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WESTAMERICA BANCORPORATION - Quarter Report: 2010 September (Form 10-Q)

Form 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
     
o   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
(State or Other Jurisdiction of
Incorporation or Organization)
  94-2156203
(I.R.S. Employer
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
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 October 22, 2010
 
 
Common Stock, No Par Value   29,111,478
 
 

 

 


 

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 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 Required by 18 U.S.C. Section 1350
 Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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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. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
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) the length and severity of current difficulties in the national and California economies and the effects of federal government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses including the recent acquisition of County Bank assets and assumption of County Bank liabilities from the Federal Deposit Insurance Corporation; (5) 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; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including data processing system failures or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; and (12) changes in the securities markets. The Company undertakes no obligation to update any forward-looking statements in this report. The reader is directed to the Company’s annual report on Form 10-K for the year ended December 31, 2009, 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.

 

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PART I — FINANCIAL INFORMATION
Item 1 Financial Statements
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS

(unaudited)
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Assets:
               
Cash and due from banks
  $ 344,169     $ 361,135  
Money market assets
    392       442  
Investment securities available for sale
    569,511       384,208  
Investment securities held to maturity, with fair values of:
               
$642,882 at September 30, 2010
    618,838          
$736,270 at December 31, 2009
            726,935  
Purchased covered loans
    718,618       855,301  
Purchased non-covered loans
    212,318        
Originated loans
    2,077,915       2,201,088  
Allowance for loan losses
    (38,129 )     (41,043 )
 
           
Total loans
    2,970,722       3,015,346  
Non-covered other real estate owned
    22,201       12,642  
Covered other real estate owned
    25,251       23,297  
Premises and equipment, net
    36,271       38,098  
Identifiable intangibles, net
    36,226       35,667  
Goodwill
    121,673       121,699  
Interest receivable and other assets
    232,617       256,032  
 
           
Total Assets
  $ 4,977,871     $ 4,975,501  
 
           
 
               
Liabilities:
               
Noninterest bearing deposits
  $ 1,428,882     $ 1,428,432  
Interest bearing deposits
    2,643,816       2,631,776  
 
           
Total deposits
    4,072,698       4,060,208  
Short-term borrowed funds
    193,202       227,178  
Federal Home Loan Bank advances
    66,934       85,470  
Debt financing and notes payable
    26,396       26,497  
Liability for interest, taxes and other expenses
    77,468       70,700  
 
           
Total Liabilities
    4,436,698       4,470,053  
 
           
 
               
Shareholders’ Equity:
               
Common stock, authorized — 150,000 shares
               
Issued and outstanding:
               
29,118 at September 30, 2010
    376,123          
29,208 at December 31, 2009
            366,247  
Deferred compensation
    2,724       2,485  
Accumulated other comprehensive income
    7,238       3,714  
Retained earnings
    155,088       133,002  
 
           
Total Shareholders’ Equity
    541,173       505,448  
 
           
Total Liabilities and Shareholders’ Equity
  $ 4,977,871     $ 4,975,501  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

 

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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME

(unaudited)
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
Interest Income:
                               
Loans
  $ 44,434     $ 48,530     $ 133,196     $ 143,148  
Money market assets and funds sold
    1       1       2       3  
Investment securities available for sale
    4,189       4,272       12,110       12,550  
Investment securities held to maturity
    6,579       8,393       20,976       27,752  
 
                       
Total Interest Income
    55,203       61,196       166,284       183,453  
 
                       
Interest Expense:
                               
Deposits
    2,047       3,273       6,716       11,525  
Short-term borrowed funds
    511       509       1,538       1,572  
Federal Home Loan Bank advances
    113       295       249       714  
Notes payable
    425       423       1,272       1,267  
 
                       
Total Interest Expense
    3,096       4,500       9,775       15,078  
 
                       
Net Interest Income
    52,107       56,696       156,509       168,375  
Provision for Loan Losses
    2,800       2,800       8,400       7,200  
 
                       
Net Interest Income After Provision For Loan Losses
    49,307       53,896       148,109       161,175  
 
                       
Noninterest Income:
                               
Service charges on deposit accounts
    8,162       9,479       25,533       27,017  
Merchant credit card
    2,234       2,163       6,631       6,818  
Debit card
    1,259       1,267       3,678       3,656  
ATM and interchange
    1,004       965       2,917       2,792  
Trust fees
    429       319       1,257       1,056  
Financial services commissions
    211       129       583       420  
Gain on acquisition
    178             178       48,844  
Other
    1,594       1,639       5,534       5,712  
 
                       
Total Noninterest Income
    15,071       15,961       46,311       96,315  
 
                       
Noninterest Expense:
                               
Salaries and related benefits
    15,481       16,402       46,849       50,221  
Occupancy
    3,962       4,008       11,561       14,831  
Outsourced data processing services
    2,187       2,258       6,629       6,740  
Amortization of identifiable intangibles
    1,573       1,671       4,711       5,051  
FDIC insurance assessments
    1,268       1,442       3,848       4,820  
Furniture and equipment
    1,067       1,789       3,234       4,618  
Professional fees
    950       913       2,480       2,580  
Courier service
    826       989       2,636       2,881  
Other
    4,194       5,679       13,687       16,198  
 
                       
Total Noninterest Expense
    31,508       35,151       95,635       107,940  
 
                       
Income Before Income Taxes
    32,870       34,706       98,785       149,550  
Provision for income taxes
    9,161       9,449       27,939       48,285  
 
                       
Net Income
    23,709       25,257       70,846       101,265  
Preferred stock dividends and discount accretion
          1,466             3,151  
 
                       
Net Income Applicable to Common Equity
  $ 23,709     $ 23,791     $ 70,846     $ 98,114  
 
                       
       
Average Common Shares Outstanding
    29,127       29,210       29,187       29,072  
Diluted Average Common Shares Outstanding
    29,385       29,429       29,515       29,313  
Per Common Share Data:
                               
Basic earnings
  $ 0.81     $ 0.81     $ 2.43     $ 3.37  
Diluted earnings
    0.81       0.81       2.40       3.35  
Dividends paid
    0.36       0.35       1.08       1.06  
See accompanying notes to unaudited condensed consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(unaudited)
                                                         
    Common                     Accumulated                    
    Shares     Preferred     Common     Deferred     Comprehensive     Retained        
    Outstanding     Stock     Stock     Compensation     Income     Earnings     Total  
    (In thousands)  
Balance, December 31, 2008
    28,880     $     $ 352,265     $ 2,409     $ 1,040     $ 54,138     $ 409,852  
Comprehensive income
                                                       
Net income for the period
                                            101,265       101,265  
Other comprehensive income, net of tax:
                                                       
Increase in net unrealized gain on securities available for sale
                                    4,986               4,986  
Post-retirement benefit transition obligation amortization
                                    27               27  
 
                                                     
Total comprehensive income
                                                    106,278  
Issuance of preferred stock and related warrants
            82,519       1,207                               83,726  
Redemption of preferred stock
            (41,863 )                                     (41,863 )
Preferred stock dividends and discount accretion
            679                               (3,151 )     (2,472 )
Exercise of stock options
    350               9,094                               9,094  
Stock option tax benefits
                    2,179                               2,179  
Restricted stock activity
    7               251       76                       327  
Stock based compensation
                    847                               847  
Stock awarded to employees
    2               78                               78  
Purchase and retirement of stock
    (32 )             (374 )                     (1,116 )     (1,490 )
Dividends
                                            (30,838 )     (30,838 )
 
                                         
Balance, September 30, 2009
    29,207     $ 41,335     $ 365,547     $ 2,485     $ 6,053     $ 120,298     $ 535,718  
 
                                         
 
                                                       
Balance, December 31, 2009
    29,208     $     $ 366,247     $ 2,485     $ 3,714     $ 133,002     $ 505,448  
Comprehensive income
                                                       
Net income for the period
                                            70,846       70,846  
Other comprehensive income, net of tax:
                                                       
Increase in net unrealized gain on securities available for sale
                                    3,497               3,497  
Post-retirement benefit transition obligation amortization
                                    27               27  
 
                                                     
Total comprehensive income
                                                    74,370  
Exercise of stock options
    305               12,682                               12,682  
Stock option tax benefits
                    917                               917  
Restricted stock activity
    7               194       239                       433  
Stock based compensation
                    1,060                               1,060  
Stock awarded to employees
    2               101                               101  
Purchase and retirement of stock
    (404 )             (5,078 )                     (17,171 )     (22,249 )
Dividends
                                            (31,589 )     (31,589 )
 
                                         
Balance, September 30, 2010
    29,118     $     $ 376,123     $ 2,724     $ 7,238     $ 155,088     $ 541,173  
 
                                         
See accompanying notes to unaudited condensed consolidated financial statements.

 

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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
                 
    For the nine months  
    ended September 30,  
    2010     2009  
    (In thousands)  
Operating Activities:
               
Net income
  $ 70,846     $ 101,265  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    11,359       7,317  
Loan loss provision
    8,400       7,200  
Net amortization of deferred loan cost
    12       358  
Decrease (increase) in interest income receivable
    742       (3,637 )
Gain on acquisition
    (178 )     (48,844 )
Decrease in other assets
    11,751       48,191  
Increase in income taxes payable
    2,530       3,811  
Decrease in interest expense payable
    (28 )     (317 )
(Decrease) increase in other liabilities
    (14,778 )     26,398  
Stock option compensation expense
    1,060       847  
Stock option tax benefits
    (917 )     (2,179 )
Gain on sale of other assets
    (608 )      
Net (gain on sale) writedown of property and equipment
    (445 )     37  
Originations of mortgage loans for resale
    (277 )     (68 )
Net proceeds from sale of mortgage loans originated for resale
    288       101  
Net loss (gain) on sale of foreclosed assets
    (561 )     (166 )
Writedown of foreclosed assets
    793       83  
 
           
Net Cash Provided by Operating Activities
    89,989       140,397  
 
           
 
               
Investing Activities:
               
Net repayments of loans
    227,056       324,315  
Proceeds from FDIC loss-sharing indemnification
    35,792       43,696  
Purchases of investment securities available for sale
    (279,827 )      
Purchases of investment securities held to maturity
          (522 )
Proceeds from maturity/calls of securities available for sale
    122,452       76,185  
Proceeds from maturity/calls of securities held to maturity
    108,096       172,002  
Net change in FRB/FHLB* securities
    3,479       1,502  
Proceeds from sale of foreclosed assets
    10,953       10,009  
Purchases of property, plant and equipment
    (657 )     (14,146 )
Proceeds from sale of property, plant and equipment
    603        
Net cash acquired from acquisitions
    57,895       44,397  
 
           
Net Cash Provided by Investing Activities
    285,842       657,438  
 
           
 
               
Financing Activities:
               
Net change in deposits
    (237,794 )     (298,770 )
Net change in short-term borrowings
    (114,764 )     (476,483 )
Exercise of stock options
    12,682       9,094  
Proceeds from issuance of preferred stock
          83,726  
Redemption of preferred stock
          (41,863 )
Stock option tax benefits
    917       2,179  
Repurchases/retirement of stock
    (22,249 )     (1,490 )
Dividends paid
    (31,589 )     (30,838 )
Preferred dividends
          (2,215 )
 
           
Net Cash Used in Financing Activities
    (392,797 )     (756,660 )
 
           
Net Change In Cash and Cash Equivalents
    (16,966 )     41,175  
Cash and Due from Banks at Beginning of Period
    361,135       138,883  
 
           
Cash and Due from Banks at End of Period
  $ 344,169     $ 180,058  
 
           
 
               
Supplemental Cash Flow Disclosures:
               
Supplemental disclosure of non cash activities:
               
Loan collateral transferred to other real estate owned
  $ 24,188     $ 23,804  
Unrealized gain on securities available for sale, net
    3,497       4,986  
Supplemental disclosure of cash flow activities:
               
Interest paid for the period
    11,759       21,719  
Income tax payments for the period
    39,578       27,553  
Acquisitions:
               
Assets acquired
  $ 315,083     $ 1,624,464  
Liabilities assumed
    314,905       1,575,620  
 
           
Net
    178       48,844  
See accompanying notes to unaudited condensed consolidated financial statements.
     
*  
Federal Reserve Bank/Federal Home Loan Bank (“FRB/FHLB”)

 

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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 and nine months ended September 30, 2010 and 2009 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, 2009.
The Company has evaluated events and transactions subsequent to the balance sheet date. Based on this evaluation, the Company is not aware of any events or transactions that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in its consolidated financial statements.
Note 2: Accounting Policies
The Company’s accounting policies are 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, 2009. Certain amounts in prior periods have been reclassified to conform to the current presentation.
Certain accounting policies underlying the preparation of these financial statements require Management to make estimates and judgments. These estimates and judgments may significantly affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities.
Management exercises judgment to estimate the appropriate level of the allowance for credit losses and purchased impaired loans, which are discussed in the Company’s accounting policies.
As described in Note 3 below, Westamerica Bank (“Bank”) acquired assets and assumed liabilities of the former Sonoma Valley Bank on August 20, 2010. The acquired assets and assumed liabilities were measured at estimated fair values, as required by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management judgmentally measured loan fair values based on loan file reviews (including borrower financial statements and tax returns), appraised collateral values, expected cash flows, and historical loss factors. Repossessed loan collateral was primarily valued based upon appraised collateral values. The Bank also recorded an identifiable intangible asset representing the value of the core deposit customer base of Sonoma Valley Bank based on Management’s evaluation of the cost of such deposits relative to alternative funding sources. In determining the value of the identifiable intangible asset, Management used significant estimates including average lives of depository accounts, future interest rate levels, the cost of servicing various depository products, and other significant estimates. Management used quoted market prices to determine the fair value of investment securities and FHLB advances.
The acquired assets of Sonoma Valley Bank include loans; such loans are not indemnified by the Federal Deposit Insurance Corporation (FDIC). However, on February 6, 2009, the Bank acquired loans in a business combination that are indemnified by the FDIC, as described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Pursuant to acquisition accounting, the loans in each business combination were measured at their estimated fair value at the respective acquisition date. This method of measuring the carrying value of purchased loans differs from loans originated by the Company, and as such, the Company identifies purchased loans not indemnified by the FDIC as “Purchased Non-covered Loans” and purchased loans indemnified by the FDIC as “Purchased Covered Loans.”
Loans originated by the Company are measured at the principal amount outstanding, net of unearned discount and unamortized deferred fees and costs. These loans are identified as “Originated Loans.”

 

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Recently Adopted Accounting Standards
In the first quarter of 2010, the Company adopted the following new accounting guidance:
FASB ASC 860, as amended, Transfers and Servicing, has been amended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since initial issuance, that are not consistent with the original intent and key requirements of that Standard and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Standard must be applied to transfers occurring on or after January 1, 2010, the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. The adoption of this Statement did not have any effect on the Company’s financial statements at the date of adoption.
FASB ASC 810, as amended, Consolidation, has been amended to improve financial reporting by enterprises involved with variable interest entities. Specifically to address: (1) the effects on certain provisions as a result of the elimination of the qualifying special-purpose entity concept in ASC 860, Transfers and Servicing, and (2) constituent concerns about the application of certain key provisions of the Standard, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. The adoption of this Statement did not have any effect on the Company’s financial statements at the date of adoption.
FASB Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820), issued January 2010 and effective January 1, 2010, requires new disclosures for: (1) transfers in and out of Levels 1 and 2, including separate disclosure of significant amounts and a description of the reasons for the transfers; and (2) separate presentation of information about purchases, sales, issuances, and settlements (on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The Update clarifies existing disclosure requirements for: (1) Level of disaggregation, which provides measurement disclosures for each class of assets and liabilities. Emphasizing that judgment should be used in determining the appropriate classes of assets and liabilities; and (2) inputs and valuation techniques for both recurring and nonrecurring Level 2 and Level 3 fair value measurements.
This update also includes conforming amendments to the guidance on employer’s disclosures about postretirement benefit plan assets changing the terminology of major categories of assets to classes of assets and providing a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures.
The adoption of this Update did not have a significant effect on the Company’s financial statements at the date of adoption.
Recently Issued Accounting Standards
FASB ASU 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset (Topic 310), was issued April 2010 and is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending after July 15, 2010. As a result of the amendments in this Update, modification of loans within the pool does not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a trouble debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. However, loans within the scope of Subtopic 310-30 that are accounted for individually will continue to be subject to the troubled debt restructuring accounting provisions.
The provisions of this Update will be applied prospectively with early application permitted. Upon initial adoption of the guidance in this Update, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. The election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.
The Company does not have any pools of loans accounted for in accordance with Subtopic 310-30, and therefore, the adoption of this Update will not have a significant effect on the Company’s financial statements.
FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310), was issued July 2010. The guidance will significantly expand the disclosures that the Company must make about the credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide financial statement users with additional information about the nature of credit risks inherent in the Company’s financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses.

