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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, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

 

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

CALIFORNIA 94-2156203
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

 

 

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

Yes ☒ No ☐

 

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

 

Yes ☒ No ☐

 

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

 

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

 

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

 

Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

 

Title of Class Shares outstanding as of July 25, 2016
   
Common Stock, 25,631,709
No Par Value  

 

 

 

TABLE OF CONTENTS

 

 

     Page 
Forward Looking Statements  3
PART I - FINANCIAL INFORMATION  
Item 1 Financial Statements  4
Notes to Unaudited Consolidated Financial Statements   9
Financial Summary  29
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations  30
Item 3 Quantitative and Qualitative Disclosures about Market Risk  51
Item 4 Controls and Procedures  51
PART II - OTHER INFORMATION  
Item 1 Legal Proceedings  52
Item 1A Risk Factors  52
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds  52
Item 3 Defaults upon Senior Securities   53
Item 4 Mine Safety Disclosures    53
Item 5 Other Information  53
Item 6 Exhibits  53
Signatures  54
Exhibit Index  55
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)  56
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)  57
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350  58
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350  59

 

 

 

 

 

 

-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 the reduction, mitigation of risk in the Company’s loan and investment 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 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. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2015, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. However, the reader should not consider these 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.

 

 

 

-3

 

PART I - FINANCIAL INFORMATION

Item 1 Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   At June 30,
2016
  At December 31,
2015
   (In thousands)
Assets:          
Cash and due from banks  $441,785   $433,044 
Investment securities available for sale   1,531,035    1,570,216 
Investment securities held to maturity, with fair values of: $1,507,177 at June 30, 2016 and $1,325,699 at December 31, 2015   1,473,357    1,316,075 
Loans   1,429,560    1,533,396 
Allowance for loan losses   (28,910)   (29,771)
Loans, net of allowance for loan losses   1,400,650    1,503,625 
Other real estate owned   4,162    9,264 
Premises and equipment, net   37,759    38,693 
Identifiable intangibles, net   8,656    10,431 
Goodwill   121,673    121,673 
Other assets   160,008    165,854 
Total Assets  $5,179,085   $5,168,875 
           
Liabilities:          
Noninterest bearing deposits  $1,978,947   $2,026,049 
Interest bearing deposits   2,506,367    2,514,610 
Total deposits   4,485,314    4,540,659 
Short-term borrowed funds   67,852    53,028 
Other liabilities   67,592    42,983 
Total Liabilities   4,620,758    4,636,670 
           
Shareholders' Equity:          
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 25,632 at June 30, 2016 and 25,528 at December 31, 2015   389,680    378,858 
Deferred compensation   1,533    2,578 
Accumulated other comprehensive income   11,885    675 
Retained earnings   155,229    150,094 
Total Shareholders' Equity   558,327    532,205 
Total Liabilities and Shareholders' Equity  $5,179,085   $5,168,875 

 

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,
   2016  2015  2016  2015
   (In thousands, except per share data)
Interest and Fee Income:                    
Loans  $17,583   $20,035   $35,936   $40,265 
Investment securities available for sale   8,091    7,999    16,058    15,468 
Investment securities held to maturity   8,053    6,391    15,380    12,609 
Total Interest and Fee Income   33,727    34,425    67,374    68,342 
Interest Expense:                    
Deposits   531    601    1,074    1,243 
Short-term borrowed funds   10    16    19    32 
Federal Home Loan Bank advances   -    -    -    1 
Total Interest Expense   541    617    1,093    1,276 
Net Interest and Fee Income   33,186    33,808    66,281    67,066 
Provision for Loan Losses   -    -    -    - 
Net Interest and Fee Income After Provision For Loan Losses   33,186    33,808    66,281    67,066 
Noninterest Income:                    
Service charges on deposit accounts   5,239    5,694    10,487    11,401 
Merchant processing services   1,638    1,783    3,167    3,486 
Debit card fees   1,621    1,534    3,137    2,990 
Trust fees   657    672    1,318    1,378 
Other service fees   650    683    1,279    1,348 
ATM processing fees   603    627    1,261    1,212 
Financial services commissions   137    198    293    351 
Other noninterest income   1,157    1,078    2,489    2,403 
Total Noninterest Income   11,702    12,269    23,431    24,569 
Noninterest Expense:                    
Salaries and related benefits   12,887    13,696    26,004    27,034 
Occupancy   3,400    3,726    6,798    7,453 
Outsourced data processing services   2,130    2,111    4,260    4,219 
Furniture and equipment   1,187    1,158    2,400    2,277 
Amortization of identifiable intangibles   870    955    1,775    1,956 
Professional fees   758    582    1,490    1,130 
Courier service   462    598    1,007    1,141 
Other real estate owned   (392)   52    (281)   367 
Other noninterest expense   3,927    4,018    7,634    8,046 
Total Noninterest Expense   25,229    26,896    51,087    53,623 
Income Before Income Taxes   19,659    19,181    38,625    38,012 
Provision for income taxes   5,113    4,420    9,853    8,694 
Net Income  $14,546   $14,761   $28,772   $29,318 
                     
