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WESTAMERICA BANCORPORATION - Quarter Report: 2015 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.

 

Commission file number: 001-09383

 

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

Yes ☒   No ☐

 

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

 

Yes ☒   No ☐

 

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

 

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

 

 

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

 

Yes ☐   No ☒

 

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

 

Title of Class   Shares outstanding as of October 23, 2015
     
Common Stock,   25,528,149
No Par Value    

 

 

 

TABLE OF CONTENTS

 

 

 

     Page
Forward Looking Statements 3

PART I - FINANCIAL INFORMATION

Item 1 Financial Statements 4
  Notes to Unaudited Consolidated Financial Statements 9
  Financial Summary 30
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 31
Item 3 Quantitative and Qualitative Disclosures about Market Risk 53
Item 4 Controls and Procedures 53
PART II - OTHER INFORMATION  
Item 1 Legal Proceedings 53
Item 1A Risk Factors 53
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 3 Defaults upon Senior Securities 54
Item 4 Mine Safety Disclosures 54
Item 5 Other Information 54
Item 6 Exhibits 54
Signatures 55
Exhibit Index 56
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 57
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 58
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 59
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 60

 

 

-2-
 

FORWARD-LOOKING STATEMENTS

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

 

These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the national and regional economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including a failure or breach in data processing systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, fire, flood, drought, and other disasters, on the uninsured value of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values, and (13) changes in the securities markets. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2014, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report.

 

 

-3-
 

PART I - FINANCIAL INFORMATION

Item 1 Financial Statements

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

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

 

See accompanying notes to unaudited consolidated financial statements.

-4-
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

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

 

See accompanying notes to unaudited consolidated financial statements.

 

-5-
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

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

 

See accompanying notes to unaudited consolidated financial statements.

 

-6-
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

 

   Common
Shares
Outstanding
  Common
Stock
  Accumulated
Deferred
Compensation
  Accumulated
Other
Comprehensive
Income
  Retained
Earnings
  Total
   (In thousands)
Balance, December 31, 2013   26,510   $378,946   $2,711   $4,313   $156,964   $542,934 
Net income for the period                       45,618    45,618 
Other comprehensive income                  5,420         5,420 
Exercise of stock options   256    12,396                   12,396 
Tax benefit decrease upon expiration/exercise of stock options        (447)                  (447)
Restricted stock activity   21    1,114                   1,114 
Stock based compensation        1,009                   1,009 
Stock awarded to employees   2    88                   88 
Retirement of common stock including repurchases   (883)   (12,911)             (31,899)   (44,810)
Dividends                       (29,927)   (29,927)
Balance, September 30, 2014   25,906   $380,195   $2,711   $9,733   $140,756   $533,395 
Balance, December 31, 2014   25,745   $378,132   $2,711   $5,292   $140,468   $526,603 
Net income for the period                       44,175    44,175 
Other comprehensive income                  1,906         1,906 
Exercise of stock options   108    4,848                   4,848 
Tax benefit decrease upon expiration/exercise of stock options        (1,215)                  (1,215)
Restricted stock activity   17    874    (133)             741 
Stock based compensation        987                   987 
Stock awarded to employees   2    89                   89 
Retirement of common stock including repurchases   (342)   (5,066)             (9,962)   (15,028)
Dividends                       (29,168)   (29,168)
Balance, September 30, 2015   25,530   $378,649   $2,578   $7,198   $145,513   $533,938 

 

See accompanying notes to unaudited consolidated financial statements.

-7-
 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

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

 

See accompanying notes to unaudited consolidated financial statements.

1 Federal Deposit Insurance Corporation ("FDIC")

2 Federal Reserve Bank ("FRB")

3 Federal Home Loan Bank ("FHLB")

-8-
 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

 

Note 2: Accounting Policies

 

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “Loan Portfolio Credit Risk” section in Item 2 of this document. Certain amounts in prior periods have been reclassified to conform to the current presentation.

 

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

 

Recently Adopted Accounting Standards

 

FASB ASU 2014-01, Investments- Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, was issued January 2014 to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with GAAP. The policy election must be applied consistently to all qualified affordable housing project investments.

 

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

 

The adoption of the ASU was limited to additional disclosures only and did not have a material effect on the Company’s financial statements at January 1, 2015, the date adopted.

 

-9-
 

FASB ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, was issued on January 17, 2014, providing clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.

 

The adoption of the ASU was limited to additional disclosures only and did not have a material effect on the Company’s financial statements at January 1, 2015, the date adopted.

 

FASB ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, was issued on June 12, 2014. The ASU improves the financial reporting of repurchase agreements and other similar transactions through a change in accounting for repurchase-to-maturity transactions and repurchase financings, and the introduction of two new disclosure requirements. New disclosures are required for (1) transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction and (2) repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings about the nature of collateral pledged and the time to maturity of those transactions.

 

The adoption of the ASU was limited to additional disclosures only and did not have a material effect on the Company’s financial statements at April 1, 2015, the date adopted.

 

Note 3: Investment Securities

 

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

 

   Investment Securities Available for Sale
At September 30, 2015
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (In thousands)
U.S. Treasury securities  $3,000   $1   $-   $3,001 
Securities of U.S. Government sponsored entities   341,038    1,381    (10)   342,409 
Residential mortgage-backed securities   19,303    1,289    (2)   20,590 
Commercial mortgage-backed securities   2,547    11    (6)   2,552 
Obligations of states and political subdivisions   152,158    9,094    (97)   161,155 
Residential collateralized mortgage obligations   199,059    438    (4,945)   194,552 
Asset-backed securities   2,350    -    (20)   2,330 
FHLMC1 and FNMA2 stock   775    5,725    -    6,500 
Corporate securities   836,882    1,707    (2,750)   835,839 
Other securities   2,039    885    (142)   2,782 
Total  $1,559,151   $20,531   $(7,972)  $1,571,710 

1 Federal Home Loan Mortgage Corporation

2 Federal National Mortgage Association

-10-
 

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

 

   Investment Securities Held to Maturity
At September 30, 2015
   Amortized
Cost
  Gross
Unrecognized
Gains
  Gross
Unrecognized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. government sponsored entities  $830   $10   $-   $840 
Residential mortgage-backed securities   362,925    2,194    (28)   365,091 
Commercial mortgage-backed securities   16,379    57    (174)   16,262 
Obligations of states and political subdivisions   682,818    12,486    (1,204)   694,100 
Residential collateralized mortgage obligations   215,862    2,404    (601)   217,665 
Total  $1,278,814   $17,151   $(2,007)  $1,293,958 

