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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 September 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 every Interactive Data File required to be submitted 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 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 ☐ 
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 29, 2018
   
Common Stock, 26,727,416
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  51
PART II - OTHER INFORMATION  
Item 1   Legal Proceedings  51
Item 1A   Risk Factors  51
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds  52
Item 3   Defaults upon Senior Securities   52
Item 4   Mine Safety Disclosures    52
Item 5   Other Information  52
Item 6   Exhibits  52
Signatures  53
Exhibit Index  54
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)  55
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)  56
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350  57
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350  58

 

 

 

 

 - 2 - 
 

 

 

FORWARD-LOOKING STATEMENTS

 

This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation (the “Company”) for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, 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 September 30,
2018
  At December 31,
2017
Assets:          
Cash and due from banks  $522,660   $575,002 
Equity securities   1,734    1,800 
Debt securities available for sale   2,478,908    2,191,707 
Debt securities held to maturity, with fair values of: $1,002,648 at September 30, 2018 and $1,155,342 at December 31, 2017     1,025,699       1,158,864  
Loans   1,196,955    1,287,982 
Allowance for loan losses   (22,027)   (23,009)
Loans, net of allowance for loan losses   1,174,928    1,264,973 
Other real estate owned   620    1,426 
Premises and equipment, net   35,391    35,301 
Identifiable intangibles, net   2,376    3,850 
Goodwill   121,673    121,673 
Other assets   165,474    158,450 
Total Assets  $5,529,463   $5,513,046 
           
Liabilities:          
Noninterest-bearing deposits  $2,211,028   $2,197,526 
Interest-bearing deposits   2,624,809    2,630,087 
Total deposits   4,835,837    4,827,613 
Short-term borrowed funds   61,756    58,471 
Other liabilities   39,279    36,723 
Total Liabilities   4,936,872    4,922,807 
           
Contingencies (Note 10)          
           
Shareholders' Equity:          
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,727 at September 30, 2018 and 26,425 at December 31, 2017   447,785    431,734 
Deferred compensation   1,395    1,533 
Accumulated other comprehensive loss   (54,066)   (16,832)
Retained earnings   197,477    173,804 
Total Shareholders' Equity   592,591    590,239 
Total Liabilities and  Shareholders' Equity  $5,529,463   $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 Nine  Months
   Ended September 30,
   2018  2017  2018  2017
   (In thousands, except per share data)
Interest and Loan Fee Income:                    
Loans  $14,593   $15,082   $44,247   $46,330 
Equity securities   85    70    256    214 
Debt securities available for sale   15,644    11,277    43,518    32,091 
Debt securities held to maturity   5,931    6,716    18,321    20,997 
Total Interest and Loan Fee Income   36,253    33,145    106,342    99,632 
Interest Expense:                    
Deposits   518    461    1,417    1,395 
Short-term borrowed funds   9    12    28    34 
Total Interest Expense   527    473    1,445    1,429 
Net Interest and Loan Fee Income   35,726    32,672    104,897    98,203 
Reversal of Provision for Loan Losses   -    -    -    (1,900)
Net Interest and Loan Fee Income After Reversal of Provision for Loan Losses   35,726    32,672    104,897    100,103 
Noninterest Income:                    
Service charges on deposit accounts   4,615    4,989    14,012    14,857 
Merchant processing services   2,464    2,153    7,190    6,080 
Debit card fees   1,656    1,784    4,959    4,851 
Trust fees   733    718    2,202    2,136 
ATM processing fees   687    684    2,049    1,914 
Other service fees   665    652    1,946    1,964 
Life insurance gains   585    -    585    - 
Financial services commissions   132    148    387    484 
Equity securities losses   (16)   -    (66)   - 
Other noninterest income   1,007    1,420    2,988    4,042 
Total Noninterest Income   12,528    12,548    36,252    36,328 
Noninterest Expense:                    
Salaries and related benefits   13,415    12,816    39,952    38,867 
Occupancy and equipment   4,809    4,907    14,365    14,571 
Loss contingency   3,500    -    3,500    - 
Outsourced data processing services   2,292    2,383    6,930    6,710 
Professional fees   621    512    2,277    1,533 
Amortization of identifiable intangibles   451    760    1,474    2,322 
Courier service   448    451    1,333    1,310 
Other noninterest expense   1,469    2,285    5,365    7,812 
Total Noninterest Expense   27,005    24,114    75,196    73,125 
Income Before Income Taxes   21,249    21,106    65,953    63,306 
Provision for income taxes   4,256    6,089    13,444    17,441 
Net Income  $16,993   $15,017   $52,509   $45,865 
                     
