f10q_043014.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the transition period from __________ to __________.

Commission file number: 001-09383
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 þ                           No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ                            No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                            No þ

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
 
Title of Class Shares outstanding as of April 21, 2014
   
Common Stock,
No Par Value
26,308,078
 
 
 


 
 

 
TABLE OF CONTENTS


 
 
Page
Forward Looking Statements
PART I - FINANCIAL INFORMATION  
Item 1
 
 
Item 2
Item 3
Item 4
PART II - OTHER INFORMATION  
Item 1
Item 1A 
Item 2
Item 3
Item 4
Item 5
Item 6
Signatures
Exhibit Index
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350
 
 
 
-2-

 
FORWARD-LOOKING STATEMENTS
 
This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995.  Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements.  Words such as "believes", "anticipates", "expects", "intends", "targeted", "projected", "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
 
These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of 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 a failure or breach in data processing systems or those of third party vendors and other service providers, including as a result of cyber attacks 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, 2013, 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 March 31,
   
At December 31,
 
   
2014
   
2013
 
   
(In thousands)
 
Assets:
           
Cash and due from banks
  $ 428,840     $ 472,028  
Investment securities available for sale
    1,240,288       1,079,381  
Investment securities held to maturity, with fair values of: $1,103,827 at March 31, 2014 and $1,112,676 at December 31, 2013
    1,110,329       1,132,299  
Loans
    1,816,319       1,827,744  
Allowance for loan losses
    (32,109 )     (31,693 )
Loans, net of allowance for loan losses
    1,784,210       1,796,051  
Other real estate owned
    12,186       13,320  
Premises and equipment, net
    36,675       37,314  
Identifiable intangibles, net
    17,452       18,557  
Goodwill
    121,673       121,673  
Other assets
    169,389       176,432  
Total Assets
  $ 4,921,042     $ 4,847,055  
                 
Liabilities:
               
Noninterest bearing deposits
  $ 1,778,034     $ 1,740,182  
Interest bearing deposits
    2,436,749       2,423,599  
Total deposits
    4,214,783       4,163,781  
Short-term borrowed funds
    64,382       62,668  
Federal Home Loan Bank advances
    20,437       20,577  
Term repurchase agreement
    10,000       10,000  
Other liabilities
    70,557       47,095  
Total Liabilities
    4,380,159       4,304,121  
                 
Shareholders' Equity:
               
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,299 at March 31, 2014 and 26,510 at December 31, 2013
    383,490       378,946  
Deferred compensation
    2,711       2,711  
Accumulated other comprehensive income
    8,856       4,313  
Retained earnings
    145,826       156,964  
Total Shareholders' Equity
    540,883       542,934  
Total Liabilities and  Shareholders' Equity
  $ 4,921,042     $ 4,847,055  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
-4-

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
   
For the
Three Months Ended
March 31,
 
   
2014
   
2013
 
   
(In thousands,
except per share data)
 
Interest and Fee Income:
           
Loans
  $ 22,901     $ 27,399  
Investment securities available for sale
    5,630       5,336  
Investment securities held to maturity
    7,033       7,730  
Total Interest and Fee Income
    35,564       40,465  
Interest Expense:
               
Deposits
    754       899  
Short-term borrowed funds
    20       11  
Term repurchase agreement
    25       24  
Federal Home Loan Bank advances
    99       118  
Debt financing
    -       200  
Total Interest Expense
    898       1,252  
Net Interest Income
    34,666       39,213  
Provision for Loan Losses
    1,000       2,800  
Net Interest Income After Provision For Loan Losses
    33,666       36,413  
Noninterest Income:
               
Service charges on deposit accounts
    6,010       6,542  
Merchant processing services
    1,924       2,409  
Debit card fees
    1,405       1,358  
Other service fees
    661       762  
Trust fees
    654       568  
ATM processing fees
    620       705  
Financial services commissions
    171       180  
Other
    1,545       1,754  
Total Noninterest Income
    12,990       14,278  
Noninterest Expense:
               
Salaries and related benefits
    14,126       14,403  
Occupancy
    3,727       3,886  
Outsourced data processing services
    2,105       2,157  
Amortization of identifiable intangibles
    1,105       1,219  
Furniture and equipment
    1,005       880  
Courier service
    610       741  
Professional fees
    430       635  
Other real estate owned
    (350 )     334  
Other
    4,115       4,422  
Total Noninterest Expense
    26,873       28,677  
Income Before Income Taxes
    19,783       22,014  
Provision for income taxes
    4,476       4,743  
Net Income
  $ 15,307     $ 17,271  
                 
Average Common Shares Outstanding
    26,433       27,145  
Diluted Average Common Shares Outstanding
    26,537       27,157  
Per Common Share Data:
               
Basic earnings
  $ 0.58     $ 0.64  
Diluted earnings
    0.58       0.64  
Dividends paid
    0.38       0.37  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
-5-

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
   
For the Three Months Ended
March 31,
 
   
2014
   
2013
 
   
(In thousands)
 
Net income
  $ 15,307     $ 17,271  
Other comprehensive income:
               
    Increase in net unrealized gains on securities available for sale
    7,823       1,272  
    Deferred tax expense
    (3,289 )     (534 )
        Increase in net unrealized gains on securities available for sale, net of tax
    4,534       738  
    Post-retirement benefit transition obligation amortization
    15       15  
    Deferred tax expense
    (6 )     (6 )
        Post-retirement benefit transition obligation amortization, net of tax
    9       9  
Total other comprehensive income
    4,543       747  
Total comprehensive income
  $ 19,850     $ 18,018  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
-6-

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
 
                     
Accumulated
             
   
Common
         
Accumulated
   
Other
             
   
Shares
   
Common
   
Deferred
   
Comprehensive
   
Retained
       
   
Outstanding
   
Stock
   
Compensation
   
Income
   
Earnings
   
Total
 
   
(In thousands)
 
                                     
Balance, December 31, 2012
    27,213     $ 372,012     $ 3,101     $ 14,625     $ 170,364     $ 560,102  
Net income for the period
                                    17,271       17,271  
Other comprehensive income
                            747               747  
Exercise of stock options
    151       6,156                               6,156  
Tax benefit decrease upon exercise of stock options
            (191 )                             (191 )
Stock based compensation
            379                               379  
Stock awarded to employees
    1       42                               42  
Purchase and retirement of stock
    (347 )     (4,819 )                     (10,623 )     (15,442 )
Dividends
                                    (10,084 )     (10,084 )
Balance, March 31, 2013
    27,018     $ 373,579     $ 3,101     $ 15,372     $ 166,928     $ 558,980  
                                                 
Balance, December 31, 2013
    26,510     $ 378,946     $ 2,711     $ 4,313     $ 156,964     $ 542,934  
Net income for the period
                                    15,307       15,307  
Other comprehensive income
                            4,543               4,543  
Exercise of stock options
    225       10,853                               10,853  
Tax benefit decrease upon exercise of stock options
            (369 )                             (369 )
Stock based compensation
            359                               359  
Stock awarded to employees
    1       52                               52  
Purchase and retirement of stock
    (437 )     (6,351 )                     (16,359 )     (22,710 )
Dividends
                                    (10,086 )     (10,086 )
Balance, March 31, 2014
    26,299     $ 383,490     $ 2,711     $ 8,856     $ 145,826     $ 540,883  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
-7-

 
WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the Three Months
Ended March 31,
 
   
2014
   
2013
 
   
(In thousands)
 
Operating Activities:
           
Net income
  $ 15,307     $ 17,271  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    4,103       4,322  
Loan loss provision
    1,000       2,800  
Net amortization of deferred loan fees
    (30 )     (80 )
Decrease (increase) in interest income receivable
    643       (199 )
Increase in deferred tax asset
    (756 )     (673 )
Increase in other assets
    (185 )     (663 )
Stock option compensation expense
    359       379  
Tax benefit decrease upon exercise of stock options
    369       191  
Increase in income taxes payable
    5,232       5,482  
Increase in interest expense payable
    5       252  
Increase (decrease) in other liabilities
    8,507       (6,726 )
Gain on sale of other assets
    (400 )     (274 )
Writedown/loss on sale of premises and equipment
    16       6  
Originations of mortgage loans for resale
    -       (90 )
Proceeds from sale of mortgage loans originated for resale
    -       92  
Net gain on sale of foreclosed assets
    (493 )     (181 )
Writedown of foreclosed assets
    69       592  
Net Cash Provided by Operating Activities
    33,746       22,501  
                 
Investing Activities:
               
Net repayments of loans
    9,598       72,880  
Proceeds from FDIC* loss-sharing agreement
    44       1,344  
Purchases of investment securities available for sale
    (237,948 )     (175,901 )
Proceeds from sale/maturity/calls of securities available for sale
    99,350       30,166  
Purchases of investment securities held to maturity
    (17,993 )     (59,677 )
Proceeds from maturity/calls of securities held to maturity
    34,403       51,876  
Purchases of premises and equipment
    (166 )     (617 )
Proceeds from sale of FRB/FHLB** stock
    3,248       738  
Proceeds from sale of foreclosed assets
    2,159       2,611  
Net Cash Used in Investing Activities
    (107,305 )     (76,580 )
                 
Financing Activities:
               
Net change in deposits
    51,063       (70,450 )
Net change in short-term borrowings
    1,620       8,167  
Exercise of stock options/issuance of shares
    10,853       6,156  
Tax benefit decrease upon exercise of stock options
    (369 )     (191 )
Retirement of common stock including repurchases
    (22,710 )     (15,442 )
Common stock dividends paid
    (10,086 )     (10,084 )
Net Cash Provided by (Used in) Financing Activities
    30,371       (81,844 )
Net Change In Cash and Due from Banks
    (43,188 )     (135,923 )
Cash and Due from Banks at Beginning of Period
    472,028       491,382  
Cash and Due from Banks at End of Period
  $ 428,840     $ 355,459  
                 
Supplemental Cash Flow Disclosures:
               
Supplemental disclosure of noncash activities:
               
   Loan collateral transferred to other real estate owned
  $ 968     $ 640  
   Securities purchases pending settlement
    (11,231 )     -  
Supplemental disclosure of cash flow activities:
               
   Interest paid for the period
    987       1,132  
   Income tax payments for the period
    -       126  
 
See accompanying notes to unaudited consolidated financial statements.
* Federal Deposit Insurance Corporation ("FDIC")
** Federal Reserve Bank/Federal Home Loan Bank ("FRB/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 months ended March 31, 2014 and 2013 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, 2013.

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, 2013.  Certain amounts in prior periods have been reclassified to conform to the current presentation.

Certain accounting policies underlying the preparation of these financial statements require Management to make estimates and judgments. These estimates and judgments may significantly affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Management exercises judgment to estimate the appropriate level of the allowance for credit losses and 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 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, was issued July 2013 to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar loss, or a tax credit carryforward exists.  The update provides that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, unless an exception applies.  The adoption of the update did not have a material effect on the Company’s financial statements at January 1, 2014, the date adopted.

Recently Issued Accounting Standards

FASB ASU 2014-01, Investments- Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, was issued January 2014 to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with GAAP.  The policy election must be applied consistently to all qualified affordable housing project investments.

The update also requires a reporting entity to disclose information regarding its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations.

