Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-2156203
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1108 Fifth Avenue, San Rafael, California 94901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (707) 863-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definitions of "large
accelerated filer," "accelerated filer," and "smaller reporting company" in
Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ x ] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ x ]
Title of Class Shares Outstanding as of October 17, 2008
Common Stock, 28,887,216
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 12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 31
Item 4 - Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 32
Item 1A - Risk Factors 32
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3 - Defaults upon Senior Securities 34
Item 4 - Submission of Matters to a Vote of Security Holders 34
Item 5 - Other Information 34
Item 6 - Exhibits 34
Signature 35
Exhibit Index 36
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 37
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 38
Exhibit 32.1 - Certification of Chief Executive Officer
Required by 18 U.S.C. Section 1350 39
Exhibit 32.2 - Certification of Chief Financial Officer
Required by 18 U.S.C. Section 1350 40
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about
Westamerica Bancorporation for which it claims the protection of the safe
harbor provisions contained in the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are based on Management's current
knowledge and belief and include information concerning the Company's
possible or assumed future financial condition and results of operations. A
number of factors, some of which are beyond the Company's ability to predict
or control, could cause future results to differ materially from those
contemplated. These factors include but are not limited to (1) a slowdown in
the national and California economies; (2) fluctuations in asset prices
including, but not limited to, stocks, bonds, real estate, and commodities;
(3) economic uncertainty created by terrorist threats and attacks on the
United States, the actions taken in response, and the uncertain effect of
these events on the national and regional economies; (4) changes in the
interest rate environment; (5) changes in the regulatory environment; (6)
significantly increasing competitive pressure in the banking industry; (7)
operational risks including data processing system failures or fraud; (8) the
effect of acquisitions and integration of acquired businesses; (9) volatility
of rate sensitive deposits and investments; (10) asset/liability management
risks and liquidity risks; (11) changes in liquidity levels in capital
markets; and (12) changes in the securities markets. The reader is directed
to the Company's annual report on Form 10-K for the year ended December 31,
2007, for further discussion of factors which could affect the Company's
business and cause actual results to differ materially from those expressed
in any forward-looking statement made in this report. The Company undertakes
no obligation to update any forward-looking statements in this report.
Page 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
At September At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Assets:
Cash and cash equivalents $142,338 $219,631 $209,764
Money market assets 340 329 333
Investment securities available for sale 304,871 570,086 532,821
Investment securities held to maturity,
with market values of:
$947,580 at September 30, 2008 962,621
$1,076,035 at September 30, 2007 1,081,009
$1,049,422 at December 31, 2007 1,045,288
Loans, gross 2,408,704 2,511,374 2,502,976
Allowance for loan losses (50,097) (52,938) (52,506)
---------------------------------------
Loans, net of allowance for loan losses 2,358,607 2,458,436 2,450,470
Other real estate owned 814 613 613
Premises and equipment, net 26,789 28,666 28,380
Identifiable intangibles 15,996 19,322 18,429
Goodwill 121,702 121,719 121,719
Interest receivable and other assets 155,404 157,205 151,142
---------------------------------------
Total Assets $4,089,482 $4,657,016 $4,558,959
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,173,852 $1,251,572 $1,245,500
Interest bearing:
Transaction 518,944 549,263 544,411
Savings 751,512 806,797 760,006
Time 685,480 732,582 714,873
---------------------------------------
Total deposits 3,129,788 3,340,214 3,264,790
Short-term borrowed funds 487,973 815,101 798,599
Debt financing and notes payable 26,665 36,809 36,773
Liability for interest, taxes and
other expenses 45,928 61,241 64,194
---------------------------------------
Total Liabilities 3,690,354 4,253,365 4,164,356
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
28,895 at September 30, 2008 352,128
29,378 at September 30, 2007 334,637
29,018 at December 31, 2007 334,211
Deferred compensation 2,409 2,990 2,990
Accumulated other comprehensive income (loss) 551 (412) (4,520)
Retained earnings 44,040 66,436 61,922
---------------------------------------
Total Shareholders' Equity 399,128 403,651 394,603
---------------------------------------
Total Liabilities and
Shareholders' Equity $4,089,482 $4,657,016 $4,558,959
=======================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
----------------------------------------------------
Interest Income:
Loans $36,710 $41,134 $112,716 $122,027
Money market assets and funds sold 1 2 3 5
Investment securities available for sale
Taxable 1,858 3,902 7,281 11,891
Tax-exempt 2,183 2,811 7,503 8,785
Investment securities held to maturity
Taxable 4,671 5,712 14,682 17,966
Tax-exempt 5,552 5,736 16,839 17,337
----------------------------------------------------
Total interest income 50,975 59,297 159,024 178,011
----------------------------------------------------
Interest Expense:
Transaction deposits 346 526 1,145 1,577
Savings deposits 1,048 1,649 3,482 4,509
Time deposits 3,566 7,791 12,984 22,637
Short-term borrowed funds 1,954 8,601 9,360 25,614
Notes payable 524 578 1,680 1,735
----------------------------------------------------
Total interest expense 7,438 19,145 28,651 56,072
----------------------------------------------------
Net Interest Income 43,537 40,152 130,373 121,939
----------------------------------------------------
Provision for loan losses 600 75 1,800 225
----------------------------------------------------
Net Interest Income After
Provision For Loan Losses 42,937 40,077 128,573 121,714
----------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 7,555 7,569 22,379 22,813
Merchant credit card 2,611 2,808 7,903 8,024
Debit card 970 969 2,852 2,825
ATM fees and interchange 756 723 2,238 2,114
Trust fees 293 337 973 978
Financial services commissions 186 383 689 1,057
Mortgage banking 39 29 106 92
Other 1,297 1,826 4,583 5,896
Securities losses and impairment (41,206) 0 (59,384) 0
Life insurance proceeds 0 0 0 822
Gain on sale of Visa common stock 0 0 5,698 0
----------------------------------------------------
Total Noninterest Income (27,499) 14,644 (11,963) 44,621
----------------------------------------------------
Noninterest Expense:
Salaries and related benefits 12,621 12,587 38,670 37,776
Occupancy 3,465 3,327 10,297 9,960
Data processing 2,098 1,800 6,323 4,866
Equipment 903 1,083 2,825 3,367
Amortization of intangibles 788 893 2,433 2,760
Courier service 835 854 2,488 2,559
Professional fees 485 451 1,704 1,355
Other 4,008 3,858 12,194 11,579
Visa litigation expense 0 0 (2,338) 0
----------------------------------------------------
Total Noninterest Expense 25,203 24,853 74,596 74,222
----------------------------------------------------
(Loss) Income Before Income Taxes (9,765) 29,868 42,014 92,113
Income Tax (Benefit) Provision (9,809) 7,846 2,989 24,169
----------------------------------------------------
Net Income $44 $22,022 $39,025 $67,944
====================================================
Average Shares Outstanding 28,908 29,532 28,895 29,935
Diluted Average Shares Outstanding 29,273 29,915 29,292 30,365
Per Share Data:
Basic Earnings $0.00 $0.75 $1.35 $2.27
Diluted Earnings 0.00 0.74 1.33 2.24
Dividends Paid 0.35 0.34 1.04 1.02
See accompanying notes to unaudited condensed consolidated financial statements.
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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands)
(unaudited)
Accumulated
Other Compre-
Common Deferred hensive Retained
Shares Stock Compensation Income (Loss) Earnings Total
------------------------------------------------------------------------------
Balance, December 31, 2006 30,547 $341,529 $2,734 $1,850 $78,122 $424,235
Comprehensive income
Net income for the period 67,944 67,944
Other comprehensive income,
net of tax:
Net unrealized loss on securities
available for sale (2,290) (2,290)
Post-retirement benefit transition
obligation amortization 28 28
-------------
Total comprehensive income 65,682
Exercise of stock options 212 7,251 7,251
Stock option tax benefits 116 116
Restricted stock activity 12 302 256 558
Stock based compensation 1,389 1,389
Stock awarded to employees 3 139 139
Purchase and retirement of stock (1,396) (16,089) (48,997) (65,086)
Dividends ------------------------------------------------------------------------------
Balance, September 30, 2007 29,378 $334,637 $2,990 ($412) $66,436 $403,651
==============================================================================
Balance, December 31, 2007 29,018 $334,211 $2,990 ($4,520) $61,922 $394,603
Comprehensive income
Net income for the period 39,025 39,025
Other comprehensive income,
net of tax:
Net unrealized gain on securities
available for sale 5,044 5,044
Post-retirement benefit transition
obligation amortization 27 27
-------------
Total comprehensive income 44,096
Exercise of stock options 566 22,815 22,815
Stock option tax benefits 1,130 1,130
Restricted stock activity 11 1,261 (581) 680
Stock based compensation 893 893
Stock awarded to employees 3 157 157
Purchase and retirement of stock (703) (8,339) (26,779) (35,118)
Dividends ------------------------------------------------------------------------------
Balance, September 30, 2008 28,895 $352,128 $2,409 $551 $44,040 $399,128
==============================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
Page 6
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
unaudited)
For the nine months
ended September 30,
--------------------------
2008 2007
--------------------------
Operating Activities:
Net income $39,025 $67,944
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,130 7,194
Provision for credit losses 1,800 225
Amortization of loan fees, net of cost (72) (935)
Decrease (increase) in interest income receivable 2,036 (169)
Increase in other assets (20,405) (9,220)
Stock option compensation expense 893 1,389
Excess tax benefits from stock-based compensation (1,130) (116)
(Decrease) increase in income taxes payable (4,089) 1,357
(Decrease) increase in interest expense payable (2,469) 275
(Decrease) increase in other liabilities (13,373) 4,103
Impairment and loss on sale of securities available for sale 59,384 0
Gain on sale of Visa common stock (5,698) 0
Net loss on writedown of equipment 9 50
Originations of loans for resale (1,269) (516)
Proceeds from sale of loans originated for resale 1,283 521
Net writedown of property acquired in satisfaction of debt 195 34
--------------------------
Net Cash Provided by Operating Activities 63,250 72,136
--------------------------
Investing Activities:
Net repayments of loans 89,415 18,673
Purchases of investment securities available for sale (6,430) (30,107)
Proceeds from maturity/calls and paydown of securities available for sale 183,616 73,368
Proceeds from sale of securities available for sale 480 0
Proceeds from maturity/calls and paydown of securities held to maturity 82,666 84,083
Purchases of FRB/FHLB* securities (120) (108)
Proceeds from sale of FRB/FHLB* stock 11,364 73
Proceeds from sale of Visa common stock 5,698 0
Purchases of property, plant and equipment (638) (1,070)
Proceeds from property acquired in satisfaction of debt 311 0
--------------------------
Net Cash Provided by Investing Activities 366,362 144,912
--------------------------
Financing Activities:
Net decrease in deposits (135,002) (176,520)
Net (decrease) increase in short-term borrowings (310,626) 83,124
Repayments of notes payable (10,109) (111)
Exercise of stock options 22,815 7,251
Excess tax benefits from stock-based compensation 1,130 116
Purchase and retirement of stock (35,118) (65,086)
Dividends paid (30,128) (30,633)
--------------------------
Net Cash Used in Financing Activities (497,038) (181,859)
--------------------------
Net (Decrease) Increase In Cash and Cash Equivalents (67,426) 35,189
--------------------------
Cash and Cash Equivalents at Beginning of Period 209,764 184,442
--------------------------
Cash and Cash Equivalents at End of Period $142,338 $219,631
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $706 $0
Unrealized gain (loss) on securities available for sale, net 5,044 ($2,290)
Supplemental Disclosure of Cash Flow Activity:
Interest paid for the period $31,120 $56,348
Income tax payments for the period 24,056 22,799
See accompanying notes to unaudited condensed consolidated financial statements.
