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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 - EXHBIIT 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 September 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 October 26, 2017
     
Common Stock,   26,345,570
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
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3 Quantitative and Qualitative Disclosures about Market Risk 49
Item 4 Controls and Procedures 49
PART II - OTHER INFORMATION  
Item 1 Legal Proceedings 49
Item 1A Risk Factors 50
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 50
Item 3 Defaults upon Senior Securities 50
Item 4 Mine Safety Disclosures 50
Item 5 Other Information 50
Item 6 Exhibits 50
Signatures 51
Exhibit Index 52
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 53
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 54
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 55
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 56

 

 

 


- 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 September 30,   At December 31,
    2017   2016
    (In thousands)
Assets:                
Cash and due from banks   $ 561,757     $ 462,271  
Investment securities available for sale     2,090,477       1,890,758  
Investment securities held to maturity, with fair values of: $1,208,279 at September 30, 2017 and $1,340,741 at December 31, 2016     1,204,240       1,346,312  
Loans     1,284,782       1,352,711  
Allowance for loan losses     (23,628 )     (25,954 )
Loans, net of allowance for loan losses     1,261,154       1,326,757  
Other real estate owned     1,426       3,095  
Premises and equipment, net     35,507       36,566  
Identifiable intangibles, net     4,605       6,927  
Goodwill     121,673       121,673  
Other assets     164,969       171,724  
Total Assets   $ 5,445,808     $ 5,366,083  
                 
Liabilities:                
Noninterest-bearing deposits   $ 2,128,342     $ 2,089,443  
Interest-bearing deposits     2,606,238       2,615,298  
Total deposits     4,734,580       4,704,741  
Short-term borrowed funds     66,337       59,078  
Other liabilities     40,934       40,897  
Total Liabilities     4,841,851       4,804,716  
                 
Contingencies (Note 10)                
                 
Shareholders' Equity:                
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,319 at September 30, 2017 and 25,907 at December 31, 2016     425,655       404,606  
Deferred compensation     1,533       1,533  
Accumulated other comprehensive loss     (3,433 )     (10,074 )
Retained earnings     180,202       165,302  
Total Shareholders' Equity     603,957       561,367  
Total Liabilities and Shareholders' Equity   $ 5,445,808     $ 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 Nine Months
    Ended September 30,
    2017   2016   2017   2016
    (In thousands, except per share data)
Interest and Loan Fee Income:                                
Loans   $ 15,082     $ 16,968     $ 46,330     $ 52,904  
Investment securities available for sale     11,347       8,796       32,305       24,855  
Investment securities held to maturity     6,716       7,704       20,997       23,083  
Total Interest and Loan Fee Income     33,145       33,468       99,632       100,842  
Interest Expense:                                
Deposits     461       512       1,395       1,586  
Short-term borrowed funds     12       11       34       30  
Total Interest Expense     473       523       1,429       1,616  
Net Interest and Loan Fee Income     32,672       32,945       98,203       99,226  
Reversal of Provision for Loan Losses     -       (3,200 )     (1,900 )     (3,200 )
Net Interest and Loan Fee Income After Reversal of Provision for Loan Losses     32,672       36,145       100,103       102,426  
Noninterest Income:                                
Service charges on deposit accounts     4,989       5,303       14,857       15,790  
Merchant processing services     2,153       1,532       6,080       4,699  
Debit card fees     1,784       1,587       4,851       4,724  
Trust fees     718       686       2,136       2,004  
ATM processing fees     684       600       1,914       1,860  
Other service fees     652       671       1,964       1,951  
Financial services commissions     148       118       484       411  
Other noninterest income     1,420       1,101       4,042       3,590  
Total Noninterest Income     12,548       11,598       36,328       35,029  
Noninterest Expense:                                
Salaries and related benefits     12,816       13,063       38,867       39,067  
Occupancy     3,665       3,749       10,807       10,546  
Outsourced data processing services     2,383       2,114       6,710       6,375  
Furniture and equipment     1,242       1,211       3,764       3,611  
Amortization of identifiable intangibles     760       867       2,322       2,642  
Professional fees     512       1,693       1,533       3,183  
Courier service     451       451       1,310       1,458  
Other real estate owned     221       (206 )     54       (487 )
Other noninterest expense     2,064       3,146       7,758       10,780  
Total Noninterest Expense     24,114       26,088       73,125       77,175  
Income Before Income Taxes     21,106       21,655       63,306       60,280  
Provision for income taxes     6,089       6,027       17,441       15,880  
Net Income   $ 15,017     $ 15,628     $ 45,865     $ 44,400  
                                 
Average Common Shares Outstanding     26,309       25,641       26,260       25,558  
Average Diluted Common Shares Outstanding     26,404       25,687       26,379       25,595  
Per Common Share Data:                                
Basic earnings   $ 0.57     $ 0.61     $ 1.75     $ 1.74  
Diluted earnings     0.57       0.61       1.74       1.73  
Dividends paid     0.39       0.39       1.17       1.17  

 

See accompanying notes to unaudited consolidated financial statements.              

