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~~2018

☐

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

For the transition period from __________ to __________.

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901

(Address of Principal Executive Offices) (Zip Code)

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

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

Yes ☒

No ☐

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

Yes ☒

No ☐

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

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

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

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

Yes ☐

No ☒

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

Title of Class		Shares outstanding as of April ~~25, 2017~~26, 2018

Common Stock,		26,626,524
No Par Value	~~26,298,078~~

TABLE OF CONTENTS

		Page

Forward Looking Statements		3

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements	4

	Notes to Unaudited Consolidated Financial Statements	9

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	2829

Item 3	Quantitative and Qualitative Disclosures about Market Risk	4749

Item 4	Controls and Procedures	4750

PART II - OTHER INFORMATION

Item 1	Legal Proceedings	4850

Item 1A	Risk Factors	4850

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	4850

Item 3	Defaults upon Senior Securities	4951

Item 4	Mine Safety Disclosures	4951

Item 5	Other Information	4951

Item 6	Exhibits	4951

Signatures		5052

Exhibit Index		5153

Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)		5254

Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)		5355

Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350		5456

Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350		5557

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

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

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this Report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, ~~2016,~~2017, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

~~-3-~~

- 3 -

PART I - FINANCIAL INFORMATION

Item 1Financial Statements

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

								At March 31,			At December 31,
		At March 31, 2017			At December 31, 2016			2018			2017
		(In thousands)						(In thousands)
Assets:	Assets:
Cash and due from banks		$	546,815		$	462,271		$	555,607		$	575,002
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
Equity securities									1,764			1,800
Debt securities available for sale									2,351,970			2,191,707
Debt securities held to maturity, with fair values of: $1,098,895 at March 31, 2018 and $1,155,342 at December 31, 2017									1,114,287			1,158,864
Loans			1,351,090			1,352,711			1,228,584			1,287,982
Allowance for loan losses			(24,919	)		(25,954	)		(23,081	)		(23,009	)
Loans, net of allowance for loan losses			1,326,171			1,326,757			1,205,503			1,264,973
Other real estate owned			2,136			3,095			1,376			1,426
Premises and equipment, net			36,025			36,566			35,790			35,301
Identifiable intangibles, net			6,127			6,927			3,280			3,850
Goodwill			121,673			121,673			121,673			121,673
Other assets			165,277			171,724			159,786			158,450
Total Assets		$	5,395,947		$	5,366,083		$	5,551,036		$	5,513,046

Liabilities:
Noninterest-bearing deposits		$	2,046,390		$	2,089,443		$	2,179,157		$	2,197,526
Interest-bearing deposits			2,651,583			2,615,298			2,688,710			2,630,087
Total deposits			4,697,973			4,704,741			4,867,867			4,827,613
Short-term borrowed funds			73,611			59,078			65,356			58,471
Other liabilities			39,475			40,897			35,730			36,723
Total Liabilities			4,811,059			4,804,716			4,968,953			4,922,807

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
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,591 at March 31, 2018 and 26,425 at December 31, 2017									439,817			431,734
Deferred compensation			1,533			1,533			1,533			1,533
Accumulated other comprehensive loss			(9,443	)		(10,074	)		(43,452	)		(16,832	)
Retained earnings			170,128			165,302			184,185			173,804
Total Shareholders' Equity			584,888			561,367			582,083			590,239
Total Liabilities and Shareholders' Equity		$	5,395,947		$	5,366,083		$	5,551,036		$	5,513,046

See accompanying notes to unaudited consolidated financial statements.

~~-4-~~

- 4 -

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	For the Three Months Ended March 31,					For the Three Months Ended March 31,
	2017			2016		2018			2017
	(In thousands, except per share data)					(In thousands, except per share data)
Interest and Fee Income:
Loans	$	15,780		$	18,353	$	14,697		$	15,780
Investment securities available for sale		10,249			7,967
Investment securities held to maturity		7,295			7,327
Equity securities							85			74
Debt securities available for sale							13,551			10,175
Debt securities held to maturity							6,174			7,295
Total Interest and Fee Income		33,324			33,647		34,507			33,324
Interest Expense:
Deposits		469			543		450			469
Short-term borrowed funds		11			9		9			11
Total Interest Expense		480			552		459			480
Net Interest and Fee Income		32,844			33,095		34,048			32,844
Provision for Loan Losses		-			-		-			-
Net Interest and Fee Income After Provision For Loan Losses		32,844			33,095		34,048			32,844
Noninterest Income:
Service charges on deposit accounts		4,923			5,248		4,752			4,923
Merchant processing services		1,875			1,529		2,420			1,875
Debit card fees		1,481			1,516		1,605			1,481
Trust fees		702			661		743			702
ATM processing fees							664			575
Other service fees		650			629		631			650
ATM processing fees		575			658
Financial services commissions		195			156		114			195
Equity securities losses							(36	)		-
Other noninterest income		1,256			1,332		1,062			1,256
Total Noninterest Income		11,657			11,729		11,955			11,657
Noninterest Expense:
Salaries and related benefits		13,070			13,117		13,351			13,070
Occupancy		3,633			3,398
Occupancy and equipment							4,691			4,887
Outsourced data processing services		2,139			2,130		2,340			2,139
Furniture and equipment		1,254			1,213
Professional fees							785			611
Amortization of identifiable intangibles		800			905		570			800
Professional fees		611			732
Courier service		421			545		463			421
Other real estate owned		(40	)		111
Other noninterest expense		2,727			3,707		2,014			2,687
Total Noninterest Expense		24,615			25,858		24,214			24,615
Income Before Income Taxes		19,886			18,966		21,789			19,886
Provision for income taxes		4,837			4,740		4,283			4,837
Net Income	$	15,049		$	14,226	$	17,506		$	15,049

Average Common Shares Outstanding		26,171			25,445		26,532			26,171
Average Diluted Common Shares Outstanding		26,329			25,468		26,665			26,329
Per Common Share Data:
Basic earnings	$	0.58		$	0.56	$	0.66		$	0.58
Diluted earnings		0.57			0.56		0.66			0.57
Dividends paid		0.39			0.39		0.40			0.39

See accompanying notes to unaudited consolidated financial statements.

~~-5-~~

- 5 -

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

							For the Three Months Ended
	For the Three Months Ended March 31,						March 31,
	2017			2016			2018			2017
	(In thousands)						(In thousands)
Net income	$	15,049		$	14,226		$	17,506		$	15,049
Other comprehensive income:
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
Other comprehensive (loss) income:
Changes in net unrealized gains on debt securities available for sale								(32,846	)		1,074
Deferred tax benefit (expense)								9,709			(452	)
Changes in net unrealized gains on debt securities available for sale, net of tax								(23,137	)		622
Post-retirement benefit transition obligation amortization		15			15			-			15
Deferred tax expense		(6	)		(6	)		-			(6	)
Post-retirement benefit transition obligation amortization, net of tax		9			9			-			9
Total other comprehensive income		631			5,944
Total comprehensive income	$	15,680		$	20,170
Total other comprehensive (loss) income								(23,137	)		631
Total comprehensive (loss) income							$	(5,631	)	$	15,680

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 (Loss)			Retained Earnings			Total									Accumulated
	(In thousands)																		Common						Other
																			Shares		Common		Deferred		Comprehensive			Retained
Balance, December 31, 2015		25,528		$	378,858		$	2,578		$	675		$	150,094		$	532,205
Net income for the period														14,226			14,226
Other comprehensive income											5,944						5,944
Exercise of stock options		40			1,717												1,717
Tax benefit decrease upon exercise and expiration of stock options					(181	)											(181	)
Restricted stock activity					1,045			(1,045	)								-
Stock based compensation					390												390
Stock awarded to employees		-			15												15
Retirement of common stock		(130	)		(1,951	)								(3,473	)		(5,424	)
Dividends														(9,919	)		(9,919	)
Balance, March 31, 2016		25,438		$	379,893		$	1,533		$	6,619		$	150,928		$	538,973
																			Outstanding		Stock		Compensation		(Loss) Income			Earnings			Total
																			(In thousands)

Balance, December 31, 2016		25,907		$	404,606		$	1,533		$	(10,074	)	$	165,302		$	561,367			25,907	$	404,606	$	1,533	$	(10,074	)	$	165,302		$	561,367
Net income for the period														15,049			15,049												15,049			15,049
Other comprehensive income											631						631									631						631
Exercise of stock options		376			17,593												17,593			376		17,593										17,593
Stock based compensation					456												456					456										456
Stock awarded to employees		-			15												15			-		15										15
Dividends														(10,223	)		(10,223	)											(10,223	)		(10,223	)
Balance, March 31, 2017		26,283		$	422,670		$	1,533		$	(9,443	)	$	170,128		$	584,888			26,283	$	422,670	$	1,533	$	(9,443	)	$	170,128		$	584,888

Balance, December 31, 2017																				26,425	$	431,734	$	1,533	$	(16,832	)	$	173,804		$	590,239
Cumulative effect of equity securities losses reclassified																										142			(142	)		-
Adjusted Balance, January 1, 2018																				26,425		431,734		1,533		(16,690	)		173,662			590,239
Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act																										(3,625	)		3,625			-
Net income for the period																													17,506			17,506
Other comprehensive loss																										(23,137	)					(23,137	)
Exercise of stock options																				166		7,534										7,534
Stock based compensation																						525										525
Stock awarded to employees																				-		24										24
Dividends																													(10,608	)		(10,608	)
Balance, March 31, 2018																				26,591	$	439,817	$	1,533	$	(43,452	)	$	184,185		$	582,083

See accompanying notes to unaudited consolidated financial statements.

~~-7-~~

- 7 -

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2017			2016			2018			2017
	(In thousands)						(In thousands)
Operating Activities:												��
Net income	$	15,049		$	14,226		$	17,506		$	15,049
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization/accretion		5,754			4,065			1,643			5,754
Net amortization of deferred net loan cost (fees)		26			(54	)
Net amortization of deferred net loan (fees) cost								(40	)		26
Decrease in interest income receivable		1,744			1,379			1,019			1,744
Life insurance premiums paid		(126	)		(126	)		(203	)		(126	)
Increase in income taxes payable		2,896			3,424			4,302			2,896
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	)
(Increase) decrease in deferred tax asset								(20	)		1,441
Decrease in other assets								2,676			895
Stock option compensation expense		456			390			525			456
Increase in interest expense payable		8			25			15			8
Decrease in other liabilities		(2,864	)		(4	)		(984	)		(2,864	)
Writedown/loss on sale of premises and equipment		50			5
Equity securities losses								36			-
Writedown of premises and equipment								1			50
Net gain on sale of foreclosed assets		(55	)		(58	)		-			(55	)
Writedown of foreclosed assets		-			126
Net Cash Provided by Operating Activities		25,274			18,218			26,476			25,274

Investing Activities:
Net repayments of loans		1,526			61,070			59,959			1,526
Net receipts under FDIC⁽¹⁾ indemnification agreements		129			5,189			-			129
Purchases of investment securities available for sale		(51,297	)		(152,128	)
Proceeds from sale/maturity/calls of securities available for sale		47,600			166,023
Purchases of investment securities held to maturity		-			(56,182	)
Proceeds from maturity/calls of securities held to maturity		45,640			33,531
Purchases of debt securities available for sale								(279,327	)		(51,297	)
Proceeds from sale/maturity/calls of debt securities available for sale								86,218			47,600
Proceeds from maturity/calls of debt securities held to maturity								44,577			45,640
Purchases of premises and equipment		(501	)		(283	)		(1,413	)		(501	)
Proceeds from sale of FRB⁽²⁾ stock		24			-			-			24
Proceeds from sale of foreclosed assets		1,014			975			50			1,014
Net Cash Provided by Investing Activities		44,135			58,195
Net Cash (Used in) Provided by Investing Activities								(89,936	)		44,135

Financing Activities:
Net change in deposits		(6,768	)		(23,909	)		40,254			(6,768	)
Net change in short-term borrowings		14,533			(577	)		6,885			14,533
Exercise of stock options/issuance of shares		17,593			1,717			7,534			17,593
Tax benefit decrease upon exercise and expiration of stock options		-			(181	)
Retirement of common stock		-			(5,424	)
Common stock dividends paid		(10,223	)		(9,919	)		(10,608	)		(10,223	)
Net Cash Provided by (Used in) Financing Activities		15,135			(38,293	)
Net Cash Provided by Financing Activities								44,065			15,135
Net Change In Cash and Due from Banks		84,544			38,120			(19,395	)		84,544
Cash and Due from Banks at Beginning of Period		462,271			433,044			575,002			462,271
Cash and Due from Banks at End of Period	$	546,815		$	471,164		$	555,607		$	546,815

Supplemental Cash Flow Disclosures:
Supplemental disclosure of noncash activities:
Loan collateral transferred to other real estate owned	$	-		$	217		$	-		$	-
Securities purchases pending settlement		-			44,580			-			-
Supplemental disclosure of cash flow activities:
Interest paid for the period		504			526			444			504
Income tax payments for the period		500			1,200			-			500

See accompanying notes to unaudited consolidated financial statements.

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

Federal Deposit Insurance Corporation ("FDIC")

⁽²⁾

Federal Reserve Bank ("FRB")

⁽²⁾~~Federal Reserve Bank ("FRB")~~

~~-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 months ended March 31, ~~2017~~2018 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

Note 2: Accounting Policies

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, ~~Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments,~~it is reasonably possible conditions could change materially affecting results of operations 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 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.financial conditions.

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

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

Recently Adopted Accounting Standards

In the three months ended March 31, 2018, the Company adopted the following new accounting guidance:

FASB ~~ASU 2016-09,~~Accounting Standard Update (ASU) 2014-09, ~~Improvements to Employee Share-Based Payment Accounting,~~Revenue (Topic 606): Revenue from Contracts with Customers, was issued ~~March 30, 2016.~~May 2014. The ~~provisions~~ASU specifies a standardized approach for revenue recognition across industries and transactions. The ASU also requires additional disclosures. The scope of the ~~new standard changes several aspects~~ASU does not include revenue streams covered by other ASU topics; thus, Topic 606 does not apply to revenue related to financial instruments, guarantees and leases, such as the Company’s net interest income.

Approximately 73% of our revenue, including all of our net interest income and a portion of our noninterest income, is out of scope of the ~~accounting~~guidance. The contracts that are in scope of the guidance are primarily related to service charges and fees on deposit accounts, merchant processing fees, debit card fees, ATM processing fees, trust fees and other service charges, commissions and fees. We have completed analyzing the individual contracts in scope and determined our revenue recognition practices within the scope of the ASU as described below did not change in any material regard upon adoption of the ASU.

- 9 -

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

Merchant Processing Services and Debit Card Fees: The Company earns interchange fees from cardholder transactions ~~including: (1) Accounting~~conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and ~~Cash Flow Classification~~are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Trust Fees: The Company earns trust fees from its contracts with customers to manage assets for ~~Excess Tax Benefits, (2) Forfeitures,~~investment or custody services. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and ~~(3) Tax Withholding Requirements and Cash Flow Classification.~~ are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Other related services provided, which are based on a fixed fee schedule, are recognized when the services are rendered.