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

 

   Investment Securities Available for Sale
At December 31, 2014
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (In thousands)
U.S. Treasury securities  $3,500   $5   $-   $3,505 
Securities of U.S. Government sponsored entities   635,278    937    (1,027)   635,188 
Residential mortgage-backed securities   24,647    1,776    (16)   26,407 
Commercial mortgage-backed securities   2,923    6    (10)   2,919 
Obligations of states and political subdivisions   171,907    10,015    (123)   181,799 
Residential collateralized mortgage obligations   230,347    634    (8,524)   222,457 
Asset-backed securities   8,349    -    (36)   8,313 
FHLMC1 and FNMA2 stock   775    4,393    -    5,168 
Corporate securities   511,699    2,169    (1,629)   512,239 
Other securities   2,039    871    (124)   2,786 
Total  $1,591,464   $20,806   $(11,489)  $1,600,781 

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, 2014
   Amortized
Cost
  Gross
Unrecognized
Gains
  Gross
Unrecognized
Losses
  Fair
Value
   (In thousands)
Securities of U.S. government sponsored entities  $1,066   $11   $-   $1,077 
Residential mortgage-backed securities   59,078    1,183    (137)   60,124 
Obligations of states and political subdivisions   720,189    11,350    (2,358)   729,181 
Residential collateralized mortgage obligations   258,325    2,236    (2,381)   258,180 
Total  $1,038,658   $14,780   $(4,876)  $1,048,562 

 

-11-
 

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

 

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

Securities available for sale at September 30, 2015 with maturity dates over one year but less than five years include $337,419  thousand (fair value) of securities of U.S. Government sponsored entities with call options on dates within one year or less, of which $43,121  thousand have interest coupons which will increase if the issuer does not exercise the call option.

 

   At December 31, 2014
   Securities Available
for Sale
  Securities Held
to Maturity
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
   (In thousands)
Maturity in years:                    
1 year or less  $57,891   $57,991   $15,355   $15,855 
Over 1 to 5 years   629,200    630,797    228,380    230,248 
Over 5 to 10 years   584,872    589,250    285,219    288,631 
Over 10 years   58,770    63,006    192,301    195,524 
Subtotal   1,330,733    1,341,044    721,255    730,258 
Mortgage-backed securities and residential collateralized mortgage obligations   257,917    251,783    317,403    318,304 
Other securities   2,814    7,954    -    - 
Total  $1,591,464   $1,600,781   $1,038,658   $1,048,562 

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

 

 

 

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-12-
 

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

 

   Investment Securities Available for Sale
At September 30, 2015
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
 
 
 
 
Investment
Positions
 
 
 
Fair Value
 
 
Unrealized
Losses
 
 
Investment
Positions
 
 
 
Fair Value
 
 
Unrealized
Losses
 
 
Investment
Positions
 
 
 
Fair Value
 
 
Unrealized
Losses
   ($ in thousands)
Securities of U.S. Government sponsored entities   1   $4,990   $(10)   -   $-   $-    1   $4,990   $(10)
Residential mortgage-backed securities   -    -    -    1    790    (2)   1    790    (2)
Commercial mortgage-backed securities   -    -    -    1    879    (6)   1    879    (6)
Obligations of states and political subdivisions   4    2,132    (31)   5    2,503    (66)   9    4,635    (97)
Residential collateralized mortgage obligations   2    13,280    (245)   29    168,927    (4,700)   31    182,207    (4,945)
Asset-backed securities   -    -    -    1    2,330    (20)   1    2,330    (20)
Corporate securities   71    379,170    (2,417)   19    63,206    (333)   90    442,376    (2,750)
Other securities   -    -    -    1    1,858    (142)   1    1,858    (142)
Total   78   $399,572   $(2,703)   57   $240,493   $(5,269)   135   $640,065   $(7,972)

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

 

   Investment Securities Held to Maturity
At September 30, 2015
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
   ($ in thousands)
Residential mortgage-backed securities   2   $21,047   $(26)   1   $96   $(2)   3   $21,143   $(28)
Commercial mortgage-backed securities   1    7,562    (74)   1    6,597    (100)   2    14,159    (174)
Obligations of states and political subdivisions   45    29,242    (189)   70    63,195    (1,015)   115    92,437    (1,204)
Residential collateralized mortgage obligations   3    15,821    (60)   12    65,404    (541)   15    81,225    (601)
Total   51   $73,672   $(349)   84   $135,292   $(1,658)   135   $208,964   $(2,007)

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

 

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

 

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

 

-13-
 

As of September 30, 2015, $715,879  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2014, $757,623  thousand of investment securities were pledged to secure public deposits, short-term borrowed funds and FHLB advances.

 

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

 

   Investment Securities Available for Sale
At December 31, 2014
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment
Positions
  Fair Value  Unrealized
Losses
  Investment
Positions
  Fair Value  Unrealized
Losses
  Investment
Positions
  Fair Value  Unrealized
Losses
   ($ in thousands)
Securities of U.S. Government sponsored entities   15   $253,632   $(989)   1   $9,963   $(38)   16   $263,595   $(1,027)
Residential mortgage-backed securities   -    -    -    2    822    (16)   2    822    (16)
Commercial mortgage-backed securities   1    942    (7)   1    803    (3)   2    1,745    (10)
Obligations of states and political subdivisions   7    2,548    (18)   17    5,518    (105)   24    8,066    (123)
Residential collateralized mortgage obligations   -    -    -    32    205,074    (8,524)   32    205,074    (8,524)
Asset-backed securities   1    5,008    (7)   1    3,305    (29)   2    8,313    (36)
Corporate securities   53    165,026    (1,304)   5    34,222    (325)   58    199,248    (1,629)
Other securities   -    -    -    1    1,876    (124)   1    1,876    (124)
Total   77   $427,156   $(2,325)   60   $261,583   $(9,164)   137   $688,739   $(11,489)

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

 

   Investment Securities Held to Maturity
At December 31, 2014
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
  Investment
Positions
  Fair Value  Unrecognized
Losses
   ($ in thousands)
Residential mortgage-backed securities   4   $19,467   $(132)   1   $201   $(5)   5   $19,668   $(137)
Obligations of states and political subdivisions   103    76,202    (439)   138    123,370    (1,919)   241    199,572    (2,358)
Residential collateralized mortgage obligations   5    13,932    (166)   22    119,513    (2,215)   27    133,445    (2,381)
Total   112   $109,601   $(737)   161   $243,084   $(4,139)   273   $352,685   $(4,876)

 

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

 

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

 

