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EX-31.2 - EXHIBIT 31.2 - WESTAMERICA BANCORPORATIONexh_312.htm
EX-32.2 - EXHIBIT 32.2 - WESTAMERICA BANCORPORATIONexh_322.htm
EX-32.1 - EXHIBIT 32.1 - WESTAMERICA BANCORPORATIONexh_321.htm
EX-31.1 - EXHIBIT 31.1 - WESTAMERICA BANCORPORATIONexh_311.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016

or

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   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

  Yes ☒ No ☐

 

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

 

  Yes ☒ No ☐

 

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

 

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
  (Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

  Yes ☐ No ☒

 

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 22, 2016
     
Common Stock,   25,496,985
No Par Value    
     

 

 

 

TABLE OF CONTENTS

 

 

     Page
Forward Looking Statements 3

PART I - FINANCIAL INFORMATION

Item 1 Financial Statements 4
  Notes to Unaudited Consolidated Financial Statements 9
Financial Summary 29
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3 Quantitative and Qualitative Disclosures about Market Risk 50
Item 4 Controls and Procedures 51
PART II - OTHER INFORMATION  
Item 1 Legal Proceedings 51
Item 1A Risk Factors 51
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 3 Defaults upon Senior Securities 52
Item 4 Mine Safety Disclosures 52
Item 5 Other Information 52
Item 6 Exhibits 52
Signatures   53
Exhibit Index   54
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 55
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 56
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 57
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 58

- 2

 

FORWARD-LOOKING STATEMENTS

 

This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation (the “Company”) 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, 2015, 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,
2016
  At December 31,
2015
   (In thousands)
Assets:          
Cash and due from banks  $471,164   $433,044 
Investment securities available for sale   1,585,970    1,570,216 
Investment securities held to maturity, with fair values of: $1,381,808 at March 31, 2016 and $1,325,699 at December 31, 2015   1,358,139    1,316,075 
Loans   1,473,196    1,533,396 
Allowance for loan losses   (29,487)   (29,771)
Loans, net of allowance for loan losses   1,443,709    1,503,625 
Other real estate owned   8,438    9,264 
Premises and equipment, net   38,045    38,693 
Identifiable intangibles, net   9,526    10,431 
Goodwill   121,673    121,673 
Other assets   163,204    165,854 
Total Assets  $5,199,868   $5,168,875 
           
Liabilities:          
Noninterest bearing deposits  $1,989,010   $2,026,049 
Interest bearing deposits   2,527,740    2,514,610 
Total deposits   4,516,750    4,540,659 
Short-term borrowed funds   52,451    53,028 
Other liabilities   91,694    42,983 
Total Liabilities   4,660,895    4,636,670 
           
Shareholders' Equity:          
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 25,438 at March 31, 2016 and 25,528 at December 31, 2015   379,893    378,858 
Deferred compensation   1,533    2,578 
Accumulated other comprehensive income   6,619    675 
Retained earnings   150,928    150,094 
Total Shareholders' Equity   538,973    532,205 
Total Liabilities and  Shareholders' Equity  $5,199,868   $5,168,875 

 

See accompanying notes to unaudited consolidated financial statements.

 

- 4

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   For the
Three Months
Ended March 31,
   2016  2015
   (In thousands,
except per share data)
Interest and Fee Income:          
Loans  $18,353   $20,230 
Investment securities available for sale   7,967    7,469 
Investment securities held to maturity   7,327    6,218 
Total Interest and Fee Income   33,647    33,917 
Interest Expense:          
Deposits   543    642 
Short-term borrowed funds   9    16 
Federal Home Loan Bank advances   -    1 
Total Interest Expense   552    659 
Net Interest and Fee Income   33,095    33,258 
Provision for Loan Losses   -    - 
Net Interest and Fee Income After Provision For Loan Losses   33,095    33,258 
Noninterest Income:          
Service charges on deposit accounts   5,248    5,707 
Merchant processing services   1,529    1,703 
Debit card fees   1,516    1,456 
Trust fees   661    706 
ATM processing fees   658    585 
Other service fees   629    665 
Financial services commissions   156    153 
Other noninterest income   1,332    1,325 
Total Noninterest Income   11,729    12,300 
Noninterest Expense:          
Salaries and related benefits   13,117    13,338 
Occupancy   3,398    3,727 
Outsourced data processing services   2,130    2,108 
Furniture and equipment   1,213    1,119 
Amortization of identifiable intangibles   905    1,001 
Professional fees   732    548 
Courier service   545    543 
Other real estate owned   111    315 
Other noninterest expense   3,707    4,028 
Total Noninterest Expense   25,858    26,727 
Income Before Income Taxes   18,966    18,831 
Provision for income taxes   4,740    4,274 
Net Income  $14,226   $14,557 
           
Average Common Shares Outstanding   25,445    25,651 
Average Diluted Common Shares Outstanding   25,458    25,655 
Per Common Share Data:          
Basic earnings  $0.56   $0.57 
Diluted earnings   0.56    0.57 
Dividends paid   0.39    0.38 

 

See accompanying notes to unaudited consolidated financial statements.    

 

- 5

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

   For the Three Months Ended
March 31,
   2016  2015
   (In thousands)
Net income  $14,226   $14,557 
Other comprehensive income:          
Increase in net unrealized gains on securities available for sale   10,241    7,418 
Deferred tax expense   (4,306)   (3,119)
Increase in net unrealized gains on securities available for sale, net of tax   5,935    4,299 
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   5,944    4,308 
Total comprehensive income  $20,170   $18,865 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

- 6

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

 

   Common
Shares
Outstanding
  Common
Stock
  Deferred
Compensation
  Accumulated
Other
Comprehensive
Income
  Retained
Earnings
  Total
   (In thousands)
                   
Balance, December 31, 2014   25,745   $378,132   $2,711   $5,292   $140,468   $526,603 
Net income for the period                       14,557    14,557 
Other comprehensive income                  4,308         4,308 
Exercise of stock options   -    -                   - 
Tax benefit decrease upon expiration/exercise of stock options        (865)                  (865)
Stock based compensation        354                   354 
Stock awarded to employees   1    45                   45 
Retirement of common stock including repurchases   (183)   (2,708)             (5,159)   (7,867)
Dividends                       (9,755)   (9,755)
Balance, March 31, 2015   25,563   $374,958   $2,711   $9,600   $140,111   $527,380 
                               
Balance, December 31, 2015   25,528   $378,858   $2,578   $675   $150,094   $532,205 
Net income for the period                       14,226    14,226 
Other comprehensive income                  5,944         5,944 
Exercise of stock options   40    1,717                   1,717 
Tax benefit decrease upon expiration/exercise of stock options        (181)                  (181)
Restricted stock activity        1,045    (1,045)             - 
Stock based compensation        390                   390 
Stock awarded to employees   -    15                   15 
Retirement of common stock including repurchases   (130)   (1,951)             (3,473)   (5,424)
Dividends                       (9,919)   (9,919)
Balance, March 31, 2016   25,438   $379,893   $1,533   $6,619   $150,928   $538,973 

 

See accompanying notes to unaudited consolidated financial statements.        

