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WESTAMERICA BANCORPORATION - Quarter Report: 2012 September (Form 10-Q)

f10q_110212.htm
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, 2012
 
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  94-2156203
 (State or Other Jurisdiction of  (I.R.S. Employer
 Incorporation or Organization)  Identification No.)
 
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (707) 863-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes 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 þ                                                         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
Smaller reporting company o
 
(Do not check if a smaller reporting company)
 
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 26, 2012
 
Common Stock,
No Par Value
 
27,386,000
 
 
 

 
TABLE OF CONTENTS

 
Page
PART I - FINANCIAL INFORMATION  
Item 1
 
 
Item 2
Item 3
Item 4
   
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
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
 
 
 
- 2 -

 
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 and potential future difficulties in the global, national and California economies and the effects of 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; (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; (12) the effect of natural disasters, including earthquakes, fire, flood, drought, and other disasters, on the uninsured value of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values, and (13) changes in the securities markets. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2011, 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.
 
 
- 3 -

 
PART I - FINANCIAL INFORMATION
Item 1     Financial Statements
 
WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
   
At September 30,
   
At December 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Assets:
         
Cash and due from banks
  $ 367,964     $ 530,045  
Investment securities available for sale
    738,462       638,753  
Investment securities held to maturity, with fair values of: $1,190,345 at September 30, 2012, $947,493 at December 31, 2011
    1,158,731       922,803  
Purchased covered loans
    418,364       535,278  
Purchased non-covered loans
    82,676       125,921  
Originated loans
    1,708,414       1,862,607  
Allowance for loan losses
    (30,966 )     (32,597 )
Total loans
    2,178,488       2,491,209  
Non-covered other real estate owned
    14,842       26,500  
Covered other real estate owned
    12,437       19,135  
Premises and equipment, net
    38,386       36,548  
Identifiable intangibles, net
    24,553       28,629  
Goodwill
    121,673       121,673  
Other assets
    204,091       226,866  
Total Assets
  $ 4,859,627     $ 5,042,161  
                 
Liabilities:
               
Deposits:
               
Noninterest bearing deposits
  $ 1,594,379     $ 1,562,254  
Interest bearing deposits:
               
Transaction
    745,852       734,988  
Savings
    1,133,788       1,148,178  
Time
    656,538       804,501  
Total deposits
    4,130,557       4,249,921  
Short-term borrowed funds
    55,630       115,689  
Federal Home Loan Bank advances
    25,855       26,023  
Term repurchase agreement
    10,000       10,000  
Debt financing
    15,000       15,000  
Other liabilities
    63,744       66,887  
Total Liabilities
    4,300,786       4,483,520  
                 
Shareholders' Equity:
               
Common stock (no par value), authorized - 150,000 shares
               
Issued and outstanding: 27,396 at September 30, 2012, 28,150 at December 31, 2011
    371,211       377,775  
Deferred compensation
    3,101       3,060  
Accumulated other comprehensive income
    14,454       11,369  
Retained earnings
    170,075       166,437  
Total Shareholders' Equity
    558,841       558,641  
Total Liabilities and Shareholders' Equity
  $ 4,859,627     $ 5,042,161  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
- 4 -

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands, except per share data)
Interest and Fee Income:
                       
Loans
  $ 31,779     $ 39,899     $ 101,180     $ 122,534  
Investment securities available for sale
    4,918       5,526       14,644       16,428  
Investment securities held to maturity
    8,575       6,551       24,646       18,597  
Total Interest and Fee Income
    45,272       51,976       140,470       157,559  
Interest Expense:
                               
Deposits
    1,020       1,677       3,314       5,344  
Short-term borrowed funds
    15       62       63       170  
Term repurchase agreement
    25       14       74       14  
Federal Home Loan Bank advances
    122       118       361       398  
Debt financing and notes payable
    200       200       601       601  
Total Interest Expense
    1,382       2,071       4,413       6,527  
Net Interest Income
    43,890       49,905       136,057       151,032  
Provision for Loan Losses
    2,800       2,800       8,400       8,400  
Net Interest Income After Provision For Loan Losses
    41,090       47,105       127,657       142,632  
Noninterest Income:
                               
Service charges on deposit accounts
    6,847       7,430       20,969       22,529  
Merchant processing services
    2,411       2,358       7,333       6,921  
Debit card fees
    1,308       1,269       3,816       3,752  
ATM processing fees
    782       980       2,648       2,911  
Trust fees
    540       432       1,526       1,407  
Financial services commissions
    175       111       540       257  
Loss on sale of securities
    -       -       (1,287 )     -  
Other
    2,563       2,625       7,283       7,462  
Total Noninterest Income
    14,626       15,205       42,828       45,239  
Noninterest Expense:
                               
Salaries and related benefits
    14,294       14,401       43,833       44,388  
Occupancy
    3,901       4,010       11,609       12,085  
Outsourced data processing services
    2,156       2,165       6,318       6,743  
Amortization of identifiable intangibles
    1,336       1,477       4,076       4,505  
Furniture and equipment
    991       943       2,883       2,915  
Professional fees
    786       1,185       2,455       3,489  
Courier service
    772       840       2,350       2,535  
Other real estate owned
    679       700       912       1,835  
Settlements
    -       -       -       2,100  
Other
    4,354       5,662       14,215       16,419  
Total Noninterest Expense
    29,269       31,383       88,651       97,014  
Income Before Income Taxes
    26,447       30,927       81,834       90,857  
Provision for income taxes
    6,425       8,495       19,843       24,774  
Net Income
  $ 20,022     $ 22,432     $ 61,991     $ 66,083  
                                 
Average Common Shares Outstanding
    27,513       28,433       27,769       28,739  
Diluted Average Common Shares Outstanding
    27,565       28,498       27,821       28,879  
Per Common Share Data:
                               
Basic earnings
  $ 0.73     $ 0.79     $ 2.23     $ 2.30  
Diluted earnings
    0.73       0.79       2.23       2.29  
Dividends paid
    0.37       0.36       1.11       1.08  
 
See accompanying notes to unaudited consolidated financial statements.
 
- 5 -

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Net income
  $ 20,022     $ 22,432     $ 61,991     $ 66,083  
Other comprehensive income:
                               
Increase in net unrealized gains on securities available for sale
    2,441       4,376       5,277       18,307  
Deferred tax expense
    (1,026 )     (1,841 )     (2,219 )     (7,698 )
Increase in net unrealized gains on securities available for sale, net of tax
    1,415       2,535       3,058       10,609  
Post-retirement benefit transition obligation amortization
    15       15       45       45  
Deferred tax expense
    (6 )     (6 )     (18 )     (18 )
Post-retirement benefit transition obligation amortization, net of tax
    9       9       27       27  
Total other comprehensive income
    1,424       2,544       3,085       10,636  
Total comprehensive income
  $ 21,446     $ 24,976     $ 65,076     $ 76,719  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
- 6 -

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
 
   
Common
Shares
Outstanding
   
Common
Stock
   
Accumulated
Deferred
Compensation
   
Accumulated
Other
Comprehensive
Income
   
Retained
Earnings
   
Total
 
   
(In thousands)
 
                                     
Balance, December 31, 2010
    29,090     $ 378,885     $ 2,724     $ 159     $ 163,519     $ 545,287  
Net income for the period
                                    66,083       66,083  
Other comprehensive income
                            10,636               10,636  
Exercise of stock options
    150       6,234                               6,234  
Tax benefit increase upon exercise of stock options
            6                               6  
Restricted stock activity
    15       455       336                       791  
Stock based compensation
            1,080                               1,080  
Stock awarded to employees
    2       75                               75  
Purchase and retirement of stock
    (956 )     (12,337 )                     (32,725 )     (45,062 )
Dividends
                                    (31,142 )     (31,142 )
Balance, September 30, 2011
    28,301     $ 374,398     $ 3,060     $ 10,795     $ 165,735     $ 553,988  
                                                 
Balance, December 31, 2011
    28,150     $ 377,775     $ 3,060     $ 11,369     $ 166,437     $ 558,641  
Net income for the period
                                    61,991       61,991  
Other comprehensive income
                            3,085               3,085  
Exercise of stock options
    69       2,917                               2,917  
Tax benefit decrease upon exercise of stock options
            (9 )                             (9 )
Restricted stock activity
    11       482       41                       523  
Stock based compensation
            1,180                               1,180  
Stock awarded to employees
    2       74                               74  
Purchase and retirement of stock
    (836 )     (11,208 )                     (27,478 )     (38,686 )
Dividends
                                    (30,875 )     (30,875 )
Balance, September 30, 2012
    27,396     $ 371,211     $ 3,101     $ 14,454     $ 170,075     $ 558,841  
 
See accompanying notes to unaudited consolidated financial statements.
 
- 7 -

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the Nine Months
Ended September 30,
 
   
2012
   
2011
 
   
(In thousands)
 
Operating Activities:
           
Net income
  $ 61,991     $ 66,083  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    10,574       10,460  
Loan loss provision
    8,400       8,400  
Net amortization of deferred loan fees
    (402 )     (295 )
Decrease in interest income receivable
    1,183       74  
(Increase) decrease in other assets
    (155 )     944  
Increase in income taxes payable
    500       805  
(Increase) decrease in net deferred tax asset
    (7,370 )     1,365  
Decrease in interest expense payable
    (97 )     (1,196 )
Increase (decrease) in other liabilities
    12,696       (551 )
Stock option compensation expense
    1,180       1,080  
Tax benefit decrease (increase) upon exercise of stock options
    9       (6 )
Loss on sale of securities available for sale
    1,287       -  
Gain on sale of other assets
    (656 )     (800 )
Net loss (gain) on sale of premises and equipment
    78       (398 )
Originations of mortgage loans for resale
    (597 )     (450 )
Net proceeds from sale of mortgage loans originated for resale
    626       471  
Net gain on sale of foreclosed assets
    (2,545 )     (280 )
Writedown of foreclosed assets
    3,033       1,326  
Net Cash Provided by Operating Activities
    89,735       87,032  
                 
Investing Activities:
               
Net repayments of loans
    296,278       240,524  
Proceeds from FDIC1 loss-sharing indemnification
    25,768       7,956  
Purchases of investment securities available for sale
    (211,349 )     (208,707 )
Purchases of investment securities held to maturity
    (410,829 )     (233,966 )
Proceeds from sale/maturity/calls of securities available for sale
    116,916       204,168  
Proceeds from maturity/calls of securities held to maturity
    156,363       61,737  
Net change in FRB2/FHLB3 securities
    1,336       (12,698 )
Proceeds from sale of foreclosed assets
    23,155       17,702  
Purchases of premises and equipment
    (3,875 )     (2,198 )
Proceeds from sale of premises and equipment
    -       640  
Net Cash Provided by Investing Activities
    (6,237 )     75,158  
                 
Financing Activities:
               
Net change in deposits
    (118,868 )     60,375  
Net change in short-term borrowings and FHLB3 advances
    (60,058 )     (21,640 )
Repayments of notes payable and debt financing
    -       (10,000 )
Exercise of stock options
    2,917       6,234  
Tax benefit (decrease) increase upon exercise of stock options
    (9 )     6  
Repurchases/retirement of stock
    (38,686 )     (45,062 )
Dividends paid
    (30,875 )     (31,142 )
Net Cash Used in Financing Activities
    (245,579 )     (41,229 )
Net Change In Cash and Due from Banks
    (162,081 )     120,961  
Cash and Due from Banks at Beginning of Period
    530,045       338,793  
Cash and Due from Banks at End of Period
  $ 367,964     $ 459,754  
                 
Supplemental Cash Flow Disclosures:
               
Supplemental disclosure of non cash activities:
               
Loan collateral transferred to other real estate owned
  $ 6,362     $ 33,196  
Supplemental disclosure of cash flow activities:
               
Interest paid for the period
    5,091       9,028  
Income tax payments for the period
    27,466       22,604  
 
See accompanying notes to unaudited consolidated financial statements.
1 Federal Deposit Insurance Corporation ("FDIC")
2 Federal Reserve Bank ("FRB")
3 Federal Home Loan Bank ("FHLB")
 
- 8 -

 
NOTES TO UNAUDITED 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, 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, 2012 and 2011 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, 2011.
 
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, 2011.  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, the acquisition date fair value of purchased loans, and the evaluation of other than temporary impairment of investment securities, which are discussed in the Company’s accounting policies.
 
Recently Adopted Accounting Standards
 
FASB ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements, was issued April 2011 addressing the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion.  The Company adopted the provisions of the Update in the first quarter of 2012 with prospective application to new transactions or existing transactions modified on or after January 1, 2012. The adoption of the Update did not have a material effect on the Company’s financial statements at the date of adoption.
 
 FASB ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, was issued May 2011 as a result of the FASB and International Accounting Standards Board’s (IASB) goal to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. The Company adopted the provisions of the Update in the first quarter of 2012 with prospective application, resulting in expanded fair value disclosure. The adoption of the Update did not have a material effect on the Company’s financial statements at the date of adoption.
 
FASB ASU 2011-05, Presentation of Comprehensive Income, was issued June 2011 requiring that all changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This Update also requires that reclassification adjustments for items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. The Company adopted the provisions of the Update in the first quarter of 2012 with retrospective application, resulting in the addition of a new financial statement titled “Consolidated Statements of Comprehensive Income”.
 
FASB ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, was issued December 2011 updating and superseding certain pending paragraphs relating to the presentation on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income.  This Update was effective concurrent with ASU 2011-05, Presentation of Comprehensive Income, and did not have a material effect on the Company’s financial statements at the date of adoption.
 