 

- 5 -
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

    For the Three Months   For the Nine Months
    Ended September 30,
    2017   2016   2017   2016
    (In thousands)
Net income   $ 15,017     $ 15,628     $ 45,865     $ 44,400  
Other comprehensive income (loss):                                
Changes in unrealized gains and losses on securities available for sale     4,179       (4,992 )     11,413       14,319  
Deferred tax (expense) benefit     (1,757 )     2,099       (4,799 )     (6,020 )
Changes in unrealized gains and losses on securities available for sale, net of tax     2,422       (2,893 )     6,614       8,299  
Post-retirement benefit transition obligation amortization     15       15       45       45  
Deferred tax expense     (6 )     (6 )     (18 )     (18 )
Post-retirement benefit transition obligation amortization, net of tax     9       9       27       27  
Total other comprehensive income (loss)     2,431       (2,884 )     6,641       8,326  
Total comprehensive income   $ 17,448     $ 12,744     $ 52,506     $ 52,726  

 

See accompanying notes to unaudited consolidated financial statements.              

 

 

 

 

- 6 -
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

 

                Accumulated        
    Common           Other        
    Shares   Common   Deferred   Comprehensive   Retained    
    Outstanding   Stock   Compensation   Income (loss)   Earnings   Total
    (In thousands)
                         
Balance, December 31, 2015     25,528     $ 378,858     $ 2,578     $ 675     $ 150,094     $ 532,205  
Net income for the period                                     44,400       44,400  
Other comprehensive income                             8,326               8,326  
Exercise of stock options     258       11,588                               11,588  
Tax benefit increase upon exercise and expiration of stock options             199                               199  
Restricted stock activity     15       1,798       (1,045 )                     753  
Stock based compensation             1,142                               1,142  
Stock awarded to employees     1       75                               75  
Retirement of common stock     (137 )     (2,059 )                     (3,721 )     (5,780 )
Dividends                                     (29,912 )     (29,912 )
Balance, September 30, 2016     25,665     $ 391,601     $ 1,533     $ 9,001     $ 160,861     $ 562,996  
                                                 
Balance, December 31, 2016     25,907     $ 404,606     $ 1,533     $ (10,074 )   $ 165,302     $ 561,367  
Net income for the period                                     45,865       45,865  
Other comprehensive income                             6,641               6,641  
Exercise of stock options     403       18,988                               18,988  
Restricted stock activity     13       707                               707  
Stock based compensation             1,368                               1,368  
Stock awarded to employees     2       76                               76  
Retirement of common stock     (6 )     (90 )                     (224 )     (314 )
Dividends                                     (30,741 )     (30,741 )
Balance, September 30, 2017     26,319     $ 425,655     $ 1,533     $ (3,433 )   $ 180,202     $ 603,957  

 

See accompanying notes to unaudited consolidated financial statements.                

 

- 7 -
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

    For the Nine Months
    Ended September 30,
    2017   2016
    (In thousands)
Operating Activities:                
Net income   $ 45,865     $ 44,400  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     18,807       14,211  
Reversal of provision for loan losses     (1,900 )     (3,200 )
Net amortization of deferred loan cost (fees)     34       (281 )
Decrease in interest income receivable     713       475  
Life insurance premiums paid     (126 )     (126 )
Increase in other assets     (2,088 )     (627 )
Increase in income taxes payable     2,461       403  
Decrease in net deferred tax asset     895       3,258  
Tax benefit increase upon exercise and expiration of stock options     -       (199 )
Stock option compensation expense     1,368       1,142  
Decrease in interest expense payable     (8 )     (19 )
(Decrease) increase in other liabilities     (1,142 )     143  
Net writedown of premises and equipment     60       21  
Net gain on sale of foreclosed assets     (72 )     (1,182 )
Writedown of foreclosed assets     219       759  
Net Cash Provided by Operating Activities     65,086       59,178  
Investing Activities:                
Net repayments of loans     69,319       171,573  
Net (payments) receipts under FDIC(1) indemnification agreements     (63 )     3,180  
Purchases of investment securities available for sale     (433,525 )     (812,697 )
Proceeds from sale/maturity/calls of securities available for sale     238,888       632,795  
Purchases of investment securities held to maturity     -       (246,956 )
Proceeds from maturity/calls of securities held to maturity     135,208       141,770  
Purchases of premises and equipment     (1,980 )     (1,299 )
Net change in FRB(2) stock     1       -  
Proceeds from sale of foreclosed assets     1,521       7,143  
Net Cash Provided by (Used in) Investing Activities     9,369       (104,491 )
Financing Activities:                
Net change in deposits     29,839       104,211  
Net change in short-term borrowings     7,259       3,330  
Exercise of stock options     18,988       11,588  
Tax benefit increase upon exercise and expiration of stock options     -       199  
Retirement of common stock     (314 )     (5,780 )
Common stock dividends paid     (30,741 )     (29,912 )
Net Cash Provided by Financing Activities     25,031       83,636  
Net Change In Cash and Due from Banks     99,486       38,323  
Cash and Due from Banks at Beginning of Period     462,271       433,044  
Cash and Due from Banks at End of Period   $ 561,757     $ 471,367  
                 