- 7

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Three Months
Ended March 31,
   2016  2015
   (In thousands)
Operating Activities:          
Net income  $14,226   $14,557 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   4,065    3,930 
Net amortization of deferred loan fees   (54)   (78)
Decrease in interest income receivable   1,379    812 
Decrease (increase) in deferred tax asset   115    (421)
Increase in other assets   (5,602)   (822)
Stock option compensation expense   390    354 
Tax benefit decrease upon expiration/exercise of stock options   181    865 
Increase in income taxes payable   3,424    4,695 
Increase in interest expense payable   25    21 
Increase (decrease) in other liabilities   (4)   (6,158)
Writedown/loss on sale of premises and equipment   5    4 
Net gain on sale of foreclosed assets   (58)   - 
Writedown of foreclosed assets   126    243 
Net Cash Provided by Operating Activities   18,218    18,002 
           
Investing Activities:          
Net repayments of loans   61,070    13,805 
Change in payable to FDIC(1)   5,189    (692)
Purchases of investment securities available for sale   (152,128)   (354,527)
Proceeds from sale/maturity/calls of securities available for sale   166,023    185,073 
Purchases of investment securities held to maturity   (56,182)   (10,359)
Proceeds from maturity/calls of securities held to maturity   33,531    30,468 
Purchases of premises and equipment   (283)   (1,326)
Proceeds from sale of FRB(2)/FHLB(3) stock   -    490 
Proceeds from sale of foreclosed assets   975    100 
Net Cash Provided by (Used in) Investing Activities   58,195    (136,968)
           
Financing Activities:          
Net change in deposits   (23,909)   30,891 
Net change in short-term borrowings and FHLB(3) advances   (577)   (26,824)
Exercise of stock options/issuance of shares   1,717    - 
Tax benefit decrease upon expiration/exercise of stock options   (181)   (865)
Retirement of common stock including repurchases   (5,424)   (7,867)
Common stock dividends paid   (9,919)   (9,755)
Net Cash Used in Financing Activities   (38,293)   (14,420)
Net Change In Cash and Due from Banks   38,120    (133,386)
Cash and Due from Banks at Beginning of Period   433,044    380,836 
Cash and Due from Banks at End of Period  $471,164   $247,450 
           
Supplemental Cash Flow Disclosures:          
Supplemental disclosure of noncash activities:          
Loan collateral transferred to other real estate owned  $217   $3,202 
Securities purchases pending settlement   44,580    1,478 
Supplemental disclosure of cash flow activities:          
Interest paid for the period   526    775 
Income tax payments for the period   1,200    - 

 

See accompanying notes to unaudited consolidated financial statements.

(1) Federal Deposit Insurance Corporation ("FDIC")

(2) Federal Reserve Bank ("FRB")

(3) Federal Home Loan Bank ("FHLB")

 

- 8

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. 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, 2016 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, 2015.

 

Note 2: Accounting Policies

 

The most significant accounting policies followed by the Company are presented 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, 2015. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “Loan Portfolio Credit Risk” discussion below. Certain amounts in prior periods have been reclassified to conform to the current presentation.

 

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

 

Recently Issued Accounting Standards

 

FASB Accounting Standards Update (ASU) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, was issued January 2016. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

 

The Company will be required to adopt the ASU provisions on January 1, 2018. Management is evaluating the impact that the ASU will have on the Company’s financial statements.

 

FASB Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), was issued February 25, 2016. The provisions of the new standard require lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP.

 

The Company will be required to adopt the ASU provisions January 1, 2019, utilizing the modified retrospective transition approach. Management is evaluating the impact that the ASU will have on the Company’s financial statements.

 

- 9

 

FASB ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, was issued March 30, 2016. The provisions of the new standard changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification.

 

The Company will be required to adopt the ASU provisions January 1, 2017. Management is evaluating the impact that the ASU will have on the Company’s financial statements.

 

Note 3: Investment Securities

 

An analysis of the amortized cost, gross unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio follows:

 

   Investment Securities Available for Sale
At March 31, 2016
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. Government sponsored entities  $360,219   $668   $(158)  $360,729 
Agency residential mortgage-backed securities (MBS)   198,740    1,460    (2,931)   197,269 
Non-agency residential MBS   345    8    -    353 
Non-agency commercial MBS   2,298    9    (5)   2,302 
Obligations of states and political subdivisions   139,551    9,048    (41)   148,558 
Asset-backed securities   1,680    -    (22)   1,658 
FHLMC(1) and FNMA(2) stock   775    3,016    -    3,791 
Corporate securities   868,796    3,670    (3,719)   868,747 
Other securities   2,036    667    (140)   2,563 
Total  $1,574,440   $18,546   $(7,016)  $1,585,970 

 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

 

An analysis of the amortized cost, gross unrecognized gains and losses, and fair value of the held to maturity investment securities portfolio follows:

 

   Investment Securities Held to Maturity
At March 31, 2016
   Amortized
Cost
  Gross
Unrecognized
Gains
  Gross
Unrecognized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. government sponsored entities  $713   $12   $-   $725 
Agency residential MBS   632,696    6,398    (404)   638,690 
Non-agency residential MBS   9,415    87    (2)   9,500 
Agency commercial MBS   16,136    36    (295)   15,877 
Obligations of states and political subdivisions   699,179    18,108    (271)   717,016 
Total  $1,358,139   $24,641   $(972)  $1,381,808 

- 10

 

An analysis of the amortized cost, gross unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio follows:

 

   Investment Securities Available for Sale
At December 31, 2015
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. Government sponsored entities  $302,292   $255   $(665)  $301,882 
Agency residential mortgage-backed securities (MBS)   208,046    1,407    (6,909)   202,544 
Non-agency residential MBS   354    16    -    370 
Non-agency commercial MBS   2,383    5    (9)   2,379 
Obligations of states and political subdivisions   148,705    8,861    (57)   157,509 
Asset-backed securities   2,025    -    (22)   2,003 
FHLMC(1) and FNMA(2) stock   775    3,554    -    4,329 
Corporate securities   902,308    882    (6,821)   896,369 
Other securities   2,039    952    (160)   2,831 
Total  $1,568,927   $15,932   $(14,643)  $1,570,216 

 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

 

An analysis of the amortized cost, gross unrecognized gains and losses, and fair value of the held to maturity investment securities portfolio follows:

 

   Investment Securities Held to Maturity
At December 31, 2015
   Amortized
Cost
  Gross
Unrecognized
Gains
  Gross
Unrecognized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. government sponsored entities  $764   $-   $-   $764 
Agency residential MBS   595,503    1,810    (4,966)   592,347 
Non-agency residential MBS   9,667    185    -    9,852 
Agency commercial MBS   16,258    20    (274)   16,004 
Obligations of states and political subdivisions   693,883    13,638    (789)   706,732 
Total  $1,316,075   $15,653   $(6,029)  $1,325,699 

 

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, 2016
   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  $126,563   $126,929   $22,825   $23,380 
Over 1 to 5 years   983,838    984,709    269,713    273,902 
Over 5 to 10 years   257,772    265,730    295,674    304,975 
Over 10 years   2,073    2,324    111,680    115,484 
Subtotal   1,370,246    1,379,692    699,892    717,741 
MBS   201,383    199,924    658,247    664,067 
Other securities   2,811    6,354    -    - 
Total  $1,574,440   $1,585,970   $1,358,139   $1,381,808 

- 11

 

Securities available for sale at March 31, 2016 with maturity dates over one year but less than five years include $221,924  thousand (fair value) of securities of U.S. Government sponsored entities with call options on dates within one year or less.

