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, 2015March 31, 2016

or

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

For the transition period from __________ to __________.

 

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

Yes ☒No ☐

 

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

 

Yes ☒No ☐

 

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

 

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

 

 

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

 

Yes ☐No ☒

 

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

 

Title of Class Shares outstanding as of October 23, 2015April 22, 2016
   
Common Stock, 25,528,14925,496,985
No Par Value  

 

 

TABLE OF CONTENTS

 

 

   Page
Forward Looking Statements3

PART I - FINANCIAL INFORMATION

Item 1Financial Statements4
 Notes to Unaudited Consolidated Financial Statements9
Financial Summary3029
Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations3130
Item 3Quantitative and Qualitative Disclosures about Market Risk5350
Item 4Controls and Procedures5351
PART II - OTHER INFORMATION 
Item 1Legal Proceedings5351
Item 1ARisk Factors5351
Item 2Unregistered Sales of Equity Securities and Use of Proceeds5451
Item 3Defaults upon Senior Securities5452
Item 4Mine Safety Disclosures5452
Item 5Other Information5452
Item 6Exhibits5452
Signatures5553
Exhibit Index5654
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)5755
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)5856
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 13505957
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 13506058

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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, 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", "intends", "targeted", "projected", "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 systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, fire, flood, drought, and other disasters, on the uninsured value of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values,values; and (13) changes in the securities markets. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2014,2015, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report.

 

 

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PART I - FINANCIAL INFORMATION

Item 1 Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

  At September 30, At December 31,
  2015 2014
  (In thousands)
Assets:        
Cash and due from banks $268,587  $380,836 
Investment securities available for sale  1,571,710   1,600,781 
Investment securities held to maturity, with fair values of: $1,293,958 at September 30, 2015 and $1,048,562 at December 31, 2014  1,278,814   1,038,658 
Loans  1,571,843   1,700,290 
Allowance for loan losses  (30,036)  (31,485)
Loans, net of allowance for loan losses  1,541,807   1,668,805 
Other real estate owned  9,269   6,374 
Premises and equipment, net  39,244   37,852 
Identifiable intangibles, net  11,379   14,287 
Goodwill  121,673   121,673 
Other assets  158,912   166,458 
Total Assets $5,001,395  $5,035,724 
Liabilities:        
Noninterest bearing deposits $1,942,450  $1,910,781 
Interest bearing deposits  2,424,470   2,438,410 
Total deposits  4,366,920   4,349,191 
Short-term borrowed funds  57,063   89,784 
Federal Home Loan Bank advances  -   20,015 
Other liabilities  43,474   50,131 
Total Liabilities  4,467,457   4,509,121 
Shareholders' Equity:        
Common stock (no par value), authorized - 150,000 shares Issued and outstanding:25,530at September 30, 2015 and 25,745 at December 31, 2014  378,649   378,132 
Deferred compensation  2,578   2,711 
Accumulated other comprehensive income  7,198   5,292 
Retained earnings  145,513   140,468 
Total Shareholders' Equity  533,938   526,603 
Total Liabilities and Shareholders' Equity $5,001,395  $5,035,724 

  At March 31,
2016		 At December 31,
2015
  (In thousands)
Assets:        
Cash and due from banks $471,164  $433,044 
Investment securities available for sale  1,585,970   1,570,216 
Investment securities held to maturity, with fair values of: $1,381,808 at March 31, 2016 and $1,325,699 at December 31, 2015  1,358,139   1,316,075 
Loans  1,473,196   1,533,396 
Allowance for loan losses  (29,487)  (29,771)
Loans, net of allowance for loan losses  1,443,709   1,503,625 
Other real estate owned  8,438   9,264 
Premises and equipment, net  38,045   38,693 
Identifiable intangibles, net  9,526   10,431 
Goodwill  121,673   121,673 
Other assets  163,204   165,854 
Total Assets $5,199,868  $5,168,875 
         
Liabilities:        
Noninterest bearing deposits $1,989,010  $2,026,049 
Interest bearing deposits  2,527,740   2,514,610 
Total deposits  4,516,750   4,540,659 
Short-term borrowed funds  52,451   53,028 
Other liabilities  91,694   42,983 
Total Liabilities  4,660,895   4,636,670 
         
Shareholders' Equity:        
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 25,438 at March 31, 2016 and 25,528 at December 31, 2015  379,893   378,858 
Deferred compensation  1,533   2,578 
Accumulated other comprehensive income  6,619   675 
Retained earnings  150,928   150,094 
Total Shareholders' Equity  538,973   532,205 
Total Liabilities and  Shareholders' Equity $5,199,868  $5,168,875 

 

See accompanying notes to unaudited consolidated financial statements.

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WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

  For the
Three Months
Ended March 31,
  2016 2015
  (In thousands,
except per share data)
Interest and Fee Income:        
Loans $18,353  $20,230 
Investment securities available for sale  7,967   7,469 
Investment securities held to maturity  7,327   6,218 
Total Interest and Fee Income  33,647   33,917 
Interest Expense:        
Deposits  543   642 
Short-term borrowed funds  9   16 
Federal Home Loan Bank advances  -   1 
Total Interest Expense  552   659 
Net Interest and Fee Income  33,095   33,258 
Provision for Loan Losses  -   - 
Net Interest and Fee Income After Provision For Loan Losses  33,095   33,258 
Noninterest Income:        
Service charges on deposit accounts  5,248   5,707 
Merchant processing services  1,529   1,703 
Debit card fees  1,516   1,456 
Trust fees  661   706 
ATM processing fees  658   585 
Other service fees  629   665 
Financial services commissions  156   153 
Other noninterest income  1,332   1,325 
Total Noninterest Income  11,729   12,300 
Noninterest Expense:        
Salaries and related benefits  13,117   13,338 
Occupancy  3,398   3,727 
Outsourced data processing services  2,130   2,108 
Furniture and equipment  1,213   1,119 
Amortization of identifiable intangibles  905   1,001 
Professional fees  732   548 
Courier service  545   543 
Other real estate owned  111   315 
Other noninterest expense  3,707   4,028 
Total Noninterest Expense  25,858   26,727 
Income Before Income Taxes  18,966   18,831 
Provision for income taxes  4,740   4,274 
Net Income $14,226  $14,557 
         
Average Common Shares Outstanding  25,445   25,651 
Average Diluted Common Shares Outstanding  25,458   25,655 
Per Common Share Data:        
Basic earnings $0.56  $0.57 
Diluted earnings  0.56   0.57 
Dividends paid  0.39   0.38 

 

  For the Three Months For the Nine Months
  Ended September 30,
  2015 2014 2015 2014
  (In thousands, except per share data)
Interest and Fee Income:                
Loans $19,378  $22,129  $59,643  $67,817 
Investment securities available for sale  7,880   6,350   23,347   17,855 
Investment securities held to maturity  7,041   6,421   19,651   20,195 
Total Interest and Fee Income  34,299   34,900   102,641   105,867 
Interest Expense:                
Deposits  573   709   1,816   2,216 
Short-term borrowed funds  12   23   44   64 
Term repurchase agreement  -   11   -   60 
Federal Home Loan Bank advances  -   103   1   304 
Total Interest Expense  585   846   1,861   2,644 
Net Interest Income  33,714   34,054   100,780   103,223 
Provision for Loan Losses  -   600   -   2,600 
Net Interest Income After Provision For Loan Losses  33,714   33,454   100,780   100,623 
Noninterest Income:                
Service charges on deposit accounts  5,581   6,207   16,981   18,322 
Debit card fees  1,538   1,543   4,528   4,482 
Merchant processing services  1,485   1,742   4,971   5,485 
Other service fees  693   695   2,041   2,044 
Trust fees  682   629   2,061   1,899 
ATM processing fees  616   637   1,828   1,891 
Financial services commissions  177   194   527   585 
Other  1,221   1,407   3,625   4,534 
Total Noninterest Income  11,993   13,054   36,562   39,242 
Noninterest Expense:                
Salaries and related benefits  12,761   13,639   39,795   41,691 
Occupancy  3,746   3,811   11,199   11,284 
Outsourced data processing services  2,115   2,093   6,334   6,314 
Furniture and equipment  1,075   1,059   3,353   3,070 
Amortization of identifiable intangibles  952   1,056   2,908   3,219 
Professional fees  746   700   1,876   1,707 
Courier service  604   663   1,744   1,938 
Other real estate owned  83   (287)  451   (908)
Other  4,091   3,882   12,136   12,131 
Total Noninterest Expense  26,173   26,616   79,796   80,446 
Income Before Income Taxes  19,534   19,892   57,546   59,419 
Provision for income taxes  4,677   4,738   13,371   13,801 
Net Income $14,857  $15,154  $44,175  $45,618 
Average Common Shares Outstanding  25,530   25,973   25,565   26,192 
Diluted Average Common Shares Outstanding  25,565   26,016   25,585   26,262 
Per Common Share Data:                
Basic earnings $0.58  $0.58  $1.73  $1.74 
Diluted earnings  0.58   0.58   1.73   1.74 
Dividends paid  0.38   0.38   1.14   1.14 

See accompanying notes to unaudited consolidated financial statements.

 

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WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

  For the Three Months Ended
March 31,
  2016 2015
  (In thousands)
Net income $14,226  $14,557 
Other comprehensive income:        
Increase in net unrealized gains on securities available for sale  10,241   7,418 
Deferred tax expense  (4,306)  (3,119)
Increase in net unrealized gains on securities available for sale, net of tax  5,935   4,299 
Post-retirement benefit transition obligation amortization  15   15 
Deferred tax expense  (6)  (6)
Post-retirement benefit transition obligation amortization, net of tax  9   9 
Total other comprehensive income  5,944   4,308 
Total comprehensive income $20,170  $18,865 

 

 For the Three Months For the Nine Months
 Ended September 30,
  2015 2014 2015 2014
  (In thousands)
Net Income $14,857  $15,154  $44,175  $45,618 
Other comprehensive income:                
Increase (decrease) in net unrealized gains on securities available for sale  5,522   (4,884)  3,242   9,305 
Deferred tax (expense) benefit  (2,321)  2,054   (1,363)  (3,912)
Increase (decrease) in net unrealized gains on securities available for sale, net of tax  3,201   (2,830)  1,879   5,393 
Post-retirement benefit transition obligation amortization  15   15   45   45 
Deferred tax expense  (6)  (6)  (18)  (18)
Post-retirement benefit transition obligation amortization, net of tax  9   9   27   27 
Total Other Comprehensive Income (Loss)  3,210   (2,821)  1,906   5,420 
Total Comprehensive Income $18,067  $12,333  $46,081  $51,038 

See accompanying notes to unaudited consolidated financial statements.

 

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WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

 

 Common
Shares
Outstanding		 Common
Stock		 Accumulated
Deferred
Compensation		 Accumulated
Other
Comprehensive
Income		 Retained
Earnings		 Total Common
Shares
Outstanding		 Common
Stock		 Deferred
Compensation		 Accumulated
Other
Comprehensive
Income		 Retained
Earnings		 Total
 (In thousands) (In thousands)
Balance, December 31, 2013  26,510  $378,946  $2,711  $4,313  $156,964  $542,934 
            
Balance, December 31, 2014  25,745  $378,132  $2,711  $5,292  $140,468  $526,603 
Net income for the period                  14,557   14,557 
Other comprehensive income              4,308       4,308 
Exercise of stock options  -   -               - 
Tax benefit decrease upon expiration/exercise of stock options      (865)              (865)
Stock based compensation      354               354 
Stock awarded to employees  1   45               45 
Retirement of common stock including repurchases  (183)  (2,708)          (5,159)  (7,867)
Dividends                  (9,755)  (9,755)
Balance, March 31, 2015  25,563  $374,958  $2,711  $9,600  $140,111  $527,380 
                        
Balance, December 31, 2015  25,528  $378,858  $2,578  $675  $150,094  $532,205 
Net income for the period                  45,618   45,618                   14,226   14,226 
Other comprehensive income              5,420       5,420               5,944       5,944 
Exercise of stock options  256   12,396               12,396   40   1,717               1,717 
Tax benefit decrease upon expiration/exercise of stock options      (447)              (447)      (181)              (181)
Restricted stock activity  21   1,114               1,114       1,045   (1,045)          - 
Stock based compensation      1,009               1,009       390               390 
Stock awarded to employees  2   88               88   -   15               15 
Retirement of common stock including repurchases  (883)  (12,911)          (31,899)  (44,810)  (130)  (1,951)          (3,473)  (5,424)
Dividends                  (29,927)  (29,927)                  (9,919)  (9,919)
Balance, September 30, 2014  25,906  $380,195  $2,711  $9,733  $140,756  $533,395 
Balance, December 31, 2014  25,745  $378,132  $2,711  $5,292  $140,468  $526,603 
Net income for the period                  44,175   44,175 
Other comprehensive income              1,906       1,906 
Exercise of stock options  108   4,848               4,848 
Tax benefit decrease upon expiration/exercise of stock options      (1,215)              (1,215)
Restricted stock activity  17   874   (133)          741 
Stock based compensation      987               987 
Stock awarded to employees  2   89               89 
Retirement of common stock including repurchases  (342)  (5,066)          (9,962)  (15,028)
Dividends                  (29,168)  (29,168)
Balance, September 30, 2015  25,530  $378,649  $2,578  $7,198  $145,513  $533,938 
Balance, March 31, 2016  25,438  $379,893  $1,533  $6,619  $150,928  $538,973 

 

See accompanying notes to unaudited consolidated financial statements.

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WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  For the Three Months
Ended March 31,
  2016 2015
  (In thousands)
Operating Activities:        
Net income $14,226  $14,557 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  4,065   3,930 
Net amortization of deferred loan fees  (54)  (78)
Decrease in interest income receivable  1,379   812 
Decrease (increase) in deferred tax asset  115   (421)
Increase in other assets  (5,602)  (822)
Stock option compensation expense  390   354 
Tax benefit decrease upon expiration/exercise of stock options  181   865 
Increase in income taxes payable  3,424   4,695 
Increase in interest expense payable  25   21 
Increase (decrease) in other liabilities  (4)  (6,158)
Writedown/loss on sale of premises and equipment  5   4 
Net gain on sale of foreclosed assets  (58)  - 
Writedown of foreclosed assets  126   243 
Net Cash Provided by Operating Activities  18,218   18,002 
         
Investing Activities:        
Net repayments of loans  61,070   13,805 
Change in payable to FDIC(1)  5,189   (692)
Purchases of investment securities available for sale  (152,128)  (354,527)
Proceeds from sale/maturity/calls of securities available for sale  166,023   185,073 
Purchases of investment securities held to maturity  (56,182)  (10,359)
Proceeds from maturity/calls of securities held to maturity  33,531   30,468 
Purchases of premises and equipment  (283)  (1,326)
Proceeds from sale of FRB(2)/FHLB(3) stock  -   490 
Proceeds from sale of foreclosed assets  975   100 
Net Cash Provided by (Used in) Investing Activities  58,195   (136,968)
         
Financing Activities:        
Net change in deposits  (23,909)  30,891 
Net change in short-term borrowings and FHLB(3) advances  (577)  (26,824)
Exercise of stock options/issuance of shares  1,717   - 
Tax benefit decrease upon expiration/exercise of stock options  (181)  (865)
Retirement of common stock including repurchases  (5,424)  (7,867)
Common stock dividends paid  (9,919)  (9,755)
Net Cash Used in Financing Activities  (38,293)  (14,420)
Net Change In Cash and Due from Banks  38,120   (133,386)
Cash and Due from Banks at Beginning of Period  433,044   380,836 
Cash and Due from Banks at End of Period $471,164  $247,450 
         
Supplemental Cash Flow Disclosures:        
Supplemental disclosure of noncash activities:        
Loan collateral transferred to other real estate owned $217  $3,202 
Securities purchases pending settlement  44,580   1,478 
Supplemental disclosure of cash flow activities:        
Interest paid for the period  526   775 
Income tax payments for the period  1,200   - 

 

  For the Nine Months
Ended September 30,
  2015 2014
 (In thousands)
Operating Activities:        
Net income $44,175  $45,618 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  12,379   12,275 
Loan loss provision  -   2,600 
Net amortization of deferred loan fees  (263)  (179)
Decrease in interest income receivable  757   1,537 
Decrease in other assets  107   1,390 
Decrease in income taxes payable  (257)  (1,160)
Decrease (increase) in net deferred tax asset  968   (19)
Decrease in interest expense payable  (56)  (102)
Decrease in other liabilities  (2,571)  (3,841)
Stock option compensation expense  987   1,009 
Tax benefit decrease upon expiration/exercise of stock options  1,215   447 
Gain on sale of other assets  -   (400)
Net loss on sale of premises and equipment  24   22 
Net gain on sale of foreclosed assets  (73)  (1,014)
Writedown of foreclosed assets  315   113 
Net Cash Provided by Operating Activities  57,707   58,296 
Investing Activities:        
Net repayments of loans  124,615   93,115 
Proceeds from FDIC1 loss-sharing indemnification  -   6,703 
Purchases of investment securities available for sale  (828,169)  (747,630)
Proceeds from sale/maturity/calls of securities available for sale  858,850   444,906 
Purchases of investment securities held to maturity  (366,247)  (26,435)
Proceeds from maturity/calls of securities held to maturity  117,877   115,799 
Purchases of premises and equipment  (4,049)  (2,392)
Net change in FRB2/FHLB3 securities  940   3,248 
Proceeds from sale of foreclosed assets  1,774   7,549 
Net Cash Used in Investing Activities  (94,409)  (105,137)
Financing Activities:        
Net change in deposits  17,737   157,947 
Net change in short-term borrowings and FHLB3 advances  (52,721)  3,992 
Exercise of stock options/issuance of shares  4,848   12,396 
Tax benefit decrease upon expiration/exercise of stock options  (1,215)  (447)
Retirement of common stock including repurchases  (15,028)  (44,810)
Common stock dividends paid  (29,168)  (29,927)
Net Cash (Used in) Provided by Financing Activities  (75,547)  99,151 
Net Change In Cash and Due from Banks  (112,249)  52,310 
Cash and Due from Banks at Beginning of Period  380,836   472,028 
Cash and Due from Banks at End of Period $268,587  $524,338 
         
Supplemental Cash Flow Disclosures:        
Supplemental disclosure of non cash activities:        
Loan collateral transferred to other real estate owned $4,911  $968 
Securities purchases pending settlement  -   24,276 
Supplemental disclosure of cash flow activities:        
Interest paid for the period  1,941   2,959 
Income tax payments for the period  12,596   14,981 

See accompanying notes to unaudited consolidated financial statements.

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

2(2) Federal Reserve Bank ("FRB")

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

-8-

- 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, 2015March 31, 2016 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.2015.

Note 2: Accounting Policies

 

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “Loan Portfolio Credit Risk” section in Item 2 of this document.discussion below. Certain amounts in prior periods have been reclassified to conform to the current presentation.

 

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

 

Recently AdoptedIssued Accounting Standards

 

FASB ASU 2014-01Accounting Standards Update (ASU) 2016-01,Investments- Equity MethodFinancial Instruments – Overall (Subtopic 825-10): Recognition and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing ProjectsMeasurement of Financial Assets and Financial Liabilities, , was issued January 2014 to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using2016. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance inASU changes the income statement as a componentimpact of income tax expense (benefit). For thoseequity investments in qualified affordable housing projects not accountedheld by the Company and the requirement for using the proportional amortization method,Company to use the investment should be accountedexit price notion when measuring the fair value of financial instruments for as an equity method investment or a cost method investment in accordance with GAAP. The policy election must be applied consistently to all qualified affordable housing project investments.disclosure purposes.

 

The ASU also requires a reporting entityCompany will be required to disclose information regarding its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations.

The adoption ofadopt the ASU was limited to additional disclosures only and did notprovisions on January 1, 2018. Management is evaluating the impact that the ASU will have a material effect on the Company’s financial statements at January 1, 2015, the date adopted.statements.

 

-9-

FASB ASU 2014-04,Accounting Standards Update (ASU) 2016-02,Receivables- Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,Leases (Topic 842), was issued on January 17, 2014, providing clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirementsFebruary 25, 2016. The provisions of the applicable jurisdiction.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 adoption ofCompany will be required to adopt the ASU was limited to additional disclosures only and did notprovisions January 1, 2019, utilizing the modified retrospective transition approach. Management is evaluating the impact that the ASU will have a material effect on the Company’s financial statements at January 1, 2015, the date adopted.statements.

