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

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2018

or

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

For the transition period from __________ to __________.

 

Commission file number: 001-09383

 

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

Yes ☒   No ☐

 

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

 

Yes ☒   No ☐

 

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

 

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

 

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

 

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

 

Yes ☐   No ☒

 

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

 

Title of Class   Shares outstanding as of July 26, 2018
     
Common Stock,   26,671,148
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 29
     
Item 3 Quantitative and Qualitative Disclosures about Market Risk 51
     
Item 4 Controls and Procedures 52
     
PART II - OTHER INFORMATION  
   
Item 1 Legal Proceedings 52
     
Item 1A Risk Factors 52
     
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3 Defaults upon Senior Securities 53
     
Item 4 Mine Safety Disclosures 53
     
Item 5 Other Information 53
     
Item 6 Exhibits 53
     
Signatures 54
   
Exhibit Index 55
   
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 56
   
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 57
   
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 58
   
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 59

 

 

 

 

 

- 2 -

 

FORWARD-LOOKING STATEMENTS

 

This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation (the “Company”) for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, future credit quality and performance, the appropriateness of the allowance for loan losses, loan growth or 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, 2017, 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 1Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands)

 

   At June 30,  At December 31,
   2018  2017
Assets:          
Cash and due from banks  $629,146   $575,002 
Equity securities   1,750    1,800 
Debt securities available for sale   2,363,194    2,191,707 
Debt securities held to maturity, with fair values of: $1,058,573 at June 30, 2018 and $1,155,342 at December 31, 2017   1,076,456    1,158,864 
Loans   1,200,192    1,287,982 
Allowance for loan losses   (23,040)   (23,009)
Loans, net of allowance for loan losses   1,177,152    1,264,973 
Other real estate owned   939    1,426 
Premises and equipment, net   35,774    35,301 
Identifiable intangibles, net   2,827    3,850 
Goodwill   121,673    121,673 
Other assets   168,933    158,450 
Total Assets  $5,577,844   $5,513,046 
           
Liabilities:          
Noninterest-bearing deposits  $2,205,971   $2,197,526 
Interest-bearing deposits   2,681,151    2,630,087 
Total deposits   4,887,122    4,827,613 
Short-term borrowed funds   68,894    58,471 
Other liabilities   35,690    36,723 
Total Liabilities   4,991,706    4,922,807 
           
Contingencies (Note 10)          
           
Shareholders' Equity:          
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,649 at June 30, 2018 and 26,425 at December 31, 2017   443,338    431,734 
Deferred compensation   1,533    1,533 
Accumulated other comprehensive loss   (49,900)   (16,832)
Retained earnings   191,167    173,804 
Total Shareholders' Equity   586,138    590,239 
Total Liabilities and Shareholders' Equity  $5,577,844   $5,513,046 

 

See accompanying notes to unaudited consolidated financial statements.

 

- 4 -

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   For the Three Months  For the Six Months
   Ended June 30,
   2018  2017  2018  2017
   (In thousands, except per share data)
Interest and Loan Fee Income:                    
Loans  $14,957   $15,468   $29,654   $31,248 
Equity securities   86    70    171    144 
Debt securities available for sale   14,323    10,639    27,874    20,814 
Debt securities held to maturity   6,216    6,986    12,390    14,281 
Total Interest and Loan Fee Income   35,582    33,163    70,089    66,487 
Interest Expense:                    
Deposits   449    465    899    934 
Short-term borrowed funds   10    11    19    22 
Total Interest Expense   459    476    918    956 
Net Interest and Loan Fee Income   35,123    32,687    69,171    65,531 
Reversal of Provision for Loan Losses   -    (1,900)   -    (1,900)
Net Interest and Loan Fee Income After Reversal of Provision for Loan Losses   35,123    34,587    69,171    67,431 
Noninterest Income:                    
Service charges on deposit accounts   4,645    4,945    9,397    9,868 
Merchant processing services   2,305    2,052    4,725    3,927 
Debit card fees   1,698    1,586    3,303    3,067 
Trust fees   726    716    1,469    1,418 
ATM processing fees   698    654    1,362    1,229 
Other service fees   650    662    1,281    1,312 
Financial services commissions   141    142    255    337 
Equity securities losses   (14)   -    (50)   - 
Other noninterest income   920    1,366    1,982    2,622 
Total Noninterest Income   11,769    12,123    23,724    23,780 
Noninterest Expense:                    
Salaries and related benefits   13,186    12,981    26,537    26,051 
Occupancy and equipment   4,864    4,776    9,555    9,663 
Outsourced data processing services   2,299    2,188    4,639    4,327 
Professional fees   871    410    1,656    1,021 
Amortization of identifiable intangibles   453    762    1,023    1,562 
Courier service   422    438    885    859 
Other noninterest expense   1,882    2,841    3,896    5,528 
Total Noninterest Expense   23,977    24,396    48,191    49,011 
Income Before Income Taxes   22,915    22,314    44,704    42,200 
Provision for income taxes   4,905    6,515    9,188    11,352 
Net Income  $18,010   $15,799   $35,516   $30,848 
                     
Average Common Shares Outstanding   26,630    26,299    26,581    26,235 
Average Diluted Common Shares Outstanding   26,728    26,402    26,696    26,366 
Per Common Share Data:                    
Basic earnings  $0.68   $0.60   $1.34   $1.18 
Diluted earnings   0.67    0.60    1.33    1.17 
Dividends paid   0.40    0.39    0.80    0.78 

 

See accompanying notes to unaudited consolidated financial statements.

