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 March 31,

For the quarterly period ended September 30, 2016

or

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

CALIFORNIA94-2156203
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)

(State or Other Jurisdiction of

Incorporation or Organization)

94-2156203

(I.R.S. Employer

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 ClassShares outstanding as of April 22,October 25, 2016
  
Common Stock,25,496,985

No Par Value
25,671,339

 

 

 

TABLE OF CONTENTS

 

  Page
 Page
Forward Looking Statements3

PART I - FINANCIAL INFORMATION

Item 1Financial Statements4
 
Notes to Unaudited Consolidated Financial Statements9
Financial Summary2930
Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations3031
Item 3Quantitative and Qualitative Disclosures about Market Risk5052
Item 4Controls and Procedures5153
PART II - OTHER INFORMATION 
Item 1Legal Proceedings5153
Item 1ARisk Factors5153
Item 2Unregistered Sales of Equity Securities and Use of Proceeds5153
Item 3Defaults upon Senior Securities5254
Item 4Mine Safety Disclosures5254
Item 5Other Information5254
Item 6Exhibits5254
Signatures55
 53
Exhibit Index56
 54
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)5557
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)5658
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 13505759
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 13505860

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- 2 -
 

FORWARD-LOOKING STATEMENTS

 

This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation (the “Company”) for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, future credit quality and performance, the appropriateness of the allowance for loan losses, loan growth or the reduction, mitigation of risk in the Company’s loan and investment portfolios, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", “estimates”, "intends", "targeted", "projected", “forecast”, "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the national and regional economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including a failure or breach in data processing or security systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, fire, flood, drought, and other disasters, on the uninsured value of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values; and (13) changes in the securities markets.markets and (14) the outcome of contingencies, such as legal proceedings. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2015, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. However, the reader should not consider these factors to be a complete set of all potential risks or uncertainties.

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this report.report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law.

 

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- 3 -
 

PART I - FINANCIAL INFORMATION

Item 1 Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

  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 

 

  At September 30,
2016		 At December 31,
2015
  (In thousands)
Assets:        
Cash and due from banks $471,367  $433,044 
Investment securities available for sale  1,762,408   1,570,216 
Investment securities held to maturity, with fair values of: $1,440,119 at September 30, 2016 and $1,325,699 at December 31, 2015  1,411,019   1,316,075 
Loans  1,364,329   1,533,396 
Allowance for loan losses  (26,359)  (29,771)
Loans, net of allowance for loan losses  1,337,970   1,503,625 
Other real estate owned  3,032   9,264 
Premises and equipment, net  37,059   38,693 
Identifiable intangibles, net  7,789   10,431 
Goodwill  121,673   121,673 
Other assets  154,461   165,854 
Total Assets $5,306,778  $5,168,875 
         
Liabilities:        
Noninterest bearing deposits $2,064,988  $2,026,049 
Interest bearing deposits  2,579,882   2,514,610 
Total deposits  4,644,870   4,540,659 
Short-term borrowed funds  56,358   53,028 
Other liabilities  42,554   42,983 
Total Liabilities  4,743,782   4,636,670 
         
Shareholders' Equity:        
Common stock (no par value), authorized - 150,000 shares Issued and outstanding:25,665 at September 30, 2016 and 25,528 at December 31, 2015  391,601   378,858 
Deferred compensation  1,533   2,578 
Accumulated other comprehensive income  9,001   675 
Retained earnings  160,861   150,094 
Total Shareholders' Equity  562,996   532,205 
Total Liabilities and  Shareholders' Equity $5,306,778  $5,168,875 

See accompanying notes to unaudited consolidated financial statements.

 

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- 4 -
 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 For the Three Months For the Nine  Months
 For the
Three Months
Ended March 31,		 Ended September 30,
 2016 2015 2016 2015 2016 2015
 (In thousands,
except per share data)		 (In thousands, except per share data)
Interest and Fee Income:                        
Loans $18,353  $20,230  $16,968  $19,378  $52,904  $59,643 
Investment securities available for sale  7,967   7,469   8,796   7,880   24,855   23,347 
Investment securities held to maturity  7,327   6,218   7,704   7,041   23,083   19,651 
Total Interest and Fee Income  33,647   33,917   33,468   34,299   100,842   102,641 
Interest Expense:                        
Deposits  543   642   512   573   1,586   1,816 
Short-term borrowed funds  9   16   11   12   30   44 
Federal Home Loan Bank advances  -   1   -   -   -   1 
Total Interest Expense  552   659   523   585   1,616   1,861 
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 
Net Interest Income  32,945   33,714   99,226   100,780 
Reversal of Provision for Loan Losses  (3,200)  -   (3,200)  - 
Net Interest Income After Reversal of Provision For Loan Losses  36,145   33,714   102,426   100,780 
Noninterest Income:                        
Service charges on deposit accounts  5,248   5,707   5,303   5,581   15,790   16,981 
Debit card fees  1,587   1,538   4,724   4,528 
Merchant processing services  1,529   1,703   1,532   1,485   4,699   4,971 
Debit card fees  1,516   1,456 
Trust fees  661   706   686   682   2,004   2,061 
Other service fees  671   693   1,951   2,041 
ATM processing fees  658   585   600   616   1,860   1,828 
Other service fees  629   665 
Financial services commissions  156   153   118   177   411   527 
Other noninterest income  1,332   1,325 
Other  1,101   1,221   3,590   3,625 
Total Noninterest Income  11,729   12,300   11,598   11,993   35,029   36,562 
Noninterest Expense:                        
Salaries and related benefits  13,117   13,338   13,063   12,761   39,067   39,795 
Occupancy  3,398   3,727   3,749   3,746   10,546   11,199 
Outsourced data processing services  2,130   2,108   2,114   2,115   6,375   6,334 
Professional fees  1,693   746   3,183   1,876 
Furniture and equipment  1,213   1,119   1,211   1,075   3,611   3,353 
Amortization of identifiable intangibles  905   1,001   867   952   2,642   2,908 
Professional fees  732   548 
Courier service  545   543   451   604   1,458   1,744 
Other real estate owned  111   315   (206)  83   (487)  451 
Other noninterest expense  3,707   4,028 
Other  3,146   4,091   10,780   12,136 
Total Noninterest Expense  25,858   26,727   26,088   26,173   77,175   79,796 
Income Before Income Taxes  18,966   18,831   21,655   19,534   60,280   57,546 
Provision for income taxes  4,740   4,274   6,027   4,677   15,880   13,371 
Net Income $14,226  $14,557  $15,628  $14,857  $44,400  $44,175 
                        
Average Common Shares Outstanding  25,445   25,651   25,641   25,530   25,558   25,565 
Average Diluted Common Shares Outstanding  25,458   25,655 
Diluted Average Common Shares Outstanding  25,687   25,565   25,595   25,585 
Per Common Share Data:                        
Basic earnings $0.56  $0.57  $0.61  $0.58  $1.74  $1.73 
Diluted earnings  0.56   0.57   0.61   0.58   1.73   1.73 
Dividends paid  0.39   0.38   0.39   0.38   1.17   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 For the Nine Months
 For the Three Months Ended
March 31,		 Ended September 30,
 2016 2015 2016 2015 2016 2015
 (In thousands) (In thousands)
Net income $14,226  $14,557  $15,628  $14,857  $44,400  $44,175 
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 
Other comprehensive (loss) income:                
(Decrease) increase in net unrealized gains on securities available for sale  (4,992)  5,522   14,319   3,242 
Deferred tax benefit (expense)  2,099   (2,321)  (6,020)  (1,363)
(Decrease) increase in net unrealized gains on securities available for sale, net of tax  (2,893)  3,201   8,299   1,879 
Post-retirement benefit transition obligation amortization  15   15   15   15   45   45 
Deferred tax expense  (6)  (6)  (6)  (6)  (18)  (18)
Post-retirement benefit transition obligation amortization, net of tax  9   9   9   9   27   27 
Total other comprehensive income  5,944   4,308 
Total other comprehensive (loss) income  (2,884)  3,210   8,326   1,906 
Total comprehensive income $20,170  $18,865  $12,744  $18,067  $52,726  $46,081 

 

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		 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, 2014  25,745  $378,132  $2,711  $5,292  $140,468  $526,603   25,745  $378,132  $2,711  $5,292  $140,468  $526,603 
Net income for the period                  14,557   14,557                   44,175   44,175 
Other comprehensive income              4,308       4,308               1,906       1,906 
Exercise of stock options  -   -               -   108   4,848               4,848 
Tax benefit decrease upon expiration/exercise of stock options      (865)              (865)
Tax benefit decrease upon exercise and expiration of stock options      (1,215)              (1,215)
Restricted stock activity  17   874   (133)          741 
Stock based compensation      354               354       987               987 
Stock awarded to employees  1   45               45   2   89               89 
Retirement of common stock including repurchases  (183)  (2,708)          (5,159)  (7,867)
Retirement of common stock  (342)  (5,066)          (9,962)  (15,028)
Dividends                  (9,755)  (9,755)                  (29,168)  (29,168)
Balance, March 31, 2015  25,563  $374,958  $2,711  $9,600  $140,111  $527,380 
Balance, September 30, 2015  25,530  $378,649  $2,578  $7,198  $145,513  $533,938 
                                                
Balance, December 31, 2015  25,528  $378,858  $2,578  $675  $150,094  $532,205   25,528  $378,858  $2,578  $675  $150,094  $532,205 
Net income for the period                  14,226   14,226                   44,400   44,400 
Other comprehensive income              5,944       5,944               8,326       8,326 
Exercise of stock options  40   1,717               1,717   258   11,588               11,588 
Tax benefit decrease upon expiration/exercise of stock options      (181)              (181)
Tax benefit increase upon exercise and expiration of stock options      199               199 
Restricted stock activity      1,045   (1,045)          -   15   1,798   (1,045)          753 
Stock based compensation      390               390       1,142               1,142 
Stock awarded to employees  -   15               15   1   75               75 
Retirement of common stock including repurchases  (130)  (1,951)          (3,473)  (5,424)
Retirement of common stock  (137)  (2,059)          (3,721)  (5,780)
Dividends                  (9,919)  (9,919)                  (29,912)  (29,912)
Balance, March 31, 2016  25,438  $379,893  $1,533  $6,619  $150,928  $538,973 
Balance, September 30, 2016  25,665  $391,601  $1,533  $9,001  $160,861  $562,996 

 

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,		 For the Nine Months
Ended September 30,
 2016 2015 2016 2015
 (In thousands) (In thousands)
Operating Activities:                
Net income $14,226  $14,557  $44,400  $44,175 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  4,065   3,930   14,211   12,379 
Reversal of provision for loan losses  (3,200)  - 
Net amortization of deferred loan fees  (54)  (78)  (281)  (263)
Decrease in interest income receivable  1,379   812   475   757 
Decrease (increase) in deferred tax asset  115   (421)
Increase in other assets  (5,602)  (822)
(Increase) decrease in other assets  (753)  107 
Increase (decrease) in income taxes payable  403   (257)
Decrease in net deferred tax asset  3,258   968 
Decrease in interest expense payable  (19)  (56)
Decrease in other liabilities  143   (2,571)
Stock option compensation expense  390   354   1,142   987 
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 
Tax benefit (increase) decrease upon exercise and expiration of stock options  (199)  1,215 
Net writedown/loss on sale of premises and equipment  21   24 
Net gain on sale of foreclosed assets  (58)  -   (1,182)  (73)
Writedown of foreclosed assets  126   243   759   315 
Net Cash Provided by Operating Activities  18,218   18,002   59,178   57,707 
        
Investing Activities:                
Net repayments of loans  61,070   13,805   171,573   124,615 
Change in payable to FDIC(1)  5,189   (692)  3,180   - 
Purchases of investment securities available for sale  (152,128)  (354,527)  (812,697)  (828,169)
Proceeds from sale/maturity/calls of securities available for sale  166,023   185,073   632,795   858,850 
Purchases of investment securities held to maturity  (56,182)  (10,359)  (246,956)  (366,247)
Proceeds from maturity/calls of securities held to maturity  33,531   30,468   141,770   117,877 
Purchases of premises and equipment  (283)  (1,326)  (1,299)  (4,049)
Proceeds from sale of FRB(2)/FHLB(3) stock  -   490 
Net change in FRB(2)/FHLB(3) securities  -   940 
Proceeds from sale of foreclosed assets  975   100   7,143   1,774 
Net Cash Provided by (Used in) Investing Activities  58,195   (136,968)
        
