Company Quick10K Filing
Quick10K
Westamerica Bancorporation
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$63.32 27 $1,710
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-29 Shareholder Vote
8-K 2019-04-25 Other Events, Exhibits
8-K 2019-04-18 Earnings, Exhibits
8-K 2019-01-24 Other Events, Exhibits
8-K 2019-01-24 Other Events, Exhibits
8-K 2019-01-17 Earnings, Exhibits
8-K 2019-01-03 Officers
8-K 2018-10-25 Other Events, Exhibits
8-K 2018-10-18 Earnings, Exhibits
8-K 2018-07-26 Other Events, Exhibits
8-K 2018-07-19 Earnings, Exhibits
8-K 2018-04-30 Shareholder Vote
8-K 2018-04-26 Other Events, Exhibits
8-K 2018-04-19 Earnings, Exhibits
8-K 2018-03-22 Amend Bylaw, Other Events, Exhibits
8-K 2018-03-13 Officers
8-K 2018-01-25 Other Events, Exhibits
8-K 2018-01-18 Earnings, Exhibits
8-K 2018-01-03 Officers
PBH Prestige Brands 1,590
CERC Cerecor 206
FOMX Foamix Pharmaceuticals 163
HYGS Hydrogenics 139
MHH Mastech Digital 56
AEZS AEterna Zentaris 51
CTDH CTD Holdings 0
NSPM Northern States Power 0
BOXS Boxscore Brands 0
RSRV Reserve Petroleum 0
WABC 2019-03-31
Part I - Financial Information
Item 1 Financial Statements
Note 1: Basis of Presentation
Note 2: Accounting Policies
Note 3: Investment Securities
Note 4: Loans, Allowance for Loan Losses and Other Real Estate Owned
Note 5: Concentration of Credit Risk
Note 6: Other Assets and Other Liabilities
Note 7: Goodwill and Identifiable Intangible Assets
Note 8: Deposits and Borrowed Funds
Note 9: Fair Value Measurements
Note 10: Commitments and Contingent Liabilities
Note 11: Earnings per Common Share
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 exh_311.htm
EX-31.2 exh_312.htm
EX-32.1 exh_321.htm
EX-32.2 exh_322.htm

Westamerica Bancorporation Earnings 2019-03-31

WABC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q_050619p.htm 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 March 31, 2019

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 every Interactive Data File required to be submitted 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 such files).

 

Yes ☒   No ☐

 

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

 

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐    

 

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

 

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

 

Yes ☐   No ☒

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, no par value WABC The Nasdaq Stock Market, LLC

 

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

 

Title of Class   Shares outstanding as of April 30, 2019
Common Stock,   26,929,915
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
     
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 29
     
Item 3 Quantitative and Qualitative Disclosures about Market Risk 49
     
Item 4 Controls and Procedures 49
     
PART II - OTHER INFORMATION
   
Item 1 Legal Proceedings 49
     
Item 1A Risk Factors 49
     
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 49
     
Item 3 Defaults upon Senior Securities 50
     
Item 4 Mine Safety Disclosures 50
     
Item 5 Other Information 50
     
Item 6 Exhibits 50
     
Signatures 51
   
Exhibit Index 52
   
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 53
   
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 54
   
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350 55
   
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350 56

 

 

- 2 -

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2018, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

 

 

 

- 3 -

 

 

PART I - FINANCIAL INFORMATION

Item 1     Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   At March 31,
2019
  At December 31,
2018
   (In thousands)
Assets:      
Cash and due from banks  $421,788   $420,284 
Equity securities   1,771    1,747 
Debt securities available for sale   2,702,240    2,654,670 
Debt securities held to maturity, with fair values of:          
$920,603 at March 31, 2019 and $971,445 at December 31, 2018   923,190    984,609 
Loans   1,204,844    1,207,202 
Allowance for loan losses   (20,477)   (21,351)
Loans, net of allowance for loan losses   1,184,367    1,185,851 
Other real estate owned   43    350 
Premises and equipment, net   33,934    34,507 
Identifiable intangibles, net   1,619    1,929 
Goodwill   121,673    121,673 
Other assets   165,336    162,906 
Total Assets  $5,555,961   $5,568,526 
           
Liabilities:          
Noninterest-bearing deposits  $2,179,803   $2,243,251 
Interest-bearing deposits   2,612,781    2,623,588 
Total deposits   4,792,584    4,866,839 
Short-term borrowed funds   58,317    51,247 
Other liabilities   48,293    34,849 
Total Liabilities   4,899,194    4,952,935 
           
Contingencies (Note 10)          
           
Shareholders' Equity:          
Common stock (no par value), authorized - 150,000 shares          
Issued and outstanding: 26,901 at March 31, 2019 and 26,730 at December 31, 2018   455,304    448,351 
Deferred compensation   771    1,395 
Accumulated other comprehensive loss   (11,249)   (39,996)
Retained earnings   211,941    205,841 
Total Shareholders' Equity   656,767    615,591 
Total Liabilities andShareholders' Equity  $5,555,961   $5,568,526 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

- 4 -

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   For the
Three Months Ended
March 31,
   2019  2018
   (In thousands,
except per share data)
Interest and Fee Income:          
Loans  $14,797   $14,697 
Equity securities   98    85 
Debt securities available for sale   17,521    13,551 
Debt securities held to maturity   5,329    6,174 
Interest-bearing cash   1,738    1,808 
Total Interest and Fee Income   39,483    36,315 
Interest Expense:          
Deposits   485    450 
Short-term borrowed funds   9    9 
Total Interest Expense   494    459 
Net Interest and Fee Income   38,989    35,856 
Provision for Loan Losses   -      -   
Net Interest and Fee Income After Provision For Loan Losses   38,989    35,856 
Noninterest Income:          
Service charges on deposit accounts   4,504    4,752 
Merchant processing services   2,558    2,420 
Debit card fees   1,507    1,605 
Trust fees   717    743 
ATM processing fees   633    664 
Other service fees   577    631 
Financial services commissions   101    114 
Equity securities gains (losses)   24    (36)
Other noninterest income   958    1,062 
Total Noninterest Income   11,579    11,955 
Noninterest Expense:          
Salaries and related benefits   13,108    13,351 
Occupancy and equipment   5,048    4,691 
Outsourced data processing services   2,369    2,340 
Professional fees   665    785 
Courier service   442    463 
Amortization of identifiable intangibles   310    570 
Other noninterest expense   3,241    3,822 
Total Noninterest Expense   25,183    26,022 
Income Before Income Taxes   25,385    21,789 
Provision for income taxes   5,739    4,283 
Net Income  $19,646   $17,506 
           
Average Common Shares Outstanding   26,841    26,532 
Average Diluted Common Shares Outstanding   26,912    26,665 
Per Common Share Data:          
Basic earnings  $0.73   $0.66 
Diluted earnings   0.73    0.66 
Dividends paid   0.40    0.40 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

- 5 -

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

   For the Three Months Ended
March 31,
   2019  2018
   (In thousands)
Net income  $19,646   $17,506 
Other comprehensive income (loss):          
Changes in net unrealized losses on debt securities available for sale   40,813    (32,846)
Deferred tax (expense) benefit   (12,066)   9,709 
Changes in net unrealized losses on debt securities available for sale, net of tax   28,747    (23,137)
Total comprehensive income (loss)  $48,393   $(5,631)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