Supplemental Cash Flow Disclosures:                
Supplemental disclosure of non cash activities:                
Loan collateral transferred to other real estate owned   $ -     $ 488  
Securities purchases pending settlement     811       171  
Supplemental disclosure of cash flow activities:                
Interest paid for the period     1,437       1,635  
Income tax payments for the period     14,657       14,032  

 

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 nine months ended September 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 nine months of 2017, 403 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 nine months of 2017 income tax provision was $688 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.

 

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, and for those equity securities with readily determinable fair values, the Company plans to elect the retrospective transition approach with a cumulative effect adjustment to the balance sheet and for those equity securities that do not have readily determinable fair values, the Company plans to elect the prospective transition approach. The adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments.

 

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, and plans to elect 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 September 30, 2017
        Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
    Cost   Gains   Losses   Value
    (In thousands)
Securities of U.S. Government sponsored entities   $ 122,280     $ 19     $ (1,840 )   $ 120,459  
Agency residential mortgage-backed securities (MBS)     754,138       1,091       (16,011 )     739,218  
Non-agency residential MBS     164       1       -       165  
Agency commercial MBS     1,916       -       (14 )     1,902  
Securities of U.S. Government entities     1,783       -       (14 )     1,769  
Obligations of states and political subdivisions     176,182       4,929       (1,610 )     179,501  
FHLMC(1) and FNMA(2) stock     749       8,811       -       9,560  
Corporate securities     1,037,173       2,943       (4,027 )     1,036,089  
Other securities     2,000       -       (186 )     1,814  
Total   $ 2,096,385     $ 17,794     $ (23,702 )   $ 2,090,477  

 

(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 September 30, 2017
        Gross   Gross    
    Amortized   Unrecognized   Unrecognized   Fair
    Cost   Gains   Losses   Value
    (In thousands)
Agency residential MBS   $ 574,017     $ 949     $ (6,802 )   $ 568,164  
Non-agency residential MBS     4,628       67       -       4,695  
Agency commercial MBS     9,114       1       (82 )     9,033  
Obligations of states and political subdivisions     616,481       10,999       (1,093 )     626,387  
Total   $ 1,204,240     $ 12,016     $ (7,977 )   $ 1,208,279  

 

 

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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
        Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
    Cost   Gains   Losses   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  
Securities of U.S. Government entities     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
        Gross   Gross    
    Amortized   Unrecognized   Unrecognized   Fair
    Cost   Gains   Losses   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 tables at the dates indicated:

 

    At September 30, 2017
    Securities Available   Securities Held
    for Sale   to Maturity
    Amortized   Fair   Amortized   Fair
    Cost   Value   Cost   Value
    (In thousands)
Maturity in years:                                
1 year or less   $ 208,391     $ 208,764     $ 37,548     $ 38,399  
Over 1 to 5 years     861,895       860,966       278,240       281,577  
Over 5 to 10 years     219,648       221,949       290,869       296,357  
Over 10 years     45,701       44,370       9,824       10,054  
Subtotal     1,335,635       1,336,049       616,481       626,387  
MBS     758,001       743,054       587,759       581,892  
Other securities     2,749       11,374       -       -  
Total   $ 2,096,385     $ 2,090,477     $ 1,204,240     $ 1,208,279  

 

 

 

- 12 -
 

 

 

    At December 31, 2016
    Securities Available   Securities Held
    for Sale   to Maturity
    Amortized   Fair   Amortized   Fair
    Cost   Value   Cost   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 September 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 September 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     6     $ 89,046     $ (1,169 )     2     $ 29,328     $ (671 )     8     $ 118,374     $ (1,840 )
Agency residential MBS     15       336,023       (8,283 )     37       202,746       (7,728 )     52       538,769       (16,011 )
Non-agency residential MBS     1       6       -       -       -       -       1       6       -  
Agency commercial MBS     1       1,902       (14 )     -       -       -       1       1,902       (14 )
Securities of U.S. Government entities     1       896       (6 )     2       873       (8 )     3       1,769       (14 )
Obligations of states and political subdivisions     35       28,910       (592 )     24       35,329       (1,018 )     59       64,239       (1,610 )
Corporate securities     36       299,545       (1,672 )     26       166,386       (2,355 )     62       465,931       (4,027 )
Other securities     -       -       -       1       1,814       (186 )     1       1,814       (186 )
Total     95     $ 756,328     $ (11,736 )     92     $ 436,476     $ (11,966 )     187     $ 1,192,804     $ (23,702 )

