10-Q 1 f10q_080113.htm FORM 10-Q f10q_080113.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
 
[  ]
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
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of Principal Executive Offices) (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes [x] No [  ]
 
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 [x] No [  ]
 
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 [x]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
(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 [  ] No [x]

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 July 23, 2013
   
Common Stock,
No Par Value
26,771,525
 
 

 
TABLE OF CONTENTS


 
 
Page
 
4
 
 
 
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
55
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
56
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350
57
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350
58
 
 
-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, 2012, 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 June 30,
   
At December 31,
 
   
2013
   
2012
 
   
(In thousands)
 
Assets:
           
Cash and due from banks
  $ 384,276     $ 491,382  
Investment securities available for sale
    1,004,888       825,636  
Investment securities held to maturity, with fair values of: $1,124,946 at June 30, 2013 and $1,184,557 at December 31, 2012
    1,134,615       1,156,041  
Purchased covered loans
    324,976       372,283  
Purchased non-covered loans
    61,062       74,891  
Originated loans
    1,553,303       1,664,183  
Allowance for loan losses
    (30,926 )     (30,234 )
Total loans
    1,908,415       2,081,123  
Non-covered other real estate owned
    8,957       12,661  
Covered other real estate owned
    10,480       13,691  
Premises and equipment, net
    38,267       38,639  
Identifiable intangibles, net
    20,877       23,261  
Goodwill
    121,673       121,673  
Other assets
    181,460       188,086  
Total Assets
  $ 4,813,908     $ 4,952,193  
                 
Liabilities:
               
Noninterest bearing deposits
  $ 1,644,151     $ 1,676,071  
Interest bearing deposits
    2,457,243       2,556,421  
Total deposits
    4,101,394       4,232,492  
Short-term borrowed funds
    66,640       53,687  
Federal Home Loan Bank advances
    25,687       25,799  
Term repurchase agreement
    10,000       10,000  
Debt financing
    15,000       15,000  
Other liabilities
    50,565       55,113  
Total Liabilities
    4,269,286       4,392,091  
                 
Shareholders' Equity:
               
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,769 at June 30, 2013 and 27,213 at December 31, 2012
    371,498       372,012  
Deferred compensation
    2,711       3,101  
Accumulated other comprehensive income
    4,524       14,625  
Retained earnings
    165,889       170,364  
Total Shareholders' Equity
    544,622       560,102  
Total Liabilities and  Shareholders' Equity
  $ 4,813,908     $ 4,952,193  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
-4-

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands, except per share data)
 
Interest and Fee Income:
                       
Loans
  $ 26,180     $ 33,745     $ 53,579     $ 69,401  
Investment securities available for sale
    5,532       4,938       10,868       9,726  
Investment securities held to maturity
    7,557       8,218       15,287       16,072  
Total Interest and Fee Income
    39,269       46,901       79,734       95,199  
Interest Expense:
                               
Deposits
    847       1,107       1,746       2,294  
Short-term borrowed funds
    26       21       37       48  
Term repurchase agreement
    25       24       49       49  
Federal Home Loan Bank advances
    120       119       238       239  
Debt financing
    201       201       401       401  
Total Interest Expense
    1,219       1,472       2,471       3,031  
Net Interest Income
    38,050       45,429       77,263       92,168  
Provision for Loan Losses
    1,800       2,800       4,600       5,600  
Net Interest Income After Provision For Loan Losses
    36,250       42,629       72,663       86,568  
Noninterest Income:
                               
Service charges on deposit accounts
    6,452       7,027       12,994       14,122  
Merchant processing services
    2,413       2,529       4,822       4,922  
Debit card fees
    1,478       1,345       2,836       2,508  
ATM processing fees
    721       932       1,426       1,865  
Trust fees
    585       497       1,153       986  
Financial services commissions
    284       194       464       365  
Loss on sale of securities
    -       (1,287 )     -       (1,287 )
Other
    2,351       2,296       4,867       4,721  
Total Noninterest Income
    14,284       13,533       28,562       28,202  
Noninterest Expense:
                               
Salaries and related benefits
    14,064       14,494       28,467       29,540  
Occupancy
    3,638       3,775       7,524       7,709  
Outsourced data processing services
    2,140       2,078       4,297       4,161  
Amortization of identifiable intangibles
    1,165       1,339       2,384       2,741  
Furniture and equipment
    1,021       1,041       1,901       1,892  
Professional fees
    745       902       1,380       1,669  
Courier service
    737       793       1,478       1,578  
Other real estate owned
    278       3       612       233  
Other
    4,404       4,924       8,826       9,860  
Total Noninterest Expense
    28,192       29,349       56,869       59,383  
Income Before Income Taxes
    22,342       26,813       44,356       55,387  
Provision for income taxes
    5,230       5,849       9,973       13,418  
Net Income
  $ 17,112     $ 20,964     $ 34,383     $ 41,969  
                                 
Average Common Shares Outstanding
    26,890       27,744       27,017       27,897  
Diluted Average Common Shares Outstanding
    26,898       27,790       27,027       27,951  
Per Common Share Data:
                               
Basic earnings
  $ 0.64     $ 0.76     $ 1.27     $ 1.50  
Diluted earnings
    0.64       0.75       1.27       1.50  
Dividends paid
    0.37       0.37       0.74       0.74  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
-5-

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
Net Income
  $ 17,112     $ 20,964     $ 34,383     $ 41,969  
Other comprehensive (loss) income:
                               
(Decrease) increase in net unrealized gains on securities available for sale
    (18,733 )     1,451       (17,461 )     2,835  
Deferred tax benefit (expense)
    7,876       (610 )     7,342       (1,192 )
(Decrease) increase in net unrealized gains on securities available for sale, net of tax
    (10,857 )     841       (10,119 )     1,643  
Post-retirement benefit transition obligation amortization
    15       15       30       30  
Deferred tax expense
    (6 )     (6 )     (12 )     (12 )
Post-retirement benefit transition obligation amortization, net of tax
    9       9       18       18  
Total Other Comprehensive (Loss) Income
    (10,848 )     850       (10,101 )     1,661  
Total Comprehensive Income
  $ 6,264     $ 21,814     $ 24,282     $ 43,630  

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, 2011
    28,150     $ 377,775     $ 3,060     $ 11,369     $ 166,437     $ 558,641  
Net income for the period
                                    41,969       41,969  
Other comprehensive income
                            1,661               1,661  
Exercise of stock options
    25       1,030                               1,030  
Tax benefit increase upon exercise of stock options
            2                               2  
Restricted stock activity
    11       482       41                       523  
Stock based compensation
            805                               805  
Stock awarded to employees
    1       63                               63  
Purchase and retirement of stock
    (566 )     (7,526 )                     (18,555 )     (26,081 )
Dividends
                                    (20,687 )     (20,687 )
Balance, June 30, 2012
    27,621     $ 372,631     $ 3,101     $ 13,030     $ 169,164     $ 557,926  
                                                 
Balance, December 31, 2012
    27,213     $ 372,012     $ 3,101     $ 14,625     $ 170,364     $ 560,102  
Net income for the period
                                    34,383       34,383  
Other comprehensive loss
                            (10,101 )             (10,101 )
Exercise of stock options
    157       6,414                               6,414  
Tax benefit decrease upon exercise of stock options
            (201 )                             (201 )
Restricted stock activity
    15       1,068       (390 )                     678  
Stock based compensation
            730                               730  
Stock awarded to employees
    1       61                               61  
Purchase and retirement of stock
    (617 )     (8,586 )                     (18,807 )     (27,393 )
Dividends
                                    (20,051 )     (20,051 )
Balance, June 30, 2013
    26,769     $ 371,498     $ 2,711     $ 4,524     $ 165,889     $ 544,622  

See accompanying notes to unaudited consolidated financial statements.
 
-7-

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the Six Months
Ended June 30,
 
   
2013
   
2012
 
   
(In thousands)
 
Operating Activities:
           
Net income
  $ 34,383     $ 41,969  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    9,032       7,037  
Loan loss provision
    4,600       5,600  
Net amortization of deferred loan fees
    (202 )     (303 )
Decrease in interest income receivable
    88       1,004  
Increase in net deferred tax asset
    (2,644 )     (6,275 )
Decrease (increase) in other assets
    8,174       (3,386 )
Stock option compensation expense
    730       805  
Tax benefit decrease (increase) upon exercise of stock options
    201       (2 )
Increase (decrease) in income taxes payable
    30       (1,186 )
Increase (decrease) in interest expense payable
    9       (129 )
(Decrease) increase in other liabilities
    (5,482 )     2,160  
Loss on sale of securities available for sale
    -       1,287  
Gain on sale of other assets
    (548 )     (256 )
Net loss on sale of premises and equipment
    9       1  
Originations of mortgage loans for resale
    (240 )     (27 )
Proceeds from sale of mortgage loans originated for resale
    241       28  
Net gain on sale of foreclosed assets
    (556 )     (2,041 )
Writedown of foreclosed assets
    1,062       1,925  
Net Cash Provided by Operating Activities
    48,887       48,211  
                 
Investing Activities:
               
Net repayments of loans
    167,500       194,740  
Proceeds from FDIC1 loss-sharing indemnification
    4,039       20,259  
Purchases of investment securities available for sale
    (275,460 )     (137,378 )
Proceeds from sale/maturity/calls of securities available for sale
    77,558       70,249  
Purchases of investment securities held to maturity
    (87,643 )     (405,281 )
Proceeds from maturity/calls of securities held to maturity
    107,428       106,080  
Purchases of premises and equipment
    (1,110 )     (2,637 )
Net change in FRB2/FHLB3 securities
    1,488       895  
Proceeds from sale of foreclosed assets
    9,401       16,632  
Net Cash Provided by (Used in) Investing Activities
    3,201       (136,441 )
                 
Financing Activities:
               
Net change in deposits
    (130,915 )     (41,048 )
Net change in short-term borrowings and FHLB3 advances
    12,952       (34,106 )
Exercise of stock options
    6,414       1,030  
Tax benefit (decrease) increase upon exercise of stock options
    (201 )     2  
Retirement of common stock including repurchases
    (27,393 )     (26,081 )
Common stock dividends paid
    (20,051 )     (20,687 )
Net Cash Used in Financing Activities
    (159,194 )     (120,890 )
Net Change In Cash and Due from Banks
    (107,106 )     (209,120 )
Cash and Due from Banks at Beginning of Period
    491,382       530,045  
Cash and Due from Banks at End of Period
  $ 384,276     $ 320,925  
                 
Supplemental Cash Flow Disclosures:
               
Supplemental disclosure of non cash activities:
               
Loan collateral transferred to other real estate owned
  $ 3,932     $ 4,108  
Supplemental disclosure of cash flow activities:
               
Interest paid for the period
    2,722       3,602  
Income tax payments for the period
    12,779       21,631  

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 which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and six months ended June 30, 2013 and 2012 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, 2012.

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 unaudited 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, 2012.  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 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 Company’s historical accounting treatment is consistent with ASU 2012-06, therefore there was no effect on the Company’s financial statements at January 1, 2013, when adopted.

FASB ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, was issued February 2013 requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of the update did not have a material effect on the Company’s financial statements at January 1, 2013, the date adopted. The Company’s only item reclassified out of other comprehensive income to net income is the amortization of unrecognized post retirement benefit transition obligation, which is immaterial for purposes of disclosure.
 