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

The Company adopted the ASU ~~provisions effective~~on 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 provision2018 and no cumulative adjustment 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~~required.

FASB ~~Accounting Standards Update (ASU)~~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.~~purposes (Note 9).

~~-9-~~

The Company ~~will be~~was required to adopt the ASU provisions on January 1, ~~2018. Management is evaluating~~2018, and for those equity securities with readily determinable fair values, the Company elected the retrospective transition approach with a cumulative effect adjustment to the balance sheet and for those equity securities that do not have readily determinable fair values, the Company elected the prospective transition approach. The impact ~~that~~of the ~~ASU will have~~adoption of this accounting standard on the Company’s consolidated financial ~~statements.~~statements will be subject to the price volatility of the equity investments. As a result of implementing the ASU provisions, effective January 1, 2018, the Company recorded a cumulative effect adjustment to retained earnings of $142 thousand.

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

Recently Issued Accounting Standards ~~Update (ASU)~~

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

The Company will be required to adopt the ASU provisions January 1, 2019, ~~utilizing~~and plans to elect the modified retrospective transition approach. Management is evaluating the impact that the ASU will have on the Company’s financial statements. As of December 31, 2017, the Company leased 58 of its operating facilities; the remaining minimum lease payments were $17.5 million. The Company does not expect a material change in noninterest expenses upon adoption of the new standard.

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

- 10 -

The Company will be required to adopt the ASU provisions on January 1, 2020. Management is evaluating the impact that the ASU will have on the Company’s consolidated financial statements. The ultimate adjustment to the allowance for loan losses will be accomplished through an offsetting after-tax adjustment to shareholders’ equity. Economic conditions and the composition of the Company’s loan portfolio at the time of adoption will influence the extent of the adopting accounting adjustment.

FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The ASU will shorten the amortization period for certain callable debt securities held at a premium. Specifically, the 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.

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

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

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- 11 -

Note 3: Investment Securities

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

At March 31, 2018, the market value of equity securities was $1,764 thousand. During the three months ended March 31, 2018, the Company recognized gross unrealized holding losses of $36 thousand in earnings.

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

	Investment Securities Available for Sale At March 31, 2017											Gross		Gross
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized		Unrealized		Unrealized			Fair
	(In thousands)									Cost		Gains		Losses			Value
At March 31, 2018										(In thousands)
Debt securities available for sale
Securities of U.S. Government sponsored entities	$	141,595	$	33	$	(2,691	)	$	138,937	$	122,291	$	1	$	(4,345	)	$	117,947
Agency residential mortgage-backed securities (MBS)		742,713		825		(21,334	)		722,204		879,824		500		(32,684	)		847,640
Non-agency residential MBS		196		-		-			196		138		1		-			139
Non-agency commercial MBS		1,955		-		(16	)		1,939
Agency commercial MBS											2,229		-		(39	)		2,190
Securities of U.S. Government entities											1,526		-		(6	)		1,520
Obligations of states and political subdivisions		176,739		5,425		(3,293	)		178,871		181,386		2,910		(3,661	)		180,635
Asset-backed securities		355		-		-			355
FHLMC⁽¹⁾ and FNMA⁽²⁾stock		749		8,651		-			9,400
Corporate securities		843,249		2,037		(6,150	)		839,136		1,226,267		523		(24,891	)		1,201,899
Other securities		2,005		456		(190	)		2,271
Total debt securities available for sale											2,413,661		3,935		(65,626	)		2,351,970
Debt securities held to maturity
Agency residential MBS											520,105		325		(16,728	)		503,702
Non-agency residential MBS											4,179		77		-			4,256
Agency commercial MBS											1,902		-		(9	)		1,893
Obligations of states and political subdivisions											588,101		4,419		(3,476	)		589,044
Total debt securities held to maturity											1,114,287		4,821		(20,213	)		1,098,895
Total	$	1,909,556	$	17,427	$	(33,674	)	$	1,893,309	$	3,527,948	$	8,756	$	(85,839	)	$	3,450,865

⁽¹⁾ ~~Federal Home Loan Mortgage Corporation~~

⁽²⁾ ~~Federal National Mortgage Association~~[The remainder of this page intentionally left blank]

~~-10-~~

- 12 -

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

Investment Securities Held to Maturity
At March 31, 2017
Amortized
Cost Gross
Unrecognized
Gains Gross
Unrecognized
Losses Fair
Value
(In thousands)
Securities of U.S. Government sponsored entities $ 538 $ - $ - $ 538
Agency residential MBS 634,958 1,007 (9,093 ) 626,872
Non-agency residential MBS 5,103 62 - 5,165
Agency commercial MBS 9,258 4 (123 ) 9,139
Obligations of states and political subdivisions 648,557 8,503 (2,036 ) 655,024
Total $ 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, 2016
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
(In thousands)
Securities of U.S. Government sponsored entities $ 141,599 $ 35 $ (2,974 ) $ 138,660
Agency residential MBS 711,623 921 (21,045 ) 691,499
Non-agency residential MBS 272 - (1 ) 271
Non-agency commercial MBS 2,041 - (16 ) 2,025
Obligations of states and political subdivisions 182,230 5,107 (3,926 ) 183,411
Asset-backed securities 696 - (1 ) 695
FHLMC⁽¹⁾ and FNMA⁽²⁾stock 749 10,120 - 10,869
Corporate securities 866,835 1,690 (7,668 ) 860,857
Other securities 2,034 621 (184 ) 2,471
Total $ 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, 2016
Amortized
Cost Gross
Unrecognized
Gains Gross
Unrecognized
Losses Fair
Value
(In thousands)
Securities of U.S. Government sponsored entities $ 581 $ 1 $ - $ 582
Agency residential MBS 668,235 1,122 (8,602 ) 660,755
Non-agency residential MBS 5,370 76 - 5,446
Agency commercial MBS 9,332 11 (143 ) 9,200
Obligations of states and political subdivisions 662,794 6,031 (4,067 ) 664,758
Total $ 1,346,312 $ 7,241 $ (12,812 ) $ 1,340,741

~~-11-~~

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

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

									At March 31, 2018
									Debt Securities Available				Debt Securities Held
	At March 31, 2017								for Sale				to Maturity
	Securities Available for Sale				Securities Held to Maturity				Amortized		Fair		Amortized		Fair
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Cost		Value		Cost		Value
	(In thousands)								(In thousands)
Maturity in years:
1 year or less	$	200,403	$	200,533	$	21,359	$	22,112	$	164,450	$	162,099	$	67,865	$	68,636
Over 1 to 5 years		687,340		683,836		296,478		298,933		1,098,360		1,075,777		248,126		247,858
Over 5 to 10 years		226,589		228,155		303,309		306,228		225,690		223,481		269,159		269,527
Over 10 years		47,606		44,775		27,949		28,289		42,970		40,644		2,951		3,023
Subtotal		1,161,938		1,157,299		649,095		655,562		1,531,470		1,502,001		588,101		589,044
MBS		744,864		724,339		649,319		641,176		882,191		849,969		526,186		509,851
Other securities		2,754		11,671		-		-
Total	$	1,909,556	$	1,893,309	$	1,298,414	$	1,296,738	$	2,413,661	$	2,351,970	$	1,114,287	$	1,098,895

									At December 31, 2017
									Debt Securities Available				Debt Securities Held
	At December 31, 2016								for Sale				to Maturity
	Securities Available for Sale				Securities Held to Maturity				Amortized		Fair		Amortized		Fair
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Cost		Value		Cost		Value
	(In thousands)								(In thousands)
Maturity in years:
1 year or less	$	154,693	$	154,835	$	14,961	$	15,639	$	193,337	$	193,385	$	50,295	$	51,105
Over 1 to 5 years		750,834		745,219		292,024		292,062		1,031,807		1,023,047		269,050		269,471
Over 5 to 10 years		238,077		239,153		318,580		319,587		159,266		160,042		277,170		281,546
Over 10 years		47,756		44,416		37,810		38,052		46,065		45,154		2,963		3,074
Subtotal		1,191,360		1,183,623		663,375		665,340		1,430,475		1,421,628		599,478		605,196
MBS		713,936		693,795		682,937		675,401		790,076		770,079		559,386		550,146
Other securities		2,783		13,340		-		-
Total	$	1,908,079	$	1,890,758	$	1,346,312	$	1,340,741	$	2,220,551	$	2,191,707	$	1,158,864	$	1,155,342

- 13 -

Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

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~~-12-~~

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

																						Debt Securities Available for Sale
	Investment Securities Available for Sale At March 31, 2017																					At March 31, 2018
	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		9	$	120,654	$	(2,691	)		-	$	-	$	-			9	$	120,654	$	(2,691	)		2	$	1,977	$	(12	)		8	$	115,889	$	(4,333	)		10	$	117,866	$	(4,345	)
Agency residential MBS		26		564,037		(16,571	)		28		117,356		(4,763	)		54		681,393		(21,334	)		11		280,804		(6,163	)		52		492,453		(26,521	)		63		773,257		(32,684	)
Non-agency residential MBS		1		177		-			-		-		-			1		177		-
Non-agency commercial MBS		2		1,189		(9	)		1		750		(7	)		3		1,939		(16	)
Agency commercial MBS																							2		2,190		(39	)		-		-		-			2		2,190		(39	)
Securities of U.S. Government entities																							-		-		-			3		1,520		(6	)		3		1,520		(6	)
Obligations of states and political subdivisions		42		55,505		(3,272	)		4		1,653		(21	)		46		57,158		(3,293	)		57		31,091		(636	)		35		49,993		(3,025	)		92		81,084		(3,661	)
Corporate securities		48		360,788		(5,201	)		25		88,217		(949	)		73		449,005		(6,150	)		82		781,714		(16,548	)		34		258,551		(8,343	)		116		1,040,265		(24,891	)
Other securities		-		-		-			1		1,810		(190	)		1		1,810		(190	)
Total		128	$	1,102,350	$	(27,744	)		59	$	209,786	$	(5,930	)		187	$	1,312,136	$	(33,674	)		154	$	1,097,776	$	(23,398	)		132	$	918,406	$	(42,228	)		286	$	2,016,182	$	(65,626	)

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

																						Debt Securities Held to Maturity
	Investment Securities Held to Maturity At March 31, 2017																					At March 31, 2018
	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		66	$	551,095	$	(8,789	)		3	$	11,465	$	(304	)		69	$	562,560	$	(9,093	)		23	$	33,919	$	(578	)		67	$	451,597	$	(16,150	)		90	$	485,516	$	(16,728	)
Agency commercial MBS		-		-		-			1		7,175		(123	)		1		7,175		(123	)		1		1,893		(9	)		-		-		-			1		1,893		(9	)
Obligations of states and political subdivisions		137		128,434		(1,668	)		13		12,905		(368	)		150		141,339		(2,036	)		266		257,849		(1,557	)		58		57,422		(1,919	)		324		315,271		(3,476	)
Total		203	$	679,529	$	(10,457	)		17	$	31,545	$	(795	)		220	$	711,074	$	(11,252	)		290	$	293,661	$	(2,144	)		125	$	509,019	$	(18,069	)		415	$	802,680	$	(20,213	)

The unrealized losses on the Company’s ~~investment~~debt securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. 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~~debt securities and has concluded that it is more likely than not that it will not be required to sell the ~~investments~~debt securities prior to recovery of the amortized cost basis. Therefore, the Company does not consider these ~~investments~~debt securities to be other-than-temporarily impaired as of March 31, ~~2017.~~2018.

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

As of March 31, 2018 and December 31, 2017, ~~$774,283 thousand of investment~~the Company had debt securities ~~were~~ pledged to secure public deposits and short-term borrowed ~~funds. As~~funds of ~~December 31, 2016, $768,845~~$696,058 thousand ~~of investment securities were pledged to secure public deposits~~ and ~~short-term borrowed funds.~~$715,774 thousand, respectively.

~~-13-~~

- 14 -

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

																						Debt Securities Available for Sale
	Investment Securities Available for Sale At December 31, 2016																					At December 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		8	$	117,227	$	(2,974	)		-	$	-	$	-			8	$	117,227	$	(2,974	)		1	$	996	$	(2	)		8	$	117,252	$	(2,965	)		9	$	118,248	$	(2,967	)
Agency residential MBS		21		524,269		(16,494	)		28		122,901		(4,551	)		49		647,170		(21,045	)		7		238,554		(1,501	)		51		516,711		(18,994	)		58		755,265		(20,495	)
Non-agency residential MBS		2		246		(1	)		-		-		-			2		246		(1	)		1		1		-			-		-		-			1		1		-
Non-agency commercial MBS		2		1,253		(9	)		1		772		(7	)		3		2,025		(16	)
Agency commercial MBS																							2		2,219		(25	)		-		-		-			2		2,219		(25	)
Securities of U.S. Government entities																							-		-		-			3		1,590		(22	)		3		1,590		(22	)
Obligations of states and political subdivisions		43		57,989		(3,905	)		3		1,117		(21	)		46		59,106		(3,926	)		50		21,453		(228	)		35		52,071		(1,254	)		85		73,524		(1,482	)
Asset-backed securities		-		-		-			1		695		(1	)		1		695		(1	)
Corporate securities		53		385,175		(6,551	)		27		96,145		(1,117	)		80		481,320		(7,668	)		64		571,112		(4,047	)		38		282,924		(5,230	)		102		854,036		(9,277	)
Other securities		-		-		-			1		1,816		(184	)		1		1,816		(184	)
Total		129	$	1,086,159	$	(29,934	)		61	$	223,446	$	(5,881	)		190	$	1,309,605	$	(35,815	)		125	$	834,335	$	(5,803	)		135	$	970,548	$	(28,465	)		260	$	1,804,883	$	(34,268	)

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

																						Debt Securities Held to Maturity
	Investment Securities Held to Maturity At December 31, 2016																					At December 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		66	$	569,876	$	(8,285	)		3	$	10,480	$	(317	)		69	$	580,356	$	(8,602	)		15	$	30,218	$	(201	)		65	$	479,775	$	(9,649	)		80	$	509,993	$	(9,850	)
Agency commercial MBS		-		-		-			1		7,214		(143	)		1		7,214		(143	)		1		1,913		(4	)		1		7,062		(62	)		2		8,975		(66	)
Obligations of states and political subdivisions		295		272,496		(3,710	)		12		13,126		(357	)		307		285,622		(4,067	)		146		131,032		(553	)		59		58,979		(1,465	)		205		190,011		(2,018	)
Total		361	$	842,372	$	(11,995	)		16	$	30,820	$	(817	)		377	$	873,192	$	(12,812	)		162	$	163,163	$	(758	)		125	$	545,816	$	(11,176	)		287	$	708,979	$	(11,934	)

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

					For the Three Months
	For the Three Months Ended March 31,				Ended March 31,
	2017		2016		2018		2017
	(In thousands)				(In thousands)

Taxable	$	12,147	$	9,674	$	14,935	$	12,147
Tax-exempt from regular federal income tax		5,397		5,620		4,875		5,397
Total interest income from investment securities	$	17,544	$	15,294	$	19,810	$	17,544

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~~-14-~~

- 15 -

Note 4: Loans and Allowance for Loan Losses

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

					At March 31,		At December 31,
	At March 31, 2017		At December 31, 2016		2018		2017
	(In thousands)				(In thousands)
Commercial	$	354,500	$	354,697	$	306,978	$	335,996
Commercial Real Estate		565,604		542,171		553,318		568,584
Construction		1,880		2,555		2,941		5,649
Residential Real Estate		79,481		87,724		59,484		65,183
Consumer Installment & Other		349,625		365,564		305,863		312,570
Total	$	1,351,090	$	1,352,711	$	1,228,584	$	1,287,982

Total loans outstanding reported above include loans purchased ~~loans~~from the FDIC of ~~$113,207~~ $75,476 thousand and ~~$121,210~~$83,478 thousand at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. ~~Purchased loans~~Loans purchased from the FDIC were separately reported in prior periods and have been reclassified into their respective categories in the current presentation.

