Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-9383
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-2156203
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1108 Fifth Avenue, San Rafael, California 94901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (707) 863-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer [ x ] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ x ]
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of May 1, 2006
Common Stock, 31,428,986
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 11
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 25
Item 4 - Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 26
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3 - Defaults upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of Security Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits 27
Exhibit 11 - Computation of Earnings Per Share 29
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 30
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a) 31
Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 32
Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 33
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, 2005, for further discussion of factors which could affect
the Company's business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report. The Company
undertakes no obligation to update any forward-looking statements in this
report.
Page 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
At March 31, At
--------------------------December 31,
2006 2005* 2005*
---------------------------------------
Assets:
Cash and cash equivalents $187,947 $168,341 $209,273
Money market assets 534 540 534
Investment securities available for sale 642,996 719,097 662,388
Investment securities held to maturity,
with market values of:
$1,282,823 at March 31, 2006 1,307,848
$1,318,206 at March 31, 2005 1,331,870
$1,323,782 at December 31, 2005 1,337,216
Loans, gross 2,639,968 2,708,052 2,672,221
Allowance for loan losses (55,768) (59,859) (55,849)
---------------------------------------
Loans, net of allowance for loan losses 2,584,200 2,648,193 2,616,372
Other real estate owned 0 0 0
Premises and equipment, net 32,535 35,586 33,221
Identifiable intangibles 25,130 29,389 26,170
Goodwill 121,719 127,503 121,907
Interest receivable and other assets 152,644 139,941 150,478
---------------------------------------
Total Assets $5,055,553 $5,200,460 $5,157,559
=======================================
Liabilities:
Deposits:
Noninterest bearing $1,355,426 $1,371,819 $1,419,313
Interest bearing:
Transaction 641,264 626,693 658,667
Savings 1,004,964 1,166,858 1,022,645
Time 737,532 773,473 745,476
---------------------------------------
Total deposits 3,739,186 3,938,843 3,846,101
Short-term borrowed funds 784,639 710,530 775,173
Debt financing and notes payable 37,030 40,391 40,281
Liability for interest, taxes and
other expenses 65,326 64,772 60,940
---------------------------------------
Total Liabilities 4,626,181 4,754,536 4,722,495
---------------------------------------
Shareholders' Equity:
Authorized - 150,000 shares of common stock
Issued and outstanding:
31,544 at March 31, 2006 342,972
32,939 at March 31, 2005 345,388
31,882 at December 31, 2005 343,035
Deferred compensation 1,969 2,146 2,423
Accumulated other comprehensive income:
Unrealized (loss) gain on securities
available for sale, net (830) 3,511 1,882
Retained earnings 85,261 94,879 87,724
---------------------------------------
Total Shareholders' Equity 429,372 445,924 435,064
---------------------------------------
Total Liabilities and
Shareholders' Equity $5,055,553 $5,200,460 $5,157,559
=======================================
See accompanying notes to unaudited condensed consolidated financial statements.
* Adjusted to adopt Financial Accounting Standard 123 (revised 2004), "Share-Based Payment." See Note 4.
Page 4
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three months ended
March 31,
2006 2005*
--------------------------
Interest Income:
Loans $41,106 $34,933
Money market assets and funds sold 1 0
Investment securities available for sale
Taxable 4,403 6,117
Tax-exempt 3,171 3,352
Investment securities held to maturity
Taxable 7,829 7,290
Tax-exempt 5,957 5,611
--------------------------
Total interest income 62,467 57,303
--------------------------
Interest Expense:
Transaction deposits 428 263
Savings deposits 898 863
Time deposits 5,916 3,231
Short-term borrowed funds 6,672 3,570
Debt financing and notes payable 598 430
--------------------------
Total interest expense 14,512 8,357
--------------------------
Net Interest Income 47,955 48,946
--------------------------
Provision for credit losses 150 300
--------------------------
Net Interest Income After
Provision For Credit Losses 47,805 48,646
--------------------------
Noninterest Income:
Service charges on deposit accounts 7,083 6,927
Merchant credit card 2,385 1,298
Trust fees 282 273
Financial services commissions 298 279
Mortgage banking 50 100
Securities losses 0 (4,903)
Other 3,541 3,221
--------------------------
Total Noninterest Income 13,639 7,195
--------------------------
Noninterest Expense:
Salaries and related benefits 13,258 13,883
Occupancy 3,232 2,952
Data processing 1,534 1,548
Furniture and equipment 1,266 1,230
Courier service 922 926
Amortization of intangibles 1,040 405
Professional fees 457 720
Other 3,774 4,199
--------------------------
Total Noninterest Expense 25,483 25,863
--------------------------
Income Before Income Taxes 35,961 29,978
Provision for income taxes 9,844 7,668
--------------------------
Net Income $26,117 $22,310
==========================
Other comprehensive Income, net of tax:
Unrealized loss on securities available for sale (2,712) (8,971)
Securities losses/impairment losses included in net income 0 2,844
--------------------------
Comprehensive Income $23,405 $16,183
==========================
Average Shares Outstanding 31,688 32,022
Diluted Average Shares Outstanding 32,276 32,680
Per Share Data:
Basic Earnings $0.82 $0.70
Diluted Earnings 0.81 0.68
Dividends Paid 0.32 0.30
See accompanying notes to unaudited condensed consolidated financial statements.
* Adjusted to adopt Financial Accounting Standard 123 (revised 2004),
"Share-Based Payment." See Note 4.
Page 5
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(unaudited)
Accumulated
Compre-
Common Deferred hensive Retained
Shares Stock Compensation Income Earnings Total
------------------------------------------------------------------------------
Balance, December 31, 2004* 31,640 $255,205 $2,146 $9,638 $99,672 $366,661
Net income for the period 22,310 22,310
Stock issued and stock options assumed for
acquisition of Redwood Empire Bancorp 1,639 90,892 90,892
Stock issued for stock options 32 1,149 1,149
Stock option tax benefits 128 128
Restricted stock activity 0 0 0 0
Stock based compensation 723 723
Purchase and retirement of stock (372) (2,709) (17,645) (20,354)
Dividends (9,458) (9,458)
Unrealized loss on securities
available for sale, net (6,127) (6,127)
------------------------------------------------------------------------------
Balance, March 31, 2005* 32,939 $345,388 $2,146 $3,511 $94,879 $445,924
==============================================================================
Balance, December 31, 2005* 31,882 $343,035 $2,423 $1,882 $87,724 $435,064
Net income for the period 26,117 26,117
Stock issued for stock options 90 3,213 3,213
Stock option tax benefits 280 280
Restricted stock activity 1 454 (454) 0
Stock based compensation 635 635
Purchase and retirement of stock (429) (4,645) (18,384) (23,029)
Dividends (10,196) (10,196)
Unrealized loss on securities
available for sale, net (2,712) (2,712)
------------------------------------------------------------------------------
Balance, March 31, 2006 31,544 $342,972 $1,969 ($830) $85,261 $429,372
==============================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
* Adjusted to adopt Financial Accounting Standard 123 (revised 2004),
"Share-Based Payment." See Note 4.
Page 6
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the three months
ended March 31,
--------------------------
2006 2005*
--------------------------
Operating Activities:
Net income $26,117 $22,310
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of fixed assets 983 1,008
Amortization of intangibles and other assets 1,610 832
Credit loss provision 150 300
Amortization of deferral of loan fees, net of cost (25) (86)
Decrease (increase) in interest income receivable 13 (2,069)
(Increase) decrease in other assets (4,015) 1,194
Increase in income taxes payable 8,786 6,132
Increase in interest expense payable 542 828
Decrease in other liabilities (1,003) (3,525)
Stock option compensation expense 635 723
Excess tax benefits from stock-based compensation (281) (23)
Loss (gain) on sales of investment securities 0 4,903
Writedown of property and equipment 1 7
Originations of loans for resale (50) (65)
Proceeds from sale of loans originated for resale 50 61
--------------------------
Net Cash Provided by Operating Activities 33,513 32,530
--------------------------
Investing Activities:
Net cash used in mergers and acquisitions 0 (35,210)
Net repayments of loans 32,046 32,111
Purchases of investment securities available for sale (2,984) 0
Proceeds from maturity of securities available for sale 17,594 31,938
Proceeds from sale of securities available for sale 0 196,004
Purchases of investment securities held to maturity 0 (81,939)
Proceeds from maturity of securities held to maturity 29,369 26,039
Purchases of FRB/FHLB securities (33) 0
Proceeds from sale of FRB/FHLB stock 80 0
Purchases of property, plant and equipment (298) (351)
--------------------------
Net Cash Provided by Investing Activities 75,774 168,592
--------------------------
Financing Activities:
Net decrease in deposits (106,915) (14,756)
Net increases (decrease) in short-term borrowings 9,466 (112,291)
Repayments of notes payable and debt financing (3,251) (3,227)
Exercise of stock options 3,031 1,129
Tax benefit from stock-based compensation 281 23
Repurchases/retirement of stock (23,029) (20,354)
Dividends paid (10,196) (9,458)
--------------------------
Net Cash Used in Financing Activities (130,613) (158,934)
--------------------------
Net (Decrease) Increase In Cash and Cash Equivalents (21,326) 42,188
--------------------------
Cash and Cash Equivalents at Beginning of Period 209,273 126,153
--------------------------
Cash and Cash Equivalents at End of Period $187,947 $168,341
==========================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned $0 $0
Supplemental Disclosure of Cash Flow Activity:
Unrealized loss on securities available for sale, net ($2,712) ($6,127)
Interest paid for the period 15,054 9,793
The acquisition of Redwood Empire Bancorp involved
the following:
Cash issued -- $57,128
Common stock issued -- 90,892
Liabilities assumed -- 500,466
Fair value of assets acquired, other than cash and cash equivalents -- (495,590)
Core deposit intangible -- (16,600)
Customer based intangible - Redwoods Merchant Services -- (10,300)
Goodwill -- (102,723)
Net cash and cash equivalent received -- 21,918
See accompanying notes to unaudited condensed consolidated financial statements.