-14-
 

Note 4: Loans and Allowance for Credit Losses

 

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

 

  At September 30, 2015
  Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
& Other
  Total
  (In thousands)
Originated loans  $354,853   $537,625   $3,461   $126,472   $354,494   $1,376,905 
Purchased covered loans:                              
Gross purchased covered loans   -    -    -    2,467    12,328    14,795 
Purchased loan discount   -    -    -    (133)   (22)   (155)
Purchased non-covered loans:                              
Gross purchased non-covered loans   15,443    136,600    984    237    34,116    187,380 
Purchased loan discount   (1,100)   (4,654)   -    (167)   (1,161)   (7,082)
Total  $369,196   $669,571   $4,445   $128,876   $399,755   $1,571,843 

 

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

 

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

 

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

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

 

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

 

-15-
 

The following summarizes activity in the allowance for loan losses:

 

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

 

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

 

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

 

 

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-16-
 

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

 

   Allowance for Credit Losses
For the Nine Months Ended September 30, 2014
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Purchased
Non-covered
Loans
  Purchased
Covered
Loans
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                             
Balance at beginning of period  $4,005   $12,070   $602   $405   $3,198   $-   $1,561   $9,852   $31,693 
Additions:                                             
Provision   945    (2,224)   (163)   17    942    1,203    -    1,880    2,600 
Deductions:                                             
Chargeoffs   (1,114)   -    -    (30)   (3,217)   (260)   -    -    (4,621)
Recoveries   516    193    3    -    1,315    70    -    -    2,097 
Net loan (losses) recoveries   (598)   193    3    (30)   (1,902)   (190)   -    -    (2,524)
Indemnification expiration   -    -    -    -    -    1,561    (1,561)   -    - 
Balance at end of period   4,352    10,039    442    392    2,238    2,574    -    11,732    31,769 
Liability for off-balance sheet credit exposure   1,706    24    105    -    451    131    -    276    2,693 
Total allowance for credit losses  $6,058   $10,063   $547   $392   $2,689   $2,705   $-   $12,008   $34,462 

 

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

 

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

 

   Allowance for Credit Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 2014
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Purchased Non-covered Loans  Purchased Covered Loans  Unallocated  Total
   (In thousands)
Allowance for credit losses:                                             
Individually evaluated for impairment  $496   $-   $-   $-   $-   $-   $-   $-   $496 
Collectively evaluated for impairment   7,372    4,245    988    2,241    8,154    2,120    -    8,562    33,682 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    -    -    -    - 
Total  $7,868   $4,245   $988   $2,241   $8,154   $2,120   $-   $8,562   $34,178 
Carrying value of loans:                                             
Individually evaluated for impairment  $11,811   $2,970   $-   $574   $599   $12,364   $-   $-   $28,318 
Collectively evaluated for impairment   362,194    564,624    11,003    146,351    370,243    196,034    16,851    -    1,667,300 
Purchased loans with evidence of credit deterioration   -    -    -    -    -    4,445    227    -    4,672 
Total  $374,005   $567,594   $11,003   $146,925   $370,842   $212,843   $17,078   $-   $1,700,290 

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

 

-17-
 

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

 

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

 

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

 

   Credit Risk Profile by Internally Assigned Grade
At December 31, 2014
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Purchased Non-covered Loans  Purchased Covered Loans (1)  Total
   (In thousands)
Grade:                                        
Pass  $366,487   $527,980   $11,003   $144,902   $369,618   $182,644   $15,509   $1,618,143 
Substandard   7,506    39,614    -    2,023    734    39,473    2,037    91,387 
Doubtful   12    -    -    -    12    77    -    101 
Loss   -    -    -    -    478    21    -    499 
Purchased loan discount   -    -    -    -    -    (9,372)   (468)   (9,840)
Total  $374,005   $567,594   $11,003   $146,925   $370,842   $212,843   $17,078   $1,700,290 

 

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

 

The following tables summarize loans by delinquency and nonaccrual status:

 

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

30-59 Days

Past Due and Accruing

 

60-89 Days

Past Due and Accruing

 

Past Due 90

days or More

and Accruing

  Nonaccrual  Total Loans
   (In thousands)
Commercial  $354,183   $417   $84   $-   $169   $354,853 
Commercial real estate   527,957    2,667    -    -    7,001    537,625 
Construction   3,461    -    -    -    -    3,461 
Residential real estate   124,305    1,360    471    -    336    126,472 
Consumer installment and other   350,289    2,834    818    481    72    354,494 
Total originated loans   1,360,195    7,278    1,373    481    7,578    1,376,905 
Purchased non-covered loans   168,816    1,736    878    -    8,868    180,298 
Purchased covered loans   14,473    137    30    -    -    14,640 
Total  $1,543,484   $9,151   $2,281   $481   $16,446   $1,571,843 

 

 

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-18-
 

 

   Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2014
   Current and Accruing 

30-59 Days

Past Due and Accruing

 

60-89 Days

Past Due and Accruing

 

Past Due 90

days or More

and Accruing

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

 

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

 

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

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2015 and December 31, 2014.

 

The following summarizes impaired loans:

 

   Impaired Loans
At September 30, 2015
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
Impaired loans with no related allowance recorded:               
Commercial  $3,073   $3,136   $- 
Commercial real estate   16,916    21,949    - 
Construction   -    -    - 
Residential real estate   566    597    - 
Consumer installment and other   428    534    - 
                
Impaired loans with an allowance recorded:               
Commercial   9,810    9,810    4,477 
Commercial real estate   4,660    5,109    585 
Construction   -    -    - 
Residential real estate   -    -    - 
Consumer installment and other   -    -    - 
                
Total:               
Commercial  $12,883   $12,946   $4,477 
Commercial real estate   21,576    27,058    585 
Construction   -    -    - 
Residential real estate   566    597    - 
Consumer installment and other   428    534    - 

 

-19-
 

 

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

Impaired loans include troubled debt restructured loans. Impaired loans at September 30, 2015, included $12,880 thousand of restructured loans, $6,772 thousand of which were on nonaccrual status. Impaired loans at December 31, 2014, included $4,837 thousand of restructured loans, none of which were on nonaccrual status.

