
thousands):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Balance, beginning of period $58,582 $59,456 $59,023 $59,537
Provision for credit losses 75 150 150 300
Loans charged off (2,244) (645) (3,488) (1,764)
Recoveries of previously
charged off loans 753 411 1,481 1,299
----------------------------------------------------
Net credit losses (1,491) (234) (2,007) (465)
----------------------------------------------------
Balance, end of period $57,166 $59,372 $57,166 $59,372
====================================================
Components:
Allowance for loan losses $53,473 $55,684 $53,473 $55,684
Reserve for unfunded credit commitments 3,693 3,688 3,693 3,688
----------------------------------------------------
Allowance for credit losses $57,166 $59,372 $57,166 $59,372
====================================================
Allowance for loan losses /
loans outstanding 2.12% 2.16%
Net credit losses rose in the three months ended June 30, 2007 due to higher
charge-offs of commercial loans and overdrafts. Annualized net loan losses to
average loans rose to 0.24% percent in the three months ended June 30, 2007,
compared to 0.08 percent in the three months ended March 31, 2007. Management
expects net credit losses to be lower in the third and fourth quarters of 2007
compared to the second quarter 2007. In Management's opinion, net loan losses
to average loans experienced in the years 2006 and 2005 of 0.04 percent and
0.03 percent, respectively, benefited from low interest rates, real estate
appreciation and other factors which are not as prevalent in 2007. Management
continues to follow conservative credit underwriting policies and practices,
and aggressively pursues collection of classified loans and recovery of
recognized loan losses.
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 one of the most significant market risks affecting the
Company. Interest rate risk results from many factors. Assets and liabilities
may mature or reprice at different times. Assets and liabilities may reprice
at the same time but by different amounts. Short-term and long-term market
interest rates may change by different amounts. The remaining maturity of
various assets or liabilities may shorten or lengthen as interest rates
change. In addition, interest rates may have an indirect impact on loan
demand, credit losses, and other sources of earnings such as account analysis
fees on commercial deposit accounts, official check fees and correspondent
bank service charges.
Rising short-term interest rates have slowed the growth of lower-cost deposit
products in the banking industry, placing more reliance on higher-cost
certificates of deposit and wholesale funding. Competitive loan pricing and
loosened underwriting standards in the banking industry are limiting the
opportunity to originate commercial loans which will remain profitable
throughout the duration of the loans, in Management's opinion. Current
interest rate spreads between loan origination yields and the rates paid on
deposits and other funding sources are very narrow. Such interest rate spreads
could be pressured in the near-term as funding costs rise while many loan
yields are generally fixed in nature. As a result, the Company has not taken
an aggressive posture relative to current loan growth. The interest rate
spread is also very narrow in regard to bond investments. As such, Westamerica
has not been making additional investments in bonds. The Company's exposure to
interest rate risk has not changed significantly during the first six months
of 2007. Loan volumes have declined in most categories, except indirect auto
loans which have a shorter duration than the overall loan portfolio. The
investment portfolio duration has also shortened as the portfolio balance
declines due to paydowns, calls and maturities. These loan and securities
trends have slightly reduced the duration of the Company's earning assets,
while the duration of its funding has not changed by a meaningful amount.
Management continues to monitor the interest rate environment as well as
economic conditions and other conditions 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.
Page 26
Management assesses interest rate risk by comparing the Company's most likely
earnings plan with various earnings models using many interest rate scenarios
that differ in the direction of interest rate changes, the degree of change
over time, the speed of change and the projected shape of the yield curve. For
example, assuming an increase of 100 bp in the federal funds rate and an
increase of 60 bp in the 10 year Constant Maturity Treasury Bond yield during
the same period, estimated earnings at risk would be approximately 2.8% of the
Company's most likely net income plan for the twelve months ending June 30,
2008. Conversely, assuming a decrease of 100 bp in the federal funds rate and
a decrease of 30 bp in the 10 year Constant Maturity Treasury Bond yield
during the same period, earnings are estimated to improve 1.4% over the
Company's most likely income plan for the twelve months ending June 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 asset liquidity is investment securities
available for sale and principal payments from consumer loans. At June 30,
2007, investment securities available for sale totaled $583 million,
representing a decrease of $33 million from December 31, 2006. At June 30,
2007, indirect auto loans totaled $462 million, which were experiencing stable
monthly principal payments of approximately $19 million. At June 30, 2007,
$490 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, during the three months
ended June 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 average borrowings during the quarter were $625
million and $18 million, respectively. 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 six months of 2007 and 2006
contributed to substantial operating cash flows of $47.3 million and $56.3
million, respectively. In 2007, operating activities and retained earnings
from prior years provided cash for $20.6 million in shareholder dividends and
$43.5 million utilized to repurchase common stock. Similarly, in the first
half of 2006, operating activities and retained earnings from prior years
provided cash for $47.8 million of Company stock repurchases, $20.3 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
six months of 2007. Proceeds from maturing investment securities of $116.1
million were only partially reinvested, for a net increase in cash of $90.0
million. This cash inflow and a $77 million increase in short-term borrowings
offset a $182 million decrease in customers' deposits. The Company's investing
activities were a net source of cash in the first six months of 2006. Proceeds
from maturing investment securities of $128.7 million were only partially
reinvested, for a net increase in cash of $123.7 million. Other investing
activities included net loan repayments of $90.7 million. This cash inflow
offset a $199.1 million decrease in customers' deposits and a $28.7 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 conditions. A highly competitive environment for deposits
has developed as short-term interest rates have increased and banking industry
loan growth had exceeded deposit growth. 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 during the recent period of elevated short-term interest rates. The
growth of deposit balances is subject to heightened competition and the
success of the Company's sales efforts and delivery of superior customer
service. 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 and other
factors.