 

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The disclosures as of the end of the reporting period are effective for the Company’s interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s interim and annual periods beginning on or after December 15, 2010. The adoption of this Update requires enhanced disclosures and is not expected to have a significant effect on the Company’s financial statements.
Note 3: Acquisition of Sonoma Valley Bank
On August 20, 2010, Westamerica Bank purchased substantially all the assets and assumed substantially all the liabilities of Sonoma Valley Bank (“Sonoma”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of Sonoma. Sonoma operated 3 commercial banking branches within Sonoma County, California. The FDIC took Sonoma under receivership upon Sonoma’s closure by the California Department of Financial Institutions at the close of business August 20, 2010. Westamerica Bank purchased substantially all of Sonoma’s net assets at a discount of $43 million, and paid a $5 million deposit premium.
The Sonoma acquisition was accounted for under the purchase method of accounting in accordance with FASB ASC 805, Business Combinations. The statement of net assets acquired as of August 20, 2010 and the resulting bargain purchase gain are presented in the following table. The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of a merger as information relative to closing date fair values becomes available. A “bargain purchase” gain totaling $178 thousand resulted from the acquisition and is included as a component of noninterest income on the statement of income. The amount of the gain is equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed. Sonoma’s results of operations prior to the acquisition are not included in Westamerica’s statement of income.
Statement of Net Assets Acquired (at fair value)
         
    At  
    August 20, 2010  
    (In thousands)  
Assets
       
Cash and due from banks
  $ 57,895  
Money market assets
    26,050  
Securities
    7,223  
Loans
    213,664  
Other real estate owned
    2,916  
Core deposit intangible
    5,270  
Other assets
    2,065  
 
     
Total Assets
  $ 315,083  
 
     
 
       
Liabilities
       
Deposits
    252,563  
Federal Home Loan Bank advances
    61,872  
Liabilities for interest and other expenses
    470  
 
     
Total Liabilities
    314,905  
 
     
 
       
Net assets acquired
  $ 178  
 
     
         
    At  
    August 20, 2010  
    (In thousands)  
Sonoma Valley Bank tangible shareholder’s equity
  $ 13,923  
Adjustments to reflect assets acquired and liabilities assumed at fair value:
       
Cash payment from FDIC
    21,270  
Loans and leases, net
    (34,562 )
Other real estate owned
    (1,491 )
Other assets
    (811 )
Core deposit intangible
    5,270  
Deposits
    (1,233 )
Federal Home Loan Bank advances
    (1,872 )
Other liabilities
    (316 )
 
     
Gain on acquisition
  $ 178  
 
     
The pro forma consolidated condensed statements of income for Westamerica Bancorporation and Sonoma Valley Bank for the nine months ended September 30, 2010 and 2009, and the year ended December 31, 2009 are presented below. The unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods.

 

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The pro forma purchase accounting adjustments related to loans and leases, deposits and Federal Home Loan Bank advances are being accreted or amortized into income using methods that approximate a level yield over their respective estimated lives. Purchase accounting adjustments related to identifiable intangibles are being amortized and recorded as noninterest expense over their respective estimated lives using accelerated methods. The pro forma consolidated condensed statements of income do not reflect any adjustments to Sonoma’s historical provision for credit losses. (in thousands, except per share data)
                                                                 
    Nine months ended September 30, 2010     Nine months ended September 30, 2009  
            Sonoma Valley     Proforma     Pro Forma             Sonoma Valley     Proforma     Pro forma  
    Westamerica     Bank     Adjustments     Combined     Westamerica     Bank     Adjustments     combined  
Interest Income
  $ 178,664     $ 11,404     $ (872 )   $ 189,196     $ 183,453     $ 13,856     $ (872 )   $ 196,437  
Interest Expense
    9,614       2,387       (863 )     11,138       15,078       3,044       (863 )     17,259  
 
                                               
Net Interest Income
    169,050       9,017       (9 )     178,058       168,375       10,812       (9 )     179,178  
Provision for Credit Losses
    8,400       4,400             12,800       7,200       29,330             36,530  
 
                                               
Net Interest Income after Provision for Credit Losses
    160,650       4,617       (9 )     165,258       161,175       (18,518 )     (9 )     142,648  
Noninterest Income
    45,998       2,034       178       48,210       96,315       1,502       178       97,995  
Noninterest Expense
    95,064       5,143       (43 )     100,164       107,940       6,885       (43 )     114,782  
 
                                               
Income (Loss) Before Taxes
    111,584       1,508       212       113,304       149,550       (23,901 )     212       125,861  
Income Tax Provision (Benefit)
    41,268       634       89       41,991       48,285       (4,629 )     89       43,745  
 
                                               
Net Income (Loss)
  $ 70,316     $ 874     $ 123     $ 71,313     $ 101,265     $ (19,272 )   $ 123     $ 82,116  
 
                                               
 
                                                               
Net Income (Loss) Applicable to Common Equity
  $ 70,316     $ 874     $ 123     $ 71,313     $ 98,114     $ (19,272 )   $ 123     $ 78,965  
 
                                               
 
                                                               
Earnings (Loss) Per Common Share
  $ 2.41     $ 0.03     $ 0.00     $ 2.44     $ 3.37     $ (0.66 )   $ 0.00     $ 2.72  
Diluted Earnings (Loss) Per Common Share
    2.38       0.03       0.00       2.42       3.35       (0.66 )     0.00       2.69  
 
                                                               
Average Common Shares Outstanding
    29,187                               29,072                          
Diluted Average Common Shares Outstanding
    29,515                               29,313                          
                                 
    Year ended December 31, 2009  
            Sonoma Valley     Proforma     Pro Forma  
    Westamerica     Bank     Adjustments     Combined  
Interest Income
  $ 241,949     $ 18,177     $ (1,163 )   $ 258,963  
Interest Expense
    19,380       3,883       (1,150 )     22,113  
 
                       
Net Interest Income
    222,569       14,294       (13 )     236,850  
Provision for Credit Losses
    10,500       31,130             41,630  
 
                       
Net Interest Income after Provision for Credit Losses
    212,069       (16,836 )     (13 )     195,220  
Noninterest Income
    112,011       2,029       178       114,218  
Noninterest Expense
    140,776       8,914       (108 )     149,582  
 
                       
Income (Loss) Before Taxes
    183,304       (23,721 )     273       159,856  
Income Tax Provision (Benefit)
    57,878       (4,481 )     115       53,512  
 
                       
Net Income (Loss)
  $ 125,426     $ (19,240 )   $ 158     $ 106,344  
 
                       
 
                               
Net Income (Loss) Applicable to Common Equity
  $ 121,463     $ (19,240 )   $ 158     $ 102,381  
 
                       
 
                               
Earnings (Loss) Per Common Share
  $ 4.17     $ (0.66 )   $ 0.01     $ 3.52  
Diluted Earnings (Loss) Per Common Share
    4.14       (0.66 )     0.01       3.49  
 
                               
Average Common Shares Outstanding
    29,105                          
Diluted Average Common Shares Outstanding
    29,353                          
Note 4: Investment Securities
The amortized cost, unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio as of September 30, 2010, follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (In thousands)  
U.S. Treasury securities
  $ 3,504     $ 7     $     $ 3,511  
Securities of U.S. Government sponsored entities
    118,673       231       (71 )     118,833  
Residential mortgage-backed securities
    112,961       5,302             118,263  
Commercial mortgage-backed securities
    5,204       10       (23 )     5,191  
Obligations of States and political subdivisions
    209,178       5,507       (377 )     214,308  
Residential collateralized mortgage obligations
    24,228       1,110             25,338  
Asset-backed securities
    9,401             (981 )     8,420  
FHLMC and FNMA stock
    824       30       (237 )     617  
Corporate securities
    69,811       142       (170 )     69,783  
Other securities
    2,790       2,487       (30 )     5,247  
 
                       
Total
  $ 556,574     $ 14,826     $ (1,889 )   $ 569,511  
 
                       

 

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The amortized cost, unrealized gains and losses, and fair value of the held to maturity investment securities portfolio as of September 30, 2010, follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (In thousands)  
Residential mortgage-backed securities
  $ 44,754     $ 1,937     $ (2 )   $ 46,689  
Obligations of States and political subdivisions
    470,638       22,426       (319 )     492,745  
Residential collateralized mortgage obligations
    103,446       2,791       (2,789 )     103,448  
 
                       
Total
  $ 618,838     $ 27,154     $ (3,110 )   $ 642,882  
 
                       
The amortized cost, unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio as of December 31, 2009, follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (In thousands)  
U.S. Treasury securities
  $ 2,987     $     $     $ 2,987  
Securities of U.S. Government sponsored entities
    21,018       48       (25 )     21,041  
Residential mortgage-backed securities
    143,625       2,504       (124 )     146,005  
Obligations of States and political subdivisions
    155,093       4,077       (977 )     158,193  
Residential collateralized mortgage obligations
    40,981       652       (223 )     41,410  
Asset-backed securities
    10,000             (1,661 )     8,339  
FHLMC and FNMA stock
    824       750       (1 )     1,573  
Other securities
    2,778       1,926       (44 )     4,660  
 
                       
Total
  $ 377,306     $ 9,957     $ (3,055 )   $ 384,208  
 
                       
The amortized cost, unrealized gains and losses, and fair value of the held to maturity investment securities portfolio as of December 31, 2009 follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (In thousands)  
Residential mortgage-backed securities
  $ 61,893     $ 1,752     $     $ 63,645  
Obligations of States and political subdivisions
    516,596       12,528       (2,190 )     526,934  
Residential collateralized mortgage obligations
    148,446       3,352       (6,107 )     145,691  
 
                       
Total
  $ 726,935     $ 17,632     $ (8,297 )   $ 736,270  
 
                       
The amortized cost and fair value of securities as of September 30, 2010, by contractual maturity, are shown in the following table:
                                 
    Securities Available     Securities Held  
    for Sale     to Maturity  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
    (In thousands)  
Maturity in years:
                               
1 year or less
  $ 26,089     $ 26,214     $ 7,850     $ 7,924  
Over 1 to 5 years
    238,045       239,761       78,128       81,386  
Over 5 to 10 years
    73,486       75,512       373,875       392,421  
Over 10 years
    72,947       73,368       10,785       11,014  
 
                       
Subtotal
    410,567       414,855       470,638       492,745  
Mortgage-backed securities and residential collateralized mortgage obligations
    142,393       148,792       148,200       150,137  
Other securities
    3,614       5,864              
 
                       
Total
  $ 556,574     $ 569,511     $ 618,838     $ 642,882  
 
                       

 

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The amortized cost and fair value of securities as of December 31, 2009, by contractual maturity, are shown in the following table:
                                 
    Securities Available     Securities Held  
    for Sale     to Maturity  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
    (In thousands)  
Maturity in years:
                               
1 year or less
  $ 12,763     $ 12,852     $ 8,303     $ 8,389  
Over 1 to 5 years
    86,757       88,759       58,111       60,075  
Over 5 to 10 years
    61,532       62,933       413,720       421,955  
Over 10 years
    28,046       26,016       36,462       36,515  
 
                       
Subtotal
    189,098       190,560       516,596       526,934  
Mortgage-backed securities and collateralized mortgage obligations
    184,606       187,415       210,339       209,336  
Other securities
    3,602       6,233              
 
                       
Total
  $ 377,306     $ 384,208     $ 726,935     $ 736,270  
 
                       
Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-backed securities.
An analysis of gross unrealized losses of the available for sale investment securities portfolio as of September 30, 2010, follows:
                                                 
    Less than 12 months     12 months or longer     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Securities of U.S. Government sponsored entities
  $ 50,812     $ (71 )   $     $     $ 50,812     $ (71 )
Residential mortgage-backed securities
    98                         98        
Commercial mortgage-backed securities
    3,071       (23 )                 3,071       (23 )
Obligations of States and political subdivisions
    14,732       (122 )     10,959       (255 )     25,691       (377 )
Residential collateralized mortgage obligations
    5                         5        
Asset-backed securities
                8,420       (981 )     8,420       (981 )
FHLMC and FNMA stock
    1       (5 )     472       (232 )     473       (237 )
Corporate securities
    29,977       (170 )                 29,977       (170 )
Other securities
    5             1,970       (30 )     1,975       (30 )
 
                                   
Total
  $ 98,701     $ (391 )   $ 21,821     $ (1,498 )   $ 120,522     $ (1,889 )
 
                                   
An analysis of gross unrealized losses of the held to maturity investment securities portfolio as of September 30, 2010, follows:
                                                 
    Less than 12 months     12 months or longer     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Residential mortgage backed securities
  $ 437     $ (2 )   $     $     $ 437     $ (2 )
Obligations of States and political subdivisions
    1,102       (17 )     13,981       (302 )     15,083       (319 )
Residential collateralized mortgage obligations
                26,698       (2,789 )     26,698       (2,789 )
 
                                   
Total
  $ 1,539     $ (19 )   $ 40,679     $ (3,091 )   $ 42,218     $ (3,110 )
 
                                   
The unrealized losses on the Company’s investments in collateralized mortgage obligations and asset backed securities were caused by market conditions for these types of investments. The Company evaluates these securities on a quarterly basis including changes in security ratings issued by ratings agencies, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure, and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be AAA rated by one or more major rating agencies.

 

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The unrealized losses on the Company’s investments in obligations of states and political subdivisions were caused by conditions in the municipal securities market. The Company’s investments in obligations of states and political subdivisions primarily finance essential community services such as school districts, water delivery systems, hospitals and fire protection services. Further, these bonds are primarily “bank qualified” issues whereby the issuing authority’s total debt issued in any one year does not exceed $30 million, thereby qualifying the bonds for tax-exempt status for federal income tax purposes. Therefore, “bank qualified” bonds are relatively small in amount providing a high degree of diversification within the Company’s investment portfolio. The Company evaluates these securities quarterly to determine if a change in security rating has occurred or the municipality has experienced financial difficulties. Substantially all of these securities continue to be investment grade rated.
The Company does not intend to sell any investments and has concluded that it is more likely than not that it will not be required to sell the investments prior to recovery of the amortized cost basis. Therefore, the Company does not consider these investments to be other-than-temporarily impaired as of September 30, 2010.
The fair values of the investment securities could decline in the future if the general economy deteriorates, credit ratings decline, or the liquidity for securities is low. As a result, other than temporary impairments may occur in the future.
An analysis of gross unrealized losses of the available for sale investment securities portfolio as of December 31, 2009, follows:
                                                 
    Less than 12 months     12 months or longer     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
U.S. Treasury securities
  $ 2,987     $     $     $     $ 2,987     $  
Securities of U.S. Government sponsored entities
    19,979       (25 )                 19,979       (25 )
Residential mortgage-backed securities
    17,885       (124 )                 17,885       (124 )
Obligations of States and political subdivisions
    25,050       (795 )     3,866       (182 )     28,916       (977 )
Residential collateralized mortgage obligations
    9,896       (37 )     5,002       (186 )     14,898       (223 )
Asset-backed securities
                8,339       (1,661 )     8,339       (1,661 )
FHLMC and FNMA stock
    4       (1 )                 4       (1 )
Other securities
                1,956       (44 )     1,956       (44 )
 
                                   
Total
  $ 75,801     $ (982 )   $ 19,163     $ (2,073 )   $ 94,964     $ (3,055 )
 
                                   
An analysis of gross unrealized losses of the held to maturity investment securities portfolio as of December 31, 2009, follows:
                                                 
    Less than 12 months     12 months or longer     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Obligations of States and political subdivisions
  $ 46,111     $ (995 )   $ 16,964     $ (1,195 )   $ 63,075     $ (2,190 )
Residential collateralized mortgage obligations
    7,639       (42 )     30,674       (6,065 )     38,313       (6,107 )
 
                                   
Total
  $ 53,750     $ (1,037 )   $ 47,638     $ (7,260 )   $ 101,388     $ (8,297 )
 
                                   

 

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Note 5: Loans and Allowance for Credit Losses
A summary of the major categories of originated, purchased covered loans and purchased non-covered loans outstanding is shown in the following tables:
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Originated loans:
               
Commercial
  $ 491,043     $ 498,594  
Commercial real estate
    769,545       801,008  
Construction
    28,987       32,156  
Residential real estate
    320,881       371,197  
Consumer installment & other
    467,459       498,133  
 
           
Gross Loans
    2,077,915       2,201,088  
Allowance for loan losses
    (38,129 )     (41,043 )
 
           
Net Loans
  $ 2,039,786     $ 2,160,045  
 
           
The carrying amount of the purchased covered loans at September 30, 2010, consisted of impaired and non impaired purchased covered loans in the following table.
                         