-9-

 
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 follows:
 
   
Investment Securities Available for Sale
At June 30, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
U.S. Treasury securities
  $ 3,511     $ 23     $ -     $ 3,534  
Securities of U.S. Government sponsored entities
    38,699       49       (367 )     38,381  
Residential mortgage-backed securities
    39,532       2,089       (11 )     41,610  
Commercial mortgage-backed securities
    3,716       73       -       3,789  
Obligations of States and political subdivisions
    191,367       7,338       (278 )     198,427  
Residential collateralized mortgage obligations
    285,670       918       (8,790 )     277,798  
Asset-backed securities
    15,328       -       (125 )     15,203  
FHLMC (1) and FNMA (2) stock
    824       7,204       -       8,028  
Corporate securities
    416,108       2,279       (3,074 )     415,313  
Other securities
    2,049       888       (132 )     2,805  
Total
  $ 996,804     $ 20,861     $ (12,777 )   $ 1,004,888  

(1) Federal Home Loan Mortgage Corporation
(2) Federal National Mortgage Association

The amortized cost, unrealized gains and losses, and fair value of investment securities held to maturity follows:
 
   
Investment Securities Held to Maturity
At June 30, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Securities of U.S. Government sponsored entities
  $ 2,256     $ 10     $ -     $ 2,266  
Residential mortgage-backed securities
    64,404       986       (488 )     64,902  
Obligations of States and political subdivisions
    723,096       9,146       (18,155 )     714,087  
Residential collateralized mortgage obligations
    344,859       1,459       (2,627 )     343,691  
Total
  $ 1,134,615     $ 11,601     $ (21,270 )   $ 1,124,946  

The amortized cost, unrealized gains and losses accumulated in other comprehensive income, and fair value of investment securities available for sale follows:
 
-10-

 
   
Investment Securities Available for Sale
At December 31, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
U.S. Treasury securities
  $ 3,520     $ 38     $ -     $ 3,558  
Securities of U.S. Government sponsored entities
    49,335       207       (17 )     49,525  
Residential mortgage-backed securities
    53,078       3,855       (1 )     56,932  
Commercial mortgage-backed securities
    4,076       69       -       4,145  
Obligations of States and political subdivisions
    200,769       14,730       (252 )     215,247  
Residential collateralized mortgage obligations
    219,613       1,786       (294 )     221,105  
Asset-backed securities
    16,130       18       (143 )     16,005  
FHLMC and FNMA stock
    824       2,061       (5 )     2,880  
Corporate securities
    250,655       3,009       (826 )     252,838  
Other securities
    2,091       1,370       (60 )     3,401  
Total
  $ 800,091     $ 27,143     $ (1,598 )   $ 825,636  

The amortized cost, unrealized gains and losses, and fair value of investment securities held to maturity follows:
 
   
Investment Securities Held to Maturity
At December 31, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Securities of U.S. Government sponsored entities
  $ 3,232     $ 43     $ -     $ 3,275  
Residential mortgage-backed securities
    72,807       2,090       (10 )     74,887  
Obligations of States and political subdivisions
    680,802       23,004       (1,235 )     702,571  
Residential collateralized mortgage obligations
    399,200       5,185       (561 )     403,824  
Total
  $ 1,156,041     $ 30,322     $ (1,806 )   $ 1,184,557  

The amortized cost and fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated:
 
   
At June 30, 2013
 
   
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
  $ 69,203     $ 69,604     $ 11,182     $ 11,441  
Over 1 to 5 years
    426,099       425,485       162,937       166,079  
Over 5 to 10 years
    71,015       72,718       282,150       281,073  
Over 10 years
    98,696       103,051       269,083       257,760  
Subtotal
    665,013       670,858       725,352       716,353  
Mortgage-backed securities and residential collateralized mortgage obligations
    328,918       323,197       409,263       408,593  
Other securities
    2,873       10,833       -       -  
Total
  $ 996,804     $ 1,004,888     $ 1,134,615     $ 1,124,946  

 
-11-

 
   
At December 31, 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
  $ 40,380     $ 40,686     $ 10,265     $ 10,496  
Over 1 to 5 years
    309,293       312,480       167,162       171,769  
Over 5 to 10 years
    59,817       63,540       227,603       236,608  
Over 10 years
    110,919       120,467       279,004       286,973  
Subtotal
    520,409       537,173       684,034       705,846  
Mortgage-backed securities and residential collateralized mortgage obligations
    276,767       282,182       472,007       478,711  
Other securities
    2,915       6,281       -       -  
Total
  $ 800,091     $ 825,636     $ 1,156,041     $ 1,184,557  

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 June 30, 2013 and December 31, 2012, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

An analysis of gross unrealized losses of investment securities available for sale follows:
 
   
Investment Securities Available for Sale
At June 30, 2013
 
   
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
  $ 24,507     $ (367 )   $ -     $ -     $ 24,507     $ (367 )
Residential mortgage-backed securities
    18       -       868       (11 )     886       (11 )
Obligations of States and political subdivisions
    9,893       (141 )     5,756       (137 )     15,649       (278 )
Residential collateralized mortgage obligations
    250,865       (8,790 )     1       -       250,866       (8,790 )
Asset-backed securities
    10,108       (10 )     5,095       (115 )     15,203       (125 )
Corporate securities
    218,697       (2,715 )     32,548       (359 )     251,245       (3,074 )
Other securities
    -       -       1,868       (132 )     1,868       (132 )
Total
  $ 514,088     $ (12,023 )   $ 46,136     $ (754 )   $ 560,224     $ (12,777 )
 
An analysis of gross unrealized losses of investment securities held to maturity follows:
 
   
Investment Securities Held to Maturity
At June 30, 2013
 
   
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
  $ 33,116     $ (360 )   $ 7,561     $ (128 )   $ 40,677     $ (488 )
Obligations of States and political subdivisions
    338,807       (17,765 )     9,307       (390 )     348,114       (18,155 )
Residential collateralized mortgage obligations
    208,216       (2,360 )     16,418       (267 )     224,634       (2,627 )
Total
  $ 580,139     $ (20,485 )   $ 33,286     $ (785 )   $ 613,425     $ (21,270 )
 
The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments particularly interest rates which rose between December 31, 2012 and June 30, 2013, causing bond prices to decline. 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. Substantially all of these securities continue to be investment grade rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

 
-12-

 
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 June 30, 2013.

The fair values of the investment securities could decline in the future if 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.

As of June 30, 2013, $815,646 thousand of investment securities were pledged to secure public deposits, short-term borrowed funds, and term repurchase agreements, compared to $850,421 thousand at December 31, 2012.

An analysis of gross unrealized losses of investment securities available for sale follows:
 
   
Investment Securities Available for Sale
At December 31, 2012
 
   
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
  $ 9,983     $ (17 )   $ -     $ -     $ 9,983     $ (17 )
Residential mortgage-backed securities
    103       (1 )     11       -       114       (1 )
Residential collateralized mortgage obligations
    72,803       (294 )     -       -       72,803       (294 )
Obligations of States and political subdivisions
    2,080       (23 )     8,928       (229 )     11,008       (252 )
Asset-backed securities
    -       -       5,828       (143 )     5,828       (143 )
FHLMC and FNMA stock
    -       -       1       (5 )     1       (5 )
Corporate securities
    53,570       (423 )     24,597       (403 )     78,167       (826 )
Other securities
    -       -       1,940       (60 )     1,940       (60 )
Total
  $ 138,539     $ (758 )   $ 41,305     $ (840 )   $ 179,844     $ (1,598 )
 
An analysis of gross unrealized losses of investment securities held to maturity follows:
 
   
Investment Securities Held to Maturity
At December 31, 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
  $ 113     $ -     $ 664     $ (10 )   $ 777     $ (10 )
Residential collateralized mortgage obligations
    26,683       (386 )     9,353       (175 )     36,036       (561 )
Obligations of States and political subdivisions
    69,839       (1,205 )     4,275       (30 )     74,114       (1,235 )
Total
  $ 96,635     $ (1,591 )   $ 14,292     $ (215 )   $ 110,927     $ (1,806 )

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 resulting in proceeds of $7,790 thousand and a realized loss on sale of $1,287 thousand during the quarter.
 
-13-

 
The following table provides information about the amount of interest income from taxable and non-taxable investment securities:
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
Taxable:
                       
    Mortgage related securities
  $ 3,371     $ 3,713     $ 6,933     $ 7,076  
    Other
    2,220       1,635       4,192       2,962  
    Total taxable
    5,591       5,348       11,125       10,038  
Tax-exempt
    7,498       7,808       15,030       15,760  
Total interest income from investment securities
  $ 13,089     $ 13,156     $ 26,155     $ 25,798  
 
Note 4: Loans and Allowance for Credit Losses

A summary of the major categories of loans outstanding is shown in the following table.
 
   
At June 30, 2013
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
& Other
   
Total
 
   
(In thousands)
 
Originated loans
  $ 309,621     $ 614,005     $ 8,015     $ 195,322     $ 426,340     $ 1,553,303  
Purchased covered loans:
                                               
    Impaired
    284       6,211       1,649       -       254       8,398  
    Non impaired
    42,386       220,054       4,805       9,280       58,567       335,092  
    Purchase discount
    (5,058 )     (11,597 )     (99 )     (434 )     (1,326 )     (18,514 )
Purchased non-covered loans:
                                               
    Impaired
    660       2,621       -       -       198       3,479  
    Non impaired
    8,170       34,758       1,330       1,015       15,919       61,192  
    Purchase discount
    (876 )     (1,002 )     -       (262 )     (1,469 )     (3,609 )
        Total
  $ 355,187     $ 865,050     $ 15,700     $ 204,921     $ 498,483     $ 1,939,341  
 
   
At December 31, 2012
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
& Other
   
Total
 
   
(In thousands)
 
Originated loans
  $ 340,116     $ 632,927     $ 7,984     $ 222,458     $ 460,698     $ 1,664,183  
Purchased covered loans:
                                               
    Impaired
    308       7,585       1,824       -       257       9,974  
    Non impaired
    59,135       247,534       5,462       9,374       66,932       388,437  
    Purchase discount
    (8,459 )     (15,140 )     (279 )     (433 )     (1,817 )     (26,128 )
Purchased non-covered loans:
                                               
    Impaired
    1,261       6,763       -       -       297       8,321  
    Non impaired
    9,840       38,673       1,619       3,110       18,554       71,796  
    Purchase discount
    (870 )     (1,748 )     (95 )     (474 )     (2,039 )     (5,226 )
        Total
  $ 401,331     $ 916,594     $ 16,515     $ 234,035     $ 542,882     $ 2,111,357  
 
 
-14-

 
Changes in the carrying amount of impaired purchased covered loans were as follows:
 
   
For the
Six Months Ended
June 30, 2013
   
For the Year Ended
December 31, 2012
 
Impaired purchased covered loans
 
(In thousands)
 
Carrying amount at the beginning of the period
  $ 7,865     $ 18,591  
Reductions during the period
    (605 )     (10,726 )
Carrying amount at the end of the period
  $ 7,260     $ 7,865  
 
Changes in the carrying amount of impaired purchased non-covered loans were as follows:
 
   
For the
Six Months Ended
June 30, 2013
   
For the Year Ended
December 31, 2012
 
Impaired purchased non-covered loans
 
(In thousands)
 
Carrying amount at the beginning of the period
  $ 6,764     $ 15,572  
Reductions during the period
    (4,166 )     (8,808 )
Carrying amount at the end of the period
  $ 2,598     $ 6,764  
 
Changes in the accretable yield for purchased loans were as follows:
 
   
For the
Six Months Ended
June 30, 2013
   
For the
Year Ended
December 31, 2012
 
Accretable yield:
 
(In thousands)
 
Balance at the beginning of the period
  $ 4,948     $ 9,990  
Reclassification from nonaccretable difference
    8,864       12,121  
Accretion
    (7,363 )     (17,163 )
Disposals and other
    -       -  
Balance at the end of the period
  $ 6,449     $ 4,948  
                 
Accretion
  $ (7,363 )   $ (17,163 )
Reduction in FDIC indemnification asset
    5,759       13,207  
(Increase) in interest income
  $ (1,604 )   $ (3,956 )
 
The following summarizes activity in the allowance for credit losses:
 
   
Allowance for Credit Losses
For the Three Months Ended June 30, 2013
 
   
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
  $ 5,536     $ 10,965     $ 480     $ 539     $ 2,768     $ -     $ 738     $ 9,328     $ 30,354  
    Additions:
                                                                       
        Provision
    (1,301 )     660       (2 )     15       225       116       46       2,041       1,800  
    Deductions:
                                                                       
        Chargeoffs
    (148 )     (427 )     -       (22 )     (896 )     (116 )     (517 )     -       (2,126 )
        Recoveries
    297       77       -       -       506       -       18       -       898  
            Net loan recoveries (losses)
    149       (350 )     -       (22 )     (390 )     (116 )     (499 )     -       (1,228 )
    Balance at end of period
    4,384       11,275       478       532       2,603       -       285       11,369       30,926  
Liability for off-balance sheet credit exposure
    1,698       1       127       -       473       -       -       394       2,693  
Total allowance for credit losses
  $ 6,082     $ 11,276     $ 605     $ 532     $ 3,076     $ -     $ 285     $ 11,763     $ 33,619  