Management is evaluating the impact that the change in accounting policy would have on the Company’s financial statements.  Management does not expect the adoption of this update to have a material effect on the financial statements when adopted on January 1, 2015.

 
-9-

 
Note 3:  Investment Securities

An analysis of 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 March 31, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
U.S. Treasury securities
  $ 3,499     $ 9     $ -     $ 3,508  
Securities of U.S. Government sponsored entities
    329,589       108       (1,387 )     328,310  
Residential mortgage-backed securities
    30,154       1,791       (18 )     31,927  
Commercial mortgage-backed securities
    3,216       10       (5 )     3,221  
Obligations of states and political subdivisions
    180,011       7,635       (222 )     187,424  
Residential collateralized mortgage obligations
    259,615       674       (12,460 )     247,829  
Asset-backed securities
    9,322       5       (56 )     9,271  
FHLMC and FNMA stock
    804       16,241       -       17,045  
Corporate securities
    406,526       3,180       (609 )     409,097  
Other securities
    2,039       767       (150 )     2,656  
Total
  $ 1,224,775     $ 30,420     $ (14,907 )   $ 1,240,288  
 
An analysis of the amortized cost, unrealized gains and losses, and fair value of investment securities held to maturity follows:

   
Investment Securities Held to Maturity
At March 31, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Securities of U.S. Government sponsored entities
  $ 1,428     $ -     $ (4 )   $ 1,424  
Residential mortgage-backed securities
    63,048       855       (388 )     63,515  
Obligations of states and political subdivisions
    748,520       7,414       (11,409 )     744,525  
Residential collateralized mortgage obligations
    297,333       1,622       (4,592 )     294,363  
Total
  $ 1,110,329     $ 9,891     $ (16,393 )   $ 1,103,827  
 
An analysis of 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 December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
U.S. Treasury securities
  $ 3,500     $ 9     $ (3 )   $ 3,506  
Securities of U.S. Government sponsored entities
    131,080       75       (663 )     130,492  
Residential mortgage-backed securities
    32,428       1,763       (15 )     34,176  
Commercial mortgage-backed securities
    3,411       19       (5 )     3,425  
Obligations of states and political subdivisions
    186,082       5,627       (323 )     191,386  
Residential collateralized mortgage obligations
    266,890       730       (14,724 )     252,896  
Asset-backed securities
    14,653       3       (101 )     14,555  
FHLMC and FNMA stock
    804       12,568       -       13,372  
Corporate securities
    430,794       2,901       (1,264 )     432,431  
Other securities
    2,049       1,251       (158 )     3,142  
Total
  $ 1,071,691     $ 24,946     $ (17,256 )   $ 1,079,381  
 
 
-10-

 
An analysis of 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, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Securities of U.S. Government sponsored entities
  $ 1,601     $ -     $ (4 )   $ 1,597  
Residential mortgage-backed securities
    65,076       854       (624 )     65,306  
Obligations of states and political subdivisions
    756,707       6,211       (21,667 )     741,251  
Residential collateralized mortgage obligations
    308,915       1,209       (5,602 )     304,522  
Total
  $ 1,132,299     $ 8,274     $ (27,897 )   $ 1,112,676  
 
The amortized cost and fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated:

   
At March 31, 2014
 
   
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
  $ 35,521     $ 35,862     $ 8,947     $ 9,215  
  Over 1 to 5 years
    726,407       728,374       206,687       209,237  
  Over 5 to 10 years
    84,231       86,679       299,437       298,232  
  Over 10 years
    82,788       86,695       234,877       229,265  
Subtotal
    928,947       937,610       749,948       745,949  
Mortgage-backed securities and residential collateralized mortgage obligations
    292,985       282,977       360,381       357,878  
Other securities
    2,843       19,701       -       -  
Total
  $ 1,224,775     $ 1,240,288     $ 1,110,329     $ 1,103,827  
 
   
At December 31, 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
  $ 75,385     $ 75,609     $ 9,639     $ 9,900  
  Over 1 to 5 years
    536,333       538,111       187,051       189,827  
  Over 5 to 10 years
    66,669       68,166       314,630       310,104  
  Over 10 years
    87,722       90,484       246,988       233,017  
Subtotal
    766,109       772,370       758,308       742,848  
Mortgage-backed securities and residential collateralized mortgage obligations
    302,729       290,497       373,991       369,828  
Other securities
    2,853       16,514       -       -  
Total
  $ 1,071,691     $ 1,079,381     $ 1,132,299     $ 1,112,676  
 
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 March 31, 2014 and December 31, 2013, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.
 
 
-11-

 
An analysis of gross unrealized losses of investment securities available for sale follows:

   
Investment Securities Available for Sale
At March 31, 2014
 
   
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
  $ 239,558     $ (1,360 )   $ 8,968     $ (27 )   $ 248,526     $ (1,387 )
Residential mortgage-backed securities
    -       -       848       (18 )     848       (18 )
Commercial mortgage-backed securities
    960       (5 )     -       -       960       (5 )
Obligations of states and political subdivisions
    11,098       (123 )     3,683       (99 )     14,781       (222 )
Residential collateralized mortgage obligations
    154,576       (9,107 )     68,889       (3,353 )     223,465       (12,460 )
Asset-backed securities
    -       -       4,205       (56 )     4,205       (56 )
Corporate securities
    38,415       (123 )     50,693       (486 )     89,108       (609 )
Other securities
    -       -       1,850       (150 )     1,850       (150 )
Total
  $ 444,607     $ (10,718 )   $ 139,136     $ (4,189 )   $ 583,743     $ (14,907 )
 
An analysis of gross unrealized losses of investment securities held to maturity follows:

   
Investment Securities Held to Maturity
At March 31, 2014
 
   
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
  $ 1,424     $ (4 )   $ -     $ -     $ 1,424     $ (4 )
Residential mortgage-backed securities
    29,321       (276 )     7,235       (112 )     36,556       (388 )
Obligations of states and political subdivisions
    201,958       (3,292 )     150,776       (8,117 )     352,734       (11,409 )
Residential collateralized mortgage obligations
    202,785       (4,572 )     1,655       (20 )     204,440       (4,592 )
Total
  $ 435,488     $ (8,144 )   $ 159,666     $ (8,249 )   $ 595,154     $ (16,393 )
 
The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. 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 a major rating agency. 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.

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 March 31, 2014.

The fair values of the investment securities could decline in the future if the general economy deteriorates, inflation increases, 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 March 31, 2014, $876,491 thousand of investment securities were pledged to secure public deposits, short-term borrowed funds, and term repurchase agreements, compared to $778,588 thousand at December 31, 2013.
 
 
-12-

 
An analysis of gross unrealized losses of investment securities available for sale follows:

   
Investment Securities Available for Sale
At December 31, 2013
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(In thousands)
 
U.S. Treasury securities
  $ 2,994     $ (3 )   $ -     $ -     $ 2,994     $ (3 )
Securities of U.S. Government sponsored entities
    91,669       (663 )     -       -       91,669       (663 )
Residential mortgage-backed securities
    864       (15 )     -       -       864       (15 )
Commercial mortgage-backed securities
    1,072       (5 )     -       -       1,072       (5 )
Obligations of states and political subdivisions
    17,516       (222 )     3,214       (101 )     20,730       (323 )
Residential collateralized mortgage obligations
    187,848       (12,326 )     40,575       (2,398 )     228,423       (14,724 )
Asset-backed securities
    5,002       (1 )     4,475       (100 )     9,477       (101 )
Corporate securities
    117,751       (1,087 )     9,824       (177 )     127,575       (1,264 )
Other securities
    -       -       1,842       (158 )     1,842       (158 )
Total
  $ 424,716     $ (14,322 )   $ 59,930     $ (2,934 )   $ 484,646     $ (17,256 )
 
An analysis of gross unrealized losses of investment securities held to maturity follows:

   
Investment Securities Held to Maturity
At December 31, 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
  $ 1,597     $ (4 )   $ -     $ -     $ 1,597     $ (4 )
Residential mortgage-backed securities
    38,396       (616 )     392       (8 )     38,788       (624 )
Obligations of states and political subdivisions
    355,797       (14,893 )     64,427       (6,774 )     420,224       (21,667 )
Residential collateralized mortgage obligations
    214,981       (5,175 )     14,120       (427 )     229,101       (5,602 )
Total
  $ 610,771     $ (20,688 )   $ 78,939     $ (7,209 )   $ 689,710     $ (27,897 )
 
The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly rising risk-free interest rates causing bond prices to decline.

The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax:

   
For the Three Months
Ended March 31,
 
   
2014
   
2013
 
   
(In thousands)
 
Taxable:
           
    Mortgage related securities
  $ 3,053     $ 3,561  
    Other
    2,630       1,974  
    Total taxable
    5,683       5,535  
Tax-exempt
    6,980       7,531  
Total interest income from investment securities
  $ 12,663     $ 13,066  
 
 
-13-

 
Note 4: Loans and Allowance for Credit Losses

FDIC indemnification expired February 6, 2014 for County Bank non-single-family residential collateralized purchased loans; accordingly, such loans have been reclassified from purchased covered loans to purchased non-covered loans.

A summary of the major categories of loans outstanding is shown in the following tables.

   
At March 31, 2014
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
& Other
   
Total
 
   
(In thousands)
 
Originated loans
  $ 360,151     $ 595,210     $ 9,837     $ 170,176     $ 394,128     $ 1,529,502  
Purchased covered loans:
                                               
Gross purchased covered loans
    -       -       -       4,856       14,756       19,612  
Credit risk discount
    -       -       -       (434 )     (209 )     (643 )
Purchased non-covered loans:
                                               
Gross purchased non-covered loans
    25,643       200,358       3,199       991       49,797       279,988  
    Credit risk discount
    (2,134 )     (7,892 )     (50 )     (262 )     (1,802 )     (12,140 )
Total
  $ 383,660     $ 787,676     $ 12,986     $ 175,327     $ 456,670     $ 1,816,319  
 
   
At December 31, 2013
 
   
Commercial
   
Commercial
Real Estate
   
Construction
   
Residential
Real Estate
   
Consumer
Installment
& Other
   
Total
 
   
(In thousands)
 
Originated loans
  $ 338,824     $ 596,653     $ 10,723     $ 176,196     $ 400,888     $ 1,523,284  
Purchased covered loans:
                                               
Gross purchased covered loans
    20,066       175,562       3,223       8,558       54,194       261,603  
Credit risk discount
    (1,530 )     (8,122 )     (50 )     (434 )     (797 )     (10,933 )
Purchased non-covered loans:
                                               
Gross purchased non-covered loans
    7,525       35,712       -       999       12,799       57,035  
Credit risk discount
    (726 )     (786 )     -       (262 )     (1,471 )     (3,245 )
Total
  $ 364,159     $ 799,019     $ 13,896     $ 185,057     $ 465,613     $ 1,827,744  
 
Changes in the carrying amount of impaired purchased loans were as follows:

   
For the
Three Months Ended
March 31, 2014
   
For the Year Ended
December 31, 2013
 
Impaired purchased loans
 
(In thousands)
 
Carrying amount at the beginning of the period
  $ 4,936     $ 14,629  
Reductions during the period
    (19 )     (9,693 )
Carrying amount at the end of the period
  $ 4,917     $ 4,936  