    Impaired     Non Impaired     Total  
    Purchased     Purchased     Purchased  
    Covered Loans     Covered Loans     Covered Loans  
    (In thousands)  
Purchased covered loans:
                       
Commercial
  $ 10,881     $ 170,577     $ 181,458  
Commercial real estate
    14,128       385,805       399,933  
Construction
    9,517       19,423       28,940  
Residential real estate
    138       18,551       18,689  
Consumer installment & other
    253       89,345       89,598  
 
                 
Total loans
  $ 34,917     $ 683,701     $ 718,618  
 
                 
The carrying amount of the purchased non-covered loans at September 30, 2010, consisted of impaired and non impaired purchased non-covered loans in the following table.
                         
    Impaired     Non Impaired     Total Purchased  
    Purchased Non-     Purchased Non-     Non-covered  
    covered Loans     covered Loans     Loans  
    (In thousands)  
Purchased non-covered loans:
                       
Commercial
  $ 492     $ 11,906     $ 12,398  
Commercial real estate
    26,252       89,600       115,852  
Construction
    7,636       18,469       26,105  
Residential real estate
    2,143       20,706       22,849  
Consumer installment & other
    1,217       33,897       35,114  
 
                 
Total loans
  $ 37,740     $ 174,578     $ 212,318  
 
                 

 

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The carrying amount of the purchased covered loans at December 31, 2009, consisted of impaired and non impaired purchased covered loans in the following table (refined).
                         
    Impaired     Non Impaired     Total  
    Purchased     Purchased     Purchased  
    Covered Loans     Covered Loans     Covered Loans  
    (In thousands)  
Purchased covered loans:
                       
Commercial
  $ 8,538     $ 244,811     $ 253,349  
Commercial real estate
    19,870       425,570       445,440  
Construction
    14,378       26,082       40,460  
Residential real estate
    138       18,383       18,521  
Consumer installment & other
    272       97,259       97,531  
 
                 
Total loans
  $ 43,196     $ 812,105     $ 855,301  
 
                 
Changes in the carrying amount of impaired purchased covered loans were as follows for the nine months ended September 30, 2010 and the period February 6, 2009 (acquisition date) through December 31, 2009:
                 
            February 6, 2009  
            through  
    Nine months ended     December 31, 2009  
    September 30, 2010     (refined)  
    (In thousands)  
Carrying amount at the beginning of the period
  $ 43,196     $ 80,544  
Reductions during the period
    (8,279 )     (37,348 )
 
           
Carrying amount at the end of the period
  $ 34,917     $ 43,196  
 
           
The following table represents the non impaired purchased non-covered loans receivable at the acquisition date of August 20, 2010. The amounts include principal only and do not reflect accrued interest as of the date of acquisition or beyond (dollars in thousands):
         
Gross contractual loan principal payment receivable
  $ 188,206  
Estimate of contractual principal not expected to be collected
    (15,058 )
Fair value of non impaired purchased loans receivable
  $ 175,922  
The Company applied the cost recovery method to impaired purchased non-covered loans at the acquisition date of August 20, 2010 due to the uncertainty as to the timing of expected cash flows as reflected in the following table (dollars in thousands):
         
Contractually required payments receivable (including interest)
  $ 70,882  
Nonaccretable difference
    (33,140 )
 
     
Cash flows expected to be collected
    37,742  
Accretable difference
     
 
     
Fair value of loans acquired
  $ 37,742  
 
     
Changes in the carrying amount of impaired purchased non-covered loans were as follows for the period from August 20, 2010 (acquisition date) through September 30, 2010:
         
    August 20, 2010  
    through  
    September 30, 2010  
    (In thousands)  
Carrying amount at the beginning of the period
  $ 37,742  
Reductions during the period
    (2 )
 
     
Carrying amount at the end of the period
  $ 37,740  
 
     

 

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Impaired purchased covered loans had an unpaid principal balance (less prior charge-offs) of $52 million, $70 million and $164 million at September 30, 2010, December 31, 2009 and February 6, 2009, respectively.
Impaired purchased non-covered loans had an unpaid principal balance (less prior charge-offs) of $60 million and $60 million at September 30, 2010 and August 20, 2010, respectively.
The Company pledges loans to secure borrowings from the Federal Home Loan Bank (FHLB). At September 30, 2010, loans pledged to secure borrowing totaled $170.1 million. The FHLB does not have the right to sell or repledge such loans.
There were no loans held for sale at September 30, 2010 and December 31, 2009.
The following summarizes the allowance for credit losses of the Company for the periods indicated:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Balance, beginning of period
  $ 42,409     $ 45,815     $ 43,736     $ 47,563  
Provision for loan losses
    2,800       2,800       8,400       7,200  
Provision for unfunded commitments
                      (400 )
Loans charged off
    (5,216 )     (3,870 )     (13,926 )     (10,735 )
Recoveries of previously charged off loans
    829       631       2,612       1,748  
 
                       
Net loan losses
    (4,387 )     (3,239 )     (11,314 )     (8,987 )
 
                       
Balance, end of period
  $ 40,822     $ 45,376     $ 40,822     $ 45,376  
 
                       
Components:
                               
Allowance for loan losses
  $ 38,129     $ 42,683                  
Reserve for unfunded credit commitments
    2,693       2,693                  
 
                           
Allowance for credit losses
  $ 40,822     $ 45,376                  
 
                           
Allowance for loan losses / originated loans outstanding
    1.83 %     1.88 %                
Management determined the credit default fair value discounts assigned to covered loans purchased on February 6, 2009 and non-covered loans purchased on August 20, 2010 remained adequate as an estimate of credit losses inherent in purchased covered and non-covered loans as of September 30, 2010.
Nonaccrual originated loans at September 30, 2010 and December 31, 2009 were $19.4 million and $19.9 million, respectively. Nonaccrual purchased covered loans at September 30, 2010 and December 31, 2009 were $52.2 million and $85.1 million, respectively. Nonaccrual purchased non-covered loans at September 30, 2010 were $37.9 million.
There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2010.
Note 6: Goodwill and Other Identifiable Intangible Assets
The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize impairment during the nine months ended September 30, 2010.
The changes in the carrying value of goodwill were (in thousands):
         
December 31, 2009
  $ 121,699  
Recognition of stock option tax benefits for the exercise of options converted upon merger
    (26 )
 
     
September 30, 2010
  $ 121,673  
 
     

 

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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 nine months ended September 30, 2010, no such adjustments were recorded.
The gross carrying amount of identifiable intangible assets and accumulated amortization was:
                                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
    Gross             Gross        
    Carrying     Accumulated     Carrying     Accumulated  
    Amount     Amortization     Amount     Amortization  
 
                               
Core Deposit Intangibles
  $ 56,808     $ (23,283 )   $ 51,538     $ (19,160 )
Merchant Draft Processing Intangible
    10,300       (7,599 )     10,300       (7,011 )
 
                       
Total Identifiable Intangible Assets
  $ 67,108     $ (30,882 )   $ 61,838     $ (26,171 )
 
                       
As of September 30, 2010, the current year and estimated future amortization expense for identifiable intangible assets was:
                         
            Merchant        
    Core     Draft        
    Deposit     Processing        
    Intangibles     Intangible     Total  
    (In thousands)  
Ninemonths ended September 30, 2010 (actual)
  $ 4,123     $ 588     $ 4,711  
Estimate for year ended December 31, 2010
    5,559       774       6,333  
2011
    5,351       624       5,975  
2012
    4,868       500       5,368  
2013
    4,304       400       4,704  
2014
    3,946       324       4,270  
2015
    3,594       262       3,856  
Note 7: Post Retirement Benefits
The Company offers a continuation of group insurance coverage to qualifying employees electing early retirement, for the period from the date of retirement until age 65. For eligible employees the Company pays a portion of these early retirees’ insurance premiums. The Company also reimburses a portion of Medicare Part B premiums for all qualifying retirees over age 65 and their qualified spouses. Eligibility for post-retirement medical benefits is based on age and years of service, and restricted to employees hired prior to February 1, 2006. The Company uses an actuarial-based accrual method of accounting for post-retirement benefits.
The following table sets forth the net periodic post-retirement benefit costs:
                 
    For the nine months ended  
    September 30,  
    2010     2009  
    (In thousands)  
Service cost (benefit)
  $ (270 )   $ (237 )
Interest cost
    144       165  
Amortization of unrecognized transition obligation
    45       45  
 
           
Net periodic cost (benefit)
  $ (81 )   $ (27 )
 
           
The Company does not fund plan assets for any post-retirement benefit plans.

 

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Note 8: Commitments and Contingent Liabilities
Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $409.8 million and $482.0 million at September 30, 2010 and December 31, 2009, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Standby letters of credit outstanding totaled $25.5 million and $27.4 million at September 30, 2010 and December 31, 2009, respectively. The Company also had commitments for commercial and similar letters of credit of $3.3 million and $176 thousand at September 30, 2010 and December 31, 2009, respectively.
Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal costs related to covered assets are 80 percent indemnified under loss-sharing agreements with the FDIC if certain conditions are met.
Note 9: Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale investment securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as certain loans held for investment and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost-or-fair value accounting or impairment or write-down of individual assets.
In accordance with the Fair Value Measurement and Disclosure topic of the Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.
The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury and federal agency securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mortgage-backed securities, municipal bonds and residential collateralized mortgage obligations as well as other real estate owned and impaired loans collateralized by real property where the fair value is generally based upon independent market prices or appraised values of the collateral.
Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Level 3 includes those impaired loans collateralized by other business assets where the expected cash flow has been used in determining the fair value.

 

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Assets Recorded at Fair Value on a Recurring Basis
The table below presents assets measured at fair value on a recurring basis.
                                 
    At September 30, 2010  
            Quoted Prices              
            in Active     Significant        
            Markets for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
    Fair Value     (Level 1)     (Level 2 )     (Level 3 )  
    (In thousands)  
U.S. Treasury securities
  $ 3,511     $ 3,511     $     $  
Securities of U.S. Government sponsored entities
    118,833       118,833              
Municipal bonds:
                               
Federally Tax-exempt — California
    84,505             84,505        
Federally Tax-exempt — 29 other states
    119,591             119,591        
Taxable — California
    9,711             9,711        
Taxable — 1 other state
    501             501        
Residential mortgage-backed securities (“MBS”):
                               
Guaranteed by GNMA
    47,613             47,613        
Issued by FNMA and FHLMC
    70,650             70,650        
Residential collateralized mortgage obligations:
                               
Issued or guaranteed by FNMA, FHLMC, or GNMA
    16,447             16,447        
All other
    8,891             8,891        
Commercial mortgage-backed securities
    5,191             5,191        
Asset-backed securities — government guaranteed student loans
    8,420             8,420        
FHLMC and FNMA stock
    617       617              
Corporate securities
    69,783       69,783              
Other securities
    5,247       3,278       1,969        
 
                       
Total securities available for sale
  $ 569,511     $ 196,022     $ 373,489     $  
 
                       
There were no significant transfers in or out of Levels 1 and 2 for the nine months ended September 30, 2010.
                                 
    At December 31, 2009  
            Quoted Prices              
            in Active     Significant        
            Markets for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
    Fair Value     (Level 1)     (Level 2 )     (Level 3 )  
    (In thousands)  
U.S. Treasury securities
  $ 2,987     $ 2,987     $     $  
Securities of U.S. Government sponsored entities
    21,041       21,041              
Municipal bonds:
                               
Federally Tax-exempt — California
    56,431             56,431        
Federally Tax-exempt — 25 other states
    97,094             97,094        
Taxable — California
    4,668             4,668        
Residential mortgage-backed securities (“MBS”):
                               
Guaranteed by GNMA
    54,361             54,361        
Issued by FNMA and FHLMC
    91,644             91,644        
Residential collateralized mortgage obligations:
                               
Issued or guaranteed by FNMA, FHLMC, or GNMA
    29,536             29,536        
All other
    11,874             11,874        
Asset-backed securities — government guaranteed student loans
    8,339             8,339        
FHLMC and FNMA stock
    1,573       1,573              
Other securities
    4,660       2,703       1,957        
 
                       
Total securities available for sale
  $ 384,208     $ 28,304     $ 355,904     $  
 
                       

 

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Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the first nine months ended September 30, 2010 and year ended December 31, 2009 that were still held in the balance sheet at the end of such periods, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at the dates indicated.
                                         
    At September 30, 2010  
    Fair Value     Level 1     Level 2     Level 3     Total losses  
    (In thousands)  
Non-covered other real estate owned (1)
  $ 1,863     $     $ 1,863     $     $ (664 )
Impaired originated loans (2)
    4,780             4,780              
 
                             
Total assets measured at fair value on a nonrecurring basis
  $ 6,643     $     $ 6,643           $ (664 )
 
                             
                                         
    At December 31, 2009  
    Fair Value     Level 1     Level 2     Level 3     Total losses  
    (In thousands)  
Non-covered other real estate owned (1)
  $ 413     $     $ 413     $     $ (233 )
Impaired originated loans (2)
    2,447             2,447              
 
                             
Total assets measured at fair value on a nonrecurring basis
  $ 2,860     $     $ 2,860     $     $ (233 )
 
                             
     
(1)  
Represents the fair value of foreclosed real estate owned that was measured at fair value subsequent to their initial classification as foreclosed assets.
 
(2)  
Represents carrying value of loans for which adjustments are predominantly based on the appraised value of the collateral and loans considered impaired under FASB ASC 310-10-35, Subsequent Measurement of Receivables, where a specific reserve has been established.
Disclosures about Fair Value of Financial Instruments
The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value.
Cash and Due from Banks The carrying amount of cash and amounts due from banks approximate fair value due to the relatively short period of time between their origination and their expected realization.
Money Market Assets The carrying amount of money market assets approximate fair value due to the relatively short period of time between their origination and their expected realization.
Investment Securities Held to Maturity The fair values of investment securities were estimated using quoted prices as described above for Level 1 and Level 2 valuation.
Loans Loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates were valued using historical cost. Fixed rate loans and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of $38.1 million at September 30, 2010 and $41.0 million at December 31, 2009 and the fair value discount due to credit default risk associated with purchased covered and non-covered loans of $66.5 million and $36.9 million, respectively at September 30, 2010 and $93.3 million associated with purchased covered loans at December 31, 2009 were applied against the estimated fair values to recognize estimated future defaults of contractual cash flows. The Company does not consider these values to be a liquidation price for the loans.
FDIC Receivable The fair value of the FDIC receivable recorded in Other Assets was estimated by discounting estimated future cash flows using current market rates for financial instruments with similar characteristics.
Deposit Liabilities The carrying amount of demand deposits, savings accounts and money market accounts approximates fair value due to the relatively short period of time between their origination and their expected realization. The fair values of the time deposits were estimated by discounting estimated future cash flows related to these financial instruments using current market rates for financial instruments with similar characteristics.
Short-Term Borrowed Funds The carrying amount of securities sold under agreement to repurchase and other short-term borrowed funds approximate fair value due to the relatively short period of time between their origination and their expected realization. The fair values of term repurchase agreements were estimated by using interpolated yields for financial instruments with similar characteristics.

 

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Federal Home Loan Bank Advances The fair values of FHLB advances were estimated by using interpolated yields for financial instruments with similar characteristics.
Debt Financing and Notes Payable The fair values of debt financing and notes payable were estimated by using interpolated yields for financial instruments with similar characteristics.
Restricted Performance Share Grants The fair value of liabilities for unvested restricted performance share grants recorded in Other Liabilities were estimated using quoted prices as described above for Level 1 valuation.
The table below is a summary of fair value estimates for financial instruments, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.
The Company has not included assets and liabilities that are not financial instruments, such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company.
                                 