 

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

 

    Investment Securities Held to Maturity
    At September 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     $ 494,096     $ (6,320 )     8     $ 19,092     $ (482 )     72     $ 513,188     $ (6,802 )
Agency commercial MBS     -       -       -       1       7,101       (82 )     1       7,101       (82 )
Obligations of states and political subdivisions     42       40,023       (417 )     26       27,693       (676 )     68       67,716       (1,093 )
Total     106     $ 534,119     $ (6,737 )     35     $ 53,886     $ (1,240 )     141     $ 588,005     $ (7,977 )

 

- 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 September 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 September 30, 2017, $771,257  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 )
Securities of U.S. Government entities     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 Nine Months
    Ended September 30,
    2017   2016   2017   2016
    (In thousands)
                 
Taxable   $ 12,957     $ 11,024     $ 37,584     $ 31,256  
Tax-exempt from regular federal income tax     5,106       5,476       15,718       16,682  
Total interest income from investment securities   $ 18,063     $ 16,500     $ 53,302     $ 47,938  

 

 

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 September 30, 2017   At December 31, 2016
    (In thousands)
Commercial   $ 316,891     $ 354,697  
Commercial Real Estate     573,717       542,171  
Construction     4,992       2,555  
Residential Real Estate     69,124       87,724  
Consumer Installment & Other     320,058       365,564  
Total   $ 1,284,782     $ 1,352,711  

 

Total loans outstanding reported above include loans purchased from the FDIC of $90,708  thousand and $121,210 thousand at September 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   For the
    Nine Months Ended   Year Ended
    September 30, 2017   December 31, 2016
Accretable yield:   (In thousands)
Balance at the beginning of the period   $ 1,237     $ 1,259  
Reclassification from nonaccretable difference     1,504       3,912  
Accretion     (1,862 )     (3,934 )
Balance at the end of the period   $ 879     $ 1,237  
                 
Accretion   $ (1,862 )   $ (3,934 )
Change in FDIC indemnification     192       1,053  
(Increase) in interest income   $ (1,670 )   $ (2,881 )

 

The following summarizes activity in the allowance for loan losses:

 

    Allowance for Loan Losses
    For the Three Months Ended September 30, 2017
                    Consumer        
        Commercial       Residential   Installment        
    Commercial   Real Estate   Construction   Real Estate   and Other   Unallocated   Total
    (In thousands)
Allowance for loan losses:                                                        
Balance at beginning of period   $ 8,167     $ 3,545     $ 160     $ 1,105     $ 7,215     $ 3,911     $ 24,103  
Additions:                                                        
(Reversal) provision     (391 )     288       136       (50 )     167       (150 )     -  
Deductions:                                                        
Chargeoffs     (132 )     -       -       -       (886 )     -       (1,018 )
Recoveries     128       -       -       -       415       -       543  
Net loan losses     (4 )     -       -       -       (471 )     -       (475 )
Total allowance for loan losses   $ 7,772     $ 3,833     $ 296     $ 1,055     $ 6,911     $ 3,761     $ 23,628  

 

 

- 15 -
 

 

 

    Allowance for Loan Losses
    For the Nine Months Ended September 30, 2017
                    Consumer        
        Commercial       Residential   Installment        
    Commercial   Real Estate   Construction   Real Estate   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:                                                        
(Reversal) provision     (220 )     415       (1,755 )     (275 )     1,009       (1,074 )     (1,900 )
Deductions:                                                        
Chargeoffs     (961 )     -       -       -       (3,783 )     -       (4,744 )
Recoveries     626       88       1,899       -       1,705       -       4,318  
Net loan (losses) recoveries     (335 )     88       1,899       -       (2,078 )     -       (426 )
Total allowance for loan losses   $ 7,772     $ 3,833     $ 296     $ 1,055     $ 6,911     $ 3,761     $ 23,628  

 

 

    Allowance for Loan Losses
    For the Three Months Ended September 30, 2016
                    Consumer        
        Commercial       Residential   Installment        
    Commercial   Real Estate   Construction   Real Estate   and Other   Unallocated   Total
    (In thousands)
Allowance for loan losses:                                                        
Balance at beginning of period   $ 10,402     $ 3,912     $ 167     $ 1,636     $ 7,651     $ 5,142     $ 28,910  
Additions:                                                        
(Reversal) provision     (3,642 )     (822 )     (22 )     (193 )     1,777       (298 )     (3,200 )
Deductions:                                                        
Chargeoffs     (88 )     -       -       -       (1,848 )     -       (1,936 )
Recoveries     1,739       509       -       -       337       -       2,585  
Net loan recoveries (losses)     1,651       509       -       -       (1,511 )     -       649  
Total allowance for loan losses   $ 8,411     $ 3,599     $ 145     $ 1,443     $ 7,917     $ 4,844     $ 26,359  