* Federal Reserve Bank/Federal Home Loan Bank ("FRB/FHLB")
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. The results of operations reflect
interim adjustments, all of which are of a normal recurring nature and which,
in the opinion of Management, are necessary for a fair presentation of the
results for the interim periods presented. The interim results for the nine
months ended September 30, 2008 and 2007 are not necessarily indicative of
the results expected for the full year. These unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes as well as other
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2007.
Note 2: Significant Accounting Policies.
Certain accounting policies underlying the preparation of these financial
statements require Management to make estimates and judgments. These
estimates and judgments may affect reported amounts of assets and
liabilities, revenues and expenses, and disclosures of contingent assets and
liabilities. The most significant of these involve the Allowance for Credit
Losses, which is discussed in Note 1 to the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2007.
On January 1, 2008, the Company adopted the following new accounting
pronouncements:
- FASB Statement No. 157 ("FAS 157") - Fair Value Measurements
- FASB Statement No. 159 ("FAS 159") - The Fair Value Option for Financial
Assets and Financial Liabilities -- Including an Amendment of FASB Statement
No. 115
The adoption of FAS 157 and FAS 159 did not have any affect on the Company's
financial statements at the date of adoption. For additional information,
see Note 3.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007),
Business Combinations. This Statement replaces FASB Statement No. 141,
Business Combinations. This Statement retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (which Statement 141
called the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. This Statement also
retains the guidance in Statement 141 for identifying and recognizing
intangible assets separately from goodwill. This Statement requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
Statement. That replaces Statement 141's cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values.
Statement 141 required the acquirer to include the costs incurred to effect
the acquisition (acquisition-related costs) in the cost of the acquisition
that was allocated to the assets acquired and the liabilities assumed. This
Statement requires those costs to be recognized separately from the
acquisition. In addition, in accordance with Statement 141, restructuring
costs that the acquirer expected but was not obligated to incur were
recognized as if they were a liability assumed at the acquisition date. This
Statement requires the acquirer to recognize those costs separately from the
business combination. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008.
The impact of this Statement on the Company's financial statements will be
contingent on the terms and conditions of future business combinations.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement
No. 133 ("FAS 161"). FAS 161 changes disclosure requirements for derivative
instruments and hedging activities. The Statement requires enhanced
disclosures about (a) how and why derivative instruments are used, (b) how
derivative and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect financial position, financial performance, and cash
flows. This Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early adoption permitted. The Company had no derivative instruments
designated as hedges as of September 30, 2008. The Company will adopt FAS
161 on January 1, 2009.
Note 3: Fair Values of Assets and Liabilities.
On January 1, 2008, the Company adopted the provisions of FAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities -- Including an
Amendment of FASB Statement No. 115. In accordance with FAS 159, the
Company, at its option, can value assets and liabilities at fair value on an
instrument-by-instrument basis with changes in fair value recorded in
earnings. The Company elected not to value any additional assets or
liabilities at fair value in accordance with FAS 159.
Page 8
On January 1, 2008, the Company also adopted the provisions of FAS 157, Fair
Value Measurements, with the exception of the requirements that pertain to
nonfinancial assets and nonfinancial liabilities covered by FASB Staff
Position (FSP) No. FAS 157-2. FAS 157 defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure
requirements for fair value measurements. FSP FAS 157-2 delays the effective
date of the FAS 157 requirements for nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008. Other real
estate owned is an example of a nonfinancial asset that the Company will be
required to measure at fair value on a non-recurring basis in accordance with
generally accepted accounting principles.
On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active. The
FSP clarifies the application of FASB Statement No. 157, Fair Value
Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. The FSP
is effective immediately, and includes prior period for which financial
statements have not been issued, and therefore the Company is subject to the
provision of the FSP effective September 30, 2008. The implementation of FSP
FAS 157-3 did not affect the Company's fair value measurement as of September
30, 2008.
Fair Value Hierarchy
In accordance with FAS 157 the Company groups its assets and liabilities
measured at fair value in three levels, based on the markets in which the
assets and liabilities are traded and the reliability of the assumptions used
to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments
traded in active exchange markets, such as the New York Stock Exchange.
Level 1 also includes U.S. Treasury and federal agency securities, which are
traded by dealers or brokers in active markets. Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
Level 2 - Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market. Level 2 securities
include mortgage-backed securities, municipal bonds and collateralized
mortgage obligations.
Level 3 - Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable
assumptions reflect the Company's estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation
techniques include use of option pricing models, discounted cash flow models
and similar techniques.
The table below presents the balances of available for sale securities
measured at fair value on a recurring basis. (in thousands)
At September 30, 2008
----------------------------------------------------
Total Level 1 Level 2 Level 3
----------------------------------------------------
$304,871 $22,131 $282,740 $0
====================================================
The Company does not record loans at fair value with the exception of
impaired loans which are measured for impairment in accordance with SFAS 114,
Accounting by Creditors for Impairment of a Loan, ("SFAS 114"). Under SFAS
114, loans measured for impairment based on the fair value of collateral or
observable market prices are within the scope of SFAS 157. Loans measured at
fair value on a non-recurring basis were measured for impairment by valuing
the underlying collateral based on third-party appraisals which are level 2
fair value measurements. At September 30, 2008, impaired loans totaled $7.8
million.
Page 9
Note 4: Investments
The amortized cost and estimated market value of the available for sale
investment securities portfolio as of September 30, 2008 follows:
Amortized Estimated
Cost Market Value
--------------------------
Securities of U.S. Treasury and federal agencies $14,039 $14,081
Mortgage-backed securities 108,375 106,010
Obligations of states and political subdivisions 164,065 166,638
Asset-backed securities 9,999 8,200
FHLMC and FNMA stock 2,848 2,848
Other securities 4,024 7,094
--------------------------
Total $303,350 $304,871
==========================
The amortized cost and estimated market value of the held to maturity
investment securities portfolio as of September 30, 2008 follows:
Amortized Estimated
Cost Market Value
--------------------------
Securities of U.S. federal agencies $110,000 $110,574
Mortgage-backed securities 304,170 296,109
Obligations of states and political subdivisions 548,451 540,897
--------------------------
Total $962,621 $947,580
==========================
Note 5: Loans
A summary of the major categories of loans outstanding is shown in the
following table.
At September 30, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Real Estate - commercial $820,317 $871,502 $856,581
Real Estate - construction 67,329 90,993 97,464
Real Estate - residential 463,575 484,555 484,549
---------------------------------------
Total Real Estate loans 1,351,221 1,447,050 1,438,594
Commercial 522,057 527,536 532,650
Installment and personal 535,426 536,788 531,732
---------------------------------------
Gross loans 2,408,704 2,511,374 2,502,976
Allowance for loan losses (50,097) (52,938) (52,506)
---------------------------------------
Net loans $2,358,607 $2,458,436 $2,450,470
=======================================
There were no loans held for sale at September 30, 2008, September 30, 2007
and December 31, 2007.
Note 6: Goodwill and Other Intangible Assets
The Company has recorded goodwill and other identifiable intangibles
associated with purchase business combinations. Goodwill is not amortized,
but is periodically evaluated for impairment. The Company did not recognize
impairment during the nine months ended September 30, 2008 and September
30, 2007. Identifiable intangibles are amortized to their estimated residual
values over their expected useful lives. Such lives and residual values are
also periodically reassessed to determine if any amortization period
adjustments are indicated. During the third quarter of 2008 and third quarter
of 2007, no such adjustments were recorded.
The changes in the carrying value of goodwill were ($ in thousands):
December 31, 2006 $121,719
--
-------------
September 30, 2007 $121,719
=============
December 31, 2007 $121,719
Recognition of stock option tax
benefits for the exercise of
options converted upon merger ($17)
-------------
September 30, 2008 $121,702
=============
Page 10
The gross carrying amount of intangible assets and accumulated amortization
was ($ in thousands):
September 30,
----------------------------------------------------
2008 2007
----------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------------------
Core Deposit Intangibles $24,383 ($12,926) $24,383 ($10,872)
Merchant Draft Processing Intangible 10,300 (5,761) 10,300 (4,489)
----------------------------------------------------
Total Intangible Assets $34,683 ($18,687) $34,683 ($15,361)
====================================================
As of September 30, 2008, the current year and estimated future amortization
expense for intangible assets was ($ in thousands):
Merchant
Core Draft
Deposit Processing
Intangibles Intangible Total
---------------------------------------
Nine months ended September 30, 2008 (actual) $1,521 $912 $2,433
Estimate for year ended December 31,
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
2013 964 400 1,364
Note 7: Post Retirement Benefits
The Company offers a continuation of group insurance coverage to qualifying
employees electing early retirement, for the period from the date of
retirement until age 65. For eligible employees the Company pays a portion of
these early retirees' insurance premiums. The Company reimburses a portion of
Medicare Part B premiums for all qualifying retirees over age 65 and their
qualified spouses. Eligibility for post-retirement medical benefits is based
on age and years of service, and restricted to employees hired prior to
February 1, 2006. The Company uses an actuarial-based accrual method of
accounting for post-retirement benefits.
The following table sets forth the net periodic post-retirement benefit costs
(in thousands):
For the nine months ended
September 30,
--------------------------
2008 2007
--------------------------
Service cost ($300) $12
Interest cost 198 198
Amortization of unrecognized
transition obligation 45 45
--------------------------
Net periodic cost ($57) $255
==========================
The Company does not fund plan assets for any post-retirement benefit plans.
Note 8: Contingent Liabilities
In accordance with Visa's by-laws, the Company and other Visa U.S.A. member
banks are obligated to share in Visa's litigation obligations which existed
at the time of Visa's restructuring transactions. Accordingly, in the fourth
quarter 2007, the Company recorded estimated litigation liabilities and
related litigation expense related to Visa Inc. in the amount of $2,338
thousand. During the first quarter 2008, in accordance with the determination
of Visa Inc.'s Litigation Committee, Visa Inc. funded its litigation escrow
account with $3 billion of net proceeds from the Visa Inc. initial public
offering. This escrow account will be used to make payments related to
certain covered Visa litigation. At the time of escrow funding, the Company
reduced its litigation liability with a corresponding reversal of litigation
expense of $2,338 thousand representing the Company's portion of the escrow
account limited by the amount previously recognized as an expense.
On October 14, 2008, Visa announced a settlement in principle with respect to
one of the litigation obligations that the Company is responsible to share
with other member banks. At this time, the exact terms of the settlement are
unknown.
Page 11
We issue standby letters of credit, which include performance and financial
guarantees, for customers in connection with contracts between the customers
and third parties. Standby letters of credit commit the Company to make
payments on behalf of customers when certain specified future events occur.
Standby letters of credit are primarily issued to support customers'
short-term financing requirements and must meet the Company's normal credit
policies and collateral requirements. Standby letters of credit outstanding
totaled $29.6 million and $33.0 million at September 30, 2008 and December
31, 2007, respectively. We also had commitments for commercial and similar
letters of credit of $1.7 million and $613 thousand at September 30, 2008 and
December 31, 2007, respectively.