Average Common Shares Outstanding   26,701    26,309    26,622    26,260 
Average Diluted Common Shares Outstanding   26,815    26,404    26,736    26,379 
Per Common Share Data:                    
Basic earnings  $0.64   $0.57   $1.97   $1.75 
Diluted earnings   0.63    0.57    1.96    1.74 
Dividends paid   0.40    0.39    1.20    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,
   2018  2017  2018  2017
   (In thousands)
Net income  $16,993   $15,017   $52,509   $45,865 
Other comprehensive (loss) income:                    
Changes in unrealized gains on debt securities available for sale   (5,915)   4,179    (47,915)   11,413 
Deferred tax benefit(expense)   1,749    (1,757)   14,164    (4,799)
Changes in unrealized gains on debt securities available for sale, net of tax   (4,166)   2,422    (33,751)   6,614 
Post-retirement benefit transition obligation amortization   -    15    -    45 
Deferred tax expense   -    (6)   -    (18)
Post-retirement benefit transition obligation amortization, net of tax   -    9    -    27 
Total other comprehensive (loss) income   (4,166)   2,431    (33,751)   6,641 
Total comprehensive income  $12,827   $17,448   $18,758   $52,506 

 

See accompanying notes to unaudited consolidated financial statements.              

 

 

 - 6 - 
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

                             

 

   Common
Shares
Outstanding
  Common
Stock
  Deferred
Compensation
  Accumulated
Other
Comprehensive
(Loss) Income
  Retained
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                       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 
                               
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                       52,509    52,509 
Other comprehensive loss                  (33,751)        (33,751)
Exercise of stock options   289    13,245                   13,245 
Restricted stock activity   20    1,281    (138)             1,143 
Stock based compensation        1,575                   1,575 
Stock awarded to employees   2    99                   99 
Retirement of common stock   (9)   (149)             (375)   (524)
Dividends                       (31,944)   (31,944)
Balance, September 30, 2018   26,727   $447,785   $1,395   $(54,066)  $197,477   $592,591 

 

See accompanying notes to unaudited consolidated financial statements.                

 

 - 7 - 
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

                 

 

   For the Nine Months
Ended September 30,
   2018  2017
   (In thousands)
Operating Activities:          
Net income  $52,509   $45,865 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   18,964    18,807 
Reversal of provision for loan losses   -    (1,900)
Net amortization of deferred loan (fees) cost   (181)   34 
(Increase) decrease in interest income receivable   (177)   713 
Life insurance premiums paid   (609)   (126)
Increase in other assets   (1,287)   (2,088)
Increase in income taxes payable   7,760    2,461 
(Increase) decrease in net deferred tax asset   (1,345)   895 
Stock option compensation expense   1,575    1,368 
Increase (decrease) in interest expense payable   5    (8)
Increase (decrease) in other liabilities   3,793    (1,142)
Life insurance gains   (585)   - 
Equity securities losses   66    - 
Net writedown of premises and equipment   3    60 
Net gain on sale of foreclosed assets   (94)   (72)
Writedown of foreclosed assets   27    219 
Net Cash Provided by Operating Activities   80,424    65,086 
Investing Activities:          
Net repayments of loans   91,594    69,319 
Net payments under FDIC(1) indemnification agreements   -    (63)
Proceeds from life insurance   1,183    - 
Purchases of debt securities available for sale   (634,113)   (433,525)
Proceeds from sale/maturity/calls of debt securities available for sale   290,663    238,888 
Proceeds from maturity/calls of debt securities held to maturity   127,578    135,208 
Purchases of premises and equipment   (2,830)   (1,980)
Net change in FRB(2) stock   -    1 
Proceeds from sale of foreclosed assets   873    1,521 
Net Cash (Used in) Provided by Investing Activities   (125,052)   9,369 
Financing Activities:          
Net change in deposits   8,224    29,839 
Net change in short-term borrowings   3,285    7,259 
Exercise of stock options   13,245    18,988 
Retirement of common stock   (524)   (314)
Common stock dividends paid   (31,944)   (30,741)
Net Cash (Used in) Provided by Financing Activities   (7,714)   25,031 
Net Change In Cash and Due from Banks   (52,342)   99,486 
Cash and Due from Banks at Beginning of Period   575,002    462,271 
Cash and Due from Banks at End of Period  $522,660   $561,757 
           
