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WABC > SEC Filings for WABC > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for WESTAMERICA BANCORPORATION

Form 10-K for WESTAMERICA BANCORPORATION


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion addresses information pertaining to the financial condition and results of operations of Westamerica Bancorporation and subsidiaries (the "Company") that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes found on pages 52 through 91, as well as with the other information presented throughout the Report.

Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the banking industry. Application of these principles requires the Company to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting and purchased loan accounting to be the accounting areas requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the "Loan Portfolio Credit Risk" discussion below.

Net Income

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

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Components of Net Income

Year ended December 31,
(Dollars in thousands except per share amounts)                    2013           2012           2011
Net interest and loan fee income *                           $  167,737     $  197,027     $  218,867
Provision for loan losses                                        (8,000 )      (11,200 )      (11,200 )
Noninterest income                                               57,011         57,022         60,097
Noninterest expense                                            (112,614 )     (116,885 )     (127,678 )
Income before income taxes *                                    104,134        125,964        140,086
Taxes *                                                         (36,957 )      (44,837 )      (52,198 )
Net income                                                   $   67,177     $   81,127     $   87,888
Net income per average fully-diluted common share            $     2.50     $     2.93     $     3.06
Net income as a percentage of average shareholders' equity        12.48 %        14.93 %        16.14 %
Net income as a percentage of average total assets                 1.38 %         1.64 %         1.78 %

* Fully taxable equivalent (FTE)

Comparing 2013 to 2012, net income decreased $14.0 million or 17.2%, primarily due to lower net interest and loan fee income (FTE), partially offset by decreases in loan loss provision, noninterest expense and income tax provision (FTE). The lower net interest and loan fee income (FTE) was primarily caused by a lower average volume of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments, lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. The provision for loan losses was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio; net loan losses and nonperforming loan volumes have declined relative to earlier periods. Noninterest expense decreased $4.3 million primarily due to reduced personnel costs, professional fees, loan administration costs, expenses related to other real estate owned and intangible asset amortization.

Comparing 2012 to 2011, net income decreased $6.8 million, 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 deposits. The provision for loan losses remained the same, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest expense declined primarily due to a $2.1 million settlement accrual in 2011 and reduced costs related to personnel and nonperforming assets.

Net Interest and Loan Fee Income (FTE)

The Company's primary source of revenue is net interest income, or the difference between interest income earned on loans and investment securities and interest expense paid on interest-bearing deposits and other borrowings. Comparing 2013 to 2012, net interest and loan fee income (FTE) decreased $29.3 million or 14.9% to $167.7 million. Net interest and loan fee income (FTE) in 2012 decreased $21.8 million or 10.0% from 2011, to $197.0 million.

Components of Net Interest and Loan Fee Income (FTE)

Year ended December 31,
(Dollars in thousands)                        2013          2012          2011
Interest and loan fee income             $ 154,396     $ 183,364     $ 207,979
Interest expense                            (4,671 )      (5,744 )      (8,382 )
FTE adjustment                              18,012        19,407        19,270
Net interest and loan fee income (FTE)   $ 167,737     $ 197,027     $ 218,867
Net interest margin (FTE)                     4.08 %        4.79 %        5.32 %

Comparing 2013 with 2012, net interest and loan fee income (FTE) decreased $29.3 million or 14.9%, primarily due to a lower average volume of loans (down $360 million) and lower yields on interest-earning assets (down 74 basis points), partially offset by higher average balances of investments (up $355 million), lower average balances of interest-bearing liabilities (down $161 million) and lower rates paid on interest-bearing deposits (down 2 basis points).

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

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Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. Management's response to prevailing economic conditions and competitive loan pricing has been to reduce loan volumes, placing greater reliance on lower-yielding investment securities. Rates on interest-bearing deposits have declined to offset some of the decline in asset yields.

In 2013, interest and loan fee income (FTE) was down $30.4 million or 15.0% from 2012. The decrease resulted from a lower average volume of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments. The total average balances of loans declined due to decreases in the average balances of commercial real estate loans (down $155 million), taxable commercial loans (down $63 million), consumer loans (down $57 million), residential real estate loans (down $53 million), tax-exempt commercial loans (down $22 million) and construction loans (down $11 million). The average investment portfolio increased largely due to higher average balances of corporate securities (up $205 million), collateralized mortgage obligations (up $172 million) and municipal securities (up $47 million), partially offset by decreases in average balances of mortgage backed securities (down $37 million) and securities of U.S. government sponsored entities (down $30 million).

The average yield on the Company's earning assets decreased from 4.93% in 2012 to 4.19% in 2013. The composite yield on loans declined 41 basis points to 5.36% mostly due to lower yields on commercial real estate loans (down 45 basis points), consumer loans (down 62 basis points), residential real estate loans (down 14 basis points), taxable commercial loans (down 8 basis points) and tax-exempt loans (down 20 basis points). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The yield on construction loans in 2013 was elevated due to interest received on nonaccrual loans and discount accretion on purchased loans. The investment yields in general declined due to market rates. The investment portfolio yield decreased 71 basis points to 3.13% in 2013 primarily due to lower yields on collateralized mortgage obligations and mortgage backed securities (down 65 basis points), municipal securities (down 55 basis points) and corporate securities (down 46 basis points).