Note 9: Earnings Per Common Share
The table below shows earnings per common share and diluted earnings per
common share. Basic earnings per share are computed by dividing net income by
the average number of shares outstanding during the period. Diluted earnings
per share are computed by dividing net income by the average number of shares
outstanding during the period plus the impact of common stock equivalents.
For the For the
three months nine months
ended September 30, ended September 30,
----------------------------------------------------
(In thousands, except per share data) 2008 2007 2008 2007
----------------------------------------------------
Weighted average number of common
shares outstanding - basic 28,908 29,532 28,895 29,935
Add exercise of options reduced by the
number of shares that could have been
purchased with the proceeds of such
exercise 365 383 397 430
----------------------------------------------------
Weighted average number of common
shares outstanding - diluted 29,273 29,915 29,292 30,365
====================================================
Net income $44 $22,022 $39,025 $67,944
Basic earnings per share $0.00 $0.75 $1.35 $2.27
Diluted earnings per share $0.00 $0.74 $1.33 $2.24
For the three months ended September 30, 2008 and 2007, options to purchase
582 thousand and 1.3 million shares of common stock, respectively, were not
included in the computation of diluted net income per share because the option
exercise price exceeded the fair value of the stock such that their inclusion
would have had an anti-dilutive effect. Similarly, for the nine months ended
September 30, 2008 and 2007, options to purchase 618 thousand and 1.0 million
shares of common stock, respectively, were not included in the computation of
diluted net income per share because the option exercise price exceeded the
fair value of the stock such that their inclusion would have had an
anti-dilutive effect.
Page 12
WESTAMERICA BANCORPORATION
Financial Summary
(Dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Net Interest Income (FTE)** $48,693 $45,563 $146,407 $138,536
Provision for Loan Losses (600) (75) (1,800) (225)
Noninterest Income:
Gain on sale of Visa common stock 0 0 5,698 0
Securities losses and impairment (41,206) 0 (59,384) 0
Life insurance proceeds 0 0 0 822
Deposit service charges and other 13,707 14,644 41,723 43,799
----------------------------------------------------
Total Noninterest Income (27,499) 14,644 (11,963) 44,621
Noninterest Expense:
Visa litigation 0 0 2,338 0
Other (25,203) (24,853) (76,934) (74,222)
----------------------------------------------------
Total Noninterest Expense (25,203) (24,853) (74,596) (74,222)
----------------------------------------------------
(Loss) Income Before Income Taxes (FTE)** (4,609) 35,279 58,048 108,710
Income Tax Benefit (Provision) (FTE)** 4,653 (13,257) (19,023) (40,766)
----------------------------------------------------
Net Income $44 $22,022 $39,025 $67,944
====================================================
Average Shares Outstanding 28,908 29,532 28,895 29,935
Diluted Average Shares Outstanding 29,273 29,915 29,292 30,365
Shares Outstanding at Period End 28,895 29,378 28,895 29,378
As Reported:
Basic Earnings Per Share $0.00 $0.75 $1.35 $2.27
Diluted Earnings Per Share $0.00 $0.74 $1.33 $2.24
Return On Assets 0.00% 1.89% 1.22% 1.95%
Return On Equity 0.04% 21.73% 12.83% 22.24%
Net Interest Margin (FTE)** 5.19% 4.34% 5.04% 4.37%
Net Loan Losses to Average Loans 0.24% 0.10% 0.23% 0.14%
Efficiency Ratio* 118.9% 41.3% 55.5% 40.5%
Average Balances:
Total Assets $4,137,232 $4,628,728 $4,275,657 $4,670,019
Earning Assets 3,745,058 4,198,859 3,878,972 4,243,610
Total Loans, Gross 2,414,317 2,514,685 2,443,574 2,516,939
Total Deposits 3,154,340 3,358,163 3,183,393 3,387,591
Shareholders' Equity 412,133 402,016 406,244 408,497
Balances at Period End:
Total Assets $4,089,482 $4,657,016
Earning Assets 3,676,536 4,162,798
Total Loans, Gross 2,408,704 2,511,374
Total Deposits 3,129,788 3,340,214
Shareholders' Equity 399,128 403,651
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.08% 2.11%
Book Value Per Share $13.81 $13.74
Equity to Assets 9.76% 8.67%
Total Capital to Risk Adjusted Assets 11.25% 10.69%
Dividends Paid Per Share $0.35 $0.34 $1.04 $1.02
Dividend Payout Ratio n/m 46% 78% 46%
The above financial summary has been derived from the Company's unaudited
consolidated financial statements. This information should be read in
conjunction with those statements, notes and the other information included
elsewhere herein. Percentages under the heading "As Reported" are annualized
with the exception of the efficiency ratio.
* The efficiency ratio is defined as noninterest expense divided by total
revenue (net interest income on a tax-equivalent basis and noninterest
income).
** Yields on securities and certain loans have been adjusted upward to a
"fully taxable equivalent" ("FTE") basis in order to reflect the effect of
income which is exempt from federal income taxation at the current statutory
tax rate.
Page 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported third
quarter 2008 net income of $44 thousand or $-0.00- diluted earnings per share.
These results compare to net income of $22.0 million or $0.74 diluted earnings
per share for the same period of 2007. In the third quarter of 2008, the
Company recognized a $24 million after-tax or $0.81 diluted earnings per share
charge for securities losses and "other than temporary impairment" of Federal
Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA") preferred stock held in its available for sale investment
portfolio. Additionally, the Company reduced its tax provision by
approximately $1 million primarily due to filing its 2007 federal tax return
and adjusting 2007 tax estimates to actual amounts included in the filed tax
return. The tax provision reduction represented $0.03 diluted earnings per
share. The adjustment primarily resulted from higher than anticipated tax
credits earned on limited partnership investments providing low-income housing
and housing for the elderly in Northern and Central California communities.
On a year-to-date basis, the Company reported net income for the nine months
ended September 30, 2008 of $39.0 million or $1.33 diluted earnings per share,
compared with $67.9 million or $2.24 diluted earnings per share for the same
period of 2007. The first nine months of 2008 included a $34 million after-tax
charge for securities losses and "other than temporary impairment" in the
value of FHLMC and FNMA preferred stock or $1.17 diluted earnings per share.
At September 30, 2008, the recorded value of FHLMC and FNMA stock was $2.8
million.
Additionally, results for this period included a $5.7 million gain on the sale
of VISA common stock from Visa's initial public offering ("IPO"), and $2.3
million in reduced expenses as known litigation contingencies were satisfied
as a part of the VISA IPO, which combined to increase diluted earnings per
share by $0.16. Results for this period also included the approximate $1.0
million reduction in its tax provision primarily due to filing its 2007
federal tax return, which increased diluted earning per share by $0.03. The
first nine months of 2007 included $822 thousand in tax-exempt company owned
life insurance proceeds, representing $0.03 diluted earnings per share.
Following is a summary of the components of net income for the periods
indicated (dollars in thousands except per share data):
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Net interest income (FTE) $48,693 $45,563 $146,407 $138,536
Provision for loan losses (600) (75) (1,800) (225)
Noninterest income (27,499) 14,644 (11,963) 44,621
Noninterest expense (25,203) (24,853) (74,596) (74,222)
Income tax benefit (provision) (FTE) 4,653 (13,257) (19,023) (40,766)
----------------------------------------------------
Net income $44 $22,022 $39,025 $67,944
====================================================
Average diluted shares 29,273 29,915 29,292 30,365
Diluted earnings per share $0.00 $0.74 $1.33 $2.24
Average total assets $4,137,232 $4,628,728 $4,275,657 $4,670,019
Net income (annualized) to average total assets 0.00% 1.89% 1.22% 1.95%
Net income for the third quarter of 2008 was $44 thousand compared with $22.0
million for the same quarter of 2007, reflecting a $24 million after-tax FHLMC
and FNMA preferred stock securities loss and impairment charge in the third
quarter of 2008. Net interest income (FTE) increased $3.1 million or 6.9%, the
net result of lower funding costs, partially offset by lower average earning
assets and declining yields on loans. The provision for loan losses increased
$525 thousand, reflecting Management's assessment of increased credit risk and
the necessary level of the allowance for loan losses. Noninterest income
declined $42.1 million in the third quarter of 2008 compared with the
corresponding period of 2007 primarily due to the above securities loss and
impairment charge. Noninterest expense increased $350 thousand or 1.4%. The
provision for income taxes (FTE) was $17.9 million lower in the third quarter
of 2008 than a year ago mostly due to the $17 million tax benefit of the
securities loss and impairment charge and the $1 million tax adjustment for
the filed 2007 federal income tax return.
Comparing the first nine months of 2008 to the prior year, net income
decreased $28.9 million, due to losses on the sale and impairment charge of
FHLMC and FNMA preferred stock and higher loan loss provision, partially
offset by higher net interest income (FTE), a gain on sale of VISA common
stock and lower tax provision (FTE). The higher net interest income (FTE) was
mainly caused by lower funding costs, partially offset by a lower volume of
average interest-earning assets and lower yields on loans. The provision for
loan losses increased $1.6 million to reflect Management's assessment of
increased credit risk and the necessary level of the allowance for loan losses.
Noninterest income in the first nine months of 2008 decreased $56.6 million
compared with the same period of 2007 mainly due to the above losses on sale
and impairment charge on FHLMC and FNMA preferred stock, $822 thousand gain
from life insurance proceeds in 2007 and a $759 thousand decrease in fees on
the issuance of cashiers' checks, partially offset by the above gain on sale of
VISA common stock. Noninterest expense increased $374 thousand or 0.5%,
primarily the net result of higher data processing and personnel costs, partly
offset by the reversal of a $2.3 million accrual for known Visa related
litigation. The income tax provision (FTE) decreased $21.7 million largely due
to the tax benefit from the impairment charge and the $1 million tax
adjustment for the filed 2007 federal income tax return, partially offset by
an increase related to the gain on sale of Visa common stock.
Page 14
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 Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Interest and fee income $50,975 $59,297 $159,024 $178,011
Interest expense (7,438) (19,145) (28,651) (56,072)
FTE adjustment 5,156 5,411 16,034 16,597
----------------------------------------------------
Net interest income (FTE) $48,693 $45,563 $146,407 $138,536
====================================================
Average earning assets $3,745,058 $4,198,859 $3,878,972 $4,243,610
Net interest margin (FTE) 5.19% 4.34% 5.04% 4.37%
The Company's net interest margin has expanded during the three and nine
months ended September 30, 2008 compared to the respective periods in 2007.
The Federal Reserve's Open Market Committee (FOMC) reduced the target federal
funds rate from 5.25 percent in August 2007 to 2.00 percent in April 2008 in
seven increments. As a result, short-term interest rates declined and the
Company managed to reduce the interest rates paid on deposits and other
interest-bearing liabilities during 2008 compared to respective periods in
2007. During this period, the Company's loan and investment yields were less
sensitive to changes in interest rates resulting in a lesser reduction in such
yields compared to the rates paid on deposits and other funding sources.
Offsetting some of the benefit of the expanding margin was the reduction in
the level of average interest-earning assets in 2008 relative to 2007.
Net interest income in the third quarter 2008 includes $359 thousand in
dividends on FNMA preferred stock which management does not anticipate
receiving in the foreseeable future. Seventy percent of such dividends are
excludable from taxable income for federal income tax purposes.
Net interest income (FTE) rose during the third quarter of 2008 by $3.1
million or 6.9% from the same period in 2007 to $48.7 million, mainly due to
lower rates on average interest- bearing liabilities (down 141 basis points
("bp")) and lower average balances of those liabilities (down $419 million),
partly offset by lower average earning assets (down $454 million) and lower
yields on loans (down 44 bp).