 
-14-

 
Changes in the accretable yield for purchased loans were as follows:

   
For the
Three Months Ended
March 31, 2014
   
For the
Year Ended
December 31, 2013
 
Accretable yield:
 
(In thousands)
 
Balance at the beginning of the period
  $ 2,505     $ 4,948  
Reclassification from nonaccretable difference
    909       12,504  
Accretion
    (1,149 )     (14,947 )
Balance at the end of the period
  $ 2,265     $ 2,505  
                 
Accretion
  $ (1,149 )   $ (14,947 )
Reduction in FDIC indemnification asset
    211       11,438  
(Increase) in interest income
  $ (938 )   $ (3,509 )
 
The following summarizes activity in the allowance for credit losses:

   
Allowance for Credit Losses
For the Three Months Ended March 31, 2014
 
                           
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
  $ 4,005     $ 12,070     $ 602     $ 405     $ 3,198     $ -     $ 1,561     $ 9,852     $ 31,693  
    Additions:
                                                                       
        Provision
    130       (974 )     (160 )     86       214       1,272       -       432       1,000  
    Deductions:
                                                                       
        Chargeoffs
    (60 )     -       -       -       (999 )     (260 )     -       -       (1,319 )
        Recoveries
    168       163       3       -       400       1       -       -       735  
            Net loan losses
    108       163       3       -       (599 )     (259 )     -       -       (584 )
    Indemnification expiration
    -       -       -       -       -       1,561       (1,561 )     -          
    Balance at end of period
    4,243       11,259       445       491       2,813       2,574       -       10,284       32,109  
Liability for off-balance sheet credit exposure
    1,672       -       185       -       440       251       -       145       2,693  
Total allowance for credit losses
  $ 5,915     $ 11,259     $ 630     $ 491     $ 3,253     $ 2,825     $ -     $ 10,429     $ 34,802  
 
   
Allowance for Credit Losses
For the Three Months Ended March 31, 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
    531       994       (4 )     246       281       -       87       665       2,800  
    Deductions:
                                                                       
        Chargeoffs
    (1,902 )     (113 )     -       (87 )     (1,308 )     -       (359 )     -       (3,769 )
        Recoveries
    462       21       -       -       601       -       5       -       1,089  
            Net loan losses
    (1,440 )     (92 )     -       (87 )     (707 )     -       (354 )     -       (2,680 )
    Balance at end of period
    5,536       10,965       480       539       2,768       -       738       9,328       30,354  
Liability for off-balance sheet credit exposure
    1,663       3       -       -       453       -       -       574       2,693  
Total allowance for credit losses
  $ 7,199     $ 10,968     $ 480     $ 539     $ 3,221     $ -     $ 738     $ 9,902     $ 33,047  
 
The allowance for credit losses and recorded investment in loans were evaluated for impairment as follows:

   
Allowance for Credit Losses and Recorded Investment in Loans Evaluated for Impairment
At March 31, 2014
 
   
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     $ 550     $ -     $ -     $ -     $ 895     $ -     $ -     $ 1,545  
Collectively evaluated for impairment
    5,815       10,709       630       491       3,253       1,930       -       10,429       33,257  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
Total
  $ 5,915     $ 11,259     $ 630     $ 491     $ 3,253     $ 2,825     $ -     $ 10,429     $ 34,802  
Carrying value of loans:
                                                                       
Individually evaluated for impairment
  $ 3,675     $ 2,761     $ -     $ -     $ -     $ 13,489     $ -     $ -     $ 19,925  
Collectively evaluated for impairment
    356,476       592,449       9,837       170,176       394,128       249,684       18,727       -       1,791,477  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       4,675       242       -       4,917  
Total
  $ 360,151     $ 595,210     $ 9,837     $ 170,176     $ 394,128     $ 267,848     $ 18,969     $ -     $ 1,816,319  
 
 
-15-

 
   
Allowance for Credit Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 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     $ 1,243     $ -     $ -     $ -     $ -     $ 153     $ -     $ 1,496  
Collectively evaluated for impairment
    5,563       10,827       639       405       3,695       -       1,408       10,353       32,890  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
Total
  $ 5,663     $ 12,070     $ 639     $ 405     $ 3,695     $ -     $ 1,561     $ 10,353     $ 34,386  
Carrying value of loans:
                                                                       
Individually evaluated for impairment
  $ 3,901     $ 3,357     $ -     $ -     $ -     $ 3,785     $ 9,999     $ -     $ 21,042  
Collectively evaluated for impairment
    334,923       593,296       10,723       176,196       400,888       47,571       238,169       -       1,801,766  
Purchased loans with evidence of credit deterioration
    -       -       -       -       -       2,434       2,502       -       4,936  
Total
  $ 338,824     $ 596,653     $ 10,723     $ 176,196     $ 400,888     $ 53,790     $ 250,670     $ -     $ 1,827,744  
 
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 are re-evaluated promptly. Credit risk grades assigned by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

The following summarizes the credit risk profile by internally assigned grade:

   
Credit Risk Profile by Internally Assigned Grade
At March 31, 2014
 
   
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
  $ 349,979     $ 550,932     $ 9,837     $ 168,110     $ 392,931     $ 209,451     $ 17,962     $ 1,699,202  
Substandard
    9,157       44,278       -       2,066       983       70,109       1,650       128,243  
Doubtful
    1,015       -       -       -       17       402       -       1,434  
Loss
    -       -       -       -       197       26       -       223  
Credit risk discount
    -       -       -       -       -       (12,140 )     (643 )     (12,783 )
Total
  $ 360,151     $ 595,210     $ 9,837     $ 170,176     $ 394,128     $ 267,848     $ 18,969     $ 1,816,319  
 
(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, 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
  $ 329,667     $ 554,991     $ 10,274     $ 174,113     $ 399,377     $ 41,490     $ 196,882     $ 1,706,794  
Substandard
    8,142       41,662       449       2,083       1,127       14,587       64,624       132,674  
Doubtful
    1,015       -       -       -       19       958       97       2,089  
Loss
    -       -       -       -       365       -       -       365  
Credit risk discount
    -       -       -       -       -       (3,245 )     (10,933 )     (14,178 )
Total
  $ 338,824     $ 596,653     $ 10,723     $ 176,196     $ 400,888     $ 53,790     $ 250,670     $ 1,827,744  
 
(1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification.

 
-16-

 
The following tables summarize loans by delinquency and nonaccrual status:

   
Summary of Loans by Delinquency and Nonaccrual Status
At March 31, 2014
 
   
Current and
Accruing
   
30-59 Days
Past Due and
Accruing
   
60-89 Days
Past Due and
Accruing
   
Past Due 90
days or More
and Accruing
   
Nonaccrual
   
Total Loans
 
   
(In thousands)
 
Commercial
  $ 357,553     $ 1,220     $ 31     $ -     $ 1,347     $ 360,151  
Commercial real estate
    584,385       7,585       253       -       2,987       595,210  
Construction
    9,837       -       -       -       -       9,837  
Residential real estate
    167,842       2,010       -       -       324       170,176  
Consumer installment & other
    391,252       2,134       381       196       165       394,128  
Total originated loans
    1,510,869       12,949       665       196       4,823       1,529,502  
Purchased non-covered loans
    248,629       4,910       1,620       209       12,480       267,848  
Purchased covered loans
    18,859       19       5       -       86       18,969  
Total
  $ 1,778,357     $ 17,878     $ 2,290     $ 405     $ 17,389     $ 1,816,319  
 
   
Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2013
 
   
Current and
Accruing
   
30-59 Days
Past Due and
Accruing
   
60-89 Days
Past Due and
Accruing
   
Past Due 90
 days or More
and Accruing
   
Nonaccrual
   
Total Loans
 
   
(In thousands)
 
Commercial
  $ 336,497     $ 677     $ 383     $ -     $ 1,267     $ 338,824  
Commercial real estate
    586,619       4,012       2,473       -       3,549       596,653  
Construction
    10,275       -       -       -       448       10,723  
Residential real estate
    173,082       2,789       325       -       -       176,196  
Consumer installment & other
    396,725       3,035       606       410       112       400,888  
Total originated loans
    1,503,198       10,513       3,787       410       5,376       1,523,284  
Purchased non-covered loans
    45,755       4,237       180       -       3,618       53,790  
Purchased covered loans
    236,577       845       940       -       12,308       250,670  
Total
  $ 1,785,530     $ 15,595     $ 4,907     $ 410     $ 21,302     $ 1,827,744  
 
The following is a summary of the effect of nonaccrual loans on interest income:

   
For the Three Months Ended
March 31,
 
   
2014
   
2013
 
   
(In thousands)
 
       
Interest income that would have been recognized had the loans performed in accordance with their original terms
  $ 375     $ 753  
Less: Interest income recognized on nonaccrual loans
    (159 )     (375 )
Total reduction of interest income
  $ 216     $ 378  
 
There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2014 and December 31, 2013.

 
-17-

 
The following summarizes impaired loans:

   
Impaired Loans
At March 31, 2014
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
   
(In thousands)
 
Impaired loans with no related allowance recorded:
                 
    Commercial
  $ 3,490     $ 4,001     $ -  
    Commercial real estate
    10,940       13,278       -  
    Construction
    2,035       2,498       -  
    Residential real estate
    324       324       -  
    Consumer installment and other
    1,418       1,525       -  
                         
Impaired loans with an allowance recorded:
                       
    Commercial
    1,262       2,436       362  
    Commercial real estate
    6,880       10,619       1,183  
                         
Total:
                       
    Commercial
  $ 4,752     $ 6,437     $ 362  
    Commercial real estate
    17,820       23,897       1,183  
    Construction
    2,035       2,498       -  
    Residential real estate
    324       324       -  
    Consumer installment and other
    1,418       1,525       -  

   
Impaired Loans
At December 31, 2013
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
   
(In thousands)
 
Impaired loans with no related allowance recorded:
                 
    Commercial
  $ 3,931     $ 4,498     $ -  
    Commercial real estate
    11,002       13,253       -  
    Construction
    2,483       2,947       -  
    Consumer installment and other
    2,014       2,133       -  
                         
Impaired loans with an allowance recorded:
                       
    Commercial
    1,000       2,173       100  
    Commercial real estate
    9,773       12,482       1,396  
                         
Total:
                       
    Commercial
  $ 4,931     $ 6,671     $ 100  
    Commercial real estate
    20,775       25,735       1,396  
    Construction
    2,483       2,947       -  
    Consumer installment and other
    2,014       2,133       -  

Impaired loans include troubled debt restructured loans. Impaired loans at March 31, 2014, included $5,271 thousand of restructured loans, including $262 thousand that were on nonaccrual status. Impaired loans at December 31, 2013, included $5,453 thousand of restructured loans, including $529 thousand that were on nonaccrual status.

