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

Show all filings for WESTAMERICA BANCORPORATION

Form 10-Q for WESTAMERICA BANCORPORATION


1-Aug-2013

Quarterly Report


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

In order to provide stimulus to the economy following the "financial crisis" recession, the Federal Reserve's Federal Open Market Committee has maintained highly accommodative monetary policies to influence interest rates to low levels. 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 decline in market interest rates following the recession 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 accounts to decline in 2012 and the three and six months ended June 30, 2013; however, debit card fees, trust fees and financial services commissions 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 income.

Westamerica Bancorporation and subsidiaries (the "Company") reported net income of $17.1 million or $0.64 diluted earnings per common share for the second quarter 2013 and net income of $34.4 million or $1.27 diluted earnings per common share for the six months ended June 30, 2013. These results compare to net income of $21.0 million or $0.75 diluted earnings per common share for the second quarter 2012 and net income of $42.0 million or $1.50 diluted earnings per common share for the six months ended June 30, 2012. The second quarter of 2012 included a $1.3 million loss realized from the sale of a collateralized mortgage obligation bond which decreased net income by $750 thousand and a tax refund from an amended tax return which increased net income by $950 thousand.

Net Income

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

                                                      For the Three Months             For the Six Months
                                                                         Ended June 30,
                                                      2013            2012            2013            2012
                                                              (In thousands, except per share data)
Net interest income (FTE)                          $    42,628     $    50,333     $    86,463     $   102,032
Provision for loan losses                               (1,800 )        (2,800 )        (4,600 )        (5,600 )
Noninterest income                                      14,284          13,533          28,562          28,202
Noninterest expense                                    (28,192 )       (29,349 )       (56,869 )       (59,383 )
Income before taxes (FTE)                               26,920          31,717          53,556          65,251
Income tax provision (FTE)                              (9,808 )       (10,753 )       (19,173 )       (23,282 )
Net income                                         $    17,112     $    20,964     $    34,383     $    41,969

Average diluted common shares                           26,898          27,790          27,027          27,951
Diluted earnings per common share                  $      0.64     $      0.75     $      1.27     $      1.50

Average total assets                               $ 4,840,319     $ 4,974,619     $ 4,874,212     $ 5,002,777
Net income to average total assets (annualized)           1.42 %          1.69 %          1.42 %          1.69 %
Net income to average common stockholders'
equity (annualized)                                      12.74 %         15.55 %         12.84 %         15.50 %

Net income for the second quarter of 2013 was $3.9 million less than the same quarter of 2012, the net result of lower net interest and fee income (fully taxable equivalent or "FTE"), partially offset by higher noninterest income and decreases in loan loss provision, 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 was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio; net loan losses and nonperforming loan volumes have declined relative to earlier periods. Noninterest expense decreased $1.2 million primarily due to reduced personnel costs, occupancy expense, professional fees and intangible asset amortization.

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Comparing the first half of 2013 to the first half of 2012, net income decreased $7.6 million primarily due to lower net interest and fee income (FTE), partially offset by higher noninterest income and decreases in loan loss provision, noninterest expense and 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, lower average balances of interest-bearing deposits and lower rates paid on interest-bearing deposits. The provision for loan losses was reduced $1.0 million, reflecting Management's evaluation of losses inherent in the loan portfolio; net loan losses and nonperforming loan volumes have declined relative to earlier periods. Noninterest expense decreased $2.5 million primarily due to reduced personnel costs, occupancy expense, professional fees and intangible asset amortization.

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             For the Six Months
                                                                         Ended June 30,
                                                      2013            2012            2013            2012
                                                                         (In thousands)
Interest and fee income                            $    39,269     $    46,901     $    79,734     $    95,199
Interest expense                                        (1,219 )        (1,472 )        (2,471 )        (3,031 )
FTE adjustment                                           4,578           4,904           9,200           9,864
Net interest income (FTE)                          $    42,628     $    50,333     $    86,463     $   102,032

Average earning assets                             $ 4,147,096     $ 4,127,699     $ 4,141,510     $ 4,093,985
Net interest margin (FTE) (annualized)                    4.12 %          4.89 %          4.19 %          5.00 %

Net interest and fee income (FTE) for the second quarter 2013 decreased $7.7 million compared with the same period in 2012 to $42.6 million, mainly due to lower average balances of loans (down $381 million) and lower yields on interest-earning assets (down 0.80%), partially offset by higher average balances of investments (up $401 million), lower average balances of interest-bearing deposits (down $146 million) and lower rates paid on interest-bearing deposits (down 0.03%).

Comparing the first half of 2013 with the first half of 2012, net interest and fee income (FTE) decreased $15.6 million primarily due to a lower average volume of loans (down $386 million) and lower yields on interest earning assets (down 0.84%), partially offset by higher average balances of investments (up $433 million) and lower average balances of interest-bearing deposits (down $134 million) and lower rates paid on interest-bearing deposits (down 0.03%).

Loan volumes have declined due to problem loan workout activities, particularly with purchased loans, and reduced volumes of loan originations. In Management's opinion, competitive loan pricing does not currently 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. Management's response to prevailing economic conditions and competitive loan pricing has been to reduce loan volumes, placing greater reliance on lower-yielding investment securities. Rates on interest-bearing deposits have declined to offset some of the decline in asset yields.