Average Common Shares Outstanding   25,586    25,514    25,516    25,582 
Average Diluted Common Shares Outstanding   25,630    25,536    25,549    25,595 
Per Common Share Data:                    
Basic earnings  $0.57   $0.58   $1.13   $1.15 
Diluted earnings   0.57    0.58    1.13    1.15 
Dividends paid   0.39    0.38    0.78    0.76 

 

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,
   2016  2015  2016  2015
   (In thousands)   
Net income  $14,546   $14,761   $28,772   $29,318 
Other comprehensive income:                    
Increase (decrease) in net unrealized gains on securities available for sale   9,070    (9,698)   19,311    (2,280)
Deferred tax (expense) benefit   (3,813)   4,078    (8,119)   958 
Increase (decrease) in net unrealized gains on securities available for sale, net of tax   5,257    (5,620)   11,192    (1,322)
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 (loss)   5,266    (5,611)   11,210    (1,304)
Total comprehensive income  $19,812   $9,150   $39,982   $28,014 

 

See accompanying notes to unaudited consolidated financial statements.              

 

-6

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

 

   Common
Shares
Outstanding
  Common
Stock
  Deferred
Compensation
  Accumulated
Other
Comprehensive
Income
  Retained
Earnings
  Total
   (In thousands)
                   
Balance, December 31, 2014   25,745   $378,132   $2,711   $5,292   $140,468   $526,603 
Net income for the period                       29,318    29,318 
Other comprehensive loss                  (1,304)        (1,304)
Exercise of stock options   81    3,602                   3,602 
Tax benefit decrease upon exercise and expiration of stock options        (1,206)                  (1,206)
Restricted stock activity   17    741                   741 
Stock based compensation        672                   672 
Stock awarded to employees   2    69                   69 
Retirement of common stock including repurchases   (316)   (4,671)             (9,019)   (13,690)
Dividends                       (19,467)   (19,467)
Balance, June 30, 2015   25,529   $377,339   $2,711   $3,988   $141,300   $525,338 
                               
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 including repurchases   (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 

 

See accompanying notes to unaudited consolidated financial statements.

 

-7

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Six Months
Ended June 30,
   2016  2015
   (In thousands)
Operating Activities:          
Net income  $28,772   $29,318 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   8,618    7,957 
Loan loss provision   -    - 
Net amortization of deferred loan fees   (157)   (149)
Decrease in interest income receivable   171    54 
Decrease (increase) in net deferred tax asset   2,066    (166)
Increase in other assets   (4,337)   (1,064)
Stock option compensation expense   752    672 
Tax benefit (increase) decrease upon exercise and expiration of stock options   (211)   1,206 
Decrease in income taxes payable   (1,469)   (640)
Increase in interest expense payable   46    25 
Increase (decrease) in other liabilities   1,849    (2,939)
Net writedown of/loss on sale of premises and equipment   7    11 
Net gain on sale of foreclosed assets   (1,017)   - 
Writedown of foreclosed assets   758    243 
Net Cash Provided by Operating Activities   35,848    34,528 
           