* Adjusted to adopt Financial Accounting Standard 123 (revised 2004),
"Share-Based Payment." See Note 4.
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of Management, are necessary for a fair presentation of the results for
the interim periods presented. The interim results for the three months ended
March 31, 2006 and 2005 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, 2005.
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 Loan 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, 2005.
Effective March 1, 2005, the Company acquired Redwood Empire Bancorp ("REBC"),
parent company of National Bank of the Redwoods. The REBC acquisition was
accounted for using the "purchase method" of accounting for business
combinations which requires valuing assets and liabilities which do not have
quoted market prices. In determining fair values for assets and liabilities
without quoted market prices for the REBC acquisition, management engaged an
independent consultant to determine such fair values. Critical assumptions used
in the valuation included prevailing market interest rates on similar financial
products, future cash flows, maturity structures and durations of similar
financial products, the cost of processing deposit products, the interest rate
structure for similar funding sources over the estimated duration of acquired
deposits, the duration of customer relationships, and other critical
assumptions.
On March 17, 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement of Financial Accounting Standards No. 156 (SFAS 156), "Accounting for
Servicing of Financial Assets an amendment of FASB No. 140". This Statement
amends FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 140). The new
Standard addresses the recognition and measurement of separately recognized
servicing assets and liabilities and provides an approach to simplify efforts to
obtain hedge-like (offset) accounting. The standard requires that a separately
recognized servicing asset or servicing liability be initially measured at fair
value, if practicable, and permits an entity with a separately recognized
servicing asset or servicing liability to choose either the amortization method
or the fair value method for subsequent measurement. The Company currently has
approximately $100 thousand in mortgage servicing rights which are currently
amortized over the period of estimated mortgage income. This method is
consistent with the SFAS 140 requirements. The Company does not currently hedge
its mortgage servicing rights as the risks to earnings from fluctuating values
is not significant. SFAS 156 is effective for fiscal years beginning after
September 15, 2006. The Company will be adopting this new Standard beginning
January 1, 2007.
Note 3: Goodwill and Other Intangible Assets
The Company has recorded goodwill and other identifiable intangibles associated
with purchase business combinations. Goodwill is not amortized, but is
periodically evaluated for impairment. The Company did not recognize impairment
during the three months ended March 31, 2006. Identifiable intangibles are
amortized to their estimated residual values over their expected useful lives.
Such lives and residual values are also periodically reassessed to determine if
any amortization period adjustments are indicated. During the first quarter of
2006, no such adjustments were recorded.
In connection with the acquisition of Redwood Empire Bancorp ("REBC") in the
first quarter of 2005, the Company recorded goodwill and identifiable
intangibles of $109 million and $27 million, respectively, in accordance with
the purchase method of accounting. The following tables summarize the Company's
goodwill and identifiable intangible assets, as of January 1 and March 31 for
2006 and 2005 (dollars in thousands). In the first quarter of 2006 goodwill
relating to the REBC acquisition was reduced by $193 related to stock options
issued in connection with the acquisition and increased $5 related to accrued
expenses.
At At
January 1, March 31,
2006 Additions Reductions 2006
----------------------------------------------------
Goodwill $125,879 $5 ($193) $125,691
Accumulated Amortization (3,972) 0 0 (3,972)
----------------------------------------------------
Net $121,907 $5 ($193) $121,719
====================================================
Core Deposit Intangibles $24,383 $0 $0 $24,383
Accumulated Amortization (6,972) 0 (582) (7,554)
Merchant Draft Processing Intangible 10,300 0 0 10,300
Accumulated Amortization (1,541) 0 (458) (1,999)
----------------------------------------------------
Net $26,170 $0 ($1,040) $25,130
====================================================
Page 8
At At
January 1, March 31,
2005 Additions Reductions 2005
----------------------------------------------------
Goodwill $22,968 $108,507 $0 $131,475
Accumulated Amortization (3,972) 0 0 (3,972)
----------------------------------------------------
Net $18,996 $108,507 $0 $127,503
====================================================
Core Deposit Intangibles $7,783 $16,600 $0 $24,383
Accumulated Amortization (4,889) 0 (278) (5,167)
Merchant Draft Processing Intangible 0 10,300 0 10,300
Accumulated Amortization 0 0 (127) (127)
----------------------------------------------------
Net $2,894 $26,900 ($405) $29,389
====================================================
At March 31, 2006, the estimated aggregate amortization of core deposit
intangibles, in thousands of dollars, for the remainder of 2006 and annually
through 2011 is $1,697, $2,153, $2,021, $1,859, $1,636, and $1,386,
respectively. The weighted average amortization period for core deposit
intangibles is 12.35 years.
At March 31, 2006, the estimated aggregate amortization of merchant draft
processing intangible, in thousands of dollars, for the remainder of 2006 and
annually through 2011 is $1,350, $1,500, $1,200, $962, $774, and $624,
respectively. The weighted average amortization period for merchant draft
processing intangibles is 11.92 years.
Note 4: Stock Options
The Company grants stock options and restricted performance shares to employees
in exchange for employee services, pursuant to the shareholder-approved 1995
Stock Option Plan, which was amended and restated in 2003. Stock options are
granted with an exercise price equal to the fair market value of the related
common stock and generally became exercisable in equal annual installments over
a three-year period with each installment vesting on the anniversary date of the
grant. Each stock option has a maximum ten-year term. A restricted performance
share grant becomes vested after three years of being awarded, provided the
Company has attained its performance goals for such three-year period.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based
Payment" on a modified retrospective basis. SFAS No. 123(R) requires the Company
to begin using the fair value method to account for stock based awards granted
to employees in exchange for their services. Prior to the adoption of SFAS No.
123(R), the Company accounted for stock option plans using the intrinsic value
method, as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation."
Under the prior intrinsic value method, compensation expense was recorded for
stock options only if the price of the underlying stock on the date of grant
exceeded the exercise price of the option. The Company's historical stock option
grants were awarded with exercise prices equal to the prevailing price of the
underlying stock on the dates of grant; therefore, no compensation expense was
recorded using the intrinsic value method. The Company has recognized
compensation expense for historical restricted performance share grants over the
relevant attribution period.
The scope of FAS 123(R) includes a wide range of stock-based compensation
arrangements including stock options, restricted stock plans, performance-based
awards, stock appreciation rights, and employee stock purchase plans. FAS 123(R)
requires that the Company measure the cost of employee services received in
exchange for an award of equity instruments based on the fair value of the award
on the grant date. That cost must be recognized in the income statement over the
vesting period of the award. In applying the "modified retrospective" method to
implement SFAS No. 123 (R), the Company adjusted the financial statements for
prior periods to give effect to the fair-value-based method of accounting for
awards that were granted, modified or settled in the fiscal years beginning
after December 15, 1994 on a basis consistent with the pro forma disclosures
required by Statement 123. Accordingly, compensation costs and the related tax
effects are recognized in those financial statements as though awards for those
periods before the effective date of statement 123(R) had been accounted for
under Statement 123. In addition, the opening balances of common stock, deferred
taxes and retained earnings for the earliest year presented are adjusted to
reflect the cumulative effect of the modified retrospective application on
earlier periods.