- 6 -

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

 

   Common
Shares
Outstanding
  Common
Stock
  Deferred
Compensation
  Accumulated
Other
Comprehensive
(Loss) Income
  Retained
Earnings
  Total
   (In thousands)
                   
Balance, December 31, 2017   26,425   $431,734   $1,533   $(16,832)  $173,804   $590,239 
Cumulative effect of equity securities losses reclassified                  142    (142)   -   
Adjusted Balance, January 1, 2018   26,425    431,734    1,533    (16,690)   173,662    590,239 
Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act                  (3,625)   3,625    -   
Net income for the period                       17,506    17,506 
Other comprehensive loss                  (23,137)        (23,137)
Exercise of stock options   166    7,534                   7,534 
Stock based compensation        525                   525 
Stock awarded to employees   -      24                   24 
Dividends                       (10,608)   (10,608)
Balance, March 31, 2018   26,591   $439,817   $1,533   $(43,452)  $184,185   $582,083 
                               
Balance, December 31, 2018   26,730   $448,351   $1,395   $(39,996)  $205,841   $615,591 
Cumulative effect of bond premium amortization adjustment, net of tax                       (2,801)   (2,801)
Adjusted Balance, January 1, 2019   26,730    448,351    1,395    (39,996)   203,040    612,790 
Net income for the period                       19,646    19,646 
Other comprehensive income                  28,747         28,747 
Shares issued from stock warrant exercise, net of repurchase   51                        -   
Exercise of stock options   120    5,771                   5,771 
Restricted stock activity        624    (624)             -   
Stock based compensation        541                   541 
Stock awarded to employees   -      17                   17 
Dividends                       (10,745)   (10,745)
Balance, March 31, 2019   26,901   $455,304   $771   $(11,249)  $211,941   $656,767 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

- 7 -

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Three Months
Ended March 31,
   2019  2018
   (In thousands)
Operating Activities:          
Net income  $19,646   $17,506 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization/accretion   4,809    1,643 
Net amortization of deferred net loan fees   (215)   (40)
Decrease in interest income receivable   1,887    1,019 
Increase in income taxes payable   1,575    4,302 
Decrease (increase) in deferred tax asset   3,175    (20)
(Increase) decrease in other assets   (1,952)   2,473 
Stock option compensation expense   541    525 
Increase in interest expense payable   8    15 
Decrease in other liabilities   (6,013)   (984)
Equity securities (gains) losses   (24)   36 
Writedown of premises and equipment   -      1 
Net Cash Provided by Operating Activities   23,437    26,476 
           
Investing Activities:          
Net repayments of loans   1,836    59,959 
Purchases of debt securities available for sale   (219,414)   (279,327)
Proceeds from sale/maturity/calls of debt securities available for sale   210,429    86,218 
Proceeds from maturity/calls of debt securities held to maturity   57,461    44,577 
Purchases of premises and equipment   (393)   (1,413)
Proceeds from sale of foreclosed assets   307    50 
Net Cash Provided by (Used in) Investing Activities   50,226    (89,936)
           
Financing Activities:          
Net change in deposits   (74,255)   40,254 
Net change in short-term borrowings   7,070    6,885 
Exercise of stock options/issuance of shares   5,771    7,534 
Common stock dividends paid   (10,745)   (10,608)
Net Cash (Used in) Provided by Financing Activities   (72,159)   44,065 
Net Change In Cash and Due from Banks   1,504    (19,395)
Cash and Due from Banks at Beginning of Period   420,284    575,002 
Cash and Due from Banks at End of Period  $421,788   $555,607 
           
Supplemental Cash Flow Disclosures:          
Supplemental disclosure of noncash activities:          
Right-of-use assets acquired in exchange for operating lease liabilities  $19,444   $-   
Amount recognized upon initial adoption of ASU 2016-02 included above   15,325    -   
Loan collateral transferred to other real estate owned   -      -   
Supplemental disclosure of cash flow activities:          
Cash paid for amounts included in operating lease liabilities   1,750    -   
Interest paid for the period   486    444 
Income tax payments for the period   -      -   

 

See accompanying notes to unaudited consolidated financial statements.

 

 

- 8 -

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three months ended March 31, 2019 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, 2018.

 

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, 2018. 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, it is reasonably possible conditions could change materially affecting results of operations and financial conditions.

 

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

 

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

 

Recently Adopted Accounting Standards

 

In the three months ended March 31, 2019, the Company adopted the following new accounting guidance:

 

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


The Company adopted the ASU provisions effective January 1, 2019, and elected the modified retrospective transition approach. The Company elected the package of practical expedients provided in the ASU, which allowed the Company to rely on lease classification determinations made under prior accounting guidance and forego reevaluation of (i) whether any existing contracts are or contain a lease, (ii) whether existing leases are operating or finance leases, and (iii) the initial direct cost for any existing leases. The Company also elected to combine lease and non-lease components and exempt short-term leases with an original term of one year or less from on-balance sheet recognition. The implementing entry recognized a lease liability of $15.3 million and right-of-use asset of $15.3 million for facilities leases. The change in occupancy and equipment expense was not material.

 

- 9 -

 

 

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

 

The Company adopted the ASU provisions on January 1, 2019. The implementing entry reduced the carrying value of investment securities, specifically obligations of states and political subdivisions, by $3.1 million and reduced retained earnings by $2.8 million, net of tax. The change in premium amortization method was not material to revenue recognition.

 

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

 

The Company adopted the ASU provisions on January 1, 2019. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company’s Board of Directors. The Company evaluated the prepayable assets in the HTM portfolio and did not effect a one-time reclassification of prepayable assets from HTM to the AFS upon implementation.

 

Recently Issued Accounting Standards

 

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

 

The Company will be required to adopt the ASU provisions on January 1, 2020. Management has evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management has preliminarily measured historical loss rates for each portfolio segment. The ultimate adjustment to the allowance for loan losses will be accomplished through an offsetting after-tax adjustment to shareholders’ equity. Management has also segmented debt securities held to maturity, selected methods to estimate losses for each segment, and preliminarily measured a loss estimate. Economic conditions and the composition of the Company’s loan portfolio and debt securities held to maturity at the time of adoption will influence the extent of the adopting accounting adjustment. Management expects to develop an aggregate loss estimate by December 31, 2019.

 

FASB ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The ASU is part of the disclosure framework project, where the primary focus is to improve the effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to Fair Value Measurements.

 

The provisions of the ASU are effective January 1, 2020 with the option to early adopt any removed or modified disclosures upon issuance of the ASU. The Company early adopted the provisions to remove and/or modify relevant disclosures in Note 11 to the consolidated financial statements. The requirement to include additional disclosures will be adopted by the Company January 1, 2020. The additional disclosures will not affect the financial results upon adoption.

 

 

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Note 3: Investment Securities

 

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

 

The market value of equity securities was $1,771 thousand and $1,747 thousand at March 31, 2019 and December 31, 2018, respectively. During the three months ended March 31, 2019, the Company recognized gross unrealized holding gains of $24 thousand in earnings. During the three months ended March 31, 2018, the Company recognized gross unrealized holding losses of $36 thousand in earnings.