Investing Activities:          
Net repayments of loans   104,975    66,820 
Change in payable to FDIC(1)   98    - 
Purchases of investment securities available for sale   (260,587)   (627,164)
Proceeds from sale/maturity/calls of securities available for sale   344,393    604,708 
Purchases of investment securities held to maturity   (246,956)   (189,632)
Proceeds from maturity/calls of securities held to maturity   82,059    72,440 
Purchases of premises and equipment   (991)   (1,833)
Net change in FRB(2)/FHLB(3) securities   -    940 
Proceeds from sale of foreclosed assets   5,848    100 
Net Cash Provided by (Used in) Investing Activities   28,839    (73,621)
           
Financing Activities:          
Net change in deposits   (55,345)   5,661 
Net change in short-term borrowings and FHLB(3) advances   14,824    (27,037)
Exercise of stock options/issuance of shares   10,060    3,602 
Tax benefit increase (decrease) upon exercise and expiration of stock options   211    (1,206)
Retirement of common stock including repurchases   (5,780)   (13,690)
Common stock dividends paid   (19,916)   (19,467)
Net Cash Used in Financing Activities   (55,946)   (52,137)
Net Change In Cash and Due from Banks   8,741    (91,230)
Cash and Due from Banks at Beginning of Period   433,044    380,836 
Cash and Due from Banks at End of Period  $441,785   $289,606 
           
Supplemental Cash Flow Disclosures:          
Supplemental disclosure of non cash activities:          
Loan collateral transferred to other real estate owned  $488   $3,229 
Securities purchases pending settlement   26,488    24,952 
Supplemental disclosure of cash flow activities:          
Interest paid for the period   1,046    1,274 
Income tax payments for the period   9,922    9,500 

 

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

(2) Federal Reserve Bank ("FRB")

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

See accompanying notes to unaudited consolidated financial statements.

 

-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, 2016 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

 

Note 2: Accounting Policies

 

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “Loan Portfolio Credit Risk” discussion below.

 

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

 

Recently Issued Accounting Standards

 

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

 

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

 

-9

 

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


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

 

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


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

 

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 financial statements.

 

Note 3: Investment Securities

 

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

 

   Investment Securities Available for Sale
At June 30, 2016
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. Government sponsored entities  $338,542   $805   $(8)  $339,339 
Agency residential mortgage-backed securities (MBS)   187,719    1,488    (1,461)   187,746 
Non-agency residential MBS   311    3    -    314 
Non-agency commercial MBS   2,213    7    (6)   2,214 
Obligations of states and political subdivisions   139,627    9,290    (67)   148,850 
Asset-backed securities   1,329    -    (12)   1,317 
FHLMC(1) and FNMA(2) stock   775    5,459    -    6,234 
Corporate securities   837,885    6,324    (1,595)   842,614 
Other securities   2,034    509    (136)   2,407 
Total  $1,510,435   $23,885   $(3,285)  $1,531,035 

 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

 

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-10

 

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, 2016
   Amortized
Cost
  Gross
Unrecognized
Gains
  Gross
Unrecognized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. government sponsored entities  $666   $9   $-   $675 
Agency residential MBS   752,173    11,129    (175)   763,127 
Non-agency residential MBS   6,004    58    (1)   6,061 
Agency commercial MBS   16,012    38    (323)   15,727 
Obligations of states and political subdivisions   698,502    23,233    (148)   721,587 
Total  $1,473,357   $34,467   $(647)  $1,507,177 

 

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

 

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

 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

 

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

 

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

 

-11

 

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, 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  $172,012   $172,481   $22,671   $23,259 
Over 1 to 5 years   808,374    813,891    276,940    282,552 
Over 5 to 10 years   335,816    344,373    301,645    313,958 
Over 10 years   1,181    1,375    97,912    102,493 
Subtotal   1,317,383    1,332,120    699,168    722,262 
MBS   190,243    190,274    774,189    784,915 
Other securities   2,809    8,641    -    - 
Total  $1,510,435   $1,531,035   $1,473,357   $1,507,177 

 

Securities available for sale at June 30, 2016 with maturity dates over one to five years include $128,405  thousand (fair value) of securities of U.S. Government sponsored entities with call options on dates within one year or less.