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

							For the			For the
							Three Months Ended			Year Ended
	For the Three Months Ended March 31, 2017			For the Year Ended December 31, 2016			March 31, 2018			December 31, 2017
Accretable yield:	(In thousands)						(In thousands)
Balance at the beginning of the period	$	1,237		$	1,259		$	738		$	1,237
Reclassification from nonaccretable difference		871			3,912			313			1,852
Accretion		(970	)		(3,934	)		(452	)		(2,351	)
Balance at the end of the period	$	1,138		$	1,237		$	599		$	738

Accretion	$	(970	)	$	(3,934	)	$	(452	)	$	(2,351	)
Change in FDIC indemnification		189			1,053			1			192
(Increase) in interest income	$	(781	)	$	(2,881	)	$	(451	)	$	(2,159	)

The following summarizes activity in the allowance for loan losses:

																					Allowance for Loan Losses
																					For the Three Months Ended March 31, 2018
																																	Consumer
	Allowance for Loan Losses For the Three Months Ended March 31, 2017																							Commercial						Residential			Installment
	Commercial			Commercial Real Estate		Construction			Residential Real Estate			Consumer Installment and Other			Unallocated			Total			Commercial			Real Estate			Construction			Real Estate			and Other			Unallocated		Total
	(In thousands)																				(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	8,327		$	3,330	$	152		$	1,330		$	7,980		$	4,835		$	25,954		$	7,746		$	3,849		$	335		$	995		$	6,418		$	3,666	$	23,009
Additions:
Provision (reversal)		209			182		(40	)		(116	)		106			(341	)		-
(Reversal) provision																						(17	)		(25	)		(160	)		(87	)		37			252		-
Deductions:
Chargeoffs		(103	)		-		-			-			(1,739	)		-			(1,842	)		(41	)		-			-			-			(1,365	)		-		(1,406	)
Recoveries		160			10		-			-			637			-			807			829			-			-			-			649			-		1,478
Net loan recoveries (losses)		57			10		-			-			(1,102	)		-			(1,035	)		788			-			-			-			(716	)		-		72
Total allowance for loan losses	$	8,593		$	3,522	$	112		$	1,214		$	6,984		$	4,494		$	24,919		$	8,517		$	3,824		$	175		$	908		$	5,739		$	3,918	$	23,081

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 Three Months Ended March 31, 2016
Commercial Commercial
Real Estate Construction Residential
Real Estate Consumer
Installment
and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Balance at beginning of period $ 9,559 $ 4,212 $ 235 $ 1,801 $ 8,001 $ 5,963 $ 29,771
Additions:
Provision (reversal) 38 10 (48 ) (94 ) 124 (30 ) -
Deductions:
Chargeoffs (1,171 ) - - - (1,006 ) - (2,177 )
Recoveries 1,421 15 - - 457 - 1,893
Net loan recoveries (losses) 250 15 - - (549 ) - (284 )
Total allowance for loan losses $ 9,847 $ 4,237 $ 187 $ 1,707 $ 7,576 $ 5,933 $ 29,487

~~-15-~~

- 16 -

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

															Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
	Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment At March 31, 2017														At March 31, 2018
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		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	$	4,991	$	-	$	-	$	-	$	-	$	-	$	4,991	$	4,777	$	214	$	-	$	-	$	-	$	-	$	4,991
Collectively evaluated for impairment		3,602		3,522		112		1,214		6,984		4,494		19,928		3,740		3,610		175		908		5,739		3,918		18,090
Purchased loans with evidence of credit deterioration		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	8,593	$	3,522	$	112	$	1,214	$	6,984	$	4,494	$	24,919	$	8,517	$	3,824	$	175	$	908	$	5,739	$	3,918	$	23,081
Carrying value of loans:
Individually evaluated for impairment	$	11,128	$	15,243	$	-	$	217	$	-	$	-	$	26,588	$	10,513	$	11,393	$	-	$	206	$	-	$	-	$	22,112
Collectively evaluated for impairment		343,345		549,838		1,880		79,264		349,303		-		1,323,630		296,432		541,327		2,941		59,278		305,705		-		1,205,683
Purchased loans with evidence of credit deterioration		27		523		-		-		322		-		872		33		598		-		-		158		-		789
Total	$	354,500	$	565,604	$	1,880	$	79,481	$	349,625	$	-	$	1,351,090	$	306,978	$	553,318	$	2,941	$	59,484	$	305,863	$	-	$	1,228,584

															Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
	Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment At December 31, 2016														At December 31, 2017
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		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	$	5,048	$	-	$	-	$	-	$	-	$	-	$	5,048	$	4,814	$	171	$	-	$	-	$	-	$	-	$	4,985
Collectively evaluated for impairment		3,279		3,330		152		1,330		7,980		4,835		20,906		2,932		3,678		335		995		6,418		3,666		18,024
Purchased loans with evidence of credit deterioration		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	8,327	$	3,330	$	152	$	1,330	$	7,980	$	4,835	$	25,954	$	7,746	$	3,849	$	335	$	995	$	6,418	$	3,666	$	23,009
Carrying value of loans:
Individually evaluated for impairment	$	11,174	$	12,706	$	-	$	835	$	-	$	-	$	24,715	$	10,675	$	14,234	$	-	$	208	$	-	$	-	$	25,117
Collectively evaluated for impairment		343,494		528,957		2,555		86,889		365,236		-		1,327,131		325,291		553,769		5,649		64,975		312,406		-		1,262,090
Purchased loans with evidence of credit deterioration		29		508		-		-		328		-		865		30		581		-		-		164		-		775
Total	$	354,697	$	542,171	$	2,555	$	87,724	$	365,564	$	-	$	1,352,711	$	335,996	$	568,584	$	5,649	$	65,183	$	312,570	$	-	$	1,287,982

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 Audit Committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans and ~~assigns~~validates management assigned credit risk grades toon evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” Loan Review Department evaluations occur every calendar quarter. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department examinations, assigned risk grades are re-evaluated promptly. Credit risk grades assigned by management and validated by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

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~~-16-~~

- 17 -

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

													Credit Risk Profile by Internally Assigned Grade
	Credit Risk Profile by Internally Assigned Grade At March 31, 2017												At March 31, 2018
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total		Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total
	(In thousands)												(In thousands)
Grade:
Pass	$	339,296	$	538,750	$	1,880	$	79,481	$	346,864	$	1,306,271	$	283,666	$	547,740	$	2,941	$	59,202	$	303,836	$	1,197,385
Substandard		15,204		25,558		-		-		2,447		43,209		23,312		5,578		-		282		1,523		30,695
Doubtful		-		1,296		-		-		-		1,296		-		-		-		-		177		177
Loss		-		-		-		-		314		314		-		-		-		-		327		327
Total	$	354,500	$	565,604	$	1,880	$	79,481	$	349,625	$	1,351,090	$	306,978	$	553,318	$	2,941	$	59,484	$	305,863	$	1,228,584

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

													Credit Risk Profile by Internally Assigned Grade
	Credit Risk Profile by Internally Assigned Grade At December 31, 2016												At December 31, 2017
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total		Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total
	(In thousands)												(In thousands)
Grade:
Pass	$	340,973	$	515,045	$	2,555	$	84,384	$	362,597	$	1,305,554	$	324,185	$	548,853	$	5,649	$	62,253	$	310,429	$	1,251,369
Substandard		13,724		25,830		-		3,340		2,477		45,371		11,811		19,731		-		2,930		1,370		35,842
Doubtful		-		1,296		-		-		10		1,306		-		-		-		-		1		1
Loss		-		-		-		-		480		480		-		-		-		-		770		770
Total	$	354,697	$	542,171	$	2,555	$	87,724	$	365,564	$	1,352,711	$	335,996	$	568,584	$	5,649	$	65,183	$	312,570	$	1,287,982

⁽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
	Summary of Loans by Delinquency and Nonaccrual Status At March 31, 2017												At March 31, 2018
	Current and Accruing		30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Loans		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	$	351,417	$	1,979	$	1,072	$	-	$	32	$	354,500	$	306,396	$	227	$	84	$	-	$	271	$	306,978
Commercial real estate		553,637		4,922		605		-		6,440		565,604		544,476		2,809		360		-		5,673		553,318
Construction		1,880		-		-		-		-		1,880		2,941		-		-		-		-		2,941
Residential real estate		78,182		1,299		-		-		-		79,481		59,184		300		-		-		-		59,484
Consumer installment and other		345,600		2,764		693		373		195		349,625		302,214		2,667		531		255		196		305,863
Total	$	1,330,716	$	10,964	$	2,370	$	373	$	6,667	$	1,351,090	$	1,215,211	$	6,003	$	975	$	255	$	6,140	$	1,228,584

													Summary of Loans by Delinquency and Nonaccrual Status
	Summary of Loans by Delinquency and Nonaccrual Status At December 31, 2016												At December 31, 2017
	Current and Accruing		30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Loans		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	$	353,497	$	966	$	40	$	-	$	194	$	354,697	$	334,908	$	627	$	164	$	-	$	297	$	335,996
Commercial real estate		533,377		1,460		445		-		6,889		542,171		561,883		1,143		125		-		5,433		568,584
Construction		2,329		226		-		-		-		2,555		5,649		-		-		-		-		5,649
Residential real estate		86,098		528		37		-		1,061		87,724		65,183		-		-		-		-		65,183
Consumer installment and other		360,549		3,288		989		497		241		365,564		307,445		3,321		1,077		531		196		312,570
Total	$	1,335,850	$	6,468	$	1,511	$	497	$	8,385	$	1,352,711	$	1,275,068	$	5,091	$	1,366	$	531	$	5,926	$	1,287,982

~~-17-~~

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, ~~2017~~2018 and December 31, ~~2016.~~2017.

- 18 -

The following summarizes impaired loans:

	Impaired Loans At March 31, 2017						Impaired Loans
	Recorded Investment		Unpaid Principal Balance		Related Allowance		At March 31,						At December 31,
	(In thousands)						2018						2017
Impaired loans with no related allowance recorded:
									Unpaid						Unpaid
							Recorded		Principal		Related		Recorded		Principal		Related
							Investment		Balance		Allowance		Investment		Balance		Allowance
							(In thousands)
With no related allowance recorded:
Commercial	$	1,080	$	1,148	$	-	$	1,183	$	1,227	$	-	$	1,212	$	1,271	$	-
Commercial real estate		15,766		17,788		-		9,766		11,752		-		13,169		14,985		-
Construction		-		-		-
Residential real estate		217		247		-		206		237		-		208		239		-
Consumer installment and other		517		623		-		354		461		-		360		466		-
Total with no related allowance recorded								11,509		13,677		-		14,949		16,961		-

Impaired loans with an allowance recorded:
With an allowance recorded:
Commercial		10,106		10,115		4,991		9,634		9,634		4,777		9,764		9,764		4,814
Commercial real estate		-		-		-		2,784		2,787		214		1,790		1,792		171
Construction		-		-		-
Residential real estate		-		-		-
Consumer installment and other		-		-		-

Total:
Commercial	$	11,186	$	11,263	$	4,991
Commercial real estate		15,766		17,788		-
Construction		-		-		-
Residential real estate		217		247		-
Consumer installment and other		517		623		-
Total with an allowance recorded								12,418		12,421		4,991		11,554		11,556		4,985
Total							$	23,927	$	26,098	$	4,991	$	26,503	$	28,517	$	4,985

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~~-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 -

Impaired loans include troubled debt restructured loans. Impaired loans at March 31, ~~2017,~~2018, included ~~$12,403~~$9,550 thousand of restructured loans, ~~$5,172~~$4,110 thousand of which were on nonaccrual status. Impaired loans include troubled debt restructured loans. Impaired loans at December 31, ~~2016,~~2017, included ~~$12,381~~$12,081 thousand of restructured loans, ~~$5,302~~$4,285 thousand of which were on nonaccrual status.

									Impaired Loans
									For the Three Months Ended March 31,
									2018				2017
	Impaired Loans For the Three Months Ended March 31,								Average		Recognized		Average		Recognized
	2017				2016				Recorded		Interest		Recorded		Interest
	Average Recorded Investment		Recognized Interest Income		Average Recorded Investment		Recognized Interest Income		Investment		Income		Investment		Income
	(In thousands)								(In thousands)
Commercial	$	11,292	$	118	$	13,410	$	133	$	10,897	$	175	$	11,292	$	118
Commercial real estate		14,500		237		20,849		159		13,755		215		14,500		237
Construction		-		-		271		-		-		-		-		-
Residential real estate		748		4		810		4		207		4		748		4
Consumer installment and other		543		7		347		6		357		3		543		7
Total	$	27,083	$	366	$	35,687	$	302	$	25,216	$	397	$	27,083	$	366

The following tables provide information on troubled debt restructurings:

Troubled Debt Restructurings
At March 31, 2018
Period-End
Individual
Number of Pre-Modification Period-End Impairment
Contracts Carrying Value Carrying Value Allowance
($ in thousands)
Commercial 7 $ 2,393 $ 1,043 $ 39
Commercial real estate 9 9,537 8,301 -
Residential real estate 1 241 206 -
Total 17 $ 12,171 $ 9,550 $ 39

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~~-19-~~

~~The following table provides information on troubled debt restructurings:~~

Troubled Debt Restructurings
At March 31, 2017
Number of
Contracts Pre-Modification
Carrying Value Period-End
Carrying Value Period-End
Individual
Impairment
Allowance
($ in thousands)
Commercial 8 $ 2,768 $ 1,468 $ 107
Commercial real estate 11 11,576 10,718 -
Residential real estate 1 241 217 -
Total 20 $ 14,585 $ 12,403 $ 107
- 19 -

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

Troubled Debt Restructurings
At December 31, 2016
Number of
Contracts Pre-Modification
Carrying Value Period-End
Carrying Value Period-End
Individual
Impairment
Allowance
($ in thousands)
Commercial 7 $ 2,719 $ 1,489 $ 113
Commercial real estate 10 11,257 10,673 -
Residential real estate 1 241 219 -
Total 18 $ 14,217 $ 12,381 $ 113

During the three months ended March 31, 2018, the Company did not modify any loans that were considered troubled debt restructurings. During the three months ended March 31, 2017, the Company modified two loans with a carrying value of $273 thousand that were considered troubled debt restructurings. The two concessions granted in the ~~first quarter~~three months ended March 31, 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. During the three months ended March 31, 2016, the Company modified three loans with a carrying value of $4,757 thousand that were considered troubled debt restructurings. The concessions granted in the first quarter 2016 consisted of two modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms and one court order requiring under-market terms. There were no chargeoffs related to troubled debt restructurings made during the three months ended March 31, ~~2017~~2018 and March 31, ~~2016.~~2017. During the three months ended March 31, ~~2017~~2018 and ~~2016,~~2017, no troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

There were no loans restricted due to collateral requirements at March 31, ~~2017~~2018 and December 31, ~~2016.~~2017.