Comparing the first nine months of 2008 with the same period of 2007, net
interest income (FTE) increased $7.9 million or 5.7%, primarily due to lower
rates paid on interest-bearing liabilities (down 108 bp) and a lower average
volume of those liabilities (down $315 million), partially offset by lower
average earning assets (down $365 million) and lower yields on loans (down 32
bp).
Interest and Fee Income
Interest and fee income (FTE) for the third quarter of 2008 decreased $8.6
million or 13.3% from the same period in 2007. The decline was caused by lower
average balances of earning assets (down $454 million) and lower yields on
loans (down 44 bp).
Interest and fee income (FTE) in the third quarter 2008 includes $359 thousand
in dividends on FNMA preferred stock which management does not anticipate
receiving in the foreseeable future. Seventy percent of these dividends are
excludable from taxable income for federal income tax purposes.
In Management's opinion, current economic conditions are not conducive for
generating profitable loan growth. Recent downward pressure on real estate
values create a cautious view toward real estate lending, and economic
pressure on consumers has reduced demand for automobile and other consumer
loans. Additionally, yields available on the highest quality investment
securities do not offer an adequate profit margin over the cost of funding. As
a result, the Company has not taken an aggressive posture relative to current
loan and investment portfolio growth.
The decrease in the average earning assets in the third quarter of 2008
compared with the same period in 2007 was substantially attributable to a $353
million decline in the average investment portfolio: U.S. government sponsored
entity obligations (down $178 million), mortgage backed securities and
collateralized mortgage obligations (down $104 million), municipal securities
(down $45 million) and corporate and other securities (down $30 million). The
average balance of corporate and other securities declined largely due to
sales and impairment of FHLMC and FNMA preferred stock. Average total loans
were lower by $100 million in the third quarter of 2008 compared with the same
period in 2007 primarily due to decreases in the average balances of
commercial real estate loans (down $41 million), residential real estate loans
(down $26 million) and tax-exempt commercial loans (down $17 million) and
construction loans (down $16 million).
Page 15
The average yield on the Company's earning assets decreased from 6.14% in the
third quarter of 2007 to 5.98% in the same period in 2008. The composite yield
on loans fell 44 bp to 6.24% due to decreases in yields on taxable commercial
loans (down 195 bp), real estate construction loans (down 372 bp), consumer
loans (down 24 bp) and commercial real estate loans (down 14 bp), partially
offset by higher yields on tax-exempt commercial loans (up 13 bp) and
residential real estate loans (up 10 bp). Real estate construction loans and
commercial lines of credit have variable interest rates based on the prime
lending rate. The prime lending rate averaged 8.25 percent in the third
quarter 2007 compared to 5.50 percent in the third quarter 2008, reducing the
yields earned on real estate construction loans and commercial lines of
credit. The investment portfolio yield increased 17 bp to 5.49%, mainly due to
higher yields on U.S. Government sponsored entity obligations (up 22 bp),
municipal securities (up 10 bp) and mortgage backed securities and
collateralized mortgage obligations (up 6 bp), partially offset by corporate
and other securities (down 211 bp). Other securities yields declined mostly
due to eliminated dividends on FHLMC preferred stock. 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 54 percent of total average
investment security volumes during the third quarter 2008, compared to 45
percent during the third quarter 2007. 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 nine months of 2008 with the corresponding period a year
ago, interest and fee income (FTE) was down $19.6 million or 10.0%. The
decrease largely resulted from lower average balances of earning assets and
lower yields on loans. Average earning assets decreased $365 million or 8.6%
for the nine months of 2008 compared with the same period of 2007, due to a
$291 million decline in the investment portfolio and a $74 million decrease in
the loan portfolio. Lower average investment balances were largely
attributable to U.S. government sponsored entity obligations (down $131
million), mortgage backed securities and collateralized mortgage obligations
(down $108 million) and municipal securities (down $39 million). The loan
portfolio decline was primarily due to decreases in the average balances of
commercial real estate loans (down $44 million), residential real estate loans
(down $26 million), tax-exempt commercial loans (down $16 million), partly
offset by an $11 million increase in the average balance of consumer loans.
The average yield on earning assets for the first nine months of 2008 was
6.02% compared with 6.12% in the corresponding period of 2007. The loan
portfolio yield for the first nine months of 2008 compared with the same
period of 2007 was lower by 32 bp, due to decreases in yields on taxable
commercial loans (down 138 bp), construction loans (down 313 bp), consumer
loans (down 21 bp) and commercial real estate loans (down 9 bp), partially
offset by commercial tax-exempt loans (up 10 bp) and residential real estate
loans (up 9 bp). The investment portfolio yield rose by 14 bp. The increase
resulted mostly from higher yields on mortgage backed securities and
collateralized mortgage obligations (up 7 bp) and municipal securities (up 4
bp), partially offset by corporate and other securities (down 85 bp).
Interest Expense
Interest expense in the third quarter of 2008 decreased $11.7 million compared
with the same period in 2007. The decrease was attributable to lower rates
paid on the interest- bearing liabilities and lower average balances of those
liabilities.
The average rate paid on interest-bearing liabilities decreased from 2.60% in
the third quarter of 2007 to 1.19% in the same quarter of 2008. Rates paid on
most interest-bearing liabilities moved with general market conditions. Rates
on deposits decreased 88 bp to 1.00% primarily due to decreases in rates paid
on CDs over $100 thousand (down 267 bp), preferred money market savings (down
146 bp) and retail CDs (down 89 bp). Rates on short-term borrowings also
decreased 277 bp mostly due to lower rates on federal funds purchased (down
320 bp) and line of credit and repurchase facilities (down 304 bp).
Interest-bearing liabilities declined $419 million or 14.4% for the third
quarter of 2008 over the same period of 2007. Most categories of deposits
declined including money market savings (down $43 million), money market
checking accounts (down $27 million), regular savings (down $20 million) and
CDs over $100 thousand (down $35 million). The decline was partially offset by
a $17 million increase in preferred money market savings. Short-term
borrowings declined $295 million primarily due to a $279 million decrease in
federal funds purchased.
Comparing the nine months ended September 30, 2008 to the corresponding period
of 2007, interest expense decreased $27.4 million, due to lower rates paid on
interest-bearing liabilities and a decline in such liabilities.
Rates paid on liabilities averaged 1.46% during the first nine months of 2008
compared to 2.54% in the same period of 2007. The average rate on short-term
borrowings fell 228 bp to 2.11%, mainly due to declines on rates paid on
federal funds purchased (down 267 bp) and line of credit and repurchase
facilities (down 176 bp). Rates on deposits were also lower (down 63 bp). CDs
over $100 thousand declined 225 bp and retail CDs decreased by 44 bp.
Preferred money market savings decreased 102 bp.
Page 16
Interest-bearing liabilities in the first nine months of 2008 declined $315
million or 10.7% over the corresponding period of 2007 mainly due to decreases
in the average balances of federal funds purchased (down $174 million), money
market savings (down $72 million), money market checking accounts (down $33
million), regular savings (down $25 million), retail CDs (down $18 million)
and line of credit and repurchase facilities (down $18 million).
In all periods, the Company has focused its sales efforts on building the
balances of more profitable, noninterest bearing and lower-cost transaction
accounts in order to minimize the cost of funds.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin
for the periods indicated (annualized):
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Yield on earning assets (FTE) 5.98% 6.14% 6.02% 6.12%
Rate paid on interest-bearing
liabilities 1.19% 2.60% 1.46% 2.54%
----------------------------------------------------
Net interest spread (FTE) 4.79% 3.54% 4.56% 3.58%
Impact of all other net
noninterest bearing funds 0.40% 0.80% 0.48% 0.79%
----------------------------------------------------
Net interest margin (FTE) 5.19% 4.34% 5.04% 4.37%
====================================================
During the third quarter of 2008, the net interest margin (FTE) increased 85
bp compared with the same period in 2007. Rates paid on interest-bearing
liabilities declined faster than yields on earning assets (FTE), resulting in
a 125 bp increase in net interest spread. The increase in the net interest
spread was partially reduced by the lower net interest margin contribution of
noninterest bearing funding sources. The margin contribution of noninterest
bearing funds decreased 40 bp because of the lower market rates of interest at
which they could be invested.
Similarly, the net interest margin (FTE) in the first nine months of 2008 rose
by 67 bp when compared with the corresponding period of 2007. Earning asset
yields decreased 10 bp while the cost of interest-bearing liabilities declined
by 108 bp, resulting in a 98 bp increase in the net interest spread. The 31 bp
decrease in noninterest bearing funding sources lowered the increase in the
net interest margin.
Page 17
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders'
equity, the amount of interest income from average earning assets and the
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest
income includes proceeds from loans on nonaccrual status only to the extent
cash payments have been received and applied as interest income. Yields on
securities and certain loans have been adjusted upward to reflect the effect
of income which is exempt from federal income taxation at the current
statutory tax rate (FTE) (dollars in thousands).