 

- 5 -

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

 

   For the Three Months  For the Six Months
   Ended June 30,
   2018  2017  2018  2017
   (In thousands)
Net income  $18,010   $15,799   $35,516   $30,848 
Other comprehensive (loss) income:                    
Changes in unrealized gains on debt securities available for sale   (9,154)   6,160    (42,000)   7,234 
Deferred tax benefit (expense)   2,706    (2,590)   12,415    (3,042)
Changes in unrealized gains on debt securities available for sale, net of tax   (6,448)   3,570    (29,585)   4,192 
Post-retirement benefit transition obligation amortization   -    15    -    30 
Deferred tax expense   -    (6)   -    (12)
Post-retirement benefit transition obligation amortization, net of tax   -    9    -    18 
Total other comprehensive (loss) income   (6,448)   3,579    (29,585)   4,210 
Total comprehensive (loss) income  $11,562   $19,378   $5,931   $35,058 

 

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  (Loss) Income  Earnings  Total
   (In thousands)
                   
Balance, December 31, 2016   25,907   $404,606   $1,533   $(10,074)  $165,302   $561,367 
Net income for the period                       30,848    30,848 
Other comprehensive income                  4,210         4,210 
Exercise of stock options   389    18,290                   18,290 
Restricted stock activity   13    707                   707 
Stock based compensation        912                   912 
Stock awarded to employees   1    54                   54 
Retirement of common stock   (6)   (90)             (224)   (314)
Dividends                       (20,480)   (20,480)
Balance, June 30, 2017   26,304   $424,479   $1,533   $(5,864)  $175,446   $595,594 
                               
Balance, December 31, 2017   26,425   $431,734   $1,533   $(16,832)  $173,804   $590,239 
Cumulative effect of equity securities losses reclassified                  142    (142)   - 
Adjusted Balance, January 1, 2018   26,425    431,734    1,533    (16,690)   173,662    590,239 
Reclass stranded tax effects resulting                              
from the Tax Cuts and Jobs Act                  (3,625)   3,625    - 
Net income for the period                       35,516    35,516 
Other comprehensive loss                  (29,585)        (29,585)
Exercise of stock options   212    9,483                   9,483 
Restricted stock activity   20    1,143                   1,143 
Stock based compensation   -    1,050                   1,050 
Stock awarded to employees   1    77                   77 
Retirement of common stock   (9)   (149)             (375)   (524)
Dividends                       (21,261)   (21,261)
Balance, June 30, 2018   26,649   $443,338   $1,533   $(49,900)  $191,167   $586,138 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

- 7 -

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Six Months
   Ended June 30,
   2018  2017
   (In thousands)
Operating Activities:          
Net income  $35,516   $30,848 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization/accretion   12,594    12,068 
Reversal of provision for loan losses   -    (1,900)
Net amortization of deferred loan (fees) costs   (112)   21 
Increase in interest income receivable   (1,375)   (415)
Life insurance premiums paid   (406)   (126)
Decrease in income taxes receivable   2,556    91 
(Increase) decrease in net deferred tax asset   (204)   262 
Decrease in other assets   60    1,155 
Stock option compensation expense   1,050    912 
Increase in interest expense payable   50    33 
Increase (decrease) in other liabilities   137    (2,553)
Equity securities losses   50    - 
Net writedown of premises and equipment   3    60 
Net gain on sale of foreclosed assets   (46)   (72)
Writedown of foreclosed assets   27    - 
Net Cash Provided by Operating Activities   49,900    40,384 
           
Investing Activities:          
Net repayments of loans   89,041    35,852 
Net payments under FDIC(1) indemnification agreements   -    (63)
Purchases of debt securities available for sale   (439,212)   (253,658)
Proceeds from sale/maturity/calls of debt securities available for sale   220,037    171,632 
Proceeds from maturity/calls of debt securities held to maturity   78,551    80,433 
Purchases of premises and equipment   (2,309)   (1,050)
Net change in FRB(2) stock   -    24 
Proceeds from sale of foreclosed assets   506    1,521 
Net Cash (Used in) Provided by Investing Activities   (53,386)   34,691 
           
Financing Activities:          
Net increase (decrease) in deposits   59,509    (22,171)
Net change in short-term borrowings   10,423    16,691 
Exercise of stock options   9,483    18,290 
Retirement of common stock   (524)   (314)
Common stock dividends paid   (21,261)   (20,480)
Net Cash Provided by (Used in) Financing Activities   57,630    (7,984)
Net Change In Cash and Due from Banks   54,144    67,091 
Cash and Due from Banks at Beginning of Period   575,002    462,271 
Cash and Due from Banks at End of Period  $629,146   $529,362 
           
Supplemental Cash Flow Disclosures:          
Supplemental disclosure of non cash activities:          
Loan collateral transferred to other real estate owned  $-   $- 
Securities purchases pending settlement   3,159    649 
Supplemental disclosure of cash flow activities:          
Interest paid for the period   885    955 
Income tax payments for the period   6,776    10,998 

 

See accompanying notes to unaudited consolidated financial statements.

 

(1)Federal Deposit Insurance Corporation ("FDIC")
(2)Federal Reserve Bank ("FRB")

 

- 8 -

 


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and six months ended June 30, 2018 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, 2017.

 

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, 2017. 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, it is reasonably possible conditions could change materially affecting results of operations and financial conditions.

 

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.

 

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

 

Recently Adopted Accounting Standards

 

In the six months ended June 30, 2018, the Company adopted the following new accounting guidance:

 

FASB Accounting Standard Update (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 ASU also requires additional disclosures. 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, which are the primary sources of the Company’s net interest income.

 

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, debit card fees, ATM processing fees, trust fees and other service charges, commissions and fees. Our revenue recognition practices within the scope of the ASU as described below did not change in any material regard upon adoption of the ASU.