The following table summarizes information about stock options granted under the
Plans as of March 31, 2006. The intrinsic value is calculated as the difference
between the market value as of March 31, 2006 and the exercise price of the
shares. The market value as of March 31, 2006 was $51.92 as reported by the
Nasdaq National:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------------
Range of Shares Aggregate Weighted Weighted Shares Aggregate Weighted Weighted
Exercise (in Intrinsic Average Average (in Intrinsic Average Average
Price thousands) Value Remaining Exercise thousands) Value Remaining Exercise
(in Contractual Price (in Contractual Price
thousands) Life thousands) Life
(years) (years)
--------------------------------------------------------------------------------------------------------------------
$10 - 15 11 $427 2.1 $13.09 11 $427 2.1 $13.09
15 - 19 1 26 2.2 16.76 1 26 2.2 16.76
19 - 20 111 3,633 0.8 19.25 111 3,633 0.8 19.25
20 - 25 417 11,644 3.8 24.00 417 11,644 3.8 24.00
32 - 33 244 4,661 1.8 32.79 244 4,661 1.8 32.79
33 - 35 279 4,852 2.8 34.56 279 4,852 2.8 34.56
35 - 40 695 8,960 5.4 39.02 695 8,960 5.4 39.02
40 - 45 474 5,296 6.8 40.75 474 5,296 6.8 40.75
45 - 50 462 1,068 7.8 49.61 309 713 7.8 49.61
50 - 55 732 0 9.2 52.55 159 0 8.8 52.54
--------------------------------------------------------------------------------------------------------------------
$10 - 55 3,426 $40,567 5.9 40.21 2,700 $40,212 5.1 37.06
====================================================================================================================
Page 9
The Company applies the Roll-Geske option pricing model (Modified Roll) to
determine grant date fair value of stock option grants. This model modifies the
Black-Scholes Model to take into account dividends and American options. The
following weighted average assumptions were used in the option pricing to value
stock options granted in the periods indicated:
For the
Three months ended
March 31,
2006 2005
--------------------------
Expected volatility*1 16% 15%
Expected life in years*2 4.0 7.0
Risk-free interest rate*3 4.41% 3.91%
Expected dividend yield 2.63% 2.47%
Fair value per award $6.54 $6.61
*1 Measured using daily price changes of Company's stock over respective
expected term of the option and the implied volatility derived from the market
prices of the Company's stock and traded options.
*2 the expected life is the number of years that the company estimates that the
options will be outstanding prior to exercise
*3 the risk-free rate for periods within the contractual term of the option is
based on the US Treasury yield curve in effect at the time of the grant
Employee stock option grants are being expensed by the Company over the grants'
three year vesting period. The company issues new shares upon the exercise of
options. The Company estimates it will issue approximately 400 thousand shares
during 2006 related to stock-based compensation programs. The number of shares
authorized to be issued for options is 2.2 million.
The impact of adopting SFAS 123(R) for the quarters ended March 31, 2006 and
2005 and at March 31, 2006 and 2005 is summarized in the following tables (in
thousands, except per share data):
For the three months ended March 31,
----------------------------------------------------
2006 2005
----------------------------------------------------
Intrinsic Fair Intrinsic Fair
Value Value Value Value
Method Method Method Method
----------------------------------------------------
Income before income taxes $36,596 $35,961 $30,701 $29,978
Net income 26,488 26,117 22,733 22,310
Net earnings per share - basic $0.84 $0.82 $0.71 $0.70
Net earnings per share - diluted share 0.82 0.81 0.70 0.68
Cash flow from operations $33,794 $33,513 $32,553 $32,530
Cash flow from financing activities (130,894) (130,613) (158,957) (158,934)
A summary of option activity is presented below:
Shares Weighted Weighted
Average Average
Exercise Remaining
Price Contractual
Term
---------------------------------------
Outstanding at January 1, 2006 3,269,086 $39.13 5.5 years
Granted 258,000 52.56 9.8
Exercised (87,975) 34.46 4.4
Forfeited or expired (12,746) 52.03 8.4
-------------
Outstanding at March 31, 2006 3,426,365 40.21 5.9
=============
Exercisable at March 31, 2006 2,700,154 37.06 5.1 years
=============
A summary of the Company's nonvested shares is presented below.
Shares Weighted
Average
Grant
Date
Fair Value
--------------------------
Nonvested at January 1, 2006 967,947 $6.57
Granted 258,000 6.54
Vested (486,990) 6.43
Forfeited (12,746) 6.63
-------------
Nonvested at March 31, 2006 726,211 6.65
=============
The weighted average estimated grant date fair value, as defined by SFAS 123(R),
for options granted under the Company's stock option plan during the three
months ended March 31, 2006 and 2005 was $6.54 and $6.61 per share,
respectively. The total remaining unrecognized compensation cost related to
nonvested awards as of March 31, 2006 is $4.4 million and the weighted average
period over which the cost is expected to be recognized is 1.9 years.
Page 10
A summary of the status of the Company's restricted performance shares as of
March 31, 2006 and 2005 and changes during the quarters ended on those dates,
follows:
2006 2005
--------------------------
Outstanding at January 1, 43,582 57,750
Granted 15,084 20,740
Exercised (1,414) 0
Forfeited 0 (1,100)
--------------------------
Outstanding at March 31, 57,252 77,390
==========================
As of March 31, 2006 and 2005, the restricted performance shares had a
weighted-average contractual life of 1.38 and 1.54 years, respectively. The
compensation cost that was charged against income for the Company's restricted
performance shares granted was $177 thousand and $300 thousand for the first
quarter of 2006 and 2005, respectively. There were no stock appreciation rights
or incentive stock options granted in the first quarter of 2006 and 2005.
Note 5: Post Retirement Benefits
The Company uses an actuarial-based accrual method of accounting for
post-retirement benefits. The Company offers a continuation of group insurance
coverage to employees electing early retirement until age 65. The Company pays a
portion of these early retirees' insurance premium which are determined at their
date of retirement. The Company reimburses a portion of Medicare Part B premiums
for all retirees and spouses over 65.
In accordance with SFAS No.132 "Employers' Disclosures about Pensions and Other
Post-Retirement Benefits", the Company provides the following interim disclosure
related to its post-retirement benefit plan.
The following table sets forth the net periodic post retirement benefit costs
for the three months ended March 31 (in thousands).
For the three months ended
March 31,
--------------------------
2006 2005
--------------------------
Service cost $47 $70
Interest cost 53 53
Amortization of unrecognized
transition obligation 15 15
--------------------------
Net periodic cost $115 $138
==========================
The Company does not fund plan assets for any post-retirement benefit plans.
Page 11
WESTAMERICA BANCORPORATION
Financial Summary
(Dollars in thousands, except per share data)
Three months ended
---------------------------------------
March 31, December 31,
--------------------------
2006 2005* 2005*
---------------------------------------
Net Interest Income (FTE)*** $53,974 $55,019 $55,830
Provision for Credit Losses 150 300 150
Noninterest Income:
Securities losses 0 (4,903) 0
Deposit service charges and other 13,639 12,098 14,427
---------------------------------------
Total noninterest income 13,639 7,195 14,427
Noninterest Expense 25,483 25,863 26,980
Provision for income taxes (FTE)*** 15,863 13,741 16,003
---------------------------------------
Net Income $26,117 $22,310 $27,124
=======================================
Average Shares Outstanding 31,688 32,022 32,029
Diluted Average Shares Outstanding 32,276 32,680 32,572
Shares Outstanding at Period End 31,544 32,939 31,882
As Reported:
Basic Earnings Per Share $0.82 $0.70 $0.85
Diluted Earnings Per Share 0.81 0.68 0.83
Return On Assets 2.10% 1.86% 2.11%
Return On Equity 24.93% 24.22% 25.50%
Net Interest Margin (FTE)*** 4.73% 4.90% 4.80%
Net Loan (Recoveries) Losses to Average Loans 0.04% (0.03%) 0.04%
Efficiency Ratio** 37.7% 41.6% 38.4%
Average Balances:
Total Assets $5,054,256 $4,864,633 $5,089,078
Earning Assets 4,606,178 4,518,930 4,639,319
Total Gross Loans 2,615,949 2,374,710 2,616,813
Total Deposits 3,784,436 3,716,554 3,898,859
Shareholders' Equity 424,832 373,627 421,536
Balances at Period End:
Total Assets $5,055,553 $5,200,460 $5,157,559
Earning Assets 4,591,346 4,759,558 4,672,358
Total Gross Loans 2,639,968 2,708,052 2,672,221
Total Deposits 3,739,186 3,938,843 3,846,101
Shareholders' Equity 429,372 445,924 435,064
Financial Ratios at Period End:
Allowance for Loan Losses to Loans 2.11% 2.21% 2.09%
Book Value Per Share $13.61 $13.54 $13.65
Equity to Assets 8.49% 8.57% 8.44%
Total Capital to Risk Adjusted Assets 10.73% 10.28% 10.40%
Dividends Paid Per Share $0.32 $0.30 $0.32
Dividend Payout Ratio 40% 44% 38%
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.
