Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
|
|
For the Three Months
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands, except per share data)
|
Net Interest and Loan Fee Income (FTE)
(1)
|
|
$
|
35,764
|
|
|
$
|
36,495
|
|
|
$
|
71,794
|
|
|
$
|
72,942
|
|
Reversal of Provision for Loan Losses
|
|
|
(1,900
|
)
|
|
|
-
|
|
|
|
(1,900
|
)
|
|
|
-
|
|
Noninterest Income
|
|
|
12,123
|
|
|
|
11,702
|
|
|
|
23,780
|
|
|
|
23,431
|
|
Noninterest Expense
|
|
|
24,396
|
|
|
|
25,229
|
|
|
|
49,011
|
|
|
|
51,087
|
|
Income Before Income Taxes (FTE)
(1)
|
|
|
25,391
|
|
|
|
22,968
|
|
|
|
48,463
|
|
|
|
45,286
|
|
Income Tax Provision (FTE)
(1)
|
|
|
9,592
|
|
|
|
8,422
|
|
|
|
17,615
|
|
|
|
16,514
|
|
Net Income
|
|
$
|
15,799
|
|
|
$
|
14,546
|
|
|
$
|
30,848
|
|
|
$
|
28,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding
|
|
|
26,299
|
|
|
|
25,586
|
|
|
|
26,235
|
|
|
|
25,516
|
|
Average Diluted Common Shares Outstanding
|
|
|
26,402
|
|
|
|
25,630
|
|
|
|
26,366
|
|
|
|
25,549
|
|
Common Shares Outstanding at Period End
|
|
|
26,304
|
|
|
|
25,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings
|
|
$
|
0.60
|
|
|
$
|
0.57
|
|
|
$
|
1.18
|
|
|
$
|
1.13
|
|
Diluted Earnings
|
|
|
0.60
|
|
|
|
0.57
|
|
|
|
1.17
|
|
|
|
1.13
|
|
Book Value
|
|
$
|
22.64
|
|
|
$
|
21.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Assets
|
|
|
1.18
|
%
|
|
|
1.13
|
%
|
|
|
1.15
|
%
|
|
|
1.12
|
%
|
Return on Common Equity
|
|
|
10.69
|
%
|
|
|
10.87
|
%
|
|
|
10.58
|
%
|
|
|
10.86
|
%
|
Net Interest Margin
(FTE)
(1)
|
|
|
3.12
|
%
|
|
|
3.27
|
%
|
|
|
3.13
|
%
|
|
|
3.30
|
%
|
Net Loan (Recoveries) Losses to Average Loans
|
|
|
(0.33
|
%)
|
|
|
0.16
|
%
|
|
|
(0.01
|
%)
|
|
|
0.12
|
%
|
Efficiency Ratio
(2)
|
|
|
50.9
|
%
|
|
|
52.3
|
%
|
|
|
51.3
|
%
|
|
|
53.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
5,385,085
|
|
|
$
|
5,184,409
|
|
|
$
|
5,390,404
|
|
|
$
|
5,179,607
|
|
Earning Assets
|
|
|
4,598,296
|
|
|
|
4,473,700
|
|
|
|
4,609,089
|
|
|
|
4,427,507
|
|
Loans
|
|
|
1,333,135
|
|
|
|
1,455,050
|
|
|
|
1,344,132
|
|
|
|
1,477,833
|
|
Deposits
|
|
|
4,669,424
|
|
|
|
4,531,751
|
|
|
|
4,681,021
|
|
|
|
4,534,650
|
|
Shareholders' Equity
|
|
|
593,028
|
|
|
|
537,987
|
|
|
|
587,736
|
|
|
|
532,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
5,393,350
|
|
|
$
|
5,179,085
|
|
|
|
|
|
|
|
|
|
Earning Assets
|
|
|
4,555,818
|
|
|
|
4,433,952
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,318,341
|
|
|
|
1,429,560
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,682,570
|
|
|
|
4,485,314
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
595,594
|
|
|
|
558,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios at Period End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Capital
|
|
|
16.69
|
%
|
|
|
14.76
|
%
|
|
|
|
|
|
|
|
|
Tangible Equity to Tangible Assets
|
|
|
8.90
|
%
|
|
|
8.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Paid Per Common Share
|
|
$
|
0.39
|
|
|
$
|
0.39
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
Common Dividend Payout Ratio
|
|
|
65
|
%
|
|
|
68
|
%
|
|
|
67
|
%
|
|
|
69
|
%
|
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).
|
Financial Overview
Westamerica Bancorporation and subsidiaries’ (the “Company”)
principal source of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment
securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”).
Market interest rates declined considerably following the recession of 2008 and 2009. Interest rates remained historically low
through 2016 as the Federal Open Market Committee’s (“FOMC”) monetary policy was highly accommodative. During
this period, Management avoided originating long-dated, low-yielding loans given the potential impact of such assets on forward
earning potential; as a result, loans declined and investment securities increased. The changing composition of the earning assets
and low market interest rates has pressured the net interest margin to lower levels. The FOMC’s first post-recession increase
in the federal funds rate occurred in December 2015, although longer-term rates declined. The FOMC’s successive post-recession
increases in the federal funds rate occurred between December 2016 and June 2017, although longer-term rates have not increased
by a similar magnitude. The more recent increase in rates has resulted in competitive loan yields which are more appealing from
a profitability perspective, in Management’s opinion.
The funding of the Company’s earning assets is primarily
customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits as these types of
deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. The first half of 2017 average
volume of checking and savings deposits was 95 percent of average total deposits.
Credit quality improved during the first half of 2017 with nonperforming
assets declining $3 million to $9 million at June 30, 2017. The Company realized net recoveries of loan losses of $1.1 million
in the second quarter 2017. The Company recorded a reversal of the provision for loan losses of $1.9 million in the second quarter
2017.
The Company’s long-term strategy also includes controlling
operating costs, or “noninterest expense.” Noninterest expense of $49.0 million for the first half of 2017 was $2.1
million lower than for the first half of 2016.
The Company presents its net interest margin and net interest income
on a 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
a FTE basis.
The Company’s significant accounting policies (see Note 1
(“Summary of Significant Accounting Policies”) to Financial Statements in the Company’s 2016 Form 10-K) are
fundamental to understanding the Company’s results of operations and financial condition. The Company adopted the
FASB
ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
effective January 1, 2017.
The Company reported net income of $15.8 million or $0.60 diluted
earnings per common share for the second quarter 2017 and net income of $30.8 million or $1.17 diluted earnings per common share
for the six months ended June 30, 2017. Second quarter 2017 results included a $1.9 million reversal of provision for loan losses
which accounted for $0.04 of the quarter’s diluted earnings per common share. Second quarter and first half of 2017 results
reflect the Company’s prospective adoption of ASU 2016-09; first quarter 2017 diluted earnings per common share measured
$0.02 higher than would have been measured under accounting standards applied in 2016. The adoption of ASU 2016-09 did not affect
second quarter 2017 results by a meaningful amount. Second quarter and first half of 2017 results compare to net income of $14.5
million or $0.57 diluted earnings per common share for the second quarter 2016 and net income of $28.8 million or $1.13 diluted
earnings per common share for the six months ended June 30, 2016.
