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EX-32.2 - EXHIBIT 32.2 - WESTAMERICA BANCORPORATIONexh_322.htm
EX-32.1 - EXHIBIT 32.1 - WESTAMERICA BANCORPORATIONexh_321.htm
EX-31.2 - EXHIBIT 31.2 - WESTAMERICA BANCORPORATIONexh_312.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 June 30, 2017

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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Smaller reporting company ☐ Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 July 27, 2017
     
Common Stock,
No Par Value
  26,305,907

 

 

 

 

TABLE OF CONTENTS

 

 

   Page
Forward Looking Statements 3
PART I - FINANCIAL INFORMATION  
Item 1 Financial Statements 4
  Notes to Unaudited Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3 Quantitative and Qualitative Disclosures about Market Risk 49
Item 4 Controls and Procedures 50
PART II - OTHER INFORMATION  
Item 1 Legal Proceedings 50
Item 1A Risk Factors 50
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 50
Item 3 Defaults upon Senior Securities 51
Item 4 Mine Safety Disclosures 51
Item 5 Other Information 51
Item 6 Exhibits 51
Signatures 52
Exhibit Index 53
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 54
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 55
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 56
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 57

 

 -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, future credit quality and performance, the appropriateness of the allowance for loan losses, loan growth or reduction, mitigation of risk in the Company’s loan and investment securities portfolios, 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", “estimates”, "intends", "targeted", "projected", “forecast”, "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 or security 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 the Company’s assets and 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; (13) changes in the securities markets and (14) the outcome of contingencies, such as legal proceedings. However, the reader should not consider the above-mentioned factors to be a complete set of all potential risks or uncertainties.

 

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this Report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2016, 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.

 

 -3- 

 

PART I - FINANCIAL INFORMATION

Item 1    Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   At June 30,
2017
  At December 31,
2016
   (In thousands)
Assets:      
Cash and due from banks  $529,362   $462,271 
Investment securities available for sale   1,976,156    1,890,758 
Investment securities held to maturity, with fair values of: $1,264,759 at June 30, 2017 and $1,340,741 at December 31, 2016   1,261,321    1,346,312 
Loans   1,318,341    1,352,711 
Allowance for loan losses   (24,103)   (25,954)
Loans, net of allowance for loan losses   1,294,238    1,326,757 
Other real estate owned   1,645    3,095 
Premises and equipment, net   35,564    36,566 
Identifiable intangibles, net   5,365    6,927 
Goodwill   121,673    121,673 
Other assets   168,026    171,724 
Total Assets  $5,393,350   $5,366,083 
           
Liabilities:          
Noninterest-bearing deposits  $2,079,608   $2,089,443 
Interest-bearing deposits   2,602,962    2,615,298 
Total deposits   4,682,570    4,704,741 
Short-term borrowed funds   75,769    59,078 
Other liabilities   39,417    40,897 
Total Liabilities   4,797,756    4,804,716 
           
Contingencies (Note 10)          
           
Shareholders' Equity:          
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,304 at June 30, 2017 and 25,907 at December 31, 2016   424,479    404,606 
Deferred compensation   1,533    1,533 
Accumulated other comprehensive loss   (5,864)   (10,074)
Retained earnings   175,446    165,302 
Total Shareholders' Equity   595,594    561,367 
Total Liabilities and Shareholders' Equity  $5,393,350   $5,366,083 

 

See accompanying notes to unaudited consolidated financial statements.

 

 -4- 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   For the Three Months  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
   (In thousands, except per share data)
Interest and Loan Fee Income:                    
Loans  $15,468   $17,583   $31,248   $35,936 
Investment securities available for sale   10,709    8,091    20,958    16,058 
Investment securities held to maturity   6,986    8,053    14,281    15,380 
Total Interest and Loan Fee Income   33,163    33,727    66,487    67,374 
Interest Expense:                    
Deposits   465    531    934    1,074 
Short-term borrowed funds   11    10    22    19 
Total Interest Expense   476    541    956    1,093 
Net Interest and Loan Fee Income   32,687    33,186    65,531    66,281 
Reversal of Provision for Loan Losses   (1,900)   -    (1,900)   - 
Net Interest and Loan Fee Income After Reversal of Provision for Loan Losses   34,587    33,186    67,431    66,281 
Noninterest Income:                    
Service charges on deposit accounts   4,945    5,239    9,868    10,487 
Merchant processing services   2,052    1,638    3,927    3,167 
Debit card fees   1,586    1,621    3,067    3,137 
Trust fees   716    657    1,418    1,318 
Other service fees   662    650    1,312    1,279 
ATM processing fees   654    603    1,229    1,261 
Financial services commissions   142    137    337    293 
Other noninterest income   1,366    1,157    2,622    2,489 
Total Noninterest Income   12,123    11,702    23,780    23,431 
Noninterest Expense:                    
Salaries and related benefits   12,981    12,887    26,051    26,004 
Occupancy   3,509    3,400    7,142    6,798 
Outsourced data processing services   2,188    2,130    4,327    4,260 
Furniture and equipment   1,267    1,187    2,521    2,400 
Amortization of identifiable intangibles   762    870    1,562    1,775 
Courier service   438    462    859    1,007 
Professional fees   410    758    1,021    1,490 
Other real estate owned   (126)   (392)   (166)   (281)
Other noninterest expense   2,967    3,927    5,694    7,634 
Total Noninterest Expense   24,396    25,229    49,011    51,087 
Income Before Income Taxes   22,314    19,659    42,200    38,625 
Provision for income taxes   6,515    5,113    11,352    9,853 
Net Income  $15,799   $14,546   $30,848   $28,772 
                     
Average Common Shares Outstanding   26,299    25,586    26,235    25,516 
Average Diluted Common Shares Outstanding   26,402    25,630    26,366    25,549 
Per Common Share Data:                    
Basic earnings  $0.60   $0.57   $1.18   $1.13 
Diluted earnings   0.60    0.57    1.17    1.13 
Dividends paid   0.39    0.39    0.78    0.78 

 

See accompanying notes to unaudited consolidated financial statements.

 

 -5- 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

   For the Three Months  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
   (In thousands)
Net income  $15,799   $14,546   $30,848   $28,772 
Other comprehensive income:                    
Changes in unrealized gains and losses on securities available for sale   6,160    9,070    7,234    19,311 
Deferred tax expense   (2,590)   (3,813)   (3,042)   (8,119)
Changes in unrealized gains and losses on securities available for sale, net of tax   3,570    5,257    4,192    11,192 
Post-retirement benefit transition obligation amortization   15    15    30    30 
Deferred tax expense   (6)   (6)   (12)   (12)
Post-retirement benefit transition obligation amortization, net of tax   9    9    18    18 
Total other comprehensive income   3,579    5,266    4,210    11,210 
Total comprehensive income  $19,378   $19,812   $35,058   $39,982 

 

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 (loss)
  Retained
Earnings
  Total
   (In thousands)
                   
Balance, December 31, 2015   25,528   $378,858   $2,578   $675   $150,094   $532,205 
Net income for the period                       28,772    28,772 
Other comprehensive income                  11,210         11,210 
Exercise of stock options   225    10,060                   10,060 
Tax benefit increase upon exercise and expiration of stock options        211                   211 
Restricted stock activity   15    1,798    (1,045)             753 
Stock based compensation        752                   752 
Stock awarded to employees   1    60                   60 
Retirement of common stock   (137)   (2,059)             (3,721)   (5,780)
Dividends                       (19,916)   (19,916)
Balance, June 30, 2016   25,632   $389,680   $1,533   $11,885   $155,229   $558,327 
                               
Balance, December 31, 2016   25,907   $404,606   $1,533   $(10,074)  $165,302   $561,367 
Net income for the period                       30,848    30,848 
Other comprehensive income                  4,210         4,210 
Exercise of stock options   389    18,290                   18,290 
Restricted stock activity   13    707                   707 
Stock based compensation        912                   912 
Stock awarded to employees   1    54                   54 
Retirement of common stock   (6)   (90)             (224)   (314)
Dividends                       (20,480)   (20,480)
Balance, June 30, 2017   26,304   $424,479   $1,533   $(5,864)  $175,446   $595,594 

 

See accompanying notes to unaudited consolidated financial statements.