Net Cash Used in Investing Activities  (104,491)  (94,409)
Financing Activities:                
Net change in deposits  (23,909)  30,891 
Net change in short-term borrowings and FHLB(3) advances  (577)  (26,824)
Net increase in deposits  104,211   17,737 
Net increase (decrease) in short-term borrowings and FHLB(3)advances  3,330   (52,721)
Exercise of stock options/issuance of shares  1,717   -   11,588   4,848 
Tax benefit decrease upon expiration/exercise of stock options  (181)  (865)
Retirement of common stock including repurchases  (5,424)  (7,867)
Tax benefit increase (decrease) upon exercise and expiration of stock options  199   (1,215)
Retirement of common stock  (5,780)  (15,028)
Common stock dividends paid  (9,919)  (9,755)  (29,912)  (29,168)
Net Cash Used in Financing Activities  (38,293)  (14,420)
Net Cash Provided by (Used in) Financing Activities  83,636   (75,547)
Net Change In Cash and Due from Banks  38,120   (133,386)  38,323   (112,249)
Cash and Due from Banks at Beginning of Period  433,044   380,836   433,044   380,836 
Cash and Due from Banks at End of Period $471,164  $247,450  $471,367  $268,587 
                
Supplemental Cash Flow Disclosures:                
Supplemental disclosure of noncash activities:        
Supplemental disclosure of non cash activities:        
Loan collateral transferred to other real estate owned $217  $3,202  $488  $4,911 
Securities purchases pending settlement  44,580   1,478   171   - 
Supplemental disclosure of cash flow activities:                
Interest paid for the period  526   775   1,635   1,941 
Income tax payments for the period  1,200   -   14,032   12,596 

 

See accompanying notes to unaudited consolidated financial statements.

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

(2) Federal Reserve Bank ("FRB")

(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 March 31,September 30, 2016 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

 

Note 2: Accounting Policies

 

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

 

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

 

The Company will be required to adopt the ASU provisions on January 1, 2018. Management is evaluatingdoes not expect the impact thatadoption of the ASU willto have a material effect on the Company’s financial statements.

 

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

 

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

 

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- 9 -
 

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

 

The Company will be required to adopt the ASU provisions January 1, 2017. Management does not expect the adoption of the ASU to have a material effect on the Company’s financial statements. The most notable impact will be the effect of Excess Tax Benefits on the provision for income taxes.

FASB ASU 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changes estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with the current expected credit loss (CECL) model, which will accelerate recognition of credit losses. Additionally, credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses under the new standard. The Company will also be required to provide additional disclosures related to the financial assets within the scope of the new standard.

The Company will be required to adopt the ASU provisions on January 1, 2020. Management is evaluating the impact that the ASU will have on the Company’s financial statements.

 

Note 3: Investment Securities

 

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

 

 Investment Securities Available for Sale
At March 31, 2016		 Investment Securities Available for Sale
At September 30, 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)
Securities of U.S. Government sponsored entities $360,219  $668  $(158) $360,729  $171,579  $300  $(33) $171,846 
Agency residential mortgage-backed securities (MBS)  198,740   1,460   (2,931)  197,269   499,860   1,712   (1,883)  499,689 
Non-agency residential MBS  345   8   -   353   301   1   -   302 
Non-agency commercial MBS  2,298   9   (5)  2,302   2,127   1   (10)  2,118 
Obligations of states and political subdivisions  139,551   9,048   (41)  148,558   177,786   8,086   (378)  185,494 
Asset-backed securities  1,680   -   (22)  1,658   1,003   -   (3)  1,000 
FHLMC(1) and FNMA(2) stock  775   3,016   -   3,791   775   3,481   -   4,256 
Corporate securities  868,796   3,670   (3,719)  868,747   891,335   5,808   (1,911)  895,232 
Other securities  2,036   667   (140)  2,563   2,034   577   (140)  2,471 
Total $1,574,440  $18,546  $(7,016) $1,585,970  $1,746,800  $19,966  $(4,358) $1,762,408 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

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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 March 31, 2016		 Investment Securities Held to Maturity
At September 30, 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 $713  $12  $-  $725  $621  $3  $-  $624 
Agency residential MBS  632,696   6,398   (404)  638,690   712,470   10,210   (194)  722,486 
Non-agency residential MBS  9,415   87   (2)  9,500   5,678   54   (1)  5,731 
Agency commercial MBS  16,136   36   (295)  15,877   9,404   24   (163)  9,265 
Obligations of states and political subdivisions  699,179   18,108   (271)  717,016   682,846   19,508   (341)  702,013 
Total $1,358,139  $24,641  $(972) $1,381,808  $1,411,019  $29,799  $(699) $1,440,119 

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

 

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

 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

 

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

 

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

 

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

 

 At March 31, 2016 At September 30, 2016
 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 $126,563  $126,929  $22,825  $23,380  $159,685  $160,009  $18,809  $19,437 
Over 1 to 5 years  983,838   984,709   269,713   273,902   745,541   750,330   290,412   295,190 
Over 5 to 10 years  257,772   265,730   295,674   304,975   301,266   308,276   308,222   319,417 
Over 10 years  2,073   2,324   111,680   115,484   35,211   34,957   66,024   68,593 
Subtotal  1,370,246   1,379,692   699,892   717,741   1,241,703   1,253,572   683,467   702,637 
MBS  201,383   199,924   658,247   664,067   502,288   502,109   727,552   737,482 
Other securities  2,811   6,354   -   -   2,809   6,727   -   - 
Total $1,574,440  $1,585,970  $1,358,139  $1,381,808  $1,746,800  $1,762,408  $1,411,019  $1,440,119 

- 11 - 

Securities available for sale at March 31, 2016 with maturity dates over one year but less than five years include $221,924  thousand (fair value) of securities of U.S. Government sponsored entities with call options on dates within one year or less.

 

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

 

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

 

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

 

 Investment Securities Available for Sale
At March 31, 2016		 Investment Securities Available for Sale
At September 30, 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  2  $39,801  $(158)  -  $-  $-   2  $39,801  $(158)  3  $39,965  $(33)  -  $-  $-   3  $39,965  $(33)
Agency residential MBS  1   7,033   (84)  30   158,762   (2,847)  31   165,795   (2,931)  9   109,244   (222)  28   133,665   (1,661)  37   242,909   (1,883)
Non-agency residential MBS  1   31   -   -   -   -   1   31   - 
Non-agency commercial MBS  -   -   -   1   837   (5)  1   837   (5)  1   324   (4)  1   794   (6)  2   1,118   (10)
Obligations of states and political subdivisions  4   2,291   (14)  3   1,118   (27)  7   3,409   (41)  30   42,214   (356)  3   1,118   (22)  33   43,332   (378)
Asset-backed securities  -   -   -   1   1,658   (22)  1   1,658   (22)  -   -   -   1   1,000   (3)  1   1,000   (3)
Corporate securities  40   198,880   (1,559)  43   162,806   (2,160)  83   361,686   (3,719)  25   136,421   (704)  26   102,085   (1,207)  51   238,506   (1,911)
Other securities  -   -   -   1   1,860   (140)  1   1,860   (140)  -   -   -   1   1,860   (140)  1   1,860   (140)
Total  47  $248,005  $(1,815)  79  $327,041  $(5,201)  126  $575,046  $(7,016)  69  $328,199  $(1,319)  60  $240,522  $(3,039)  129  $568,721  $(4,358)

 

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

 

  Investment Securities Held to Maturity
At September 30, 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  $12,463  $(79)  3  $11,615  $(115)  9  $24,078  $(194)
Non-agency residential MBS  1   1,253   (1)  -   -   -   1   1,253   (1)
Agency commercial MBS  -   -   -   1   7,250   (163)  1   7,250   (163)
Obligations of states and political subdivisions  31   30,041   (182)  9   6,779   (159)  40   36,820   (341)
Total  38  $43,757  $(262)  13  $25,644  $(437)  51  $69,401  $(699)

  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 ratingsrating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

 

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

 

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

 

As of March 31,September 30, 2016, $712,412755,762  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2015, $738,865  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds.

 

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

 

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

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

 

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

 

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

 

 For the Three Months For the Nine Months
 For the Three Months
Ended March 31,		 Ended September 30,
 2016 2015 2016 2015 2016 2015
 (In thousands) (In thousands)
            
Taxable $9,674  $7,554  $11,024  $9,120  $31,256  $25,067 
Tax-exempt from regular federal income tax  5,620   6,133   5,476   5,801   16,682   17,931 
Total interest income from investment securities $15,294  $13,687  $16,500  $14,921  $47,938  $42,998 

 

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Note 4: Loans and Allowance for Loan Losses

 

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

 

 At March 31, 2016 At September 30, 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 $341,898  $515,183  $2,147  $109,201  $341,654  $1,310,083  $331,429  $480,950  $2,282  $91,934  $335,629  $1,242,224 
Purchased covered loans:                        
Gross purchased covered loans  -   -   -   2,330   11,352   13,682 
Purchased loan discount  -   -   -   -   (18)  (18)
Purchased covered loans  -   -   -   2,233   9,512   11,745 
Purchased non-covered loans:                                                
Gross purchased non-covered loans  14,447   108,968   960   229   30,929   155,533   12,337   74,595   153   224   27,973   115,282 
Purchased loan discount  (931)  (3,975)  -   (23)  (1,155)  (6,084)  (682)  (3,197)  -   (23)  (1,020)  (4,922)
Total $355,414  $620,176  $3,107  $111,737  $382,762  $1,473,196  $343,084  $552,348  $2,435  $94,368  $372,094  $1,364,329 

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  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
Three Months Ended
March 31, 2016		 For the Year Ended
December 31, 2015		 For the
Nine Months Ended
September 30, 2016		 For the Year Ended
December 31, 2015
Impaired purchased loans (In thousands) (In thousands)
Carrying amount at the beginning of the period $3,887  $4,672  $3,887  $4,672 
Reductions during the period  (2,628)  (785)  (2,651)  (785)
Carrying amount at the end of the period $1,259  $3,887  $1,236  $3,887 

 

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

 

 For the
Three Months Ended
March 31, 2016		 For the
Year Ended
December 31, 2015		 For the
Nine Months Ended
September 30, 2016		 For the
Year Ended
December 31, 2015
Accretable yield: (In thousands) (In thousands)
Balance at the beginning of the period $1,259  $2,261  $1,259  $2,261 
Reclassification from nonaccretable difference  1,077   3,051   3,322   3,051 
Accretion  (1,319)  (4,053)  (2,936)  (4,053)
Balance at the end of the period $1,017  $1,259  $1,645  $1,259 
                
Accretion $(1,319) $(4,053) $(2,936) $(4,053)
Change in FDIC indemnification  694   698   995   698 
(Increase) in interest income $(625) $(3,355) $(1,941) $(3,355)

 

- 15 -

The following summarizes activity in the allowance for loan losses:

 

  Allowance for Loan Losses
For the Three Months Ended September 30, 2016
  Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910 
Additions:                                    
Provision  (3,638)  (328)  9   (193)  1,651   (399)  (4)  (298)  (3,200)
Deductions:                                    
Chargeoffs  (88)  -   -   -   (1,736)  (112)  -   -   (1,936)
Recoveries  1,735   15   -   -   337   498   -   -   2,585 
Net loan recoveries (losses)  1,647   15   -   -   (1,399)  386   -   -   649 
Total allowance for loan losses $8,411  $3,599  $136  $1,408  $6,868  $1,031  $62  $4,844  $26,359 

  Allowance for Loan Losses
For the Nine Months Ended September 30, 2016
  Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771 
Additions:                                    
Provision  (1,641)  (670)  (41)  (393)  2,074   (1,472)  62   (1,119)  (3,200)
Deductions:                                    
Chargeoffs  (2,024)  -   -   -   (3,418)  (150)  -   -   (5,592)
Recoveries  2,517   45   -   -   1,132   1,686   -   -   5,380 
Net loan recoveries (losses)  493   45   -   -   (2,286)  1,536   -   -   (212)
Total allowance for loan losses $8,411  $3,599  $136  $1,408  $6,868  $1,031  $62  $4,844  $26,359 