Supplemental Cash Flow Disclosures:          
Supplemental disclosure of non cash activities:          
Loan collateral transferred to other real estate owned  $-   $- 
Securities purchases pending settlement   -    811 
Supplemental disclosure of cash flow activities:          
Interest paid for the period   1,440    1,437 
Income tax payments for the period   7,028    14,657 

 

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, 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 nine months ended September 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 the Company’s revenue, including all of its net interest income and a portion of its 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. The Company’s 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.

 

 - 10 - 
 

 

The Company will be required to adopt the ASU provisions on January 1, 2020. Management has commenced an implementation project to include evaluating available data, defining portfolio segments of loans with similar attributes, and selecting loss estimate models for each identified loan portfolio segment. The ultimate adjustment to the allowance for loan losses will be accomplished through an offsetting after-tax adjustment to shareholders’ equity. Management has also segmented debt securities held to maturity and selected methods to estimate losses for each segment. 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 has evaluated the impact the ASU will have on the Company’s financial statements relative to shareholder’s equity and the change in monthly earnings and the impact is not expected to be material.

 

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. The Company has evaluated the prepayable assets in the HTM portfolio and will not effect a one-time reclassification of prepayable assets from HTM to the AFS upon implementation.

 

FASB ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The ASU is part of the disclosure framework project, where the primary focus is to improve the effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to Fair Value Measurements.

 

The provisions of the ASU are effective January 1, 2020 with the option to early adopt any removed or modified disclosures upon issuance of the ASU. The Company early adopted the provisions to remove and/or modify relevant disclosures in Note 9 to the unaudited consolidated financial statements. The requirement to include additional disclosures will be adopted by the Company January 1, 2020. The additional disclosures will not affect the financial results upon adoption.

 

 

 

 

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 - 11 - 
 

 

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 September 30, 2018, the market value of equity securities was $1,734 thousand. During the nine months ended September 30, 2018, the Company recognized gross unrealized holding losses of $66 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:

 

   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
At September 30, 2018  (In thousands)
Debt securities available for sale                    
Securities of U.S. Government sponsored entities  $167,222   $-   $(5,478)  $161,744 
Agency residential mortgage-backed securities (MBS)   919,381    243    (41,595)   878,029 
Non-agency residential MBS   122    2    -    124 
Agency commercial MBS   1,877    -    (30)   1,847 
Securities of U.S. Government entities   1,223    -    (13)   1,210 
Obligations of states and political subdivisions   182,851    1,841    (4,349)   180,343 
Corporate securities   1,282,991    411    (27,791)   1,255,611 
Total debt securities available for sale   2,555,667    2,497    (79,256)   2,478,908 
Debt securities held to maturity                    
Agency residential MBS   468,354    200    (21,100)   447,454 
Non-agency residential MBS   3,524    72    -    3,596 
Obligations of states and political subdivisions   553,821    2,526    (4,749)   551,598 
Total debt securities held to maturity   1,025,699    2,798    (25,849)   1,002,648 
Total  $3,581,366   $5,295   $(105,105)  $3,481,556 