 

 -7- 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Six Months
Ended June 30,
   2017  2016
   (In thousands)
Operating Activities:          
Net income  $30,848   $28,772 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   12,068    8,618 
Reversal of provision for loan losses   (1,900)   - 
Net amortization of deferred loan cost (fees)   21    (157)
(Increase) decrease in interest income receivable   (415)   171 
Life insurance premiums paid   (126)   (126)
Increase (decrease) in income taxes payable   91    (1,469)
Decrease in net deferred tax asset   262    2,066 
Tax benefit increase upon exercise and expiration of stock options   -    (211)
Decrease (increase) in other assets   1,155    (4,211)
Stock option compensation expense   912    752 
Increase in interest expense payable   33    46 
(Decrease) increase in other liabilities   (2,553)   1,849 
Net writedown of premises and equipment   60    7 
Net gain on sale of foreclosed assets   (72)   (1,017)
Writedown of foreclosed assets   -    758 
Net Cash Provided by Operating Activities   40,384    35,848 
           
Investing Activities:          
Net repayments of loans   35,852    104,975 
Net (payments) receipts under FDIC(1) indemnification agreements   (63)   98 
Purchases of investment securities available for sale   (253,658)   (260,587)
Proceeds from sale/maturity/calls of securities available for sale   171,632    344,393 
Purchases of investment securities held to maturity   -    (246,956)
Proceeds from maturity/calls of securities held to maturity   80,433    82,059 
Purchases of premises and equipment   (1,050)   (991)
Net change in FRB(2) stock   24    - 
Proceeds from sale of foreclosed assets   1,521    5,848 
Net Cash Provided by Investing Activities   34,691    28,839 
           
Financing Activities:          
Net change in deposits   (22,171)   (55,345)
Net change in short-term borrowings   16,691    14,824 
Exercise of stock options   18,290    10,060 
Tax benefit increase upon exercise and expiration of stock options   -    211 
Retirement of common stock   (314)   (5,780)
Common stock dividends paid   (20,480)   (19,916)
Net Cash Used in Financing Activities   (7,984)   (55,946)
Net Change In Cash and Due from Banks   67,091    8,741 
Cash and Due from Banks at Beginning of Period   462,271    433,044 
Cash and Due from Banks at End of Period  $529,362   $441,785 
           
Supplemental Cash Flow Disclosures:          
Supplemental disclosure of non cash activities:          
Loan collateral transferred to other real estate owned  $-   $488 
Securities purchases pending settlement   649    26,488 
Supplemental disclosure of cash flow activities:          
Interest paid for the period   955    1,046 
Income tax payments for the period   10,998    9,922 

 

See accompanying notes to unaudited consolidated financial statements.

 

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

(2) Federal Reserve Bank ("FRB")

 

 -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 and six months ended June 30, 2017 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, 2016.

 

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, 2016. 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 is included in the “Provision for Loan Losses,” “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” 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 Adopted Accounting Standards

 

FASB Accounting Standards Update (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 adopted the ASU provisions effective January 1, 2017, which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or expire. During the first six months of 2017, 389 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1.6 million. The first six months of 2017 income tax provision was $666 thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09. The Company elected to account for forfeitures as they occur.

 

Recently Issued Accounting Standards

 

FASB ASU 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers, was issued May 2014. The ASU specifies a standardized approach for revenue recognition across industries and transactions. The scope of the ASU does not include revenue streams covered by other ASU topics; thus, Topic 606 does not apply to revenue related to financial instruments, guarantees and leases, such as the Company’s net interest income.

 

 -9- 

 

Approximately 73% of our revenue, including all of our net interest income and a portion of our noninterest income, is out of scope of the guidance. The contracts that are in scope of the guidance are primarily related to service charges and fees on deposit accounts, merchant processing fees, trust fees and other service charges, commissions and fees. We have created an implementation team that is analyzing the individual contracts in scope to determine if our current accounting will change. This review is expected be completed in the fourth quarter of 2017.

 

The Company will be required to adopt the ASU on January 1, 2018. The Company intends to adopt the accounting standard during the first quarter of 2018, as required. The Company has not yet selected a transition method. The Company’s preliminary analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the Company’s consolidated financial statements as substantially all of the Company’s revenues are excluded from the scope of the new standard.

 

FASB 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 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. As of December 31, 2016, the Company leased 61 of its operating facilities; the remaining minimum lease payments were $20.8 million. The Company does not expect a material change in noninterest expenses upon adoption of the new standard.

 

FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changes estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with the current expected credit loss (CECL) model, which will accelerate recognition of credit losses. Additionally, credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses under the new standard. The Company will also be required to provide additional disclosures related to the financial assets within the scope of the new standard.

 

The Company will be required to adopt the ASU provisions on January 1, 2020. Management is evaluating the impact that the ASU will have on the Company’s consolidated financial statements. The ultimate adjustment to the allowance for loan losses will be accomplished through an offsetting after-tax adjustment to shareholders’ equity. Management expects the Company and the Bank to meet all regulatory capital adequacy requirements to which they are subject following adoption of the new standard. Economic conditions and the composition of the Company’s loan portfolio at the time of adoption will influence the extent of the adopting accounting adjustment.

 

FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The ASU will shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

 

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

 

 -10- 

 

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 June 30, 2017
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. Government sponsored entities  $122,274   $18   $(1,999)  $120,293 
Agency residential mortgage-backed securities (MBS)   719,638    841    (16,997)   703,482 
Non-agency residential MBS   183    -    -    183 
Agency commercial MBS   1,927    -    (13)   1,914 
Non-agency commercial MBS   1,869    -    (14)   1,855 
Obligations of states and political subdivisions   177,603    5,387    (2,103)   180,887 
FHLMC(1) and FNMA(2) stock   749    6,576    -    7,325 
Corporate securities   959,997    2,600    (4,532)   958,065 
Other securities   2,003    337    (188)   2,152 
Total  $1,986,243   $15,759   $(25,846)  $1,976,156 

 

(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 June 30, 2017
   Amortized
Cost
  Gross
Unrecognized
Gains
  Gross
Unrecognized
Losses
  Fair
Value
   (In thousands)
Agency residential MBS  $605,983   $738   $(7,287)  $599,434 
Non-agency residential MBS   4,911    82    -    4,993 
Agency commercial MBS   9,187    3    (103)   9,087 
Obligations of states and political subdivisions   641,240    11,188    (1,183)   651,245 
Total  $1,261,321   $12,011   $(8,573)  $1,264,759 