 

- 9 - 

FASB ASU 2014-112016-09,,Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures,Improvements to Employee Share-Based Payment Accounting, was issued on June 12, 2014.March 30, 2016. The ASU improvesprovisions of the financial reportingnew standard changes several aspects of repurchase agreements and other similar transactions through a change inthe accounting for repurchase-to-maturityshare-based payment award transactions, including: (1) Accounting and repurchase financings,Cash Flow Classification for Excess Tax Benefits, (2) Forfeitures, and the introduction of two new disclosure requirements. New disclosures are required for (1) transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction(3) Tax Withholding Requirements and (2) repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings about the nature of collateral pledged and the time to maturity of those transactions.Cash Flow Classification.

 

The adoption ofCompany will be required to adopt the ASU was limited to additional disclosures only and did notprovisions January 1, 2017. Management is evaluating the impact that the ASU will have a material effect on the Company’s financial statements at April 1, 2015, the date adopted.statements.

Note 3: Investment Securities

 

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

 

 Investment Securities Available for Sale
At September 30, 2015		 Investment Securities Available for Sale
At March 31, 2016
 Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value		 Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
 (In thousands) (In thousands)
U.S. Treasury securities $3,000  $1  $-  $3,001 
Securities of U.S. Government sponsored entities  341,038   1,381   (10)  342,409  $360,219  $668  $(158) $360,729 
Residential mortgage-backed securities  19,303   1,289   (2)  20,590 
Commercial mortgage-backed securities  2,547   11   (6)  2,552 
Agency residential mortgage-backed securities (MBS)  198,740   1,460   (2,931)  197,269 
Non-agency residential MBS  345   8   -   353 
Non-agency commercial MBS  2,298   9   (5)  2,302 
Obligations of states and political subdivisions  152,158   9,094   (97)  161,155   139,551   9,048   (41)  148,558 
Residential collateralized mortgage obligations  199,059   438   (4,945)  194,552 
Asset-backed securities  2,350   -   (20)  2,330   1,680   -   (22)  1,658 
FHLMC1 and FNMA2 stock  775   5,725   -   6,500 
FHLMC(1) and FNMA(2) stock  775   3,016   -   3,791 
Corporate securities  836,882   1,707   (2,750)  835,839   868,796   3,670   (3,719)  868,747 
Other securities  2,039   885   (142)  2,782   2,036   667   (140)  2,563 
Total $1,559,151  $20,531  $(7,972) $1,571,710  $1,574,440  $18,546  $(7,016) $1,585,970 

1(1) Federal Home Loan Mortgage Corporation

2(2) Federal National Mortgage Association

-10-

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

 

 Investment Securities Held to Maturity
At September 30, 2015		 Investment Securities Held to Maturity
At March 31, 2016
 Amortized
Cost		 Gross
Unrecognized
Gains		 Gross
Unrecognized
Losses		 Fair
Value		 Amortized
Cost		 Gross
Unrecognized
Gains		 Gross
Unrecognized
Losses		 Fair
Value
 (In thousands) (In thousands)
Securities of U.S. government sponsored entities $830  $10  $-  $840  $713  $12  $-  $725 
Residential mortgage-backed securities  362,925   2,194   (28)  365,091 
Commercial mortgage-backed securities  16,379   57   (174)  16,262 
Agency residential MBS  632,696   6,398   (404)  638,690 
Non-agency residential MBS  9,415   87   (2)  9,500 
Agency commercial MBS  16,136   36   (295)  15,877 
Obligations of states and political subdivisions  682,818   12,486   (1,204)  694,100   699,179   18,108   (271)  717,016 
Residential collateralized mortgage obligations  215,862   2,404   (601)  217,665 
Total $1,278,814  $17,151  $(2,007) $1,293,958  $1,358,139  $24,641  $(972) $1,381,808 

- 10 - 

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

 

 Investment Securities Available for Sale
At December 31, 2014		 Investment Securities Available for Sale
At December 31, 2015
 Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value		 Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
 (In thousands) (In thousands)
U.S. Treasury securities $3,500  $5  $-  $3,505 
Securities of U.S. Government sponsored entities  635,278   937   (1,027)  635,188  $302,292  $255  $(665) $301,882 
Residential mortgage-backed securities  24,647   1,776   (16)  26,407 
Commercial mortgage-backed securities  2,923   6   (10)  2,919 
Agency residential mortgage-backed securities (MBS)  208,046   1,407   (6,909)  202,544 
Non-agency residential MBS  354   16   -   370 
Non-agency commercial MBS  2,383   5   (9)  2,379 
Obligations of states and political subdivisions  171,907   10,015   (123)  181,799   148,705   8,861   (57)  157,509 
Residential collateralized mortgage obligations  230,347   634   (8,524)  222,457 
Asset-backed securities  8,349   -   (36)  8,313   2,025   -   (22)  2,003 
FHLMC1 and FNMA2 stock  775   4,393   -   5,168 
FHLMC(1) and FNMA(2) stock  775   3,554   -   4,329 
Corporate securities  511,699   2,169   (1,629)  512,239   902,308   882   (6,821)  896,369 
Other securities  2,039   871   (124)  2,786   2,039   952   (160)  2,831 
Total $1,591,464  $20,806  $(11,489) $1,600,781  $1,568,927  $15,932  $(14,643) $1,570,216 

1(1) Federal Home Loan Mortgage Corporation

2(2) Federal National Mortgage Association

 

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

 

 Investment Securities Held to Maturity
At December 31, 2014		 Investment Securities Held to Maturity
At December 31, 2015
 Amortized
Cost		 Gross
Unrecognized
Gains		 Gross
Unrecognized
Losses		 Fair
Value		 Amortized
Cost		 Gross
Unrecognized
Gains		 Gross
Unrecognized
Losses		 Fair
Value
 (In thousands) (In thousands)
Securities of U.S. government sponsored entities $1,066  $11  $-  $1,077  $764  $-  $-  $764 
Residential mortgage-backed securities  59,078   1,183   (137)  60,124 
Agency residential MBS  595,503   1,810   (4,966)  592,347 
Non-agency residential MBS  9,667   185   -   9,852 
Agency commercial MBS  16,258   20   (274)  16,004 
Obligations of states and political subdivisions  720,189   11,350   (2,358)  729,181   693,883   13,638   (789)  706,732 
Residential collateralized mortgage obligations  258,325   2,236   (2,381)  258,180 
Total $1,038,658  $14,780  $(4,876) $1,048,562  $1,316,075  $15,653  $(6,029) $1,325,699 

 

-11-

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

 

  At March 31, 2016
  Securities Available
for Sale		 Securities Held
to Maturity
  Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
  (In thousands)
Maturity in years:                
1 year or less $126,563  $126,929  $22,825  $23,380 
Over 1 to 5 years  983,838   984,709   269,713   273,902 
Over 5 to 10 years  257,772   265,730   295,674   304,975 
Over 10 years  2,073   2,324   111,680   115,484 
Subtotal  1,370,246   1,379,692   699,892   717,741 
MBS  201,383   199,924   658,247   664,067 
Other securities  2,811   6,354   -   - 
Total $1,574,440  $1,585,970  $1,358,139  $1,381,808 

  At September 30, 2015
  Securities Available
for Sale		 Securities Held
to Maturity
  Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
  (In thousands)
Maturity in years:                
1 year or less $111,972  $112,333  $19,012  $19,647 
Over 1 to 5 years  1,066,830   1,068,036   237,908   240,961 
Over 5 to 10 years  129,133   134,756   285,130   290,517 
Over 10 years  27,493   29,609   141,598   143,815 
Subtotal  1,335,428   1,344,734   683,648   694,940 
Mortgage-backed securities and residential collateralized mortgage obligations  220,909   217,694   595,166   599,018 
Other securities  2,814   9,282   -   - 
Total $1,559,151  $1,571,710  $1,278,814  $1,293,958 

- 11 - 

Securities available for sale at September 30, 2015March 31, 2016 with maturity dates over one year but less than five years include $$337,419221,924  thousand (fair value) of securities of U.S. Government sponsored entities with call options on dates within one year or less, of which$43,121  thousand have interest coupons which will increase if the issuer does not exercise the call option.less.

 

 At December 31, 2014 At December 31, 2015
 Securities Available
for Sale		 Securities Held
to Maturity		 Securities Available
for Sale		 Securities Held
to Maturity
 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
 (In thousands) (In thousands)
Maturity in years:                                
1 year or less $57,891  $57,991  $15,355  $15,855  $136,717  $136,976  $20,709  $21,354 
Over 1 to 5 years  629,200   630,797   228,380   230,248   1,049,786   1,044,453   259,556   262,163 
Over 5 to 10 years  584,872   589,250   285,219   288,631   166,352   173,585   289,568   296,352 
Over 10 years  58,770   63,006   192,301   195,524   2,475   2,749   124,814   127,627 
Subtotal  1,330,733   1,341,044   721,255   730,258   1,355,330   1,357,763   694,647   707,496 
Mortgage-backed securities and residential collateralized mortgage obligations  257,917   251,783   317,403   318,304 
MBS  210,783   205,293   621,428   618,203 
Other securities  2,814   7,954   -   -   2,814   7,160   -   - 
Total $1,591,464  $1,600,781  $1,038,658  $1,048,562  $1,568,927  $1,570,216  $1,316,075  $1,325,699 

Expected maturities of mortgage-backedmortgage-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-backedmortgage-related securities. At September 30, 2015March 31, 2016 and December 31, 2014,2015, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

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-12-

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

 

 Investment Securities Available for Sale
At September 30, 2015		 Investment Securities Available for Sale
At March 31, 2016
 No. of Less than 12 months No. of 12 months or longer No. of Total No. of Less than 12 months No. of 12 months or longer No. of Total

 
 		Investment
Positions		 
 		 
Fair Value		 
 		Unrealized
Losses		 
 		Investment
Positions		 
 		 
Fair Value		 
 		Unrealized
Losses		 
 		Investment
Positions		 
 		 
Fair Value		 
 		Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses
 ($ in thousands) ($ in thousands)
Securities of U.S. Government sponsored entities  1  $4,990  $(10)  -  $-  $-   1  $4,990  $(10)  2  $39,801  $(158)  -  $-  $-   2  $39,801  $(158)
Residential mortgage-backed securities  -   -   -   1   790   (2)  1   790   (2)
Commercial mortgage-backed securities  -   -   -   1   879   (6)  1   879   (6)
Agency residential MBS  1   7,033   (84)  30   158,762   (2,847)  31   165,795   (2,931)
Non-agency commercial MBS  -   -   -   1   837   (5)  1   837   (5)
Obligations of states and political subdivisions  4   2,132   (31)  5   2,503   (66)  9   4,635   (97)  4   2,291   (14)  3   1,118   (27)  7   3,409   (41)
Residential collateralized mortgage obligations  2   13,280   (245)  29   168,927   (4,700)  31   182,207   (4,945)
Asset-backed securities  -   -   -   1   2,330   (20)  1   2,330   (20)  -   -   -   1   1,658   (22)  1   1,658   (22)
Corporate securities  71   379,170   (2,417)  19   63,206   (333)  90   442,376   (2,750)  40   198,880   (1,559)  43   162,806   (2,160)  83   361,686   (3,719)
Other securities  -   -   -   1   1,858   (142)  1   1,858   (142)  -   -   -   1   1,860   (140)  1   1,860   (140)
Total  78  $399,572  $(2,703)  57  $240,493  $(5,269)  135  $640,065  $(7,972)  47  $248,005  $(1,815)  79  $327,041  $(5,201)  126  $575,046  $(7,016)

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- 12 - 

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

 

  Investment Securities Held to Maturity
At September 30, 2015
  No. of Less than 12 months No. of 12 months or longer No. of Total
  Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses
  ($ in thousands)
Residential mortgage-backed securities  2  $21,047  $(26)  1  $96  $(2)  3  $21,143  $(28)
Commercial mortgage-backed securities  1   7,562   (74)  1   6,597   (100)  2   14,159   (174)
Obligations of states and political subdivisions  45   29,242   (189)  70   63,195   (1,015)  115   92,437   (1,204)
Residential collateralized mortgage obligations  3   15,821   (60)  12   65,404   (541)  15   81,225   (601)
Total  51  $73,672  $(349)  84  $135,292  $(1,658)  135  $208,964  $(2,007)
  Investment Securities Held to Maturity
At March 31, 2016
  No. of Less than 12 months No. of 12 months or longer No. of Total
  Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses
  ($ in thousands)
Agency residential MBS  6  $13,853  $(58)  8  $34,193  $(346)  14  $48,046  $(404)
Non-agency residential MBS  1   1,366   (2)  -   -   -   1   1,366   (2)
Agency commercial MBS  -   -   -   2   13,823   (295)  2   13,823   (295)
Obligations of states and political subdivisions  30   26,386   (113)  18   15,044   (158)  48   41,430   (271)
Total  37  $41,605  $(173)  28  $63,060  $(799)  65  $104,665  $(972)

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

 

The Company does not intend to sell any investments and has concluded that it is more likely than not that it will not be required to sell the investments prior to recovery of the amortized cost basis. Therefore, the Company does not consider these investments to be other-than-temporarily impaired as of September 30, 2015.March 31, 2016.

 

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

 

-13-

As of September 30, 2015,March 31, 2016, $$715,879712,412  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2014, $757,6232015, $738,865  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds and FHLB advances.funds.

 

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

 

 Investment Securities Available for Sale
At December 31, 2014		 Investment Securities Available for Sale
At December 31, 2015
 No. of Less than 12 months No. of 12 months or longer No. of Total No. of Less than 12 months No. of 12 months or longer No. of Total
 Investment
Positions		 Fair Value Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses		 Investment
Positions		 Fair Value Unrealized
Losses
 ($ in thousands) ($ in thousands)
Securities of U.S. Government sponsored entities  15  $253,632  $(989)  1  $9,963  $(38)  16  $263,595  $(1,027)  8  $121,392  $(665)  -  $-  $-   8  $121,392  $(665)
Residential mortgage-backed securities  -   -   -   2   822   (16)  2   822   (16)
Commercial mortgage-backed securities  1   942   (7)  1   803   (3)  2   1,745   (10)
Agency residential MBS  2   12,491   (366)  31   161,296   (6,543)  33   173,787   (6,909)
Non-agency commercial MBS  1   1,071   -   1   855   (9)  2   1,926   (9)
Obligations of states and political subdivisions  7   2,548   (18)  17   5,518   (105)  24   8,066   (123)  3   2,728   (18)  4   1,644   (39)  7   4,372   (57)
Residential collateralized mortgage obligations  -   -   -   32   205,074   (8,524)  32   205,074   (8,524)
Asset-backed securities  1   5,008   (7)  1   3,305   (29)  2   8,313   (36)  -   -   -   1   2,003   (22)  1   2,003   (22)
Corporate securities  53   165,026   (1,304)  5   34,222   (325)  58   199,248   (1,629)  97   548,177   (5,442)  25   86,762   (1,379)  122   634,939   (6,821)
Other securities  -   -   -   1   1,876   (124)  1   1,876   (124)  -   -   -   1   1,840   (160)  1   1,840   (160)
Total  77  $427,156  $(2,325)  60  $261,583  $(9,164)  137  $688,739  $(11,489)  111  $685,859  $(6,491)  63  $254,400  $(8,152)  174  $940,259  $(14,643)

- 13 - 

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

 

 Investment Securities Held to Maturity
At December 31, 2014		 Investment Securities Held to Maturity
At December 31, 2015
 No. of Less than 12 months No. of 12 months or longer No. of Total No. of Less than 12 months No. of 12 months or longer No. of Total
 Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses		 Investment
Positions		 Fair Value Unrecognized
Losses
 ($ in thousands) ($ in thousands)
Residential mortgage-backed securities  4  $19,467  $(132)  1  $201  $(5)  5  $19,668  $(137)
Agency residential MBS  41  $426,317  $(3,490)  13  $62,041  $(1,476)  54  $488,358  $(4,966)
Agency commercial MBS  -   -   -   2   13,951   (274)  2   13,951   (274)
Obligations of states and political subdivisions  103   76,202   (439)  138   123,370   (1,919)  241   199,572   (2,358)  55   44,585   (249)  54   42,081   (540)  109   86,666   (789)
Residential collateralized mortgage obligations  5   13,932   (166)  22   119,513   (2,215)  27   133,445   (2,381)
Total  112  $109,601  $(737)  161  $243,084  $(4,139)  273  $352,685  $(4,876)  96  $470,902  $(3,739)  69  $118,073  $(2,290)  165  $588,975  $(6,029)

 

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

 

  For the Three Months For the Nine Months
  Ended September 30,
  2015 2014 2015 2014
  (In thousands)
Taxable $9,120  $6,348  $25,067  $17,907 
Tax-exempt  5,801   6,423   17,931   20,143 
Total interest income from investment securities $14,921  $12,771  $42,998  $38,050 

  For the Three Months
Ended March 31,
  2016 2015
  (In thousands)
     
Taxable $9,674  $7,554 
Tax-exempt from regular federal income tax  5,620   6,133 
Total interest income from investment securities $15,294  $13,687 

 

-14-

Note 4: Loans and Allowance for CreditLoan Losses

 

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

 

 At September 30, 2015 At March 31, 2016
 Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
& Other		 Total Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
& Other		 Total
 (In thousands) (In thousands)  
Originated loans $354,853  $537,625  $3,461  $126,472  $354,494  $1,376,905  $341,898  $515,183  $2,147  $109,201  $341,654  $1,310,083 
Purchased covered loans:                                                
Gross purchased covered loans  -   -   -   2,467   12,328   14,795   -   -   -   2,330   11,352   13,682 
Purchased loan discount  -   -   -   (133)  (22)  (155)  -   -   -   -   (18)  (18)
Purchased non-covered loans:                                                
Gross purchased non-covered loans  15,443   136,600   984   237   34,116   187,380   14,447   108,968   960   229   30,929   155,533 
Purchased loan discount  (1,100)  (4,654)  -   (167)  (1,161)  (7,082)  (931)  (3,975)  -   (23)  (1,155)  (6,084)
Total $369,196  $669,571  $4,445  $128,876  $399,755  $1,571,843  $355,414  $620,176  $3,107  $111,737  $382,762  $1,473,196 

 

 At December 31, 2014
 Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
& Other		 Total
 (In thousands)
Originated loans $374,005  $567,594  $11,003  $146,925  $370,842  $1,470,369 
Purchased covered loans:                        
Gross purchased covered loans  -   -   -   2,626   14,920   17,546 
Purchased loan discount  -   -   -   (434)  (34)  (468)
Purchased non-covered loans:                        
Gross purchased non-covered loans  19,166   157,502   2,919   972   41,656   222,215 
Purchased loan discount  (1,356)  (6,492)  (50)  (262)  (1,212)  (9,372)
Total $391,815  $718,604  $13,872  $149,827  $426,172  $1,700,290 

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- 14 - 

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

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

 

 For the
Nine Months Ended
September 30, 2015		 For the Year Ended
December 31, 2014		 For the
Three Months Ended
March 31, 2016		 For the Year Ended
December 31, 2015
Impaired purchased loans (In thousands) (In thousands)
Carrying amount at the beginning of the period $4,672  $4,936  $3,887  $4,672 
Reductions during the period  (3)  (264)  (2,628)  (785)
Carrying amount at the end of the period $4,669  $4,672  $1,259  $3,887 

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

 

  For the
Nine Months Ended
September 30, 2015		 For the
Year Ended
December 31, 2014
Accretable yield: (In thousands)
Balance at the beginning of the period $2,261  $2,505 
Reclassification from nonaccretable difference  2,327   5,016 
Accretion  (3,031)  (5,260)
Balance at the end of the period $1,557  $2,261 
         
Accretion $(3,031) $(5,260)
Change in FDIC indemnification  506   1,110 
(Increase) in interest income $(2,525) $(4,150)

  For the
Three Months Ended
March 31, 2016		 For the
Year Ended
December 31, 2015
Accretable yield: (In thousands)
Balance at the beginning of the period $1,259  $2,261 
Reclassification from nonaccretable difference  1,077   3,051 
Accretion  (1,319)  (4,053)
Balance at the end of the period $1,017  $1,259 
         
Accretion $(1,319) $(4,053)
Change in FDIC indemnification  694   698 
(Increase) in interest income $(625) $(3,355)