 

   At December 31, 2015
   Securities Available
for Sale
  Securities Held
to Maturity
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
   (In thousands)
Maturity in years:                    
1 year or less  $136,717   $136,976   $20,709   $21,354 
Over 1 to 5 years   1,049,786    1,044,453    259,556    262,163 
Over 5 to 10 years   166,352    173,585    289,568    296,352 
Over 10 years   2,475    2,749    124,814    127,627 
Subtotal   1,355,330    1,357,763    694,647    707,496 
MBS   210,783    205,293    621,428    618,203 
Other securities   2,814    7,160    -    - 
Total  $1,568,927   $1,570,216   $1,316,075   $1,325,699 

 

Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At June 30, 2016 and December 31, 2015, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

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-12

 

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

 

 
 
 
 
Investment Securities Available for Sale
At June 30, 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   1   $9,992   $(8)   -   $-   $-    1   $9,992   $(8)
Agency residential MBS   1    109    -    28    141,639    (1,461)   29    141,748    (1,461)
Non-agency residential MBS   1    37    -    -    -    -    1    37    - 
Non-agency commercial MBS   -    -    -    1    816    (6)   1    816    (6)
Obligations of states and political subdivisions   6    5,280    (28)   4    1,573    (39)   10    6,853    (67)
Asset-backed securities   -    -    -    1    1,317    (12)   1    1,317    (12)
Corporate securities   10    36,304    (211)   34    156,558    (1,384)   44    192,862    (1,595)
Other securities   -    -    -    1    1,864    (136)   1    1,864    (136)
Total   19   $51,722   $(247)   69   $303,767   $(3,038)   88   $355,489   $(3,285)

 

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

 

 
 
 
 
Investment Securities Held to Maturity
At June 30, 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   3   $4,539   $(38)   3   $12,222   $(137)   6   $16,761   $(175)
Non-agency residential MBS   1    1,318    (1)   -    -    -    1    1,318    (1)
Agency commercial MBS   -    -    -    2    13,685    (323)   2    13,685    (323)
Obligations of states and political subdivisions   16    11,355    (32)   11    7,082    (116)   27    18,437    (148)
Total   20   $17,212   $(71)   16   $32,989   $(576)   36   $50,201   $(647)

 

The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates securities on a quarterly basis including changes in security ratings issued by ratings agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

 

The Company does not intend to sell any investments and has concluded that it is more likely than not that it will not be required to sell the investments prior to recovery of the amortized cost basis. Therefore, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2016.

 

The fair values of the investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines. As a result, other than temporary impairments may occur in the future.

 

As of June 30, 2016, $744,632  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2015, $738,865  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds.

 

-13

 

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

 

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

 

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

 

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

 

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

 

   For the Three Months  For the Six Months
   Ended June 30,
   2016  2015  2016  2015
   (In thousands)
             
Taxable  $10,558   $8,393   $20,231   $15,946 
Tax-exempt from regular federal income tax   5,586    5,997    11,207    12,131 
Total interest income from investment securities  $16,144   $14,390   $31,438   $28,077 

  

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-14

 

Note 4: Loans and Allowance for Loan Losses

 

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

 

   At June 30, 2016
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
& Other
  Total
   (In thousands)   
Originated loans  $337,619   $502,493   $2,103   $102,292   $335,687   $1,280,194 
Purchased covered loans:                              
Gross purchased covered loans   -    -    -    2,280    10,497    12,777 
Purchased loan discount   -    -    -    -    -    - 
Purchased non-covered loans:                              
Gross purchased non-covered loans   13,072    98,553    160    228    29,987    142,000 
Purchased loan discount   (819)   (3,453)   -    (23)   (1,116)   (5,411)
Total  $349,872   $597,593   $2,263   $104,777   $375,055   $1,429,560 

 

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

 

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

 

   For the
Six Months Ended
June 30, 2016
  For the Year Ended
December 31, 2015
Impaired purchased loans  (In thousands)
Carrying amount at the beginning of the period  $3,887   $4,672 
Reductions during the period   (2,646)   (785)
Carrying amount at the end of the period  $1,241   $3,887 