[The remainder of this page intentionally left blank]
Net Income
Following is a summary of the components of net income for the
periods indicated:
|
|
For the Three Months
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands, except per share data)
|
Net interest and loan fee income (FTE)
|
|
$
|
35,764
|
|
|
$
|
36,495
|
|
|
$
|
71,794
|
|
|
$
|
72,942
|
|
Reversal of Provision for loan losses
|
|
|
(1,900
|
)
|
|
|
-
|
|
|
|
(1,900
|
)
|
|
|
-
|
|
Noninterest income
|
|
|
12,123
|
|
|
|
11,702
|
|
|
|
23,780
|
|
|
|
23,431
|
|
Noninterest expense
|
|
|
24,396
|
|
|
|
25,229
|
|
|
|
49,011
|
|
|
|
51,087
|
|
Income before taxes (FTE)
|
|
|
25,391
|
|
|
|
22,968
|
|
|
|
48,463
|
|
|
|
45,286
|
|
Income tax provision (FTE)
|
|
|
9,592
|
|
|
|
8,422
|
|
|
|
17,615
|
|
|
|
16,514
|
|
Net income
|
|
$
|
15,799
|
|
|
$
|
14,546
|
|
|
$
|
30,848
|
|
|
$
|
28,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares
|
|
|
26,402
|
|
|
|
25,630
|
|
|
|
26,366
|
|
|
|
25,549
|
|
Diluted earnings per common share
|
|
$
|
0.60
|
|
|
$
|
0.57
|
|
|
$
|
1.17
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
5,385,085
|
|
|
$
|
5,184,409
|
|
|
$
|
5,390,404
|
|
|
$
|
5,179,607
|
|
Net income to average total assets (annualized)
|
|
|
1.18
|
%
|
|
|
1.13
|
%
|
|
|
1.15
|
%
|
|
|
1.12
|
%
|
Net income to average common shareholders' equity (annualized)
|
|
|
10.69
|
%
|
|
|
10.87
|
%
|
|
|
10.58
|
%
|
|
|
10.86
|
%
|
Net income for the second quarter of 2017 was $1.3 million more
than the same quarter of 2016, the net result of a reversal of provision for loan losses, higher noninterest income and lower
noninterest expense, partially offset by lower net interest and fee income (FTE) and higher income tax provision (FTE). Net interest
and loan fee income (FTE) decreased in the second quarter 2017 compared with second quarter 2016 mostly attributable to lower
average balances of loans and lower yield on those loans, partially offset by higher average balances of investments. The Company
recorded a $1.9 million reversal of provision for loan losses, reflecting Management's evaluation of losses inherent in the loan
portfolio. Noninterest income increased primarily due to higher merchant processing services fees. Noninterest expense decreased
due to reductions in professional fees, correspondent service charges, insurance premiums, limited partnership operating losses,
intangible amortization and other expenses. Second quarter 2017 tax provision (FTE) was higher than second quarter 2016 primarily
due to higher pre-tax income, reduced levels of federally tax-exempt income on interest-earning assets relative to pre-tax income,
and lower tax credits. The ASU 2016-09 did not affect second quarter 2017 results by a meaningful amount.
Comparing the first half of 2017 with the first half of 2016, net
income increased $2.1 million due to a reversal of provision for loan losses, higher noninterest income and lower noninterest
expense, partially offset by lower net interest and fee income (FTE) and higher income tax provision (FTE). Net interest and loan
fee income (FTE) decreased in the first half of 2017 compared with first half of 2016 mostly attributable to lower average balances
of loans and lower yield on those loans, partially offset by higher average balances of investments. The Company recorded a $1.9
million reversal of provision for loan losses, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest
income increased primarily due to higher merchant processing services fees. Noninterest expense decreased due to reductions in
professional fees, correspondent service charges, courier service charges, insurance premiums, limited partnership operating losses,
intangible amortization and other expenses. The tax provision (FTE) for the first half of 2017 was higher than in the first half
of 2016 primarily due to higher pre-tax income, reduced levels of federally tax-exempt income on interest-earning assets relative
to pre-tax income, and lower tax credits. The first six months of 2017 income tax provision was $666 thousand lower than would
have been under accounting standards prior to the adoption of ASU 2016-09.
[The remainder of this page intentionally left blank]
Net Interest and Loan Fee Income (FTE)
Following is a summary of the components of net interest and loan
fee income (FTE) for the periods indicated:
|
|
For the Three Months
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
($ in thousands)
|
Interest and loan fee income
|
|
$
|
33,163
|
|
|
$
|
33,727
|
|
|
$
|
66,487
|
|
|
$
|
67,374
|
|
Interest expense
|
|
|
476
|
|
|
|
541
|
|
|
|
956
|
|
|
|
1,093
|
|
FTE adjustment
|
|
|
3,077
|
|
|
|
3,309
|
|
|
|
6,263
|
|
|
|
6,661
|
|
Net interest and loan fee income (FTE)
|
|
$
|
35,764
|
|
|
$
|
36,495
|
|
|
$
|
71,794
|
|
|
$
|
72,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$
|
4,598,296
|
|
|
$
|
4,473,700
|
|
|
$
|
4,609,089
|
|
|
$
|
4,427,507
|
|
Net interest margin (FTE) (annualized)
|
|
|
3.12
|
%
|
|
|
3.27
|
%
|
|
|
3.13
|
%
|
|
|
3.30
|
%
|
Net interest and loan fee income (FTE) decreased $731 thousand
in the second quarter 2017 compared with second quarter 2016 mostly attributable to lower average balances of loans (down $122
million) and lower yield on those loans (down 0.21%), partially offset by higher average balances of investments (up $247 million).
Comparing the first half of 2017 with the first half of 2016, net
interest and loan fee income (FTE) decreased $1.1 million mostly due to lower average balances of loans (down $134 million) and
lower yield on those loans (down 0.21%), partially offset by higher average balances of investments (up $315 million).
Yields on interest-earning assets declined due to relatively low
interest rates prevailing in the market. The annualized net interest margin (FTE) was 3.12% in the second quarter 2017 and 3.13%
in the first half of 2017 compared with 3.27% in the second quarter 2016 and 3.30% in the first half of 2016. The volume of older-dated
higher-yielding loans and municipal bonds declined due to principal maturities and paydowns. The Company, in anticipation of rising
interest rates, has been purchasing shorter-duration investment securities with lower yields than longer-duration securities to
increase liquidity. The Company’s high levels of liquidity will provide an opportunity to invest in higher yielding assets
assuming market interest rates increase to levels higher than yields on maturing securities and security paydowns.
The Company has been replacing higher-cost funding sources with
low-cost deposits and interest expense has declined to offset some of the decline in interest income. Average balances of time
deposits declined $29 million from the first half of 2016 to first half of 2017 while lower-cost checking and savings deposits
grew 4% in the same period. Average balances of checking and saving deposits accounted for 94.6% of average total deposits in
the first half of 2017 compared with 93.8% in the first half of 2016.
Net Interest Margin (FTE)
The following summarizes the components of the Company's net interest
margin for the periods indicated (percentages are annualized):
|
|
For the Three Months
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Yield on earning assets (FTE)
|
|
|
3.16
|
%
|
|
|
3.32
|
%
|
|
|
3.17
|
%
|
|
|
3.35
|
%
|
Rate paid on interest-bearing liabilities
|
|
|
0.07
|
%
|
|
|
0.08
|
%
|
|
|
0.07
|
%
|
|
|
0.08
|
%
|
Net interest spread (FTE)
|
|
|
3.09
|
%
|
|
|
3.24
|
%
|
|
|
3.10
|
%
|
|
|
3.27
|
%
|
Impact of noninterest-bearing demand deposits
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
Net interest margin (FTE)
|
|
|
3.12
|
%
|
|
|
3.27
|
%
|
|
|
3.13
|
%
|
|
|
3.30
|
%
|
During 2016 and through the second quarter 2017, the net interest
margin (FTE) was affected by historically low market interest rates. The changing composition of interest-earning assets and low
market rates has pressured the net interest margin. Rates on interest-bearing liabilities were kept low by reducing the volume
of higher-cost time deposits and increasing balances of checking and savings deposits, which earn relatively low interest rates
and are less volatile than time deposits during periods of rising market interest rates.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present information regarding the consolidated
average assets, liabilities and shareholders’ equity, the amounts of interest income earned from average interest earning
assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the
resulting rates. Average loan balances include nonperforming loans. Interest income includes reversal of previously accrued interest
on loans placed on non-accrual status during the period and proceeds from loans on nonaccrual status only to the extent cash payments
have been received and applied as interest income and accretion of purchased loan discounts. Yields on tax-exempt securities and
loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax
rate. Yields, rates and interest margins are annualized.
