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WABC > SEC Filings for WABC > Form 10-Q on 1-May-2013All Recent SEC Filings

Show all filings for WESTAMERICA BANCORPORATION | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WESTAMERICA BANCORPORATION


1-May-2013

Quarterly Report


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

The Federal Reserve's Federal Open Market Committee has maintained highly accommodative monetary policies to influence interest rates to low levels in order to provide stimulus to the economy following the "financial crisis" recession. The Company's principal source of revenue is net interest and fee income, which represents interest earned on loans and investment securities ("earning assets") reduced by interest paid on deposits and other borrowings ("interest bearing liabilities"). The recent decline in market interest rates has reduced the spread between interest rates on earning assets and interest bearing liabilities. As a result, the Company's net interest margin and net interest income have declined. The Company also earns revenue from service charges on deposit accounts, merchant processing services, debit card fees, and other fees ("noninterest income"). Service charges on deposit accounts are subject to laws and regulations; recent regulations and customer activity have caused service charges on deposit account to decline in 2012 and the three-months ended March 31, 2013; however, merchant processing fees, debit card fees and trust fees have increased due to higher transaction volumes and the Company's sales efforts. The Company incurs noninterest expenses to deliver products and services to our customers. Management is focused on controlling noninterest expense levels, particularly due to the recent market interest rate pressure on net interest.

Westamerica Bancorporation and subsidiaries (the "Company") reported first quarter 2013 net income of $17.3 million or $0.64 diluted earnings per common share. These results compare to net income applicable to common equity of $21.0 million or $0.75 diluted earnings per common share and $19.1 million or $0.70 diluted earnings per common share, respectively, for the first and fourth quarters of 2012.

Net Income

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

                                                                     For the Three months ended
                                                                    March 31,               December 31,
                                                              2013            2012              2012
                                                               (In thousands, except per share data)
Net interest and fee income (FTE)                          $    43,835     $    51,699     $       46,283
Provision for loan losses                                       (2,800 )        (2,800 )           (2,800 )
Noninterest income                                              14,278          14,669             14,194
Noninterest expense                                            (28,677 )       (30,034 )          (28,233 )
Income before taxes (FTE)                                       26,636          33,534             29,444
Income tax provision (FTE)                                      (9,365 )       (12,529 )          (10,308 )
Net income                                                 $    17,271     $    21,005     $       19,136

Average diluted common shares                                   27,157          28,111             27,334
Diluted earnings per common share                          $      0.64     $      0.75     $         0.70

Average total assets                                       $ 4,908,483     $ 5,030,935     $    4,920,620
Net income to average total assets (annualized)                   1.43 %          1.68 %             1.55 %
Net income to average common stockholders' equity
(annualized)                                                     12.93 %         15.45 %            14.05 %

Net income for the first quarter of 2013 was $3.7 million less than the same quarter of 2012, the net result of declines in net interest and fee income (fully taxable equivalent or "FTE") and noninterest income, partially offset by decreases in noninterest expense and income tax provision (FTE). A decrease in net interest and fee 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 deposits 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. Noninterest expense decreased $1.4 million primarily due to reduced personnel costs, loan administration expenses, intangible amortization and professional fees.

Comparing the first quarter of 2013 to the fourth quarter of 2012, net income decreased $1.9 million primarily due to lower net interest and fee income (FTE) and higher noninterest expense, partially offset by a decrease in income tax provision (FTE). The lower net interest and fee 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 and lower average balances of time deposits and lower rates paid on those 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 FDIC and purchased loan credit-default discounts. Noninterest expense increased $444 thousand.