 

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

 

   For the
Six Months Ended
June 30, 2016
  For the
Year Ended
December 31, 2015
Accretable yield:  (In thousands)
Balance at the beginning of the period  $1,259   $2,261 
Reclassification from nonaccretable difference   1,637    3,051 
Accretion   (2,338)   (4,053)
Balance at the end of the period  $558   $1,259 
           
Accretion  $(2,338)  $(4,053)
Change in FDIC indemnification   942    698 
(Increase) in interest income  $(1,396)  $(3,355)

 

-15

 

The following summarizes activity in the allowance for loan losses:

 

   Allowance for Loan Losses
For the Three Months Ended June 30, 2016
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Purchased
Non-covered
Loans
  Purchased
Covered
Loans
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                             
Balance at beginning of period  $9,847   $4,237   $130   $1,707   $6,683   $950   $-   $5,933   $29,487 
Additions:                                             
Provision   782    (340)   (3)   (106)   271    121    66    (791)   - 
Deductions:                                             
Chargeoffs   (764)   -    -    -    (677)   (38)   -    -    (1,479)
Recoveries   537    15    -    -    339    11    -    -    902 
Net loan (losses) recoveries   (227)   15    -    -    (338)   (27)   -    -    (577)
Total allowance for loan losses  $10,402   $3,912   $127   $1,601   $6,616   $1,044   $66   $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
  Purchased
Non-covered
Loans
  Purchased
Covered
Loans
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                             
Balance at beginning of period  $9,559   $4,224   $177   $1,801   $7,080   $967   $-   $5,963   $29,771 
Additions:                                             
Provision   1,996    (342)   (50)   (200)   423    (1,072)   66    (821)   - 
Deductions:                                             
Chargeoffs   (1,935)   -    -    -    (1,682)   (38)   -    -    (3,655)
Recoveries   782    30    -    -    795    1,187    -    -    2,794 
Net loan (losses) recoveries   (1,153)   30    -    -    (887)   1,149    -    -    (861)
Total allowance for loan losses  $10,402   $3,912   $127   $1,601   $6,616   $1,044   $66   $5,142   $28,910 

 

   Allowance for Loan Losses
For the Three Months Ended June 30, 2015
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Purchased
Non-covered
Loans
  Purchased
Covered
Loans
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                             
Balance at beginning of period  $5,470   $4,123   $730   $2,140   $7,031   $2,339   $-   $9,354   $31,187 
Additions:                                             
Provision   1,704    758    (327)   (82)   350    (921)   -    (1,482)   - 
Deductions:                                             
Chargeoffs   (401)   -    -    -    (576)   (396)   -    -    (1,373)
Recoveries   334    15    -    -    443    222    -    -    1,014 
Net loan (losses) recoveries   (67)   15    -    -    (133)   (174)   -    -    (359)
Total allowance for loan losses  $7,107   $4,896   $403   $2,058   $7,248   $1,244   $-   $7,872   $30,828 

 

   Allowance for Loan Losses
For the Six Months Ended June 30, 2015
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Purchased
Non-covered
Loans
  Purchased
Covered
Loans
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                             
Balance at beginning of period  $5,460   $4,245   $644   $2,241   $7,717   $2,120   $-   $9,058   $31,485 
Additions:                                             
Provision   1,594    621    (241)   (183)   69    (674)   -    (1,186)   - 
Deductions:                                             
Chargeoffs   (461)   -    -    -    (1,571)   (431)   -    -    (2,463)
Recoveries   514    30    -    -    1,033    229    -    -    1,806 
Net loan recoveries (losses)   53    30    -    -    (538)   (202)   -    -    (657)
Total allowance for loan losses  $7,107   $4,896   $403   $2,058   $7,248   $1,244   $-   $7,872   $30,828 

 

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-16

 