    At September 30, 2010     At December 31, 2009  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
    (In thousands)  
Financial Assets
                               
Cash and due from banks
  $ 344,169     $ 344,169     $ 361,135     $ 361,135  
Money market assets
    392       392       442       442  
Investment securities held to maturity
    618,838       642,882       726,935       736,270  
Loans
    2,970,722       2,992,724       3,015,346       3,024,866  
Other assets — FDIC receivable
    49,994       49,707       85,787       83,806  
 
                               
Financial Liabilities
                               
Deposits
    4,072,698       4,073,550       4,060,208       4,061,380  
Short-term borrowed funds
    193,202       193,257       227,178       228,463  
Federal Home Loan Bank Advances
    66,934       67,138       85,470       85,601  
Debt financing and notes payable
    26,396       26,244       26,497       23,520  
Other liabilities — restricted performance share grants
    2,069       2,069       1,942       1,942  
The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.
Note 10: Shareholders’ Equity
On February 13, 2009, the Company issued to the United States Department of the Treasury (the “Treasury”) 83,726 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”), having a liquidation preference of $1,000 per share. The structure of the Series A Preferred Stock included cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. On September 2, 2009 and November 18, 2009, the Company redeemed 41,863 shares and 41,863 shares, respectively, of its Series A Preferred Stock at $1,000 per share. Prior to redemption, under the terms of the Series A Preferred Stock, the Company could not declare or pay any dividends or make any distribution on its common stock, other than regular quarterly cash dividends not exceeding $0.35 or dividends payable only in shares of its common stock, or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement with the Treasury. The Treasury, as part of the preferred stock issuance, received a warrant to purchase 246,640 shares of the Company’s common stock at an exercise price of $50.92. The proceeds from Treasury were allocated based on the relative fair value of the warrant as compared with the fair value of the preferred stock. The fair value of the warrant was determined using a valuation model which incorporates assumptions including the Company’s common stock price, dividend yield, stock price volatility, the risk-free interest rate, and other assumptions. The Company allocated $1.2 million of the proceeds from the Series A Preferred Stock to the warrant. The discount on the preferred stock was accreted to par value during the period the Series A Preferred Stock was outstanding, and reported as a reduction to net income applicable to common equity over that period.

 

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Note 11: Earnings Per Common Share
The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income applicable to common equity by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income applicable to common equity by the average number of common shares outstanding during the period plus the impact of common stock equivalents.
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
Weighted average number of common shares outstanding — basic
    29,127       29,210       29,187       29,072  
Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise
    258       219       328       241  
 
                       
Weighted average number of common shares outstanding — diluted
    29,385       29,429       29,515       29,313  
 
                       
Net income applicable to common equity
  $ 23,709     $ 23,791     $ 70,846     $ 98,114  
Basic earnings per common share
  $ 0.81     $ 0.81     $ 2.43     $ 3.37  
Diluted earnings per common share
    0.81       0.81       2.40       3.35  
For the three months and nine months ended September 30, 2010, options to purchase 273 thousand and 285 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect. For the three and nine months ended September 30, 2009, options and warrants to purchase 726 thousand and 889 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

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WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
Net Interest Income (FTE)*
  $ 56,669     $ 61,593     $ 170,271     $ 183,270  
Provision for Loan Losses
    (2,800 )     (2,800 )     (8,400 )     (7,200 )
Noninterest Income:
                               
Gain on acquisition
    178             178       48,844  
Deposit service charges and other
    14,893       15,961       46,133       47,471  
 
                       
Total Noninterest Income
    15,071       15,961       46,311       96,315  
Noninterest Expense
    31,508       35,151       95,635       107,940  
 
                       
Income Before Income Taxes (FTE)*
    37,432       39,603       112,547       164,445  
Income Tax Provision (FTE)*
    13,723       14,346       41,701       63,180  
 
                       
Net Income
    23,709       25,257       70,846       101,265  
Preferred stock dividends and discount accretion
          1,466             3,151  
 
                       
Net Income Applicable to Common Equity
  $ 23,709     $ 23,791     $ 70,846     $ 98,114  
 
                       
 
                               
Average Common Shares Outstanding
    29,127       29,210       29,187       29,072  
Diluted Average Common Shares Outstanding
    29,385       29,429       29,515       29,313  
Common Shares Outstanding at Period End
    29,118       29,207       29,118       29,207  
 
                               
As Reported:
                               
Basic Earnings Per Common Share
  $ 0.81     $ 0.81     $ 2.43     $ 3.37  
Diluted Earnings Per Common Share
    0.81       0.81       2.40       3.35  
Return On Assets
    1.95 %     1.86 %     1.98 %     2.57 %
Return On Common Equity
    17.90 %     19.68 %     18.32 %     28.38 %
Net Interest Margin (FTE)*
    5.54 %     5.48 %     5.59 %     5.39 %
Net Loan Losses to Average Originated Loans
    0.83 %     0.56 %     0.71 %     0.51 %
Efficiency Ratio**
    43.9 %     45.3 %     44.2 %     38.6 %
 
                               
Average Balances:
                               
Total Assets
  $ 4,835,357     $ 5,072,866     $ 4,793,266     $ 5,113,359  
Total Earning Assets
    4,068,561       4,470,851       4,071,089       4,541,596  
Originated Loans
    2,096,937       2,289,331       2,132,687       2,360,540  
Purchased Covered Loans
    743,126       974,057       787,142       900,922  
Purchased Non-covered Loans
    97,438             32,836        
Total Deposits
    3,981,437       4,131,388       3,944,231       4,066,462  
Shareholders’ Equity
    525,630       549,331       517,121       527,635  
 
                               
Balances at Period End:
                               
Total Assets
  $ 4,977,871     $ 4,971,159                  
Total Earning Assets
    4,197,592       4,372,739                  
Originated Loans
    2,077,915       2,267,130                  
Purchased Covered Loans
    718,618       932,656                  
Purchased Non-covered Loans
    212,318                        
Total Deposits
    4,072,698       4,024,626                  
Shareholders’ Equity
    541,173       535,718                  
 
                               
Financial Ratios at Period End:
                               
Allowance for Loan Losses to Originated Loans
    1.83 %     1.88 %                
Book Value Per Common Share
  $ 18.59     $ 16.93                  
Equity to Assets
    10.87 %     10.78 %                
Total Capital to Risk Adjusted Assets
    14.88 %     15.07 %                
 
                               
Dividends Paid Per Common Share
  $ 0.36     $ 0.35     $ 1.08     $ 1.06  
Common Dividend Payout Ratio
    44 %     43 %     45 %     32 %
The above financial summary has been derived from the Company’s unaudited consolidated financial statements. This information should be read in conjunction with those statements, notes and the other information included elsewhere herein. Percentages under the heading “As Reported” are annualized with the exception of the efficiency ratio.
     
*  
Yields on securities and certain loans have been adjusted upward to a “fully taxable equivalent” (“FTE”) basis, which is a non-GAAP financial measure, in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.
 
**  
The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis, which is a non-GAAP financial measure, and noninterest income).

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Westamerica Bancorporation and subsidiaries (the “Company”) reported third quarter 2010 net income applicable to common equity of $23.7 million or $0.81 diluted earnings per common share. The third quarter of 2010 included a $178 thousand gain on the acquisition of Sonoma Valley Bank. These results compare to net income applicable to common equity of $23.8 million or $0.81 diluted earnings per common share for the same period of 2009.
The Company reported net income applicable to common equity of $70.8 million or $2.40 diluted earnings per common share for the nine months ended September 30, 2010, compared with $98.1 million or $3.35 diluted earnings per common share for the same period of 2009. The first nine months of 2009 included a $48.8 million gain on the acquisition of County Bank (“County”) which increased net income by $28.3 million and earnings per diluted common share by $0.97.
Acquisitions
As described in Note 3, Westamerica Bank (“Bank”) acquired assets and assumed liabilities of the former Sonoma Valley Bank on August 20, 2010. The acquired assets and assumed liabilities were measured at estimated fair values, as required by FASB ASC 805, Business Combinations. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management judgmentally measured loan fair values based on loan file reviews (including borrower financial statements and tax returns), appraised collateral values, expected cash flows, and historical loss factors. Repossessed loan collateral was primarily valued based upon appraised collateral values. The Bank also recorded an identifiable intangible asset representing the value of the core deposit customer base of Sonoma Valley Bank based on Management’s evaluation of the cost of such deposits relative to alternative funding sources. In determining the value of the identifiable intangible asset, Management used significant estimates including average lives of depository accounts, future interest rate levels, the cost of servicing various depository products, and other significant estimates. Management used quoted market prices to determine the fair value of investment securities, FHLB advances and other borrowings which were purchased and assumed.
On February 6, 2009, Westamerica Bank (“Bank”) acquired the banking operations of County Bank (“County”) from the Federal Deposit Insurance Corporation (“FDIC”). The Bank acquired approximately $1.62 billion assets and assumed approximately $1.58 billion liabilities. The Bank and the FDIC entered loss sharing agreements regarding future losses incurred on acquired loans and foreclosed loan collateral. Under the terms of the loss sharing agreements, the FDIC absorbs 80 percent of losses and is entitled to 80 percent of loss recoveries on the first $269 million of losses, and absorbs 95 percent of losses and is entitled to 95 percent of loss recoveries on losses exceeding $269 million. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The County acquisition was accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations. The Company recorded a “bargain purchase” gain totaling $48.8 million resulting from the acquisition, which is a component of noninterest income on the statement of income. The amount of the gain is equal to the amount by which the estimated fair value of assets purchased exceeded the estimated fair value of liabilities assumed. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding the acquisition.

 

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Net Income
Following is a summary of the components of net income for the periods indicated:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
Net interest income (FTE)
  $ 56,669     $ 61,593     $ 170,271     $ 183,270  
Provision for loan losses
    (2,800 )     (2,800 )     (8,400 )     (7,200 )
Noninterest income
    15,071       15,961       46,311       96,315  
Noninterest expense
    (31,508 )     (35,151 )     (95,635 )     (107,940 )
 
                       
Income before taxes (FTE)
    37,432       39,603       112,547       164,445  
Income tax provision (FTE)
    (13,723 )     (14,346 )     (41,701 )     (63,180 )
 
                       
Net income
  $ 23,709     $ 25,257     $ 70,846     $ 101,265  
 
                       
Net income applicable to common equity
  $ 23,709     $ 23,791     $ 70,846     $ 98,114  
 
                       
 
                               
Average diluted common shares
    29,385       29,429       29,515       29,313  
Diluted earnings per common share
  $ 0.81     $ 0.81     $ 2.40     $ 3.35  
 
                               
Average total assets
  $ 4,835,357     $ 5,072,866     $ 4,793,266     $ 5,113,359  
Net income applicable to common equity to average total assets (annualized)
    1.95 %     1.86 %     1.98 %     2.57 %
Net income applicable to common equity to average common stockholders’ equity (annualized)
    17.90 %     19.68 %     18.32 %     28.38 %
Net income applicable to common equity for the third quarter of 2010 was $82 thousand or 0.3% less than the same quarter of 2009, the net result of lower net interest income (FTE) and lower noninterest income, partially offset by decreases in noninterest expense and income tax provision (FTE) and the elimination of preferred stock dividends and discount accretion. A $4.9 million or 8.0% decrease in net interest income (FTE) was mostly attributed to lower average balances of interest earning assets and lower yields on investments, partially offset by higher yields on loans, 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 originated loan portfolio. Noninterest income decreased $890 thousand mainly due to lower service charges on deposit accounts. Noninterest expense decreased $3.6 million mostly due to lower personnel, occupancy and equipment expenses and other operating expenses. The provision for income taxes (FTE) decreased $623 thousand. Net income applicable to common equity in the third quarter of 2009 reflected $1.5 million in preferred stock dividends and discount accretion.
Comparing the first nine months of 2010 to the first nine months of 2009, net income applicable to common equity decreased $27.3 million, primarily due to a $48.8 million gain on acquisition in the first nine months of 2009, lower net interest income (FTE) and higher provision for loan losses, partially offset by decreases in noninterest expense and income tax provision (FTE) and the elimination of preferred stock dividends and discount accretion. The lower net interest income (FTE) was primarily caused by a lower volume of average interest earning assets, lower yields on investments and higher rates paid on borrowings, partially offset by higher yields on loans, lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. The provision for loan losses increased $1.2 million, reflecting Management’s evaluation of losses inherent in the originated loan portfolio. Noninterest income decreased $50.0 million largely due to a $48.8 million acquisition gain in the first nine months of 2009. Noninterest expense declined $12.3 million primarily due to decreases in personnel, occupancy and equipment expenses subsequent to integrating the acquired County Bank and lower FDIC insurance assessments. The income tax provision (FTE) decreased $21.5 million. Net income applicable to common equity in the first nine months of 2009 reflected $3.2 million in preferred stock dividends and discount accretion. The preferred stock was redeemed during the fourth quarter of 2009.

 

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Net Interest Income
Following is a summary of the components of net interest income for the periods indicated:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Interest and fee income
  $ 55,203     $ 61,196     $ 166,284     $ 183,453  
Interest expense
    (3,096 )     (4,500 )     (9,775 )     (15,078 )
FTE adjustment
    4,562       4,897       13,762       14,895  
 
                       
Net interest income (FTE)
  $ 56,669     $ 61,593     $ 170,271     $ 183,270  
 
                       
 
                               
Average earning assets
  $ 4,068,561     $ 4,470,851     $ 4,071,089     $ 4,541,596  
Net interest margin (FTE) (annualized)
    5.54 %     5.48 %     5.59 %     5.39 %
Net interest income (FTE) decreased during the third quarter of 2010 by $4.9 million or 8.0% from the same period in 2009 to $56.7 million, mainly due to lower average balances of interest earning assets (down $402 million), lower yields on investments (down 0.38%) and higher rates on short-term borrowings (up 0.08%), partially offset by higher yields on loans (up 0.1%), lower average balances of interest-bearing liabilities (down $264 million) and lower rates paid on interest-bearing deposits (down 0.15%).
Comparing the first nine months of 2010 with the first nine months of 2009, net interest income (FTE) decreased $13.0 million or 7.1%, primarily due to a lower volume of average earning assets (down $471 million) and lower yields on investments (down 0.17%) and higher rates on short-term borrowings (up 0.37%), partially offset by higher yields on loans (up 0.16%), lower average balances of interest-bearing liabilities (down $377 million) and lower rates paid on interest-bearing deposits (down 0.21%).
At September 30, 2010, purchased FDIC covered loans represented 24 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.
Interest and Fee Income
Interest and fee income (FTE) for the third quarter of 2010 decreased $6.3 million or 9.6% from the same period in 2009. The decrease was caused by lower average balances of earning assets (down $402 million) and lower yields on investments (down 0.38%), partially offset by higher yields on loans (up 0.1%). The total average balances of loans declined $326 million or 10.0% due to decreases in the average balances of taxable commercial loans (down $105 million), commercial real estate loans (down $79 million), residential real estate loans (down $69 million), indirect auto loans (down $46 million) and tax-exempt commercial loans (down $19 million). The average investment portfolio decreased $76 million largely due to declines in average balances of collateralized mortgage obligations (down $81 million), residential mortgage backed securities (down $55 million), and municipal securities (down $33 million), partially offset by increases in the average balances of U.S. Government sponsored entities (up $48 million) and corporate and other securities (up $36 million). The average yield on the Company’s earning assets decreased from 5.88% in the third quarter of 2009 to 5.84% in the corresponding period of 2010. The composite yield on loans rose 0.1% to 6.13% due to increases in yields on taxable commercial loans (up 0.5%) and construction loans (up 2.03%), partially offset by decreases in yields on residential real estate loans (down 0.5%) and indirect auto loans (down 0.19%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The investment portfolio yield decreased 0.38% to 5.09%, mainly due to declines in yields on U.S. government sponsored entity obligations (down 2.78%), municipal securities (down 0.11%) and U.S. Treasury (down 2.25%), partially offset by a 0.12% increase in yields on corporate and other securities.