There were no loans held for sale at March 31, ~~2017~~2018 and December 31, ~~2016.~~2017.

At March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company held total other real estate owned (OREO) of ~~$2,136~~$1,376 thousand net of reserve of ~~$1,685~~$1,905 thousand and ~~$3,095~~$1,426 thousand net of reserve of ~~$1,816~~$1,905 thousand, respectively, of which ~~$-0-~~$-0- thousand was foreclosed residential real estate properties or covered OREO at both ~~dates.~~dates, respectively. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was ~~$-0-~~$196 thousand at March 31, ~~2017~~2018 and December 31, ~~2016.~~2017.

Note 5: Concentration of Credit Risk

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At March 31, ~~2017,~~2018, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At March 31, ~~2017,~~2018, Westamerica Bank had 3936 lending relationships each with aggregate ~~loans~~amounts exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of ~~$60,831~~$48,623 thousand and ~~$57,721~~$53,874 thousand at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At March 31, ~~2017,~~2018, Westamerica Bank held corporate bonds in 5072 issuing entities that exceeded $5 million for each issuer.

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~~-20-~~

- 20 -

Note 6: Other Assets

Other assets consisted of the following:

	At March 31, 2017		At December 31, 2016		At March 31,		At December 31,
	(In thousands)				2018		2017
Cost method equity investments:
					(In thousands)
Equity securities without readily determinable fair values:
Federal Reserve Bank stock ⁽¹⁾	$	14,045	$	14,069	$	14,069	$	14,069
Other investments		201		201		158		158
Total cost method equity investments		14,246		14,270
Total equity securities without readily determinable fair values						14,227		14,227
Life insurance cash surrender value		52,177		51,535		54,742		54,101
Net deferred tax asset		53,518		55,417		42,842		33,112
Limited partnership investments		12,141		12,591		9,519		10,119
Interest receivable		19,745		21,489		22,538		23,557
Prepaid assets		4,997		4,825		4,532		4,906
Other assets		8,453		11,597		11,386		18,428
Total other assets	$	165,277	$	171,724	$	159,786	$	158,450

⁽¹⁾

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

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At March 31, ~~2017,~~2018, this investment totaled ~~$12,141~~$9,519 thousand and ~~$2,299~~$2,299 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, ~~2016,~~2017, this investment totaled ~~$12,591~~$10,119 thousand and $2,299 thousand of this amount represented outstanding equity capital commitments. At March 31, ~~2017,~~2018, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $722 thousand in 2020, $131 thousand in 2023, $90 thousand in 2024 and $1,356 thousand in 2025 or thereafter.

The amounts recognized in net income for these investments include:

					For the Three Months Ended
	For the Three Months Ended March 31,				March 31,
	2017		2016		2018		2017
	(In thousands)				(In thousands)
Investment loss included in pre-tax income	$	450	$	675	$	600	$	450
Tax credits recognized in provision for income taxes		463		598		336		463

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 months ended March 31, ~~2017~~2018 and year ended December 31, ~~2016.~~2017. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three months ended March 31, ~~2017~~2018 and year ended December 31, ~~2016,~~2017 no such adjustments were recorded.

~~-21-~~

The carrying values of goodwill were:

At March 31, 2017 At December 31, 2016
(In thousands)
Goodwill $ 121,673 $ 121,673
At March 31, 2018 At December 31, 2017
(In thousands)
Goodwill $ 121,673 $ 121,673

- 21 -

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

											At March 31,					At December 31,
											2018					2017
											Gross					Gross
	At March 31, 2017					At December 31, 2016					Carrying		Accumulated			Carrying		Accumulated
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Amount		Amortization			Amount		Amortization
	(In thousands)										(In thousands)
Core Deposit Intangibles	$	56,808	$	(50,827	)	$	56,808	$	(50,074	)	$	56,808	$	(53,528	)	$	56,808	$	(52,987	)
Merchant Draft Processing Intangible		10,300		(10,154	)		10,300		(10,107	)		10,300		(10,300	)		10,300		(10,271	)
Total Identifiable Intangible Assets	$	67,108	$	(60,981	)	$	67,108	$	(60,181	)	$	67,108	$	(63,828	)	$	67,108	$	(63,258	)

As of March 31, ~~2017,~~2018, 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 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
Merchant
Core Draft
Deposit Processing
Intangibles Intangible Total
(In thousands)
For the Three Months ended March 31, 2018 (actual) $ 541 $ 29 $ 570
Estimate for the remainder of year ending December 31, 2018 1,351 - 1,351
Estimate for year ending December 31, 2019 538 - 538
2020 287 - 287
2021 269 - 269
2022 252 - 252
2023 236 - 236

Note 8: Deposits and Borrowed Funds

The following table provides additional detail regarding deposits.

					Deposits
	Deposits				At March 31,		At December 31,
	At March 31, 2017		At December 31, 2016		2018		2017
	(In thousands)				(In thousands)
Noninterest-bearing	$	2,046,390	$	2,089,443	$	2,179,157	$	2,197,526
Interest-bearing:
Transaction		905,588		865,701		924,081		904,245
Savings		1,494,854		1,493,427		1,540,192		1,494,024
Time deposits less than $100 thousand		129,889		133,712		114,301		117,848
Time deposits $100 thousand through $250 thousand		83,636		84,925		74,436		76,578
Time deposits more than $250 thousand		37,616		37,533		35,700		37,392
Total deposits	$	4,697,973	$	4,704,741	$	4,867,867	$	4,827,613

Demand deposit overdrafts of ~~$806~~$788 thousand and ~~$2,679~~$2,786 thousand were included as loan balances at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $97 thousand in the three months ended March 31, 2018 and $106 thousand in the ~~first quarter 2017 and $137 thousand in the first quarter 2016.~~three months ended March 31, 2017.

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~~-22-~~

- 22 -

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

					Repurchase Agreements (Sweep) Accounted for as Secured Borrowings
	Repurchase Agreements (Sweep) Accounted for as Secured Borrowings				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		At March 31, 2018		At December 31, 2017
Repurchase agreements:	(In thousands)				(In thousands)
Collateral securing borrowings:
Securities of U.S. Government sponsored entities	$	74,205	$	74,031	$	73,165	$	74,173
Agency residential MBS		62,217		63,277		64,266		58,251
Corporate securities		90,598		90,554		104,210		105,113
Total collateral carrying value	$	227,020	$	227,862	$	241,641	$	237,537
Total short-term borrowed funds	$	73,611	$	59,078	$	65,356	$	58,471

Note 9: Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ~~Available~~Equity securities and available for sale ~~investment~~debt 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~~debt securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.

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

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

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

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

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

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

~~-23-~~

- 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 three months ended March 31, ~~2017~~2018 and year ended December 31, ~~2016,~~2017, there were no transfers in to or out of levels 1, 2 or 3.

Assets Recorded at Fair Value on a Recurring Basis

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

	At March 31, 2017								At March 31, 2018
	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)
Equity securities
Mutual funds									$	1,764	$	-	$	1,764	$	-
Total equity securities										1,764		-		1,764		-
Debt securities available for sale
Securities of U.S. Government sponsored entities	$	138,937	$	-	$	138,937	$	-		117,947		-		117,947		-
Agency residential MBS		722,204		-		722,204		-		847,640		-		847,640		-
Non-agency residential MBS		196		-		196		-		139		-		139		-
Non-agency commercial MBS		1,939		-		1,939		-
Agency commercial MBS										2,190		-		2,190		-
Securities of U.S. Government entities										1,520		-		1,520		-
Obligations of states and political subdivisions		178,871		-		178,871		-		180,635		-		180,635		-
Asset-backed securities		355		-		355		-
FHLMC and FNMA stock		9,400		12		9,388		-
Corporate securities		839,136		-		839,136		-		1,201,899		-		1,201,899		-
Other securities		2,271		461		1,810		-
Total securities available for sale	$	1,893,309	$	473	$	1,892,836	$	-
Total debt securities available for sale										2,351,970		-		2,351,970		-
Total									$	2,353,734	$	-	$	2,353,734	$	-

	At December 31, 2016								At December 31, 2017
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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)
Equity securities
Mutual funds									$	1,800	$	-	$	1,800	$	-
Total equity securities										1,800		-		1,800		-
Debt securities available for sale
Securities of U.S. Government sponsored entities	$	138,660	$	-	$	138,660	$	-		119,319		-		119,319		-
Agency residential MBS		691,499		-		691,499		-		767,706		-		767,706		-
Non-agency residential MBS		271		-		271		-		154		-		154		-
Non-agency commercial MBS		2,025		-		2,025		-
Agency commercial MBS										2,219		-		2,219		-
Securities of U.S. Government entities										1,590		-		1,590		-
Obligations of states and political subdivisions		183,411		-		183,411		-		185,221		-		185,221		-
Asset-backed securities		695		-		695		-
FHLMC and FNMA stock		10,869		17		10,852		-
Corporate securities		860,857		-		860,857		-		1,115,498		-		1,115,498		-
Other securities		2,471		656		1,815		-
Total securities available for sale	$	1,890,758	$	673	$	1,890,085	$	-
Total debt securities available for sale										2,191,707		-		2,191,707		-
Total									$	2,193,507	$	-	$	2,193,507	$	-

~~-24-~~

- 24 -

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~~lower of cost or ~~fair-value~~fair value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, the following ~~table provides~~tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

																			For the
									For the Three Months Ended										Three Months Ended
	At March 31, 2017								March 31, 2017		At March 31, 2018								March 31, 2018
	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	$	2,136	$	-	$	-	$	2,136	$	-	$	1,376	$	-	$	-	$	1,376	$	-
Impaired loans		9,400		-		-		9,400		-
Impaired loans:
Commercial												4,857		-		-		4,857		-
Commercial real estate												6,680		-		-		6,680		-
Total assets measured at fair value on a nonrecurring basis	$	11,536	$	-	$	-	$	11,536	$	-	$	12,913	$	-	$	-	$	12,913	$	-

																				For the
									For the Year Ended											Year Ended
	At December 31, 2016								December 31, 2016			At December 31, 2017								December 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	$	3,095	$	-	$	-	$	3,095	$	(705	)	$	1,426	$	-	$	-	$	1,426	$	(219	)
Impaired loans		9,525		-		-		9,525		-
Impaired loans:
Commercial													4,950		-		-		4,950		-
Commercial real estate													5,904		-		-		5,904		-
Total assets measured at fair value on a nonrecurring basis	$	12,620	$	-	$	-	$	12,620	$	(705	)	$	12,280	$	-	$	-	$	12,280	$	(219	)

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

Disclosures about Fair Value of Financial Instruments

The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value in the balance sheet. The Company implemented the provisions of ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, effective January 1, 2018. The provisions require the Company to use the “exit price notion” when measuring the fair value of financial instruments for disclosure purposes.

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

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

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

- 25 -

Prior to adoption of ASU 2016-01, loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates were valued using historical cost. Fixed rate loans and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of ~~$24,919 thousand at March 31, 2017 and $25,954~~$23,009 thousand at December 31, ~~2016~~2017 was 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-~~

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~~Banks 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 using net present value of cash flows methodology that seeks to incorporate interest rate, credit, liquidity and prepayment risks in the fair market value estimation. Inputs to calculation include market rates for similarly offered products, market interest rate projections, credit spreads and prepayment assumptions. The resulting cash flows are compared against alternative funding sources.

Prior to adoption of ASU 2016-01, the fair value of time deposits were estimated by discounting estimated future contractual cash flows using current market rates for financial instruments with similar characteristics.

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

The ~~table~~tables below isare 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~~tables are recorded in the balance sheet under the indicated captions.

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

	At March 31, 2017										At March 31, 2018
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2 )		Significant Unobservable Inputs (Level 3 )		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	$	546,815	$	546,815	$	546,815	$	-	$	-	$	555,607	$	555,607	$	555,607	$	-	$	-
Investment securities held to maturity		1,298,414		1,296,738		-		1,296,738		-
Debt securities held to maturity												1,114,287		1,098,895		-		1,098,895		-
Loans		1,326,171		1,332,148		-		-		1,332,148		1,205,503		1,244,670		-		-		1,244,670

Financial Liabilities:
Deposits	$	4,697,973		4,695,676	$	-	$	4,446,832		248,844	$	4,867,867	$	4,864,792	$	-	$	4,643,430	$	221,362
Short-term borrowed funds		73,611		73,611		-		73,611		-		65,356		65,356		-		65,356		-

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	At December 31, 2016										At December 31, 2017
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2 )		Significant Unobservable Inputs (Level 3 )		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	$	462,271	$	462,271	$	462,271	$	-	$	-	$	575,002	$	575,002	$	575,002	$	-	$	-
Investment securities held to maturity		1,346,312		1,340,741		-		1,340,741		-
Debt securities held to maturity												1,158,864		1,155,342		-		1,155,342		-
Loans		1,326,757		1,337,774		-		-		1,337,774		1,264,973		1,257,811		-		-		1,257,811

Financial Liabilities:
Deposits	$	4,704,741	$	4,702,797	$	-	$	4,448,571	$	254,226	$	4,827,613	$	4,824,586	$	-	$	4,595,795	$	228,791
Short-term borrowed funds		59,078		59,078		-		59,078		-		58,471		58,471		-		58,471		-

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

~~-26-~~

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 ~~$305,544~~$282,428 thousand and ~~$304,508~~$272,646 thousand at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled ~~$19,762~~$3,849 thousand and ~~$21,732~~$19,263 thousand at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The Company ~~also~~ had no commitments outstanding for commercial and similar letters of credit ~~of $-0- thousand~~ at March 31, ~~2017~~2018 and December 31, ~~2016.~~2017. The Company had a reserve for unfunded commitments of ~~$2,308~~$2,308 thousand at March 31, ~~2017~~2018 and ~~$2,408~~$2,308 thousand at December 31, ~~2016,~~2017, included in other liabilities.