 

 

   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
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 

 

 - 12 - 
 

 

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

 

 

   At September 30, 2018
   Debt Securities Available
for Sale
  Debt Securities Held
to Maturity
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
   (In thousands)
Maturity in years:                    
1 year or less  $128,356   $128,080   $90,266   $90,491 
Over 1 to 5 years   1,355,592    1,323,725    220,377    219,016 
Over 5 to 10 years   111,553    110,850    242,137    241,023 
Over 10 years   38,786    36,253    1,041    1,068 
Subtotal   1,634,287    1,598,908    553,821    551,598 
MBS   921,380    880,000    471,878    451,050 
Total  $2,555,667   $2,478,908   $1,025,699   $1,002,648 

 

 

   At December 31, 2017
   Debt Securities Available
for Sale
  Debt Securities Held
to Maturity
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
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 September 30, 2018 and December 31, 2017, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

 

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 - 13 - 
 

 

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

 

   Debt Securities Available for Sale
   At September 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   5   $46,531   $(461)   8   $115,213   $(5,017)   13   $161,744   $(5,478)
Agency residential MBS   23    421,962    (9,816)   50    447,104    (31,779)   73    869,066    (41,595)
Agency commercial MBS   -    -    -    1    1,847    (30)   1    1,847    (30)
Securities of U.S. Government entities   -    -    -    2    1,210    (13)   2    1,210    (13)
Obligations of states and political subdivisions   43    32,193    (392)   74    67,715    (3,957)   117    99,908    (4,349)
Corporate securities   86    826,287    (16,386)   37    333,319    (11,405)   123    1,159,606    (27,791)
Total   157   $1,326,973   $(27,055)   172   $966,408   $(52,201)   329   $2,293,381   $(79,256)

 

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

 

   Debt Securities Held to Maturity
   At September 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   26   $34,278   $(952)   70   $404,842   $(20,148)   96   $439,120   $(21,100)
Obligations of states and political subdivisions   224    191,579    (1,540)   162    164,011    (3,209)   386    355,590    (4,749)
Total   250   $225,857   $(2,492)   232   $568,853   $(23,357)   482   $794,710   $(25,849)

 

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 $14.1 million at September 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 September 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 September 30, 2018 and December 31, 2017, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $740,177  thousand and $715,774  thousand, respectively.

 

 - 14 - 
 

 

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 Nine Months
   Ended September 30,
   2018  2017  2018  2017
   (In thousands)
             
Taxable  $16,780   $12,957   $47,327   $37,584 
Tax-exempt from regular federal income tax   4,880    5,106    14,768    15,718 
Total interest income from investment securities  $21,660   $18,063   $62,095   $53,302 

 

 

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 - 15 - 
 

 

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 September 30,
2018
  At December 31,
2017
   (In thousands)
Commercial  $276,031   $335,996 
Commercial Real Estate   567,213    568,584 
Construction   3,939    5,649 
Residential Real Estate   48,150    65,183 
Consumer Installment & Other   301,622    312,570 
Total  $1,196,955   $1,287,982 

 

Total loans outstanding reported above include loans purchased from the FDIC of $65,868  thousand and $83,478 thousand at September 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
Nine Months Ended
September 30, 2018
  For the
Year Ended
December 31, 2017
Accretable yield:  (In thousands)
Balance at the beginning of the period  $738   $1,237 
Reclassification from nonaccretable difference   896    1,852 
Accretion   (1,380)   (2,351)
Balance at the end of the period  $254   $738 
           
Accretion  $(1,380)  $(2,351)
Change in FDIC indemnification   2    192 
(Increase) in interest income  $(1,378)  $(2,159)

 

The following summarizes activity in the allowance for loan losses:

 

 