 
-15-

 
   
Allowance for Credit Losses
For the Six Months Ended June 30, 2013
 
   
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
  $ 6,445     $ 10,063     $ 484     $ 380     $ 3,194     $ -     $ 1,005     $ 8,663     $ 30,234  
    Additions:
                                                                       
        Provision
    (770 )     1,653       (6 )     261       507       116       133       2,706       4,600  
    Deductions:
                                                                       
        Chargeoffs
    (2,050 )     (539 )     -       (109 )     (2,205 )     (116 )     (876 )     -       (5,895 )
        Recoveries
    759       98       -       -       1,107       -       23       -       1,987  
            Net loan losses
    (1,291 )     (441 )     -       (109 )     (1,098 )     (116 )     (853 )     -       (3,908 )
    Balance at end of period
    4,384       11,275       478       532       2,603       -       285       11,369       30,926  
Liability for off-balance sheet credit exposure
    1,698       1       127       -       473       -       -       394       2,693  
Total allowance for credit losses
  $ 6,082     $ 11,276     $ 605     $ 532     $ 3,076     $ -     $ 285     $ 11,763     $ 33,619  
 
   
Allowance for Credit Losses
For the Three Months Ended June 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
  $ 6,814     $ 11,427     $ 2,755     $ 645     $ 2,825     $ -     $ 139     $ 7,278     $ 31,883  
    Additions:
                                                                       
        Provision
    1,984       (1,561 )     (270 )     19       817       25       324       1,462       2,800  
    Deductions:
                                                                       
        Chargeoffs
    (2,696 )     -       -       (62 )     (1,211 )     (25 )     (247 )     -       (4,241 )
        Recoveries
    228       33       196       -       600       -       24       -       1,081  
            Net loan (losses) recoveries
    (2,468 )     33       196       (62 )     (611 )     (25 )     (223 )     -       (3,160 )
    Balance at end of period
    6,330       9,899       2,681       602       3,031       -       240       8,740       31,523  
Liability for off-balance sheet credit exposure
    1,644       16       12       -       384       -       -       637       2,693  
Total allowance for credit losses
  $ 7,974     $ 9,915     $ 2,693     $ 602     $ 3,415     $ -     $ 240     $ 9,377     $ 34,216  
 
   
Allowance for Credit Losses
For the Six Months Ended June 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
    3,259       203       141       753       1,444       25       814       (1,039 )     5,600  
    Deductions:
                                                                       
        Chargeoffs
    (3,558 )     (948 )     -       (932 )     (2,864 )     (25 )     (612 )     -       (8,939 )
        Recoveries
    617       33       198       -       1,379       -       38       -       2,265  
            Net loan (losses) recoveries
    (2,941 )     (915 )     198       (932 )     (1,485 )     (25 )     (574 )     -       (6,674 )
    Balance at end of period
    6,330       9,899       2,681       602       3,031       -       240       8,740       31,523  
Liability for off-balance sheet credit exposure
    1,644       16       12       -       384       -       -       637       2,693  
Total allowance for credit losses
  $ 7,974     $ 9,915     $ 2,693     $ 602     $ 3,415     $ -     $ 240     $ 9,377     $ 34,216  

The recorded investment in loans evaluated for impairment follows:
 
   
Allowance for Credit Losses and
Recorded Investment in Loans Evaluated for Impairment
At June 30, 2013
 
   
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
  $ 100     $ -     $ -     $ -     $ -     $ -     $ 147     $ -     $ 247  
Collectively evaluated for impairment
    5,982       11,276       605       532       3,076       -       138       11,763       33,372  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
Total
  $ 6,082     $ 11,276     $ 605     $ 532     $ 3,076     $ -     $ 285     $ 11,763     $ 33,619  
Carrying value of loans:
                                                                       
Individually evaluated for impairment
  $ 2,496     $ 4,421     $ -     $ -     $ -     $ 3,990     $ 15,169     $ -     $ 26,076  
Collectively evaluated for impairment
    307,125       609,584       8,015       195,322       426,340       54,474       302,547       -       1,903,407  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       2,598       7,260       -       9,858  
Total
  $ 309,621     $ 614,005     $ 8,015     $ 195,322     $ 426,340     $ 61,062     $ 324,976     $ -     $ 1,939,341  

 
-16-

 
   
Allowance for Credit Losses and
Recorded Investment in Loans Evaluated for Impairment
At December 31, 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
  $ 1,865     $ 134     $ -     $ -     $ -     $ -     $ 753     $ -     $ 2,752  
Collectively evaluated for impairment
    6,314       9,938       484       380       3,613       -       252       9,194       30,175  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
Total
  $ 8,179     $ 10,072     $ 484     $ 380     $ 3,613     $ -     $ 1,005     $ 9,194     $ 32,927  
Carrying value of loans:
                                                                       
Individually evaluated for impairment
  $ 5,153     $ 4,161     $ -     $ -     $ -     $ 3,029     $ 16,680     $ -     $ 29,023  
Collectively evaluated for impairment
    334,963       628,766       7,984       222,458       460,698       65,098       347,738       -       2,067,705  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       6,764       7,865       -       14,629  
Total
  $ 340,116     $ 632,927     $ 7,984     $ 222,458     $ 460,698     $ 74,891     $ 372,283     $ -     $ 2,111,357  

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.” Loan Review evaluations occur every calendar quarter.  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 June 30, 2013
 
   
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
  $ 297,214     $ 568,854     $ 7,557     $ 192,790     $ 424,989     $ 44,635     $ 227,835     $ 1,763,874  
Substandard
    10,271       45,151       458       2,532       1,137       19,049       115,255       193,853  
Doubtful
    2,136       -       -       -       8       987       350       3,481  
Loss
    -       -       -       -       206       -       50       256  
Default risk purchase discount
    -       -       -       -       -       (3,609 )     (18,514 )     (22,123 )
Total
  $ 309,621     $ 614,005     $ 8,015     $ 195,322     $ 426,340     $ 61,062     $ 324,976     $ 1,939,341  
 
 (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, 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
  $ 324,452     $ 599,472     $ 7,518     $ 219,655     $ 459,076     $ 51,901     $ 274,976     $ 1,937,050  
Substandard
    11,413       33,455       466       2,803       1,158       27,066       122,815       199,176  
Doubtful
    4,251       -       -       -       46       1,145       470       5,912  
Loss
    -       -       -       -       418       5       150       573  
Default risk purchase discount
    -       -       -       -       -       (5,226 )     (26,128 )     (31,354 )
Total
  $ 340,116     $ 632,927     $ 7,984     $ 222,458     $ 460,698     $ 74,891     $ 372,283     $ 2,111,357  
 
 (1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification.
 
-17-

 
The following tables summarize loans by delinquency and nonaccrual status:
 
   
Summary of Loans by Delinquency and Nonaccrual Status
At June 30, 2013
 
   
Current and
Accruing
   
30-89 Days Past
Due and
Accruing
   
Past Due 90
days or More
and Accruing
   
Nonaccrual
   
Total Loans
 
   
(In thousands)
 
Commercial
  $ 304,644     $ 2,302     $ -     $ 2,675     $ 309,621  
Commercial real estate
    593,883       14,275       -       5,847       614,005  
Construction
    8,015       -       -       -       8,015  
Residential real estate
    194,348       560       -       414       195,322  
Consumer installment & other
    422,702       3,397       241       -       426,340  
Total originated loans
    1,523,592       20,534       241       8,936       1,553,303  
Purchased non-covered loans
    54,447       1,712       -       4,903       61,062  
Purchased covered loans
    300,332       7,747       74       16,823       324,976  
Total
  $ 1,878,371     $ 29,993     $ 315     $ 30,662     $ 1,939,341  
 
   
Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 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
  $ 333,474     $ 1,032     $ -     $ 5,610     $ 340,116  
Commercial real estate
    616,276       10,750       -       5,901       632,927  
Construction
    7,984       -       -       -       7,984  
Residential real estate
    220,032       2,193       -       233       222,458  
Consumer installment & other
    455,007       5,205       455       31       460,698  
Total originated loans
    1,632,773       19,180       455       11,775       1,664,183  
Purchased non-covered loans
    65,567       1,821       4       7,499       74,891  
Purchased covered loans
    352,619       6,488       155       13,021       372,283  
Total
  $ 2,050,959     $ 27,489     $ 614     $ 32,295     $ 2,111,357  

The following is a summary of the effect of nonaccrual loans on interest income:
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
Interest income that would have been recognized had the loans performed in accordance with their original terms
  $ 634     $ 1,104     $ 1,388     $ 2,168  
Less: Interest income recognized on nonaccrual loans
    (203 )     (494 )     (578 )     (1,336 )
Total reduction of interest income
  $ 431     $ 610     $ 810     $ 832  

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2013 and December 31, 2012.
 
-18-

 
The following summarizes impaired loans:
 
   
Impaired Loans
At June 30, 2013
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
   
(In thousands)
 
Impaired loans with no related allowance recorded:
             
    Commercial
  $ 9,717     $ 17,846     $ -  
    Commercial real estate
    21,536       24,652       -  
    Construction
    2,935       3,369       -  
    Residential real estate
    414       414       -  
    Consumer installment and other
    521       627       -  
                         
Impaired loans with an allowance recorded:
                 
    Commercial
    1,000       2,173       100  
    Commercial real estate
    3,954       3,954       147  
                         
Total:
                       
    Commercial
  $ 10,717     $ 20,019     $ 100  
    Commercial real estate
    25,490       28,606       147  
    Construction
    2,935       3,369       -  
    Residential real estate
    414       414       -  
    Consumer installment and other
    521       627       -  
 
   
Impaired Loans
At December 31, 2012
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
   
(In thousands)
 
Impaired loans with no related allowance recorded:
             
    Commercial
  $ 3,100     $ 9,506     $ -  
    Commercial real estate
    24,135       27,972       -  
    Construction
    2,363       2,992       -  
    Residential real estate
    668       668       -  
    Consumer installment and other
    2,328       2,616       -  
                         
Impaired loans with an allowance recorded:
                 
    Commercial
    12,129       13,739       2,588  
    Commercial real estate
    4,038       4,038       164  
                         
Total:
                       
    Commercial
  $ 15,229     $ 23,245     $ 2,588  
    Commercial real estate
    28,173       32,010       164  
    Construction
    2,363       2,992       -  
    Residential real estate
    668       668       -  
    Consumer installment and other
    2,328       2,616       -  
 
Impaired loans may include troubled debt restructured loans. Impaired loans at June 30, 2013, included $8,014 thousand of restructured loans, including $7,358 thousand that were on nonaccrual status. Impaired loans at December 31, 2012, included $6,678 thousand of restructured loans, including $988 thousand that were on nonaccrual status.
 
-19-

 
   
Impaired Loans
 
   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
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
  $ 11,473     $ 52     $ 9,888     $ 67     $ 12,601     $ 106     $ 9,342     $ 117  
Commercial real estate
    27,166       205       30,228       349       27,836       505       31,416       727  
Construction
    2,397       25       7,552       59       2,254       51       7,981       159  
Residential real estate
    558       -       1,112       -       621       -       957       -  
Consumer installment and other
    1,059       8       2,825       8       1,511       15       2,873       26  
Total
  $ 42,653     $ 290     $ 51,605     $ 483     $ 44,823     $ 677     $ 52,569     $ 1,029  

The following table provides information on troubled debt restructurings:
 
   
Troubled Debt Restructurings
At June 30, 2013
 
   
Number of
Contracts
   
Pre-Modification
Carrying Value
   
Period-End
Carrying Value
   
Period-End
Individual
Impairment
Allowance
 
   
(In thousands)
 
Commercial
    4     $ 1,991     $ 1,759     $ -  
Commercial real estate
    3       6,295       6,255       147  
Total
    7     $ 8,286     $ 8,014     $ 147  
 
   
Troubled Debt Restructurings
At December 31, 2012
 
   
Number of
Contracts
   
Pre-Modification
Carrying Value
   
Period-End
Carrying Value
   
Period-End
Individual
Impairment
Allowance
 
   
(In thousands)
 
Commercial
    3     $ 1,318     $ 1,196     $ 797  
Commercial real estate
    2       5,391       5,482       -  
Total
    5     $ 6,709     $ 6,678     $ 797  
 
During the three and six months ended June 30, 2013, the Company modified three loans with a total carrying value of $1,010 thousand and four loans with a total carrying value of $3,019 thousand, respectively, that were considered troubled debt restructurings. During the three and six months ended June 30, 2012, the Company modified one loan with a carrying value of $429 thousand and two loans totaling $1,817 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the four restructurings completed in the first six months of 2013 consisted of modification of payment terms to lower the interest rate and extend the maturity date to allow for deferred principal repayment. The concessions granted in the restructurings completed during the first six months of 2012 largely consisted of modification of payment terms extending the maturity date to allow for deferred principal repayment. During the three and six months ended June 30, 2013, a commercial real estate loan with a carrying value of $3,954 thousand defaulted. During the three and six months ended June 30, 2012, a construction loan with a carrying value of $3,068 thousand defaulted.