Westamerica Bancorporation ("the Parent Company") is a separate entity from
Westamerica Bank ("the Bank") and must provide for its own liquidity. In
addition to its operating expenses, the Parent Company is responsible for
interest and principal on outstanding debt and the payment of dividends
declared for shareholders. Substantially all of the Parent Company's revenues
are obtained from service fees and dividends received from the Bank and, to a
lesser extent, other subsidiaries. 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 27
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 904 thousand shares and 920 thousand shares in the
first half of 2007 and 2006, respectively.
The Company's capital position represents the level of capital available to
support continued operations and expansion. The Company's primary capital
resource is shareholders' equity, which was $408.0 million at June 30, 2007, a
decrease of $15.5 million or 3.7% from a year ago, and a decrease of $16.3
million or 3.8% from December 31, 2006. These decreases are reflective of the
effect of common stock repurchases, dividends paid to shareholders and a
change in accumulated other comprehensive income (loss), 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 rose to 8.78%
at June 30, 2007, from 8.63% a year ago but declined from 8.90% at December
31, 2006.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At June 30, At Minimum
--------------------------December 31, Regulatory
2007 2006 2006 Requirement
----------------------------------------------------
Tier I Capital 9.51% 9.61% 9.77% 4.00%
Total Capital 10.83% 10.93% 11.09% 8.00%
Leverage ratio 6.34% 6.26% 6.42% 4.00%
The risk-based capital ratios declined at June 30, 2007, compared with June 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 anticipated future needs. All ratios as shown in the table above are
in excess of the regulatory definition of "well capitalized".
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk, even though such activities may be
permitted with the approval of the Company's Board of Directors.
Interest rate risk as discussed above is the most significant market risk
affecting the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, are not significant
in the normal course of the Company's business activities.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, as of June 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 June 30, 2007
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
Page 28
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; all such actions are of a
routine nature and arise in the normal course of business of the
Subsidiary Bank.
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 June 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
----------------------------------------------------------------
April 1
through
April 30 123 $47.36 123 909
----------------------------------------------------------------
May 1
through
May 31 227 46.92 227 682
----------------------------------------------------------------
June 1
through
June 30 106 45.75 106 576
----------------------------------------------------------------
Total 456 $46.77 456 576
================================================================
* Includes 5 thousand, 5 thousand and 3 thousand shares purchased in April,
May and June, 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 second 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.
Item 3. Defaults upon Senior Securities
None
Page 29
Item 4. Submission of Matters to a Vote of Security Holders
Proxies for the Annual Meeting of shareholders held on April 26,
2007, were solicited pursuant Regulation 14A of the Securities
Exchange Act of 1934. The Report of Inspector of election
indicates that 25,767,381 shares of the Common Stock of the
Company, out of 30,321,619 shares outstanding on the February 26,
2007 record date, were present, in person or by proxy, at the
meeting. There were no "broker non-votes" because the election of
directors is considered "routine" under applicable exchange rules
and therefore, on this matter, brokers were able to vote shares
for which no direction was provided by the beneficial owner. The
following matter was submitted to a vote of the shareholders:
1. - Election of directors:
For Withheld
--------------------------
Etta Allen 25,425,415 341,966
Louis E. Bartolini 25,321,932 445,449
E.Joseph Bowler 23,410,140 2,357,241
Arthur C. Latno, Jr. 23,517,235 2,250,146
Patrick D. Lynch 25,415,292 352,089
Catherine C. MacMillan 25,350,072 417,309
Ronald A. Nelson 23,497,385 2,269,996
David L. Payne 25,460,104 307,277
Edward B. Sylvester 25,443,643 323,738
Shareholders were to cast their vote for or to withhold their vote.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibit list required by this item is
incorporated by reference to the Exhibit Index filed
with this report.
Page 30
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)
July 31, 2007 /s/ John "Robert" Thorson
------------- -------------------------
Date John "Robert" Thorson
Senior Vice President
and Chief Financial Officer
(Chief Financial and Accounting Officer)
Page 31
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