For the three months ended
September 30, 2008
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $840 $1 0.47%
Investment securities:
Available for sale
Taxable 164,644 1,858 4.51%
Tax-exempt (1) 194,576 3,212 6.60%
Held to maturity
Taxable 423,088 4,671 4.42%
Tax-exempt (1) 547,593 8,536 6.24%
Loans:
Commercial:
Taxable 322,455 5,547 6.84%
Tax-exempt (1) 205,505 3,347 6.48%
Commercial real estate 830,001 14,516 6.96%
Real estate construction 69,216 1,070 6.15%
Real estate residential 462,004 5,604 4.85%
Consumer 525,136 7,769 5.89%
--------------------------
Total loans (1) 2,414,317 37,853 6.24%
--------------------------
Total earning assets (1) 3,745,058 56,131 5.98%
Other assets 392,174
-------------
Total assets $4,137,232
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,172,953 $-- --
Savings and interest-bearing
transaction 1,303,821 1,394 0.43%
Time less than $100,000 193,170 1,201 2.47%
Time $100,000 or more 484,396 2,365 1.94%
--------------------------
Total interest-bearing deposits 1,981,387 4,960 1.00%
Short-term borrowed funds 470,109 1,954 1.63%
Debt financing and notes payable 35,163 524 5.96%
--------------------------
Total interest-bearing liabilities 2,486,659 7,438 1.19%
Other liabilities 65,487
Shareholders' equity 412,133
-------------
Total liabilities and shareholders' equity $4,137,232
=============
Net interest spread (1) (2) 4.79%
Net interest income and interest margin (1) (3) $48,693 5.19%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 18
For the three months ended
September 30, 2007
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $706 $2 1.12%
Investment securities:
Available for sale
Taxable 359,233 3,902 4.34%
Tax-exempt (1) 231,516 4,108 7.10%
Held to maturity
Taxable 525,766 5,712 4.35%
Tax-exempt (1) 566,953 8,674 6.12%
Loans:
Commercial:
Taxable 317,997 7,042 8.79%
Tax-exempt (1) 222,555 3,564 6.35%
Commercial real estate 871,225 15,602 7.10%
Real estate construction 84,938 2,113 9.87%
Real estate residential 487,573 5,792 4.75%
Consumer 530,397 8,197 6.13%
--------------------------
Total loans (1) 2,514,685 42,310 6.68%
--------------------------
Total earning assets (1) 4,198,859 64,708 6.14%
Other assets 429,869
-------------
Total assets $4,628,728
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,254,530 $-- --
Savings and interest-bearing
transaction 1,376,769 2,175 0.63%
Time less than $100,000 207,376 1,755 3.36%
Time $100,000 or more 519,488 6,036 4.61%
--------------------------
Total interest-bearing deposits 2,103,633 9,966 1.88%
Short-term borrowed funds 764,992 8,601 4.40%
Debt financing and notes payable 36,832 578 6.28%
--------------------------
Total interest-bearing liabilities 2,905,457 19,145 2.60%
Other liabilities 66,725
Shareholders' equity 402,016
-------------
Total liabilities and shareholders' equity $4,628,728
=============
Net interest spread (1) (2) 3.54%
Net interest income and interest margin (1) (3) $45,563 4.34%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 19
For the nine months ended
September 30, 2008
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $948 $3 0.42%
Investment securities:
Available for sale
Taxable 227,227 7,281 4.27%
Tax-exempt (1) 209,365 11,067 7.05%
Held to maturity
Taxable 444,314 14,682 4.41%
Tax-exempt (1) 553,544 25,806 6.22%
Loans:
Commercial:
Taxable 316,018 17,194 7.27%
Tax-exempt (1) 211,221 10,319 6.53%
Commercial real estate 841,391 44,442 7.06%
Real estate construction 80,473 4,143 6.88%
Real estate residential 469,952 17,021 4.83%
Consumer 524,519 23,100 5.88%
--------------------------
Total loans (1) 2,443,574 116,219 6.35%
--------------------------
Total earning assets (1) 3,878,972 175,058 6.02%
Other assets 396,685
-------------
Total assets $4,275,657
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,186,443 $-- --
Savings and interest-bearing
transaction 1,309,921 4,627 0.47%
Time less than $100,000 194,305 4,144 2.85%
Time $100,000 or more 492,724 8,840 2.40%
--------------------------
Total interest-bearing deposits 1,996,950 17,611 1.18%
Short-term borrowed funds 582,564 9,360 2.11%
Debt financing and notes payable 36,210 1,680 6.19%
--------------------------
Total interest-bearing liabilities 2,615,724 28,651 1.46%
Other liabilities 67,246
Shareholders' equity 406,244
-------------
Total liabilities and shareholders' equity $4,275,657
=============
Net interest spread (1)(2) 4.56%
Net interest income and interest margin (1) (3) $146,407 5.04%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 20
For the nine months ended
September 30, 2007
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $622 $5 1.07%
Investment securities:
Available for sale
Taxable 367,693 11,891 4.31%
Tax-exempt (1) 234,316 12,811 7.29%
Held to maturity
Taxable 553,471 17,966 4.33%
Tax-exempt (1) 570,569 26,290 6.14%
Loans:
Commercial:
Taxable 318,827 20,639 8.65%
Tax-exempt (1) 227,611 10,938 6.43%
Commercial real estate 885,172 47,341 7.15%
Real estate construction 76,340 5,718 10.01%
Real estate residential 495,766 17,629 4.74%
Consumer 513,223 23,380 6.09%
--------------------------
Total loans (1) 2,516,939 125,645 6.67%
--------------------------
Total earning assets (1) 4,243,610 194,608 6.12%
Other assets 426,409
-------------
Total assets $4,670,019
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,264,147 $-- --
Savings and interest-bearing
transaction 1,410,389 6,086 0.58%
Time less than $100,000 212,666 5,241 3.29%
Time $100,000 or more 500,389 17,396 4.65%
--------------------------
Total interest-bearing deposits 2,123,444 28,723 1.81%
Short-term borrowed funds 770,378 25,614 4.39%
Debt financing and notes payable 36,868 1,735 6.27%
--------------------------
Total interest-bearing liabilities 2,930,690 56,072 2.54%
Other liabilities 66,685
Shareholders' equity 408,497
-------------
Total liabilities and shareholders' equity $4,670,019
=============
Net interest spread (1) (2) 3.58%
Net interest income and interest margin (1) (3) $138,536 4.37%
==========================
(1) Interest and rates calculated on a fully taxable equivalent basis using
the current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 21
Summary of Changes in Interest Income and Expense due to
Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income and
interest expense due to changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in
thousands).
Three months ended September 30, 2008
compared with three months
ended September 30, 2007
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 ($1) ($1)
Investment securities:
Available for sale
Taxable (2,192) 148 (2,044)
Tax-exempt (1) (624) (272) (896)
Held to maturity
Taxable (1,133) 92 (1,041)
Tax-exempt (1) (301) 163 (138)
Loans:
Commercial:
Taxable 96 (1,591) (1,495)
Tax-exempt (1) (284) 67 (217)
Commercial real estate (756) (330) (1,086)
Real estate construction (344) (699) (1,043)
Real estate residential (310) 122 (188)
Consumer (85) (343) (428)
---------------------------------------
Total loans (1) (1,683) (2,774) (4,457)
Total decrease in interest ---------------------------------------
and fee income (1) (5,933) (2,644) (8,577)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (111) (670) (781)
Time less than $100,000 (115) (439) (554)
Time $100,000 or more (385) (3,286) (3,671)
---------------------------------------
Total interest-bearing deposits (611) (4,395) (5,006)
---------------------------------------
Short-term borrowed funds (2,529) (4,118) (6,647)
Debt financing and notes payable (26) (28) (54)
---------------------------------------
Total decrease in interest expense (3,166) (8,541) (11,707)
---------------------------------------
(Decrease) increase in Net Interest Income (1) ($2,767) $5,897 $3,130
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 22
Nine months ended September 30, 2008
compared with nine months
ended September 30, 2007
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $2 ($4) ($2)
Investment securities:
Available for sale
Taxable (4,501) (109) ($4,610)
Tax-exempt (1) (1,320) (424) ($1,744)
Held to maturity
Taxable (3,596) 312 ($3,284)
Tax-exempt (1) (766) 282 ($484)
Loans:
Commercial:
Taxable (120) (3,325) ($3,445)
Tax-exempt (1) (784) 165 ($619)
Commercial real estate (2,251) (648) ($2,899)
Real estate construction 308 (1,883) ($1,575)
Real estate residential (914) 306 ($608)
Consumer 564 (844) ($280)
---------------------------------------
Total loans (1) (3,197) (6,229) (9,426)
Total decrease in interest ---------------------------------------
and fee income (1) (13,378) (6,172) (19,550)
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (397) (1,062) ($1,459)
Time less than $100,000 (417) (680) ($1,097)
Time $100,000 or more (230) (8,326) ($8,556)
---------------------------------------
Total interest-bearing deposits (1,044) (10,068) (11,112)
---------------------------------------
Short-term borrowed funds (5,177) (11,077) ($16,254)
Debt financing and notes payable (27) (28) ($55)
---------------------------------------
Total decrease in interest expense (6,248) (21,173) (27,421)
---------------------------------------
(Decrease) increase in Net Interest Income (1) ($7,130) $15,001 $7,871
=======================================
(1) Amounts calculated on a fully taxable equivalent basis using the current
statutory federal tax rate.
Page 23
Provision for Credit Losses
The Company manages credit costs by consistently enforcing conservative
underwriting and administration procedures and aggressively pursuing
collection efforts with troubled debtors. The Company provided $600 thousand
for loan losses in the third quarter of 2008, compared with $75 thousand in
the same period of 2007. For the first nine months of 2008 and 2007, $1.8
million and $225 thousand were provided in each respective period. In the
third quarter of 2008, the reserve for unfunded credit commitments was reduced
by $200 thousand due to a decline in unfunded credit commitments. 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 Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Service charges on deposit accounts $7,555 $7,569 $22,379 $22,813
Merchant credit card fees 2,611 2,808 7,903 8,024
Debit card fees 970 969 2,852 2,825
ATM fees and interchange 756 723 2,238 2,114
Other service fees 495 506 1,517 1,496
Financial services commissions 186 383 689 1,057
Trust fees 293 337 973 978
Official check issuance income 19 279 145 904
Mortgage banking income 39 29 106 92
Securities losses and impairment (41,206) 0 (59,384) 0
Gain on sale of Visa common stock 0 0 5,698 0
Life insurance gains 0 0 0 822
Other noninterest income 783 1,041 2,921 3,496
----------------------------------------------------
Total ($27,499) $14,644 ($11,963) $44,621
====================================================
Noninterest income for the third quarter of 2008 decreased by $42.1 million
from the same period in 2007 mainly due to $41.2 million in losses on sale and
writedown of FHLMC and FNMA preferred stock. During the second quarter of
2008, the Company began issuing its own cashier's checks rather than use a
vendor which paid the Company fees based on the availability of funds while
the cashier's checks remained outstanding ("float"). By issuing its own
cashier's checks, the Company uses the related float as a source of funding
and reduces its interest expense. Such vendor fees were $260 thousand lower in
the third quarter of 2008 compared with the same period of 2007. Merchant
credit card fees declined $197 thousand or 7.0%. Financial services
commissions decreased by $197 thousand. Other noninterest income decreased
$258 thousand or 24.8% mostly due to gains on sales of other assets in the
third quarter of 2007.
In the first nine months of 2008, noninterest income decreased $56.6 million
compared with the same period of the previous year. Noninterest income for the
2008 period included the $59.4 million in losses on sale and impairment charge
of FHLMC and FNMA preferred stock and $5.7 million in securities gains from
the redemption of VISA Class B common stock as part of Visa's initial public
offering. Noninterest income for the nine months of 2007 included an $822
thousand gain on company-owned life insurance. Official check issuance income
declined $759 thousand because the Company began issuing its own cashier's
checks rather than use an outside vendor as mentioned in the preceding
paragraph. Service charges on deposits declined $434 thousand or 1.9%, due to
declines in fees charged on business and retail checking and savings accounts
(down $396 thousand), overdraft fees and returned item charges (down $189
thousand), partially offset by a $151 thousand increase in deficit fees
charged on analyzed accounts. Deficit fees are service charges collected from
business customers that typically pay for such services with compensating
balances. Financial services commissions fell $368 thousand or 34.8%. Merchant
credit card fees declined $121 thousand or 1.5%. Other noninterest income
decreased $575 thousand or 16.4% primarily due to a $276 thousand decline in
interest recoveries on charged-off loans. ATM fees and interchange income
increased $124 thousand or 5.9%.
Page 24
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Salaries and related benefits $12,621 $12,587 $38,670 $37,776
Occupancy 3,465 3,327 10,297 9,960
Data processing services 2,098 1,800 6,323 4,866
Equipment 903 1,083 2,825 3,367
Amortization of intangibles 788 893 2,433 2,760
Courier service 835 854 2,488 2,559
Professional fees 485 451 1,704 1,355
Postage 369 404 1,142 1,211
Telephone 342 342 1,023 1,055
Stationery and supplies 272 323 836 906
Customer checks 247 228 724 704
Operational losses 113 228 494 559
Correspondent Service Charges 178 223 498 668
Loan expense 246 217 653 555
Advertising/public relations 191 150 660 641
FDIC insurance assessments 131 98 359 305
Visa litigation expense 0 0 (2,338) 0
Other noninterest expense 1,919 1,645 5,805 4,975
----------------------------------------------------
Total $25,203 $24,853 $74,596 $74,222
====================================================
Average full time equivalent staff 899 876 892 893
Noninterest expense to revenues (FTE) 118.92% 41.28% 55.48% 40.52%
Noninterest expense rose by $350 thousand or 1.4% in the third quarter of 2008
compared with the same period in 2007. Data processing service costs were $298
thousand or 16.6% higher due to conversion of the Company's item processing
function to an outside vendor in September of 2007. Occupancy expense
increased $138 thousand or 4.1%. Other noninterest expense rose by $274
thousand or 16.7% largely due to a $200 thousand writedown of foreclosed real
estate and a $330 thousand increase in amortization of low-income housing
investments as tax benefits are realized, partly offset with a $200 thousand
reduction in the reserve for unfunded credit commitments. FDIC insurance
assessments increased $33 thousand or 33.7%. The above increases were
partially reduced by decreases in equipment expense (down $180 thousand or
16.6%) as a result of lower depreciation and maintenance costs, operational
losses (down $115 thousand or 50.4%) and amortization of intangible assets
(down $105 thousand or 11.8%).