 

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Comparing the first nine months of 2010 with the first nine months of 2009, interest and fee income (FTE) was down $18.3 million or 9.2%. The decrease resulted from a lower volume of average earning assets and lower yields on investment securities, partially offset by higher yields on loans. Average interest earning assets decreased $471 million or 10.4% in the first nine months of 2010 compared with the same period of 2009 due to a $309 million decrease in average loans and a $162 million decrease in average investments. The decrease in the average balance of the loan portfolio was attributable to decreases in average balances of indirect auto loans (down $101 million), taxable commercial loans (down $98 million), residential real estate loans (down $78 million), commercial real estate loans (down $57 million), tax-exempt commercial loans (down $19 million) and construction loans (down $12 million), partially offset by a $56 million increase in the average balance of direct consumer loans. The average investment portfolio decreased $162 million largely due to declines in average balances of collateralized mortgage obligations (down $89 million), municipal securities (down $46 million), U.S. government sponsored entity obligations (down $11 million) and residential mortgage backed securities (down $41 million), partially offset by a $19 million increase in the average balances of corporate and other securities. The average yield on earning assets for the first nine months of 2010 was 5.91% compared with 5.83% in the first nine months of 2009. The loan portfolio yield for the first nine months of 2010 compared with the corresponding 2009 period was higher by 0.16%, due to increases in yields on construction loans (up 1.73%), taxable commercial loans (up 0.56%), commercial real estate loans (up 0.07%) and a 0.57% increase in yields on indirect auto loans, partially offset by a 0.34% decrease in yields on residential real estate loans. The investment portfolio yield decreased by 0.17%, reflecting lower yields on U.S. government sponsored entity obligations (down 2.81%), municipal securities (down 0.05%), U.S. Treasury (down 2.32%) and corporate and other securities (down 0.38%).
Interest Expense
Interest expense in the third quarter of 2010 decreased $1.4 million or 31.2% compared with the same period in 2009. The decrease was attributable to lower average balances of interest-bearing liabilities and lower rates paid on the interest-bearing deposits, partially offset by higher rates paid on short-term borrowings. The average rate paid on interest-bearing liabilities decreased from 0.58% in the third quarter of 2009 to 0.43% in the same quarter of 2010. Rates on interest-bearing deposits decreased 0.15% to 0.32% primarily due to decreases in rates paid on time deposits $100 thousand or more (down 0.28%), time deposits less than $100 thousand (down 0.26%) and preferred money market savings (down 0.15%). Rates on short-term borrowings increased 0.08%. Average interest-bearing liabilities declined $264 million. Interest-bearing deposits decreased $196 million mostly due to decreases in the average balance of time deposits less than $100 thousand (down $150 million), time deposits $100 thousand or more (down $32 million) and money market checking accounts (down $30 million). Average FHLB advances and sweep accounts declined $50 million and $21 million, respectively.
Comparing the first nine months of 2010 with the first nine months of 2009, interest expense declined $5.3 million or 35.2%, due to lower average balances of interest-bearing liabilities and lower rates on interest-bearing deposits, offset by higher rates paid on borrowings. Average interest-bearing liabilities during the first nine months of 2010 fell by $377 million over the same period of 2009 mainly due to decreases in average balances of federal funds purchased (down $144 million), FHLB advances (down $54 million), time deposits less than $100 thousand (down $105 million), time deposits $100 thousand or more (down $73 million) and money market checking accounts (down $37 million), partially offset by increases in the average balance of repurchases facilities (up $12 million), regular savings (up $14 million) and money market savings (up $12 million). Rates paid on interest-bearing liabilities averaged 0.46% during the first nine months of 2010 compared with 0.63% for the first nine months of 2009. The average rate paid on interest-bearing deposits declined 0.21% to 0.35% in the first nine months of 2010 compared with the same period of 2009 mainly due to lower rates on time deposits less than $100 thousand (down 0.52%), time deposits $100 thousand or more (down 0.28%), preferred money market savings (down 0.14%) and regular savings (down 0.10%).
Net Interest Margin (FTE)
The following summarizes the components of the Company’s net interest margin for the periods indicated:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
 
                               
Yield on earning assets (FTE)
    5.84 %     5.88 %     5.91 %     5.83 %
Rate paid on interest-bearing liabilities
    0.43 %     0.58 %     0.46 %     0.63 %
 
                       
Net interest spread (FTE)
    5.41 %     5.30 %     5.45 %     5.20 %
Impact of all other net noninterest bearing funds
    0.13 %     0.18 %     0.14 %     0.19 %
 
                       
Net interest margin (FTE)
    5.54 %     5.48 %     5.59 %     5.39 %
 
                       
During the third quarter of 2010, the net interest margin (FTE) increased 0.06% compared with the same period in 2009. Lower rates paid on interest-bearing liabilities were partially offset by lower yields on earning assets and resulted in a 0.11% increase in net interest spread. The increase in the net interest spread was partially reduced by the lower net interest margin contribution of noninterest-bearing demand deposits. The net interest margin (FTE) in the first nine months of 2010 rose by 0.20% compared with the corresponding period of 2009. Earning asset yields increased 0.08% while the cost of interest-bearing liabilities declined by 0.17%, resulting in a 0.25% increase in the net interest spread. The 0.05% decrease in margin contribution from noninterest bearing funding sources resulted in the net interest margin of 5.59%.

 

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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 from average earning assets and the resulting annualized yields, and the amount of interest expense paid on average interest-bearing liabilities and the resulting annualized rate paid. 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).
                         
    For the three months ended  
    September 30, 2010  
            Interest     Rates  
    Average     Income/     Earned/  
    Balance     Expense     Paid  
    (In thousands)  
Assets:
                       
Money market assets and funds sold
  $ 5,130     $ 1       0.08 %
Investment securities:
                       
Available for sale
                       
Taxable
    302,176       2,158       2.86 %
Tax-exempt (1)
    187,405       3,059       6.53 %
Held to maturity
                       
Taxable
    166,634       1,798       4.32 %
Tax-exempt (1)
    469,715       7,367       6.27 %
Loans:
                       
Commercial:
                       
Taxable
    537,116       8,534       6.30 %
Tax-exempt (1)
    164,838       2,733       6.58 %
Commercial real estate
    1,234,475       20,696       6.65 %
Real estate construction
    71,043       998       5.57 %
Real estate residential
    355,103       3,744       4.22 %
Consumer
    574,926       8,677       5.99 %
 
                   
Total loans (1)
    2,937,501       45,382       6.13 %
 
                   
Total earning assets (1)
    4,068,561     $ 59,765       5.84 %
Other assets
    766,796                  
 
                     
 
                       
Total assets
  $ 4,835,357                  
 
                     
 
                       
Liabilities and shareholders’ equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,417,638     $        
Savings and interest-bearing transaction
    1,672,458       892       0.21 %
Time less than $100,000
    341,882       357       0.41 %
Time $100,000 or more
    549,459       798       0.58 %
 
                   
Total interest-bearing deposits
    2,563,799       2,047       0.32 %
Short-term borrowed funds
    203,841       511       0.98 %
Federal Home Loan Bank advances
    36,298       113       1.22 %
Debt financing and notes payable
    26,417       425       6.43 %
 
                   
Total interest-bearing liabilities
    2,830,355     $ 3,096       0.43 %
Other liabilities
    61,734                  
Shareholders’ equity
    525,630                  
 
                     
 
                       
Total liabilities and shareholders’ equity
  $ 4,835,357                  
 
                     
 
                       
Net interest spread (1) (2)
                    5.41 %
 
                       
Net interest income and interest margin (1) (3)
          $ 56,669       5.54 %
 
                   
     
(1)  
Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2)  
Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities.
 
(3)  
Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.

 

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Table of Contents

                         
    For the three months ended  
    September 30, 2009  
            Interest     Rates  
    Average     Income/     Earned/  
    Balance     Expense     Paid  
    (In thousands)  
Assets:
                       
Money market assets and funds sold
  $ 602     $ 1       0.66 %
Investment securities:
                       
Available for sale
                       
Taxable
    237,965       2,352       3.95 %
Tax-exempt (1)
    167,339       2,846       6.80 %
Held to maturity
                       
Taxable
    275,553       3,025       4.39 %
Tax-exempt (1)
    526,004       8,290       6.30 %
Loans:
                       
Commercial:
                       
Taxable
    642,366       9,391       5.80 %
Tax-exempt (1)
    184,054       3,032       6.54 %
Commercial real estate
    1,313,545       21,967       6.63 %
Real estate construction
    74,707       667       3.54 %
Real estate residential
    424,189       5,004       4.72 %
Consumer
    624,527       9,518       6.05 %
 
                   
Total loans (1)
    3,263,388       49,579       6.03 %
 
                   
Total earning assets (1)
    4,470,851     $ 66,093       5.88 %
Other assets
    602,015                  
 
                     
 
                       
Total assets
  $ 5,072,866                  
 
                     
 
                       
Liabilities and shareholders’ equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,371,124     $        
Savings and interest-bearing transaction
    1,687,028       1,178       0.28 %
Time less than $100,000
    491,555       829       0.67 %
Time $100,000 or more
    581,681       1,266       0.86 %
 
                   
Total interest-bearing deposits
    2,760,264       3,273       0.47 %
Short-term borrowed funds
    221,100       509       0.90 %
Federal Home Loan Bank advances
    86,166       295       1.34 %
Debt financing and notes payable
    26,551       423       6.36 %
 
                   
Total interest-bearing liabilities
    3,094,081     $ 4,500       0.58 %
Other liabilities
    58,330                  
Shareholders’ equity
    549,331                  
 
                     
 
                       
Total liabilities and shareholders’ equity
  $ 5,072,866                  
 
                     
 
                       
Net interest spread (1) (2)
                    5.30 %
 
                       
Net interest income and interest margin (1) (3)
          $ 61,593       5.48 %
 
                   
     
(1)  
Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2)  
Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities.
 
(3)  
Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.

 

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Table of Contents

                         
    For the nine months ended  
    September 30, 2010  
            Interest     Rates  
    Average     Income/     Earned/  
    Balance     Expense     Paid  
    (In thousands)  
Assets:
                       
Money market assets and funds sold
  $ 2,174     $ 2       0.12 %
Investment securities:
                       
Available for sale
                       
Taxable
    272,141       6,465       3.17 %
Tax-exempt (1)
    171,122       8,466       6.60 %
Held to maturity
                       
Taxable
    186,336       6,119       4.38 %
Tax-exempt (1)
    486,651       22,906       6.28 %
Loans:
                       
Commercial:
                       
Taxable
    546,269       25,660       6.28 %
Tax-exempt (1)
    169,314       8,344       6.59 %
Commercial real estate
    1,232,406       61,229       6.64 %
Real estate construction
    65,352       2,767       5.66 %
Real estate residential
    363,337       12,104       4.44 %
Consumer
    575,987       25,984       6.03 %
 
                   
Total loans (1)
    2,952,665       136,088       6.16 %
 
                   
Total earning assets (1)
    4,071,089     $ 180,046       5.91 %
Other assets
    722,177                  
 
                     
 
                       
Total assets
  $ 4,793,266                  
 
                     
 
                       
Liabilities and shareholders’ equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,394,033     $        
Savings and interest-bearing transaction
    1,640,421       2,725       0.22 %
Time less than $100,000
    360,929       1,425       0.53 %
Time $100,000 or more
    548,848       2,566       0.63 %
 
                   
Total interest-bearing deposits
    2,550,198       6,716       0.35 %
Short-term borrowed funds
    209,846       1,538       0.97 %
Federal Home Loan Bank advances
    23,767       249       1.38 %
Debt financing and notes payable
    26,450       1,272       6.41 %
 
                   
Total interest-bearing liabilities
    2,810,261     $ 9,775       0.46 %
Other liabilities
    71,851                  
Shareholders’ equity
    517,121                  
 
                     
 
                       
Total liabilities and shareholders’ equity
  $ 4,793,266                  
 
                     
 
                       
Net interest spread (1) (2)
                    5.45 %
 
                       
Net interest income and interest margin (1) (3)
          $ 170,271       5.59 %
 
                   
     
(1)  
Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2)  
Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities.
 
(3)  
Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.

 

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    For the nine months ended  
    September 30, 2009  
            Interest     Rates  
    Average     Income/     Earned/  
    Balance     Expense     Paid  
    (In thousands)  
Assets:
                       
Money market assets and funds sold
  $ 942     $ 3       0.43 %
Investment securities:
                       
Available for sale
                       
Taxable
    242,125       6,775       3.73 %
Tax-exempt (1)
    170,519       8,591       6.72 %
Held to maturity
                       
Taxable
    332,416       11,384       4.57 %
Tax-exempt (1)
    534,132       25,219       6.30 %
Loans:
                       
Commercial:
                       
Taxable
    644,107       27,565       5.72 %
Tax-exempt (1)
    188,479       9,351       6.63 %
Commercial real estate
    1,289,190       63,354       6.57 %
Real estate construction
    77,677       2,286       3.93 %
Real estate residential
    440,975       15,802       4.78 %
Consumer
    621,034       28,018       6.03 %
 
                   
Total loans (1)
    3,261,462       146,376       6.00 %
 
                   
Total earning assets (1)
    4,541,596     $ 198,348       5.83 %
Other assets
    571,763                  
 
                     
 
                       
Total assets
  $ 5,113,359                  
 
                     
 
                       
Liabilities and shareholders’ equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,330,495     $        
Savings and interest-bearing transaction
    1,647,624       3,635       0.29 %
Time less than $100,000
    466,175       3,662       1.05 %
Time $100,000 or more
    622,168       4,228       0.91 %
 
                   
Total interest-bearing deposits
    2,735,967       11,525       0.56 %
Short-term borrowed funds
    347,072       1,572       0.60 %
Federal Home Loan Bank advances
    77,290       714       1.22 %
Debt financing and notes payable
    26,584       1,267       6.35 %
 
                   
Total interest-bearing liabilities
    3,186,913     $ 15,078       0.63 %
Other liabilities
    68,316                  
Shareholders’ equity
    527,635                  
 
                     
 
                       
Total liabilities and shareholders’ equity
  $ 5,113,359                  
 
                     
 
                       
Net interest spread (1) (2)
                    5.20 %
 
                       
Net interest income and interest margin (1) (3)
          $ 183,270       5.39 %
 
                   
     
(1)  
Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2)  
Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities.
 
(3)  
Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.

 

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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.
                         
    Three months ended September 30, 2010  
    compared with  
    Three months ended September 30, 2009  
    Volume     Rate     Total  
    (In thousands)  
Interest and fee income:
                       
Money market assets and funds sold
  $ 2     $ (2 )   $ 0  
Investment securities:
                       
Available for sale
                       
Taxable
    553       (747 )     (194 )
Tax-exempt (1)
    332       (119 )     213  
Held to maturity
                       
Taxable
    (1,176 )     (51 )     (1,227 )
Tax-exempt (1)
    (883 )     (40 )     (923 )
Loans:
                       
Commercial:
                       
Taxable
    (1,626 )     769       (857 )
Tax-exempt (1)
    (318 )     19       (299 )
Commercial real estate
    (1,325 )     54       (1,271 )
Real estate construction
    (34 )     365       331  
Real estate residential
    (763 )     (497 )     (1,260 )
Consumer
    (749 )     (92 )     (841 )
 
                 
Total loans (1)
    (4,815 )     618       (4,197 )
 
                 
Total decrease in interest and fee income (1)
    (5,987 )     (341 )     (6,328 )
 
                 
 
                       
Interest expense:
                       
Deposits:
                       
Savings and interest-bearing transaction
    (10 )     (276 )     (286 )
Time less than $100,000
    (210 )     (262 )     (472 )
Time $100,000 or more
    (67 )     (401 )     (468 )
 
                 
Total interest-bearing deposits
    (287 )     (939 )     (1,226 )
 
                 
 
                       
Short-term borrowed funds
    (41 )     43       2  
Federal Home Loan Bank advances
    (157 )     (26 )     (183 )
Debt financing and notes payable
    (2 )     5       3  
 
                 
 
                       
Total decrease in interest expense
    (487 )     (917 )     (1,404 )
 
                 
(Decrease) increase in Net Interest Income (1)
  $ (5,500 )   $ 576     $ (4,924 )
 
                 
     
(1)  
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

 

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Table of Contents

                         
    Nine months ended September 30, 2010  
    compared with  
    Nine months ended September 30, 2009  
    Volume     Rate     Total  
    (In thousands)  
Interest and fee income:
                       
Money market assets and funds sold
  $ 2     $ (3 )   $ (1 )
Investment securities:
                       
Available for sale
                       
Taxable
    780       (1,090 )     (310 )
Tax-exempt (1)
    30       (155 )     (125 )
Held to maturity
                       
Taxable
    (4,815 )     (450 )     (5,265 )
Tax-exempt (1)
    (2,235 )     (78 )     (2,313 )
Loans:
                       
Commercial:
                       
Taxable
    (4,436 )     2,531       (1,905 )
Tax-exempt (1)
    (945 )     (62 )     (1,007 )
Commercial real estate
    (2,815 )     690       (2,125 )
Real estate construction
    (405 )     886       481  
Real estate residential
    (2,642 )     (1,056 )     (3,698 )
Consumer
    (2,032 )     (2 )     (2,034 )
 
                 
Total loans (1)
    (13,275 )     2,987       (10,288 )
 
                 
Total (decrease) increase in interest and fee income (1)
    (19,513 )     1,211       (18,302 )
 
                 
 
                       
Interest expense:
                       
Deposits:
                       
Savings and interest-bearing transaction
    (16 )     (894 )     (910 )
Time less than $100,000
    (698 )     (1,539 )     (2,237 )
Time $100,000 or more
    (456 )     (1,206 )     (1,662 )
 
                 
Total interest-bearing deposits
    (1,170 )     (3,639 )     (4,809 )
 
                 
 
                       
Short-term borrowed funds
    (771 )     737       (34 )
Federal Home Loan Bank advances
    (550 )     85       (465 )
Debt financing and notes payable
    (6 )     11       5  
 
                 
 
                       
Total decrease in interest expense
    (2,497 )     (2,806 )     (5,303 )
 
                 
(Decrease) increase in Net Interest Income (1)
  $ (17,016 )   $ 4,017     $ (12,999 )
 
                 
     
(1)  
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
Provision for Loan Losses
The Company manages credit costs by consistently enforcing conservative underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The Company recorded the purchased County loans at estimated fair value upon acquisition as of February 6, 2009. Further, County loans purchased from the FDIC are “covered” by loss-sharing agreements the Company entered with the FDIC. Due to the loss-sharing agreements and fair value recognition, the Company did not record a provision for loan losses during the first nine months of 2010 related to such loans covered by the FDIC loss-sharing agreements. The Company recorded purchased Sonoma loans at estimated fair value upon acquisition as of August 20, 2010. Due to the fair value recognition, the Company did not record a provision for loan losses for the period August 20, 2010 through September 30, 2010 related to purchased Sonoma loans. In Management’s judgment, the acquisition date loan fair value discounts remaining at September 30, 2010 represent appropriate loss estimates for default risk inherent in the purchased loans. The Company provided $2.8 million for loan losses related to originated loans in the third quarter of 2010, unchanged from the third quarter of 2009. For the first nine months of 2010 and 2009, $8.4 million and $7.2 million were provided in each respective period. The provision reflects Management’s assessment of credit risk in the originated loan portfolio for each of the periods presented. For further information regarding credit risk, the FDIC loss-sharing agreements, net credit losses and the allowance for loan losses, see the “Loan Portfolio Credit Risk” and “Allowance for Credit Losses” sections of this report.