 
-18-

 
   
Impaired Loans
For the Three Months Ended March 31,
 
   
2014
   
2013
 
   
Average
Recorded
Investment
   
Recognized
Interest
Income
   
Average
Recorded
Investment
   
Recognized
Interest
Income
 
   
(In thousands)
 
Commercial
  $ 4,842     $ 67     $ 13,729     $ 54  
Commercial real estate
    19,298       117       28,507       300  
Construction
    2,259       -       2,111       26  
Residential real estate
    162       -       685       -  
Consumer installment and other
    1,716       8       1,963       7  
  Total
  $ 28,277     $ 192     $ 46,995     $ 387  
 
The following table provides information on troubled debt restructurings:

   
Troubled Debt Restructurings
At March 31, 2014
 
   
Number of
Contracts
   
Pre-Modification
Carrying Value
   
Period-End
Carrying Value
   
Period-End
Individual
Impairment
Allowance
 
   
(In thousands)
 
Commercial
    3     $ 3,201     $ 2,938     $ 262  
Commercial real estate
    2       2,291       2,316       -  
Consumer installment and other
    1       18       17       -  
Total
    6     $ 5,510     $ 5,271     $ 262  

   
Troubled Debt Restructurings
At March 31, 2013
 
   
Number of
Contracts
   
Pre-Modification
Carrying Value
   
Period-End
Carrying Value
   
Period-End
Individual
Impairment
Allowance
 
   
(In thousands)
 
Commercial
    3     $ 1,318     $ 1,172     $ 786  
Commercial real estate
    3       7,383       7,535       -  
Total
    6     $ 8,701     $ 8,707     $ 786  

During the three months ended March 31, 2014 and 2013, the Company modified one loan in each period with carrying values of $17 thousand and $2,009 thousand, respectively that was considered a troubled debt restructuring. The concession granted in the first quarter 2014 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment. The concession granted in the restructuring completed in the first quarter 2013 consisted of modification of payment terms to lower the interest rate and extend the maturity date to allow for deferred principal repayment. During the three months ended March 31, 2014 and 2013, no troubled debt restructured loans defaulted. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

The Company pledges loans to secure borrowings from the Federal Home Loan Bank (FHLB). The carrying value of the FHLB advances was $20,437 thousand and $20,577 thousand at March 31, 2014 and December 31, 2013, respectively. The loans restricted due to collateral requirements approximate $22,766 thousand and $24,242 thousand at March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013.
 
 
-19-

 
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 $65,318 thousand and $61,447 thousand at March 31, 2014 and December 31, 2013, 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 March 31,
2014
   
At December 31,
2013
 
   
(In thousands)
 
Cost method equity investments:
           
    Federal Reserve Bank stock (1)
  $ 14,069     $ 14,069  
    Federal Home Loan Bank stock (2)
    940       4,188  
    Other investments
    346       376  
        Total cost method equity investments
    15,355       18,633  
Life insurance cash surrender value
    44,417       43,896  
Net deferred tax asset
    50,323       53,281  
Limited partnership investments
    17,643       18,198  
Interest receivable
    18,282       18,925  
FDIC indemnification receivable
    5,610       4,032  
Prepaid assets
    5,242       5,229  
Other assets
    12,517       14,238  
    Total other assets
  $ 169,389     $ 176,432  
 
(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 three months ended March 31, 2014 and year ended December 31, 2013. 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 three months ended March 31, 2014 and year ended December 31, 2013, no such adjustments were recorded.

The carrying values of goodwill were:

   
At March 31,
2014
   
At December 31,
2013
 
   
(In thousands)
 
Goodwill
  $ 121,673     $ 121,673  
 
 
-20-

 
The gross carrying amount of identifiable intangible assets and accumulated amortization was:

   
At March 31, 2014
   
At December 31, 2013
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
   
(In thousands)
 
Core Deposit Intangibles
  $ 56,808     $ (40,257 )   $ 56,808     $ (39,242 )
Merchant Draft Processing Intangible
    10,300       (9,399 )     10,300       (9,309 )
    Total Identifiable Intangible Assets
  $ 67,108     $ (49,656 )   $ 67,108     $ (48,551 )
 
As of March 31, 2014, the current year and estimated future amortization expense for identifiable intangible assets was:

     
Core
Deposit
Intangibles
   
Merchant
Draft
Processing
Intangible
   
Total
 
     
(In thousands)
 
Three months ended March 31, 2014 (actual)
  $ 1,015     $ 90     $ 1,105  
Estimate for year ended December 31,
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  
     
2019       538       -       538  
 
Note 8: Deposits and Borrowed Funds

The following table provides additional detail regarding deposits.

   
Deposits
 
   
At March 31, 2014
   
At December 31, 2013
 
   
(In thousands)
 
Noninterest-bearing
  $ 1,778,034     $ 1,740,182  
Interest-bearing:
               
    Transaction
    771,299       763,088  
    Savings
    1,207,881       1,167,744  
    Time
    457,569       492,767  
        Total deposits
  $ 4,214,783     $ 4,163,781  

Demand deposit overdrafts of $6,573 thousand and $3,002 thousand were included as loan balances at March 31, 2014 and December 31, 2013, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $232 thousand in the first quarter 2014 and $304 thousand in the first quarter 2013.

Short-term borrowed funds of $64,382 thousand and $62,668 thousand at March 31, 2014 and December 31, 2013, respectively, 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 carrying amount of the securities approximates $213,960 thousand and $113,902 thousand at March 31, 2014 and December 31, 2013, respectively. The short-term borrowed funds mature on an overnight basis.

Federal Home Loan Bank (“FHLB”) advances with carrying value of $20,437 thousand at March 31, 2014 and $20,577 thousand at December 31, 2013 are secured by residential real estate loans, the amount of such loans approximates $22,766 thousand at March 31, 2014 and $24,242 thousand at December 31, 2013. The FHLB advances are due in full at par value upon their maturity dates: $20,000 thousand mature in January 2015. The FHLB advances may be paid off prior to such maturity dates subject to prepayment fees.
 
 
-21-

 
The $10,000 thousand term repurchase agreement at March 31, 2014 and December 31, 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 $10,740 thousand at March 31, 2014 and $11,278 thousand at December 31, 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 March 31, 2014 and December 31, 2013. The line of credit interest rate is a variable rate of 2.0% per annum, payable monthly on outstanding advances. Advances may be made up to the unused credit limit under the line of credit through March 18, 2015.
 
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 other real estate owned, impaired loans, 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 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 at a market price below 95 percent of par value and with a market to book ratio below 95:100. 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 value estimates may not be realized in an actual sale of the securities.

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 three months ended March 31, 2014 and year ended December 31, 2013, there were no transfers in or out of levels 1, 2 or 3.

 
-22-

 
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 March 31, 2014
  $ 1,240,288     $ 349,669     $ 890,619     $ -  
At December 31, 2013
  $ 1,079,381     $ 148,670     $ 930,711     $ -  

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 fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at March 31, 2014 and December 31, 2013, 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 March 31, 2014
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
   
(In thousands)
Other real estate owned
  $ 12,186     $ -     $ 12,186     $ -     $ (37 )
Impaired loans
    8,145       -       6,450       1,695       (260 )
Total assets measured at fair value on a nonrecurring basis
  $ 20,331     $ -     $ 18,636     $ 1,695     $ (297 )
 
   
At December 31, 2013
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
   
(In thousands)
 
Other real estate owned
  $ 13,320     $ -     $ 13,320     $ -     $ (814 )
Impaired loans
    9,672       -       7,967       1,705       (233 )
Total assets measured at fair value on a nonrecurring basis
  $ 22,992     $ -     $ 21,287     $ 1,705     $ (1,047 )

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 upon transfer to foreclosed assets and impaired loans collateralized by real property where a specific reserve has been established or a charge-off has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets.
 
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.

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 in 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.

 
-23-

 
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 $32,109 thousand at March 31, 2014 and $31,693 thousand at December 31, 2013 and the fair value discount due to credit default risk associated with purchased covered and purchased non-covered loans of $643 thousand and $12,140 thousand, respectively at March 31, 2014 and purchased covered and purchased non-covered loans of $10,933 thousand and $3,245 thousand, respectively at December 31, 2013 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.

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 for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled 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.
 
 
-24-

 
   
At March 31, 2014
 
   
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
  $ 428,840     $ 428,840     $ 428,840     $ -     $ -  
    Investment securities held to maturity
    1,110,329       1,103,827       1,424       1,102,403       -  
    Loans
    1,784,210       1,788,511       -       -       1,788,511  
    Other assets - FDIC indemnification receivable
    5,610       5,610       -       -       5,610  
                                         
Financial Liabilities:
                                       
    Deposits
  $ 4,214,783     $ 4,213,384     $ -     $ 3,757,214     $ 456,170  
    Short-term borrowed funds
    64,382       64,382       -       64,382       -  
    Federal Home Loan Bank advances
    20,437       20,426       20,426       -       -  
    Term repurchase agreement
    10,000       10,033       -       10,033       -  

   
At December 31, 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
  $ 472,028     $ 472,028     $ 472,028     $ -     $ -  
    Investment securities held to maturity
    1,132,299       1,112,676       1,597       1,111,079       -  
    Loans
    1,796,051       1,800,625       -       -       1,800,625  
    Other assets - FDIC indemnification receivable
    4,032       4,032       -       -       4,032  
                                         
Financial Liabilities:
                                       
    Deposits
  $ 4,163,781     $ 4,162,935     $ -     $ 3,671,014     $ 491,921  
    Short-term borrowed funds
    62,668       62,668       -       62,668       -  
    Federal Home Loan Bank advances
    20,577       20,558       20,558       -       -  
    Term repurchase agreement
    10,000       10,054       -       10,054       -  

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 $310,127 thousand and $320,934 thousand at March 31, 2014 and December 31, 2013, 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. Financial and performance standby letters of credit outstanding totaled $31,213 thousand and $31,777 thousand at March 31, 2014 and December 31, 2013, respectively. The Company also had commitments for commercial and similar letters of credit of $344 thousand at March 31, 2014 and December 31, 2013.

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.
 
 
-25-

 
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 by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period plus the impact of common stock equivalents.

   
For the Three Months Ended
March 31,
 
   
2014
   
2013
 
   
(In thousands, except per share data)
 
Net income (numerator)
  $ 15,307     $ 17,271  
Basic earnings per common share
               
Weighted average number of common shares outstanding - basic (denominator)
    26,433       27,145  
Basic earnings per common share
  $ 0.58     $ 0.64  
Diluted earnings per common share
               
Weighted average number of common shares outstanding - basic
    26,433       27,145  
Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise
    104       12  
Weighted average number of common shares outstanding - diluted (denominator)
    26,537       27,157  
Diluted earnings per common share
  $ 0.58     $ 0.64  
 
For the three months ended March 31, 2014 and 2013, options to purchase 1,148 thousand and 2,317 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.