 

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

 

   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
At March 31, 2019  (In thousands)
Debt securities available for sale                    
U.S. Treasury securities  $109,000   $54   $-     $109,054 
Securities of U.S. Government sponsored entities   167,234    91    (1,586)   165,739 
Agency residential mortgage-backed securities (MBS)   945,117    3,599    (18,693)   930,023 
Non-agency residential MBS   111    1    -      112 
Agency commercial MBS   1,860    -      (23)   1,837 
Securities of U.S. Government entities   1,091    -      (10)   1,081 
Obligations of states and political subdivisions   169,947    2,817    (711)   172,053 
Corporate securities   1,323,850    6,881    (8,390)   1,322,341 
Total debt securities available for sale   2,718,210    13,443    (29,413)   2,702,240 
Debt securities held to maturity                    
Agency residential MBS   427,387    364    (9,269)   418,482 
Non-agency residential MBS   3,124    63    -      3,187 
Obligations of states and political subdivisions   492,679    6,367    (112)   498,934 
Total debt securities held to maturity   923,190    6,794    (9,381)   920,603 
Total  $3,641,400   $20,237   $(38,794)  $3,622,843 

 

   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
At December 31, 2018  (In thousands)
Debt securities available for sale                    
U.S. Treasury securities  $139,572   $5   $(3)  $139,574 
Securities of U.S. Government sponsored entities   167,228    65    (3,275)   164,018 
Agency residential mortgage-backed securities (MBS)   883,715    595    (30,439)   853,871 
Non-agency residential MBS   113    1    -      114 
Agency commercial MBS   1,869    -      (27)   1,842 
Securities of U.S. Government entities   1,128    -      (9)   1,119 
Obligations of states and political subdivisions   180,220    1,856    (2,985)   179,091 
Corporate securities   1,337,608    1,075    (23,642)   1,315,041 
Total debt securities available for sale   2,711,453    3,597    (60,380)   2,654,670 
Debt securities held to maturity                    
Agency residential MBS   447,332    249    (14,129)   433,452 
Non-agency residential MBS   3,387    40    -      3,427 
Obligations of states and political subdivisions   533,890    3,403    (2,727)   534,566 
Total debt securities held to maturity   984,609    3,692    (16,856)   971,445 
Total  $3,696,062   $7,289   $(77,236)  $3,626,115 

 

- 11 -

 

 

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

 

   At March 31, 2019
   Debt Securities Available
for Sale
  Debt Securities Held
to Maturity
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
   (In thousands)
Maturity in years:                    
1 year or less  $280,961   $280,891   $88,062   $88,138 
Over 1 to 5 years   1,357,380    1,354,969    186,922    188,819 
Over 5 to 10 years   94,223    96,091    216,663    220,913 
Over 10 years   38,558    38,317    1,032    1,064 
Subtotal   1,771,122    1,770,268    492,679    498,934 
MBS   947,088    931,972    430,511    421,669 
Total  $2,718,210   $2,702,240   $923,190   $920,603 

 

   At December 31, 2018
   Debt Securities Available
for Sale
  Debt Securities Held
to Maturity
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
   (In thousands)
Maturity in years:                    
1 year or less  $262,418   $261,976   $86,172   $86,148 
Over 1 to 5 years   1,438,849    1,414,020    214,137    213,829 
Over 5 to 10 years   85,817    85,877    232,544    233,515 
Over 10 years   38,672    36,970    1,037    1,074 
Subtotal   1,825,756    1,798,843    533,890    534,566 
MBS   885,697    855,827    450,719    436,879 
Total  $2,711,453   $2,654,670   $984,609   $971,445 

 

Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At March 31, 2019 and December 31, 2018, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

 

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

 

 
 
 
 
Debt Securities Available for Sale
At March 31, 2019
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment  Fair  Unrealized  Investment  Fair  Unrealized  Investment  Fair  Unrealized
   Positions  Value  Losses  Positions  Value  Losses  Positions  Value  Losses
   ($ in thousands)
Securities of U.S. Government sponsored entities   -     $-     $-      10   $120,648   $(1,586)   10   $120,648   $(1,586)
Agency residential MBS   1    176    -      58    645,183    (18,693)   59    645,359    (18,693)
Agency commercial MBS   -      -      -      1    1,837    (23)   1    1,837    (23)
Securities of U.S. Government entities   -      -      -      2    1,081    (10)   2    1,081    (10)
Obligations of states and political subdivisions   6    5,215    (15)   52    54,137    (696)   58    59,352    (711)
Corporate securities   4    17,527    (30)   84    832,548    (8,360)   88    850,075    (8,390)
Total   11   $22,918   $(45)   207   $1,655,434   $(29,368)   218   $1,678,352   $(29,413)

 

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

 

 
 
 
 
Debt Securities Held to Maturity
At March 31, 2019
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment  Fair  Unrecognized  Investment  Fair   Unrecognized  Investment  Fair  Unrecognized
   Positions  Value  Losses  Positions  Value  Losses  Positions  Value  Losses
   ($ in thousands)
Agency residential MBS   3   $201   $-      80   $399,404   $(9,269)   83   $399,605   $(9,269)
Obligations of states and political subdivisions   -      -      -      62    55,801    (112)   62    55,801    (112)
Total   3   $201   $-      142   $455,205   $(9,381)   145   $455,406   $(9,381)

 

The unrealized losses on the Company’s debt securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. One corporate bond with a carrying value of $15.0 million and a market value of $14.3 million at March 31, 2019, is rated below investment grade. 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 debt securities and has concluded that it is more likely than not that it will not be required to sell the debt securities prior to recovery of the amortized cost basis. Therefore, the Company does not consider these debt securities to be other-than-temporarily impaired as of March 31, 2019.

 

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

 

As of March 31, 2019 and December 31, 2018, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $716,434  thousand and $728,161 thousand, respectively.

 

- 13 -

 

 

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

 

 
 
 
 
Debt Securities Available for Sale
At December 31, 2018
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment  Fair  Unrealized  Investment  Fair  Unrealized  Investment  Fair  Unrealized
   Positions  Value  Losses  Positions  Value  Losses  Positions  Value  Losses
   ($ in thousands)
U.S. Treasury securities   2   $54,805   $(3)   -     $-     $-      2   $54,805   $(3)
Securities of U.S. Government sponsored entities   1    990    (5)   9    117,963    (3,270)   10    118,953    (3,275)
Agency residential MBS   8    107,497    (507)   58    640,210    (29,932)   66    747,707    (30,439)
Agency commercial MBS   1    1,842    (27)   -      -      -      1    1,842    (27)
Securities of U.S. Government entities   -      -      -      2    1,119    (9)   2    1,119    (9)
Obligations of states and political subdivisions   32    26,452    (166)   71    67,121    (2,819)   103    93,573    (2,985)
Corporate securities   38    308,157    (3,403)   79    722,740    (20,239)   117    1,030,897    (23,642)
Total   82   $499,743   $(4,111)   219   $1,549,153   $(56,269)   301   $2,048,896   $(60,380)

 

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

 

   Debt Securities Held to Maturity
At December 31, 2018
   No. of  Less than 12 months  No. of  12 months or longer  No. of  Total
   Investment  Fair   Unrecognized  Investment  Fair   Unrecognized  Investment  Fair   Unrecognized
   Positions  Value  Losses  Positions  Value  Losses  Positions  Value  Losses
   ($ in thousands)
Agency residential MBS   16   $8,495   $(34)   78   $412,574   $(14,095)   94   $421,069   $(14,129)
Non-agency residential MBS   1    26    -      -      -      -      1    26    -   
Obligations of states and political subdivisions   97    83,633    (271)   142    151,546    (2,456)   239    235,179    (2,727)
Total   114   $92,154   $(305)   220   $564,120   $(16,551)   334   $656,274   $(16,856)

 

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
Ended March 31,
   2019  2018
   (In thousands)
       
Taxable  $18,633   $14,935 
Tax-exempt from regular federal income tax   4,315    4,875 
Total interest income from investment securities  $22,948   $19,810 

 

 

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Note 4: Loans, Allowance for Loan Losses and Other Real Estate Owned

 

At December 31, 2018, the Company had $5,713 thousand in residential real estate secured loans which are indemnified from loss by the FDIC up to eighty percent of principal; the indemnification expired February 6, 2019.