Distribution of Assets, Liabilities & Shareholders’ Equity
and Yields, Rates & Interest Margin
|
|
For the Three Months Ended June 30, 2017
|
|
|
|
|
Interest
|
|
|
|
|
Average
|
|
Income/
|
|
Yields/
|
|
|
Balance
|
|
Expense
|
|
Rates
|
|
|
($ in thousands)
|
Assets
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
2,447,248
|
|
|
$
|
12,481
|
|
|
|
2.04
|
%
|
Tax-exempt
(1)
|
|
|
817,913
|
|
|
|
8,012
|
|
|
|
3.92
|
%
|
Total investments
(1)
|
|
|
3,265,161
|
|
|
|
20,493
|
|
|
|
2.51
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,269,852
|
|
|
|
14,949
|
|
|
|
4.72
|
%
|
Tax-exempt
(1)
|
|
|
63,283
|
|
|
|
798
|
|
|
|
5.06
|
%
|
Total
loans
(1)
|
|
|
1,333,135
|
|
|
|
15,747
|
|
|
|
4.74
|
%
|
Total Interest-earning
assets
(1)
|
|
|
4,598,296
|
|
|
|
36,240
|
|
|
|
3.16
|
%
|
Other assets
|
|
|
786,789
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,385,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
2,048,155
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Savings and interest-bearing transaction
|
|
|
2,371,753
|
|
|
|
279
|
|
|
|
0.05
|
%
|
Time less than $100,000
|
|
|
138,754
|
|
|
|
81
|
|
|
|
0.23
|
%
|
Time $100,000 or more
|
|
|
110,762
|
|
|
|
105
|
|
|
|
0.38
|
%
|
Total interest-bearing deposits
|
|
|
2,621,269
|
|
|
|
465
|
|
|
|
0.07
|
%
|
Short-term borrowed funds
|
|
|
71,178
|
|
|
|
11
|
|
|
|
0.06
|
%
|
Total interest-bearing liabilities
|
|
|
2,692,447
|
|
|
|
476
|
|
|
|
0.07
|
%
|
Other liabilities
|
|
|
51,455
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
593,028
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
5,385,085
|
|
|
|
|
|
|
|
|
|
Net interest spread
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
3.09
|
%
|
Net interest and fee income and interest margin
(1) (3)
|
|
|
|
|
|
$
|
35,764
|
|
|
|
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.
|
Distribution of Assets, Liabilities & Shareholders’ Equity
and Yields, Rates & Interest Margin
|
|
For the Three Months Ended June 30, 2016
|
|
|
|
|
Interest
|
|
|
|
|
Average
|
|
Income/
|
|
Yields/
|
|
|
Balance
|
|
Expense
|
|
Rates
|
|
|
($ in thousands)
|
Assets
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
2,182,962
|
|
|
$
|
10,558
|
|
|
|
1.93
|
%
|
Tax-exempt
(1)
|
|
|
835,688
|
|
|
|
8,581
|
|
|
|
4.11
|
%
|
Total investments
(1)
|
|
|
3,018,650
|
|
|
|
19,139
|
|
|
|
2.53
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,386,677
|
|
|
|
16,999
|
|
|
|
4.93
|
%
|
Tax-exempt
(1)
|
|
|
68,373
|
|
|
|
898
|
|
|
|
5.28
|
%
|
Total
loans
(1)
|
|
|
1,455,050
|
|
|
|
17,897
|
|
|
|
4.95
|
%
|
Total Interest-earning
assets
(1)
|
|
|
4,473,700
|
|
|
|
37,036
|
|
|
|
3.32
|
%
|
Other assets
|
|
|
710,709
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,184,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
1,994,803
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Savings and interest-bearing transaction
|
|
|
2,260,054
|
|
|
|
292
|
|
|
|
0.05
|
%
|
Time less than $100,000
|
|
|
157,419
|
|
|
|
104
|
|
|
|
0.27
|
%
|
Time $100,000 or more
|
|
|
119,475
|
|
|
|
135
|
|
|
|
0.45
|
%
|
Total interest-bearing deposits
|
|
|
2,536,948
|
|
|
|
531
|
|
|
|
0.08
|
%
|
Short-term borrowed funds
|
|
|
61,920
|
|
|
|
10
|
|
|
|
0.07
|
%
|
Total interest-bearing liabilities
|
|
|
2,598,868
|
|
|
|
541
|
|
|
|
0.08
|
%
|
Other liabilities
|
|
|
52,751
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
537,987
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
5,184,409
|
|
|
|
|
|
|
|
|
|
Net interest spread
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
Net interest and fee income and interest margin
(1) (3)
|
|
|
|
|
|
$
|
36,495
|
|
|
|
3.27
|
%
|
(1)
|
|
Amounts calculated
on an FTE basis using the current statutory federal tax rate.
|
(2)
|
|
Net interest
spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
|
(3)
|
|
Net interest
margin is computed by calculating the difference between interest income and expense, divided by the average balance
of
interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing
demand deposits.
|
[The remainder of this page intentionally left blank]
Distribution of Assets, Liabilities & Shareholders’ Equity
and Yields, Rates & Interest Margin
|
|
For the Six Months Ended June 30, 2017
|
|
|
|
|
Interest
|
|
|
|
|
Average
|
|
Income/
|
|
Yields/
|
|
|
Balance
|
|
Expense
|
|
Rates
|
|
|
($ in thousands)
|
Assets
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
2,440,496
|
|
|
$
|
24,627
|
|
|
|
2.02
|
%
|
Tax-exempt
(1)
|
|
|
824,461
|
|
|
|
16,307
|
|
|
|
3.96
|
%
|
Total investments
(1)
|
|
|
3,264,957
|
|
|
|
40,934
|
|
|
|
2.51
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,279,917
|
|
|
|
30,191
|
|
|
|
4.76
|
%
|
Tax-exempt
(1)
|
|
|
64,215
|
|
|
|
1,625
|
|
|
|
5.10
|
%
|
Total loans
(1)
|
|
|
1,344,132
|
|
|
|
31,816
|
|
|
|
4.77
|
%
|
Total Interest-earning assets
(1)
|
|
|
4,609,089
|
|
|
|
72,750
|
|
|
|
3.17
|
%
|
Other assets
|
|
|
781,315
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,390,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
2,052,483
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Savings and interest-bearing transaction
|
|
|
2,377,021
|
|
|
|
559
|
|
|
|
0.05
|
%
|
Time less than $100,000
|
|
|
140,070
|
|
|
|
164
|
|
|
|
0.24
|
%
|
Time $100,000 or more
|
|
|
111,447
|
|
|
|
211
|
|
|
|
0.38
|
%
|
Total interest-bearing deposits
|
|
|
2,628,538
|
|
|
|
934
|
|
|
|
0.07
|
%
|
Short-term borrowed funds
|
|
|
69,888
|
|
|
|
22
|
|
|
|
0.06
|
%
|
Total interest-bearing liabilities
|
|
|
2,698,426
|
|
|
|
956
|
|
|
|
0.07
|
%
|
Other liabilities
|
|
|
51,759
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
587,736
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
5,390,404
|
|
|
|
|
|
|
|
|
|
Net interest spread
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
Net interest and fee income and interest margin
(1) (3)
|
|
|
|
|
|
$
|
71,794
|
|
|
|
3.13
|
%
|
(1)
|
|
Amounts calculated
on an FTE basis using the current statutory federal tax rate.
|
(2)
|
|
Net interest
spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
|
(3)
|
|
Net interest
margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning
assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing
demand
deposits.