 

   At December 31, 2015
   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  $136,717   $136,976   $20,709   $21,354 
Over 1 to 5 years   1,049,786    1,044,453    259,556    262,163 
Over 5 to 10 years   166,352    173,585    289,568    296,352 
Over 10 years   2,475    2,749    124,814    127,627 
Subtotal   1,355,330    1,357,763    694,647    707,496 
MBS   210,783    205,293    621,428    618,203 
Other securities   2,814    7,160    -    - 
Total  $1,568,927   $1,570,216   $1,316,075   $1,325,699 

 

Expected maturities of mortgage-related 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-related securities. At March 31, 2016 and December 31, 2015, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

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

 

   Investment Securities Available for Sale
At March 31, 2016
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment
Positions
  Fair Value  Unrealized
Losses
  Investment
Positions
  Fair Value  Unrealized
Losses
  Investment
Positions
  Fair Value  Unrealized
Losses
   ($ in thousands)
Securities of U.S. Government sponsored entities   2   $39,801   $(158)   -   $-   $-    2   $39,801   $(158)
Agency residential MBS   1    7,033    (84)   30    158,762    (2,847)   31    165,795    (2,931)
Non-agency commercial MBS   -    -    -    1    837    (5)   1    837    (5)
Obligations of states and political subdivisions   4    2,291    (14)   3    1,118    (27)   7    3,409    (41)
Asset-backed securities   -    -    -    1    1,658    (22)   1    1,658    (22)
Corporate securities   40    198,880    (1,559)   43    162,806    (2,160)   83    361,686    (3,719)
Other securities   -    -    -    1    1,860    (140)   1    1,860    (140)
Total   47   $248,005   $(1,815)   79   $327,041   $(5,201)   126   $575,046   $(7,016)

 

 

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- 12

 

An analysis of gross unrecognized losses of the held to maturity investment securities portfolio follows:

 

   Investment Securities Held to Maturity
At March 31, 2016
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
   ($ in thousands)
Agency residential MBS   6   $13,853   $(58)   8   $34,193   $(346)   14   $48,046   $(404)
Non-agency residential MBS   1    1,366    (2)   -    -    -    1    1,366    (2)
Agency commercial MBS   -    -    -    2    13,823    (295)   2    13,823    (295)
Obligations of states and political subdivisions   30    26,386    (113)   18    15,044    (158)   48    41,430    (271)
Total   37   $41,605   $(173)   28   $63,060   $(799)   65   $104,665   $(972)

 

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-backed 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, 2016.

 

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, 2016, $712,412  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2015, $738,865  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds.

 

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

 

   Investment Securities Available for Sale
At December 31, 2015
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment
Positions
  Fair Value  Unrealized
Losses
  Investment
Positions
  Fair Value  Unrealized
Losses
  Investment
Positions
  Fair Value  Unrealized
Losses
   ($ in thousands)
Securities of U.S. Government sponsored entities   8   $121,392   $(665)   -   $-   $-    8   $121,392   $(665)
Agency residential MBS   2    12,491    (366)   31    161,296    (6,543)   33    173,787    (6,909)
Non-agency commercial MBS   1    1,071    -    1    855    (9)   2    1,926    (9)
Obligations of states and political subdivisions   3    2,728    (18)   4    1,644    (39)   7    4,372    (57)
Asset-backed securities   -    -    -    1    2,003    (22)   1    2,003    (22)
Corporate securities   97    548,177    (5,442)   25    86,762    (1,379)   122    634,939    (6,821)
Other securities   -    -    -    1    1,840    (160)   1    1,840    (160)
Total   111   $685,859   $(6,491)   63   $254,400   $(8,152)   174   $940,259   $(14,643)

- 13

 

An analysis of gross unrecognized losses  of investment securities held to maturity follows:

 

   Investment Securities Held to Maturity
At December 31, 2015
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
   ($ in thousands)
Agency residential MBS   41   $426,317   $(3,490)   13   $62,041   $(1,476)   54   $488,358   $(4,966)
Agency commercial MBS   -    -    -    2    13,951    (274)   2    13,951    (274)
Obligations of states and political subdivisions   55    44,585    (249)   54    42,081    (540)   109    86,666    (789)
Total   96   $470,902   $(3,739)   69   $118,073   $(2,290)   165   $588,975   $(6,029)

 

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,
   2016  2015
   (In thousands)
       
Taxable  $9,674   $7,554 
Tax-exempt from regular federal income tax   5,620    6,133 
Total interest income from investment securities  $15,294   $13,687 

 

Note 4: Loans and Allowance for Loan Losses

 

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

 

   At March 31, 2016
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
& Other
  Total
   (In thousands)   
Originated loans  $341,898   $515,183   $2,147   $109,201   $341,654   $1,310,083 
Purchased covered loans:                              
Gross purchased covered loans   -    -    -    2,330    11,352    13,682 
Purchased loan discount   -    -    -    -    (18)   (18)
Purchased non-covered loans:                              
Gross purchased non-covered loans   14,447    108,968    960    229    30,929    155,533 
Purchased loan discount   (931)   (3,975)   -    (23)   (1,155)   (6,084)
Total  $355,414   $620,176   $3,107   $111,737   $382,762   $1,473,196 

 

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- 14

 

   At December 31, 2015
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
& Other
  Total
   (In thousands)   
Originated loans  $368,117   $517,070   $2,978   $117,631   $346,043   $1,351,839 
Purchased covered loans:                              
Gross purchased covered loans   -    -    -    2,385    11,828    14,213 
Purchased loan discount   -    -    -    (133)   (19)   (152)
Purchased non-covered loans:                              
Gross purchased non-covered loans   15,620    124,650    973    231    32,454    173,928 
Purchased loan discount   (989)   (4,264)   -    (23)   (1,156)   (6,432)
Total  $382,748   $637,456   $3,951   $120,091   $389,150   $1,533,396 

 

Changes in the carrying amount of impaired purchased loans were as follows:

 

   For the
Three Months Ended
March 31, 2016
  For the Year Ended
December 31, 2015
Impaired purchased loans  (In thousands)
Carrying amount at the beginning of the period  $3,887   $4,672 
Reductions during the period   (2,628)   (785)
Carrying amount at the end of the period  $1,259   $3,887 

 

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

 

   For the
Three Months Ended
March 31, 2016
  For the
Year Ended
December 31, 2015
Accretable yield:  (In thousands)
Balance at the beginning of the period  $1,259   $2,261 
Reclassification from nonaccretable difference   1,077    3,051 
Accretion   (1,319)   (4,053)
Balance at the end of the period  $1,017   $1,259 
           
Accretion  $(1,319)  $(4,053)
Change in FDIC indemnification   694    698 
(Increase) in interest income  $(625)  $(3,355)

 

The following summarizes activity in the allowance for loan losses:

 

   Allowance for Loan Losses
For the Three Months Ended March 31, 2016
   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  $9,559   $4,224   $177   $1,801   $7,080   $967   $-   $5,963   $29,771 
Additions:                                             
Provision   1,214    (2)   (47)   (94)   152    (1,193)   -    (30)   - 
Deductions:                                             
Chargeoffs   (1,171)   -    -    -    (1,006)   -    -    -    (2,177)
Recoveries   245    15    -    -    457    1,176    -    -    1,893 
Net loan (losses) recoveries   (926)   15    -    -    (549)   1,176    -    -    (284)
Total allowance for loan losses  $9,847   $4,237   $130   $1,707   $6,683   $950   $-   $5,933   $29,487 