  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
  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 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
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771 
Additions:                                    
Provision  1,214   (2)  (47)  (94)  152   (1,193)  -   (30)  - 
Deductions:                                    
Chargeoffs  (1,171)  -   -   -   (1,006)  -   -   -   (2,177)
Recoveries  245   15   -   -   457   1,176   -   -   1,893 
Net loan (losses) recoveries  (926)  15   -   -   (549)  1,176   -   -   (284)
Total allowance for loan losses $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487 

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- 16 -
 

  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
  (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  (110)  (137)  86   (101)  (281)  247   -   296   - 
Deductions:                                    
Chargeoffs  (60)  -   -   -   (995)  (35)  -   -   (1,090)
Recoveries  180   15   -   -   590   7   -   -   792 
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 loan losses and recorded investment in loans were evaluated for impairment as follows:

 

 Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At March 31, 2016		 Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At September 30, 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 $5,831  $585  $-  $-  $-  $-  $-  $-  $6,416  $5,070  $216  $-  $-  $-  $-  $-  $-  $5,286 
Collectively evaluated for impairment  4,016   3,652   130   1,707   6,683   950   -   5,933   23,071   3,341   3,383   136   1,408   6,868   1,031   62   4,844   21,073 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487  $8,411  $3,599  $136  $1,408  $6,868  $1,031  $62  $4,844  $26,359 
Carrying value of loans:                                                                        
Individually evaluated for impairment $13,388  $7,516  $-  $-  $-  $11,733  $-  $-  $32,637  $11,210  $5,270  $-  $-  $-  $6,125  $-  $-  $22,605 
Collectively evaluated for impairment  328,510   507,667   2,147   109,201   341,654   136,658   13,463   -   1,439,300   320,219   475,680   2,282   91,934   335,629   103,189   11,555   -   1,340,488 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   1,058   201   -   1,259   -   -   -   -   -   1,046   190   -   1,236 
Total $341,898  $515,183  $2,147  $109,201  $341,654  $149,449  $13,664  $-  $1,473,196  $331,429  $480,950  $2,282  $91,934  $335,629  $110,360  $11,745 ��$-  $1,364,329 

 

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

 

- 16 - 

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

 

  Credit Risk Profile by Internally Assigned Grade
At September 30, 2016
  Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non-covered Loans Purchased Covered Loans(1) Total
  (In thousands)
Grade:                
Pass $318,077  $466,364  $2,282  $88,920  $334,163  $101,295  $10,126  $1,321,227 
Substandard  13,352   14,586   -   3,014   1,000   13,983   1,619   47,554 
Doubtful  -   -   -   -   26   -   -   26 
Loss  -   -   -   -   440   4   -   444 
Purchased loan discount  -   -   -   -   -   (4,922)  -   (4,922)
Total $331,429  $480,950  $2,282  $91,934  $335,629  $110,360  $11,745  $1,364,329 

(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 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 
- 17 -

 

(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, 2015		 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 $353,474  $496,744  $2,978  $114,525  $344,876  $149,100  $12,563  $1,474,260  $353,474  $496,744  $2,978  $114,525  $344,876  $149,100  $12,563  $1,474,260 
Substandard  14,643   20,326   -   3,106   781   24,810   1,650   65,316   14,643   20,326   -   3,106   781   24,810   1,650   65,316 
Doubtful  -   -   -   -   12   18   -   30   -   -   -   -   12   18   -   30 
Loss  -   -   -   -   374   -   -   374   -   -   -   -   374   -   -   374 
Purchased loan discount  -   -   -   -   -   (6,432)  (152)  (6,584)  -   -   -   -   -   (6,432)  (152)  (6,584)
Total $368,117  $517,070  $2,978  $117,631  $346,043  $167,496  $14,061  $1,533,396  $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.

(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 March 31, 2016		 Summary of Loans by Delinquency and Nonaccrual Status
At September 30, 2016
 Current and
Accruing		 30-59 Days
Past Due and
Accruing		 60-89 Days
Past Due and
Accruing		 Past Due 90
Days or More
and Accruing		 Nonaccrual Total Loans 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 $338,683  $780  $308  $-  $2,127  $341,898  $330,596  $647  $186  $-  $-  $331,429 
Commercial real estate  505,878   715   400   -   8,190   515,183   474,741   914   -   -   5,295   480,950 
Construction  2,147   -   -   -   -   2,147   2,282   -   -   -   -   2,282 
Residential real estate  105,355   2,350   767   -   729   109,201   90,713   908   -   -   313   91,934 
Consumer installment and other  338,687   2,137   647   183   -   341,654   331,310   3,198   683   438   -   335,629 
Total originated loans  1,290,750   5,982   2,122   183   11,046   1,310,083   1,229,642   5,667   869   438   5,608   1,242,224 
Purchased non-covered loans  141,930   721   40   77   6,681   149,449   105,255   4,030   370   49   656   110,360 
Purchased covered loans  13,635   -   29   -   -   13,664   11,716   -   -   -   29   11,745 
Total $1,446,315  $6,703  $2,191  $260  $17,727  $1,473,196  $1,346,613  $9,697  $1,239  $487  $6,293  $1,364,329 

 

  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 

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

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

 

  For the Three Months Ended
March 31,
  2016 2015
  (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms $280  $311 
Less: Interest income recognized on nonaccrual loans  (263)  (205)
Total reduction of interest income $17  $106 
  For the Three Months Ended For the Nine Months Ended
  September 30,
  2016 2015 2016 2015
  (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms $193  $315  $756  $969 
Less: Interest income (recognized) reversed on nonaccrual loans  (500)  17   (1,033)  (308)
Total (addition) reduction of interest income $(307) $332  $(277) $661 

 

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

 

The following summarizes impaired loans:

  Impaired Loans
At September 30, 2016
  Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
  (In thousands)
Impaired loans with no related allowance recorded:            
Commercial $1,058  $1,145  $- 
Commercial real estate  8,013   9,560   - 
Construction  -   -   - 
Residential real estate  533   563   - 
Consumer installment and other  611   718   - 
             
Impaired loans with an allowance recorded:            
Commercial  10,202   10,211   5,070 
Commercial real estate  4,410   5,427   216 
Construction  -   -   - 
Residential real estate  -   -   - 
Consumer installment and other  -   -   - 
             
Total:            
Commercial $11,260  $11,356  $5,070 
Commercial real estate  12,423   14,987   216 
Construction  -   -   - 
Residential real estate  533   563   - 
Consumer installment and other  611   718   - 

 

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- 18 - 

- 19 -
 

The following summarizes impaired loans:

  Impaired Loans
At March 31, 2016
  Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
  (In thousands)
Impaired loans with no related allowance recorded:            
Commercial $2,099  $2,185  $- 
Commercial real estate  16,069   20,742   - 
Construction  271   271   - 
Residential real estate  953   984   - 
Consumer installment and other  344   451   - 
             
Impaired loans with an allowance recorded:            
Commercial  11,634   12,452   5,831 
Commercial real estate  4,660   5,109   585 
Construction  -   -   - 
Residential real estate  -   -   - 
Consumer installment and other  -   -   - 
             
Total:            
Commercial $13,733  $14,637  $5,831 
Commercial real estate  20,729   25,851   585 
Construction  271   271   - 
Residential real estate  953   984   - 
Consumer installment and other  344   451   - 

 

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

- 19 - 

Impaired loans include troubled debt restructured loans. Impaired loans at March 31,September 30, 2016, included $19,64512,402 thousand of restructured loans, $12,1145,307 thousand of which were on nonaccrual status. Impaired loans at December 31, 2015, included $15,712$15,712 thousand of restructured loans, $7,464$7,464 thousand of which were on nonaccrual status.

 

 Impaired Loans
 Impaired Loans
For the Three Months Ended March 31,		 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2016 2015 2016 2015 2016 2015
 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income		 Average
Recorded
Investment		 Recognized
Interest
Income
 (In thousands) (In thousands)
Commercial $13,410  $133  $12,226  $146  $12,858  $126  $12,750  $147  $13,454  $394  $12,513  $440 
Commercial real estate  20,849   159   18,318   257   14,486   188   21,923   142   17,991   549   19,985   546 
Construction  271   -   917   -   -   -   -   -   136   -   306   - 
Residential real estate  810   4   860   6   530   4   403   9   693   13   652   23 
Consumer installment and other  347   6   1,254   6   545   6   516   6   435   18   856   19 
Total $35,687  $302  $33,575  $415  $28,419  $324  $35,592  $304  $32,709  $974  $34,312  $1,028 

 

The following table provides information on troubled debt restructurings:

 

  Troubled Debt Restructurings
At September 30, 2016
  Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance
  ($ in thousands)
Commercial  7  $2,719  $1,519  $169 
Commercial real estate  10   11,257   10,663   216 
Residential real estate  1   241   220   - 
Total  18  $14,217  $12,402  $385 

  Troubled Debt Restructurings
  At March 31, 2016
  Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance
  (In thousands)
Commercial  7  $2,568  $2,156  $194 
Commercial real estate  11   17,587   17,265   585 
Residential real estate  1   242   224   - 
Total  19  $20,397  $19,645  $779 
- 20 -

 

 Troubled Debt Restructurings
 At December 31, 2015 Troubled Debt Restructurings
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  $3,138  $2,802  $194   6  $3,138  $2,802  $194 
Commercial real estate  10   12,927   12,684   -   10   12,927   12,684   - 
Residential real estate  1   242   226   -   1   242   226   - 
Total  17  $16,307  $15,712  $194   17  $16,307  $15,712  $194 

 

During the three and nine months ended March 31,September 30, 2016, the Company modifiedthreezero loans andfour loans with a total carrying value of $4,7574,843 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in thefour restructurings completed in the first quarternine months of 2016 consisted of twothree modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms andone court order requiring under-market terms.

During the three and nine months ended March 31,September 30, 2015, the Company modified five loansone loan with a carrying value of $1,736$6,330 thousand and seven loans with an aggregate carrying value of $8,150 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the seven restructurings completed in the first quarternine months of 2015 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment, under-market terms and under-market terms. court order.

During the three and nine months ended March 31,September 30, 2016 and 2015, no troubled debt restructured loans defaulted.defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety90 days or more past due.

 

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

 

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

 

- 20 - 

At March 31,September 30, 2016 and December 31, 2015, the Company held total other real estate owned (OREO) of $8,4383,032 thousand net of reserve of $2,1022,238 thousand and $9,264 $9,264 thousand net of reserve of $1,986$1,986 thousand, respectively, of which $-0-  thousand was foreclosed residential real estate properties.properties at both dates. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $-0-  thousand at March 31,September 30, 2016 and $-0- thousand at December 31, 2015.

 

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At March 31,September 30, 2016,, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At March 31,September 30, 2016, Westamerica Bank had3832 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 $60,66058,148 thousand and $61,190$61,190 thousand at March 31,September 30, 2016 and December 31, 2015, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At March 31,September 30, 2016, Westamerica Bank held corporate bonds in4851 issuing entities which exceeded $5 million of each issuer.

 

- 21 -

Note 6: Other Assets

 

Other assets consisted of the following:

 At March 31,
2016		 At December 31,
2015		 At September 30,
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 
Other investments  201   201   201   201 
Total cost method equity investments  14,270   14,270   14,270   14,270 
Life insurance cash surrender value  49,607   48,972   50,883   48,972 
Net deferred tax asset  47,069   51,748   42,505   51,748 
Limited partnership investments  14,551   15,259   13,188   15,259 
Interest receivable  18,795   20,174   19,699   20,174 
Prepaid assets  4,732   4,771   4,112   4,771 
Other assets  14,180   10,660   9,804   10,660 
Total other assets $163,204  $165,854  $154,461  $165,854 

 

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

(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 March 31,September 30, 2016, this investment totaled $14,55113,188 thousand and $2,299 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2015, this investment totaled $15,259$15,259 thousand and $2,299$2,299 thousand of this amount represents outstanding equity capital commitments. At March 31,September 30, 2016, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $453 thousand in 2016, $763 thousand in 2017, and $1,083 thousand in 2018 or thereafter.