 

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 -11- 

 

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, 2016
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. Government sponsored entities  $141,599   $35   $(2,974)  $138,660 
Agency residential MBS   711,623    921    (21,045)   691,499 
Non-agency residential MBS   272    -    (1)   271 
Non-agency commercial MBS   2,041    -    (16)   2,025 
Obligations of states and political subdivisions   182,230    5,107    (3,926)   183,411 
Asset-backed securities   696    -    (1)   695 
FHLMC(1) and FNMA(2) stock   749    10,120    -    10,869 
Corporate securities   866,835    1,690    (7,668)   860,857 
Other securities   2,034    621    (184)   2,471 
Total  $1,908,079   $18,494   $(35,815)  $1,890,758 

 

(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, 2016
   Amortized
Cost
  Gross
Unrecognized
Gains
  Gross
Unrecognized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. Government sponsored entities  $581   $1   $-   $582 
Agency residential MBS   668,235    1,122    (8,602)   660,755 
Non-agency residential MBS   5,370    76    -    5,446 
Agency commercial MBS   9,332    11    (143)   9,200 
Obligations of states and political subdivisions   662,794    6,031    (4,067)   664,758 
Total  $1,346,312   $7,241   $(12,812)  $1,340,741 

 

The amortized cost and fair value of investment securities by contractual maturity are shown in the following table s at the dates indicated:

 

   At June 30, 2017
   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  $212,847   $213,262   $27,034   $27,849 
Over 1 to 5 years   760,615    758,384    287,607    290,554 
Over 5 to 10 years   238,957    241,929    304,849    310,660 
Over 10 years   47,455    45,670    21,750    22,182 
Subtotal   1,259,874    1,259,245    641,240    651,245 
MBS   723,617    707,434    620,081    613,514 
Other securities   2,752    9,477    -    - 
Total  $1,986,243   $1,976,156   $1,261,321   $1,264,759 

 

 -12- 

 

   At December 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  $154,693   $154,835   $14,961   $15,639 
Over 1 to 5 years   750,834    745,219    292,024    292,062 
Over 5 to 10 years   238,077    239,153    318,580    319,587 
Over 10 years   47,756    44,416    37,810    38,052 
Subtotal   1,191,360    1,183,623    663,375    665,340 
MBS   713,936    693,795    682,937    675,401 
Other securities   2,783    13,340    -    - 
Total  $1,908,079   $1,890,758   $1,346,312   $1,340,741 

 

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 June 30, 2017 and December 31, 2016, 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 June 30, 2017
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment     Unrealized  Investment     Unrealized  Investment     Unrealized
   Positions  Fair Value  Losses  Positions  Fair Value  Losses  Positions  Fair Value  Losses
   ($ in thousands)
Securities of U.S. Government sponsored entities   8   $118,210   $(1,999)   -   $-   $-    8   $118,210   $(1,999)
Agency residential MBS   23    468,590    (12,775)   29    112,860    (4,222)   52    581,450    (16,997)
Agency commercial MBS   1    1,914    (13)   -    -    -    1    1,914    (13)
Non-agency commercial MBS   2    1,126    (7)   1    729    (7)   3    1,855    (14)
Obligations of states and political subdivisions   53    57,306    (2,003)   4    3,633    (100)   57    60,939    (2,103)
Corporate securities   57    425,374    (3,717)   23    81,265    (815)   80    506,639    (4,532)
Other securities   -    -    -    1    1,812    (188)   1    1,812    (188)
Total   144   $1,072,520   $(20,514)   58   $200,299   $(5,332)   202   $1,272,819   $(25,846)

 

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

 

   Investment Securities Held to Maturity
At June 30, 2017
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment     Unrecognized  Investment     Unrecognized  Investment     Unrecognized
   Positions  Fair Value  Losses  Positions  Fair Value  Losses  Positions  Fair Value  Losses
   ($ in thousands)
Agency residential MBS   64   $497,924   $(6,995)   6   $12,895   $(292)   70   $510,819   $(7,287)
Agency commercial MBS   -    -    -    1    7,137    (103)   1    7,137    (103)
Obligations of states and political subdivisions   85    76,591    (783)   13    12,815    (400)   98    89,406    (1,183)
Total   149   $574,515   $(7,778)   20   $32,847   $(795)   169   $607,362   $(8,573)

 

 -13- 

 

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 rating 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 June 30, 2017.

 

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 June 30, 2017, $795,007  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2016, $768,845  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, 2016
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment     Unrealized  Investment     Unrealized  Investment     Unrealized
   Positions  Fair Value  Losses  Positions  Fair Value  Losses  Positions  Fair Value  Losses
   ($ in thousands)
Securities of U.S. Government sponsored entities   8   $117,227   $(2,974)   -   $-   $-    8   $117,227   $(2,974)
Agency residential MBS   21    524,269    (16,494)   28    122,901    (4,551)   49    647,170    (21,045)
Non-agency residential MBS   2    246    (1)   -    -    -    2    246    (1)
Non-agency commercial MBS   2    1,253    (9)   1    772    (7)   3    2,025    (16)
Obligations of states and political subdivisions   43    57,989    (3,905)   3    1,117    (21)   46    59,106    (3,926)
Asset-backed securities   -    -    -    1    695    (1)   1    695    (1)
Corporate securities   53    385,175    (6,551)   27    96,145    (1,117)   80    481,320    (7,668)
Other securities   -    -    -    1    1,816    (184)   1    1,816    (184)
Total   129   $1,086,159   $(29,934)   61   $223,446   $(5,881)   190   $1,309,605   $(35,815)

 

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

 

   Investment Securities Held to Maturity
At December 31, 2016
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment     Unrecognized  Investment     Unrecognized  Investment     Unrecognized
   Positions  Fair Value  Losses  Positions  Fair Value  Losses  Positions  Fair Value  Losses
   ($ in thousands)
Agency residential MBS   66   $569,876   $(8,285)   3   $10,480   $(317)   69   $580,356   $(8,602)
Agency commercial MBS   -    -    -    1    7,214    (143)   1    7,214    (143)
Obligations of states and political subdivisions   295    272,496    (3,710)   12    13,126    (357)   307    285,622    (4,067)
Total   361   $842,372   $(11,995)   16   $30,820   $(817)   377   $873,192   $(12,812)

 

 -14- 

 

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  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
   (In thousands)
             
Taxable  $12,481   $10,558   $24,627   $20,231 
Tax-exempt from regular federal income tax   5,214    5,586    10,612    11,207 
Total interest income from investment securities  $17,695   $16,144   $35,239   $31,438 

 

Note 4: Loans and Allowance for Loan Losses

 

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

 

   At June 30, 2017  At December 31, 2016
   (In thousands)
Commercial  $344,702   $354,697 
Commercial Real Estate   564,372    542,171 
Construction   2,699    2,555 
Residential Real Estate   72,375    87,724 
Consumer Installment & Other   334,193    365,564 
Total  $1,318,341   $1,352,711 

 

Total loans outstanding reported above include loans purchased from the FDIC of $104,481  thousand and $121,210 thousand at June 30, 2017 and December 31, 2016, respectively. Loans purchased from the FDIC were separately reported in prior periods and have been reclassified into their respective categories in the current presentation.