 

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

 

 
 
 
 
At March 31,
2019
 
 
At December 31,
2018
   (In thousands)
Commercial  $276,357   $275,080 
Commercial Real Estate   584,221    580,480 
Construction   3,555    3,982 
Residential Real Estate   41,798    44,866 
Consumer Installment & Other   298,913    302,794 
Total  $1,204,844   $1,207,202 

 

Total loans outstanding reported above include loans purchased from the FDIC of $55,757  thousand and $58,247  thousand at March 31, 2019 and December 31, 2018, respectively.

 

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

 

   For the
Three Months Ended
March 31, 2019
  For the
Year Ended
December 31, 2018
Accretable yield:  (In thousands)
Balance at the beginning of the period  $182   $738 
Reclassification from nonaccretable difference   1,103    1,119 
Accretion   (141)   (1,675)
Balance at the end of the period  $1,144   $182 
           
Accretion  $(141)  $(1,675)
Change in FDIC indemnification   -      2 
(Increase) in interest income  $(141)  $(1,673)

 

The following summarizes activity in the allowance for loan losses:

 

   Allowance for Loan Losses
For the Three Months Ended March 31, 2019
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $6,311   $3,884   $1,465   $869   $5,645   $3,177   $21,351 
(Reversal) provision   125    31    (612)   (608)   792    272    -   
Chargeoffs   (23)   -      -      -      (1,368)   -      (1,391)
Recoveries   93    12    -      -      412    -      517 
Total allowance for loan losses  $6,506   $3,927   $853   $261   $5,481   $3,449   $20,477 

 

   Allowance for Loan Losses
For the Three Months Ended March 31, 2018
   Commercial  Commercial
Real Estate
  Construction  Residential
Real Estate
  Consumer
Installment
and Other
  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Balance at beginning of period  $7,746   $3,849   $335   $995   $6,418   $3,666   $23,009 
(Reversal) provision   (17)   (25)   (160)   (87)   37    252    -   
Chargeoffs   (41)   -      -      -      (1,365)   -      (1,406)
Recoveries   829    -      -      -      649    -      1,478 
Total allowance for loan losses  $8,517   $3,824   $175   $908   $5,739   $3,918   $23,081 

 

- 15 -

 

 

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

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At March 31, 2019
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Individually evaluated for impairment  $2,715   $-     $-     $-     $-     $-     $2,715 
Collectively evaluated for impairment   3,791    3,927    853    261    5,481    3,449    17,762 
Total  $6,506   $3,927   $853   $261   $5,481   $3,449   $20,477 
Carrying value of loans:                                   
Individually evaluated for impairment  $9,763   $6,750   $-     $197   $116   $-     $16,826 
Collectively evaluated for impairment   266,594    577,471    3,555    41,601    298,797    -      1,188,018 
Total  $276,357   $584,221   $3,555   $41,798   $298,913   $-     $1,204,844 

 

   Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 2018
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Unallocated  Total
   (In thousands)
Allowance for loan losses:                                   
Individually evaluated for impairment  $2,752   $-     $-     $-     $-     $-     $2,752 
Collectively evaluated for impairment   3,559    3,884    1,465    869    5,645    3,177    18,599 
Total  $6,311   $3,884   $1,465   $869   $5,645   $3,177   $21,351 
Carrying value of loans:                                   
Individually evaluated for impairment  $9,944   $8,438   $-     $717   $143   $-     $19,242 
Collectively evaluated for impairment   265,136    572,042    3,982    44,149    302,651    -      1,187,960 
Total  $275,080   $580,480   $3,982   $44,866   $302,794   $-     $1,207,202 

 

The Company’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 Company’s subsidiary, Westamerica Bank (the “Bank”) maintains a Loan Review Department which reports directly to the Audit Committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans and validates management assigned credit risk grades on 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 performs continuous evaluations throughout the year. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department examinations, assigned risk grades are re-evaluated promptly. Credit risk grades assigned by management and validated by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

 

 

 

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

 

   Credit Risk Profile by Internally Assigned Grade
At March 31, 2019
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Total
   (In thousands)
Grade:                              
Pass  $266,405   $572,937   $3,555   $41,601   $297,781   $1,182,279 
Substandard   9,952    11,284    -      197    584    22,017 
Doubtful   -      -      -      -      204    204 
Loss   -      -      -      -      344    344 
Total  $276,357   $584,221   $3,555   $41,798   $298,913   $1,204,844 

 

   Credit Risk Profile by Internally Assigned Grade
At December 31, 2018
   Commercial  Commercial Real Estate  Construction  Residential Real Estate  Consumer Installment and Other  Total
   (In thousands)
Grade:                              
Pass  $264,634   $567,578   $3,982   $43,112   $300,553   $1,179,859 
Substandard   10,446    12,902    -      1,754    1,556    26,658 
Doubtful   -      -      -      -      135    135 
Loss   -      -      -      -      550    550 
Total  $275,080   $580,480   $3,982   $44,866   $302,794   $1,207,202 

 

Credit risk profile reflects internally assigned grades of purchased covered loans without regard to FDIC indemnification on $5,713 thousand residential real estate and consumer loans at December 31, 2018. The indemnification expired February 6, 2019.

 

The following tables summarize loans by delinquency and nonaccrual status:

 

   Summary of Loans by Delinquency and Nonaccrual Status
At March 31, 2019
   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  $275,577   $747   $21   $-     $12   $276,357 
Commercial real estate   579,041    1,308         -      3,872    584,221 
Construction   3,555    -      -      -      -      3,555 
Residential real estate   41,798    -      -      -      -      41,798 
Consumer installment and other   295,179    2,626    598    394    116    298,913 
Total  $1,195,150   $4,681   $619   $394   $4,000   $1,204,844 

 

   Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2018
   Current and Accruing  30-59 Days Past Due and Accruing  60-89 Days Past Due and Accruing  Past Due 90 Days or More and Accruing  Nonaccrual  Total Loans
   (In thousands)
Commercial  $274,045   $781   $254   $-     $-     $275,080 
Commercial real estate   574,853    617    785    -      4,225    580,480 
Construction   3,982    -      -      -      -      3,982 
Residential real estate   43,372    789    189    -      516    44,866 
Consumer installment and other   297,601    3,408    1,107    551    127    302,794 
Total  $1,193,853   $5,595   $2,335   $551   $4,868   $1,207,202 

 

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2019 and December 31, 2018.

