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WABC > SEC Filings for WABC > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for WESTAMERICA BANCORPORATION

Form 10-Q for WESTAMERICA BANCORPORATION


30-Apr-2014

Quarterly Report


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

The Federal Reserve's Federal Open Market Committee has maintained highly accommodative monetary policies to influence interest rates to low levels in order to provide stimulus to the economy following the "financial crisis" recession. The Company's principal source of revenue is net interest and fee income, which represents interest earned on loans and investment securities ("earning assets") reduced by interest paid on deposits and other borrowings ("interest-bearing liabilities"). The relatively low level of market interest rates has reduced the spread between interest rates on earning assets and interest bearing liabilities. The Company's net interest margin and net interest income declined as market interest rates on newly originated loans remain below the yields earned on older-dated loans and on the overall loan portfolio. The Company is reducing its exposure to rising interest rates by purchasing shorter-duration investment securities with lower yields than longer-duration securities. The Company's noninterest income was lower in the first quarter 2014 due to fewer processing days compared to the fourth quarter 2013 and lower levels of customer transaction activity during the first quarter 2014. The Company incurs noninterest expenses to deliver products and services to its customers. The Company's credit quality continued to improve, as nonperforming assets and loan charge-offs declined in the first quarter 2014 and contributed to reducing expenses for nonperforming assets. Management is focused on controlling all noninterest expense levels, particularly due to market interest rate pressure on net interest income.

Westamerica Bancorporation and subsidiaries (the "Company") reported first quarter 2014 net income of $15.3 million or $0.58 diluted earnings per common share. These results compare to net income of $17.3 million or $0.64 diluted earnings per common share and $16.1 million or $0.60 diluted earnings per common share, respectively, for the first and fourth quarters of 2013.

Net Income

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

                                                                For the Three Months Ended
                                                              March 31,               December 31,
                                                        2014            2013              2013
                                                         (In thousands, except per share data)
Net interest and fee income (FTE)                    $    38,864     $    43,835     $       40,050
Provision for loan losses                                 (1,000 )        (2,800 )           (1,600 )
Noninterest income                                        12,990          14,278             14,030
Noninterest expense                                      (26,873 )       (28,677 )          (27,987 )
Income before taxes (FTE)                                 23,981          26,636             24,493
Income tax provision (FTE)                                (8,674 )        (9,365 )           (8,437 )
Net income                                           $    15,307     $    17,271     $       16,056

Average diluted common shares                             26,537          27,157             26,754
Diluted earnings per common share                    $      0.58     $      0.64     $         0.60

Average total assets                                 $ 4,889,940     $ 4,908,483     $    4,876,884
Net income to average total assets (annualized)             1.27 %          1.43 %             1.31 %
Net income to average common stockholders' equity
(annualized)                                               11.64 %         12.93 %            11.85 %

Net income for the first quarter of 2014 was $2.0 million less than the same quarter of 2013, the net result of declines in net interest and fee income (fully taxable equivalent or "FTE") and noninterest income, partially offset by decreases in the provision for loan losses, noninterest expense and income tax provision (FTE). A decrease in net interest and fee income (FTE) was mostly attributed to lower average balances of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments and lower average balances of interest-bearing liabilities. The provision for loan losses was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio; net losses and nonperforming loan volumes have declined relative to earlier periods. Noninterest expense decreased primarily due to reduced personnel costs, loan administration expenses, intangible amortization and professional fees.

Comparing the first quarter of 2014 to the fourth quarter of 2013, net income decreased $749 thousand primarily due to lower net interest and fee income (FTE) and lower noninterest income, partially offset by decreases in the provision for loan losses and noninterest expense. The lower net interest and fee income (FTE) was primarily caused by a lower average volume of loans and lower yields on interest earning assets, partially offset by higher average balances of investments and lower average balances of higher costing interest-bearing liabilities. The provision for loan losses was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest expense decreased mostly due to declines in loan administration expenses and professional fees.