 

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

 

   For the
Six Months Ended
June 30, 2017
  For the
Year Ended
December 31, 2016
Accretable yield:  (In thousands)
Balance at the beginning of the period  $1,237   $1,259 
Reclassification from nonaccretable difference   1,209    3,912 
Accretion   (1,462)   (3,934)
Balance at the end of the period  $984   $1,237 
           
Accretion  $(1,462)  $(3,934)
Change in FDIC indemnification   191    1,053 
(Increase) in interest income  $(1,271)  $(2,881)

 

The following summarizes activity in the allowance for loan losses:

 

   Allowance for Loan Losses
For the Three Months Ended June 30, 2017
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $8,593   $3,522   $112   $1,214   $6,984   $4,494   $24,919 
Additions:                                   
(Reversal) provision   (38)   (55)   (1,851)   (109)   736    (583)   (1,900)
Deductions:                                   
Chargeoffs   (726)   -    -    -    (1,158)   -    (1,884)
Recoveries   338    78    1,899    -    653    -    2,968 
Net loan (losses) recoveries   (388)   78    1,899    -    (505)   -    1,084 
Total allowance for loan losses  $8,167   $3,545   $160   $1,105   $7,215   $3,911   $24,103 

 

 -15- 

 

   Allowance for Loan Losses
For the Six Months Ended June 30, 2017
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $8,327   $3,330   $152   $1,330   $7,980   $4,835   $25,954 
Additions:                                   
Provision (reversal)   171    127    (1,891)   (225)   842    (924)   (1,900)
Deductions:                                   
Chargeoffs   (829)   -    -    -    (2,897)   -    (3,726)
Recoveries   498    88    1,899    -    1,290    -    3,775 
Net loan (losses) recoveries   (331)   88    1,899    -    (1,607)   -    49 
Total allowance for loan losses  $8,167   $3,545   $160   $1,105   $7,215   $3,911   $24,103 

 

   Allowance for Loan Losses
For the Three Months Ended June 30, 2016
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $9,847   $4,237   $187   $1,707   $7,576   $5,933   $29,487 
Additions:                                   
Provision (reversal)   777    (340)   (20)   (71)   445    (791)   - 
Deductions:                                   
Chargeoffs   (764)   -    -    -    (715)   -    (1,479)
Recoveries   542    15    -    -    345    -    902 
Net loan (losses) recoveries   (222)   15    -    -    (370)   -    (577)
Total allowance for loan losses  $10,402   $3,912   $167   $1,636   $7,651   $5,142   $28,910 

 

   Allowance for Loan Losses
For the Six Months Ended June 30, 2016
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $9,559   $4,212   $235   $1,801   $8,001   $5,963   $29,771 
Additions:                                   
Provision (reversal)   815    (330)   (68)   (165)   569    (821)   - 
Deductions:                                   
Chargeoffs   (1,935)   -    -    -    (1,720)   -    (3,655)
Recoveries   1,963    30    -    -    801    -    2,794 
Net loan recoveries (losses)   28    30    -    -    (919)   -    (861)
Total allowance for loan losses  $10,402   $3,912   $167   $1,636   $7,651   $5,142   $28,910 

 

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

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At June 30, 2017
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Individually evaluated for impairment  $4,908   $-   $-   $-   $-   $-   $4,908 
Collectively evaluated for impairment   3,259    3,545    160    1,105    7,215    3,911    19,195 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    - 
Total  $8,167   $3,545   $160   $1,105   $7,215   $3,911   $24,103 
Carrying value of loans:                                   
Individually evaluated for impairment  $10,829   $14,009   $-   $214   $-   $-   $25,052 
Collectively evaluated for impairment   333,846    549,820    2,699    72,161    333,877    -    1,292,403 
Purchased loans with evidence of credit deterioration   27    543    -    -    316    -    886 
Total  $344,702   $564,372   $2,699   $72,375   $334,193   $-   $1,318,341 

 

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 -16- 

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 2016
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Individually evaluated for impairment  $5,048   $-   $-   $-   $-   $-   $5,048 
Collectively evaluated for impairment   3,279    3,330    152    1,330    7,980    4,835    20,906 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    - 
Total  $8,327   $3,330   $152   $1,330   $7,980   $4,835   $25,954 
Carrying value of loans:                                   
Individually evaluated for impairment  $11,174   $12,706   $-   $835   $-   $-   $24,715 
Collectively evaluated for impairment   343,494    528,957    2,555    86,889    365,236    -    1,327,131 
Purchased loans with evidence of credit deterioration   29    508    -    -    328    -    865 
Total  $354,697   $542,171   $2,555   $87,724   $365,564   $-   $1,352,711 

 

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.

 

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

 

   Credit Risk Profile by Internally Assigned Grade
At June 30, 2017
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Total
   (In thousands)
Grade:                  
Pass  $331,343   $540,343   $2,699   $69,379   $331,571   $1,275,335 
Substandard   13,359    24,029    -    2,996    2,399    42,783 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    223    223 
Total  $344,702   $564,372   $2,699   $72,375   $334,193   $1,318,341 

 

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

 

   Credit Risk Profile by Internally Assigned Grade
At December 31, 2016
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Total
   (In thousands)
Grade:                  
Pass  $340,973   $515,045   $2,555   $84,384   $362,597   $1,305,554 
Substandard   13,724    25,830    -    3,340    2,477    45,371 
Doubtful   -    1,296    -    -    10    1,306 
Loss   -    -    -    -    480    480 
Total  $354,697   $542,171   $2,555   $87,724   $365,564   $1,352,711 

 

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

 

 -17- 

 

The following tables summarize loans by delinquency and nonaccrual status:

 

   Summary of Loans by Delinquency and Nonaccrual Status
At June 30, 2017
   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  $342,091   $1,987   $221   $-   $403   $344,702 
Commercial real estate   557,707    861    12    -    5,792    564,372 
Construction   2,699    -    -    -    -    2,699 
Residential real estate   71,553    209    308    -    305    72,375 
Consumer installment and other   330,604    2,597    611    186    195    334,193 
Total  $1,304,654   $5,654   $1,152   $186   $6,695   $1,318,341 

 

   Summary of Loans by Delinquency and Nonaccrual Status
At December 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  $353,497   $966   $40   $-   $194   $354,697 
Commercial real estate   533,377    1,460    445    -    6,889    542,171 
Construction   2,329    226    -    -    -    2,555 
Residential real estate   86,098    528    37    -    1,061    87,724 
Consumer installment and other   360,549    3,288    989    497    241    365,564 
Total  $1,335,850   $6,468   $1,511   $497   $8,385   $1,352,711 

 

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2017 and December 31, 2016.