* Adjusted to adopt SFAS 123(R)
** 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 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Westamerica Bancorporation and subsidiaries (the "Company") reported first
quarter 2006 net income of $26.1 million or $.81 diluted earnings per share.
These results compare to net income of $22.3 million or $.68 diluted earnings
per share and $27.1 million or $.83 diluted earnings per share, respectively,
for the first and fourth quarters of 2005. First quarter 2005 results include
one month of operating results of Redwood Empire Bancorp ("REBC"), parent
company of National Bank of the Redwoods, which was acquired on March 1, 2005.
First quarter 2005 also included a loss on sale of available-for-sale investment
securities totaling $2.8 million, net of tax, or $0.09 per diluted share
outstanding.
Following is a summary of the components of net income for the periods indicated
(dollars in thousands except per share data):
Three months ended
---------------------------------------
March 31, December 31,
--------------------------
2006 2005* 2005*
---------------------------------------
Net interest income (FTE) $53,974 $55,019 $55,830
Provision for credit losses (150) (300) (150)
Noninterest income:
Securities losses 0 (4,903) 0
Deposit service charges and other 13,639 12,098 14,427
Total noninterest income 13,639 7,195 14,427
Noninterest expense (25,483) (25,863) (26,980)
Provision for income taxes (FTE) (15,863) (13,741) (16,003)
---------------------------------------
Net income $26,117 $22,310 $27,124
=======================================
Average diluted shares 32,276 32,680 32,572
Diluted earnings per share $0.81 $0.68 $0.83
Average total assets $5,054,256 $4,864,633 $5,089,078
Net income (annualized) to average total assets 2.10% 1.86% 2.11%
* Adjusted to adopt SFAS 123(R)
Net income for the first quarter of 2006 was $3.8 million or 17.1% more than the
same quarter of 2005, primarily due to higher noninterest income, partially
offset by lower net interest income (FTE) and a higher income tax provision. The
decrease in net interest income (FTE) (down $1.0 million or 1.9%) was
attributable to higher funding costs and lower loan fee income, partially offset
by an increase due to growth of average interest-earning assets and higher
yields earned on those assets. The loan loss provision decreased $150 thousand
or 50.0% from a year ago, reflecting Management's assessment of credit risk for
the loan portfolio. Noninterest income increased $6.4 million or 89.6% as 2005
included $4.9 million in securities losses and merchant credit card income rose
due to the REBC acquisition. Noninterest expense decreased $380 thousand or
1.5%. The provision for income taxes (FTE) rose $2.1 million or 15.4% largely
due to increased pretax income.
Comparing the first three months of 2006 to the prior quarter, net income
declined $1.0 million or 3.7%, due to lower net interest income (FTE) and lower
noninterest income, offset by decreases in noninterest expense and the provision
for income taxes. The lower net interest income (FTE) was caused by higher
funding costs, the effect of two less accrual days and lower average earning
assets, partially offset by higher yields on those assets. Noninterest income
decreased $788 thousand or 5.5% due to seasonal declines in merchant card
volumes, fewer processing days for deposit services, and $357 thousand life
insurance proceeds in the fourth quarter of 2005. Noninterest expense declined
$1.5 million or 5.6% primarily due to lower personnel costs. The income tax
provision (FTE) decreased mainly due to lower earnings.
Page 13
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended
---------------------------------------
March 31, December 31,
--------------------------
2006 2005 2005
---------------------------------------
Interest and fee income $62,467 $57,303 $62,234
Interest expense (14,512) (8,357) (12,519)
FTE adjustment 6,019 6,073 6,115
---------------------------------------
Net interest income (FTE) $53,974 $55,019 $55,830
=======================================
Average earning assets $4,606,178 $4,518,930 $4,639,319
Net interest margin (FTE) 4.73% 4.90% 4.80%
Approximately eighty percent of the Company's revenue is derived from net
interest income, or the difference between interest income earned on loans and
investments and interest expense paid on interest-bearing deposits and
borrowings. Net interest income (FTE) during the first quarter of 2006 decreased
$1.0 million or 1.9% from the same period in 2005 to $54.0 million, mainly due
to rates on interest-bearing liabilities (up 75 basis points ("bp")) moving
faster than yields on earning assets (up 37 bp), higher average interest-bearing
liabilities (up $73 million), and lower loan fee income (down $168 thousand),
partially offset by growth of average earning assets (up $87 million.)
Comparing the first quarter of 2006 with the previous quarter, net interest
income (FTE) declined $1.9 million or 3.3%, primarily due to higher average
interest-bearing liabilities (up $37 million), higher rates on those liabilities
(up 26 bp), the effect of two less accrual days and lower average earning assets
(down $33 million), partially offset by higher yields on those assets (up 13
bp).
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2006 rose $5.1 million or
8.1% from the same period in 2005. The increase was caused by higher average
earning assets (up $87.2 million) and higher yields on those assets (up 37 bp),
partially offset by lower loan fee income (down $168 thousand.)
The average yield on the Company's earning assets, excluding loan fee income,
increased from 5.60% in the first quarter of 2005 to 5.97% in the same period in
2006 (up 37 bp). The composite yield on loans, excluding loan fees, rose 41 bp
to 6.52% due to increases in the average yields on commercial loans (up 101 bp),
residential real estate loans (up 27 bp), direct consumer loans (up 136 bp),
construction loans (up 153 bp) and indirect consumer loans (up 15 bp.)
The investment portfolio yield increased 18 bp to 5.23%, caused by increases in
the average yield on mortgage backed securities and collateralized mortgage
obligations (up 23 bp) and U.S. government sponsored entity obligations (up 23
bp). Partially offsetting these increases were decreases in the average yield on
municipal securities (down 13 bp) and corporate and other securities (down 40
bp.)
Average earning asset expansion of $87 million for the first quarter of 2006
compared to the same period in 2005 was attributable to growth in the loan
portfolio, partially offset by a decrease in the investment portfolio. The
Company's acquisition of REBC on March 1, 2005 was the principal cause of the
loan portfolio growth. Average commercial real estate loans rose by $113
million. Average residential real estate loans were up $87 million and average
balances of construction loans and commercial loans were also up $33 million and
$16 million, respectively. A $3 million decline in the average balance of direct
consumer loans partially offset these increases.
Average investments declined $154 million for the first quarter of 2006 compared
to the same period in 2005 primarily due to decreased average balances of U.S.
government sponsored entity obligations (down $138 million), mortgage backed
securities and collateralized mortgage obligations (down $28 million) and other
securities (down $9 million), partially offset by a $22 million increase in
average municipal securities. The Company sold approximately $170 million in
"available-for-sale" U.S. government sponsored entity obligations in the first
quarter of 2005 to manage interest rate risk associated with the REBC
acquisition.
Comparing the first quarter of 2006 with the previous quarter, interest and fee
income (FTE) was up $136 thousand or 0.2%. The increase largely resulted from
rising yields on those assets, partially offset by the effect of a lower volume
of average earning assets.
The average yield on earning assets excluding loan fees for the first three
months of 2006 was 5.97% compared with 5.84% in the fourth quarter of 2005. The
loan portfolio yield excluding loan fees for the first quarter of 2006 compared
with the previous quarter was higher by 20 bp, due to increases in yields on
commercial loans (up 31 bp), commercial real estate loans (up 22 bp),
residential real estate loans (up 10 bp) and construction loans (up 67 bp.)
The investment portfolio yield rose by 1 bp. The increase resulted from higher
average yields on U.S. government sponsored entity obligations (up 6 bp) and
mortgage backed securities and collateralized mortgage obligations (up 3 bp),
partially offset by lower average yields on municipal securities (down 5 bp) and
corporate and other securities (down 3 bp.)
Average earning assets decreased $33 million or 0.7% for the first quarter of
2006 compared with the previous quarter primarily due to a $32 million decline
in the investment portfolio. Decreases in average balances of mortgage backed
securities and collateralized mortgage obligations (down $28 million) and
municipal securities (down $7 million) were partially offset by a $3 million
increase in the average balance of other securities.
Page 14
The loan portfolio decreased $1 million due to decreases in average balances of
commercial loans (down $15 million) and direct consumer loans (down $5 million),
offset by increases in average balances of construction loans (up $7 million),
residential real estate loans (up $6 million) and indirect consumer loans (up $4
million.)