 

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

 

- 9 -

 

Merchant Processing Services and Debit Card Fees: The Company earns interchange fees from cardholder transactions conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

 

Trust Fees: The Company earns trust fees from its contracts with customers to manage assets for investment or custody services. These fees are primarily earned over time as the Company provides the contracted monthly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Other related services provided, which are based on a fixed fee schedule, are recognized when the services are rendered.

 

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. The Company does not finance the sale of OREO.

 

The Company adopted the ASU on January 1, 2018 and no cumulative adjustment was required.

 

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 (Note 9).

 

The Company was required to adopt the ASU provisions on January 1, 2018, and for those equity securities with readily determinable fair values, the Company elected 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 elected the prospective transition approach. The impact of the adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments. As a result of implementing the ASU provisions, effective January 1, 2018, the Company recorded a cumulative effect adjustment to retained earnings of $142 thousand.

 

FASB ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, was issued February 2018. The ASU eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Company early adopted the provisions of the ASU effective January 1, 2018, by reclassifying the Company’s $3,625 thousand stranded tax effect.

 

Recently Issued Accounting Standards

 

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 effective 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, 2017, the Company leased 58 of its operating facilities; the remaining minimum lease payments were $17.5 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 debt securities available-for-sale 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.

 

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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. 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 ASU requires the premium to be amortized to the earliest call date. The ASU does 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.

 

FASB ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, was issued August 2017. The ASU will expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The ASU also provides for a one-time reclassification of prepayable assets from held-to-maturity (HTM) to available for sale (AFS) regardless of derivative use.

 

The Company will be required to adopt the ASU provisions on January 1, 2019. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company’s Board of Directors. However, the Company is currently evaluating the prepayable assets in the HTM portfolio to determine if a one-time reclassification of prepayable assets from HTM to the AFS will occur upon implementation.

 

 

 

 

 

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Note 3: Investment Securities

 

Effective January 1, 2018, upon adoption of ASU 2016-01, equity securities included in the Company’s available for sale portfolio of $1,800 thousand were reclassified to equity securities. The reclassification of equity securities resulted in recording a cumulative effect adjustment to retained earnings of $142 thousand, net of tax.

 

At June 30, 2018, the market value of equity securities was $1,750 thousand. During the six months ended June 30, 2018, the Company recognized gross unrealized holding losses of $50 thousand in earnings.

 

An analysis of the amortized cost and fair value by major categories of debt securities available for sale, which are carried at fair value with net unrealized gains (losses) reported on an after-tax basis as a component of cumulative other comprehensive income, and debt securities held to maturity, which are carried at amortized cost, follows:

 

      Gross  Gross   
   Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
At June 30, 2018  (In thousands)
Debt securities available for sale                    
Securities of U.S. Government sponsored entities  $122,296   $-   $(4,924)  $117,372 
Agency residential mortgage-backed securities (MBS)   894,339    348    (37,322)   857,365 
Non-agency residential MBS   127    1    -    128 
Agency commercial MBS   2,219    -    (41)   2,178 
Securities of U.S. Government entities   1,441    -    (8)   1,433 
Obligations of states and political subdivisions   184,865    2,466    (3,640)   183,691 
Corporate securities   1,228,751    613    (28,337)   1,201,027 
Total debt securities available for sale   2,434,038    3,428    (74,272)   2,363,194 
Debt securities held to maturity                    
Agency residential MBS   493,872    256    (18,857)   475,271 
Non-agency residential MBS   3,743    74    -    3,817 
Agency commercial MBS   1,886    -    (6)   1,880 
Obligations of states and political subdivisions   576,955    4,039    (3,389)   577,605 
Total debt securities held to maturity   1,076,456    4,369    (22,252)   1,058,573 
Total  $3,510,494   $7,797   $(96,524)  $3,421,767 

 

      Gross  Gross   
   Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
At December 31, 2017  (In thousands)
Debt securities available for sale                    
Securities of U.S. Government sponsored entities  $122,285   $1   $(2,967)  $119,319 
Agency residential MBS   787,679    522    (20,495)   767,706 
Non-agency residential MBS   153    1    -    154 
Agency commercial MBS   2,244    -    (25)   2,219 
Securities of U.S. Government entities   1,612    -    (22)   1,590 
Obligations of states and political subdivisions   182,907    3,796    (1,482)   185,221 
Corporate securities   1,123,671    1,104    (9,277)   1,115,498 
Total debt securities available for sale   2,220,551    5,424    (34,268)   2,191,707 
Debt securities held to maturity                    
Agency residential MBS   545,883    606    (9,850)   536,639 
Non-agency residential MBS   4,462    70    -    4,532 
Agency commercial MBS   9,041    -    (66)   8,975 
Obligations of states and political subdivisions   599,478    7,736    (2,018)   605,196 
Total debt securities held to maturity   1,158,864    8,412    (11,934)   1,155,342 
Total  $3,379,415   $13,836   $(46,202)  $3,347,049 

 

 

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

 

   At June 30, 2018
   Debt Securities Available  Debt Securities Held
   for Sale  to Maturity
   Amortized  Fair  Amortized  Fair
   Cost  Value  Cost  Value
   (In thousands)
Maturity in years:                    
1 year or less  $124,211   $123,868   $77,266   $77,884 
Over 1 to 5 years   1,192,306    1,162,929    239,877    239,547 
Over 5 to 10 years   180,999    179,109    256,872    257,158 
Over 10 years   39,837    37,617    2,940    3,016 
Subtotal   1,537,353    1,503,523    576,955    577,605 
MBS   896,685    859,671    499,501    480,968 
Total  $2,434,038   $2,363,194   $1,076,456   $1,058,573 

 