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Net Interest and Fee Income (FTE)

Following is a summary of the components of net interest and fee income (FTE)
for the periods indicated:

                                                   For the Three Months Ended
                                                  March 31,               December 31,
                                            2013            2012              2012
                                                         (In thousands)
Interest and fee income                  $    40,465     $    48,298     $       42,893
Interest expense                              (1,252 )        (1,559 )           (1,331 )
FTE adjustment                                 4,622           4,960              4,721
Net interest and fee income (FTE)        $    43,835     $    51,699     $       46,283

Average earning assets                   $ 4,135,863     $ 4,060,271     $    4,111,970
Net interest margin (FTE) (annualized)          4.27 %          5.12 %             4.49 %

Net interest and fee income (FTE) decreased during the first quarter of 2013 by $7.9 million from the same period in 2012 to $43.8 million, mainly due to lower average balances of loans (down $390 million) and lower yields on interest-earning assets (down 0.88%), partially offset by higher average balances of investments (up $465 million), lower average balances of interest-bearing deposits (down $122 million) and lower rates paid on interest-bearing deposits (down 0.04%).

Comparing the first quarter of 2013 with the fourth quarter of 2012, net interest and fee income (FTE) decreased $2.4 million primarily due to a lower average volume of loans (down $77 million) and lower yields on interest earning assets (down 0.23%), partially offset by higher average balances of investments
(up $101 million) and lower average balances of time deposits (down $18 million)
and lower rates paid on those deposits.

Loan volumes have declined due to problem loan workout activities, particularly with purchased loans, and reduced volumes of loan originations. In Management's opinion, current levels of competitive loan pricing do not provide adequate forward earnings potential. As a result, the Company has not currently taken an aggressive posture relative to loan portfolio growth. Management has maintained relatively stable interest-earning asset volumes by increasing investment securities as loan volumes have declined.

Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. Economic conditions, competitive pricing 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.

At March 31, 2013, purchased FDIC covered loans represented 17 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 in respect to the underlying loan. FDIC loss indemnification of covered non-residential assets expires February 6, 2014. For further information, see the Loan Portfolio Credit Risk section of this report.

Interest and Fee Income (FTE)

Interest and fee income (FTE) for the first quarter of 2013 decreased $8.2 million or 15.3% from the same period in 2012. 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 $186 million), taxable commercial loans (down $78 million), consumer loans (down $34 million), real estate residential loans (down $51 million), tax-exempt commercial loans (down $24 million) and construction loans (down $17 million). The average investment portfolio increased largely due to higher average balances of collateralized mortgage obligations and mortgage backed securities (up $309 million), corporate securities (up $188 million) and municipal securities (up $29 million), partially offset by a $63 million decrease in average balances of securities of U.S. government sponsored entities. The average yield on the Company's earning assets decreased from 5.27% in the first quarter of 2012 to 4.39% in the corresponding period of 2013. The composite yield on loans declined 0.47% to 5.46% mostly due to lower yields on consumer loans (down 0.84%), commercial real estate loans (down 0.40%) and taxable commercial loans (down 0.29%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The investment yields in general declined due to market rates. The investment portfolio yield decreased 0.92% to 3.32% primarily due to lower yields on collateralized mortgage obligations and mortgage backed securities (down 1.10%), municipal securities (down 0.46%) and corporate securities (down 0.27%).

- 29 -

Comparing the first quarter of 2013 with the fourth quarter of 2012, interest and fee income (FTE) was down $2.5 million. 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 increased $24 million or 0.6% in the first quarter of 2013 compared with the fourth quarter of 2012 due to a $101 million increase in average investments and a $77 million decrease in average loans. The decrease in the average balance of the loan portfolio was attributable to decreases in average balances of commercial real estate loans (down $35 million), taxable commercial loans (down $13 million), consumer loans (down $10 million), tax-exempt commercial loans (down $5 million) and residential real estate loans (down $12 million).

The average investment portfolio increased mostly due to higher average balances of corporate securities (up $66 million), collateralized mortgage obligations and mortgage backed securities (up $38 million) and municipal securities (up $19 million), partially offset by a $21 million decrease in average balances of securities of U.S. government sponsored entities.