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

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
   At June 30, 2016
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Purchased Non-covered Loans  Purchased Covered Loans  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                             
Individually evaluated for impairment  $5,283   $316   $-   $-   $-   $-   $-   $-   $5,599 
Collectively evaluated for impairment   5,119    3,596    127    1,601    6,616    1,044    66    5,142    23,311 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    -    -    - 
Total  $10,402   $3,912   $127   $1,601   $6,616   $1,044   $66   $5,142   $28,910 
Carrying value of loans:                                             
Individually evaluated for impairment  $14,035   $5,375   $-   $-   $-   $10,198   $-   $-   $29,608 
Collectively evaluated for impairment   323,584    497,118    2,103    102,292    335,687    125,346    12,581    -    1,398,711 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    1,045    196    -    1,241 
Total  $337,619   $502,493   $2,103   $102,292   $335,687   $136,589   $12,777   $-   $1,429,560 

 

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

 

The Bank’s customers are small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Bank maintains a Loan Review Department which reports directly to the Board of Directors. The Loan Review Department performs independent evaluations of loans and assigns credit risk grades to evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” Loan Review Department evaluations occur every calendar quarter. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department examinations, assigned risk grades are re-evaluated promptly. Credit risk grades assigned by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

 

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

  

   Credit Risk Profile by Internally Assigned Grade
   At June 30, 2016
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Purchased Non-covered Loans  Purchased Covered Loans (1)  Total
   (In thousands)
Grade:                                        
Pass  $320,298   $483,433   $2,103   $99,248   $334,394   $120,779   $11,053   $1,371,308 
Substandard   16,899    19,060    -    3,044    1,006    21,169    1,724    62,902 
Doubtful   422    -    -    -    17    -    -    439 
Loss   -    -    -    -    270    52    -    322 
Purchased loan discount   -    -    -    -    -    (5,411)   -    (5,411)
Total  $337,619   $502,493   $2,103   $102,292   $335,687   $136,589   $12,777   $1,429,560 

 

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

 

-17

 

   Credit Risk Profile by Internally Assigned Grade
   At December 31, 2015
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Purchased Non-covered Loans  Purchased Covered Loans (1)  Total
   (In thousands)
Grade:                                        
Pass  $353,474   $496,744   $2,978   $114,525   $344,876   $149,100   $12,563   $1,474,260 
Substandard   14,643    20,326    -    3,106    781    24,810    1,650    65,316 
Doubtful   -    -    -    -    12    18    -    30 
Loss   -    -    -    -    374    -    -    374 
Purchased loan discount   -    -    -    -    -    (6,432)   (152)   (6,584)
Total  $368,117   $517,070   $2,978   $117,631   $346,043   $167,496   $14,061   $1,533,396 

 

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

 

The following tables summarize loans by delinquency and nonaccrual status:

 

   Summary of Loans by Delinquency and Nonaccrual Status
At June 30, 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  $333,544   $941   $498   $-   $2,636   $337,619 
Commercial real estate   495,851    903    208    -    5,531    502,493 
Construction   2,103    -    -    -    -    2,103 
Residential real estate   99,990    1,683    315    -    304    102,292 
Consumer installment and other   331,904    2,596    772    303    112    335,687 
Total originated loans   1,263,392    6,123    1,793    303    8,583    1,280,194 
Purchased non-covered loans   129,939    388    1,256    53    4,953    136,589 
Purchased covered loans   12,727    21    -    -    29    12,777 
Total  $1,406,058   $6,532   $3,049   $356   $13,565   $1,429,560 

 

   Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2015
   Current and Accruing  30-59 Days Past Due and Accruing  60-89 Days Past Due and Accruing  Past Due 90 Days or More and Accruing  Nonaccrual  Total Loans
   (In thousands)
Commercial  $365,450   $1,777   $122   $-   $768   $368,117 
Commercial real estate   504,970    5,930    726    -    5,444    517,070 
Construction   2,978    -    -    -    -    2,978 
Residential real estate   115,575    1,202    414    -    440    117,631 
Consumer installment and other   341,566    3,263    919    295    -    346,043 
Total originated loans   1,330,539    12,172    2,181    295    6,652    1,351,839 
Purchased non-covered loans   158,554    589    7    -    8,346    167,496 
Purchased covered loans   13,929    132    -    -    -    14,061 
Total  $1,503,022   $12,893   $2,188   $295   $14,998   $1,533,396 

 

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

 

   For the Three Months Ended  For the Six Months Ended
   June 30,
   2016  2015  2016  2015
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $284   $342   $563   $654 
Less: Interest income recognized on nonaccrual loans   (271)   (118)   (533)   (324)
Total reduction of interest income  $13   $224   $30   $330 

 

-18

 

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2016 and December 31, 2015.