|
[The remainder of this page intentionally left blank]
Distribution of Assets, Liabilities & Shareholders’ Equity
and Yields, Rates & Interest Margin
|
|
For the Six Months Ended June 30, 2016
|
|
|
|
|
Interest
|
|
|
|
|
Average
|
|
Income/
|
|
Yields/
|
|
|
Balance
|
|
Expense
|
|
Rates
|
|
|
($ in thousands)
|
Assets
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
2,114,700
|
|
|
$
|
20,231
|
|
|
|
1.91
|
%
|
Tax-exempt
(1)
|
|
|
834,974
|
|
|
|
17,218
|
|
|
|
4.12
|
%
|
Total investments
(1)
|
|
|
2,949,674
|
|
|
|
37,449
|
|
|
|
2.54
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,407,891
|
|
|
|
34,725
|
|
|
|
4.96
|
%
|
Tax-exempt
(1)
|
|
|
69,942
|
|
|
|
1,861
|
|
|
|
5.35
|
%
|
Total loans
(1)
|
|
|
1,477,833
|
|
|
|
36,586
|
|
|
|
4.98
|
%
|
Total Interest-earning assets
(1)
|
|
|
4,427,507
|
|
|
|
74,035
|
|
|
|
3.35
|
%
|
Other assets
|
|
|
752,100
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,179,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
1,994,395
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Savings and interest-bearing transaction
|
|
|
2,259,867
|
|
|
|
585
|
|
|
|
0.05
|
%
|
Time less than $100,000
|
|
|
158,805
|
|
|
|
218
|
|
|
|
0.28
|
%
|
Time $100,000 or more
|
|
|
121,583
|
|
|
|
271
|
|
|
|
0.45
|
%
|
Total interest-bearing deposits
|
|
|
2,540,255
|
|
|
|
1,074
|
|
|
|
0.08
|
%
|
Short-term borrowed funds
|
|
|
59,883
|
|
|
|
19
|
|
|
|
0.07
|
%
|
Total interest-bearing liabilities
|
|
|
2,600,138
|
|
|
|
1,093
|
|
|
|
0.08
|
%
|
Other liabilities
|
|
|
52,492
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
532,582
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
5,179,607
|
|
|
|
|
|
|
|
|
|
Net interest spread
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
3.27
|
%
|
Net interest and fee income and interest margin
(1) (3)
|
|
|
|
|
|
$
|
72,942
|
|
|
|
3.30
|
%
|
(1)
|
|
Amounts calculated
on an FTE basis using the current statutory federal tax rate.
|
(2)
|
|
Net interest
spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
|
(3)
|
|
Net interest
margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning
assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing
demand
deposits.
|
[The remainder of this page intentionally left blank]
Summary of Changes in Interest Income and Expense due to Changes
in Average Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest
income and interest expense due to changes in average assets and liability balances (volume) and changes in average interest yields/rates
for the periods indicated. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the
respective volume and yield/rate components.
Summary of Changes in Interest Income and Expense
|
|
For the Three Months Ended June 30, 2017
|
|
|
Compared with
|
|
|
For the Three Months Ended June 30, 2016
|
|
|
Volume
|
|
Yield/Rate
|
|
Total
|
|
|
(In thousands)
|
Increase (decrease) in interest and loan fee income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
1,278
|
|
|
$
|
645
|
|
|
$
|
1,923
|
|
Tax-exempt
(1)
|
|
|
(183
|
)
|
|
|
(386
|
)
|
|
|
(569
|
)
|
Total investments
(1)
|
|
|
1,095
|
|
|
|
259
|
|
|
|
1,354
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(1,384
|
)
|
|
|
(666
|
)
|
|
|
(2,050
|
)
|
Tax-exempt
(1)
|
|
|
(65
|
)
|
|
|
(35
|
)
|
|
|
(100
|
)
|
Total
loans
(1)
|
|
|
(1,449
|
)
|
|
|
(701
|
)
|
|
|
(2,150
|
)
|
Total
decrease in interest and loan fee income
(1)
|
|
|
(354
|
)
|
|
|
(442
|
)
|
|
|
(796
|
)
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest-bearing transaction
|
|
|
15
|
|
|
|
(28
|
)
|
|
|
(13
|
)
|
Time less than $100,000
|
|
|
(12
|
)
|
|
|
(11
|
)
|
|
|
(23
|
)
|
Time $100,000 or more
|
|
|
(10
|
)
|
|
|
(20
|
)
|
|
|
(30
|
)
|
Total interest-bearing deposits
|
|
|
(7
|
)
|
|
|
(59
|
)
|
|
|
(66
|
)
|
Short-term borrowed funds
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
1
|
|
Total decrease in interest expense
|
|
|
(5
|
)
|
|
|
(60
|
)
|
|
|
(65
|
)
|
Decrease in net interest and loan fee income
(1)
|
|
$
|
(349
|
)
|
|
$
|
(382
|
)
|
|
$
|
(731
|
)
|
(1)
|
|
Amounts calculated
on an FTE basis using the current statutory federal tax rate.
|
[The remainder of this page intentionally left blank]
Summary of Changes in Interest Income and Expense
|
|
For the Six Months Ended June 30, 2017
|
|
|
Compared with
|
|
|
For the Six Months Ended June 30, 2016
|
|
|
Volume
|
|
Yield/Rate
|
|
Total
|
|
|
(In thousands)
|
Increase (decrease) in interest and loan fee income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
3,117
|
|
|
$
|
1,279
|
|
|
$
|
4,396
|
|
Tax-exempt
(1)
|
|
|
(217
|
)
|
|
|
(694
|
)
|
|
|
(911
|
)
|
Total investments
(1)
|
|
|
2,900
|
|
|
|
585
|
|
|
|
3,485
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(3,102
|
)
|
|
|
(1,432
|
)
|
|
|
(4,534
|
)
|
Tax-exempt
(1)
|
|
|
(150
|
)
|
|
|
(86
|
)
|
|
|
(236
|
)
|
Total loans
(1)
|
|
|
(3,252
|
)
|
|
|
(1,518
|
)
|
|
|
(4,770
|
)
|
Total decrease in interest and loan fee income
(1)
|
|
|
(352
|
)
|
|
|
(933
|
)
|
|
|
(1,285
|
)
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest-bearing transaction
|
|
|
31
|
|
|
|
(57
|
)
|
|
|
(26
|
)
|
Time less than $100,000
|
|
|
(26
|
)
|
|
|
(28
|
)
|
|
|
(54
|
)
|
Time $100,000 or more
|
|
|
(22
|
)
|
|
|
(38
|
)
|
|
|
(60
|
)
|
Total interest-bearing deposits
|
|
|
(17
|
)
|
|
|
(123
|
)
|
|
|
(140
|
)
|
Short-term borrowed funds
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
3
|
|
Total decrease in interest expense
|
|
|
(13
|
)
|
|
|
(124
|
)
|
|
|
(137
|
)
|
Decrease in net interest and loan fee income
(1)
|
|
$
|
(339
|
)
|
|
$
|
(809
|
)
|
|
$
|
(1,148
|
)
|
(1)
|
|
Amounts calculated
on an FTE basis using the current statutory federal tax rate.
|
Provision for Loan Losses
The Company manages credit costs by consistently enforcing conservative
underwriting and administration procedures and aggressively pursuing collection efforts with debtors experiencing financial difficulties.
The provision for loan losses reflects Management's assessment of credit risk in the loan portfolio during each of the periods
presented.