 

- 21 - 

The amounts recognized in net income for these investments include:

 

 For the Three Months Ended For the Nine Months Ended
 For the Three Months Ended
March 31,		 September 30,
 2016 2015 2016 2015 2016 2015
 (In thousands) (In thousands)
Investment loss included in pre-tax income $675  $675  $675  $750  $2,025  $2,175 
Tax credits recognized in provision for income taxes  598   658   562   663   1,723   1,988 

 

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

 

The carrying values of goodwill were:

 

  At September 30,
2016		 At December 31,
2015
  (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 March 31, 2016 At December 31, 2015 At September 30, 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  $(47,628) $56,808  $(46,782) $56,808  $(49,263) $56,808  $(46,782)
Merchant Draft Processing Intangible  10,300   (9,954)  10,300   (9,895)  10,300   (10,056)  10,300   (9,895)
Total Identifiable Intangible Assets $67,108  $(57,582) $67,108  $(56,677) $67,108  $(59,319) $67,108  $(56,677)

 

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

 

 Merchant
Core
Deposit
Intangibles		 Draft
Processing
Intangible		 Total Core
Deposit
Intangibles		 Merchant
Draft
Processing
Intangible		 Total
 (In thousands) (In thousands)
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 
For the Nine Months ended September 30, 2016 (actual) $2,481  $161  $2,642 
Estimate for the remainder of year ended December 31, 2016  811   51   862 
Estimate for year ended December 31, 2017  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 
2021  269   -   269 

 

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- 22 - 

- 23 -
 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

  Deposits
  At September 30,
2016		 At December 31,
2015
  (In thousands)
Noninterest-bearing $2,064,988  $2,026,049 
Interest-bearing:        
Transaction  851,885   860,706 
Savings  1,462,860   1,366,936 
Time deposits less than $100 thousand  138,655   150,780 
Time deposits $100 thousand through $250 thousand  88,666   96,971 
Time deposits more than $250 thousand  37,816   39,217 
Total deposits $4,644,870  $4,540,659 

  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 $2,9512,880  thousand and $3,038$3,038  thousand were included as loan balances at March 31,September 30, 2016 and December 31, 2015, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $137124 thousand in the first quarter 2016 and $197395 thousand infor the first quarter 2015.three months and nine months ended September 30, 2016, respectively and $164 thousand and $543 thousand for the three months and nine months ended September 30, 2015, respectively.

 

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

 

 Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
 At March 31, 2016 At December 31, 2015 Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
 Remaining Contractual Maturity of the Agreements Remaining Contractual Maturity of the Agreements
Overnight and Continuous
 Overnight and Continuous At September 30, 2016 At December 31, 2015
Repurchase agreements: (In thousands) (In thousands)
Collateral securing borrowings:                
Securities of U.S. Government sponsored entities $99,343  $98,969  $86,034  $98,969 
Agency residential MBS  20,742   - 
Obligations of states and political subdivisions  3,250   3,975   1,015   3,975 
Corporate securities  49,715   54,681   91,160   54,681 
Total collateral carrying value $152,308  $157,625  $198,951  $157,625 
Total short-term borrowed funds $52,451  $53,028  $56,358  $53,028 

 

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

 

Note 9: Fair Value Measurements

 

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

 

- 24 -

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

- 23 - 

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

 

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

 

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

 

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

 

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3. When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the nine months ended September 30, 2016, and three months ended March 31, 2016 and 2015, there were no transfers in or out of levels 1, 2 or 3. During the quarterthree months ended June 30, 2015, the Company reevaluated the valuation techniques and assumptions used by its vendors in valuing the Company’s available for sale securities, and based on the evaluation, transferred $437,715 thousand out of level 1 and transferred $437,715 thousand into level 2. There were no transfers into level 1 or into or out of level 3.3 during this same period. Subsequent to June 30, 2015 and through the year ended December 31, 2015, there were no transfers into or out of levels 1, 2 or 3.

 

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- 24 - 

- 25 -
 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

  At September 30, 2016
  Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2 )		 Significant Unobservable Inputs
(Level 3 )
  (In thousands)
Securities of U.S. Government sponsored entities $171,846  $-  $171,846  $- 
Agency residential MBS  499,689   -   499,689   - 
Non-agency residential MBS  302   -   302   - 
Non-agency commercial MBS  2,118   -   2,118   - 
Obligations of states and political subdivisions  185,494   -   185,494   - 
Asset-backed securities  1,000   -   1,000   - 
FHLMC and FNMA stock  4,256   7   4,249   - 
Corporate securities  895,232   -   895,232   - 
Other securities  2,471   611   1,860   - 
Total securities available for sale $1,762,408  $618  $1,761,790  $- 

 At March 31, 2016 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)
Securities of U.S. Government sponsored entities $360,729  $-  $360,729  $-  $301,882  $-  $301,882  $- 
Agency residential MBS  197,269   -   197,269   -   202,544   -   202,544   - 
Non-agency residential MBS  353       353   -   370   -   370   - 
Non-agency commercial MBS  2,302   -   2,302   -   2,379   -   2,379   - 
Obligations of states and political subdivisions  148,558   -   148,558   -   157,509   -   157,509   - 
Asset-backed securities  1,658   -   1,658   -   2,003   -   2,003   - 
FHLMC and FNMA stock  3,791   6   3,785   -   4,329   7   4,322   - 
Corporate securities  868,747   -   868,747   -   896,369   -   896,369   - 
Other securities  2,563   703   1,860   -   2,831   991   1,840   - 
Total securities available for sale $1,585,970  $709  $1,585,261  $-  $1,570,216  $998  $1,569,218  $- 

 

  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 )
  (In thousands)
Securities of U.S. Government sponsored entities $301,882  $-  $301,882  $- 
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  157,509   -   157,509   - 
Asset-backed securities  2,003   -   2,003   - 
FHLMC and FNMA stock  4,329   7   4,322   - 
Corporate securities  896,369   -   896,369   - 
Other securities  2,831   991   1,840   - 
Total securities available for sale $1,570,216  $998  $1,569,218  $- 

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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 March 31,September 30, 2016 and December 31, 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 March 31, 2016 For the
Three Months Ended
March 31, 2016		 At September 30, 2016 For the
Nine Months Ended
September 30, 2016
 Carrying 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 $8,438  $-  $-  $8,438  $(126) $3,032  $-  $-  $3,032  $(705)
Impaired loans  16,208   -   -   16,208   (814)  9,326   -   -   9,326   - 
Total assets measured at fair value on a nonrecurring basis $24,646  $-  $-  $24,646  $(940) $12,358  $-  $-  $12,358  $(705)

 

  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 present value of expected future cash flows, independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. Level 3 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets. The unobservable inputs and qualitative information about the unobservable inputs are not presented due to the unavailability from third party evaluators.

 

Disclosures about Fair Value of Financial Instruments

 

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

 

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

 

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

 

Loans Loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates were valued using historical cost. Fixed rate loans and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of $29,48726,359 thousand at March 31,September 30, 2016 and $29,771$29,771 thousand at December 31, 2015 and the purchased loan discount associated with purchased covered and purchased non-covered loans of $18$-0- thousand and $6,0844,922 thousand, respectively at March 31,September 30, 2016 and $152$152 thousand and $6,432$6,432 thousand, respectively at December 31, 2015 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.

 

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

 

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

 

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

 

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

 

 At March 31, 2016 At September 30, 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)		 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) (In thousands)
Cash and due from banks $471,164  $471,164  $471,164  $-  $-  $471,367  $471,367  $471,367  $-  $- 
Investment securities held to maturity  1,358,139   1,381,808   -   1,381,808   -   1,411,019   1,440,119   -   1,440,119   - 
Loans  1,443,709   1,464,418   -   -   1,464,418   1,337,970   1,358,225   -   -   1,358,225 
                                        
Financial Liabilities:                                        
Deposits $4,516,750  $4,515,926  $-  $4,237,937  $277,989  $4,644,870  $4,643,754  $-  $4,379,733  $264,021 
Short-term borrowed funds  52,451   52,451   -   52,451   -   56,358   56,358   -   56,358   - 

 

  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   - 

 

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.

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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 $321,077312,592 thousand and $299,884$299,884 thousand at March 31,September 30, 2016 and December 31, 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 $23,58121,131 thousand and $26,149$26,149 thousand at March 31,September 30, 2016 and December 31, 2015, respectively. The Company also had commitments for commercial and similar letters of credit of $-0- thousand at March 31,September 30, 2016 and $40$40 thousand at December 31, 2015. At March 31,September 30, 2016 and December 31, 2015, the Company had a reserve for unfunded commitments of $2,593 thousand, 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 Ended For the Three Months For the Nine Months
 March 31, Ended September 30,
 2016 2015 2016 2015 2016 2015
 (In thousands, except per share data) (In thousands, except per share data)
Net income (numerator) $14,226  $14,557
Net income applicable to common equity (numerator) $15,628  $14,857  $44,400  $44,175 
Basic earnings per common share                        
Weighted average number of common shares outstanding - basic (denominator)  25,445   25,651   25,641   25,530   25,558   25,565 
Basic earnings per common share $0.56  $0.57  $0.61  $0.58  $1.74  $1.73 
Diluted earnings per common share                        
Weighted average number of common shares outstanding - basic  25,445   25,651   25,641   25,530   25,558   25,565 
Add common stock equivalents for options  23   4   46   35   37   20 
Weighted average number of common shares outstanding - diluted (denominator)  25,468   25,655   25,687   25,565   25,595   25,585 
Diluted earnings per common share $0.56  $0.57  $0.61  $0.58  $1.73  $1.73 

 

For the three and nine months ended March 31,September 30, 2016, and 2015, options to purchase1,297771 thousand and1,775948 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, 2015, options to purchase 1,043 thousand and 1,396 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

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WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

 For the Three Months Ended For the Three Months For the Nine Months
 March 31, March 31, December 31, Ended September 30,
 2016 2015 2015 2016 2015 2016 2015
 (In thousands, except per share data) (In thousands, except per share data)
Net Interest and Fee Income (FTE)(1) $36,447  $36,930  $36,734  $36,176  $37,179  $109,118  $111,524 
Provision for Loan Losses  -   -   - 
Reversal of Provision for Loan Losses  (3,200)  -   (3,200)  - 
Noninterest Income  11,729   12,300   11,305   11,598   11,993   35,029   36,562 
Noninterest Expense  25,858   26,727   25,504   26,088   26,173   77,175   79,796 
Income Before Income Taxes (FTE)(1)  22,318   22,503   22,535   24,886   22,999   70,172   68,290 
Provision for Income Taxes (FTE)(1)  8,092   7,946   7,957 
Income Tax Provision (FTE)(1)  9,258   8,142   25,772   24,115 
Net Income $14,226  $14,557  $14,578  $15,628  $14,857  $44,400  $44,175 
                            
Average Common Shares Outstanding  25,445   25,651   25,528   25,641   25,530   25,558   25,565 
Average Diluted Common Shares Outstanding  25,468   25,655   25,555   25,687   25,565   25,595   25,585 
Common Shares Outstanding at Period End  25,438   25,563   25,528   25,665   25,530         
                            
Per Common Share:                            
Basic Earnings $0.56  $0.57  $0.57  $0.61  $0.58  $1.74  $1.73 
Diluted Earnings  0.56   0.57   0.57   0.61   0.58   1.73   1.73 
Book Value Per Common Share $21.19  $20.63  $20.85 
Book Value $21.94  $20.91         
                            
Financial Ratios:                            
Return On Assets  1.11%  1.17%  1.12%
Return On Common Equity  10.85%  11.44%  11.01%
Return on Assets  1.18%  1.16%  1.14%  1.17%
Return on Common Equity  11.39%  11.33%  11.04%  11.42%
Net Interest Margin (FTE)(1)  3.34%  3.43%  3.32%  3.21%  3.31%  3.27%  3.37%
Net Loan Losses to Average Loans  0.08%  0.07%  0.07%
Net Loan (Recoveries) Losses to Average Loans  (0.19%)  0.20%  0.02%  0.12%
Efficiency Ratio(2)  53.7%  54.3%  53.1%  54.6%  53.2%  53.5%  53.9%
                            
Average Balances:                            
Assets $5,174,804  $5,059,537  $5,168,805  $5,253,502  $5,062,334  $5,204,418  $5,055,421 
Earning Assets  4,381,423   4,342,031   4,411,599   4,489,317   4,471,690   4,448,261   4,417,114 
Loans  1,500,616   1,683,748   1,543,591   1,386,186   1,591,798   1,447,061   1,643,438 
Deposits  4,537,548   4,402,946   4,536,256   4,588,762   4,414,711   4,552,819   4,404,379 
Shareholders' Equity  527,177   516,086   525,277   545,771   520,261   537,010   517,054 
                            
Period End Balances:                            
Assets $5,199,868  $5,035,777  $5,168,875  $5,306,778  $5,001,395         
Earning Assets  4,417,305   4,476,435   4,419,687   4,537,756   4,422,367         
Loans  1,473,196   1,683,884   1,533,396   1,364,329   1,571,843         
Deposits  4,516,750   4,380,076   4,540,659   4,644,870   4,366,920         
Shareholders' Equity  538,973   527,380   532,205   562,996   533,938         
                            
Capital Ratios at Period End:                            
Total Risk Based Capital  13.51%  13.08%  13.39%  15.16%  13.39%        
Tangible Equity to Tangible Assets  8.04%  8.01%  7.94%  8.37%  8.23%        
                            
Dividends Paid Per Common Share $0.39  $0.38  $0.39  $0.39  $0.38  $1.17  $1.14 
Common Dividend Payout Ratio  70%  67%  68%  64%  66%  68%  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.