 

 

[The remainder of this page intentionally left blank]

 

 -18- 

 

The following summarizes impaired loans:

 

   Impaired Loans
At June 30, 2017
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
Impaired loans with no related allowance recorded:               
Commercial  $1,356   $1,422   $- 
Commercial real estate   14,827    16,967    - 
Construction   -    -    - 
Residential real estate   519    549    - 
Consumer installment and other   511    618    - 
                
Impaired loans with an allowance recorded:               
Commercial   9,845    9,845    4,908 
Commercial real estate   -    -    - 
Construction   -    -    - 
Residential real estate   -    -    - 
Consumer installment and other   -    -    - 
                
Total:               
Commercial  $11,201   $11,267   $4,908 
Commercial real estate   14,827    16,967    - 
Construction   -    -    - 
Residential real estate   519    549    - 
Consumer installment and other   511    618    - 

 

   Impaired Loans
At December 31, 2016
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
Impaired loans with no related allowance recorded:               
Commercial  $1,234   $1,303   $- 
Commercial real estate   13,233    15,610    - 
Construction   -    -    - 
Residential real estate   1,279    1,309    - 
Consumer installment and other   569    675    - 
                
Impaired loans with an allowance recorded:               
Commercial   10,163    10,172    5,048 
Commercial real estate   -    -    - 
Construction   -    -    - 
Residential real estate   -    -    - 
Consumer installment and other   -    -    - 
                
Total:               
Commercial  $11,397   $11,475   $5,048 
Commercial real estate   13,233    15,610    - 
Construction   -    -    - 
Residential real estate   1,279    1,309    - 
Consumer installment and other   569    675    - 

 

 -19- 

 

Impaired loans include troubled debt restructured loans. Impaired loans at June 30, 2017, included $12,419 thousand of restructured loans, $5,106 thousand of which were on nonaccrual status. Impaired loans at December 31, 2016, included $12,381 thousand of restructured loans, $5,302 thousand of which were on nonaccrual status.

 

   Impaired Loans
   For the Three Months Ended June 30,  For the Six Months Ended June 30,
   2017  2016  2017  2016
   Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
   (In thousands)
Commercial  $11,194   $118   $14,094   $135   $11,243   $236   $13,752   $268 
Commercial real estate   15,297    224    18,639    202    14,898    461    19,744    361 
Construction   -    -    136    -    -    -    203    - 
Residential real estate   368    5    740    5    558    9    775    9 
Consumer installment and other   514    7    412    6    529    14    379    12 
Total  $27,373   $354   $34,021   $348   $27,228   $720   $34,853   $650 

 

The following table provides information on troubled debt restructurings:

 

   Troubled Debt Restructurings
At June 30, 2017
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   ($ in thousands)
Commercial   7   $2,418   $1,195   $49 
Commercial real estate   11    11,847    11,010    - 
Residential real estate   1    241    214    - 
Total   19   $14,506   $12,419   $49 

 

   Troubled Debt Restructurings
At December 31, 2016
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   ($ in thousands)
Commercial   7   $2,719   $1,489   $113 
Commercial real estate   10    11,257    10,673    - 
Residential real estate   1    241    219    - 
Total   18   $14,217   $12,381   $113 

 

During the three and six months ended June 30, 2017, the Company modified one loan with a carrying value of $407 thousand and three loans with a carrying value of $680 thousand, respectively, that were considered troubled debt restructurings. The three concessions granted in the first six months of 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. During the three and six months ended June 30, 2016, the Company modified one loan with a carrying value of $242 thousand and four loans with a total carrying value of $4,843 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the four restructurings completed in the first six months of 2016 consisted of three 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. There were no chargeoffs related to troubled debt restructurings made during the three and six months ended June 30, 2017 and June 30, 2016. During the three and six months ended June 30, 2017 and 2016, no troubled debt restructured loans defaulted within 12 months of the modification date. 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 June 30, 2017 and December 31, 2016.

 

There were no loans held for sale at June 30, 2017 and December 31, 2016.

 

 -20- 

 

At June 30, 2017 and December 31, 2016, the Company held total other real estate owned (OREO) of $1,645 thousand net of reserve of $1,685 thousand and $3,095 thousand net of reserve of $1,816 thousand, respectively, of which $-0-  thousand was foreclosed residential real estate properties or covered OREO at both dates. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $195  thousand at June 30, 2017 and $-0- thousand at December 31, 2016.

 

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 June 30, 2017, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At June 30, 2017, Westamerica Bank had 36 lending relationships each 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 $56,654 thousand and $57,721 thousand at June 30, 2017 and December 31, 2016, 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 June 30, 2017, Westamerica Bank held corporate bonds in 61 issuing entities that exceeded $5 million for each issuer.

 

Note 6: Other Assets

 

Other assets consisted of the following:

 

   At June 30, 2017  At December 31, 2016
   (In thousands)
Cost method equity investments:          
Federal Reserve Bank stock (1)  $14,045   $14,069 
Other investments   159    201 
Total cost method equity investments   14,204    14,270 
Life insurance cash surrender value   52,818    51,535 
Net deferred tax asset   52,101    55,417 
Limited partnership investments   11,691    12,591 
Interest receivable   21,904    21,489 
Prepaid assets   4,065    4,825 
Other assets   11,243    11,597 
Total other assets  $168,026   $171,724 

 

(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 June 30, 2017, this investment totaled $11,691 thousand and $2,299  thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2016, this investment totaled $12,591 thousand and $2,299  thousand of this amount represented outstanding equity capital commitments. At June 30, 2017, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $722 thousand in 2020, $131 thousand in 2023, $90 thousand in 2024 and $1,356 thousand in 2025 or thereafter.

 

 -21- 

 

The amounts recognized in net income for these investments include:

 

   For the Three Months Ended  For the Six Months Ended
   June 30,
   2017  2016  2017  2016
   (In thousands)
Investment loss included in pre-tax income  $450   $675   $900   $1,350 
Tax credits recognized in provision for income taxes   462    511    925    1,109 

 

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 and six months ended June 30, 2017 and year ended December 31, 2016. 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 and six months ended June 30, 2017 and year ended December 31, 2016, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

   At June 30, 2017  At December 31, 2016
   (In thousands)
Goodwill  $121,673   $121,673 

 

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

 

   At June 30, 2017  At December 31, 2016
   Gross
Carrying
Amount
  Accumulated
Amortization
  Gross
Carrying
Amount
  Accumulated
Amortization
   (In thousands)
Core Deposit Intangibles  $56,808   $(51,550)  $56,808   $(50,074)
Merchant Draft Processing Intangible   10,300    (10,193)   10,300    (10,107)
Total Identifiable Intangible Assets  $67,108   $(61,743)  $67,108   $(60,181)

 

As of June 30, 2017, the current period and estimated future amortization expense for identifiable intangible assets was:

 

   Core
Deposit
Intangibles
  Merchant
Draft
Processing
Intangible
  Total
   (In thousands)
For the Six Months ended June 30, 2017 (actual)  $1,476   $86   $1,562 
Estimate for the remainder of year ending December 31, 2017   1,437    78    1,515 
Estimate for year ending December 31, 2018   1,892    29    1,921 
2019   538    -    538 
2020   287    -    287 
2021   269    -    269 
2022   252    -    252 

 

 -22- 

 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   Deposits
   At June 30, 2017  At December 31, 2016
   (In thousands)
Noninterest-bearing  $2,079,608   $2,089,443 
Interest-bearing:          
Transaction   885,516    865,701 
Savings   1,470,978    1,493,427 
Time deposits less than $100 thousand   127,401    133,712 
Time deposits $100 thousand through $250 thousand   80,940    84,925 
Time deposits more than $250 thousand   38,127    37,533 
Total deposits  $4,682,570   $4,704,741 

 

Demand deposit overdrafts of $959 thousand and $2,679  thousand were included as loan balances at June 30, 2017 and December 31, 2016, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $105 thousand and $211 thousand for the three and six months ended June 30, 2017, respectively and $135 thousand and $271 thousand for the three and six months ended June 30, 2016, respectively.