In the first nine months of 2008, noninterest expense increased $374 thousand
or 0.5% compared with the corresponding period of 2007. The first nine months
of 2008 included a reversal of the $2.3 million accrual for known Visa related
litigation, which was reversed with the funding of a litigation escrow as a
part of the Visa IPO. Data processing service costs were higher by $1.5
million or 29.9% due to conversion of the Company's item processing function
to an outside vendor. Salaries and related benefits increased $894 thousand or
2.4% mainly due to annual merit increases granted to continuing staff and
increases in incentives and employee benefits. Professional fees increased
$349 thousand or 25.8% primarily due to higher legal fees, partially offset by
lower audit fees. Occupancy costs increased $337 thousand or 3.4%. Other
noninterest expense rose by $830 thousand or 16.7% due to writedown of
foreclosed property and higher insurance costs and amortization of low-income
housing investments as tax benefits are realized, partly offset by a reduction
in the reserve for unfunded loan commitments. FDIC insurance assessments
increased $54 thousand or 17.7%. Other categories of expense decreased from
the first nine months of 2007, offsetting the increases outlined above.
Equipment expense declined $542 thousand or 16.1% mostly due to reduced
depreciation costs and lower maintenance expenses. Amortization of intangible
assets decreased $327 thousand or 11.8%. Correspondent service charges were
lower by $170 thousand or 25.4%.
Provision for Income Tax
During the third quarter of 2008, the Company recorded income tax benefits
(FTE) of $4.7 million compared with income tax provision (FTE) of $13.3
million for the third quarter of 2007.
During the third quarter 2008, the Company filed its 2007 federal income tax
return. Amounts included in that filed return were reconciled to estimates of
such amounts used to recognize the 2007 federal income tax provision. As a
result, a reduction in the tax provision in the amount of $877 thousand was
recognized in the third quarter 2008 to adjust the 2007 tax estimates to
amounts included in the filed tax return. The adjustment primarily resulted
from higher than anticipated tax credits earned on limited partnership
investments providing low-income housing and housing for the elderly in our
Northern and Central California communities. During the third quarter 2008,
the Company further reduced its tax provision by $107 thousand to reflect a
reduction in its unrecognized tax benefits due to a lapse in the statute of
limitations.
Page 25
The income tax provision (FTE) was $19.0 million for the first nine months of
2008 compared with $40.8 million for the same period of 2007. The effective
tax rate (FTE) of 32.8% for the first nine months of 2008 compared with 37.5%
for the same period of 2007. The tax provision for the first nine months of
2008 included a $25 million tax benefit from the FHLMC and FNMA preferred
stock losses and impairment charge, and higher tax credits from low-income
housing investments, partially offset by an increase due to the higher tax
rate for the income related to the Visa IPO. The tax provision in the same
period of 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 losses on FHLMC and FNMA preferred stock were capital in nature as of
September 30, 2008, requiring offsetting capital gains for the losses to
generate tax benefits. Management believes the Company has sufficient capital
gains in the current year, the three-year capital loss carry- back period, and
from owned equity securities, limited partnership investments, and real estate
to fully offset the capital losses recognized through September 30, 2008.
Therefore, the full tax benefit was recorded with respect to the impairment
losses of the preferred stock. The Troubled Asset Relief Program, signed into
law on October 3, 2008, provided ordinary tax treatment to losses on FHLMC and
FNMA preferred stock held on September 6, 2008 or sold on or after January 1,
2008. As a result, the Company's losses on FNMA and FHLMC preferred stock will
receive ordinary tax treatment. Further, FASB Interpretation No. 18,
Accounting for Income Taxes in Interim Periods, (FIN 18) provides guidance for
allocating income taxes among interim periods. Under the provisions of FIN 18,
transactions or events which are unusual in nature or infrequent, but not
both, are treated as discrete events in the period of recognition. The Company
has treated the securities loss and impairment of FHLMC and FNMA preferred
stock as infrequent due to the U.S. government's conservatorship of the two
institutions. As a result, the Company's combined effective tax rate applied
to the securities loss and impairment of FHLMC and FNMA preferred stock was
approximately 42 percent.
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 September 30, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Classified loans $38,070 $21,403 $24,419
Other real estate owned 814 613 613
---------------------------------------
Classified loans and other real estate owned $38,884 $22,016 $25,032
=======================================
Allowance for loan losses /
classified loans 132% 247% 215%
Classified loans include loans graded "substandard", "doubtful" and "loss"
using regulatory guidelines. At September 30, 2008, $35.9 million of loans or
94.3% of total classified loans are graded "substandard". Such substandard
loans accounted for 1.5% of total gross loans at September 30, 2008.
Classified loans at September 30, 2008, increased $16.7 million from a year
ago. The increase is primarily attributable to one classified construction
loan relationship with $9.4 million outstanding at September 30, 2008. The
loan collateral at September 30, 2008, located north of Sacramento,
California, is comprised of land purchased for development and construction of
approximately 110 residential properties and 13 completed residential
properties. The borrower has marketed and received purchase offers on 10 of
the completed properties. The borrower has also received a purchase offer on
50 of the developed lots. The Company is not offering financing for these
pending transactions. The Company recognized a charge-off of $783 thousand
during the second quarter 2008 as the anticipated sales price of the
residential units is less than the related loan balance. The construction loan
relationship was placed on non-accrual status during the second quarter 2008
and is included in non-accrual loans at September 30, 2008. Management is
aggressively pursuing collection of the entire loan relationship. The Company
has started foreclosure proceedings on the loan collateral.
Other real estate owned was $814 thousand, $613 thousand and $613 thousand at
September 30, 2008, December 31, 2007 and September 30, 2007, respectively.
The increase in OREO resulted from foreclosure of collateral underlying one
residential real estate loan, partially offset by a $200 thousand writedown on
existing real estate owned.
Page 26
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 September 30, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Performing nonaccrual loans $73 $1,695 $1,688
Nonperforming nonaccrual loans 12,132 3,132 3,164
Total nonaccrual loans 12,205 4,827 4,852
---------------------------------------
Loans 90 days past due and
still accruing 363 251 297
---------------------------------------
Total nonperforming loans 12,568 5,078 5,149
Other real estate owned 814 613 613
---------------------------------------
Total $13,382 $5,691 $5,762
=======================================
As a percentage of total loans 0.56% 0.23% 0.23%
Nonaccrual loans increased $7.4 million during the nine months ended September
30, 2008. Twenty three loans comprised the $12.2 million nonaccrual loans as
of September 30, 2008. Five of those loans were on nonaccrual status
throughout the first nine months of 2008, while eighteen of the loans were
placed on nonaccrual status during the nine months ended September 30, 2008.
The increase in nonperforming nonaccrual loans is primarily due to placing the
construction loan relationship described in the "Classified Assets" section on
nonaccrual status. The reduction in performing nonaccrual loans is primarily
due to returning two commercial real estate loans to accrual status based upon
the payment history, payment status, and improved financial condition of the
borrowers. The Company actively pursues full collection of nonaccrual loans.
The Company's residential real estate loan underwriting standards for first
mortgages limit the loan amount to no more than 80 percent of the appraised
value of the property serving as collateral for the loan at the time of
origination, and require verification of income of the borrower(s). The
Company had no "sub-prime" loans as of September 30, 2008, December 31, 2007
and September 30, 2007. Of the loans 90 days past due and still accruing at
September 30, 2008, none were residential real estate loans and $342 thousand
were automobile loans. Delinquent residential real estate and automobile loans
on accrual status were as follows ($ in thousands):
At September 30, At
--------------------------December 31,
2008 2007 2007
---------------------------------------
Residential real estate loans:
--------------------------------------
30-89 days delinquent:
Dollar amount $1,311 $89 $2,761
Percentage of total residential real estate loans 0.28% 0.02% 0.57%
90 or more days delinquent:
Dollar amount $-0- $-0- $-0-
Percentage of total residential real estate loans 0.00% 0.00% 0.00%
Automobile loans:
-------------------------
30-89 days delinquent:
Dollar amount $3,572 $2,692 $2,872
Percentage of total automobile loans 0.75% 0.57% 0.61%
90 or more days delinquent:
Dollar amount $342 $207 $253
Percentage of total automobile loans 0.07% 0.04% 0.05%
The Company had no restructured loans as of September 30, 2008, September 30,
2007 and December 31, 2007.
The amount of gross interest income that would have been recorded for
nonaccrual loans for the three and nine month periods ended September 30,
2008, if all such loans had performed in accordance with their original terms,
was $184 thousand and $466 thousand, respectively, compared to $107 thousand
and $326 thousand, respectively, for the third quarter and the first nine
months of 2007.
Page 27
The amount of interest income that was recognized on nonaccrual loans from all
cash payments, including those related to interest owed from prior years, made
during the three and nine months ended September 30, 2008, totaled $48
thousand and $312 thousand, respectively, compared with $130 thousand and $399
thousand, respectively, for the comparable periods in 2007. These cash
payments represent annualized yields of 1.56% and 4.26%, respectively, for the
third quarter and the first nine months of 2008 compared to 10.36% and 11.02%,
respectively, for the third quarter and the first nine months of 2007.
Total cash payments received during the third quarter and first nine months of
2008 which were applied against the book balance of nonaccrual loans
outstanding at September 30, 2008, totaled $-0- thousand and $-0- thousand,
respectively. Total cash payments received during the third quarter and first
nine months of 2007 which were applied against the book balance of nonaccrual
loans outstanding at September 30, 2007, totaled $-0- thousand and $5
thousand, respectively.
Management believes the overall credit quality of the loan portfolio continues
to be stable; 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 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 Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Balance, beginning of period $54,257 $57,166 $55,799 $59,023
Provision for loan losses 600 75 1,800 225
Provision for unfunded credit commitments (200) 0 (200) 0
Loans charged off (1,786) (1,031) (5,532) (4,519)
Recoveries of previously
charged off loans 319 421 1,323 1,902
----------------------------------------------------
Net credit losses (1,467) (610) (4,209) (2,617)
----------------------------------------------------
Balance, end of period $53,190 $56,631 $53,190 $56,631
====================================================
Components:
Allowance for loan losses $50,097 $52,938 $50,097 $52,938
Reserve for unfunded credit commitments 3,093 3,693 3,093 3,693
----------------------------------------------------
Allowance for credit losses $53,190 $56,631 $53,190 $56,631
====================================================
Allowance for loan losses /
loans outstanding 2.08% 2.11%
Net credit losses rose in the three months ended September 30, 2008 compared
to the three months ended September 30, 2007 due to lower recoveries and
higher chargeoffs on automobile loans. Net credit losses rose in the nine
months ended September 30, 2008 compared to the nine months ended September
30, 2007 due to lower recoveries on commercial loans and higher chargeoffs on
construction and automobile loans, partially offset by higher recoveries on
consumer loans and lower chargeoffs on commercial and consumer loans.