 
- 9 -

 
FASB ASU 2011-08, Testing for Goodwill Impairment, was issued September 2011 giving an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is more than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The Company adopted the provisions of the Update in the first quarter of 2012. The adoption of the Update did not have a material effect on the Company’s financial statements at the date of adoption.
 
Recently Issued Accounting Standards
 
FASB ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, was issued December 2011 to require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  The Update will not have a material effect on the Company’s financial statements at the date of adoption.
 
FASB ASU 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution, was issued October 2012 to provide guidance for consistently measuring an indemnification asset subsequent to acquisition.  Subsequent accounting for changes in the measurement of the indemnification asset should be on the same basis as a change in the assets subject to indemnification.  Any amortization of changes in value is limited to the shorter of the contractual term of the indemnification agreement or the remaining life of the indemnified assets.  The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012, with early adoption permitted.  The amendments will not have a material effect on the Company’s financial statements at the date of adoption.
 
Note 3:  Investment Securities
 
The amortized cost, unrealized gains and losses accumulated in other comprehensive income, and fair value of investment securities available for sale follow:
 
   
Investment Securities Available for Sale
At September 30, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
U.S. Treasury securities
  $ 3,524     $ 45     $ -     $ 3,569  
Securities of U.S. Government sponsored entities
    85,319       323       -       85,642  
Residential mortgage-backed securities
    61,206       4,661       (1 )     65,866  
Commercial mortgage-backed securities
    4,206       82       -       4,288  
Obligations of States and political subdivisions
    210,258       15,627       (236 )     225,649  
Residential collateralized mortgage obligations
    106,609       1,435       (288 )     107,756  
Asset-backed securities
    16,541       5       (193 )     16,353  
FHLMC and FNMA stock
    824       288       (40 )     1,072  
Corporate securities
    222,563       2,646       (750 )     224,459  
Other securities
    2,147       1,699       (38 )     3,808  
Total
  $ 713,197     $ 26,811     $ (1,546 )   $ 738,462  
 
 
- 10 -

 
The amortized cost, unrealized gains and losses, and fair value of investment securities held to maturity follow:
 
   
Investment Securities Held to Maturity
At September 30, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Securities of U.S. Government sponsored entities
  $ 3,739     $ 29     $ -     $ 3,768  
Residential mortgage-backed securities
    77,166       2,469       (6 )     79,629  
Obligations of States and political subdivisions
    651,747       25,496       (82 )     677,161  
Residential collateralized mortgage obligations
    426,079       4,291       (583 )     429,787  
Total
  $ 1,158,731     $ 32,285     $ (671 )   $ 1,190,345  
 
The amortized cost, unrealized gains and losses accumulated in other comprehensive income, and fair value of investment securities available for sale follow:
 
   
Investment Securities Available for Sale
At December 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
U.S. Treasury securities
  $ 3,537     $ 59     $ -     $ 3,596  
Securities of U.S. Government sponsored entities
    117,150       375       (53 )     117,472  
Residential mortgage-backed securities
    84,961       5,457       (10 )     90,408  
Commercial mortgage-backed securities
    4,506       27       (3 )     4,530  
Obligations of States and political subdivisions
    234,522       11,839       (268 )     246,093  
Residential collateralized mortgage obligations
    49,111       2,053       -       51,164  
Asset-backed securities
    7,566       -       (260 )     7,306  
FHLMC and FNMA stock
    824       1,027       (4 )     1,847  
Corporate securities
    114,286       203       (2,290 )     112,199  
Other securities
    2,302       1,884       (48 )     4,138  
Total
  $ 618,765     $ 22,924     $ (2,936 )   $ 638,753  
 
The amortized cost, unrealized gains and losses, and fair value of investment securities held to maturity follow:
 
   
Investment Securities Held to Maturity
At December 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Residential mortgage-backed securities
  $ 54,869     $ 1,532     $ (77 )   $ 56,324  
Obligations of States and political subdivisions
    625,390       23,581       (496 )     648,475  
Residential collateralized mortgage obligations
    242,544       2,781       (2,631 )     242,694  
Total
  $ 922,803     $ 27,894     $ (3,204 )   $ 947,493  
 
 
- 11 -

 
The amortized cost and fair value of investment securities by contractual maturity are shown in the following table:
 
   
At September 30, 2012
 
   
Securities Available
for Sale
   
Securities Held
to Maturity
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Maturity in years:
                       
1 year or less
  $ 42,448     $ 42,703     $ 9,385     $ 9,532  
Over 1 to 5 years
    322,278       325,349       167,756       172,534  
Over 5 to 10 years
    61,047       65,023       260,070       270,793  
Over 10 years
    112,432       122,597       218,275       228,070  
Subtotal
    538,205       555,672       655,486       680,929  
Mortgage-backed securities and residential collateralized mortgage obligations
    172,021       177,910       503,245       509,416  
Other securities
    2,971       4,880       -       -  
Total
  $ 713,197     $ 738,462     $ 1,158,731     $ 1,190,345  
 
The amortized cost and fair value of investment securities by contractual maturity are shown in the following table:
 
   
At December 31, 2011
 
   
Securities Available
for Sale
   
Securities Held
to Maturity
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Maturity in years:
                       
1 year or less
  $ 37,785     $ 37,967     $ 12,056     $ 12,121  
Over 1 to 5 years
    242,766       241,945       158,438       162,791  
Over 5 to 10 years
    63,442       65,919       307,504       321,922  
Over 10 years
    133,068       140,835       147,392       151,641  
Subtotal
    477,061       486,666       625,390       648,475  
Mortgage-backed securities and residential collateralized mortgage obligations
    138,578       146,102       297,413       299,018  
Other securities
    3,126       5,985       -       -  
Total
  $ 618,765     $ 638,753     $ 922,803     $ 947,493  
 
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. At September 30, 2012 and December 31, 2011, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.
 
 
- 12 -

 
An analysis of gross unrealized losses of investment securities available for sale follows:
 
   
Investment Securities Available for Sale
At September 30, 2012
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
   
(In thousands)
 
Residential mortgage-backed securities
  $ 170     $ (1 )   $ 36     $ -     $ 206     $ (1 )
Obligations of States and political subdivisions
    2,403       (41 )     9,415       (195 )     11,818       (236 )
Residential collateralized mortgage obligations
    65,215       (288 )     -       -       65,215       (288 )
Asset-backed securities
    -       -       11,318       (193 )     11,318       (193 )
FHLMC and FNMA stock
    309       (36 )     1       (4 )     310       (40 )
Corporate securities
    4,841       (50 )     39,300       (700 )     44,141       (750 )
Other securities
    -       -       1,962       (38 )     1,962       (38 )
Total
  $ 72,938     $ (416 )   $ 62,032     $ (1,130 )   $ 134,970     $ (1,546 )
 
An analysis of gross unrealized losses of investment securities held to maturity follows:
 
   
Investment Securities Held to Maturity
At September 30, 2012
 
   
Less than 12 months
   
12 months or longer
   
Total
 
         
 
         
 
         
 
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
   
(In thousands)
 
Residential mortgage-backed securities
  $ 754     $ (6 )   $ -     $ -     $ 754     $ (6 )
Obligations of States and political subdivisions
    9,279       (67 )     2,755       (15 )     12,034       (82 )
Residential collateralized mortgage obligations
    37,907       (532 )     6,412       (51 )     44,319       (583 )
Total
  $ 47,940     $ (605 )   $ 9,167     $ (66 )   $ 57,107     $ (671 )
 
The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments.  The Company evaluates securities on a quarterly basis including changes in security ratings issued by ratings agencies, changes in the financial condition of the issuer, and, for mortgage-related and asset-backed securities, 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. During the second quarter 2012, the Company transferred one residential collateralized mortgage obligation with a carrying value of $9,077 thousand from the held to maturity portfolio to the available for sale portfolio. The residential collateralized mortgage obligation was subsequently sold due to a decline in the credit worthiness from increased losses on subordinate tranches. Substantially all securities owned at September 30, 2012 continue to be investment grade rated by one or more major rating agencies.
 
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, 2012.
 
The fair values of the investment securities could decline in the future if interest rates rise, the general economy deteriorates, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines.  As a result, other than temporary impairments may occur in the future due to increased risk of default.
 
As of September 30, 2012, $833,972 thousand of investment securities were pledged to secure public deposits and short-term funding needs, compared to $903,807 thousand at December 31, 2011.
 
 
- 13 -

 
An analysis of gross unrealized losses of investment securities available for sale follows:
 
   
Investment Securities Available for Sale
At December 31, 2011
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
   
(In thousands)
 
Securities of U.S. Government sponsored entities
  $ 35,051     $ (53 )   $ -     $ -     $ 35,051     $ (53 )
Residential mortgage-backed securities
    3,443       (10 )     -       -       3,443       (10 )
Commercial mortgage-backed securities
    -       -       1,347       (3 )     1,347       (3 )
Obligations of States and political subdivisions
    5,803       (61 )     15,015       (207 )     20,818       (268 )
Asset-backed securities
    -       -       7,306       (260 )     7,306       (260 )
FHLMC and FNMA stock
    -       -       1       (4 )     1       (4 )
Corporate securities
    32,048       (1,516 )     24,226       (774 )     56,274       (2,290 )
Other securities
    -       -       1,953       (48 )     1,953       (48 )
Total
  $ 76,345     $ (1,640 )   $ 49,848     $ (1,296 )   $ 126,193     $ (2,936 )
 
An analysis of gross unrealized losses of investment securities held to maturity follows:
 
   
Investment Securities Held to Maturity
At December 31, 2011
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
   
(In thousands)
 
Residential mortgage-backed securities
  $ 14,032     $ (77 )   $ -     $ -     $ 14,032     $ (77 )
Obligations of States and political subdivisions
    38,026       (334 )     6,441       (162 )     44,467       (496 )
Residential collateralized mortgage obligations
    50,355       (373 )     15,443       (2,258 )     65,798       (2,631 )
Total
  $ 102,413     $ (784 )   $ 21,884     $ (2,420 )   $ 124,297     $ (3,204 )
 
The following table provides information about the amount of interest income from taxable and non-taxable investment securities:
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Taxable
  $ 5,705     $ 4,624     $ 15,742     $ 12,604  
Tax-exempt
    7,788       7,453       23,548       22,421  
Total interest income from investment securities
  $ 13,493     $ 12,077     $ 39,290     $ 35,025  
 
 
- 14 -

 
Note 4: Loans and Allowance for Credit Losses
 
A summary of the major categories of loans outstanding is shown in the following table.
 
   
At September 30, 2012
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
& Other
   
Total
 
   
(In thousands)
 
Originated loans
  $ 350,229     $ 646,450     $ 8,896     $ 236,310     $ 466,529     $ 1,708,414  
Purchased covered loans:
                                               
Impaired
    321       8,266       2,260       -       258       11,105  
Non impaired
    67,921       279,619       9,450       9,823       67,687       434,500  
Purchase discount
    (9,816 )     (16,558 )     (366 )     (433 )     (68 )     (27,241 )
Purchased non-covered loans:
                                               
Impaired
    1,656       7,131       -       -       298       9,085  
Non impaired
    10,983       42,842       1,619       3,428       20,214       79,086  
Purchase discount
    (845 )     (2,078 )     (95 )     (474 )     (2,003 )     (5,495 )
Total
  $ 420,449     $ 965,672     $ 21,764     $ 248,654     $ 552,915     $ 2,209,454  
 
   
At December 31, 2011
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
& Other
   
Total
 
   
(In thousands)
 
Originated loans
  $ 398,446     $ 704,655     $ 14,580     $ 271,111     $ 473,815     $ 1,862,607  
Purchased covered loans:
                                               
Impaired
    1,296       20,697       2,977       -       262       25,232  
Non impaired
    117,777       333,428       13,372       13,016       78,735       556,328  
Purchase discount
    (19,535 )     (22,318 )     (2,473 )     (524 )     (1,432 )     (46,282 )
Purchased non-covered loans:
                                               
Impaired
    2,262       17,090       -       -       638       19,990  
Non impaired
    14,129       67,045       6,076       3,598       25,294       116,142  
Purchase discount
    (1,013 )     (6,101 )     (95 )     (474 )     (2,528 )     (10,211 )
Total
  $ 513,362     $ 1,114,496     $ 34,437     $ 286,727     $ 574,784     $ 2,523,806  
 
Changes in the carrying amount of impaired purchased covered loans were as follows:
 
   
For the
Nine Months Ended
September 30, 2012
   
For the Year Ended
December 31, 2011
 
Impaired purchased covered loans
 
(In thousands)
 
Carrying amount at the beginning of the period
  $ 18,591     $ 33,556  
Reductions during the period
    (10,156 )     (14,965 )
Carrying amount at the end of the period
  $ 8,435     $ 18,591  

Changes in the carrying amount of impaired purchased non-covered loans were as follows:
 
   
For the
Nine Months Ended
September 30, 2012
   
For the Year Ended
December 31, 2011
 
Impaired purchased non-covered loans
 
(In thousands)
 
Carrying amount at the beginning of the period
  $ 15,572     $ 33,725  
Reductions during the period
    (8,285 )     (18,153 )
Carrying amount at the end of the period
  $ 7,287     $ 15,572  
 
 
- 15 -

 
Changes in the accretable yield for purchased loans were as follows:
 
   
For the
Nine Months Ended
September 30, 2012
   
For the
Year Ended
December 31, 2011
 
Accretable yield for purchased loans
 
(In thousands)
Balance at the beginning of the period
  $ 9,990     $ 6,089  
Reclassification from nonaccretable difference
    8,290       16,906  
Accretion
    (12,962 )     (13,005 )
Disposals and other
    -       -  
Balance at the end of the period
  $ 5,318     $ 9,990  
                 