The Company pledges loans to secure borrowings from the Federal Home Loan Bank (“FHLB”). The carrying value of the FHLB advances was $25,687 thousand and $25,799 thousand at June 30, 2013 and December 31, 2012, respectively. The loans restricted due to collateral requirements approximate $28,492 thousand and $32,084 thousand at June 30, 2013 and December 31, 2012, respectively. The amount of loans pledged exceeds collateral requirements. The FHLB does not have the right to sell or repledge such loans.

There were no loans held for sale at June 30, 2013 and December 31, 2012.
 
-20-

 
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 $69,988 thousand and $69,345 thousand at June 30, 2013 and December 31, 2012, 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 at origination.

Note 6: Other Assets

Other assets consisted of the following:
 
   
At June 30,
2013
   
At December 31,
2012
 
   
(In thousands)
 
Cost method equity investments:
           
Federal Reserve Bank stock (1)
  $ 14,069     $ 14,069  
Federal Home Loan Bank stock (2)
    5,865       7,353  
Other investments
    376       376  
Total cost method equity investments
    20,310       21,798  
Life insurance cash surrender value
    46,056       45,579  
Deferred taxes receivable
    52,486       42,449  
Limited partnership investments
    19,219       20,631  
Interest receivable
    20,186       20,274  
FDIC indemnification receivable
    8,758       13,847  
Prepaid assets
    3,180       11,679  
Other assets
    11,265       11,829  
Total other assets
  $ 181,460     $ 188,086  

(1) A bank applying for membership in the Federal Reserve System is required to subscribe to stock in the Federal Reserve Bank (FRB) in a sum equal to six percent of the bank’s paid-up capital stock and surplus. One-half of the amount of the bank's subscription shall be paid to the FRB and the remaining half will be subject to call when deemed necessary by the Board of Governors of the Federal Reserve System.

(2) Borrowings from the Federal Home Loan Bank (FHLB) must be supported by capital stock holdings. The minimum activity-based requirement is 4.7% of the outstanding advances. The requirement may be adjusted from time to time by the FHLB within limits established in the FHLB's Capital Plan.
 
Note 7: 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 six months ended June 30, 2013 and 2012. 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 six months ended June 30, 2013 and 2012, no such adjustments were recorded.

The carrying values of goodwill were (in thousands):
 
June 30, 2013    $ 121,673    
December 31, 2012   $ 121,673    
 
 
-21-

 
The gross carrying amount of identifiable intangible assets and accumulated amortization was:
 
   
At June 30, 2013
   
At December 31, 2012
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
   
(In thousands)
 
Core Deposit Intangibles
  $ 56,808     $ (37,114 )   $ 56,808     $ (34,938 )
Merchant Draft Processing Intangible
    10,300       (9,117 )     10,300       (8,909 )
Total Identifiable Intangible Assets
  $ 67,108     $ (46,231 )   $ 67,108     $ (43,847 )

As of June 30, 2013, the current year and estimated future amortization expense for identifiable intangible assets was:
 
   
Core
Deposit
Intangibles
   
Merchant
Draft
Processing
Intangible
   
Total
 
   
(In thousands)
 
Six months ended June 30, 2013 (actual)
  $ 2,176     $ 208     $ 2,384  
Estimate for year ended December 31, 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
    2,913       164       3,077  
2018
    1,892       29       1,921  
 
Note 8: Deposits and Borrowed Funds

Deposits totaled $4,101,394 thousand at June 30, 2013, compared with $4,232,492 thousand at December 31, 2012. The following table provides additional detail regarding deposits.
 
   
Deposits
 
   
At June 30, 2013
   
At December 31, 2012
 
   
(In thousands)
 
Noninterest-bearing
  $ 1,644,151     $ 1,676,071  
Interest-bearing:
               
Transaction
    725,852       748,818  
Savings
    1,139,110       1,165,032  
Time
    592,281       642,571  
Total deposits
  $ 4,101,394     $ 4,232,492  

Demand deposit overdrafts of $3,033 thousand and $6,307 thousand were included as loan balances at June 30, 2013 and December 31, 2012, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $283 thousand and $587 thousand in the second quarter and first six months of 2013, respectively and $414 thousand and $836 thousand in the second quarter and first six months of 2012, respectively.

Short-term borrowed funds of $66,640 thousand at June 30, 2013 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. Securities sold under repurchase agreements are held in the custody of independent securities brokers. The amount of the securities approximates $108,872 thousand at June 30, 2013. The short-term borrowed funds mature on an overnight basis.

FHLB advances with carrying value of $25,687 thousand at June 30, 2013 are secured by $28,492 thousand of residential real estate loans and $9,320 thousand of securities at June 30, 2013. 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.

 
-22-

 
A term repurchase agreement of $10,000 thousand at June 30, 2013 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. Securities sold under repurchase agreements are held in the custody of independent securities brokers. The carrying amount of the related securities is approximately $14,243 thousand at June 30, 2013. The term repurchase agreement matures in full in August 2014.

The Company has a $35,000 thousand unsecured line of credit which had no outstanding balance at June 30, 2013, and a variable interest rate of 2.0% per annum with interest payable monthly on outstanding advances. Advances may be made up to the unused credit limit under the line of credit through March 19, 2014.

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. The note is subject to financial covenants requiring the Company to maintain, at all times, certain minimum levels of consolidated tangible net worth and maximum levels of capital debt. The Company believes it is in compliance with all of the covenants required by the note as of June 30, 2013.

Note 9:  Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Available for sale investment securities are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as certain loans held for investment, investment securities held to maturity, 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:

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.

The Company relies on independent vendor pricing services to measure fair value for investment securities available for sale and investment securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company routinely randomly selects securities for pricing by two or more of the vendors; significant pricing differences, if any, are evaluated using all available independent quotes with the lowest quote generally used as the fair value estimate. In addition, the Company conducts “other than temporary impairment (OTTI)” analysis on a quarterly basis; securities selected for OTTI analysis include all securities with fair value pricing of less than 95 percent of amortized cost. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair values estimates may not be realized in an actual sale of the securities.

 
-23-

 
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 six months ended June 30, 2013 and 2012, 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 June 30, 2013
  $ 1,004,888     $ 50,880     $ 954,008     $ -  
At December 31, 2012
  $ 825,636     $ 57,424     $ 768,212     $ -  

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 June 30, 2013 and December 31, 2012, 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 June 30, 2013
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
   
(In thousands)
 
Non-covered other real estate owned
  $ 4,909     $ -     $ 4,909     $ -     $ (822 )
Covered other real estate owned
    6,035       -       6,035       -       (133 )
Originated impaired loans
    4,278       -       2,537       1,741       (2,093 )
Purchased covered impaired loans
    8,911       -       3,421       5,490       (517 )
Total assets measured at fair value on a nonrecurring basis
  $ 24,133     $ -     $ 16,902     $ 7,231     $ (3,565 )
 
   
At December 31, 2012
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
   
(In thousands)
 
Non-covered other real estate owned
  $ 6,618     $ -     $ 6,618     $ -     $ (1,360 )
Covered other real estate owned
    7,929       -       7,929       -       (371 )
Originated impaired loans
    5,197       -       3,097       2,100       (3,158 )
Purchased covered impaired loans
    6,684       -       2,224       4,460       (83 )
Total assets measured at fair value on a nonrecurring basis
  $ 26,428     $ -     $ 19,868     $ 6,560     $ (4,972 )
 
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.  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.
 
 
-24-

 
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 $30,926 thousand at June 30, 2013 and $30,234 thousand at December 31, 2012 and the fair value discount due to credit default risk associated with purchased covered and purchased non-covered loans of $18,514 thousand and $3,609 thousand, respectively at June 30, 2013 and purchased covered and purchased non-covered loans of $26,128 thousand and $5,226 thousand, respectively at December 31, 2012 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 Indemnification Receivable  The fair value of the FDIC indemnification 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.

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.

 
-25-

 

   
At June 30, 2013
 
   
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
  $ 384,276     $ 384,276     $ 384,276     $ -     $ -  
Investment securities held to maturity
    1,134,615       1,124,946       2,266       1,122,680       -  
Loans
    1,908,415       1,922,777       -       -       1,922,777  
Other assets - FDIC indemnification receivable
    8,758       8,756       -       -       8,756  
                                         
Financial Liabilities:
                                       
Deposits
  $ 4,101,394     $ 4,100,948     $ -     $ 3,509,113     $ 591,835  
Short-term borrowed funds
    66,640       66,640       -       66,640       -  
Federal Home Loan Bank advances
    25,687       25,834       25,834       -       -  
Term repurchase agreement
    10,000       10,096       -       10,096       -  
Debt financing
    15,000       15,201       -       15,201       -  
 
   
At December 31, 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
  $ 491,382     $ 491,382     $ 491,382     $ -     $ -  
Investment securities held to maturity
    1,156,041       1,184,557       3,275       1,181,282       -  
Loans
    2,081,123       2,090,712       -       -       2,090,712  
Other assets - FDIC indemnification receivable
    13,847       13,834       -       -       13,834  
                                         
Financial Liabilities:
                                       
Deposits
  $ 4,232,492     $ 4,232,239     $ -     $ 3,589,921     $ 642,318  
Short-term borrowed funds
    53,687       53,687       -       53,687       -  
Federal Home Loan Bank advances
    25,799       26,150       26,150       -       -  
Term repurchase agreement
    10,000       10,135       -       10,135       -  
Debt financing
    15,000       15,645       -       15,645       -  

The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.
 
Note 10: 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 $334,136 thousand and $339,651 thousand at June 30, 2013 and December 31, 2012, 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 $32,293 thousand and $32,347 thousand at June 30, 2013 and December 31, 2012, respectively. The Company also had commitments for commercial and similar letters of credit of $344 thousand and $344 thousand at June 30, 2013 and December 31, 2012, 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.
 