Annualized net loan losses to average loans rose to 0.24 percent in the three
months ended September 30, 2008, compared to 0.10 percent in the three months
ended September 30, 2007. Management does not anticipate an increase in net
charge-off experience in the last three months of 2008 as compared to the
first nine months of 2008. However, no assurance can be given that higher
levels of net charge-offs will not occur. Management continues to follow
conservative credit underwriting policies and practices, and aggressively
pursues collection of classified loans and recovery of recognized loan 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 loans whose full
collectibility is uncertain. Such allocations are determined by Management
based on loan-by-loan analyses. A second allocation is based in part on
quantitative analyses of historical credit loss experience, in which
criticized and classified credit balances identified through an independent
internal credit review process are analyzed using a linear regression model to
determine standard loss rates. The results of this analysis are applied to
current criticized and classified loan balances to allocate the reserve to the
respective segments of the loan portfolio. In addition, loans with similar
characteristics not usually criticized using regulatory guidelines are
Page 28
analyzed based on the historical loss rates and delinquency trends, grouped by
the number of days the payments on these loans are delinquent. Last,
allocations are made to non-criticized and classified commercial loans and
residential real estate loans based on historical loss rates, and other
statistical data. The remainder of the allowance is considered to be
unallocated. The unallocated allowance is established to provide for probable
losses that have been incurred as of the reporting date but not reflected in
the allocated allowance. It addresses additional qualitative factors
consistent with Management's analysis of the level of risks inherent in the
loan portfolio, which are related to the risks of the Company's general
lending activity. Included in the unallocated allowance is the risk of losses
that are attributable to national or local economic or industry trends which
have occurred but have not yet been recognized in past loan charge-off history
(external factors). The external factors evaluated by the Company include:
economic and business conditions, external competitive issues, and other
factors. Also included in the unallocated allowance is the risk of losses
attributable to general attributes of the Company's loan portfolio and credit
administration (internal factors). The internal factors evaluated by the
Company include: loan review system, adequacy of lending Management and staff,
loan policies and procedures, problem loan trends, concentrations of credit,
and other factors. By their nature, these risks are not readily allocable to
any specific loan category in a statistically meaningful manner and are
difficult to quantify with a specific number. Management assigns a range of
estimated risk to the qualitative risk factors described above based on
Management's judgment as to the level of risk, and assigns a quantitative risk
factor from the range of loss estimates to determine the appropriate level of
the unallocated portion of the allowance. Management considers the $53.2
million allowance for credit losses to be adequate as a reserve against losses
as of September 30, 2008.
The following table presents the allocation of the allowance for credit
losses:
Allocation of the Allowance for Credit Losses
At September 30, At December 31,
2008 2007
----------------------------------------------------
Allocation Loans as Allocation Loans as
of the Percent of the Percent
Allowance of Total Allowance of Total
(dollars in thousands) Balance Loans Balance Loans
----------------------------------------------------
Commercial $26,226 56% $27,233 56%
Real estate construction 6,083 3% 5,403 4%
Real estate residential 469 19% 388 19%
Consumer 5,196 22% 4,626 21%
Unallocated portion 15,216 -- 18,149 --
----------------------------------------------------
Total $53,190 100% $55,799 100%
====================================================
The allocation to loan portfolio segments changed from December 31, 2007 to
September 30, 2008. The decrease in allocation to commercial loans reflects a
decrease in criticized commercial loans. The increases in allocation to real
estate construction and consumer loans reflect increases in criticized real
estate construction loans and delinquency trends in consumer loans.
The unallocated portion of the allowance for credit losses declined $2.9
million from December 31, 2007 to September 30, 2008. The unallocated
allowance is established to provide for probable losses that have been
incurred, but not reflected in the allocated allowance. At December 31, 2007
and September 30, 2008, Management's evaluations of the unallocated portion of
the allowance for credit losses attributed significant risk levels to
developing economic and business conditions ($4.0 million and $3.9 million,
respectively), external competitive issues ($2.0 million and $1.4 million,
respectively), internal credit administration considerations ($4.2 million and
$2.4 million, respectively), and delinquency and problem loan trends ($4.2
million and $4.1 million, respectively). The change in the amounts allocated
to the above qualitative risk factors was based upon Management's judgment,
review of trends in its loan portfolio, levels of the allowance allocated to
portfolio segments, and current economic conditions in its marketplace
including loan underwriting and pricing practices of competitors. Based on
Management's analysis and judgment, the amount of the unallocated portion of
the allowance for credit losses was $18.1 million at December 31, 2007,
compared to $15.2 million at September 30, 2008.
Asset/Liability and Market Risk Management
Asset/liability management involves the evaluation, monitoring and management
of interest rate risk, market risk, liquidity and funding. 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
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk results from many factors. Assets and liabilities may
mature or reprice at different times. Assets and liabilities may reprice at
the same time but by different amounts. Short-term and long-term market
interest rates may change by different amounts. The remaining maturity of
various assets or liabilities may shorten or lengthen as interest rates
change. In addition, interest rates may have an impact on loan demand, credit
losses, and other sources of earnings such as account analysis fees on
commercial deposit accounts and correspondent bank service charges.
In adjusting the Company's asset/liability position, Management attempts to
manage interest rate risk while enhancing the 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 29
The Company's asset and liability position remains slightly "liability
sensitive," with a greater amount of interest-bearing liabilities subject to
immediate and near-term interest rate changes relative to earning assets. As a
result, the FOMC's recent reductions in the federal funds target rate
(charged for short-term inter-bank borrowings) and the related decline in U.S.
Treasury bill rates has improved the Company's net interest margin in the
first nine months of 2008. The FOMC reduced the federal funds target rate
again in October, 2008, and the futures markets indicate an expectation the
FOMC might reduce the federal funds target rate further in the near-term. The
Company's net interest margin would increase with additional reductions in
short-term interest rates. Management continues to monitor the interest rate
environment as well as economic conditions and other factors it deems relevant
in managing the Company's exposure to interest rate risk.
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, using the current composition of the Company's balance sheet and
assuming a decrease of 100 bp in the federal funds rate and no change in the
10 year Constant Maturity Treasury Bond yield during the same period, earnings
are estimated to improve 0.9% over the Company's most likely net income plan
for the twelve months ending September 30, 2009. Conversely, using the current
composition of the Company's balance sheet and assuming an increase of 100 bp
in the federal funds rate and an increase of 40 bp in the 10 year Constant
Maturity Treasury Bond yield during the same period, estimated earnings at
risk would be approximately 2.7% of the Company's most likely net income plan
for the twelve months ending September 30, 2009. Simulation estimates depend
on, and will change with, the size and mix of the actual and projected balance
sheet at the time of each simulation. Management is currently deploying
tactics to reduce the "liability sensitivity" of the Company's balance sheet
to a more "neutral" condition where changes in interest rates result in less
significant changes in earnings. 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.
Market Risk - Equity Markets
Equity price risk can affect the Company. As an example, any preferred or
common stock holdings, as permitted by banking regulations, can fluctuate in
value. Management regularly assesses the extent and duration of any declines
in market value, the causes of such declines, the likelihood of a recovery in
market value, and its intent to hold securities until a recovery in value
occurs. Declines in value of preferred or common stock holdings that are
deemed "other than temporary" could result in loss recognition in the
Company's income statement.
Fluctuations in the Company's common stock price can impact the Company's
financial results in several ways. First, the Company has regularly
repurchased and retired its common stock; the market price paid to retire the
Company's common stock can affect the level of the Company's shareholders'
equity, cash flows and shares outstanding for purposes of computing earnings
per share. Second, the Company's common stock price impacts the number of
dilutive equivalent shares used to compute diluted earnings per share. Third,
fluctuations in the Company's common stock price can motivate holders of
options to purchase Company common stock through the exercise of such options
thereby increasing the number of shares outstanding. Finally, the amount of
compensation expense associated with share based compensation fluctuates with
changes in and the volatility of the Company's common stock price.
Market Risk - Other
Market values of loan collateral can directly impact the level of loan
chargeoffs and the provision for loan losses. Other types of market risk, such
as foreign currency exchange risk and commodity price risk, are not
significant in the normal course of the Company's business activities.
Liquidity and Funding
The Company's routine operating sources of liquidity are operating earnings,
investment securities, consumer and other loans, deposits, and other borrowed
funds. During the first nine months of 2008, investment securities provided
$266.3 million in liquidity from paydowns and maturities, and loans provided
$89.4 million in liquidity from scheduled payments and maturities, net of loan
fundings. The Company projects $38 million in additional liquidity from
investment security paydowns and maturities in the three months ending
December 31, 2008.
At September 30, 2008, indirect automobile loans totaled $478.9 million, which
were experiencing stable monthly principal payments of approximately $17.5
million during the third quarter 2008. During the nine months ended September
30, 2008, a portion of the liquidity provided by investment securities and
loans provided funds to meet a net reduction in deposits totaling $135.0
million. The remaining liquidity was used to reduce higher-costing borrowed
funds, primarily subordinated debt which decreased $10 million and federal
funds purchased which declined $248.0 million. During the first nine months of
2007, investment securities provided $157.5 million in liquidity from paydowns
and maturities, and loans provided $18.7 million in liquidity from scheduled
payments and maturities, net of loan fundings. During the nine months ended
September 30, 2007, a portion of the liquidity provided by investment
securities, loans and a $83.1 million increase in short term borrowings
provided funds to meet a net reduction in deposits totaling $176.5 million.
Page 30
The Company held $1.3 billion in total investment securities at September 30,
2008. Under certain deposit, borrowing and other arrangements, the Company
must hold investment securities as collateral. At September 30, 2008, such
collateral requirements totaled approximately $879 million. At September 30,
2008, $304.9 million of the Company's investment securities were classified as
"available-for-sale", and as such, could provide additional liquidity if sold,
subject to the Company's ability to meet continuing collateral requirements.
At September 30, 2008, $410.2 million in collateralized mortgage obligations
("CMOs") and mortgage backed securities ("MBSs") were held in the Company's
investment portfolios. None of the CMOs or MBSs are backed by sub-prime
mortgages. All of the CMOs and MBSs are rated AAA based on their subordination
structures without reliance on monoline insurance. Other than nominal amounts
of FHLMC and FNMA MBSs purchased for Community Reinvestment Act investment
purposes, the Company has not purchased a CMO or MBS since November 2005. The
CMOs and MBSs have been experiencing stable principal paydowns of
approximately $7 million per month during the last three months. In addition,
at September 30, 2008, the Company had customary lines for overnight
borrowings from other financial institutions in excess of $700 million and a
$35 million line of credit, under which $373.0 million and $-0- million were
outstanding, respectively. Additionally, the Company has access to borrowing
from the Federal Reserve. The Company's short-term debt rating from Fitch
Ratings is F1. The Company's long-term debt rating from Fitch Ratings is A
with a stable outlook. Management expects the Company could access additional
long-term debt financing if desired. In Management's judgment, the Company's
liquidity position is strong and asset liquidations or additional long-term
debt are considered unnecessary to meet the ongoing liquidity needs of the
Company.
The Company's operating earnings during the first nine months of 2008 and 2007
contributed to substantial operating cash flows of $63.3 million and $72.1
million, respectively. In the first nine months of 2008, profitability and
retained earnings from prior years provided cash for $35.1 million of Company
stock repurchases and $30.1 million in shareholder dividends. Similarly, in
the same period of 2007, profitability and retained earnings from prior years
provided cash for $30.6 million in shareholder dividends and $65.1 million
utilized to repurchase common stock.