Accretion
  $ (12,962 )   $ (13,005 )
Reduction in FDIC indemnification asset
    9,823       9,315  
(Increase) in interest income
  $ (3,139 )   $ (3,690 )
 
The following summarizes activity in the allowance for credit losses:
 
   
Allowance for Credit Losses
For the Three Months Ended September 30, 2012
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
and Other
   
Purchased
Non-covered
Loans
   
Purchased
Covered
Loans
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                     
Balance at beginning of period
  $ 6,330     $ 9,899     $ 2,681     $ 602     $ 3,031     $ -     $ 240     $ 8,740     $ 31,523  
Additions:
                                                                       
Provision
    829       587       (87 )     103       894       535       1,105       (1,166 )     2,800  
Deductions:
                                                                       
Chargeoffs
    (65 )     (168 )     (2,091 )     (224 )     (1,439 )     (535 )     (111 )     -       (4,633 )
Recoveries
    500       145       26       -       589       -       16       -       1,276  
Net loan recoveries (losses)
    435       (23 )     (2,065 )     (224 )     (850 )     (535 )     (95 )     -       (3,357 )
Balance at end of period
    7,594       10,463       529       481       3,075       -       1,250       7,574       30,966  
Liability for off-balance sheet credit exposure
    1,642       14       2       -       402       -       -       633       2,693  
Total allowance for credit losses
  $ 9,236     $ 10,477     $ 531     $ 481     $ 3,477     $ -     $ 1,250     $ 8,207     $ 33,659  
 
   
Allowance for Credit Losses
For the Nine Months Ended September 30, 2012
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
and Other
   
Purchased
Non-covered
Loans
   
Purchased
Covered
Loans
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                     
Balance at beginning of period
  $ 6,012     $ 10,611     $ 2,342     $ 781     $ 3,072     $ -     $ -     $ 9,779     $ 32,597  
Additions:
                                                                       
Provision
    4,088       790       54       856       2,338       560       1,919       (2,205 )     8,400  
Deductions:
                                                                       
Chargeoffs
    (3,623 )     (1,116 )     (2,091 )     (1,156 )     (4,303 )     (560 )     (723 )     -       (13,572 )
Recoveries
    1,117       178       224       -       1,968       -       54       -       3,541  
Net loan losses
    (2,506 )     (938 )     (1,867 )     (1,156 )     (2,335 )     (560 )     (669 )     -       (10,031 )
Balance at end of period
    7,594       10,463       529       481       3,075       -       1,250       7,574       30,966  
Liability for off-balance sheet credit exposure
    1,642       14       2       -       402       -       -       633       2,693  
Total allowance for credit losses
  $ 9,236     $ 10,477     $ 531     $ 481     $ 3,477     $ -     $ 1,250     $ 8,207     $ 33,659  
 
 
- 16 -

 
   
Allowance for Credit Losses
For the Three Months Ended September 30, 2011
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
and Other
   
Unallocated
   
Purchased
Covered
Loans
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                               
Balance at beginning of period
  $ 6,729     $ 10,241     $ 3,959     $ 466     $ 3,522     $ 8,091     $ -     $ 33,008  
Additions:
                                                               
Provision
    539       1,422       (826 )     317       539       381       428       2,800  
Deductions:
                                                               
Chargeoffs
    (799 )     (398 )     (452 )     -       (1,575 )     -       (428 )     (3,652 )
Recoveries
    190       -       -       -       547       -       -       737  
Net loan losses
    (609 )     (398 )     (452 )     -       (1,028 )     -       (428 )     (2,915 )
Balance at end of period
    6,659       11,265       2,681       783       3,033       8,472       -       32,893  
Liability for off-balance sheet credit exposure
    1,835       1       62       -       150       645       -       2,693  
Total allowance for credit losses
  $ 8,494     $ 11,266     $ 2,743     $ 783     $ 3,183     $ 9,117     $ -     $ 35,586  
 
   
Allowance for Credit Losses
For the Nine Months Ended September 30, 2011
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
and Other
   
Unallocated
   
Purchased
Covered
Loans
   
Total
 
   
(In thousands)
Allowance for loan losses:
                                               
Balance at beginning of period
  $ 8,094     $ 9,607     $ 3,260     $ 617     $ 6,372     $ 7,686     $ -     $ 35,636  
Additions:
                                                               
Provision
    3,518       2,057       1,347       693       (429 )     786       428       8,400  
Deductions:
                                                               
Chargeoffs
    (5,786 )     (399 )     (1,926 )     (527 )     (5,050 )     -       (428 )     (14,116 )
Recoveries
    833       -       -       -       2,140       -       -       2,973  
Net loan losses
    (4,953 )     (399 )     (1,926 )     (527 )     (2,910 )     -       (428 )     (11,143 )
Balance at end of period
    6,659       11,265       2,681       783       3,033       8,472       -       32,893  
Liability for off-balance sheet credit exposure
    1,835       1       62       -       150       645       -       2,693  
Total allowance for credit losses
  $ 8,494     $ 11,266     $ 2,743     $ 783     $ 3,183     $ 9,117     $ -     $ 35,586  
 
The recorded investment in loans evaluated for impairment follows:
 
   
Recorded Investment in Loans and Related Impairment Method
At September 30, 2012
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential Real
Estate
   
Consumer
Installment and
Other
   
Purchased Non-
covered Loans
   
Purchased
Covered Loans
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for credit losses:
                                                     
Individually evaluated for impairment
  $ 3,109     $ 87     $ -     $ -     $ -     $ -     $ 1,011     $ -     $ 4,207  
Collectively evaluated for impairment
    6,127       10,390       531       481       3,477       -       239       8,207       29,452  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
Total
  $ 9,236     $ 10,477     $ 531     $ 481     $ 3,477     $ -     $ 1,250     $ 8,207     $ 33,659  
Carrying value of loans:
                                                                       
Individually evaluated for impairment
  $ 9,286     $ 1,563     $ -     $ -     $ -     $ 3,874     $ 17,751     $ -     $ 32,474  
Collectively evaluated for impairment
    340,943       644,887       8,896       236,310       466,529       71,515       392,178       -       2,161,258  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       7,287       8,435       -       15,722  
Total
  $ 350,229     $ 646,450     $ 8,896     $ 236,310     $ 466,529     $ 82,676     $ 418,364     $ -     $ 2,209,454  
 
   
Recorded Investment in Loans and Related Impairment Method
At December 31, 2011
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment and
Other
   
Purchased Non-
covered Loans
   
Purchased
Covered Loans
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for credit losses:
                                                     
Individually evaluated for impairment
  $ -     $ 229     $ 1,794     $ -     $ -     $ -     $ -     $ -     $ 2,023  
Collectively evaluated for impairment
    7,672       10,382       582       781       3,270       -       -       10,580       33,267  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
Total
  $ 7,672     $ 10,611     $ 2,376     $ 781     $ 3,270     $ -     $ -     $ 10,580     $ 35,290  
Carrying value of loans:
                                                                       
Individually evaluated for impairment
  $ -     $ 1,399     $ 3,126     $ -     $ -     $ 5,611     $ 5,988     $ -     $ 16,124  
Collectively evaluated for impairment
    398,446       703,256       11,454       271,111       473,815       104,738       510,699       -       2,473,519  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       15,572       18,591       -       34,163  
Total
  $ 398,446     $ 704,655     $ 14,580     $ 271,111     $ 473,815     $ 125,921     $ 535,278     $ -     $ 2,523,806  
 
 
- 17 -

 
The Bank’s customers are small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. 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. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review examinations, assigned risk grades will be re-evaluated promptly. Credit risk grades assigned by the Loan Review Department are subject to review by the Bank’s regulatory authority during regulatory examinations.
 
The following summarizes the credit risk profile by internally assigned grade:
 
   
Credit Risk Profile by Internally Assigned Grade
At September 30, 2012
 
   
Commercial
   
Commercial Real
Estate
   
Construction
   
Residential Real
Estate
   
Consumer
Installment and
Other
   
Purchased Non-
covered Loans
   
Purchased
Covered
Loans (1)
   
Total
 
   
(In thousands)
 
Grade:
                                               
Pass
  $ 319,117     $ 582,830     $ 7,988     $ 233,582     $ 464,721     $ 49,461     $ 287,125     $ 1,944,824  
Special mention
    12,509       29,439       436       471       264       9,265       23,270       75,654  
Substandard
    14,030       34,181       472       2,257       1,148       27,938       133,665       213,691  
Doubtful
    4,573       -       -       -       11       1,507       1,445       7,536  
Loss
    -       -       -       -       385       -       100       485  
Default risk purchase discount
    -       -       -       -       -       (5,495 )     (27,241 )     (32,736 )
Total
  $ 350,229     $ 646,450     $ 8,896     $ 236,310     $ 466,529     $ 82,676     $ 418,364     $ 2,209,454  
 
(1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification.
 
   
Credit Risk Profile by Internally Assigned Grade
At December 31, 2011
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential Real
Estate
   
Consumer
Installment and
Other
   
Purchased Non-
covered Loans
   
Purchased
Covered
Loans (1)
   
Total
 
   
(In thousands)
 
Grade:
                                               
Pass
  $ 360,279     $ 646,078     $ 10,413     $ 264,861     $ 471,783     $ 63,955     $ 372,560     $ 2,189,929  
Special mention
    17,247       29,103       341       1,961       600       15,701       32,365       97,318  
Substandard
    20,695       29,474       3,826       4,289       1,014       52,994       175,410       287,702  
Doubtful
    225       -       -       -       66       3,444       1,070       4,805  
Loss
    -       -       -       -       352       38       155       545  
Default risk purchase discount
    -       -       -       -       -       (10,211 )     (46,282 )     (56,493 )
Total
  $ 398,446     $ 704,655     $ 14,580     $ 271,111     $ 473,815     $ 125,921     $ 535,278     $ 2,523,806  
 
(1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification.
 
The following tables summarize loans by delinquency and nonaccrual status:
 
   
Summary of Loans by Delinquency and Nonaccrual Status
At September 30, 2012
   
Current and
Accruing
   
30-89 Days Past
Due and
Accruing
   
Past Due 90
days or More
and Accruing
   
Nonaccrual
   
Total Loans
 
   
(In thousands)
 
Commercial
  $ 337,996     $ 2,049     $ -     $ 10,184     $ 350,229  
Commercial real estate
    631,559       12,344       -       2,547       646,450  
Construction
    8,896       -       -       -       8,896  
Residential real estate
    235,464       567       -       279       236,310  
Consumer installment & other
    461,795       4,272       433       29       466,529  
Total originated loans
    1,675,710       19,232       433       13,039       1,708,414  
Purchased non-covered loans
    69,428       3,164       1       10,083       82,676  
Purchased covered loans
    390,684       7,023       59       20,598       418,364  
Total
  $ 2,135,822     $ 29,419     $ 493     $ 43,720     $ 2,209,454  
 
 
- 18 -

 
   
Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2011
 
   
Current and
Accruing
   
30-89 Days Past
Due and
Accruing
   
Past Due 90
days or More
and Accruing
   
Nonaccrual
   
Total
Loans
 
   
(In thousands)
 
Commercial
  $ 388,322     $ 6,953     $ -     $ 3,171     $ 398,446  
Commercial real estate
    679,633       16,967       1,626       6,429       704,655  
Construction
    10,664       570       -       3,346       14,580  
Residential real estate
    262,917       5,648       -       2,546       271,111  
Consumer installment & other
    467,015       6,324       421       55       473,815  
Total originated loans
    1,808,551       36,462       2,047       15,547       1,862,607  
Purchased non-covered loans
    101,585       1,095       34       23,207       125,921  
Purchased covered loans
    501,823       18,902       241       14,312       535,278  
Total
  $ 2,411,959     $ 56,459     $ 2,322     $ 53,066     $ 2,523,806  
 
The following is a summary of the effect of nonaccrual loans on interest income:
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Interest income that would have been recognized had the loans performed in accordance with their original terms
  $ 767     $ 1,104     $ 2,345     $ 4,373  
Less: Interest income recognized on nonaccrual loans
    (684 )     (1,010 )     (2,021 )     (3,886 )
Total reduction of interest income
  $ 83     $ 94     $ 324     $ 487  
 
There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2012 and December 31, 2011.
 
The following summarizes impaired loans:
 
   
Impaired Loans
At September 30, 2012
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
   
(In thousands)
Impaired loans with no related allowance recorded:
             
Commercial
  $ 6,947     $ 14,904     $ -  
Commercial real estate
    21,152       18,086       -  
Construction
    5,489       7,114       -  
Residential real estate
    713       713       -  
Consumer installment and other
    2,134       2,137       -  
                         
Impaired loans with an allowance recorded:
                 
Commercial
    14,906       15,676       3,979  
Commercial real estate
    739       739       87  
Construction
    1,172       1,172       141  
                         
Total:
                       
Commercial
  $ 21,853     $ 30,580     $ 3,979  
Commercial real estate
    21,891       18,825       87  
Construction
    6,661       8,286       141  
Residential real estate
    713       713       -  
Consumer installment and other
    2,134       2,137       -  
 
 
- 19 -

 
   
Impaired Loans
At December 31, 2011
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
   
(In thousands)
 
Impaired loans with no related allowance recorded:
             
Commercial
  $ 5,483     $ 11,727     $ -  
Commercial real estate
    33,095       43,793       -  
Construction
    4,194       7,209       -  
Consumer installment and other
    2,990       3,658       -  
                         
Impaired loans with an allowance recorded:
                       
Commercial real estate
    1,399       1,399       229  
Construction
    3,126       3,183       1,794  
                         
Total:
                       
Commercial
  $ 5,483     $ 11,727     $ -  
Commercial real estate
    34,494       45,192       229  
Construction
    7,320       10,392       1,794  
Consumer installment and other
    2,990       3,658       -  
 
Impaired loans may include troubled debt restructured loans. Impaired loans at September 30, 2012, included no troubled debt restructured loans. Impaired loans at December 31, 2011, included $3,126 thousand of restructured loans, which were on nonaccrual status.
 