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-26-

 
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
 
   
For the Three Months Ended
 
   
March 31,
   
March 31,
   
December 31,
 
   
2014
   
2013
   
2013
 
   
(In thousands, except per share data)
 
Net Interest and Fee Income (FTE)1
  $ 38,864     $ 43,835     $ 40,050  
Provision for Loan Losses
    1,000       2,800       1,600  
Noninterest Income
    12,990       14,278       14,030  
Noninterest Expense
    26,873       28,677       27,987  
Income Before Income Taxes (FTE)1
    23,981       26,636       24,493  
Income Tax Provision (FTE)1
    8,674       9,365       8,437  
Net Income
  $ 15,307     $ 17,271     $ 16,056  
                         
Average Common Shares Outstanding
    26,433       27,145       26,609  
Diluted Average Common Shares Outstanding
    26,537       27,157       26,754  
Common Shares Outstanding at Period End
    26,299       27,018       26,510  
                         
Per Common Share:
                       
  Basic Earnings
  $ 0.58     $ 0.64     $ 0.60  
  Diluted Earnings
    0.58       0.64       0.60  
  Book Value Per Common Share
  $ 20.57     $ 20.69     $ 20.48  
                         
Financial Ratios:
                       
  Return On Assets
    1.27 %     1.43 %     1.31 %
  Return On Common Equity
    11.64 %     12.93 %     11.85 %
  Net Interest Margin (FTE)1
    3.83 %     4.27 %     3.92 %
  Net Loan Losses to Average Loans
    0.13 %     0.52 %     0.39 %
  Efficiency Ratio2
    51.8 %     49.3 %     51.8 %
                         
Average Balances:
                       
  Assets
  $ 4,889,940     $ 4,908,483     $ 4,876,884  
  Earning Assets
    4,093,087       4,135,863       4,062,976  
  Loans
    1,822,065       2,077,989       1,846,700  
  Deposits
    4,209,723       4,199,229       4,189,135  
  Shareholders' Equity
    533,159       541,874       537,709  
                         
Period End Balances:
                       
  Assets
  $ 4,921,042     $ 4,887,844     $ 4,847,055  
  Earning Assets
    4,166,936       4,171,468       4,039,424  
  Loans
    1,816,319       2,036,934       1,827,744  
  Deposits
    4,214,783       4,161,950       4,163,781  
  Shareholders' Equity
    540,883       558,980       542,934  
                         
Capital Ratios at Period End:
                       
  Total Risk Based Capital
    15.19 %     15.99 %     16.18 %
  Tangible Equity to Tangible Assets
    8.40 %     8.75 %     8.56 %
                         
Dividends Paid Per Common Share
  $ 0.38     $ 0.37     $ 0.38  
Common Dividend Payout Ratio
    66 %     58 %     63 %
 
The above financial summary has been derived from the Company's unaudited consolidated financial statements. This information should be read in conjunction with those statements, notes and the other information included elsewhere herein. Percentages under the heading "Financial Ratios" are annualized with the exception of the efficiency ratio.
 
1 Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis, which is a non-GAAP financial measure, in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.
 
2 The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis, which is a non-GAAP financial measure, and noninterest income).
 
 
-27-

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

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

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

Net Income

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

   
For the Three Months Ended
   
March 31,
   
December 31,
 
   
2014
   
2013
   
2013
 
   
(In thousands, except per share data)
 
Net interest and fee income (FTE)
  $ 38,864     $ 43,835     $ 40,050  
Provision for loan losses
    (1,000 )     (2,800 )     (1,600 )
Noninterest income
    12,990       14,278       14,030  
Noninterest expense
    (26,873 )     (28,677 )     (27,987 )
Income  before taxes (FTE)
    23,981       26,636       24,493  
Income tax provision (FTE)
    (8,674 )     (9,365 )     (8,437 )
Net income
  $ 15,307     $ 17,271     $ 16,056  
                         
Average diluted common shares
    26,537       27,157       26,754  
Diluted earnings per common share
  $ 0.58     $ 0.64     $ 0.60  
                         
Average total assets
  $ 4,889,940     $ 4,908,483     $ 4,876,884  
Net income to average total assets (annualized)
    1.27 %     1.43 %     1.31 %
Net income to average common stockholders' equity (annualized)
    11.64 %     12.93 %     11.85 %

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

Comparing the first quarter of 2014 to the fourth quarter of 2013, net income decreased $749 thousand primarily due to lower net interest and fee income (FTE) and lower noninterest income, partially offset by decreases in the provision for loan losses and noninterest expense. The lower net interest and fee income (FTE) was primarily caused by a lower average volume of loans and lower yields on interest earning assets, partially offset by higher average balances of investments and lower average balances of higher costing interest-bearing liabilities. The provision for loan losses was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest expense decreased mostly due to declines in loan administration expenses and professional fees.
 
 
-28-

 
Net Interest and Fee Income (FTE)

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

   
For the Three Months Ended
 
   
March 31,
   
December 31,
 
   
2014
   
2013
   
2013
 
   
(In thousands)
 
Interest and fee income
  $ 35,564     $ 40,465     $ 36,706  
Interest expense
    (898 )     (1,252 )     (1,024 )
FTE adjustment
    4,198       4,622       4,368  
  Net interest and fee income (FTE)
  $ 38,864     $ 43,835     $ 40,050  
                         
Average earning assets
  $ 4,093,087     $ 4,135,863     $ 4,062,976  
Net interest margin (FTE) (annualized)
    3.83 %     4.27 %     3.92 %

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

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

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

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

Interest and fee income (FTE) for the first quarter of 2014 decreased $5.3 million or 11.8% from the same period in 2013. The decrease was caused by lower average balances of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments.

The total average balances of loans declined due to decreases in the average balances of commercial real estate loans (down $117 million), consumer loans (down $76 million), residential real estate loans (down $48 million) and tax-exempt commercial loans (down $19 million). The average investment portfolio increased largely due to higher average balances of securities of U.S. Government sponsored entities (up $167 million), corporate securities (up $111 million) and municipal securities (up $43 million), partially offset by a $97 million decrease in average balances of collateralized mortgage obligations and mortgage-backed securities.

 
-29-

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

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

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

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

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

 
-30-

 
Net Interest Margin (FTE)

The following summarizes the components of the Company's net interest margin for the periods indicated:

   
For the Three Months Ended
 
   
March 31,
   
December 31,
 
 
 
2014
   
2013
   
2013
 
                   
Yield on earning assets (FTE)
    3.92 %     4.39 %     4.02 %
Rate paid on interest-bearing liabilities
    0.14 %     0.19 %     0.16 %
  Net interest spread (FTE)
    3.78 %     4.20 %     3.86 %
Impact of noninterest-bearing funds
    0.05 %     0.07 %     0.06 %
    Net interest margin (FTE)
    3.83 %     4.27 %     3.92 %
 
During the first quarter 2014, the net interest margin (FTE) was affected by low market interest rates. The volume of older-dated higher-yielding loans and securities declined due to principal maturities and paydowns. Newly originated loans and purchased securities have lower-yields. The Company is reducing its exposure to rising interest rates by purchasing shorter-duration investment securities, which carry lower yields than longer-duration securities. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost funding sources. During the first quarter 2014 the net interest margin (FTE) decreased 44 bp compared with the same period in 2013. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 42 bp decrease in net interest spread (FTE). The 5 bp net interest margin contribution of noninterest-bearing demand deposits resulted in the net interest margin (FTE) of 3.83%. During the first quarter of 2014, the net interest margin (FTE) decreased 9 bp compared with the fourth quarter of 2013. The net interest spread (FTE) in the first quarter of 2014 was 3.78% compared with 3.86% in the fourth quarter of 2013, the net result of a 10 bp decrease in earning asset yields, partially offset by lower cost of interest-bearing liabilities (down 2 bp).
 

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-31-

 
Summary of Average Balances, Yields/Rates and Interest Differential

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

Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin

   
For the Three Months Ended
March 31, 2014
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yields/
Rates
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
  Available for sale
                 
    Taxable
  $ 970,514     $ 3,925       1.62 %
    Tax-exempt (1)
    177,452       2,434       5.49 %
  Held to maturity
                       
    Taxable
    379,393       1,758       1.85 %
    Tax-exempt (1)
    743,663       8,286       4.46 %
Loans:
                       
  Commercial:
                       
    Taxable
    281,015       4,073       5.88 %
    Tax-exempt (1)
    94,841       1,312       5.61 %
  Commercial real estate
    788,270       11,923       6.13 %
  Real estate construction
    13,141       190       5.88 %
  Real estate residential
    184,427       1,549       3.36 %
  Consumer
    460,371       4,312       3.80 %
    Total loans (1)
    1,822,065       23,359       5.19 %
        Total Interest-earning assets (1)
    4,093,087     $ 39,762       3.92 %
Other assets
    796,853                  
    Total assets
  $ 4,889,940                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
  Noninterest-bearing demand
  $ 1,768,464     $ -       - %
  Savings and interest-bearing transaction
    1,974,430       301       0.06 %
  Time less than $100,000
    208,627       221       0.43 %
  Time $100,000 or more
    258,202       232       0.36 %
     Total interest-bearing deposits
    2,441,259       754       0.13 %
Short-term borrowed funds
    62,472       20       0.13 %
Term repurchase agreement
    10,000       25       1.01 %
Federal Home Loan Bank advances
    20,520       99       1.97 %
    Total interest-bearing liabilities
    2,534,251     $ 898       0.14 %
Other liabilities
    54,066                  
Shareholders' equity
    533,159                  
    Total liabilities and shareholders' equity
  $ 4,889,940                  
Net interest spread (1) (2)
                    3.78 %
Net interest and fee income and interest margin (1) (3)
          $ 38,864       3.83 %
 
(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.
 
 
-32-

 
Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin

   
For the Three Months Ended
March 31, 2013
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yields/
Rates
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
  Available for sale
                 
    Taxable
  $ 710,506     $ 3,443       1.94 %
    Tax-exempt (1)
    192,127       2,786       5.80 %
  Held to maturity
                       
    Taxable
    472,994       2,092       1.77 %
    Tax-exempt (1)
    682,247       8,777       5.15 %
Loans:
                       
  Commercial:
                       
    Taxable
    274,498       4,277       6.32 %
    Tax-exempt (1)
    114,117       1,692       6.01 %
  Commercial real estate
    904,841       14,128       6.33 %
  Real estate construction
    16,277       285       7.10 %
  Real estate residential
    231,969       2,060       3.55 %
  Consumer
    536,287       5,547       4.19 %
    Total loans (1)
    2,077,989       27,989       5.46 %
        Total Interest-earning assets (1)
    4,135,863     $ 45,087       4.39 %
Other assets
    772,620                  
    Total assets
  $ 4,908,483                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
  Noninterest-bearing demand
  $ 1,643,348     $ -       - %
  Savings and interest-bearing transaction
    1,925,264       296       0.06 %
  Time less than $100,000
    240,099       299       0.51 %
  Time $100,000 or more
    390,518       304       0.32 %
     Total interest-bearing deposits
    2,555,881       899       0.14 %
Short-term borrowed funds
    57,733       11       0.08 %
Term repurchase agreement
    10,000       24       0.96 %
Federal Home Loan Bank advances
    25,777       118       1.86 %
Debt financing
    15,000       200       5.35 %
    Total interest-bearing liabilities
    2,664,391     $ 1,252       0.19 %
Other liabilities
    58,870                  
Shareholders' equity
    541,874                  
    Total liabilities and shareholders' equity
  $ 4,908,483                  
Net interest spread (1) (2)
                    4.20 %
Net interest and fee income and interest margin (1) (3)
          $ 43,835       4.27 %
 
(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
December 31, 2013
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yields/
Rates
 
   
(In thousands)
 
Assets
                 
Investment securities:
                 
  Available for sale
                 
    Taxable
  $ 898,921     $ 3,805       1.69 %
    Tax-exempt (1)
    182,243       2,494       5.47 %
  Held to maturity
                       
    Taxable
    396,478       1,768       1.78 %
    Tax-exempt (1)
    738,634       8,563       4.64 %
Loans:
                       