 

-15-

The following summarizes activity in the allowance for loan losses:

 

 Allowance for Loan Losses
For the Three Months Ended September 30, 2015		 Allowance for Loan Losses
For the Three Months Ended March 31, 2016
 Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
 (In thousands) (In thousands)
Allowance for loan losses:                                                                        
Balance at beginning of period $7,107  $4,896  $403  $2,058  $7,248  $1,244  $-  $7,872  $30,828  $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771 
Additions:                                                                        
Provision  1,246   (96)  (205)  (50)  367   (15)  65   (1,312)  -   1,214   (2)  (47)  (94)  152   (1,193)  -   (30)  - 
Deductions:                                                                        
Chargeoffs  (239)  (449)  -   -   (773)  -   -   -   (1,461)  (1,171)  -   -   -   (1,006)  -   -   -   (2,177)
Recoveries  300   27   -   -   336   6   -   -   669   245   15   -   -   457   1,176   -   -   1,893 
Net loan recoveries (losses)  61   (422)  -   -   (437)  6   -   -   (792)
Net loan (losses) recoveries  (926)  15   -   -   (549)  1,176   -   -   (284)
Total allowance for loan losses $8,414  $4,378  $198  $2,008  $7,178  $1,235  $65  $6,560  $30,036  $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487 

- 15 - 

  Allowance for Loan Losses
For the Nine Months Ended September 30, 2015
  Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $5,460  $4,245  $644  $2,241  $7,717  $2,120  $-  $9,058  $31,485 
Additions:                                    
Provision  2,840   525   (446)  (233)  436   (689)  65   (2,498)  - 
Deductions:                                    
Chargeoffs  (700)  (449)  -   -   (2,344)  (431)  -   -   (3,924)
Recoveries  814   57   -   -   1,369   235   -   -   2,475 
Net loan recoveries (losses)  114   (392)  -   -   (975)  (196)  -   -   (1,449)
Total allowance for loan losses $8,414  $4,378  $198  $2,008  $7,178  $1,235  $65  $6,560  $30,036 

  Allowance for Credit Losses
For the Three Months Ended September 30, 2014
  Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $5,297  $10,664  $442  $409  $2,055  $2,707  $-  $10,824  $32,398 
Additions:                                    
Provision  (269)  (640)  -   (17)  802   (184)  -   908   600 
Deductions:                                    
Chargeoffs  (905)  -   -   -   (916)  -   -   -   (1,821)
Recoveries  229   15   -   -   297   51   -   -   592 
Net loan (losses) recoveries  (676)  15   -   -   (619)  51   -   -   (1,229)
Balance at end of period  4,352   10,039   442   392   2,238   2,574   -   11,732   31,769 
Liability for off-balance sheet credit exposure  1,706   24   105   -   451   131   -   276   2,693 
Total allowance for credit losses $6,058  $10,063  $547  $392  $2,689  $2,705  $-  $12,008  $34,462 

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-16-
 

FDIC indemnification expired February 6, 2014 for County Bank non-single-family residential collateralized purchased loans; accordingly, such loans have been reclassified from purchased covered loans to purchased non-covered loans as well as the related allowance for credit losses.

 Allowance for Credit Losses
For the Nine Months Ended September 30, 2014		 Allowance for Loan Losses
For the Three Months Ended March 31, 2015
 Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
 (In thousands) (In thousands)
Allowance for loan losses:                                                                        
Balance at beginning of period $4,005  $12,070  $602  $405  $3,198  $-  $1,561  $9,852  $31,693  $5,460  $4,245  $644  $2,241  $7,717  $2,120  $-  $9,058  $31,485 
Additions:                                                                        
Provision  945   (2,224)  (163)  17   942   1,203   -   1,880   2,600   (110)  (137)  86   (101)  (281)  247   -   296   - 
Deductions:                                                                        
Chargeoffs  (1,114)  -   -   (30)  (3,217)  (260)  -   -   (4,621)  (60)  -   -   -   (995)  (35)  -   -   (1,090)
Recoveries  516   193   3   -   1,315   70   -   -   2,097   180   15   -   -   590   7   -   -   792 
Net loan (losses) recoveries  (598)  193   3   (30)  (1,902)  (190)  -   -   (2,524)
Indemnification expiration  -   -   -   -   -   1,561   (1,561)  -   - 
Balance at end of period  4,352   10,039   442   392   2,238   2,574   -   11,732   31,769 
Liability for off-balance sheet credit exposure  1,706   24   105   -   451   131   -   276   2,693 
Total allowance for credit losses $6,058  $10,063  $547  $392  $2,689  $2,705  $-  $12,008  $34,462 
Net loan recoveries (losses)  120   15   -   -   (405)  (28)  -   -   (298)
Total allowance for loan losses $5,470  $4,123  $730  $2,140  $7,031  $2,339  $-  $9,354  $31,187 

 

The allowance for creditloan losses and recorded investment in loans were evaluated for impairment as followsfollows:

 

 Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At September 30, 2015		 Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At March 31, 2016
 Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non-covered Loans Purchased Covered Loans Unallocated Total Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
 (In thousands) (In thousands)
Allowance for loan losses:                                                                        
Individually evaluated for impairment $4,477  $585  $-  $-  $-  $-  $-  $-  $5,062  $5,831  $585  $-  $-  $-  $-  $-  $-  $6,416 
Collectively evaluated for impairment  3,937   3,793   198   2,008   7,178   1,235   65   6,560   24,974   4,016   3,652   130   1,707   6,683   950   -   5,933   23,071 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total $8,414  $4,378  $198  $2,008  $7,178  $1,235  $65  $6,560  $30,036  $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487 
Carrying value of loans:                                                                        
Individually evaluated for impairment $12,327  $5,864  $-  $-  $-  $10,008  $-  $-  $28,199  $13,388  $7,516  $-  $-  $-  $11,733  $-  $-  $32,637 
Collectively evaluated for impairment  342,526   531,761   3,461   126,472   354,494   165,833   14,428   -   1,538,975   328,510   507,667   2,147   109,201   341,654   136,658   13,463   -   1,439,300 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   4,457   212   -   4,669   -   -   -   -   -   1,058   201   -   1,259 
Total $354,853  $537,625  $3,461  $126,472  $354,494  $180,298  $14,640  $-  $1,571,843  $341,898  $515,183  $2,147  $109,201  $341,654  $149,449  $13,664  $-  $1,473,196 

 

 Allowance for Credit Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 2014		 Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 2015
 Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non-covered Loans Purchased Covered Loans Unallocated Total Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
 (In thousands) (In thousands)
Allowance for credit losses:                                    
Allowance for loan losses:                                    
Individually evaluated for impairment $496  $-  $-  $-  $-  $-  $-  $-  $496  $4,942  $585  $-  $-  $-  $-  $-  $-  $5,527 
Collectively evaluated for impairment  7,372   4,245   988   2,241   8,154   2,120   -   8,562   33,682   4,617   3,639   177   1,801   7,080   967   -   5,963   24,244 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total $7,868  $4,245  $988  $2,241  $8,154  $2,120  $-  $8,562  $34,178  $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771 
Carrying value of loans:                                                                        
Individually evaluated for impairment $11,811  $2,970  $-  $574  $599  $12,364  $-  $-  $28,318  $12,587  $5,541  $-  $-  $-  $11,777  $-  $-  $29,905 
Collectively evaluated for impairment  362,194   564,624   11,003   146,351   370,243   196,034   16,851   -   1,667,300   355,530   511,529   2,978   117,631   346,043   152,038   13,855   -   1,499,604 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   4,445   227   -   4,672   -   -   -   -   -   3,681   206   -   3,887 
Total $374,005  $567,594  $11,003  $146,925  $370,842  $212,843  $17,078  $-  $1,700,290  $368,117  $517,070  $2,978  $117,631  $346,043  $167,496  $14,061  $-  $1,533,396 

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

 

-17-

- 16 - 

 

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

 

  Credit Risk Profile by Internally Assigned Grade
At September 30, 2015
  Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non-covered Loans Purchased Covered Loans (1) Total
  (In thousands)
Grade:                                
Pass $338,778  $512,570  $3,461  $123,753  $353,226  $155,312  $13,128  $1,500,228 
Substandard  16,075   25,055   -   2,719   900   32,049   1,667   78,465 
Doubtful      -   -   -   30   19   -   49 
Loss  -   -   -   -   338   -   -   338 
Purchased loan discount  -   -   -   -   -   (7,082)  (155)  (7,237)
Total $354,853  $537,625  $3,461  $126,472  $354,494  $180,298  $14,640  $1,571,843 

  Credit Risk Profile by Internally Assigned Grade
At March 31, 2016
  Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans (1)		 Total
  (In thousands)
Grade:                                
Pass $321,513  $492,359  $2,147  $106,117  $340,536  $133,109  $11,938  $1,407,719 
Substandard  18,544   22,824   -   3,084   843   22,329   1,744   69,368 
Doubtful  1,841   -   -   -   21   18   -   1,880 
Loss  -   -   -   -   254   77   -   331 
Purchased loan discount  -   -   -   -   -   (6,084)  (18)  (6,102)
Total $341,898  $515,183  $2,147  $109,201  $341,654  $149,449  $13,664  $1,473,196 

 

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

 

 Credit Risk Profile by Internally Assigned Grade
At December 31, 2014		 Credit Risk Profile by Internally Assigned Grade
At December 31, 2015
 Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non-covered Loans Purchased Covered Loans (1) Total Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans (1)		 Total
 (In thousands) (In thousands)
Grade:                                                                
Pass $366,487  $527,980  $11,003  $144,902  $369,618  $182,644  $15,509  $1,618,143  $353,474  $496,744  $2,978  $114,525  $344,876  $149,100  $12,563  $1,474,260 
Substandard  7,506   39,614   -   2,023   734   39,473   2,037   91,387   14,643   20,326   -   3,106   781   24,810   1,650   65,316 
Doubtful  12   -   -   -   12   77   -   101   -   -   -   -   12   18   -   30 
Loss  -   -   -   -   478   21   -   499   -   -   -   -   374   -   -   374 
Purchased loan discount  -   -   -   -   -   (9,372)  (468)  (9,840)  -   -   -   -   -   (6,432)  (152)  (6,584)
Total $374,005  $567,594  $11,003  $146,925  $370,842  $212,843  $17,078  $1,700,290  $368,117  $517,070  $2,978  $117,631  $346,043  $167,496  $14,061  $1,533,396 

 

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

 

The following tables summarize loans by delinquency and nonaccrual status:

 

 Summary of Loans by Delinquency and Nonaccrual Status
At September 30, 2015		 Summary of Loans by Delinquency and Nonaccrual Status
At March 31, 2016
 Current and Accruing 

30-59 Days

Past Due and Accruing

 

60-89 Days

Past Due and Accruing

 

Past Due 90

days or More

and Accruing

 Nonaccrual Total Loans 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) (In thousands)
Commercial $354,183  $417  $84  $-  $169  $354,853  $338,683  $780  $308  $-  $2,127  $341,898 
Commercial real estate  527,957   2,667   -   -   7,001   537,625   505,878   715   400   -   8,190   515,183 
Construction  3,461   -   -   -   -   3,461   2,147   -   -   -   -   2,147 
Residential real estate  124,305   1,360   471   -   336   126,472   105,355   2,350   767   -   729   109,201 
Consumer installment and other  350,289   2,834   818   481   72   354,494   338,687   2,137   647   183   -   341,654 
Total originated loans  1,360,195   7,278   1,373   481   7,578   1,376,905   1,290,750   5,982   2,122   183   11,046   1,310,083 
Purchased non-covered loans  168,816   1,736   878   -   8,868   180,298   141,930   721   40   77   6,681   149,449 
Purchased covered loans  14,473   137   30   -   -   14,640   13,635   -   29   -   -   13,664 
Total $1,543,484  $9,151  $2,281  $481  $16,446  $1,571,843  $1,446,315  $6,703  $2,191  $260  $17,727  $1,473,196 

 

 

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- 17 - 

-18-
 

  Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2014
  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 $372,235  $1,704  $36  $-  $30  $374,005 
Commercial real estate  557,041   6,500   -   -   4,053   567,594 
Construction  11,003   -   -   -   -   11,003 
Residential real estate  144,021   1,513   817   -   574   146,925 
Consumer installment and other  365,753   3,310   625   502   652   370,842 
Total originated loans  1,450,053   13,027   1,478   502   5,309   1,470,369 
Purchased non-covered loans  196,150   4,204   491   -   11,998   212,843 
Purchased covered loans  16,389   389   3   -   297   17,078 
Total $1,662,592  $17,620  $1,972  $502  $17,604  $1,700,290 

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

 

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

 

 For the Three Months For the Nine Months
 Ended September 30, For the Three Months Ended
March 31,
 2015 2014 2015 2014 2016 2015
 (In thousands) (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms $315  $298  $969  $833  $280  $311 
Interest income reversed (recognized) on nonaccrual loans  17   15   (308)  (55)
Less: Interest income recognized on nonaccrual loans  (263)  (205)
Total reduction of interest income $332  $313  $661  $778  $17  $106 

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2015March 31, 2016 and December 31, 2014.2015.

 

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- 18 - 

The following summarizes impaired loans:

 

 Impaired Loans
At September 30, 2015		 Impaired Loans
At March 31, 2016
 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
 (In thousands) (In thousands)
Impaired loans with no related allowance recorded:                        
Commercial $3,073  $3,136  $-  $2,099  $2,185  $- 
Commercial real estate  16,916   21,949   -   16,069   20,742   - 
Construction  -   -   -   271   271   - 
Residential real estate  566   597   -   953   984   - 
Consumer installment and other  428   534   -   344   451   - 
                        
Impaired loans with an allowance recorded:                        
Commercial  9,810   9,810   4,477   11,634   12,452   5,831 
Commercial real estate  4,660   5,109   585   4,660   5,109   585 
Construction  -   -   -   -   -   - 
Residential real estate  -   -   -   -   -   - 
Consumer installment and other  -   -   -   -   -   - 
                        
Total:                        
Commercial $12,883  $12,946  $4,477  $13,733  $14,637  $5,831 
Commercial real estate  21,576   27,058   585   20,729   25,851   585 
Construction  -   -   -   271   271   - 
Residential real estate  566   597   -   953   984   - 
Consumer installment and other  428   534   -   344   451   - 

 

-19-
  Impaired Loans
At December 31, 2015
  Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
  (In thousands)
Impaired loans with no related allowance recorded:            
Commercial $2,917  $2,979  $- 
Commercial real estate  16,309   21,168   - 
Construction  271   271   - 
Residential real estate  666   697   - 
Consumer installment and other  350   456   - 
             
Impaired loans with an allowance recorded:            
Commercial  10,170   10,170   4,942 
Commercial real estate  4,660   5,109   585 
Construction  -   -   - 
Residential real estate  -   -   - 
Consumer installment and other  -   -   - 
             
Total:            
Commercial $13,087  $13,149  $4,942 
Commercial real estate  20,969   26,277   585 
Construction  271   271   - 
Residential real estate  666   697   - 
Consumer installment and other  350   456   - 

- 19 - 

 

  Impaired Loans
At December 31, 2014
  Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
  (In thousands)
Impaired loans with no related allowance recorded:            
Commercial $2,031  $2,095  $- 
Commercial real estate  19,478   25,519   - 
Construction  1,834   1,884   - 
Residential real estate  574   574   - 
Consumer installment and other  1,518   1,628   - 
             
Impaired loans with an allowance recorded:            
Commercial  9,910   9,910   496 
Commercial real estate  -   -   - 
Construction  -   -   - 
Residential real estate  -   -   - 
Consumer installment and other  -   -   - 
             
Total:            
Commercial $11,941  $12,005  $496 
Commercial real estate  19,478   25,519   - 
Construction  1,834   1,884   - 
Residential real estate  574   574   - 
Consumer installment and other  1,518   1,628   - 

Impaired loans include troubled debt restructured loans. Impaired loans at September 30, 2015,March 31, 2016, included $12,88019,645 thousand of restructured loans, $6,77212,114 thousand of which were on nonaccrual status. Impaired loans at December 31, 2014,2015, included $4,837$15,712 thousand of restructured loans, none$7,464 thousand of which were on nonaccrual status.

 

 Impaired Loans
 For the Three Months Ended September 30, For the Nine Months Ended September 30, Impaired Loans
For the Three Months Ended March 31,
 2015 2014 2015 2014 2016 2015
 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income
 (In thousands) (In thousands)
Commercial $12,750  $147  $3,885  $59  $12,513  $440  $4,388  $186  $13,410  $133  $12,226  $146 
Commercial real estate  21,923   142   20,787   103   19,985   546   19,961   373   20,849   159   18,318   257 
Construction  -   -   1,934   -   306   -   2,076   -   271   -   917   - 
Residential real estate  403   9   -   -   652   23   108   -   810   4   860   6 
Consumer installment and other  516   6   1,207   7   856   19   1,416   22   347   6   1,254   6 
Total $35,592  $304  $27,813  $169  $34,312  $1,028  $27,949  $581  $35,687  $302  $33,575  $415 

 

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-20-

The following table provides information on troubled debt restructurings:

 

 Troubled Debt Restructurings
 Troubled Debt Restructurings
At September 30, 2015		 At March 31, 2016
 Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance		 Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance
 (In thousands) (In thousands)
Commercial  6  $2,813  $2,517  $-   7  $2,568  $2,156  $194 
Commercial real estate  7   10,305   10,133   -   11   17,587   17,265   585 
Residential real estate  1   242   230   -   1   242   224   - 
Total  14  $13,360  $12,880  $-   19  $20,397  $19,645  $779 

 

 Troubled Debt Restructurings
 Troubled Debt Restructurings
At September 30, 2014		 At December 31, 2015
 Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance		 Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance
 (In thousands) (In thousands)
Commercial  6  $3,465  $3,109  $259   6  $3,138  $2,802  $194 
Commercial real estate  3   2,754   2,787   -   10   12,927   12,684   - 
Consumer installment and other  1   18   11   - 
Residential real estate  1   242   226   - 
Total  10  $6,237  $5,907  $259   17  $16,307  $15,712  $194 

During the three and nine months ended September 30, 2015,March 31, 2016, the Company modifiedonethree loanloans with a carrying value of $6,3304,757 thousand andseven loans with an aggregate carrying value of $8,150 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in theseven restructurings completed first quarter 2016 consisted of two modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms and one court order requiring under-market terms. During the three months ended March 31, 2015, the Company modified five loans with a carrying value of $1,736 thousand that were considered troubled debt restructurings. The concessions granted in the first nine months ofquarter 2015 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms and court order.

terms. During the three and nine months ended September 30, 2014, the Company modified three loans with a total carrying value of $617 thousandMarch 31, 2016 and five loans with a total carrying value of $726 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the five restructurings completed in the first nine months of 2014 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment.

During the three and nine months ended September 30, 2015, and 2014, no troubled debt restructured loans defaulted within 12 months of the modification date.defaulted. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

 

The Company repaid $20,015 thousand of Federal Home Loan Bank (“FHLB”) advances in January 2015, which had been collateralized by loans; the collateral requirements expired upon repayment of the debt. At December 31, 2014, the Company pledged loans to secure borrowings with a carrying value of $20,015 thousand from the FHLB. TheThere were no loans restricted due to collateral requirements approximated $18,366 thousand at March 31, 2016 and December 31, 2014.2015.

 

There were no loans held for sale at September 30, 2015March 31, 2016 and December 31, 2014.2015.

 

- 20 - 

At September 30,March 31, 2016 and December 31, 2015, and September 30, 2014, the Company held total other real estate owned (OREO) of $9,2698,438 thousand net of reserve of $2,102 thousand and $7,2739,264 thousand net of reserve of $1,986 thousand, respectively, of which $-0-  thousand and $585 thousand, respectively, werewas foreclosed residential real estate properties. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process totaledwas $-0-  thousand at March 31, 2016 and $595 thousand at September 30, 2015 and September 30, 2014, respectively.December 31, 2015.

 

-21-

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, 2015,March 31, 2016, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2015,March 31, 2016, Westamerica Bank had38 lending relationships with aggregate loans exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $60,84860,660 thousand and $66,086$61,190 thousand at September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At September 30, 2015,March 31, 2016, Westamerica Bank held corporate bonds in4548 issuing entities which exceeded $5 million of each issuer.