   
Impaired Loans
 
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
Average
Recorded
Investment
   
Recognized
Interest
Income
   
Average
Recorded
Investment
   
Recognized
Interest
Income
   
Average
Recorded
Investment
   
Recognized
Interest
Income
   
Average
Recorded
Investment
   
Recognized
Interest
Income
 
   
(In thousands)
Commercial
  $ 16,980     $ 71     $ 10,950     $ 39     $ 12,772     $ 188     $ 16,664     $ 548  
Commercial real estate
    26,302       210       33,978       520       28,079       937       39,098       1,249  
Construction
    8,081       29       17,065       122       6,891       188       21,839       295  
Residential real estate
    1,158       -       225       -       712       -       374       -  
Consumer installment and other
    2,493       9       2,474       7       2,618       35       2,444       24  
Total
  $ 55,014     $ 319     $ 64,692     $ 688     $ 51,072     $ 1,348     $ 80,419     $ 2,116  

The following table provides information on troubled debt restructurings:
 
   
Troubled Debt Restructurings
At September 30, 2012
   
Number of
Contracts
   
Pre-Modification
Carrying Value
   
Period-End
Carrying Value
   
Period-End
Individual
Impairment
Allowance
 
   
(In thousands)
Commercial
    2     $ 326     $ 303     $ -  
Commercial real estate
    1       1,388       1,433       -  
Total
    3     $ 1,714     $ 1,736     $ -  

   
Troubled Debt Restructurings
At December 31, 2011
   
Number of
Contracts
   
Pre-Modification
Carrying Value
   
Period-End
Carrying Value
   
Period-End
Individual
Impairment
Allowance
 
   
(In thousands)
Commercial
    2     $ 326     $ 321     $ -  
Construction
    1       3,183       3,126       1,794  
Total
    3     $ 3,509     $ 3,447     $ 1,794  

 
 
- 20 -

 
No loans were modified that were considered troubled debt restructurings during the three months ended September 30, 2012. During the nine months ended September 30, 2012, the Company modified two loans with a carrying value totaling $1,817 thousand that were considered troubled debt restructurings. During the three and nine months ended September 30, 2011, the Company modified one loan with a carrying value of $3,183 thousand that was considered a troubled debt restructuring. The concessions granted in the restructuring completed during the first nine months of 2012 and 2011 largely consisted of modification of payment terms extending the maturity date to allow for deferred principal repayment.
 
During the three months ended September 30, 2012, no troubled debt restructurings defaulted. During the nine months ended September 30, 2012, a construction loan with a carrying value of $3,068 thousand defaulted. During the three and nine months ended September 30, 2011, no troubled debt restructurings were in default.
 
The Company pledges loans to secure borrowings from the Federal Home Loan Bank (FHLB). At September 30, 2012, loans pledged to secure borrowing totaled $46,168 thousand compared with $69,145 thousand at December 31, 2011. The amount of loans pledged exceeds collateral requirements. The loans restricted due to collateral requirements approximate $35,638 thousand and $35,894 thousand at September 30, 2012 and December 31, 2011, respectively. The FHLB does not have the right to sell or repledge such loans.
 
There were no loans held for sale at September 30, 2012 and December 31, 2011.
 
Note 5: Concentration of Credit Risk
 
The Company’s business activity is with customers in Northern and Central California. The loan portfolio is well diversified within the Company’s geographic market, although the Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments and standby letters of credit related to real estate loans of $69,738 thousand and $77,988 thousand at September 30, 2012 and December 31, 2011, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans.
 
Note 6: Goodwill and 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, 2012 and 2011.
 
The carrying values of goodwill were (in thousands):
 
September 30, 2012
  $ 121,673  
December 31, 2011
  $ 121,673  
 
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, 2012 and 2011, no such adjustments were recorded.
 
The gross carrying amount of identifiable intangible assets and accumulated amortization was:
 
   
At September 30,
   
At December 31,
 
   
2012
   
2011
 
   
(In thousands)
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
                         
Core Deposit Intangibles
  $ 56,808     $ (33,766 )   $ 56,808     $ (30,070 )
Merchant Draft Processing Intangible
    10,300       (8,789 )     10,300       (8,409 )
Total Identifiable Intangible Assets
  $ 67,108     $ (42,555 )   $ 67,108     $ (38,479 )
 
 
- 21 -

 
As of September 30, 2012, the current year and estimated future amortization expense for identifiable intangible assets was:
 
   
Core
Deposit
Intangibles
   
Merchant
Draft
Processing
Intangible
   
Total
 
   
(In thousands)
For the nine months ended September 30, 2012 (actual)
  $ 3,696     $ 380     $ 4,076  
Estimate for year ended December 31, 2012
    4,868       500       5,368  
2013
    4,304       400       4,704  
2014
    3,946       324       4,270  
2015
    3,594       262       3,856  
2016
    3,292       212       3,504  
2017
    2,853       164       3,017  
 
Note 7: 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 $322,990 thousand and $348,621 thousand at September 30, 2012 and December 31, 2011, 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 $25,939 thousand and $27,221 thousand at September 30, 2012 and December 31, 2011, respectively. The Company also had commitments for commercial and similar letters of credit of $514 thousand and $454 thousand at September 30, 2012 and December 31, 2011, 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 liabilities are accrued when obligations become probable and the amount is reasonably estimable. Legal costs related to covered assets are eighty percent indemnified under loss-sharing agreements with the FDIC if certain conditions are met.
 
Note 8:  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 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 under current market conditions.  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. When the valuation assumptions used to measure the fair value of the asset or liability are categorized within different levels of the fair value hierarchy, the asset or liability is categorized in its entirety within the lowest level of the hierarchy. These levels are:
 
 
- 22 -

 
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, equity securities 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, corporate securities, asset-backed securities, municipal bonds and residential collateralized mortgage obligations.
 
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.
 
When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new assumptions used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the nine months ended September 30, 2012 and 2011, there were no transfers in or out of levels 1, 2 or 3.
 
Assets Recorded at Fair Value on a Recurring Basis
 
The table below presents assets measured at fair value on a recurring basis.
 
   
Fair Value
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2 )
   
Significant
Unobservable
Inputs
(Level 3 )
 
   
(In thousands)
 
Investment securities available for sale:
                       
At September 30, 2012
  $ 738,462     $ 92,129     $ 646,333     $ -  
At December 31, 2011
  $ 638,753     $ 125,101     $ 513,652     $ -  
 
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 of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at September 30, 2012 and December 31, 2011, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.
 
   
At September 30, 2012
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
   
(In thousands)
 
Non-covered other real estate owned
  $ 7,970     $ -     $ 7,970     $ -     $ (2,167 )
Covered other real estate owned
    7,999       -       7,999       -       (102 )
Originated impaired loans
    5,021       -       2,021       3,000       (1,985 )
Purchased covered impaired loans
    8,190       -       3,730       4,460       (180 )
Total assets measured at fair value on a nonrecurring basis
  $ 29,180     $ -     $ 21,720     $ 7,460     $ (4,434 )
 
   
At December 31, 2011
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
   
(In thousands)
 
Non-covered other real estate owned
  $ 6,350     $ -     $ 6,350     $ -     $ (1,000 )
Covered other real estate owned
    10,695       -       10,695       -       (578 )
Originated impaired loans
    2,502       -       2,502       -       -  
Total assets measured at fair value on a nonrecurring basis
  $ 19,547     $ -     $ 19,547     $ -     $ (1,578 )
 
 
- 23 -

 
Level 2 – Valuation is based upon independent market prices or appraised value of the collateral, less 10% for selling costs, generally.  Level 2 includes other real estate owned that has been measured at fair value subsequent to its initial classification as foreclosed assets and impaired loans collateralized by real property where a specific reserve has been established or a charge-off has been recorded.
 
Level 3 – Valuation is based upon estimated liquidation values of loan collateral, which includes business assets such as accounts receivable, inventory and fixed assets, ranging from 50 to 55 percent.  The value of level 3 assets can also include a component of real estate, which is valued as described for level 2 inputs, when collateral for the impaired loan includes both business assets and real estate.  Level 3 includes impaired loans where a specific reserve has been established or a charge-off has been recorded.
 
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 in the balance sheet.
 
Cash and Due from Banks  Cash and due from banks represent U.S. dollar denominated coin and currency, deposits at the Federal Reserve Bank and correspondent banks, and amounts being settled with other banks to complete the processing of  customers’ daily transactions. Collectively, the Federal Reserve Bank and financial institutions operate a market in which cash and due from banks transactions are processed continuously in significant daily volumes honoring the face value of the U.S. dollar.
 
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 $30,966 thousand at September 30, 2012 and $32,597 thousand at December 31, 2011 and the fair value discount due to credit default risk associated with purchased covered and purchased non-covered loans of $27,241 thousand and $5,495 thousand, respectively at September 30, 2012 and purchased covered and purchased non-covered loans of $46,282 thousand and $10,211 thousand, respectively at December 31, 2011 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  Deposits with no stated maturity such as checking accounts, savings accounts and money market accounts can be readily converted to cash or used to settle transactions at face value through the broad financial system operated by the Federal Reserve Bank and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair values of time deposits were estimated by discounting estimated future contractual cash flows 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.
 
Federal Home Loan Bank Advances  The fair values of FHLB advances were estimated by using redemption amounts quoted by the Federal Home Loan Bank of San Francisco.
 
Term Repurchase Agreement  The fair value of the term repurchase agreement was estimated by using interpolated yields for financial instruments with similar characteristics.
 
Debt Financing  The fair value of debt financing was estimated by using interpolated yields for financial instruments with similar characteristics.
 
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, 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.
 
 
- 24 -

 
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, 2012
   
Carrying
Amount
   
Estimated
Fair Value
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2 )
   
Significant
Unobservable
Inputs
(Level 3 )
 
Financial Assets
  (In thousands)
Cash and due from banks
  $ 367,964     $ 367,964     $ 367,964     $ -     $ -  
Investment securities held to maturity
    1,158,731       1,190,345       3,768       1,186,577       -  
Loans
    2,178,488       2,197,978       -       -       2,197,978  
Other assets - FDIC receivable
    15,416       15,397       -       -       15,397  
                                         
Financial Liabilities
                                       
Deposits
  $ 4,130,557     $ 4,131,735     $ -     $ 3,474,019     $ 657,716  
Short-term borrowed funds
    55,630       55,630       -       55,630       -  
Federal Home Loan Bank advances
    25,855       26,288       26,288       -       -  
Term repurchase agreement
    10,000       10,148       -       10,148       -  
Debt financing
    15,000       15,557       -       15,557       -  
 
   
At December 31, 2011
 
   
Carrying
Amount
   
Estimated
Fair Value
 
   
(In thousands)
Financial Assets
           
Cash and due from banks
  $ 530,045     $ 530,045  
Investment securities held to maturity
    922,803       947,493  
Loans
    2,491,209       2,515,095  
Other assets - FDIC receivable
    40,113       40,046  
                 
Financial Liabilities
               
Deposits
  $ 4,249,921     $ 4,250,164  
Short-term borrowed funds
    115,689       115,689  
Federal Home Loan Bank advances
    26,023       26,532  
Term repurchase agreement
    10,000       10,242  
Debt financing
    15,000       15,222  
 
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 9: Borrowings and Debt Financing
 
Short-term borrowed funds of $55,630 thousand represent securities sold under agreements to repurchase the securities. As the Company is obligated to repurchase the securities, the transfer of the securities is accounted for as a secured borrowing rather than a sale. The carrying amount of the securities approximates $56,743 thousand. The short-term borrowed funds mature on an overnight basis.
 
Federal Home Loan Bank (“FHLB”) advances with carrying value of $25,855 thousand are secured by residential real estate loans, the amount of such loans approximates $35,638 thousand. The FHLB advances are due in full upon their maturity dates: $5,000 thousand mature in December 2013 and $20,000 thousand mature in January 2015. The FHLB advances may be paid off prior to such maturity dates subject to prepayment fees.
 
The $10,000 thousand term repurchase agreement represents securities sold under an agreement to repurchase the securities. As the Company is obligated to repurchase the securities, the transfer of the securities is accounted for as a secured borrowing rather than a sale. The carrying amount of the related securities is approximately $10,500 thousand. The term repurchase agreement matures in full in August 2014.
 
 
- 25 -

 
Debt financing of $15,000 thousand is a note issued by Westamerica Bancorporation on October 31, 2003 which matures October 31, 2013. Interest of 5.31% per annum is payable semiannually on April 30 and October 31, with principal due at maturity.
 
Note 10: 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
   
For the Nine Months
   
Ended September 30,
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands, except per share data)
Net income (numerator)
  $ 20,022     $ 22,432     $ 61,991     $ 66,083  
Basic earnings per common share
                               
Weighted average number of common shares outstanding - basic (denominator)
    27,513       28,433       27,769       28,739  
Basic earnings per common share
  $ 0.73     $ 0.79     $ 2.23     $ 2.30  
Diluted earnings per common share
                               
Weighted average number of common shares outstanding - basic
    27,513       28,433       27,769       28,739  
Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise
    52       65       52       140  
Weighted average number of common shares outstanding - diluted (denominator)
    27,565       28,498       27,821       28,879  
Diluted earnings per common share
  $ 0.73     $ 0.79     $ 2.23     $ 2.29  
 
For the three months ended September 30, 2012 and 2011, options to purchase 1,995 thousand and 1,940 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 nine months ended September 30, 2012 and 2011, options to purchase 2,021 thousand and 1,452 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because their inclusion would have had an anti-dilutive effect.
 