Interest Expense
Interest expense in the first quarter of 2006 increased $6.2 million or 73.7%
compared with the same period in 2005. The increase was attributable to higher
rates paid on the interest-bearing liabilities and growth in those liabilities.
The average rate paid on interest-bearing liabilities increased from 1.08% in
the first quarter of 2005 to 1.82% in 2006. Rates paid on most liabilities moved
with general market conditions: the average rate on federal funds purchased rose
197 bp and rates on deposits increased as well, including those on certificates
of deposit ("CDs") over $100 thousand, which rose 161 bp; on retail CDs, which
went up by 48 bp; and on money market checking accounts, which rose an average
of 9 bp.
Interest-bearing liabilities grew $73 million or 2.3% for the first quarter of
2006 over the same period of 2005. CDs over $100 thousand increased $95 million,
primarily due to inflows of public funds. Short term borrowings other than
federal funds, primarily repurchase agreements with commercial banking
customers, increased $42 million. Long-term debt increased $11 million, the net
result of assumption of REBC's $20 million subordinated debentures and scheduled
annual repayments of senior notes. Offsetting the increase were decreases in
retail CDs (down $17 Million) and money market savings (down $89 million).
Comparing the first quarter of 2006 with the previous quarter, interest expense
rose $2.0 million or 15.9%, due to higher rates paid on interest-bearing
liabilities and growth of such liabilities.
Rates paid on liabilities averaged 1.82% during the first three months of 2006
compared with 1.56% in the fourth quarter of 2005. The most significant rate
increases were federal funds purchased which rose 46 bp, CDs over $100 thousand
which rose 45 bp and retail CDs which increased by 16 bp.
Interest-bearing liabilities grew $37 million or 1.2% over the fourth quarter of
2005. Federal funds purchased grew $68 million and CDs over $100 thousand
increased $31 million, primarily due to inflows of public funds. An $11 million
decline in retail CDs partially offset the increase.
In all periods, the Company has attempted to continue to reduce high-rate time
deposits while increasing the balances of more profitable, lower-cost
transaction accounts in order to minimize the cost of funds. Lower-cost
transaction accounts experience seasonal trends primarily due to customer income
and property tax payments, with the most significant deposit outflows occurring
in the first calendar quarter of each year.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest margin for
the periods indicated:
Three months ended
---------------------------------------
March 31, December 31,
--------------------------
2006 2005 2005
---------------------------------------
Yield on earning assets 6.00% 5.65% 5.87%
Rate paid on interest-bearing
liabilities 1.82% 1.08% 1.56%
---------------------------------------
Net interest spread 4.18% 4.57% 4.31%
Impact of all other net
noninterest bearing funds 0.55% 0.33% 0.49%
---------------------------------------
Net interest margin 4.73% 4.90% 4.80%
=======================================
During the first quarter of 2006, the net interest margin declined 17 bp
compared with the same period in 2005. Rates paid on interest-bearing
liabilities increased faster than the yields on earning assets, resulting in a
39 bp decline in net interest spread. The decline in the net interest spread was
mitigated by the higher value of noninterest bearing funding sources. While the
average balance of these sources increased $41 million or 3.1%, their value
increased 22 bp, from 33 bp in the first quarter of 2005 to 55 bp in the first
quarter of 2006, because of the higher earning asset yields at which they could
be invested.
The net interest margin declined by 7 bp when compared with the fourth quarter
of 2005. Earning asset yields increased 13 bp, however, the cost of
interest-bearing liabilities rose by 26 bp, resulting in a 13 bp decrease in the
interest spread. Although noninterest bearing funding sources decreased $80
million or 5.6%, their margin contribution increased by 6 bp.
Page 15
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amount of interest income from average earning assets and the resulting
yields, and the amount of interest expense paid on interest-bearing liabilities.
Average loan balances include nonperforming loans. Interest income includes
proceeds from loans on nonaccrual status only to the extent cash payments have
been received and applied as interest income. Yields on securities and certain
loans have been adjusted upward to reflect the effect of income which is exempt
from federal income taxation at the current statutory tax rate (FTE) (dollars in
thousands).
For the three months ended
March 31, 2006
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $820 $1 0.49%
Investment securities:
Available for sale
Taxable 411,109 4,403 4.28%
Tax-exempt (FTE) 254,839 4,645 7.29%
Held to maturity
Taxable 735,649 7,829 4.26%
Tax-exempt (FTE) 587,812 9,125 6.21%
Loans:
Commercial:
Taxable 359,147 7,371 8.32%
Tax-exempt (FTE) 253,276 4,095 6.56%
Commercial real estate 922,838 16,815 7.39%
Real estate construction 78,349 1,687 8.73%
Real estate residential 509,037 5,895 4.63%
Consumer 493,302 6,620 5.44%
--------------------------
Total loans 2,615,949 42,483 6.52%
--------------------------
Total earning assets 4,606,178 68,486 6.00%
Other assets 448,078
-------------
Total assets $5,054,256
=============
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand $1,355,501 $-- --
Savings and interest-bearing
transaction 1,673,634 1,326 0.32%
Time less than $100,000 254,002 1,460 2.33%
Time $100,000 or more 501,299 4,456 3.60%
--------------------------
Total interest-bearing deposits 2,428,935 7,242 1.21%
Short-term borrowed funds 738,307 6,672 3.62%
Federal Home Loan Bank advances 0 0 0.00%
Debt financing and notes payable 38,124 598 6.27%
--------------------------
Total interest-bearing liabilities 3,205,366 14,512 1.82%
Other liabilities 68,557
Shareholders' equity 424,832
-------------
Total liabilities and shareholders' equity $5,054,256
=============
Net interest spread (1) 4.18%
Net interest income and interest margin (2) $53,974 4.73%
==========================
(1) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 16
For the three months ended
March 31, 2005
---------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------
Assets:
Money market assets and funds sold $709 $0 0.00%
Investment securities:
Available for sale
Taxable 584,174 6,117 4.19%
Tax-exempt (FTE) 270,411 4,950 7.32%
Held to maturity
Taxable 739,906 7,290 3.94%
Tax-exempt (FTE) 549,020 8,683 6.33%
Loans:
Commercial:
Taxable 349,171 5,701 6.62%
Tax-exempt (FTE) 247,553 4,100 6.72%
Commercial real estate 809,807 14,754 7.39%
Real estate construction 45,737 810 7.18%
Real estate residential 421,723 4,606 4.37%
Consumer 500,719 6,365 5.16%
--------------------------
Total loans 2,374,710 36,336 6.16%
--------------------------
Total earning assets 4,518,930 63,376 5.65%
Other assets 345,703
-------------
Total assets $4,864,633
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,314,485 $-- --
Savings and interest-bearing
transaction 1,724,574 1,126 0.26%
Time less than $100,000 271,461 1,238 1.85%
Time $100,000 or more 406,034 1,993 1.99%
--------------------------
Total interest-bearing deposits 2,402,069 4,357 0.74%
Short-term borrowed funds 703,468 3,570 2.03%
Debt financing and notes payable 26,881 430 6.40%
--------------------------
Total interest-bearing liabilities 3,132,418 8,357 1.08%
Other liabilities 44,103
Shareholders' equity 373,627
-------------
Total liabilities and shareholders' equity $4,864,633
=============
Net interest spread (1) 4.57%
Net interest income and interest margin (2) $55,019 4.90%
==========================
(1) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 17
For the three months ended
December 31, 2005
---------------------------------------
Interest Rates
Average income/ earned/
Balance expense paid
---------------------------------------
Assets:
Money market assets and funds sold $977 $1 0.41%
Investment securities:
Available for sale
Taxable 412,002 4,394 4.27%
Tax-exempt (FTE) 258,497 4,752 7.35%
Held to maturity
Taxable 760,405 8,020 4.22%
Tax-exempt (FTE) 590,626 9,211 6.24%
Loans:
Commercial:
Taxable 377,918 7,503 7.88%
Tax-exempt (FTE) 249,577 4,073 6.47%
Commercial real estate 921,141 16,579 7.14%
Real estate construction 70,881 1,451 8.12%
Real estate residential 503,163 5,695 4.53%
Consumer 494,132 6,670 5.36%
--------------------------
Total loans 2,616,812 41,971 6.32%
--------------------------
Total earning assets 4,639,319 68,349 5.87%
Other assets 449,759
-------------
Total assets $5,089,078
=============
Liabilities and shareholders' equity:
Deposits:
Noninterest bearing demand $1,435,193 $-- --
Savings and interest-bearing
transaction 1,729,080 1,410 0.32%
Time less than $100,000 264,570 1,444 2.17%
Time $100,000 or more 470,016 3,732 3.15%
--------------------------
Total interest-bearing deposits 2,463,666 6,586 1.06%
Short-term borrowed funds 664,752 5,296 3.12%
Debt financing and notes payable 40,303 637 6.32%
--------------------------
Total interest-bearing liabilities 3,168,721 12,519 1.56%
Other liabilities 63,628
Shareholders' equity 421,536
-------------
Total liabilities and shareholders' equity $5,089,078
=============
Net interest spread (1) 4.31%
Net interest income and interest margin (2) $55,830 4.80%
==========================
(1) Net interest spread represents the average yield earned on earning assets
minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense (annualized), divided by the average balance of
earning assets.