 

Note 6: Other Assets

 

Other assets consisted of the following:

 

 At September 30,
2015		 At December 31,
2014		 At March 31,
2016		 At December 31,
2015
 (In thousands) (In thousands)
Cost method equity investments:                
Federal Reserve Bank stock (1) $14,069  $14,069  $14,069  $14,069 
Federal Home Loan Bank stock (2)  -   940 
Other investments  201   241   201   201 
Total cost method equity investments  14,270   15,250   14,270   14,270 
Life insurance cash surrender value  48,335   46,479   49,607   48,972 
Net deferred tax asset  47,046   50,903   47,069   51,748 
Limited partnership investments  15,934   18,673   14,551   15,259 
Interest receivable  18,637   19,394   18,795   20,174 
Prepaid assets  4,309   5,609   4,732   4,771 
Other assets  10,381   10,150   14,180   10,660 
Total other assets $158,912  $166,458  $163,204  $165,854 

(1)A bank applying for membership in the Federal Reserve System is required to subscribe to stock in the Federal Reserve Bank of San Francisco (FRB) 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.

 

(2)Borrowings from the FHLB must be supported by capital stock holdings. The minimum activity-based requirement is 4.7% of the outstanding advances. The requirement may be adjusted from time to time by the FHLB within limits established in the FHLB's Capital Plan.

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

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At September 30,March 31, 2016, this investment totaled $14,551 thousand and $2,299 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2015, this investment totaled $15,93415,259 thousand and $2,299 thousand of this amount represents outstanding equity capital commitments. TheseAt March 31, 2016, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $453 thousand in 2015, $763 thousand in 2016, and $1,083$763 thousand in 2017, and $1,083 thousand in 2018, or thereafter.

 

- 21 - 

The amounts recognized in net income for these investments include:

 

  For the Three Months For the Nine Months
  Ended September 30,
  2015 2014 2015 2014
  (In thousands)
Investment loss included in pre-tax income $750  $750  $2,175  $2,200 
Tax credits recognized in provision for income taxes  663   610   1,988   2,200 

  For the Three Months Ended
March 31,
  2016 2015
  (In thousands)
Investment loss included in pre-tax income $675  $675 
Tax credits recognized in provision for income taxes  598   658 

 

-22-

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 periodically evaluated for impairment.impairment at least annually. The Company did not recognize impairment during the three and nine months ended September 30, 2015March 31, 2016 and year ended December 31, 2014.2015. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the ninethree months ended September 30, 2015March 31, 2016 and year ended December 31, 2014,2015, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

  At September 30,
2015		 At December 31,
2014
  (In thousands)
Goodwill $121,673  $121,673 

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

 

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

 

 At September 30, 2015 At December 31, 2014 At March 31, 2016 At December 31, 2015
 Gross
Carrying
Amount		 Accumulated
Amortization		 Gross
Carrying
Amount		 Accumulated
Amortization		 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
 (In thousands) (In thousands)
Core Deposit Intangibles $56,808  $(45,897) $56,808  $(43,188) $56,808  $(47,628) $56,808  $(46,782)
Merchant Draft Processing Intangible  10,300   (9,832)  10,300   (9,633)  10,300   (9,954)  10,300   (9,895)
Total Identifiable Intangible Assets $67,108  $(55,729) $67,108  $(52,821) $67,108  $(57,582) $67,108  $(56,677)

As of September 30, 2015,March 31, 2016, the current yearperiod and estimated future amortization expense for identifiable intangible assets was:

 

 Core
Deposit
Intangibles		 Merchant
Draft
Processing
Intangible		 Total Merchant
Core
Deposit
Intangibles		 Draft
Processing
Intangible		 Total
 (In thousands) (In thousands)
Nine months ended September 30, 2015 (actual) $2,709  $199  $2,908 
Estimate for year ended December 31, 2015  3,594   262   3,856 
2016  3,292   212   3,504 
For the Three Months ended March 31, 2016 (actual) $846  $59  $905 
Estimate for year ended December 31, 2016  3,292   212   3,504 
2017  2,913   164   3,077   2,913   164   3,077 
2018  1,892   29   1,921   1,892   29   1,921 
2019  538   -   538   538   -   538 
2020  287   -   287   287   -   287 

 

 

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Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

  Deposits
  At September 30, 2015 At December 31, 2014
  (In thousands)
Noninterest-bearing $1,942,450  $1,910,781 
Interest-bearing:        
Transaction  812,940   792,448 
Savings  1,310,985   1,260,819 
Time deposits less than $100 thousand  156,503   169,959 
Time deposits $100 thousand through $250 thousand  101,317   113,023 
Time deposits more than $250 thousand  42,725   102,161 
Total deposits $4,366,920  $4,349,191 

  Deposits
 
 		 
 		At March 31,
2016		 
 		At December 31,
2015
  (In thousands)
Noninterest-bearing $1,989,010  $2,026,049 
Interest-bearing:        
Transaction  855,008   860,706 
Savings  1,393,919   1,366,936 
Time deposits less than $100 thousand  147,699   150,780 
Time deposits $100 thousand through $250 thousand  93,460   96,971 
Time deposits more than $250 thousand  37,654   39,217 
Total deposits $4,516,750  $4,540,659 

Demand deposit overdrafts of $2,7532,951  thousand and $3,173$3,038  thousand were included as loan balances at September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $164 thousand and $543137 thousand in the thirdfirst quarter of2016 and first nine months of 2015, respectively and $219 thousand and $683$197 thousand in the thirdfirst quarter of and first nine months of 2014, respectively.2015.

 

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

 

 Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings		 Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
 At September 30, 2015 At December 31, 2014 At March 31, 2016 At December 31, 2015
 Remaining Contractual Maturity of the Agreements Remaining Contractual Maturity of the Agreements
 Overnight and Continuous Overnight and Continuous Overnight and Continuous
Repurchase agreements: (In thousands) (In thousands)
Collateral securing borrowings:        
Securities of U.S. Government sponsored entities $110,541  $80,827  $99,343  $98,969 
Obligations of states and political subdivisions  3,975   14,251   3,250   3,975 
Corporate securities  54,832   52,936   49,715   54,681 
Total collateral carrying value $169,348  $148,014  $152,308  $157,625 
Total short-term borrowed funds $57,063  $89,784  $52,451  $53,028 

FHLB advances matured and were repaid in full in January 2015. At December 31, 2014, FHLB advances with a carrying value of $20,015 thousand were secured by residential real estate loans and securities of approximately $26,484  thousand.

 

The Company has a $35,000 thousand unsecured line of credit which hadexpired, with no outstanding balance, March 18, 2016 and was not renewed. There was no outstanding balance at September 30, 2015 and December 31, 2014. The line of credit has a variable interest rate, which was2.0% per annum at September 30, 2015, with interest payable monthly on outstanding advances. Advances may be made up to the unused credit limit through March 18, 2016.2015.

Note 9: Fair Value Measurements

 

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

 

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

 

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

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-24-
 

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

 

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

 

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

 

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

 

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3. When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur. DuringFor the three months ended March 31, 2016 and 2015, there were no transfers in or out of levels 1, 2 or 3. During the quarter ended June 30, 2015, the Company reevaluated the valuation techniques and assumptions used by its vendors in valuing the Company’s available for sale securities, and based on the evaluation, transferred $437,715 thousand out of level 1 and transferred $437,715 thousand into level 2. There were no transfers into level 1 or into or out of level 3. For the three months ended SeptemberSubsequent to June 30, 2015 and through the year ended December 31, 2014,2015, there were no transfers into or out of levels 1, 2 or 3.

 

 

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Assets Recorded at Fair Value on a Recurring Basis

 

The tabletables below presentspresent assets measured at fair value on a recurring basis.basis on the dates indicated.

 

 At September 30, 2015 At March 31, 2016
 Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 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) (In thousands)
U.S. Treasury securities $3,001  $3,001  $-  $- 
Securities of U.S. Government sponsored entities  342,409   -   342,409   -  $360,729  $-  $360,729  $- 
Residential mortgage-backed securities  20,590   -   20,590   - 
Commercial mortgage-backed securities  2,552   -   2,552   - 
Agency residential MBS  197,269   -   197,269   - 
Non-agency residential MBS  353       353   - 
Non-agency commercial MBS  2,302   -   2,302   - 
Obligations of states and political subdivisions  161,155   -   161,155   -   148,558   -   148,558   - 
Residential collateralized mortgage obligations  194,552   -   194,552   - 
Asset-backed securities  2,330   -   2,330   -   1,658   -   1,658   - 
FHLMC and FNMA stock  6,500   10   6,490   -   3,791   6   3,785   - 
Corporate securities  835,839   -   835,839   -   868,747   -   868,747   - 
Other securities  2,782   924   1,858   -   2,563   703   1,860   - 
Total securities available for sale $1,571,710  $3,935  $1,567,775  $-  $1,585,970  $709  $1,585,261  $- 

 

 At December 31, 2014 At December 31, 2015
 Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 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) (In thousands)
U.S. Treasury securities $3,505  $3,505  $-  $- 
Securities of U.S. Government sponsored entities  635,188   635,188   -   -  $301,882  $-  $301,882  $- 
Residential mortgage-backed securities  26,407   -   26,407   - 
Commercial mortgage-backed securities  2,919   -   2,919   - 
Agency residential MBS  202,544   -   202,544   - 
Non-agency residential MBS  370       370   - 
Non-agency commercial MBS  2,379   -   2,379   - 
Obligations of states and political subdivisions  181,799   -   181,799   -   157,509   -   157,509   - 
Residential collateralized mortgage obligations  222,457   -   222,457   - 
Asset-backed securities  8,313   -   8,313   -   2,003   -   2,003   - 
FHLMC and FNMA stock  5,168   5,168   -   -   4,329   7   4,322   - 
Corporate securities  512,239   -   512,239   -   896,369   -   896,369   - 
Other securities  2,786   910   1,876   -   2,831   991   1,840   - 
Total securities available for sale $1,600,781  $644,771  $956,010  $-  $1,570,216  $998  $1,569,218  $- 

 

 

 

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-26-
 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at September 30, 2015March 31, 2016 and December 31, 2014,2015, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

 

 At September 30, 2015 

For the Nine

Months Ended

September 30, 2015

 At March 31, 2016 For the
Three Months Ended
March 31, 2016
 Fair Value Level 1 Level 2 Level 3 Total Losses Carrying Value Level 1 Level 2 Level 3 Total Losses
 (In thousands) (In thousands)
Other real estate owned $9,269  $-  $-  $9,269  $(315) $8,438  $-  $-  $8,438  $(126)
Impaired loans  15,738   -   -   15,738   (449)  16,208   -   -   16,208   (814)
Total assets measured at fair value on a nonrecurring basis $25,007  $-  $-  $25,007  $(764) $24,646  $-  $-  $24,646  $(940)

 At December 31, 2015 For the
Year Ended
December 31, 2015
 Carrying Value Level 1 Level 2 Level 3 Total Losses
 (In thousands)
Other real estate owned $9,264  $-  $-  $9,264  $(320)
Impaired loans  15,633   -   -   15,633   (449)
Total assets measured at fair value on a nonrecurring basis $24,897  $-  $-  $24,897  $(769)

 

Level 3 – Valuation is based upon 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 due to the unavailability from third party evaluators.

 

At December 31, 2014

 

For the

Year Ended

December 31, 2014

 Fair Value Level 1 Level 2 Level 3 Total Losses
 (In thousands)
Other real estate owned $6,374  $-  $6,374  $-  $(358)
Impaired loans  17,085   -   7,670   9,415   (884)
Total assets measured at fair value on a nonrecurring basis $23,459  $-  $14,044  $9,415  $(1,242)

Level 2 – Valuation is based upon independent market prices or appraised value of the collateral, less 10% for selling costs, generally. Level 2 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property 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.

Level 3 – Valuation is based upon estimated liquidation values of loan collateral. The value of level 3 assets can also include a component of real estate, which is valued as described for level 2 inputs, when collateral for the impaired loan includes both business assets and real estate. Level 3 includes impaired loans where a specific reserve has been established or a chargeoff has been recorded.

 

Disclosures about Fair Value of Financial Instruments

 

The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value in the balance sheet.

 

Cash and Due from Banks Cash and due from banks represent U.S. dollar denominated coin and currency, deposits at the Federal Reserve Bank and correspondent banks, and amounts being settled with other banks to complete the processing of customers’ daily transactions. Collectively, the Federal Reserve Bank and financial institutions operate in a market in which cash and due from banks transactions are processed continuously in significant daily volumes honoring the face value of the U.S. dollar.

 

Investment Securities Held to Maturity The fair values of investment securities were estimated using quoted prices as described above for Level 1 and Level 2 valuation.

 

Loans Loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates were valued using historical cost. Fixed rate loans and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of $30,03629,487 thousand at September 30, 2015March 31, 2016 and $31,485$29,771 thousand at December 31, 20142015 and the purchased loan discount associated with purchased covered and purchased non-covered loans of $15518 thousand and $7,0826,084 thousand, respectively at September 30, 2015March 31, 2016 and of $468$152 thousand and $9,372$6,432 thousand, respectively at December 31, 20142015 were applied against the estimated fair values to recognize estimated future defaults of contractual cash flows. The Company does not consider these values to be a liquidation price for the loans.

 

- 26 - 

-27-
 

Deposit Liabilities Deposits with no stated maturity such as checking accounts, savings accounts and money market accounts can be readily converted to cash or used to settle transactions at face value through the broad financial system operated by the Federal Reserve Bank and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair values of time deposits were estimated by discounting estimated future contractual cash flows using current market rates for financial instruments with similar characteristics.

 

Short-Term Borrowed Funds The carrying amount of securities sold under agreement to repurchase and other short-term borrowed funds approximate fair value due to the relatively short period of time between their origination and their expected realization.

Federal Home Loan Bank Advances The fair values of FHLB advances were estimated by using redemption amounts quoted by the Federal Home Loan Bank of San Francisco.

 

The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled in larger quantities. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.

 

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

 

 At September 30, 2015
 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 $268,587  $268,587  $268,587  $-  $- 
Investment securities held to maturity  1,278,814   1,293,958   -   1,293,958   - 
Loans  1,541,807   1,554,908   -   -   1,554,908 
                     
Financial Liabilities:                    
Deposits $4,366,920  $4,365,831  $-  $4,066,375  $299,456 
Short-term borrowed funds  57,063   57,063   -   57,063   - 

 At March 31, 2016
 Carrying Amount Estimated Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)
Financial Assets:  (In thousands)
Cash and due from banks $471,164  $471,164  $471,164  $-  $- 
Investment securities held to maturity  1,358,139   1,381,808   -   1,381,808   - 
Loans  1,443,709   1,464,418   -   -   1,464,418 
                     
Financial Liabilities:                    
Deposits $4,516,750  $4,515,926  $-  $4,237,937  $277,989 
Short-term borrowed funds  52,451   52,451   -   52,451   - 

 

 At December 31, 2014
 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 $380,836  $380,836  $380,836  $-  $- 
Investment securities held to maturity  1,038,658   1,048,562   1,077   1,047,485   - 
Loans  1,668,805   1,685,048   -   -   1,685,048 
Financial Liabilities:                    
Deposits $4,349,191  $4,348,958  $-  $3,964,048  $384,910 
Short-term borrowed funds  89,784   89,784   -   89,784   - 
Federal Home Loan Bank advances  20,015   20,014   20,014   -   - 

 At December 31, 2015
 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 $433,044  $433,044  $433,044  $-  $- 
Investment securities held to maturity  1,316,075   1,325,699   -   1,325,699   - 
Loans  1,503,625   1,517,394   -   -   1,517,394 
                     
Financial Liabilities:                    
Deposits $4,540,659  $4,539,455  $-  $4,253,691  $285,764 
Short-term borrowed funds  53,028   53,028   -   53,028   - 

 

-28-

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.

- 27 - 

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 $316,947321,077 thousand and $312,694$299,884 thousand at September 30, 2015March 31, 2016 and December 31, 2014,2015, 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 $27,11723,581 thousand and $29,002$26,149 thousand at September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. The Company also had commitments for commercial and similar letters of credit of $-0- thousand at March 31, 2016 and $40 thousand at September 30, 2015December 31, 2015. At March 31, 2016 and December 31, 2014. At September 30, 2015, and December 31, 2014, the Company had a reserve for unfunded commitments of $2,593$2,593 thousand, and $2,693 thousand, respectively, 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 is reasonably estimable.

Note 11: Earnings Per Common Share

 

The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period plus the impact of common stock equivalents.

 

 For the Three Months For the Nine Months
 Ended September 30,
  2015 2014 2015 2014
 (In thousands, except per share data)
Net income applicable to common equity (numerator) $14,857  $15,154  $44,175  $45,618 
Basic earnings per common share                
Weighted average number of common shares outstanding - basic (denominator)  25,530   25,973   25,565   26,192 
Basic earnings per common share $0.58  $0.58  $1.73  $1.74 
Diluted earnings per common share                
Weighted average number of common shares outstanding - basic  25,530   25,973   25,565   26,192 
Add common stock equivalents for options  35   43   20   70 
Weighted average number of common shares outstanding - diluted (denominator)  25,565   26,016   25,585   26,262 
Diluted earnings per common share $0.58  $0.58  $1.73  $1.74 

  For the Three Months Ended
  March 31,
  2016 2015
  (In thousands, except per share data)
Net income (numerator) $14,226  $14,557
Basic earnings per common share        
Weighted average number of common shares outstanding - basic (denominator)  25,445   25,651 
Basic earnings per common share $0.56  $0.57 
Diluted earnings per common share        
Weighted average number of common shares outstanding - basic  25,445   25,651 
Add common stock equivalents for options  23   4 
Weighted average number of common shares outstanding - diluted (denominator)  25,468   25,655 
Diluted earnings per common share $0.56  $0.57 

For the three and nine months ended September 30,March 31, 2016 and 2015, options to purchase 1,0431,297 thousand and1,3961,775 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

For the three and nine months ended September 30, 2014, options to purchase 1,322 thousand and 1,060 thousand shares

[The remainder of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.this page intentionally left blank]

 

 

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WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

  For the Three Months Ended
  March 31, March 31, December 31,
  2016 2015 2015
  (In thousands, except per share data)
Net Interest and Fee Income (FTE)(1) $36,447  $36,930  $36,734 
Provision for Loan Losses  -   -   - 
Noninterest Income  11,729   12,300   11,305 
Noninterest Expense  25,858   26,727   25,504 
Income Before Income Taxes (FTE)(1)  22,318   22,503   22,535 
Provision for Income Taxes (FTE)(1)  8,092   7,946   7,957 
Net Income $14,226  $14,557  $14,578 
             
Average Common Shares Outstanding  25,445   25,651   25,528 
Average Diluted Common Shares Outstanding  25,468   25,655   25,555 
Common Shares Outstanding at Period End  25,438   25,563   25,528 
             
Per Common Share:            
Basic Earnings $0.56  $0.57  $0.57 
Diluted Earnings  0.56   0.57   0.57 
Book Value Per Common Share $21.19  $20.63  $20.85 
             
Financial Ratios:            
Return On Assets  1.11%  1.17%  1.12%
Return On Common Equity  10.85%  11.44%  11.01%
Net Interest Margin (FTE)(1)  3.34%  3.43%  3.32%
Net Loan Losses to Average Loans  0.08%  0.07%  0.07%
Efficiency Ratio(2)  53.7%  54.3%  53.1%
             
Average Balances:            
Assets $5,174,804  $5,059,537  $5,168,805 
Earning Assets  4,381,423   4,342,031   4,411,599 
Loans  1,500,616   1,683,748   1,543,591 
Deposits  4,537,548   4,402,946   4,536,256 
Shareholders' Equity  527,177   516,086   525,277 
             
Period End Balances:            
Assets $5,199,868  $5,035,777  $5,168,875 
Earning Assets  4,417,305   4,476,435   4,419,687 
Loans  1,473,196   1,683,884   1,533,396 
Deposits  4,516,750   4,380,076   4,540,659 
Shareholders' Equity  538,973   527,380   532,205 
             
Capital Ratios at Period End:            
Total Risk Based Capital  13.51%  13.08%  13.39%
Tangible Equity to Tangible Assets  8.04%  8.01%  7.94%
             
Dividends Paid Per Common Share $0.39  $0.38  $0.39 
Common Dividend Payout Ratio  70%  67%  68%

 

 For the Three Months For the Nine Months
 Ended September 30,
  2015 2014 2015 2014
 (In thousands, except per share data)
Net Interest and Fee Income (FTE)1 $37,179  $37,905  $111,524  $115,351 
Provision for Loan Losses  -   600   -   2,600 
Noninterest Income  11,993   13,054   36,562   39,242 
Noninterest Expense  26,173   26,616   79,796   80,446 
Income Before Income Taxes (FTE)1  22,999   23,743   68,290   71,547 
Income Tax Provision (FTE)1  8,142   8,589   24,115   25,929 
Net Income $14,857  $15,154  $44,175  $45,618 
Average Common Shares Outstanding  25,530   25,973   25,565   26,192 
Diluted Average Common Shares Outstanding  25,565   26,016   25,585   26,262 
Common Shares Outstanding at Period End  25,530   25,906         
Per Common Share:                
Basic Earnings $0.58  $0.58  $1.73  $1.74 
Diluted Earnings  0.58   0.58   1.73   1.74 
Book Value $20.91  $20.59         
Financial Ratios:                
Return on Assets  1.16%  1.21%  1.17%  1.24%
Return on Common Equity  11.33%  11.55%  11.42%  11.59%
Net Interest Margin (FTE)1  3.31%  3.66%  3.37%  3.75%
Net Loan Losses to Average Loans  0.20%  0.28%  0.12%  0.19%
Efficiency Ratio2  53.2%  52.2%  53.9%  52.0%
Average Balances:                
Assets $5,062,334  $4,971,808  $5,055,421  $4,923,705 
Earning Assets  4,471,690   4,125,835   4,417,114   4,111,364 
Loans  1,591,798   1,760,115   1,643,438   1,794,513 
Deposits  4,414,711   4,303,389   4,404,379   4,250,969 
Shareholders' Equity  520,261   520,702   517,054   526,337 
Period End Balances:                
Assets $5,001,395  $4,993,725         
Earning Assets  4,422,367   4,158,785         
Loans  1,571,843   1,732,382         
Deposits  4,366,920   4,321,638         
Shareholders' Equity  533,938   533,395         
Capital Ratios at Period End:                
Total Risk Based Capital  13.39%  15.03%        
Tangible Equity to Tangible Assets  8.23%  8.16%        
Dividends Paid Per Common Share $0.38  $0.38  $1.14  $1.14 
Common Dividend Payout Ratio  66%  66%  66%  66%

The above financial summary has been derived from the Company's unaudited consolidated financial statements. This information should be read in conjunction with those statements, notes and the other information included elsewhere herein. Percentages under the heading "Financial Ratios" are annualized with the exception of the efficiency ratio.