  Commercial:
                       
    Taxable
    249,649       4,016       6.38 %
    Tax-exempt (1)
    99,796       1,469       5.84 %
  Commercial real estate
    817,090       12,486       6.06 %
  Real estate construction
    15,089       194       5.10 %
  Real estate residential
    192,534       1,645       3.42 %
  Consumer
    472,542       4,634       3.89 %
    Total loans (1)
    1,846,700       24,444       5.25 %
        Total Interest-earning assets (1)
    4,062,976     $ 41,074       4.02 %
Other assets
    813,908                  
    Total assets
  $ 4,876,884                  
                         
Liabilities and shareholders' equity
                       
Deposits:
                       
  Noninterest-bearing demand
  $ 1,759,495     $ -       - %
  Savings and interest-bearing transaction
    1,924,346       299       0.06 %
  Time less than $100,000
    216,603       242       0.44 %
  Time $100,000 or more
    288,691       252       0.35 %
     Total interest-bearing deposits
    2,429,640       793       0.13 %
Short-term borrowed funds
    54,208       20       0.14 %
Term repurchase agreement
    10,000       24       0.98 %
Federal Home Loan Bank advances
    24,846       120       1.91 %
Debt financing
    4,891       67       5.46 %
    Total interest-bearing liabilities
    2,523,585     $ 1,024       0.16 %
Other liabilities
    56,095                  
Shareholders' equity
    537,709                  
    Total liabilities and shareholders' equity
  $ 4,876,884                  
Net interest spread (1) (2)
                    3.86 %
Net interest and fee income and interest margin (1) (3)
          $ 40,050       3.92 %
 
(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-

 
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

   
For the Three Months Ended March 31, 2014
Compared with
For the Three Months Ended March 31, 2013
 
   
Volume
   
Yield/Rate
   
Total
 
   
(In thousands)
 
Increase (decrease) in interest and fee income:
                 
Investment securities:
                 
  Available for sale
                 
    Taxable
  $ 1,105     $ (623 )   $ 482  
    Tax-exempt (1)
    (206 )     (146 )     (352 )
  Held to maturity
                       
    Taxable
    (428 )     94       (334 )
    Tax-exempt (1)
    735       (1,226 )     (491 )
Loans:
                       
  Commercial:
                       
    Taxable
    100       (304 )     (204 )
    Tax-exempt (1)
    (272 )     (108 )     (380 )
  Commercial real estate
    (1,774 )     (431 )     (2,205 )
  Real estate construction
    (50 )     (45 )     (95 )
  Real estate residential
    (404 )     (107 )     (511 )
  Consumer
    (741 )     (494 )     (1,235 )
    Total loans (1)
    (3,141 )     (1,489 )     (4,630 )
    Total decrease in interest and fee income (1)
    (1,935 )     (3,390 )     (5,325 )
Increase (decrease) in interest expense:
                       
Deposits:
                       
  Savings and interest-bearing
                       
    transaction
    8       (3 )     5  
  Time less than $100,000
    (37 )     (41 )     (78 )
  Time $100,000 or more
    (114 )     42       (72 )
     Total interest-bearing deposits
    (143 )     (2 )     (145 )
Short-term borrowed funds
    1       8       9  
Term repurchase agreement
    -       1       1  
Federal Home Loan Bank advances
    (25 )     6       (19 )
Debt financing
    (200 )     -       (200 )
   Total (decrease) increase in interest expense
    (367 )     13       (354 )
Decrease in net interest and fee income (1)
  $ (1,568 )   $ (3,403 )   $ (4,971 )

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

 
-35-

 
Summary of Changes in Interest Income and Expense

   
For the Three Months Ended March 31, 2014
Compared with
For the Three Months Ended December 31, 2013
 
   
Volume
   
Yield/Rate
   
Total
 
   
(In thousands)
 
Increase (decrease) in interest and fee income:
                 
Investment securities:
                 
  Available for sale
                 
    Taxable
  $ 267     $ (147 )   $ 120  
    Tax-exempt (1)
    (68 )     8       (60 )
  Held to maturity
                       
    Taxable
    (92 )     82       (10 )
    Tax-exempt (1)
    (49 )     (228 )     (277 )
Loans:
                       
  Commercial:
                       
    Taxable
    383       (326 )     57  
    Tax-exempt (1)
    (101 )     (56 )     (157 )
  Commercial real estate
    (707 )     144       (563 )
  Real estate construction
    (31 )     27       (4 )
  Real estate residential
    (76 )     (20 )     (96 )
  Consumer
    (215 )     (107 )     (322 )
    Total loans (1)
    (747 )     (338 )     (1,085 )
    Total decrease in interest and fee income (1)
    (689 )     (623 )     (1,312 )
Increase (decrease) in interest expense:
                       
Deposits:
                       
  Savings and interest-bearing
                       
    transaction
    1       1       2  
  Time less than $100,000
    (14 )     (7 )     (21 )
  Time $100,000 or more
    (33 )     13       (20 )
     Total interest-bearing deposits
    (46 )     7       (39 )
Short-term borrowed funds
    2       (2 )     -  
Term repurchase agreement
    (1 )     2       1  
Federal Home Loan Bank advances
    (24 )     3       (21 )
Debt financing
    (67 )     -       (67 )
   Total (decrease) increase in interest expense
    (136 )     10       (126 )
Decrease in net interest and fee income (1)
  $ (553 )   $ (633 )   $ (1,186 )
 
(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
 
Provision for Loan Losses

The Company manages credit costs by consistently enforcing conservative underwriting and administration procedures and aggressively pursuing collection efforts with 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 $1.0 million, $2.8 million and $1.6 million for loan losses in the first quarter 2014, the first quarter 2013 and the fourth quarter 2013, respectively. The reduced provision for loan losses for the first quarter 2014 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 secured by single-family residential real estate are “covered” through February 6, 2019 by loss-sharing agreements the Company entered with the FDIC which mitigates losses during the term of the agreements. The FDIC indemnification of purchased County Bank non-single-family residential secured loans expired February 6, 2014. 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.
 
 
-36-

 
Noninterest Income

The following table summarizes the components of noninterest income for the periods indicated.

   
For the Three Months Ended
 
   
March 31,
   
December 31,
 
   
2014
   
2013
   
2013
 
 
 
(In thousands)
 
                   
Service charges on deposit accounts
  $ 6,010     $ 6,542     $ 6,266  
Merchant processing services
    1,924       2,409       2,058  
Debit card fees
    1,405       1,358       1,527  
Other service fees
    661       762       672  
Trust fees
    654       568       593  
ATM processing fees
    620       705       630  
Financial services commissions
    171       180       218  
Other noninterest income
    1,545       1,754       2,066  
  Total
  $ 12,990     $ 14,278     $ 14,030  
 
Noninterest income for the first quarter 2014 declined by $1.3 million or 9.0% from the same period in 2013. Service charges on deposits decreased $532 thousand due to declines in fees charged on overdrawn and insufficient funds accounts (down $369 thousand) and lower activity on checking accounts (down $103 thousand). Merchant processing services fees decreased $485 thousand primarily due to lower transaction volumes. Other noninterest income decreased $209 thousand generally due to lower commissions on check sales and lower ACH processing fees.

In the first quarter 2014, noninterest income decreased $1.0 million or 7.4% compared with the fourth quarter 2013 due to fewer processing days and lower levels of customer transaction activity. Service charges on deposits decreased $256 thousand compared with the fourth quarter 2013 due to declines in fees charged on overdrawn and insufficient funds accounts (down $300 thousand), partially offset by fee increases on analyzed accounts and collection of annual IRA fees in the first quarter 2014. Merchant processing services fees and debit card fees decreased $134 thousand and $122 thousand, respectively, primarily due to lower transaction volumes. Other noninterest income decreased $521 thousand primarily due to  lower commissions on check sales and lower purchased loan principal recoveries exceeding purchase date fair values.



[The remainder of this page intentionally left blank]
 
 
-37-

 
Noninterest Expense

The following table summarizes the components of noninterest expense for the periods indicated.

   
For the Three Months Ended
 
   
March 31,
   
December 31,
 
   
2014
   
2013
   
2013
 
   
(In thousands)
 
                   
Salaries and related benefits
  $ 14,126     $ 14,403     $ 14,340  
Occupancy
    3,727       3,886       3,784  
Outsourced data processing services
    2,105       2,157       2,112  
Amortization of identifiable intangibles
    1,105       1,219       1,157  
Equipment
    1,005       880       994  
Courier service
    610       741       664  
Professional fees
    430       635       947  
Other real estate owned
    (350 )     334       245  
Other noninterest expense
    4,115       4,422       3,744  
Total
  $ 26,873     $ 28,677     $ 27,987  
 
Noninterest expense decreased $1.8 million or 6.3% in the first quarter 2014 compared with the same period in 2013 primarily due to lower personnel costs, lower loan administration expenses, lower intangible amortization, lower professional fees and other real estate owned (“OREO”) expense net of disposition gains. Salaries and related benefits declined $277 thousand mostly due to employee attrition. Occupancy expense decreased $159 thousand primarily due to lower utility costs. Amortization of identifiable intangibles decreased $114 thousand as assets are amortized on a declining balance method. Professional fees decreased $205 thousand due to lower legal fees relating to nonperforming assets and accrual of accounting fees. Expenses for other real estate owned in the first quarter 2014 included net gains on disposition of foreclosed assets while the first quarter 2013 included net writedowns. Other noninterest expense decreased $307 thousand mostly due to lower limited partnership operating losses.

In the first quarter 2014, noninterest expense decreased $1.1 million or 4.0% compared with the fourth quarter 2013 primarily due to lower personnel costs, lower professional fees and OREO expense net of disposition gains. Salaries and related benefits decreased $214 thousand primarily because the fourth quarter 2014 included higher share-based compensation as the Company’s share price increased. The higher share-based compensation in the fourth quarter 2013 was partially offset by seasonally higher payroll taxes in the first quarter 2014. Professional fees declined $517 thousand due to lower legal fees associated with nonperforming assets and accrual of accounting fees. Expenses for other real estate owned in the first quarter 2014 included net gains on disposition of foreclosed assets while the fourth quarter 2013 included higher maintenance expenses and property tax payments. Other noninterest expense increased $371 thousand primarily due to lower loan administration costs during the fourth quarter 2013.
 
Provision for Income Tax

During the first quarter 2014, the Company recorded an income tax provision (FTE) of $8.7 million, compared with $9.4 million and $8.4 million for the first and fourth quarters of 2013, respectively. The current quarter provision represents an effective tax rate (FTE) of 36.2%, compared with 35.2% and 34.4% for the first and fourth quarters of 2013, respectively.

The effective tax rates for the first quarter 2013 and fourth quarter 2013 were lower primarily because tax-exempt income elements represented a greater proportion of pre-tax book income and because state enterprise zone tax credits were eliminated in 2014. The Company earns interest on municipal loans and investment securities which are federally tax-exempt and recognizes life insurance policy benefits which are exempt from federal and state taxes. The lower effective tax rate (FTE) for the fourth quarter 2013 was also attributable to additional tax credits claimed on an amended California tax return.
 