   At December 31, 2017
   Debt Securities Available  Debt Securities Held
   for Sale  to Maturity
   Amortized  Fair  Amortized  Fair
   Cost  Value  Cost  Value
   (In thousands)
Maturity in years:                    
1 year or less  $193,337   $193,385   $50,295   $51,105 
Over 1 to 5 years   1,031,807    1,023,047    269,050    269,471 
Over 5 to 10 years   159,266    160,042    277,170    281,546 
Over 10 years   46,065    45,154    2,963    3,074 
Subtotal   1,430,475    1,421,628    599,478    605,196 
MBS   790,076    770,079    559,386    550,146 
Total  $2,220,551   $2,191,707   $1,158,864   $1,155,342 

 

 

Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At June 30, 2018 and December 31, 2017, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

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

 

   Debt Securities Available for Sale
   At June 30, 2018
   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   2   $1,972   $(18)   8   $115,320   $(4,906)   10   $117,292   $(4,924)
Agency residential MBS   19    353,273    (7,324)   50    469,052    (29,998)   69    822,325    (37,322)
Agency commercial MBS   1    323    (10)   1    1,855    (31)   2    2,178    (41)
Securities of U.S. Government entities   -    -    -    3    1,433    (8)   3    1,433    (8)
Obligations of states and political subdivisions   48    32,632    (588)   47    52,964    (3,052)   95    85,596    (3,640)
Corporate securities   80    794,677    (18,385)   37    291,282    (9,952)   117    1,085,959    (28,337)
Total   150   $1,182,877   $(26,325)   146   $931,906   $(47,947)   296   $2,114,783   $(74,272)

 

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

 

   Debt Securities Held to Maturity
   At June 30, 2018
   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   27   $39,066   $(788)   68   $426,277   $(18,069)   95   $465,343   $(18,857)
Agency commercial MBS   1    1,880    (6)   -    -    -    1    1,880    (6)
Obligations of states and political subdivisions   224    222,929    (1,382)   56    57,045    (2,007)   280    279,974    (3,389)
Total   252   $263,875   $(2,176)   124   $483,322   $(20,076)   376   $747,197   $(22,252)

 

The unrealized losses on the Company’s debt securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates debt 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. One corporate bond with a carrying value of $15.0 million and a market value of $13.9 million at June 30, 2018, is rated below investment grade. 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 debt securities and has concluded that it is more likely than not that it will not be required to sell the debt securities prior to recovery of the amortized cost basis. Therefore, the Company does not consider these debt securities to be other-than-temporarily impaired as of June 30, 2018.

 

The fair values of the debt 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 debt securities declines. As a result, other than temporary impairments may occur in the future.

 

As of June 30, 2018 and December 31, 2017, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $718,005 thousand and $715,774 thousand, respectively.

 

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

 

   Debt Securities Available for Sale
   At December 31, 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   1   $996   $(2)   8   $117,252   $(2,965)   9   $118,248   $(2,967)
Agency residential MBS   7    238,554    (1,501)   51    516,711    (18,994)   58    755,265    (20,495)
Non-agency residential MBS   1    1    -    -    -    -    1    1    - 
Agency commercial MBS   2    2,219    (25)   -    -    -    2    2,219    (25)
Securities of U.S. Government entities   -    -    -    3    1,590    (22)   3    1,590    (22)
Obligations of states and political subdivisions   50    21,453    (228)   35    52,071    (1,254)   85    73,524    (1,482)
Corporate securities   64    571,112    (4,047)   38    282,924    (5,230)   102    854,036    (9,277)
Total   125   $834,335   $(5,803)   135   $970,548   $(28,465)   260   $1,804,883   $(34,268)

 

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

 

   Debt Securities Held to Maturity
   At December 31, 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   15   $30,218   $(201)   65   $479,775   $(9,649)   80   $509,993   $(9,850)
Agency commercial MBS   1    1,913    (4)   1    7,062    (62)   2    8,975    (66)
Obligations of states and political subdivisions   146    131,032    (553)   59    58,979    (1,465)   205    190,011    (2,018)
Total   162   $163,163   $(758)   125   $545,816   $(11,176)   287   $708,979   $(11,934)

 

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

 

   For the Three Months  For the Six Months
   Ended June 30,
   2018  2017  2018  2017
   (In thousands)
             
Taxable  $15,598   $12,481   $30,547   $24,627 
Tax-exempt from regular federal income tax   5,027    5,214    9,888    10,612 
Total interest income from investment securities  $20,625   $17,695   $40,435   $35,239 

 

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Note 4: Loans, Allowance for Loan Losses and Other Real Estate Owned

 

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

 

   At June 30,  At December 31,
   2018  2017
   (In thousands)
Commercial  $288,499   $335,996 
Commercial Real Estate   552,294    568,584 
Construction   3,254    5,649 
Residential Real Estate   54,030    65,183 
Consumer Installment & Other   302,115    312,570 
Total  $1,200,192   $1,287,982 

 

Total loans outstanding reported above include loans purchased from the FDIC of $70,835  thousand and $83,478 thousand at June 30, 2018 and December 31, 2017, 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
   Six Months Ended  Year Ended
   June 30, 2018  December 31, 2017
Accretable yield:  (In thousands)
Balance at the beginning of the period  $738   $1,237 
Reclassification from nonaccretable difference   696    1,852 
Accretion   (1,114)   (2,351)
Balance at the end of the period  $320   $738 
           
Accretion  $(1,114)  $(2,351)
Change in FDIC indemnification   2    192 
(Increase) in interest income  $(1,112)  $(2,159)

 

The following summarizes activity in the allowance for loan losses:

 