 

1Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis, which is a non-GAAP
(1)Yields on securities and certain loans have been adjusted upward to an FTE basis, which is a non-GAAP financial measure, in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.

(2)The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis, which is a non-GAAP financial measure, and noninterest income).

 

2The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis, which is anon-GAAP financial measure, and noninterest income).

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

 

The Federal Reserve’s Federal Open Market Committee has maintained highly accommodative monetary policies to influence interest rates to low levels in order to provide stimulus to the economy following the “financial crisis” recession. The Company’sWestamerica Bancorporation and subsidiaries’ (the “Company’s”) principal source of revenue is net interest and fee income, which represents interest earned on loans and investment securities (“earninginterest-earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). The relatively low level of market interest rates has reduced the spread between interest rates on earning assets and interest bearing liabilities. The Company’s net interest margin and net interest income have declined as market interest rates on newly originated loans remain below the yields earned on older-dated loans and on the overall loan portfolio. The Company’s loan portfolio has declined from the first quarter 2015 through the first quarter 2016; Management has been avoiding long-dated, low-yielding loans given historically low interest rates. Management has also maintained, in their opinion, conservative loan underwriting, terms and conditions. During this period, the investment portfolio has grown. The Company ishas been reducing its exposure to rising interest rates by purchasing shorter-duration investment securities, withwhich have lower yields than longer-duration securities. The Company’s credit quality continued to improve, as nonperforming loans at September 30, 2015 declined9.6 percent compared with September 30, 2014changing composition of interest earning assets and low market interest rates has pressured the net loan losses remained relatively low in the three and nine months ended September 30, 2015.interest margin on a fully taxable equivalent (“FTE”) basis. The improvement in credit quality has resulted in Management reducing the provision for loan losses to zero in the third quarter andnet interest margin in the first nine months ofquarter 2016 increased from the fourth quarter 2015 from $600 thousandreflecting the Federal Open Market Committee’s (“FOMC”s) 0.25 percent increase in the thirdfederal funds rate on December 16, 2015, which increased yields on loans and investment securities with floating rates. In the first quarter 20142016 the Company’s average checking and $2.6 millionsavings deposits were 6 percent higher than in the first nine months of 2014.quarter 2015. The credit quality improvement alsogrowth in lower-costing deposit products contributed to reducing noninterest expenses relatedlowering the funding cost from 0.06 percent in the first quarter 2015 to nonperforming assets.0.05 percent in the first quarter 2016. Management is focused on controlling all noninterest expense levels, particularly due to market interest rate pressure on net interest income.

 

Westamerica BancorporationThe Company presents its net interest margin and subsidiaries (the “Company”net interest income on a FTE basis using the current statutory federal tax rate, which is a non-generally accepted accounting principles (GAAP) financial measure. Management believes the FTE basis is valuable to the reader because the Company’s loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks, therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on a FTE basis.

The Company’s significant accounting policies (see Note 1 (“Summary Significant Accounting Policies”) earnedto Financial Statements in the Company’s 2015 Form 10-K) are fundamental to understanding the Company’s results of operations and financial condition. There have been no changes to the Company’s significant accounting policies during the first quarter of 2016.

The Company reported first quarter 2016 net income of $14.914.2 million or $0.580.56 diluted earnings per common share for the third quarter 2015 and net income of $44.2 million or $1.73 diluted earnings per common share for the nine months ended September 30, 2015.share. These results compare to net income of $15.2$14.6 million or $0.58$0.57 diluted earnings per common share and $14.6 million or $0.57 diluted earnings per common share for both the third quarter 2014first and net income of $45.6 million or $1.74 diluted earnings per common share for the nine months ended September 30, 2014.fourth quarters 2015.

 

 

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Net Income

 

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

 

 For the Three Months For the Nine Months For the Three Months Ended
 Ended September 30, March 31, December 31,
 2015 2014 2015 2014 2016 2015 2015
 (In thousands, except per share data) (In thousands, except per share data)
Net interest income (FTE) $37,179  $37,905  $111,524  $115,351 
Net interest and loan fee income (FTE) $36,447  $36,930  $36,734 
Provision for loan losses  -   (600)  -   (2,600)  -   -   - 
Noninterest income  11,993   13,054   36,562   39,242   11,729   12,300   11,305 
Noninterest expense  (26,173)  (26,616)  (79,796)  (80,446)  25,858   26,727   25,504 
Income before taxes (FTE)  22,999   23,743   68,290   71,547   22,318   22,503   22,535 
Income tax provision (FTE)  (8,142)  (8,589)  (24,115)  (25,929)  8,092   7,946   7,957 
Net income $14,857  $15,154  $44,175  $45,618  $14,226  $14,557  $14,578 
                            
Average diluted common shares  25,565   26,016   25,585   26,262   25,468   25,655   25,555 
Diluted earnings per common share $0.58  $0.58  $1.73  $1.74  $0.56  $0.57  $0.57 
                            
Average total assets $5,062,334  $4,971,808  $5,055,421  $4,923,705  $5,174,804  $5,059,537  $5,168,805 
Net income to average total assets (annualized)  1.16%  1.21%  1.17%  1.24%  1.11%  1.17%  1.12%
Net income to average common stockholders' equity (annualized)  11.33%  11.55%  11.42%  11.59%
Net income to average common shareholders' equity (annualized)  10.85%  11.44%  11.01%

Net income for the thirdfirst quarter of 20152016 was $331 thousand less than the same quarter of 2014,2015, the net result of declines inlower net interest and loan fee income (fully taxable equivalent or “FTE”)(FTE), lower noninterest income and noninteresthigher income tax provision (FTE), partially offset by decreases in the provision for loan losses,lower noninterest expense and income tax provision (FTE).expense. A decrease in net interest and fee income (FTE) was mostly attributed to lower average balances of loans and lower netcomposite yield on interest-earning assets,investments, partially offset by higher average balances of investments and a lower average volumethe effect of higher-cost funding sources.one additional accrual day. The provision for loan losses was reduced toremained zero, reflecting Management's evaluation of losses inherent in the loan portfolio; net losses and nonperforming loan volumes have declined relative to earlier periods. Noninterest income decreased primarily due to reduced levels of service charges on deposit accounts and merchant processing service fees. Noninterest expense decreased primarily due to lower personnel costs.

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Comparing the first nine months of 2015 to the first nine months of 2014, net income decreased due to lower net interest and fee income (FTE) and lower noninterest income, partially offset by decreases in the provision for loan losses, noninterest expense and income tax provision (FTE). The lower net interest and fee income (FTE) was primarily caused by a lower average volume of loans and lower net yield on interest earning assets, partially offset by higher average balances of investments and a lower average volume of higher-cost funding sources. The provision for loan losses was reduced to zero, reflecting improved credit quality and Management's evaluation of losses inherent in the loan portfolio. Noninterest income decreased primarily due to reduced levels of service charges on deposit accounts and lower merchant processing services and other income.credit card fees. Noninterest expense decreased mostly due to lower personnel expenses,salaries and related benefit expense caused by employee attrition, occupancy cost reductions from branch closures, and lower expense for foreclosed properties. The income tax provision (FTE) was higher in the first quarter 2016 due to reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits.

Comparing the first quarter of 2016 with the fourth quarter of 2015, net income decreased $352 thousand due to lower net interest and loan fee income (FTE), higher noninterest expense and higher income tax provision (FTE), partially offset by higher noninterest income. The lower net interest and fee income (FTE) was primarily caused by lower average balances of loans and the effect of one less accrual day, partially offset by higher average balances of investments and the effect of the FOMC’s 0.25 percent increase in the federal funds rate on December 16, 2015 on interest-earning assets with floating rates. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income increased primarily due to higher merchant credit card fees. Noninterest expense increased mostly due to seasonally high payroll taxes, higher expenses for other real estate owned.information technology upgrades, partially offset by cost savings from branch closures. Income tax provision (FTE) increased because the fourth quarter 2015 provision (FTE) was higher in the first quarter 2016 due to reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits.

 

 

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Net Interest and Loan Fee Income (FTE)

 

Following is a summary of the components of net interest and loan fee income (FTE) for the periods indicated:

 

 For the Three Months For the Nine Months For the Three Months Ended
 Ended September 30, March 31, December 31,
 2015 2014 2015 2014 2016 2015 2015
 (In thousands) (In thousands)
Interest and fee income $34,299  $34,900  $102,641  $105,867 
Interest and loan fee income $33,647  $33,917  $33,888 
Interest expense  (585)  (846)  (1,861)  (2,644)  552   659   563 
FTE adjustment  3,465   3,851   10,744   12,128   3,352   3,672   3,409 
Net interest and fee income (FTE) $37,179  $37,905  $111,524  $115,351 
Net interest and loan fee income (FTE) $36,447  $36,930  $36,734 
                            
Average earning assets $4,471,690  $4,125,835  $4,417,114  $4,111,364  $4,381,423  $4,342,031  $4,411,599 
Net interest margin (FTE) (annualized)  3.31%  3.66%  3.37%  3.75%  3.34%  3.43%  3.32%

 

Net interest and loan fee income (FTE) decreased during the thirdfirst quarter 20152016 by $726$483 thousand from the same period in 2014 to $37.2 million,2015, mainly due to lower average balances of loans (down $168$183 million) and lower yields on interest-earning assetsinvestments (down 381 basis pointspoint or “bp”), partially offset by higher average balances of investments (up $514$223 million), higher yields on loans (up 5 bp) and lower average balancesthe effect of higher-costing interest-bearing liabilities.one additional accrual day.

 

Comparing the first nine monthsquarter of 2016 with the fourth quarter of 2015, with the first nine months of 2014, net interest and loan fee income (FTE) decreased $3.8 million$287 thousand due to a lower average volumebalances of loans (down $151$43 million) and lower yields on interest earning assets (down 41 bp),the effect of one less accrual day, partially offset by higher average balances of investments (up $457$13 million) and a lower average volume of higher-cost funding sources.higher yields on interest-earning assets (up 2 bp).

 

Loan volumes have declined due to reduced volumes of loan originations and problem loan workout activities (such as chargeoffs, collateral repossessions and principal payments)., particularly with purchased loans, and reduced volumes of loan originations. In Management’s opinion, current levels of competitive loan pricing do not provide adequate forward earnings potential. As a result, the Company has not currently taken an aggressive posture relative to loan portfolio growth. Management has maintained relatively stable interest-earning asset volumes by increasing investment securities as loan volumes have declined.

 

Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. The net interest margin (FTE) was3.31% and3.37% 3.34% in the thirdfirst quarter and2016, 3.43% in the first nine months ofquarter 2015 respectively, compared with 3.66% and 3.75%3.32% in the thirdfourth quarter 2015. The net interest margin (FTE) was affected by declining market interest rates until the FOMC’s 0.25 percent increase in the federal funds rate on December 16, 2015, which increased yields on loans and the first nine months of 2014, respectively.investment securities with floating rates. The volume of older-dated higher-yielding loans declined due to principal maturities and paydowns. Newly originated loans have lower yields. The Company, in anticipation of rising interest rates, has been purchasing floating rate and shorter-duration investment securities with lower yields than longer-duration securities to increase liquidity. The Company’s high levels of liquidity will provide an opportunity to obtain higher yielding assets onceassuming market interest rates start rising.

The Company has been replacing higher-cost funding sources with low-cost deposits and interest expense has declined to offset some of the decline in interest income.

Interest and Fee Income (FTE)

Interest and fee income (FTE) for the third quarter 2015 decreased $987 thousand or 2.5% from the same period in 2014. The decrease was caused by lower average balances of loans and lower net yield on interest-earning assets, partially offset by higher average balances of investments.

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The total average balances of loans declined due to decreases in the average balances of commercial real estate loans (down $66 million), consumer loans (down $42 million), residential real estate loans (down $33 million) and commercial loans (down $20 million). The average investment portfolio increased largely due to higher average balances of corporate securities (up $356 million) and collateralized mortgage obligations and mortgage-backed securities (up $154 million) and securities of U.S. Government sponsored entities (up $53 million), partially offset by a $40 million decrease in average balances of municipal securities.

The average yield on the Company's earning assets decreased from 3.74% in the third quarter 2014 to 3.36% in the corresponding period of 2015. The composite yield on loans declined 16 bp to 4.92% as newly originated loans generally yield less than the overall portfolio due to low market interest rates. The investment yields in general declined due to market rates; the investment portfolio yield decreased 24 bp to 2.50%.

Comparing the nine months of 2015 with the nine months of 2014, interest and fee income (FTE) was down $4.6 million or 3.9%. The decrease resulted from a lower average volume of loans and net lower yield on interest earning assets, partially offset by higher average balances of investments.

In the first nine months of 2015 the average balance of the loan portfolio decreased compared with the first nine months of 2014 primarily due to decreases in average balances of commercial real estate loans (down $78 million), consumer loans (down $37 million) and residential real estate loans (down $34 million). The average investment portfolio increased mostly due to higher average balances of U.S. government sponsored entities (up $217 million) and corporate securities (up $292 million), partially offset by lower average balances of municipal securities (down $47 million). The average yield on earning assets for the first nine months of 2015 was 3.43% compared with 3.84% in the first nine months of 2014. The loan portfolio yield for the first nine months of 2015 was 4.94% compared with 5.15% for the first nine months of 2014. The investment portfolio yield decreased 28 bp to 2.53%. Yields on loans and investment securities declined as newly originated loans and purchased investment securities have yields lower than aggregate portfolio yields due to low market interest rates.

Interest Expense

Interest expense has been reduced by lowering rates paid on interest-bearing deposits and borrowings and by reducing the volume of higher-cost funding sources. A $10 million term repurchase agreement was repaid in August 2014. Federal Home Loan Bank advances of $20 million were repaid in January 2015. Average balances of time deposits declined $110$96 million infrom the thirdfirst quarter 2015 compared with the thirdto first quarter 2014. Similarly, average balances of time deposits declined $100 million in the first nine months of 2015 compared with the first nine months of 2014. Lower-cost2016 while lower-cost checking and savings deposits grew 6% in the same period. Average balances of checking and saving deposits accounted for 92.8% and 92.1%93.7% of average total average deposits in the thirdfirst quarter 20152016 compared with 91.4% and 93.5% in the first nine months of 2015, respectively, compared with 90.1% and 89.4% in the third quarter 2014 and in the first nine months of 2014, respectively.

As a result, interest expense in the third quarter of 2015 decreased $261 thousand or 30.9% compared with the same period in 2014. The average rate paid on interest-bearing liabilities decreased from 0.13% in the third quarter of 2014 compared to 0.09% in the third quarter offourth quarters 2015.

Comparing the first nine months of 2015 with the first nine months of 2014, interest expense declined $783 thousand or 29.6%. Rates paid on interest-bearing liabilities averaged 0.10% during the first nine months of 2015 compared with 0.14% for the first nine months of 2014. Rates paid on interest-bearing deposits were 0.10% in the first nine months of 2015 compared with 0.12% in the first nine months of 2014.

 

 

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Net Interest Margin (FTE)

 

The following summarizes the components of the Company's net interest margin for the periods indicated (Percentages(percentages are annualized.):

 

 For the Three Months For the Nine Months
 Ended September 30,
  2015 2014 2015 2014
Yield on earning assets (FTE)  3.36%  3.74%  3.43%  3.84%
Rate paid on interest-bearing liabilities  0.09%  0.13%  0.10%  0.14%
Net interest spread (FTE)  3.27%  3.61%  3.33%  3.70%
Impact of noninterest bearing demand deposits  0.04%  0.05%  0.04%  0.05%
Net interest margin (FTE)  3.31%  3.66%  3.37%  3.75%

 For the Three Months Ended
 March 31, December 31,
  2016 2015 2015
Yield on earning assets (FTE)  3.39%  3.49%  3.37%
Rate paid on interest-bearing liabilities  0.09%  0.10%  0.09%
Net interest spread (FTE)  3.30%  3.39%  3.28%
Impact of noninterest-bearing funds  0.04%  0.04%  0.04%
Net interest margin (FTE)  3.34%  3.43%  3.32%

 

During the third quarter and the first nine months of 2015, the net interest margin (FTE) was affected by low market interest rates. The volume of older-dated higher-yielding loans and securities declined due to principal maturities and paydowns. Newly originatedManagement has been avoiding long-dated, low-yielding loans have lower yields.given historically low interest rates. Management has also maintained conservative loan underwriting, terms and conditions. During this period, the investment portfolio has grown. The Company, in anticipationchanging composition of rising interestinterest-earning assets and low market rates has been purchasing floatingpressured the net interest margin. The increase in the net interest margin from the fourth quarter 2015 to the first quarter 2016 reflects the FOMC’s 0.25% increase in the federal funds rate on December 16, 2015, which increased yields on loans and shorter-duration investment securities to increase liquidity.which have floating rates. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost funding sources. During the third quarter 2015 the net interest margin (FTE) decreased 35 bp compared with the same period in 2014. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 34 bp decrease in net interest spread (FTE). During the first nine months of 2015, the net interest margin (FTE) decreased 38 bp compared with the first nine months of 2014. The net interest spread (FTE) in the first nine months of 2015 was 3.33% compared with 3.70% in the first nine months of 2014, the net result of a 41 bp decrease in earning asset yield and 4 bp decrease in the cost of interest-bearing liabilities.time deposits.

 

 

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Summary of Average Balances, Yields/Rates and Interest Differential

 

The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates. Average loan balances include nonperforming loans. Interest income includes reversal of previously accrued interest on loans placed on non-accrual status during the period and proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income and accretion of purchased loan discounts. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate. Yields, rates and interest margins are annualized.