Investment Portfolio

The Company maintains a securities portfolio consisting of securities issued by U.S. Treasury, U.S. Government sponsored entities, state and political subdivisions, corporations, and asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian.

 
-38-

 
Management has maintained relatively stable interest-earning asset volumes by increasing investment securities as loan volumes have declined. The carrying value of the Company’s investment securities portfolio was $2.4 billion as of March 31, 2014, an increase of $138.9 million or 6.3% compared to December 31, 2013.

Management continually evaluates the Company’s investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which the Company is exposed.  These evaluations may cause Management to change the level of funds the Company deploys into investment securities, change the composition of the Company’s investment securities portfolio, and change the proportion of investments allocated into the available for sale and held to maturity investment categories.

In the first quarter of 2014, the Company reduced its positions in mortgage-related securities in an effort to manage extension risk. Extension risk represents the risk mortgages underlying the securities experience slower principal reductions as rising market interest rates cause a disincentive for borrowers to reduce principal balances; under such circumstances the Company will hold these securities for a longer period than anticipated at current yield levels rather than having the opportunity to reinvest cash flows at higher yields. The Company re-invested these proceeds, in part, into floating rate corporate bonds and federal agency, state and municipal bond holdings. As of March 31, 2014, substantially all of the Company’s investment 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.

The Company’s procedures for evaluating investments in securities issued by states, municipalities and political subdivisions are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance.  Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds.  There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

The following tables summarize the total general obligation and revenue bonds in the Company’s investment securities portfolios as of dates indicated identifying the state in which the issuing government municipality or agency operates.

At March 31, 2014, the Company’s investment securities portfolios included securities issued by 794 state and local government municipalities and agencies located within 47 states with a fair value of $931.9 million.  The largest exposure to any one municipality or agency was $7.5 million (fair value) represented by three revenue bonds.

   
At March 31, 2014
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Obligations of states and political subdivisions:
           
General obligation bonds:
           
California
  $ 115,011     $ 116,325  
Texas
    56,834       56,897  
Pennsylvania
    48,710       48,626  
Other (37 states)
    366,244       366,617  
Total general obligation bonds
  $ 586,799     $ 588,465  
                 
Revenue bonds:
               
California
  $ 62,205     $ 63,931  
Pennsylvania
    29,536       29,578  
Colorado
    18,159       17,918  
Indiana
    17,733       17,209  
Other (36 states)
    214,099       214,848  
Total revenue bonds
  $ 341,732     $ 343,484  
Total obligations of states and political subdivisions
  $ 928,531     $ 931,949  
 
 
-39-

 
At December 31, 2013, the Company’s investment securities portfolios included securities issued by 808 state and local government municipalities and agencies located within 47 states with a fair value of $932.6 million.  The largest exposure to any one municipality or agency was $5.3 million (fair value) represented by two revenue bonds.

   
At December 31, 2013
 
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Obligations of states and political subdivisions:
           
General obligation bonds:
           
California
  $ 119,215     $ 119,360  
Texas
    57,433       56,594  
Pennsylvania
    48,722       47,394  
Other (37 states)
    375,640       371,215  
Total general obligation bonds
  $ 601,010     $ 594,563  
                 
Revenue bonds:
               
California
  $ 63,001     $ 64,246  
Pennsylvania
    29,537       28,898  
Colorado
    18,176       17,563  
Indiana
    17,811       17,031  
Other (37 states)
    213,254       210,336  
Total revenue bonds
  $ 341,779     $ 338,074  
Total obligations of states and political subdivisions
  $ 942,789     $ 932,637  

At March 31, 2014, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 26 revenue sources.  The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table.

   
At March 31, 2014
 
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Revenue bonds by revenue source
           
Water
  $ 70,263     $ 71,369  
Sewer
    49,587       49,839  
Sales tax
    33,782       33,952  
Lease (abatement)
    21,637       22,089  
Lease (renewal)
    20,775       20,576  
Other
    145,688       145,659  
Total revenue bonds by revenue source
  $ 341,732     $ 343,484  
 
 
-40-

 
At December 31, 2013, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 27 revenue sources.  The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table.

 
   
At December 31, 2013
 
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
Revenue bonds by revenue source
           
   Water
  $ 70,924     $ 70,948  
   Sewer
    49,625       48,911  
   Sales tax
    34,291       33,465  
   Lease (abatement)
    21,821       22,033  
   Lease (renewal)
    21,353       20,742  
   Other
    143,765       141,975  
Total revenue bonds by revenue source
  $ 341,779     $ 338,074  

See Note 3 to the unaudited consolidated financial statements for additional information related to the investment securities.
 
Loan Portfolio Credit Risk

The risk that loan customers will 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. 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. “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”).

The former County Bank loans and repossessed loan collateral were purchased from the FDIC with indemnifying loss-sharing agreements. The loss-sharing agreement on single-family residential real estate assets expires February 6, 2019. The loss-sharing agreement on non-single-family residential assets expired February 6, 2014 as to losses and expires February 6, 2017 as to loss recoveries; the Company reclassified assets for which loss indemnification expired during the first quarter 2014 from “purchased covered” to “purchased non-covered”.
 
 
-41-

 
Nonperforming Assets
 
   
At March 31,
   
At December 31,
 
   
2014
   
2013
   
2013
 
   
(In thousands)
 
Originated:
                 
Nonperforming nonaccrual loans
  $ 4,784     $ 7,005     $ 5,301  
Performing nonaccrual loans
    39       1,154       75  
Total nonaccrual loans
    4,823       8,159       5,376  
Accruing loans 90 or more days past due
    196       305       410  
Total nonperforming loans
    5,019       8,464       5,786  
Other real estate owned
    5,347       7,691       5,527  
Total nonperforming assets
  $ 10,366     $ 16,155     $ 11,313  
                         
Purchased covered:
                       
Nonperforming nonaccrual loans
  $ 86     $ 9,578     $ 11,672  
Performing nonaccrual loans
    -       2,299       636  
Total nonaccrual loans
    86       11,877       12,308  
Accruing loans 90 or more days past due
    -       88       -  
Total nonperforming loans
    86       11,965       12,308  
Other real estate owned
    585       13,713       7,793  
Total nonperforming assets
  $ 671     $ 25,678     $ 20,101  
                         
Purchased non-covered:
                       
Nonperforming nonaccrual loans
  $ 11,578     $ 6,052     $ 2,920  
Performing nonaccrual loans
    902       3,060       698  
Total nonaccrual loans
    12,480       9,112       3,618  
Accruing loans 90 or more days past due
    209       -       -  
Total nonperforming loans
    12,689       9,112       3,618  
Other real estate owned
    6,254       1,980       -  
Total nonperforming assets
  $ 18,943     $ 11,092     $ 3,618  
                         
Total nonperforming assets
  $ 29,980     $ 52,925     $ 35,032  

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 March 31, 2014, the Bank’s nonaccrual loans reflected this diversification: nonaccrual originated loans with a carrying value totaling $5 million comprised twelve borrowers, nonaccrual purchased covered loans with a carrying value totaling $86 thousand comprised one borrower, and nonaccrual purchased non-covered loans with a carrying value totaling $12 million comprised seventeen 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.
 
 
-42-

 
Allowance for Credit Losses

The Company’s allowance for credit losses represents Management’s estimate of credit losses inherent in the loan portfolio. In evaluating credit risk for loans, Management measures loss potential of the carrying value of loans. As described above, payments received on nonaccrual loans may be applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Further, the carrying value of purchased loans includes fair value discounts assigned at the time of purchase under the provisions of FASB ASC 805, Business Combinations, and FASB ASC 310-30, Loans or Debt Securities with Deteriorated Credit Quality. The allowance for credit losses represents Management’s estimate of credit losses in excess of these reductions to the carrying value of loans within the loan portfolio. The following table summarizes the allowance for credit losses, chargeoffs and recoveries of the Company for the periods indicated:

   
For the Three Months Ended
 
   
March 31,
   
December 31,
 
   
2014
   
2013
   
2013
 
   
(In thousands)
 
Analysis of the Allowance for Credit Losses
                 
Balance, beginning of period
  $ 34,386     $ 32,927     $ 34,609  
  Provision for loan losses
    1,000       2,800       1,600  
  Provision for unfunded commitments
    -       -       -  
  Loans charged off
                       
    Commercial
    (60 )     (1,902 )     (170 )
    Commercial real estate
    -       (113 )     (341 )
    Real estate construction
    -       -       -  
    Real estate residential
    -       (87 )     -  
    Consumer installment and other
    (999 )     (1,308 )     (983 )
    Purchased covered loans
    (260 )     (359 )     (1,331 )
    Purchased non-covered loans
    -       -       (269 )
  Total chargeoffs
    (1,319 )     (3,769 )     (3,094 )
  Recoveries of loans previously charged off
                       
    Commercial
    168       462       491  
    Commercial real estate
    163       21       63  
    Real estate construction
    3       -       -  
    Consumer installment and other
    400       601       528  
    Purchased covered loans
    1       5       189  
  Total recoveries
    735       1,089       1,271  
  Net loan (losses)
    (584 )     (2,680 )     (1,823 )
Balance, end of period
  $ 34,802     $ 33,047     $ 34,386  
Components:
                       
  Allowance for loan losses
  $ 32,109     $ 30,354     $ 31,693  
  Liability for off-balance sheet credit exposure
    2,693       2,693       2,693  
  Allowance for credit losses
  $ 34,802     $ 33,047     $ 34,386  
Net loan (losses) recoveries:
                       
  Originated loans
  $ (325 )   $ (2,326 )   $ (412 )
  Purchased covered loans
    (259 )     (354 )     (1,142 )
  Purchased non-covered loans
    -       -       (269 )
Net loan losses (recoveries) as a percentage of
                       
    average total loans
    0.13 %     0.52 %     0.39 %

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 evaluates all classified loans and nonaccrual loans with outstanding principal balances in excess of $500 thousand, and all “troubled debt restructured” loans for impairment. 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. Last, allocations are made to originated non-classified commercial and commercial real estate loans based on historical loss rates and other statistical data.

