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WABC > SEC Filings for WABC > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for WESTAMERICA BANCORPORATION

Form 10-Q for WESTAMERICA BANCORPORATION


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Westamerica Bancorporation and subsidiaries (the "Company") reported net income of $20.0 million or $0.73 diluted earnings per common share for the third quarter 2012 and net income of $62.0 million or $2.23 diluted earnings per common share for the nine months ended September 30, 2012. The nine months ended September 30, 2012 included a $1.3 million loss realized from the sale of a collateralized mortgage obligation bond which reduced net income by $750 thousand and a tax refund from an amended tax return which increased net income by $968 thousand. These results compare to net income of $22.4 million or $0.79 diluted earnings per common share for the third quarter 2011 and net income of $66.1 million or $2.29 diluted earnings per common share for the nine months ended September 30, 2011. The nine months ended September 30, 2011 included $2.1 million in litigation settlement accruals which decreased net income by $1.2 million and expenses related to the integration of the former Sonoma Valley Bank ("Sonoma") of $393 thousand after tax.

Net Income

Following is a summary of the components of net income for the periods
indicated:

                                                      For the Three Months             For the Nine Months
                                                                       Ended September 30,
                                                          2012            2011            2012            2011
                                                              (In thousands, except per share data)
Net interest income (FTE)                          $    48,712     $    54,675     $   150,743     $   165,506
Provision for loan losses                               (2,800 )        (2,800 )        (8,400 )        (8,400 )
Noninterest income                                      14,626          15,205          42,828          45,239
Noninterest expense                                    (29,269 )       (31,383 )       (88,651 )       (97,014 )
Income before taxes (FTE)                               31,269          35,697          96,520         105,331
Income tax provision (FTE)                             (11,247 )       (13,265 )       (34,529 )       (39,248 )
Net income                                         $    20,022     $    22,432     $    61,991     $    66,083

Average diluted common shares                           27,565          28,498          27,821          28,879
Diluted earnings per common share                  $      0.73     $      0.79     $      2.23     $      2.29

Average total assets                               $ 4,892,088     $ 4,920,482     $ 4,965,611     $ 4,929,701
Net income applicable to common equity to
average total assets (annualized)                         1.63 %          1.81 %          1.67 %          1.79 %
Net income applicable to common equity to
average common stockholders' equity (annualized)         14.68 %         16.44 %         15.23 %         16.24 %

Net income for the third quarter of 2012 was $2.4 million or 10.7% less than the third quarter of 2011, the net result of declines in net interest income (fully taxable equivalent or "FTE") and lower noninterest income, partially offset by decreases in noninterest expense and income tax provision (FTE). A $6.0 million or 10.9% decrease in net interest income (FTE) was mostly attributed to lower average balances of loans and lower yields on interest earning assets, partially offset by higher average balances of investments, lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. The provision for loan losses remained the same, reflecting Management's evaluation of losses inherent in the loan portfolio not covered by loss-sharing agreements with the Federal Deposit Insurance Corporation ("FDIC") and purchased loan credit-default discounts.

Comparing the first nine months of 2012 to the first nine months of 2011, net income decreased $4.1 million or 6.2%, primarily due to lower net interest income (FTE) and a $1.3 million loss on sale of securities, partially offset by decreases in noninterest expense and income tax provision (FTE). The lower net interest income (FTE) was primarily caused by a lower average volume of loans and lower yields on interest earning assets, partially offset by higher average balances of investments, lower average balances of interest-bearing liabilities and lower rates on interest-bearing liabilities. The provision for loan losses remained the same, reflecting Management's evaluation of losses inherent in the loan portfolio not covered by loss-sharing agreements with the FDIC and purchased loan credit-default discounts. Noninterest expense declined $8.4 million primarily due to a $2.1 million settlement accrual in the second quarter 2011 and reduced costs related to managing nonperforming assets.

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Net Interest Income

Following is a summary of the components of net interest income for the periods
indicated:

                                                      For the Three Months             For the Nine Months
                                                                       Ended September 30,
                                                          2012            2011            2012            2011
                                                                         (In thousands)
Interest and fee income                            $    45,272     $    51,976     $   140,470     $   157,559
Interest expense                                        (1,382 )        (2,071 )        (4,413 )        (6,527 )
FTE adjustment                                           4,822           4,770          14,686          14,474
Net interest income (FTE)                          $    48,712     $    54,675     $   150,743     $   165,506

Average earning assets                             $ 4,160,953     $ 4,093,020     $ 4,116,471     $ 4,133,898
Net interest margin (FTE) (annualized)                    4.67 %          5.32 %          4.89 %          5.35 %

Net interest income (FTE) decreased during the third quarter of 2012 by $6.0 million or 10.9% from the same period in 2011 to $48.7 million, mainly due to lower average balances of loans (down $428 million) and lower yields on interest-earning assets (down 0.72%), partially offset by higher average balances of investments (up $496 million), lower average balances of interest-bearing liabilities (down $139 million) and lower rates paid on interest-bearing liabilities (down 0.08%).