The Company recorded a reversal of the provision for loan losses
of $1.9 million in the three and six months ended June 30, 2017. The Company provided no provision for loan losses in the three
and six months ended June 30, 2016. During the first six months ended June 30, 2017, classified loans declined $4.2 million to
$43.0 million (total classified loans included nonperforming loans of $6.7 million). The Company realized net recoveries of $1.1
million in the second quarter 2017; these developments were reflected in Management’s evaluation of credit quality, the
level of the provision for loan losses, and the adequacy of the allowance for loan losses at June 30, 2017. Management’s
evaluation of credit quality includes originated and purchased loans. The Company recorded purchased loans at estimated fair value
upon the acquisition dates. Such estimated fair values were recognized for individual loans, although small balance homogenous
loans were pooled for valuation purposes. The valuation discounts recorded for purchased loans included Management’s assessment
of the risk of principal loss under economic and borrower conditions prevailing on the dates of purchase. The purchased County
Bank loans secured by single-family residential real estate are “covered” through February 6, 2019 by loss-sharing
agreements the Company entered with the FDIC which mitigates losses during the term of the agreements. Any deterioration in estimated
value related to principal loss subsequent to the acquisition dates requires additional loss recognition through a provision for
loan losses. No assurance can be given future provisions for loan losses related to purchased loans will not be necessary. For
further information regarding credit risk, net credit losses and the allowance for loan losses, see the “Loan Portfolio
Credit Risk” and “Allowance for Loan Losses” sections of this Report.
Noninterest Income
The following table summarizes the components of noninterest income
for the periods indicated:
|
|
For the Three Months
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
4,945
|
|
|
$
|
5,239
|
|
|
$
|
9,868
|
|
|
$
|
10,487
|
|
Merchant processing services
|
|
|
2,052
|
|
|
|
1,638
|
|
|
|
3,927
|
|
|
|
3,167
|
|
Debit card fees
|
|
|
1,586
|
|
|
|
1,621
|
|
|
|
3,067
|
|
|
|
3,137
|
|
Trust fees
|
|
|
716
|
|
|
|
657
|
|
|
|
1,418
|
|
|
|
1,318
|
|
Other service fees
|
|
|
662
|
|
|
|
650
|
|
|
|
1,312
|
|
|
|
1,279
|
|
ATM processing fees
|
|
|
654
|
|
|
|
603
|
|
|
|
1,229
|
|
|
|
1,261
|
|
Financial services commissions
|
|
|
142
|
|
|
|
137
|
|
|
|
337
|
|
|
|
293
|
|
Other noninterest income
|
|
|
1,366
|
|
|
|
1,157
|
|
|
|
2,622
|
|
|
|
2,489
|
|
Total
|
|
$
|
12,123
|
|
|
$
|
11,702
|
|
|
$
|
23,780
|
|
|
$
|
23,431
|
|
Noninterest income for the second quarter 2017 increased by $421
thousand from the same period in 2016. Merchant processing services fees increased $414 thousand primarily due to increased transaction
volumes. Offsetting the increase was service charges on deposits which decreased $294 thousand due to declines in fees charged
on overdrawn and insufficient funds accounts (down $232 thousand) and lower fees on analyzed accounts (down $56 thousand).
In the first half of 2017, noninterest income increased $349 thousand
compared with the first half of 2016 mostly due to a $760 thousand increase in merchant processing services fees primarily due
to the improved transaction volumes. Trust fees increased $100 thousand due to marketing efforts. Offsetting the increase was
service charges on deposits which decreased $619 thousand due to declines in fees charged on overdrawn and insufficient funds
accounts (down $491 thousand) and lower fees on analyzed accounts (down $152 thousand).
Noninterest Expense
The following table summarizes the components of noninterest expense
for the periods indicated:
|
|
For the Three Months
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits
|
|
$
|
12,981
|
|
|
$
|
12,887
|
|
|
$
|
26,051
|
|
|
$
|
26,004
|
|
Occupancy
|
|
|
3,509
|
|
|
|
3,400
|
|
|
|
7,142
|
|
|
|
6,798
|
|
Outsourced data processing services
|
|
|
2,188
|
|
|
|
2,130
|
|
|
|
4,327
|
|
|
|
4,260
|
|
Furniture and equipment
|
|
|
1,267
|
|
|
|
1,187
|
|
|
|
2,521
|
|
|
|
2,400
|
|
Amortization of identifiable intangibles
|
|
|
762
|
|
|
|
870
|
|
|
|
1,562
|
|
|
|
1,775
|
|
Courier service
|
|
|
438
|
|
|
|
462
|
|
|
|
859
|
|
|
|
1,007
|
|
Professional fees
|
|
|
410
|
|
|
|
758
|
|
|
|
1,021
|
|
|
|
1,490
|
|
Other real estate owned
|
|
|
(126
|
)
|
|
|
(392
|
)
|
|
|
(166
|
)
|
|
|
(281
|
)
|
Other noninterest expense
|
|
|
2,967
|
|
|
|
3,927
|
|
|
|
5,694
|
|
|
|
7,634
|
|
Total
|
|
$
|
24,396
|
|
|
$
|
25,229
|
|
|
$
|
49,011
|
|
|
$
|
51,087
|
|
Noninterest expense decreased $833 thousand in the second quarter
2017 compared with the same period in 2016. Other noninterest expense decreased $960 thousand primarily due to decreases in correspondent
bank service charges, insurance premiums and limited partnership operating losses. Professional fees decreased $348 thousand due
to lower legal fees associated with nonperforming assets. Amortization of intangibles decreased $108 thousand as assets are amortized
on a declining balance method. Offsetting the decrease were other real estate owned and occupancy expenses. Expenses of other
real estate owned increased $266 thousand due to lower gains on sale of foreclosed assets.
In the first half of 2017, noninterest expense decreased $2.1 million
compared with the first half of 2016. Other noninterest expense decreased $1.9 million primarily due to decreases in correspondent
bank service charges, insurance premiums and limited partnership operating losses. Professional fees decreased $469 thousand due
to lower legal fees associated with nonperforming assets. Amortization of intangibles decreased $213 thousand as assets are amortized
on a declining balance method. Occupancy expense increased $344 thousand mostly due to branch closure expenses and higher maintenance
costs. Expenses of other real estate owned increased $115 thousand due to lower gains on sale of foreclosed assets.
Provision for Income Tax
The Company recorded an income tax provision (FTE) of $9.6 million
for the second quarter 2017 and $17.6 million for the first half of 2017. Effective January 1, 2017, the Company adopted ASU 2016-09
which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or
expire. During the first half of 2017, 389 thousand shares were issued due to the exercise of nonqualified stock options resulting
in a tax deduction exceeding related share based compensation by $1.6 million. The first half of 2017 income tax provision was
$666 thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09. Second quarter and first
half of 2017 income tax provision (FTE) compared with $8.4 million and $16.5 million for the second and first half of 2016, respectively.
The effective tax rates (FTE) of 37.8% and 36.3% for the second quarter and first half of 2017, respectively, compared with 36.7%
and 36.5% for the second quarter and first half of 2016, respectively. The second quarter and first half of 2017 effective tax
rates (FTE) would have been 37.8% and 37.7%, respectively, under accounting rules applied in 2016.
Investment Portfolio
The Company maintains an investment securities portfolio consisting
of securities issued by U.S. Government sponsored entities, agency and non-agency mortgage backed securities, state and political
subdivisions, corporations, and other securities.
Management has increased the investment securities portfolio in
response to deposit growth and loan volume declines. The carrying value of the Company’s investment securities portfolio
was $3.2 billion as of June 30, 2017 and December 31, 2016.
Management continually evaluates the Company’s investment
securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect
profitability, liquidity, and the level of interest rate risk to which the Company is exposed. These evaluations may cause Management
to change the level of funds the Company deploys into investment securities and change the composition of the Company’s
investment securities portfolio. In 2016 Management reduced securities of U.S. Government sponsored entities to reduce call optionality
and increased agency residential MBS to develop more reliable cash flows.
As of June 30, 2017, substantially all of the Company’s investment
securities continue to be investment grade rated by one or more major rating agencies. In addition to monitoring credit rating
agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets
underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance
with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance
on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. There have been no significant
differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.