   Allowance for Loan Losses
For the Three Months Ended September 30, 2018
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $8,275   $3,789   $210   $1,064   $5,943   $3,759   $23,040 
(Reversal) provision   (184)   372    44    (120)   (137)   25    - 
Chargeoffs   (384)   (240)   -    -    (845)   -    (1,469)
Recoveries   103    -    -    -    353    -    456 
Total allowance for loan losses  $7,810   $3,921   $254   $944   $5,314   $3,784   $22,027 

 

   Allowance for Loan Losses
For the Nine Months Ended September 30, 2018
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $7,746   $3,849   $335   $995   $6,418   $3,666   $23,009 
(Reversal) provision   (863)   312    (81)   (51)   565    118    - 
Chargeoffs   (425)   (240)   -    -    (3,015)   -    (3,680)
Recoveries   1,352    -    -    -    1,346    -    2,698 
Total allowance for loan losses  $7,810   $3,921   $254   $944   $5,314   $3,784   $22,027 

 

 - 16 - 
 

 

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

 

   Allowance for Loan Losses
For the Nine Months Ended September 30, 2017
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
    Balance at beginning of period  $8,327   $3,330   $152   $1,330   $7,980   $4,835   $25,954 
        (Reversal) provision   (220)   415    (1,755)   (275)   1,009    (1,074)   (1,900)
        Chargeoffs   (961)   -    -    -    (3,783)   -    (4,744)
        Recoveries   626    88    1,899    -    1,705    -    4,318 
Total allowance for loan losses  $7,772   $3,833   $296   $1,055   $6,911   $3,761   $23,628 

 

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, 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  $4,668   $172   $-   $-   $-   $-   $4,840 
Collectively evaluated for impairment   3,142    3,749    254    944    5,314    3,784    17,187 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    - 
Total  $7,810   $3,921   $254   $944   $5,314   $3,784   $22,027 
Carrying value of loans:                                   
Individually evaluated for impairment  $10,254   $10,816   $-   $202   $-   $-   $21,272 
Collectively evaluated for impairment   265,740    556,173    3,939    47,948    301,473    -    1,175,273 
Purchased loans with evidence of credit deterioration   37    224    -    -    149    -    410 
Total  $276,031   $567,213   $3,939   $48,150   $301,622   $-   $1,196,955 

 

 

   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 the 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 performs continuous evaluations throughout the year. 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.

 

 - 17 - 
 

 

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

 

   Loan Credit Risk Profile by Internally Assigned Grade
At September 30, 2018
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Total
   (In thousands)
Grade:                              
Pass  $264,908   $551,956   $3,939   $46,901   $299,590   $1,167,294 
Substandard   11,123    15,257    -    1,249    1,618    29,247 
Doubtful   -    -    -    -    56    56 
Loss   -    -    -    -    358    358 
Total  $276,031   $567,213   $3,939   $48,150   $301,622   $1,196,955 

 

Credit risk profile reflects internally assigned grades of purchased covered loans without regard to FDIC indemnification on $6,086 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 grades 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 September 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  $275,259   $425   $347   $-   $-   $276,031 
Commercial real estate   559,441    2,334    -    -    5,438    567,213 
Construction   3,939    -    -    -    -    3,939 
Residential real estate   47,634    516    -    -    -    48,150 
Consumer installment and other   297,416    3,001    801    361    43    301,622 
Total  $1,183,689   $6,276   $1,148   $361   $5,481   $1,196,955 

 

 

   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 

 

 - 18 - 
 

 

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

 

The following summarizes impaired loans:

 

   Impaired Loans
   At September 30,
2018
  At December 31,
2017
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
With no related allowance recorded:                              
Commercial  $809   $845   $-   $1,212   $1,271   $- 
Commercial real estate   9,690    11,632    -    13,169    14,985    - 
Residential real estate   202    232    -    208    239    - 
Consumer installment and other   192    298    -    360    466    - 
Total with no related allowance recorded   10,893    13,007    -    14,949    16,961    - 
                               