 

The following summarizes impaired loans:

 

   Impaired Loans
At June 30, 2016
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
Impaired loans with no related allowance recorded:               
    Commercial  $3,953   $4,042   $- 
    Commercial real estate   12,039    16,691    - 
    Construction   -    -    - 
    Residential real estate   527    557    - 
    Consumer installment and other   479    586    - 
                
Impaired loans with an allowance recorded:               
    Commercial   10,501    12,009    5,283 
    Commercial real estate   4,510    5,527    316 
    Construction   -    -    - 
    Residential real estate   -    -    - 
    Consumer installment and other   -    -    - 
                
Total:               
    Commercial  $14,454   $16,051   $5,283 
    Commercial real estate   16,549    22,218    316 
    Construction   -    -    - 
    Residential real estate   527    557    - 
    Consumer installment and other   479    586    - 

 

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

 

-19

 

Impaired loans include troubled debt restructured loans. Impaired loans at June 30, 2016, included $17,962 thousand of restructured loans, $10,255 thousand of which were on nonaccrual status. Impaired loans at December 31, 2015, included $15,712 thousand of restructured loans, $7,464 thousand of which were on nonaccrual status.

 

   Impaired Loans
   For the Three Months Ended June 30,  For the Six Months Ended June 30,
   2016  2015  2016  2015
   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  $14,094   $135   $12,564   $147   $13,752   $268   $12,395   $293 
Commercial real estate   18,639    202    19,715    147    19,744    361    19,017    404 
Construction   136    -    -    -    203    -    459    - 
Residential real estate   740    5    693    8    775    9    776    14 
Consumer installment and other   412    6    797    7    379    12    1,026    13 
Total  $34,021   $348   $33,769   $309   $34,853   $650   $33,673   $724 

 

The following table provides information on troubled debt restructurings:

 

   Troubled Debt Restructurings
At June 30, 2016
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   ($ in thousands)
Commercial   8   $2,817   $2,171   $174 
Commercial real estate   11    17,587    15,568    316 
Residential real estate   1    241    223    - 
Total   20   $20,645   $17,962   $490 

 

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

 

During the three 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. During the three and six months ended June 30, 2015, the Company modified one loan with a carrying value of $100 thousand and six loans with an aggregate carrying value of $1,830 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the six restructurings completed in the first six months of 2015 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. During the three and six months ended June 30, 2016 and 2015, no troubled debt restructured loans defaulted. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

 

There were no loans restricted due to collateral requirements at June 30, 2016 and December 31, 2015.

 

There were no loans held for sale at June 30, 2016 and December 31, 2015.

 

-20

 

At June 30, 2016 and December 31, 2015, the Company held total other real estate owned (OREO) of $4,162 thousand net of reserve of $2,534 thousand and $9,264 thousand net of reserve of $1,986 thousand, respectively, of which $-0-  thousand was foreclosed residential real estate properties. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $29  thousand at June 30, 2016 and $-0- thousand at December 31, 2015.

  

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At June 30, 2016, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At June 30, 2016, Westamerica Bank had 36 lending relationships with aggregate loans exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $59,171 thousand and $61,190 thousand at June 30, 2016 and December 31, 2015, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At June 30, 2016, Westamerica Bank held corporate bonds in 48 issuing entities which exceeded $5 million of each issuer.