 
 
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WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
 
   
For the Three Months
   
For the Nine Months
   
Ended September 30,
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands, except per share data)
Net Interest and Fee Income (FTE)1
  $ 48,712     $ 54,675     $ 150,743     $ 165,506  
Provision for Loan Losses
    2,800       2,800       8,400       8,400  
Noninterest Income
                               
Loss on sale of securities
    -       -       (1,287 )     -  
Other
    14,626       15,205       44,115       45,239  
Total Noninterest Income
    14,626       15,205       42,828       45,239  
Noninterest Expense:
                               
Settlements
    -       -       -       2,100  
Other
    29,269       31,383       88,651       94,914  
Total Noninterest Expense
    29,269       31,383       88,651       97,014  
Income Before Income Taxes (FTE)1
    31,269       35,697       96,520       105,331  
Income Tax Provision (FTE)1
    11,247       13,265       34,529       39,248  
Net Income
  $ 20,022     $ 22,432     $ 61,991     $ 66,083  
                                 
Average Common Shares Outstanding
    27,513       28,433       27,769       28,739  
Diluted Average Common Shares Outstanding
    27,565       28,498       27,821       28,879  
Common Shares Outstanding at Period End
    27,396       28,301                  
                                 
Per Common Share:
                               
Basic Earnings
  $ 0.73     $ 0.79     $ 2.23     $ 2.30  
Diluted Earnings
    0.73       0.79       2.23       2.29  
Book Value Per Common Share
  $ 20.40     $ 19.57                  
                                 
Financial Ratios:
                               
Return On Assets
    1.63 %     1.81 %     1.67 %     1.79 %
Return On Common Equity
    14.68 %     16.44 %     15.23 %     16.24 %
Net Interest Margin (FTE)1
    4.67 %     5.32 %     4.89 %     5.35 %
Net Loan Losses As A Percentage of Average Loans
                               
Originated Loans
    0.63 %     0.51 %     0.66 %     0.73 %
Purchased covered Loans
    0.09 %     0.28 %     0.19 %     0.09 %
Purchased Non-covered Loans
    2.19 %     - %     0.69 %     - %
Efficiency Ratio2
    46.2 %     44.9 %     45.8 %     46.0 %
                                 
Average Balances:
                               
Assets
  $ 4,892,088     $ 4,920,482     $ 4,965,611     $ 4,929,701  
Earning Assets
    4,160,953       4,093,020       4,116,471       4,133,898  
Originated Loans
    1,730,186       1,943,379       1,784,726       1,974,316  
Purchased Covered Loans
    435,953       596,072       475,815       638,189  
Purchased Non-covered Loans
    97,100       151,634       107,989       174,333  
Deposits
    4,176,342       4,155,812       4,219,129       4,146,183  
Shareholders' Equity
    542,708       541,369       543,855       544,056  
                                 
Period End Balances:
                               
Assets
  $ 4,859,627     $ 4,966,499                  
Earning Assets
    4,106,647       4,074,457                  
Originated Loans
    1,708,414       1,920,286                  
Purchased Covered Loans
    418,364       575,353                  
Purchased Non-covered Loans
    82,676       139,200                  
Deposits
    4,130,557       4,192,383                  
Shareholders' Equity
    558,841       553,988                  
                                 
Capital Ratios at Period End:
                               
Total Risk Based Capital
    16.22 %     15.41 %                
Tangible Equity to Tangible Assets
    8.75 %     8.35 %                
                                 
Dividends Paid Per Common Share
  $ 0.37     $ 0.36     $ 1.11     $ 1.08  
Common Dividend Payout Ratio
    51 %     46 %     50 %     47 %
 
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 "Financial Ratios" are annualized with the exception of the efficiency ratio.
 
1 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.
 
2 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).
 
 
- 27 -

 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Westamerica Bancorporation and subsidiaries (the “Company”) reported net income of $20.0 million or $0.73 diluted earnings per common share for the third quarter 2012 and net income of $62.0 million or $2.23 diluted earnings per common share for the nine months ended September 30, 2012. The nine months ended September 30, 2012 included a $1.3 million loss realized from the sale of a collateralized mortgage obligation bond which reduced net income by $750 thousand and a tax refund from an amended tax return which increased net income by $968 thousand. These results compare to net income of $22.4 million or $0.79 diluted earnings per common share for the third quarter 2011 and net income of $66.1 million or $2.29 diluted earnings per common share for the nine months ended September 30, 2011. The nine months ended September 30, 2011 included $2.1 million in litigation settlement accruals which decreased net income by $1.2 million and expenses related to the integration of the former Sonoma Valley Bank (“Sonoma”) of $393 thousand after tax.
 
Net Income
 
Following is a summary of the components of net income for the periods indicated:
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands, except per share data)
 
Net interest income (FTE)
  $ 48,712     $ 54,675     $ 150,743     $ 165,506  
Provision for loan losses
    (2,800 )     (2,800 )     (8,400 )     (8,400 )
Noninterest income
    14,626       15,205       42,828       45,239  
Noninterest expense
    (29,269 )     (31,383 )     (88,651 )     (97,014 )
Income before taxes (FTE)
    31,269       35,697       96,520       105,331  
Income tax provision (FTE)
    (11,247 )     (13,265 )     (34,529 )     (39,248 )
Net income
  $ 20,022     $ 22,432     $ 61,991     $ 66,083  
                                 
Average diluted common shares
    27,565       28,498       27,821       28,879  
Diluted earnings per common share
  $ 0.73     $ 0.79     $ 2.23     $ 2.29  
                                 
Average total assets
  $ 4,892,088     $ 4,920,482     $ 4,965,611     $ 4,929,701  
Net income applicable to common equity to average total assets (annualized)
    1.63 %     1.81 %     1.67 %     1.79 %
Net income applicable to common equity to average common stockholders' equity (annualized)
    14.68 %     16.44 %     15.23 %     16.24 %
 
Net income for the third quarter of 2012 was $2.4 million or 10.7% less than the third quarter of 2011, the net result of declines in net interest income (fully taxable equivalent or “FTE”) and lower noninterest income, partially offset by decreases in noninterest expense and income tax provision (FTE). A $6.0 million or 10.9% decrease in net interest income (FTE) was mostly attributed to lower average balances of loans and lower yields on interest earning assets, partially offset by higher average balances of investments, lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. The provision for loan losses remained the same, reflecting Management's evaluation of losses inherent in the loan portfolio not covered by loss-sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) and purchased loan credit-default discounts.
 
Comparing the first nine months of 2012 to the first nine months of 2011, net income decreased $4.1 million or 6.2%, primarily due to lower net interest income (FTE) and a $1.3 million loss on sale of securities, partially offset by decreases in  noninterest expense and income tax provision (FTE). The lower net interest income (FTE) was primarily caused by a lower average volume of loans and lower yields on interest earning assets, partially offset by higher average balances of investments, lower average balances of interest-bearing liabilities and lower rates on interest-bearing liabilities. The provision for loan losses remained the same, reflecting Management's evaluation of losses inherent in the loan portfolio not covered by loss-sharing agreements with the FDIC and purchased loan credit-default discounts. Noninterest expense declined $8.4 million primarily due to a $2.1 million settlement accrual in the second quarter 2011 and reduced costs related to managing nonperforming assets.
 
 
- 28 -

 
Net Interest Income
 
Following is a summary of the components of net interest income for the periods indicated:
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Interest and fee income
  $ 45,272     $ 51,976     $ 140,470     $ 157,559  
Interest expense
    (1,382 )     (2,071 )     (4,413 )     (6,527 )
FTE adjustment
    4,822       4,770       14,686       14,474  
Net interest income (FTE)
  $ 48,712     $ 54,675     $ 150,743     $ 165,506  
                                 
Average earning assets
  $ 4,160,953     $ 4,093,020     $ 4,116,471     $ 4,133,898  
Net interest margin (FTE) (annualized)
    4.67 %     5.32 %     4.89 %     5.35 %
                                 
 
Net interest income (FTE) decreased during the third quarter of 2012 by $6.0 million or 10.9% from the same period in 2011 to $48.7 million, mainly due to lower average balances of loans (down $428 million) and lower yields on interest-earning assets (down 0.72%), partially offset by higher average balances of investments (up $496 million), lower average balances of interest-bearing liabilities (down $139 million) and lower rates paid on interest-bearing liabilities (down 0.08%).
 
Comparing the first nine months of 2012 with the first nine months of 2011, net interest income (FTE) decreased $14.8 million or 8.9%, primarily due to a lower average volume of loans (down $418 million) and lower yields on interest-earning assets (down 0.53%), partially offset by higher average balances of investments (up $401 million) and lower rates paid on interest-bearing liabilities (down 0.10%).
 
Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. Economic conditions, competitive pricing and underwriting, and deleveraging by businesses and individuals have reduced loan volumes, placing greater reliance on lower-yielding investment securities. Rates on interest-bearing deposits and borrowings have declined to offset some of the decline in asset yields.
 
In Management's judgment, economic conditions and competitive pricing create a cautious view toward commercial lending, and economic pressure on consumers has reduced demand for automobile and other consumer loans. As a result, the Company has not taken an aggressive posture relative to loan portfolio growth.
 
At September 30, 2012, purchased FDIC covered loans represented 19 percent of the Company’s loan portfolio. Under the terms of the FDIC loss-sharing agreements, the FDIC is obligated to reimburse the Bank 80 percent of loan interest income foregone on covered loans. Such reimbursements are limited to the lesser of 90 days contractual interest or actual unpaid contractual interest at the time a principal loss is recognized with respect to the underlying loan.
 
Interest and Fee Income
 
Interest and fee income (FTE) for the third quarter of 2012 decreased $6.7 million or 11.7% from the same period in 2011. The decrease was caused by lower average balances of loans and lower yields on interest earning assets, partially offset by higher average balances of investments.
 
The total average balances of loans declined due to decreases in the average balances of commercial real estate loans (down $195 million), taxable commercial loans (down $108 million), residential real estate loans (down $49 million), consumer loans (down $30 million), construction loans (down $25 million) and tax-exempt commercial loans (down $21 million). The average investment portfolio increased largely due to higher average balances of residential collateralized mortgage obligations (up $293 million), municipal securities (up $109 million) and corporate securities (up $123 million), partially offset by a $52 million decrease in average balances of securities of U.S. government sponsored entities.
 
The average yield on the Company's earning assets decreased from 5.52% in the third quarter of 2011 to 4.80% in the corresponding period of 2012. The composite yield on loans declined 0.30% to 5.70%. Lower yields on consumer loans (down 0.77%), taxable commercial loans (down 0.74%), construction loans (down 3.25%) and residential real estate loans (down 0.35%) were offset by higher yields on commercial real estate loans (up 0.29%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The yield on commercial real estate loans in the third quarter 2012 was elevated due to interest received on nonaccrual loans and discount accretion on purchased loans. The investment yields in general declined as newly purchased securities have yields at current market rates which are lower than yields on older dated securities. The investment portfolio yield decreased 0.86% to 3.72% primarily due to lower yields on municipal securities (down 0.57%), residential collateralized mortgage obligations (down 1.06%) and residential mortgage backed securities (down 0.99%).
 
 
- 29 -

 
Comparing the first nine months of 2012 with the first nine months of 2011, interest and fee income (FTE) was down $16.9 million or 9.8%. The decrease resulted from a lower average volume of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments. Average interest earning assets decreased $17 million or 0.4% in the first nine months of 2012 compared with the first nine months of 2011 due to a $418 million decrease in average loans and a $401 million increase in average investments. The decrease in the average balance of the loan portfolio was attributable to decreases in average balances of commercial real estate loans (down $177 million), taxable commercial loans (down $122 million), construction loans (down $35 million), residential real estate loans (down $47 million), tax-exempt commercial loans (down $18 million) and consumer loans (down $19 million). The average investment portfolio increased mostly due to higher average balances of municipal securities (up $114 million), residential collateralized mortgage obligations (up $243 million) and corporate securities (up $80 million), partially offset by a $60 million decline in U.S. government sponsored entities.
 
The average yield on earning assets for the first nine months of 2012 was 5.03% compared with 5.56% in the first nine months of 2011. The loan portfolio yield for the first nine months of 2012 compared with the first nine months of 2011 was lower by 0.18% mostly due to lower yields on consumer loans (down 0.75%), residential real estate loans (down 0.35%) and tax-exempt commercial loans (down 0.35%), taxable commercial loans (down 0.11%) and construction loans (down 0.36%), partially offset by higher yields on commercial real estate loans (up 0.24%). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The yield on commercial real estate loans in the first nine months of 2011 was elevated due to interest received on nonaccrual loans and discount accretion on purchased loans. The investment portfolio yield decreased 0.69% to 3.96% primarily due to lower yields on municipal securities (down 0.56%), residential collateralized mortgage obligations (down 1.34%), residential mortgage backed securities (down 0.66%) and securities of U.S. government sponsored entities (down 0.25%), partially offset by a 0.12% increase in yields on corporate securities which contain floating interest rate structures.
Interest Expense
Interest expense in the third quarter of 2012 decreased $689 thousand or 33.3% compared with the same period in 2011 due to lower rates paid on interest-bearing deposits and a shift from higher costing deposits and financing to lower cost checking and savings accounts. Checking and savings deposits accounted for 83.5% of total deposits in the third quarter 2012 compared with 79.9% in the same quarter of 2011. Interest-bearing liabilities declined due to lower average balances of time deposits (down $145 million), FHLB advances (down $9 million), long-term debt (down $6 million), and preferred money market savings (down $52 million), partially offset by higher average balances of money market checking accounts (up $49 million), money market savings (up $26 million), regular savings (up $32 million) and term repurchase agreement (up $4 million). Lower average balances of long-term debt were attributable to the redemption of $10 million of subordinated debt in August 2011. The average rate paid on interest-bearing liabilities decreased from 0.29% in the third quarter of 2011 to 0.21% in the same quarter of 2012. Rates on interest-bearing deposits decreased 0.09% to 0.16% primarily due to decreases in rates paid on time deposits less than $100 thousand (down 0.18%), time deposits $100 thousand or more (down 0.06%), preferred money market savings (down 0.11%), money market checking (down 0.07%), money market savings (down 0.05%) and regular savings (down 0.05%).
 