 

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Noninterest Income
The following table summarizes the components of noninterest income for the periods indicated.
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
 
                               
Service charges on deposit accounts
  $ 8,162     $ 9,479     $ 25,533     $ 27,017  
Merchant credit card fees
    2,234       2,163       6,631       6,818  
Debit card fees
    1,259       1,267       3,678       3,656  
ATM fees and interchange
    1,004       965       2,917       2,792  
Other service fees
    789       558       2,024       1,629  
Trust fees
    429       319       1,257       1,056  
Check sale income
    221       223       676       661  
Financial services commissions
    211       129       583       420  
Gain on acquisition
    178             178       48,844  
Other noninterest income
    584       858       2,834       3,422  
 
                       
 
                               
Total
  $ 15,071     $ 15,961     $ 46,311     $ 96,315  
 
                       
Noninterest income for the third quarter of 2010 declined by $890 thousand or 5.6% from the same period in 2009. Service charges on deposits decreased $1.3 million or 13.9% due to the July 1, 2010 adoption of new regulations over overdraft fees. These new regulations were effective August 15, 2010 for accounts existing as of June 30, 2010; as such, the majority of the impact from the new regulations began August 15, 2010. Overdraft fees were $680 thousand lower in the third quarter 2010 compared to the third quarter 2009. There are other factors which contributed to the decline: Lower returned item charges (down $475 thousand) and deficit fees charged on analyzed accounts (down $270 thousand). The decline in service charges on deposits was partially offset by a $115 thousand increase in fees charged on checking accounts. Other noninterest income fell $274 thousand or 31.9% mostly due to miscellaneous fees and a gain on sale of foreclosed assets in the third quarter of 2009. Other service charges increased $231 thousand or 41.4% mainly due to a new service of cashing checks for non customers which began in July 2010. Trust fees also increased $110 thousand or 34.5%. The third quarter of 2010 included a $178 thousand gain on the acquisition of Sonoma net assets.
In the first nine months of 2010, noninterest income decreased $50.0 million compared with the first nine months of 2009 primarily due to the $48.8 million gain on acquisition in the first nine months of 2009. The third quarter of 2010 included a $178 thousand gain on acquisition. Service charges on deposits decreased $1.5 million or 5.5% due to declines in returned item charges (down $2 million) and deficit fees charged on analyzed accounts (down $600 thousand), partially offset by increases in overdraft fees (up $803 thousand) and fees charged on checking accounts (up $323 thousand). Merchant credit card fees declined $187 thousand or 2.7% mainly due to lower transaction volumes. Other noninterest income fell $588 thousand or 17.2% mostly due to miscellaneous fees and a gain on sale of foreclosed assets in the first nine months of 2009. The decline in other noninterest income was partially offset by a $490 thousand gain on sale of other assets. Other categories of fees partially offset the decline in noninterest income. Other service fees increased $395 thousand or 24.2% mainly due to increases in check cashing fees, internet banking fees and foreign currency commissions. Trust fees increased $201 thousand or 19.0%. Financial service commissions increased $163 thousand or 38.8%. ATM fees and interchange income was higher by $125 thousand or 4.5%.

 

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Noninterest Expense
The following table summarizes the components of noninterest expense for the periods indicated.
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
 
                               
Salaries and related benefits
  $ 15,481     $ 16,402     $ 46,849     $ 50,221  
Occupancy
    3,962       4,008       11,561       14,831  
Outsourced data processing services
    2,187       2,258       6,629       6,740  
Amortization of identifiable intangibles
    1,573       1,671       4,711       5,051  
FDIC insurance assessments
    1,268       1,442       3,848       4,820  
Equipment
    1,067       1,789       3,234       4,618  
Professional fees
    950       913       2,480       2,580  
Courier service
    826       989       2,636       2,881  
Loan expense
    354       491       1,248       1,689  
Telephone
    346       622       1,141       1,487  
Postage
    322       576       1,251       1,570  
Stationery and supplies
    276       450       956       1,191  
Operational losses
    237       242       615       658  
OREO expense
    188       (116 )     653       403  
In-house meetings
    176       367       534       863  
Customer checks
    170       163       503       526  
Advertising/public relations
    153       229       629       809  
Correspondent service charges
    35       302       272       892  
Other noninterest expense
    1,937       2,353       5,885       6,110  
 
                       
 
                               
Total
  $ 31,508     $ 35,151     $ 95,635     $ 107,940  
 
                       
 
                               
Average full time equivalent staff
    1,004       1,086       1,018       1,135  
 
                               
Noninterest expense to revenues (FTE)
    43.92 %     45.32 %     44.16 %     38.61 %
Noninterest expense decreased $3.6 million or 10.4% in the third quarter 2010 compared with the same period in 2009 mainly due to declines in lower personnel, occupancy and equipment and other operating expenses. Salaries and related benefits decreased $921 thousand or 5.6% primarily due to a reduction in regular salaries and payroll taxes, partially offset by annual merit increases, higher group health insurance costs, profit sharing and stock based compensation. FDIC insurance assessments declined $174 thousand or 12.1%. Equipment expense declined $722 thousand or 40.4% primarily due to branch and administrative office consolidations. Other categories which decreased from the third quarter 2009 were courier service expense (down $163 thousand or 16.5%), loan expense (down $137 thousand or 27.9%), postage (down $254 thousand or 44.1%), stationery and supplies expense (down $174 thousand or 38.7%) and in-house meeting expense (down $191 thousand or 52.0%). Telephone expense declined $276 thousand or 44.4% mainly due to branch and administrative office consolidations. A $267 thousand or 88.4% decrease in correspondent service charges was mostly attributable to higher interest received on reserve balances held with the Federal Reserve Bank. Other noninterest expense decreased $416 thousand or 17.7% mainly because the third quarter 2009 included settlements and lower cash surrender values for insurance policies. Offsetting the decreases was OREO expense which increased from -$116 thousand in the third quarter 2009 to $188 thousand in the third quarter 2010 mainly due to writedown of foreclosed assets. Additionally, the third quarter 2009 expense was reduced by refunds from cancellation of property insurance and property taxes related to purchased covered foreclosed assets. Gains on sale of foreclosed assets partially offset the increase in OREO expense.
In the first nine months of 2010, noninterest expense decreased $12.3 million or 11.4% compared with the corresponding period of 2009 primarily due to lower personnel, occupancy and equipment expenses resulting from the systems integrations and branch consolidations following the County acquisition and lower FDIC insurance assessments. Salaries and related benefits decreased $3.4 million or 6.7% primarily due to a reduction in salaries and executive bonus and lower payroll taxes and workers compensation expense, partially offset by higher group health insurance costs, annual merit increases and higher profit sharing and stock based compensation. Occupancy and equipment expenses decreased $3.3 million or 22.0% and $1.4 million or 30.0%, respectively, mainly due to branch and administrative office consolidations. Amortization of intangibles declined $340 thousand or 6.7% as intangible

 

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assets are amortized on a declining balance method. FDIC insurance assessments decreased $972 thousand or 20.2% mostly due to a non-routine assessment charged in the first nine months of 2009. Loan expense decreased $441 thousand or 26.1% generally because the first nine months of 2009 included servicing fees on factoring receivables acquired from County. Such factoring receivables were fully liquidated in April 2009. Offsetting the decline were higher credit report expenses. Telephone expense declined $346 thousand or 23.3% mainly due to branch and administrative office consolidations. In-house meeting expense decreased $329 thousand or 38.1% generally because the first nine months of 2009 included employee travel and lodging expenses related to the County integration. A $620 thousand or 69.5% decrease in correspondent service charges was mostly attributable to higher interest received on reserve balances held with the Federal Reserve Bank. Other categories which decreased from the first nine months of 2009 were outsourced data processing expense (down $111 thousand or 1.6%), professional fees (down $100 thousand or 3.9%), courier service expense (down $245 thousand or 8.5%), postage (down $319 thousand or 20.3%), stationery and supplies expense (down $235 thousand or 19.7%) and advertising/public relations expense (down $180 thousand or 22.2%). Other noninterest expense decreased $225 thousand or 3.7% mainly because the third quarter 2009 included lower cash surrender values for insurance policies, partially offset by a $400 thousand reduction in provision for loan commitments in the first nine months of 2009. Offsetting the decreases in noninterest expense was OREO expense which increased from $403 thousand in the first nine months of 2009 to $653 thousand in the first nine months of 2010 mainly due to additional writedowns of foreclosed assets and lower levels of expenses for which FDIC indemnification reimbursements are received. Additionally, the first nine months of 2009 expense was reduced by refunds from cancellation of property insurance and property taxes related to purchased covered foreclosed assets. Gains on sale of foreclosed assets partially offset the increase in OREO expense.
Provision for Income Tax
During the third quarter of 2010, the Company recorded income tax provision (FTE) of $13.7 million compared with $14.3 million for the third quarter of 2009. The current quarter provision represents an effective tax rate (FTE) of 36.7%, compared with 36.2% for the third quarter of 2009.
The income tax provision (FTE) was $41.7 million for the first nine months of 2010 compared with $63.2 million for the corresponding period of 2009. The first nine months of 2010 effective tax rate (FTE) was 37.1% compared to 38.4% for the same period of 2009. The lower effective tax rate (FTE) for the first nine months of 2010 is primarily attributable to tax-exempt interest income representing a higher proportion of pre-tax income and increased tax credits.
Loan Portfolio Credit Risk
The risk that loan customers do not repay loans granted by the Bank is the most significant risk to the Company. The Company closely monitors the markets in which it conducts its lending operations and follows a strategy to control exposure to loans with high credit risk. The Bank’s organization structure separates the functions of business development and loan underwriting; Management believes this segregation of duties avoids inherent conflicts of combining business development and loan approval. In measuring and managing credit risk, the Company adheres to the following practices.
   
The Bank maintains a Loan Review Department which reports directly to the Board of Directors. The Loan Review Department performs independent evaluations of loans and assigns credit risk grades to evaluated loans using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated management attention to maximize collection.
 
   
The Bank maintains two loan administration offices whose sole responsibility is to manage and collect classified loans.
Classified loans with higher levels of credit risk are further designated as “nonaccrual loans.” Management places loans on nonaccrual status when full collection of contractual interest and principal payments is in doubt. Interest previously accrued on loans placed on nonaccrual status is charged against interest income, net of estimated FDIC reimbursements under loss- sharing agreements. The Company does not accrue interest income on nonaccrual loans. Interest payments received on nonaccrual loans are applied to reduce the carrying amount of the loan unless the carrying amount is well secured by loan collateral or covered by FDIC loss-sharing agreements. “Nonperforming assets” include nonaccrual loans, loans 90 or more days past due and still accruing, and repossessed loan collateral.
On February 6, 2009, the Bank purchased loans and repossessed loan collateral of the former County Bank from the FDIC. This purchase transaction included loss-sharing agreements with the FDIC wherein the FDIC and the Bank share losses on the purchased assets. The loss-sharing agreements significantly reduce the credit risk of these purchased assets. In evaluating credit risk, Management separates the Bank’s total loan portfolio between those loans qualifying under the FDIC loss-sharing agreements (referred to as “purchased covered loans”) and loans not qualifying under the FDIC loss-sharing agreements (referred to as “purchased non-covered loans” and “originated loans”). At September 30, 2010, purchased covered loans totaled $719 million, or 24 percent of total loans, originated loans totaled $2.1 billion, or 69 percent and purchased non-covered loans totaled $212 million, or 7 percent of total loans.

 

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Purchased Covered Loans and Repossessed Loan Collateral (Purchased Covered Assets)
Purchased covered loans and repossessed loan collateral qualify under loss-sharing agreements with the FDIC. Under the terms of the loss-sharing agreements, the FDIC absorbs 80 percent of losses and shares in 80 percent of loss recoveries on the first $269 million in losses on purchased covered assets (“First Tier”), and absorbs 95 percent of losses and shares in 95 percent of loss recoveries if losses on purchased covered assets exceed $269 million (“Second Tier”). The term of the loss-sharing agreement on residential real estate assets is ten years, while the term for loss-sharing on non-residential real estate assets is five years with respect to losses and eight years with respect to loss recoveries.
The purchased covered assets are primarily located in the California Central Valley, including Merced County. This geographic area currently has some of the weakest economic conditions within California and has experienced significant declines in real estate values. Management expects higher loss rates on purchased covered assets than on originated assets.
The Bank recorded purchased covered assets at estimated fair value on the February 6, 2009 acquisition date. The credit risk discount ascribed to the $1.2 billion acquired loan and repossessed loan collateral portfolio was $161 million representing estimated losses inherent in the assets at the acquisition date. The Bank also recorded a related receivable from the FDIC in the amount of $129 million representing estimated FDIC reimbursements under the loss-sharing agreements.
The maximum risk to future earnings if First Tier losses exceed Management’s estimated $161 million in recognized losses under the FDIC loss-sharing agreements follows (dollars in thousands):
         
First Tier Loss Coverage
  $ 269,000  
Less: Recognized credit risk discount
    161,203  
 
     
Exposure to under-estimated risk within First Tier
    107,797  
Bank loss-sharing percentage
  20 percent  
 
     
First Tier risk to Bank, pre-tax
  $ 21,559  
 
     
First Tier risk to Bank, after-tax
  $ 12,494  
 
     
Management has judged the likelihood of experiencing losses of a magnitude to trigger Second Tier FDIC reimbursement as remote. The Bank’s maximum after-tax exposure to Second Tier losses is $18 million as of September 30, 2010, which would be realized only if all covered assets at September 30, 2010 generated no future cash flows.
Purchased covered assets have declined since the acquisition date, and losses have been offset against the estimated credit risk discount. Purchased covered assets totaled $744 million at September 30, 2010, net of a credit risk discount of $66 million, compared to $879 million at December 31, 2009, net of a credit risk discount of $93 million. Purchased covered assets are evaluated for risk classification without regard to FDIC indemnification such that Management can identify purchased covered assets with potential payment problems and devote appropriate credit administration practices to maximize collections. Purchased covered assets classified without regard to FDIC indemnification totaled $200 million and $205 million at September 30, 2010 and December 31, 2009, respectively. FDIC indemnification limits the Company’s loss exposure to covered classified assets.
In Management’s judgment, the credit risk discount recognized for the purchased assets remains adequate as an estimate of credit risk inherent in purchased covered assets as of September 30, 2010. In the event credit risk deteriorates beyond that estimated by Management, losses in excess of the credit risk discount would be recognized as an expense, net of related FDIC loss indemnification.