At June 30, 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 second quarter of 2013 decreased $8.0 million or 15.4% 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 $166 million), taxable commercial loans (down $73 million), consumer loans (down $53 million), residential real estate loans (down $52 million), tax-exempt commercial loans (down $24 million) and construction loans (down $13 million). The average investment portfolio increased largely due to higher average balances of corporate securities (up $228 million), collateralized mortgage obligations and mortgage backed securities (up $201 million) and municipal securities (up $42 million), partially offset by a $67 million decrease in average balances of securities of U.S. government sponsored entities. The average yield on the Company's earning assets decreased from 5.04% in the second quarter 2012 to 4.24% in the corresponding period of 2013. The composite yield on loans declined 0.46% to 5.38% mostly due to lower yields on commercial real estate loans (down 0.49%), consumer loans (down 0.52%), taxable commercial loans (down 0.71%), residential real estate loans (down 0.18%) and tax-exempt loans (down 0.34%), partially offset by higher yields on construction loans (up 4.47%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. Yields on construction loans increased primarily due to higher delinquent interest received on nonaccrual loans. The investment yields in general declined due to market rates. The investment portfolio yield decreased 0.77% to 3.18% primarily due to lower yields on collateralized mortgage obligations and mortgage backed securities (down 0.90%), municipal securities (down 0.46%) and corporate securities (down 0.45%).

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Comparing the first half of 2013 with the first half of 2012, interest and fee income (FTE) was down $16.1 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. The total average balances of loans declined due to decreases in the average balances of commercial real estate loans (down $176 million), taxable commercial loans (down $75 million), consumer loans (down $44 million), residential real estate loans (down $52 million), tax-exempt commercial loans (down $24 million) and construction loans (down $15 million). The average investment portfolio increased largely due to higher average balances of collateralized mortgage obligations and mortgage backed securities (up $255 million), corporate securities (up $208 million) and municipal securities (up $36 million), partially offset by a $65 million decrease in average balances of securities of U.S. government sponsored entities. The average yield on the Company's earning assets decreased from 5.15% in the first half of 2012 to 4.31% in the corresponding period of 2013. The composite yield on loans declined 0.46% to 5.42% mostly due to lower yields on commercial real estate loans (down 0.44%), consumer loans (down 0.67%), taxable commercial loans (down 0.49%), residential real estate loans (down 0.15%) and tax-exempt loans (down 0.16%), partially offset by higher yields on construction loans (up 2.34%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The yield on construction loans in the first half of 2013 was elevated due to delinquent interest received on nonaccrual loans. The investment yields in general declined due to market rates. The investment portfolio yield for the first half of 2013 decreased 0.84% to 3.25% compared with the same period in 2012 primarily due to lower yields on collateralized mortgage obligations and mortgage backed securities (down 0.98%), municipal securities (down 0.46%) and corporate securities (down 0.37%).

Interest Expense

Interest expense has been reduced by lowering rates paid on interest-bearing deposits and by reducing the volume of higher-cost funding sources. Lower-cost checking and savings deposits accounted for 85.5% of total average deposits in the second quarter 2013 compared with 81.7% in the second quarter 2012. Interest expense in the second quarter of 2013 decreased $253 thousand or 17.2% compared with the same period in 2012 due to lower rates paid on interest-bearing deposits and a shift from higher costing deposits to lower costing deposits. Interest-bearing liabilities declined due to lower average balances of time deposits $100 thousand or more (down $132 million), time deposits less than $100 thousand (down $39 million), preferred money market savings (down $20 million) and customer sweep accounts (down $33 million), partially offset by higher average balances of regular savings (up $29 million) and money market savings (up $13 million). The average rate paid on interest-bearing liabilities was 0.19% in the second quarter of 2013 compared with 0.21% in the second quarter of 2012. Rates on interest-bearing deposits for the second quarter 2013 decreased 0.03% to 0.14% compared with second quarter 2012 primarily due to decreases in rates paid on time deposits less than $100 thousand (down 0.10%) and time deposits $100 thousand or more (down 0.02%).

Comparing the first half of 2013 with the first half of 2012, interest expense declined $559 thousand due to lower average balances of interest-bearing deposits and short-term borrowings, and lower rates paid on interest-bearing deposits. Lower-cost checking and savings deposits accounted for 85.2% of total average deposits in the first half 2013 compared with 81.6% in the first half of 2012. Average interest-bearing liabilities during the first half of 2013 fell $179 million compared with the first half of 2012 primarily due to declines in the average balances of time deposits $100 thousand or more (down $127 million) and time deposits less than $100 thousand (down $40 million), preferred money market accounts (down $24 million) and customer sweep accounts (down $45 million), partially offset by increases in the average balances of regular savings (up $30 million) and money market savings (up $17 million). Rates paid on interest-bearing deposits averaged 0.14% during the first half of 2013 compared with 0.17% for the first half of 2012 as a result of decreases in rates paid on time deposits less than $100 thousand (down 0.11%) and time deposits $100 thousand or more (down 0.02%).

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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 Six Months
                                                                        Ended June 30,
                                                      2013             2012          2013            2012

Yield on earning assets (FTE)                            4.24 %           5.04 %        4.31 %         5.15 %
Rate paid on interest-bearing liabilities                0.19 %           0.21 %        0.19 %         0.22 %
Net interest spread (FTE)                                4.05 %           4.83 %        4.12 %         4.93 %
Impact of noninterest bearing demand deposits            0.07 %           0.06 %        0.07 %         0.07 %
Net interest margin (FTE)                                4.12 %           4.89 %        4.19 %         5.00 %

During the second quarter of 2013, the net interest margin (FTE) decreased 0.77% 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 0.78% 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 4.12%. During the first half of 2013, the net interest margin (FTE) decreased 0.81% compared with the first half of 2012. The net interest spread (FTE) in the first half of 2013 was 4.12% compared with 4.93% in the first half of 2012, the net result of a 0.84% decrease in earning asset yields, partially offset by lower cost of interest-bearing liabilities (down 0.03%).

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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 premiums and 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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