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, 2017

orFor the quarterly period ended June 30, 2016

or

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

For the transition period from __________ to __________.

 

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

CALIFORNIA94-2156203
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification No.)Number)

 

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, or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Smaller reporting company ☐Emerging growth company ☐

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

 

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

 

Yes ☐No ☒

 

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

 

Title of ClassShares outstanding as of JulyApril 25, 20162017
  
Common Stock,25,631,709

No Par Value		26,298,078

 

 

 

TABLE OF CONTENTS

 

 

  Page
Forward Looking Statements3
PART I - FINANCIAL INFORMATION 
Item 1Financial Statements4
Notes to Unaudited Consolidated Financial Statements9
Financial Summary 29
Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations3028
Item 3Quantitative and Qualitative Disclosures about Market Risk5147
Item 4Controls and Procedures5147
PART II - OTHER INFORMATION 
Item 1Legal Proceedings5248
Item 1ARisk Factors5248
Item 2Unregistered Sales of Equity Securities and Use of Proceeds5248
Item 3Defaults upon Senior Securities5349
Item 4Mine Safety Disclosures5349
Item 5Other Information5349
Item 6Exhibits5349
Signatures5450
Exhibit Index5551
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)5652
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)5753
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 13505854
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 13505955

 

 

 

 

 

 

-2-

-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 securities portfolios, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", “estimates”, "intends", "targeted", "projected", “forecast”, "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

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

 

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

The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2016, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

 

-3-

-3- 

PART I - FINANCIAL INFORMATION

Item 1Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

  At June 30,
2016		 At December 31,
2015
  (In thousands)
Assets:        
Cash and due from banks $441,785  $433,044 
Investment securities available for sale  1,531,035   1,570,216 
Investment securities held to maturity, with fair values of: $1,507,177 at June 30, 2016 and $1,325,699 at December 31, 2015  1,473,357   1,316,075 
Loans  1,429,560   1,533,396 
Allowance for loan losses  (28,910)  (29,771)
Loans, net of allowance for loan losses  1,400,650   1,503,625 
Other real estate owned  4,162   9,264 
Premises and equipment, net  37,759   38,693 
Identifiable intangibles, net  8,656   10,431 
Goodwill  121,673   121,673 
Other assets  160,008   165,854 
Total Assets $5,179,085  $5,168,875 
         
Liabilities:        
Noninterest bearing deposits $1,978,947  $2,026,049 
Interest bearing deposits  2,506,367   2,514,610 
Total deposits  4,485,314   4,540,659 
Short-term borrowed funds  67,852   53,028 
Other liabilities  67,592   42,983 
Total Liabilities  4,620,758   4,636,670 
         
Shareholders' Equity:        
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 25,632 at June 30, 2016 and 25,528 at December 31, 2015  389,680   378,858 
Deferred compensation  1,533   2,578 
Accumulated other comprehensive income  11,885   675 
Retained earnings  155,229   150,094 
Total Shareholders' Equity  558,327   532,205 
Total Liabilities and Shareholders' Equity $5,179,085  $5,168,875 

See accompanying notes to unaudited consolidated financial statements.

-4- 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

  For the Three Months For the Six Months
  Ended June 30,
  2016 2015 2016 2015
  (In thousands, except per share data)
Interest and Fee Income:                
Loans $17,583  $20,035  $35,936  $40,265 
Investment securities available for sale  8,091   7,999   16,058   15,468 
Investment securities held to maturity  8,053   6,391   15,380   12,609 
Total Interest and Fee Income  33,727   34,425   67,374   68,342 
Interest Expense:                
Deposits  531   601   1,074   1,243 
Short-term borrowed funds  10   16   19   32 
Federal Home Loan Bank advances  -   -   -   1 
Total Interest Expense  541   617   1,093   1,276 
Net Interest and Fee Income  33,186   33,808   66,281   67,066 
Provision for Loan Losses  -   -   -   - 
Net Interest and Fee Income After Provision For Loan Losses  33,186   33,808   66,281   67,066 
Noninterest Income:                
Service charges on deposit accounts  5,239   5,694   10,487   11,401 
Merchant processing services  1,638   1,783   3,167   3,486 
Debit card fees  1,621   1,534   3,137   2,990 
Trust fees  657   672   1,318   1,378 
Other service fees  650   683   1,279   1,348 
ATM processing fees  603   627   1,261   1,212 
Financial services commissions  137   198   293   351 
Other noninterest income  1,157   1,078   2,489   2,403 
Total Noninterest Income  11,702   12,269   23,431   24,569 
Noninterest Expense:                
Salaries and related benefits  12,887   13,696   26,004   27,034 
Occupancy  3,400   3,726   6,798   7,453 
Outsourced data processing services  2,130   2,111   4,260   4,219 
Furniture and equipment  1,187   1,158   2,400   2,277 
Amortization of identifiable intangibles  870   955   1,775   1,956 
Professional fees  758   582   1,490   1,130 
Courier service  462   598   1,007   1,141 
Other real estate owned  (392)  52   (281)  367 
Other noninterest expense  3,927   4,018   7,634   8,046 
Total Noninterest Expense  25,229   26,896   51,087   53,623 
Income Before Income Taxes  19,659   19,181   38,625   38,012 
Provision for income taxes  5,113   4,420   9,853   8,694 
Net Income $14,546  $14,761  $28,772  $29,318 
                 
Average Common Shares Outstanding  25,586   25,514   25,516   25,582 
Average Diluted Common Shares Outstanding  25,630   25,536   25,549   25,595 
Per Common Share Data:                
Basic earnings $0.57  $0.58  $1.13  $1.15 
Diluted earnings  0.57   0.58   1.13   1.15 
Dividends paid  0.39   0.38   0.78   0.76 
  At March 31,
2017		 At December 31,
2016
  (In thousands)
Assets:  
Cash and due from banks $546,815  $462,271 
Investment securities available for sale  1,893,309   1,890,758 
Investment securities held to maturity, with fair values of: $1,296,738 at March 31, 2017 and $1,340,741 at December 31, 2016  1,298,414   1,346,312 
Loans  1,351,090   1,352,711 
Allowance for loan losses  (24,919)  (25,954)
Loans, net of allowance for loan losses  1,326,171   1,326,757 
Other real estate owned  2,136   3,095 
Premises and equipment, net  36,025   36,566 
Identifiable intangibles, net  6,127   6,927 
Goodwill  121,673   121,673 
Other assets  165,277   171,724 
Total Assets $5,395,947  $5,366,083 
         
Liabilities:        
Noninterest-bearing deposits $2,046,390  $2,089,443 
Interest-bearing deposits  2,651,583   2,615,298 
Total deposits  4,697,973   4,704,741 
Short-term borrowed funds  73,611   59,078 
Other liabilities  39,475   40,897 
Total Liabilities  4,811,059   4,804,716 
         
Contingencies (Note 10)        
         
Shareholders' Equity:        
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,283 at March 31, 2017 and 25,907 at December 31, 2016  422,670   404,606 
Deferred compensation  1,533   1,533 
Accumulated other comprehensive loss  (9,443)  (10,074)
Retained earnings  170,128   165,302 
Total Shareholders' Equity  584,888   561,367 
Total Liabilities and  Shareholders' Equity $5,395,947  $5,366,083 

 

See accompanying notes to unaudited consolidated financial statements.

 

-4-

-5- 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

  For the
Three Months Ended
March 31,
  2017 2016
  (In thousands,
except per share data)
Interest and Fee Income:        
Loans $15,780  $18,353 
Investment securities available for sale  10,249   7,967 
Investment securities held to maturity  7,295   7,327 
Total Interest and Fee Income  33,324   33,647 
Interest Expense:        
Deposits  469   543 
Short-term borrowed funds  11   9 
Total Interest Expense  480   552 
Net Interest and Fee Income  32,844   33,095 
Provision for Loan Losses  -   - 
Net Interest and Fee Income After Provision For Loan Losses  32,844   33,095 
Noninterest Income:        
Service charges on deposit accounts  4,923   5,248 
Merchant processing services  1,875   1,529 
Debit card fees  1,481   1,516 
Trust fees  702   661 
Other service fees  650   629 
ATM processing fees  575   658 
Financial services commissions  195   156 
Other noninterest income  1,256   1,332 
Total Noninterest Income  11,657   11,729 
Noninterest Expense:        
Salaries and related benefits  13,070   13,117 
Occupancy  3,633   3,398 
Outsourced data processing services  2,139   2,130 
Furniture and equipment  1,254   1,213 
Amortization of identifiable intangibles  800   905 
Professional fees  611   732 
Courier service  421   545 
Other real estate owned  (40)  111 
Other noninterest expense  2,727   3,707 
Total Noninterest Expense  24,615   25,858 
Income Before Income Taxes  19,886   18,966 
Provision for income taxes  4,837   4,740 
Net Income $15,049  $14,226 
         
Average Common Shares Outstanding  26,171   25,445 
Average Diluted Common Shares Outstanding  26,329   25,468 
Per Common Share Data:        
Basic earnings $0.58  $0.56 
Diluted earnings  0.57   0.56 
Dividends paid  0.39   0.39 

See accompanying notes to unaudited consolidated financial statements.

-5-

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 For the Three Months For the Six Months
 Ended June 30, For the Three Months Ended
March 31,
 2016 2015 2016 2015 2017 2016
 (In thousands)   (In thousands)
Net income $14,546  $14,761  $28,772  $29,318  $15,049  $14,226 
Other comprehensive income:                        
Increase (decrease) in net unrealized gains on securities available for sale  9,070   (9,698)  19,311   (2,280)
Deferred tax (expense) benefit  (3,813)  4,078   (8,119)  958 
Increase (decrease) in net unrealized gains on securities available for sale, net of tax  5,257   (5,620)  11,192   (1,322)
Increase in net unrealized gains on securities available for sale  1,074   10,241 
Deferred tax expense  (452)  (4,306)
Increase in net unrealized gains on securities available for sale, net of tax  622   5,935 
Post-retirement benefit transition obligation amortization  15   15   30   30   15   15 
Deferred tax expense  (6)  (6)  (12)  (12)  (6)  (6)
Post-retirement benefit transition obligation amortization, net of tax  9   9   18   18   9   9 
Total other comprehensive income (loss)  5,266   (5,611)  11,210   (1,304)
Total other comprehensive income  631   5,944 
Total comprehensive income $19,812  $9,150  $39,982  $28,014  $15,680  $20,170 

 

See accompanying notes to unaudited consolidated financial statements.

 

-6- 

-6-

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 (Loss)		 Retained
Earnings		 Total
 (In thousands) (In thousands)
                        
Balance, December 31, 2014  25,745  $378,132  $2,711  $5,292  $140,468  $526,603 
Balance, December 31, 2015  25,528  $378,858  $2,578  $675  $150,094  $532,205 
Net income for the period                  29,318   29,318                   14,226   14,226 
Other comprehensive loss              (1,304)      (1,304)
Other comprehensive income              5,944       5,944 
Exercise of stock options  81   3,602               3,602   40   1,717               1,717 
Tax benefit decrease upon exercise and expiration of stock options      (1,206)              (1,206)      (181)              (181)
Restricted stock activity  17   741               741       1,045   (1,045)          - 
Stock based compensation      672               672       390               390 
Stock awarded to employees  2   69               69   -   15               15 
Retirement of common stock including repurchases  (316)  (4,671)          (9,019)  (13,690)
Retirement of common stock  (130)  (1,951)          (3,473)  (5,424)
Dividends                  (19,467)  (19,467)                  (9,919)  (9,919)
Balance, June 30, 2015  25,529  $377,339  $2,711  $3,988  $141,300  $525,338 
Balance, March 31, 2016  25,438  $379,893  $1,533  $6,619  $150,928  $538,973 
                                                
Balance, December 31, 2015  25,528  $378,858  $2,578  $675  $150,094  $532,205 
Balance, December 31, 2016  25,907  $404,606  $1,533  $(10,074) $165,302  $561,367 
Net income for the period                  28,772   28,772                   15,049   15,049 
Other comprehensive income              11,210       11,210               631       631 
Exercise of stock options  225   10,060               10,060   376   17,593               17,593 
Tax benefit increase upon exercise and expiration of stock options      211               211 
Restricted stock activity  15   1,798   (1,045)          753 
Stock based compensation      752               752       456               456 
Stock awarded to employees  1   60               60   -   15               15 
Retirement of common stock including repurchases  (137)  (2,059)          (3,721)  (5,780)
Dividends                  (19,916)  (19,916)                  (10,223)  (10,223)
Balance, June 30, 2016  25,632  $389,680  $1,533  $11,885  $155,229  $558,327 
Balance, March 31, 2017  26,283  $422,670  $1,533  $(9,443) $170,128  $584,888 

 

See accompanying notes to unaudited consolidated financial statements.

 

-7- 

-7-

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 For the Six Months
Ended June 30,		 For the Three Months
Ended March 31,
 2016 2015 2017 2016
 (In thousands) (In thousands)
Operating Activities:                
Net income $28,772  $29,318  $15,049  $14,226 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  8,618   7,957 
Loan loss provision  -   - 
Net amortization of deferred loan fees  (157)  (149)
Depreciation and amortization/accretion  5,754   4,065 
Net amortization of deferred net loan cost (fees)  26   (54)
Decrease in interest income receivable  171   54   1,744   1,379 
Decrease (increase) in net deferred tax asset  2,066   (166)
Increase in other assets  (4,337)  (1,064)
Life insurance premiums paid  (126)  (126)
Increase in income taxes payable  2,896   3,424 
Decrease in deferred tax asset  1,441   115 
Tax benefit decrease upon exercise and expiration of stock options  -   181 
Decrease (increase) in other assets  895   (5,476)
Stock option compensation expense  752   672   456   390 
Tax benefit (increase) decrease upon exercise and expiration of stock options  (211)  1,206 
Decrease in income taxes payable  (1,469)  (640)
Increase in interest expense payable  46   25   8   25 
Increase (decrease) in other liabilities  1,849   (2,939)
Net writedown of/loss on sale of premises and equipment  7   11 
Decrease in other liabilities  (2,864)  (4)
Writedown/loss on sale of premises and equipment  50   5 
Net gain on sale of foreclosed assets  (1,017)  -   (55)  (58)
Writedown of foreclosed assets  758   243   -   126 
Net Cash Provided by Operating Activities  35,848   34,528   25,274   18,218 
                
Investing Activities:                
Net repayments of loans  104,975   66,820   1,526   61,070 
Change in payable to FDIC(1)  98   - 
Net receipts under FDIC(1) indemnification agreements  129   5,189 
Purchases of investment securities available for sale  (260,587)  (627,164)  (51,297)  (152,128)
Proceeds from sale/maturity/calls of securities available for sale  344,393   604,708   47,600   166,023 
Purchases of investment securities held to maturity  (246,956)  (189,632)  -   (56,182)
Proceeds from maturity/calls of securities held to maturity  82,059   72,440   45,640   33,531 
Purchases of premises and equipment  (991)  (1,833)  (501)  (283)
Net change in FRB(2)/FHLB(3) securities  -   940 
Proceeds from sale of FRB(2) stock  24   - 
Proceeds from sale of foreclosed assets  5,848   100   1,014   975 
Net Cash Provided by (Used in) Investing Activities  28,839   (73,621)
Net Cash Provided by Investing Activities  44,135   58,195 
                
Financing Activities:                
Net change in deposits  (55,345)  5,661   (6,768)  (23,909)
Net change in short-term borrowings and FHLB(3) advances  14,824   (27,037)
Net change in short-term borrowings  14,533   (577)
Exercise of stock options/issuance of shares  10,060   3,602   17,593   1,717 
Tax benefit increase (decrease) upon exercise and expiration of stock options  211   (1,206)
Retirement of common stock including repurchases  (5,780)  (13,690)
Tax benefit decrease upon exercise and expiration of stock options  -   (181)
Retirement of common stock  -   (5,424)
Common stock dividends paid  (19,916)  (19,467)  (10,223)  (9,919)
Net Cash Used in Financing Activities  (55,946)  (52,137)
Net Cash Provided by (Used in) Financing Activities  15,135   (38,293)
Net Change In Cash and Due from Banks  8,741   (91,230)  84,544   38,120 
Cash and Due from Banks at Beginning of Period  433,044   380,836   462,271   433,044 
Cash and Due from Banks at End of Period $441,785  $289,606  $546,815  $471,164 
                
Supplemental Cash Flow Disclosures:                
Supplemental disclosure of non cash activities:        
Supplemental disclosure of noncash activities:        
Loan collateral transferred to other real estate owned $488  $3,229  $-  $217 
Securities purchases pending settlement  26,488   24,952   -   44,580 
Supplemental disclosure of cash flow activities:                
Interest paid for the period  1,046   1,274   504   526 
Income tax payments for the period  9,922   9,500   500   1,200 

 

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")

See accompanying notes to unaudited consolidated financial statements.