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

The Company has determined that it will be obligated to provide refunds of revenue recognized in prior years to some customers. The Company estimates the probable amount of these obligations will be $5,542 thousand and has accrued a liability for such amount; the estimated liability is subject to revision.

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Note 11: Earnings Per Common Share

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

					For the Three Months Ended
	For the Three Months Ended March 31,				March 31,
	2017		2016		2018		2017
	(In thousands, except per share data)				(In thousands, except per share data)
Net income (numerator)	$	15,049	$	14,226	$	17,506	$	15,049
Basic earnings per common share
Weighted average number of common shares outstanding - basic (denominator)		26,171		25,445		26,532		26,171
Basic earnings per common share	$	0.58	$	0.56	$	0.66	$	0.58
Diluted earnings per common share
Weighted average number of common shares outstanding - basic		26,171		25,445		26,532		26,171
Add common stock equivalents for options		158		23		133		158
Weighted average number of common shares outstanding - diluted (denominator)		26,329		25,468		26,665		26,329
Diluted earnings per common share	$	0.57	$	0.56	$	0.66	$	0.57

For the three months ended March 31, ~~2017~~2018 and ~~2016,~~2017, options to purchase ~~299~~491 thousand and ~~1,297~~299 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

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~~-27-~~

- 28 -

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

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

	For the Three Months Ended									For the Three Months Ended
	March 31,			March 31,			December 31,			March 31,						December 31,
	2017			2016			2016			2018			2017			2017
	(In thousands, except per share data)									(In thousands, except per share data)
Net Interest and Fee Income (FTE)⁽¹⁾	$	36,030		$	36,447		$	35,959		$	35,467		$	36,030		$	36,644
Provision for Loan Losses		-			-			-			-			-			-
Noninterest Income		11,657			11,729			11,545
Noninterest Income:
Securities (Losses) Gains											(36	)		-			7,955
Other Noninterest Income											11,991			11,657			12,345
Total Noninterest Income											11,955			11,657			20,300
Noninterest Expense		24,615			25,858			24,577			24,214			24,615			30,167
Income Before Income Taxes (FTE)⁽¹⁾		23,072			22,318			22,927			23,208			23,072			26,777
Provision for Income Taxes (FTE)⁽¹⁾		8,023			8,092			8,474			5,702			8,023			22,617
Net Income	$	15,049		$	14,226		$	14,453		$	17,506		$	15,049		$	4,160

Average Common Shares Outstanding		26,171			25,445			25,773			26,532			26,171			26,384
Average Diluted Common Shares Outstanding		26,329			25,468			25,925			26,665			26,329			26,538
Common Shares Outstanding at Period End		26,283			25,438			25,907			26,591			26,283			26,425

Per Common Share:
Basic Earnings	$	0.58		$	0.56		$	0.56		$	0.66		$	0.58		$	0.16
Diluted Earnings		0.57			0.56			0.56			0.66			0.57			0.16
Book Value Per Common Share	$	22.25		$	21.19		$	21.67		$	21.89		$	22.25		$	22.34

Financial Ratios:
Return On Assets		1.13	%		1.11	%		1.07	%		1.28	%		1.13	%		0.30	%
Return On Common Equity		10.48	%		10.85	%		10.30	%		11.57	%		10.48	%		2.70	%
Net Interest Margin (FTE)⁽¹⁾		3.14	%		3.34	%		3.15	%		3.02	%		3.14	%		3.12	%
Net Loan Losses to Average Loans		0.31	%		0.08	%		0.12	%
Net Loan (Recoveries) Losses to Average Loans											(0.02	)%		0.31	%		0.19	%
Efficiency Ratio⁽²⁾		51.6	%		53.7	%		51.7	%		51.1	%		51.6	%		53.0	%

Average Balances:
Assets	$	5,395,783		$	5,174,804		$	5,370,412		$	5,564,705		$	5,395,783		$	5,534,700
Earning Assets		4,620,001			4,381,423			4,561,619			4,723,213			4,620,001			4,682,897
Loans		1,355,250			1,500,616			1,356,350			1,243,750			1,355,250			1,285,748
Deposits		4,692,746			4,537,548			4,702,129			4,828,352			4,692,746			4,811,035
Shareholders' Equity		582,384			527,177			558,057			613,860			582,384			610,200

Period End Balances:
Assets	$	5,395,947		$	5,199,868		$	5,366,083		$	5,551,036		$	5,395,947		$	5,513,046
Earning Assets		4,542,813			4,417,305			4,589,781			4,696,605			4,542,813			4,640,353
Loans		1,351,090			1,473,196			1,352,711			1,228,584			1,351,090			1,287,982
Deposits		4,697,973			4,516,750			4,704,741			4,867,867			4,697,973			4,827,613
Shareholders' Equity		584,888			538,973			561,367			582,083			584,888			590,239

Capital Ratios at Period End:
Total Risk Based Capital		16.91	%		13.51	%		15.95	%		16.53	%		16.91	%		16.17	%
Tangible Equity to Tangible Assets		8.68	%		8.04	%		8.26	%		8.42	%		8.68	%		8.63	%

Dividends Paid Per Common Share	$	0.39		$	0.39		$	0.39		$	0.40		$	0.39		$	0.40
Common Dividend Payout Ratio		68	%		70	%		70	%		61	%		68	%		250	%

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 andnoninterest income).

~~-28-~~

- 29 -

Financial Overview

Westamerica Bancorporation and subsidiaries’ (the Company”) principal source of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). Market interest rates declined considerably following the recession of 2008 and 2009. Interest rates remained historically low through 2016 as the Federal Open Market Committee’s (“FOMC”) monetary policy was highly accommodative. During this period, Management avoided originating long-dated, low-yielding loans given the potential impact of such assets on forward earning potential; as a result, loans declined and investment securities increased. The changing composition of the earning assets and low market interest rates has pressured the net interest margin to 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 inbetween December 2016 and March ~~2017, and~~2018, although longer-term rates have not increased ~~as well. The recent increase in rates has resulted in competitive loan yields, which are more appealing from~~by a ~~profitability perspective, in Management’s opinion. Total average loan volumes were stable during~~similar magnitude. Net interest income was $34.0 million for the first quarter 2018, compared with $33.7 million for the fourth quarter 2017 and $32.8 million for the first quarter 2017. The increase in net interest income is due to higher asset yields and higher levels of average earning assets.

The funding source of the Company’s earning assets is primarily customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. The first quarter ~~2017~~2018 average volume of checking and savings deposits was 95 percent of average total deposits.

Credit quality ~~improved during the first quarter 2017~~remained strong with nonperforming assets ~~declining $3 million to $9~~totaling $8 million at March 31, ~~2017.~~2018 and net loan loss recoveries of $72 thousand for the first quarter 2018. 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 for the first quarter 2017 was $1.3 million lower than the comparable first quarter 2016.2018.

The Company presents its net interest margin and net interest income on aan FTE basis using the current statutory federal tax 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 aan FTE basis. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the federal statutory tax rate of 35% for 2017. Due to the Tax Cuts and Jobs Act of 2017 (“Act”), the federal tax rate became 21% for 2018; as such, the upward adjustment to reflect the effect of income exempt from federal taxation is lower in 2018.

The Company’s significant accounting policies (see Note 1, ~~(“Summary~~“Summary of Significant Accounting ~~Policies”)~~Policies,” to Financial Statements in the Company’s ~~2016~~2017 Form 10-K) are fundamental to understanding the Company’s results of operations and financial condition. ~~The Company adopted the~~ ~~FASB ASU 2016-09,~~~~Improvements to Employee Share-Based Payment Accounting~~ ~~effective January 1, 2017.~~

The Company reported first quarter ~~2017~~2018 net income of $17.5 million or $0.66 diluted earnings per common share. First quarter 2018 results compare to net income of $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 measured $0.02 higher than would have been measured under accounting standards applied in 2016. First quarter 2017 results compare to net income of $14.2 million or $0.56 diluted earnings per common share for the first quarter ~~2016~~2017 and ~~$14.5~~$4.2 million or ~~$0.56~~$0.16 diluted earnings per common share for the fourth quarter ~~2016.~~2017. Fourth quarter 2017 results include adjustments to asset values triggered by enactment of the Act, recognition of a loss contingency, and securities gains which collectively reduced EPS $0.42.

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~~-29-~~

- 30 -

Net Income

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

	For the Three Months Ended									For the Three Months Ended
	March 31,						December 31,			March 31,						December 31,
	2017			2016			2016			2018			2017			2017
	(In thousands, except per share data)									(In thousands, except per share data)
Net interest and loan fee income										$	34,048		$	32,844		$	33,733
FTE adjustment											1,419			3,186			2,911
Net interest and loan fee income (FTE)	$	36,030		$	36,447		$	35,959			35,467			36,030			36,644
Provision for loan losses		-			-			-			-			-			-
Noninterest income		11,657			11,729			11,545			11,955			11,657			20,300
Noninterest expense		24,615			25,858			24,577			24,214			24,615			30,167
Income before taxes (FTE)		23,072			22,318			22,927			23,208			23,072			26,777
Income tax provision (FTE)		8,023			8,092			8,474			5,702			8,023			22,617
Net income	$	15,049		$	14,226		$	14,453		$	17,506		$	15,049		$	4,160

Average diluted common shares		26,329			25,468			25,925			26,665			26,329			26,538
Diluted earnings per common share	$	0.57		$	0.56		$	0.56		$	0.66		$	0.57		$	0.16

Average total assets	$	5,395,783		$	5,174,804		$	5,370,412		$	5,564,705		$	5,395,783		$	5,534,700
Net income to average total assets (annualized)		1.13	%		1.11	%		1.07	%		1.28	%		1.13	%		0.30	%
Net income to average common shareholders' equity (annualized)		10.48	%		10.85	%		10.30	%		11.57	%		10.48	%		2.70	%

Net income for the first quarter of ~~2017~~2018 was ~~$823 thousand~~$2.5 million more than the same quarter of ~~2016.~~2017. Net interest and loan fee income increased $1.2 million in the first quarter 2018 compared with first quarter 2017 mostly attributable to higher average balances of investments and higher yield on earning assets as market interest rates rose. The increase was offset by lower average balances of loans. Net interest and loan fee income (FTE) ~~decreased~~in the first quarter 2018 included a lower FTE adjustment than in the first quarter 2017 ~~compared with first quarter 2016 mostly attributable~~due to ~~lower average balances~~the reduced federal corporate tax as a result of ~~loans and lower yield on interest-earning assets, partially offset by higher average balances~~enactment of ~~investments and lower average balances of higher-costing time deposits.~~the Act. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest expense decreased mostly due to reductions in professional fees, courier costs, postage, correspondent service charges, OREO expense, insurance premiums, limited partnership operating losses and intangible amortization. The ~~effective~~book tax ~~rate decreased to 34.8% in~~provision for the first quarter 2018 was $4.3 million compared with $4.8 million for the first quarter 2017, ~~from 36.3% in~~representing effective tax rates of 19.7% and 24.3%, respectively. The book tax provisions for the first quarter ~~2016 primarily due to~~2018 and the ~~adoption~~first quarter 2017 include tax benefits of ~~ASU 2016-09.~~$451 thousand and $671 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements; these benefits reduced the effective tax rate by 2.0% and 3.4%, respectively.

Comparing the first quarter of ~~2017~~2018 with the fourth quarter of ~~2016,~~2017, net income increased ~~$596~~$13.3 million. Net interest and loan fee income increased $315 thousand in the first quarter 2018 compared with fourth quarter 2017 mostly attributable to higher average balances of investments and higher yield on earning assets as market interest rates rose. The increase was offset by lower average balances of loans. Net interest and loan fee income (FTE) in the first quarter 2018 included a lower FTE adjustment than in the fourth quarter 2017 due to ~~lower income~~the reduced federal corporate tax ~~provision (FTE) and higher noninterest income.~~as a result of enactment of the Act. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income ~~increased primarily~~in the first quarter 2018 was $8.3 million lower than in the fourth quarter 2017 due to ~~higher merchant~~gains on sale of securities of $8.0 million in the fourth quarter 2017. Noninterest expense decreased $6.0 million primarily because the fourth quarter 2017 included a $5.5 million loss contingency accrual and a $625 thousand impairment charge on tax credit ~~card fees.~~investments. The book tax provision for the first quarter 2018 was $4.3 million compared with $19.7 million for the fourth quarter 2017, representing effective tax rates of 19.7% and 82.6%, respectively. The book tax provision for the fourth quarter 2017 includes a $12.3 million charge resulting from re-measurement of the Company’s net deferred tax asset triggered by enactment of the Act.

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Net Interest and Loan Fee Income (FTE)

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

	For the Three Months Ended									For the Three Months Ended
	March 31,						December 31,			March 31,						December 31,
	2017			2016			2016			2018			2017			2017
	(In thousands)									(In thousands)
Interest and loan fee income	$	33,324		$	33,647		$	33,209		$	34,507		$	33,324		$	34,204
Interest expense		480			552			500			459			480			471
Net interest and loan fee income											34,048			32,844			33,733
FTE adjustment		3,186			3,352			3,250			1,419			3,186			2,911
Net interest and loan fee income (FTE)	$	36,030		$	36,447		$	35,959		$	35,467		$	36,030		$	36,644

Average earning assets	$	4,620,001		$	4,381,423		$	4,561,619		$	4,723,213		$	4,620,001		$	4,682,897
Net interest margin (FTE) (annualized)		3.14	%		3.34	%		3.15	%		3.02	%		3.14	%		3.12	%

Net interest and loan fee income ~~(FTE) decreased during~~increased $1.2 million in the first quarter 2018 compared with the first quarter 2017, ~~by $417 thousand from the same period in 2016,~~ mainly due to higher average balances of investments (up $215 million) and higher yield on earning assets (up 0.04%), partially offset by lower average balances of loans (down ~~$145~~$111 million) ~~and~~The FTE adjustment was lower ~~yield on interest-earning assets, partially offset by higher average balances~~in the first quarter 2018 compared with the first quarter 2017 due to the reduced federal corporate tax rate as a result of ~~investments (up $384 million) and lower average balances~~enactment of ~~higher-costing time deposits (down $30 million).~~the Act.

~~-30-~~

Comparing the first quarter ~~2017~~2018 with the fourth quarter ~~2016,~~2017, net interest and loan fee income ~~(FTE)~~ increased ~~$71~~$315 thousand due to higher average balances of investments (up ~~$59~~$82 million) and higher yield on ~~those investments~~interest earning assets (up ~~0.01%~~0.03%), offset by lower ~~net yield on~~average balances of loans (down ~~0.04%).~~$42 million) The FTE adjustment was lower in the first quarter 2018 compared with the fourth quarter 2017 due to the reduced federal corporate tax rate as a result of enactment of the Act.