 

- 17 -

 

 

The following summarizes impaired loans:

 

   Impaired Loans
   At March 31,
2019
  At December 31,
2018
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
With no related allowance recorded:                              
Commercial  $706   $706   $-     $755   $759   $-   
Commercial real estate   6,750    8,197    -      8,438    10,373    -   
Residential real estate   197    227    -      717    747    -   
Consumer installment and other   116    151    -      270    377    -   
Total with no related allowance recorded   7,769    9,281    -      10,180    12,256    -   
                               
With an allowance recorded:                              
Commercial   9,057    9,057    2,715    9,189    9,189    2,752 
Commercial real estate   -      -      -      -      -      -   
Total with an allowance recorded   9,057    9,057    2,715    9,189    9,189    2,752 
Total  $16,826   $18,338   $2,715   $19,369   $21,445   $2,752 

 

Impaired loans include troubled debt restructured loans. Impaired loans at March 31, 2019, included $7,505 thousand of restructured loans, $3,670 thousand of which were on nonaccrual status. Impaired loans at December 31, 2018, included $8,579 thousand of restructured loans, $4,225 thousand of which were on nonaccrual status.

 

   Impaired Loans
For the Three Months Ended March 31,
   2019  2018
   Average
Recorded
Investment
  Recognized
Interest
Income
  Average
Recorded
Investment
  Recognized
Interest
Income
   (In thousands)
Commercial  $9,848   $167   $10,897   $175 
Commercial real estate   6,893    147    13,755    215 
Residential real estate   198    3    207    4 
Consumer installment and other   132    -      357    3 
Total  $17,071   $317   $25,216   $397 

 

The following tables provide information on troubled debt restructurings:

 

   Troubled Debt Restructurings
At March 31, 2019
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   ($ in thousands)
Commercial   4   $2,274   $760   $17 
Commercial real estate   6    8,367    6,548    -   
Residential real estate   1    241    197    -   
Total   11   $10,882   $7,505   $17 

 

- 18 -

 

 

   Troubled Debt Restructurings
At December 31, 2018
   Number of
Contracts
  Pre-Modification
Carrying Value
  Period-End
Carrying Value
  Period-End
Individual
Impairment
Allowance
   ($ in thousands)
Commercial   4   $2,274   $811   $19 
Commercial real estate   8    9,237    7,568    -   
Residential real estate   1    241    200    -   
Total   13   $11,752   $8,579   $19 

 

During the three months ended March 31, 2019 and March 31, 2018, the Company did not modify any loans that were considered troubled debt restructurings. There were no chargeoffs related to troubled debt restructurings made during the three months ended March 31, 2019 and March 31, 2018. During the three months ended March 31, 2019 and 2018, no troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

 

There were no loans restricted due to collateral requirements at March 31, 2019 and December 31, 2018.

 

There were no loans held for sale at March 31, 2019 and December 31, 2018.

 

At March 31, 2019 and December 31, 2018, the Company held total other real estate owned (OREO) of $43 thousand net of reserve of $-0- thousand and $350 thousand net of reserve of $-0- thousand, respectively, of which $-0- was foreclosed residential real estate properties or covered OREO at both dates. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $178 thousand at March 31, 2019 and $516 thousand at December 31, 2018.

 

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At March 31, 2019, the Bank did not have credit extended to any one entity exceeding these limits. At March 31, 2019, the Bank had 36 lending relationships each with aggregate amounts of $5 million or more. 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 $51,175 thousand and $53,891 thousand at March 31, 2019 and December 31, 2018, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At March 31, 2019, the Bank held corporate bonds in 78 issuing entities that exceeded $5 million for each issuer.

 

 

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- 19 -

 

 

Note 6: Other Assets and Other Liabilities

 

Other assets consisted of the following:

 

   At March 31,
2019
  At December 31,
2018
   (In thousands)
Cost method equity investments:          
Federal Reserve Bank stock (1)  $14,069   $14,069 
Other investments   158    158 
Total cost method equity investments   14,227    14,227 
Life insurance cash surrender value   56,725    56,083 
Net deferred tax asset   27,332    42,256 
Right-of-use asset   17,891    -   
Limited partnership investments   9,343    10,219 
Interest receivable   23,947    25,834 
Prepaid assets   4,373    4,658 
Other assets   11,498    9,629 
Total other assets  $165,336   $162,906 

 

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

 

The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. On July 5, 2018, Visa Inc. announced a new conversion rate applicable to its class B common stock resulting from its June 28, 2018 deposit of funds into its litigation escrow account. This funding reduced the conversion rate of class B common stock into class A common stock, which is unrestricted and trades actively on the New York Stock Exchange, to 1.6298 per share. Visa Inc. class A common stock had a closing price of $156.19 per share on March 31, 2019, the last day of stock market trading for the first quarter 2019. The ultimate value of the Company’s Visa Inc. class B shares is subject to the extent of Visa Inc.’s future litigation escrow fundings, the resulting conversion rate to class A common stock, and current and future trading restrictions on the class B common stock.

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At March 31, 2019, this investment totaled $9,343 thousand and $4,773  thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2018, this investment totaled $10,219 thousand and $4,799  thousand of this amount represented outstanding equity capital commitments. At March 31, 2019, the $4,773 thousand of outstanding equity capital commitments are expected to be paid as follows, $601 thousand in the remainder of 2019, $2,026 thousand in 2020, $138 thousand in 2021, $261 thousand in 2022, $134 thousand in 2023, $1,041 thousand in 2024 and $572 thousand in 2025 or thereafter.

 

The amounts recognized in net income for these investments include:

 

 
 
 
 
For the Three Months Ended
March 31,
   2019  2018
   (In thousands)
Investment loss included in pre-tax income  $600   $600 
Tax credits recognized in provision for income taxes   266    336 

 

- 20 -

 

 

Other liabilities consisted of the following:

 

   At March 31,
2019
  At December 31,
2018
   (In thousands)
Operating lease liability  $17,891   $-   
Other liabilities   30,402    34,849 
Total other liabilities  $48,293   $34,849 

 

The Company has entered into leases for most branch locations and certain other offices that were classified as operating leases primarily with original terms of 5 years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional 5 year terms. Unexercised extension options are not considered reasonably certain of exercise and have not been included in the lease term used to determine the lease liability or right-of-use asset. The Company did not have any finance leases as of March 31, 2019.

 

As of March 31, 2019, the company recorded a lease liability of $17,891 thousand and a right-of-use asset of $17,891 thousand, respectively. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 4.15 years and 3.01 percent, respectively, at March 31, 2019. The company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of March 31, 2019.

 

Total lease costs during the three months ended March 31, 2019, of $1,705 thousand were recorded within occupancy and equipment expense. The company did not have any material short-term or variable leases costs or sublease income during the three months ended March 31, 2019.

 

The following table summarizes the remaining maturity of operating lease liabilities:

 

   Minimum
future lease
payments
At March 31,
2019
   (In thousands)
Remaining 9 months of 2019  $4,786 
2020   5,076 
2021   3,381 
2022   2,580 
2023   1,938 
Thereafter   1,230 
Total minimum lease payments   18,991 
Less: discount   (1,100)
Present value of lease liability  $17,891 

 

Minimum future rental payments under noncancelable operating leases as of December 31, 2018, prior to adoption of ASU 2016-02, are as follows:

 

   Minimum
future rental
payments
   (In thousands)
2019  $5,996 
2020   4,409 
2021   2,741 
2022   1,921 
2023   1,223 
Thereafter   1,044 
Total minimum lease payments  $17,334 

 

- 21 -

 

 

Note 7: Goodwill and Identifiable Intangible Assets

 

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the three months ended March 31, 2019 and year ended December 31, 2018. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three months ended March 31, 2019 and year ended December 31, 2018 no such adjustments were recorded.