 

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

 

 For the Three Months Ended
September 30, 2015
 Average
Balance		 Interest
Income/
Expense		 Yields/
Rates
 (In thousands)
Assets            
Investment securities:            
Taxable $2,043,470  $9,120   1.79%
Tax-exempt (1)  836,422   8,912   4.26%
Total investments (1)  2,879,892   18,032   2.50%
Loans:            
Taxable  1,516,937   18,719   4.90%
Tax-exempt (1)  74,861   1,013   5.37%
Total loans (1)  1,591,798   19,732   4.92%
Total Interest-earning assets (1)  4,471,690  $37,764   3.36%
Other assets  590,644         
Total assets $5,062,334         
             
Liabilities and shareholders' equity            
Noninterest-bearing demand $1,975,498  $-   -%
Savings and interest-bearing transaction  2,121,607   276   0.05%
Time less than $100,000  170,390   133   0.31%
Time $100,000 or more  147,216   164   0.44%
Total interest-bearing deposits  2,439,213   573   0.09%
Short-term borrowed funds  72,607   12   0.07%
Total interest-bearing liabilities  2,511,820  $585   0.09%
Other liabilities  54,755         
Shareholders' equity  520,261         
Total liabilities and shareholders' equity $5,062,334         
Net interest spread(1) (2)        3.27%
Net interest and fee income and interest margin(1) (3)   $37,179  3.31%

 For the Three Months Ended March 31, 2016
 
Average
Balance		 Interest
Income/
Expense		 Yields/
Rates
 ($ in thousands)
Assets            
Investment securities:            
Taxable $2,046,547  $9,674   1.89%
Tax-exempt (1)  834,260   8,636   4.14%
Total investments (1)  2,880,807   18,310   2.54%
Loans:            
Taxable  1,429,106   17,726   4.99%
Tax-exempt (1)  71,510   963   5.41%
Total loans (1)  1,500,616   18,689   5.01%
Total Interest-earning assets (1)  4,381,423   36,999   3.39%
Other assets  793,381         
Total assets $5,174,804         
             
Liabilities and shareholders' equity            
Noninterest-bearing demand $1,993,986  $-   -%
Savings and interest-bearing transaction  2,259,681   293   0.05%
Time less than $100,000  160,190   113   0.28%
Time $100,000 or more  123,691   137   0.44%
Total interest-bearing deposits  2,543,562   543   0.09%
Short-term borrowed funds  57,846   9   0.07%
Total interest-bearing liabilities  2,601,408   552   0.09%
Other liabilities  52,233         
Shareholders' equity  527,177         
Total liabilities and shareholders' equity $5,174,804         
Net interest spread (1) (2)        3.30%
Net interest and fee income and interest margin (1) (3)   $36,447  3.34%

 

(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

(2)
(1)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurredon interest-bearing liabilities.

(3)Net interest margin is computed by calculating the difference between interest income and expense, divided

Amounts calculated on an FTE basis using the current statutory federal tax rate.
(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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

 

 

For the Three Months Ended

September 30, 2014

 For the Three Months Ended March 31, 2015
 

Average

Balance

 

Interest

Income/

Expense

Yields/

Rates

 
 
 		 
Average
Balance		 
 
 		Interest
Income/
Expense		 
 
 		 
Yields/
Rates
 (In thousands) ($ in thousands)
Assets                        
Investment securities:                        
Taxable $1,498,048  $6,348   1.70% $1,788,223  $7,554   1.69%
Tax-exempt (1)  867,672   9,865   4.55%  870,060   9,422   4.33%
Total investments (1)  2,365,720   16,213   2.74%  2,658,283   16,976   2.55%
Loans:                        
Taxable  1,674,517   21,365   5.06%  1,604,842   19,517   4.93%
Tax-exempt (1)  85,598   1,173   5.44%  78,906   1,096   5.63%
Total loans (1)  1,760,115   22,538   5.08%  1,683,748   20,613   4.96%
Total Interest-earning assets (1)  4,125,835  $38,751   3.74%
Total interest-earning assets (1)  4,342,031   37,589   3.49%
Other assets  845,973           717,506         
Total assets $4,971,808          $5,059,537         
                        
Liabilities and shareholders' equity                        
Deposits:            
Noninterest-bearing demand $1,869,853  $-   -% $1,919,820  $-   -%
Savings and interest-bearing transaction  2,005,687   290   0.06%  2,103,115   279   0.05%
Time less than $100,000  194,338   200   0.41%  180,760   166   0.37%
Time $100,000 or more  233,511   219   0.37%  199,251   197   0.40%
Total interest-bearing deposits  2,433,536   709   0.12%  2,483,126   642   0.10%
Short-term borrowed funds  71,067   23   0.13%  86,354   16   0.08%
Term repurchase agreement  4,457   11   1.00%
Federal Home Loan Bank advances  20,240   103   2.02%  2,004   1   0.20%
Total interest-bearing liabilities  2,529,300  $846   0.13%  2,571,484   659   0.10%
Other liabilities  51,953           52,147         
Shareholders' equity  520,702           516,086         
Total liabilities and shareholders' equity $4,971,808          $5,059,537         
Net interest spread(1) (2)        3.61%          3.39%
Net interest and fee income and interest margin(1) (3)   $37,905  3.66%     $36,930   3.43%

 

(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.
(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurredon interest-bearing liabilities.

(3)Net interest margin is computed by calculating the difference between interest income and expense, dividedby the average balance of interest-earning assets.

 

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

 

 For the Nine Months Ended
September 30, 2015		 For the Three Months Ended December 31, 2015
 Average
Balance		 Interest
Income/
Expense		 Yields/
Rates		 
 
 		 
Average
Balance		 
 
 		Interest
Income/
Expense		 
 
 		 
Yields/
Rates
 (In thousands) ($ in thousands)
Assets                        
Investment securities:                        
Taxable $1,918,319  $25,067   1.74% $2,035,421  $9,406   1.85%
Tax-exempt (1)  855,357   27,549   4.29%  832,587   8,734   4.20%
Total investments (1)  2,773,676   52,616   2.53%  2,868,008   18,140   2.53%
Loans:                        
Taxable  1,566,333   57,547   4.91%  1,470,845   18,130   4.89%
Tax-exempt (1)  77,105   3,222   5.59%  72,746   1,027   5.60%
Total loans (1)  1,643,438   60,769   4.94%  1,543,591   19,157   4.93%
Total Interest-earning assets (1)  4,417,114  $113,385   3.43%
Total interest-earning assets(1)  4,411,599   37,297   3.37%
Other assets  638,307           757,206         
Total assets $5,055,421          $5,168,805         
                        
Liabilities and shareholders' equity                        
Deposits:            
Noninterest-bearing demand $1,946,018  $-   -% $2,036,470  $-   -%
Savings and interest-bearing transaction  2,109,831   824   0.05%  2,206,732   288   0.05%
Time less than $100,000  175,696   449   0.34%  164,351   122   0.29%
Time $100,000 or more  172,834   543   0.42%  128,703   144   0.44%
Total interest-bearing deposits  2,458,361   1,816   0.10%  2,499,786   554   0.09%
Short-term borrowed funds  81,926   44   0.07%  54,661   9   0.06%
Federal Home Loan Bank advances  661   1   0.20%
Total interest-bearing liabilities  2,540,948  $1,861   0.10%  2,554,447   563   0.09%
Other liabilities  51,401           52,611         
Shareholders' equity  517,054           525,277         
Total liabilities and shareholders' equity $5,055,421          $5,168,805         
Net interest spread (1) (2)          3.33%          3.28%
Net interest and fee income and interest margin (1) (3)     $111,524   3.37%     $36,734   3.32%

 

(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurredon interest-bearing liabilities.

(3)Net interest margin is computed by calculating the difference between interest income and expense, dividedby the average balance of interest-earning assets.

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.
(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

 

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

  For the Nine Months Ended
September 30, 2014
  Average
Balance		 Interest
Income/
Expense		 Yields/
Rates
  (In thousands)
Assets            
Investment securities:            
Taxable $1,421,601  $17,907   1.68%
Tax-exempt (1)  895,250   30,935   4.61%
Total investments (1)  2,316,851   48,842   2.81%
Loans:            
Taxable  1,704,546   65,325   5.12%
Tax-exempt (1)  89,967   3,828   5.69%
Total loans (1)  1,794,513   69,153   5.15%
Total Interest-earning assets (1)  4,111,364  $117,995   3.84%
Other assets  812,341         
Total assets $4,923,705         
             
Liabilities and shareholders' equity            
Deposits:            
Noninterest-bearing demand $1,813,141  $-   -%
Savings and interest-bearing transaction  1,988,905   896   0.06%
Time less than $100,000  201,438   637   0.42%
Time $100,000 or more  247,485   683   0.37%
Total interest-bearing deposits  2,437,828   2,216   0.12%
Short-term borrowed funds  64,836   64   0.13%
Term repurchase agreement  8,132   60   0.99%
Federal Home Loan Bank advances  20,379   304   1.99%
Total interest-bearing liabilities  2,531,175  $2,644   0.14%
Other liabilities  53,052         
Shareholders' equity  526,337         
Total liabilities and shareholders' equity $4,923,705         
Net interest spread (1) (2)          3.70%
Net interest and fee income and interest margin (1) (3)     $115,351   3.75%

(1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

(2)Net interest spread represents the average yield earned on interest-earning assets less the average rate incurredon interest-bearing liabilities.

(3)Net interest margin is computed by calculating the difference between interest income and expense (annualized),divided by the average balance of interest-earning assets.

 

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Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid

 

The following tables set forth a summary of the changes in interest income and interest expense due to changes in average assets and liability balances (volume) and changes in average interest yields/rates for the periods indicated. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.

 

Summary of Changes in Interest Income and Expense

 

  For the Three Months Ended September 30, 2015
Compared with
For the Three Months Ended September 30, 2014
  Volume Yield/Rate Total
  (In thousands)
Increase (decrease) in interest and fee income:            
Investment securities:            
Taxable $2,359  $413  $2,772 
Tax-exempt (1)  (392)  (561)  (953)
Total investments (1)  1,967   (148)  1,819 
Loans:            
Taxable  (1,915)  (731)  (2,646)
Tax-exempt (1)  (147)  (13)  (160)
Total loans (1)  (2,062)  (744)  (2,806)
Total decrease in interest and fee income (1)  (95)  (892)  (987)
Increase (decrease) in interest expense:            
Deposits:            
Savings and interest-bearing transaction  17   (31)  (14)
Time less than $100,000  (25)  (42)  (67)
Time $100,000 or more  (81)  26   (55)
Total interest-bearing deposits  (89)  (47)  (136)
Short-term borrowed funds  -   (11)  (11)
Term repurchase agreement  (11)  -   (11)
Federal Home Loan Bank advances  (103)  -   (103)
Total decrease in interest expense  (203)  (58)  (261)
Increase (decrease) in net interest and fee income (1) $108  $(834) $(726)

  For the Three Months Ended March 31, 2016
  Compared with
  For the Three Months Ended March 31, 2015
  Volume Yield/Rate Total
  (In thousands)
Increase (decrease) in interest and loan fee income:            
Investment securities:            
Taxable $1,091  $1,029  $2,120 
Tax-exempt (1)  (388)  (398)  (786)
Total investments (1)  703   631   1,334 
Loans:            
Taxable  (2,008)  217   (1,791)
Tax-exempt (1)  (97)  (36)  (133)
Total loans (1)  (2,105)  181   (1,924)
Total (decrease) increase in interest and loan fee income (1)  (1,402)  812   (590)
Increase (decrease) in interest expense:            
Deposits:            
Savings and interest-bearing transaction  23   (9)  14 
Time less than $100,000  (19)  (34)  (53)
Time $100,000 or more  (74)  14   (60)
Total interest-bearing deposits  (70)  (29)  (99)
Short-term borrowed funds  (5)  (2)  (7)
Federal Home Loan Bank advances  (1)  -   (1)
Total decrease in interest expense  (76)  (31)  (107)
(Decrease) increase in net interest and loan fee income (1) $(1,326) $843  $(483)

 

(1) Amounts calculated on a fully taxable equivalentan FTE basis using the current statutory federal tax rate.

 

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Summary of Changes in Interest Income and Expense

 

  For the Nine Months Ended September 30, 2015
Compared with
For the Nine Months Ended September 30, 2014
  Volume Yield/Rate Total
  (In thousands)
Increase (decrease) in interest and fee income:            
Investment securities:            
Taxable $6,100  $1,060  $7,160 
Tax-exempt (1)  (1,413)  (1,973)  (3,386)
Total investments (1)  4,687   (913)  3,774 
Loans:            
Taxable  (5,035)  (2,743)  (7,778)
Tax-exempt (1)  (547)  (59)  (606)
Total loans (1)  (5,582)  (2,802)  (8,384)
Total decrease in interest and fee income (1)  (895)  (3,715)  (4,610)
Increase (decrease) in interest expense:            
Deposits:            
Savings and interest-bearing transaction  54   (126)  (72)
Time less than $100,000  (81)  (107)  (188)
Time $100,000 or more  (206)  66   (140)
Total interest-bearing deposits  (233)  (167)  (400)
Short-term borrowed funds  17   (37)  (20)
Term repurchase agreement  (60)  -   (60)
Federal Home Loan Bank advances  (294)  (9)  (303)
Total decrease in interest expense  (570)  (213)  (783)
Decrease in net interest and fee income (1) $(325) $(3,502) $(3,827)

  For the Three Months Ended March 31, 2016
  Compared with
  For the Three Months Ended December 31, 2015
  Volume Yield/Rate Total
  (In thousands)
Increase (decrease) in interest and loan fee income:            
Investment securities:            
Taxable $51  $217  $268 
Tax-exempt(1)  18   (116)  (98)
Total investments(1)  69   101   170 
Loans:            
Taxable  (655)  251   (404)
Tax-exempt(1)  (22)  (42)  (64)
Total loans(1)  (677)  209   (468)
Total (decrease) increase in interest and loan fee income(1)  (608)  310   (298)
Increase (decrease) in interest expense:            
Deposits:            
Savings and interest-bearing transaction  4   1   5 
Time less than $100,000  (4)  (5)  (9)
Time $100,000 or more  (7)  0   (7)
Total interest-bearing deposits  (7)  (4)  (11)
Short-term borrowed funds  -   -   - 
Total decrease in interest expense  (7)  (4)  (11)
(Decrease) increase in net interest and loan fee income (1) $(601) $314  $(287)

 

(1)Amounts calculated on a fully taxable equivalentan FTE basis using the current statutory federal tax rate.

Provision for Loan Losses

 

The Company manages credit costs by consistently enforcing, in management’s opinion, conservative underwriting and administration procedures and aggressively pursuing collection efforts with debtors experiencing financial difficulties. The provision for loan losses reflects Management's assessment of credit risk in the loan portfolio during each of the periods presented.

 

The Company provided no provision for loan losses in the thirdfirst quarter 2015of 2016 and the first nine monthsand fourth quarters of 2015 compared with $600 thousand and $2.6 million in the third quarter 2014 and the first nine months of 2014, respectively.2015. The provision for loan losses is determined based on Management’s evaluation of credit quality for the loan portfolio. The reduction in the provision for loan losses in the third quarter and the first nine months of 2015 reflects the decline in net losses and nonperforming loan volumes during the periods relative to earlier periods. The Company recorded purchased County Bank and Sonoma Valley Bank loans at estimated fair value upon the acquisition dates, February 6, 2009 and August 20, 2010, respectively. Such estimated fair values were recognized for individual loans, although small balance homogenous loans were pooled for valuation purposes. The valuation discounts recorded for purchased loans included Management’s assessment of the risk of principal loss under economic and borrower conditions prevailing on the dates of purchase. The purchased County Bank loans secured by single-family residential real estate are “covered” through February 6, 2019 by loss-sharing agreements the Company entered with the FDIC which mitigates losses during the term of the agreements. The FDIC indemnification of purchased County Bank non-single-family residential secured loans expired February 6, 2014. Any deterioration in estimated value related to principal loss subsequent to the acquisition dates requires additional loss recognition through a provision for loan losses. No assurance can be given future provisions for loan losses related to purchased loans will not be necessary. For further information regarding credit risk, the FDIC loss-sharing agreements, net credit losses and the allowance for loan losses, see the “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” sections of this report.

 

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Noninterest Income

 

The following table summarizes the components of noninterest income for the periods indicated.

 

  For the Three Months For the Nine Months
  Ended September 30,
  2015 2014 2015 2014
  (In thousands)
         
Service charges on deposit accounts $5,581  $6,207  $16,981  $18,322 
Merchant processing services  1,485   1,742   4,971   5,485 
Debit card fees  1,538   1,543   4,528   4,482 
Other service fees  693   695   2,041   2,044 
Trust fees  682   629   2,061   1,899 
ATM processing fees  616   637   1,828   1,891 
Financial services commissions  177   194   527   585 
Other  1,221   1,407   3,625   4,534 
Total $11,993  $13,054  $36,562  $39,242 

  For the Three Months Ended
  March 31, December 31,
  2016 2015 2015
  (In thousands)
       
Service charges on deposit accounts $5,248  $5,707  $5,259 
Merchant processing services  1,529   1,703   1,368 
Debit card fees  1,516   1,456   1,557 
Trust fees  661   706   671 
ATM processing fees  658   585   569 
Other service fees  629   665   648 
Financial services commissions  156   153   168 
Other noninterest income  1,332   1,325   1,065 
Total $11,729  $12,300  $11,305 

 

Noninterest income for the thirdfirst quarter 20152016 declined by $1.0 million$571 thousand or 8.1%4.6% from the same period in 2014.2015. Service charges on deposits decreased $626$459 thousand due to declines in fees charged on overdrawn and insufficient funds accounts (down $232 thousand) and lower fees on analyzed accounts.accounts (down $205 thousand). Merchant processing services declined $257fees decreased $174 thousand primarily due to lowerbecause larger sales relationships with low margins accounted for a significant portion of transaction volumes.

 

In the first nine months of 2015,quarter 2016, noninterest income decreased $2.7 millionincreased $424 thousand or 6.8%3.8% compared with the first nine months of 2014. Service charges on deposits decreased $1.3 million compared with the first nine months of 2014fourth quarter 2015 mostly due to declinesa $161 thousand increase in fees charged on overdrawn and insufficient funds accounts, lower fees on analyzed accounts and lower activity on checking accounts. Merchantmerchant processing services declined $514 thousandfees primarily due to lowerthe improved margin mix of transaction volumes. Trust fees increased mostly due to successful marketing efforts to increase customer accounts.

 

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-41-

Noninterest Expense

 

The following table summarizes the components of noninterest expense for the periods indicated.

 

 For the Three Months For the Nine Months For the Three Months Ended
 Ended September 30, March 31, December 31,
 2015 2014 2015 2014 2016 2015 2015
 (In thousands) (In thousands)
              
Salaries and related benefits $12,761  $13,639  $39,795  $41,691  $13,117  $13,338  $12,398 
Occupancy  3,746   3,811   11,199   11,284   3,398   3,727   3,761 
Outsourced data processing services  2,115   2,093   6,334   6,314   2,130   2,108   2,107 
Furniture and equipment  1,075   1,059   3,353   3,070   1,213   1,119   1,081 
Amortization of identifiable intangibles  952   1,056   2,908   3,219   905   1,001   948 
Professional fees  732   548   614 
Courier service  604   663   1,744   1,938   545   543   585 
Professional fees  746   700   1,876   1,707 
Other real estate owned  83   (287)  451   (908)  111   315   53 
Other  4,091   3,882   12,136   12,131 
Other noninterest expense  3,707   4,028   3,957 
Total $26,173  $26,616  $79,796  $80,446  $25,858  $26,727  $25,504 

Noninterest expense decreased $443$869 thousand in the thirdfirst quarter 20152016 compared with the same period in 2014 primarily due to lower personnel costs, partially offset by increases in other real estate owned (“OREO”) expense.2015. Salaries and related benefits declined $221 thousand in the first quarter 2016 compared with the same period in 2015 mostly due to employee attrition. Amortization of identifiable intangiblesOccupancy expense decreased as assets are amortized on a declining balance method. OREO expense$329 thousand in the thirdfirst quarter 2014 was reduced2016 compared with the same period in 2015 mostly due to branch closures and lease expiration of a non-branch building. Expenses for other real estate owned in the first quarter 2016 included lower net writedowns than in the first quarter 2015. Professional fees increased $184 thousand due to higher legal fees associated with nonperforming assets, partially offset by net gains on disposition of foreclosed assets and higher rental income.lower audit fees.