Yields on interest-earning assets ~~declined due to relatively low~~increased in the first quarter 2018 as market interest rates ~~prevailing in the market.~~rose. The annualized net interest margin (FTE) was 3.02% in the first quarter 2018 compared with 3.14% in the first quarter 2017 ~~compared with 3.34%~~and 3.12% in the fourth quarter 2017. The first quarter net interest margin (FTE) was lower than in the first quarter ~~2016~~2017 and ~~3.15% in~~ the fourth quarter ~~2016. The volume of older-dated higher-yielding loans declined~~2017 due to ~~principal maturities and paydowns. The Company, in anticipation~~the reduced federal corporate tax rate as a result 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~~enactment of ~~liquidity will provide an opportunity to invest in higher yielding assets assuming market interest rates increase to levels higher than yields on maturing securities and security paydowns.~~the Act.

The ~~Company has been replacing higher-cost~~Company’s funding ~~sources with low-cost deposits and interest expense has declined to offset some of~~costs were 0.04% in the ~~decline in interest income.~~first quarter 2018, unchanged from the first quarter 2017. Average balances of time deposits declined ~~$30~~$25 million from the first quarter ~~2016~~2017 to first quarter ~~2017~~2018 while lower-cost checking and savings deposits grew 4% in the same period. Average balances of checking and saving deposits accounted for ~~94.6%~~95.3% of average total deposits in the first quarter ~~2017~~2018 compared with ~~93.7%~~94.6% in the first quarter ~~2016~~2017 and ~~94.5%~~95.1% in the fourth quarter ~~2016.~~2017; checking and savings deposits are less sensitive to rising interest rates than time deposits.

Net Interest Margin (FTE)

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

	For the Three Months Ended									For the Three Months Ended
	March 31,						December 31,			March 31,						December 31,
	2017			2016			2016			2018			2017			2017

Yield on earning assets											2.94	%		2.90	%		2.91	%
Impact of FTE adjustment											0.12	%		0.28	%		0.25	%
Yield on earning assets (FTE)		3.18	%		3.39	%		3.19	%		3.06	%		3.18	%		3.16	%
Rate paid on interest-bearing liabilities		0.07	%		0.09	%		0.07	%		0.07	%		0.07	%		0.07	%
Net interest spread (FTE)		3.11	%		3.30	%		3.12	%		2.99	%		3.11	%		3.09	%
Impact of noninterest-bearing funds		0.03	%		0.04	%		0.03	%		0.03	%		0.03	%		0.03	%
Net interest margin (FTE)		3.14	%		3.34	%		3.15	%		3.02	%		3.14	%		3.12	%

~~During~~

- 32 -

The FOMC increased the federal funds rate between December 2016 and ~~through~~March 2018. In the first quarter 2018 yield on earning assets increased with rising market interest rates. The net interest spread and net interest margin stated on an FTE basis are lower in the first quarter 2018 compared with the first quarter 2017 and the ~~net interest margin (FTE) was affected by historically low market interest rates. The changing composition~~fourth quarter 2017 because the FTE adjustment to reflect the effect of ~~interest-earning assets and low market rates has pressured the net interest margin.~~income exempt from federal taxation is lower in 2018 compared with 2017. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost time deposits and increasing balances of checking and savings deposits, which earn relatively low interest rates and are less volatile than time deposits during periods of rising market interest rates.

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- 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, rates and interest margins are annualized. 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~~federal statutory tax ~~rate. Yields, rates~~rate of 35 percent for 2017. Due to the Tax Cuts and ~~interest margins are annualized.~~Jobs Act of 2017, the federal tax rate became 21 percent for 2018; as such, the upward adjustment to reflect the effect of income exempt from federal taxation is lower in 2018.

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

	For the Three Months Ended March 31, 2017							For the Three Months Ended March 31, 2018
			Interest							Interest
	Average		Income/		Yields/			Average		Income/		Yields/
	Balance		Expense		Rates			Balance		Expense		Rates
	($ in thousands)							($ in thousands)
Assets
Investment securities:
Taxable	$	2,433,669	$	12,147		2.00	%	$	2,709,643	$	14,935		2.20	%
Tax-exempt ⁽¹⁾		831,082		8,294		3.99	%		769,820		6,169		3.21	%
Total investments ⁽¹⁾		3,264,751		20,441		2.50	%		3,479,463		21,104		2.43	%
Loans:
Taxable		1,290,093		15,243		4.79	%		1,184,715		14,223		4.87	%
Tax-exempt ⁽¹⁾		65,157		826		5.14	%		59,035		599		4.11	%
Total loans ⁽¹⁾		1,355,250		16,069		4.81	%		1,243,750		14,822		4.83	%
Total Interest-earning assets ⁽¹⁾		4,620,001		36,510		3.18	%		4,723,213		35,926		3.06	%
Other assets		775,782							841,492
Total assets	$	5,395,783						$	5,564,705

Liabilities and shareholders' equity
Noninterest-bearing demand	$	2,056,858	$	-		-	%	$	2,156,626	$	-		-	%
Savings and interest-bearing transaction		2,382,348		280		0.05	%		2,443,561		282		0.05	%
Time less than $100,000		141,400		83		0.24	%		125,020		71		0.23	%
Time $100,000 or more		112,140		106		0.38	%		103,145		97		0.38	%
Total interest-bearing deposits		2,635,888		469		0.07	%		2,671,726		450		0.07	%
Short-term borrowed funds		68,584		11		0.06	%		62,501		9		0.06	%
Total interest-bearing liabilities		2,704,472		480		0.07	%		2,734,227		459		0.07	%
Other liabilities		52,069							59,992
Shareholders' equity		582,384							613,860
Total liabilities and shareholders' equity	$	5,395,783						$	5,564,705
Net interest spread ^{(1) (2)}						3.11	%						2.99	%
Net interest and fee income and interest margin ^{(1) (3)}			$	36,030		3.14	%			$	35,467		3.02	%

⁽¹⁾

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

⁽²⁾

Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.

⁽³⁾

Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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- 34 -

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

	For the Three Months Ended March 31, 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	$	2,046,547	$	9,674		1.89	%	$	2,433,669	$	12,147		2.00	%
Tax-exempt ⁽¹⁾		834,260		8,636		4.14	%		831,082		8,294		3.99	%
Total investments ⁽¹⁾		2,880,807		18,310		2.54	%		3,264,751		20,441		2.50	%
Loans:
Taxable		1,429,106		17,726		4.99	%		1,290,093		15,243		4.79	%
Tax-exempt ⁽¹⁾		71,510		963		5.41	%		65,157		826		5.14	%
Total loans ⁽¹⁾		1,500,616		18,689		5.01	%		1,355,250		16,069		4.81	%
Total Interest-earning assets ⁽¹⁾		4,381,423		36,999		3.39	%		4,620,001		36,510		3.18	%
Other assets		793,381							775,782
Total assets	$	5,174,804						$	5,395,783

Liabilities and shareholders' equity
Noninterest-bearing demand	$	1,993,986	$	-		-	%	$	2,056,858	$	-		-	%
Savings and interest-bearing transaction		2,259,681		293		0.05	%		2,382,348		280		0.05	%
Time less than $100,000		160,190		113		0.28	%		141,400		83		0.24	%
Time $100,000 or more		123,691		137		0.44	%		112,140		106		0.38	%
Total interest-bearing deposits		2,543,562		543		0.09	%		2,635,888		469		0.07	%
Short-term borrowed funds		57,846		9		0.07	%		68,584		11		0.06	%
Total interest-bearing liabilities		2,601,408		552		0.09	%		2,704,472		480		0.07	%
Other liabilities		52,233							52,069
Shareholders' equity		527,177							582,384
Total liabilities and shareholders' equity	$	5,174,804						$	5,395,783
Net interest spread ^{(1) (2)}						3.30	%						3.11	%
Net interest and fee income and interest margin ^{(1) (3)}			$	36,447		3.34	%			$	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⁾

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~~-33-~~

- 35 -

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

For the Three Months Ended December 31, 2016
Interest
Average Income/ Yields/
Balance Expense Rates
($ in thousands)
Assets
Investment securities:
Taxable $ 2,351,530 $ 11,462 1.95 %
Tax-exempt ⁽¹⁾ 853,739 8,471 3.97 %
Total investments ⁽¹⁾ 3,205,269 19,933 2.49 %
Loans:
Taxable 1,290,372 15,693 4.84 %
Tax-exempt ⁽¹⁾ 65,978 833 5.02 %
Total loans ⁽¹⁾ 1,356,350 16,526 4.85 %
Total interest-earning assets ⁽¹⁾ 4,561,619 36,459 3.19 %
Other assets 808,793
Total assets $ 5,370,412

Liabilities and shareholders' equity
Deposits:
Noninterest-bearing demand $ 2,077,213 $ - - %
Savings and interest-bearing transaction 2,364,695 288 0.05 %
Time less than $100,000 146,440 90 0.24 %
Time $100,000 or more 113,781 113 0.40 %
Total interest-bearing deposits 2,624,916 491 0.07 %
Short-term borrowed funds 56,669 9 0.06 %
Total interest-bearing liabilities 2,681,585 500 0.07 %
Other liabilities 53,557
Shareholders' equity 558,057
Total liabilities and shareholders' equity $ 5,370,412
Net interest spread ^{(1) (2)} 3.12 %
Net interest and fee income and interest margin ^{(1) (3)} $ 35,959 3.15 %

For the Three Months Ended December 31, 2017
Interest
Average Income/ Yields/
Balance Expense Rates
($ in thousands)
Assets
Investment securities:
Taxable $ 2,612,669 $ 13,861 2.12 %
Tax-exempt ⁽¹⁾ 784,480 7,583 3.87 %
Total investments ⁽¹⁾ 3,397,149 21,444 2.52 %
Loans:
Taxable 1,225,020 14,923 4.83 %
Tax-exempt ⁽¹⁾ 60,728 748 4.89 %
Total loans ⁽¹⁾ 1,285,748 15,671 4.84 %
Total interest-earning assets ⁽¹⁾ 4,682,897 37,115 3.16 %
Other assets 851,803
Total assets $ 5,534,700

Liabilities and shareholders' equity
Deposits:
Noninterest-bearing demand $ 2,172,678 $ - - %
Savings and interest-bearing transaction 2,401,694 285 0.05 %
Time less than $100,000 129,917 75 0.23 %
Time $100,000 or more 106,746 101 0.38 %
Total interest-bearing deposits 2,638,357 461 0.07 %
Short-term borrowed funds 62,833 10 0.06 %
Total interest-bearing liabilities 2,701,190 471 0.07 %
Other liabilities 50,632
Shareholders' equity 610,200
Total liabilities and shareholders' equity $ 5,534,700
Net interest spread ^{(1) (2)} 3.09 %
Net interest and fee income and interest margin ^{(1) (3)} $ 36,644 3.12 %
⁽¹⁾ Amounts calculated on an FTE basis using the current statutory federal tax rate.
⁽²⁾ Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
⁽³⁾ Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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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 March 31, 2017
Compared with
For the Three Months Ended March 31, 2016
Volume Yield/Rate Total
(In thousands)
Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable $ 1,830 $ 643 $ 2,473
Tax-exempt ⁽¹⁾ (33 ) (309 ) (342 )
Total investments ⁽¹⁾ 1,797 334 2,131
Loans:
Taxable (1,697 ) (786 ) (2,483 )
Tax-exempt ⁽¹⁾ (84 ) (53 ) (137 )
Total loans ⁽¹⁾ (1,781 ) (839 ) (2,620 )
Total increase (decrease) in interest and loan fee income ⁽¹⁾ 16 (505 ) (489 )
Increase (decrease) in interest expense:
Deposits:
Savings and interest-bearing transaction 16 (29 ) (13 )
Time less than $100,000 (13 ) (17 ) (30 )
Time $100,000 or more (13 ) (18 ) (31 )
Total interest-bearing deposits (10 ) (64 ) (74 )
Short-term borrowed funds 3 (1 ) 2
Total decrease in interest expense (7 ) (65 ) (72 )
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.~~
For the Three Months Ended March 31, 2018
Compared with
For the Three Months Ended March 31, 2017
Volume Yield/Rate Total
(In thousands)
Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable $ 1,377 $ 1,411 $ 2,788
Tax-exempt ⁽¹⁾ (611 ) (1,514 ) (2,125 )
Total investments ⁽¹⁾ 766 (103 ) 663
Loans:
Taxable (1,245 ) 225 (1,020 )
Tax-exempt ⁽¹⁾ (78 ) (149 ) (227 )
Total loans ⁽¹⁾ (1,323 ) 76 (1,247 )
Total decrease in interest and loan fee income⁽¹⁾ (557 ) (27 ) (584 )
Increase (decrease) in interest expense:
Deposits:
Savings and interest-bearing transaction 7 (5 ) 2
Time less than $100,000 (10 ) (2 ) (12 )
Time $100,000 or more (9 ) - (9 )
Total interest-bearing deposits (12 ) (7 ) (19 )
Short-term borrowed funds (1 ) (1 ) (2 )
Total decrease in interest expense (13 ) (8 ) (21 )
Decrease in net interest and loan fee income ⁽¹⁾ $ (544 ) $ (19 ) $ (563 )

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~~-35-~~
~~Summary of Changes in Interest Income and Expense~~
For the Three Months Ended March 31, 2017
Compared with
For the Three Months Ended December 31, 2016
Volume Yield/Rate Total
(In thousands)
Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable $ 400 $ 285 $ 685
Tax-exempt ⁽¹⁾ (225 ) 48 (177 )
Total investments ⁽¹⁾ 175 333 508
Loans:
Taxable (10 ) (440 ) (450 )
Tax-exempt ⁽¹⁾ (16 ) 9 (7 )
Total loans ⁽¹⁾ (26 ) (431 ) (457 )
Total increase (decrease) in interest and loan fee income ⁽¹⁾ 149 (98 ) 51
Increase (decrease) in interest expense:
Deposits:
Savings and interest-bearing transaction 0 (8 ) (8 )
Time less than $100,000 (4 ) (3 ) (7 )
Time $100,000 or more (2 ) (5 ) (7 )
Total interest-bearing deposits (6 ) (16 ) (22 )
Short-term borrowed funds 2 - 2
Total decrease in interest expense (4 ) (16 ) (20 )
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.
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- 37 -
Summary of Changes in Interest Income and Expense
For the Three Months Ended March 31, 2018
Compared with
For the Three Months Ended December 31, 2017
Volume Yield/Rate Total
(In thousands)
Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable $ 515 $ 559 $ 1,074
Tax-exempt ⁽¹⁾ (142 ) (1,272 ) (1,414 )
Total investments ⁽¹⁾ 373 (713 ) (340 )
Loans:
Taxable (751 ) 51 (700 )
Tax-exempt ⁽¹⁾ (23 ) (126 ) (149 )
Total loans ⁽¹⁾ (774 ) (75 ) (849 )
Total decrease in interest and loan fee income ⁽¹⁾ (401 ) (788 ) (1,189 )
(Decrease) increase in interest expense:
Deposits:
Savings and interest-bearing transaction - (3 ) (3 )
Time less than $100,000 (4 ) - (4 )
Time $100,000 or more (5 ) 1 (4 )
Total interest-bearing deposits (9 ) (2 ) (11 )
Short-term borrowed funds - (1 ) (1 )
Total decrease in interest expense (9 ) (3 ) (12 )
Decrease in net interest and loan fee income ⁽¹⁾ $ (392 ) $ (785 ) $ (1,177 )
⁽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 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 first quarter of ~~2017~~2018 and the first and fourth quarters of ~~2016. Management’s evaluation of credit quality includes originated and purchased loans.~~2017. Classified loans declined ~~$26.8~~$13.6 million ~~(which included nonperforming loans of $6.7 million)~~ during the period from March 31, ~~2016~~2017 to March 31, ~~2017.~~2018. 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~~2018. At March 31, 2018, 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-familyhad $7.1 million in residential real estate secured loans which are ~~“covered” through~~indemnified from loss by the FDIC up to eighty percent of principal; the indemnification expires 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.