 

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

 

   Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
   Remaining Contractual Maturity of the Agreements
Overnight and Continuous
   At June 30, 2017  At December 31, 2016
Repurchase agreements:  (In thousands)
Collateral securing borrowings:          
Securities of U.S. Government sponsored entities  $74,695   $74,031 
Agency residential MBS   61,612    63,277 
Corporate securities   100,934    90,554 
Total collateral carrying value  $237,241   $227,862 
Total short-term borrowed funds  $75,769   $59,078 

 

Note 9: Fair Value Measurements

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale investment securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, impaired loans, certain loans held for investment, investment securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.

 

In accordance with the Fair Value Measurement and Disclosure topic of the Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.

 

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. When the valuation assumptions used to measure the fair value of the asset or liability are categorized within different levels of the fair value hierarchy, the asset or liability is categorized in its entirety within the lowest level of the hierarchy. These levels are:

 

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury 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.

 

 -23- 

 

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. 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 six months ended June 30, 2017 and year ended December 31, 2016, there were no transfers in or out of levels 1, 2 or 3.

 

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 June 30, 2017
   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  $120,293   $-   $120,293   $- 
Agency residential MBS   703,482    -    703,482    - 
Non-agency residential MBS   183    -    183    - 
Agency commercial MBS   1,914    -    1,914    - 
Non-agency commercial MBS   1,855    -    1,855    - 
Obligations of states and political subdivisions   180,887    -    180,887    - 
FHLMC and FNMA stock   7,325    10    7,315    - 
Corporate securities   958,065    -    958,065    - 
Other securities   2,152    340    1,812    - 
Total securities available for sale  $1,976,156   $350   $1,975,806   $- 

 

 -24- 

 

   At December 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  $138,660   $-   $138,660   $- 
Agency residential MBS   691,499    -    691,499    - 
Non-agency residential MBS   271    -    271    - 
Non-agency commercial MBS   2,025    -    2,025    - 
Obligations of states and political subdivisions   183,411    -    183,411    - 
Asset-backed securities   695    -    695    - 
FHLMC and FNMA stock   10,869    17    10,852    - 
Corporate securities   860,857    -    860,857    - 
Other securities   2,471    656    1,815    - 
Total securities available for sale  $1,890,758   $673   $1,890,085   $- 

 

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 June 30, 2017 and December 31, 2016, 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.

 

               For the
               Six Months Ended
   At June 30, 2017  June 30, 2017
   Carrying Value  Level 1  Level 2  Level 3  Total Losses
   (In thousands)
Other real estate owned  $1,645   $-   $-   $1,645   $- 
Impaired loans   9,222    -    -    9,222    - 
Total assets measured at fair value on a nonrecurring basis  $10,867   $-   $-   $10,867   $- 

 

               For the
               Year Ended
   At December 31, 2016  December 31, 2016
   Carrying Value  Level 1  Level 2  Level 3  Total Losses
   (In thousands)
Other real estate owned  $3,095   $-   $-   $3,095   $(705)
Impaired loans   9,525    -    -    9,525    - 
Total assets measured at fair value on a nonrecurring basis  $12,620   $-   $-   $12,620   $(705)

 

Level 3 – Valuation is based upon present value of expected future cash flows, 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 as the inputs were not developed by the Company.

 

 -25- 

 

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 $24,103 thousand at June 30, 2017 and $25,954 thousand at December 31, 2016 was 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.

 

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.

 

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 -26- 

 

   At June 30, 2017
   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  $529,362   $529,362   $529,362   $-   $- 
Investment securities held to maturity   1,261,321    1,264,759    -    1,264,759    - 
Loans   1,294,238    1,299,025    -    -    1,299,025 
                          
Financial Liabilities:                         
Deposits  $4,682,570   $4,680,373   $-   $4,436,102   $244,271 
Short-term borrowed funds   75,769    75,769    -    75,769    - 

 

   At December 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  $462,271   $462,271   $462,271   $-   $- 
Investment securities held to maturity   1,346,312    1,340,741    -    1,340,741    - 
Loans   1,326,757    1,337,774    -    -    1,337,774 
                          
Financial Liabilities:                         
Deposits  $4,704,741   $4,702,797   $-   $4,448,571   $254,226 
Short-term borrowed funds   59,078    59,078    -    59,078    - 

 

The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.

 

Note 10: Commitments and Contingent Liabilities

 

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $293,481 thousand and $304,508 thousand at June 30, 2017 and December 31, 2016, 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 $20,042 thousand and $21,732 thousand at June 30, 2017 and December 31, 2016, respectively. The Company had no commitments outstanding for commercial and similar letters of credit at June 30, 2017 and December 31, 2016. The Company had a reserve for unfunded commitments of $2,308 thousand at June 30, 2017 and $2,408 thousand at December 31, 2016, 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 can be reasonably estimated.

 

 -27- 

 

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  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
   (In thousands, except per share data)
Net income applicable to common equity (numerator)  $15,799   $14,546   $30,848   $28,772 
Basic earnings per common share                    
Weighted average number of common shares outstanding - basic (denominator)   26,299    25,586    26,235    25,516 
Basic earnings per common share  $0.60   $0.57   $1.18   $1.13 
Diluted earnings per common share                    
Weighted average number of common shares outstanding - basic   26,299    25,586    26,235    25,516 
Add common stock equivalents for options   103    44    131    33 
Weighted average number of common shares outstanding - diluted (denominator)   26,402    25,630    26,366    25,549 
Diluted earnings per common share  $0.60   $0.57   $1.17   $1.13 

 

For the three and six months ended June 30, 2017, options to purchase 352 thousand and 326 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

For the three and six months ended June 30, 2016, options to purchase 779 thousand and 1,038 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common 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- 

 

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

 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

   For the Three Months  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
   (In thousands, except per share data)
Net Interest and Loan Fee Income (FTE)(1)  $35,764   $36,495   $71,794   $72,942 
Reversal of Provision for Loan Losses   (1,900)   -    (1,900)   - 
Noninterest Income   12,123    11,702    23,780    23,431 
Noninterest Expense   24,396    25,229    49,011    51,087 
Income Before Income Taxes (FTE)(1)   25,391    22,968    48,463    45,286 
Income Tax Provision (FTE)(1)   9,592    8,422    17,615    16,514 
Net Income  $15,799   $14,546   $30,848   $28,772 
                     
Average Common Shares Outstanding   26,299    25,586    26,235    25,516 
Average Diluted Common Shares Outstanding   26,402    25,630    26,366    25,549 
Common Shares Outstanding at Period End   26,304    25,632           
                     
Per Common Share:                    
Basic Earnings  $0.60   $0.57   $1.18   $1.13 
Diluted Earnings   0.60    0.57    1.17    1.13 
Book Value  $22.64   $21.78           
                     