Comparing the first nine months of 2012 with the first nine months of 2011, interest expense declined $2.1 million or 32.4%, due to lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. Average interest-bearing deposits during the first nine months of 2012 fell $39 million compared with the same period in 2011 primarily due to declines in the average balances of time deposits less than $100 thousand (down $49 million), time deposits $100 thousand or more (down $60 million) and preferred money market savings (down $35 million), partially offset by increases in the average balance of money market checking accounts (up $44 million), money market savings (up $34 million) and regular savings (up $27 million). Average balances of debt financing declined $9 million while average balances of term repurchase agreement increased $8 million. Rates paid on interest-bearing deposits averaged 0.17% during the first nine months of 2012 compared with 0.27% for the first nine months of 2011 mainly due to lower rates on money market savings (down 0.08%), preferred money market savings (down 0.12%), regular savings (down 0.05%), time deposits less than $100 thousand (down 0.08%) and time deposits $100 thousand and more (down 0.12%).
 
 
- 30 -

 
Net Interest Margin (FTE)
 
The following summarizes the components of the Company's net interest margin for the periods indicated:
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Yield on earning assets (FTE)
    4.80 %     5.52 %     5.03 %     5.56 %
Rate paid on interest-bearing liabilities
    0.21 %     0.29 %     0.21 %     0.31 %
Net interest spread (FTE)
    4.59 %     5.23 %     4.82 %     5.25 %
Impact of all other net noninterest bearing funds
    0.08 %     0.09 %     0.07 %     0.10 %
Net interest margin (FTE)
    4.67 %     5.32 %     4.89 %     5.35 %

During the third quarter of 2012, the net interest margin (FTE) decreased 0.65% compared with the same period in 2011. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 0.64% decrease in net interest spread (FTE). The 0.08% net interest margin contribution of noninterest-bearing demand deposits resulted in the net interest margin (FTE) of 4.67%. During the first nine months of 2012, the net interest margin (FTE) decreased 0.46% compared with the first nine months of 2011. The net interest spread (FTE) in the first nine months of 2012 was 4.82% compared with 5.25% in the first nine months of 2011, the net result of a 0.53% decrease in earning asset yields, partially offset by lower cost of interest-bearing liabilities (down 0.10%).
 
 
 
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- 31 -

 
Summary of Average Balances, Yields/Rates and Interest Differential
 
The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amount of interest income earned from average earning assets and the resulting annualized yields, and the amount of interest expense incurred on average interest-bearing liabilities and the resulting annualized rates. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income and accretion of purchased loan discounts. Yields on securities and certain loans have been adjusted upward to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate (FTE).
 
   
For the Three Months Ended
 
   
September 30, 2012
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yields/
Rates
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 506,508     $ 2,894       2.29 %
Tax-exempt (1)
    209,861       3,055       5.82 %
Held to maturity
                       
Taxable
    539,822       2,811       2.08 %
Tax-exempt (1)
    641,523       8,900       5.55 %
Loans:
                       
Commercial:
                       
Taxable
    307,446       4,518       5.85 %
Tax-exempt (1)
    124,862       1,878       5.98 %
Commercial real estate
    990,509       17,015       6.83 %
Real estate construction
    25,336       335       5.26 %
Real estate residential
    259,754       2,308       3.55 %
Consumer
    555,332       6,380       4.57 %
Total loans (1)
    2,263,239       32,434       5.70 %
Total interest-earning assets (1)
    4,160,953     $ 50,094       4.80 %
Other assets
    731,135                  
Total assets
  $ 4,892,088                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,605,362     $ -       - %
Savings and interest-bearing transaction
    1,882,110       301       0.06 %
Time less than $100,000
    258,631       359       0.55 %
Time $100,000 or more
    430,239       360       0.33 %
Total interest-bearing deposits
    2,570,980       1,020       0.16 %
Short-term borrowed funds
    61,794       15       0.10 %
Term repurchase agreement
    10,000       25       0.97 %
Federal Home Loan Bank advances
    25,889       122       1.87 %
Debt financing
    15,000       200       5.35 %
Total interest-bearing liabilities
    2,683,663     $ 1,382       0.21 %
Other liabilities
    60,355                  
Shareholders' equity
    542,708                  
Total liabilities and shareholders' equity
  $ 4,892,088                  
Net interest spread (1) (2)
                    4.59 %
Net interest income and interest margin (1) (3)
          $ 48,712       4.67 %
                         
 
(1) Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2) Net interest spread represents the average yield earned on earning assets minus the average rate incurred on interest-bearing liabilities.
 
(3) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.
 
 
- 32 -

 
   
For the Three Months Ended
September 30, 2011
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yields/
Rates
 
   
(In thousands)
 
Assets:
                 
Money market assets and funds sold
  $ 281     $ -       - %
Investment securities:
                       
Available for sale
                       
Taxable
    453,330       2,989       2.64 %
Tax-exempt (1)
    252,356       3,895       6.17 %
Held to maturity
                       
Taxable
    209,826       1,635       3.12 %
Tax-exempt (1)
    486,142       7,538       6.20 %
Loans:
                       
Commercial:
                       
Taxable
    415,219       6,901       6.59 %
Tax-exempt (1)
    145,672       2,270       6.18 %
Commercial real estate
    1,185,692       19,557       6.54 %
Real estate construction
    49,972       1,072       8.51 %
Real estate residential
    309,203       3,013       3.90 %
Consumer
    585,327       7,876       5.34 %
Total loans (1)
    2,691,085       40,689       6.00 %
Total Interest earning assets (1)
    4,093,020     $ 56,746       5.52 %
Other assets
    827,462                  
Total assets
  $ 4,920,482                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,494,773     $ -       - %
Savings and interest-bearing transaction
    1,826,688       597       0.13 %
Time less than $100,000
    303,768       556       0.73 %
Time $100,000 or more
    530,583       524       0.39 %
Total interest-bearing deposits
    2,661,039       1,677       0.25 %
Short-term borrowed funds
    99,730       62       0.25 %
Term repurchase agreement
    5,652       14       0.97 %
Federal Home Loan Bank advances
    35,309       118       1.34 %
Debt financing and notes payable
    21,075       200       3.80 %
Total interest-bearing liabilities
    2,822,805     $ 2,071       0.29 %
Other liabilities
    61,535                  
Shareholders' equity
    541,369                  
Total liabilities and shareholders' equity
  $ 4,920,482                  
Net interest spread (1) (2)
                    5.23 %
Net interest income and interest margin (1) (3)
          $ 54,675       5.32 %
 
(1) Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2) Net interest spread represents the average yield earned on earning assets minus the average rate incurred on interest-bearing liabilities.
 
(3) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.
 
 
- 33 -

 
   
For the Nine Months Ended
September 30, 2012
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yields/
Rates
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 456,310     $ 8,231       2.41 %
Tax-exempt (1)
    218,610       9,667       5.90 %
Held to maturity
                       
Taxable
    444,654       7,511       2.25 %
Tax-exempt (1)
    628,367       26,469       5.62 %
Loans:
                       
Commercial:
                       
Taxable
    329,920       15,790       6.39 %
Tax-exempt (1)
    132,040       6,017       6.09 %
Commercial real estate
    1,042,613       52,795       6.76 %
Real estate construction
    29,063       1,187       5.46 %
Real estate residential
    271,320       7,407       3.64 %
Consumer
    563,574       20,082       4.76 %
Total loans (1)
    2,368,530       103,278       5.82 %
Total interest-earning assets (1)
    4,116,471     $ 155,156       5.03 %
Other assets
    849,140                  
Total assets
  $ 4,965,611                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,586,993     $ -       - %
Savings and interest-bearing transaction
    1,881,134       934       0.07 %
Time less than $100,000
    269,930       1,184       0.59 %
Time $100,000 or more
    481,072       1,196       0.33 %
Total interest-bearing deposits
    2,632,136       3,314       0.17 %
Short-term borrowed funds
    89,986       63       0.09 %
Term repurchase agreement
    10,000       74       0.97 %
Federal Home Loan Bank advances
    25,944       361       1.86 %
Debt financing and notes payable
    15,000       601       5.35 %
Total interest-bearing liabilities
    2,773,066     $ 4,413       0.21 %
Other liabilities
    61,697                  
Shareholders' equity
    543,855                  
Total liabilities and shareholders' equity
  $ 4,965,611                  
Net interest spread (1) (2)
                    4.82 %
Net interest income and interest margin (1) (3)
          $ 150,743       4.89 %
 
(1) Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2) Net interest spread represents the average yield earned on earning assets minus the average rate incurred on interest-bearing liabilities.
 
(3) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.
 
 
- 34 -

 
   
For the Nine Months Ended
September 30, 2011
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yields/
Rates
 
   
(In thousands)
 
Assets:
                 
Money market assets and funds sold
  $ 386     $ -       - %
Investment securities:
                       
Available for sale
                       
Taxable
    452,444       8,368       2.47 %
Tax-exempt (1)
    264,379       12,348       6.23 %
Held to maturity
                       
Taxable
    157,623       4,236       3.58 %
Tax-exempt (1)
    472,228       22,038       6.22 %
Loans:
                       
Commercial:
                       
Taxable
    452,372       21,985       6.50 %
Tax-exempt (1)
    149,634       7,207       6.44 %
Commercial real estate
    1,219,657       59,502       6.52 %
Real estate construction
    64,044       2,789       5.82 %
Real estate residential
    318,546       9,540       3.99 %
Consumer
    582,585       24,020       5.51 %
Total loans (1)
    2,786,838       125,043       6.00 %
Total earning assets (1)
    4,133,898     $ 172,033       5.56 %
Other assets
    795,803                  
Total assets
  $ 4,929,701                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,474,983     $ -       - %
Savings and interest-bearing transaction
    1,811,962       1,915       0.14 %
Time less than $100,000
    318,613       1,598       0.67 %
Time $100,000 or more
    540,625       1,831       0.45 %
Total interest-bearing deposits
    2,671,200       5,344       0.27 %
Short-term borrowed funds
    104,544       170       0.22 %
Term repurchase agreement
    1,905       14       0.97 %
Federal Home Loan Bank advances
    47,027       398       1.13 %
Debt financing and notes payable
    24,447       601       3.28 %
Total interest-bearing liabilities
    2,849,123     $ 6,527       0.31 %
Other liabilities
    61,539                  
Shareholders' equity
    544,056                  
Total liabilities and shareholders' equity
  $ 4,929,701                  
Net interest spread (1) (2)
                    5.25 %
Net interest income and interest margin (1) (3)
          $ 165,506       5.35 %
                         
 
(1) Interest and rates calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
(2) Net interest spread represents the average yield earned on earning assets minus the average rate incurred on interest-bearing liabilities.
 
(3) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets.
 
 
- 35 -

 
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.
 
   
For the Three Months Ended September 30, 2012
Compared with
For the Three months Ended September 30, 2011
 
   
Volume
   
Rate
   
Total
 
   
(In thousands)
 
Interest and fee income:
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 331     $ (426 )   $ (95 )
Tax-exempt (1)
    (628 )     (212 )     (840 )
Held to maturity
                       
Taxable
    1,873       (697 )     1,176  
Tax-exempt (1)
    2,227       (865 )     1,362  
Loans:
                       
Commercial:
                       
Taxable
    (1,660 )     (723 )     (2,383 )
Tax-exempt (1)
    (320 )     (72 )     (392 )
Commercial real estate
    (3,367 )     825       (2,542 )
Real estate construction
    (416 )     (321 )     (737 )
Real estate residential
    (455 )     (250 )     (705 )
Consumer
    (394 )     (1,102 )     (1,496 )
Total loans (1)
    (6,612 )     (1,643 )     (8,255 )
Total decrease in interest and fee income (1)
    (2,809 )     (3,843 )     (6,652 )
                         
Interest expense:
                       
Deposits:
                       
Savings and interest-bearing transaction
    17       (313 )     (296 )
Time less than $100,000
    (76 )     (121 )     (197 )
Time $100,000 or more
    (91 )     (73 )     (164 )
Total interest-bearing deposits
    (150 )     (507 )     (657 )
Short-term borrowed funds
    (17 )     (30 )     (47 )
Term repurchase agreement
    11       -       11  
Federal Home Loan Bank advances
    (37 )     41       4  
Debt financing
    (68 )     68       -  
Total decrease in interest expense
    (261 )     (428 )     (689 )
Decrease in Net Interest Income (1)
  $ (2,548 )   $ (3,415 )   $ (5,963 )
                         
 
(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
 
- 36 -

 
   
For the Nine Months Ended September 30, 2012
Compared with
For the Nine Months Ended September 30, 2011
 
   
Volume
   
Rate
   
Total
 
   
(In thousands)
 
Interest and fee income:
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 91     $ (228 )   $ (137 )
Tax-exempt (1)
    (2,042 )     (639 )     (2,681 )
Held to maturity
                       
Taxable
    5,332       (2,057 )     3,275  
Tax-exempt (1)
    6,751       (2,320 )     4,431  
Loans:
                       
Commercial:
                       
Taxable
    (5,843 )     (352 )     (6,195 )
Tax-exempt (1)
    (805 )     (385 )     (1,190 )
Commercial real estate
    (8,817 )     2,110       (6,707 )
Real estate construction
    (1,436 )     (166 )     (1,602 )
Real estate residential
    (1,325 )     (808 )     (2,133 )
Consumer
    (699 )     (3,239 )     (3,938 )
Total loans (1)
    (18,925 )     (2,840 )     (21,765 )
Total decrease in interest and fee income (1)
    (8,793 )     (8,084 )     (16,877 )
                         
Interest expense:
                       
Deposits:
                       
Savings and interest-bearing transaction
    74       (1,055 )     (981 )
Time less than $100,000
    (225 )     (189 )     (414 )
Time $100,000 or more
    (182 )     (453 )     (635 )
Total interest-bearing deposits
    (333 )     (1,697 )     (2,030 )
Short-term borrowed funds
    (21 )     (86 )     (107 )
Term repurchase agreement
    52       8       60  
Federal Home Loan Bank advances
    (225 )     188       (37 )
Debt financing
    (287 )     287       -  
Total decrease in interest expense
    (814 )     (1,300 )     (2,114 )
Decrease in Net Interest Income (1)
  $ (7,979 )   $ (6,784 )   $ (14,763 )
 
(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
 
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Provision for Loan Losses
 
The Company manages credit costs by consistently enforcing conservative underwriting and administration procedures and aggressively pursuing collection efforts with debtors experiencing financial difficulties. The provision for loan losses reflects Management's assessment of credit risk in the loan portfolio during each of the periods presented.
 