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~~-36-~~ - 38 -
Noninterest Income

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

For the Three Months Ended For the Three Months Ended
March 31, December 31, March 31, December 31,
2017 2016 2016 2018 2017 2017
(In thousands) (In thousands)

Service charges on deposit accounts $ 4,923 $ 5,248 $ 5,064 $ 4,752 $ 4,923 $ 4,756
Merchant processing services 1,875 1,529 1,678 2,420 1,875 2,346
Debit card fees 1,481 1,516 1,566 1,605 1,481 1,569
Trust fees 702 661 682 743 702 739
ATM processing fees 664 575 696
Other service fees 650 629 620 631 650 620
ATM processing fees 575 658 551
Financial services commissions 195 156 157 114 195 155
Equity securities (losses) gains (36 ) - 7,955
Other noninterest income 1,256 1,332 1,227 1,062 1,256 1,464
Total $ 11,657 $ 11,729 $ 11,545 $ 11,955 $ 11,657 $ 20,300

Noninterest income for the first quarter ~~2017 declined~~2018 increased by ~~$72~~$298 thousand from the same period in 2016. Service charges on deposits decreased $325 thousand due to declines in fees charged on overdrawn and insufficient funds accounts (down $259 thousand) and lower fees on analyzed accounts (down $95 thousand).2017. Merchant processing services fees increased ~~$346~~$545 thousand primarily due to successful sales efforts and higher transaction volumes. Debit card fees increased $124 thousand mostly due to increased transaction volumes. Service charges on deposit accounts decreased $171 thousand due to lower fees for overdrafts and checking accounts.

In the first quarter ~~2017,~~2018, noninterest income ~~increased $112 thousand~~decreased $8.3 million compared with the fourth quarter ~~2016 mostly due to a $197 thousand increase~~2017 primarily because the fourth quarter 2017 included $8.0 million in ~~merchant processing services fees primarily due to the improved margin mix~~gains on sale of transaction volumes. Service charges on deposits decreased $141 thousand due to declines in fees charged on overdrawn and insufficient funds accounts (down $181 thousand) and lower fees on analyzed accounts (down $48 thousand), partially offset by fee increases and collection of annual IRA account fees.equity securities.

Noninterest Expense

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

For the Three Months Ended For the Three Months Ended
March 31, December 31, March 31, December 31,
2017 2016 2016 2018 2017 2017
(In thousands) (In thousands)

Salaries and related benefits $ 13,070 $ 13,117 $ 12,439 $ 13,351 $ 13,070 $ 12,652
Occupancy 3,633 3,398 3,570
Occupancy and equipment 4,691 4,887 4,860
Outsourced data processing services 2,139 2,130 2,131 2,340 2,139 2,325
Furniture and equipment 1,254 1,213 1,290
Professional fees 785 611 627
Amortization of identifiable intangibles 800 905 863 570 800 755
Professional fees 611 732 797
Courier service 421 545 494 463 421 423
Other real estate owned (40 ) 111 7
Loss contingency - - 5,542
Impairment of tax credit investments - - 625
Other noninterest expense 2,727 3,707 2,986 2,014 2,687 2,358
Total $ 24,615 $ 25,858 $ 24,577 $ 24,214 $ 24,615 $ 30,167

Noninterest expense decreased ~~$1.3 million~~$401 thousand in the first quarter ~~2017~~2018 compared with the same period in 2016 mostly due to reductions in professional fees, courier costs, OREO expense, intangible amortization and other noninterest expense. Other noninterest expense decreased $980 thousand primarily due to decreases in insurance premiums, correspondent bank service charges, limited partnership operating losses, postage and amortization of intangibles.2017. Amortization of intangibles decreased ~~$105~~$230 thousand as assets are amortized on a declining balance method. ~~Professional fees~~Other noninterest expense decreased ~~$121~~$673 thousand primarily due to decreases in correspondent bank service charges and operational losses, partially offset by an increase in operating losses on limited partnership investments. Salaries and related benefits increased $281 thousand primarily due to higher employee benefit costs. Outsourced data processing services expense increased $201 thousand due to ~~lower legal fees associated with nonperforming assets. Expenses of other real estate owned decreased in~~additional processing services.
In the first quarter 2018, noninterest expense decreased $6.0 million compared with the fourth quarter 2017 primarily because the fourth quarter 2017 included a $5.5 million loss contingency and a $625 thousand impairment charge on tax credit investments. Amortization of intangibles decreased $185 thousand as assets are amortized on a declining balance method. Other noninterest expense decreased $344 thousand primarily due to ~~gains on sale of disposition of foreclosed assets~~decreases in correspondent bank service charges. Salaries and ~~because first quarter 2016 included net writedowns. Occupancy expense~~related benefits increased ~~$235~~$699 thousand primarily due to higher ~~maintenance and utility~~employee benefit costs.

~~-37-~~ - 39 -
In the first quarter 2017, noninterest expense increased $38 thousand compared with the fourth quarter 2016. Salaries and related benefits increased $631 thousand primarily due to seasonally higher payroll taxes. Professional fees decreased $186 thousand due to lower legal fees. Other noninterest expense decreased $259 thousand primarily due to lower correspondent bank service charges.

Provision for Income Tax

The Company’s first quarter ~~2017~~2018 income tax provision ~~(FTE)~~ was ~~$8.0 million. Effective January 1,~~$4.3 million compared with $19.7 million for the fourth quarter 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~~and $4.8 million for the first quarter 2017, ~~376~~representing effective tax rates of 19.7%, 82.6% and 24.3%, respectively. The book tax provisions for the first quarter 2018 and the first quarter 2017 include tax benefits of $451 thousand ~~shares were issued~~and $671 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements; these benefits reduced the effective tax rate by 2.0% and 3.4%, respectively. The lower effective tax rate for the first quarter 2018 reflects a reduction in the federal corporate tax rate due to the ~~exercise of nonqualified stock options resulting in a~~Act. The book tax ~~deduction exceeding related share based compensation by $1.6 million. First~~provision for the fourth quarter 2017 ~~income~~includes a charge of $12.3 million resulting from re-measurement of the Company’s net deferred tax ~~provision was $671 thousand lower than would have been under accounting standards prior to~~asset triggered by enactment of the adoption of ASU 2016-09. First quarter 2017 income tax provision (FTE) compared with $8.1 million and $8.5 million for the first and fourth quarters 2016, respectively. The current quarter provision represents an effective tax rate (FTE) of 34.8%, compared with 36.3% and 37.0% for the first and fourth quarters 2016, respectively. The first quarter 2017 effective tax rate (FTE) would have been 37.7% under accounting rules applied in 2016.Act.

Investment Portfolio

The Company maintains an 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 ~~$3.2~~$3.5 billion ~~as of~~at March 31, ~~2017~~2018 and $3.4 billion at December 31, ~~2016.~~2017.

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. In ~~2016 Management reduced~~the first quarter 2018 corporate securities increased in order to improve yields without extending the duration of ~~U.S. Government sponsored entities to reduce call optionality and increased agency residential MBS to develop more reliable cash flows.~~the bond portfolio.

~~As of~~At March 31, ~~2017,~~2018, substantially all of the Company’s investment securities continue to be investment grade rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. ~~Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds.~~ There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

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~~-38-~~ - 40 -
The following table summarizes total corporate securities by the industry sector in which the issuing companies operate:
At March 31, At December 31,
2018 2017
Market value As a percent of
total corporate
securities Market value As a percent of
total corporate
securities
($ in thousands)
Basic materials $ 34,445 3 % $ 35,219 3 %
Communications 49,814 4 % 50,763 5 %
Consumer, cyclical 22,513 2 % 12,592 1 %
Consumer, non-cyclical 160,164 13 % 133,476 12 %
Financial 488,173 41 % 525,932 47 %
Industrial 165,052 14 % 129,989 12 %
Technology 109,670 9 % 71,708 6 %
Utilities 172,068 14 % 155,819 14 %
Total corporate securities $ 1,201,899 100 % $ 1,115,498 100 %
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 March 31, ~~2017,~~2018, the Company’s investment securities portfolios included securities issued by ~~687~~635 state and local government municipalities and agencies located within 44 ~~states with a fair value of $833.9 million.~~ states. None of the Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any one municipality or agency was ~~$10.1~~$9.8 million (fair value) represented by nine general obligation bonds.

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 March 31, 2018
Amortized Fair
Cost Value
(In thousands)
Obligations of states and political subdivisions:
General obligation bonds:
California $ 105,741 $ 106,722
Texas 63,630 63,202
New Jersey 38,023 37,999
Minnesota 29,819 29,831
Other (36 states) 287,885 286,822
Total general obligation bonds $ 525,098 $ 524,576

Revenue bonds:
California $ 38,822 $ 39,314
Kentucky 20,806 20,808
Iowa 17,287 17,184
Colorado 14,936 14,924
Washington 13,084 13,411
Indiana 12,890 12,884
Other (29 states) 126,564 126,578
Total revenue bonds $ 244,389 $ 245,103
Total obligations of states and political subdivisions $ 769,487 $ 769,679

At December 31, ~~2016,~~2017, the Company’s investment securities portfolios included securities issued by ~~698~~647 state and local government municipalities and agencies located within 44 ~~states with a fair value of $848.2 million.~~states. None of the Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any one municipality or agency was $10.0 million (fair value) represented by nine general obligation bonds.

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~~-39-~~ - 41 -
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
At December 31, 2017
Amortized Fair
Cost Value
(In thousands)
Obligations of states and political subdivisions:
General obligation bonds:
California $ 104,330 $ 106,311
Texas 66,636 66,699
New Jersey 39,387 39,612
Minnesota 30,485 30,707
Other (36 states) 292,102 294,779
Total general obligation bonds $ 532,940 $ 538,108

Revenue bonds:
California $ 38,838 $ 39,660
Kentucky 21,731 21,958
Iowa 17,304 17,287
Colorado 14,956 15,086
Washington 13,506 13,963
Indiana 12,914 13,054
Other (29 states) 130,196 131,301
Total revenue bonds $ 249,445 $ 252,309
Total obligations of states and political subdivisions $ 782,385 $ 790,417

At March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, 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 2322 revenue ~~sources.~~sources at March 31, 2018 and at December 31, 2017. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

At March 31, 2017 At March 31, 2018
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands) (In thousands)
Revenue bonds by revenue source:
Water $ 55,334 $ 57,043 $ 50,680 $ 51,374
Sales tax 30,212 30,497
Sewer 35,455 36,187 28,696 28,965
Sales tax 31,119 31,951
Lease (renewal) 24,208 24,411 19,090 19,097
College & University 17,806 17,808 17,179 16,938
Other (18 sources) 112,122 113,146
Other (17 sources) 98,532 98,232
Total revenue bonds by revenue source $ 276,044 $ 280,546 $ 244,389 $ 245,103

At December 31, 2016 At December 31, 2017
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands) (In thousands)
Revenue bonds by revenue source:
Water $ 55,401 $ 56,826 $ 50,737 $ 51,854
Sewer 37,996 38,497 30,427 31,030
Sales tax 31,146 31,835 30,233 30,777
Lease (renewal) 24,242 24,235 20,007 20,235
College & University 17,856 17,762 17,230 17,087
Other (18 sources) 113,308 113,889
Other (17 sources) 100,811 101,326
Total revenue bonds by revenue source $ 279,949 $ 283,044 $ 249,445 $ 252,309

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

~~-40-~~ - 42 -
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~~maintained by assessing or reversing a provision for loan losses ~~against~~through 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 a Loan Review Department which reports directly to the audit committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans to challenge the credit risk grades assigned by Management using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated Management attention to maximize collection.

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

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

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

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~~-41-~~ - 43 -
Nonperforming Assets
At March 31, At December 31,
2018 2017 2017
(In thousands)

Nonperforming nonaccrual loans $ 2,030 $ 2,382 $ 1,641
Performing nonaccrual loans 4,110 4,285 4,285
Total nonaccrual loans 6,140 6,667 5,926
Accruing loans 90 or more days past due 255 373 531
Total nonperforming loans 6,395 7,040 6,457
Other real estate owned 1,376 2,136 1,426
Total nonperforming assets $ 7,771 $ 9,176 $ 7,883
Nonperforming assets have declined during ~~2016~~2017 and the first quarter ~~2017~~2018 due to payoffs, chargeoffs and ~~chargeoffs.~~sale of Other Real Estate Owned. At March 31, ~~2017,~~ 2018, one loan secured by commercial real estate with a balance of ~~$4.3~~$4.1 million was on nonaccrual status. The remaining ~~seven~~six nonaccrual loans held at March 31, ~~2017~~2018 had an average carrying value of ~~$340~~$338 thousand and the largest carrying value was ~~$1.3~~$1.0 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.

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

For the Three Months Ended For the Three Months Ended
March 31, December 31, March 31, December 31,
2017 2016 2016 2018 2017 2017
(In thousands) (In thousands)
Analysis of the Allowance for Loan Losses
Balance, beginning of period $ 25,954 $ 29,771 $ 26,359 $ 23,009 $ 25,954 $ 23,628
Provision for loan losses - - -
Provision for unfunded commitments - - -
Provision (reversal) for loan losses - - -
Loans charged off
Commercial (103 ) (1,171 ) - (41 ) (103 ) -
Commercial real estate - - -
Consumer installment and other (1,739 ) (1,006 ) (1,180 ) (1,365 ) (1,739 ) (1,174 )
Total chargeoffs (1,842 ) (2,177 ) (1,180 ) (1,406 ) (1,842 ) (1,174 )
Recoveries of loans previously charged off
Commercial 160 1,421 325 829 160 136
Commercial real estate 10 15 15 - 10 -
Construction - - -
Consumer installment and other 637 457 435 649 637 419
Total recoveries 807 1,893 775 1,478 807 555
Net loan losses (1,035 ) (284 ) (405 )
Net loan recoveries (losses) 72 (1,035 ) (619 )
Balance, end of period $ 24,919 $ 29,487 $ 25,954 $ 23,081 $ 24,919 $ 23,009

Net loan losses as a percentage of
average total loans (annualized) 0.31 % 0.08 % 0.12 %
Net loan (recoveries) losses as a percentage of average total loans (annualized) (0.02 )% 0.31 % 0.19 %

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, 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~~a loss emergence period. Liquidating purchased consumer installment loans are evaluated separately by applying historical loss rates to forecasted liquidating principal balances to ~~initially~~ measure losses inherent in this portfolio segment. The loss rates are applied to segmented loan balances to allocate the allowance to the segments of the loan portfolio.