Page 18
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income and
interest expense due to changes in average asset and liability balances (volume)
and changes in average interest rates for the periods indicated. Changes not
solely attributable to volume or rates have been allocated in proportion to the
respective volume and rate components (dollars in thousands).
Three months ended March 31, 2006
compared with three months
ended March 31, 2005
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 $1 $1
Investment securities:
Available for sale
Taxable (1,851) 137 (1,714)
Tax-exempt (284) (21) (305)
Held to maturity
Taxable (42) 581 539
Tax-exempt 601 (159) 442
Loans:
Commercial:
Taxable 167 1,503 1,670
Tax-exempt 94 (99) (5)
Commercial real estate 2,060 1 2,061
Real estate construction 673 204 877
Real estate residential 998 291 1,289
Consumer (95) 350 255
---------------------------------------
Total loans 3,897 2,250 6,147
---------------------------------------
Total earning assets 2,321 2,789 5,110
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (34) 234 200
Time less than $100,000 (84) 306 222
Time $100,000 or more 553 1,910 2,463
---------------------------------------
Total interest-bearing deposits 435 2,450 2,885
---------------------------------------
Short-term borrowed funds 185 2,917 3,102
Debt financing and notes payable 177 (9) 168
---------------------------------------
Total interest-bearing liabilities 797 5,358 6,155
---------------------------------------
Increase (Decrease) in Net Interest Income $1,524 ($2,569) ($1,045)
=======================================
Page 19
Three months ended March 31, 2006
compared with three months
ended December 31, 2005
---------------------------------------
Volume Rate Total
---------------------------------------
Interest and fee income:
Money market assets and funds sold $0 $0 $0
Investment securities:
Available for sale
Taxable (10) 19 9
Tax-exempt (67) (40) (107)
Held to maturity
Taxable (263) 72 (191)
Tax-exempt (44) (42) (86)
Loans:
Commercial:
Taxable (380) 248 (132)
Tax-exempt 60 (38) 22
Commercial real estate 31 205 236
Real estate construction 158 78 236
Real estate residential 67 133 200
Consumer (11) (39) (50)
---------------------------------------
Total loans (75) 587 512
---------------------------------------
Total earning assets (459) 596 137
---------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing
transaction (45) (39) (84)
Time less than $100,000 (59) 75 16
Time $100,000 or more 259 465 724
---------------------------------------
Total interest-bearing deposits 155 501 656
---------------------------------------
Short-term borrowed funds 622 754 1,376
Debt financing and notes payable (34) (5) (39)
---------------------------------------
Total interest-bearing liabilities 743 1,250 1,993
---------------------------------------
Decrease in Net Interest Income ($1,202) ($654) ($1,856)
=======================================
Page 20
Provision for Credit Losses
The level of the provision for credit losses during each of the periods
presented reflects the Company's continued efforts to manage credit costs by
enforcing underwriting and administration procedures and aggressively pursuing
collection efforts with troubled debtors. The Company provided $150 thousand for
credit losses in the first quarter of 2005, compared with $150 thousand in the
fourth quarter and $300 thousand in the first quarter of 2005. The provision
reflects the Company's loss experience and Management's assessment of credit
risk in the loan portfolio for each of the periods presented. For further
information regarding net credit losses and the allowance for loan losses, see
the "Classified Loans" 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
---------------------------------------
March 31,
--------------------------December 31,
2006 2005 2005
---------------------------------------
Service charges on deposit accounts $7,083 $6,927 $7,202
Merchant credit card fees 2,385 1,298 2,751
Debit card fees 828 697 865
ATM fees and interchange 678 624 653
Official check issuance income 334 225 310
Financial services commissions 298 279 380
Trust fees 282 273 275
Check sale income 200 289 176
Mortgage banking income 50 100 62
Securities losses 0 (4,903) 0
Other noninterest income 1,501 1,386 1,753
---------------------------------------
Total $13,639 $7,195 $14,427
=======================================
Noninterest income for the first quarter of 2006 rose by $6.4 million or 89.6%
from the same period in 2005, which included $4.9 million in securities losses
arising from sales of investment securities available for sale. Merchant credit
card income increased $1.1 million or 83.7% primarily due to the acquisition of
the merchant card servicing business of Redwood Empire Bancorp on March 1, 2005.
Service charges on deposit accounts increased $156 thousand or 2.25% mainly due
to a $199 thousand increase in overdraft fees, partially offset by declines in
retail and business checking account service fees. Debit card fees rose $131
thousand or 18.8% largely due to increased usage. Official check issuance income
increased $109 thousand or 48.4% mainly due to higher earning credit rates on
outstanding checks. Other noninterest income was higher by $115 thousand or 8.3%
mostly due to $108 thousand in interest received on tax refunds.
In the first quarter of 2006, noninterest income decreased $788 thousand or 5.5%
compared with the previous quarter. Merchant credit card income declined $366
thousand or 13.3% primarily due to seasonally lower credit card sales. Service
charges on deposit accounts fell $119 thousand or 1.7% mostly due to a $124
thousand decline in overdraft fees. Other noninterest income declined $252
thousand or 14.4% mainly because the previous quarter included $357 thousand in
life insurance proceeds while the first quarter of 2006 included $108 thousand
in interest received on tax refunds.
Page 21
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2006 2005* 2005*
---------------------------------------
Salaries and incentives $13,258 $13,883 $13,867
Occupancy 3,232 2,952 3,196
Data processing services 1,534 1,548 1,524
Equipment 1,266 1,230 1,321
Amortization of identifiable intangibles 1,040 405 1,064
Courier service 922 926 952
Professional fees 457 720 599
Telephone 432 528 497
Postage 410 422 441
Customer checks 290 231 248
Stationery and supplies 270 348 314
Advertising/public relations 234 206 237
Loan expense 195 204 200
Operational losses 189 190 303
Correspondent service charges 183 250 217
Other noninterest expense 1,571 1,820 2,000
---------------------------------------
Total $25,483 $25,863 $26,980
=======================================
Average full time equivalent staff 939 963 945
Noninterest expense to revenues (FTE) 37.69% 41.57% 38.40%
* Reflects the adoption of SFAS 123(R)
Noninterest expense decreased $380 thousand or 1.5% in the first quarter of 2006
compared with the same period in 2005. The largest decline was salaries and
incentives, which was down $625 thousand or 4.5% mainly due to a $211 thousand
decrease in stock based compensation (Restricted Performance Shares ("RPS") and
stock options), a $186 thousand decrease in regular salaries resulting from
reduced full time equivalent employees, a $153 thousand decrease in retirement
plan costs, and a $112 thousand decrease in employee incentives, partially
offset by annual merit increases to continuing staff. Professional fees were
down $263 thousand or 36.5% mainly because the first quarter of 2005 included
legal fees associated with the REBC acquisition and higher audit fees. Other
noninterest expense declined $249 thousand or 13.7% mainly due to lower cost of
insurance. The $635 thousand increase in amortization of identifiable
intangibles was attributable to the REBC acquisition. Occupancy expense
increased $280 thousand 9.5% primarily due to a $289 thousand increase in rent,
net of sublease income, resulting from the REBC acquisition and annual
increases.
In the first three months of 2006, noninterest expense fell $1.5 million or 5.6%
compared with the fourth quarter of 2005. Salaries and incentives declined $609
thousand or 4.4% mainly due to a decrease in incentives and stock based
compensation (stock options), offset in part by a seasonal increase in payroll
taxes. Other noninterest expense declined $429 thousand or 21.5% due to a $357
thousand gain on company owned life insurance. Professional fees decreased $142
thousand or 23.7% mainly due to decreased legal fees relating to loans. Finally,
operational losses declined $114 thousand.
Provision for Income Tax
During the first quarter of 2006, the Company recorded income tax expense (FTE)
of $15.9 million, compared to $13.7 million and $16.0 million for the first and
fourth quarters of 2005, respectively. The current quarter provision represents
an effective tax rate of 37.8%, compared with 37.4% and 36.4% for the first and
fourth quarters of 2005, respectively.