 

   Impaired Loans
   For the Three Months Ended September 30,  For the Nine Months Ended September 30,
   2015  2014  2015  2014
   Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
   (In thousands)
Commercial  $12,750   $147   $3,885   $59   $12,513   $440   $4,388   $186 
Commercial real estate   21,923    142    20,787    103    19,985    546    19,961    373 
Construction   -    -    1,934    -    306    -    2,076    - 
Residential real estate   403    9    -    -    652    23    108    - 
Consumer installment and other   516    6    1,207    7    856    19    1,416    22 
Total  $35,592   $304   $27,813   $169   $34,312   $1,028   $27,949   $581 

 

 

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-20-
 

The following table provides information on troubled debt restructurings:

 

   Troubled Debt Restructurings
At September 30, 2015
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   (In thousands)
Commercial   6   $2,813   $2,517   $- 
Commercial real estate   7    10,305    10,133    - 
Residential real estate   1    242    230    - 
Total   14   $13,360   $12,880   $- 

 

   Troubled Debt Restructurings
At September 30, 2014
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   (In thousands)
Commercial   6   $3,465   $3,109   $259 
Commercial real estate   3    2,754    2,787    - 
Consumer installment and other   1    18    11    - 
Total   10   $6,237   $5,907   $259 

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

 

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

 

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

 

The Company repaid $20,015 thousand of Federal Home Loan Bank (“FHLB”) advances in January 2015, which had been collateralized by loans; the collateral requirements expired upon repayment of the debt. At December 31, 2014, the Company pledged loans to secure borrowings with a carrying value of $20,015 thousand from the FHLB. The loans restricted due to collateral requirements approximated $18,366 thousand at December 31, 2014.

 

There were no loans held for sale at September 30, 2015 and December 31, 2014.

 

At September 30, 2015 and September 30, 2014, the Company held total other real estate owned (OREO) of $9,269 thousand and $7,273 thousand, respectively, of which $-0-  thousand and $585  thousand, respectively, were foreclosed residential real estate properties. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process totaled $-0- thousand and $595  thousand at September 30, 2015 and September 30, 2014, respectively.

 

-21-
 

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At September 30, 2015, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2015, Westamerica Bank had 38 lending relationships with aggregate loans exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $60,848 thousand and $66,086  thousand at September 30, 2015 and December 31, 2014, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At September 30, 2015, Westamerica Bank held corporate bonds in 45 issuing entities which exceeded $5 million of each issuer.

 

Note 6: Other Assets

 

Other assets consisted of the following:

 

   At September 30,
2015
  At December 31,
2014
   (In thousands)
Cost method equity investments:          
Federal Reserve Bank stock (1)  $14,069   $14,069 
Federal Home Loan Bank stock (2)   -    940 
Other investments   201    241 
Total cost method equity investments   14,270    15,250 
Life insurance cash surrender value   48,335    46,479 
Net deferred tax asset   47,046    50,903 
Limited partnership investments   15,934    18,673 
Interest receivable   18,637    19,394 
Prepaid assets   4,309    5,609 
Other assets   10,381    10,150 
Total other assets  $158,912   $166,458 

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

 

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

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At September 30, 2015, this investment totaled $15,934 thousand and $2,299 thousand of this amount represents outstanding equity capital commitments. These commitments are expected to be paid as follows, $453 thousand in 2015, $763 thousand in 2016, and $1,083 thousand in 2017 or thereafter.

 

The amounts recognized in net income for these investments include:

 

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

 

-22-
 

Note 7: Goodwill and Identifiable Intangible Assets

 

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize impairment during the three and nine months ended September 30, 2015 and year ended December 31, 2014. 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 nine months ended September 30, 2015 and year ended December 31, 2014, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

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

 

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

 

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

As of September 30, 2015, the current year and estimated future amortization expense for identifiable intangible assets was:

 

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

 

 

 

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-23-
 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

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

Demand deposit overdrafts of $2,753  thousand and $3,173  thousand were included as loan balances at September 30, 2015 and December 31, 2014, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $164 thousand and $543 thousand in the third quarter of and first nine months of 2015, respectively and $219 thousand and $683 thousand in the third quarter of and first nine months of 2014, respectively.

 

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

 

   Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
   At September 30, 2015  At December 31, 2014
   Remaining Contractual Maturity of the Agreements
   Overnight and Continuous  Overnight and Continuous
Repurchase agreements:  (In thousands)
Securities of U.S. Government sponsored entities  $110,541   $80,827 
Obligations of states and political subdivisions   3,975    14,251 
Corporate securities   54,832    52,936 
Total collateral carrying value  $169,348   $148,014 
Total short-term borrowed funds  $57,063   $89,784 

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

 

The Company has a $35,000 thousand unsecured line of credit which had no outstanding balance at September 30, 2015 and December 31, 2014. The line of credit has a variable interest rate, which was 2.0%  per annum at September 30, 2015, with interest payable monthly on outstanding advances. Advances may be made up to the unused credit limit through March 18, 2016.

 

Note 9: Fair Value Measurements

 

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

 

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

 

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

 

-24-
 

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

 

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

 

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

 

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

 

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

 

 

 

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-25-
 

Assets Recorded at Fair Value on a Recurring Basis

 

The table below presents assets measured at fair value on a recurring basis.

 

   At September 30, 2015
   Fair Value  Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3)
   (In thousands)
U.S. Treasury securities  $3,001   $3,001   $-   $- 
Securities of U.S. Government sponsored entities   342,409    -    342,409    - 
Residential mortgage-backed securities   20,590    -    20,590    - 
Commercial mortgage-backed securities   2,552    -    2,552    - 
Obligations of states and political subdivisions   161,155    -    161,155    - 
Residential collateralized mortgage obligations   194,552    -    194,552    - 
Asset-backed securities   2,330    -    2,330    - 
FHLMC and FNMA stock   6,500    10    6,490    - 
Corporate securities   835,839    -    835,839    - 
Other securities   2,782    924    1,858    - 
Total securities available for sale  $1,571,710   $3,935   $1,567,775   $- 

 

   At December 31, 2014
   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)
U.S. Treasury securities  $3,505   $3,505   $-   $- 
Securities of U.S. Government sponsored entities   635,188    635,188    -    - 
Residential mortgage-backed securities   26,407    -    26,407    - 
Commercial mortgage-backed securities   2,919    -    2,919    - 
Obligations of states and political subdivisions   181,799    -    181,799    - 
Residential collateralized mortgage obligations   222,457    -    222,457    - 
Asset-backed securities   8,313    -    8,313    - 
FHLMC and FNMA stock   5,168    5,168    -    - 
Corporate securities   512,239    -    512,239    - 
Other securities   2,786    910    1,876    - 
Total securities available for sale  $1,600,781   $644,771   $956,010   $- 

 

 

 

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-26-
 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

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

 

  At September 30, 2015 

For the Nine

Months Ended

September 30, 2015

  Fair Value  Level 1  Level 2  Level 3  Total Losses
  (In thousands)
Other real estate owned  $9,269   $-   $-   $9,269   $(315)
Impaired loans   15,738    -    -    15,738    (449)
Total assets measured at fair value on a nonrecurring basis  $25,007   $-   $-   $25,007   $(764)

 

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

 

 

At December 31, 2014

 

For the

Year Ended

December 31, 2014

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

 

Level 2 – Valuation is based upon independent market prices or appraised value of the collateral, less 10% for selling costs, generally. Level 2 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets.