 
-43-

 
Purchased loans were recorded on the date of purchase at estimated fair value; fair value discounts include a component for estimated credit losses. The Company evaluates all nonaccrual purchased loans with outstanding principal balances in excess of $500 thousand for impairment; the impaired loan value is compared to the recorded investment in the loan, which has been reduced by the credit default discount estimated on the date of purchase. If Management’s impairment analysis determines the impaired loan value is less than the recorded investment in the purchased loan, an allocation of the allowance for credit losses is established, net of estimated FDIC indemnification. For all other purchased loans, Management evaluates 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 March 31, 2014 are: economic and business conditions $1.3 million, external competitive issues $900 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 $900 thousand, adequacy of lending Management and staff $900 thousand, loan policies and procedures $900 thousand, concentrations of credit $900 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 March 31, 2014
 
   
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
  $ 4,005     $ 12,070     $ 602     $ 405     $ 3,198     $ -     $ 1,561     $ 9,852     $ 31,693  
    Additions:
                                                                       
        Provision
    130       (974 )     (160 )     86       214       1,272       -       432       1,000  
    Deductions:
                                                                       
        Chargeoffs
    (60 )     -       -       -       (999 )     (260 )     -       -       (1,319 )
        Recoveries
    168       163       3       -       400       1       -       -       735  
            Net loan losses
    108       163       3       -       (599 )     (259 )     -       -       (584 )
    Indemnification expiration
    -       -       -       -       -       1,561       (1,561 )     -          
    Balance at end of period
    4,243       11,259       445       491       2,813       2,574       -       10,284       32,109  
Liability for off-balance sheet credit exposure
    1,672       -       185       -       440       251       -       145       2,693  
Total allowance for credit losses
  $ 5,915     $ 11,259     $ 630     $ 491     $ 3,253     $ 2,825     $ -     $ 10,429     $ 34,802  
 
   
Allowance for Credit Losses and Recorded Investment in Loans Evaluated for Impairment
At March 31, 2014
 
   
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     $ 550     $ -     $ -     $ -     $ 895     $ -     $ -     $ 1,545  
    Collectively evaluated for impairment
    5,815       10,709       630       491       3,253       1,930       -       10,429       33,257  
    Purchased loans with evidence of credit deterioration
    -       -       -       -       -       -       -       -       -  
       Total
  $ 5,915     $ 11,259     $ 630     $ 491     $ 3,253     $ 2,825     $ -     $ 10,429     $ 34,802  
Carrying value of loans:
                                                                       
    Individually evaluated for impairment
  $ 3,675     $ 2,761     $ -     $ -     $ -     $ 13,489     $ -     $ -     $ 19,925  
    Collectively evaluated for impairment
    356,476       592,449       9,837       170,176       394,128       249,684       18,727       -       1,791,477  
    Purchased loans with evidence of credit deterioration
    -       -       -       -       -       4,675       242       -       4,917  
       Total
  $ 360,151     $ 595,210     $ 9,837     $ 170,176     $ 394,128     $ 267,848     $ 18,969     $ -     $ 1,816,319  
 
Management considers the $34.8 million allowance for credit losses to be adequate as a reserve against credit losses inherent in the loan portfolio as of March 31, 2014.

 
-44-

 
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 and Market Risk Management

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk.

Interest Rate Risk

Interest rate risk is a significant market risk affecting the Company. Many factors affect the Company’s exposure to interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments.  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 Company’s earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve Board (the “FRB”).  The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities.  The nature and impact of future changes in monetary policies are generally not predictable.

The Federal Open Market Committee’s March 19, 2014 press release stated “The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate….. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.”  In this context, Management’s most likely earnings forecast for the twelve months ending March 31, 2015 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 generally 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 risk neutral to slightly “liability sensitive” at March 31, 2014, 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.

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.
 
 
-45-

 
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 of funding for average total assets in the first quarters of 2014 and 2013. The stability of the Company’s funding from customer deposits is in part 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.

During the first quarters of 2014 and 2013, non-deposit funding has continued to be provided by short-term borrowings, a term repurchase agreement, and Federal Home Loan Bank advances. 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 $2.4 billion in total investment securities at March 31, 2014. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At March 31, 2014, such collateral requirements totaled approximately $876 million.
 
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.
 
 
-46-

 
Management will monitor the Company’s cash levels throughout 2014. Loan demand from credit-worthy borrowers will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of these deposit balances is subject to heightened competition, the success of the Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, and a variety of other conditions, deposit growth may be used to fund loans, reduce borrowings or purchase investment securities. However, due to possible concerns such as uncertainty in the general economic environment, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

Westamerica Bancorporation ("Parent Company") is a separate entity 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 any outstanding debt. 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 and proceeds from the exercise of stock options provided adequate cash flow for the Parent Company in the first quarters of 2014 and 2013 to pay shareholder dividends of $10 million in each quarter, and retire common stock in the amount of $23 million and $15 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.

Capital Resources

The Company has historically generated high levels of earnings, which provides a means of raising capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been 11.6% in the first quarter 2014, 12.5% in 2013 and 14.9% in 2012. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options totaled $10.9 million in the first quarter 2014, $21.5 million in 2013 and $7.6 million in 2012.

The Company paid common dividends totaling $10.1 million in the first quarter 2014, $40.1 million in 2013 and $41.0 million in 2012, which represent dividends per common share of $0.38, $1.49 and $1.48, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has repurchased and retired its common stock as another means to return earnings to shareholders. The Company repurchased and retired 437 thousand shares valued at $22.7 million in the first quarter 2014, 1.2 million shares valued at $57.3 million in 2013 and 1.1 million shares valued at $51.5 million in 2012.

The Company's primary capital resource is shareholders' equity, which was $540.9 million at March 31, 2014 compared with $542.9 million at December 31, 2013. The Company's ratio of equity to total assets was 10.99% at March 31, 2014 and 11.20% at December 31, 2013.

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.
 
 
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Capital to Risk-Adjusted Assets

The following summarizes the ratios of regulatory capital to risk-adjusted assets for the Company on the dates indicated:

                               
   
At March 31,
   
At December 31,
             
   
2014
   
2013
   
2013
   
Minimum
Regulatory
Requirement
   
Well-capitalized
by Regulatory
Definition
 
                               
Tier I Capital
    13.74 %     14.71 %     14.71 %     4.00 %     6.00 %
Total Capital
    15.19 %     15.99 %     16.18 %     8.00 %     10.00 %
Leverage ratio
    8.40 %     8.56 %     8.55 %     4.00 %     5.00 %

The following summarizes the ratios of capital to risk-adjusted assets for the Bank on the dates indicated:

                               
   
At March 31,
   
At December 31,
             
   
2014
   
2013
   
2013
   
Minimum
Regulatory
Requirement
   
Well-capitalized
by Regulatory
Definition
 
                               
Tier I Capital
    12.40 %     13.57 %     13.26 %     4.00 %     6.00 %
Total Capital
    14.07 %     15.07 %     14.93 %     8.00 %     10.00 %
Leverage ratio
    7.54 %     7.85 %     7.67 %     4.00 %     5.00 %

FDIC-indemnified assets are generally 20% risk-weighted. The FDIC indemnification expires on February 6, 2019 as to single-family residential real estate indemnified assets and expired on February 6, 2014 as to non-single-family residential real estate indemnified assets. Subsequent to such dates, previously FDIC-indemnified assets will generally be included in the 100% risk-weight category. The expiration of FDIC indemnification related to non-single-family residential real estate assets on February 6, 2014 caused an increase in risk-weighted assets, and a corresponding decline in the Tier 1 and Total Capital ratios.

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,”
 
·
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, and
 
·
Establish limits on the amount of deferred tax assets with any excess treated as a deduction from Tier 1 capital.

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 buffer 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” ratio.

 
-48-

 
Management has evaluated the capital structure and assets for the Company and the Bank as of March 31, 2014 assuming the Federal Reserve’s final rule was currently fully phased-in. 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
Minimum
Capital
Requirement
   
"Well-capitalized"
Under PCA
Proposal
   
Final Rule
Minimum
Plus "Capital
Conservation
Buffer"
   
Proforma Measurements as of
March 31, 2014 Assuming Final
Rule Fully Phased-in and
Covered Asset Indemnification
Expired
 
                     
Company
   
Bank
 
Capital Measurement:
                             
Leverage
    4.00 %     5.00 %     4.00 %     8.39 %     7.53 %
Common Equity Tier 1
    4.50 %     6.50 %     7.00 %     13.63 %     12.30 %
Tier I Capital
    6.00 %     8.00 %     8.50 %     13.63 %     12.30 %
Total Capital
    8.00 %     10.00 %     10.50 %     15.07 %     13.75 %

 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 and Market Risk 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 March 31, 2014.

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 March 31, 2014 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 collection efforts, transaction processing for deposit accounts 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.
 
 
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Item 1A. Risk Factors

The Company’s Form 10-K as of December 31, 2013 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 March 31, 2014.
 
Period
 
(a)
Total Number of
Shares Purchased
   
(b)
Average Price
Paid per Share
   
(c)
Total Number
of Shares
Purchased as Part of
Publicly Announced
Plans or Programs*
   
(d)
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
 
(In thousands, except per share data)
 
January 1
                       
through
    162     $ 52.04       162       1,306  
January 31
                               
February 1
                               
through
    95       49.38       95       1,211  
February 28
                               
March 1
                               
through
    180       53.17       180       1,031  
March 31
                               
Total
    437     $ 51.93       437       1,031  
 
* Includes 4 thousand, 2 thousand and 4 thousand shares purchased in January, February and March, respectively, by the Company in private transactions with the independent administrator of the Company's Tax Deferred Savings/Retirement Plan (ESOP). The Company includes the shares purchased in such transactions within the total number of shares authorized for purchase pursuant to the currently existing publicly announced program.

The Company repurchases shares of its common stock in the open market to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements.

Shares were repurchased during the first quarter of 2014 pursuant to a program approved by the Board of Directors on July 25, 2013, authorizing the purchase of up to 2 million shares of the Company’s common stock from time to time prior to September 1, 2014.
 
Item 3. Defaults upon Senior Securities

None
 
 
-50-

 
Item 4. Mine Safety Disclosures

Not applicable.
 
Item 5. Other Information

(a) Submission of Matters to a Vote of Security Holders

Proxies for the Annual Meeting of shareholders held on April 24, 2014, were solicited pursuant Regulation 14A of the Securities Exchange Act of 1934. The Report of Inspector of election indicates that 22,908,343 shares of the Common Stock of the Company, out of 26,409,146 shares outstanding on the February 24, 2014 record date, were present, in person or by proxy, at the meeting. The following matters were submitted to a vote of the shareholders:

1.
Election of Directors:

Nominee
 
For
   
Withheld
   
Non-Votes
   
Uncast
 
Etta Allen
    19,336,526       203,539       3,368,278       0  
Louis E. Bartolini
    19,241,555       298,510       3,368,278       0  
E. Joseph Bowler
    19,358,568       181,497       3,368,278       0  
Arthur C. Latno, Jr.
    15,625,340       3,914,725       3,368,278       0  
Patrick D. Lynch
    19,247,279       292,786       3,368,278       0  
Catherine C. MacMillan
    19,347,852       192,213       3,368,278       0  
Ronald A. Nelson
    19,360,537       179,528       3,368,278       0  
David L. Payne
    19,270,170       269,895       3,368,278       0  
Edward B. Sylvester
    19,308,157       231,908       3,368,278       0  
 
2.
Approval of a Non-Binding Advisory Vote on Executive Compensation

For
Against
Abstain
Non-Votes
19,072,267
336,121
131,677
3,368,278

3.
Ratification of Selection of KPMG as Company’s Independent Auditors for Fiscal Year 2014

For
Against
Abstain
Non-Votes
22,647,895
92,640
167,808
0
 
Item 6. Exhibits

The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report.
 
 
-51-

 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

WESTAMERICA BANCORPORATION
(Registrant)



/s/ JOHN "ROBERT" THORSON                              
John "Robert" Thorson
Senior Vice President and Chief Financial Officer
(Chief Financial and Accounting Officer)

Date: April 30, 2014

 
-52-

 
EXHIBIT INDEX

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

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

Exhibit 32.1: Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2:  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101:  Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three months ended March 31, 2014 and 2013; (ii) Consolidated Balance Sheets at March 31, 2014, and December 31, 2013; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2014 and 2013; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 and (vi) Notes to the Unaudited Consolidated Financial Statements.
 
 
 
 
 
-53-