[The remainder of this page intentionally left blank]
The following tables summarize the total general obligation and
revenue bonds issued by states and political subdivisions held in the Company’s investment securities portfolios as of the
dates indicated, identifying the state in which the issuing government municipality or agency operates.
At June 30, 2017, the Company’s investment securities portfolios
included securities issued by 685 state and local government municipalities and agencies located within 44 states. None of the
Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any one municipality
or agency was $10.2 million (fair value) represented by nine general obligation bonds.
|
|
At June 30, 2017
|
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
|
(In thousands)
|
Obligations of states and political subdivisions:
|
|
|
|
|
General obligation bonds:
|
|
|
|
|
|
|
|
|
California
|
|
$
|
101,999
|
|
|
$
|
104,711
|
|
Texas
|
|
|
68,641
|
|
|
|
69,016
|
|
New Jersey
|
|
|
39,936
|
|
|
|
40,485
|
|
Minnesota
|
|
|
30,630
|
|
|
|
31,013
|
|
Pennsylvania
|
|
|
28,324
|
|
|
|
28,555
|
|
Other (36 states)
|
|
|
276,892
|
|
|
|
280,397
|
|
Total general obligation bonds
|
|
$
|
546,422
|
|
|
$
|
554,177
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
California
|
|
$
|
45,853
|
|
|
$
|
47,016
|
|
Kentucky
|
|
|
22,767
|
|
|
|
23,211
|
|
Iowa
|
|
|
17,339
|
|
|
|
17,543
|
|
Pennsylvania
|
|
|
16,062
|
|
|
|
16,169
|
|
Colorado
|
|
|
15,533
|
|
|
|
15,861
|
|
Washington
|
|
|
13,540
|
|
|
|
14,201
|
|
Other (29 states)
|
|
|
141,327
|
|
|
|
143,954
|
|
Total revenue bonds
|
|
$
|
272,421
|
|
|
$
|
277,955
|
|
Total obligations of states and political subdivisions
|
|
$
|
818,843
|
|
|
$
|
832,132
|
|
At December 31, 2016, the Company’s investment securities
portfolios included securities issued by 698 state and local government municipalities and agencies located within 44 states.
None of the Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any
one municipality or agency was $10.0 million (fair value) represented by nine general obligation bonds.
[The remainder of this page intentionally left blank]
|
|
At December 31, 2016
|
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
|
(In thousands)
|
Obligations of states and political subdivisions:
|
|
|
|
|
General obligation bonds:
|
|
|
|
|
|
|
|
|
California
|
|
$
|
105,129
|
|
|
$
|
106,391
|
|
Texas
|
|
|
69,017
|
|
|
|
68,671
|
|
New Jersey
|
|
|
40,111
|
|
|
|
40,102
|
|
Pennsylvania
|
|
|
37,384
|
|
|
|
37,543
|
|
Minnesota
|
|
|
32,946
|
|
|
|
32,847
|
|
Other (36 states)
|
|
|
280,488
|
|
|
|
279,571
|
|
Total general obligation bonds
|
|
$
|
565,075
|
|
|
$
|
565,125
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
California
|
|
$
|
47,415
|
|
|
$
|
48,429
|
|
Kentucky
|
|
|
22,854
|
|
|
|
22,902
|
|
Pennsylvania
|
|
|
18,568
|
|
|
|
18,683
|
|
Iowa
|
|
|
18,086
|
|
|
|
18,302
|
|
Colorado
|
|
|
15,574
|
|
|
|
15,674
|
|
Other (30 states)
|
|
|
157,452
|
|
|
|
159,054
|
|
Total revenue bonds
|
|
$
|
279,949
|
|
|
$
|
283,044
|
|
Total obligations of states and political subdivisions
|
|
$
|
845,024
|
|
|
$
|
848,169
|
|
At June 30, 2017 and December 31, 2016, the revenue bonds in the
Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund
public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements.
The revenue bonds were payable from 22 revenue sources at June 30, 2017 and 23 revenue sources December 31, 2016. The revenue
sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.
|
|
At June 30, 2017
|
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
|
(In thousands)
|
Revenue bonds by revenue source:
|
|
|
|
|
|
|
|
|
Water
|
|
$
|
53,923
|
|
|
$
|
55,802
|
|
Sewer
|
|
|
34,975
|
|
|
|
35,821
|
|
Sales tax
|
|
|
31,092
|
|
|
|
32,042
|
|
Lease (renewal)
|
|
|
21,026
|
|
|
|
21,459
|
|
College & University
|
|
|
17,755
|
|
|
|
17,772
|
|
Other (17 sources)
|
|
|
113,650
|
|
|
|
115,059
|
|
Total revenue bonds by revenue source
|
|
$
|
272,421
|
|
|
$
|
277,955
|
|
|
|
At December 31, 2016
|
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
|
(In thousands)
|
Revenue bonds by revenue source:
|
|
|
|
|
|
|
|
|
Water
|
|
$
|
55,401
|
|
|
$
|
56,826
|
|
Sewer
|
|
|
37,996
|
|
|
|
38,497
|
|
Sales tax
|
|
|
31,146
|
|
|
|
31,835
|
|
Lease (renewal)
|
|
|
24,242
|
|
|
|
24,235
|
|
College & University
|
|
|
17,856
|
|
|
|
17,762
|
|
Other (18 sources)
|
|
|
113,308
|
|
|
|
113,889
|
|
Total revenue bonds by revenue source
|
|
$
|
279,949
|
|
|
$
|
283,044
|
|
See Note 3 to the unaudited consolidated financial statements for
additional information related to the investment securities.
Loan Portfolio Credit Risk
The Company extends loans to commercial and consumer customers
which expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed
to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant
risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition,
and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment
include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics
related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into
the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the
residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the
property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial
condition of the borrowers and the value of collateral securing the loans.
The preparation of the financial statements requires Management
to estimate the amount of losses inherent in the loan portfolio and establish an allowance for credit losses. The allowance for
credit losses is maintained by assessing or reversing a provision for loan losses through the Company’s earnings. In estimating
credit losses, Management must exercise judgment in evaluating information deemed relevant, such as financial information regarding
individual borrowers, overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations
of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio
can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce
the differences between estimated and actual losses.
The Company closely monitors the markets in which it conducts its
lending operations and follows a strategy to control exposure to loans with high credit risk. The Bank’s organization structure
separates the functions of business development and loan underwriting; Management believes this segregation of duties avoids inherent
conflicts of combining business development and loan approval functions. In measuring and managing credit risk, the Company adheres
to the following practices.
|
·
|
The
Bank maintains a Loan Review Department which reports directly to the Board of Directors.
The Loan Review Department performs independent evaluations of loans and assigns credit
risk grades to evaluated loans using grading standards employed by bank regulatory agencies.
Those loans judged to carry higher risk attributes are referred to as “classified
loans.” Classified loans receive elevated management attention to maximize collection.
|
|
·
|
The
Bank maintains two loan administration offices whose sole responsibility is to manage
and collect classified loans.
|
Classified loans with higher levels of credit risk are further
designated as “nonaccrual loans.” Management places classified loans on nonaccrual status when full collection of
contractual interest and principal payments is in doubt. Uncollected interest previously accrued on loans placed on nonaccrual
status is reversed as a charge against interest income. The Company does not accrue interest income on loans following placement
on nonaccrual status. Interest payments received on nonaccrual loans are applied to reduce the carrying amount of the loan unless
the carrying amount is well secured by loan collateral. “Nonperforming assets” include nonaccrual loans, loans 90
or more days past due and still accruing, and repossessed loan collateral (commonly referred to as “Other Real Estate Owned”).