The average yield on earning assets for the first quarter of 2013 was 4.39% compared with 4.62% in the fourth quarter of 2012. The loan portfolio yield for the first quarter of 2013 compared with the fourth quarter of 2012 was lower by 0.13% mostly due to lower yields on construction loans (down 9.56%), consumer loans (down 0.21%) and commercial real estate loans (down 0.05%). The yield on construction loans in the fourth quarter 2012 was elevated due to interest received on nonaccrual loans. The investment portfolio yield decreased 0.22% to 3.32% primarily due to lower yields on collateralized mortgage obligations and mortgage backed securities (down 0.21%), corporate securities (down 0.21%), municipal securities (down 0.17%) and securities of U.S. government sponsored entities (down 0.15%).

Interest Expense

Interest expense has been reduced by lowering rates paid on interest-bearing deposits and borrowings and by reducing the volume of higher-cost funding sources. Lower-cost checking and savings deposits accounted for 85.0% of total average deposits in the first quarter 2013 compared with 81.4% in the first quarter 2012. Interest expense in the first quarter of 2013 decreased $307 thousand or 19.7% compared with the same period in 2012 due to lower rates paid on interest-bearing deposits and a shift of higher costing deposits and financing to lower cost checking and savings accounts. Interest-bearing liabilities declined due to lower average balances of time deposits $100 thousand or more (down $122 million), time deposits less than $100 thousand (down $41 million), preferred money market savings (down $29 million) and customer sweep accounts (down $57 million), partially offset by higher average balances of regular savings (up $32 million) and money market savings (up $22 million). The average rate paid on interest-bearing liabilities decreased from 0.22% in the first quarter of 2012 to 0.19% in the first quarter of 2013. Rates on interest-bearing deposits decreased 0.04% to 0.14% primarily due to decreases in rates paid on time deposits less than $100 thousand (down 0.12%) and short-term borrowings (down 0.02%).

Comparing the first quarter of 2013 with the fourth quarter of 2012, interest expense declined $79 thousand due to lower average balances of interest-bearing deposits and lower rates paid on interest-bearing deposits. Lower-cost checking and savings deposits accounted for 85.0% of total average deposits in the first quarter 2013 compared with 84.6% in the fourth quarter 2012. Average interest-bearing deposits during the first quarter of 2013 fell $1 million compared with the fourth quarter 2012 primarily due to declines in the average balances of time deposits $100 thousand or more (down $10 million) and time deposits less than $100 thousand (down $8 million), partially offset by increases in the average balances of money market savings (up $7 million), regular savings (up $7 million) and money market checking accounts (up $5 million). Rates paid on interest-bearing deposits averaged 0.14% during the first quarter of 2013 compared with 0.15% for the fourth quarter of 2012.

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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 Ended
                                                    March 31,              December 31,
                                              2013            2012             2012

Yield on earning assets (FTE)                    4.39 %          5.27 %             4.62 %
Rate paid on interest-bearing liabilities        0.19 %          0.22 %             0.20 %
Net interest spread (FTE)                        4.20 %          5.05 %             4.42 %
Impact of noninterest-bearing funds              0.07 %          0.07 %             0.07 %
Net interest margin (FTE)                        4.27 %          5.12 %             4.49 %

During the first quarter of 2013, the net interest margin (FTE) decreased 0.85% compared with the same period in 2012. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 0.85% decrease in net interest spread (FTE). The 0.07% net interest margin contribution of noninterest-bearing demand deposits resulted in the net interest margin (FTE) of 4.27%. During the first quarter of 2013, the net interest margin (FTE) decreased 0.22% compared with the fourth quarter of 2012. The net interest spread (FTE) in the first quarter of 2013 was 4.20% compared with 4.42% in the fourth quarter of 2012, the net result of a 0.22% decrease in earning asset yields, partially offset by lower cost of interest-bearing liabilities (down 0.01%).

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Summary of Average Balances, Yields/Rates and Interest Differential

The following tables present, for the periods indicated, information regarding the consolidated average assets, liabilities and shareholders' equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting 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 tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate (FTE).

Distribution of Assets, Liabilities & Shareholders' Equity and Yields, Rates &

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