~~-42-~~ - 44 -
The remainder of the allowance is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. The unallocated allowance addresses additional qualitative factors consistent with Management's analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company's general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in loan chargeoff history (external factors). The primary external factor evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management as of March 31, ~~2017~~2018 is economic and business conditions ~~$1.1~~$0.7 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~~$1.0 million, adequacy of lending Management and staff ~~$0.9~~$0.9 million and concentrations of credit ~~$1.3~~$1.3 million.

Allowance for Loan Losses Allowance for Loan Losses
For the Three Months Ended March 31, 2017 For the Three Months Ended March 31, 2018
Consumer Consumer
Commercial Residential Installment Commercial Residential Installment
Commercial Real Estate Construction Real Estate and Other Unallocated Total Commercial Real Estate Construction Real Estate and Other Unallocated Total
(In thousands) (In thousands)
Allowance for loan losses:
Balance at beginning of period $ 8,327 $ 3,330 $ 152 $ 1,330 $ 7,980 $ 4,835 $ 25,954 $ 7,746 $ 3,849 $ 335 $ 995 $ 6,418 $ 3,666 $ 23,009
Additions:
Provision (reversal) 209 182 (40 ) (116 ) 106 (341 ) -
(Reversal) provision (17 ) (25 ) (160 ) (87 ) 37 252 -
Deductions:
Chargeoffs (103 ) - - - (1,739 ) - (1,842 ) (41 ) - - - (1,365 ) - (1,406 )
Recoveries 160 10 - - 637 - 807 829 - - - 649 - 1,478
Net loan recoveries (losses) 57 10 - - (1,102 ) - (1,035 ) 788 - - - (716 ) - 72
Total allowance for loan losses $ 8,593 $ 3,522 $ 112 $ 1,214 $ 6,984 $ 4,494 $ 24,919 $ 8,517 $ 3,824 $ 175 $ 908 $ 5,739 $ 3,918 $ 23,081

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 March 31, 2018
Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment $ 4,777 $ 214 $ - $ - $ - $ - $ 4,991
Collectively evaluated for impairment 3,740 3,610 175 908 5,739 3,918 18,090
Purchased loans with evidence of credit deterioration - - - - - - -
Total $ 8,517 $ 3,824 $ 175 $ 908 $ 5,739 $ 3,918 $ 23,081
Carrying value of loans:
Individually evaluated for impairment $ 10,513 $ 11,393 $ - $ 206 $ - $ - $ 22,112
Collectively evaluated for impairment 296,432 541,327 2,941 59,278 305,705 - 1,205,683
Purchased loans with evidence of credit deterioration 33 598 - - 158 - 789
Total $ 306,978 $ 553,318 $ 2,941 $ 59,484 $ 305,863 $ - $ 1,228,584

The portion of the allowance for loan losses ascribed to loan segments declined from March 31, ~~2016~~2017 to March 31, ~~2017~~2018 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 ~~$24.9~~$23.1 million allowance for loan losses to be adequate as a reserve against loan losses inherent in the loan portfolio as of March 31, ~~2017.~~2018.

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.
- 45 -

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~~Open Market Committee (the ~~“FRB”~~“FOMC”). The monetary policies of the ~~FRB~~FOMC 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 March 31, ~~2018~~2019 assumes market interest rates will gradually rise, with short-term rates 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.~~position. 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 March 31, ~~2017,~~2018, 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 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.

- 46 -
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 quarter ~~2017~~2018 and in ~~2016.~~2017. 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 ~~$3.2~~$3.5 billion in total investment securities at March 31, ~~2017.~~2018. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At March 31, ~~2017,~~2018, such collateral requirements totaled approximately ~~$774~~$696 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~~continually monitors the Company’s cash ~~levels throughout 2017.~~levels. 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. The Parent Company currently has no 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, proceeds from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder dividends of ~~$10~~$11 million in the first quarter ~~2017~~2018 and ~~$40~~$41 million in ~~2016,~~2017, and retire common stock in the amount of ~~$-0- million~~$-0- in the first quarter ~~2017~~2018 and ~~$6 million~~$314 thousand in ~~2016.~~2017. 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-~~ - 47 -
Capital Resources

The Company has historically generated high levels of earnings, which provide a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been ~~10.5%~~11.6% in the first quarter ~~2017~~2018 and ~~10.9%~~8.4% in ~~2016.~~2017. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was ~~$18~~$8 million in the first quarter ~~2017~~2018 and ~~$24~~$25 million in ~~2016.~~2017.

The Company paid common dividends totaling ~~$10~~$11 million in the first quarter ~~2017~~2018 and ~~$40~~$41 million in ~~2016,~~2017, which represent dividends per common share of ~~$0.39~~$0.40 and ~~$1.56,~~$1.57, 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 at times 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~~2018 and ~~137~~6 thousand shares valued at ~~$6 million~~$314 thousand in ~~2016.~~2017.

The Company's primary capital resource is shareholders' equity, which was ~~$585~~$582 million at March 31, ~~2017~~2018 compared with ~~$561~~$590 million at December 31, ~~2016.~~2017. The Company's ratio of equity to total assets was ~~10.84%~~10.49% at March 31, ~~2017~~2018 and ~~10.46%~~10.71% at December 31, ~~2016.~~2017.

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

Capital to Risk-Adjusted Assets

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

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

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

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-~~ - 48 -
The capital ratios for the Company and the Bank under the new capital framework are presented in the ~~table~~tables below, on the dates indicated.

To Be To Be
Required for Well-capitalized Required for Well-capitalized
Capital Adequacy Purposes Under Prompt Capital Adequacy Purposes Under Prompt
At March 31, 2017 Effective Effective Corrective Action At March 31, 2018 Effective Effective Corrective Action
Company Bank January 1, 2017 January 1, 2019 Regulations (Bank) Company Bank January 1, 2018 January 1, 2019 Regulations (Bank)

Common Equity Tier I Capital 15.85 % 11.97 % 5.75 %⁽¹⁾ 7.00 %⁽²⁾ 6.50 % 15.72 % 12.97 % 6.375 %⁽¹⁾ 7.00 %⁽²⁾ 6.50 %
Tier I Capital 15.85 % 11.97 % 7.25 %⁽¹⁾ 8.50 %⁽²⁾ 8.00 % 15.72 % 12.97 % 7.875 %⁽¹⁾ 8.50 %⁽²⁾ 8.00 %
Total Capital 16.91 % 13.24 % 9.25 %⁽¹⁾ 10.50 %⁽²⁾ 10.00 % 16.53 % 13.98 % 9.875 %⁽¹⁾ 10.50 %⁽²⁾ 10.00 %
Leverage Ratio 8.84 % 6.64 % 4.00 % 4.00 % 5.00 % 9.12 % 7.48 % 4.000 % 4.00 % 5.00 %
⁽¹⁾ ~~Includes 1.25% capital conservation buffer.~~
⁽²⁾
⁽¹⁾ Includes 1.875% capital conservation buffer.
⁽²⁾ Includes 2.5% capital conservation buffer.

To Be To Be
Required for Well-capitalized Required for Well-capitalized
Capital Adequacy Purposes Under Prompt Capital Adequacy Purposes Under Prompt
At December 31, 2016 Effective Effective Corrective Action At December 31, 2017 Effective Effective Corrective Action
Company Bank January 1, 2016 January 1, 2019 Regulations (Bank) Company Bank January 1, 2017 January 1, 2019 Regulations (Bank)

Common Equity Tier I Capital 14.85 % 11.70 % 5.125 %⁽³⁾ 7.00 %⁽⁴⁾ 6.50 % 15.36 % 12.50 % 5.75 %⁽³⁾ 7.00 %⁽⁴⁾ 6.50 %
Tier I Capital 14.85 % 11.70 % 6.625 %⁽³⁾ 8.50 %⁽⁴⁾ 8.00 % 15.36 % 12.50 % 7.25 %⁽³⁾ 8.50 %⁽⁴⁾ 8.00 %
Total Capital 15.95 % 13.02 % 8.625 %⁽³⁾ 10.50 %⁽⁴⁾ 10.00 % 16.17 % 13.52 % 9.25 %⁽³⁾ 10.50 %⁽⁴⁾ 10.00 %
Leverage Ratio 8.46 % 6.63 % 4.000 % 4.00 % 5.00 % 8.86 % 7.16 % 4.00 % 4.00 % 5.00 %
⁽³⁾ ~~Includes 0.625% capital conservation buffer.~~
⁽⁴⁾ ~~Includes 2.5% capital conservation buffer.~~
⁽³⁾ Includes 1.25% 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.
[The remainder of this page intentionally left blank]
- 49 -

Item 4. Controls and Procedures

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of March 31, ~~2017.~~2018.

~~-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, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is their 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, ~~2016~~2017 includes detailed disclosure about the risks faced by the Company’s business; such risks have not materially changed since the Form 10-K was filed.

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

(a) Previously reported on Form 8-K.
(b) None
(c) Issuer Purchases of Equity Securities

The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended March 31, ~~2017~~2018 (in thousands, except per share data).

~~2017~~2018
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.

- 50 -
No shares were repurchased during the period from January 1, ~~2017~~2018 through March 31, ~~2017.~~2018. A program approved by the Board of Directors on July ~~28, 2016 authorized~~27, 2017 authorizes the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, ~~2017.~~2018.
~~-48-~~
Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~(a)~~ ~~Submission of Matters to a Vote of Security Holders~~None
~~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-~~ - 51 -
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~~thereunto duly authorized.

WESTAMERICA BANCORPORATION
(Registrant)

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

Date: May ~~5, 2017~~
4, 2018

~~-50-~~ - 52 -
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~~101.INS: XBRL Instance Document
Exhibit 101.SCH: XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL: XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF: XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB: XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE: XBRL Taxonomy Extension Presentation Linkbase Document
[The remainder of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three months ended March 31, 2017 and 2016; (ii) Consolidated Balance Sheets at March 31, 2017, and December 31, 2016; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; and (vi) Notes to the Unaudited Consolidated Financial Statements.this page intentionally left blank]

- 53 -

	Investment Securities Held to Maturity At March 31, 2017
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
	(In thousands)
Securities of U.S. Government sponsored entities	$	538	$	-	$	-		$	538
Agency residential MBS		634,958		1,007		(9,093	)		626,872
Non-agency residential MBS		5,103		62		-			5,165
Agency commercial MBS		9,258		4		(123	)		9,139
Obligations of states and political subdivisions		648,557		8,503		(2,036	)		655,024
Total	$	1,298,414	$	9,576	$	(11,252	)	$	1,296,738

	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		-

	Troubled Debt Restructurings
	At March 31, 2018
							Period-End
							Individual
	Number of		Pre-Modification		Period-End		Impairment
	Contracts		Carrying Value		Carrying Value		Allowance
	($ in thousands)
Commercial		7	$	2,393	$	1,043	$	39
Commercial real estate		9		9,537		8,301		-
Residential real estate		1		241		206		-
Total		17	$	12,171	$	9,550	$	39

	Troubled Debt Restructurings At March 31, 2017
	Number of Contracts		Pre-Modification Carrying Value		Period-End Carrying Value		Period-End Individual Impairment Allowance
	($ in thousands)
Commercial		8	$	2,768	$	1,468	$	107
Commercial real estate		11		11,576		10,718		-
Residential real estate		1		241		217		-
Total		20	$	14,585	$	12,403	$	107

	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

			Merchant
	Core		Draft
	Deposit		Processing
	Intangibles		Intangible		Total
	(In thousands)
For the Three Months ended March 31, 2018 (actual)	$	541	$	29	$	570
Estimate for the remainder of year ending December 31, 2018		1,351		-		1,351
Estimate for year ending December 31, 2019		538		-		538
2020		287		-		287
2021		269		-		269
2022		252		-		252
2023		236		-		236

	For the Three Months Ended March 31, 2017
	Compared with
	For the Three Months Ended March 31, 2016
	Volume			Yield/Rate			Total
	(In thousands)
Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable	$	1,830		$	643		$	2,473
Tax-exempt ⁽¹⁾		(33	)		(309	)		(342	)
Total investments ⁽¹⁾		1,797			334			2,131
Loans:
Taxable		(1,697	)		(786	)		(2,483	)
Tax-exempt ⁽¹⁾		(84	)		(53	)		(137	)
Total loans ⁽¹⁾		(1,781	)		(839	)		(2,620	)
Total increase (decrease) in interest and loan fee income ⁽¹⁾		16			(505	)		(489	)
Increase (decrease) in interest expense:
Deposits:
Savings and interest-bearing transaction		16			(29	)		(13	)
Time less than $100,000		(13	)		(17	)		(30	)
Time $100,000 or more		(13	)		(18	)		(31	)
Total interest-bearing deposits		(10	)		(64	)		(74	)
Short-term borrowed funds		3			(1	)		2
Total decrease in interest expense		(7	)		(65	)		(72	)
Increase (decrease) in net interest and loan fee income ⁽¹⁾	$	23		$	(440	)	$	(417	)

													To Be															To Be
							Required for						Well-capitalized									Required for						Well-capitalized
							Capital Adequacy Purposes						Under Prompt									Capital Adequacy Purposes						Under Prompt
	At March 31, 2017						Effective			Effective			Corrective Action			At March 31, 2018						Effective			Effective			Corrective Action
	Company			Bank			January 1, 2017			January 1, 2019			Regulations (Bank)			Company			Bank			January 1, 2018			January 1, 2019			Regulations (Bank)

Common Equity Tier I Capital		15.85	%		11.97	%		5.75	%⁽¹⁾		7.00	%⁽²⁾		6.50	%		15.72	%		12.97	%		6.375	%⁽¹⁾		7.00	%⁽²⁾		6.50	%
Tier I Capital		15.85	%		11.97	%		7.25	%⁽¹⁾		8.50	%⁽²⁾		8.00	%		15.72	%		12.97	%		7.875	%⁽¹⁾		8.50	%⁽²⁾		8.00	%
Total Capital		16.91	%		13.24	%		9.25	%⁽¹⁾		10.50	%⁽²⁾		10.00	%		16.53	%		13.98	%		9.875	%⁽¹⁾		10.50	%⁽²⁾		10.00	%
Leverage Ratio		8.84	%		6.64	%		4.00	%		4.00	%		5.00	%		9.12	%		7.48	%		4.000	%		4.00	%		5.00	%

	~~2017~~2018
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