Nonperforming Assets
|
|
At June 30,
|
|
At December 31,
|
|
|
2017
|
|
2016
|
|
2016
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Nonperforming nonaccrual loans
|
|
$
|
2,215
|
|
|
$
|
6,527
|
|
|
$
|
3,956
|
|
Performing nonaccrual loans
|
|
|
4,480
|
|
|
|
7,038
|
|
|
|
4,429
|
|
Total nonaccrual loans
|
|
|
6,695
|
|
|
|
13,565
|
|
|
|
8,385
|
|
Accruing loans 90 or more days past due
|
|
|
186
|
|
|
|
356
|
|
|
|
497
|
|
Total nonperforming loans
|
|
|
6,881
|
|
|
|
13,921
|
|
|
|
8,882
|
|
Other real estate owned
|
|
|
1,645
|
|
|
|
4,162
|
|
|
|
3,095
|
|
Total nonperforming assets
|
|
$
|
8,526
|
|
|
$
|
18,083
|
|
|
$
|
11,977
|
|
Nonperforming assets have declined during 2016 and the first half
of 2017 due to payoffs and chargeoffs. At June 30, 2017, one loan secured by commercial real estate with a balance of $4.3 million
was on nonaccrual status. The remaining nine nonaccrual loans held at June 30, 2017 had an average carrying value of $268 thousand
and the largest carrying value was $577 thousand.
Management believes the overall credit quality of the loan portfolio
is reasonably stable; however, classified and nonperforming assets could fluctuate from period to period. The performance of any
individual loan can be affected by external factors such as the interest rate environment, economic conditions, and collateral
values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent
loans will not occur in the future.
Allowance for Credit Losses
The Company’s allowance for loan losses represents Management’s
estimate of loan losses inherent in the loan portfolio. In evaluating credit risk for loans, Management measures loss potential
of the carrying value of loans. As described above, payments received on nonaccrual loans may be applied against the principal
balance of the loans until such time as full collection of the remaining recorded balance is expected.
The following table summarizes the allowance for loan losses, chargeoffs
and recoveries for the periods indicated:
|
|
For the Three Months
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
($ in thousands)
|
Analysis of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
24,919
|
|
|
$
|
29,487
|
|
|
$
|
25,954
|
|
|
$
|
29,771
|
|
Reversal of provision for loan losses
|
|
|
(1,900
|
)
|
|
|
-
|
|
|
|
(1,900
|
)
|
|
|
-
|
|
Loans charged off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(726
|
)
|
|
|
(764
|
)
|
|
|
(829
|
)
|
|
|
(1,935
|
)
|
Real estate residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer installment and other
|
|
|
(1,158
|
)
|
|
|
(715
|
)
|
|
|
(2,897
|
)
|
|
|
(1,720
|
)
|
Total chargeoffs
|
|
|
(1,884
|
)
|
|
|
(1,479
|
)
|
|
|
(3,726
|
)
|
|
|
(3,655
|
)
|
Recoveries of loans previously charged off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
338
|
|
|
|
542
|
|
|
|
498
|
|
|
|
1,963
|
|
Commercial real estate
|
|
|
78
|
|
|
|
15
|
|
|
|
88
|
|
|
|
30
|
|
Construction
|
|
|
1,899
|
|
|
|
-
|
|
|
|
1,899
|
|
|
|
-
|
|
Consumer installment and other
|
|
|
653
|
|
|
|
345
|
|
|
|
1,290
|
|
|
|
801
|
|
Total recoveries
|
|
|
2,968
|
|
|
|
902
|
|
|
|
3,775
|
|
|
|
2,794
|
|
Net loan recoveries (losses)
|
|
|
1,084
|
|
|
|
(577
|
)
|
|
|
49
|
|
|
|
(861
|
)
|
Balance, end of period
|
|
$
|
24,103
|
|
|
$
|
28,910
|
|
|
$
|
24,103
|
|
|
$
|
28,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan (recoveries) losses as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average total loans (annualized)
|
|
|
(0.33
|
%)
|
|
|
0.16
|
%
|
|
|
(0.01
|
%)
|
|
|
0.12
|
%
|
The Company's allowance for loan losses is maintained at a level
considered appropriate to provide for losses that can be estimated based upon specific and general conditions. These include conditions
unique to individual borrowers, as well as overall loan loss experience, the amount of past due, nonperforming and classified
loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance
is individually allocated to impaired loans whose full collectability of principal is uncertain. Such allocations are determined
by Management based on loan-by-loan analyses. The Company evaluates for impairment all loans with outstanding principal balances
in excess of $500 thousand which are classified or on nonaccrual status and all “troubled debt restructured” loans.
The remainder of the loan portfolio is collectively evaluated for impairment based in part on quantitative analyses of historical
loan loss experience of loan portfolio segments to determine standard loss rates for each segment. The loss rate for each loan
portfolio segment reflects both the historical loss experience during a look-back period and a loss emergence period. Liquidating
purchased consumer installment loans are evaluated separately by applying historical loss rates to forecasted liquidating principal
balances to measure losses inherent in this portfolio segment. The loss rates are applied to segmented loan balances to allocate
the allowance to the segments of the loan portfolio.
The remainder of the allowance is considered to be unallocated.
The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not
reflected in the allocated allowance. The unallocated allowance addresses additional qualitative factors consistent with Management's
analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company's general lending
activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry
trends which have occurred but have not yet been recognized in loan chargeoff history (external factors). The primary external
factor evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management as of June 30, 2017 is
economic and business conditions $0.6 million. Also included in the unallocated allowance is the risk of losses attributable to
general attributes of the Company's loan portfolio and credit administration (internal factors). The internal factors evaluated
by the Company and the judgmental amount of unallocated reserve assigned by Management are: loan review system $1.1 million, adequacy
of lending Management and staff $0.9 million and concentrations of credit $1.3 million.