With an allowance recorded:                              
Commercial   9,482    9,482    4,668    9,764    9,764    4,814 
Commercial real estate   1,750    1,752    172    1,790    1,792    171 
Total with an allowance recorded   11,232    11,234    4,840    11,554    11,556    4,985 
Total  $22,125   $24,241   $4,840   $26,503   $28,517   $4,985 

 

Impaired loans include troubled debt restructured loans. Impaired loans at September 30, 2018, included $8,747 thousand of restructured loans, $4,270 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 September 30,  For the Nine Months Ended September 30,
   2018  2017  2018  2017
   Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
   (In thousands)
Commercial  $10,426   $175   $11,125   $130   $10,671   $495   $11,203   $366 
Commercial real estate   11,282    189    14,681    208    12,291    615    14,826    669 
Residential real estate   203    4    365    4    205    12    494    13 
Consumer installment and other   173    4    340    3    261    10    466    17 
Total  $22,084   $372   $26,511   $345   $23,428   $1,132   $26,989   $1,065 

 

The following tables provide information on troubled debt restructurings:

 

   Troubled Debt Restructurings
At September 30, 2018
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   ($ in thousands)
Commercial   5   $2,324   $904   $34 
Commercial real estate   8    9,237    7,642    - 
Residential real estate   1    241    201    - 
Total   14   $11,802   $8,747   $34 

 

 

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 - 19 - 
 

 

   Troubled Debt Restructurings
At December 31, 2017
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
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 nine months ended September 30, 2018, the Company did not modify any loans that were considered troubled debt restructurings. 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. There were no chargeoffs related to troubled debt restructurings made during the three and nine months ended September 30, 2018. 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. During the three and nine months ended September 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 September 30, 2018 and December 31, 2017.

 

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

 

At September 30, 2018 and December 31, 2017, the Company held total other real estate owned (OREO) of $620 thousand net of reserve of $-0-   thousand and $1,426 thousand net of reserve of $1,905 thousand, respectively, of which there were no  foreclosed residential real estate properties or covered OREO at both dates, respectively. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $19 thousand at September 30, 2018 and $196 thousand at December 31, 2017.

 

 

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, 2018, the Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2018, the Bank had 35 lending relationships each with aggregate amounts of $5 million or more. 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 $52,842 thousand and $53,874 thousand at September 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 September 30, 2018, the Bank held corporate bonds in 80 issuing entities that exceeded $5 million for each issuer.

 

 

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 - 20 - 
 

 

Note 6: Other Assets

 

Other assets consisted of the following:

 

   At September 30,
2018
  At December 31,
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   55,442    54,101 
Net deferred tax asset   48,622    33,112 
Limited partnership investments   10,919    10,119 
Interest receivable   23,734    23,557 
Prepaid assets   4,119    4,906 
Other assets   8,411    18,428 
Total other assets  $165,474   $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 owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. On July 5, 2018, Visa Inc. announced a new conversion rate applicable to its class B common stock resulting from its June 28, 2018 deposit of funds into its litigation escrow account. This funding reduced the conversion rate of class B common stock into class A common stock, which is unrestricted and trades actively on the New York Stock Exchange, from 1.6483 to 1.6298. Visa Inc. class A common stock had a closing price of $150.09 per share on September 28, 2018, the last day of stock market trading for the third quarter 2018. The ultimate value of the Company’s Visa Inc. class B shares is subject to the extent of Visa Inc.’s future litigation escrow fundings; the resulting conversion rate to class A common stock, and current and future trading restrictions on the class B common stock.

 

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, 2018, this investment totaled $10,919 thousand and $5,088  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 September 30, 2018, the $5,088 thousand of outstanding equity capital commitments are expected to be paid as follows, $552 thousand in 2018, $364 thousand in 2019, $2,026 thousand in 2020, $138 thousand in 2021, $261 thousand in 2022, $134 thousand in 2023, $1,041 thousand in 2024 and $572 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,
   2018  2017  2018  2017
   (In thousands)
Investment loss included in pre-tax income  $900   $450   $2,200   $1,350 
Tax credits recognized in provision for income taxes   336