   Allowance for Loan Losses
   For the Three Months Ended June 30, 2018
               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  $8,517   $3,824   $175   $908   $5,739   $3,918   $23,081 
(Reversal) provision   (662)   (35)   35    156    665    (159)   - 
Chargeoffs   -    -    -    -    (805)   -    (805)
Recoveries   420    -    -    -    344    -    764 
Total allowance for loan losses  $8,275   $3,789   $210   $1,064   $5,943   $3,759   $23,040 

 

   Allowance for Loan Losses
   For the Six Months Ended June 30, 2018
               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  $7,746   $3,849   $335   $995   $6,418   $3,666   $23,009 
(Reversal) provision   (679)   (60)   (125)   69    702    93    - 
Chargeoffs   (41)   -    -    -    (2,170)   -    (2,211)
Recoveries   1,249    -    -    -    993    -    2,242 
Total allowance for loan losses  $8,275   $3,789   $210   $1,064   $5,943   $3,759   $23,040 

 

 

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   Allowance for Loan Losses
   For the Three Months Ended June 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  $8,593   $3,522   $112   $1,214   $6,984   $4,494   $24,919 
(Reversal) provision   (38)   (55)   (1,851)   (109)   736    (583)   (1,900)
Chargeoffs   (726)   -    -    -    (1,158)   -    (1,884)
Recoveries   338    78    1,899    -    653    -    2,968 
Total allowance for loan losses  $8,167   $3,545   $160   $1,105   $7,215   $3,911   $24,103 

 

   Allowance for Loan Losses
   For the Six Months Ended June 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 
Provision (reversal)   171    127    (1,891)   (225)   842    (924)   (1,900)
Chargeoffs   (829)   -    -    -    (2,897)   -    (3,726)
Recoveries   498    88    1,899    -    1,290    -    3,775 
Total allowance for loan losses  $8,167   $3,545   $160   $1,105   $7,215   $3,911   $24,103 

 

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

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
   At June 30, 2018
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Individually evaluated for impairment  $4,720   $168   $-   $-   $-   $-   $4,888 
Collectively evaluated for impairment   3,555    3,621    210    1,064    5,943    3,759    18,152 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    - 
Total  $8,275   $3,789   $210   $1,064   $5,943   $3,759   $23,040 
Carrying value of loans:                                   
Individually evaluated for impairment  $10,328   $10,338   $-   $204   $-   $-   $20,870 
Collectively evaluated for impairment   278,137    541,729    3,254    53,826    301,962    -    1,178,908 
Purchased loans with evidence of credit deterioration   34    227    -    -    153    -    414 
Total  $288,499   $552,294   $3,254   $54,030   $302,115   $-   $1,200,192 

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
   At December 31, 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  $4,814   $171   $-   $-   $-   $-   $4,985 
Collectively evaluated for impairment   2,932    3,678    335    995    6,418    3,666    18,024 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    - 
Total  $7,746   $3,849   $335   $995   $6,418   $3,666   $23,009 
Carrying value of loans:                                   
Individually evaluated for impairment  $10,675   $14,234   $-   $208   $-   $-   $25,117 
Collectively evaluated for impairment   325,291    553,769    5,649    64,975    312,406    -    1,262,090 
Purchased loans with evidence of credit deterioration   30    581    -    -    164    -    775 
Total  $335,996   $568,584   $5,649   $65,183   $312,570   $-   $1,287,982 

 

The Company’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 Company’s subsidiary, Westamerica Bank (the “Bank”) maintains a Loan Review Department which reports directly to Audit Committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans and validates management assigned credit risk grades on 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 management and validated by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

 

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

 

   Loan Credit Risk Profile by Internally Assigned Grade
   At June 30, 2018
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment and
Other
  Total
   (In thousands)
Grade:                  
Pass  $276,492   $536,256   $3,254   $52,960   $300,173   $1,169,135 
Substandard   12,007    16,038    -    1,070    1,645    30,760 
Doubtful   -    -    -    -    105    105 
Loss   -    -    -    -    192    192 
Total  $288,499   $552,294   $3,254   $54,030   $302,115   $1,200,192 

 

Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification on $6,473 thousand residential real estate and consumer loans.

 

   Loan Credit Risk Profile by Internally Assigned Grade
   At December 31, 2017
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment and
Other
  Total
   (In thousands)
Grade:                  
Pass  $324,185   $548,853   $5,649   $62,253   $310,429   $1,251,369 
Substandard   11,811    19,731    -    2,930    1,370    35,842 
Doubtful   -    -    -    -    1    1 
Loss   -    -    -    -    770    770 
Total  $335,996   $568,584   $5,649   $65,183   $312,570   $1,287,982 

 

Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification on $7,766 thousand residential real estate and consumer loans.

 

The following tables summarize loans by delinquency and nonaccrual status:

 

   Summary of Loans by Delinquency and Nonaccrual Status
   At June 30, 2018
   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  $287,123   $899   $253   $-   $224   $288,499 
Commercial real estate   543,502    3,320    803    -    4,669    552,294 
Construction   3,254    -    -    -    -    3,254 
Residential real estate   53,099    -    931    -    -    54,030 
Consumer installment and other   298,436    2,779    707    193    -    302,115 
Total  $1,185,414   $6,998   $2,694   $193   $4,893   $1,200,192 

 

   Summary of Loans by Delinquency and Nonaccrual Status
   At December 31, 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  $334,908   $627   $164   $-   $297   $335,996 
Commercial real estate   561,883    1,143    125    -    5,433    568,584 
Construction   5,649    -    -    -    -    5,649 
Residential real estate   65,183    -    -    -    -    65,183 
Consumer installment and other   307,445    3,321    1,077    531    196    312,570 
Total  $1,275,068   $5,091   $1,366   $531   $5,926   $1,287,982 

 

 

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There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2018 and December 31, 2017.