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Net Interest and Fee Income (FTE)

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

                                                   For the Three Months Ended
                                                  March 31,                December 31,
                                                2014            2013               2013
                                                         (In thousands)
Interest and fee income                  $    35,564     $    40,465     $       36,706
Interest expense                                (898 )        (1,252 )           (1,024 )
FTE adjustment                                 4,198           4,622              4,368
 Net interest and fee income (FTE)       $    38,864     $    43,835     $       40,050

Average earning assets                   $ 4,093,087     $ 4,135,863     $    4,062,976
Net interest margin (FTE) (annualized)          3.83 %          4.27 %             3.92 %

Net interest and fee income (FTE) decreased during the first quarter 2014 by $5.0 million from the same period in 2013 to $38.9 million, mainly due to lower average balances of loans (down $256 million) and lower yields on interest-earning assets (down 47 basis points "bp"), partially offset by higher average balances of investments (up $213 million) and lower average balances of interest-bearing liabilities (down $130 million).

Comparing the first quarter of 2014 with the fourth quarter of 2013, net interest and fee income (FTE) decreased $1.2 million primarily due to a lower average volume of loans (down $25 million) and lower yields on interest earning assets (down 10 bp), partially offset by higher average balances of investments (up $55 million) and lower average balances of higher costing interest-bearing liabilities.

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

Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. In the first quarter 2014, the Company purchased shorter-duration investment securities with lower yields than longer-duration securities in order to reduce its exposure to rising interest rates. The Company's high levels of liquidity will provide an opportunity to obtain higher yielding assets once market interest rates start rising. The Company has been replacing higher-cost funding sources with low-cost deposits and interest expense has declined to offset some of the decline in asset yields.

Interest and Fee Income (FTE)

Interest and fee income (FTE) for the first quarter of 2014 decreased $5.3 million or 11.8% from the same period in 2013. 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 $117 million), consumer loans (down $76 million), residential real estate loans (down $48 million) and tax-exempt commercial loans (down $19 million). The average investment portfolio increased largely due to higher average balances of securities of U.S. Government sponsored entities (up $167 million), corporate securities (up $111 million) and municipal securities (up $43 million), partially offset by a $97 million decrease in average balances of collateralized mortgage obligations and mortgage-backed securities.

-29-

The average yield on the Company's earning assets decreased from 4.39% in the first quarter 2013 to 3.92% in the corresponding period of 2014. The composite yield on loans declined 27 bp to 5.19% mostly due to lower yields on consumer loans (down 39 bp), commercial real estate loans (down 20 bp), taxable commercial loans (down 44 bp), tax-exempt commercial loans (down 40 bp) and residential real estate loans (down 19 bp). Nonperforming loans are included in average loan volumes used to compute loan yields; fluctuations in nonaccrual loan volumes impact loan yields. The investment yields in general declined due to market rates. The investment portfolio yield decreased 43 bp to 2.89% primarily due to lower yields on municipal securities (down 61 bp) and corporate securities (down 39 bp), partially offset by a 27 bp increase in yields on securities of U.S. Government sponsored entities. The yield on securities of U.S. government sponsored entities rose as securities added to the portfolio in the first quarter 2014 were higher yielding than securities held in the prior period.

Comparing the first quarter of 2014 with the fourth quarter of 2013, interest and fee income (FTE) was down $1.3 million or 3.2%. 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 $30 million or 0.7% in the first quarter of 2014 compared with the fourth quarter of 2013 due to a $55 million increase in average investments and a $25 million decrease in average loans. The decrease in the average balance of the loan portfolio was attributable to decreases in average balances of commercial real estate loans (down $29 million), consumer loans (down $12 million), tax-exempt commercial loans (down $5 million) and residential real estate loans (down $8 million), partially offset by a $31 million increase in the average balance of taxable commercial loans. The average investment portfolio increased mostly due to higher average balances of U.S. government sponsored entities (up $105 million), partially offset by decreases in average balances of collateralized mortgage obligations and mortgage-backed securities (down $26 million) and corporate securities (down $16 million). The average yield on earning assets for the first quarter of 2014 was 3.92% compared with 4.02% in the fourth quarter of 2013. The loan portfolio yield for the first quarter of 2014 was 5.19% compared with 5.25% for the fourth quarter of 2013 mostly due to lower yields on taxable commercial loans (down 50 bp), consumer loans (down 9 bp), commercial real estate loans (down 7 bp) and tax-exempt commercial loans (down 23 bp). The investment portfolio yield decreased 11 bp to 2.89% primarily due to lower yields on municipal securities (down 14 bp) and corporate securities (down 10 bp), partially offset by higher yields on securities of U.S. government sponsored entities (up 21 bp). The yield on securities of U.S. government sponsored entities rose as securities added to the portfolio in the first quarter 2014 were higher yielding than securities held in the prior period.