 

The carrying values of goodwill were:

 

   At March 31, 2019  At December 31, 2018
   (In thousands)
Goodwill  $121,673   $121,673 

 

 

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

 

 
 
 
 
At March 31,
2019
 
 
At December 31,
2018
 
 
 
 
 
 
Gross
Carrying
Amount
 
 
 
 
Accumulated
Amortization
 
 
 
Gross
Carrying
Amount
 
 
 
 
Accumulated
Amortization
   (In thousands)
Core Deposit Intangibles  $56,808   $(55,189)  $56,808   $(54,879)

 

As of December 31, 2018, the current period and estimated future amortization expense for identifiable intangible assets was:

 

 
 
 
 
 
 
 
 
Total
Core
Deposit
Intangibles
    (In thousands) 
For the Three Months ended March 31, 2019 (actual)  $310 
Estimate for the remainder of year ending December 31, 2019   228 
Estimate for year ending December 31, 2020   287 
2021   269 
2022   252 
2023   236 
2024   222 

 

 

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- 22 -

 

 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   Deposits
 
 
 
 
At March 31,
2019
 
 
At December 31,
2018
   (In thousands)
Noninterest-bearing  $2,179,803   $2,243,251 
Interest-bearing:          
Transaction   941,379    929,346 
Savings   1,482,187    1,498,991 
Time deposits less than $100 thousand   100,066    102,654 
Time deposits $100 thousand through $250 thousand   61,684    64,512 
Time deposits more than $250 thousand   27,465    28,085 
Total deposits  $4,792,584   $4,866,839 

 

Demand deposit overdrafts of $1,350  thousand and $980  thousand were included as loan balances at March 31, 2019 and December 31, 2018, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $82 thousand in the three months ended March 31, 2019 and $97 thousand in the three months ended March 31, 2018.

 

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

 

   Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
 
 
 
 
Remaining Contractual Maturity of the Agreements
Overnight and Continuous
 
 
 
 
At March 31,
2019
 
 
At December 31,
2018
Repurchase agreements:  (In thousands)
Collateral securing borrowings:          
Securities of U.S. Government sponsored entities  $74,857   $73,803 
Agency residential MBS   57,953    58,380 
Corporate securities   92,977    91,837 
Total collateral carrying value  $225,787   $224,020 
Total short-term borrowed funds  $58,317   $51,247 

 

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. Equity securities and debt securities available for sale 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, debt securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.

 

In accordance with the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards 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.

 

- 23 -

 

 

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

 

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

 

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

 

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

 

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

 

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.

 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

   At March 31, 2019
   Fair Value  Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3) (1)
   (In thousands)
Equity securities                    
Mutual funds  $1,771   $-     $1,771   $-   
Total equity securities   1,771    -      1,771    -   
Debt securities available for sale                    
U.S. Treasury securities   109,054    109,054    -      -   
Securities of U.S. Government sponsored entities   165,739    -      165,739    -   
Agency residential MBS   930,023    -      930,023    -   
Non-agency residential MBS   112    -      112    -   
Agency commercial MBS   1,837    -      1,837    -   
Securities of U.S. Government entities   1,081    -      1,081    -   
Obligations of states and political subdivisions   172,053    -      172,053    -   
Corporate securities   1,322,341    -      1,322,341    -   
Total debt securities available for sale   2,702,240    109,054    2,593,186    -   
Total  $2,704,011   $109,054   $2,594,957   $-   

 

(1) There were no transfers in to or out of level 3 during the three months ended March 31, 2019.

 

- 24 -

 

 

   At December 31, 2018
   Fair Value  Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3) (1)
   (In thousands)
Equity securities                    
Mutual funds  $1,747   $-     $1,747   $-   
Total equity securities   1,747    -      1,747    -   
Debt securities available for sale                    
U.S. Treasury securities   139,574    139,574    -      -   
Securities of U.S. Government sponsored entities   164,018    -      164,018    -   
Agency residential MBS   853,871    -      853,871    -   
Non-agency residential MBS   114    -      114    -   
Agency commercial MBS   1,842    -      1,842    -   
Securities of U.S. Government entities   1,119    -      1,119    -   
Obligations of states and political subdivisions   179,091    -      179,091    -   
Corporate securities   1,315,041    -      1,315,041    -   
Total debt securities available for sale   2,654,670    139,574    2,515,096    -   
Total  $2,656,417   $139,574   $2,516,843   $-   

 

(1) There were no transfers in to or out of level 3 during the year ended December 31, 2018.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at March 31, 2019 and December 31, 2018, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the
Three Months Ended
   At March 31, 2019  March 31, 2019
   Carrying Value  Level 1  Level 2  Level 3  Total Losses
   (In thousands)
Other real estate owned  $43   $-     $-     $43   $-   
Impaired loans:                         
Commercial   6,342    -      -      6,342    -   
Commercial real estate   4,100    -      -      4,100    -   
Residential real estate   197    -      -      197    -   
Consumer installment and other   77    -      -      77    -   
Total assets measured at fair value on a nonrecurring basis  $10,759   $-     $-     $10,759   $-   

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the
Year Ended
   At December 31, 2018  December 31, 2018
   Carrying Value  Level 1  Level 2  Level 3  Total Losses
   (In thousands)
Other real estate owned  $350   $-     $-     $350   $-   
Impaired loans:                         
Commercial   6,437    -      -      6,437    -   
Commercial real estate   3,870    -      -      3,870    (240)
Total assets measured at fair value on a nonrecurring basis  $10,657   $-     $-     $10,657   $(240)

 

- 25 -

 

 

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

 

Disclosures about Fair Value of Financial Instruments

 

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

 

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.

 

Equity Securities The fair values of equity securities were estimated using quoted prices as describe above for Level 2 valuation.

 

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

 

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

 

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 Banks and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair value of time deposits was estimated using a net present value of cash flows methodology, incorporating market interest rate projections and rates on alternative funding sources.

 

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

 

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

 

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

 

 

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   At March 31, 2019
   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  $421,788   $421,788   $421,788   $-   $- 
Debt securities held to maturity   923,190    920,603    -    920,603    - 
Loans   1,184,367    1,213,251    -    -    1,213,251 
                          
Financial Liabilities:                         
Deposits  $4,792,584   $4,788,497   $-   $4,603,369   $185,128 
Short-term borrowed funds   58,317    58,317    -    58,317    - 

 

   At December 31, 2018
   Carrying Amount  Estimated Fair Value  Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs
(Level 2 )
  Significant Unobservable Inputs
(Level 3 )
Financial Assets:  (In thousands)
Cash and due from banks  $420,284   $420,284   $420,284   $-   $- 
Debt securities held to maturity   984,609    971,445    -    971,445    - 
Loans   1,185,851    1,184,770    -    -    1,184,770 
                          
Financial Liabilities:                         
Deposits  $4,866,839   $4,862,668   $-   $4,671,588   $191,080 
Short-term borrowed funds   51,247    51,247    -    51,247    - 

 

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 $271,945 thousand at March 31, 2019 and $278,598 thousand at December 31, 2018. 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 $2,772 thousand at March 31, 2019 and $2,772 thousand at December 31, 2018. The Company had no commitments outstanding for commercial and similar letters of credit at March 31, 2019 and December 31, 2018. The Company had $550 thousand and $75 thousand in outstanding full recourse guarantees to a 3rd party credit card company at March 31, 2019 and December 31, 2018, respectively. The Company had a reserve for unfunded commitments of $2,308 thousand at March 31, 2019 and December 31, 2018, included in other liabilities.