 

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

 

Disclosures about Fair Value of Financial Instruments

 

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

 

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

 

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

 

Loans Loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates were valued using historical cost. Fixed rate loans and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of $30,036 thousand at September 30, 2015 and $31,485 thousand at December 31, 2014 and the purchased loan discount associated with purchased covered and purchased non-covered loans of $155 thousand and $7,082 thousand, respectively at September 30, 2015 and of $468 thousand and $9,372 thousand, respectively at December 31, 2014 were applied against the estimated fair values to recognize estimated future defaults of contractual cash flows. The Company does not consider these values to be a liquidation price for the loans.

 

-27-
 

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

 

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

 

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

 

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

 

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

 

  At September 30, 2015
  Carrying Amount  Estimated Fair Value  Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3)
Financial Assets:  (In thousands)
Cash and due from banks  $268,587   $268,587   $268,587   $-   $- 
Investment securities held to maturity   1,278,814    1,293,958    -    1,293,958    - 
Loans   1,541,807    1,554,908    -    -    1,554,908 
                          
Financial Liabilities:                         
Deposits  $4,366,920   $4,365,831   $-   $4,066,375   $299,456 
Short-term borrowed funds   57,063    57,063    -    57,063    - 

 

  At December 31, 2014
  Carrying Amount  Estimated Fair Value  Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3)
Financial Assets:  (In thousands)
Cash and due from banks  $380,836   $380,836   $380,836   $-   $- 
Investment securities held to maturity   1,038,658    1,048,562    1,077    1,047,485    - 
Loans   1,668,805    1,685,048    -    -    1,685,048 
Financial Liabilities:                         
Deposits  $4,349,191   $4,348,958   $-   $3,964,048   $384,910 
Short-term borrowed funds   89,784    89,784    -    89,784    - 
Federal Home Loan Bank advances   20,015    20,014    20,014    -    - 

 

-28-
 

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

 

Note 10: Commitments and Contingent Liabilities

 

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $316,947 thousand and $312,694 thousand at September 30, 2015 and December 31, 2014, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled $27,117 thousand and $29,002 thousand at September 30, 2015 and December 31, 2014, respectively. The Company also had commitments for commercial and similar letters of credit of $40 thousand at September 30, 2015 and December 31, 2014. At September 30, 2015 and December 31, 2014, the Company had a reserve for unfunded commitments of $2,593 thousand and $2,693 thousand, respectively, included in other liabilities.

 

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

 

Note 11: Earnings Per Common Share

 

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

 

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

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

 

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

 

 

-29-
 

 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

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

 

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

 

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

 

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

-30-
 

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

 

The Federal Reserve’s Federal Open Market Committee has maintained highly accommodative monetary policies to influence interest rates to low levels in order to provide stimulus to the economy following the “financial crisis” recession. The Company’s principal source of revenue is net interest and fee income, which represents interest earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). The relatively low level of market interest rates has reduced the spread between interest rates on earning assets and interest bearing liabilities. The Company’s net interest margin and net interest income have declined as market interest rates on newly originated loans remain below the yields earned on older-dated loans and on the overall loan portfolio. The Company is reducing its exposure to rising interest rates by purchasing shorter-duration investment securities with lower yields than longer-duration securities. The Company’s credit quality continued to improve, as nonperforming loans at September 30, 2015 declined 9.6 percent compared with September 30, 2014 and net loan losses remained relatively low in the three and nine months ended September 30, 2015. The improvement in credit quality has resulted in Management reducing the provision for loan losses to zero in the third quarter and in the first nine months of 2015 from $600 thousand in the third quarter 2014 and $2.6 million in the first nine months of 2014. The credit quality improvement also contributed to reducing noninterest expenses related to nonperforming assets. Management is focused on controlling all noninterest expense levels, particularly due to market interest rate pressure on net interest income.

 

Westamerica Bancorporation and subsidiaries (the “Company”) earned net income of $14.9 million or $0.58 diluted earnings per common share for the third quarter 2015 and net income of $44.2 million or $1.73 diluted earnings per common share for the nine months ended September 30, 2015. These results compare to net income of $15.2 million or $0.58 diluted earnings per common share for the third quarter 2014 and net income of $45.6 million or $1.74 diluted earnings per common share for the nine months ended September 30, 2014.

 

 

Net Income

 

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

 

  For the Three Months  For the Nine Months
  Ended September 30,
   2015  2014  2015  2014
  (In thousands, except per share data)
Net interest income (FTE)  $37,179   $37,905   $111,524   $115,351 
Provision for loan losses   -    (600)   -    (2,600)
Noninterest income   11,993    13,054    36,562    39,242 
Noninterest expense   (26,173)   (26,616)   (79,796)   (80,446)
Income before taxes (FTE)   22,999    23,743    68,290    71,547 
Income tax provision (FTE)   (8,142)   (8,589)   (24,115)   (25,929)
Net income  $14,857   $15,154   $44,175   $45,618 
                     
Average diluted common shares   25,565    26,016    25,585    26,262 
Diluted earnings per common share  $0.58   $0.58   $1.73   $1.74 
                     
Average total assets  $5,062,334   $4,971,808   $5,055,421   $4,923,705 
Net income to average total assets (annualized)   1.16%   1.21%   1.17%   1.24%
Net income to average common stockholders' equity (annualized)   11.33%   11.55%   11.42%   11.59%

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

 

-31-
 

Comparing the first nine months of 2015 to the first nine months of 2014, net income decreased due to lower net interest and fee income (FTE) and lower noninterest income, partially offset by decreases in the provision for loan losses, noninterest expense and income tax provision (FTE). The lower net interest and fee income (FTE) was primarily caused by a lower average volume of loans and lower net yield on interest earning assets, partially offset by higher average balances of investments and a lower average volume of higher-cost funding sources. The provision for loan losses was reduced to zero, reflecting improved credit quality and Management's evaluation of losses inherent in the loan portfolio. Noninterest income decreased primarily due to reduced levels of service charges on deposit accounts, merchant processing services and other income. Noninterest expense decreased mostly due to lower personnel expenses, partially offset by higher expense for other real estate owned.