Financial Ratios:                    
Return on Assets   1.18%   1.13%   1.15%   1.12%
Return on Common Equity   10.69%   10.87%   10.58%   10.86%
Net Interest Margin (FTE)(1)   3.12%   3.27%   3.13%   3.30%
Net Loan (Recoveries) Losses to Average Loans   (0.33%)   0.16%   (0.01%)   0.12%
Efficiency Ratio(2)   50.9%   52.3%   51.3%   53.0%
                     
Average Balances:                    
Assets  $5,385,085   $5,184,409   $5,390,404   $5,179,607 
Earning Assets   4,598,296    4,473,700    4,609,089    4,427,507 
Loans   1,333,135    1,455,050    1,344,132    1,477,833 
Deposits   4,669,424    4,531,751    4,681,021    4,534,650 
Shareholders' Equity   593,028    537,987    587,736    532,582 
                     
Period End Balances:                    
Assets  $5,393,350   $5,179,085           
Earning Assets   4,555,818    4,433,952           
Loans   1,318,341    1,429,560           
Deposits   4,682,570    4,485,314           
Shareholders' Equity   595,594    558,327           
                     
Capital Ratios at Period End:                    
Total Risk Based Capital   16.69%   14.76%          
Tangible Equity to Tangible Assets   8.90%   8.48%          
                     
Dividends Paid Per Common Share  $0.39   $0.39   $0.78   $0.78 
Common Dividend Payout Ratio   65%   68%   67%   69%

 

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 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 and noninterest income).

 

 -29- 

 

Financial Overview

 

Westamerica Bancorporation and subsidiaries’ (the “Company”) principal source of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). Market interest rates declined considerably following the recession of 2008 and 2009. Interest rates remained historically low through 2016 as the Federal Open Market Committee’s (“FOMC”) monetary policy was highly accommodative. During this period, Management avoided originating long-dated, low-yielding loans given the potential impact of such assets on forward earning potential; as a result, loans declined and investment securities increased. The changing composition of the earning assets and low market interest rates has pressured the net interest margin to lower levels. The FOMC’s first post-recession increase in the federal funds rate occurred in December 2015, although longer-term rates declined. The FOMC’s successive post-recession increases in the federal funds rate occurred between December 2016 and June 2017, although longer-term rates have not increased by a similar magnitude. The more recent increase in rates has resulted in competitive loan yields which are more appealing from a profitability perspective, in Management’s opinion.

 

The funding of the Company’s earning assets is primarily customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. The first half of 2017 average volume of checking and savings deposits was 95 percent of average total deposits.

 

Credit quality improved during the first half of 2017 with nonperforming assets declining $3 million to $9 million at June 30, 2017. The Company realized net recoveries of loan losses of $1.1 million in the second quarter 2017. The Company recorded a reversal of the provision for loan losses of $1.9 million in the second quarter 2017.

 

The Company’s long-term strategy also includes controlling operating costs, or “noninterest expense.” Noninterest expense of $49.0 million for the first half of 2017 was $2.1 million lower than for the first half of 2016.

 

The Company presents its net interest margin and net interest income on a FTE basis using the current statutory federal tax rate. 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 of Significant Accounting Policies”) to Financial Statements in the Company’s 2016 Form 10-K) are fundamental to understanding the Company’s results of operations and financial condition. The Company adopted the FASB ASU 2016-09, Improvements to Employee Share-Based Payment Accounting effective January 1, 2017.

 

The Company reported net income of $15.8 million or $0.60 diluted earnings per common share for the second quarter 2017 and net income of $30.8 million or $1.17 diluted earnings per common share for the six months ended June 30, 2017. Second quarter 2017 results included a $1.9 million reversal of provision for loan losses which accounted for $0.04 of the quarter’s diluted earnings per common share. Second quarter and first half of 2017 results reflect the Company’s prospective adoption of ASU 2016-09; first quarter 2017 diluted earnings per common share measured $0.02 higher than would have been measured under accounting standards applied in 2016. The adoption of ASU 2016-09 did not affect second quarter 2017 results by a meaningful amount. Second quarter and first half of 2017 results compare to net income of $14.5 million or $0.57 diluted earnings per common share for the second quarter 2016 and net income of $28.8 million or $1.13 diluted earnings per common share for the six months ended June 30, 2016.

 

 

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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  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
   (In thousands, except per share data)
Net interest and loan fee income (FTE)  $35,764   $36,495   $71,794   $72,942 
Reversal of Provision for loan losses   (1,900)   -    (1,900)   - 
Noninterest income   12,123    11,702    23,780    23,431 
Noninterest expense   24,396    25,229    49,011    51,087 
Income  before taxes (FTE)   25,391    22,968    48,463    45,286 
Income tax provision (FTE)   9,592    8,422    17,615    16,514 
Net income  $15,799   $14,546   $30,848   $28,772 
                     
Average diluted common shares   26,402    25,630    26,366    25,549 
Diluted earnings per common share  $0.60   $0.57   $1.17   $1.13 
                     
Average total assets  $5,385,085   $5,184,409   $5,390,404   $5,179,607 
Net income to average total assets (annualized)   1.18%   1.13%   1.15%   1.12%
Net income to average common shareholders' equity (annualized)   10.69%   10.87%   10.58%   10.86%

 

Net income for the second quarter of 2017 was $1.3 million more than the same quarter of 2016, the net result of a reversal of provision for loan losses, higher noninterest income and lower noninterest expense, partially offset by lower net interest and fee income (FTE) and higher income tax provision (FTE). Net interest and loan fee income (FTE) decreased in the second quarter 2017 compared with second quarter 2016 mostly attributable to lower average balances of loans and lower yield on those loans, partially offset by higher average balances of investments. The Company recorded a $1.9 million reversal of provision for loan losses, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income increased primarily due to higher merchant processing services fees. Noninterest expense decreased due to reductions in professional fees, correspondent service charges, insurance premiums, limited partnership operating losses, intangible amortization and other expenses. Second quarter 2017 tax provision (FTE) was higher than second quarter 2016 primarily due to higher pre-tax income, reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits. The ASU 2016-09 did not affect second quarter 2017 results by a meaningful amount.

 

Comparing the first half of 2017 with the first half of 2016, net income increased $2.1 million due to a reversal of provision for loan losses, higher noninterest income and lower noninterest expense, partially offset by lower net interest and fee income (FTE) and higher income tax provision (FTE). Net interest and loan fee income (FTE) decreased in the first half of 2017 compared with first half of 2016 mostly attributable to lower average balances of loans and lower yield on those loans, partially offset by higher average balances of investments. The Company recorded a $1.9 million reversal of provision for loan losses, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income increased primarily due to higher merchant processing services fees. Noninterest expense decreased due to reductions in professional fees, correspondent service charges, courier service charges, insurance premiums, limited partnership operating losses, intangible amortization and other expenses. The tax provision (FTE) for the first half of 2017 was higher than in the first half of 2016 primarily due to higher pre-tax income, reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits. The first six months of 2017 income tax provision was $666 thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09.