 

In the first nine months of 2015,quarter 2016, noninterest expense decreasedincreased $354 thousand compared with the first nine months of 2014 primarily due to lower personnel costs, lower intangible amortization, lower courier service costs and other expense, partially offset by increases in expenses for OREO, furniture and equipment and professional services.fourth quarter 2015. Salaries and related benefits decreasedincreased $719 thousand primarily due to seasonally higher payroll taxes and other employee attrition. Amortization of identifiable intangibles decreased as assets are amortized on a declining balance method. Courier expense decreased primarily due to consolidating service runs. OREO expense in the first nine months of 2015 included net writedowns while in the first nine months of 2014 the Company realized net gains on disposition of foreclosed assets.benefits. Furniture and equipment expense increased primarily$132 thousand mainly due to higher depreciation costs resulting from computerinformation technology upgrades. Occupancy expense decreased $363 thousand in the first quarter 2016 compared with the fourth quarter 2015 mostly due to branch closures and software upgrades and higher software license fees.lease expiration of a non-branch building.

 

- 39 - 

Provision for Income Tax

 

During the thirdfirst quarter 2015,2016, the Company recorded an income tax provision (FTE) of $8.1 million, compared with $8.6$7.9 million inand $8.0 million for the thirdfirst and fourth quarters 2015, respectively. The current quarter 2014. The third quarter 2015 provision represents an effective tax rate (FTE) of35.4% 36.3%, compared with 36.2% for the third quarter 2014. The income tax provision (FTE) was $24.1 million35.3% for the first nine months of 2015 compared with $25.9 million for the corresponding period of 2014.and fourth quarters 2015. The first nine months of 2015higher effective tax rate (FTE) was35.3% compared to 36.2% for the same periodfirst quarter 2016 was attributable to reduced levels of 2014. The effectivefederally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax rates (FTE) for the third quarter 2015 and the first nine months of 2015 were lower than prior periods primarily because 2015 included an adjustment based on filing the 2014 federal tax return and tax benefits from completing audits with California Franchise Tax Board.

credits.

 

Investment Portfolio

 

The Company maintains a securities portfolio consisting of securities issued by U.S. Treasury, U.S. Government sponsored entities, agency and non-agency mortgage backed securities, state and political subdivisions, corporations, and asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian.

 

Management has increased the investment portfolio in response to deposit growth and loan volume declines. The carrying value of the Company’s investment securities portfolio was $2.9 billion as of September 30, 2015,March 31, 2016, an increase of $211$58 million compared to December 31, 2014.2015.

 

Management continually evaluates the Company’s investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, liquidity, and the level of interest rate risk to which the Company is exposed. These evaluations may cause Management to change the level of funds the Company deploys into investment securities, change the composition of the Company’s investment securities portfolio, and change the proportion of investments allocated into the available for sale and held to maturity investment categories.

 

-42-

The Company’s positioning of the balance sheet for rising interest rates has resulted in the purchase of floating rate corporate bonds, federal agency bonds, mortgage-backed securities, and short-term state and municipal bonds. As of September 30, 2015,March 31, 2016, substantially all of the Company’s investment securities continue to be investment grade rated by one or more major rating agencies. 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’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

 

The following tables summarize the total general obligation and revenue bonds in the Company’s investment securities portfolios as of the dates indicated identifying the state in which the issuing government municipality or agency operates.

At September 30, 2015,March 31, 2016, the Company’s investment securities portfolios included securities issued by719724 state and local government municipalities and agencies located within44 states with a fair value of $855.3865.6 million. None of the Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any one municipality or agency was $10.310.4 million (fair value) represented bynine general obligation bonds.

 

The following tables summarize the total general obligation and revenue bonds in the Company’s investment securities portfolios as of dates indicated identifying the state in which the issuing government municipality or agency operates.

  At September 30, 2015
  Amortized
Cost		 Fair
Value
  (In thousands)
Obligations of states and political subdivisions:    
California $117,972  $120,816 
Texas  63,065   64,404 
Pennsylvania  48,641   49,273 
Minnesota  32,659   33,227 
New Jersey  31,654   32,128 
Other (34 states)  241,017   246,738 
Total general obligation bonds $535,008  $546,586 
         
Revenue bonds:        
California $47,758  $49,962 
Pennsylvania  29,450   29,885 
Kentucky  19,862   20,416 
Colorado  18,472   18,811 
Iowa  18,173   18,788 
Indiana  15,536   15,616 
Other (30 states)  150,717   155,191 
Total revenue bonds $299,968  $308,669 
Total obligations of states and political subdivisions $834,976  $855,255 

 

 

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- 40 - 

 

  At March 31, 2016
 
 		 
 		Amortized
Cost		 
 		Fair
Value
  (In thousands)
Obligations of states and political subdivisions:    
General obligation bonds:        
California $117,077  $121,044 
Texas  62,100   63,777 
Pennsylvania  44,848   45,481 
New Jersey  40,373   41,362 
Minnesota  31,677   32,395 
Other (34 states)  244,003   252,276 
Total general obligation bonds $540,078  $556,335 
         
Revenue bonds:        
California $49,074  $51,284 
Pennsylvania  26,267   26,647 
Kentucky  23,998   24,653 
Iowa  18,138   18,766 
Colorado  16,141   16,728 
Other (31 states)  165,034   171,161 
Total revenue bonds $298,652  $309,239 
Total obligations of states and political subdivisions $838,730  $865,574 

At December 31, 2014,2015, the Company’s investment securities portfolios included securities issued by 763725 state and local government municipalities and agencies located within 4544 states with a fair value of $911.0$864.2 million. None of the Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any one municipality or agency was $7.4$10.3 million (fair value) represented by three revenuenine general obligation bonds.

 

 At December 31, 2014 At December 31, 2015
 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
 (In thousands) (In thousands)
Obligations of states and political subdivisions:        
General obligation bonds:                
California $107,997  $110,563  $117,968  $121,096 
Texas  65,292   66,162   62,030   63,394 
Pennsylvania  48,675   49,546   51,547   52,115 
New Jersey  38,651   39,322 
Minnesota  33,524   33,840   32,588   33,133 
New Jersey  30,223   30,598 
Arizona  28,492   29,378 
Other (34 states)  249,513   254,043   243,488   249,854 
Total general obligation bonds $563,716  $574,130  $546,272  $558,914 
                
Revenue bonds:                
California $60,473  $62,788  $49,095  $51,206 
Pennsylvania  29,462   30,101   29,446   29,841 
Kentucky  19,975   20,370   19,825   20,400 
Iowa  18,225   18,898   18,156   18,728 
Colorado  18,532   18,862   16,161   16,560 
Indiana  16,865   16,859 
Other (31 states)  164,848   168,972   163,633   168,592 
Total revenue bonds $328,380  $336,850  $296,316  $305,327 
Total obligations of states and political subdivisions $892,096  $910,980  $842,588  $864,241 

 

- 41 - 

At September 30,March 31, 2016, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 22 revenue sources. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table.

  At March 31, 2016
 
 		 
 		Amortized
Cost		 
 		Fair
Value
  (In thousands)
Revenue bonds by revenue source:        
Water $60,731  $63,843 
Sewer  44,560   46,084 
Sales tax  31,653   33,187 
Lease (renewal)  25,359   26,068 
College & University  18,412   18,747 
Lease (abatement)  16,956   17,759 
Other  100,981   103,551 
Total revenue bonds by revenue source $298,652  $309,239 

At December 31, 2015, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from23 22 revenue sources. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table.

 

 At September 30, 2015 At December 31, 2015
 Amortized
Cost		 Fair
Value		 
 		Amortized
Cost		 
 		Fair
Value
 (In thousands) (In thousands)
Revenue bonds by revenue source        
Revenue bonds by revenue source:        
Water $63,993  $66,647  $62,661  $65,412 
Sewer  45,952   47,253   45,912   47,242 
Sales tax  33,606   34,750   31,680   32,945 
Lease (renewal)  21,702   22,158   21,673   22,227 
College & University  17,967   18,215 
Lease (abatement)  18,407   18,677   17,017   17,769 
College & University  17,540   18,315 
Other  98,768   100,869   99,406   101,517 
Total revenue bonds by revenue source $299,968  $308,669  $296,316  $305,327 

 

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-44-

At December 31, 2014, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 25 revenue sources. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table.

  At December 31, 2014
  Amortized
Cost		 Fair
Value
  (In thousands)
Revenue bonds by revenue source        
Water $66,305  $68,885 
Sewer  48,461   49,773 
Sales tax  35,045   36,289 
Lease (renewal)  21,789   22,091 
Lease (abatement)  19,002   19,710 
College & University  17,655   17,849 
Other  120,123   122,253 
Total revenue bonds by revenue source $328,380  $336,850 

See Note 3 to the unaudited consolidated financial statements for additional information related to the investment securities.

 

Loan Portfolio Credit Risk

 

The Company extends loans to commercial and consumer customers which expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans.

 

The preparation of the financial statements requires Management to estimate the amount of losses inherent in the loan portfolio and establish an allowance for credit losses. The allowance for credit losses is established by assessing a provision for loan losses against the Company’s earnings. In estimating credit losses, Management must exercise judgment in evaluating information deemed relevant, such as financial information regarding individual borrowers, overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses.

 

- 42 - 

The Company closely monitors the markets in which it conducts its lending operations and follows a strategy to control exposure to loans with high credit risk. The Bank’s organization structure separates the functions of business development and loan underwriting; Management believes this segregation of duties avoids inherent conflicts of combining business development and loan approval functions. In measuring and managing credit risk, the Company adheres to the following practices.

 

·The Bank maintains a Loan Review Department which reports directly to the Board of Directors. The Loan Review Department performs independent evaluations of loans and assigns credit risk grades to evaluated loans using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated management attention to maximize collection.

 

·The Bank maintains two loan administration offices whose sole responsibility is to manage and collect classified loans.

-45-

Classified loans with higher levels of credit risk are further designated as “nonaccrual loans.” Management places classified loans on nonaccrual status when full collection of contractual interest and principal payments is in doubt. Uncollected interest previously accrued on loans placed on nonaccrual status is reversed as a charge against interest income. The Company does not accrue interest income on loans following placement on nonaccrual status. Interest payments received on nonaccrual loans are applied to reduce the carrying amount of the loan unless the carrying amount is well secured by loan collateral. “Nonperforming assets” include nonaccrual loans, loans 90 or more days past due and still accruing, and repossessed loan collateral (commonly referred to as “Other Real Estate Owned”).

 

The former County Bank loans and repossessed loan collateral were purchased from the FDIC with indemnifying loss-sharing agreements. The loss-sharing agreement on single-family residential real estate assets expires February 6, 2019. The loss-sharing agreement on non-single-family residential real estate assets expired February 6, 2014 as to losses and expires February 6, 2017 as to loss recoveries.

 

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- 43 - 

Nonperforming Assets

 At September 30, At December 31, At March 31, At December 31,
 2015 2014 2014 2016 2015 2015
 (In thousands) (In thousands)
Originated:                        
Nonperforming nonaccrual loans $7,578  $4,696  $5,296  $9,205  $3,315  $6,302 
Performing nonaccrual loans  -   13   13   1,841   26   350 
Total nonaccrual loans  7,578   4,709   5,309   11,046   3,341   6,652 
Accruing loans 90 or more days past due  481   342   502   183   191   295 
Total nonperforming loans  8,059   5,051   5,811   11,229   3,532   6,947 
Other real estate owned  5,834   5,123   4,809   4,786   5,483   5,829 
Total nonperforming assets $13,893  $10,174  $10,620  $16,015  $9,015  $12,776 
                        
Purchased covered:                        
Nonperforming nonaccrual loans $-  $295  $297  $-  $-  $- 
Performing nonaccrual loans  -   -   -   -   -   - 
Total nonaccrual loans  -   295   297   -   -   - 
Accruing loans 90 or more days past due  -   -   -   -   -   - 
Total nonperforming loans  -   295   297   -   -   - 
Other real estate owned  486   585   -   -   486   - 
Total nonperforming assets $486  $880  $297  $-  $486  $- 
                        
Purchased non-covered:                        
Nonperforming nonaccrual loans $8,784  $12,745  $11,901  $6,601  $8,952  $8,346 
Performing nonaccrual loans  84   552   97   80   1,093   - 
Total nonaccrual loans  8,868   13,297   11,998   6,681   10,045   8,346 
Accruing loans 90 or more days past due  -   76   -   77   -   - 
Total nonperforming loans  8,868   13,373   11,998   6,758   10,045   8,346 
Other real estate owned  2,949   1,565   1,565   3,652   3,264   3,435 
Total nonperforming assets $11,817  $14,938  $13,563  $10,410  $13,309  $11,781 
                        
Total nonperforming assets $26,196  $25,992  $24,480  $26,425  $22,810  $24,557 

At September 30, 2015,March 31, 2016, two loans secured bycommercial real estate totaling $10,990 thousand were on nonaccrual status. The remainingtwenty fourteen nonaccrual loans held at September 30, 2015March 31, 2016 had an average carrying value of $273$481 thousand and the largest carrying value was $1,3231,984 thousand.

 

Management believes the overall credit quality of the loan portfolio is reasonably stable; however, classified and nonperforming assets could fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, and collateral values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent loans will not occur in the future.

 

-46-

Allowance for LoanCredit Losses

 

The Company’s allowance for loan losses represents Management’s estimate of loan losses inherent in the loan portfolio.In evaluating credit risk for loans, Management measures loss potential of the carrying value of loans. As described above, payments received on nonaccrual loans may be applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Further, thethe carrying value of purchased loans includes fair value discounts assigned at the time of purchase under the provisions of FASB ASC 805, Business Combinations, and FASB ASC 310-30,Loans or Debt Securities with Deteriorated Credit Quality. The allowance for loan losses represents Management’s estimate of loan losses in excess of these reductions to the carrying value of loans within the loan portfolio.

- 44 - 

The following table summarizes the allowance for loan losses, chargeoffs and recoveries of the Company for the periods indicated:

 

  For the Three Months For the Nine Months
  Ended September 30,
  2015 2014 2015 2014
  (In thousands)
Analysis of the Allowance for Loan Losses        
Balance, beginning of period $30,828  $32,398  $31,485  $31,693 
Provision for loan losses  -   600   -   2,600 
Loans charged off                
Commercial  (239)  (905)  (700)  (1,114)
Commercial real estate  (449)      (449)    
Real estate residential  -   -   -   (30)
Consumer installment and other  (773)  (916)  (2,344)  (3,217)
Purchased non-covered loans  -   -   (431)  (260)
Total chargeoffs  (1,461)  (1,821)  (3,924)  (4,621)
Recoveries of loans previously charged off                
Commercial  300   229   814   516 
Commercial real estate  27   15   57   193 
Real estate construction  -   -   -   3 
Consumer installment and other  336   297   1,369   1,315 
Purchased non-covered loans  6   51   235   70 
Total recoveries  669   592   2,475   2,097 
Net loan losses  (792)  (1,229)  (1,449)  (2,524)
Balance, end of period $30,036  $31,769  $30,036  $31,769 
Components:                
Net loan (losses) recoveries:                
Originated loans $(798) $(1,280) $(1,253) $(2,334)
Purchased covered loans  -   -   -   - 
Purchased non-covered loans  6   51   (196)  (190)
Net loan losses as a percentage of average total loans (annualized)  0.20%  0.28%  0.12%  0.19%

  For the Three Months Ended
  March 31, December 31,
  2016 2015 2015
  (In thousands)
Analysis of the Allowance for Loan Losses      
Balance, beginning of period $29,771  $31,485  $30,036 
Provision for loan losses  -   -   - 
Provision for unfunded commitments  -   -   - 
Loans charged off            
Commercial  (1,171)  (60)  (56)
Commercial real estate  -   -   - 
Consumer installment and other  (1,006)  (995)  (1,149)
Purchased non-covered loans  -   (35)  - 
Total chargeoffs  (2,177)  (1,090)  (1,205)
Recoveries of loans previously charged off            
Commercial  245   180   339 
Commercial real estate  15   15   15 
Construction  -   -   45 
Consumer installment and other  457   590   537 
Purchased non-covered loans  1,176   7   4 
Total recoveries  1,893   792   940 
Net loan losses  (284)  (298)  (265)
Balance, end of period $29,487  $31,187  $29,771 
Net loan (losses) recoveries:            
Originated loans $(1,460) $(270) $(269)
Purchased non-covered loans  1,176   (28)  4 
Net loan losses as a percentage of average total loans (annualized)  0.08%  0.07%  0.07%

 

The Company's allowance for loan losses is maintained at a level considered appropriate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall loan loss experience, the amount of past due, nonperforming and classified loans, the amount of non-indemnified purchased loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is individually allocated to impaired loans whose full collectability of principal is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. The Company evaluates all loans with outstanding principal balances in excess of $500 thousand which are classified or on nonaccrual status and all “troubled debt restructured” loans for impairment. The remainder of the loan portfolio is collectively evaluated for impairment based in part on quantitative analyses of historical loan loss experience of loan portfolio segments to determine standard loss rates for each segment. The loss rate for each loan portfolio segment reflects both the historical loss experience during a look-back period and the loss emergence period. During 2014, the Company refined its processes used to measure look-back periods and loss emergence periods. The loss rates are applied to segmented loan balances to allocate the allowance to the segments of the loan portfolio.

 

Purchased loans were recorded on the date of purchase at estimated fair value; fair value discounts include a component for estimated loan losses. The Company evaluates all nonaccrual purchased loans with outstanding principal balances in excess of $500 thousand for impairment; the impaired loan value is compared to the recorded investment in the loan, which has been reduced by the loan default discount estimated on the date of purchase. If Management’s impairment analysis determines the impaired loan value is less than the recorded investment in the purchased loan, an allocation of the allowance for loan losses is established for the deficiency. For all other purchased loan portfolio segments, Management applies the standard loss rates to the purchased loan portfolio segments to determine initial allocations of the allowance. Further, liquidating purchased consumer installment loans are evaluated separately by applying historical loss rates to forecasted liquidating principal balances to initially measure losses inherent in this portfolio segment. The initial allocations of the allowance to purchased loan portfolio segments are compared to loan default discounts ascribed to each segment. Management establishes allocations of the allowance for loan losses for any estimated deficiency.

 

-47-

The remainder of the allowance is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. The unallocated allowance addresses additional qualitative factors consistent with Management's analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company's general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in loan chargeoff history (external factors). The primary external factor evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management as of September 30, 2015March 31, 2016 are economic and business conditions $1.01.3 million. Also included in the unallocated allowance is the risk of losses attributable to general attributes of the Company's loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management are: loan review system $1.41.1 million, adequacy of lending Management and staff $1.91.2 million, concentrations of credit $2.22.4 million, and other factors.