  

Note 6: Other Assets

 

Other assets consisted of the following:

 

   At June 30,
2016
  At December 31,
2015
   (In thousands)
Cost method equity investments:          
    Federal Reserve Bank stock (1)  $14,069   $14,069 
    Other investments   201    201 
        Total cost method equity investments   14,270    14,270 
Life insurance cash surrender value   50,245    48,972 
Net deferred tax asset   41,617    51,748 
Limited partnership investments   13,863    15,259 
Interest receivable   20,003    20,174 
Prepaid assets   3,984    4,771 
Other assets   16,026    10,660 
    Total other assets  $160,008   $165,854 

 

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

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At June 30, 2016, this investment totaled $13,863 thousand and $2,299  thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2015, this investment totaled $15,259 thousand and $2,299  thousand of this amount represents outstanding equity capital commitments. At June 30, 2016, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $453 thousand in 2016, $763 thousand in 2017, and $1,083 thousand in 2018 or thereafter.

 

-21

 

The amounts recognized in net income for these investments include:

 

   For the Three Months Ended  For the Six Months Ended
   June 30,
   2016  2015  2016  2015
   (In thousands)
Investment loss included in pre-tax income  $675   $750   $1,350   $1,425 
Tax credits recognized in provision for income taxes   511    658    1,109    1,316 

 

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, 2016 and year ended December 31, 2015. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three and six months ended June 30, 2016 and year ended December 31, 2015, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

   At June 30,
2016
  At December 31,
2015
   (In thousands)
Goodwill  $121,673   $121,673 

 

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

 

   At June 30, 2016  At December 31, 2015
   Gross
Carrying
Amount
  Accumulated
Amortization
  Gross
Carrying
Amount
  Accumulated
Amortization
   (In thousands)
Core Deposit Intangibles  $56,808   $(48,447)  $56,808   $(46,782)
Merchant Draft Processing Intangible   10,300    (10,005)   10,300    (9,895)
    Total Identifiable Intangible Assets  $67,108   $(58,452)  $67,108   $(56,677)

 

As of June 30, 2016, 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, 2016 (actual)  $1,665   $110   $1,775 
Estimate for year ended December 31, 2016   3,292    212    3,504 
   2017   2,913    164    3,077 
   2018   1,892    29    1,921 
   2019   538    -    538 
   2020   287    -    287 

 

-22

 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   Deposits
   At June 30,
2016
  At December 31,
2015
   (In thousands)
Noninterest-bearing  $1,978,947   $2,026,049 
Interest-bearing:          
    Transaction   827,857    860,706 
    Savings   1,404,840    1,366,936 
    Time deposits less than $100 thousand   142,863    150,780 
    Time deposits $100 thousand through $250 thousand   92,477    96,971 
    Time deposits more than $250 thousand   38,330    39,217 
        Total deposits  $4,485,314   $4,540,659 

 

Demand deposit overdrafts of $2,979  thousand and $3,038  thousand were included as loan balances at June 30, 2016 and December 31, 2015, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $135 thousand and $271 thousand for the three months and six months ended June 30, 2016, respectively and $182 thousand and $379 thousand for the three months and six months ended June 30, 2015, respectively.

 

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

 

   Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
   At June 30, 2016  At December 31, 2015
   Remaining Contractual Maturity of the Agreements
   Overnight and Continuous
Repurchase agreements:  (In thousands)
Collateral securing borrowings:          
Securities of U.S. Government sponsored entities  $101,131   $98,969 
Obligations of states and political subdivisions   1,015    3,975 
Corporate securities   49,846    54,681 
Total collateral carrying value  $151,992   $157,625 
Total short-term borrowed funds  $67,852   $53,028 

 

The $35,000 thousand unsecured line of credit expired, with no outstanding balance, March 18, 2016 and was not renewed. There was no outstanding balance at December 31, 2015.

 

Note 9: Fair Value Measurements

 

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

 

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

 

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

 

-23

 

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury and equity securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes federal agency securities, mortgage-backed securities, corporate securities, asset-backed securities, and municipal bonds.

 

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

The Company relies on independent vendor pricing services to measure fair value for investment securities available for sale and investment securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote closely affecting the market generally used as the fair value estimate. In addition, the Company conducts “other than temporary impairment (OTTI)” analysis on a quarterly basis; securities selected for OTTI analysis include all securities at a market price below 95 percent of par value or with a market to book ratio below 95:100. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair value estimates may not be realized in an actual sale of the securities.

 

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

 

 

 

 

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-24

 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

   At June 30, 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  $339,339   $