 

 

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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  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
   ($ in thousands)
Interest and loan fee income  $33,163   $33,727   $66,487   $67,374 
Interest expense   476    541    956    1,093 
FTE adjustment   3,077    3,309    6,263    6,661 
Net interest and loan fee income (FTE)  $35,764   $36,495   $71,794   $72,942 
                     
Average earning assets  $4,598,296   $4,473,700   $4,609,089   $4,427,507 
Net interest margin (FTE) (annualized)   3.12%   3.27%   3.13%   3.30%

 

Net interest and loan fee income (FTE) decreased $731 thousand in the second quarter 2017 compared with second quarter 2016 mostly attributable to lower average balances of loans (down $122 million) and lower yield on those loans (down 0.21%), partially offset by higher average balances of investments (up $247 million).

 

Comparing the first half of 2017 with the first half of 2016, net interest and loan fee income (FTE) decreased $1.1 million mostly due to lower average balances of loans (down $134 million) and lower yield on those loans (down 0.21%), partially offset by higher average balances of investments (up $315 million).

 

Yields on interest-earning assets declined due to relatively low interest rates prevailing in the market. The annualized net interest margin (FTE) was 3.12% in the second quarter 2017 and 3.13% in the first half of 2017 compared with 3.27% in the second quarter 2016 and 3.30% in the first half of 2016. The volume of older-dated higher-yielding loans and municipal bonds declined due to principal maturities and paydowns. The Company, in anticipation of rising interest rates, has been purchasing 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 invest in higher yielding assets assuming market interest rates increase to levels higher than yields on maturing securities and security paydowns.

 

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 $29 million from the first half of 2016 to first half of 2017 while lower-cost checking and savings deposits grew 4% in the same period. Average balances of checking and saving deposits accounted for 94.6% of average total deposits in the first half of 2017 compared with 93.8% in the first half of 2016.

 

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  For the Six Months
   Ended June 30,
   2017  2016  2017  2016
             
Yield on earning assets (FTE)   3.16%   3.32%   3.17%   3.35%
Rate paid on interest-bearing liabilities   0.07%   0.08%   0.07%   0.08%
Net interest spread (FTE)   3.09%   3.24%   3.10%   3.27%
Impact of noninterest-bearing demand deposits   0.03%   0.03%   0.03%   0.03%
Net interest margin (FTE)   3.12%   3.27%   3.13%   3.30%

 

During 2016 and through the second quarter 2017, the net interest margin (FTE) was affected by historically low market interest rates. The changing composition of interest-earning assets and low market rates has pressured the net interest margin. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost time deposits and increasing balances of checking and savings deposits, which earn relatively low interest rates and are less volatile than time deposits during periods of rising market interest rates.

 

 -32- 

 

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 June 30, 2017
      Interest   
   Average  Income/  Yields/
   Balance  Expense  Rates
   ($ in thousands)
Assets         
Investment securities:               
Taxable  $2,447,248   $12,481    2.04%
Tax-exempt (1)   817,913    8,012    3.92%
Total investments (1)   3,265,161    20,493    2.51%
Loans:               
Taxable   1,269,852    14,949    4.72%
Tax-exempt (1)   63,283    798    5.06%
Total loans (1)   1,333,135    15,747    4.74%
Total Interest-earning assets (1)   4,598,296    36,240    3.16%
Other assets   786,789           
Total assets  $5,385,085           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $2,048,155   $-    -%
Savings and interest-bearing transaction   2,371,753    279    0.05%
Time less than $100,000   138,754    81    0.23%
Time $100,000 or more   110,762    105    0.38%
Total interest-bearing deposits   2,621,269    465    0.07%
Short-term borrowed funds   71,178    11    0.06%
Total interest-bearing liabilities   2,692,447    476    0.07%
Other liabilities   51,455           
Shareholders' equity   593,028           
Total liabilities and shareholders' equity  $5,385,085           
Net interest spread (1) (2)             3.09%
Net interest and fee income and interest margin (1) (3)       $35,764    3.12%

 

(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.

 

 -33- 

 

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

 

   For the Three Months Ended June 30, 2016
      Interest   
   Average  Income/  Yields/
   Balance  Expense  Rates
   ($ in thousands)
Assets         
Investment securities:               
Taxable  $2,182,962   $10,558    1.93%
Tax-exempt (1)   835,688    8,581    4.11%
Total investments (1)   3,018,650    19,139    2.53%
Loans:               
Taxable   1,386,677    16,999    4.93%
Tax-exempt (1)   68,373    898    5.28%
Total loans (1)   1,455,050    17,897    4.95%
Total Interest-earning assets (1)   4,473,700    37,036    3.32%
Other assets   710,709           
Total assets  $5,184,409           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $1,994,803   $-    -%
Savings and interest-bearing transaction   2,260,054    292    0.05%
Time less than $100,000   157,419    104    0.27%
Time $100,000 or more   119,475    135    0.45%
Total interest-bearing deposits   2,536,948    531    0.08%
Short-term borrowed funds   61,920    10    0.07%
Total interest-bearing liabilities   2,598,868    541    0.08%
Other liabilities   52,751           
Shareholders' equity   537,987           
Total liabilities and shareholders' equity  $5,184,409           
Net interest spread (1) (2)             3.24%
Net interest and fee income and interest margin (1) (3)       $36,495    3.27%

 

(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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 -34- 

 

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

 

   For the Six Months Ended June 30, 2017
      Interest   
   Average  Income/  Yields/
   Balance  Expense  Rates
   ($ in thousands)
Assets         
Investment securities:               
Taxable  $2,440,496   $24,627    2.02%
Tax-exempt (1)   824,461    16,307    3.96%
Total investments (1)   3,264,957    40,934    2.51%
Loans:               
Taxable   1,279,917    30,191    4.76%
Tax-exempt (1)   64,215    1,625    5.10%
Total loans (1)   1,344,132    31,816    4.77%
Total Interest-earning assets (1)   4,609,089    72,750    3.17%
Other assets   781,315           
Total assets  $5,390,404           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $2,052,483   $-    -%
Savings and interest-bearing transaction   2,377,021    559    0.05%
Time less than $100,000   140,070    164    0.24%
Time $100,000 or more   111,447    211    0.38%
Total interest-bearing deposits   2,628,538    934    0.07%
Short-term borrowed funds   69,888    22    0.06%
Total interest-bearing liabilities   2,698,426    956    0.07%
Other liabilities   51,759           
Shareholders' equity   587,736           
Total liabilities and shareholders' equity  $5,390,404           
Net interest spread (1) (2)             3.10%
Net interest and fee income and interest margin (1) (3)       $71,794    3.13%

 

(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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 -35- 

 

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

 

   For the Six Months Ended June 30, 2016
      Interest   
   Average  Income/  Yields/
   Balance  Expense  Rates
   ($ in thousands)
Assets         
Investment securities:               
Taxable  $2,114,700   $20,231    1.91%
Tax-exempt (1)   834,974    17,218    4.12%
Total investments (1)   2,949,674    37,449    2.54%
Loans:               
Taxable   1,407,891    34,725    4.96%
Tax-exempt (1)   69,942    1,861    5.35%
Total loans (1)   1,477,833    36,586    4.98%
Total Interest-earning assets (1)   4,427,507    74,035    3.35%
Other assets   752,100           
Total assets  $5,179,607           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $1,994,395   $-    -%
Savings and interest-bearing transaction   2,259,867    585    0.05%
Time less than $100,000   158,805    218    0.28%
Time $100,000 or more   121,583    271    0.45%
Total interest-bearing deposits   2,540,255    1,074    0.08%
Short-term borrowed funds   59,883