 

 

    Allowance for Loan Losses
    For the Nine Months Ended September 30, 2016
                    Consumer        
        Commercial       Residential   Installment        
    Commercial   Real Estate   Construction   Real Estate   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:                                                        
(Reversal) provision     (2,827 )     (1,152 )     (90 )     (358 )     2,346       (1,119 )     (3,200 )
Deductions:                                                        
Chargeoffs     (2,024 )     -       -       -       (3,568 )     -       (5,592 )
Recoveries     3,703       539       -       -       1,138       -       5,380  
Net loan recoveries (losses)     1,679       539       -       -       (2,430 )     -       (212 )
Total allowance for loan losses   $ 8,411     $ 3,599     $ 145     $ 1,443     $ 7,917     $ 4,844     $ 26,359  

 

 

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 September 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   $ 4,922     $ 154     $ -     $ -     $ -     $ -     $ 5,076  
Collectively evaluated for impairment     2,850       3,679       296       1,055       6,911       3,761       18,552  
Purchased loans with evidence of credit deterioration     -       -       -       -       -       -       -  
Total   $ 7,772     $ 3,833     $ 296     $ 1,055     $ 6,911     $ 3,761     $ 23,628  
Carrying value of loans:                                                        
Individually evaluated for impairment   $ 10,749     $ 13,973     $ -     $ 211     $ -     $ -     $ 24,933  
Collectively evaluated for impairment     306,113       559,182       4,992       68,913       319,889       -       1,259,089  
Purchased loans with evidence of credit deterioration     29       562       -       -       169       -       760  
Total   $ 316,891     $ 573,717     $ 4,992     $ 69,124     $ 320,058     $ -     $ 1,284,782  

 

 

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    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 September 30, 2017
    Commercial   Commercial Real Estate   Construction   Residential Real Estate   Consumer Installment and Other   Total
    (In thousands)
Grade:                                                
Pass   $ 304,710     $ 551,222     $ 4,992     $ 66,164     $ 317,933     $ 1,245,021  
Substandard     12,181       22,495       -       2,960       1,603       39,239  
Doubtful     -       -       -       -       6       6  
Loss     -       -       -       -       516       516  
Total   $ 316,891     $ 573,717     $ 4,992     $ 69,124     $ 320,058     $ 1,284,782  

 

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  

 

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

 

 

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The following tables summarize loans by delinquency and nonaccrual status:

 

 

    Summary of Loans by Delinquency and Nonaccrual Status
    At September 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   $ 316,150     $ 404     $ 66     $ -     $ 271     $ 316,891  
Commercial real estate     565,377       2,820       8       -       5,512       573,717  
Construction     4,992       -       -       -       -       4,992  
Residential real estate     69,124       -       -       -       -       69,124  
Consumer installment and other     315,520       3,351       753       434       -       320,058  
Total   $ 1,271,163     $ 6,575     $ 827     $ 434     $ 5,783     $ 1,284,782  

 

 

    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 September 30, 2017 and December 31, 2016.

 

The following summarizes impaired loans:

 

    Impaired Loans   Impaired Loans
    At September 30, 2017   At December 31, 2016
        Unpaid           Unpaid    
    Recorded   Principal   Related   Recorded   Principal   Related
    Investment   Balance   Allowance   Investment   Balance   Allowance
    (In thousands)   (In thousands)
With no related allowance recorded:                                                
Commercial   $ 1,246     $ 1,308     $ -     $ 1,234     $ 1,303     $ -  
Commercial real estate     12,726       14,817       -       13,233       15,610       -  
Residential real estate     211       241       -       1,279       1,309       -  
Consumer installment and other     169       276       -       569       675       -  
Total with no related allowance recorded     14,352       16,642       -       16,315       18,897       -  
                                                 
With an allowance recorded:                                                
Commercial     9,803       9,803       4,922       10,163       10,172       5,048  
Commercial real estate     1,809       1,811       154       -       -       -  
Total with an allowance recorded     11,612       11,614       5,076       10,163       10,172       5,048  
Total   $ 25,964     $ 28,256     $ 5,076     $ 26,478     $ 29,069     $ 5,048  

 

Impaired loans include troubled debt restructured loans. Impaired loans at September 30, 2017, included $12,365 thousand of restructured loans, $5,044 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.