 

The following summarizes impaired loans:

 

   Impaired Loans
   At June 30,  At December 31,
   2018  2017
      Unpaid        Unpaid   
   Recorded  Principal  Related  Recorded  Principal  Related
   Investment  Balance  Allowance  Investment  Balance  Allowance
   (In thousands)
With no related allowance recorded:                              
Commercial  $1,065   $1,107   $-   $1,212   $1,271   $- 
Commercial real estate   9,359    11,067    -    13,169    14,985    - 
Residential real estate   204    234    -    208    239    - 
Consumer installment and other   153    260    -    360    466    - 
Total with no related allowance recorded   10,781    12,668    -    14,949    16,961    - 
                               
With an allowance recorded:                              
Commercial   9,496    9,496    4,720    9,764    9,764    4,814 
Commercial real estate   1,765    1,767    168    1,790    1,792    171 
Total with an allowance recorded   11,261    11,263    4,888    11,554    11,556    4,985 
Total  $22,042   $23,931   $4,888   $26,503   $28,517   $4,985 

 

Impaired loans include troubled debt restructured loans. Impaired loans at June 30, 2018, included $9,089 thousand of restructured loans, $4,134 thousand of which were on nonaccrual status. Impaired loans at December 31, 2017, included $12,081 thousand of restructured loans, $4,285 thousand of which were on nonaccrual status.

 

   Impaired Loans
   For the Three Months Ended June 30,  For the Six Months Ended June 30,
   2018  2017  2018  2017
   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  $10,689   $145   $11,194   $118   $10,793   $320   $11,243   $236 
Commercial real estate   11,837    211    15,297    224    12,796    426    14,898    461 
Residential real estate   205    4    368    5    206    8    558    9 
Consumer installment and other   254    3    514    7    305    6    529    14 
Total  $22,985   $363   $27,373   $354   $24,100   $760   $27,228   $720 

 

The following tables provide information on troubled debt restructurings:

 

   Troubled Debt Restructurings
   At June 30, 2018
            Period-End
            Individual
   Number of  Pre-Modification  Period-End  Impairment
   Contracts  Carrying Value  Carrying Value  Allowance
   ($ in thousands)
Commercial   6   $2,377   $978   $36 
Commercial real estate   8    9,237    7,907    - 
Residential real estate   1    241    204    - 
Total   15   $11,855   $9,089   $36 

 

 

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   Troubled Debt Restructurings
   At December 31, 2017
            Period-End
            Individual
   Number of  Pre-Modification  Period-End  Impairment
   Contracts  Carrying Value  Carrying Value  Allowance
   ($ in thousands)
Commercial   7   $2,393   $1,085   $43 
Commercial real estate   10    11,528    10,788    - 
Residential real estate   1    241    208    - 
Total   18   $14,162   $12,081   $43 

 

During the three and six months ended June 30, 2018, the Company did not modify any loans that were considered troubled debt restructurings. During the three and six months ended June 30, 2017, the Company modified one loan with a carrying value of $407 thousand and three loans with an aggregate carrying value of $680 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the first six months of 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. There were no chargeoffs related to troubled debt restructurings made during the three and six months ended June 30, 2018 and 2017. During the three and six months ended June 30, 2018 and 2017, no troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

 

There were no loans restricted due to collateral requirements at June 30, 2018 and December 31, 2017.

 

There were no loans held for sale at June 30, 2018 and December 31, 2017.

 

At June 30, 2018 and December 31, 2017, the Company held total other real estate owned (OREO) of $939 thousand net of reserve of $1,264   thousand and $1,426 thousand net of reserve of $1,905 thousand, respectively, of which $-0-  was foreclosed residential real estate properties or covered OREO at both dates, respectively. At June 30, 2018 and December 31, 2017 there were no consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process.

 

 

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At June 30, 2018, the Bank did not have credit extended to any one entity exceeding these limits. At June 30, 2018, the Bank had 36 lending relationships each with aggregate amounts exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $56,137 thousand and $53,874 thousand at June 30, 2018 and December 31, 2017, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At June 30, 2018, the Bank held corporate bonds in 78 issuing entities that exceeded $5 million for each issuer.

 

 

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Note 6: Other Assets

 

Other assets consisted of the following:

 

   At June 30,  At December 31,
   2018  2017
   (In thousands)
Equity securities without readily determinable fair values:          
Federal Reserve Bank stock (1)  $14,069   $14,069 
Other investments   158    158 
Total equity securities without readily determinable fair values   14,227    14,227 
Life insurance cash surrender value   55,384    54,101 
Net deferred tax asset   45,733    33,112 
Limited partnership investments   8,819    10,119 
Interest receivable   24,932    23,557 
Prepaid assets   3,945    4,906 
Other assets   15,893    18,428 
Total other assets  $168,933   $158,450 

 

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

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At June 30, 2018, this investment totaled $8,819 thousand and $2,088  thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2017, this investment totaled $10,119 thousand and $2,299  thousand of this amount represented outstanding equity capital commitments. At June 30, 2018, the $2,088 thousand of outstanding equity capital commitments are expected to be paid as follows, $425 thousand in 2018, $131 thousand in 2023, $1,038 thousand in 2024 and $494 thousand in 2025 or thereafter.

 

The amounts recognized in net income for these investments include:

 

   For the Three Months Ended  For the Six Months Ended
   June 30,
   2018  2017  2018  2017
   (In thousands)
Investment loss included in pre-tax income  $700   $450   $1,300   $900 
Tax credits recognized in provision for income taxes   336    462    672    925 

 

 

Note 7: Goodwill and Identifiable Intangible Assets

 

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the three and six months ended June 30, 2018 and year ended December 31, 2017. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three and six months ended June 30, 2018 and year ended December 31, 2017 no such adjustments were recorded.