 

-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 six months ended June 30, 2016March 31, 2017 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

Note 2: Accounting Policies

 

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “Provision for Loan Losses,” “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” discussion below. Certain amounts in prior periods have been reclassified to conform to the current presentation.

 

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

 

Recently Adopted Accounting Standards

FASB ASU 2016-09,Improvements to Employee Share-Based Payment Accounting, was issued March 30, 2016. The provisions of the new standard changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. The Company adopted the ASU provisions effective January 1, 2017, which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or expire. During the first quarter 2017, 376 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1.6 million. First quarter 2017 income tax provision was $671 thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09. The Company elected to account for forfeitures as they occur.

Recently Issued Accounting Standards

 

FASB 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.

 

-9-

The Company will be required to adopt the ASU provisions on January 1, 2018. Management is evaluating the impact that the ASU will have on the Company’s financial statements.

 

-9- 

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.

 

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 is evaluating the impact that the ASU will have on the Company’s financial statements.

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

The Company will also be required to provide additional disclosures related to the financial assets within the scope of the new standard.

 

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

FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The ASU will shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

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

 

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 June 30, 2016		 Investment Securities Available for Sale
At March 31, 2017
 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 $338,542  $805  $(8) $339,339  $141,595  $33  $(2,691) $138,937 
Agency residential mortgage-backed securities (MBS)  187,719   1,488   (1,461)  187,746   742,713   825   (21,334)  722,204 
Non-agency residential MBS  311   3   -   314   196   -   -   196 
Non-agency commercial MBS  2,213   7   (6)  2,214   1,955   -   (16)  1,939 
Obligations of states and political subdivisions  139,627   9,290   (67)  148,850   176,739   5,425   (3,293)  178,871 
Asset-backed securities  1,329   -   (12)  1,317   355   -   -   355 
FHLMC(1) and FNMA(2) stock  775   5,459   -   6,234   749   8,651   -   9,400 
Corporate securities  837,885   6,324   (1,595)  842,614   843,249   2,037   (6,150)  839,136 
Other securities  2,034   509   (136)  2,407   2,005   456   (190)  2,271 
Total $1,510,435  $23,885  $(3,285) $1,531,035  $1,909,556  $17,427  $(33,674) $1,893,309 

 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

 

[The remainder of this page intentionally left blank]

-10-

 

-10- 

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

 

 Investment Securities Held to Maturity
At June 30, 2016		 Investment Securities Held to Maturity
At March 31, 2017
 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 $666  $9  $-  $675 
Securities of U.S. Government sponsored entities $538  $-  $-  $538 
Agency residential MBS  752,173   11,129   (175)  763,127   634,958   1,007   (9,093)  626,872 
Non-agency residential MBS  6,004   58   (1)  6,061   5,103   62   -   5,165 
Agency commercial MBS  16,012   38   (323)  15,727   9,258   4   (123)  9,139 
Obligations of states and political subdivisions  698,502   23,233   (148)  721,587   648,557   8,503   (2,036)  655,024 
Total $1,473,357  $34,467  $(647) $1,507,177  $1,298,414  $9,576  $(11,252) $1,296,738 

 

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, 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 $302,292  $255  $(665) $301,882  $141,599  $35  $(2,974) $138,660 
Agency residential MBS  208,046   1,407   (6,909)  202,544   711,623   921   (21,045)  691,499 
Non-agency residential MBS  354   16   -   370   272   -   (1)  271 
Non-agency commercial MBS  2,383   5   (9)  2,379   2,041   -   (16)  2,025 
Obligations of states and political subdivisions  148,705   8,861   (57)  157,509   182,230   5,107   (3,926)  183,411 
Asset-backed securities  2,025   -   (22)  2,003   696   -   (1)  695 
FHLMC(1) and FNMA(2) stock  775   3,554   -   4,329   749   10,120   -   10,869 
Corporate securities  902,308   882   (6,821)  896,369   866,835   1,690   (7,668)  860,857 
Other securities  2,039   952   (160)  2,831   2,034   621   (184)  2,471 
Total $1,568,927  $15,932  $(14,643) $1,570,216  $1,908,079  $18,494  $(35,815) $1,890,758 

 

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

 

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

 

 Investment Securities Held to Maturity
At December 31, 2015		 Investment Securities Held to Maturity
At December 31, 2016
 Amortized
Cost		 Gross
Unrecognized
Gains		 Gross
Unrecognized
Losses		 Fair
Value		 Amortized
Cost		 Gross
Unrecognized
Gains		 Gross
Unrecognized
Losses		 Fair
Value
 (In thousands) (In thousands)
Securities of U.S. government sponsored entities $764  $-  $-  $764 
Securities of U.S. Government sponsored entities $581  $1  $-  $582 
Agency residential MBS  595,503   1,810   (4,966)  592,347   668,235   1,122   (8,602)  660,755 
Non-agency residential MBS  9,667   185   -   9,852   5,370   76   -   5,446 
Agency commercial MBS  16,258   20   (274)  16,004   9,332   11   (143)  9,200 
Obligations of states and political subdivisions  693,883   13,638   (789)  706,732   662,794   6,031   (4,067)  664,758 
Total $1,316,075  $15,653  $(6,029) $1,325,699  $1,346,312  $7,241  $(12,812) $1,340,741 

 

-11-

-11- 

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

 

 At June 30, 2016 At March 31, 2017
 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 $172,012  $172,481  $22,671  $23,259  $200,403  $200,533  $21,359  $22,112 
Over 1 to 5 years  808,374   813,891   276,940   282,552   687,340   683,836   296,478   298,933 
Over 5 to 10 years  335,816   344,373   301,645   313,958   226,589   228,155   303,309   306,228 
Over 10 years  1,181   1,375   97,912   102,493   47,606   44,775   27,949   28,289 
Subtotal  1,317,383   1,332,120   699,168   722,262   1,161,938   1,157,299   649,095   655,562 
MBS  190,243   190,274   774,189   784,915   744,864   724,339   649,319   641,176 
Other securities  2,809   8,641   -   -   2,754   11,671   -   - 
Total $1,510,435  $1,531,035  $1,473,357  $1,507,177  $1,909,556  $1,893,309  $1,298,414  $1,296,738 

Securities available for sale at June 30, 2016 with maturity dates over one to five years include $128,405  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 At December 31, 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 $136,717  $136,976  $20,709  $21,354  $154,693  $154,835  $14,961  $15,639 
Over 1 to 5 years  1,049,786   1,044,453   259,556   262,163   750,834   745,219   292,024   292,062 
Over 5 to 10 years  166,352   173,585   289,568   296,352   238,077   239,153   318,580   319,587 
Over 10 years  2,475   2,749   124,814   127,627   47,756   44,416   37,810   38,052 
Subtotal  1,355,330   1,357,763   694,647   707,496   1,191,360   1,183,623   663,375   665,340 
MBS  210,783   205,293   621,428   618,203   713,936   693,795   682,937   675,401 
Other securities  2,814   7,160   -   -   2,783   13,340   -   - 
Total $1,568,927  $1,570,216  $1,316,075  $1,325,699  $1,908,079  $1,890,758  $1,346,312  $1,340,741 

 

Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At June 30, 2016March 31, 2017 and December 31, 2015,2016, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

[The remainder of this page intentionally left blank]

 

-12-

-12- 

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

 


 
 		Investment Securities Available for Sale
At June 30, 2016		 Investment Securities Available for Sale
At March 31, 2017
 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   Unrealized Investment   Unrealized Investment   Unrealized Investment   Unrealized Investment   Unrealized Investment   Unrealized
 Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses
 ($ in thousands) ($ in thousands)
Securities of U.S. Government sponsored entities  1  $9,992  $(8)  -  $-  $-   1  $9,992  $(8)  9  $120,654  $(2,691)  -  $-  $-   9  $120,654  $(2,691)
Agency residential MBS  1   109   -   28   141,639   (1,461)  29   141,748   (1,461)  26   564,037   (16,571)  28   117,356   (4,763)  54   681,393   (21,334)
Non-agency residential MBS  1   37   -   -   -   -   1   37   -   1   177   -   -   -   -   1   177   - 
Non-agency commercial MBS  -   -   -   1   816   (6)  1   816   (6)  2   1,189   (9)  1   750   (7)  3   1,939   (16)
Obligations of states and political subdivisions  6   5,280   (28)  4   1,573   (39)  10   6,853   (67)  42   55,505   (3,272)  4   1,653   (21)  46   57,158   (3,293)
Asset-backed securities  -   -   -   1   1,317   (12)  1   1,317   (12)
Corporate securities  10   36,304   (211)  34   156,558   (1,384)  44   192,862   (1,595)  48   360,788   (5,201)  25   88,217   (949)  73   449,005   (6,150)
Other securities  -   -   -   1   1,864   (136)  1   1,864   (136)  -   -   -   1   1,810   (190)  1   1,810   (190)
Total  19  $51,722  $(247)  69  $303,767  $(3,038)  88  $355,489  $(3,285)  128  $1,102,350  $(27,744)  59  $209,786  $(5,930)  187  $1,312,136  $(33,674)

 

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

 


 
 		Investment Securities Held to Maturity
At June 30, 2016		 Investment Securities Held to Maturity
At March 31, 2017
 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   Unrecognized Investment   Unrecognized Investment   Unrecognized Investment   Unrecognized Investment   Unrecognized Investment   Unrecognized
 Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses
 ($ in thousands) ($ in thousands)
Agency residential MBS  3  $4,539  $(38)  3  $12,222  $(137)  6  $16,761  $(175)  66  $551,095  $(8,789)  3  $11,465  $(304)  69  $562,560  $(9,093)
Non-agency residential MBS  1   1,318   (1)  -   -   -   1   1,318   (1)
Agency commercial MBS  -   -   -   2   13,685   (323)  2   13,685   (323)  -   -   -   1   7,175   (123)  1   7,175   (123)
Obligations of states and political subdivisions  16   11,355   (32)  11   7,082   (116)  27   18,437   (148)  137   128,434   (1,668)  13   12,905   (368)  150   141,339   (2,036)
Total  20  $17,212  $(71)  16  $32,989  $(576)  36  $50,201  $(647)  203  $679,529  $(10,457)  17  $31,545  $(795)  220  $711,074  $(11,252)

 

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 June 30, 2016.March 31, 2017.

 

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

 

As of June 30, 2016, $744,632March 31, 2017, $774,283  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2015, $738,8652016, $768,845  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds.

 

-13-

-13- 

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

 


 
 		Investment Securities Available for Sale
At December 31, 2015		 Investment Securities Available for Sale
At December 31, 2016
 No. of Less than 12 months No. of 12 months or longer No. of Total No. of Less than 12 months No. of 12 months or longer No. of Total
 Investment   Unrealized Investment   Unrealized Investment   Unrealized Investment   Unrealized Investment   Unrealized Investment   Unrealized
 Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses
 ($ in thousands) ($ in thousands)
Securities of U.S. Government sponsored entities  8  $121,392  $(665)  -  $-  $-   8  $121,392  $(665)  8  $117,227  $(2,974)  -  $-  $-   8  $117,227  $(2,974)
Agency residential MBS  2   12,491   (366)  31   161,296   (6,543)  33   173,787   (6,909)  21   524,269   (16,494)  28   122,901   (4,551)  49   647,170   (21,045)
Non-agency residential MBS  2   246   (1)  -   -   -   2   246   (1)
Non-agency commercial MBS  1   1,071   -   1   855   (9)  2   1,926   (9)  2   1,253   (9)  1   772   (7)  3   2,025   (16)
Obligations of states and political subdivisions  3   2,728   (18)  4   1,644   (39)  7   4,372   (57)  43   57,989   (3,905)  3   1,117   (21)  46   59,106   (3,926)
Asset-backed securities  -   -   -   1   2,003   (22)  1   2,003   (22)  -   -   -   1   695   (1)  1   695   (1)
Corporate securities  97   548,177   (5,442)  25   86,762   (1,379)  122   634,939   (6,821)  53   385,175   (6,551)  27   96,145   (1,117)  80   481,320   (7,668)
Other securities  -   -   -   1   1,840   (160)  1   1,840   (160)  -   -   -   1   1,816   (184)  1   1,816   (184)
Total  111  $685,859  $(6,491)  63  $254,400  $(8,152)  174  $940,259  $(14,643)  129  $1,086,159  $(29,934)  61  $223,446  $(5,881)  190  $1,309,605  $(35,815)

 

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

 


 
 		Investment Securities Held to Maturity
At December 31, 2015		 Investment Securities Held to Maturity
At December 31, 2016
 No. of Less than 12 months No. of 12 months or longer No. of Total No. of Less than 12 months No. of 12 months or longer No. of Total
 Investment   Unrecognized Investment   Unrecognized Investment   Unrecognized Investment   Unrecognized Investment   Unrecognized Investment   Unrecognized
 Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses Positions Fair Value Losses
 ($ in thousands) ($ in thousands)
Agency residential MBS  41  $426,317  $(3,490)  13  $62,041  $(1,476)  54  $488,358  $(4,966)  66  $569,876  $(8,285)  3  $10,480  $(317)  69  $580,356  $(8,602)
Agency commercial MBS  -   -   -   2   13,951   (274)  2   13,951   (274)  -   -   -   1   7,214   (143)  1   7,214   (143)
Obligations of states and political subdivisions  55   44,585   (249)  54   42,081   (540)  109   86,666   (789)  295   272,496   (3,710)  12   13,126   (357)  307   285,622   (4,067)
Total  96  $470,902  $(3,739)  69  $118,073  $(2,290)  165  $588,975  $(6,029)  361  $842,372  $(11,995)  16  $30,820  $(817)  377  $873,192  $(12,812)

 

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

 

 For the Three Months For the Six Months
 Ended June 30, 
 		For the Three Months
Ended March 31,
 2016 2015 2016 2015 2017 2016
 (In thousands) (In thousands)
            
Taxable $10,558  $8,393  $20,231  $15,946  $12,147  $9,674 
Tax-exempt from regular federal income tax  5,586   5,997   11,207   12,131   5,397   5,620 
Total interest income from investment securities $16,144  $14,390  $31,438  $28,077  $17,544  $15,294 

 

[The remainder of this page intentionally left blank]

 

-14- 

-14-

Note 4: Loans and Allowance for Loan Losses

 

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

 

  At June 30, 2016
  Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
& Other		 Total
  (In thousands)  
Originated loans $337,619  $502,493  $2,103  $102,292  $335,687  $1,280,194 
Purchased covered loans:                        
Gross purchased covered loans  -   -   -   2,280   10,497   12,777 
Purchased loan discount  -   -   -   -   -   - 
Purchased non-covered loans:                        
Gross purchased non-covered loans  13,072   98,553   160   228   29,987   142,000 
Purchased loan discount  (819)  (3,453)  -   (23)  (1,116)  (5,411)
Total $349,872  $597,593  $2,263  $104,777  $375,055  $1,429,560 
  At March 31, 2017 At December 31, 2016
  (In thousands)
Commercial $354,500  $354,697 
Commercial Real Estate  565,604   542,171 
Construction  1,880   2,555 
Residential Real Estate  79,481   87,724 
Consumer Installment & Other  349,625   365,564 
Total $1,351,090  $1,352,711 

 

  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 

ChangesTotal loans outstanding reported above include purchased loans of $113,207 thousand and $121,210 thousand at March 31, 2017 and December 31, 2016, respectively. Purchased loans were separately reported in prior periods and have been reclassified into their respective categories in the carrying amount of impaired purchased loans were as follows:current presentation.