The tax provisions and effective tax rates fluctuated due to the relative level
of tax- exempt income from municipal investments and loans to the level of
pretax income, tax-free life insurance proceeds of $375 thousand in the fourth
quarter of 2005, and benefits from the apportionment of income to affiliates for
state tax purposes.
Classified Loans
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.
Page 22
The following is a summary of classified loans and other real estate owned on
the dates indicated (dollars in thousands):
At March 31, At
--------------------------December 31,
2006 2005 2005
---------------------------------------
Classified loans $28,878 $35,258 $29,997
Other real estate owned 0 0 0
---------------------------------------
Classified loans and other real estate owned $28,878 $35,258 $29,997
=======================================
Allowance for loan losses /
classified loans 193% 170% 186%
Classified loans at March 31, 2006, decreased $6.4 million or 18.1% from a year
ago. Classified loans increased $16.1 million at the time of the acquisition of
REBC. The subsequent decline resulted from upgrades, charge-offs and payoffs,
partially offset by new downgrades. Other real estate owned remained at zero at
the end of each period shown above. A $1.1 million or 3.7% decrease in
classified loans from December 31, 2005 was generally due to paydowns and
improved credit quality.
Nonperforming Loans
Nonperforming loans include nonaccrual loans and loans 90 days past due as to
principal or interest and still accruing. Loans are placed on nonaccrual status
when they become 90 days or more delinquent, unless the loan is well secured and
in the process of collection. Interest previously accrued on loans placed on
nonaccrual status is charged against interest income. In addition, loans secured
by real estate with temporarily impaired values and commercial loans to
borrowers experiencing financial difficulties are placed on nonaccrual status
even though the borrowers continue to repay the loans as scheduled. Such loans
are classified as "performing nonaccrual" and are included in total
nonperforming assets. When the ability to fully collect nonaccrual loan
principal is in doubt, cash payments received are applied against the principal
balance of the loan until such time as full collection of the remaining recorded
balance is expected. Any subsequent interest received is recorded as interest
income on a cash basis.
The following is a summary of nonperforming loans and OREO on the dates
indicated (dollars in thousands):
At March 31, At
--------------------------December 31,
2006 2005 2005
---------------------------------------
Performing nonaccrual loans $3,232 $6,550 $4,256
Nonperforming, nonaccrual loans 2,993 1,766 2,068
---------------------------------------
Total nonaccrual loans 6,225 8,316 6,324
Loans 90 days past due and
still accruing 29 107 162
---------------------------------------
Total nonperforming loans 6,254 8,423 6,486
Other real estate owned 0 0 0
---------------------------------------
Total $6,254 $8,423 $6,486
=======================================
As a percentage of total loans 0.24% 0.31% 0.24%
Performing nonaccrual loans at March 31, 2006 decreased $3.3 million or 50.7% as
the $4.0 million performing nonaccrual loans acquired from REBC were charged off
or paid off. Performing nonaccrual loans at March 31, 2006 decreased $1.0
million or 24.1% mainly due to charge-offs, loans being returned to accrual
status and loans being placed on nonperforming nonaccrual, partially offset by
new loans being placed on nonaccrual.
Nonperforming nonaccrual loans at March 31, 2006 increased $1.2 million or 69.5%
and $925 thousand or 44.7% from the previous year and December 31, 2005,
respectively. The increase was due to the net result of loans being added to
nonaccrual, partially offset by loans returned to accrual status or being
charged off or paid off.
The Company had no restructured loans as of March 31, 2006 and 2005 and December
31, 2005.
The amount of gross interest income that would have been recorded for nonaccrual
loans for the three months ended March 31, 2006, if all such loans had been
current in accordance with their original terms, was $120 thousand, compared to
$124 thousand and $134 thousand, respectively, for the first and fourth quarters
of 2005.
The amount of interest income that was recognized on nonaccrual loans from all
cash payments, including those related to interest owed from prior years, made
during the three months ended March 31, 2006, totaled $60 thousand, compared to
$165 thousand and $45 thousand, respectively, for the first and fourth quarters
of 2005. These cash payments represent annualized yields of 4.15% for first
three months of 2006 compared to 10.15% and 2.83%, respectively, for the first
and the fourth quarter of 2005.
Total cash payments received, including those recorded in prior years, which
were applied against the book balance of nonaccrual loans outstanding at March
31, 2006, totaled approximately $32 thousand, compared with $151 thousand and
$124 thousand for the first and the fourth quarters of 2005, respectively.
Page 23
Management believes the overall credit quality of the loan portfolio continues
to be strong; however, nonperforming assets could fluctuate from period to
period. The performance of any individual loan can be impacted by external
factors such as the interest rate environment, economic conditions or factors
particular to the borrower. No assurance can be given that additional increases
in nonaccrual loans will not occur in the future.
Allowance for Credit Losses
The Company's allowance for credit losses is maintained at a level considered
adequate to provide for losses that can be estimated based upon specific and
general conditions. These include conditions unique to individual borrowers, as
well as overall credit loss experience, the amount of past due, nonperforming
loans and classified loans, recommendations of regulatory authorities,
prevailing economic conditions and other factors. A portion of the allowance is
specifically allocated to impaired and other identified loans whose full
collectibility is uncertain. Such allocations are determined by Management based
on loan-by-loan analyses. A second allocation is based in part on quantitative
analyses of historical credit loss experience, in which criticized and
classified credit balances identified through an internal credit review process
are analyzed using a linear regression model to determine standard loss rates.
The results of this analysis are applied to current criticized and classified
loan balances to allocate the reserve to the respective segments of the loan
portfolio. In addition, loans with similar characteristics not usually
criticized using regulatory guidelines are analyzed based on the historical loss
rates and delinquency trends, grouped by the number of days the payments on
these loans are delinquent. Last, allocations are made to general loan
categories based on commercial office vacancy rates, mortgage loan foreclosure
trends, agriculture commodity prices, and levels of government funding. The
remainder of the reserve is considered to be unallocated and is established at a
level considered necessary based on relevant economic conditions and available
data, including unemployment statistics, unidentified economic and business
conditions, the quality of lending management and staff, credit quality trends,
concentrations of credit, and changing underwriting standards due to external
competitive factors. Management considers the $59.5 million allowance for credit
losses to be adequate as a reserve against losses as of March 31, 2006.
The following table summarizes the credit loss provision, net credit losses and
allowance for credit losses for the periods indicated (dollars in thousands):
Three months ended
---------------------------------------
March 31,
--------------------------December 31,
2006 2005 2005
---------------------------------------
Balance, beginning of period $59,537 $54,152 $59,674
Credit loss provision 150 300 150
Allowance acquired through merger 0 5,213 0
Loans charged off (1,118) (599) (701)
Recoveries of previously
charged off loans 887 793 414
---------------------------------------
Net credit recoveries (losses) (231) 194 (287)
---------------------------------------
Balance, end of period $59,456 $59,859 $59,537
=======================================
Components:
Allowance for loan losses 55,768 59,859 55,849
Reserve for unfunded credit commitments (1) 3,688 -- 3,688
---------------------------------------
Allowance for credit losses $59,456 $59,859 $59,537
=======================================
Allowance for loan losses /
loans outstanding 2.11% 2.21% 2.09%
(1) Effective December 31, 2005, the Company transferred the portion of the
allowance for credit losses related to lending commitments and letters of credit
to other liabilities.
Asset and Liability Management
The fundamental objective of the Company's management of assets and liabilities
is to maximize its economic value while maintaining adequate liquidity and a
conservative level of interest rate risk.
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk results from many factors. Assets and liabilities may mature
or reprice at different times. Assets and liabilities may reprice at the same
time but by different amounts. Short-term and long-term market interest rates
may change by different amounts. The remaining maturity of various assets or
liabilities may shorten or lengthen as interest rates change. In addition,
interest rates may have an indirect impact on loan demand, credit losses, and
other sources of earnings such as account analysis fees on commercial deposit
accounts, official check fees and correspondent bank service charges.
In adjusting the Company's asset/liability position, Management attempts to
manage interest rate risk while enhancing net interest margin and net interest
income. At times, depending on expected increases or decreases in general
interest rates, the relationship between long and short term interest rates,
market conditions and competitive factors, Management may adjust the Company's
interest rate risk position in order to manage its net interest margin and net
interest income. The Company's results of operations and net portfolio values
remain subject to changes in interest rates and to fluctuations in the
difference between long and short term interest rates.