 

(1)Yields on securities and certain loans have been adjusted upward to an FTEa "fully taxable equivalent" ("FTE") basis, which is a non-GAAPfinancial 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 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

 

Westamerica Bancorporation and subsidiaries’ (the “Company’s”“Company”) principal source of revenue is net interest and fee income, which represents interest earned on loans and investment securities (“interest-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 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 firstthird quarter 2015 through the firstthird 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 has been reducing its exposure to rising interest rates by purchasing shorter-duration investment securities, which have lower yields than longer-duration securities. The changing composition of interest earning assets and low market interest rates has pressured the net interest margin on a fully taxable equivalent (“FTE”) basis. The net interest margin in the first quarter 2016 increased from the fourth quarter 2015 reflecting the Federal Open Market Committee’s (“FOMC”s) 0.25 percent increase in the federal funds rate on December 16, 2015, which increased yields on loans and investment securities with floating rates. In the firstthird quarter 2016 the Company’s average checking and savings deposits were 65 percent higher than in the firstthird quarter 2015. The growth inThese lower-costing deposit products, which earn relatively low interest rates and are less volatile than time deposits during periods of rising market interest rates, represented 94 percent of average total deposits during the third quarter 2016. Credit quality improved with nonperforming assets declining to $9.8 million at September 30, 2016 from $26.2 million at September 30, 2015; the resolution of these problem loans contributed to loweringnet recoveries of prior loan losses of $649 thousand during the funding cost from 0.06 percentthird quarter 2016. Reflecting Management's evaluation of losses inherent in the firstloan portfolio, including improvements in most credit metrics during the third quarter, 2015 to 0.05 percent in the firstCompany recorded a reversal of the provision for loan losses of $3.2 million for the third quarter 2016. Management is focused on controlling all noninterest expense levels, particularly due to market interest rate pressure on net interest income.

 

The Company presents its net interest margin and 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 (seeare presented in Note 1 (“Summary Significant Accounting Policies”) to Financial Statementsthe audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, Form 10-K)and 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 quarternine months of 2016.

 

The Company reported first quarter 2016 net income of $14.215.6 million or $0.560.61 diluted earnings per common share.share for the third quarter 2016 and net income of $44.4 million or $1.73 diluted earnings per common share for the nine months ended September 30, 2016. These results compare to net income of $14.6$14.9 million or $0.57 diluted earnings per common share and $14.6 million or $0.57$0.58 diluted earnings per common share for both the firstthird quarter 2015 and fourth quartersnet income of $44.2 million or $1.73 diluted earnings per common share for the nine months ended September 30, 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
  Ended September 30,
  2016 2015 2016 2015
  (In thousands, except per share data)
Net interest and fee income (FTE) $36,176  $37,179  $109,118  $111,524 
Reversal of provision for loan losses  3,200   -   3,200   - 
Noninterest income  11,598   11,993   35,029   36,562 
Noninterest expense  (26,088)  (26,173)  (77,175)  (79,796)
Income  before taxes (FTE)  24,886   22,999   70,172   68,290 
Income tax provision (FTE)  (9,258)  (8,142)  (25,772)  (24,115)
Net income $15,628  $14,857  $44,400  $44,175 
                 
Average diluted common shares  25,687   25,565   25,595   25,585 
Diluted earnings per common share $0.61  $0.58  $1.73  $1.73 
                 
Average total assets $5,253,502  $5,062,334  $5,204,418  $5,055,421 
Net income to average total assets (annualized)  1.18%  1.16%  1.14%  1.17%
Net income to average common shareholders' equity (annualized)  11.39%  11.33%  11.04%  11.42%

  For the Three Months Ended
  March 31, December 31,
  2016 2015 2015
  (In thousands, except per share data)
Net interest and loan fee income (FTE) $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 taxes (FTE)  22,318   22,503   22,535 
Income tax provision (FTE)  8,092   7,946   7,957 
Net income $14,226  $14,557  $14,578 
             
Average diluted common shares  25,468   25,655   25,555 
Diluted earnings per common share $0.56  $0.57  $0.57 
             
Average total assets $5,174,804  $5,059,537  $5,168,805 
Net income to average total assets (annualized)  1.11%  1.17%  1.12%
Net income to average common shareholders' equity (annualized)  10.85%  11.44%  11.01%

 

Net income for the firstthird quarter of 2016 was $331$771 thousand lessmore than the same quarter of 2015, the net result of a reversal of provision for loan losses, partially offset by lower net interest and loan fee income (FTE), lower noninterest income and higher income tax provision (FTE), partially offset by lower noninterest expense.. A decrease in net interest and fee income (FTE) was mostly attributed to lower average balances of loans, and lower composite yield on investments, partially offset by higher average balances of investments and the effectlower average balances of one additional accrual day.higher-costing time deposits. The Company recorded a reversal of provision for loan losses remained zero,of $3.2 million, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income decreased primarily due to reduced levels of service charges on deposit accounts. The income tax provision (FTE) was higher in the third 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 nine months of 2016 with the first nine months of 2015, net income increased $225 thousand due to a reversal of provision for loan losses and lower noninterest expense, partially offset by lower net interest and fee income (FTE), lower noninterest income and higher income tax provision (FTE). The lower net interest and fee income (FTE) was primarily caused by lower average balances of loans, partially offset by higher average balances of investments and lower average balances of higher-costing time deposits. The Company recorded a reversal of provision for loan losses of $3.2 million, reflecting 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 credit card fees, partially offset by higher debit card fees. Noninterest expense decreased mostly due to lower salaries and related benefitnet expenses for foreclosed properties, lower personnel costs, lower occupancy expense caused by employee attrition, occupancy cost reductions from branch closures, and lower expense for foreclosed properties. The incomeother expenses, offset in part by higher legal fees. Income tax provision (FTE) was higherincreased in the first quarternine months of 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 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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- 32 -
 

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 Ended For the Three Months For the Nine Months
 March 31, December 31, Ended September 30,
 2016 2015 2015 2016 2015 2016 2015
 (In thousands) ($ in thousands)
Interest and loan fee income $33,647  $33,917  $33,888 
Interest and fee income $33,468  $34,299  $100,842  $102,641 
Interest expense  552   659   563   (523)  (585)  (1,616)  (1,861)
FTE adjustment  3,352   3,672   3,409   3,231   3,465   9,892   10,744 
Net interest and loan fee income (FTE) $36,447  $36,930  $36,734 
Net interest and fee income (FTE) $36,176  $37,179  $109,118  $111,524 
                            
Average earning assets $4,381,423  $4,342,031  $4,411,599  $4,489,317  $4,471,690  $4,448,261  $4,417,114 
Net interest margin (FTE) (annualized)  3.34%  3.43%  3.32%  3.21%  3.31%  3.27%  3.37%

 

Net interest and loan fee income (FTE) decreased during the firstthird quarter 2016 by $483 thousand$1.0 million from the same period in 2015, mainly due to lower average balances of loans (down $183$206 million) and lower yields on investments (down 1 basis point or “bp”), partially offset by higher average balances of investments (up $223 million), higher yields on loans (up 5 bp) and the effectlower average balances of one additional accrual day.higher-costing time deposits (down $47 million).

 

Comparing the first quarternine months of 2016 with the fourth quarterfirst nine months of 2015, net interest and loan fee income (FTE) decreased $287 thousand$2.4 million due to lower average balances of loans (down $43$196 million) and the effect of one less accrual day,, partially offset by higher average balances of investments (up $13$228 million) and higher yields on interest-earning assets (up 2 bp)lower average balances of higher-costing time deposits (down $72 million).

 

Loan volumes have declined due to 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 declined due to relatively low interest rates prevailing in the market. The annualized net interest margin (FTE) was 3.34%3.21% in the third quarter 2016 and 3.27% in the first nine months of 2016 compared with 3.31% in the third quarter 2016, 3.43%2015 and 3.37% in the first quarter 2015 and 3.32% in the fourth quarternine months of 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 investment securities with floating rates. The volume of older-dated higher-yielding loans declined due to principal maturities and paydowns. 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 obtaininvest in higher yielding assets assuming 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. Average balances of time deposits declined $96$47 million from the firstthird quarter 2015 to firstthird quarter 2016 while lower-cost checking and savings deposits grew 6%5% in the same period. Average balances of checking and saving deposits accounted for 93.7%94.1% of average total deposits in the third quarter 2016 and 93.9% in the first quarternine months of 2016 compared with 91.4%92.8% and 93.5%92.1% in the third quarter 2015 and first and fourth quarters 2015.

nine months of 2015, respectively.

 

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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 are annualized.):

 

 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%

  For the Three Months For the Nine Months
  Ended September 30,
  2016 2015 2016 2015
         
Yield on earning assets (FTE)  3.26%  3.36%  3.32%  3.43%
Rate paid on interest-bearing liabilities  0.08%  0.09%  0.08%  0.10%
Net interest spread (FTE)  3.18%  3.27%  3.24%  3.33%
Impact of noninterest-bearing demand deposits  0.03%  0.04%  0.03%  0.04%
Net interest margin (FTE)  3.21%  3.31%  3.27%  3.37%

 

During 2015 and 2016, the net interest margin (FTE) was affected by historically low market interest rates. The volume of older-dated higher-yielding loans and securities declined due to principal maturities and paydowns. Management has been avoidingavoided long-dated, low-yielding loans given historically low interest rates. Management has also maintained conservative loan underwriting, terms and conditions. During this period, the investment portfolio has grown. The changing composition of interest-earning assets and low market rates has pressured 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 investment securities which have floating rates. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost time deposits.

deposits and increasing balances of checking and savings deposits, which earn relatively low interest rates and are less volatile than time deposits during periods of rising market interest rates.