 

 

Net Interest and Fee Income (FTE)

 

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

 

  For the Three Months  For the Nine Months
  Ended September 30,
   2015  2014  2015  2014
  (In thousands)
Interest and fee income  $34,299   $34,900   $102,641   $105,867 
Interest expense   (585)   (846)   (1,861)   (2,644)
FTE adjustment   3,465    3,851    10,744    12,128 
Net interest and fee income (FTE)  $37,179   $37,905   $111,524   $115,351 
                     
Average earning assets  $4,471,690   $4,125,835   $4,417,114   $4,111,364 
Net interest margin (FTE) (annualized)   3.31%   3.66%   3.37%   3.75%

 

Net interest and fee income (FTE) decreased during the third quarter 2015 by $726 thousand from the same period in 2014 to $37.2 million, mainly due to lower average balances of loans (down $168 million) and lower yields on interest-earning assets (down 38 basis points “bp”), partially offset by higher average balances of investments (up $514 million) and lower average balances of higher-costing interest-bearing liabilities.

 

Comparing the first nine months of 2015 with the first nine months of 2014, net interest and fee income (FTE) decreased $3.8 million due to a lower average volume of loans (down $151 million) and lower yields on interest earning assets (down 41 bp), partially offset by higher average balances of investments (up $457 million) and a lower average volume of higher-cost funding sources.

 

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

 

Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. The net interest margin (FTE) was 3.31% and 3.37% in the third quarter and the first nine months of 2015, respectively, compared with 3.66% and 3.75% in the third quarter and the first nine months of 2014, respectively. The volume of older-dated higher-yielding loans declined due to principal maturities and paydowns. Newly originated loans have lower yields. The Company, in anticipation of rising interest rates, has been purchasing floating rate and shorter-duration investment securities with lower yields than longer-duration securities to increase liquidity. The Company’s high levels of liquidity will provide an opportunity to obtain higher yielding assets once market interest rates start rising. The Company has been replacing higher-cost funding sources with low-cost deposits and interest expense has declined to offset some of the decline in interest income.

 

 

Interest and Fee Income (FTE)

 

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

 

-32-
 

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

 

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

 

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

 

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

 

 

Interest Expense

 

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

 

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

 

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

 

 

 

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Net Interest Margin (FTE)

 

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

 

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

 

During the third quarter and the first nine months of 2015, the net interest margin (FTE) was affected by low market interest rates. The volume of older-dated higher-yielding loans and securities declined due to principal maturities and paydowns. Newly originated loans have lower yields. The Company, in anticipation of rising interest rates, has been purchasing floating rate and shorter-duration investment securities to increase liquidity. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost funding sources. During the third quarter 2015 the net interest margin (FTE) decreased 35 bp compared with the same period in 2014. Lower yields on earning assets were partially offset by lower rates paid on interest-bearing liabilities and resulted in a 34 bp decrease in net interest spread (FTE). During the first nine months of 2015, the net interest margin (FTE) decreased 38 bp compared with the first nine months of 2014. The net interest spread (FTE) in the first nine months of 2015 was 3.33% compared with 3.70% in the first nine months of 2014, the net result of a 41 bp decrease in earning asset yield and 4 bp decrease in the cost of interest-bearing liabilities.

 

 

 

 

 

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Summary of Average Balances, Yields/Rates and Interest Differential

 

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

 

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

 

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

 

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

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

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

 

 

For the Three Months Ended

September 30, 2014

 

Average

Balance

 

Interest

Income/

Expense

Yields/

Rates

  (In thousands)
Assets               
Investment securities:               
Taxable  $1,498,048   $6,348    1.70%
Tax-exempt (1)   867,672    9,865    4.55%
Total investments (1)   2,365,720    16,213    2.74%
Loans:               
Taxable   1,674,517    21,365    5.06%
Tax-exempt (1)   85,598    1,173    5.44%
Total loans (1)   1,760,115    22,538    5.08%
Total Interest-earning assets (1)   4,125,835   $38,751    3.74%
Other assets   845,973           
Total assets  $4,971,808           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $1,869,853   $-    -%
Savings and interest-bearing transaction   2,005,687    290    0.06%
Time less than $100,000   194,338    200    0.41%
Time $100,000 or more   233,511    219    0.37%
Total interest-bearing deposits   2,433,536    709    0.12%
Short-term borrowed funds   71,067    23    0.13%
Term repurchase agreement   4,457    11    1.00%
Federal Home Loan Bank advances   20,240    103    2.02%
Total interest-bearing liabilities   2,529,300   $846    0.13%
Other liabilities   51,953           
Shareholders' equity   520,702           
Total liabilities and shareholders' equity  $4,971,808           
Net interest spread (1) (2)           3.61%
Net interest and fee income and interest margin (1) (3)     $37,905   3.66%

 

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

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

 

 

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

 

   For the Nine Months Ended
September 30, 2015
   Average
Balance
  Interest
Income/
Expense
  Yields/
Rates
   (In thousands)
Assets               
Investment securities:               
Taxable  $1,918,319   $25,067    1.74%
Tax-exempt (1)   855,357    27,549    4.29%
Total investments (1)   2,773,676    52,616    2.53%
Loans:               
Taxable   1,566,333    57,547    4.91%
Tax-exempt (1)   77,105    3,222    5.59%
Total loans (1)   1,643,438    60,769    4.94%
Total Interest-earning assets (1)   4,417,114   $113,385    3.43%
Other assets   638,307           
Total assets  $5,055,421           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $1,946,018   $-    -%
Savings and interest-bearing transaction   2,109,831    824    0.05%
Time less than $100,000   175,696    449    0.34%
Time $100,000 or more   172,834    543    0.42%
Total interest-bearing deposits   2,458,361    1,816    0.10%
Short-term borrowed funds   81,926    44    0.07%
Federal Home Loan Bank advances   661    1    0.20%
Total interest-bearing liabilities   2,540,948   $1,861    0.10%
Other liabilities   51,401           
Shareholders' equity   517,054           
Total liabilities and shareholders' equity  $5,055,421           
Net interest spread (1) (2)             3.33%
Net interest and fee income and interest margin (1) (3)       $111,524    3.37%

 

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

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

 

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

 

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

 

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

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

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

 

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

 

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

 

Summary of Changes in Interest Income and Expense

 

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

 

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

 

 

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-39-
 

Summary of Changes in Interest Income and Expense

 

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

 

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

 

-40-
 

Noninterest Income

 

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

 

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

 

Noninterest income for the third quarter 2015 declined by $1.0 million or 8.1% from the same period in 2014. Service charges on deposits decreased $626 thousand due to declines in fees charged on overdrawn and insufficient funds accounts and lower fees on analyzed accounts. Merchant processing services declined $257 thousand primarily due to lower transaction volumes.