Comparing the first nine months of 2012 with the first nine months of 2011, net interest income (FTE) decreased $14.8 million or 8.9%, primarily due to a lower average volume of loans (down $418 million) and lower yields on interest-earning assets (down 0.53%), partially offset by higher average balances of investments (up $401 million) and lower rates paid on interest-bearing liabilities (down 0.10%).

Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. Economic conditions, competitive pricing and underwriting, and deleveraging by businesses and individuals have reduced loan volumes, placing greater reliance on lower-yielding investment securities. Rates on interest-bearing deposits and borrowings have declined to offset some of the decline in asset yields.

In Management's judgment, economic conditions and competitive pricing create a cautious view toward commercial lending, and economic pressure on consumers has reduced demand for automobile and other consumer loans. As a result, the Company has not taken an aggressive posture relative to loan portfolio growth.

At September 30, 2012, purchased FDIC covered loans represented 19 percent of the Company's loan portfolio. Under the terms of the FDIC loss-sharing agreements, the FDIC is obligated to reimburse the Bank 80 percent of loan interest income foregone on covered loans. Such reimbursements are limited to the lesser of 90 days contractual interest or actual unpaid contractual interest at the time a principal loss is recognized with respect to the underlying loan.

Interest and Fee Income

Interest and fee income (FTE) for the third quarter of 2012 decreased $6.7 million or 11.7% from the same period in 2011. The decrease was caused by lower average balances of loans and lower yields on interest earning assets, partially offset by higher average balances of investments.

The total average balances of loans declined due to decreases in the average balances of commercial real estate loans (down $195 million), taxable commercial loans (down $108 million), residential real estate loans (down $49 million), consumer loans (down $30 million), construction loans (down $25 million) and tax-exempt commercial loans (down $21 million). The average investment portfolio increased largely due to higher average balances of residential collateralized mortgage obligations (up $293 million), municipal securities (up $109 million) and corporate securities (up $123 million), partially offset by a $52 million decrease in average balances of securities of U.S. government sponsored entities.

The average yield on the Company's earning assets decreased from 5.52% in the third quarter of 2011 to 4.80% in the corresponding period of 2012. The composite yield on loans declined 0.30% to 5.70%. Lower yields on consumer loans (down 0.77%), taxable commercial loans (down 0.74%), construction loans (down 3.25%) and residential real estate loans (down 0.35%) were offset by higher yields on commercial real estate loans (up 0.29%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The yield on commercial real estate loans in the third quarter 2012 was elevated due to interest received on nonaccrual loans and discount accretion on purchased loans. The investment yields in general declined as newly purchased securities have yields at current market rates which are lower than yields on older dated securities. The investment portfolio yield decreased 0.86% to 3.72% primarily due to lower yields on municipal securities (down 0.57%), residential collateralized mortgage obligations (down 1.06%) and residential mortgage backed securities (down 0.99%).

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Comparing the first nine months of 2012 with the first nine months of 2011, interest and fee income (FTE) was down $16.9 million or 9.8%. The decrease resulted from a lower average volume of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments. Average interest earning assets decreased $17 million or 0.4% in the first nine months of 2012 compared with the first nine months of 2011 due to a $418 million decrease in average loans and a $401 million increase in average investments. The decrease in the average balance of the loan portfolio was attributable to decreases in average balances of commercial real estate loans (down $177 million), taxable commercial loans (down $122 million), construction loans (down $35 million), residential real estate loans (down $47 million), tax-exempt commercial loans (down $18 million) and consumer loans (down $19 million). The average investment portfolio increased mostly due to higher average balances of municipal securities (up $114 million), residential collateralized mortgage obligations (up $243 million) and corporate securities (up $80 million), partially offset by a $60 million decline in U.S. government sponsored entities.