- 15

 

   Allowance for Loan Losses
For the Three Months Ended March 31, 2015
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Purchased
Non-covered
Loans
  Purchased
Covered
Loans
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                             
Balance at beginning of period  $5,460   $4,245   $644   $2,241   $7,717   $2,120   $-   $9,058   $31,485 
Additions:                                             
Provision   (110)   (137)   86    (101)   (281)   247    -    296    - 
Deductions:                                             
Chargeoffs   (60)   -    -    -    (995)   (35)   -    -    (1,090)
Recoveries   180    15    -    -    590    7    -    -    792 
Net loan recoveries (losses)   120    15    -    -    (405)   (28)   -    -    (298)
Total allowance for loan losses  $5,470   $4,123   $730   $2,140   $7,031   $2,339   $-   $9,354   $31,187 

 

The allowance for loan losses and recorded investment in loans were evaluated for impairment as follows:

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At March 31, 2016
   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:                                             
Individually evaluated for impairment  $5,831   $585   $-   $-   $-   $-   $-   $-   $6,416 
Collectively evaluated for impairment   4,016    3,652    130    1,707    6,683    950    -    5,933    23,071 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    -    -    - 
Total  $9,847   $4,237   $130   $1,707   $6,683   $950   $-   $5,933   $29,487 
Carrying value of loans:                                             
Individually evaluated for impairment  $13,388   $7,516   $-   $-   $-   $11,733   $-   $-   $32,637 
Collectively evaluated for impairment   328,510    507,667    2,147    109,201    341,654    136,658    13,463    -    1,439,300 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    1,058    201    -    1,259 
Total  $341,898   $515,183   $2,147   $109,201   $341,654   $149,449   $13,664   $-   $1,473,196 

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 2015
   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:                                             
Individually evaluated for impairment  $4,942   $585   $-   $-   $-   $-   $-   $-   $5,527 
Collectively evaluated for impairment   4,617    3,639    177    1,801    7,080    967    -    5,963    24,244 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    -    -    - 
Total  $9,559   $4,224   $177   $1,801   $7,080   $967   $-   $5,963   $29,771 
Carrying value of loans:                                             
Individually evaluated for impairment  $12,587   $5,541   $-   $-   $-   $11,777   $-   $-   $29,905 
Collectively evaluated for impairment   355,530    511,529    2,978    117,631    346,043    152,038    13,855    -    1,499,604 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    3,681    206    -    3,887 
Total  $368,117   $517,070   $2,978   $117,631   $346,043   $167,496   $14,061   $-   $1,533,396 

 

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 Department evaluations occur every calendar quarter. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department 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.

 

- 16

 

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

 

   Credit Risk Profile by Internally Assigned Grade
At March 31, 2016
   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  $321,513   $492,359   $2,147   $106,117   $340,536   $133,109   $11,938   $1,407,719 
Substandard   18,544    22,824    -    3,084    843    22,329    1,744    69,368 
Doubtful   1,841    -    -    -    21    18    -    1,880 
Loss   -    -    -    -    254    77    -    331 
Purchased loan discount   -    -    -    -    -    (6,084)   (18)   (6,102)
Total  $341,898   $515,183   $2,147   $109,201   $341,654   $149,449   $13,664   $1,473,196 

 

(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, 2015
   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  $353,474   $496,744   $2,978   $114,525   $344,876   $149,100   $12,563   $1,474,260 
Substandard   14,643    20,326    -    3,106    781    24,810    1,650    65,316 
Doubtful   -    -    -    -    12    18    -    30 
Loss   -    -    -    -    374    -    -    374 
Purchased loan discount   -    -    -    -    -    (6,432)   (152)   (6,584)
Total  $368,117   $517,070   $2,978   $117,631   $346,043   $167,496   $14,061   $1,533,396 

 

(1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification.

 

The following tables summarize loans by delinquency and nonaccrual status:

 

   Summary of Loans by Delinquency and Nonaccrual Status
At March 31, 2016
   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  $338,683   $780   $308   $-   $2,127   $341,898 
Commercial real estate   505,878    715    400    -    8,190    515,183 
Construction   2,147    -    -    -    -    2,147 
Residential real estate   105,355    2,350    767    -    729    109,201 
Consumer installment and other   338,687    2,137    647    183    -    341,654 
Total originated loans   1,290,750    5,982    2,122    183    11,046    1,310,083 
Purchased non-covered loans   141,930    721    40    77    6,681    149,449 
Purchased covered loans   13,635    -    29    -    -    13,664 
Total  $1,446,315   $6,703   $2,191   $260   $17,727   $1,473,196 

 

 

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- 17

 

   Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2015
   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  $365,450   $1,777   $122   $-   $768   $368,117 
Commercial real estate   504,970    5,930    726    -    5,444    517,070 
Construction   2,978    -    -    -    -    2,978 
Residential real estate   115,575    1,202    414    -    440    117,631 
Consumer installment and other   341,566    3,263    919    295    -    346,043 
Total originated loans   1,330,539    12,172    2,181    295    6,652    1,351,839 
Purchased non-covered loans   158,554    589    7    -    8,346    167,496 
Purchased covered loans   13,929    132    -    -    -    14,061 
Total  $1,503,022   $12,893   $2,188   $295   $14,998   $1,533,396 

 

The following is a summary of the effect of nonaccrual loans on interest income:

 

   For the Three Months Ended
March 31,
   2016  2015
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $280   $311 
Less: Interest income recognized on nonaccrual loans   (263)   (205)
Total reduction of interest income  $17   $106 

 

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2016 and December 31, 2015.

 

 

 

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- 18

 

The following summarizes impaired loans:

 

   Impaired Loans
At March 31, 2016
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
Impaired loans with no related allowance recorded:               
Commercial  $2,099   $2,185   $- 
Commercial real estate   16,069    20,742    - 
Construction   271    271    - 
Residential real estate   953    984    - 
Consumer installment and other   344    451    - 
                
Impaired loans with an allowance recorded:               
Commercial   11,634    12,452    5,831 
Commercial real estate   4,660    5,109    585 
Construction   -    -    - 
Residential real estate   -    -    - 
Consumer installment and other   -    -    - 
                
Total:               
Commercial  $13,733   $14,637   $5,831 
Commercial real estate   20,729    25,851    585 
Construction   271    271    - 
Residential real estate   953    984    - 
Consumer installment and other   344    451    - 

 

   Impaired Loans
At December 31, 2015
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
Impaired loans with no related allowance recorded:               
Commercial  $2,917   $2,979   $- 
Commercial real estate   16,309    21,168    - 
Construction   271    271    - 
Residential real estate   666    697    - 
Consumer installment and other   350    456    - 
                
Impaired loans with an allowance recorded:               
Commercial   10,170    10,170    4,942 
Commercial real estate   4,660    5,109    585 
Construction   -    -    - 
Residential real estate   -    -    - 
Consumer installment and other   -    -    - 
                
Total:               
Commercial  $13,087   $13,149   $4,942 
Commercial real estate   20,969    26,277    585 
Construction   271    271    - 
Residential real estate   666    697    - 
Consumer installment and other   350    456    - 

 

- 19

 

Impaired loans include troubled debt restructured loans. Impaired loans at March 31, 2016, included $19,645 thousand of restructured loans, $12,114 thousand of which were on nonaccrual status. Impaired loans at December 31, 2015, included $15,712 thousand of restructured loans, $7,464 thousand of which were on nonaccrual status.