 
-26-

 
Note 11: Earnings Per Common Share

The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income applicable to common equity by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income applicable to common equity by the average number of common shares outstanding during the period plus the impact of common stock equivalents.
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands, except per share data)
 
Net income applicable to common equity (numerator)
  $ 17,112     $ 20,964     $ 34,383     $ 41,969  
Basic earnings per common share
                               
Weighted average number of common shares outstanding - basic (denominator)
    26,890       27,744       27,017       27,897  
Basic earnings per common share
  $ 0.64     $ 0.76     $ 1.27     $ 1.50  
Diluted earnings per common share
                               
Weighted average number of common shares outstanding - basic
    26,890       27,744       27,017       27,897  
Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise
    8       46       10       54  
Weighted average number of common shares outstanding - diluted (denominator)
    26,898       27,790       27,027       27,951  
Diluted earnings per common share
  $ 0.64     $ 0.75     $ 1.27     $ 1.50  

For the three and six months ended June 30, 2013, options to purchase 2,264 thousand and 2,290 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

For the three and six months ended June 30, 2012, options to purchase 2,072 thousand and 2,035 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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-27-

 
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands, except per share data)
 
Net Interest and Fee Income (FTE)1
  $ 42,628     $ 50,333     $ 86,463     $ 102,032  
Provision for Loan Losses
    1,800       2,800       4,600       5,600  
Noninterest Income
                               
Loss on Sale of Securities
    -       (1,287 )     -       (1,287 )
Other
    14,284       14,820       28,562       29,489  
Total Noninterest Income
    14,284       13,533       28,562       28,202  
Noninterest Expense
    28,192       29,349       56,869       59,383  
Income Before Income Taxes (FTE)1
    26,920       31,717       53,556       65,251  
Income Tax Provision (FTE)1
    9,808       10,753       19,173       23,282  
Net Income
  $ 17,112     $ 20,964     $ 34,383     $ 41,969  
                                 
Average Common Shares Outstanding
    26,890       27,744       27,017       27,897  
Diluted Average Common Shares Outstanding
    26,898       27,790       27,027       27,951  
Common Shares Outstanding at Period End
    26,769       27,621       26,769       27,621  
                                 
Per Common Share:
                               
Basic Earnings
  $ 0.64     $ 0.76     $ 1.27     $ 1.50  
Diluted Earnings
    0.64       0.75       1.27       1.50  
Book Value Per Common Share
  $ 20.34     $ 20.20                  
                                 
Financial Ratios:
                               
Return on Assets
    1.42 %     1.69 %     1.42 %     1.69 %
Return on Common Equity
    12.74 %     15.55 %     12.84 %     15.50 %
Net Interest Margin (FTE)1
    4.12 %     4.89 %     4.19 %     5.00 %
Net Loan Losses to Average Loans:
                               
Originated Loans
    0.15 %     0.65 %     0.37 %     0.67 %
Purchased Covered Loans
    0.59 %     0.19 %     0.49 %     0.23 %
Purchased Non-covered Loans
    0.71 %     0.09 %     0.34 %     0.04 %
Efficiency Ratio2
    49.5 %     46.0 %     49.4 %     45.6 %
                                 
Average Balances:
                               
Assets
  $ 4,840,319     $ 4,974,619     $ 4,874,212     $ 5,002,777  
Earning Assets
    4,147,096       4,127,699       4,141,510       4,093,985  
Originated Loans
    1,586,435       1,789,221       1,613,769       1,812,296  
Purchased Covered Loans
    341,896       478,965       352,802       495,965  
Purchased Non-covered Loans
    66,030       107,483       69,373       113,493  
Deposits
    4,132,509       4,227,752       4,165,685       4,240,758  
Shareholders' Equity
    538,529       542,192       540,192       544,434  
                                 
Period End Balances:
                               
Assets
  $ 4,813,908     $ 4,953,130                  
Earning Assets
    4,078,844       4,232,582                  
Originated Loans
    1,553,303       1,751,578                  
Purchased Covered Loans
    324,976       463,251                  
Purchased Non-covered Loans
    61,062       102,390                  
Deposits
    4,101,394       4,208,499                  
Shareholders' Equity
    544,622       557,926                  
                                 
Capital Ratios at Period End:
                               
Total Risk Based Capital
    15.98 %     15.74 %                
Tangible Equity to Tangible Assets
    8.61 %     8.54 %                
                                 
Dividends Paid Per Common Share
  $ 0.37     $ 0.37     $ 0.74     $ 0.74  
Common Dividend Payout Ratio
    58 %     49 %     58 %     49 %
 
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).
 
-28-

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

In order to provide stimulus to the economy following the “financial crisis” recession, the Federal Reserve’s Federal Open Market Committee has maintained highly accommodative monetary policies to influence interest rates to low levels. The Company’s principal source of revenue is net interest and fee income, which represents interest earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest bearing liabilities”). The decline in market interest rates following the recession has reduced the spread between interest rates on earning assets and interest bearing liabilities. As a result, the Company’s net interest margin and net interest income have declined. The Company also earns revenue from service charges on deposit accounts, merchant processing services, debit card fees, and other fees (“noninterest income”). Service charges on deposit accounts are subject to laws and regulations; recent regulations and customer activity have caused service charges on deposit accounts to decline in 2012 and the three and six months ended June 30, 2013; however, debit card fees, trust fees and financial services commissions have increased due to higher transaction volumes and the Company’s sales efforts. The Company incurs noninterest expenses to deliver products and services to our customers. Management is focused on controlling noninterest expense levels, particularly due to the recent market interest rate pressure on net interest income.

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

Net Income

Following is a summary of the components of net income for the periods indicated:
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands, except per share data)
 
Net interest income (FTE)
  $ 42,628     $ 50,333     $ 86,463     $ 102,032  
Provision for loan losses
    (1,800 )     (2,800 )     (4,600 )     (5,600 )
Noninterest income
    14,284       13,533       28,562       28,202  
Noninterest expense
    (28,192 )     (29,349 )     (56,869 )     (59,383 )
Income  before taxes (FTE)
    26,920       31,717       53,556       65,251  
Income tax provision (FTE)
    (9,808 )     (10,753 )     (19,173 )     (23,282 )
Net income
  $ 17,112     $ 20,964     $ 34,383     $ 41,969  
                                 
Average diluted common shares
    26,898       27,790       27,027       27,951  
Diluted earnings per common share
  $ 0.64     $ 0.75     $ 1.27     $ 1.50  
                                 
Average total assets
  $ 4,840,319     $ 4,974,619     $ 4,874,212     $ 5,002,777  
Net income to average total assets (annualized)
    1.42 %     1.69 %     1.42 %     1.69 %
Net income to average common stockholders' equity (annualized)
    12.74 %     15.55 %     12.84 %     15.50 %

Net income for the second quarter of 2013 was $3.9 million less than the same quarter of 2012, the net result of lower net interest and fee income (fully taxable equivalent or “FTE”), partially offset by higher noninterest income and decreases in loan loss provision, noninterest expense and income tax provision (FTE). A decrease in net interest and fee income (FTE) was mostly attributed to lower average balances of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments, lower average balances of interest-bearing deposits and lower rates paid on interest-bearing deposits. The provision for loan losses was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio; net loan losses and nonperforming loan volumes have declined relative to earlier periods. Noninterest expense decreased $1.2 million primarily due to reduced personnel costs, occupancy expense, professional fees and intangible asset amortization.
 
-29-

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

Net Interest and Fee Income (FTE)

Following is a summary of the components of net interest and fee income (FTE) for the periods indicated:
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
Interest and fee income
  $ 39,269     $ 46,901     $ 79,734     $ 95,199  
Interest expense
    (1,219 )     (1,472 )     (2,471 )     (3,031 )
FTE adjustment
    4,578       4,904       9,200       9,864  
Net interest income (FTE)
  $ 42,628     $ 50,333     $ 86,463     $ 102,032  
                                 
Average earning assets
  $ 4,147,096     $ 4,127,699     $ 4,141,510     $ 4,093,985  
Net interest margin (FTE) (annualized)
    4.12 %     4.89 %     4.19 %     5.00 %

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

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

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

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

At June 30, 2013, purchased FDIC covered loans represented 17 percent of the Company’s loan portfolio. Under the terms of the FDIC loss-sharing agreements, the FDIC is obligated to reimburse the Bank 80 percent of loan interest income foregone on covered loans. Such reimbursements are limited to the lesser of 90 days contractual interest or actual unpaid contractual interest at the time a principal loss is recognized in respect to the underlying loan. FDIC loss indemnification of covered non-residential assets expires February 6, 2014. For further information, see the Loan Portfolio Credit Risk section of this report.

Interest and Fee Income (FTE)

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

 
-30-

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

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

Comparing the first half of 2013 with the first half of 2012, interest expense declined $559 thousand due to lower average balances of interest-bearing deposits and short-term borrowings, and lower rates paid on interest-bearing deposits. Lower-cost checking and savings deposits accounted for 85.2% of total average deposits in the first half 2013 compared with 81.6% in the first half of 2012. Average interest-bearing liabilities during the first half of 2013 fell $179 million compared with the first half of 2012 primarily due to declines in the average balances of time deposits $100 thousand or more (down $127 million) and time deposits less than $100 thousand (down $40 million), preferred money market accounts (down $24 million) and customer sweep accounts (down $45 million), partially offset by increases in the average balances of regular savings (up $30 million) and money market savings (up $17 million). Rates paid on interest-bearing deposits averaged 0.14% during the first half of 2013 compared with 0.17% for the first half of 2012 as a result of decreases in rates paid on time deposits less than $100 thousand (down 0.11%) and time deposits $100 thousand or more (down 0.02%).
 
 
-31-

 
Net Interest Margin (FTE)

The following summarizes the components of the Company's net interest margin for the periods indicated:
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Yield on earning assets (FTE)
    4.24 %     5.04 %     4.31 %     5.15 %
Rate paid on interest-bearing liabilities
    0.19 %     0.21 %     0.19 %     0.22 %
Net interest spread (FTE)
    4.05 %     4.83 %     4.12 %     4.93 %
Impact of noninterest bearing demand deposits
    0.07 %     0.06 %     0.07 %     0.07 %
Net interest margin (FTE)
    4.12 %     4.89 %     4.19 %     5.00 %

During the second quarter of 2013, the net interest margin (FTE) decreased 0.77% compared with the same period in 2012. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 0.78% decrease in net interest spread (FTE). The 0.07% net interest margin contribution of noninterest-bearing demand deposits resulted in the net interest margin (FTE) of 4.12%. During the first half of 2013, the net interest margin (FTE) decreased 0.81% compared with the first half of 2012. The net interest spread (FTE) in the first half of 2013 was 4.12% compared with 4.93% in the first half of 2012, the net result of a 0.84% decrease in earning asset yields, partially offset by lower cost of interest-bearing liabilities (down 0.03%).

 
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-32-

 
Summary of Average Balances, Yields/Rates and Interest Differential

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

Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
 
   
For the Three Months Ended
 
   
June 30, 2013
 
         
Interest
       
   
Average
   
Income/
   
Yields/
 
   
Balance
   
Expense
   
Rates
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 812,920     $ 3,715       1.83 %
Tax-exempt (1)
    188,231       2,632       5.59 %
Held to maturity
                       
Taxable
    441,285       1,875       1.70 %
Tax-exempt (1)
    710,299       8,880       5.00 %
Loans:
                       
Commercial:
                       
Taxable
    257,516       3,834       5.97 %
Tax-exempt (1)
    109,410       1,620       5.94 %
Commercial real estate
    881,108       13,725       6.25 %
Real estate construction
    15,706       340       8.68 %
Real estate residential
    218,926       1,915       3.50 %
Consumer
    511,695       5,311       4.16 %
Total loans (1)
    1,994,361       26,745       5.38 %
Total Interest-earning assets (1)
    4,147,096     $ 43,847       4.24 %
Other assets
    693,223                  
Total assets
  $ 4,840,319                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest-bearing demand
  $ 1,630,326     $ -       - %
Savings and interest-bearing transaction
    1,901,341       292       0.06 %
Time less than $100,000
    231,567       272       0.47 %
Time $100,000 or more
    369,275       283       0.31 %
Total interest-bearing deposits
    2,502,183       847       0.14 %
Short-term borrowed funds
    61,076       26       0.17 %
Term repurchase agreement
    10,000       25       0.99 %
Federal Home Loan Bank advances
    25,719       120       1.87 %
Debt financing
    15,000       201       5.35 %
Total interest-bearing liabilities
    2,613,978     $ 1,219       0.19 %
Other liabilities
    57,486                  
Shareholders' equity
    538,529                  
Total liabilities and shareholders' equity
  $ 4,840,319                  
Net interest spread (1) (2)
                    4.05 %
Net interest and fee income and interest margin (1) (3)
          $ 42,628       4.12 %
 
(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 (annualized), divided by the average balance of interest-earning assets.
 
-33-

 
Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
 
   
For the Three Months Ended
 
   
June 30, 2012
 
               
Yields
 
         
Interest
   
Earned/
 
   
Average
   
Income/
   
Rates
 
   
Balance
   
Expense
   
Paid
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 449,977     $ 2,774       2.47 %
Tax-exempt (1)
    220,724       3,254       5.90 %
Held to maturity
                       
Taxable
    451,988       2,574       2.28 %
Tax-exempt (1)
    629,341       8,731       5.55 %
Loans:
                       
Commercial:
                       
Taxable
    330,485       5,490       6.68 %
Tax-exempt (1)
    133,591       2,085       6.28 %
Commercial real estate
    1,046,878       17,531       6.74 %
Real estate construction
    28,627       300       4.21 %
Real estate residential
    271,196       2,496       3.68 %
Consumer
    564,892       6,570       4.68 %
Total loans (1)
    2,375,669       34,472       5.84 %
Total interest-earning assets (1)
    4,127,699     $ 51,805       5.04 %
Other assets
    846,920                  
Total assets
  $ 4,974,619                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,579,359     $ -       - %
Savings and interest-bearing transaction
    1,876,734       308       0.07 %
Time less than $100,000
    270,549       385       0.57 %
Time $100,000 or more
    501,110       414       0.33 %
Total interest-bearing deposits
    2,648,393       1,107       0.17 %
Short-term borrowed funds
    93,568       21       0.09 %
Term repurchase agreement
    10,000       24       0.97 %
Federal Home Loan Bank advances
    25,944       119       1.86 %
Debt financing
    15,000       201       5.35 %
Total interest-bearing liabilities
    2,792,905     $ 1,472       0.21 %
Other liabilities
    60,163                  
Shareholders' equity
    542,192                  
Total liabilities and shareholders' equity
  $ 4,974,619                  
Net interest spread (1) (2)
                    4.83 %
Net interest income and interest margin (1) (3)
          $ 50,333       4.89 %
 
(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 (annualized), divided by the average balance of interest-earning assets.
 