It is anticipated that loan demand will be weak during the remainder of 2008,
although such demand will be dictated by economic and competitive conditions.
The Company aggressively solicits non-interest bearing demand deposits and
money market checking deposits, which are the least sensitive to interest
rates. The growth of deposit balances is subject to heightened competition,
the success of the Company's sales efforts, delivery of superior customer
service and market conditions. The recent series of reductions in the federal
funds rate resulted in declining short-term interest rates, which could impact
deposit volumes in the future. Depending on economic conditions, interest rate
levels, and a variety of other conditions, deposit growth may be used to fund
loans, purchase investment securities or to reduce short-term borrowings.
However, due to concerns such as uncertainty in the general economic
environment, competition 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 and
apart from Westamerica Bank ("the Bank") and must provide for its own
liquidity. In addition to its operating expenses, the Parent Company is
responsible for the payment of dividends declared for its shareholders, and
interest and principal on outstanding debt. Substantially all of the Parent
Company's revenues are obtained from subsidiary service fees and dividends.
Payment of such dividends to the Parent Company by the Bank is limited under
California law. The amount that can be paid in any calendar year, without
prior approval from the state regulatory agency, cannot exceed the net profits
(as defined) for the preceding three calendar years less dividends paid. The
Company believes that such restriction will not have an impact on the Parent
Company's ability to meet its ongoing cash obligations.
Capital Resources
The Company has historically generated high levels of earnings, which provides
a means of raising capital. The Company's net income as a percentage of
average shareholders' equity ("return on equity" or ROE") has been 23.4
percent in 2006, 22.1 percent in 2007 and 12.8 percent (annualized) in the
first nine months of 2008. The Company also raises capital as employees
exercise stock options, which are awarded as a part of the Company's executive
compensation programs and efforts to reinforce shareholders' interests in the
Management of the Company. Capital raised through the exercise of stock
options totaled $18.2 million in 2006, $14.6 million in 2007 and $35.1 million
in the first nine months of 2008.
The Company paid dividends totaling $40.7 million in 2006, $40.6 million in
2007, and $30.1 million in the first nine months of 2008, which represent
dividends per share of $1.30, $1.36, and $1.04, respectively. The Company's
earnings have historically exceeded dividends paid to shareholders. The amount
of earnings in excess of dividends gives the Company resources to finance
growth and maintain appropriate levels of shareholders' equity. In the absence
of profitable growth opportunities, the Company has repurchased and retired
its common stock as another means to return earnings to shareholders. The
Company repurchased and retired common stock valued at $89.0 million in 2006,
$87.1 million in 2007, and $35.1 million in the first nine months of 2008.
Page 31
The following summarizes the ratios of capital to risk-adjusted assets for the
Company on the dates indicated:
Well-capitalized
At September 30, At Minimum by
--------------------------December 31, Regulatory Regulatory
2008 2007 2007 Requirement Definition
-----------------------------------------------------------------
Tier I Capital 9.97% 9.38% 9.33% 4.00% 6.00%
Total Capital 11.25% 10.69% 10.64% 8.00% 10.00%
Leverage ratio 6.94% 6.31% 6.32% 4.00% 5.00%
The Company's risk-based capital ratios increased at September 30, 2008,
compared with September 30 and December 31 of 2007, due to a decline in
risk-weighted assets.
The following summarizes the ratios of capital to risk-adjusted assets for the
Bank on the dates indicated:
Well-capitalized
At September 30, At Minimum by
--------------------------December 31, Regulatory Regulatory
2008 2007 2007 Requirement Definition
-----------------------------------------------------------------
Tier I Capital 9.24% 9.60% 9.52% 4.00% 6.00%
Total Capital 10.72% 11.06% 10.98% 8.00% 10.00%
Leverage ratio 6.38% 6.42% 6.41% 4.00% 5.00%
The risk-based capital ratios declined at September 30, 2008, compared with
September 30 and December 31, 2007, due to a decrease in regulatory capital,
offset in part by a decline in risk-weighted assets.
The Company intends to maintain regulatory capital in excess of the highest
regulatory standard, referred to as "well capitalized". The Company routinely
projects its capital levels by analyzing forecasted earnings, credit quality,
securities valuations, shareholder dividends, asset volumes, share repurchase
activity, stock option exercise proceeds, and other factors. Based on current
capital projections the Company expects to maintain regulatory capital levels
exceeding the "well capitalized" standard and pay quarterly dividends to
shareholders. No assurance can be given that changes in capital management
plans will not occur.
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 and equity price risk, as discussed above, are the most
significant market risks affecting the Company. Other types of market risk,
such as foreign currency exchange risk and commodity price risk, are not
significant in the normal course of the Company's business activities.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, as of September 30, 2008. Based upon their
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective.
The evaluation did not identify any change in the Company's internal control
over financial reporting that occurred during the quarter ended September 30,
2008 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Page 32
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
Federal and state governments could pass legislation responsive to current
credit conditions. As an example, the Company could experience higher credit
losses because of federal or state legislation or regulatory action that
reduces the amount the Bank's borrowers are otherwise contractually required
to pay under existing loan contracts. Also, the Company could experience
higher credit losses because of federal or state legislation or regulatory
action that limits the Bank's ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.
The Federal Deposit Insurance Corporation ("FDIC") insures deposits at FDIC
insured financial institutions up to certain limits. The FDIC charges insured
financial institutions premiums to maintain the Deposit Insurance Fund.
Current economic conditions have increased expectations for bank failures, in
which case the FDIC would take control of failed banks and ensure payment of
deposits up to insured limits using the resources of the Deposit Insurance
Fund. In such case, the FDIC may increase premium assessments to maintain
adequate funding of the Deposit Insurance Fund.
FDIC insurance assessment rates are three basis points above the "base" rates,
currently ranging from 5 to 7 basis points for Risk Category I institutions,
10 basis points for Risk Category II institutions, 28 basis points for Risk
Category III institutions, and 43 basis points for Risk Category IV
institutions. The Bank is categorized as a Risk Category I institution and
currently pays premiums at a 5 basis point assessment rate.
The FDIC has designated the Deposit Insurance Fund long-term target reserve
ratio at 1.25 percent of insured deposits. Due to recent bank failures, the
FDIC insurance fund reserve ratio has fallen below 1.15 percent, the statutory
minimum. The FDIC has developed a proposed restoration plan that will
uniformly increase insurance assessments by 7 basis points (annualized). The
plan also proposes changes to the deposit insurance assessment system
requiring riskier institutions to pay a larger share. An increase in premium
assessments would increase the Company's expenses. The Company was assessed a
$400 thousand quarterly premium for the third quarter 2008 at the current 5
basis point assessment rate.
In October of 2006, FDIC's Board adopted a final rule governing the
distribution and use of the $4.7 billion one-time assessment credit. The Bank
was allowed to apply assessment credits of $360 thousand to offset premiums
assessed in the third quarter 2008. Application of such credits toward the
$400 thousand assessed premium caused the Bank to pay assessments of $40
thousand in the third quarter 2008. At September 30, 2008, the Bank's
remaining assessment credits totaled $2.7 million.
The Emergency Economic Stabilization Act of 2008 included a provision for an
increase in the amount of deposits insured by the Federal Deposit Insurance
Corporation (FDIC) to $250,000. On October 14, 2008, the FDIC announced a new
program -- the Temporary Liquidity Guarantee Program that provides unlimited
deposit insurance on funds in noninterest-bearing transaction deposit accounts
not otherwise covered by the existing deposit insurance limit of $250,000. All
eligible institutions will be covered under the program for the first 30 days
without incurring any costs. After the initial period, participating
institutions will be assessed a 10 basis point surcharge on the additional
insured deposits.
The behavior of depositors in regard to the level of FDIC insurance could
cause our existing customers to reduce the amount of deposits held at the
Bank, and could cause new customers to open deposit accounts at the Bank. The
level and composition of the Bank's deposit portfolio directly impacts the
Bank's funding cost and net interest margin.
The Federal Reserve Bank has been providing vast amounts of liquidity into the
banking system to compensate for weaknesses in short-term borrowing markets
and other capital markets. A reduction in the Federal Reserve's activities or
capacity could reduce liquidity in the markets, thereby increasing funding
costs to the Bank or reducing the availability of funds to the Bank to finance
its existing operations.
Page 33
On October 3, 2008, the Troubled Asset Relief Program ("TARP") was signed into
law. TARP gave the United States Treasury Department ("Treasury") authority to
deploy up to $750 billion into the financial system with an objective of
improving liquidity in capital markets. On October 24, 2008, Treasury
announced plans to direct $250 billion of this authority into preferred stock
investments in banks. The general terms of this preferred stock program are as
follows for a participating bank:
- Pay 5% dividends on the Treasury's preferred stock for the first five years,
and then 9% dividends thereafter,
- Can not increase common stock dividends for three years while Treasury is an
investor,
- Can not redeem the Treasury preferred stock for three years unless the
participating bank raises high-quality private capital,
- Must receive Treasury's consent to buy back their own stock,
- Treasury receives warrants entitling Treasury to buy participating bank's
common stock equal to 15% of Treasury's total investment in the participating
bank, and
- Participating bank executives must agree to certain compensation
restrictions, and restrictions on the amount of executive compensation which
is tax deductible.
The term of this Treasury preferred stock program could reduce investment
returns to participating banks' shareholders by restricting dividends to
common shareholders, diluting existing shareholders' interests, and
restricting capital management practices. The Company does not expect to be a
candidate for this Treasury preferred stock program given its
"well-capitalized" condition, high-quality loan portfolio, appropriate
allowance for loan losses, strong operating earnings, and adequate liquidity.
There are no other material changes to the risk factors disclosed in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c) Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by
or on behalf of Westamerica Bancorporation or any "affiliated purchaser" (as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of
common stock during the quarter ended September 30, 2008 (in thousands, except
per share data).
(c) (d)
Total Maximum
Number Number
of Shares of Shares
(b) Purchased that May
(a) Average as Part of Yet Be
Total Price Publicly Purchased
Number of Paid Announced Under the
Shares per Plans Plans or
Period Purchased Share or Programs* Programs
-----------------------------------------------------------------
July 1
through
July 31 24 $49.24 24 753
-----------------------------------------------------------------
August 1
through
August 31 77 49.61 77 2,000
-----------------------------------------------------------------
September 1
through
September 30 7 59.04 7 1,993
-----------------------------------------------------------------
Total 108 $50.10 108 1,993
=================================================================
* Includes 2 thousand, 5 thousand and 7 thousand shares purchased in July,
August and September, respectively by the Company in private transactions with
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.
Page 34
Shares were repurchased during the third quarter of 2008 pursuant to a program
approved by the Board of Directors on August 23, 2007 authorizing the purchase
of up to 2,000,000 shares of the Company's common stock from time to time
prior to September 1, 2008. A replacement plan was approved by the Board of
Directors on August 28, 2008 to repurchase up to 2,000,000 shares prior to
September 1, 2009.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibit list required by this item is incorporated by reference
to the Exhibit Index filed with this report.
Page 35
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)
October 22, 2008 /s/ John "Robert" Thorson
---------------- -------------------------
Date John "Robert" Thorson
Senior Vice President
and Chief Financial Officer
(Chief Financial and Accounting Officer)
Page 36
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