Comparing 2013 with 2012, interest expense declined $1.1 million or 18.7% due to lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. Lower-cost checking and savings deposits accounted for 86.3% of total average deposits in 2013 compared with 82.8% in 2012. Average interest-bearing liabilities fell $161 million in 2013 compared with 2012 primarily due to declines in the average balances of time deposits $100 thousand or more (down $120 million) and time deposits less than $100 thousand (down $36 million), preferred money market accounts (down $23 million) and customer sweep accounts (down $23 million), partially offset by increases in the average balances of regular savings (up $25 million) and money market savings (up $17 million). Rates paid on interest-bearing deposits averaged 0.14% in 2013 compared with 0.16% for 2012 as a result of decreases in rates paid on time deposits less than $100 thousand (down 10 basis points).

Comparing 2012 with 2011, net interest and loan fee income (FTE) declined $21.8 million mostly due to a lower average volume of loans (down $422 million) and lower yields on interest earning assets (down 59 basis points), partially offset by higher average balances of investments (up $424 million), lower average balances of interest-bearing liabilities (down $103 million) and lower rates on interest-bearing deposits (down 9 basis points).

Interest and loan fee income (FTE) was down $24.5 million or 10.8% from 2012 to 2011. The decrease resulted from a lower average volume of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments. Average interest earning assets increased $2 million in 2012 compared with 2011 due to a $424 million increase in average investments, offset by a $422 million decrease in average loans. The average investment portfolio increased mostly due to higher average balances of collateralized mortgage obligations and mortgage backed securities (up $271 million), municipal securities (up $108 million) and corporate securities (up $92 million), partially offset by a $57 million decline in securities issued by U.S. government sponsored entities. The decrease in the average balance of the loan portfolio was attributable to decreases in average balances of commercial real estate loans (down $183 million), taxable commercial loans (down $118 million), construction loans (down $31 million), residential real estate loans (down $48 million), tax-exempt commercial loans (down $19 million) and consumer loans (down $22 million).

The average yield on earning assets in 2012 was 4.93% compared with 5.52% in 2011. The loan portfolio yield for 2012 compared with 2011 was lower by 22 basis points mostly due to lower yields on consumer loans (down 76 basis points), residential real estate loans (down 33 basis points) and tax-exempt commercial loans (down 35 basis points) and taxable commercial loans (down 9 basis points), partially offset by higher yields on commercial real estate loans (up 15 basis points). 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 2012 and 2011 was elevated due to interest received on nonaccrual loans and discount accretion on purchased loans. The investment portfolio yield decreased 76 basis points to 3.84% from 2012 to 2011 primarily due to lower yields on collateralized mortgage obligations and mortgage backed securities (down 118 basis points), municipal securities (down 55 basis points), and securities of U.S. government sponsored entities (down 26 basis points), partially offset by a 5 basis points increase in yields on corporate securities which contain floating interest rate structures.

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Interest expense was reduced by lowering rates paid on interest-bearing deposits and borrowings and by reducing the volume of higher-cost funding sources. Lower-cost checking and savings deposits accounted for 82.8% of total average deposits in 2012 compared with 79.6% in 2011. In 2012 interest expense declined $2.6 million or 31.5% from 2011, due to lower average balances of interest-bearing liabilities and lower rates paid on interest-bearing deposits. In 2012 average interest-bearing deposits fell $62 million compared with 2011 primarily due to declines in the average balances of time deposits $100 thousand or more (down $75 million), time deposits less than $100 thousand (down $49 million), and preferred money market savings (down $38 million), partially offset by increases in the average balances of money market checking accounts (up $41 million), money market savings (up $30 million) and regular savings (up $29 million). Average balances of debt financing declined $7 million due to the redemption of a $10 million subordinated note in August 2011. Increases were partially offset by higher average balances of term repurchase agreement (up $6 million). Rates paid on interest-bearing deposits averaged 0.16% in 2012 compared with 0.25% in 2011 mainly due to lower rates on money market savings (down 7 basis points), preferred money market savings (down 32 basis points), regular savings (down 5 basis points), time deposits $100 thousand and more (down 10 basis points) and time deposits less than $100 thousand (down 10 basis points).

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Summary of Average Balances, Yields/Rates and Interest Differential

The following tables present information regarding the consolidated average assets, liabilities and shareholders' equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates. Average loan balances include nonperforming loans. Interest income includes reversal of previously accrued interest on loans placed on non-accrual status during the period and proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income and accretion of purchased loan discounts. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate.