 

- 45 - 

 
 		 
 		Allowance for Loan Losses
For the Three Months Ended September 30, 2015
  Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $7,107  $4,896  $403  $2,058  $7,248  $1,244  $-  $7,872  $30,828 
Additions:                                    
Provision  1,246   (96)  (205)  (50)  367   (15)  65   (1,312) ��- 
Deductions:                                    
Chargeoffs  (239)  (449)  -   -   (773)  -   -   -   (1,461)
Recoveries  300   27   -   -   336   6   -   -   669 
Net loan recoveries (losses)  61   (422)  -   -   (437)  6   -   -   (792)
Total allowance for loan losses $8,414  $4,378  $198  $2,008  $7,178  $1,235  $65  $6,560  $30,036 

 

 Allowance for Loan Losses
For the Nine Months Ended September 30, 2015		 
 		Allowance for Loan Losses
For the Three Months Ended March 31, 2016
 Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total 
 
 		 
 
Commercial		 
 
 		 
Commercial
Real Estate		 
 
 		 
 
Construction		 
 
 		 
Residential
Real Estate		 
 
 		Consumer
Installment
and Other		 
 
 		Purchased
Non-covered
Loans		 
 
 		Purchased
Covered
Loans		 
 
 		 
 
Unallocated		 
 
 		 
 
Total
 (In thousands) (In thousands)
Allowance for loan losses:                                                                        
Balance at beginning of period $5,460  $4,245  $644  $2,241  $7,717  $2,120  $-  $9,058  $31,485  $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771 
Additions:                                                                        
Provision  2,840   525   (446)  (233)  436   (689)  65   (2,498)  -   1,214   (2)  (47)  (94)  152   (1,193)  -   (30)  - 
Deductions:                                                                        
Chargeoffs  (700)  (449)  -   -   (2,344)  (431)  -   -   (3,924)  (1,171)  -   -   -   (1,006)  -   -   -   (2,177)
Recoveries  814   57   -   -   1,369   235   -   -   2,475   245   15   -   -   457   1,176   -   -   1,893 
Net loan recoveries (losses)  114   (392)  -   -   (975)  (196)  -   -   (1,449)
Net loan (losses) recoveries  (926)  15   -   -   (549)  1,176   -   -   (284)
Total allowance for loan losses $8,414  $4,378  $198  $2,008  $7,178  $1,235  $65  $6,560  $30,036  $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487 

  Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
  At March 31, 2016
  Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased
Non-covered
Loans		 Purchased Covered Loans Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Individually evaluated for impairment $5,831  $585  $-  $-  $-  $-  $-  $-  $6,416 
Collectively evaluated for impairment  4,016   3,652   130   1,707   6,683   950   -   5,933   23,071 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   - 
Total $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487 
Carrying value of loans:                                    
Individually evaluated for impairment $13,388  $7,516  $-  $-  $-  $11,733  $-  $-  $32,637 
Collectively evaluated for impairment  328,510   507,667   2,147   109,201   341,654   136,658   13,463   -   1,439,300 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   1,058   201   -   1,259 
Total $341,898  $515,183  $2,147  $109,201  $341,654  $149,449  $13,664  $-  $1,473,196 

 

  Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At September 30, 2015
  Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non-covered Loans Purchased Covered Loans Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Individually evaluated for impairment $4,477  $585  $-  $-  $-  $-  $-  $-  $5,062 
Collectively evaluated for impairment  3,937   3,793   198   2,008   7,178   1,235   65   6,560   24,974 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   - 
Total $8,414  $4,378  $198  $2,008  $7,178  $1,235  $65  $6,560  $30,036 
Carrying value of loans:                                    
Individually evaluated for impairment $12,327  $5,864  $-  $-  $-  $10,008  $-  $-  $28,199 
Collectively evaluated for impairment  342,526   531,761   3,461   126,472   354,494   165,833   14,428   -   1,538,975 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   4,457   212   -   4,669 
Total $354,853  $537,625  $3,461  $126,472  $354,494  $180,298  $14,640  $-  $1,571,843 

Management considers the $30.029.5 million allowance for loan losses to be adequate as a reserve against loan losses inherent in the loan portfolio as of September 30, 2015.March 31, 2016.

 

See Note 4 to the unaudited consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, and allowance for loan losses.

 

-48-

Asset/Liability and Market Risk Management

 

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk.

 

Interest Rate Risk

 

Interest rate risk is a significant market risk affecting the Company. Many factors affect the Company’s exposure to interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Assets and liabilities may mature or re-price at different times. Assets and liabilities may re-price at the same time but by different amounts. Short-term and long-term market interest rates may change by different amounts. The timing and amount of cash flows of various assets or liabilities may shorten or lengthen as interest rates change. In addition, the changing levels of interest rates may have an impact on loan demand, demand for various deposit products, credit losses, and other elements of earnings such as account analysis fees on commercial deposit accounts and correspondent bank service charges.

 

The Company’s earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve Board (the “FRB”). The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities. The nature and impact of future changes in monetary policies are generally not predictable.

 

- 46 - 

The Federal Open Market Committee’s September 17, 2015 press release stated “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise(“FOMC”) increased the target range for the federal funds rate when it has seen further improvementto 1/4 to 1/2 percent on December 16, 2015. Subsequently, interest rates on intermediate-term and long-term United States Treasury obligations declined from January 1, 2016 through March 31, 2016. In this context, Management expects a high level of uncertainty in regard to interest rate levels in the labor marketimmediate term, and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.… When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” In this context, Management’s most likely earnings forecast for the twelve months ending September 30, 2016March 31, 2017 assumes market interest rates will either remain at relatively stablelow levels or short-term rates will rise gradually.

 

In adjusting the Company's asset/liability position, Management attempts to manage interest rate risk while enhancing the net interest margin and net interest income. At times, depending on expected increases or decreases in general interest rates, the relationship between long and short termshort-term interest rates, market conditions and competitive factors, Management may adjust the Company's interest rate risk position in order to manage its net interest margin and net interest income. The Company's results of operations and net portfolio values remain subject to changes in interest rates and to fluctuations in the difference between long and short termshort-term interest rates.

 

The Company’s asset and liability position was slightly “asset sensitive” at September 30, 2015,March 31, 2016, depending on the interest rate assumptions applied to the simulation model employed by Management to measure interest rate risk. An “asset sensitive” position results in a slightly larger change in interest income than in interest expense resulting from application of assumed interest rate changes. Simulation estimates depend on, and will change with, the size and mix of the actual and projected balance sheet at the time of each simulation. Management’s interest rate risk management is currently biased toward stable or gradually increasing interest rates in the near-term and ultimately, rising interest rates.intermediate-term. Management continues to monitor the interest rate environment as well as economic conditions and other factors it deems relevant in managing the Company's exposure to interest rate risk.

 

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.

-49-

Market Risk - Equity Markets

 

Equity price risk can affect the Company. As an example, any preferred or common stock holdings, as permitted by banking regulations, can fluctuate in value. Management regularly assesses the extent and duration of any declines in market value, the causes of such declines, the likelihood of a recovery in market value, and its intent to hold securities until a recovery in value occurs. Declines in value of preferred or common stock holdings that are deemed “other than temporary” could result in loss recognition in the Company's income statement.

 

Fluctuations in the Company's common stock price can impact the Company's financial results in several ways. First, the Company has regularly repurchased and retired its common stock; the market price paid to retire the Company's common stock can affect the level of the Company's shareholders' equity, cash flows and shares outstanding. Second, the Company's common stock price impacts the number of dilutive equivalent shares used to compute diluted earnings per share. Third, fluctuations in the Company's common stock price can motivate holders of options to purchase Company common stock through the exercise of such options thereby increasing the number of shares outstanding. Finally, the amount of compensation expense associated with share based compensation fluctuates with changes in and the volatility of the Company's common stock price.

 

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- 47 - 

Market Risk - Other

 

Market values of loan collateral can directly impact the level of loan chargeoffs and the provision for loan losses. The financial condition and liquidity of debtors issuing bonds and debtors whose mortgages or other obligations are securitized can directly impact the credit quality of the Company’s investment portfolio requiring the Company to recognize other than temporary impairment charges. Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company's business activities.

 

Liquidity and Funding

 

The objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets.

 

In recent years, the Company's deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided97 98  percent of funding for average total assets in the first nine months of 2015quarter 2016 and 2014.97 percent in 2015. The stability of the Company’s funding from customer deposits is in part reliant on the confidence clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate level of liquidity reserves.

 

Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides a substantial secondary liquidity reserve. The Company held $2.9 billion in total investment securities at September 30, 2015.March 31, 2016. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At September 30, 2015,March 31, 2016, such collateral requirements totaled approximately $716712 million.

 

Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. The Company performs liquidity stress tests on a periodic basis to evaluate the sustainability of its liquidity. Under the stress testing, the Company assumes outflows of funds increase beyond expected levels. Measurement of such heightened outflows considers the composition of the Company’s deposit base, including any concentration of deposits, non-deposit funding such as short-term borrowings, and unfunded lending commitments. The Company evaluates its stock of highly liquid assets to meet the assumed higher levels of outflows. Highly liquid assets include cash and amounts due from other banks from daily transaction settlements, reduced by branch cash needs and Federal Reserve Bank reserve requirements, and investment securities based on regulatory risk-weighting guidelines. Based on the results of the most recent liquidity stress test, Management is satisfied with the liquidity condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced liquidity.

 

Management will monitor the Company’s cash levels throughout 2015.2016. Loan demand from credit-worthy borrowers will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of these deposit balances is subject to heightened competition, the success of the Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, deposit growth may be used to fund loans reduce borrowings or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

 

-50-

Westamerica Bancorporation ("Parent Company") is a separate entity apart from Westamerica Bank (“Bank”) and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends declared for its shareholders, and interest and principal on any outstanding debt. Substantially all of the Parent Company's revenues are obtained from subsidiary dividends and service fees.

 

In the first nine months of 2015, theThe Bank’s dividends paid to the Parent Company and proceeds from the exercise of stock options provided adequate cash flow for the Parent Company to pay shareholder dividends of $2910 million in the first quarter 2016 and $39 million in 2015, and retire common stock in the amount of $155 million. In the first nine months of 2014, the Bank’s dividends paid to the Parent Company and proceeds from the exercise of stock options provided adequate cash flow for the Parent Company to pay shareholder dividends of $30 million and retire common stock in the amount of $45 million.$15 million, respectively. Payment of dividends to the Parent Company by the Bank is limited under California and Federal laws. The Company believes these regulatory dividend restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations.

 

- 48 - 

Capital Resources

 

The Company has historically generated high levels of earnings, which provides a means of accumulating capital. The Company's net income as an annualizeda percentage of average shareholders' equity (“return on equity” or “ROE”) has been11.410.9% (annualized) in the first nine months ofquarter 2016, 11.3% in 2015 and 11.6% in 2014 and 12.5% in 2013.2014. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $52million in the first nine months ofquarter 2016 compared with $5 million in 2015 compared withand $12 million in 2014 and $21 million in 2013.2014.

 

The Company paid common dividends totaling $2910 million in the first nine months ofquarter 2016, $39 million in 2015 and $40 million in 2014, and $40 million in 2013, which represent dividends per common share of $1.140.39, $1.52$1.53 and $1.49,$1.52, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has repurchased and retired its common stock as another means to return earnings to shareholders. The Company repurchased and retired342130 thousand shares valued at $155 million in the first nine months ofquarter 2016, 344 thousand shares valued at $15 million in 2015 and 1.0 million shares valued at $53 million in 2014 and 1.2 million shares valued at $57 million in 2013.2014.

 

The Company's primary capital resource is shareholders' equity, which was $533.9539million at September 30, 2015March 31, 2016 compared with $526.6$532 million at December 31, 2014.2015. The Company's ratio of equity to total assets was10.6810.37% at September 30, 2015March 31, 2016 and 10.46%10.30% at December 31, 2014.2015.

 

The Company performs capital stress tests on a periodic basis to evaluate the sustainability of its capital. Under the stress testing, the Company assumes various scenarios such as deteriorating economic and operating conditions, unanticipated asset devaluations, and significant operational lapses. The Company measures the impact of these scenarios on its earnings and capital. Based on the results of the most recent stress tests, Management is satisfied with the capital condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced earnings or a reduction in capital from unanticipated events and circumstances.

 

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-51-

Capital to Risk-Adjusted Assets

 

On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The rule’s provisions which most affected the regulatory capital requirements of the Company and the Bank:

 

·Introduced a new “Common Equity Tier 1” capital measurement,
·Established higher minimum levels of capital,
·Introduced a “capital conservation buffer,”
·Increased the risk-weighting of certain assets, and
·Established limits on the amount of deferred tax assets with any excess treated as a deduction from Tier 1 capital.

 

Under the final rule, a banking organization that is not subject to the “advanced approaches rule” may make a one-time election not to include most elements of Accumulated Other Comprehensive Income, including net-of-tax unrealized gains and losses on available for sale investment securities, in regulatory capital. Neither the Company nor the Bank are subject to the “advanced approaches rule” and made the election not to include most elements of Accumulated Other Comprehensive Income in regulatory capital.

 

Banking organizations that are not subject to the “advanced approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations will beginbegan on January 1, 2016 and will end January 1, 2019. Any bank subject to the rule which is unable to maintain its “capital conservation buffer” will be restricted in the payment of discretionary executive compensation and shareholder distributions, such as dividends and share repurchases.

 

- 49 - 

The final rule did not supersede provisions of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) requiring federal banking agencies to take prompt corrective action (PCA) to resolve problems of insured depository institutions. The final rule revised the PCA thresholds to incorporate the higher minimum levels of capital, including the newly proposed “common equity tier 1” ratio.

 

The capital ratios for the Company and the Bank under the new capital framework are presented in the table below.

 

     Transitional   Well-capitalized
     Minimum Minimum by Regulatory
     Regulatory Regulatory Definition
     Requirement Requirement (1) Under FDICIA     Transitional
Minimum
Regulatory
Requirement		 Minimum
Regulatory
Requirement		 Well-capitalized
by Regulatory
Definition
Under FDICIA
 At September 30, 2015 Effective Effective Effective At March 31, 2016 Effective Effective Effective
 Company Bank January 1, 2015 January 1, 2019 January 1, 2015 Company Bank January 1, 2016 January 1, 2019 January 1, 2015
                    
Common Equity Tier I Capital  12.79%  11.15%  4.50%  7.00%  6.50%  13.22%  11.34%  5.125%(1)  7.00%(2)  6.50%
Tier I Capital  12.79%  11.15%  6.00%  8.50%  8.00%  13.22%  11.34%  6.625%(1)  8.50%(2)  8.00%
Total Capital  13.39%  11.88%  8.00%  10.50%  10.00%  13.51%  11.71%  8.625%(1)  10.50%(2)  10.00%
Leverage Ratio  8.06%  6.99%  4.00%  4.00%  5.00%  7.99%  6.81%  4.000%  4.00%  5.00%

(1) Includes 0.625% capital conservation buffer.

(2) Includes 2.5% capital conservation buffer.

 

The Company and the Bank intend to maintain regulatory

      Transitional
Minimum
Regulatory
Requirement		 Minimum
Regulatory
Requirement		 Well-capitalized
by Regulatory
Definition
Under FDICIA
  At December 31, 2015 Effective Effective Effective
  Company Bank January 1, 2015 January 1, 2019 January 1, 2015
           
Common Equity Tier I Capital  12.82%  11.00%  4.50%  7.00%(3)  6.50%
Tier I Capital  12.82%  11.00%  6.00%  8.50%(3)  8.00%
Total Capital  13.39%  11.68%  8.00%  10.50%(3)  10.00%
Leverage Ratio  7.99%  6.82%  4.00%  4.00%  5.00%

(3) Includes 2.5% capital in excess of the highest regulatory standard. conservation buffer.

The Company and the Bank routinely project capital levels by analyzing forecasted earnings, credit quality, securities valuations, shareholder dividends, asset volumes, share repurchase activity, stock option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain regulatory capital levels exceeding the highest effective regulatory standard and pay quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur.

-52-

The following summarizes the ratios of regulatory capital to risk-adjusted assets under the superseded capital framework on the dates indicated:

    Minimum Well-capitalized
  At December 31, Regulatory by Regulatory
  2014 Requirement Definition
             
Company:            
Tier I Capital  13.30%  4.00%  6.00%
Total Capital  14.54%  8.00%  10.00%
Leverage ratio  7.95%  4.00%  5.00%
             
Bank:            
Tier I Capital  12.04%  4.00%  6.00%
Total Capital  13.49%  8.00%  10.00%
Leverage ratio  7.16%  4.00%  5.00%

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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.

 

Credit risk and interest rate risk are the most significant market risks affecting the Company, and equity price risk can also affect the Company’s financial results. These risks are described in the preceding sections regarding “Loan Portfolio Credit Risk,” and “Asset/Liability and Market Risk Management.” Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company’s business activities.

- 50 - 

Item 4. Controls and Procedures

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of September 30, 2015.March 31, 2016.

 

Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2015March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is theirits property the subject of any material pending legal proceeding, other than ordinary routine legal proceedings arising in the ordinary course of the Company’s business. None of these proceedings is expected to have a material adverse impact upon the Company’s business, financial position or results of operations.

 

Item 1A. Risk Factors

 

The Company’s Form 10-K as of December 31, 20142015 includes detailed disclosure about the risks faced by the Company’s business; such risks have not materially changed since the Form 10-K was filed.

-53-

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Previously reported on Form 8-K.

(b) None

(c) Issuer Purchases of Equity Securities

 

The table below sets forth the information with respect to purchases made by or on behalf of the CompanyWestamerica Bancorporation or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended September 30, 2015.March 31, 2016 (in thousands, except per share data).

 

 
 
 
 
 
Period		 
 
 
 
 
 		 
 
 
(a)
Total Number of
Shares Purchased		 
 
 
 
 
 		 
 
 
(b)
Average Price
Paid per Share		 
 
 
 
 
 		(c)
Total Number
of Shares
Purchased as Part of
Publicly Announced
Plans or Programs*		 
 
 
 
 
 		(d)
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
(In thousands, except per share data)
July 1        
through  26  $50.30   26   1,729 
July 31                
August 1                
through  -   -   -   1,729 
August 31                
September 1                
through  -   -   -   1,729 
September 30                
Total  26  $50.30   26   1,729 
  2016
Period (a) Total Number of shares Purchased (b) Average Price Paid per Share (c) Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
  (In thousands, except price paid)
January 1 through January 31  95  $41.38   95   1,632 
February 1 through February 29  35   41.92   35   1,597 
March 1 through March 31  -   -   -   1,597 
Total  130   41.53   130   1,597 

* Includes-0- thousand,-0- thousand and-0- thousand shares purchased in July, August and September, respectively, by the Company in private transactions with the independent administrator of the Company's Tax Deferred Savings/Retirement Plan (ESOP). The Company includes the shares purchased in such transactions within the total number of shares authorized for purchase pursuant to the currently existing publicly announced program.

The Company repurchases shares of its common stock in the open market  to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares under stock option plans, and other ongoing requirements.

 

- 51 - 

Shares were repurchased during the period from July 1 through July 22, 2015first quarter 2016 pursuant to a program approved by the Board of Directors on July 24, 2014 authorizing the purchase of up to 2 million shares of the Company’s common stock. Shares were repurchased during the period from July 23, 2015 through September 30, 2015 pursuant to a replacement program approved by the Board of Directors on July 23, 2015 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2016.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.(a) Submission of Matters to a Vote of Security Holders

Proxies for the Annual Meeting of shareholders held on April 28, 2016, were solicited pursuant Regulation 14A of the Securities Exchange Act of 1934. The Report of Inspector of election indicates that22,012,916 shares of the Common Stock of the Company, out of 25,400,207 shares outstanding on the February 29, 2016 record date, were present, in person or by proxy, at the meeting. The following matters were submitted to a vote of the shareholders:

1.Election of Directors:

Nominee For Withheld Non-Votes
Etta Allen  18,437,477   594,284   2,981,155 
Louis E. Bartolini  18,357,973   673,788   2,981,155 
E. Joseph Bowler  18,853,669   178,092   2,981,155 
Arthur C. Latno, Jr.  18,291,193   740,568   2,981,155 
Patrick D. Lynch  18,359,542   672,219   2,981,155 
Catherine C. MacMillan  18,445,064   586,697   2,981,155 
Ronald A. Nelson  18,440,175   591,586   2,981,155 
David L. Payne  18,825,013   206,748   2,981,155 
Edward B. Sylvester  18,841,665   190,096   2,981,155 

2.Approval of a Non-Binding Advisory Vote on Executive Compensation

For Against Abstain Non-Votes
 18,032,288   895,354   104,119   2,981,155 

3.Ratification of Selection of Crowe Horwath as Company’s Independent Auditors for Fiscal Year 2016

For Against Abstain Non-Votes
 21,803,396   29,990   179,530   0 

4.Required Independent Board Chairman

For Against Abstain Non-Votes
 6,819,532   11,691,141   521,088   2,981,155 

 

Item 6. Exhibits

 

The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

WESTAMERICA BANCORPORATION

(Registrant)

 

 

/s/ JOHN "ROBERT" THORSON

John "Robert" Thorson                                                            

Senior Vice President and Chief Financial Officer

(Chief Financial and Accounting Officer)

/s/ JOHN "ROBERT" THORSON
John "Robert" Thorson
Senior Vice President and Chief Financial Officer
(Chief Financial and Accounting Officer)

 

Date: NovemberMay 2, 20152016

 

 

 

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EXHIBIT INDEX

 

Exhibit 31.1: Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

 

Exhibit 31.2: Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

 

Exhibit 32.1: Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2: Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 101: Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2015,March 31, 2016, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three and nine months ended September 30, 2015March 31, 2016 and 2014;2015; (ii) Consolidated Balance Sheets at September 30, 2015,March 31, 2016, and December 31, 2014;2015; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the ninethree months ended September 30, 2015March 31, 2016 and 2014;2015; (v) Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 and (vi) Notes to the Unaudited Consolidated Financial Statements.

 

 

 

 

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