The Company provided $2.8 million and $8.4 million for loan losses in the third quarter and first nine months of 2012, respectively, unchanged from comparable periods in 2011. The Company recorded purchased County Bank (“County”) and Sonoma loans at estimated fair value upon the acquisition dates, February 6, 2009 and August 20, 2010, respectively. Such estimated fair values were recognized for individual loans, although small balance homogenous loans were pooled for valuation purposes. The valuation discounts recorded for purchased loans included Management’s assessment of the risk of principal loss under economic and borrower conditions prevailing on the dates of purchase. The purchased County loans are “covered” by loss-sharing agreements the Company entered with the FDIC which mitigates losses during the term of the agreements. Any deterioration in estimated value related to principal loss subsequent to the acquisition dates requires additional loss recognition through a provision for loan losses. Of the total recorded provision, the Company provided $1.6 million and $2.5 million for purchased loans in the third quarter and first nine months of 2012, respectively, and $428 thousand for the third quarter and first nine months of 2011. No assurance can be given future provisions for loan losses related to purchased loans will not be necessary. 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.
 
Noninterest Income
 
The following table summarizes the components of noninterest income for the periods indicated.
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
 
 
(In thousands)
 
                         
Service charges on deposit accounts
  $ 6,847     $ 7,430     $ 20,969     $ 22,529  
Merchant processing services
    2,411       2,358       7,333       6,921  
Debit card fees
    1,308       1,269       3,816       3,752  
ATM processing fees
    782       980       2,648       2,911  
Other service fees
    729       743       2,122       2,155  
Trust fees
    540       432       1,526       1,407  
Check sale income
    196       207       615       640  
Safe deposit fees
    196       188       586       525  
Financial services commissions
    175       111       540       257  
Loss on sale of securities
    -       -       (1,287 )     -  
Other noninterest income
    1,442       1,487       3,960       4,142  
Total
  $ 14,626     $ 15,205     $ 42,828     $ 45,239  
 
Noninterest income for the third quarter of 2012 declined by $579 thousand from the same period in 2011. Service charges on deposits decreased $583 thousand or 7.8% due to declines in fees charged on overdrawn and insufficient funds accounts (down $576 thousand). ATM processing fees decreased $198 thousand or 20.2% primarily due to a lower transaction volume at non-Westamerica Bank terminals.
 
In the first nine months of 2012, noninterest income decreased $2.4 million compared with the first nine months of 2011. The decline in the first nine months of 2012 noninterest income is primarily due to a $1.3 million loss realized from the sale of a collateralized mortgage obligation bond whose underlying support tranches began experiencing escalating losses, which began deteriorating the creditworthiness of the bond. Service charges on deposits decreased $1.6 million or 6.9% due to declines in fees charged on overdrawn and insufficient funds accounts (down $1.9 million), partially offset by higher deficit fees charged on analyzed accounts (up $259 thousand) and higher fees charged on checking accounts (up $130 thousand). ATM processing fees decreased $263 thousand or 9.0% primarily due to a lower transaction volume at non-Westamerica Bank terminals. Merchant processing services income increased $412 thousand or 6.0% mainly due to increased transactions. Financial services commissions increased $283 thousand from improved sales activities.
 
 
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Noninterest Expense
 
The following table summarizes the components of noninterest expense for the periods indicated.
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
                         
Salaries and related benefits
  $ 14,294     $ 14,401     $ 43,833     $ 44,388  
Occupancy
    3,901       4,010       11,609       12,085  
Outsourced data processing services
    2,156       2,165       6,318       6,743  
Amortization of identifiable intangibles
    1,336       1,477       4,076       4,505  
Furniture and equipment
    991       943       2,883       2,915  
Professional fees
    786       1,185       2,455       3,489  
Courier service
    772       840       2,350       2,535  
Other real estate owned
    679       700       912       1,835  
Telephone
    429       422       1,224       1,285  
Loan expense
    400       578       1,417       1,515  
Postage
    308       353       1,024       1,083  
Stationery and supplies
    274       272       764       919  
Advertising/public relations
    123       156       426       488  
Operational losses
    110       226       433       815  
Settlements
    -       -       -       2,100  
Other noninterest expense
    2,710       3,655       8,927       10,314  
Total
  $ 29,269     $ 31,383     $ 88,651     $ 97,014  
 
Noninterest expense decreased $2.1 million or 6.7% in the third quarter 2012 compared with the same period in 2011. Professional fees declined $399 thousand or 33.7% due to lower legal fees. Loan expense decreased $178 thousand or 30.8% primarily due to lower foreclosure expenses and appraisal fees. Operational losses declined $116 thousand. Occupancy expense declined $109 thousand mostly due to lower lease rates on bank premises. Salaries and related benefits decreased $107 thousand or 0.7% primarily due to lower salaries resulting from employee attrition, partly offset by higher employee benefit costs.
 
In the first nine months of 2012, noninterest expense decreased $8.4 million or 8.6% compared with the first nine months of 2011 mainly due to a $2.1 million settlement accrual in 2011 and lower costs related to managing nonperforming assets. Additionally, the first quarter 2011 included $679 thousand in expenses related to pre-integration costs for the acquired Sonoma, primarily outsourced data processing and personnel costs. Sonoma operations were fully integrated in February 2011. Professional fees declined $1.0 million or 29.6% largely due to lower legal fees. Other real estate owned expense decreased $923 thousand or 50.3% mainly due to higher gains on sale of foreclosed assets and lower maintenance costs, partially offset by higher writedowns. Salaries and related benefits decreased $555 thousand or 1.3% primarily due to lower salaries resulting from employee attrition, partially offset by higher employee benefit costs. Occupancy expense declined $476 thousand or 3.9% mostly due to lower lease rates on bank premises and lower maintenance expense. Operational losses declined $382 thousand.
 
Provision for Income Tax
 
During the third quarter of 2012, the Company recorded income tax provision (FTE) of $11.2 million compared with $13.3 million for the third quarter of 2011. The current quarter provision represents an effective tax rate (FTE) of 36.0%, compared with 37.2% for the third quarter of 2011. The decline in the tax rate is attributable to a higher proportion of pre-tax income represented by tax exempt elements, such as interest earned on municipal loans and investment securities.
 
The income tax provision (FTE) was $34.5 million for the first nine months of 2012 compared with $39.3 million for the corresponding period of 2011. The first nine months of 2012 effective tax rate was 35.8% compared to 37.3% for the same period of 2011. The lower tax rate in the first nine months of 2012 was attributable to a $968 thousand tax refund from an amended 2006 federal income tax return. This claim for tax refund was processed by the Internal Revenue Service in conjunction with the conclusion of an examination of the Company’s 2008 federal income tax return. In addition, the decline in the tax rate is attributable to a higher proportion of pre-tax income represented by tax exempt elements, such as interest earned on municipal loans and investment securities.
 
 
- 39 -

 
Loan Portfolio Credit Risk
 
The risk that loan customers do not repay loans extended 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 functions. 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 classified 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.
 
The Bank’s commercial loan customers are primarily small businesses and professionals. As a result, average loan balances are relatively small, providing risk diversification within the overall loan portfolio. At September 30, 2012, the Bank’s nonaccrual loans reflected this diversification: nonaccrual originated loans with a carrying value totaling $13 million comprised twenty-six borrowers, nonaccrual purchased non-covered loans with a carrying value totaling $10 million comprised thirteen borrowers, and nonaccrual purchased covered loans with a carrying value totaling $21 million comprised thirty borrowers.
 
Management believes the overall credit quality of the loan portfolio is reasonably stable; however, classified and nonperforming 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 loans will not occur in the future.
 
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, 2012, purchased covered loans totaled $418 million, or 19 percent of total loans, originated loans totaled $1.7 billion, or 77 percent and purchased non-covered loans totaled $83 million, or 4 percent of total loans.
 
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 loss-sharing agreement on covered residential real estate assets expires February 6, 2019 and the loss-sharing agreement on covered non-residential assets expires February 6, 2014 as to losses and February 6, 2017 as 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.
 
 
- 40 -

 
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 is estimated to be $12 million as 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 $9 million as of September 30, 2012, which would be realized only if all purchased covered assets at September 30, 2012 generated no future cash flows.
 
Purchased covered assets have declined since the acquisition date, and losses have been primarily offset against the estimated credit risk discount, although some losses exceeding the purchase date estimated credit risk discount have been provided for and charged-off against the related allowance for credit losses. Purchased covered assets totaled $431 million at September 30, 2012, net of a credit risk discount of $27 million, compared to $554 million at December 31, 2011, net of a credit risk discount of $46 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. Classified purchased covered assets without regard to FDIC indemnification totaled $130 million and $168 million at September 30, 2012 and December 31, 2011, respectively. FDIC indemnification limits the Company’s loss exposure to covered classified assets.
 
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 received 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.
 
 
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For the Three Months
   
For the Nine Months
 
   
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Analysis of the Allowance for Credit Losses
                       
Balance, beginning of period
  $ 34,216     $ 35,701     $ 35,290     $ 38,329  
Provision for loan losses
    2,800       2,800       8,400       8,400  
Provision for unfunded commitments
    -       -       -       -  
Loans charged off
                               
Commercial
    (65 )     (799 )     (3,623 )     (5,786 )
Commercial real estate
    (168 )     (398 )     (1,116 )     (399 )
Real estate construction
    (2,091 )     (452 )     (2,091 )     (1,926 )
Real estate residential
    (224 )     -       (1,156 )     (527 )
Consumer and other installment
    (1,439 )     (1,575 )     (4,303 )     (5,050 )
Purchased covered loans
    (111 )     (428 )     (723 )     (428 )
Purchased non-covered loans
    (535 )     -       (560 )     -  
Total chargeoffs
    (4,633 )     (3,652 )     (13,572 )     (14,116 )
Recoveries of loans previously charged off
                               
Commercial
    500       190       1,117       833  
Commercial real estate
    145       -       178       -  
Real estate construction
    26       -       224       -  
Consumer and other installment
    589       547       1,968       2,140  
Purchased covered loans
    16       -       54       -  
Total recoveries
    1,276       737       3,541       2,973  
Net loan losses
    (3,357 )     (2,915 )     (10,031 )     (11,143 )
Balance, end of period
  $ 33,659     $ 35,586     $ 33,659     $ 35,586  
Components:
                               
Allowance for loan losses
  $ 30,966     $ 32,893                  
Liability for off-balance sheet credit exposure
    2,693       2,693                  
Allowance for credit losses
  $ 33,659     $ 35,586                  
Net loan losses:
                               
Originated loans
  $ (2,727 )   $ (2,487 )   $ (8,802 )   $ (10,715 )
Purchased covered loans
    (95 )     (428 )     (669 )     (428 )
Purchased non-covered loans
    (535 )     -       (560 )     -  
Net loan losses as a percentage of average loans (annualized):
                         
Originated loans
    0.63 %     0.51 %     0.66 %     0.73 %
Purchased covered loans
    0.09 %     0.28 %     0.19 %     0.09 %
Purchased non-covered loans
    2.19 %     - %     0.69 %     - %
 
The Company's allowance for credit losses is maintained at a level considered appropriate 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 indemnification, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is specifically allocated to impaired loans whose full collectability of principal is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. In the first quarter 2012, the Company lowered the dollar threshold for loans evaluated for impairment. The Company evaluates all nonaccrual loans with outstanding principal balances in excess of $500 thousand for impairment. A second allocation is based in part on quantitative analyses of historical credit loss experience, in which historical originated criticized and classified credit balances are analyzed using a linear regression model to determine standard loss rates for originated loans. The results of this analysis are applied to originated criticized and classified loan balances to allocate the allowance to the respective segments of the loan portfolio. In addition, originated 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 originated consumer installment loans. Current levels of originated consumer installment loan losses are compared to initial allowance allocations and, based on Management’s judgment, additional allocations are applied, if needed, to estimate losses. For originated residential real estate loans, Management is comparing ultimate loss rates on foreclosed residential real estate properties and applying such loss rates to nonaccrual originated residential real estate loans. Based on this analysis, Management exercises judgment in allocating additional allowance if deemed appropriate to estimate losses on originated residential real estate loans. Last, allocations are made to originated non-criticized and non-classified commercial and commercial real estate loans based on historical loss rates and other statistical data.
 