  For the
Six Months Ended
June 30, 2016		 For the Year Ended
December 31, 2015
Impaired purchased loans (In thousands)
Carrying amount at the beginning of the period $3,887  $4,672 
Reductions during the period  (2,646)  (785)
Carrying amount at the end of the period $1,241  $3,887 

 

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

 

 For the
Six Months Ended
June 30, 2016		 For the
Year Ended
December 31, 2015		 For the
Three Months Ended
March 31, 2017		 For the
Year Ended
December 31, 2016
Accretable yield: (In thousands) (In thousands)
Balance at the beginning of the period $1,259  $2,261  $1,237  $1,259 
Reclassification from nonaccretable difference  1,637   3,051   871   3,912 
Accretion  (2,338)  (4,053)  (970)  (3,934)
Balance at the end of the period $558  $1,259  $1,138  $1,237 
                
Accretion $(2,338) $(4,053) $(970) $(3,934)
Change in FDIC indemnification  942   698   189   1,053 
(Increase) in interest income $(1,396) $(3,355) $(781) $(2,881)

 

-15- 

The following summarizes activity in the allowance for loan losses:

 

 Allowance for Loan Losses
For the Three Months Ended June 30, 2016		 Allowance for Loan Losses
For the Three Months Ended March 31, 2017
 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		 Unallocated Total
 (In thousands) (In thousands)
Allowance for loan losses:                                                                
Balance at beginning of period $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487  $8,327  $3,330  $152  $1,330  $7,980  $4,835  $25,954 
Additions:                                                                
Provision  782   (340)  (3)  (106)  271   121   66   (791)  - 
Provision (reversal)  209   182   (40)  (116)  106   (341)  - 
Deductions:                                                                
Chargeoffs  (764)  -   -   -   (677)  (38)  -   -   (1,479)  (103)  -   -   -   (1,739)  -   (1,842)
Recoveries  537   15   -   -   339   11   -   -   902   160   10   -   -   637   -   807 
Net loan (losses) recoveries  (227)  15   -   -   (338)  (27)  -   -   (577)
Net loan recoveries (losses)  57   10   -   -   (1,102)  -   (1,035)
Total allowance for loan losses $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910  $8,593  $3,522  $112  $1,214  $6,984  $4,494  $24,919 

 

 Allowance for Loan Losses
For the Six Months Ended June 30, 2016		 Allowance for Loan Losses
For the Three Months Ended March 31, 2016
 Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Purchased
Non-covered
Loans		 Purchased
Covered
Loans		 Unallocated Total Commercial Commercial
Real Estate		 Construction Residential
Real Estate		 Consumer
Installment
and Other		 Unallocated Total
 (In thousands) (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  $9,559  $4,212  $235  $1,801  $8,001  $5,963  $29,771 
Additions:                                                                
Provision  1,996   (342)  (50)  (200)  423   (1,072)  66   (821)  - 
Provision (reversal)  38   10   (48)  (94)  124   (30)  - 
Deductions:                                                                
Chargeoffs  (1,935)  -   -   -   (1,682)  (38)  -   -   (3,655)  (1,171)  -   -   -   (1,006)  -   (2,177)
Recoveries  782   30   -   -   795   1,187   -   -   2,794   1,421   15   -   -   457   -   1,893 
Net loan (losses) recoveries  (1,153)  30   -   -   (887)  1,149   -   -   (861)
Net loan recoveries (losses)  250   15   -   -   (549)  -   (284)
Total allowance for loan losses $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910  $9,847  $4,237  $187  $1,707  $7,576  $5,933  $29,487 

 

  Allowance for Loan Losses
For the Three Months Ended June 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 $5,470  $4,123  $730  $2,140  $7,031  $2,339  $-  $9,354  $31,187 
Additions:                                    
Provision  1,704   758   (327)  (82)  350   (921)  -   (1,482)  - 
Deductions:                                    
Chargeoffs  (401)  -   -   -   (576)  (396)  -   -   (1,373)
Recoveries  334   15   -   -   443   222   -   -   1,014 
Net loan (losses) recoveries  (67)  15   -   -   (133)  (174)  -   -   (359)
Total allowance for loan losses $7,107  $4,896  $403  $2,058  $7,248  $1,244  $-  $7,872  $30,828 
-15-

 

  Allowance for Loan Losses
For the Six Months Ended June 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  1,594   621   (241)  (183)  69   (674)  -   (1,186)  - 
Deductions:                                    
Chargeoffs  (461)  -   -   -   (1,571)  (431)  -   -   (2,463)
Recoveries  514   30   -   -   1,033   229   -   -   1,806 
Net loan recoveries (losses)  53   30   -   -   (538)  (202)  -   -   (657)
Total allowance for loan losses $7,107  $4,896  $403  $2,058  $7,248  $1,244  $-  $7,872  $30,828 

[The remainder of this page intentionally left blank]

-16- 

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

 

 Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
 At June 30, 2016 
 		Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At March 31, 2017
 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 Unallocated Total
 (In thousands) (In thousands)
Allowance for loan losses:                                                                
Individually evaluated for impairment $5,283  $316  $-  $-  $-  $-  $-  $-  $5,599  $4,991  $-  $-  $-  $-  $-  $4,991 
Collectively evaluated for impairment  5,119   3,596   127   1,601   6,616   1,044   66   5,142   23,311   3,602   3,522   112   1,214   6,984   4,494   19,928 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910  $8,593  $3,522  $112  $1,214  $6,984  $4,494  $24,919 
Carrying value of loans:                                                                
Individually evaluated for impairment $14,035  $5,375  $-  $-  $-  $10,198  $-  $-  $29,608  $11,128  $15,243  $-  $217  $-  $-  $26,588 
Collectively evaluated for impairment  323,584   497,118   2,103   102,292   335,687   125,346   12,581   -   1,398,711   343,345   549,838   1,880   79,264   349,303   -   1,323,630 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   1,045   196   -   1,241   27   523   -   -   322   -   872 
Total $337,619  $502,493  $2,103  $102,292  $335,687  $136,589  $12,777  $-  $1,429,560  $354,500  $565,604  $1,880  $79,481  $349,625  $-  $1,351,090 

 

 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, 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 Unallocated Total
 (In thousands) (In thousands)
Allowance for loan losses:                                                                
Individually evaluated for impairment $4,942  $585  $-  $-  $-  $-  $-  $-  $5,527  $5,048  $-  $-  $-  $-  $-  $5,048 
Collectively evaluated for impairment  4,617   3,639   177   1,801   7,080   967   -   5,963   24,244   3,279   3,330   152   1,330   7,980   4,835   20,906 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total $9,559  $4,224  $177  $1,801  $7,080  $967  $-  $5,963  $29,771  $8,327  $3,330  $152  $1,330  $7,980  $4,835  $25,954 
Carrying value of loans:                                                                
Individually evaluated for impairment $12,587  $5,541  $-  $-  $-  $11,777  $-  $-  $29,905  $11,174  $12,706  $-  $835  $-  $-  $24,715 
Collectively evaluated for impairment  355,530   511,529   2,978   117,631   346,043   152,038   13,855   -   1,499,604   343,494   528,957   2,555   86,889   365,236   -   1,327,131 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   3,681   206   -   3,887   29   508   -   -   328   -   865 
Total $368,117  $517,070  $2,978  $117,631  $346,043  $167,496  $14,061  $-  $1,533,396  $354,697  $542,171  $2,555  $87,724  $365,564  $-  $1,352,711 

 

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

 

[The remainder of this page intentionally left blank]

-16-

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

 Credit Risk Profile by Internally Assigned Grade
 At June 30, 2016 Credit Risk Profile by Internally Assigned Grade
At March 31, 2017
 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 Total
 (In thousands) (In thousands)
Grade:                                            
Pass $320,298  $483,433  $2,103  $99,248  $334,394  $120,779  $11,053  $1,371,308  $339,296  $538,750  $1,880  $79,481  $346,864  $1,306,271 
Substandard  16,899   19,060   -   3,044   1,006   21,169   1,724   62,902   15,204   25,558   -   -   2,447   43,209 
Doubtful  422   -   -   -   17   -   -   439   -   1,296   -   -   -   1,296 
Loss  -   -   -   -   270   52   -   322   -   -   -   -   314   314 
Purchased loan discount  -   -   -   -   -   (5,411)  -   (5,411)
Total $337,619  $502,493  $2,103  $102,292  $335,687  $136,589  $12,777  $1,429,560  $354,500  $565,604  $1,880  $79,481  $349,625  $1,351,090 

 

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

 

-17- 

 Credit Risk Profile by Internally Assigned Grade
 At December 31, 2015 Credit Risk Profile by Internally Assigned Grade
At December 31, 2016
 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 Total
 (In thousands) (In thousands)
Grade:                                            
Pass $353,474  $496,744  $2,978  $114,525  $344,876  $149,100  $12,563  $1,474,260  $340,973  $515,045  $2,555  $84,384  $362,597  $1,305,554 
Substandard  14,643   20,326   -   3,106   781   24,810   1,650   65,316   13,724   25,830   -   3,340   2,477   45,371 
Doubtful  -   -   -   -   12   18   -   30   -   1,296   -   -   10   1,306 
Loss  -   -   -   -   374   -   -   374   -   -   -   -   480   480 
Purchased loan discount  -   -   -   -   -   (6,432)  (152)  (6,584)
Total $368,117  $517,070  $2,978  $117,631  $346,043  $167,496  $14,061  $1,533,396  $354,697  $542,171  $2,555  $87,724  $365,564  $1,352,711 

(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 June 30, 2016		 Summary of Loans by Delinquency and Nonaccrual Status
At March 31, 2017
 Current and Accruing 30-59 Days Past Due and Accruing 60-89 Days Past Due and Accruing Past Due 90 Days or More and Accruing Nonaccrual Total Loans 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 $333,544  $941  $498  $-  $2,636  $337,619  $351,417  $1,979  $1,072  $-  $32  $354,500 
Commercial real estate  495,851   903   208   -   5,531   502,493   553,637   4,922   605   -   6,440   565,604 
Construction  2,103   -   -   -   -   2,103   1,880   -   -   -   -   1,880 
Residential real estate  99,990   1,683   315   -   304   102,292   78,182   1,299   -   -   -   79,481 
Consumer installment and other  331,904   2,596   772   303   112   335,687   345,600   2,764   693   373   195   349,625 
Total originated loans  1,263,392   6,123   1,793   303   8,583   1,280,194 
Purchased non-covered loans  129,939   388   1,256   53   4,953   136,589 
Purchased covered loans  12,727   21   -   -   29   12,777 
Total $1,406,058  $6,532  $3,049  $356  $13,565  $1,429,560  $1,330,716  $10,964  $2,370  $373  $6,667  $1,351,090 

 

 Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2015		 Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2016
 Current and Accruing 30-59 Days Past Due and Accruing 60-89 Days Past Due and Accruing Past Due 90 Days or More and Accruing Nonaccrual Total Loans 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 $365,450  $1,777  $122  $-  $768  $368,117  $353,497  $966  $40  $-  $194  $354,697 
Commercial real estate  504,970   5,930   726   -   5,444   517,070   533,377   1,460   445   -   6,889   542,171 
Construction  2,978   -   -   -   -   2,978   2,329   226   -   -   -   2,555 
Residential real estate  115,575   1,202   414   -   440   117,631   86,098   528   37   -   1,061   87,724 
Consumer installment and other  341,566   3,263   919   295   -   346,043   360,549   3,288   989   497   241   365,564 
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  $1,335,850  $6,468  $1,511  $497  $8,385  $1,352,711 

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

 

  For the Three Months Ended For the Six Months Ended
  June 30,
  2016 2015 2016 2015
  (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms $284  $342  $563  $654 
Less: Interest income recognized on nonaccrual loans  (271)  (118)  (533)  (324)
Total reduction of interest income $13  $224  $30  $330 
-17-

 

-18- 

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2016March 31, 2017 and December 31, 2015.2016.