 

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated. In the third quarter 2018, the Company achieved a mediated settlement to dismiss a lawsuit and accrued a liability for $3,500 thousand; the liability was paid in the first quarter 2019.

 

The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2017 to some customers. The Company estimates the probable amount of these obligations will be $5,542 thousand and accrued a liability for such amount in 2017; the estimated liability is subject to revision.

 

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Note 11: Earnings Per Common Share

 

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

 

   For the Three Months Ended
   March 31,
   2019  2018
   (In thousands, except per share data)
Net income (numerator)  $19,646   $17,506 
Basic earnings per common share          
Weighted average number of common shares outstanding - basic (denominator)   26,841    26,532 
Basic earnings per common share  $0.73   $0.66 
Diluted earnings per common share          
Weighted average number of common shares outstanding - basic   26,841    26,532 
Add common stock equivalents for options   71    133 
Weighted average number of common shares outstanding - diluted (denominator)   26,912    26,665 
Diluted earnings per common share  $0.73   $0.66 

 

For the three months ended March 31, 2019 and 2018, options to purchase 463 thousand and 491 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

 

 

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

 

WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
          

   For the Three Months Ended
   March 31,  December 31,
   2019  2018  2018
   (In thousands, except per share data)
Net Interest and Fee Income (FTE)(1)  $40,247   $37,275   $40,288 
Provision for Loan Losses   -    -    - 
Noninterest Income   11,579    11,955    11,897 
Noninterest Expense   25,183    26,022    25,787 
Income Before Income Taxes (FTE)(1)   26,643    23,208    26,398 
Provision for Income Taxes (FTE)(1)   6,997    5,702    7,343 
Net Income  $19,646   $17,506   $19,055 
                
Average Common Shares Outstanding   26,841    26,532    26,729 
Average Diluted Common Shares Outstanding   26,912    26,665    26,815 
Common Shares Outstanding at Period End   26,901    26,591    26,730 
                
Per Common Share:               
Basic Earnings  $0.73   $0.66   $0.71 
Diluted Earnings   0.73    0.66    0.71 
Book Value Per Common Share   24.41    21.89    23.03 
                
Financial Ratios:               
Return On Assets   1.42%   1.28%   1.33%
Return On Common Equity   12.16%   11.57%   11.70%
Net Interest Margin (FTE)(1)   3.12%   2.89%   3.06%
Net Loan (Recoveries) Losses to Average Loans   0.29%   (0.02)%   0.23%
Efficiency Ratio(2)   48.6%   52.9%   49.4%
                
Average Balances:               
Assets  $5,611,762   $5,564,705   $5,680,321 
Loans   1,205,656    1,243,750    1,189,744 
Investments   3,689,852    3,479,463    3,692,951 
Deposits   4,834,690    4,828,352    4,917,901 
Shareholders' Equity   655,380    613,860    646,129 
                
Period End Balances:               
Assets  $5,555,961   $5,551,036   $5,568,526 
Loans   1,204,844    1,228,584    1,207,202 
Investments   3,627,201    3,468,021    3,641,026 
Deposits   4,792,584    4,867,867    4,866,839 
Shareholders' Equity   656,767    582,083    615,591 
                
Capital Ratios at Period End:               
Total Risk Based Capital   17.49%   16.53%   16.17%
Tangible Equity to Tangible Assets   9.82%   8.42%   9.04%
                
Dividends Paid Per Common Share  $0.40   $0.40   $0.40 
Common Dividend Payout Ratio   55%   61%   56%

 

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

 

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

 

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Financial Overview

 

Westamerica Bancorporation and subsidiaries’ (collectively, the “Company”) reported first quarter 2019 net income of $19.6 million or $0.73 diluted earnings per common share. First quarter 2019 results compare to net income of $17.5 million or $0.66 diluted earnings per common share for the first quarter 2018 and $19.1 million or $0.71 diluted earnings per common share for the fourth quarter 2018.

 

The Company’s principal source of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). Market interest rates declined considerably following the recession of 2008 and 2009. Interest rates remained historically low through 2016 as the monetary policy of the Federal Open Market Committee (the “FOMC”) was highly accommodative. During this period, Management avoided originating long-dated, low-yielding loans given the potential impact of such assets on forward earning potential; as a result, loans declined and investment securities increased. The changed composition of the earning assets and low market interest rates pressured the net interest margin to lower levels. The FOMC began removing monetary stimulus in December 2016 and has increased the federal funds rate by 2.00 percent to 2.50 percent through March 2019, although longer-term rates have not increased by a similar magnitude. This recent increase in market interest rates has begun benefiting the Company’s earning asset yields. However, the rising market rates have not resulted in higher rates paid on deposits. The funding source of the Company’s earning assets is primarily customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. During the three months ended March 31, 2019 the average volume of checking and savings deposits was 96.0  percent of average total deposits. Net interest income (FTE) was $40.2 million for the first quarter 2019, compared with $40.3 million for the fourth quarter 2018 and $37.3 million for the first quarter 2018. The increase in net interest income (FTE) in the first quarter 2019 is due to higher asset yields.

 

Credit quality remained solid with nonperforming assets totaling $4.4 million at March 31, 2019 compared with $5.8 million at December 31, 2018 and $7.8 million at March 31, 2018. The Company did not recognize a provision for loan losses in the three months ended March 31, 2019.

 

The Company presents its net interest margin and net interest income on an FTE basis using the current statutory federal tax rate. Management believes the FTE basis is valuable to the reader because the Company’s loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks, therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on an FTE basis. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the federal statutory tax rate.

 

The Company’s significant accounting policies (see Note 1, “Summary of Significant Accounting Policies,” to Financial Statements in the Company’s 2018 Form 10-K) are fundamental to understanding the Company’s results of operations and financial condition.

 

 

 

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Net Income

 

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

 

   For the Three Months Ended
   March 31,  December 31,
   2019  2018  2018
   (In thousands, except per share data)
Net interest and loan fee income (FTE)  $40,247   $37,275   $40,288 
Provision for loan losses   -    -    - 
Noninterest income   11,579    11,955    11,897 
Noninterest expense   25,183    26,022    25,787 
Income before taxes (FTE)   26,643    23,208    26,398 
Income tax provision (FTE)   6,997    5,702    7,343 
Net income  $19,646   $17,506   $19,055 
                
Average diluted common shares   26,912    26,665    26,815 
Diluted earnings per common share  $0.73   $0.66   $0.71 
                
Average total assets  $5,611,762   $5,564,705   $5,680,321 
Net income to average total assets (annualized)   1.42%   1.28%   1.33%
Net income to average common shareholders' equity (annualized)   12.16%   11.57%   11.70%

 

Net income for the first quarter 2019 was $2.1 million more than the same quarter of 2018. Net interest and loan fee income (FTE) increased $3.0 million in the first quarter 2019 compared with the first quarter 2018 mainly due to higher averages of investments and higher yield on earning assets, partially offset by lower average balances of loans. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest expense decreased $839 thousand in the first quarter 2019 compared with the same period in 2018 due to lower personnel costs, professional fees and amortization of intangible assets, offset in part by higher occupancy and equipment expenses. Income tax provision (FTE) increased $1.3 million compared with the first quarter 2018 due to higher pretax income. The income tax provisions (FTE) for the first quarter 2019 and the first quarter 2018 include tax benefits of $284 thousand and $451 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements.