 

The carrying values of goodwill were:

 

   At June 30, 2018  At December 31, 2017
   (In thousands)
Goodwill  $121,673   $121,673 

 

 

- 21 -

 

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

 

   At June 30,  At December 31,
   2018  2017
   Gross     Gross   
   Carrying  Accumulated  Carrying  Accumulated
   Amount  Amortization  Amount  Amortization
   (In thousands)
Core Deposit Intangibles  $56,808   $(53,981)  $56,808   $(52,987)
Merchant Draft Processing Intangible   10,300    (10,300)   10,300    (10,271)
Total Identifiable Intangible Assets  $67,108   $(64,281)  $67,108   $(63,258)

 

As of June 30, 2018, 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 Six Months ended June 30, 2018 (actual)  $994   $29   $1,023 
Estimate for the remainder of year ending December 31, 2018   898    -    898 
Estimate for year ending December 31, 2019   538    -    538 
2020   287    -    287 
2021   269    -    269 
2022   252    -    252 
2023   236    -    236 

 

 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   Deposits
   At June 30,  At December 31,
   2018  2017
   (In thousands)
Noninterest-bearing  $2,205,971   $2,197,526 
Interest-bearing:          
Transaction   939,002    904,245 
Savings   1,526,228    1,494,024 
Time deposits less than $100 thousand   110,723    117,848 
Time deposits $100 thousand through $250 thousand   70,818    76,578 
Time deposits more than $250 thousand   34,380    37,392 
Total deposits  $4,887,122   $4,827,613 

 

Demand deposit overdrafts of $918  thousand and $2,786  thousand were included as loan balances at June 30, 2018 and December 31, 2017, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $95 thousand and $192 thousand for the three and six months ended June 30, 2018, respectively and $105 thousand and $211 thousand for the three and six months ended June 30, 2017, respectively.

 

 

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

 

   Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
   Remaining Contractual Maturity of the Agreements
   Overnight and Continuous
   At June 30, 2018  At December 31, 2017
Repurchase agreements:  (In thousands)
Collateral securing borrowings:          
Securities of U.S. Government sponsored entities  $72,771   $74,173 
Agency residential MBS   61,555    58,251 
Corporate securities   91,904    105,113 
Total collateral carrying value  $226,230   $237,537 
Total short-term borrowed funds  $68,894   $58,471 

 

 

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. Equity securities and debt securities available for sale 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, debt 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 FASB Accounting Standards 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.

 

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 mutual funds, 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 equity securities, debt securities available for sale and debt 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 most closely reflecting the market generally used as the fair value estimate. In addition, the Company conducts “other than temporary impairment (OTTI)” analysis on a quarterly basis; debt securities selected for OTTI analysis include all debt 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.

 

- 23 -

 

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3. When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the six months ended June 30, 2018 and year ended December 31, 2017, there were no transfers in to or out of levels 1, 2 or 3.

 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

   At June 30, 2018
   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)
Equity securities                    
Mutual funds  $1,750   $-   $1,750   $- 
Total equity securities   1,750    -    1,750    - 
Debt securities available for sale                    
Securities of U.S. Government sponsored entities   117,372    -    117,372    - 
Agency residential MBS   857,365    -    857,365    - 
Non-agency residential MBS   128    -    128    - 
Agency commercial MBS   2,178    -    2,178    - 
Securities of U.S. Government entities   1,433    -    1,433    - 
Obligations of states and political subdivisions   183,691    -    183,691    - 
Corporate securities   1,201,027    -    1,201,027    - 
Total debt securities available for sale   2,363,194    -    2,363,194    - 
Total  $2,364,944   $-   $2,364,944   $- 

 

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   At December 31, 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)
Equity securities                    
Mutual funds  $1,800   $-   $1,800   $- 
Total equity securities   1,800    -    1,800    - 
Debt securities available for sale                    
Securities of U.S. Government sponsored entities   119,319    -    119,319    - 
Agency residential MBS   767,706    -    767,706    - 
Non-agency residential MBS   154    -    154    - 
Agency commercial MBS   2,219    -    2,219    - 
Securities of U.S. Government entities   1,590    -    1,590    - 
Obligations of states and political subdivisions   185,221    -    185,221    - 
Corporate securities   1,115,498    -    1,115,498    - 
Total debt securities available for sale   2,191,707    -    2,191,707    - 
Total  $2,193,507   $-   $2,193,507   $- 

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at June 30, 2018 and December 31, 2017, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

 

               For the
               Six Months Ended
   At June 30, 2018  June 30, 2018
   Carrying Value  Level 1  Level 2  Level 3  Total Losses
   (In thousands)
Other real estate owned  $939   $-   $-   $939   $- 
Impaired loans:                         
Commercial   4,776    -    -    4,776    - 
Commercial real estate   5,707    -    -    5,707    - 
Total assets measured at fair value on a nonrecurring basis  $11,422   $-   $-   $11,422   $- 

 

               For the
               Year Ended
   At December 31, 2017  December 31, 2017
   Carrying Value  Level 1  Level 2  Level 3  Total Losses
   (In thousands)
Other real estate owned  $1,426   $-   $-   $1,426   $(219)
Impaired loans:                         
Commercial   4,950    -    -    4,950    - 
Commercial real estate   5,904    -    -    5,904    - 
Total assets measured at fair value on a nonrecurring basis  $12,280   $-   $-   $12,280   $(219)

 

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. The Company implemented the provisions of ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, effective January 1, 2018. The provisions require the Company to use the “exit price notion” when measuring the fair value of financial instruments for disclosure purposes.