 

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- 34 -
 

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, 2016
   Interest  
 For the Three Months Ended March 31, 2016 Average Income/ Yields/
 
Average
Balance		 Interest
Income/
Expense		 Yields/
Rates		 Balance Expense Rates
 ($ in thousands) ($ in thousands)
Assets                  
Investment securities:                        
Taxable $2,046,547  $9,674   1.89% $2,265,883  $11,024   1.95%
Tax-exempt (1)  834,260   8,636   4.14%  837,248   8,415   4.02%
Total investments (1)  2,880,807   18,310   2.54%  3,103,131   19,439   2.51%
Loans:                        
Taxable  1,429,106   17,726   4.99%  1,320,635   16,424   4.95%
Tax-exempt (1)  71,510   963   5.41%  65,551   836   5.07%
Total loans (1)  1,500,616   18,689   5.01%  1,386,186   17,260   4.95%
Total Interest-earning assets (1)  4,381,423   36,999   3.39%  4,489,317   36,699   3.26%
Other assets  793,381           764,185         
Total assets $5,174,804          $5,253,502         
                        
Liabilities and shareholders' equity                        
Noninterest-bearing demand $1,993,986  $-   -% $2,041,045  $-   -%
Savings and interest-bearing transaction  2,259,681   293   0.05%  2,277,462   293   0.05%
Time less than $100,000  160,190   113   0.28%  152,142   95   0.25%
Time $100,000 or more  123,691   137   0.44%  118,113   124   0.42%
Total interest-bearing deposits  2,543,562   543   0.09%  2,547,717   512   0.08%
Short-term borrowed funds  57,846   9   0.07%  68,640   11   0.06%
Total interest-bearing liabilities  2,601,408   552   0.09%  2,616,357   523   0.08%
Other liabilities  52,233           50,329         
Shareholders' equity  527,177           545,771         
Total liabilities and shareholders' equity $5,174,804          $5,253,502         
Net interest spread (1) (2)        3.30%          3.18%
Net interest and fee income and interest margin (1) (3)   $36,447  3.34%     $36,176   3.21%

 

(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-bearingliabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balanceof 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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- 35 -
 

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

 

  For the Three Months Ended March 31, 2015
 
 
 		 
 
 		 
Average
Balance		 
 
 		Interest
Income/
Expense		 
 
 		 
Yields/
Rates
  ($ in thousands)
Assets            
Investment securities:            
Taxable $1,788,223  $7,554   1.69%
Tax-exempt (1)  870,060   9,422   4.33%
Total investments (1)  2,658,283   16,976   2.55%
Loans:            
Taxable  1,604,842   19,517   4.93%
Tax-exempt (1)  78,906   1,096   5.63%
Total loans (1)  1,683,748   20,613   4.96%
Total interest-earning assets (1)  4,342,031   37,589   3.49%
Other assets  717,506         
Total assets $5,059,537         
             
Liabilities and shareholders' equity            
Deposits:            
Noninterest-bearing demand $1,919,820  $-   -%
Savings and interest-bearing transaction  2,103,115   279   0.05%
Time less than $100,000  180,760   166   0.37%
Time $100,000 or more  199,251   197   0.40%
Total interest-bearing deposits  2,483,126   642   0.10%
Short-term borrowed funds  86,354   16   0.08%
Federal Home Loan Bank advances  2,004   1   0.20%
Total interest-bearing liabilities  2,571,484   659   0.10%
Other liabilities  52,147         
Shareholders' equity  516,086         
Total liabilities and shareholders' equity $5,059,537         
Net interest spread (1) (2)          3.39%
Net interest and fee income and interest margin (1) (3)     $36,930   3.43%

  For the Three Months Ended September 30, 2015
    Interest  
  Average Income/ Yields/
  Balance Expense 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%

 

(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-bearingliabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balanceof 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, 2016
    Interest  
  Average Income/ Yields/
  Balance Expense Rates
  ($ in thousands)
Assets      
Investment securities:            
Taxable $2,165,463  $31,256   1.92%
Tax-exempt(1)  835,737   25,632   4.09%
Total investments(1)  3,001,200   56,888   2.53%
Loans:            
Taxable  1,378,593   51,150   4.96%
Tax-exempt(1)  68,468   2,696   5.26%
Total loans(1)  1,447,061   53,846   4.97%
Total Interest-earning assets(1)  4,448,261   110,734   3.32%
Other assets  756,157         
Total assets $5,204,418         
             
Liabilities and shareholders' equity            
Noninterest-bearing demand $2,010,058  $-   -%
Savings and interest-bearing transaction  2,265,775   878   0.05%
Time less than $100,000  156,568   313   0.27%
Time $100,000 or more  120,418   395   0.44%
Total interest-bearing deposits  2,542,761   1,586   0.08%
Short-term borrowed funds  62,823   30   0.06%
Total interest-bearing liabilities  2,605,584   1,616   0.08%
Other liabilities  51,766         
Shareholders' equity  537,010         
Total liabilities and shareholders' equity $5,204,418         
Net interest spread(1) (2)          3.24%
Net interest and fee income and interest margin(1) (3)     $109,118   3.27%

(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-bearingliabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balanceof 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, 2015
    Interest  
  Average Income/ Yields/
  Balance Expense Rates
  ($ in thousands)
Assets      
Investment securities:            
Taxable $1,918,319  $25,067   1.74%
Tax-exempt(1)  855,357   27,549   4.29%
Total investments(1)  2,773,676   52,616   2.53%
Loans:            
Taxable  1,566,333   57,547   4.91%
Tax-exempt(1)  77,105   3,222   5.59%
Total loans(1)  1,643,438   60,769   4.94%
Total Interest-earning assets(1)  4,417,114  $113,385   3.43%
Other assets  638,307         
Total assets $5,055,421         
             
Liabilities and shareholders' equity            
Noninterest-bearing demand $1,946,018  $-   -%
Savings and interest-bearing transaction  2,109,831   824   0.05%
Time less than $100,000  175,696   449   0.34%
Time $100,000 or more  172,834   543   0.42%
Total interest-bearing deposits  2,458,361   1,816   0.10%
Short-term borrowed funds  81,926   44   0.07%
Federal Home Loan Bank advances  661   1   0.20%
Total interest-bearing liabilities  2,540,948  $1,861   0.10%
Other liabilities  51,401         
Shareholders' equity  517,054         
Total liabilities and shareholders' equity $5,055,421         
Net interest spread(1) (2)          3.33%
Net interest and fee income and interest margin(1) (3)     $111,524   3.37%

(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-bearingliabilities.
(3)Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balanceof 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 December 31, 2015
 
 
 		 
 
 		 
Average
Balance		 
 
 		Interest
Income/
Expense		 
 
 		 
Yields/
Rates
  ($ in thousands)
Assets            
Investment securities:            
Taxable $2,035,421  $9,406   1.85%
Tax-exempt(1)  832,587   8,734   4.20%
Total investments(1)  2,868,008   18,140   2.53%
Loans:            
Taxable  1,470,845   18,130   4.89%
Tax-exempt(1)  72,746   1,027   5.60%
Total loans(1)  1,543,591   19,157   4.93%
Total interest-earning assets(1)  4,411,599   37,297   3.37%
Other assets  757,206         
Total assets $5,168,805         
             
Liabilities and shareholders' equity            
Deposits:            
Noninterest-bearing demand $2,036,470  $-   -%
Savings and interest-bearing transaction  2,206,732   288   0.05%
Time less than $100,000  164,351   122   0.29%
Time $100,000 or more  128,703   144   0.44%
Total interest-bearing deposits  2,499,786   554   0.09%
Short-term borrowed funds  54,661   9   0.06%
Total interest-bearing liabilities  2,554,447   563   0.09%
Other liabilities  52,611         
Shareholders' equity  525,277         
Total liabilities and shareholders' equity $5,168,805         
Net interest spread (1) (2)          3.28%
Net interest and fee income and interest margin (1) (3)     $36,734   3.32%

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.- 38 -
(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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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, 2016
  Compared with
  For the Three Months Ended September 30, 2015
  Volume Yield/Rate Total
  (In thousands)
Increase (decrease) in interest and loan fee income:            
Investment securities:            
Taxable $993  $911  $1,904 
Tax-exempt(1)  9   (506)  (497)
Total investments(1)  1,002   405   1,407 
Loans:            
Taxable  (2,462)  167   (2,295)
Tax-exempt(1)  (128)  (49)  (177)
Total loans(1)  (2,590)  118   (2,472)
Total (decrease) increase in interest and loan fee income(1)  (1,588)  523   (1,065)
Increase (decrease) in interest expense:            
Deposits:            
Savings and interest-bearing transaction  20   (3)  17 
Time less than $100,000  (14)  (24)  (38)
Time $100,000 or more  (33)  (7)  (40)
Total interest-bearing deposits  (27)  (34)  (61)
Short-term borrowed funds  (1)  -   (1)
Total decrease in interest expense  (28)  (34)  (62)
(Decrease) increase in net interest and loan fee income(1) $(1,560) $557  $(1,003)

 

  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 an FTE basis using the current statutory federal tax rate.

 

(1) Amounts calculated on an FTE basis using the current statutory federal tax rate.

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Summary of Changes in Interest Income and Expense

 

 For the Three Months Ended March 31, 2016 For the Nine Months Ended September 30, 2016
 Compared with Compared with
 For the Three Months Ended December 31, 2015 For the Nine Months Ended September 30, 2015
 Volume Yield/Rate Total Volume Yield/Rate Total
 (In thousands) (In thousands)
Increase (decrease) in interest and loan fee income:                        
Investment securities:                        
Taxable $51  $217  $268  $3,229  $2,960  $6,189 
Tax-exempt(1)  18   (116)  (98)  (632)  (1,285)  (1,917)
Total investments(1)  69   101   170   2,597   1,675   4,272 
Loans:                        
Taxable  (655)  251   (404)  (6,854)  457   (6,397)
Tax-exempt(1)  (22)  (42)  (64)  (359)  (167)  (526)
Total loans(1)  (677)  209   (468)  (7,213)  290   (6,923)
Total (decrease) increase in interest and loan fee income(1)  (608)  310   (298)  (4,616)  1,965   (2,651)
Increase (decrease) in interest expense:                        
Deposits:                        
Savings and interest-bearing transaction  4   1   5   62   (8)  54 
Time less than $100,000  (4)  (5)  (9)  (49)  (87)  (136)
Time $100,000 or more  (7)  0   (7)  (164)  16   (148)
Total interest-bearing deposits  (7)  (4)  (11)  (151)  (79)  (230)
Short-term borrowed funds  -   -   -   (11)  (3)  (14)
Federal Home Loan Bank advances  (1)  -   (1)
Total decrease in interest expense  (7)  (4)  (11)  (163)  (82)  (245)
(Decrease) increase in net interest and loan fee income (1) $(601) $314  $(287) $(4,453) $2,047  $(2,406)

 

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.

(1)Amounts calculated on an FTE basis using the current statutory federal tax rate.

Provision for Loan Losses

 

The Company manages credit costs by consistently enforcing, in management’sManagement’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 recorded a reversal of the provision for loan losses of $3.2 million in the three months and nine months ended September 30, 2016. The Company provided no provision for loan losses in the firstthree months and nine months ended September 30, 2015. During the third quarter 2016, classified loans declined $15.6 million (which included nonperforming loans of 2016$7.1 million) and the first and fourth quartersCompany achieved net recoveries of 2015. The provision forprior loan losses is determined based onof $649 thousand; these developments were reflected in Management’s evaluation of credit quality and the adequacy of the allowance for the loan portfolio.losses at September 30, 2016. Management’s evaluation of credit quality includes originated and purchased loans. 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.dates. 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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- 40 -
 

Noninterest Income

 

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

 

 For the Three Months Ended For the Three Months For the Nine Months
 March 31, December 31, Ended September 30,
 2016 2015 2015 2016 2015 2016 2015
 (In thousands) (In thousands)
              
Service charges on deposit accounts $5,248  $5,707  $5,259  $5,303  $5,581  $15,790  $16,981 
Debit card fees  1,587   1,538   4,724   4,528 
Merchant processing services  1,529   1,703   1,368   1,532   1,485   4,699   4,971 
Debit card fees  1,516   1,456   1,557 
Trust fees  661   706   671   686   682   2,004   2,061 
Other service charges  671   693   1,951   2,041 
ATM processing fees  658   585   569   600   616   1,860   1,828 
Other service fees  629   665   648 
Financial services commissions  156   153   168   118   177   411   527 
Other noninterest income  1,332   1,325   1,065   1,101   1,221   3,590   3,625 
Total $11,729  $12,300  $11,305  $11,598  $11,993  $35,029  $36,562 

 

Noninterest income for the firstthird quarter 2016 declined by $571$395 thousand or 4.6%3.3% from the same period in 2015. Service charges on deposits decreased $459$278 thousand due to declines in fees charged on overdrawn and insufficient funds accounts (down $232$292 thousand), partially offset by the effect of deposit fee increases effective February 2016. Other noninterest income decreased $120 thousand primarily due to a decline in interest recoveries on charged off loans.