-34-

 
Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
 
   
For the Six Months Ended
 
   
June 30, 2013
 
         
Interest
       
   
Average
   
Income/
   
Yields/
 
   
Balance
   
Expense
   
Rates
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 761,994     $ 7,158       1.88 %
Tax-exempt (1)
    190,170       5,845       6.15 %
Held to maturity
                       
Taxable
    457,052       3,967       1.74 %
Tax-exempt (1)
    696,350       17,230       4.95 %
Loans:
                       
Commercial:
                       
Taxable
    265,961       8,110       6.15 %
Tax-exempt (1)
    111,750       3,312       5.98 %
Commercial real estate
    892,908       27,853       6.29 %
Real estate construction
    15,990       625       7.88 %
Real estate residential
    225,412       3,975       3.53 %
Consumer
    523,923       10,859       4.18 %
Total loans (1)
    2,035,944       54,734       5.42 %
Total Interest-earning assets (1)
    4,141,510     $ 88,934       4.31 %
Other assets
    732,702                  
Total assets
  $ 4,874,212                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest-bearing demand
  $ 1,636,801     $ -       - %
Savings and interest-bearing transaction
    1,913,236       588       0.06 %
Time less than $100,000
    235,810       571       0.49 %
Time $100,000 or more
    379,838       587       0.31 %
Total interest-bearing deposits
    2,528,884       1,746       0.14 %
Short-term borrowed funds
    59,414       37       0.13 %
Term repurchase agreement
    10,000       49       0.99 %
Federal Home Loan Bank advances
    25,748       238       1.87 %
Debt financing
    15,000       401       5.35 %
Total interest-bearing liabilities
    2,639,046     $ 2,471       0.19 %
Other liabilities
    58,173                  
Shareholders' equity
    540,192                  
Total liabilities and shareholders' equity
  $ 4,874,212                  
Net interest spread (1) (2)
                    4.12 %
Net interest and fee income and interest margin (1) (3)
          $ 86,463       4.19 %
 
(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 (annualized), divided by the average balance of interest-earning assets.
 
-35-

 
Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
 
   
For the Six Months Ended
 
   
June 30, 2012
 
               
Yields
 
         
Interest
   
Earned/
 
   
Average
   
Income/
   
Rates
 
   
Balance
   
Expense
   
Paid
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 430,935     $ 5,338       2.48 %
Tax-exempt (1)
    223,032       6,613       5.93 %
Held to maturity
                       
Taxable
    396,547       4,700       2.37 %
Tax-exempt (1)
    621,717       17,568       5.65 %
Loans:
                       
Commercial:
                       
Taxable
    341,280       11,273       6.64 %
Tax-exempt (1)
    135,669       4,139       6.14 %
Commercial real estate
    1,068,951       35,780       6.73 %
Real estate construction
    30,947       852       5.54 %
Real estate residential
    277,167       5,099       3.68 %
Consumer
    567,740       13,701       4.85 %
Total loans (1)
    2,421,754       70,844       5.88 %
Total interest-earning assets (1)
    4,093,985     $ 105,063       5.15 %
Other assets
    908,792                  
Total assets
  $ 5,002,777                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
Noninterest bearing demand
  $ 1,577,708     $ -       - %
Savings and interest-bearing transaction
    1,880,640       634       0.07 %
Time less than $100,000
    275,642       824       0.60 %
Time $100,000 or more
    506,768       836       0.33 %
Total interest-bearing deposits
    2,663,050       2,294       0.17 %
Short-term borrowed funds
    104,237       48       0.09 %
Term repurchase agreement
    10,000       49       0.98 %
Federal Home Loan Bank advances
    25,972       239       1.85 %
Debt financing
    15,000       401       5.35 %
Total interest-bearing liabilities
    2,818,259     $ 3,031       0.22 %
Other liabilities
    62,376                  
Shareholders' equity
    544,434                  
Total liabilities and shareholders' equity
  $ 5,002,777                  
Net interest spread (1) (2)
                    4.93 %
Net interest income and interest margin (1) (3)
          $ 102,032       5.00 %
 
(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 (annualized), divided by the average balance of interest-earning assets.
 
-36-

 
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 assets and liability balances (volume) and changes in average interest yields/rates for the periods indicated. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.

Summary of Changes in Interest Income and Expense
 
   
Three Months Ended June 30, 2013
 
   
Compared with
 
   
Three Months Ended June 30, 2012
 
   
Volume
   
Yield/Rate
   
Total
 
   
(In thousands)
 
Increase (decrease) in interest and fee income:
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 1,796     $ (855 )   $ 941  
Tax-exempt (1)
    (463 )     (159 )     (622 )
Held to maturity
                       
Taxable
    (59 )     (640 )     (699 )
Tax-exempt (1)
    1,056       (907 )     149  
Loans:
                       
Commercial:
                       
Taxable
    (1,117 )     (539 )     (1,656 )
Tax-exempt (1)
    (358 )     (107 )     (465 )
Commercial real estate
    (2,610 )     (1,196 )     (3,806 )
Real estate construction
    (178 )     218       40  
Real estate residential
    (462 )     (119 )     (581 )
Consumer
    (580 )     (679 )     (1,259 )
Total loans (1)
    (5,305 )     (2,422 )     (7,727 )
Total decrease in interest and fee income (1)
    (2,975 )     (4,983 )     (7,958 )
Increase (decrease) in interest expense:
                       
Deposits:
                       
Savings and interest-bearing transaction
    4       (20 )     (16 )
Time less than $100,000
    (51 )     (62 )     (113 )
Time $100,000 or more
    (102 )     (29 )     (131 )
Total interest-bearing deposits
    (149 )     (111 )     (260 )
Short-term borrowed funds
    (9 )     14       5  
Term repurchase agreement
    -       1       1  
Federal Home Loan Bank advances
    (1 )     2       1  
Debt financing
    -       -       -  
Total decrease in interest expense
    (159 )     (94 )     (253 )
Decrease in net interest and fee income (1)
  $ (2,816 )   $ (4,889 )   $ (7,705 )
 
(1)
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
-37-

 
Summary of Changes in Interest Income and Expense
 
   
Six Months Ended June 30, 2013
 
   
Compared with
 
   
Six Months Ended June 30, 2012
 
   
Volume
   
Yield/Rate
   
Total
 
   
(In thousands)
 
Increase (decrease) in interest and fee income:
                 
Investment securities:
                 
Available for sale
                 
Taxable
  $ 3,322     $ (1,502 )   $ 1,820  
Tax-exempt (1)
    (1,007 )     239       (768 )
Held to maturity
                       
Taxable
    626       (1,359 )     (733 )
Tax-exempt (1)
    1,915       (2,253 )     (338 )
Loans:
                       
Commercial:
                       
Taxable
    (2,379 )     (784 )     (3,163 )
Tax-exempt (1)
    (724 )     (103 )     (827 )
Commercial real estate
    (5,718 )     (2,209 )     (7,927 )
Real estate construction
    (507 )     280       (227 )
Real estate residential
    (924 )     (200 )     (1,124 )
Consumer
    (1,054 )     (1,788 )     (2,842 )
Total loans (1)
    (11,306 )     (4,804 )     (16,110 )
Total decrease in interest and fee income (1)
    (6,450 )     (9,679 )     (16,129 )
Increase (decrease) in interest expense:
                       
Deposits:
                       
Savings and interest-bearing transaction
    8       (54 )     (46 )
Time less than $100,000
    (112 )     (141 )     (253 )
Time $100,000 or more
    (201 )     (48 )     (249 )
Total interest-bearing deposits
    (305 )     (243 )     (548 )
Short-term borrowed funds
    (25 )     14       (11 )
Term repurchase agreement
    -       -       -  
Federal Home Loan Bank advances
    (1 )     -       (1 )
Debt financing
    (1 )     1       -  
Total decrease in interest expense
    (332 )     (228 )     (560 )
Decrease in net interest and fee income (1)
  $ (6,118 )   $ (9,451 )   $ (15,569 )
 
(1)
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
Provision for Loan Losses

The Company manages credit costs by consistently enforcing conservative loan 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 $1.8 million for loan losses in the second quarter of 2013, $2.8 million in the second quarter of 2012, $4.6 million in the first half of 2013 and $5.6 million in the first half of 2012. The reduced provision for loan losses for the second quarter 2013 reflects Management’s current evaluation of credit quality for the loan portfolio. The Company recorded purchased County Bank and Sonoma Valley Bank 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 Bank 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. 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.
 
-38-

 
Noninterest Income

The following table summarizes the components of noninterest income for the periods indicated.
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
                         
Service charges on deposit accounts
  $ 6,452     $ 7,027     $ 12,994     $ 14,122  
Merchant processing services
    2,413       2,529       4,822       4,922  
Debit card fees
    1,478       1,345       2,836       2,508  
ATM processing fees
    721       932       1,426       1,865  
Other service fees
    696       697       1,458       1,393  
Trust fees
    585       497       1,153       986  
Financial services commissions
    284       194       464       365  
Check sale income
    203       208       386       420  
Safe deposit rental
    182       193       377       390  
Loss on sale of securities
    -       (1,287 )     -       (1,287 )
Other
    1,270       1,198       2,646       2,518  
Total
  $ 14,284     $ 13,533     $ 28,562     $ 28,202  

Noninterest income for the second quarter of 2013 increased $751 thousand from the same period in 2012 primarily because the second quarter 2012 included $1.3 million in securities losses. Debit card fees increased $133 thousand or 9.9% primarily due to increased transactions. Service charges on deposits decreased $575 thousand or 8.2% due to declines in fees charged on overdrawn and insufficient funds accounts (down $331 thousand) and lower deficit fees charged on analyzed accounts (down $214 thousand). ATM processing fees decreased $211 thousand mainly because the Bank customers had fewer transactions at non-Westamerica ATMs and other cash dispensing terminals.

In the first half of 2013, noninterest income increased $360 thousand compared with the first half of 2012 primarily because the second quarter 2012 included $1.3 million in securities losses. Debit card fees increased $328 thousand or 13.1% primarily due to increased transactions. Trust fees increased $167 thousand or 16.9% due to improved sales. Service charges on deposits decreased $1.1 million or 8.0% due to declines in fees charged on overdrawn and insufficient funds accounts (down $603 thousand) and lower deficit fees charged on analyzed accounts (down $425 thousand), partially offset by fee increases on savings accounts (up $65 thousand). ATM processing fees decreased $439 thousand mainly because the Bank customers had fewer transactions at non-Westamerica ATMs and other cash dispensing terminals.



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-39-

 
Noninterest Expense

The following table summarizes the components of noninterest expense for the periods indicated.
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
                         
Salaries and related benefits
  $ 14,064     $ 14,494     $ 28,467     $ 29,540  
Occupancy
    3,638       3,775       7,524       7,709  
Outsourced data processing services
    2,140       2,078       4,297       4,161  
Amortization of identifiable intangibles
    1,165       1,339       2,384       2,741  
Furniture and equipment
    1,021       1,041       1,901       1,892  
Professional fees
    745       902       1,380       1,669  
Courier service
    737       793       1,478       1,578  
Telephone
    462       418       910       794  
Loan expense
    414       390       831       1,017  
Postage
    293       344       593       716  
Other real estate owned
    278       3       612       233  
Stationery and supplies
    235       247       516       490  
Advertising and public relations
    170       151       315       303  
Operational losses
    86       149       214       322  
Other noninterest expense
    2,744       3,225       5,447       6,218  
Total
  $ 28,192     $ 29,349     $ 56,869     $ 59,383  

Noninterest expense decreased $1.2 million or 3.9% in the second quarter 2013 compared with the same period in 2012 primarily due to lower personnel costs, occupancy expenses, professional fees, and intangible asset amortization. Salaries and related benefits declined $430 thousand or 3.0% due to employee attrition and lower employee benefit costs. Occupancy expense decreased $137 thousand or 3.6% mainly due to lower lease rates on bank premises and utility costs. Amortization of identifiable intangibles decreased $174 thousand as such assets are amortized on a declining balance method. Professional fees decreased $157 thousand mostly due to lower legal fees relating to nonperforming assets. Expenses relating to other real estate owned increased $275 thousand mainly due to higher writedowns and maintenance expenses.