 

   Impaired Loans
For the Three Months Ended March 31,
   2016  2015
   Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
   (In thousands)
Commercial  $13,410   $133   $12,226   $146 
Commercial real estate   20,849    159    18,318    257 
Construction   271    -    917    - 
Residential real estate   810    4    860    6 
Consumer installment and other   347    6    1,254    6 
Total  $35,687   $302   $33,575   $415 

 

The following table provides information on troubled debt restructurings:

 

   Troubled Debt Restructurings
   At March 31, 2016
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   (In thousands)
Commercial   7   $2,568   $2,156   $194 
Commercial real estate   11    17,587    17,265    585 
Residential real estate   1    242    224    - 
Total   19   $20,397   $19,645   $779 

 

   Troubled Debt Restructurings
   At December 31, 2015
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   (In thousands)
Commercial   6   $3,138   $2,802   $194 
Commercial real estate   10    12,927    12,684    - 
Residential real estate   1    242    226    - 
Total   17   $16,307   $15,712   $194 

 

During the three months ended March 31, 2016, the Company modified three loans with a carrying value of $4,757 thousand that were considered troubled debt restructurings. The concessions granted in the first quarter 2016 consisted of two modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms and one court order requiring under-market terms. During the three months ended March 31, 2015, the Company modified five loans with a carrying value of $1,736 thousand that were considered troubled debt restructurings. The concessions granted in the first quarter 2015 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. During the three months ended March 31, 2016 and 2015, 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.

 

There were no loans restricted due to collateral requirements at March 31, 2016 and December 31, 2015.

 

There were no loans held for sale at March 31, 2016 and December 31, 2015.

 

- 20

 

At March 31, 2016 and December 31, 2015, the Company held total other real estate owned (OREO) of $8,438 thousand net of reserve of $2,102 thousand and $9,264 thousand net of reserve of $1,986 thousand, respectively, of which $-0-  thousand was foreclosed residential real estate properties. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $-0-  thousand at March 31, 2016 and December 31, 2015.

 

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At March 31, 2016, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At March 31, 2016, Westamerica Bank had 38 lending relationships with aggregate loans exceeding $5 million. 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 related to real estate loans of $60,660 thousand and $61,190 thousand at March 31, 2016 and December 31, 2015, 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 March 31, 2016, Westamerica Bank held corporate bonds in 48 issuing entities which exceeded $5 million of each issuer.

 

Note 6: Other Assets

 

Other assets consisted of the following:

 

   At March 31,
2016
  At December 31,
2015
   (In thousands)
Cost method equity investments:          
Federal Reserve Bank stock (1)  $14,069   $14,069 
Other investments   201    201 
Total cost method equity investments   14,270    14,270 
Life insurance cash surrender value   49,607    48,972 
Net deferred tax asset   47,069    51,748 
Limited partnership investments   14,551    15,259 
Interest receivable   18,795    20,174 
Prepaid assets   4,732    4,771 
Other assets   14,180    10,660 
Total other assets  $163,204   $165,854 

 

(1)A bank applying for membership in the Federal Reserve System is required to subscribe to stock in the Federal Reserve Bank (FRB) in its district 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.

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At March 31, 2016, this investment totaled $14,551 thousand and $2,299  thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2015, this investment totaled $15,259 thousand and $2,299  thousand of this amount represents outstanding equity capital commitments. At March 31, 2016, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $453 thousand in 2016, $763 thousand in 2017, and $1,083 thousand in 2018, or thereafter.

 

- 21

 

The amounts recognized in net income for these investments include:

 

   For the Three Months Ended
March 31,
   2016  2015
   (In thousands)
Investment loss included in pre-tax income  $675   $675 
Tax credits recognized in provision for income taxes   598    658 

 

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 evaluated for impairment at least annually. The Company did not recognize impairment during the three months ended March 31, 2016 and year ended December 31, 2015. 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, 2016 and year ended December 31, 2015, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

   At March 31,
2016
  At December 31,
2015
   (In thousands)
Goodwill  $121,673   $121,673 

 

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

 

   At March 31, 2016  At December 31, 2015
   Gross Carrying Amount  Accumulated Amortization  Gross Carrying Amount  Accumulated Amortization
   (In thousands)
Core Deposit Intangibles  $56,808   $(47,628)  $56,808   $(46,782)
Merchant Draft Processing Intangible   10,300    (9,954)   10,300    (9,895)
Total Identifiable Intangible Assets  $67,108   $(57,582)  $67,108   $(56,677)

 

As of March 31, 2016, the current period and estimated future amortization expense for identifiable intangible assets was:

 

  Merchant
Core
Deposit
Intangibles
  Draft
Processing
Intangible
  Total
  (In thousands)
For the Three Months ended March 31, 2016 (actual)  $846   $59   $905 
Estimate for year ended December 31, 2016   3,292    212    3,504 
2017   2,913    164    3,077 
2018   1,892    29    1,921 
2019   538    -    538 
2020   287    -    287 

 

 

 

- 22

 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   Deposits
 
 
 
 
At March 31,
2016
 
 
At December 31,
2015
   (In thousands)
Noninterest-bearing  $1,989,010   $2,026,049 
Interest-bearing:          
Transaction   855,008    860,706 
Savings   1,393,919    1,366,936 
Time deposits less than $100 thousand   147,699    150,780 
Time deposits $100 thousand through $250 thousand   93,460    96,971 
Time deposits more than $250 thousand   37,654    39,217 
Total deposits  $4,516,750   $4,540,659 

 

Demand deposit overdrafts of $2,951  thousand and $3,038  thousand were included as loan balances at March 31, 2016 and December 31, 2015, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $137 thousand in the first quarter 2016 and $197 thousand in the first quarter 2015.

 

The following table provides additional detail regarding short-term borrowed funds.

 

   Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
   At March 31, 2016  At December 31, 2015
   Remaining Contractual Maturity of the Agreements
   Overnight and Continuous
Repurchase agreements:  (In thousands)
Collateral securing borrowings:          
Securities of U.S. Government sponsored entities  $99,343   $98,969 
Obligations of states and political subdivisions   3,250    3,975 
Corporate securities   49,715    54,681 
Total collateral carrying value  $152,308   $157,625 
Total short-term borrowed funds  $52,451   $53,028 

 

The $35,000 thousand unsecured line of credit expired, with no outstanding balance, March 18, 2016 and was not renewed. There was no outstanding balance at December 31, 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:

- 23

 

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 and equity 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 federal agency securities, mortgage-backed securities, corporate securities, asset-backed securities, and municipal bonds.

 

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 compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote closely affecting the market 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 or 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.

 

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3. 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, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the three months ended March 31, 2016 and 2015, there were no transfers in or out of levels 1, 2 or 3. During the quarter ended June 30, 2015, the Company reevaluated the valuation techniques and assumptions used by its vendors in valuing the Company’s available for sale securities, and based on the evaluation, transferred $437,715 thousand out of level 1 and transferred $437,715 thousand into level 2. There were no transfers into level 1 or into or out of level 3. Subsequent to June 30, 2015 and through the year ended December 31, 2015, there were no transfers into or out of levels 1, 2 or 3.