In the first nine months of 2016, noninterest income decreased $1.5 million or4.2% compared with the first nine months of 2015. Service charges on deposits decreased $1.2 million due to declines in fees charged on overdrawn and insufficient funds accounts (down $826 thousand) and lower fees on analyzed accounts (down $205$391 thousand)., partially offset by the effect of deposit fee increases effective February 2016. Merchant processing services fees decreased $174$272 thousand primarily due to lower transaction volumes and because larger sales relationships with low margins accounted for a significant portion of transaction volumes.

In the first quarter 2016, noninterest incomevolumes, offset in part by increased $424debit card fees of $196 thousand or 3.8% compared with the fourth quarter 2015 mostly due toas a $161 thousand increase in merchant processing services fees primarily due to the improved margin mixresult of increased transaction volumes.

 

Noninterest Expense

 

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

 

 For the Three Months Ended For the Three Months For the Nine Months
 March 31, December 31, Ended September 30,
 2016 2015 2015 2016 2015 2016 2015
 (In thousands) (In thousands)
              
Salaries and related benefits $13,117  $13,338  $12,398  $13,063  $12,761  $39,067  $39,795 
Occupancy  3,398   3,727   3,761   3,749   3,746   10,546   11,199 
Outsourced data processing services  2,130   2,108   2,107   2,114   2,115   6,375   6,334 
Professional services  1,693   746   3,183   1,876 
Furniture and equipment  1,213   1,119   1,081   1,211   1,075   3,611   3,353 
Amortization of identifiable intangibles  905   1,001   948   867   952   2,642   2,908 
Professional fees  732   548   614 
Courier service  545   543   585   451   604   1,458   1,744 
Other real estate owned  111   315   53   (206)  83   (487)  451 
Other noninterest expense  3,707   4,028   3,957   3,146   4,091   10,780   12,136 
Total $25,858  $26,727  $25,504  $26,088  $26,173  $77,175  $79,796 

 

Noninterest expense decreased $869$85 thousand in the firstthird quarter 2016 compared with the same period in 2015. Expenses for other real estate owned in the third quarter 2016 were reduced by net gains from the sale of foreclosed properties. Courier expense decreased $153 thousand primarily due to switching to new low-cost vendors. Other categories of expense offset the decrease: Professional fees increased $947 thousand due to higher legal fees associated with loan administration and collection activities. Salaries and related benefits declined $221increased $302 thousand in the firstthird quarter 2016 compared with the same period in 2015 mostly due to higher employee attrition. Occupancybenefit costs. Furniture and equipment expense increased $136 thousand due to increases in depreciation and maintenance expenses.

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In the first nine months of 2016, noninterest expense decreased $329 thousand in the first quarter 2016$2.6 million or 3.3% compared with the same period in 2015 mostly due to branch closures and lease expirationfirst nine months of a non-branch building.2015. Expenses for other real estate owned in the first quarternine months of 2016 includedwere reduced by net gains from the sale of foreclosed properties. Salaries and related benefits decreased $728 thousand primarily due to lower net writedowns thansalaries resulting from employee attrition. Occupancy expense decreased $653 thousand in the first quarter 2015.nine months of 2016 compared with the first nine months of 2015 mostly due to branch closures and a lease expiration related to a non-branch building. Courier expense decreased $286 thousand primarily due to logistical changes and switching to new low-cost vendors. Amortization of identifiable intangibles decreased as assets are amortized on a declining balance method. Two categories of expense offset the decrease: Professional fees increased $184 thousand$1.3 million due to higher legal fees associated with nonperforming assets, partially offset by lower audit fees.

In the first quarter 2016, noninterest expense increased $354 thousand compared with the fourth quarter 2015. Salariesloan administration and related benefits increased $719 thousand primarily due to seasonally higher payroll taxes and other employee benefits.collection activities. Furniture and equipment expense increased $132$258 thousand mainly due to information technology upgrades. Occupancy expense decreased $363 thousand in the first quarter 2016 compared with the fourth quarter 2015 mostly due to branch closures and lease expiration of a non-branch building.increased depreciation costs for technology.

 

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Provision for Income Tax

 

During the firstthird quarter 2016, the Company recorded an income tax provision (FTE) of $8.19.3million, compared with $7.9$8.1 million and $8.0 million forin the first and fourth quarters 2015, respectively.third quarter 2015. The currentthird quarter 2016 provision represents an effective tax rate (FTE) of 36.3%37.2%, compared with 35.3%35.4% for the third quarter 2015. The income tax provision (FTE) was $25.8 million for the first and fourth quartersnine months of 2016 compared with $24.1 million for the corresponding period of 2015. The higherfirst nine months of 2016 effective tax rate (FTE) was36.7% compared to35.3% for the same period of 2015. The effective tax rates (FTE) for the third quarter 2015 and the first quarternine months of 2015 were lower than the effective tax rates for the respective periods in 2016 was attributabledue to reduced levels of federally tax-exempt income on interest-earning assets relative tohigher pre-tax income and lowerdeclining tax credits.preference items. Interest income earned on municipal securities and tax free loans which are exempt from federal income taxes have declined in 2016. The tax credits earned from investments in limited partnerships have also declined in 2016.

 

Investment Portfolio

 

The Company maintains a securities portfolio consisting of securities issued by 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 $2.93.2 billion as of March 31,September 30, 2016, an increase of $58$287 million compared to December 31, 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 and change the composition of the Company’s investment securities portfolio,portfolio. During the nine months ended September 30, 2016, Management reduced securities of U.S. Government sponsored entities to reduce call optionality and change the proportion of investments allocated into the available for sale and heldincreased agency residential MBS to maturity investment categories.develop more reliable cash flows.

 

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 March 31,September 30, 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.

 

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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 March 31,September 30, 2016, the Company’s investment securities portfolios included securities issued by724718 state and local government municipalities and agencies located within44 states with a fair value of $865.6887.5 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 $10.410.5 million (fair value) represented by nine general obligation bonds.

 

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 At September 30, 2016
 At March 31, 2016 Amortized Fair

 
 		Amortized
Cost		 
 		Fair
Value		 Cost Value
 (In thousands) (In thousands)
Obligations of states and political subdivisions:        
General obligation bonds:                
California $117,077  $121,044  $110,820  $115,071 
Texas  62,100   63,777   69,205   70,598 
New Jersey  40,198   41,236 
Pennsylvania  44,848   45,481   39,844   40,367 
New Jersey  40,373   41,362 
Minnesota  31,677   32,395   33,019   33,761 
Other (34 states)  244,003   252,276 
Other (36 states)  277,560   286,215 
Total general obligation bonds $540,078  $556,335  $570,646  $587,248 
                
Revenue bonds:                
California $49,074  $51,284  $49,641  $51,653 
Kentucky  23,912   24,667 
Pennsylvania  26,267   26,647   23,617   23,905 
Kentucky  23,998   24,653 
Iowa  18,138   18,766   18,103   18,638 
Colorado  16,141   16,728   16,100   16,717 
Other (31 states)  165,034   171,161 
Other (30 states)  158,613   164,679 
Total revenue bonds $298,652  $309,239  $289,986  $300,259 
Total obligations of states and political subdivisions $838,730  $865,574  $860,632  $887,507 

 

At December 31, 2015, the Company’s investment securities portfolios included securities issued by 725 state and local government municipalities and agencies located within 44 states with a fair value of $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 $10.3 million (fair value) represented by nine general obligation bonds.

 

  At December 31, 2015
  Amortized
Cost		 Fair
Value
  (In thousands)
Obligations of states and political subdivisions:    
General obligation bonds:        
California $117,968  $121,096 
Texas  62,030   63,394 
Pennsylvania  51,547   52,115 
New Jersey  38,651   39,322 
Minnesota  32,588   33,133 
Other (34 states)  243,488   249,854 
Total general obligation bonds $546,272  $558,914 
         
Revenue bonds:        
California $49,095  $51,206 
Pennsylvania  29,446   29,841 
Kentucky  19,825   20,400 
Iowa  18,156   18,728 
Colorado  16,161   16,560 
Other (31 states)  163,633   168,592 
Total revenue bonds $296,316  $305,327 
Total obligations of states and political subdivisions $842,588  $864,241 

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At 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
  Amortized Fair
  Cost Value
  (In thousands)
Obligations of states and political subdivisions:    
General obligation bonds:        
California $117,968  $121,096 
Texas  62,030   63,394 
Pennsylvania  51,547   52,115 
New Jersey  38,651   39,322 
Minnesota  32,588   33,133 
Other (34 states)  243,488   249,854 
Total general obligation bonds $546,272  $558,914 
         
Revenue bonds:        
California $49,095  $51,206 
Pennsylvania  29,446   29,841 
Kentucky  19,825   20,400 
Iowa  18,156   18,728 
Colorado  16,161   16,560 
Other (31 states)  163,633   168,592 
Total revenue bonds $296,316  $305,327 
Total obligations of states and political subdivisions $842,588  $864,241 

 

At September 30, 2016 and 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 from22 revenue sources.sources at September 30, 2016 and December 31, 2015. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table.tables.

 

 At September 30, 2016
 At December 31, 2015 Amortized Fair

 
 		Amortized
Cost		 
 		Fair
Value		 Cost Value
 (In thousands) (In thousands)
Revenue bonds by revenue source:                
Water $62,661  $65,412  $55,972  $58,898 
Sewer  45,912   47,242   41,629   43,204 
Sales tax  31,680   32,945   31,598   33,184 
Lease (renewal)  21,673   22,227   25,291   26,134 
College & University  17,967   18,215   18,312   18,594 
Lease (abatement)  17,017   17,769   15,211   15,948 
Other  99,406   101,517   101,973   104,297 
Total revenue bonds by revenue source $296,316  $305,327  $289,986  $300,259 

 

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  At December 31, 2015
  Amortized Fair
  Cost Value
  (In thousands)
Revenue bonds by revenue source:        
Water $62,661  $65,412 
Sewer  45,912   47,242 
Sales tax  31,680   32,945 
Lease (renewal)  21,673   22,227 
College & University  17,967   18,215 
Lease (abatement)  17,017   17,769 
Other  99,406   101,517 
Total revenue bonds by revenue source $296,316  $305,327 

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.

 

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

 

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”).

 

- 45 -

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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Nonperforming Assets

  At March 31, At December 31,
  2016 2015 2015
  (In thousands)
Originated:            
Nonperforming nonaccrual loans $9,205  $3,315  $6,302 
Performing nonaccrual loans  1,841   26   350 
Total nonaccrual loans  11,046   3,341   6,652 
Accruing loans 90 or more days past due  183   191   295 
Total nonperforming loans  11,229   3,532   6,947 
Other real estate owned  4,786   5,483   5,829 
Total nonperforming assets $16,015  $9,015  $12,776 
             
Purchased covered:            
Nonperforming nonaccrual loans $-  $-  $- 
Performing nonaccrual loans  -   -   - 
Total nonaccrual loans  -   -   - 
Accruing loans 90 or more days past due  -   -   - 
Total nonperforming loans  -   -   - 
Other real estate owned  -   486   - 
Total nonperforming assets $-  $486  $- 
             
Purchased non-covered:            
Nonperforming nonaccrual loans $6,601  $8,952  $8,346 
Performing nonaccrual loans  80   1,093   - 
Total nonaccrual loans  6,681   10,045   8,346 
Accruing loans 90 or more days past due  77   -   - 
Total nonperforming loans  6,758   10,045   8,346 
Other real estate owned  3,652   3,264   3,435 
Total nonperforming assets $10,410  $13,309  $11,781 
             
Total nonperforming assets $26,425  $22,810  $24,557 

Nonperforming Assets      
  At September 30, At December 31,
  2016 2015 2015
  (In thousands)
Originated:      
Nonperforming nonaccrual loans $1,198  $7,578  $6,302 
Performing nonaccrual loans  4,410   -   350 
Total nonaccrual loans  5,608   7,578   6,652 
Accruing loans 90 or more days past due  438   481   295 
Total nonperforming loans  6,046   8,059   6,947 
Other real estate owned  666   5,834   5,829 
Total nonperforming assets $6,712  $13,893  $12,776 
             
Purchased covered:            
Nonperforming nonaccrual loans $29  $-  $- 
Performing nonaccrual loans  -   -   - 
Total nonaccrual loans  29   -   - 
Accruing loans 90 or more days past due  -   -   - 
Total nonperforming loans  29   -   - 
Other real estate owned  -   486   - 
Total nonperforming assets $29  $486  $- 
             
Purchased non-covered:            
Nonperforming nonaccrual loans $634  $8,784  $8,346 
Performing nonaccrual loans  22   84   - 
Total nonaccrual loans  656   8,868   8,346 
Accruing loans 90 or more days past due  49   -   - 
Total nonperforming loans  705   8,868   8,346 
Other real estate owned  2,366   2,949   3,435 
Total nonperforming assets $3,071  $11,817  $11,781 
             
Total nonperforming assets $9,812  $26,196  $24,557 

 

Nonperforming assets have declined during the nine months ended September 30, 2016 due to payoffs and chargeoffs. At March 31,September 30, 2016, two loansone loan secured by commercial real estate totalingwith a balance of $10,9904.4 thousand weremillion was on nonaccrual status. During the third quarter 2016, nonaccrual loans declined due to loan payoffs which generated recoveries of prior charge-offs. The remaining fourteennine nonaccrual loans held at March 31,September 30, 2016 had an average carrying value of $481$209 thousand and the largest carrying value was $1,984584 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.