In the first half of 2013, noninterest expense decreased $2.5 million or 4.2% compared with the first half of 2012. Salaries and related benefits decreased $1.1 million primarily due to employee attrition and decreases in incentives and employee benefit costs. Amortization of identifiable intangibles decreased $357 thousand as such assets are amortized on a declining balance method. Professional fees declined $289 thousand due to lower legal fees associated with nonperforming assets. Loan expense decreased $186 thousand due to lower foreclosure expenses, partially offset by higher expenses for credit reports. Occupancy expense decreased $185 thousand mainly due to lower lease rates on bank premises and utility costs. Expenses relating to other real estate owned increased $379 thousand mainly due to lower gains on sale of foreclosed assets.
 
Provision for Income Tax

During the second quarter 2013, the Company recorded income tax provision (FTE) of $9.8 million, compared with $10.8 million in the second quarter 2012. The second quarter 2013 provision represents an effective tax rate (FTE) of 36.4%, compared with 33.9% for the second quarter 2012. The reduced tax rate in the second quarter 2012 is attributable to a $968 thousand tax refund from an amended 2006 federal income tax return. The income tax provision (FTE) was $19.2 million for the first six months of 2013 compared with $23.3 million for the corresponding period of 2012. The first half of 2013 effective tax rate (FTE) was 35.8% compared to 35.7% for the same period of 2012.

On July 11, 2013, California’s Governor Jerry Brown signed two bills which end a 30-year-old enterprise zone tax incentive program and replace it with new incentives. Due to the passage of these bills, many tax benefits will be phased out by the end of 2014. The Company has been realizing tax benefits under the historical enterprise zone tax incentive program, including:

·  
Net interest income on loans funding economic activity within enterprise zones has been a deduction in determining California taxable income.

 
-40-

 
·  
California tax credits have been realized by hiring employees within enterprise zones; however, the economic value of the tax credits is partially offset by a reduction in deductible compensation expense by the amount of the tax credits.

Effective January 1, 2014, the new law eliminates the net interest deduction for enterprise zone loans and the hiring credits are significantly altered. The Company is currently evaluating the impact of the new laws on its tax provision, particularly hiring tax credits provided under the new laws, which replace expiring tax credits. However, the Company does not expect a significant change in its tax provision due to the new laws; the tax benefits recognized from the current enterprise zone tax incentive program for the six months ended June 30, 2013 were $61 thousand, net of federal income tax consequences.
 
Loan Portfolio Credit Risk

The risk that loan customers do not repay loans extended by the Bank is a 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. Uncollected interest previously accrued on loans placed on nonaccrual status is reversed as a charge against interest income, net of estimated FDIC reimbursements under loss-sharing agreements. The Company does not accrue interest income on loans following placement on nonaccrual status. 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 (commonly referred to as “Other Real Estate Owned”).



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-41-

 
 
Nonperforming Assets
                 
   
At June 30,
   
At December 31,
 
   
2013
   
2012
   
2012
 
   
(In thousands)
 
Originated:
                 
Nonperforming nonaccrual loans
  $ 7,664     $ 15,445     $ 10,016  
Performing nonaccrual loans
    1,272       1,101       1,759  
Total nonaccrual loans
    8,936       16,546       11,775  
Accruing loans 90 or more days past due
    241       525       455  
Total nonperforming loans
    9,177       17,071       12,230  
Other real estate owned
    5,414       10,551       9,295  
Total nonperforming assets
  $ 14,591     $ 27,622     $ 21,525  
                         
Purchased covered:
                       
Nonperforming nonaccrual loans
  $ 14,619     $ 8,627     $ 11,698  
Performing nonaccrual loans
    2,204       1,409       1,323  
Total nonaccrual loans
    16,823       10,036       13,021  
Accruing loans 90 or more days past due
    74       140       155  
Total nonperforming loans
    16,897       10,176       13,176  
Other real estate owned
    10,480       14,608       13,691  
Total nonperforming assets
  $ 27,377     $ 24,784     $ 26,867  
                         
Purchased non-covered:
                       
Nonperforming nonaccrual loans
  $ 1,890     $ 12,822     $ 7,038  
Performing nonaccrual loans
    3,013       7,050       461  
Total nonaccrual loans
    4,903       19,872       7,499  
Accruing loans 90 or more days past due
    -       -       4  
Total nonperforming loans
    4,903       19,872       7,503  
Other real estate owned
    3,543       7,034       3,366  
Total nonperforming assets
  $ 8,446     $ 26,906     $ 10,869  
 
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 June 30, 2013, the Bank’s nonaccrual loans reflected this diversification: nonaccrual originated loans with a carrying value totaling $9 million comprised eighteen borrowers, nonaccrual purchased covered loans with a carrying value totaling $17 million comprised nineteen borrowers, and nonaccrual purchased non-covered loans with a carrying value totaling $5 million comprised nine 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.

The former County Bank loans and repossessed loan collateral were purchased from the FDIC with indemnifying loss-sharing agreements. The loss-sharing agreements significantly reduce the credit risk of these purchased assets during the term of the agreements. 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 $1.3 billion acquired loan and repossessed loan collateral portfolio was $161 million representing estimated losses inherent in the assets at the acquisition date.

 
-42-

 

Purchased Covered Assets
                       
   
At June 30,
   
At December 31,
   
February 6,
 
   
2013
   
2012
   
2012
   
2009
 
   
(In thousands)
 
                         
Non-residential assets
  $ 330,090     $ 476,415     $ 384,285     $ 1,298,526  
Residential assets
    22,394       30,100       25,570       40,955  
Total indemnified assets
    352,484       506,515       409,855       1,339,481  
Credit risk discount
    (18,514 )     (30,366 )     (26,128 )     (161,203 )
Other adjustments
    1,486       1,710       2,247       5,407  
Carrying value of covered assets
  $ 335,456     $ 477,859     $ 385,974     $ 1,183,685  
                                 
Comprised of:
                               
Purchased covered loans
  $ 324,976     $ 463,251     $ 372,283     $ 1,174,353  
Covered other real estate owned
    10,480       14,608       13,691       9,332  
Carrying value of covered assets
  $ 335,456     $ 477,859     $ 385,974     $ 1,183,685  

Aggregate indemnified losses from February 6, 2009 through June 30, 2013 have been $139 million, which includes principal losses, loss in value of other real estate owned, loss on sale of other real estate owned, and reimbursement of incurred collection and asset management expenses such as legal fees, property taxes, appraisals and other customary expenses. Purchased covered asset principal 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 allowance for credit losses.

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 $116 million, $131 million and $122 million at June 30, 2013, June 30, 2012 and December 31, 2012, respectively.

As noted above, FDIC loss indemnification of covered non-residential assets expires February 6, 2014; loss exposure on such assets after February 6, 2014 will be represented by such assets’ carrying values at such time. Loss exposure for loans is mitigated by the borrowers’ financial condition and ability to repay their loans, loan collateral values, the amount of credit risk discount remaining at such time, any existing borrower guarantees which are perfected and have economic value, and the allowance for credit losses. Loss exposure for other real estate owned is mitigated by the value of the repossessed loan collateral, less disposition costs.
 
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, 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. The allowance for credit losses represents Management’s estimate of credit losses in excess of these reductions to the carrying value of loans within the loan portfolio.

 
-43-

 
The following table summarizes the allowance for credit losses, loans charged off and recoveries of loans previously charged off for the periods indicated:
 
   
For the Three Months
   
For the Six Months
 
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
Analysis of the Allowance for Credit Losses
                       
Balance, beginning of period
  $ 33,047     $ 34,576     $ 32,927     $ 35,290  
Provision for loan losses
    1,800       2,800       4,600       5,600  
Provision for unfunded commitments
    -       -       -       -  
Loans charged off
                               
Commercial
    (148 )     (2,696 )     (2,050 )     (3,558 )
Commercial real estate
    (427 )     -       (539 )     (948 )
Real estate construction
    -       -       -       -  
Real estate residential
    (22 )     (62 )     (109 )     (932 )
Consumer
    (896 )     (1,211 )     (2,205 )     (2,864 )
Purchased covered loans
    (517 )     (247 )     (876 )     (612 )
Purchased non-covered loans
    (116 )     (25 )     (116 )     (25 )
Total chargeoffs
    (2,126 )     (4,241 )     (5,895 )     (8,939 )
Recoveries of loans previously charged off
                               
Commercial
    297       228       759       617  
Commercial real estate
    77       33       98       33  
Real estate construction
    -       196       -       198  
Real estate residential
    -       -       -       -  
Consumer
    506       600       1,107       1,379  
Purchased covered loans
    18       24       23       38  
Total recoveries
    898       1,081       1,987       2,265  
Net loan losses
    (1,228 )     (3,160 )     (3,908 )     (6,674 )
Balance, end of period
  $ 33,619     $ 34,216     $ 33,619     $ 34,216  
Components:
                               
Allowance for loan losses
  $ 30,926     $ 31,523                  
Liability for off-balance sheet credit exposure
    2,693       2,693                  
Allowance for credit losses
  $ 33,619     $ 34,216                  
Net loan losses:
                               
Originated loans
  $ (613 )   $ (2,912 )   $ (2,939 )   $ (6,075 )
Purchased covered loans
    (499 )     (223 )     (853 )     (574 )
Purchased non-covered loans
    (116 )     (25 )     (116 )     (25 )
Net loan losses as a percentage of average loans (annualized):
                               
Originated loans
    0.15 %     0.65 %     0.37 %     0.67 %
Purchased covered loans
    0.59 %     0.19 %     0.49 %     0.23 %
Purchased non-covered loans
    0.71 %     0.09 %     0.34 %     0.04 %
 
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 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. The Company performs impairment evaluations for all classified loans and nonaccrual loans with outstanding principal balances in excess of $500 thousand, and all “troubled debt restructured” loans. A second allocation is based in part on quantitative analyses of historical credit loss experience, in which historical originated classified credit balances are analyzed using a statistical model to determine standard loss rates for originated loans. The results of this analysis are applied to originated 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 current economic conditions, Management is applying further analysis to originated consumer 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  consumer loans. Last, allocations are made to originated non-classified commercial and commercial real estate loans based on historical loss rates and other statistical data.

 
-44-

 
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. 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 post-acquisition historical credit losses on purchased loans, credit default discounts on purchased loans, and other data to evaluate the likelihood of realizing the recorded investment of 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 and the judgmental amount of unallocated reserve assigned by Management as of June 30, 2013 are: economic and business conditions $1.1 million, external competitive issues $800 thousand, 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 and the judgmental amount of unallocated reserve assigned by Management are: loan review system $800 thousand, adequacy of lending Management and staff $800 thousand, loan policies and procedures $800 thousand, purchased loans $1.0 million, concentrations of credit $800 thousand, 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.