 

The following summarizes impaired loans:

 

 Impaired Loans
At June 30, 2016		 Impaired Loans
At March 31, 2017
 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
 (In thousands) (In thousands)
Impaired loans with no related allowance recorded:                        
Commercial $3,953  $4,042  $-  $1,080  $1,148  $- 
Commercial real estate  12,039   16,691   -   15,766   17,788   - 
Construction  -   -   -   -   -   - 
Residential real estate  527   557   -   217   247   - 
Consumer installment and other  479   586   -   517   623   - 
                        
Impaired loans with an allowance recorded:                        
Commercial  10,501   12,009   5,283   10,106   10,115   4,991 
Commercial real estate  4,510   5,527   316   -   -   - 
Construction  -   -   -   -   -   - 
Residential real estate  -   -   -   -   -   - 
Consumer installment and other  -   -   -   -   -   - 
                        
Total:                        
Commercial $14,454  $16,051  $5,283  $11,186  $11,263  $4,991 
Commercial real estate  16,549   22,218   316   15,766   17,788   - 
Construction  -   -   -   -   -   - 
Residential real estate  527   557   -   217   247   - 
Consumer installment and other  479   586   -   517   623   - 

[The remainder of this page intentionally left blank]

 

  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   - 
-18-

  Impaired Loans
At December 31, 2016
  Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
  (In thousands)
Impaired loans with no related allowance recorded:            
Commercial $1,234  $1,303  $- 
Commercial real estate  13,233   15,610   - 
Construction  -   -   - 
Residential real estate  1,279   1,309   - 
Consumer installment and other  569   675   - 
             
Impaired loans with an allowance recorded:            
Commercial  10,163   10,172   5,048 
Commercial real estate  -   -   - 
Construction  -   -   - 
Residential real estate  -   -   - 
Consumer installment and other  -   -   - 
             
Total:            
Commercial $11,397  $11,475  $5,048 
Commercial real estate  13,233   15,610   - 
Construction  -   -   - 
Residential real estate  1,279   1,309   - 
Consumer installment and other  569   675   - 

 

-19- 

Impaired loans include troubled debt restructured loans. Impaired loans at June 30, 2016,March 31, 2017, included $17,962$12,403 thousand of restructured loans, $10,255$5,172 thousand of which were on nonaccrual status. Impaired loans at December 31, 2015,2016, included $15,712$12,381 thousand of restructured loans, $7,464$5,302 thousand of which were on nonaccrual status.

 

 Impaired Loans
 For the Three Months Ended June 30, For the Six Months Ended June 30, Impaired Loans
For the Three Months Ended March 31,
 2016 2015 2016 2015 2017 2016
 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 $14,094  $135  $12,564  $147  $13,752  $268  $12,395  $293  $11,292  $118  $13,410  $133 
Commercial real estate  18,639   202   19,715   147   19,744   361   19,017   404   14,500   237   20,849   159 
Construction  136   -   -   -   203   -   459   -   -   -   271   - 
Residential real estate  740   5   693   8   775   9   776   14   748   4   810   4 
Consumer installment and other  412   6   797   7   379   12   1,026   13   543   7   347   6 
Total $34,021  $348  $33,769  $309  $34,853  $650  $33,673  $724  $27,083  $366  $35,687  $302 

 

[The remainder of this page intentionally left blank]

-19-

The following table provides information on troubled debt restructurings:

 

 Troubled Debt Restructurings
At June 30, 2016		 Troubled Debt Restructurings
At March 31, 2017
 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  8  $2,817  $2,171  $174   8  $2,768  $1,468  $107 
Commercial real estate  11   17,587   15,568   316   11   11,576   10,718   - 
Residential real estate  1   241   223   -   1   241   217   - 
Total  20  $20,645  $17,962  $490   20  $14,585  $12,403  $107 

 

 Troubled Debt Restructurings
At December 31, 2015		 Troubled Debt Restructurings
At December 31, 2016
 Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance		 Number of
Contracts		 Pre-Modification
Carrying Value		 Period-End
Carrying Value		 Period-End
Individual
Impairment
Allowance
 ($ in thousands) ($ in thousands)
Commercial  6  $3,138  $2,802  $194   7  $2,719  $1,489  $113 
Commercial real estate  10   12,927   12,684   -   10   11,257   10,673   - 
Residential real estate  1   242   226   -   1   241   219   - 
Total  17  $16,307  $15,712  $194   18  $14,217  $12,381  $113 

 

During the three and six months ended June 30, 2016,March 31, 2017, the Company modified one loantwo loans with a carrying value of $242$273 thousand that were considered troubled debt restructurings. The two concessions granted in the first quarter 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and fourunder-market terms. During the three months ended March 31, 2016, the Company modified three loans with a total carrying value of $4,843$4,757 thousand respectively, that were considered troubled debt restructurings. The concessions granted in the four restructurings completed in the first six months ofquarter 2016 consisted of threetwo modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms and one court order requiring under-market terms. There were no chargeoffs related to troubled debt restructurings made during the three months ended March 31, 2017 and March 31, 2016. During the three and six months ended June 30, 2015, the Company modified one loan with a carrying value of $100 thousandMarch 31, 2017 and six loans with an aggregate carrying value of $1,830 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the six restructurings completed in the first six months of 2015 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. During the three and six months ended June 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 ninety days or more past due.

 

There were no loans restricted due to collateral requirements at June 30, 2016March 31, 2017 and December 31, 2015.2016.

 

There were no loans held for sale at June 30, 2016March 31, 2017 and December 31, 2015.2016.

 

-20- 

At June 30, 2016March 31, 2017 and December 31, 2015,2016, the Company held total other real estate owned (OREO) of $4,162$2,136 thousand net of reserve of $2,534$1,685 thousand and $9,264$3,095 thousand net of reserve of $1,986$1,816 thousand, respectively, of which $-0-  thousand was foreclosed residential real estate properties.properties or covered OREO 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 $29  thousand at June 30, 2016 and $-0-  thousand at March 31, 2017 and December 31, 2015.2016.

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At June 30, 2016,March 31, 2017, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At June 30, 2016,March 31, 2017, Westamerica Bank had 3639 lending relationships each with aggregate loans exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $59,171$60,831 thousand and $61,190$57,721 thousand at June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At June 30, 2016,March 31, 2017, Westamerica Bank held corporate bonds in 4850 issuing entities whichthat exceeded $5 million offor each issuer.

-20-

Note 6: Other Assets

 

Other assets consisted of the following:

 

 At June 30,
2016		 At December 31,
2015		 At March 31, 2017 At December 31, 2016
 (In thousands) (In thousands)
Cost method equity investments:                
Federal Reserve Bank stock (1) $14,069  $14,069  $14,045  $14,069 
Other investments  201   201   201   201 
Total cost method equity investments  14,270   14,270   14,246   14,270 
Life insurance cash surrender value  50,245   48,972   52,177   51,535 
Net deferred tax asset  41,617   51,748   53,518   55,417 
Limited partnership investments  13,863   15,259   12,141   12,591 
Interest receivable  20,003   20,174   19,745   21,489 
Prepaid assets  3,984   4,771   4,997   4,825 
Other assets  16,026   10,660   8,453   11,597 
Total other assets $160,008  $165,854  $165,277  $171,724 

 

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

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

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At June 30, 2016,March 31, 2017, this investment totaled $13,863$12,141 thousand and $2,299  thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2015,2016, this investment totaled $15,259$12,591 thousand and $2,299  thousand of this amount representsrepresented outstanding equity capital commitments. At June 30, 2016,March 31, 2017, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $453$722 thousand in 2016, $7632020, $131 thousand in 2017, and $1,0832023, $90 thousand in 20182024 and $1,356 thousand in 2025 or thereafter.

 

-21- 

The amounts recognized in net income for these investments include:

 

 For the Three Months Ended For the Six Months Ended
 June 30, For the Three Months Ended
March 31,
 2016 2015 2016 2015 2017 2016
 (In thousands) (In thousands)
Investment loss included in pre-tax income $675  $750  $1,350  $1,425  $450  $675 
Tax credits recognized in provision for income taxes  511   658   1,109   1,316   463   598 

 

Note 7: Goodwill and Identifiable Intangible Assets

 

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the three and six months ended June 30, 2016March 31, 2017 and year ended December 31, 2015.2016. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three and six months ended June 30, 2016March 31, 2017 and year ended December 31, 2015,2016, no such adjustments were recorded.

 

-21-

The carrying values of goodwill were:

 

  At June 30,
2016		 At December 31,
2015
  (In thousands)
Goodwill $121,673  $121,673 
  At March 31, 2017 At December 31, 2016
  (In thousands)
Goodwill $121,673  $121,673 

 

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

 

 At June 30, 2016 At December 31, 2015 At March 31, 2017 At December 31, 2016
 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  $(48,447) $56,808  $(46,782) $56,808  $(50,827) $56,808  $(50,074)
Merchant Draft Processing Intangible  10,300   (10,005)  10,300   (9,895)  10,300   (10,154)  10,300   (10,107)
Total Identifiable Intangible Assets $67,108  $(58,452) $67,108  $(56,677) $67,108  $(60,981) $67,108  $(60,181)

 

As of June 30, 2016,March 31, 2017, the current period and estimated future amortization expense for identifiable intangible assets was:

 

  Core
Deposit
Intangibles		 Merchant
Draft
Processing
Intangible		 Total
  (In thousands)
For the Six Months ended June 30, 2016 (actual) $1,665  $110  $1,775 
Estimate for year ended December 31, 2016  3,292   212   3,504 
   2017  2,913   164   3,077 
   2018  1,892   29   1,921 
   2019  538   -   538 
   2020  287   -   287 
  Core
Deposit
Intangibles		 Merchant
Draft
Processing
Intangible		 Total
  (In thousands)
For the Three Months ended March 31, 2017 (actual) $753  $47  $800 
Estimate for the remainder of year ending December 31, 2017  2,160   117   2,277 
Estimate for year ending December 31, 2018  1,892   29   1,921 
2019  538   -   538 
2020  287   -   287 
2021  269   -   269 
2022  252   -   252 

 

-22- 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

 Deposits Deposits
 At June 30,
2016		 At December 31,
2015		 At March 31, 2017 At December 31, 2016
 (In thousands) (In thousands)
Noninterest-bearing $1,978,947  $2,026,049  $2,046,390  $2,089,443 
Interest-bearing:                
Transaction  827,857   860,706   905,588   865,701 
Savings  1,404,840   1,366,936   1,494,854   1,493,427 
Time deposits less than $100 thousand  142,863   150,780   129,889   133,712 
Time deposits $100 thousand through $250 thousand  92,477   96,971   83,636   84,925 
Time deposits more than $250 thousand  38,330   39,217   37,616   37,533 
Total deposits $4,485,314  $4,540,659  $4,697,973  $4,704,741 

 

Demand deposit overdrafts of $2,979$806  thousand and $3,038$2,679 thousand were included as loan balances at June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $135$106 thousand in the first quarter 2017 and $271$137 thousand forin the three months and six months ended June 30, 2016, respectively and $182 thousand and $379 thousand for the three months and six months ended June 30, 2015, respectively.first quarter 2016.

 

-22-

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

 

 Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
 At June 30, 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 March 31, 2017 At December 31, 2016
Repurchase agreements: (In thousands) (In thousands)
Collateral securing borrowings:                
Securities of U.S. Government sponsored entities $101,131  $98,969  $74,205  $74,031 
Obligations of states and political subdivisions  1,015   3,975 
Agency residential MBS  62,217   63,277 
Corporate securities  49,846   54,681   90,598   90,554 
Total collateral carrying value $151,992  $157,625  $227,020  $227,862 
Total short-term borrowed funds $67,852  $53,028  $73,611  $59,078 

 

The $35,000 thousand unsecured line of credit expired, with no outstanding balance, March 18, 2016 and was not renewed. 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.

 

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.value. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair value estimates may not be realized in an actual sale of the securities.

 

-23-

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3. When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the six months ended June 30, 2016, and three months ended March 31, 2015,2017 and year ended December 31, 2016, there were no transfers in or out of levels 1, 2 or 3. During the three 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 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.

 

[The remainder of this page intentionally left blank]

-24- 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

 At June 30, 2016 At March 31, 2017
 Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2 )		 Significant Unobservable Inputs
(Level 3 )		 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 $339,339  $-  $339,339  $-  $138,937  $-  $138,937  $- 
Agency residential MBS  187,746   -   187,746   -   722,204   -   722,204   - 
Non-agency residential MBS  314       314   -   196   -   196   - 
Non-agency commercial MBS  2,214   -   2,214   -   1,939   -   1,939   - 
Obligations of states and political subdivisions  148,850   -   148,850   -   178,871   -   178,871   - 
Asset-backed securities  1,317   -   1,317   -   355   -   355   - 
FHLMC and FNMA stock  6,234   9   6,225   -   9,400   12   9,388   - 
Corporate securities  842,614   -   842,614   -   839,136   -   839,136   - 
Other securities  2,407   543   1,864   -   2,271   461   1,810   - 
Total securities available for sale $1,531,035  $552  $1,530,483  $-  $1,893,309  $473  $1,892,836  $- 

 

 At December 31, 2015 At December 31, 2016
 Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2 )		 Significant Unobservable Inputs
(Level 3 )		 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 $301,882  $-  $301,882  $-  $138,660  $-  $138,660  $- 
Agency residential MBS  202,544   -   202,544   -   691,499   -   691,499   - 
Non-agency residential MBS  370       370   -   271   -   271   - 
Non-agency commercial MBS  2,379   -   2,379   -   2,025   -   2,025   - 
Obligations of states and political subdivisions  157,509   -   157,509   -   183,411   -   183,411   - 
Asset-backed securities  2,003   -   2,003   -   695   -   695   - 
FHLMC and FNMA stock  4,329   7   4,322   -   10,869   17   10,852   - 
Corporate securities  896,369   -   896,369   -   860,857   -   860,857   - 
Other securities  2,831   991   1,840   -   2,471   656   1,815   - 
Total securities available for sale $1,570,216  $998  $1,569,218  $-  $1,890,758  $673  $1,890,085  $- 

[The remainder of this page intentionally left blank]

 

-24-

-25- 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at June 30, 2016March 31, 2017 and December 31, 2015,2016, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

 

         For the
Three Months Ended
 At June 30, 2016 For the
Six Months Ended
June 30, 2016		 At March 31, 2017 March 31, 2017
 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 $4,162  $-  $-  $4,162  $(759) $2,136  $-  $-  $2,136  $- 
Impaired loans  14,217   -   -   14,217   (1,499)  9,400   -   -   9,400   - 
Total assets measured at fair value on a nonrecurring basis $18,379  $-  $-  $18,379  $(2,258) $11,536  $-  $-  $11,536  $- 

 

         For the
Year Ended
 At December 31, 2015 For the
Year Ended
December 31, 2015		 At December 31, 2016 December 31, 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 $9,264  $-  $-  $9,264  $(320) $3,095  $-  $-  $3,095  $(705)
Impaired loans  15,633   -   -   15,633   (449)  9,525   -   -   9,525   - 
Total assets measured at fair value on a nonrecurring basis $24,897  $-  $-  $24,897  $(769) $12,620  $-  $-  $12,620  $(705)

 

Level 3 – Valuation is based upon present value of expected future cash flows, independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. Level 3 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets. The unobservable inputs and qualitative information about the unobservable inputs are not presented 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 $28,910$24,919 thousand at June 30, 2016March 31, 2017 and $29,771$25,954 thousand at December 31, 2015 and the purchased loan discount associated with purchased covered and purchased non-covered loans of $-0- thousand and $5,411 thousand, respectively at June 30, 2016 and $152 thousand and $6,432 thousand, respectively at December 31, 2015 werewas 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.