 

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Classified Purchased Covered Loans and Repossessed Loan Collateral (Classified Purchased Covered Assets)
The following is a summary of classified purchased covered loans and repossessed loan collateral without regard to FDIC indemnification:
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Classified Purchased Covered Assets
               
Classified loans
  $ 175,169     $ 181,516  
Repossessed loan collateral
    25,251       23,297  
 
           
Total
  $ 200,420     $ 204,813  
 
           
Nonperforming Purchased Covered Loans and Repossessed Loan Collateral (Nonperforming Purchased Covered Assets)
The following is a summary of nonperforming purchased covered assets:
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Nonperforming Purchased Covered Assets
               
Nonperforming, nonaccrual loans
  $ 39,783     $ 66,965  
Performing, nonaccrual loans
    12,388       18,183  
 
           
Total nonaccrual loans
    52,171       85,148  
Loans 90 days past due and still accruing
    4,078       210  
 
           
Total nonperforming loans
    56,249       85,358  
Repossessed loan collateral
    25,251       23,297  
 
           
Total
  $ 81,500     $ 108,655  
 
           
 
               
As a percentage of total purchased covered assets
    10.96 %     12.37 %
The amount of gross interest income that would have been recorded if all nonaccrual purchased covered loans had been current in accordance with their original terms while outstanding was $1.0 million and $3.5 million in the third quarter and first nine months of 2010, respectively, compared with $1.4 million and $2.5 million for the third quarter and first nine months of 2009, respectively. The amount of interest income that was recognized on nonaccrual purchased covered loans from all cash payments made during the three and nine months ended September 30, 2010, totaled $1.6 million and $4.6 million, respectively, compared with $396 thousand for the third quarter and first nine months of 2009, all of which was received in the third quarter of 2009. These cash payments represent annualized yields of 9.95% and 8.67%, respectively, for the third quarter and the first nine months of 2010 compared with 1.97% and 1.07%, respectively, for the third quarter and first nine months of 2009.
There were no cash payments received which were applied against the book balance of nonaccrual purchased covered loans outstanding at September 30, 2010 in the third quarter and first nine months of 2010. Similarly, there were no cash payments received in the third quarter and first nine months of 2009 which were applied against the book balances of nonaccrual loans outstanding at September 30, 2009.

 

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Nonperforming Purchased Non-covered Loans and Repossessed Loan Collateral (Nonperforming Purchased Non-covered Assets)
The following is a summary of nonperforming purchased non-covered assets:
         
    At September 30,  
    2010  
    (In thousands)  
Nonperforming Purchased Non-covered Assets
       
Nonperforming, nonaccrual loans
  $ 18,304  
Performing, nonaccrual loans
    19,554  
 
     
Total nonaccrual loans
    37,858  
Loans 90 days past due and still accruing
     
 
     
Total nonperforming loans
    37,858  
Repossessed loan collateral
    2,916  
 
     
Total
  $ 40,774  
 
     
 
       
As a percentage of total purchased non-covered assets
    18.94 %
The amount of gross interest income that would have been recorded if all nonaccrual purchased non-covered loans had been current in accordance with their original terms while outstanding was $318 thousand in the period from August 20, 2010 through September 30, 2010. There were no cash payments received on nonaccual purchased non-covered loans that were recognized as interest income during the period from August 20, 2010 through September 30, 2010.
The amount of cash payments received, which were applied against the book balance of nonaccrual purchased non-covered loans outstanding at September 30, 2010 in the period from August 20, 2010 through September 30, 2010, totaled $60 thousand.
Classified Originated Loans and Repossessed Loan Collateral (Classified Originated Assets)
The following is a summary of classified originated loans and repossessed loan collateral:
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Classified Originated Assets
               
Classified loans
  $ 47,754     $ 57,241  
Repossessed loan collateral
    19,285       12,642  
 
           
Total
  $ 67,039     $ 69,883  
 
           
Allowance for loan losses / classified orignated loans
    79.84 %     72.00 %
Nonperforming Originated Loans and Repossessed Loan Collateral (Nonperforming Originated Assets)
The following is a summary of nonperforming originated assets on the dates indicated:
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Nonperforming Originated Assets
               
Nonperforming, nonaccrual loans
  $ 19,194     $ 19,837  
Performing, nonaccrual loans
    233       25  
 
           
Total nonaccrual loans
    19,427       19,862  
Loans 90 days past due and still accruing
    686       800  
 
           
Total nonperforming loans
    20,113       20,662  
Repossessed loan collateral
    19,285       12,642  
 
           
Total
  $ 39,398     $ 33,304  
 
           
 
               
As a percentage of total originated assets
    1.88 %     1.50 %

 

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The amount of gross interest income that would have been recorded if all nonaccrual originated loans had been current in accordance with their original terms while outstanding was $279 thousand and $892 thousand in the third quarter and first nine months of 2010, respectively, compared with $443 thousand and $913 thousand for the third quarter and first nine months of 2009, respectively. The amount of interest income that was recognized on nonaccrual originated loans from all cash payments made during the three and nine months ended September 30, 2010, totaled $151 thousand and $583 thousand, respectively, compared with $140 thousand and $263 thousand, respectively, for the third quarter and first nine months of 2009, respectively. These cash payments represent annualized yields of 3.27% and 3.93%, respectively, for the third quarter and the first nine months of 2010 compared with 1.76% and 1.60%, respectively, for the third quarter and first nine months of 2009.
There were no cash payments received, which were applied against the book balance of originated nonaccrual loans outstanding at September 30, 2010 in the third quarter and the first nine months of 2010. Total cash payments received during the third quarter and the first nine months of 2009 which were applied against the book balance of nonaccrual loans outstanding at September 30, 2009 totaled approximately $-0- thousand and $1 thousand, respectively.
Fifty one loans comprised the $19.4 million in nonaccrual originated loans as of September 30, 2010. During the first nine months of 2010 three commercial real estate relationships ($5.1 million) were transferred to OREO while one commercial relationship ($2.2 million) and one commercial real estate relationship ($1.3 million) became current and came off nonaccrual status. Conversely, one construction relationship ($4.1 million), three commercial real estate relationships ($3.9 million) and one commercial relationship ($1.6 million) were placed on nonaccrual status.
The Company had no restructured loans as of September 30, 2010 and December 31, 2009.
Delinquent originated commercial, construction and commercial real estate loans on accrual status were as follows:
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Originated Commercial Loans:
               
30-89 days delinquent:
               
Dollar amount
  $ 16,210     $ 10,677  
Percentage of total originated commercial loans
    3.30 %     2.14 %
90 or more days delinquent:
               
Dollar amount
  $     $  
Percentage of total originated commercial loans
    %     %
Originated Construction Loans:
               
30-89 days delinquent:
               
Dollar amount
  $ 149     $ 149  
Percentage of total orignated construction loans
    0.51 %     0.46 %
90 or more days delinquent:
               
Dollar amount
  $     $  
Percentage of total orignated construction loans
    %     %
Originated Commercial Real Estate Loans:
               
30-89 days delinquent:
               
Dollar amount
  $ 13,524     $ 12,158  
Percentage of total originated commercial real estate loans
    1.76 %     1.52 %
90 or more days delinquent:
               
Dollar amount
  $     $  
Percentage of total originated commercial real estate loans
    %     %
The Company’s residential real estate loan underwriting standards for first mortgages limit the loan amount to no more than 80 percent of the appraised value of the property serving as collateral for the loan at the time of origination, and require verification of income of the borrower(s). The Company had no “sub-prime” originated loans as of September 30, 2010 and December 31, 2009. At September 30, 2010, $2.1 million originated residential real estate loans were on nonaccrual status.

 

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Delinquent originated residential real estate, indirect automobile and other consumer loans on accrual status were as follows:
                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
Originated Residential Real Estate Loans:
               
30-89 days delinquent:
               
Dollar amount
  $ 520     $ 3,064  
Percentage of total originated residential real estate loans
    0.16 %     0.83 %
90 or more days delinquent:
               
Dollar amount
  $     $  
Percentage of total originated residential real estate loans
    %     %
Originated Indirect Automobile Loans:
               
30-89 days delinquent:
               
Dollar amount
  $ 5,576     $ 6,506  
Percentage of total originated indirect automobile loans
    1.36 %     1.49 %
90 or more days delinquent:
               
Dollar amount
  $ 627     $ 723  
Percentage of total originated indirect automobile loans
    0.15 %     0.17 %
Other Originated Consumer Loans:
               
30-89 days delinquent:
               
Dollar amount
  $ 557     $ 762  
Percentage of total other originated consumer loans
    0.95 %     1.25 %
90 or more days delinquent:
               
Dollar amount
  $ 59     $ 77  
Percentage of total other originated consumer loans
    0.10 %     0.13 %
Management believes the overall credit quality of the originated loan portfolio is reasonably stable; however, nonperforming originated assets could fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, and collateral values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent originated loans will not occur in the future.
Allowance for Credit Losses
The Company’s allowance for credit losses represents Management’s estimate of credit losses inherent in the loan portfolio. In evaluating credit risk for loans, Management measures loss potential of the carrying value of loans. As described above, payments on nonaccrual loans may be applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Further, the carrying value of purchased loans includes fair value discounts assigned at the time of purchase under the provisions of FASB ASC 805, Business Combinations, and FASB ASC 310-30, Loans or Debt Securities with Deteriorated Credit Quality. The allowance for credit losses represents Management’s estimate of credit losses in excess of these principal reductions.
Management determined the credit default fair value discounts assigned to purchased loans remained adequate as an estimate of credit losses inherent in purchased loans as of September 30, 2010.

 

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The following table summarizes the credit loss provision, net credit losses and allowance for credit losses for the periods indicated:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Total originated loans outstanding at period end
  $ 2,077,915     $ 2,267,130     $ 2,077,915     $ 2,267,130  
Average originated loans outstanding during the period
    2,096,937       2,289,331       2,132,687       2,360,540  
Analysis of the allowance
                               
Balance, beginning of period
    42,409       45,815       43,736       47,563  
Provision for loan losses
    2,800       2,800       8,400       7,200  
Provision for unfunded commitments
                      (400 )
Loans charged off:
                               
Commercial and commercial real estate
    (2,010 )     (1,514 )     (4,141 )     (3,288 )
Real estate construction
                (1,115 )     (311 )
Real estate residential
    (759 )     (114 )     (1,568 )     (242 )
Consumer
    (2,447 )     (2,242 )     (7,102 )     (6,894 )
 
                       
Total originated loans chargeoffs
    (5,216 )     (3,870 )     (13,926 )     (10,735 )
Recoveries of previously charged off originated loans:
                               
Commercial and commercial real estate
    170       110       750       258  
Real estate construction
          6             14  
Real estate residential
                       
Consumer
    659       515       1,862       1,476  
 
                       
Total recoveries
    829       631       2,612       1,748  
 
                       
Net loan losses
    (4,387 )     (3,239 )     (11,314 )     (8,987 )
 
                       
Balance, end of period
  $ 40,822     $ 45,376     $ 40,822     $ 45,376  
 
                       
 
                               
Net loan losses to average originated loans
    0.83 %     0.56 %     0.71 %     0.51 %
Components:
                               
Allowance for loan losses
  $ 38,129     $ 42,683                  
Reserve for unfunded credit commitments
    2,693       2,693                  
 
                           
Allowance for credit losses
  $ 40,822     $ 45,376                  
 
                           
Allowance for loan losses /originated loans outstanding
    1.83 %     1.88 %                
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, FDIC loss-sharing coverage relative to purchased covered loan carrying amounts, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is specifically allocated to impaired loans whose full collectibility is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. A second allocation is based in part on quantitative analyses of historical credit loss experience, in which criticized and classified credit balances identified through an independent internal credit review process are analyzed using a linear regression model to determine standard loss rates. The results of this analysis are applied to current criticized and classified loan balances to allocate the allowance 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. Given currently weak economic conditions, Management is applying further analysis to consumer loans. Current levels of indirect automobile loan losses are compared to initial allowance allocations and, based on Management judgment, additional allocations are applied, if needed, to estimated losses. For residential real estate loans, Management is comparing ultimate loss rates on foreclosed residential real estate properties and applying such loss rates to nonaccrual residential real estate loans. Based on this analysis, Management exercises judgment in allocating additional allowance if deemed appropriate to estimated losses on residential real estate loans. Last, allocations are made to non-criticized and non-classified commercial loans based on historical loss rates and other statistical data.

 

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The remainder of the allowance is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. It addresses additional qualitative factors consistent with Management’s analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company’s general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in loan charge-off history (external factors). The external factors evaluated by the Company include: economic and business conditions, external competitive issues, and other factors. Also included in the unallocated allowance is the risk of losses attributable to general attributes of the Company’s loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company include: loan review system, adequacy of lending Management and staff, loan policies and procedures, problem loan trends, concentrations of credit, and other factors. By their nature, these risks are not readily allocable to any specific loan category in a statistically meaningful manner and are difficult to quantify with a specific number. Management assigns a range of estimated risk to the qualitative risk factors described above based on Management’s judgment as to the level of risk, and assigns a quantitative risk factor from the range of loss estimates to determine the appropriate level of the unallocated portion of the allowance. Management considers the $40.8 million allowance for credit losses to be adequate as a reserve against originated credit losses as of September 30, 2010.
The following table presents the allocation of the allowance for credit losses:
                                 
    At September 30,     At December 31,  
    2010     2009  
    (In thousands)  
            Originated Loans             Originated Loans  
    Allocation of the     as Percent of Total     Allocation of the     as Percent of Total  
    Allowance Balance     Originated Loans     Allowance Balance     Originated Loans  
Commercial
  $ 18,934       61 %   $ 19,108       59 %
Real estate construction
    2,697       1 %     2,968       1 %
Real estate residential
    608       15 %     1,529       17 %
Consumer
    7,155       23 %     8,424       23 %
Unallocated portion
    11,428             11,707        
 
                       
Total
  $ 40,822       100 %   $ 43,736       100 %
 
                       
The allocation to loan portfolio segments changed from December 31, 2009 to September 30, 2010. The decrease in allocation for originated commercial loans was substantially attributable to a decrease in criticized originated commercial loans outstanding and lower commitments, partially offset by the balance of new impaired loans. Additionally, management’s evaluation of loss rates against originated commercial loan performance metrics. The decrease in allocation to originated real estate construction loans reflects a decline in originated criticized construction loans outstanding, partially offset by an increase in impaired loans. The decrease in the allocation to originated real estate residential loans is due to a lower outstanding balance of delinquent originated real estate residential loans and Management’s judgment regarding the appropriate allocation based on recent foreclosure losses and levels of originated nonaccrual mortgages. The lower allocation for originated consumer loans was primarily due to a lower outstanding balance of originated delinquent consumer loans and Management’s judgment regarding the appropriate allocation based on current levels of originated auto loan charge-offs. The unallocated portion of the allowance for credit losses decreased $279 thousand from December 31, 2009 to September 30, 2010. The unallocated allowance is established to provide for probable losses that have been incurred, but not reflected in the allocated allowance. At September 30, 2010 and December 31, 2009, Management’s evaluations of the unallocated portion of the allowance for credit losses attributed significant risk levels to developing economic and business conditions ($2.4 million and $2.3 million, respectively), external competitive issues ($0.8 million and $0.8 million, respectively), internal credit administration considerations ($2.0 million and $2.0 million, respectively), and delinquency and problem loan trends ($3.4 million and $3.5 million, respectively). The change in the amounts allocated to the above qualitative risk factors was based upon Management’s judgment, review of trends in its originated loan portfolio, extent of migration of previously non-classified originated loans to classified status, levels of the allowance allocated to portfolio segments, and current economic conditions in its marketplace. Based on Management’s analysis and judgment, the amount of the unallocated portion of the allowance for credit losses was $11.4 million at September 30, 2010, compared to $11.7 million at December 31, 2009.
Asset/Liability and Market Risk Management
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The fundamental objective of the Company’s management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk.