 

Comparing the first quarter 2019 with the fourth quarter 2018 net income increased $591 thousand. Net interest and loan fee (FTE) income decreased $41 thousand due to lower average balances of earning assets, offset by higher yield on interest earning assets. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. In the first quarter 2019 noninterest expense decreased $604 thousand compared with the fourth quarter 2018 due to lower occupancy and equipment expenses, amortization of intangible assets and operating losses on limited partnership investments. Income tax provision (FTE) decreased $346 thousand in the first quarter 2019 compared with the fourth quarter 2018. The income tax provisions (FTE) for the first quarter 2019 and the fourth quarter 2018 include tax benefits of $284 thousand and $7 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements.

 

 

 

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Net Interest and Loan Fee Income (FTE)

 

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

 

   For the Three Months Ended
   March 31,  December 31,
   2019  2018  2018
   (In thousands)
Interest and loan fee income  $39,483   $36,315   $39,448 
Interest expense   494    459    514 
Net interest and loan fee income   38,989    35,856    38,934 
FTE adjustment   1,258    1,419    1,354 
Net interest and loan fee income (FTE)  $40,247   $37,275   $40,288 
                
Average earning assets  $5,184,978   $5,161,144   $5,270,708 
Net interest margin (FTE) (annualized)   3.12%   2.89%   3.06%

 

Net interest and loan fee income (FTE) increased $3.0 million in the first quarter 2019 compared with the first quarter 2018 mainly due to higher averages of investments (up $210 million) and higher yield on earning assets (up 0.23%), partially offset by lower average balances of loans (down $38 million).

 

Comparing the first quarter 2019 with the fourth quarter 2018 net interest and loan fee income (FTE) decreased $41 thousand due to lower average balances of earning assets (down $86 million), offset by higher yield on interest earning assets (up 0.06%).

 

The annualized net interest margin (FTE) increased to 3.12% in the first quarter 2019 from 2.89% in the first quarter 2018 and 3.06% in the fourth quarter 2018. The net interest margin (FTE) increased in the first quarter, reflecting earning assets repriced to higher yield.

 

The Company’s funding costs were 0.04% in the first quarter 2019, unchanged from the first and fourth quarters 2018. Average balances of time deposits declined $36 million from the first quarter 2018 to the first quarter 2019. Average balances of checking and saving deposits accounted for 96.0% of average total deposits in the first quarter 2019 compared with 95.3% in the first quarter 2018 and 95.9% in the fourth quarter 2018.

 

Net Interest Margin (FTE)

 

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

 

   For the Three Months Ended
   March 31,  December 31,
   2019  2018  2018
          
Yield on earning assets (FTE)   3.16%   2.93%   3.10%
Rate paid on interest-bearing liabilities   0.08%   0.07%   0.08%
Net interest spread (FTE)   3.08%   2.86%   3.02%
Impact of noninterest-bearing funds   0.04%   0.03%   0.04%
Net interest margin (FTE)   3.12%   2.89%   3.06%

 

The FOMC increased the federal funds rate between December 2016 and December 2018. In the first quarter 2019 the yield on earning assets increased compared with the first and fourth quarters of 2018 as earning assets repriced to higher yield. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost time deposits and maintaining steady rates paid on checking and savings deposits.

 

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Summary of Average Balances, Yields/Rates and Interest Differential

 

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

 

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

 

   For the Three Months Ended March 31, 2019
 
 
 
 
 
 
 
Average
Balance
 
 
 
Interest
Income/
Expense
 
 
 
 
Yields/
Rates
   ($ in thousands)
Assets         
Investment securities:               
Taxable  $3,009,046   $18,633    2.48%
Tax-exempt (1)   680,806    5,462    3.21%
Total investments (1)   3,689,852    24,095    2.61%
Loans:               
Taxable   1,153,980    14,378    5.05%
Tax-exempt (1)   51,676    530    4.16%
Total loans (1)   1,205,656    14,908    5.01%
Total interest-bearing cash   289,470    1,738    2.40%
Total Interest-earning assets (1)   5,184,978    40,741    3.16%
Other assets   426,784           
Total assets  $5,611,762           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $2,204,232   $-    -%
Savings and interest-bearing transaction   2,438,558    337    0.06%
Time less than $100,000   109,104    66    0.24%
Time $100,000 or more   82,796    82    0.40%
Total interest-bearing deposits   2,630,458    485    0.07%
Short-term borrowed funds   59,226    9    0.06%
Total interest-bearing liabilities   2,689,684    494    0.08%
Other liabilities   62,466           
Shareholders' equity   655,380           
Total liabilities and shareholders' equity  $5,611,762           
Net interest spread (1) (2)             3.08%
Net interest and fee income and interest margin (1) (3)       $40,247    3.12%

 

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

 

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

 

   For the Three Months Ended March 31, 2018
 
 
 
 
 
 
 
Average
Balance
 
 
 
Interest
Income/
Expense
 
 
 
 
Yields/
Rates
   ($ in thousands)
Assets         
Investment securities:               
Taxable  $2,709,643   $14,935    2.20%
Tax-exempt (1)   769,820    6,169    3.21%
Total investments (1)   3,479,463    21,104    2.43%
Loans:               
Taxable   1,184,715    14,223    4.87%
Tax-exempt (1)   59,035    599    4.11%
Total loans (1)   1,243,750    14,822    4.83%
Interest-bearing cash   437,931    1,808    1.52%
Total Interest-earning assets (1)   5,161,144    37,734    2.93%
Other assets   403,561           
Total assets  $5,564,705           
                
Liabilities and shareholders' equity               
Noninterest-bearing demand  $2,156,626   $-    -%
Savings and interest-bearing transaction   2,443,561    282    0.05%
Time less than $100,000   125,020    71    0.23%
Time $100,000 or more   103,145    97    0.38%
Total interest-bearing deposits   2,671,726    450    0.07%
Short-term borrowed funds   62,501    9    0.06%
Total interest-bearing liabilities   2,734,227    459    0.07%
Other liabilities   59,992           
Shareholders' equity   613,860           
Total liabilities and shareholders' equity  $5,564,705           
Net interest spread (1) (2)             2.86%
Net interest and fee income and interest margin (1) (3)       $37,275    2.89%

 

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

 

 

 

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

 

   For the Three Months Ended December 31, 2018
 
 
 
 
 
 
 
Average
Balance
 
 
 
Interest
Income/
Expense
 
 
 
 
Yields/
Rates
   ($ in thousands)
Assets         
Investment securities:               
Taxable  $2,973,286   $18,003    2.42%
Tax-exempt (1)   719,665