 

-25-

-26- 

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 June 30, 2016 At March 31, 2017
 Carrying Amount Estimated Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2 )		 Significant Unobservable Inputs
(Level 3 )		 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 $441,785  $441,785  $441,785  $-  $-  $546,815  $546,815  $546,815  $-  $- 
Investment securities held to maturity  1,473,357   1,507,177   -   1,507,177   -   1,298,414   1,296,738   -   1,296,738   - 
Loans  1,400,650   1,423,629   -   -   1,423,629   1,326,171   1,332,148   -   -   1,332,148 
                                        
Financial Liabilities:                                        
Deposits $4,485,314  $4,484,269  $-  $4,211,644  $272,625  $4,697,973   4,695,676  $-  $4,446,832   248,844 
Short-term borrowed funds  67,852   67,852   -   67,852   -   73,611   73,611   -   73,611   - 

 

 At December 31, 2015 At December 31, 2016
 Carrying Amount Estimated Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Other Observable Inputs
(Level 2 )		 Significant Unobservable Inputs
(Level 3 )		 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 $433,044  $433,044  $433,044  $-  $-  $462,271  $462,271  $462,271  $-  $- 
Investment securities held to maturity  1,316,075   1,325,699   -   1,325,699   -   1,346,312   1,340,741   -   1,340,741   - 
Loans  1,503,625   1,517,394   -   -   1,517,394   1,326,757   1,337,774   -   -   1,337,774 
                                        
Financial Liabilities:                                        
Deposits $4,540,659  $4,539,455  $-  $4,253,691  $285,764  $4,704,741  $4,702,797  $-  $4,448,571  $254,226 
Short-term borrowed funds  53,028   53,028   -   53,028   -   59,078   59,078   -   59,078   - 

 

The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.

 

-26-

-27- 

Note 10: Commitments and Contingent Liabilities

 

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $299,744$305,544 thousand and $299,884$304,508 thousand at June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled $23,567$19,762 thousand and $26,149$21,732 thousand at June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. The Company also had commitments for commercial and similar letters of credit of $-0- thousand at June 30, 2016 and $40 thousand at DecemberMarch 31, 2015. At June 30, 20162017 and December 31, 2015, the2016. The Company had a reserve for unfunded commitments of $2,593$2,308 thousand at March 31, 2017 and $2,408 thousand at December 31, 2016, included in other liabilities.

 

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount iscan be reasonably estimable.estimated.

 

Note 11: Earnings Per Common Share

 

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

 

 For the Three Months For the Six Months 
 		For the Three Months Ended
March 31,
 Ended June 30, 2017 2016
 2016 2015 2016 2015 (In thousands, except per share data)
 (In thousands, except per share data)
Net income applicable to common equity (numerator) $14,546  $14,761  $28,772  $29,318 
Net income (numerator) $15,049  $14,226 
Basic earnings per common share                        
Weighted average number of common shares outstanding - basic (denominator)  25,586   25,514   25,516   25,582   26,171   25,445 
Basic earnings per common share $0.57  $0.58  $1.13  $1.15  $0.58  $0.56 
Diluted earnings per common share                        
Weighted average number of common shares outstanding - basic  25,586   25,514   25,516   25,582   26,171   25,445 
Add common stock equivalents for options  44   22   33   13   158   23 
Weighted average number of common shares outstanding - diluted (denominator)  25,630   25,536   25,549   25,595   26,329   25,468 
Diluted earnings per common share $0.57  $0.58  $1.13  $1.15  $0.57  $0.56 

 

For the three and six months ended June 30,March 31, 2017 and 2016, options to purchase 779299 thousand and 1,0381,297 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 six months ended June 30, 2015, options to purchase 1,376 thousand and 1,575 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.

 

[The remainder of this page intentionally left blank]

 

-28- 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

  For the Three Months For the Six Months
  Ended June 30,
  2016 2015 2016 2015
  (In thousands, except per share data)
Net Interest and Fee Income (FTE)(1) $36,495  $37,415  $72,942  $74,345 
Provision for Loan Losses  -   -   -   - 
Noninterest Income  11,702   12,269   23,431   24,569 
Noninterest Expense  25,229   26,896   51,087   53,623 
Income Before Income Taxes (FTE)(1)  22,968   22,788   45,286   45,291 
Income Tax Provision (FTE)(1)  8,422   8,027   16,514   15,973 
Net Income $14,546  $14,761  $28,772  $29,318 
                 
Average Common Shares Outstanding  25,586   25,514   25,516   25,582 
Average Diluted Common Shares Outstanding  25,630   25,536   25,549   25,595 
Common Shares Outstanding at Period End  25,632   25,529         
                 
Per Common Share:                
  Basic Earnings $0.57  $0.58  $1.13  $1.15 
  Diluted Earnings  0.57   0.58   1.13   1.15 
  Book Value $21.78  $20.58         
                 
Financial Ratios:                
  Return on Assets  1.13%  1.17%  1.12%  1.17%
  Return on Common Equity  10.87%  11.50%  10.86%  11.47%
  Net Interest Margin (FTE)(1)  3.27%  3.37%  3.30%  3.40%
  Net Loan Losses to Average Loans  0.16%  0.09%  0.12%  0.08%
  Efficiency Ratio(2)  52.3%  54.1%  53.0%  54.2%
                 
Average Balances:                
  Assets $5,184,409  $5,044,361  $5,179,607  $5,051,907 
  Earning Assets  4,473,700   4,436,196   4,427,507   4,389,374 
  Loans  1,455,050   1,655,779   1,477,833   1,669,686 
  Deposits  4,531,751   4,395,351   4,534,650   4,399,127 
  Shareholders' Equity  537,987   514,768   532,582   515,423 
                 
Period End Balances:                
  Assets $5,179,085  $5,031,230         
  Earning Assets  4,433,952   4,425,730         
  Loans  1,429,560   1,631,271         
  Deposits  4,485,314   4,354,844         
  Shareholders' Equity  558,327   525,338         
                 
Capital Ratios at Period End:                
  Total Risk Based Capital  14.76%  13.08%        
  Tangible Equity to Tangible Assets  8.48%  7.99%        
                 
Dividends Paid Per Common Share $0.39  $0.38  $0.78  $0.76 
Common Dividend Payout Ratio  68%  66%  69%  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 a "fully taxable equivalent" ("FTE") basis, which is a non-GAAP financial measure, in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.
-27- 
(2)The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis, which is a non-GAAP financial measure, and noninterest income).

 

-29- 

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

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

  For the Three Months Ended
  March 31, March 31, December 31,
  2017 2016 2016
  (In thousands, except per share data)
Net Interest and Fee Income (FTE)(1) $36,030  $36,447  $35,959 
Provision for Loan Losses  -   -   - 
Noninterest Income  11,657   11,729   11,545 
Noninterest Expense  24,615   25,858   24,577 
Income Before Income Taxes (FTE)(1)  23,072   22,318   22,927 
Provision for Income Taxes (FTE)(1)  8,023   8,092   8,474 
Net Income $15,049  $14,226  $14,453 
             
Average Common Shares Outstanding  26,171   25,445   25,773 
Average Diluted Common Shares Outstanding  26,329   25,468   25,925 
Common Shares Outstanding at Period End  26,283   25,438   25,907 
             
Per Common Share:            
Basic Earnings $0.58  $0.56  $0.56 
Diluted Earnings  0.57   0.56   0.56 
Book Value Per Common Share $22.25  $21.19  $21.67 
             
Financial Ratios:            
Return On Assets  1.13%  1.11%  1.07%
Return On Common Equity  10.48%  10.85%  10.30%
Net Interest Margin (FTE)(1)  3.14%  3.34%  3.15%
Net Loan Losses to Average Loans  0.31%  0.08%  0.12%
Efficiency Ratio(2)  51.6%  53.7%  51.7%
             
Average Balances:            
Assets $5,395,783  $5,174,804  $5,370,412 
Earning Assets  4,620,001   4,381,423   4,561,619 
Loans  1,355,250   1,500,616   1,356,350 
Deposits  4,692,746   4,537,548   4,702,129 
Shareholders' Equity  582,384   527,177   558,057 
             
Period End Balances:            
Assets $5,395,947  $5,199,868  $5,366,083 
Earning Assets  4,542,813   4,417,305   4,589,781 
Loans  1,351,090   1,473,196   1,352,711 
Deposits  4,697,973   4,516,750   4,704,741 
Shareholders' Equity  584,888   538,973   561,367 
             
Capital Ratios at Period End:            
Total Risk Based Capital  16.91%  13.51%  15.95%
Tangible Equity to Tangible Assets  8.68%  8.04%  8.26%
             
Dividends Paid Per Common Share $0.39  $0.39  $0.39 
Common Dividend Payout Ratio  68%  70%  70%

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 FTE basis in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.
(2)The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis and noninterest income).

-28-

Financial Overview

 

Westamerica Bancorporation and subsidiaries’ (the “Company”Company”) principal source of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment securities (“interest-earningearning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). The relatively low level of marketMarket interest rates has reduceddeclined considerably following the spread between interestrecession of 2008 and 2009. Interest rates on earning assets and interest bearing liabilities. The Company’s net interest margin and net interest income declinedremained historically low through 2016 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 second quarter 2015 through the second quarter 2016;Federal Open Market Committee’s (“FOMC”) monetary policy was highly accommodative. During this period, Management has been avoidingavoided originating long-dated, low-yielding loans given historically low interest rates. Management has also maintained, in their opinion, conservative loan underwriting, termsthe potential impact of such assets on forward earning potential; as a result, loans declined 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.increased. The changing composition of interestthe earning assets and low market interest rates has pressured the net interest margin onto lower levels. The FOMC’s first post-recession increase in the federal funds rate occurred in December 2015, although longer-term rates declined. The FOMC’s second and third post-recession increases in the federal funds rate occurred in December 2016 and March 2017, and longer-term rates increased as well. The recent increase in rates has resulted in competitive loan yields, which are more appealing from a fully taxable equivalent (“FTE”) basis. Inprofitability perspective, in Management’s opinion. Total average loan volumes were stable during the secondfirst quarter 20162017.

The funding of the Company’s averageearning assets is primarily customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits were 5as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. The first quarter 2017 average volume of checking and savings deposits was 95 percent higher than in the second quarter 2015. The growth in lower-costing deposit products contributed to lowering the funding cost from 0.06 percent in the second quarter 2015 to 0.05 percent in the second quarter 2016. of average total deposits.

Credit quality improved during the first quarter 2017 with nonperforming assets declining $3 million to $18.1$9 million at June 30, 2016 from $25.7March 31, 2017. The Company did not recognize a provision for loan losses in the first quarter 2017.

The Company’s long-term strategy also includes controlling operating costs, or “noninterest expense.” Noninterest expense of $24.6 million at June 30, 2015. Management is focused on controlling all noninterest expense levels, particularly due to market interest rate pressure on net interest income.for the first quarter 2017 was $1.3 million lower than the comparable first quarter 2016.

 

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.rate. Management believes the FTE basis is valuable to the reader because the Company’s loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks, therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on a FTE basis.

 

The Company’s significant accounting policies are presented in(see Note 1 (“Summary of Significant Accounting Policies”) to the audited consolidated financial statements includedFinancial Statements in the Company’s Annual Report on2016 Form 10-K for the year ended December 31, 2015, and10-K) are fundamental to understanding the Company’s results of operations and financial condition. There have been no changesThe Company adopted the FASB ASU 2016-09,Improvements to the Company’s significant accounting policies during the first half of 2016.Employee Share-Based Payment Accounting effective January 1, 2017.

 

The Company reported first quarter 2017 net income of $14.5$15.0 million or $0.57 diluted earnings per common share. First quarter 2017 results reflect the Company’s prospective adoption of ASU 2016-09; first quarter 2017 diluted earnings per common share for the secondmeasured $0.02 higher than would have been measured under accounting standards applied in 2016. First quarter 2016 and2017 results compare to net income of $28.8$14.2 million or $1.13$0.56 diluted earnings per common share for the six months ended June 30, 2016. These results compare to net income of $14.8first quarter 2016 and $14.5 million or $0.58$0.56 diluted earnings per common share for the secondfourth quarter 2015 and net income of $29.3 million or $1.15 diluted earnings per common share for the six months ended June 30, 2015.2016.

 

[The remainder of this page intentionally left blank]

 

-29-

-30- 

Net Income

 

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

 

  For the Three Months For the Six Months
  Ended June 30,
  2016 2015 2016 2015
  (In thousands, except per share data)
Net interest and fee income (FTE) $36,495  $37,415  $72,942  $74,345 
Provision for loan losses  -   -   -   - 
Noninterest income  11,702   12,269   23,431   24,569 
Noninterest expense  25,229   26,896   51,087   53,623 
Income  before taxes (FTE)  22,968   22,788   45,286   45,291 
Income tax provision (FTE)  8,422   8,027   16,514   15,973 
Net income $14,546  $14,761  $28,772  $29,318 
                 
Average diluted common shares  25,630   25,536   25,549   25,595 
Diluted earnings per common share $0.57  $0.58  $1.13  $1.15 
                 
Average total assets $5,184,409  $5,044,361  $5,179,607  $5,051,907 
Net income to average total assets (annualized)  1.13%  1.17%  1.12%  1.17%
Net income to average common shareholders' equity (annualized)  10.87%  11.50%  10.86%  11.47%

  For the Three Months Ended
  March 31, December 31,
  2017 2016 2016
  (In thousands, except per share data)
Net interest and loan fee income (FTE) $36,030  $36,447  $35,959 
Provision for loan losses  -   -   - 
Noninterest income  11,657   11,729   11,545 
Noninterest expense  24,615   25,858   24,577 
Income  before taxes (FTE)  23,072   22,318   22,927 
Income tax provision (FTE)  8,023   8,092   8,474 
Net income $15,049  $14,226  $14,453 
             
Average diluted common shares  26,329   25,468   25,925 
Diluted earnings per common share $0.57  $0.56  $0.56 
             
Average total assets $5,395,783  $5,174,804  $5,370,412 
Net income to average total assets (annualized)  1.13%  1.11%  1.07%
Net income to average common shareholders' equity (annualized)  10.48%  10.85%  10.30%

 

Net income for the secondfirst quarter of 20162017 was $215$823 thousand lessmore than the same quarter of 2015, the net result of lower net2016. Net interest and fee income (FTE), lower noninterest income and higher income tax provision (FTE), partially offset by lower noninterest expense. A decrease in net interest andloan fee income (FTE) wasdecreased in the first quarter 2017 compared with first quarter 2016 mostly attributedattributable to lower average balances of loans and lower yield on interest-earning assets, partially offset by higher average balances of investments and lower average balances of higher-costing time deposits. The provision for loan losses remained zero, 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. Noninterest expense decreased mostly due to lowerreductions in professional fees, courier costs, postage, correspondent service charges, OREO expense, insurance related costspremiums, limited partnership operating losses and lower salaries resulting from employee attrition, occupancy cost reductions from branch closures, and gains on sale of foreclosed properties.intangible amortization. The incomeeffective tax provision (FTE) was higherrate decreased to 34.8% in the secondfirst quarter 2017 from 36.3% in the first quarter 2016 primarily due to reduced levelsthe adoption of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits.ASU 2016-09.