 

In the first nine months of 2015, noninterest income decreased $2.7 million or 6.8% compared with the first nine months of 2014. Service charges on deposits decreased $1.3 million compared with the first nine months of 2014 due to declines in fees charged on overdrawn and insufficient funds accounts, lower fees on analyzed accounts and lower activity on checking accounts. Merchant processing services declined $514 thousand primarily due to lower transaction volumes. Trust fees increased mostly due to successful marketing efforts to increase customer accounts.

 

 

 

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-41-
 

Noninterest Expense

 

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

 

   For the Three Months  For the Nine Months
   Ended September 30,
   2015  2014  2015  2014
   (In thousands)
             
Salaries and related benefits  $12,761   $13,639   $39,795   $41,691 
Occupancy   3,746    3,811    11,199    11,284 
Outsourced data processing services   2,115    2,093    6,334    6,314 
Furniture and equipment   1,075    1,059    3,353    3,070 
Amortization of identifiable intangibles   952    1,056    2,908    3,219 
Courier service   604    663    1,744    1,938 
Professional fees   746    700    1,876    1,707 
Other real estate owned   83    (287)   451    (908)
Other   4,091    3,882    12,136    12,131 
Total  $26,173   $26,616   $79,796   $80,446 

Noninterest expense decreased $443 thousand in the third quarter 2015 compared with the same period in 2014 primarily due to lower personnel costs, partially offset by increases in other real estate owned (“OREO”) expense. Salaries and related benefits declined mostly due to employee attrition. Amortization of identifiable intangibles decreased as assets are amortized on a declining balance method. OREO expense in the third quarter 2014 was reduced by net gains on disposition of foreclosed assets and higher rental income.

 

In the first nine months of 2015, noninterest expense decreased compared with the first nine months of 2014 primarily due to lower personnel costs, lower intangible amortization, lower courier service costs and other expense, partially offset by increases in expenses for OREO, furniture and equipment and professional services. Salaries and related benefits decreased primarily due to employee attrition. Amortization of identifiable intangibles decreased as assets are amortized on a declining balance method. Courier expense decreased primarily due to consolidating service runs. OREO expense in the first nine months of 2015 included net writedowns while in the first nine months of 2014 the Company realized net gains on disposition of foreclosed assets. Furniture and equipment expense increased primarily due to higher depreciation costs resulting from computer and software upgrades and higher software license fees.

 

 

Provision for Income Tax

 

During the third quarter 2015, the Company recorded an income tax provision (FTE) of $8.1 million, compared with $8.6 million in the third quarter 2014. The third quarter 2015 provision represents an effective tax rate (FTE) of 35.4%, compared with 36.2% for the third quarter 2014. The income tax provision (FTE) was $24.1 million for the first nine months of 2015 compared with $25.9 million for the corresponding period of 2014. The first nine months of 2015 effective tax rate (FTE) was 35.3% compared to 36.2% for the same period of 2014. The effective tax rates (FTE) for the third quarter 2015 and the first nine months of 2015 were lower than prior periods primarily because 2015 included an adjustment based on filing the 2014 federal tax return and tax benefits from completing audits with California Franchise Tax Board.

 

 

Investment Portfolio

 

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

 

Management has increased the investment portfolio in response to deposit growth and loan volume declines. The carrying value of the Company’s investment securities portfolio was $2.9 billion as of September 30, 2015, an increase of $211 million compared to December 31, 2014.

 

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

 

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The Company’s positioning of the balance sheet for rising interest rates has resulted in the purchase of floating rate corporate bonds, federal agency bonds, mortgage-backed securities, and short-term state and municipal bonds. As of September 30, 2015, 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.

 

At September 30, 2015, the Company’s investment securities portfolios included securities issued by 719 state and local government municipalities and agencies located within 44 states with a fair value of $855.3 million. None of the Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any one municipality or agency was $10.3 million (fair value) represented by nine general obligation bonds.

 

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

 

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

 

 

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-43-
 

At December 31, 2014, the Company’s investment securities portfolios included securities issued by 763 state and local government municipalities and agencies located within 45 states with a fair value of $911.0 million. The largest exposure to any one municipality or agency was $7.4 million (fair value) represented by three revenue bonds.

 

   At December 31, 2014
   Amortized
Cost
  Fair
Value
   (In thousands)
Obligations of states and political subdivisions:      
General obligation bonds:          
California  $107,997   $110,563 
Texas   65,292    66,162 
Pennsylvania   48,675    49,546 
Minnesota   33,524    33,840 
New Jersey   30,223    30,598 
Arizona   28,492    29,378 
Other (34 states)   249,513    254,043 
Total general obligation bonds  $563,716   $574,130 
           
Revenue bonds:          
California  $60,473   $62,788 
Pennsylvania   29,462    30,101 
Kentucky   19,975    20,370 
Iowa   18,225    18,898 
Colorado   18,532    18,862 
Indiana   16,865    16,859 
Other (31 states)   164,848    168,972 
Total revenue bonds  $328,380   $336,850 
Total obligations of states and political subdivisions  $892,096   $910,980 

 

At September 30, 2015, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 23 revenue sources. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table.

 

   At September 30, 2015
   Amortized
Cost
  Fair
Value
   (In thousands)
Revenue bonds by revenue source          
Water  $63,993   $66,647 
Sewer   45,952    47,253 
Sales tax   33,606    34,750 
Lease (renewal)   21,702    22,158 
Lease (abatement)   18,407    18,677 
College & University   17,540    18,315 
Other   98,768    100,869 
Total revenue bonds by revenue source  $299,968   $308,669 

 

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-44-
 

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

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

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

 

 

Loan Portfolio Credit Risk

 

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

 

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

 

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

 

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

 

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

-45-
 

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

 

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

 

Nonperforming Assets

   At September 30,  At December 31,
   2015  2014  2014
   (In thousands)
Originated:               
Nonperforming nonaccrual loans  $7,578   $4,696   $5,296 
Performing nonaccrual loans   -    13    13 
Total nonaccrual loans   7,578    4,709    5,309 
Accruing loans 90 or more days past due   481    342    502 
Total nonperforming loans   8,059    5,051    5,811 
Other real estate owned   5,834    5,123    4,809 
Total nonperforming assets  $13,893   $10,174   $10,620 
                