The average yield on earning assets for the first nine months of 2012 was 5.03% compared with 5.56% in the first nine months of 2011. The loan portfolio yield for the first nine months of 2012 compared with the first nine months of 2011 was lower by 0.18% mostly due to lower yields on consumer loans (down 0.75%), residential real estate loans (down 0.35%) and tax-exempt commercial loans (down 0.35%), taxable commercial loans (down 0.11%) and construction loans (down 0.36%), partially offset by higher yields on commercial real estate loans (up 0.24%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The yield on commercial real estate loans in the first nine months of 2011 was elevated due to interest received on nonaccrual loans and discount accretion on purchased loans. The investment portfolio yield decreased 0.69% to 3.96% primarily due to lower yields on municipal securities (down 0.56%), residential collateralized mortgage obligations (down 1.34%), residential mortgage backed securities (down 0.66%) and securities of U.S. government sponsored entities (down 0.25%), partially offset by a 0.12% increase in yields on corporate securities which contain floating interest rate structures. Interest Expense
Interest expense in the third quarter of 2012 decreased $689 thousand or 33.3% compared with the same period in 2011 due to lower rates paid on interest-bearing deposits and a shift from higher costing deposits and financing to lower cost checking and savings accounts. Checking and savings deposits accounted for 83.5% of total deposits in the third quarter 2012 compared with 79.9% in the same quarter of 2011. Interest-bearing liabilities declined due to lower average balances of time deposits (down $145 million), FHLB advances (down $9 million), long-term debt (down $6 million), and preferred money market savings (down $52 million), partially offset by higher average balances of money market checking accounts (up $49 million), money market savings (up $26 million), regular savings (up $32 million) and term repurchase agreement (up $4 million). Lower average balances of long-term debt were attributable to the redemption of $10 million of subordinated debt in August 2011. The average rate paid on interest-bearing liabilities decreased from 0.29% in the third quarter of 2011 to 0.21% in the same quarter of 2012. Rates on interest-bearing deposits decreased 0.09% to 0.16% primarily due to decreases in rates paid on time deposits less than $100 thousand (down 0.18%), time deposits $100 thousand or more (down 0.06%), preferred money market savings (down 0.11%), money market checking (down 0.07%), money market savings (down 0.05%) and regular savings (down 0.05%).

Comparing the first nine months of 2012 with the first nine months of 2011, interest expense declined $2.1 million or 32.4%, due to lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. Average interest-bearing deposits during the first nine months of 2012 fell $39 million compared with the same period in 2011 primarily due to declines in the average balances of time deposits less than $100 thousand (down $49 million), time deposits $100 thousand or more (down $60 million) and preferred money market savings (down $35 million), partially offset by increases in the average balance of money market checking accounts (up $44 million), money market savings (up $34 million) and regular savings (up $27 million). Average balances of debt financing declined $9 million while average balances of term repurchase agreement increased $8 million. Rates paid on interest-bearing deposits averaged 0.17% during the first nine months of 2012 compared with 0.27% for the first nine months of 2011 mainly due to lower rates on money market savings (down 0.08%), preferred money market savings (down 0.12%), regular savings (down 0.05%), time deposits less than $100 thousand (down 0.08%) and time deposits $100 thousand and more (down 0.12%).

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Net Interest Margin (FTE)

The following summarizes the components of the Company's net interest margin for
the periods indicated:

                                                       For the Three Months            For the Nine Months
                                                                       Ended September 30,
                                                       2012             2011           2012            2011

Yield on earning assets (FTE)                             4.80 %           5.52 %         5.03 %         5.56 %
Rate paid on interest-bearing liabilities                 0.21 %           0.29 %         0.21 %         0.31 %
Net interest spread (FTE)                                 4.59 %           5.23 %         4.82 %         5.25 %
Impact of all other net noninterest bearing funds         0.08 %           0.09 %         0.07 %         0.10 %
Net interest margin (FTE)                                 4.67 %           5.32 %         4.89 %         5.35 %

During the third quarter of 2012, the net interest margin (FTE) decreased 0.65% compared with the same period in 2011. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 0.64% decrease in net interest spread (FTE). The 0.08% net interest margin contribution of noninterest-bearing demand deposits resulted in the net interest margin (FTE) of 4.67%. During the first nine months of 2012, the net interest margin (FTE) decreased 0.46% compared with the first nine months of 2011. The net interest spread (FTE) in the first nine months of 2012 was 4.82% compared with 5.25% in the first nine months of 2011, the net result of a 0.53% decrease in earning asset yields, partially offset by lower cost of interest-bearing liabilities (down 0.10%).

[The remainder of this page intentionally left blank]

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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 earned from average earning assets and the resulting annualized yields, and the amount of interest expense incurred on average interest-bearing liabilities and the resulting annualized rates. 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 and accretion of purchased loan discounts. 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).