 

Comparing the first halfquarter of 2017 with the fourth quarter of 2016, with the first half of 2015, net income decreased $546increased $596 thousand due to lower net interest and fee income (FTE), lower noninterest income and higher income tax provision (FTE), partially offset by lower and higher noninterest expense. 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, the effect of one additional accrual day and lower average balances of higher-costing time deposits.income. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income decreasedincreased primarily due to reduced levels of service charges on deposit accounts and lowerhigher merchant credit card fees, partially offset by higher debit card fees. Noninterest expense decreased mostly due to lower insurance related costs and lower salaries resulting from employee attrition, occupancy cost savings from branch closures, and gains on sale of foreclosed properties. Income tax provision (FTE) increased in the first half of 2016 due to reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income, and lower tax credits.

 

[The remainder of this page intentionally left blank]

-31- 

Net Interest and Loan Fee Income (FTE)

 

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

 

  For the Three Months For the Six Months
  Ended June 30,
  2016 2015 2016 2015
  ($ in thousands)
Interest and fee income $33,727  $34,425  $67,374  $68,342 
Interest expense  541   617   1,093   1,276 
FTE adjustment  3,309   3,607   6,661   7,279 
Net interest and fee income (FTE) $36,495  $37,415  $72,942  $74,345 
                 
Average earning assets $4,473,700  $4,436,196  $4,427,507  $4,389,374 
Net interest margin (FTE) (annualized)  3.27%  3.37%  3.30%  3.40%

  For the Three Months Ended
  March 31, December 31,
  2017 2016 2016
  (In thousands)
Interest and loan fee income $33,324  $33,647  $33,209 
Interest expense  480   552   500 
FTE adjustment  3,186   3,352   3,250 
Net interest and loan fee income (FTE) $36,030  $36,447  $35,959 
             
Average earning assets $4,620,001  $4,381,423  $4,561,619 
Net interest margin (FTE) (annualized)  3.14%  3.34%  3.15%

 

Net interest and fee income (FTE) decreased during the secondfirst quarter 20162017 by $920$417 thousand from the same period in 2015,2016, mainly due to lower average balances of loans (down $201$145 million), and lower yield on interest-earning assets, partially offset by higher average balances of investments (up $238$384 million) and lower average balances of higher-costing time deposits (down $72$30 million).

 

-30-

Comparing the first half of 2016quarter 2017 with the first half of 2015,fourth quarter 2016, net interest and fee income (FTE) decreased $1.4 millionincreased $71 thousand due to lower average balances of loans (down $192 million), partially offset by higher average balances of investments (up $230$59 million) and higher yield on those investments (up 0.01%), the effect of one additional accrual day andoffset by lower average balances of higher-costing time depositsnet yield on loans (down $84 million)0.04%).

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 3.27%3.14% in the secondfirst quarter 2017 compared with 3.34% in the first quarter 2016 and 3.30%3.15% in the first half of 2016 compared with 3.37% in the secondfourth quarter 2015 and 3.40% in the first half of 2015.2016. 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 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 invest in higher yielding assets assuming market interest rates start rising.increase to levels higher than yields on maturing securities and security paydowns.

 

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 $72$30 million from the secondfirst quarter 20152016 to secondfirst quarter 20162017 while lower-cost checking and savings deposits grew 5%4% in the same period. Average balances of checking and saving deposits accounted for 93.9%94.6% of average total deposits in the secondfirst quarter 2017 compared with 93.7% in the first quarter 2016 and 93.8%94.5% in the first half of 2016 compared with 92.1% and 91.7% in the secondfourth quarter 2015 and first half of 2015, respectively.2016.

 

[The remainder of this page intentionally left blank]

-32- 

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 For the Six Months
  Ended June 30,
  2016 2015 2016 2015
         
Yield on earning assets (FTE)  3.32%  3.43%  3.35%  3.46%
Rate paid on interest-bearing liabilities  0.08%  0.10%  0.08%  0.10%
Net interest spread (FTE)  3.24%  3.33%  3.27%  3.36%
Impact of noninterest-bearing demand deposits  0.03%  0.04%  0.03%  0.04%
Net interest margin (FTE)  3.27%  3.37%  3.30%  3.40%

  For the Three Months Ended
  March 31, December 31,
  2017 2016 2016
       
Yield on earning assets (FTE)  3.18%  3.39%  3.19%
Rate paid on interest-bearing liabilities  0.07%  0.09%  0.07%
Net interest spread (FTE)  3.11%  3.30%  3.12%
Impact of noninterest-bearing funds  0.03%  0.04%  0.03%
Net interest margin (FTE)  3.14%  3.34%  3.15%

 

During 20152016 and 2016,through the first quarter 2017, 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 avoiding 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. 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.

 

[The remainder of this page intentionally left blank]

 

-31-

 

-33- 

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 June 30, 2016 For the Three Months Ended March 31, 2017
   Interest     Interest  
 Average Income/ Yields/ Average Income/ Yields/
 Balance Expense Rates Balance Expense Rates
 ($ in thousands) ($ in thousands)
Assets                  
Investment securities:                        
Taxable $2,182,962  $10,558   1.93% $2,433,669  $12,147   2.00%
Tax-exempt (1)  835,688   8,581   4.11%  831,082   8,294   3.99%
Total investments (1)  3,018,650   19,139   2.53%  3,264,751   20,441   2.50%
Loans:                        
Taxable  1,386,677   16,999   4.93%  1,290,093   15,243   4.79%
Tax-exempt (1)  68,373   898   5.28%  65,157   826   5.14%
Total loans (1)  1,455,050   17,897   4.95%  1,355,250   16,069   4.81%
Total Interest-earning assets (1)  4,473,700   37,036   3.32%  4,620,001   36,510   3.18%
Other assets  710,709           775,782         
Total assets $5,184,409          $5,395,783         
                        
Liabilities and shareholders' equity                        
Noninterest-bearing demand $1,994,803  $-   -% $2,056,858  $-   -%
Savings and interest-bearing transaction  2,260,054   292   0.05%  2,382,348   280   0.05%
Time less than $100,000  157,419   104   0.27%  141,400   83   0.24%
Time $100,000 or more  119,475   135   0.45%  112,140   106   0.38%
Total interest-bearing deposits  2,536,948   531   0.08%  2,635,888   469   0.07%
Short-term borrowed funds  61,920   10   0.07%  68,584   11   0.06%
Total interest-bearing liabilities  2,598,868   541   0.08%  2,704,472   480   0.07%
Other liabilities  52,751           52,069         
Shareholders' equity  537,987           582,384         
Total liabilities and shareholders' equity $5,184,409          $5,395,783         
Net interest spread (1) (2)          3.24%          3.11%
Net interest and fee income and interest margin (1) (3)     $36,495   3.27%     $36,030   3.14%

 

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

 

-32-

-34- 

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

 

 For the Three Months Ended June 30, 2015 For the Three Months Ended March 31, 2016
   Interest     Interest  
 Average Income/ Yields/ Average Income/ Yields/
 Balance Expense Rates Balance Expense Rates
 ($ in thousands) ($ in thousands)
Assets                  
Investment securities:                        
Taxable $1,920,459  $8,393   1.75% $2,046,547  $9,674   1.89%
Tax-exempt (1)  859,958   9,215   4.29%  834,260   8,636   4.14%
Total investments (1)  2,780,417   17,608   2.53%  2,880,807   18,310   2.54%
Loans:                        
Taxable  1,578,185   19,310   4.91%  1,429,106   17,726   4.99%
Tax-exempt (1)  77,594   1,114   5.76%  71,510   963   5.41%
Total loans (1)  1,655,779   20,424   4.95%  1,500,616   18,689   5.01%
Total Interest-earning assets (1)  4,436,196  $38,032   3.43%  4,381,423   36,999   3.39%
Other assets  608,165           793,381         
Total assets $5,044,361          $5,174,804         
                        
Liabilities and shareholders' equity                        
Deposits:            
Noninterest-bearing demand $1,942,124  $-   -% $1,993,986  $-   -%
Savings and interest-bearing transaction  2,104,570   269   0.05%  2,259,681   293   0.05%
Time less than $100,000  176,052   150   0.34%  160,190   113   0.28%
Time $100,000 or more  172,605   182   0.42%  123,691   137   0.44%
Total interest-bearing deposits  2,453,227   601   0.10%  2,543,562   543   0.09%
Short-term borrowed funds  86,967   16   0.07%  57,846   9   0.07%
Total interest-bearing liabilities  2,540,194  $617   0.10%  2,601,408   552   0.09%
Other liabilities  47,275           52,233         
Shareholders' equity  514,768           527,177         
Total liabilities and shareholders' equity $5,044,361          $5,174,804         
Net interest spread (1) (2)          3.33%          3.30%
Net interest and fee income and interest margin (1) (3)     $37,415   3.37%     $36,447   3.34%

 

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

[The remainder of this page intentionally left blank]

-35- 

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

  For the Six Months Ended June 30, 2016
    Interest  
  Average Income/ Yields/
  Balance Expense Rates
  ($ in thousands)
Assets            
Investment securities:            
  Taxable $2,114,700  $20,231   1.91%
  Tax-exempt (1)  834,974   17,218   4.12%
    Total investments (1)  2,949,674   37,449   2.54%
Loans:            
  Taxable  1,407,891   34,725   4.96%
  Tax-exempt (1)  69,942   1,861   5.35%
    Total loans (1)  1,477,833   36,586   4.98%
        Total Interest-earning assets (1)  4,427,507   74,035   3.35%
Other assets  752,100         
    Total assets $5,179,607         
             
Liabilities and shareholders' equity            
  Noninterest-bearing demand $1,994,395  $-   -%
  Savings and interest-bearing transaction  2,259,867   585   0.05%
  Time less than $100,000  158,805   218   0.28%
  Time $100,000 or more  121,583   271   0.45%
     Total interest-bearing deposits  2,540,255   1,074   0.08%
Short-term borrowed funds  59,883   19   0.07%
    Total interest-bearing liabilities  2,600,138   1,093   0.08%
Other liabilities  52,492         
Shareholders' equity  532,582         
    Total liabilities and shareholders' equity $5,179,607         
Net interest spread (1) (2)          3.27%
Net interest and fee income and interest margin (1) (3)     $72,942   3.30%

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

[The remainder of this page intentionally left blank]

 

-36- 

-33-

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

 

 For the Six Months Ended June 30, 2015 For the Three Months Ended December 31, 2016
   Interest     Interest  
 Average Income/ Yields/ Average Income/ Yields/
 Balance Expense Rates Balance Expense Rates
 ($ in thousands) ($ in thousands)
Assets                  
Investment securities:                        
Taxable $1,854,706  $15,946   1.72% $2,351,530  $11,462   1.95%
Tax-exempt (1)  864,982   18,638   4.31%  853,739   8,471   3.97%
Total investments (1)  2,719,688   34,584   2.54%  3,205,269   19,933   2.49%
Loans:                        
Taxable  1,591,440   38,827   4.92%  1,290,372   15,693   4.84%
Tax-exempt (1)  78,246   2,210   5.70%  65,978   833   5.02%
Total loans (1)  1,669,686   41,037   4.96%  1,356,350   16,526   4.85%
Total Interest-earning assets (1)  4,389,374  $75,621   3.46%
Total interest-earning assets (1)  4,561,619   36,459   3.19%
Other assets  662,533           808,793         
Total assets $5,051,907          $5,370,412         
                        
Liabilities and shareholders' equity                        
Deposits:                        
Noninterest-bearing demand $1,931,034  $-   -% $2,077,213  $-   -%
Savings and interest-bearing transaction  2,103,846   548   0.05%  2,364,695   288   0.05%
Time less than $100,000  178,393   316   0.36%  146,440   90   0.24%
Time $100,000 or more  185,854   379   0.41%  113,781   113   0.40%
Total interest-bearing deposits  2,468,093   1,243   0.10%  2,624,916   491   0.07%
Short-term borrowed funds  86,662   32   0.07%  56,669   9   0.06%
Federal Home Loan Bank advances  997   1   0.20%
Total interest-bearing liabilities  2,555,752  $1,276   0.10%  2,681,585   500   0.07%
Other liabilities  49,698           53,557         
Shareholders' equity  515,423           558,057         
Total liabilities and shareholders' equity $5,051,907          $5,370,412         
Net interest spread (1) (2)          3.36%          3.12%
Net interest and fee income and interest margin (1) (3)     $74,345   3.40%     $35,959   3.15%

 

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

 

[The remainder of this page intentionally left blank]

 

-34-

 

-37- 

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 June 30, 2016 For the Three Months Ended March 31, 2017
 Compared with Compared with
 For the Three Months Ended June 30, 2015 For the Three Months Ended March 31, 2016
 Volume Yield/Rate Total Volume Yield/Rate Total
 (In thousands) (In thousands)
Increase (decrease) in interest and loan fee income:                        
Investment securities:                        
Taxable $1,147  $1,018  $2,165  $1,830  $643  $2,473 
Tax-exempt (1)  (260)  (374)  (634)  (33)  (309)  (342)
Total investments (1)  887   644   1,531   1,797   334   2,131 
Loans:                        
Taxable  (2,355)  44   (2,311)  (1,697)  (786)  (2,483)
Tax-exempt (1)  (134)  (82)  (216)  (84)  (53)  (137)
Total loans (1)  (2,489)  (38)  (2,527)  (1,781)  (839)  (2,620)
Total (decrease) increase in interest and loan fee income (1)  (1,602)  606   (996)
Total increase (decrease) in interest and loan fee income (1)  16   (505)  (489)
Increase (decrease) in interest expense:                        
Deposits:                        
Savings and interest-bearing transaction  19   4   23   16   (29)  (13)
Time less than $100,000  (16)  (30)  (46)  (13)  (17)  (30)
Time $100,000 or more  (56)  9   (47)  (13)  (18)  (31)
Total interest-bearing deposits  (53)  (17)  (70)  (10)  (64)  (74)
Short-term borrowed funds  (5)  (1)  (6)  3   (1)  2 
Total decrease in interest expense  (58)  (18)  (76)  (7)  (65)  (72)
(Decrease) increase in net interest and loan fee income (1) $(1,544) $624  $(920)
Increase (decrease) in net interest and loan fee income (1) $23  $(440) $(417)

 

(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.