 

 

 

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    Impaired Loans
    For the Three Months Ended September 30,   For the Nine Months Ended September 30,
    2017   2016   2017   2016
    Average   Recognized   Average   Recognized   Average   Recognized   Average   Recognized
    Recorded   Interest   Recorded   Interest   Recorded   Interest   Recorded   Interest
    Investment   Income   Investment   Income   Investment   Income   Investment   Income
    (In thousands)
Commercial   $ 11,125     $ 130     $ 12,858     $ 126     $ 11,203     $ 366     $ 13,454     $ 394  
Commercial real estate     14,681       208       14,486       188       14,826       669       17,991       549  
Construction     -       -       -       -       -       -       136       -  
Residential real estate     365       4       530       4       494       13       693       13  
Consumer installment and other     340       3       545       6       466       17       435       18  
Total   $ 26,511     $ 345     $ 28,419     $ 324     $ 26,989     $ 1,065     $ 32,709     $ 974  

 

The following table provides information on troubled debt restructurings:

 

    Troubled Debt Restructurings
    At September 30, 2017
                Period-End
                Individual
    Number of   Pre-Modification   Period-End   Impairment
    Contracts   Carrying Value   Carrying Value   Allowance
    ($ in thousands)
Commercial     7     $ 2,393     $ 1,140     $ 49  
Commercial real estate     11       11,847       11,014       -  
Residential real estate     1       241       211       -  
Total     19     $ 14,481     $ 12,365     $ 49  

 

 

    Troubled Debt Restructurings
    At December 31, 2016
                Period-End
                Individual
    Number of   Pre-Modification   Period-End   Impairment
    Contracts   Carrying Value   Carrying Value   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 nine months ended September 30, 2017, the Company modified one loan with a carrying value of $50 thousand and four loans with a carrying value of $699 thousand, respectively, that were considered troubled debt restructurings. The four concessions granted in the first nine 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 nine months ended September 30, 2016, the Company modified zero loans 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 nine 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 nine months ended September 30, 2017, one troubled debt restructured loan with a carrying value of $58 thousand was charged off. There were no chargeoffs related to troubled debt restructurings made during the three and nine months ended September 30, 2016. During the three and nine months ended September 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 September 30, 2017 and December 31, 2016.

 

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

 

At September 30, 2017 and December 31, 2016, the Company held total other real estate owned (OREO) of $1,426 thousand net of reserve of $1,905 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. There were no consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process at September 30, 2017 and December 31, 2016.

 

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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 September 30, 2017, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2017, Westamerica Bank had 38 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 $58,046 thousand and $57,721 thousand at September 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 September 30, 2017, Westamerica Bank held corporate bonds in 66 issuing entities that exceeded $5 million for each issuer.

 

 

Note 6: Other Assets

 

Other assets consisted of the following:

 

    At September 30, 2017   At December 31, 2016
    (In thousands)
Cost method equity investments:                
Federal Reserve Bank stock (1)   $ 14,068     $ 14,069  
Other investments     159       201  
Total cost method equity investments     14,227       14,270  
Life insurance cash surrender value     53,459       51,535  
Net deferred tax asset     49,514       55,417  
Limited partnership investments     11,241       12,591  
Interest receivable     20,776       21,489  
Prepaid assets     3,969       4,825  
Other assets     11,783       11,597  
Total other assets   $ 164,969     $ 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 September 30, 2017, this investment totaled $11,241 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 September 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.

 

The amounts recognized in net income for these investments include:

 

    For the Three Months Ended   For the Nine Months Ended
    September 30,
    2017   2016   2017   2016
    (In thousands)
Investment loss included in pre-tax income   $ 450     $ 675     $ 1,350     $ 2,025  
Tax credits recognized in provision for income taxes     463       562       1,388       1,723  

 

 

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

 

The carrying values of goodwill were:

 

    At September 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 September 30, 2017   At December 31, 2016
    Gross       Gross    
    Carrying   Accumulated   Carrying   Accumulated
    Amount   Amortization   Amount   Amortization
    (In thousands)    
Core Deposit Intangibles   $ 56,808     $ (52,271 )   $ 56,808     $ (50,074 )
Merchant Draft Processing Intangible     10,300       (10,232 )     10,300       (10,107 )
Total Identifiable Intangible Assets   $ 67,108     $ (62,503 )   $ 67,108     $ (60,181 )

 

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

 

 

 

        Merchant    
    Core   Draft    
    Deposit   Processing    
    Intangibles   Intangible   Total
    (In thousands)
For the Nine Months ended September 30, 2017 (actual)   $ 2,197     $ 125     $ 2,322  
Estimate for the remainder of year ending December 31, 2017     716       39       755  
Estimate for year ending December 31, 2018     1,892       29       1,921  
2019     538       -       538  
2020     287       -       287  
2021     269       -       269  
2022     252       -       252  

 

 

 

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Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