 
- 42 -

 
Purchased loans were not underwritten using the Company’s credit policies and practices. Thus, the historical loss rates for originated loans are not applied to estimate credit losses for purchased loans. Purchased loans were recorded on the date of purchase at estimated fair value; fair value discounts include a component for estimated credit losses. The Company evaluates all nonaccrual purchased loans with outstanding principal balances in excess of $500 thousand for impairment; the impaired loan value is compared to the recorded investment in the loan, which has been reduced by the credit default discount estimated on the date of purchase. If Management’s impairment analysis determines the impaired loan value is less than the recorded investment in the purchased loan, an allocation of the allowance for credit losses is established, net of estimated FDIC indemnification. For all other purchased loans, Management evaluates historical credit losses on purchased loans, credit default discounts on purchased loans, and other data to evaluate the likelihood of realizing the recorded investment in purchased loans. Management establishes allocations of the allowance for credit losses for any estimated deficiency.
 
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. The unallocated allowance 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 chargeoff 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 $33.7 million allowance for credit losses to be adequate as a reserve against credit losses inherent in the loan portfolio as of September 30, 2012.
 
See Note 4 to the unaudited consolidated financial statements for additional information related to the loan portfolio and allowance for credit losses.
 
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.
 
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 re-price at different times. Assets and liabilities may re-price 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.
 
The Federal Open Market Committee’s October 24, 2012 press release stated “the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are likely warranted at least through mid-2015”. In this context, Management’s most likely earnings plan for the twelve months ended September 30, 2013 assumes interest rates remain relatively stable and yields on newly originated or refinanced loans and on purchased investment securities will reflect current interest rates, which are lower than yields on older dated loans and investment securities.
 
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.
 
 
- 43 -

 
Management’s interest rate risk management is currently biased toward stable interest rates in the near-term, and ultimately, 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.
 
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. 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.
 
Market Risk - Other
 
Market values of loan collateral can directly impact the level of loan charge-offs and the provision for loan losses. The financial condition and liquidity of debtors issuing bonds and debtors whose mortgages or other obligations are securitized  can directly impact the credit quality of the Company’s investment portfolio requiring the Company to recognize other than temporary impairment charges. 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's routine sources of liquidity are operating earnings, investment securities, consumer and other loans, deposits, and other borrowed funds. During the first nine months of 2012, operating activities provided $90 million to pay $31 million in shareholder dividends and $39 million applied to repurchase Company common stock. During the first nine months of 2011, the Company’s operating activities generated $87 million in liquidity providing funds to pay common shareholders $31 million in dividends and fund $45 million in stock repurchases.
 
During the first nine months of 2012, investment securities provided $275 million in liquidity from paydowns, maturities and sales, and loans provided $296 million in liquidity from scheduled payments, payoffs and maturities, net of loan fundings. Securities of $622 million were purchased. During the first nine months of 2011, investment securities provided $267 million in liquidity from paydowns and maturities, and loans provided $241 million in liquidity from scheduled payments and maturities, net of loan fundings. Additionally, deposit growth increased cash $60 million. First nine months of 2011 liquidity provided funds to purchase securities of $457 million and to reduce short-term borrowings by $22 million.
 
At September 30, 2012, the Company’s assets included $368 million in cash and amounts due from other banks from daily transaction settlements. The Bank maintains cash balances for its branches of approximately $50 million to meet the routine needs of its customers. Further, the Bank must maintain approximately $30 million at the Federal Reserve Bank (FRB) to meet its reserve requirement; this reserve requirement is reduced by cash held for branches. Excluding cash for branch needs and cash required at the FRB, cash and amounts due from other banks of approximately $290 million provided excess liquidity, equivalent to seven percent of total deposits.
 
The Company projects $243 million in additional liquidity from investment security paydowns and maturities during the twelve months ending September 30, 2013. At September 30, 2012, $677 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. The residential CMOs and MBSs provided $45 million in liquidity from paydowns during the three months ended September 30, 2012. At September 30, 2012, indirect automobile loans totaled $406 million, which were experiencing stable monthly principal payments of approximately $16 million during the third quarter of 2012.
 
 
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The Company held $1.9 billion in total investment securities at September 30, 2012. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At September 30, 2012, such collateral requirements totaled approximately $834 million. At September 30, 2012, $738 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, 2012, the Company had customary lines for overnight borrowings from other financial institutions in excess of $700 million, under which $-0- was outstanding. Additionally, the Company has access to borrowing from the Federal Reserve. 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.
 
Management will monitor the Company’s cash levels throughout the remainder of 2012 and 2013. Loan demand from credit-worthy borrowers will be dictated by economic and competitive condition. 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 these deposit balances is subject to heightened competition, the success of the Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, and a variety of other conditions, deposit growth may be used to fund loans, 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.
 
The Company performs liquidity stress tests on a periodic basis to evaluate the sustainability of its liquidity. Under the stress testing, the Company assumes outflows of funds increase beyond expected levels. Measurement of such heightened outflows considers the composition of the Company’s deposit base, including any concentration of deposits, non-deposit funding such as short-term borrowings and Federal Home Loan Bank advances, and unfunded lending commitments. The Company evaluates its stock of highly liquid assets to meet the assumed higher levels of outflows. Highly liquid assets include cash and amounts due from other banks from daily transaction settlements, reduced by branch cash needs and FRB reserve requirement, and investment securities based on regulatory risk-weighting guidelines. Based on the results of the most recent liquidity stress test, Management is satisfied with the liquidity condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced liquidity.
 
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. The $15 million note issued by the Parent Company, as described in Note 9 to the unaudited financial statements, matures October 31, 2013. 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 and Federal laws. The Company believes that regulatory dividend restrictions 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 14.7% (annualized) in the first nine months of 2012, 16.1% in 2011 and 18.1% in 2010. 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 $3 million in the first nine months of 2012, $14 million in 2011 and $17 million in 2010.
 
The Company paid dividends totaling $31 million in the first nine months of 2012, $42 million in 2011 and $42 million in 2010, which represent dividends per share of $1.11, $1.45 and $1.44, 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 836 thousand shares of common stock valued at $39 million in the first nine months of 2012, 1.3 million shares valued at $61 million in 2011 and 533 thousand shares valued at $29 million in 2010.
 
 
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The Company's shareholders' equity remained the same at $559 million at September 30, 2012 compared with December 31, 2011. In the nine months ended September 30, 2012, the Company earned $62 million in net income, raised $3 million from issuance of stock in connection with exercises of employee stock options, paid $31 million in dividends, and repurchased $39 million in common stock.
 
The Company performs capital stress tests on a periodic basis to evaluate the sustainability of its capital. Under the stress testing, the Company assumes various scenarios such as deteriorating economic and operating conditions, unanticipated asset devaluations, and significant operational lapses. The Company measures the impact of these scenarios on its earnings and capital. Based on the results of the most recent stress tests, Management is satisfied with the capital condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced earnings or a reduction in capital from unanticipated events and circumstances.
 
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 December 31,
   
Regulatory
   
by Regulatory
 
   
2012
   
2011
   
2011
   
Requirement
   
Definition
 
                               
Tier I Capital
    14.96 %     14.11 %     14.54 %     4.00 %     6.00 %
Total Capital
    16.22 %     15.41 %     15.83 %     8.00 %     10.00 %
Leverage ratio
    8.58 %     8.44 %     8.38 %     4.00 %     5.00 %
 
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 December 31,
   
Regulatory
   
by Regulatory
 
   
2012
   
2011
   
2011
   
Requirement
   
Definition
 
                               
Tier I Capital
    14.30 %     13.99 %     13.84 %     4.00 %     6.00 %
Total Capital
    15.78 %     15.49 %     15.32 %     8.00 %     10.00 %
Leverage ratio
    8.15 %     8.32 %     7.93 %     4.00 %     5.00 %

FDIC-covered assets are generally included in the 20% risk-weighted category for regulatory capital measurements due to loss sharing agreements, which expire on February 5, 2019 as to the residential real estate covered assets and on February 5, 2014 as to non-residential real estate covered assets. Subsequent to such dates, previously FDIC-indemnified assets will generally be included in the 100% risk-weight category.
 
On June 7, 2012, the Federal Reserve Board invited comment on three proposed rules intended to improve the quality and increase the quantity of capital in the banking industry. The proposals’ provisions which would most affect the regulatory capital requirements of the Company and the Bank:
 
·  
Redefine the type of capital which qualifies as regulatory capital in a manner which is more restrictive than current rules,
·  
Introduce a new “Common Equity Tier 1” capital measurement,
·  
Establish higher minimum levels of capital,
·  
Introduce a “capital conservation buffer,”
·  
Increase the risk-weighting of certain assets and commitments, in particular construction loans, loans on nonaccrual status, loans 90 days or more past due, short-term credit commitments, and deferred tax assets, and
·  
Alter the risk-weightings on residential real estate loans based on loan quality (underwriting standards and terms) and the loan-to-value ratio determined at time of origination or subsequent restructuring or modification.
 
Under the proposals, any bank subject to the rules which is unable to maintain its “capital conservation buffer” will be restricted in the payment of shareholder distributions, as an example dividends and share repurchases, and restricted in the payment of discretionary executive compensation. The proposals have phase-in schedules for the various provisions; the higher minimum capital requirements are fully phased-in by January 1, 2015 and the “capital conservation buffer” and changed risk-weightings are fully phased-in by January 1, 2019.
 
 
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These proposals do not supersede the Federal Deposit Insurance Corporation Improvement Act (FDICIA) requiring federal banking agencies to take prompt corrective action (PCA) to resolve problems of insured depository institutions. The proposals would revise the PCA thresholds to incorporate the proposed regulatory capital minimums, including the newly proposed “common equity tier 1” ratios.
 
Management has evaluated the capital structure and assets for the Company and the Bank as of September 30, 2012 assuming (1) the Federal Reserve’s proposed rules were currently fully phased-in and (2) the FDIC indemnification of the Bank’s purchased covered assets had expired, causing an increase in risk-weightings on such assets. Based on this evaluation, the Company and the Bank currently maintain capital in excess of all the proposed regulatory ratios, as follows:
 
   
Proposed
Minimum
Capital
Requirement
   
"Well-capitalized"
Under PCA
Proposal
   
Proposed
Minimum
Plus "Capital
Conservation
Buffer"
   
Proforma Measurements as of
September 30, 2012 Assuming New
Proposals Fully Phased-in and
Covered Asset Indemnification
Expired
 
                     
Company
   
Bank
 
Capital Measurement:
                             
Leverage
    4.00 %     5.00 %     4.00 %     8.83 %     8.40 %
Common Equity Tier 1
    4.50 %     6.50 %     7.00 %     13.69 %     13.06 %
Tier I Capital
    6.00 %     8.00 %     8.50 %     13.69 %     13.06 %
Total Capital
    8.00 %     10.00 %     10.50 %     14.78 %     14.17 %

The Company and the Bank intend to maintain regulatory capital in excess of the highest regulatory standard. 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 highest effective regulatory 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 and asset valuation risk, as discussed above are the most significant market risks 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, 2012. 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, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
 
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PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Due to the nature of its business, the Company is subject to various threatened or filed legal cases resulting from loan collection efforts, transaction processing for deposit accounts, employment practices and other routine business activities. The Company establishes a liability for contingent litigation losses for any legal matter when payments associated with the claims become probable and the costs can be reasonably estimated. Legal costs related to covered assets are eighty percent indemnified under loss-sharing agreements with the FDIC if certain conditions are met.
 

Item 1A. Risk Factors
 
The Company’s Form 10-K as of December 31, 2011 includes detailed disclosure about the risks faced by the Company’s business; such risks have not materially changed since the Form 10-K was filed.
 
 
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, 2012.
 
Period
 
(a)
Total Number of
Shares Purchased
   
(b)
Average Price
Paid per Share
   
(c)
Total Number
of Shares
Purchased as Part of
Publicly Announced
Plans or Programs*
   
(d)
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
 
             
(In thousands, except per share data)
         
July 1
through
July 31
    90     $ 45.99       90       1,967  
August 1
through
August 31
    80       45.93       80       1,887  
September 1
through
September 30
    100       47.77       100       1,787  
Total
    270     $ 46.63       270       1,787  
 
* Includes 2 thousand, 4 thousand and 1 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 July 25, 2012 pursuant to a program approved by the Board of Directors on July 28, 2011 authorizing the purchase of up to 2 million shares of the Company’s common stock from time to time prior to September 1, 2012. Shares were repurchased during the period from July 26, 2012 through September 30, 2012 pursuant to a replacement program approved by the Board of Directors on July 26, 2012 authorizing the purchase of up to 2 million shares of the Company’s common stock from time to time prior to September 1, 2013.

 
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Item 3. Defaults upon Senior Securities

None
 
 
Item 4. Mine Safety Disclosures

Not applicable.
 
 
Item 5. Other Information

None
 
 
Item 6. Exhibits

The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report.
 
 
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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: November 2, 2012
 
 

 
- 50 -

 
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

Exhibit 101:  Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011; (ii) Consolidated Balance Sheets at September 30, 2012, and December 31, 2011; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 and (vi) Notes to Consolidated Financial Statements.
 
 
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