 

[The remainder of this page intentionally left blank]

 

-38- 

-35-

Summary of Changes in Interest Income and Expense

 

 For the Six Months Ended June 30, 2016 For the Three Months Ended March 31, 2017
 Compared with Compared with
 For the Six Months Ended June 30, 2015 For the Three Months Ended December 31, 2016
 Volume Yield/Rate Total Volume Yield/Rate Total
 (In thousands) (In thousands)
Increase (decrease) in interest and loan fee income:                        
Investment securities:                        
Taxable $2,235  $2,050  $4,285  $400  $285  $685 
Tax-exempt (1)  (647)  (773)  (1,420)  (225)  48   (177)
Total investments (1)  1,588   1,277   2,865   175   333   508 
Loans:                        
Taxable  (4,388)  286   (4,102)  (10)  (440)  (450)
Tax-exempt (1)  (231)  (118)  (349)  (16)  9   (7)
Total loans (1)  (4,619)  168   (4,451)  (26)  (431)  (457)
Total (decrease) increase in interest and loan fee income (1)  (3,031)  1,445   (1,586)
Total increase (decrease) in interest and loan fee income (1)  149   (98)  51 
Increase (decrease) in interest expense:                        
Deposits:                        
Savings and interest-bearing transaction  42   (5)  37   0   (8)  (8)
Time less than $100,000  (35)  (63)  (98)  (4)  (3)  (7)
Time $100,000 or more  (130)  22   (108)  (2)  (5)  (7)
Total interest-bearing deposits  (123)  (46)  (169)  (6)  (16)  (22)
Short-term borrowed funds  (13)  -   (13)  2   -   2 
Federal Home Loan Bank advances  (1)  -   (1)
Total decrease in interest expense  (137)  (46)  (183)  (4)  (16)  (20)
(Decrease) increase in net interest and loan fee income (1) $(2,894) $1,491  $(1,403)
Increase (decrease) in net interest and loan fee income (1) $153  $(82) $71 

 

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

 

The Company provided no provision for loan losses in the three monthsfirst quarter of 2017 and six months ended June 30, 2016the first and 2015. The provision for loan losses is determined based onfourth quarters of 2016. Management’s evaluation of credit quality includes originated and purchased loans. Classified loans declined $26.8 million (which included nonperforming loans of $6.7 million) during the period from March 31, 2016 to March 31, 2017. This development was reflected in Management’s evaluation of credit quality, the level of the provision for loan losses, and the adequacy of the allowance for loan losses at March 31, 2017. Management’s evaluation of credit quality includes originated and purchased loans. The Company recorded purchased loans at estimated fair value upon the acquisition 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. 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.Report.

 

-36-

-39- 

Noninterest Income

 

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

 

  For the Three Months For the Six Months
  Ended June 30,
  2016 2015 2016 2015
  (In thousands)
         
Service charges on deposit accounts $5,239  $5,694  $10,487  $11,401 
Merchant processing services  1,638   1,783   3,167   3,486 
Debit card fees  1,621   1,534   3,137   2,990 
Trust fees  657   672   1,318   1,378 
Other service charges  650   683   1,279   1,348 
ATM processing fees  603   627   1,261   1,212 
Financial services commissions  137   198   293   351 
Other noninterest income  1,157   1,078   2,489   2,403 
Total $11,702  $12,269  $23,431  $24,569 

  For the Three Months Ended
  March 31, December 31,
  2017 2016 2016
  (In thousands)
       
Service charges on deposit accounts $4,923  $5,248  $5,064 
Merchant processing services  1,875   1,529   1,678 
Debit card fees  1,481   1,516   1,566 
Trust fees  702   661   682 
Other service fees  650   629   620 
ATM processing fees  575   658   551 
Financial services commissions  195   156   157 
Other noninterest income  1,256   1,332   1,227 
Total $11,657  $11,729  $11,545 

 

Noninterest income for the secondfirst quarter 20162017 declined by $567$72 thousand or 4.6% from the same period in 2015.2016. Service charges on deposits decreased $455$325 thousand due to declines in fees charged on overdrawn and insufficient funds accounts (down $302$259 thousand) and lower fees on analyzed accounts (down $184$95 thousand), partially offset by the effect of deposit fee increases effective February 2016.. Merchant processing services fees decreased $145increased $346 thousand primarily due to lower transaction volumes and because larger sales relationships with low margins accounted for a significant portion ofincreased transaction volumes.

 

In the first half of 2016,quarter 2017, noninterest income decreased $1.1 million or 4.6%increased $112 thousand compared with the first halffourth quarter 2016 mostly due to a $197 thousand increase in merchant processing services fees primarily due to the improved margin mix of 2015.transaction volumes. Service charges on deposits decreased $914$141 thousand due to declines in fees charged on overdrawn and insufficient funds accounts (down $534$181 thousand) and lower fees on analyzed accounts (down $389$48 thousand), partially offset by the effect of deposit fee increases effective February 2016. Merchant processing services fees decreased $319 thousand primarily due to lower transaction volumes and because larger sales relationships with low margins accounted for a significant portioncollection of transaction volumes. Debit card fees increased $147 thousand due to increased transaction volumes.annual IRA account fees.

 

Noninterest Expense

 

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

 

 For the Three Months For the Six Months For the Three Months Ended
 Ended June 30, March 31, December 31,
 2016 2015 2016 2015 2017 2016 2016
 (In thousands) (In thousands)
  ��           
Salaries and related benefits $12,887  $13,696  $26,004  $27,034  $13,070  $13,117  $12,439 
Occupancy  3,400   3,726   6,798   7,453   3,633   3,398   3,570 
Outsourced data processing services  2,130   2,111   4,260   4,219   2,139   2,130   2,131 
Furniture and equipment  1,187   1,158   2,400   2,277   1,254   1,213   1,290 
Amortization of identifiable intangibles  870   955   1,775   1,956   800   905   863 
Professional services  758   582   1,490   1,130 
Professional fees  611   732   797 
Courier service  462   598   1,007   1,141   421   545   494 
Other real estate owned  (392)  52   (281)  367   (40)  111   7 
Other noninterest expense  3,927   4,018   7,634   8,046   2,727   3,707   2,986 
Total $25,229  $26,896  $51,087  $53,623  $24,615  $25,858  $24,577 

 

Noninterest expense decreased $1.7$1.3 million 6.2% in the secondfirst quarter 20162017 compared with the same period in 2015. Salaries and related benefits declined $809 thousand in the second quarter 2016 compared with the same period in 2015 mostly due to lower insurancereductions in professional fees, courier costs, OREO expense, intangible amortization and lower salaries resulting from employee attrition. Occupancyother noninterest expense. Other noninterest expense decreased $326 thousand in the second quarter 2016 compared with the same period in 2015 mostly due to branch closures and a lease expiration related to a non-branch building. Courier expense decreased $136$980 thousand primarily due to logistical changes. Expenses for other real estate owneddecreases in the second quarter 2016 were reduced by net gains from the saleinsurance premiums, correspondent bank service charges, limited partnership operating losses, postage and amortization of foreclosed properties.intangibles. Amortization of intangibles decreased $105 thousand as assets are amortized on a declining balance method. Professional fees increased $176decreased $121 thousand due to higherlower legal fees associated with nonperforming assets. Expenses of other real estate owned decreased in the first quarter 2017 due to gains on sale of disposition of foreclosed assets and because first quarter 2016 included net writedowns. Occupancy expense increased $235 thousand due to higher maintenance and utility costs.

 

-37-

-40- 

In the first half of 2016,quarter 2017, noninterest expense decreased $2.5 million or 4.7%increased $38 thousand compared with the first half of 2015.fourth quarter 2016. Salaries and related benefits increased $631 thousand primarily due to seasonally higher payroll taxes. Professional fees decreased $1.0 million$186 thousand due to lower legal fees. Other noninterest expense decreased $259 thousand primarily due to lower insurance costs and lower salaries resulting from employee attrition. Occupancy expense decreased $655 thousand in the first half of 2016 compared with the first half of 2015 mostly due to branch closures and a lease expiration related to a non-branch building. Courier expense decreased $134 thousand primarily due to logistical changes. Expenses for other real estate owned in the first half of 2016 were reduced by net gains from the sale of foreclosed properties. Professional fees increased $360 thousand due to higher legal fees associated with nonperforming assets. Furniture and equipment expense increased $123 thousand mainly due to increased depreciation costs for technology.correspondent bank service charges.

 

Provision for Income Tax

 

During the secondThe Company’s first quarter 2016, the Company recorded an2017 income tax provision (FTE) was $8.0 million. Effective January 1, 2017, the Company adopted ASU 2016-09 which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or expire. During the first quarter 2017, 376 thousand shares were issued due to the exercise of $8.4 million,nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1.6 million. First quarter 2017 income tax provision was $671 thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09. First quarter 2017 income tax provision (FTE) compared with $8.0$8.1 million inand $8.5 million for the secondfirst and fourth quarters 2016, respectively. The current quarter 2015. The second quarter 2016 provision represents an effective tax rate (FTE) of 36.7%34.8%, compared with 35.2% for the second quarter 2015. The income tax provision (FTE) was $16.5 million36.3% and 37.0% for the first half ofand fourth quarters 2016, compared with $16.0 million for the corresponding period of 2015.respectively. The first half of 2015quarter 2017 effective tax rate (FTE) was 36.5% compared to 35.3% for the same period of 2015. The effective tax rates (FTE) for the second quarter 2015 and the first half of 2015 were lower thanwould have been 37.7% under accounting rules applied in the respective periods of 2016 due to declining tax preference items. Interest income earned on municipal securities and loans which is exempt from federal income taxes has declined with both declining interest rates and lower volumes of municipal securities and loans. The Company’s investments in limited partnerships that qualify for tax credits have also declined.

2016.

 

Investment Portfolio

 

The Company maintains aan investment 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 securities portfolio in response to deposit growth and loan volume declines. The carrying value of the Company’s investment securities portfolio was $3.0$3.2 billion as of June 30, 2016, an increase of $118 million compared toMarch 31, 2017 and December 31, 2015.2016.

 

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. In 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.

 

As of June 30, 2016,March 31, 2017, substantially all of the Company’s investment securities continue to be investment grade rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

 

[The remainder of this page intentionally left blank]

 

-41- 

-38-

The following tables summarize the total general obligation and revenue bonds issued by states and political subdivisions held 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 June 30, 2016,March 31, 2017, the Company’s investment securities portfolios included securities issued by 717687 state and local government municipalities and agencies located within 4344 states with a fair value of $870.4$833.9 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 $10.6$10.1 million (fair value) represented by nine general obligation bonds.

 

  At June 30, 2016
  Amortized Fair
  Cost Value
  (In thousands)
Obligations of states and political subdivisions:    
General obligation bonds:        
California $117,263  $122,041 
Texas  61,945   63,859 
New Jersey  40,286   41,559 
Pennsylvania  40,584   41,271 
Minnesota  33,093   34,067 
Other (35 states)  253,435   263,899 
Total general obligation bonds $546,606  $566,696 
         
Revenue bonds:        
California $47,829  $50,130 
Pennsylvania  25,309   25,677 
Kentucky  23,955   24,858 
Iowa  18,121   18,789 
Colorado  16,120   16,866 
Other (30 states)  160,189   167,421 
Total revenue bonds $291,523  $303,741 
Total obligations of states and political subdivisions $838,129  $870,437 

  At March 31, 2017
  Amortized Fair
  Cost Value
  (In thousands)
Obligations of states and political subdivisions:    
General obligation bonds:        
California $102,125  $104,225 
Texas  68,829   68,944 
New Jersey  40,024   40,346 
Minnesota  30,703   30,947 
Pennsylvania  29,690   29,888 
Other (36 states)  277,881   278,999 
Total general obligation bonds $549,252  $553,349 
         
Revenue bonds:        
California $46,448  $47,514 
Kentucky  22,811   23,062 
Iowa  18,068   18,309 
Pennsylvania  16,067   16,179 
Colorado  15,553   15,739 
Washington  13,557   14,179 
Other (29 states)  143,540   145,564 
Total revenue bonds $276,044  $280,546 
Total obligations of states and political subdivisions $825,296  $833,895 

 

At December 31, 2015,2016, the Company’s investment securities portfolios included securities issued by 725698 state and local government municipalities and agencies located within 44 states with a fair value of $864.2$848.2 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$10.0 million (fair value) represented by nine general obligation bonds.

 

[The remainder of this page intentionally left blank]

 

-39-

  At December 31, 2016
  Amortized Fair
  Cost Value
  (In thousands)
Obligations of states and political subdivisions:    
General obligation bonds:        
California $105,129  $106,391 
Texas  69,017   68,671 
New Jersey  40,111   40,102 
Pennsylvania  37,384   37,543 
Minnesota  32,946   32,847 
Other (36 states)  280,488   279,571 
Total general obligation bonds $565,075  $565,125 
         
Revenue bonds:        
California $47,415  $48,429 
Kentucky  22,854   22,902 
Pennsylvania  18,568   18,683 
Iowa  18,086   18,302 
Colorado  15,574   15,674 
Other (30 states)  157,452   159,054 
Total revenue bonds $279,949  $283,044 
Total obligations of states and political subdivisions $845,024  $848,169 

 

-42- 

  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 June 30, 2016March 31, 2017 and December 31, 2015,2016, 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 2223 revenue sources. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

 

  At June 30, 2016
  Amortized Fair
  Cost Value
  (In thousands)
Revenue bonds by revenue source:        
Water $56,469  $59,909 
Sewer  43,357   45,101 
Sales tax  31,625   33,413 
Lease (renewal)  25,325   26,331 
College & University  18,362   18,781 
Lease (abatement)  16,771   17,609 
Other  99,614   102,597 
Total revenue bonds by revenue source $291,523  $303,741 

  At March 31, 2017
  Amortized Fair
  Cost Value
  (In thousands)
Revenue bonds by revenue source:        
Water $55,334  $57,043 
Sewer  35,455   36,187 
Sales tax  31,119   31,951 
Lease (renewal)  24,208   24,411 
College & University  17,806   17,808 
Other (18 sources)  112,122   113,146 
Total revenue bonds by revenue source $276,044  $280,546 

 

[The remainder of this page intentionally left blank]

  At December 31, 2016
  Amortized Fair
  Cost Value
  (In thousands)
Revenue bonds by revenue source:        
Water $55,401  $56,826 
Sewer  37,996   38,497 
Sales tax  31,146   31,835 
Lease (renewal)  24,242   24,235 
College & University  17,856   17,762 
Other (18 sources)  113,308   113,889 
Total revenue bonds by revenue source $279,949  $283,044 

 

-43- 

  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.

 

-40-

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.

 

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

 

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

 

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

 

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”).

 

-44- 

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.

  At March 31, At December 31,
  2017 2016 2016
  (In thousands)
       
Nonperforming nonaccrual loans $2,382  $15,806  $3,956 
Performing nonaccrual loans  4,285   1,921   4,429 
Total nonaccrual loans  6,667   17,727   8,385 
Accruing loans 90 or more days past due  373   260   497 
Total nonperforming loans  7,040   17,987   8,882 
Other real estate owned  2,136   8,438   3,095 
Total nonperforming assets $9,176  $26,425  $11,977 

 

Nonperforming Assets      
  At June 30, At December 31,
  2016 2015 2015
  (In thousands)
Originated:            
Nonperforming nonaccrual loans $1,693  $6,269  $6,302 
Performing nonaccrual loans  6,890   11   350 
Total nonaccrual loans  8,583   6,280   6,652 
Accruing loans 90 or more days past due  303   221   295 
Total nonperforming loans  8,886   6,501   6,947 
Other real estate owned  1,089   5,906   5,829 
Total nonperforming assets $9,975  $12,407  $12,776 
             
Purchased covered:            
Nonperforming nonaccrual loans $29  $3  $- 
Performing nonaccrual loans  -   -   - 
Total nonaccrual loans  29   3   - 
Accruing loans 90 or more days past due  -   -   - 
Total nonperforming loans  29   3   - 
Other real estate owned  -   486   - 
Total nonperforming assets $29  $489  $- 
             
Purchased non-covered:            
Nonperforming nonaccrual loans $4,805  $9,937  $8,346 
Performing nonaccrual loans  148   5   - 
Total nonaccrual loans  4,953   9,942   8,346 
Accruing loans 90 or more days past due  53   -   - 
Total nonperforming loans  5,006   9,942   8,346 
Other real estate owned  3,073   2,868   3,435 
Total nonperforming assets $8,079  $12,810  $11,781 
             
Total nonperforming assets $18,083  $25,706  $24,557 
-41-

 

Nonperforming assets have declined during 2016 and the first quarter 2017 due to payoffs and chargeoffs. At June 30, 2016, two loansMarch 31, 2017, one loan secured by commercial real estate totaling $9.3with a balance of $4.3 million werewas on nonaccrual status. The remaining fourteenseven nonaccrual loans held at June 30, 2016March 31, 2017 had an average carrying value of $304$340 thousand and the largest carrying value was $1.9$1.3 million.