Interest Expense

Interest expense has been reduced by lowering rates paid on interest-bearing deposits and borrowings and by reducing the volume of higher-cost funding sources. A $15 million long-term note was repaid in October 2013 and average balances of time deposits for the first quarter 2014 declined $164 million compared with first quarter 2013 and $38 million compared with fourth quarter 2013. Lower-cost checking and savings deposits accounted for 88.9% of total average deposits in the first quarter 2014 compared with 85.0% in the first quarter 2013 and 87.9% in the fourth quarter 2013.

Interest expense in the first quarter of 2014 decreased $354 thousand or 28.3% compared with the same period in 2013 due to lower average balances of interest-bearing liabilities. Interest-bearing liabilities declined due to lower average balances of time deposits $100 thousand or more (down $132 million), time deposits less than $100 thousand (down $32 million), preferred money market savings (down $19 million), debt financing (down $15 million) and Federal Home Loan Bank advances (down $5 million), partially offset by higher average balances of money market savings (up $40 million), money market checking accounts (up $15 million) and regular savings (up $13 million). The average rate paid on interest-bearing liabilities decreased from 0.19% in the first quarter of 2013 to 0.14% in the first quarter of 2014. Rates on interest-bearing deposits were 0.13% for the first quarter 2014 compared with 0.14% for the first quarter 2013.

Comparing the first quarter of 2014 with the fourth quarter of 2013, interest expense declined $126 thousand or 12.3% due to a shift from higher costing deposits and financing to lower cost checking and savings accounts. Average balances of debt financing and Federal Home Loan Bank advances declined $5 million and $4 million, respectively. Average balances of interest-bearing deposits increased primarily due to higher balances of money market checking accounts (up $18 million) and money market savings (up $22 million), partially offset by lower average balances of time deposits $100 thousand or more (down $30 million) and time deposits less than $100 thousand (down $8 million). Rates paid on interest-bearing liabilities averaged 0.14% during the first quarter 2014 compared with 0.16% for the fourth quarter 2013. Rates paid on interest-bearing deposits were 0.13%, unchanged from the fourth quarter 2013.

-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 Ended
                                                    March 31,              December 31,
                                              2014            2013             2013

Yield on earning assets (FTE)                    3.92 %          4.39 %             4.02 %
Rate paid on interest-bearing liabilities        0.14 %          0.19 %             0.16 %
 Net interest spread (FTE)                       3.78 %          4.20 %             3.86 %
Impact of noninterest-bearing funds              0.05 %          0.07 %             0.06 %
  Net interest margin (FTE)                      3.83 %          4.27 %             3.92 %

During the first quarter 2014, the net interest margin (FTE) was affected by low market interest rates. The volume of older-dated higher-yielding loans and securities declined due to principal maturities and paydowns. Newly originated loans and purchased securities have lower-yields. The Company is reducing its exposure to rising interest rates by purchasing shorter-duration investment securities, which carry lower yields than longer-duration securities. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost funding sources. During the first quarter 2014 the net interest margin (FTE) decreased 44 bp compared with the same period in 2013. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 42 bp decrease in net interest spread (FTE). The 5 bp net interest margin contribution of noninterest-bearing demand deposits resulted in the net interest margin (FTE) of 3.83%. During the first quarter of 2014, the net interest margin (FTE) decreased 9 bp compared with the fourth quarter of 2013. The net interest spread (FTE) in the first quarter of 2014 was 3.78% compared with 3.86% in the fourth quarter of 2013, the net result of a 10 bp decrease in earning asset yields, partially offset by lower cost of interest-bearing liabilities (down 2 bp).

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-31-

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 &

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