 

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Interest Rate Risk
Interest rate risk is a 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 timing and amount of cash flows of various assets or liabilities may shorten or lengthen as interest rates change. In addition, interest rates may have an impact on loan demand, demand for various deposit products, credit losses, and other sources of earnings such as account analysis fees on commercial deposit accounts and correspondent bank service charges.
In adjusting the Company’s asset/liability position, Management attempts to manage interest rate risk while enhancing the net interest margin and net interest income. At times, depending on expected increases or decreases in general interest rates, the relationship between long and short term interest rates, market conditions and competitive factors, Management may adjust the Company’s interest rate risk position in order to manage its net interest margin and net interest income. The Company’s results of operations and net portfolio values remain subject to changes in interest rates and to fluctuations in the difference between long and short term interest rates.
The Company’s asset and liability position ranged from “neutral” to slightly “asset sensitive” at September 30, 2010, depending on the interest rate assumptions applied to the simulation model employed by Management to measure interest rate risk. A “neutral” position results in similar amounts of change in interest income and interest expense resulting from application of assumed interest rate changes. A slightly “asset sensitive” position results in a slightly larger increase in interest income than in interest expense resulting from application of assumed interest rate changes. Management’s simulation modeling is currently biased toward rising interest rates. Management continues to monitor the interest rate environment as well as economic conditions and other factors it deems relevant in managing the Company’s exposure to interest rate risk.
Management assesses interest rate risk by comparing the Company’s most likely earnings plan with various earnings models using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, using the current composition of the Company’s balance sheet and assuming no change in the federal funds rate and no change in the 10 year Constant Maturity Treasury Bond yield during the same period, earnings are not estimated to change by a meaningful amount compared to the Company’s most likely net income plan for the twelve months ending September 30, 2011. Using the current composition of the Company’s balance sheet and assuming an increase of 100 basis points (“bp”) in the federal funds rate and an increase of 60 bp in the 10 year Constant Maturity Treasury Bond yield during the same period, earnings are not estimated to change by a meaningful amount compared to the Company’s most likely net income plan for the twelve months ending September 30, 2011. The Sonoma Valley Bank acquired assets and assumed liabilities have not significantly altered the Company’s asset/liability position. 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. In the current operating environment, Management’s objective is to maintain a “neutral” to slightly “asset sensitive” interest rate risk position. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company’s Board of Directors.
Market Risk — Equity Markets
Equity price risk can affect the Company. As an example, any preferred or common stock holdings, as permitted by banking regulations, can fluctuate in value. Management regularly assesses the extent and duration of any declines in market value, the causes of such declines, the likelihood of a recovery in market value, and its intent to hold securities until a recovery in value occurs. Declines in value of preferred or common stock holdings that are deemed “other than temporary” could result in loss recognition in the Company’s income statement.
Fluctuations in the Company’s common stock price can impact the Company’s financial results in several ways. First, the Company has regularly repurchased and retired its common stock; the market price paid to retire the Company’s common stock can affect the level of the Company’s shareholders’ equity, cash flows and shares outstanding for purposes of computing earnings per share. Second, the Company’s common stock price impacts the number of dilutive equivalent shares used to compute diluted earnings per share. Third, fluctuations in the Company’s common stock price can motivate holders of options to purchase Company common stock through the exercise of such options thereby increasing the number of shares outstanding. Finally, the amount of compensation expense associated with share based compensation fluctuates with changes in and the volatility of the Company’s common stock price.

 

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Market Risk — Other
Market values of loan collateral can directly impact the level of loan charge-offs and the provision for loan losses. Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company’s business activities.
Liquidity and Funding
The Company generates significant liquidity from its operating activities. The Company’s profitability during the first nine months of 2010 and 2009 contributed substantial operating cash flows of $90.0 million and $140.4 million, respectively. In the first nine months of 2010, the Company paid $31.6 million in common shareholder dividends and used $22.2 million to repurchase and retire common stock. In the first nine months of 2009, the Company paid $30.8 million in common shareholder dividends and used $1.5 million to repurchase and retire common stock.
The Company’s routine sources of liquidity include investment securities, consumer and other loans, and other borrowed funds. During the first nine months of 2010, investment securities provided $230.5 million in liquidity from paydowns and maturities and $279.8 million was used to purchase securities. Loans provided $227.1 million in liquidity from scheduled payments, paydowns and maturities, net of loan fundings. First nine months of 2010, operating and investing liquidity provided funds to meet a net reduction in deposits totaling $237.8 million and a $114.8 million reduction in short-term borrowed funds.
During the first nine months of 2009, investment securities provided $248.2 million in liquidity from paydowns and maturities, and loans provided $324.3 million in liquidity from scheduled payments, paydowns and maturities, net of loan fundings. Operating cash flows in the first nine months of 2009 increased $30 million from the settlement of County Bank securities sales which were unsettled trades on the acquisition date. The Company also raised $83.7 million from the issuance of preferred stock to the United States Treasury in the first quarter of 2009 and redeemed $42 million of the same preferred stock in the third quarter of 2009. During the first nine months of 2009, a portion of the liquidity provided by operating activities, investment securities and loans provided funds to meet a net reduction in deposits totaling $298.8 million and a reduction in short-term borrowed funds, primarily federal funds purchased which declined from $335 million at December 31, 2008 to $-0- at September 30, 2009.
The Company projects $68.5 million in additional liquidity from investment security paydowns and maturities during the three months ending December 31, 2010. At September 30, 2010, $291.8 million in residential collateralized mortgage obligations (“CMOs”) and residential mortgage backed securities (“MBSs”) were held in the Company’s investment portfolios. None of the CMOs or MBSs are backed by sub-prime mortgages. Substantially all of the Non Agency residential CMOs are rated AAA based on their subordination structures without reliance on monoline insurance. Other than nominal amounts of FHLMC and FNMA MBSs purchased for Community Reinvestment Act investment purposes and those securities purchased as part of the County acquisition, the Company has not purchased a residential CMO or residential MBS since November 2005. The residential CMOs and MBSs provided $37.2 million in liquidity from paydowns during the three months ended September 30, 2010. At September 30, 2010, indirect automobile loans totaled $409.1 million, which were experiencing stable monthly principal payments of approximately $16.4 million during the third quarter of 2010.
The Company held $1.2 billion in total investment securities at September 30, 2010. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At September 30, 2010, such collateral requirements totaled approximately $1.0 billion. At September 30, 2010, $569.5 million of the Company’s investment securities were classified as “available-for-sale”, and as such, could provide additional liquidity if sold, subject to the Company’s ability to meet continuing collateral requirements.
In addition, at September 30, 2010, the Company had customary lines for overnight borrowings from other financial institutions in excess of $700 million, under which $-0- million was outstanding. Additionally, the Company has access to borrowing from the Federal Reserve. The Company’s short-term debt rating from Fitch Ratings is F1. The Company’s long-term debt rating from Fitch Ratings is A with a stable outlook. Management expects the Company could access additional long-term debt financing if desired. In Management’s judgment, the Company’s liquidity position is strong and asset liquidations or additional long-term debt are considered unnecessary to meet the ongoing liquidity needs of the Company.

 

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The Company anticipates maintaining its cash levels in the remainder of 2010. It is anticipated that loan demand from credit-worthy borrowers will be weak throughout 2010 and early 2011, although such demand will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of deposit balances is subject to heightened competition, the success of the Company’s sales efforts, delivery of superior customer service and market conditions. Changes in interest rates, most notably rising interest rates, could impact deposit volumes in the future. Depending on economic conditions, interest rate levels, and a variety of other conditions, deposit growth may be used to fund loans, to reduce borrowings or purchase investment securities. However, due to concerns such as uncertainty in the general economic environment, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board’s discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.
Westamerica Bancorporation (“Parent Company”) is a separate entity and apart from Westamerica Bank (“Bank”) and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends declared for its shareholders, and interest and principal on outstanding debt. Substantially all of the Parent Company’s revenues are obtained from subsidiary dividends and service fees. Payment of dividends to the Parent Company by the Bank is limited under California law. The amount that can be paid in any calendar year, without prior approval from the state regulatory agency, cannot exceed the net profits (as defined) for the preceding three calendar years less distributions in that period. The Company believes that such restriction will not have an impact on the Parent Company’s ability to meet its ongoing cash obligations.
Capital Resources
The Company has historically generated high levels of earnings, which provides a means of raising capital. The Company’s net income as a percentage of average common equity (“return on common equity” or “ROE”) was 18.3% in the first nine months of 2010, 25.8% in 2009 and 14.8% in 2008. The Company also raises capital as employees exercise stock options, which are awarded as a part of the Company’s executive compensation programs to reinforce shareholders’ interests in the Management of the Company. Capital raised through the exercise of stock options totaled $12.7 million in the first nine months of 2010, $9.6 million in 2009 and $22.8 million in 2008.
The Company paid dividends totaling $31.6 million in the first nine months of 2010, $41.1 million in 2009 and $40.2 million in 2008, which represent dividends per share of $1.08, $1.41 and $1.39, respectively. The Company’s earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends gives the Company resources to finance growth and maintain appropriate levels of shareholders’ equity. In the absence of profitable growth opportunities, the Company has repurchased and retired its common stock as another means to return capital to shareholders. The Company repurchased and retired 404 thousand shares of common stock valued at $22.2 million in the first nine months of 2010, 42 thousand shares valued at $2.0 million in 2009 and 719 thousand shares valued at $35.9 million in 2008. Share repurchases were restricted to amounts conducted in coordination with employee benefit programs under the terms of the February 13, 2009 issuance of preferred stock to the Treasury; such restrictions were removed with full redemption of the preferred stock in November 2009.
The Company’s primary capital resource is shareholders’ equity, which increased $35.7 million or 7.1% at September 30, 2010 since December 31, 2009, primarily due to $70.8 million in profits earned during the first nine months of 2010 and $12.7 million in issuance of stock in connection with exercises of employee stock options, offset by $31.6 million in dividends paid and $22.2 million in stock repurchases.
Capital to Risk-Adjusted Assets
The following summarizes the ratios of capital to risk-adjusted assets for the Company on the dates indicated:
                                         
                            Minimum     Well-capitalized  
    At September 30,     At September 30,     At December 31,     Regulatory     by Regulatory  
    2010     2009     2009     Requirement     Definition  
 
                                       
Tier I Capital
    13.59 %     13.75 %     13.20 %     4.00 %     6.00 %
Total Capital
    14.88 %     15.07 %     14.50 %     8.00 %     10.00 %
Leverage ratio
    8.52 %     8.00 %     7.60 %     4.00 %     5.00 %
The risk-based capital ratios decreased at September 30, 2010 compared with September 30, 2009, due to redemption of the preferred stock and an increase in risk-weighted assets, partially offset by increased retained earnings. The risk-based capital ratios increased at September 30, 2010, compared with December 31, 2009, due to increased retained earnings, partially offset by an increase in risk-weighted assets. FDIC-covered assets are included in the 20% risk-weight category until the loss-sharing agreements terminate; the residential loss-sharing agreement expires February 6, 2019 and the non-residential loss-sharing agreement expires (as to losses) February 6, 2014.

 

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The following summarizes the ratios of capital to risk-adjusted assets for the Bank on the dates indicated:
                                         
                            Minimum     Well-capitalized  
    At September 30,     At September 30,     At December 31,     Regulatory     by Regulatory  
    2010     2009     2009     Requirement     Definition  
 
 
Tier I Capital
    13.49 %     12.93 %     13.39 %     4.00 %     6.00 %
Total Capital
    14.95 %     14.43 %     14.88 %     8.00 %     10.00 %
Leverage ratio
    8.42 %     7.49 %     7.67 %     4.00 %     5.00 %
The risk-based capital ratios increased at September 30, 2010, compared with September 30, 2009 and December 31, 2009, due to an increase in retained earnings, partially offset by an increase in risk-weighted assets.
The Company and the Bank intend to maintain regulatory capital in excess of the highest regulatory standard, referred to as “well capitalized.” The Company and the Bank routinely project capital levels by analyzing forecasted earnings, credit quality, securities valuations, shareholder dividends, asset volumes, share repurchase activity, stock option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain regulatory capital levels exceeding the “well capitalized” standard and pay quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be undertaken 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 September 30, 2010. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and are effective in ensuring that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to Management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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; generally such actions are of a routine nature and arise in the normal course of business of the Bank. The Bank is not a party to any pending or threatened legal action that, if determined adversely to the Bank, is likely in Management’s opinion to have a material adverse effect on the Bank’s financial condition or results of operations.

 

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Item 1A. Risk Factors
The 2009 Form 10-K includes detailed disclosure about the risks faced by the Company’s business. Such risks have not materially changed since December 31, 2009, except as described below:
Regulatory Risks
On July 21, 2010, President Obama signed into law the Dodd Frank Wall Street Reform and Consumer Protection Act (“the Act”). The Act will institute far-reaching reforms, including the creation of an independent Bureau of Consumer Financial Protection inside the Federal Reserve Board and new federal government power to wind down large, failing financial institutions.
The Act permanently raises the current standard maximum deposit insurance amount to $250,000. The standard maximum insurance amount of $100,000 had been temporarily raised to $250,000 until December 31, 2013. The FDIC issued a proposed rule to implement Section 343 of the Act to provide temporary unlimited coverage for noninterest-bearing transaction accounts from December 31, 2010 through December 31, 2012. These increases in deposit insurance limits could increase the Company’s future insurance assessments.
The Act requires the Federal Reserve to issue regulations to ensure that fees charged to merchants for debit card transactions are reasonable and proportional to the cost of processing those transactions. While institutions with less than $10 billion in assets are exempt from these regulations, the effect of competition on the fee levels has the potential for making that illusory. In all likelihood, all banks will see a loss of revenue from changes that will occur with interchange fees.
The Act will establish a 10-member Financial Stability Oversight Council. The duties of this council include monitoring financial regulatory proposals and accounting issues, facilitating coordination among the regulatory agencies, requiring Federal Reserve supervision of systemically significant non-bank financial companies, recommending new standards and reviewing accounting principles.
The Act places new limits, known as the Volcker Rule, on the amount of money a bank can invest in hedge funds and private equity funds. It also discourages financial institutions from excessive risk-taking by imposing tough new capital and leverage requirements. Further, it allows the Government Accountability Office to conduct a one-time audit of the Federal Reserve’s emergency lending activities during the financial crisis and establishes the Federal Insurance Office to supervise insurance products, other than health insurance, at the federal level.
Other provisions will establish closer oversight of the over-the-counter derivatives market, including mandatory clearing and trading and real-time reporting of derivatives trades. Among other measures, the bill will institute numerous investor protections, including stricter oversight of credit rating agencies, securitization reforms and expanded Securities and Exchange Commission enforcement powers. The legislation establishes mortgage protections requiring lenders to ensure that their borrowers can repay their loans by establishing minimum federal standards for all home loans.
No assurance can be given as to the ultimate effect that the Act or any of its provisions may have on the Company, the financial services industry or the nation’s economy.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Previously reported on Form 8-K.
(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 the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended September 30, 2010.
                                 
                    (c)     (d)  
                    Total Number     Maximum Number  
                    of Shares     of Shares that May  
    (a)     (b)     Purchased as Part of     Yet Be Purchased  
    Total Number of     Average Price     Publicly Announced     Under the Plans  
Period   Shares Purchased     Paid per Share     Plans or Programs*     or Programs  
    (In thousands, except per share data)  
July 1 through July 31
    61     $ 52.33       61       1,618  
 
                               
August 1 through August 31
    33       51.48       33       1,998  
 
                               
September 1 through September 30
    3       54.24       3       1,995  
 
                               
Total
    97     $ 52.08       97       1,995  
     
*  
Includes 2 thousand, 1 thousand and 3 thousand shares purchased in July, August and September, 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 period from July 1 through August 25, 2010 pursuant to a program approved by the Board of Directors on August 27, 2009 authorizing the purchase of up to 2 million shares of the Company’s common stock from time to time prior to September 1, 2010. Shares were repurchased during the period from August 26, 2010 through September 30, 2010 pursuant to a replacement program approved by the Board of Directors on August 26, 2010 authorizing the purchase of up to 2 million shares of the Company’s common stock from time to time prior to September 1, 2011.
Item 3. Defaults upon Senior Securities
None
Item 4. Reserved
Item 5. Other Information
None

 

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Item 6. Exhibits
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

 

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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)
     
/s/ JOHN “ROBERT” THORSON
 
John “Robert” Thorson
   
Senior Vice President and Chief Financial Officer
   
(Chief Financial and Accounting Officer)
   
Date: October 29, 2010

 

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EXHIBIT INDEX
Exhibit 31.1: Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2: Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1: Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2: Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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