 

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.

 

-45- 

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

 

  For the Three Months For the Six Months
  Ended June 30,
  2016 2015 2016 2015
  ($ in thousands)
Analysis of the Allowance for Loan Losses        
Balance, beginning of period $29,487  $31,187  $29,771  $31,485 
  Provision for loan losses  -   -   -   - 
  Loans charged off                
    Commercial  (764)  (401)  (1,935)  (461)
    Real estate residential  -   -   -   - 
    Consumer installment and other  (677)  (576)  (1,682)  (1,571)
    Purchased non-covered loans  (38)  (396)  (38)  (431)
  Total chargeoffs  (1,479)  (1,373)  (3,655)  (2,463)
  Recoveries of loans previously charged off                
    Commercial  537   334   782   514 
    Commercial real estate  15   15   30   30 
    Real estate construction  -   -   -   - 
    Consumer installment and other  339   443   795   1,033 
    Purchased non-covered loans  11   222   1,187   229 
  Total recoveries  902   1,014   2,794   1,806 
  Net loan losses  (577)  (359)  (861)  (657)
Balance, end of period $28,910  $30,828  $28,910  $30,828 
                 
Net loan (losses) recoveries:                
  Originated loans $(550) $(185) $(2,010) $(455)
  Purchased non-covered loans  (27)  (174)  1,149   (202)
Net loan losses as a percentage of average total loans (annualized)  0.16%  0.09%  0.12%  0.08%

  For the Three Months Ended
  March 31, December 31,
  2017 2016 2016
  (In thousands)
Analysis of the Allowance for Loan Losses      
Balance, beginning of period $25,954  $29,771  $26,359 
Provision for loan losses  -   -   - 
Provision for unfunded commitments  -   -   - 
Loans charged off            
Commercial  (103)  (1,171)  - 
Commercial real estate  -   -   - 
Consumer installment and other  (1,739)  (1,006)  (1,180)
Total chargeoffs  (1,842)  (2,177)  (1,180)
Recoveries of loans previously charged off            
Commercial  160   1,421   325 
Commercial real estate  10   15   15 
Construction  -   -   - 
Consumer installment and other  637   457   435 
Total recoveries  807   1,893   775 
Net loan losses  (1,035)  (284)  (405)
Balance, end of period $24,919  $29,487  $25,954 
             
Net loan losses as a percentage of            
average total loans (annualized)  0.31%  0.08%  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. 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 loss rates to the purchased loan portfolio segments to determine initial allocations of the allowance. Further, liquidatingLiquidating 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 ofloss rates are applied to segmented loan balances to allocate the allowance to purchased loan portfoliothe segments are compared to loan default discounts ascribed to each segment. Management establishes allocations of the allowance for loan losses for any estimated deficiency.portfolio.

 

-42-

-46- 

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 June 30, 2016March 31, 2017 is economic and business conditions $1.1 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 $1.1 million, adequacy of lending Management and staff $0.9 million and concentrations of credit $2.0$1.3 million.

 

  Allowance for Loan Losses
  For the Three Months Ended June 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 $9,847  $4,237  $130  $1,707  $6,683  $950  $-  $5,933  $29,487 
    Additions:                                    
        Provision  782   (340)  (3)  (106)  271   121   66   (791)  - 
    Deductions:                                    
        Chargeoffs  (764)  -   -   -   (677)  (38)  -   -   (1,479)
        Recoveries  537   15   -   -   339   11   -   -   902 
            Net loan (losses) recoveries  (227)  15   -   -   (338)  (27)  -   -   (577)
Total allowance for loan losses $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910 

  Allowance for Loan Losses
  For the Three Months Ended March 31, 2017
          Consumer    
    Commercial   Residential Installment    
  Commercial Real Estate Construction Real Estate and Other Unallocated Total
  (In thousands)
Allowance for loan losses:                            
Balance at beginning of period $8,327  $3,330  $152  $1,330  $7,980  $4,835  $25,954 
Additions:                            
Provision (reversal)  209   182   (40)  (116)  106   (341)  - 
Deductions:                            
Chargeoffs  (103)  -   -   -   (1,739)  -   (1,842)
Recoveries  160   10   -   -   637   -   807 
Net loan recoveries (losses)  57   10   -   -   (1,102)  -   (1,035)
Total allowance for loan losses $8,593  $3,522  $112  $1,214  $6,984  $4,494  $24,919 

 

  Allowance for Loan Losses
  For the Six Months Ended June 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  1,996   (342)  (50)  (200)  423   (1,072)  66   (821)  - 
    Deductions:                                    
        Chargeoffs  (1,935)  -   -   -   (1,682)  (38)  -   -   (3,655)
        Recoveries  782   30   -   -   795   1,187   -   -   2,794 
            Net loan (losses) recoveries  (1,153)  30   -   -   (887)  1,149   -   -   (861)
Total allowance for loan losses $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910 
  Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
  At March 31, 2017
  Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Unallocated Total
  (In thousands)
Allowance for loan losses:                            
Individually evaluated for impairment $4,991  $-  $-  $-  $-  $-  $4,991 
Collectively evaluated for impairment  3,602   3,522   112   1,214   6,984   4,494   19,928 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   - 
Total $8,593  $3,522  $112  $1,214  $6,984  $4,494  $24,919 
Carrying value of loans:                            
Individually evaluated for impairment $11,128  $15,243  $-  $217  $-  $-  $26,588 
Collectively evaluated for impairment  343,345   549,838   1,880   79,264   349,303   -   1,323,630 
Purchased loans with evidence of credit deterioration  27   523   -   -   322   -   872 
Total $354,500  $565,604  $1,880  $79,481  $349,625  $-  $1,351,090 

 

  Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
  At June 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:                                    
Individually evaluated for impairment $5,283  $316  $-  $-  $-  $-  $-  $-  $5,599 
Collectively evaluated for impairment  5,119   3,596   127   1,601   6,616   1,044   66   5,142   23,311 
Purchased loans with evidence of credit deterioration  -   -   -   -   -   -   -   -   - 
Total $10,402  $3,912  $127  $1,601  $6,616  $1,044  $66  $5,142  $28,910 
Carrying value of loans:                                    
Individually evaluated for impairment $14,035  $5,375  $-  $-  $-  $10,198  $-  $-  $29,608 
Collectively evaluated for impairment  323,584   497,118   2,103   102,292   335,687   125,346   12,581   -   1,398,711 
Purchased loans with evidence of credit deterioration  -   -  ��-   -   -   1,045   196   -   1,241 
Total $337,619  $502,493  $2,103  $102,292  $335,687  $136,589  $12,777  $-  $1,429,560 

The portion of the allowance for loan losses ascribed to loan segments declined from March 31, 2016 to March 31, 2017 due to declines in classified loans, delinquent loans, and the overall loan portfolio. The decline in the unallocated portion was due to improved economic conditions within the Company’s geographic markets and credit quality metrics.

 

Management considers the $28.9$24.9 million allowance for loan losses to be adequate as a reserve against loan losses inherent in the loan portfolio as of June 30, 2016.March 31, 2017.

 

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.

 

-47- 

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.

 

-43-

The Company’s earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the 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.

 

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 June 30, 2017March 31, 2018 assumes market interest rates will either remain at relatively low levels orgradually rise, with short-term rates will rise gradually.rising more than long-term rates.

 

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 “neutral” to slightly “asset sensitive” at June 30, 2016,March 31, 2017, 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 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 affects 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.outstanding and potentially adding volatility to the book tax provision. 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.

-48- 

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 securities portfolio requiring the Company to recognize other than temporary impairment charges. Other types of market risk, such as foreign currency exchange risk, are not significant in the normal course of the Company's business activities.

 

-44-

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, provided 98 percent of funding for average total assets in the first half of 2016quarter 2017 and 97 percent in 2015.2016. 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 $3.0$3.2 billion in total investment securities at June 30, 2016.March 31, 2017. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At June 30, 2016,March 31, 2017, such collateral requirements totaled approximately $745$774 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 2016.2017. Loan demand from credit worthy borrowers will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of these deposit balances is subject to heightened competition, the success of the Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, deposit growth may be used to fund loans 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, and Parent Company cash balances provided adequate cash flow for the Parent Company to pay shareholder dividends of $20$10 million in the first half of 2016quarter 2017 and $39$40 million in 2015,2016, and retire common stock in the amount of $-0- million in the first quarter 2017 and $6 million and $15 million, respectively.in 2016. 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.

 

-45-

-49- 

Capital Resources

 

The Company has historically generated high levels of earnings, which providesprovide a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been 10.9% (annualized)10.5% in the first half of 2016, 11.3%quarter 2017 and 10.9% in 2015 and 11.6% in 2014.2016. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $10$18 million in the first half of 2016 compared with $5quarter 2017 and $24 million in 2015 and $12 million in 2014.2016.

 

The Company paid common dividends totaling $20$10 million in the first half of 2016, $39 million in 2015quarter 2017 and $40 million in 2014,2016, which represent dividends per common share of $0.78, $1.53$0.39 and $1.52,$1.56, 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 retired -0- shares in the first quarter 2017 and 137 thousand shares valued at $6 million in the first half of 2016, 344 thousand shares valued at $15 million in 2015 and 1.0 million shares valued at $53 million in 2014.2016.

 

The Company's primary capital resource is shareholders' equity, which was $558$585 million at June 30, 2016March 31, 2017 compared with $532$561 million at December 31, 2015.2016. The Company's ratio of equity to total assets was 10.78%10.84% at June 30, 2016March 31, 2017 and 10.30%10.46% at December 31, 2015.2016.

 

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.

 

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 areis subject to the “advanced approaches rule” and both 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.

 

-50- 

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.

 

-46-

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

 

     Transitional   Well-capitalized
     Minimum Minimum by Regulatory         To Be
     Regulatory Regulatory Definition     Required for Well-capitalized
     Requirement Requirement Under FDICIA     Capital Adequacy Purposes Under Prompt
 At June 30, 2016 Effective Effective Effective At March 31, 2017 Effective Effective Corrective Action
 Company Bank January 1, 2016 January 1, 2019 January 1, 2015 Company Bank January 1, 2017 January 1, 2019 Regulations (Bank)
                    
Common Equity Tier I Capital  14.11%  11.72%  5.125%(1)  7.00%(2)  6.50%  15.85%  11.97%  5.75%(1)  7.00%(2)  6.50%
Tier I Capital  14.11%  11.72%  6.625%(1)  8.50%(2)  8.00%  15.85%  11.97%  7.25%(1)  8.50%(2)  8.00%
Total Capital  14.76%  12.43%  8.625%(1)  10.50%(2)  10.00%  16.91%  13.24%  9.25%(1)  10.50%(2)  10.00%
Leverage Ratio  8.26%  6.81%  4.000%  4.00%  5.00%  8.84%  6.64%  4.00%  4.00%  5.00%

(1) Includes 0.625%1.25% capital conservation buffer.

(2) Includes 2.5% capital conservation buffer.

 

     Transitional   Well-capitalized
     Minimum Minimum by Regulatory         To Be
     Regulatory Regulatory Definition     Required for Well-capitalized
     Requirement Requirement Under FDICIA     Capital Adequacy Purposes Under Prompt
 At December 31, 2015 Effective Effective Effective At December 31, 2016 Effective Effective Corrective Action
 Company Bank January 1, 2015 January 1, 2019 January 1, 2015 Company Bank January 1, 2016 January 1, 2019 Regulations (Bank)
                    
Common Equity Tier I Capital  12.82%  11.00%  4.50%  7.00%(3)  6.50%  14.85%  11.70%  5.125%(3)  7.00%(4)  6.50%
Tier I Capital  12.82%  11.00%  6.00%  8.50%(3)  8.00%  14.85%  11.70%  6.625%(3)  8.50%(4)  8.00%
Total Capital  13.39%  11.68%  8.00%  10.50%(3)  10.00%  15.95%  13.02%  8.625%(3)  10.50%(4)  10.00%
Leverage Ratio  7.99%  6.82%  4.00%  4.00%  5.00%  8.46%  6.63%  4.000%  4.00%  5.00%

(3) Includes 0.625% capital conservation buffer.

(4) 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.

 

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 June 30, 2016.March 31, 2017.

 

-47-

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 June 30, 2016March 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

-51- 

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 itstheir 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, 20152016 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 June 30, 2016March 31, 2017 (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)
April 1 through April 30  7  $49.35   7   1,590 
May 1 through May 31  -   -   -   1,590 
June 1 through June 30  -   -   -   1,590 
Total  7   49.35   7   1,590 
2017
Period(a) Total Number of shares Purchased(b) Average Price Paid per Share(c) Number of Shares Purchased as Part of Publicly Announced Plans or Programs(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
(In thousands, except price paid)
January 1 through January 31-$--1,750
February 1 through February 28---1,750
March 1 through March 31---1,750
Total-$--1,750

 

The Company repurchases shares of its common stock in the open market on a discretionary basis 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.

 

SharesNo shares were repurchased during the second quarter 2016 pursuant to aperiod from January 1, 2017 through March 31, 2017. A program approved by the Board of Directors on July 23, 2015 authorizing28, 2016 authorized 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.

 

-48-

 

-52- 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

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

The information required by this item is incorporated by reference to Item 5.07 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on May 1, 2017.

 

Item 6. Exhibits

 

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

 

 

 

[The remainder of this page intentionally left blank]

 

-49-

 

-53- 

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

/s/ JOHN "ROBERT" THORSON                                        

John "Robert" Thorson

Senior Vice President and Chief Financial Officer

(Chief Financial and Accounting Officer)

 

Date: August 2, 2016May 5, 2017

 

 

 

 

-50-

-54- 

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 June 30, 2016,March 31, 2017, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three and six months ended June 30, 2016March 31, 2017 and 2015;2016; (ii) Consolidated Balance Sheets at June 30, 2016,March 31, 2017, and December 31, 2015;2016; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30,March 31, 2017 and 2016, and 2015, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the sixthree months ended June 30, 2016March 31, 2017 and 2015;2016; (v) Consolidated Statements of Cash Flows for the sixthree months ended June 30, 2016March 31, 2017 and 20152016; and (vi) Notes to the Unaudited Consolidated Financial Statements.

 

 

 

 

 

-55-