Page 24
Management assesses interest rate risk by comparing the Company's most likely
earnings plan with various earnings models using many interest rate scenarios
that differ in the direction of interest rate changes, the degree of change over
time, the speed of change and the projected shape of the yield curve. For
example, assuming an increase of 200 bp in the federal funds rate and an
increase of 156 bp in the 10 year Constant Maturity Treasury Bond yield during
the same period, estimated earnings at risk would be approximately 4.7% of the
Company's most likely net income plan for 2006. Simulation estimates depend on,
and will change with, the size and mix of the actual and projected balance sheet
at the time of each simulation.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk, even though such activities may be
permitted with the approval of the Company's Board of Directors.
Liquidity
The Company's principal sources of asset liquidity are investment securities
available for sale and principal payments from investment securities held to
maturities and consumer loans. At March 31, 2006, investment securities
available for sale totaled $643 million. At March 31, 2006, residential real
estate loans and indirect auto loans totaled $923 million. In addition, at March
31, 2006, the Company had customary lines for overnight borrowings from other
financial institutions in excess of $700 million and a $35 million line of
credit, under which $22.2 million was outstanding at March 31, 2006. As a member
of the Federal Reserve System, the Company also has the ability to borrow from
the Federal Reserve. The Company's short-term debt rating from Fitch Ratings is
F1 with a stable outlook. Management expects the Company can access short-term
debt financing if desired. The Company's long-term debt rating from Fitch
Ratings is A with a stable outlook. Management expects the Company can access
additional long-term debt financing if desired. The Company generates
significant liquidity from its operating activities. The Company's profitability
during the first three months of 2006 and 2005 contributed to substantial
operating cash flows of $33.5 million and $32.5 million, respectively. In 2006,
operating activities provided enough cash for $23.0 million of Company stock
repurchases and $10.2 million in shareholder dividends. In 2005, operating
activities provided a substantial portion of cash for $9.5 million in
shareholder dividends, $3.2 million for repayment of long term debt and $20.4
million utilized to repurchase common stock.
In the first three months of 2006, investing activities generated $75.7 million,
compared with $168.6 million in the same period of 2005. In 2006, sales and
maturities, net of purchases, of investment securities were $44.0 million. In
2005, sales and maturities, net of purchases, of investment securities were
$172.0 million, which were used to reduce short-term borrowings by $112.3
million. In the first quarter of 2005, the Company used net cash of $35.2
million for the REBC acquisition, which use had been largely facilitated in 2004
by reducing the allocation of operating cash flow used to repurchase and retire
common stock.
The Company anticipates maintaining its cash levels in 2006 mainly through
profitability and retained earnings. It is anticipated that loan demand will
increase moderately in 2006, although such demand will be dictated by economic
conditions. The growth of deposit balances is expected to exceed the anticipated
growth in loan demand through the end of 2006. Depending on economic conditions,
interest rate levels, and a variety of other conditions, excess deposit growth
may be used to purchase investment securities or to reduce short-term
borrowings. However, due to changes in consumer confidence, possible terrorist
attacks, the war in Iraq, and changes in the general economic environment, loan
demand and levels of customer deposits are not certain. Shareholder dividends
and share repurchases are expected to continue in 2006 but will depend on the
Board's ongoing evaluation of the advisability of such actions.
Westamerica Bancorporation ("the Parent Company") is a separate entity from
Westamerica Bank ("the Bank") and must provide for its own liquidity. In
addition to its operating expenses, the Parent Company is responsible for the
payment of dividends to its shareholders, and interest and principal on
outstanding debt. Substantially all of the Parent Company's revenues are
obtained from service fees and dividends received from the Bank. Payment of such
dividends to the Parent Company by the Bank is limited under regulations for
Federal Reserve member banks and California law. The amount that can be paid in
any calendar year, without prior approval from federal and state regulatory
agencies, cannot exceed the net profits (as defined) for that year plus the net
profits of the preceding two calendar years less dividends paid. The Company
believes that such restrictions will not have an impact on the Parent Company's
ability to meet its ongoing cash obligations.
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management. The
Company repurchases shares of its common stock in the open market pursuant to
stock repurchase plans approved by the Board with the intention of lessening the
dilutive impact of issuing new shares under stock option plans, and other
ongoing requirements. In addition, other programs have been implemented to
optimize the Company's use of equity capital and enhance shareholder value.
Pursuant to these programs, the Company collectively repurchased 429 thousand
shares in the first quarter of 2006, 372 thousand shares in the first quarter of
2005, and 500 thousand shares in the fourth quarter of 2005.
The Company's capital position represents the level of capital available to
support continued operations and expansion. The Company's primary capital
resource is shareholders' equity, which was $429.4 million at March 31, 2006.
This amount, which is reflective of the effect of the generation of earnings,
offset by common stock repurchases, dividends paid to shareholders and
unrealized loss on securities available for sale, represents a decrease of $16.6
million or 3.71% from a year ago, and a decrease of $5.7 million or 1.31% from
December 31, 2005. The Company's ratio of equity to total assets declined to
8.49% at March 31, 2006, from 8.57% a year ago. The shareholder's equity to
total assets increased at March 31, 2006, compared with 8.44% at December 31,
2005.
Page 25
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At March 31, At Minimum
--------------------------December 31, Regulatory
2006 2005 2005 Requirement
----------------------------------------------------
Tier I Capital 9.41% 8.94% 9.08% 4.00%
Total Capital 10.73% 10.28% 10.40% 8.00%
Leverage ratio 6.18% 6.32% 6.01% 4.00%
The risk-based capital ratios rose at March 31, 2006, compared with the first
quarter of 2005, due to a decrease in risk-weighted assets and a decrease in
goodwill. The risk-based capital ratios rose at March 31, 2006 from the previous
quarter due to a decrease in risk-weighted assets.
Capital ratios are reviewed by Management on a regular basis to ensure that
capital exceeds the prescribed regulatory minimums and is adequate to meet the
Company's anticipated future needs. All ratios as shown in the table above are
in excess of the regulatory definition of "well capitalized".
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk, even though such activities may be
permitted with the approval of the Company's Board of Directors.
Interest rate risk as discussed above is the most significant market risk
affecting the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, are not significant
in the normal course of the Company's business activities.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, as of March 31, 2006. Based upon their
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective.
The evaluation did not identify any change in the Company's internal control
over financial reporting that occurred during the quarter ended March 31, 2006
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Page 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of the banking business, the Bank is at
times party to various legal actions; all such actions are of a
routine nature and arise in the normal course of business of the
Subsidiary Bank.
Item 1A. Risk Factors
There are no material changes to the risk factors disclosed in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c) Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by
or on behalf of Westamerica Bancorporation or any "affiliated purchaser" (as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of
common stock during the quarter ended March 31, 2006 (in thousands, except per
share data).
(c) (d)
Total Maximum
Number Number
of Shares of Shares
(b) Purchased that May
(a) Average as Part of Yet Be
Total Price Publicly Purchased
Number of Paid Announced Under the
Shares per Plans Plans or
Period Purchased Share or Programs* Programs
-----------------------------------------------------------------
January 1
through
January 31 95 $53.35 95 1,386
-----------------------------------------------------------------
February 1
through
February 28 265 53.94 265 1,121
-----------------------------------------------------------------
March 1
through
March 31 69 52.80 69 1,052
-----------------------------------------------------------------
Total 429 $53.62 429 1,052
=================================================================
* Includes 6 thousand, 7 thousand and 4 thousand shares purchased in January,
February and March, respectively, by the Company in private transactions with
the independent administrator of the Company's Tax Deferred Savings/Retirement
Plan (ESOP). The Company includes the shares purchased in such transactions
within the total number of shares authorized for purchase pursuant to the
currently existing publicly announced program.
The Company repurchases shares of its common stock in the open market to
optimize the Company's use of equity capital and enhance shareholder value and
with the intention of lessening the dilutive impact of issuing new shares to
meet stock performance, option plans, and other ongoing requirements.
Shares were repurchased during the first quarter of 2006 pursuant to a program
approved by the Board of Directors on August 25, 2005 authorizing the purchase
of up to 2,000,000 shares of the Company's common stock from time to time
prior to September 1, 2006.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Page 27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11: Computation of Earnings Per Share on Common
and Common Equivalent Shares and on Common
Shares Assuming Full Dilution
Exhibit 31.1: Certification of Chief Executive
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2: Certification of Chief Financial
Officer pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1: Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2: Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Page 28
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
WESTAMERICA BANCORPORATION
(Registrant)
May 5, 2006 /s/ John "Robert" Thorson
----------- -------------------------
Date John "Robert" Thorson
Senior Vice President
and Chief Financial Officer
(Chief Financial and Accounting Officer)