 

 

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- 24

 

Assets Recorded at Fair Value on a Recurring Basis

 

The tables below present assets measured at fair value on a recurring basis on the dates indicated.

 

   At March 31, 2016
   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)
Securities of U.S. Government sponsored entities  $360,729   $-   $360,729   $- 
Agency residential MBS   197,269    -    197,269    - 
Non-agency residential MBS   353         353    - 
Non-agency commercial MBS   2,302    -    2,302    - 
Obligations of states and political subdivisions   148,558    -    148,558    - 
Asset-backed securities   1,658    -    1,658    - 
FHLMC and FNMA stock   3,791    6    3,785    - 
Corporate securities   868,747    -    868,747    - 
Other securities   2,563    703    1,860    - 
Total securities available for sale  $1,585,970   $709   $1,585,261   $- 

 

 

   At December 31, 2015
   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)
Securities of U.S. Government sponsored entities  $301,882   $-   $301,882   $- 
Agency residential MBS   202,544    -    202,544    - 
Non-agency residential MBS   370         370    - 
Non-agency commercial MBS   2,379    -    2,379    - 
Obligations of states and political subdivisions   157,509    -    157,509    - 
Asset-backed securities   2,003    -    2,003    - 
FHLMC and FNMA stock   4,329    7    4,322    - 
Corporate securities   896,369    -    896,369    - 
Other securities   2,831    991    1,840    - 
Total securities available for sale  $1,570,216   $998   $1,569,218   $- 

 

 

 

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- 25

 

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, 2016 and December 31, 2015, 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, 2016  For the
Three Months Ended
March 31, 2016
  Carrying Value  Level 1  Level 2  Level 3  Total Losses
  (In thousands)
Other real estate owned  $8,438   $-   $-   $8,438   $(126)
Impaired loans   16,208    -    -    16,208    (814)
Total assets measured at fair value on a nonrecurring basis  $24,646   $-   $-   $24,646   $(940)

 

  At December 31, 2015  For the
Year Ended
December 31, 2015
  Carrying Value  Level 1  Level 2  Level 3  Total Losses
  (In thousands)
Other real estate owned  $9,264   $-   $-   $9,264   $(320)
Impaired loans   15,633    -    -    15,633    (449)
Total assets measured at fair value on a nonrecurring basis  $24,897   $-   $-   $24,897   $(769)

 

Level 3 – Valuation is based upon independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. Level 3 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been established or a chargeoff 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. The unobservable inputs and qualitative information about the unobservable inputs are not presented due to the unavailability from third party evaluators.

 

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.

 

Investment Securities Held to Maturity The fair values of investment securities were estimated using quoted prices as described above for 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 $29,487 thousand at March 31, 2016 and $29,771 thousand at December 31, 2015 and the purchased loan discount associated with purchased covered and purchased non-covered loans of $18 thousand and $6,084 thousand, respectively at March 31, 2016 and $152 thousand and $6,432 thousand, respectively at December 31, 2015 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.

 

- 26

 

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.

 

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.

 

  At March 31, 2016
  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  $471,164   $471,164   $471,164   $-   $- 
Investment securities held to maturity   1,358,139    1,381,808    -    1,381,808    - 
Loans   1,443,709    1,464,418    -    -    1,464,418 
                          
Financial Liabilities:                         
Deposits  $4,516,750   $4,515,926   $-   $4,237,937   $277,989 
Short-term borrowed funds   52,451    52,451    -    52,451    - 

 

  At December 31, 2015
  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  $433,044   $433,044   $433,044   $-   $- 
Investment securities held to maturity   1,316,075    1,325,699    -    1,325,699    - 
Loans   1,503,625    1,517,394    -    -    1,517,394 
                          
Financial Liabilities:                         
Deposits  $4,540,659   $4,539,455   $-   $4,253,691   $285,764 
Short-term borrowed funds   53,028    53,028    -    53,028    - 

 

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.

 

 

- 27

 

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 $321,077 thousand and $299,884 thousand at March 31, 2016 and December 31, 2015, 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 $23,581 thousand and $26,149 thousand at March 31, 2016 and December 31, 2015, respectively. The Company also had commitments for commercial and similar letters of credit of $-0- thousand at March 31, 2016 and $40 thousand at December 31, 2015. At March 31, 2016 and December 31, 2015, the Company had a reserve for unfunded commitments of $2,593 thousand, included in other liabilities.

 

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.

 

 

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,
   2016  2015
   (In thousands, except per share data)
Net income (numerator)  $ 14,226    $ 14,557
Basic earnings per common share          
Weighted average number of common shares outstanding - basic (denominator)   25,445    25,651 
Basic earnings per common share  $0.56   $0.57 
Diluted earnings per common share          
Weighted average number of common shares outstanding - basic   25,445    25,651 
Add common stock equivalents for options   23    4 
Weighted average number of common shares outstanding - diluted (denominator)   25,468    25,655 
Diluted earnings per common share  $0.56   $0.57 

 

 

For the three months ended March 31, 2016 and 2015, options to purchase 1,297 thousand and 1,775 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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- 28

 

 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

   For the Three Months Ended
   March 31,  March 31,  December 31,
   2016  2015  2015
   (In thousands, except per share data)
Net Interest and Fee Income (FTE)(1)  $36,447   $36,930   $36,734 
Provision for Loan Losses   -    -    - 
Noninterest Income   11,729    12,300    11,305 
Noninterest Expense   25,858    26,727    25,504 
Income Before Income Taxes (FTE)(1)   22,318    22,503    22,535 
Provision for Income Taxes (FTE)(1)   8,092    7,946    7,957 
Net Income  $14,226   $14,557   $14,578 
                
Average Common Shares Outstanding   25,445    25,651    25,528 
Average Diluted Common Shares Outstanding   25,468    25,655    25,555 
Common Shares Outstanding at Period End   25,438    25,563    25,528 
                
Per Common Share:               
Basic Earnings  $0.56   $0.57   $0.57 
Diluted Earnings   0.56    0.57    0.57 
Book Value Per Common Share  $21.19   $20.63   $20.85 
                
Financial Ratios:               
Return On Assets   1.11%   1.17%   1.12%
Return On Common Equity   10.85%   11.44%   11.01%
Net Interest Margin (FTE)(1)   3.34%   3.43%   3.32%
Net Loan Losses to Average Loans   0.08%   0.07%   0.07%
Efficiency Ratio(2)   53.7%   54.3%   53.1%
                
Average Balances:               
Assets  $5,174,804   $5,059,537   $5,168,805 
Earning Assets   4,381,423    4,342,031    4,411,599 
Loans   1,500,616    1,683,748    1,543,591 
Deposits   4,537,548    4,402,946    4,536,256 
Shareholders' Equity   527,177    516,086    525,277 
                
Period End Balances:               
Assets  $5,199,868   $5,035,777   $5,168,875 
Earning Assets   4,417,305    4,476,435    4,419,687 
Loans   1,473,196    1,683,884    1,533,396 
Deposits   4,516,750    4,380,076    4,540,659 
Shareholders' Equity   538,973    527,380    532,205 
                
Capital Ratios at Period End:               
Total Risk Based Capital   13.51%   13.08%   13.39%
Tangible Equity to Tangible Assets   8.04%   8.01%   7.94%
                
Dividends Paid Per Common Share  $0.39   $0.38   $0.39 
Common Dividend Payout Ratio   70%   67%   68%

 

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 an 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).