Purchased covered:               
Nonperforming nonaccrual loans  $-   $295   $297 
Performing nonaccrual loans   -    -    - 
Total nonaccrual loans   -    295    297 
Accruing loans 90 or more days past due   -    -    - 
Total nonperforming loans   -    295    297 
Other real estate owned   486    585    - 
Total nonperforming assets  $486   $880   $297 
                
Purchased non-covered:               
Nonperforming nonaccrual loans  $8,784   $12,745   $11,901 
Performing nonaccrual loans   84    552    97 
Total nonaccrual loans   8,868    13,297    11,998 
Accruing loans 90 or more days past due   -    76    - 
Total nonperforming loans   8,868    13,373    11,998 
Other real estate owned   2,949    1,565    1,565 
Total nonperforming assets  $11,817   $14,938   $13,563 
                
Total nonperforming assets  $26,196   $25,992   $24,480 

At September 30, 2015, two loans secured by commercial real estate totaling $10,990 thousand  were on nonaccrual status. The remaining twenty nonaccrual loans held at September 30, 2015 had an average carrying value of $273 thousand  and the largest carrying value was $1,323 thousand.

 

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

 

 

-46-
 

 

Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

-47-
 

The remainder of the allowance is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. The unallocated allowance addresses additional qualitative factors consistent with Management's analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company's general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in loan chargeoff history (external factors). The primary external factor evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management as of September 30, 2015 are economic and business conditions $1.0 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 $1.4 million, adequacy of lending Management and staff $1.9 million, concentrations of credit $2.2 million, and other factors.

 

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

 

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

 

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

Management considers the $30.0 million allowance for loan losses to be adequate as a reserve against loan losses inherent in the loan portfolio as of September 30, 2015.

 

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

 

-48-
 

Asset/Liability and Market Risk Management

 

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

 

Interest Rate Risk

 

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

 

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

 

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

 

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

 

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

 

The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company's Board of Directors.

 

-49-
 

Market Risk - Equity Markets

 

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

 

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

 

Market Risk - Other

 

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

 

Liquidity and Funding

 

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

 

In recent years, the Company's deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 97  percent of funding for average total assets in the first nine months of 2015 and 2014. The stability of the Company’s funding from customer deposits is in part reliant on the confidence clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate level of liquidity reserves.

 

Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides a substantial secondary liquidity reserve. The Company held $2.9 billion in total investment securities at September 30, 2015. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At September 30, 2015, such collateral requirements totaled approximately $716 million.

 

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

 

Management will monitor the Company’s cash levels throughout 2015. 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, and a variety of other conditions, deposit growth may be used to fund loans, reduce borrowings or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

 

-50-
 

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

 

In the first nine months of 2015, the Bank’s dividends paid to the Parent Company and proceeds from the exercise of stock options provided adequate cash flow for the Parent Company to pay shareholder dividends of $29 million and retire common stock in the amount of $15 million. In the first nine months of 2014, the Bank’s dividends paid to the Parent Company and proceeds from the exercise of stock options provided adequate cash flow for the Parent Company to pay shareholder dividends of $30 million and retire common stock in the amount of $45 million. 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.

 

Capital Resources

 

The Company has historically generated high levels of earnings, which provides a means of accumulating capital. The Company's net income as an annualized percentage of average shareholders' equity (“return on equity” or “ROE”) has been 11.4% in the first nine months of 2015, 11.6% in 2014 and 12.5% in 2013. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $5 million in the first nine months of 2015 compared with $12 million in 2014 and $21 million in 2013.

 

The Company paid common dividends totaling $29 million in the first nine months of 2015, $40 million in 2014 and $40 million in 2013, which represent dividends per common share of $1.14, $1.52 and $1.49, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has repurchased and retired its common stock as another means to return earnings to shareholders. The Company repurchased and retired 342 thousand shares valued at $15 million in the first nine months of 2015, 1.0 million shares valued at $53 million in 2014 and 1.2 million shares valued at $57 million in 2013.

 

The Company's primary capital resource is shareholders' equity, which was $533.9 million at September 30, 2015 compared with $526.6 million at December 31, 2014. The Company's ratio of equity to total assets was 10.68% at September 30, 2015 and 10.46% at December 31, 2014.

 

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

 

 

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Capital to Risk-Adjusted Assets

 

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

 

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

 

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

 

Banking organizations that are not subject to the “advanced approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations will begin on January 1, 2016 and 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 newly proposed “common equity tier 1” ratio.

 

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

 

         Transitional     Well-capitalized
         Minimum  Minimum  by Regulatory
         Regulatory  Regulatory  Definition
         Requirement  Requirement (1)  Under FDICIA
   At September 30, 2015  Effective  Effective  Effective
   Company  Bank  January 1, 2015  January 1, 2019  January 1, 2015
                
Common Equity Tier I Capital   12.79%   11.15%   4.50%   7.00%   6.50%
Tier I Capital   12.79%   11.15%   6.00%   8.50%   8.00%
Total Capital   13.39%   11.88%   8.00%   10.50%   10.00%
Leverage Ratio   8.06%   6.99%   4.00%   4.00%   5.00%

(1) Includes 2.5% capital conservation buffer.

 

The Company and the Bank intend to maintain regulatory capital in excess of the highest regulatory standard. 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.

 

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

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company’s Board of Directors.

 

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

 

 

Item 4. Controls and Procedures

 

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

 

Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2015 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, 2014 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.

 

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

 

(a) Previously reported on Form 8-K.

(b) None

(c) Issuer Purchases of Equity Securities

 

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

 

 
 
 
 
 
Period
 
 
 
 
 
 
 
 
 
(a)
Total Number of
Shares Purchased
 
 
 
 
 
 
 
 
 
(b)
Average Price
Paid per Share
 
 
 
 
 
 
(c)
Total Number
of Shares
Purchased as Part of
Publicly Announced
Plans or Programs*
 
 
 
 
 
 
(d)
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
(In thousands, except per share data)
July 1            
through   26   $50.30    26    1,729 
July 31                    
August 1                    
through   -    -    -    1,729 
August 31                    
September 1                    
through   -    -    -    1,729 
September 30                    
Total   26   $50.30    26    1,729 

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

 

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

 

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

 

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

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

 

-54-
 

SIGNATURES

 

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

 

WESTAMERICA BANCORPORATION

(Registrant)

 

 

 

/s/ JOHN "ROBERT" THORSON

John "Robert" Thorson                                                            

Senior Vice President and Chief Financial Officer

(Chief Financial and Accounting Officer)

 

Date: November 2, 2015

 

 

 

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EXHIBIT INDEX

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

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