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

Interest Margin

                                                       Year Ended December 31, 2013
                                                                   Interest
                                                      Average       Income/       Yields/
(Dollars in thousands)                                Balance       Expense         Rates
Assets
Investment securities:
Available for sale
Taxable                                          $    823,228     $  14,685          1.78 %
Tax-exempt (1)                                        186,101        10,435          5.61 %
Held to maturity
Taxable                                               431,246         7,516          1.74 %
Tax-exempt (1)                                        714,515        34,961          4.89 %
Loans:
Commercial
Taxable                                               256,638        16,042          6.25 %
Tax-exempt (1)                                        106,871         6,264          5.86 %
Commercial real estate                                862,266        53,615          6.22 %
Real estate construction                               15,514         1,182          7.62 %
Real estate residential                               211,360         7,357          3.48 %
Consumer                                              501,932        20,351          4.05 %
Total Loans (1)                                     1,954,581       104,811          5.36 %
Interest-earning assets (1)                         4,109,671       172,408          4.19 %
Other assets                                          754,191
Total assets                                     $  4,863,862
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand                       $  1,683,447            --            --
Savings and interest-bearing transaction            1,910,131         1,182          0.06 %
Time less than $100,000                               228,061         1,070          0.47 %
Time $100,000 or more                                 341,184         1,096          0.32 %
Total interest-bearing deposits                     2,479,376         3,348          0.14 %
Short-term borrowed funds                              57,454            77          0.13 %
Federal Home Loan Bank advances                        25,499           480          1.88 %
Term repurchase agreement                              10,000            98          0.98 %
Debt financing and notes payable                       12,452           668          5.37 %
Total interest-bearing liabilities                  2,584,781         4,671          0.18 %
Other liabilities                                      57,469
Shareholders' equity                                  538,165
Total liabilities and shareholders' equity       $  4,863,862
Net interest spread (2)                                                              4.01 %
Net interest income and interest margin (1)(3)                    $ 167,737          4.08 %



(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

(2) Net interest spread represents the average yield earned on interest earning assets less the average rate incurred on interest-bearing liabilities.

(3) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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

Interest Margin

                                                       Year Ended December 31, 2012
                                                                   Interest
                                                      Average       Income/       Yields/
(Dollars in thousands)                                Balance       Expense         Rates
Assets
Investment securities:
Available for sale
Taxable                                          $    491,338     $  11,430          2.33 %
Tax-exempt (1)                                        214,268        12,603          5.88 %
Held to maturity
Taxable                                               460,381         9,916          2.15 %
Tax-exempt (1)                                        634,482        35,277          5.56 %
Loans:
Commercial
Taxable                                               319,235        20,216          6.33 %
Tax-exempt (1)                                        128,887         7,815          6.06 %
Commercial real estate                              1,016,805        67,863          6.67 %
Real estate construction                               26,314         1,946          7.40 %
Real estate residential                               264,497         9,583          3.62 %
Consumer                                              559,132        26,122          4.67 %
Total Loans (1)                                     2,314,870       133,545          5.77 %
Interest-earning assets (1)                         4,115,339       202,771          4.93 %
Other assets                                          838,963
Total assets                                     $  4,954,302
Liabilities and shareholders' equity
Deposits:
Noninterest bearing demand                       $  1,603,981            --            --
Savings and interest-bearing transaction            1,887,959         1,238          0.07 %
Time less than $100,000                               264,466         1,515          0.57 %
Time $100,000 or more                                 460,833         1,530          0.33 %
Total interest-bearing deposits                     2,613,258         4,283          0.16 %
Short-term borrowed funds                              81,323            77          0.09 %
Federal Home Loan Bank advances                        25,916           483          1.86 %
Term repurchase agreement                              10,000            99          0.99 %
Debt financing and notes payable                       15,000           802          5.35 %
Total interest-bearing liabilities                  2,745,497         5,744          0.21 %
Other liabilities                                      61,515
Shareholders' equity                                  543,309
Total liabilities and shareholders' equity       $  4,954,302
Net interest spread (2)                                                              4.72 %
Net interest income and interest margin (1)(3)                    $ 197,027          4.79 %



(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

(2) Net interest spread represents the average yield earned on interest earning assets less the average rate incurred on interest-bearing liabilities.

(3) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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

Interest Margin

                                                       Year Ended December 31, 2011
                                                                   Interest
                                                      Average       Income/       Yields/
(Dollars in thousands)                                Balance       Expense         Rates
Assets
Money market assets and funds sold               $        430     $      --            -- %
Investment securities:
Available for sale
Taxable                                               445,527        11,166          2.51 %
Tax-exempt (1)                                        258,867        15,989          6.18 %
Held to maturity
Taxable                                               188,751         6,238          3.30 %
Tax-exempt (1)                                        483,255        29,878          6.18 %
Loans:
Commercial
Taxable                                               437,581        28,087          6.42 %
Tax-exempt (1)                                        148,144         9,494          6.41 %
Commercial real estate                              1,199,390        78,179          6.52 %
Real estate construction                               57,529         4,331          7.53 %
Real estate residential                               312,615        12,340          3.95 %
Consumer                                              581,286        31,547          5.43 %
Total Loans (1)                                     2,736,545       163,978          5.99 %
. . .
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