    Deposits
    At September 30, 2017   At December 31, 2016
    (In thousands)
Noninterest-bearing   $ 2,128,342     $ 2,089,443  
Interest-bearing:                
Transaction     873,145       865,701  
Savings     1,491,168       1,493,427  
Time deposits less than $100 thousand     124,252       133,712  
Time deposits $100 thousand through $250 thousand     79,614       84,925  
Time deposits more than $250 thousand     38,059       37,533  
Total deposits   $ 4,734,580     $ 4,704,741  

 

Demand deposit overdrafts of $1,179  thousand and $2,679  thousand were included as loan balances at September 30, 2017 and December 31, 2016, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $103 thousand and $314 thousand for the three and nine months ended September 30, 2017, respectively and $124 thousand and $395 thousand for the three and nine months ended September 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 September 30, 2017   At December 31, 2016
Repurchase agreements:   (In thousands)
Collateral securing borrowings:                
Securities of U.S. Government sponsored entities   $ 74,852     $ 74,031  
Agency residential MBS     60,023       63,277  
Corporate securities     105,698       90,554  
Total collateral carrying value   $ 240,573     $ 227,862  
Total short-term borrowed funds   $ 66,337     $ 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.

 

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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 nine months ended September 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 September 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   $ 120,459     $ -     $ 120,459     $ -  
Agency residential MBS     739,218       -       739,218       -  
Non-agency residential MBS     165       -       165       -  
Agency commercial MBS     1,902       -       1,902       -  
Securities of U.S. Government entities     1,769       -       1,769       -  
Obligations of states and political subdivisions     179,501       -       179,501       -  
FHLMC and FNMA stock     9,560       13       9,547       -  
Corporate securities     1,036,089       -       1,036,089       -  
Other securities     1,814       -       1,814       -  
Total securities available for sale   $ 2,090,477     $ 13     $ 2,090,464     $ -  

 

 

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    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       -  
Securities of U.S. Government entities     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 September 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
                    Nine Months Ended
    At September 30, 2017   September 30, 2017
    Carrying Value   Level 1   Level 2   Level 3   Total Losses
    (In thousands)    
Other real estate owned   $ 1,426     $ -     $ -     $ 1,426     $ (219 )
Impaired loans     10,821       -       -       10,821       -  
Total assets measured at fair value on a nonrecurring basis   $ 12,247     $ -     $ -     $ 12,247     $ (219 )

 

                    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.

 

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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 $23,628 thousand at September 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.

 

    At September 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   $ 561,757     $ 561,757     $ 561,757     $ -     $ -  
Investment securities held to maturity     1,204,240       1,208,279       -       1,208,279       -  
Loans     1,261,154       1,264,503       -       -       1,264,503  
                                         
Financial Liabilities:                                        
Deposits   $ 4,734,580     $ 4,731,990     $ -     $ 4,492,655     $ 239,335  
Short-term borrowed funds     66,337       66,337       -       66,337       -  

 

 

 

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    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 $307,269 thousand and $304,508 thousand at September 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 $19,956 thousand and $21,732 thousand at September 30, 2017 and December 31, 2016, respectively. The Company had no commitments outstanding for commercial and similar letters of credit at September 30, 2017 and December 31, 2016. The Company had a reserve for unfunded commitments of $2,308 thousand at September 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.

 

The Company has determined that it will be obligated to provide refunds of revenue recognized in prior years to some customers. The Company is not yet able to quantify the amount of refunds and has therefore not accrued a liability.  The Company will provide additional information and accrue a liability when a determination of the probable amount of these obligations is made.

 

The October 2017 California wildfires have disrupted operations in the Company's geographic footprint mainly due to temporary power outages, unhealthy air quality, and evacuations affecting some branches and an operations center. The Company maintains secondary power generation capability at its principal operations center. The Company maintains, and regularly tests, disaster recovery plans and protocols to be prepared for disasters such as these wildfires. The Company has not experienced a casualty loss as of the date of this report, but does carry customary casualty insurance to protect against such risk.

 

Management has performed an initial evaluation of loss exposure caused by the wildfires within the Company's loan portfolio and investment portfolio; Management has not identified any increased risk of loss, however, continuing Management evaluations and further wildfire developments could result in identification of losses which are not currently apparent.