 

 

- 29

 

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

 

Westamerica Bancorporation and subsidiaries’ (the “Company’s”) principal source of revenue is net interest and fee income, which represents interest earned on loans and investment securities (“interest-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’s loan portfolio has declined from the first quarter 2015 through the first quarter 2016; Management has been avoiding long-dated, low-yielding loans given historically low interest rates. Management has also maintained, in their opinion, conservative loan underwriting, terms and conditions. During this period, the investment portfolio has grown. The Company has been reducing its exposure to rising interest rates by purchasing shorter-duration investment securities, which have lower yields than longer-duration securities. The changing composition of interest earning assets and low market interest rates has pressured the net interest margin on a fully taxable equivalent (“FTE”) basis. The net interest margin in the first quarter 2016 increased from the fourth quarter 2015 reflecting the Federal Open Market Committee’s (“FOMC”s) 0.25 percent increase in the federal funds rate on December 16, 2015, which increased yields on loans and investment securities with floating rates. In the first quarter 2016 the Company’s average checking and savings deposits were 6 percent higher than in the first quarter 2015. The growth in lower-costing deposit products contributed to lowering the funding cost from 0.06 percent in the first quarter 2015 to 0.05 percent in the first quarter 2016. Management is focused on controlling all noninterest expense levels, particularly due to market interest rate pressure on net interest income.

 

The Company presents its net interest margin and net interest income on a FTE basis using the current statutory federal tax rate, which is a non-generally accepted accounting principles (GAAP) financial measure. Management believes the FTE basis is valuable to the reader because the Company’s loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks, therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on a FTE basis.

 

The Company’s significant accounting policies (see Note 1 (“Summary Significant Accounting Policies”) to Financial Statements in the Company’s 2015 Form 10-K) are fundamental to understanding the Company’s results of operations and financial condition. There have been no changes to the Company’s significant accounting policies during the first quarter of 2016.

 

The Company reported first quarter 2016 net income of $14.2 million or $0.56 diluted earnings per common share. These results compare to net income of $14.6 million or $0.57 diluted earnings per common share and $14.6 million or $0.57 diluted earnings per common share for both the first and fourth quarters 2015.

 

 

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- 30

 

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,
   2016  2015  2015
   (In thousands, except per share data)
Net interest and loan fee income (FTE)  $36,447   $36,930   $36,734 
Provision for loan losses   -    -    - 
Noninterest income   11,729    12,300    11,305 
Noninterest expense   25,858    26,727    25,504 
Income  before taxes (FTE)   22,318    22,503    22,535 
Income tax provision (FTE)   8,092    7,946    7,957 
Net income  $14,226   $14,557   $14,578 
                
Average diluted common shares   25,468    25,655    25,555 
Diluted earnings per common share  $0.56   $0.57   $0.57 
                
Average total assets  $5,174,804   $5,059,537   $5,168,805 
Net income to average total assets (annualized)   1.11%   1.17%   1.12%
Net income to average common shareholders' equity (annualized)   10.85%   11.44%   11.01%

 

Net income for the first quarter of 2016 was $331 thousand less than the same quarter of 2015, the net result of lower net interest and loan fee income (FTE), lower noninterest income and higher income tax provision (FTE), partially offset by lower noninterest expense. A decrease in net interest and fee income (FTE) was mostly attributed to lower average balances of loans and lower composite yield on investments, partially offset by higher average balances of investments and the effect of one additional accrual day. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income decreased primarily due to reduced levels of service charges on deposit accounts and lower merchant credit card fees. Noninterest expense decreased mostly due to lower salaries and related benefit expense caused by employee attrition, occupancy cost reductions from branch closures, and lower expense for foreclosed properties. The income tax provision (FTE) was higher in the first quarter 2016 due to reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits.

 

Comparing the first quarter of 2016 with the fourth quarter of 2015, net income decreased $352 thousand due to lower net interest and loan fee income (FTE), higher noninterest expense and higher income tax provision (FTE), partially offset by higher noninterest income. The lower net interest and fee income (FTE) was primarily caused by lower average balances of loans and the effect of one less accrual day, partially offset by higher average balances of investments and the effect of the FOMC’s 0.25 percent increase in the federal funds rate on December 16, 2015 on interest-earning assets with floating rates. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income increased primarily due to higher merchant credit card fees. Noninterest expense increased mostly due to seasonally high payroll taxes, higher expenses for information technology upgrades, partially offset by cost savings from branch closures. Income tax provision (FTE) increased because the fourth quarter 2015 provision (FTE) was higher in the first quarter 2016 due to reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits.

 

 

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- 31

 

Net Interest and Loan Fee Income (FTE)

 

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

 

   For the Three Months Ended
   March 31,  December 31,
   2016  2015  2015
   (In thousands)
Interest and loan fee income  $33,647   $33,917   $33,888 
Interest expense   552    659    563 
FTE adjustment   3,352    3,672    3,409 
Net interest and loan fee income (FTE)  $36,447   $36,930   $36,734 
                
Average earning assets  $4,381,423   $4,342,031   $4,411,599 
Net interest margin (FTE) (annualized)   3.34%   3.43%   3.32%

 

Net interest and loan fee income (FTE) decreased during the first quarter 2016 by $483 thousand from the same period in 2015, mainly due to lower average balances of loans (down $183 million) and lower yields on investments (down 1 basis point or “bp”), partially offset by higher average balances of investments (up $223 million), higher yields on loans (up 5 bp) and the effect of one additional accrual day.

 

Comparing the first quarter of 2016 with the fourth quarter of 2015, net interest and loan fee income (FTE) decreased $287 thousand due to lower average balances of loans (down $43 million) and the effect of one less accrual day, partially offset by higher average balances of investments (up $13 million) and higher yields on interest-earning assets (up 2 bp).

 

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 declined due to relatively low interest rates prevailing in the market. The net interest margin (FTE) was 3.34% in the first quarter 2016, 3.43% in the first quarter 2015 and 3.32% in the fourth quarter 2015. The net interest margin (FTE) was affected by declining market interest rates until the FOMC’s 0.25 percent increase in the federal funds rate on December 16, 2015, which increased yields on loans and investment securities with floating rates. The volume of older-dated higher-yielding loans declined due to principal maturities and paydowns. The Company, in anticipation of rising interest rates, has been purchasing floating rate and shorter-duration investment securities with lower yields than longer-duration securities to increase liquidity. The Company’s high levels of liquidity will provide an opportunity to obtain higher yielding assets assuming 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 interest income. Average balances of time deposits declined $96 million from the first quarter 2015 to first quarter 2016 while lower-cost checking and savings deposits grew 6% in the same period. Average balances of checking and saving deposits accounted for 93.7% of average total deposits in the first quarter 2016 compared with 91.4% and 93.5% in the first and fourth quarters 2015.