 

Allowance for Credit 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, the 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 - 

- 46 -
 

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

 

 For the Three Months Ended For the Three Months For the Nine Months
 March 31, December 31, Ended September 30,
 2016 2015 2015 2016 2015 2016 2015
 (In thousands) ($ in thousands)
Analysis of the Allowance for Loan Losses              
Balance, beginning of period $29,771  $31,485  $30,036  $28,910  $30,828  $29,771  $31,485 
Provision for loan losses  -   -   - 
Provision for unfunded commitments  -   -   - 
Reversal of provision for loan losses  (3,200)  -   (3,200)  - 
Loans charged off                            
Commercial  (1,171)  (60)  (56)  (88)  (239)  (2,024)  (700)
Commercial real estate  -   -   -   -   (449)  -   (449)
Real estate residential  -   -   -   - 
Consumer installment and other  (1,006)  (995)  (1,149)  (1,736)  (773)  (3,418)  (2,344)
Purchased non-covered loans  -   (35)  -   (112)  -   (150)  (431)
Total chargeoffs  (2,177)  (1,090)  (1,205)  (1,936)  (1,461)  (5,592)  (3,924)
Recoveries of loans previously charged off                            
Commercial  245   180   339   1,735   300   2,517   814 
Commercial real estate  15   15   15   15   27   45   57 
Construction  -   -   45 
Real estate construction  -   -   -   - 
Consumer installment and other  457   590   537   337   336   1,132   1,369 
Purchased non-covered loans  1,176   7   4   498   6   1,686   235 
Total recoveries  1,893   792   940   2,585   669   5,380   2,475 
Net loan losses  (284)  (298)  (265)
Net loan recoveries (losses)  649   (792)  (212)  (1,449)
Balance, end of period $29,487  $31,187  $29,771  $26,359  $30,036  $26,359  $30,036 
Net loan (losses) recoveries:            
                
Net loan recoveries (losses):                
Originated loans $(1,460) $(270) $(269) $263  $(798) $(1,748) $(1,253)
Purchased non-covered loans  1,176   (28)  4   386   6   1,536   (196)
Net loan losses as a percentage of average total loans (annualized)  0.08%  0.07%  0.07%
Net loan (recoveries) losses as a percentage of average total loans (annualized)  (0.19%)  0.20%  0.02%  0.12%

 

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 for impairment 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.loans. 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. 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 March 31,September 30, 2016 areis economic and business conditions $1.30.8 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 $1.11.4 million, adequacy of lending Management and staff $1.21.0 million and concentrations of credit $2.41.3 million, and other factors.million.

 

- 45 - 

  Allowance for Loan Losses
  For the Three Months Ended September 30, 2016
          Consumer Purchased Purchased    
    Commercial   Residential Installment Non-covered Covered    
  Commercial Real Estate Construction Real Estate and Other Loans Loans Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910 
Additions:                                    
Provision  (3,638)  (328)  9   (193)  1,651   (399)  (4)  (298)  (3,200)
Deductions:                                    
Chargeoffs  (88)  -   -   -   (1,736)  (112)  -   -   (1,936)
Recoveries  1,735   15   -   -   337   498   -   -   2,585 
Net loan recoveries (losses)  1,647   15   -   -   (1,399)  386   -   -   649 
Total allowance for loan losses $8,411  $3,599  $136  $1,408  $6,868  $1,031  $62  $4,844  $26,359 

The decline in the portion of the allowance for loan losses ascribed to commercial loans was due to declines in classified commercial loans.

  Allowance for Loan Losses
  For the Nine Months Ended September 30, 2016
          Consumer Purchased Purchased    
    Commercial   Residential Installment Non-covered Covered    
  Commercial Real Estate Construction Real Estate and Other Loans Loans Unallocated Total
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771 
Additions:                                    
Provision  (1,641)  (670)  (41)  (393)  2,074   (1,472)  62   (1,119)  (3,200)
Deductions:                                    
Chargeoffs  (2,024)  -   -   -   (3,418)  (150)  -   -   (5,592)
Recoveries  2,517   45   -   -   1,132   1,686   -   -   5,380 
Net loan recoveries (losses)  493   45   -   -   (2,286)  1,536   -   -   (212)
Total allowance for loan losses $8,411  $3,599  $136  $1,408  $6,868  $1,031  $62  $4,844  $26,359 

 

 
 		 
 		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
  (In thousands)
Allowance for loan losses:                                    
Balance at beginning of period $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771 
Additions:                                    
Provision  1,214   (2)  (47)  (94)  152   (1,193)  -   (30)  - 
Deductions:                                    
Chargeoffs  (1,171)  -   -   -   (1,006)  -   -   -   (2,177)
Recoveries  245   15   -   -   457   1,176   -   -   1,893 
Net loan (losses) recoveries  (926)  15   -   -   (549)  1,176   -   -   (284)
Total allowance for loan losses   $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 Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
 At March 31, 2016 At September 30, 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 $5,831  $585  $-  $-  $-  $-  $-  $-  $6,416  $5,070  $216  $-  $-  $-  $-  $-  $-  $5,286 
Collectively evaluated for impairment  4,016   3,652   130   1,707   6,683   950   -   5,933   23,071   3,341   3,383   136   1,408   6,868   1,031   62   4,844   21,073 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487  $8,411  $3,599  $136  $1,408  $6,868  $1,031  $62  $4,844  $26,359 
Carrying value of loans:                                                                        
Individually evaluated for impairment $13,388  $7,516  $-  $-  $-  $11,733  $-  $-  $32,637  $11,210  $5,270  $-  $-  $-  $6,125  $-  $-  $22,605 
Collectively evaluated for impairment  328,510   507,667   2,147   109,201   341,654   136,658   13,463   -   1,439,300   320,219   475,680   2,282   91,934   335,629   103,189   11,555   -   1,340,488 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   1,058   201   -   1,259   -   -   -   -   -   1,046   190   -   1,236 
Total $341,898  $515,183  $2,147  $109,201  $341,654  $149,449  $13,664  $-  $1,473,196  $331,429  $480,950  $2,282  $91,934  $335,629  $110,360  $11,745  $-  $1,364,329 

 

Management considers the $29.526.4 million allowance for loan losses to be adequate as a reserve against loan losses inherent in the loan portfolio as of March 31,September 30, 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.

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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.United States government 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 (“FOMC”) increased the target range for the federal funds rate to 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 immediate term, and Management’s most likely earnings forecast for the twelve months ending March 31,September 30, 2017 assumes market interest rates will either remain at relatively low 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-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-term interest rates.

 

The Company’s asset and liability position was slightly “asset sensitive” at March 31,September 30, 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 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.

 

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 affectaffects 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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- 49 -
 

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, provided98 percent of funding for average total assets in the first quarternine months of 2016 and 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 $2.93.2 billion in total investment securities at March 31,September 30, 2016. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At March 31,September 30, 2016, such collateral requirements totaled approximately $712756 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 2016. Loan demand from credit-worthycredit 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 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.

 

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.

 

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 $1030 million in the first quarternine months of 2016 and $39 million in 2015, and retire common stock in the amount of $5$6 million and $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.

 

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Capital Resources

 

The Company has historically generated high levels of earnings, which provides a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been10.911.0% (annualized) in the first quarternine months of 2016 and 11.3% in 2015 and 11.6% in 2014.2015. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $212 million in the first quarternine months of 2016 compared with $5 million in 2015 and $12 million in 2014.2015.

 

The Company paid common dividends totaling $1030 million in the first quarternine months of 2016 and $39 million in 2015, and $40 million in 2014, which represent dividends per common share of $0.391.17, $1.53 and $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 retired130137 thousand shares valued at $56 million in the first quarternine months of 2016 and 344 thousand shares valued at $15 million in 2015 and 1.0 million shares valued at $53 million in 2014.2015.

 

The Company's primary capital resource is shareholders' equity, which was $539563 million at March 31,September 30, 2016 compared with $532 million at December 31, 2015. The Company's ratio of equity to total assets was10.3710.61% at March 31,September 30, 2016 and 10.30% at December 31, 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.

 

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.
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 began 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.

 

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- 51 -
 

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 “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
     Transitional
Minimum
Regulatory
Requirement		 Minimum
Regulatory
Requirement		 Well-capitalized
by Regulatory
Definition
Under FDICIA		     Requirement Requirement Under FDICIA
 At March 31, 2016 Effective Effective Effective At September 30, 2016 Effective Effective Effective
 Company Bank January 1, 2016 January 1, 2019 January 1, 2015 Company Bank January 1, 2016 January 1, 2019 January 1, 2015
                    
Common Equity Tier I Capital  13.22%  11.34%  5.125%(1)  7.00%(2)  6.50%  14.32%  11.75%  5.125%(1)  7.00%(2)  6.50%
Tier I Capital  13.22%  11.34%  6.625%(1)  8.50%(2)  8.00%  14.32%  11.75%  6.625%(1)  8.50%(2)  8.00%
Total Capital  13.51%  11.71%  8.625%(1)  10.50%(2)  10.00%  15.16%  12.64%  8.625%(1)  10.50%(2)  10.00%
Leverage Ratio  7.99%  6.81%  4.000%  4.00%  5.00%  8.30%  6.76%  4.000%  4.00%  5.00%

(1)Includes 0.625% capital conservation buffer.
(2)Includes 2.5% capital conservation buffer.

 

(1) Includes 0.625% capital conservation buffer.

(2) Includes 2.5% capital conservation buffer.

      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%

      Transitional   Well-capitalized
      Minimum Minimum by Regulatory
      Regulatory Regulatory Definition
      Requirement Requirement 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 conservation buffer.

(3)Includes 2.5% capital 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.

 

 

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.

 

 

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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 March 31,September 30, 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,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 March 31,September 30, 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 its 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, 2015 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.

 

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 Westamerica 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 March 31,September 30, 2016 (in thousands, except per share data).

 

  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 

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)
July 1 through July 31-$--1,750
August 1 through August 31---1,750
September 1 through September 30---1,750
Total---1,750

 

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.

 

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SharesNo shares were repurchased during the first quarterperiod from July 1, 2016 pursuant to athrough September 30, 2016. A replacement program approved by the Board of Directors on July 23, 2015 authorizing28, 2016 authorizes the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2016.2017.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

(a) Submission of Matters to a Vote of Security HoldersNone

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)  

Date: MayNovember 2, 2016

 

 

 

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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 March 31,September 30, 2016, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three and nine months ended March 31,September 30, 2016 and 2015; (ii) Consolidated Balance Sheets at March 31,September 30, 2016, and December 31, 2015; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended March 31,September 30, 2016 and 2015, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the threenine months ended March 31,September 30, 2016 and 2015; (v) Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2016 and 2015 and (vi) Notes to the Unaudited Consolidated Financial Statements.

 

 

 

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