 


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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 Nine Months
    Ended September 30,
    2017   2016   2017   2016
    (In thousands, except per share data)
Net income applicable to common equity (numerator)   $ 15,017     $ 15,628     $ 45,865     $ 44,400  
Basic earnings per common share                                
Weighted average number of common shares outstanding - basic
(denominator)
    26,309       25,641       26,260       25,558  
Basic earnings per common share   $ 0.57     $ 0.61     $ 1.75     $ 1.74  
Diluted earnings per common share                                
Weighted average number of common shares outstanding - basic     26,309       25,641       26,260       25,558  
Add common stock equivalents for options     95       46       119       37  
Weighted average number of common shares outstanding - diluted
(denominator)
    26,404       25,687       26,379       25,595  
Diluted earnings per common share   $ 0.57     $ 0.61     $ 1.74     $ 1.73  

 

 

For the three and nine months ended September 30, 2017, options to purchase 376 thousand and 343 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 nine months ended September 30, 2016, options to purchase 771 thousand and 948 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

 

 

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

 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

    For the Three Months   For the Nine Months
    Ended September 30,
    2017   2016   2017   2016
    (In thousands, except per share data)
Net Interest and Loan Fee Income (FTE)(1)   $ 35,680     $ 36,176     $ 107,474     $ 109,118  
Reversal of Provision for Loan Losses     -       (3,200 )     (1,900 )     (3,200 )
Noninterest Income     12,548       11,598       36,328       35,029  
Noninterest Expense     24,114       26,088       73,125       77,175  
Income Before Income Taxes (FTE)(1)     24,114       24,886       72,577       70,172  
Income Tax Provision (FTE)(1)     9,097       9,258       26,712       25,772  
Net Income   $ 15,017     $ 15,628     $ 45,865     $ 44,400  
                                 
Average Common Shares Outstanding     26,309       25,641       26,260       25,558  
Average Diluted Common Shares Outstanding     26,404       25,687       26,379       25,595  
Common Shares Outstanding at Period End     26,319       25,665                  
                                 
Per Common Share:                                
Basic Earnings   $ 0.57     $ 0.61     $ 1.75     $ 1.74  
Diluted Earnings     0.57       0.61       1.74       1.73  
Book Value   $ 22.95     $ 21.94                  
                                 
Financial Ratios:                                
Return on Assets     1.09 %     1.18 %     1.13 %     1.14 %
Return on Common Equity     9.94 %     11.39 %     10.36 %     11.04 %
Net Interest Margin (FTE)(1)     3.10 %     3.21 %     3.12 %     3.27 %
Net Loan Losses (Recoveries) to Average Loans     0.15 %     (0.19 %)     0.04 %     0.02 %
Efficiency Ratio(2)     50.0 %     54.6 %     50.9 %     53.5 %
                                 
Average Balances:                                
Assets   $ 5,441,612     $ 5,253,502     $ 5,407,661     $ 5,204,418  
Earning Assets     4,587,848       4,489,317       4,601,931       4,448,261  
Loans     1,287,740       1,386,186       1,325,128       1,447,061  
Deposits     4,714,579       4,588,762       4,692,330       4,552,819  
Shareholders' Equity     599,473       545,771       591,691       537,010  
                                 
Period End Balances:                                
Assets   $ 5,445,808     $ 5,306,778                  
Earning Assets     4,579,499       4,537,756                  
Loans     1,284,782       1,364,329                  
Deposits     4,734,580       4,644,870                  
Shareholders' Equity     603,957       562,996                  
                                 
Capital Ratios at Period End:                                
Total Risk Based Capital     16.71 %     15.16 %                
Tangible Equity to Tangible Assets     8.98 %     8.37 %                
                                 
Dividends Paid Per Common Share   $ 0.39     $ 0.39     $ 1.17     $ 1.17  
Common Dividend Payout Ratio     68 %     64 %     67 %     68 %

 

The above financial summary has been derived from the Company's unaudited consolidated financial statements. This information should be read

in conjunction with those statements, notes and the other information included elsewhere herein. Percentages under the heading "Financial Ratios"

are annualized with the exception of the efficiency ratio.

 

(1) Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("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).

 

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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 nine months of 2017 average volume of checking and savings deposits was 95 percent of average total deposits.

 

The Company recognized a reversal of the provision for loan losses of $1.9 million in the first nine months of 2017. Credit quality improved during the first nine months of 2017 with nonperforming assets declining $4 million to $8 million at September 30, 2017. The Company’s net losses were $426 thousand for the first nine months of 2017. These developments were reflected in Management’s evaluation of credit quality, the level of the provision for loan losses, and the adequacy of the allowance for loan losses at September 30, 2017.

 

The Company’s long-term strategy also includes controlling operating costs, or “noninterest expense.” Noninterest expense of $73.1 million for the first nine months of 2017 was $4.1 million lower than for the first nine months of 2016.

 

The Company presents its net interest margin and net interest income on an 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 an 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 $15.0 million or $0.57 diluted earnings per common share for the third quarter 2017 and net income of $45.9 million or $1.74 diluted earnings per common share for the nine months ended September 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. Third quarter and first nine months 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 or third quarter 2017 results by a meaningful amount. Third quarter and first nine months of 2017 results compare to net income of $15.6 million or $0.61 diluted earnings per common share for the third quarter 2016 and net income of $44.4 million or $1.73 diluted earnings per common share for the nine months ended September 30, 2016.

 

 

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Net Income

 

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

 

&n