   
Allowance for Credit Losses
 
   
For the Three Months Ended June 30, 2013
 
                           
Consumer
   
Purchased
   
Purchased
             
         
Commercial
         
Residential
   
Installment
   
Non-covered
   
Covered
             
   
Commercial
   
Real Estate
   
Construction
   
Real Estate
   
and Other
   
Loans
   
Loans
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                     
Balance at beginning of period
  $ 5,536     $ 10,965     $ 480     $ 539     $ 2,768     $ -     $ 738     $ 9,328     $ 30,354  
Additions:
                                                                       
Provision
    (1,301 )     660       (2 )     15       225       116       46       2,041       1,800  
Deductions:
                                                                       
Chargeoffs
    (148 )     (427 )     -       (22 )     (896 )     (116 )     (517 )     -       (2,126 )
Recoveries
    297       77       -       -       506       -       18       -       898  
Net loan recoveries (losses)
    149       (350 )     -       (22 )     (390 )     (116 )     (499 )     -       (1,228 )
Balance at end of period
    4,384       11,275       478       532       2,603       -       285       11,369       30,926  
Liability for off-balance sheet credit exposure
    1,698       1       127       -       473       -       -       394       2,693  
Total allowance for credit losses
  $ 6,082     $ 11,276     $ 605     $ 532     $ 3,076     $ -     $ 285     $ 11,763     $ 33,619  


   
Allowance for Credit Losses
 
   
For the Six Months Ended June 30, 2013
 
                           
Consumer
   
Purchased
   
Purchased
             
         
Commercial
         
Residential
   
Installment
   
Non-covered
   
Covered
             
   
Commercial
   
Real Estate
   
Construction
   
Real Estate
   
and Other
   
Loans
   
Loans
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                     
Balance at beginning of period
  $ 6,445     $ 10,063     $ 484     $ 380     $ 3,194     $ -     $ 1,005     $ 8,663     $ 30,234  
Additions:
                                                                       
Provision
    (770 )     1,653       (6 )     261       507       116       133       2,706       4,600  
Deductions:
                                                                       
Chargeoffs
    (2,050 )     (539 )     -       (109 )     (2,205 )     (116 )     (876 )     -       (5,895 )
Recoveries
    759       98       -       -       1,107       -       23       -       1,987  
Net loan losses
    (1,291 )     (441 )     -       (109 )     (1,098 )     (116 )     (853 )     -       (3,908 )
Balance at end of period
    4,384       11,275       478       532       2,603       -       285       11,369       30,926  
Liability for off-balance sheet credit exposure
    1,698       1       127       -       473       -       -       394       2,693  
Total allowance for credit losses
  $ 6,082     $ 11,276     $ 605     $ 532     $ 3,076     $ -     $ 285     $ 11,763     $ 33,619  


 
-45-

 

   
Allowance for Credit Losses and
 
   
Recorded Investment in Loans Evaluated for Impairment
 
   
At June 30, 2013
 
   
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
  $ 100     $ -     $ -     $ -     $ -     $ -     $ 147     $ -     $ 247  
Collectively evaluated for impairment
    5,982       11,276       605       532       3,076       -       138       11,763       33,372  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
Total
  $ 6,082     $ 11,276     $ 605     $ 532     $ 3,076     $ -     $ 285     $ 11,763     $ 33,619  
Carrying value of loans:
                                                                       
Individually evaluated for impairment
  $ 2,496     $ 4,421     $ -     $ -     $ -     $ 3,990     $ 15,169     $ -     $ 26,076  
Collectively evaluated for impairment
    307,125       609,584       8,015       195,322       426,340       54,474       302,547       -       1,903,407  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       2,598       7,260       -       9,858  
Total
  $ 309,621     $ 614,005     $ 8,015     $ 195,322     $ 426,340     $ 61,062     $ 324,976     $ -     $ 1,939,341  

See Note 4 to the unaudited consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, and allowance for credit losses.

Asset/Liability 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, the changing levels of interest rates may have an impact on loan demand, demand for various deposit products, credit losses, and other elements of earnings such as account analysis fees on commercial deposit accounts and correspondent bank service charges.

The Federal Open Market Committee’s June 19, 2013 press release stated ”the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent”. In this context, Management’s most likely earnings forecast for the twelve months ending June 30, 2014 assumes market 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 the Company’s 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.

The Company’s asset and liability position ranged from slightly to modestly “liability sensitive” at June 30, 2013, depending on the interest rate assumptions applied to the simulation model employed by Management to measure interest rate risk. A  “liability sensitive” position results in a slightly larger change in interest expense than in interest income resulting from application of assumed interest rate changes. Simulation estimates depend on, and will change with, the size and mix of the actual and projected balance sheet at the time of each simulation. 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.

 
-46-

 
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 objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets.
 
In recent years, the Company's deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 97 percent and 96 percent of funding for average total assets in the six months ended June 30, 2013 and the year 2012, respectively. The stability of the Company’s funding from customer deposits is reliant on the confidence clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate level of liquidity reserves.
 
Effective December 31, 2010, the Dodd-Frank Act required unlimited FDIC deposit insurance on all non-interest bearing transaction accounts and mandated participation by all member banks. This requirement and mandate expired on December 31, 2012, at which time unlimited FDIC insurance on non-interest bearing transaction accounts came to an end. Upon expiration, the standard maximum FDIC insurance coverage returned to $250,000 for non-interest bearing transaction accounts. The change in deposit insurance has not had a significant impact to the Company's deposit levels.
 
During 2012 and the first half of 2013, non-deposit funding has been obtained through short-term borrowings, a term repurchase agreement, Federal Home Loan Bank advances, and long-term debt financing. These non-deposit sources of funds comprise a modest portion of total funding.
 
Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides a substantial secondary liquidity reserve. The Company held $2.1 billion in total investment securities at June 30, 2013. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At June 30, 2013, such collateral requirements totaled approximately $816 million.
 
 
-47-

 
Westamerica Bancorporation ("Parent Company") is a separate entity 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 8 to the unaudited consolidated financial statements, matures October 31, 2013; the Company intends to retire the note with cash. Substantially all of the Parent Company's revenues are obtained from subsidiary dividends and service fees. The Bank’s dividends paid to the Parent Company provided adequate cash flow for the Parent Company in the first six months of 2013 and 2012 to pay shareholder dividends of $20 million and $21 million, respectively, and retire common stock in the amount of $27 million and $26 million, respectively. Payment of dividends to the Parent Company by the Bank is limited under California and Federal laws. The Company believes these regulatory dividend restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations.
 
Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. 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 Federal Reserve Bank reserve requirements, 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.
 
Capital Resources

The Company has historically generated relatively high levels of earnings, which provides a means of raising capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been 12.8% (annualized) in the first six months of 2013, 14.9% in 2012 and 16.1% in 2011. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options totaled $6.4 million in the first six months of 2013, $7.6 million in 2012 and $14.4 million in 2011.

The Company paid common dividends totaling $20.1 million in the first six months of 2013, $41.0 million in 2012 and $41.7 million in 2011, which represent dividends per common share of $0.74, $1.48 and $1.45, 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 provide returns to shareholders. The Company repurchased and retired 617 thousand shares valued at $27.4 million in the first six months of 2013, 1.1 million shares valued at $51.5 million in 2012 and 1.3 million shares valued at $60.5 million in 2011.

The Company's ratio of equity to total assets was 11.31% at June 30, 2013 and at December 31, 2012.

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.
 
 
-48-

 
Capital to Risk-Adjusted Assets

The following summarizes the ratios of regulatory capital to risk-adjusted assets for the Company on the dates indicated:
 
                     
Minimum
   
Well-capitalized
 
   
At June 30,
   
At December 31,
   
Regulatory
   
by Regulatory
 
   
2013
   
2012
   
2012
   
Requirement
   
Definition
 
                               
Tier I Capital
    14.64 %     14.46 %     15.06 %     4.00 %     6.00 %
Total Capital
    15.98 %     15.74 %     16.33 %     8.00 %     10.00 %
Leverage ratio
    8.62 %     8.43 %     8.56 %     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 June 30,
   
At December 31,
   
Regulatory
   
by Regulatory
 
   
2013
   
2012
   
2012
   
Requirement
   
Definition
 
                               
Tier I Capital
    13.47 %     13.85 %     14.14 %     4.00 %     6.00 %
Total Capital
    15.04 %     15.32 %     15.62 %     8.00 %     10.00 %
Leverage ratio
    7.89 %     8.02 %     7.99 %     4.00 %     5.00 %
 
FDIC-covered assets are generally included in the 20% risk-weighted category due to loss-sharing agreements, under which loss reimbursement expires on February 6, 2019 as to the residential real estate covered assets and on February 6, 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 July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The rule’s provisions which would most affect the regulatory capital requirements of the Company and the Bank:

·  
Introduce a new “Common Equity Tier 1” capital measurement,
·  
Establish higher minimum levels of capital,
·  
Introduce a “capital conservation buffer” and “counter cyclical buffer,” and
·  
Increase the risk-weighting of certain assets, in particular construction loans, loans on nonaccrual status, loans 90 days or more past due, and deferred tax assets.

Under the final rule, a banking organization that is not subject to the “advanced approaches rule” may make a one-time election not to include most elements of Accumulated Other Comprehensive Income, including net-of-tax unrealized gains and losses on available for sale investment securities, in regulatory capital and instead effectively use the existing treatment under the general risk-based capital rules. Neither the Company nor the Bank are subject to the “advanced approaches rule” and intend to make the election not to include most elements of Accumulated Other Comprehensive Income in regulatory capital.

Generally, banking organizations that are not subject to the “advanced approaches rule” must begin complying with the final rule on January 1, 2015; on such date, the Company and the Bank become subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations must begin calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016 and end January 1, 2019. Any bank subject to the rule which is unable to maintain its “capital conservation buffer” will be restricted in the payment of discretionary executive compensation and shareholder distributions, such as dividends and share repurchases.

The final rule does 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 final rule revises the PCA thresholds to incorporate the higher minimum levels of capital, including the newly proposed “common equity tier 1” ratios.

 
-49-

 
Management has evaluated the capital structure and assets for the Company and the Bank as of June 30, 2013 assuming (1) the Federal Reserve’s final rule was 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 final rule regulatory ratios, as follows:
 
               
Final Rule
   
Proforma Measurements as of
 
   
Final Rule
         
Minimum
   
June 30, 2013 Assuming Final
 
   
Minimum
   
"Well-capitalized"
   
Plus "Capital
   
Rule Fully Phased-in and
 
   
Capital
   
Under PCA
   
Conservation
   
Covered Asset Indemnification
 
   
Requirement
   
Proposal
   
Buffer"
   
Expired
 
                     
Company
   
Bank
 
Capital Measurement:
                             
Leverage
    4.00 %     5.00 %     4.00 %     8.62 %     7.89 %
Common Equity Tier 1
    4.50 %     6.50 %     7.00 %     13.36 %     12.28 %
Tier I Capital
    6.00 %     8.00 %     8.50 %     13.36 %     12.28 %
Total Capital
    8.00 %     10.00 %     10.50 %     14.46 %     13.40 %

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 permitted with the approval of the Company’s Board of Directors.

Credit risk and interest rate risk are the most significant market risks affecting the Company, and equity price risk can also affect the Company’s financial results. These risks are described in the preceding sections regarding “Loan Portfolio Credit Risk,” and “Asset/Liability Management.” 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.
 
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 June 30, 2013.

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 material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Due to the nature of its business, the Company is subject to various threatened or filed legal cases resulting from loan administration practices, loan collection efforts, transaction processing, and employment practices. 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.
 
 
-50-

 
Item 1A. Risk Factors

The Company’s Form 10-K as of December 31, 2012 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 June 30, 2013.

               
(c)
   
(d)
 
               
Total Number
   
Maximum Number
 
               
of Shares
   
of Shares that May
 
   
(a)
   
(b)
   
Purchased as Part of
   
Yet Be Purchased
 
   
Total Number of
   
Average Price
   
Publicly Announced
   
Under the Plans
 
Period
 
Shares Purchased
   
Paid per Share
   
Plans or Programs*
   
or Programs
 
(In thousands, except per share data)
 
April 1
                       
through
    84     $ 43.54       84       1,057  
April 30
                               
May 1
                               
through
    124       44.29       124       933  
May 31
                               
June 1
                               
through
    62       45.31       62       871  
June 30
                               
Total
    270     $ 44.29       270       871  

* Includes 4 thousand, 3 thousand and 5 thousand shares purchased in April, May and June, 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 related to stock option plans and other ongoing requirements.

Shares were repurchased during the second quarter of 2013 pursuant to a 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.
 
Item 3. Defaults upon Senior Securities

None
 
Item 4. Mine Safety Disclosures

Not applicable.
 
 
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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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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: August 1, 2013

 
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Exhibit 31.1:  Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

Exhibit 31.2:  Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

Exhibit 32.1: Certification of Chief Executive Officer 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 June 30, 2013, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012; (ii) Consolidated Balance Sheets at June 30, 2013, and December 31, 2012; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2013 and 2012; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 and (vi) Notes to the unaudited Consolidated Financial Statements.
 
 
 
 
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