 

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.

 

Debt Securities Held to Maturity The fair values of debt securities were estimated using quoted prices as described above for Level 2 valuation.

 

Loans Loans are valued using the exit price notion. The Company uses a net present value of cash flows methodology that seeks to incorporate interest rate, credit, liquidity and prepayment risks in the fair market value estimation. Inputs to calculation include market rates for similarly offered products, market interest rate projections, credit spreads, estimated credit losses and prepayment assumptions.

 

Prior to adoption of ASU 2016-01, 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 $23,009 thousand at December 31, 2017 was applied against the estimated fair values to recognize estimated future defaults of contractual cash flows.

 

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 Banks and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair value of time deposits was estimated using a net present value of cash flows methodology, incorporating market interest rate projections and rates on alternative funding sources.

 

Prior to adoption of ASU 2016-01, the fair value 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 tables below are 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 tables are recorded in the balance sheet under the indicated captions.

 

The Company has not included assets and liabilities that are not financial instruments, such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company.

 

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   At June 30, 2018
   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  $629,146   $629,146   $629,146   $-   $- 
Debt securities held to maturity   1,076,456    1,058,573    -    1,058,573    - 
Loans   1,177,152    1,211,071    -    -    1,211,071 
                          
Financial Liabilities:                         
Deposits  $4,887,122   $4,883,659   $-   $4,671,201   $212,458 
Short-term borrowed funds   68,894    68,894    -    68,894    - 

 

   At December 31, 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  $575,002   $575,002   $575,002   $-   $- 
Debt securities held to maturity   1,158,864    1,155,342    -    1,155,342    - 
Loans   1,264,973    1,257,811    -    -    1,257,811 
                          
Financial Liabilities:                         
Deposits  $4,827,613   $4,824,586   $-   $4,595,795   $228,791 
Short-term borrowed funds   58,471    58,471    -    58,471    - 

 

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 $295,027 thousand and $272,646 thousand at June 30, 2018 and December 31, 2017, 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 $2,824 thousand and $19,263 thousand at June 30, 2018 and December 31, 2017, respectively. The Company had no commitments outstanding for commercial and similar letters of credit at June 30, 2018 and December 31, 2017. The Company had a reserve for unfunded commitments of $2,308 thousand at June 30, 2018 and $2,308 thousand at December 31, 2017, 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 estimates the probable amount of these obligations will be $5,542 thousand and has accrued a liability for such amount; the estimated liability is subject to revision.

 

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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 Six Months
   Ended June 30,
   2018  2017  2018  2017
   (In thousands, except per share data)
Net income applicable to common equity (numerator)  $18,010   $15,799   $35,516   $30,848 
Basic earnings per common share                    
Weighted average number of common shares outstanding - basic (denominator)   26,630    26,299    26,581    26,235 
Basic earnings per common share  $0.68   $0.60   $1.34   $1.18 
Diluted earnings per common share                    
Weighted average number of common shares outstanding - basic   26,630    26,299    26,581    26,235 
Add common stock equivalents for options   98    103    115    131 
Weighted average number of common shares outstanding - diluted (denominator)   26,728    26,402    26,696    26,366 
Diluted earnings per common share  $0.67   $0.60   $1.33   $1.17 

 

For the three and six months ended June 30, 2018, options to purchase 482 thousand and 486 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

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

 

 

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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 Six Months
   Ended June 30,
   2018  2017  2018  2017
   (In thousands, except per share data)
Net Interest and Loan Fee Income (FTE)(1)  $36,585   $35,764   $72,052   $71,794 
Reversal of Provision for Loan Losses   -    (1,900)   -    (1,900)
Noninterest Income:                    
Securities Losses   (14)   -    (50)   - 
Other Noninterest Income   11,783    12,123    23,774    23,780 
Total Noninterest Income   11,769    12,123    23,724    23,780 
Noninterest Expense   23,977    24,396    48,191    49,011 
Income Before Income Taxes (FTE)(1)   24,377    25,391    47,585    48,463 
Income Tax Provision (FTE)(1)   6,367    9,592    12,069    17,615 
Net Income  $18,010   $15,799   $35,516   $30,848 
                     
Average Common Shares Outstanding   26,630    26,299    26,581    26,235 
Average Diluted Common Shares Outstanding   26,728    26,402    26,696    26,366 
Common Shares Outstanding at Period End   26,649    26,304           
                     
Per Common Share:                    
Basic Earnings  $0.68   $0.60   $1.34   $1.18 
Diluted Earnings   0.67    0.60    1.33    1.17 
Book Value  $21.99   $22.64           
                     
Financial Ratios:                    
Return on Assets   1.29%   1.18%   1.28%   1.15%
Return on Common Equity   11.55%   10.69%   11.56%   10.58%
Net Interest Margin (FTE)(1)   3.08%   3.12%   3.05%   3.13%
Net Loan Losses (Recoveries) to Average Loans   0.01%   (0.33%)   (0.01%)   (0.01%)
Efficiency Ratio(2)   49.6%   50.9%   50.3%   51.3%
                     
Average Balances:                    
Assets  $5,587,871   $5,385,085   $5,576,352   $5,390,404 
Earning Assets   4,752,887    4,598,296    4,738,132    4,609,089 
Loans   1,209,049    1,333,135    1,226,304    1,344,132 
Deposits   4,846,986    4,669,424    4,837,721    4,681,021 
Shareholders' Equity   625,409    593,028    619,666    587,736 
                     
Period End Balances:                    
Assets  $5,577,844   $5,393,350           
Earning Assets   4,641,592    4,555,818           
Loans   1,200,192    1,318,341           
Deposits   4,887,122    4,682,570           
Shareholders' Equity   586,138    595,594