 

 

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- 32

 

Net Interest Margin (FTE)

 

The following summarizes the components of the Company's net interest margin for the periods indicated (percentages are annualized.):

 

  For the Three Months Ended
  March 31,  December 31,
   2016  2015  2015
Yield on earning assets (FTE)   3.39%   3.49%   3.37%
Rate paid on interest-bearing liabilities   0.09%   0.10%   0.09%
Net interest spread (FTE)   3.30%   3.39%   3.28%
Impact of noninterest-bearing funds   0.04%   0.04%   0.04%
Net interest margin (FTE)   3.34%   3.43%   3.32%

 

During 2015, 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. Management has been avoiding long-dated, low-yielding loans given historically low interest rates. Management has also maintained conservative loan underwriting, terms and conditions. During this period, the investment portfolio has grown. The changing composition of interest-earning assets and low market rates has pressured the net interest margin. The increase in the net interest margin from the fourth quarter 2015 to the first quarter 2016 reflects the FOMC’s 0.25% increase in the federal funds rate on December 16, 2015, which increased yields on loans and investment securities which have floating rates. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost time deposits.

 

 

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- 33

 

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. Yields, rates and interest margins are annualized.

 

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

 

  For the Three Months Ended March 31, 2016
 
Average
Balance
  Interest
Income/
Expense
  Yields/
Rates
  ($ in thousands)
Assets               
Investment securities:               
Taxable  $2,046,547   $9,674    1.89%
Tax-exempt (1)   834,260    8,636    4.14%
Total investments (1)   2,880,807    18,310    2.54%
Loans:               
Taxable   1,429,106    17,726    4.99%
Tax-exempt (1)   71,510    963    5.41%
Total loans (1)   1,500,616    18,689    5.01%
Total Interest-earning assets (1)   4,381,423    36,999    3.39%
Other assets   793,381           
Total assets  $5,174,804           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $1,993,986   $-    -%
Savings and interest-bearing transaction   2,259,681    293    0.05%
Time less than $100,000   160,190    113    0.28%
Time $100,000 or more   123,691    137    0.44%
Total interest-bearing deposits   2,543,562    543    0.09%
Short-term borrowed funds   57,846    9    0.07%
Total interest-bearing liabilities   2,601,408    552    0.09%
Other liabilities   52,233           
Shareholders' equity   527,177           
Total liabilities and shareholders' equity  $5,174,804           
Net interest spread (1) (2)           3.30%
Net interest and fee income and interest margin (1) (3)     $36,447   3.34%

 

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.
(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

 

 

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

 

   For the Three Months Ended March 31, 2015
 
 
 
 
 
 
 
Average
Balance
 
 
 
Interest
Income/
Expense
 
 
 
 
Yields/
Rates
   ($ in thousands)
Assets               
Investment securities:               
Taxable  $1,788,223   $7,554    1.69%
Tax-exempt (1)   870,060    9,422    4.33%
Total investments (1)   2,658,283    16,976    2.55%
Loans:               
Taxable   1,604,842    19,517    4.93%
Tax-exempt (1)   78,906    1,096    5.63%
Total loans (1)   1,683,748    20,613    4.96%
Total interest-earning assets (1)   4,342,031    37,589    3.49%
Other assets   717,506           
Total assets  $5,059,537           
                
Liabilities and shareholders' equity               
Deposits:               
Noninterest-bearing demand  $1,919,820   $-    -%
Savings and interest-bearing transaction   2,103,115    279    0.05%
Time less than $100,000   180,760    166    0.37%
Time $100,000 or more   199,251    197    0.40%
Total interest-bearing deposits   2,483,126    642    0.10%
Short-term borrowed funds   86,354    16    0.08%
Federal Home Loan Bank advances   2,004    1    0.20%
Total interest-bearing liabilities   2,571,484    659    0.10%
Other liabilities   52,147           
Shareholders' equity   516,086           
Total liabilities and shareholders' equity  $5,059,537           
Net interest spread (1) (2)             3.39%
Net interest and fee income and interest margin (1) (3)       $36,930    3.43%

 

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.
(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

 

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

 

   For the Three Months Ended December 31, 2015
 
 
 
 
 
 
 
Average
Balance
 
 
 
Interest
Income/
Expense
 
 
 
 
Yields/
Rates
   ($ in thousands)
Assets               
Investment securities:               
Taxable  $2,035,421   $9,406    1.85%
Tax-exempt (1)   832,587    8,734    4.20%
Total investments (1)   2,868,008    18,140    2.53%
Loans:               
Taxable   1,470,845    18,130    4.89%
Tax-exempt (1)   72,746    1,027    5.60%
Total loans (1)   1,543,591    19,157    4.93%
Total interest-earning assets (1)   4,411,599    37,297    3.37%
Other assets   757,206           
Total assets  $5,168,805           
                
Liabilities and shareholders' equity               
Deposits:               
Noninterest-bearing demand  $2,036,470   $-    -%
Savings and interest-bearing transaction   2,206,732    288    0.05%
Time less than $100,000   164,351    122    0.29%
Time $100,000 or more   128,703    144    0.44%
Total interest-bearing deposits   2,499,786    554    0.09%
Short-term borrowed funds   54,661    9    0.06%
Total interest-bearing liabilities   2,554,447    563    0.09%
Other liabilities   52,611           
Shareholders' equity   525,277           
Total liabilities and shareholders' equity  $5,168,805           
Net interest spread (1) (2)             3.28%
Net interest and fee income and interest margin (1) (3)       $36,734    3.32%

 

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.
(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

 

 

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- 36

 

Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid

 

The following tables set forth a summary of the changes in interest income and interest expense due to changes in average assets and liability balances (volume) and changes in average interest yields/rates for the periods indicated. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.

 

Summary of Changes in Interest Income and Expense

 

 

   For the Three Months Ended March 31, 2016
   Compared with
   For the Three Months Ended March 31, 2015
   Volume  Yield/Rate  Total
   (In thousands)
Increase (decrease) in interest and loan fee income:               
Investment securities:               
Taxable  $1,091   $1,029   $2,120 
Tax-exempt (1)   (388)   (398)   (786)
Total investments (1)   703    631    1,334 
Loans:               
Taxable   (2,008)   217    (1,791)
Tax-exempt (1)   (97)   (36)   (133)
Total loans (1)   (2,105)   181    (1,924)
Total (decrease) increase in interest and loan fee income (1)   (1,402)   812    (590)
Increase (decrease) in interest expense:               
Deposits:               
Savings and interest-bearing transaction   23    (9)   14 
Time less than $100,000   (19)   (34)   (53)
Time $100,000 or more   (74)   14    (60)
Total interest-bearing deposits   (70)   (29)   (99)
Short-term borrowed funds   (5)   (2)   (7)
Federal Home Loan Bank advances   (1)   -    (1)
Total decrease in interest expense   (76)   (31)   (107)
(Decrease) increase in net interest and loan fee income (1)  $(1,326)  $843   $(483)

 

(1) Amounts calculated on an FTE basis using the current statutory federal tax rate.

 

 

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- 37

 

Summary of Changes in Interest Income and Expense

 

   For the Three Months Ended March 31, 2016
   Compared with
   For the Three Months Ended December 31, 2015
   Volume  Yield/Rate  Total
   (In thousands)
Increase (decrease) in interest and loan fee income:               
Investment securities:               
Taxable  $51   $217   $268 
Tax-exempt (1)   18    (116)   (98)
Total investments (1)   69    101    170 
Loans:               
Taxable   (655)   251    (404)
Tax-exempt (1)   (22)   (42)   (64)
Total loans (1)   (677)   209    (468)
Total (decrease) increase in interest and loan fee income (1)   (608)   310    (298)
Increase (decrease) in interest expense:               
Deposits:               
Savings and interest-bearing transaction   4    1    5 
Time less than $100,000   (4)   (5)   (9)
Time $100,000 or more   (7)   0