                                                        For the Three Months Ended
                                                            September 30, 2012
                                                                   Interest
                                                      Average       Income/       Yields/
                                                      Balance       Expense         Rates
                                                              (In thousands)
Assets
Investment securities:
Available for sale
Taxable                                           $   506,508     $   2,894          2.29 %
Tax-exempt (1)                                        209,861         3,055          5.82 %
Held to maturity
Taxable                                               539,822         2,811          2.08 %
Tax-exempt (1)                                        641,523         8,900          5.55 %
Loans:
Commercial:
Taxable                                               307,446         4,518          5.85 %
Tax-exempt (1)                                        124,862         1,878          5.98 %
Commercial real estate                                990,509        17,015          6.83 %
Real estate construction                               25,336           335          5.26 %
Real estate residential                               259,754         2,308          3.55 %
Consumer                                              555,332         6,380          4.57 %
Total loans (1)                                     2,263,239        32,434          5.70 %
Total interest-earning assets (1)                   4,160,953     $  50,094          4.80 %
Other assets                                          731,135
Total assets                                      $ 4,892,088

Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand                        $ 1,605,362     $       -             - %
Savings and interest-bearing transaction            1,882,110           301          0.06 %
Time less than $100,000                               258,631           359          0.55 %
Time $100,000 or more                                 430,239           360          0.33 %
Total interest-bearing deposits                     2,570,980         1,020          0.16 %
Short-term borrowed funds                              61,794            15          0.10 %
Term repurchase agreement                              10,000            25          0.97 %
Federal Home Loan Bank advances                        25,889           122          1.87 %
Debt financing                                         15,000           200          5.35 %
Total interest-bearing liabilities                  2,683,663     $   1,382          0.21 %
Other liabilities                                      60,355
Shareholders' equity                                  542,708
Total liabilities and shareholders' equity        $ 4,892,088
Net interest spread (1) (2)                                                          4.59 %
Net interest income and interest margin (1) (3)                   $  48,712          4.67 %

(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 incurred 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.

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                                                        For the Three Months Ended
                                                            September 30, 2011
                                                                   Interest
                                                      Average       Income/       Yields/
                                                      Balance       Expense         Rates
                                                              (In thousands)
Assets:
Money market assets and funds sold                $       281     $       -             - %
Investment securities:
Available for sale
Taxable                                               453,330         2,989          2.64 %
Tax-exempt (1)                                        252,356         3,895          6.17 %
Held to maturity
Taxable                                               209,826         1,635          3.12 %
Tax-exempt (1)                                        486,142         7,538          6.20 %
Loans:
Commercial:
Taxable                                               415,219         6,901          6.59 %
Tax-exempt (1)                                        145,672         2,270          6.18 %
Commercial real estate                              1,185,692        19,557          6.54 %
Real estate construction                               49,972         1,072          8.51 %
Real estate residential                               309,203         3,013          3.90 %
Consumer                                              585,327         7,876          5.34 %
Total loans (1)                                     2,691,085        40,689          6.00 %
Total Interest earning assets (1)                   4,093,020     $  56,746          5.52 %
Other assets                                          827,462
Total assets                                      $ 4,920,482

Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand                        $ 1,494,773     $       -             - %
Savings and interest-bearing transaction            1,826,688           597          0.13 %
Time less than $100,000                               303,768           556          0.73 %
Time $100,000 or more                                 530,583           524          0.39 %
Total interest-bearing deposits                     2,661,039         1,677          0.25 %
Short-term borrowed funds                              99,730            62          0.25 %
Term repurchase agreement                               5,652            14          0.97 %
Federal Home Loan Bank advances                        35,309           118          1.34 %
Debt financing and notes payable                       21,075           200          3.80 %
Total interest-bearing liabilities                  2,822,805     $   2,071          0.29 %
Other liabilities                                      61,535
Shareholders' equity                                  541,369
Total liabilities and shareholders' equity        $ 4,920,482
Net interest spread (1) (2)                                                          5.23 %
Net interest income and interest margin (1) (3)                   $  54,675          5.32 %

(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 incurred 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.

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                                                         For the Nine Months Ended
                                                            September 30, 2012
                                                                   Interest
                                                      Average       Income/       Yields/
                                                      Balance       Expense         Rates
                                                              (In thousands)
Assets
Investment securities:
Available for sale
Taxable                                           $   456,310     $   8,231          2.41 %
Tax-exempt (1)                                        218,610         9,667          5.90 %
Held to maturity
Taxable                                               444,654         7,511          2.25 %
Tax-exempt (1)                                        628,367        26,469          5.62 %
Loans:
Commercial:
Taxable                                               329,920        15,790          6.39 %
Tax-exempt (1)                                        132,040         6,017          6.09 %
Commercial real estate                              1,042,613        52,795          6.76 %
Real estate construction                               29,063         1,187          5.46 %
Real estate residential                               271,320         7,407          3.64 %
Consumer                                              563,574        20,082          4.76 %
Total loans (1)                                     2,368,530       103,278          5.82 %
Total interest-earning assets (1)                   4,116,471     $ 155,156          5.03 %
Other assets                                          849,140
Total assets                                      $ 4,965,611

Liabilities and shareholders' equity
Deposits:
. . .
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