|
|
Allowance for Loan Losses
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
Residential
|
|
Installment
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
Construction
|
|
Real Estate
|
|
and Other
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
8,593
|
|
|
$
|
3,522
|
|
|
$
|
112
|
|
|
$
|
1,214
|
|
|
$
|
6,984
|
|
|
$
|
4,494
|
|
|
$
|
24,919
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reversal) provision
|
|
|
(38
|
)
|
|
|
(55
|
)
|
|
|
(1,851
|
)
|
|
|
(109
|
)
|
|
|
736
|
|
|
|
(583
|
)
|
|
|
(1,900
|
)
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs
|
|
|
(726
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,158
|
)
|
|
|
-
|
|
|
|
(1,884
|
)
|
Recoveries
|
|
|
338
|
|
|
|
78
|
|
|
|
1,899
|
|
|
|
-
|
|
|
|
653
|
|
|
|
-
|
|
|
|
2,968
|
|
Net loan (losses) recoveries
|
|
|
(388
|
)
|
|
|
78
|
|
|
|
1,899
|
|
|
|
-
|
|
|
|
(505
|
)
|
|
|
-
|
|
|
|
1,084
|
|
Total allowance for loan losses
|
|
$
|
8,167
|
|
|
$
|
3,545
|
|
|
$
|
160
|
|
|
$
|
1,105
|
|
|
$
|
7,215
|
|
|
$
|
3,911
|
|
|
$
|
24,103
|
|
|
|
Allowance for Loan Losses
|
|
|
For the Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
Residential
|
|
Installment
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
Construction
|
|
Real Estate
|
|
and Other
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
8,327
|
|
|
$
|
3,330
|
|
|
$
|
152
|
|
|
$
|
1,330
|
|
|
$
|
7,980
|
|
|
$
|
4,835
|
|
|
$
|
25,954
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (reversal)
|
|
|
171
|
|
|
|
127
|
|
|
|
(1,891
|
)
|
|
|
(225
|
)
|
|
|
842
|
|
|
|
(924
|
)
|
|
|
(1,900
|
)
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs
|
|
|
(829
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,897
|
)
|
|
|
-
|
|
|
|
(3,726
|
)
|
Recoveries
|
|
|
498
|
|
|
|
88
|
|
|
|
1,899
|
|
|
|
-
|
|
|
|
1,290
|
|
|
|
-
|
|
|
|
3,775
|
|
Net loan (losses) recoveries
|
|
|
(331
|
)
|
|
|
88
|
|
|
|
1,899
|
|
|
|
-
|
|
|
|
(1,607
|
)
|
|
|
-
|
|
|
|
49
|
|
Total allowance for loan losses
|
|
$
|
8,167
|
|
|
$
|
3,545
|
|
|
$
|
160
|
|
|
$
|
1,105
|
|
|
$
|
7,215
|
|
|
$
|
3,911
|
|
|
$
|
24,103
|
|
|
|
Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
|
|
|
At June 30, 2017
|
|
|
Commercial
|
|
Commercial Real Estate
|
|
Construction
|
|
Residential Real Estate
|
|
Consumer Installment and Other
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
4,908
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,908
|
|
Collectively evaluated for impairment
|
|
|
3,259
|
|
|
|
3,545
|
|
|
|
160
|
|
|
|
1,105
|
|
|
|
7,215
|
|
|
|
3,911
|
|
|
|
19,195
|
|
Purchased loans with evidence of credit deterioration
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
8,167
|
|
|
$
|
3,545
|
|
|
$
|
160
|
|
|
$
|
1,105
|
|
|
$
|
7,215
|
|
|
$
|
3,911
|
|
|
$
|
24,103
|
|
Carrying value of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
10,829
|
|
|
$
|
14,009
|
|
|
$
|
-
|
|
|
$
|
214
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,052
|
|
Collectively evaluated for impairment
|
|
|
333,846
|
|
|
|
549,820
|
|
|
|
2,699
|
|
|
|
72,161
|
|
|
|
333,877
|
|
|
|
-
|
|
|
|
1,292,403
|
|
Purchased loans with evidence of credit deterioration
|
|
|
27
|
|
|
|
543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316
|
|
|
|
-
|
|
|
|
886
|
|
Total
|
|
$
|
344,702
|
|
|
$
|
564,372
|
|
|
$
|
2,699
|
|
|
$
|
72,375
|
|
|
$
|
334,193
|
|
|
$
|
-
|
|
|
$
|
1,318,341
|
|
The portion of the allowance for loan losses ascribed
to loan segments declined from June 30, 2016 to June 30, 2017 due to declines in classified loans, delinquent loans, and the overall
loan portfolio. The decline in the unallocated portion was due to improved economic conditions within the Company’s geographic
markets.
Management considers the $24.1 million allowance for loan losses
to be adequate as a reserve against loan losses inherent in the loan portfolio as of June 30, 2017.
See Note 4 to the unaudited consolidated financial statements for
additional information related to the loan portfolio, loan portfolio credit risk, and allowance for loan losses.
Asset/Liability and Market Risk Management
Asset/liability management involves the evaluation, monitoring
and management of interest rate risk, market risk, liquidity and funding. The fundamental objective of the Company's management
of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest
rate risk.
Interest Rate Risk
Interest rate risk is a significant market risk affecting the Company.
Many factors affect the Company’s exposure to interest rates, such as general economic and financial conditions, customer
preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Assets and liabilities
may mature or re-price at different times. Assets and liabilities may re-price at the same time but by different amounts. Short-term
and long-term market interest rates may change by different amounts. The timing and amount of cash flows of various assets or
liabilities may shorten or lengthen as interest rates change. In addition, the changing levels of interest rates may have an impact
on loan demand, demand for various deposit products, credit losses, and other elements of earnings such as account analysis fees
on commercial deposit accounts and correspondent bank service charges.
The Company’s earnings are affected not only by general economic
conditions, but also by the monetary and fiscal policies of the United States government and its agencies, particularly the Federal
Open Market Committee (the “FOMC”). The monetary policies of the FOMC can influence the overall growth of loans, investment
securities, and deposits and the level of interest rates earned on assets and paid for liabilities. The nature and impact of future
changes in monetary policies are generally not predictable.
Management expects a high level of uncertainty
in regard to interest rate levels in the immediate term, and Management’s most likely earnings forecast for the twelve months
ending June 30, 2018 assumes market interest rates will gradually rise, with short-term rates rising more than long-term rates.
In adjusting the Company's asset/liability position, Management
attempts to manage interest rate risk while enhancing the net interest margin and net interest income. At times, depending on
expected increases or decreases in general interest rates, the relationship between long and short-term interest rates, market
conditions and competitive factors, Management may adjust the Company's interest rate risk position in order to manage its net
interest margin and net interest income. The Company's results of operations and net portfolio values remain subject to changes
in interest rates and to fluctuations in the difference between long and short-term interest rates.
The Company’s asset and liability position was “neutral”
to slightly “asset sensitive” at June 30, 2017, depending on the interest rate assumptions applied to the simulation
model employed by Management to measure interest rate risk. An “asset sensitive” position results in a slightly larger
change in interest income than in interest expense resulting from application of assumed interest rate changes. Simulation estimates
depend on, and will change with, the size and mix of the actual and projected balance sheet at the time of each simulation. Management
continues to monitor the interest rate environment as well as economic conditions and other factors it deems relevant in managing
the Company's exposure to interest rate risk.
The Company does not currently engage in trading activities or
use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the
Company's Board of Directors.
Market Risk - Equity Markets
Equity price risk can affect the Company. As an example, any preferred
or common stock holdings, as permitted by banking regulations, can fluctuate in value. Management regularly assesses the extent
and duration of any declines in market value, the causes of such declines, the likelihood of a recovery in market value, and its
intent to hold securities until a recovery in value occurs. Declines in value of preferred or common stock holdings that are deemed
“other than temporary” could result in loss recognition in the Company's income statement.
Fluctuations in the Company's common stock price can impact the
Company's financial results in several ways. First, the Company has regularly repurchased and retired its common stock; the market
price paid to retire the Company's common stock affects the level of the Company's shareholders' equity, cash flows and shares
outstanding. Second, the Company's common stock price impacts the number of dilutive equivalent shares used to compute diluted
earnings per share. Third, fluctuations in the Company's common stock price can motivate holders of options to purchase Company
common stock through the exercise of such options thereby increasing the number of shares outstanding and potentially adding volatility
to the book tax provision. Finally, the amount of compensation expense associated with share based compensation fluctuates with
changes in and the volatility of the Company's common stock price.
Market Risk - Other
Market values of loan collateral can directly impact the level
of loan chargeoffs and the provision for loan losses. The financial condition and liquidity of debtors issuing bonds and debtors
whose mortgages or other obligations are securitized can directly impact the credit quality of the Company’s investment
securities portfolio requiring the Company to recognize other than temporary impairment charges. Other types of market risk, such
as foreign currency exchange risk, are not significant in the normal course of the Company's business activities.
Liquidity and Funding
The objective of liquidity management is to manage cash flow and
liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a
timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity
mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds
as needed in the wholesale markets.
In recent years, the Company's deposit base has provided the majority
of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided
98 percent of funding for average total assets in the first half of 2017 and in 2016. The stability of the Company’s
funding from customer deposits is in part reliant on the confidence clients have in the Company. The Company places a very high
priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate
level of liquidity reserves.
Liquidity is further provided by assets such as balances held at
the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides
a substantial secondary liquidity reserve. The Company held $3.2 billion in total investment securities at June 30, 2017. Under
certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At June
30, 2017, such collateral requirements totaled approximately $795 million.
Liquidity risk can result from the mismatching of asset and liability
cash flows, or from disruptions in the financial markets. The Company performs liquidity stress tests on a periodic basis to evaluate
the sustainability of its liquidity. Under the stress testing, the Company assumes outflows of funds increase beyond expected
levels. Measurement of such heightened outflows considers the composition of the Company’s deposit base, including any concentration
of deposits, non-deposit funding such as short-term borrowings, and unfunded lending commitments. The Company evaluates its stock
of highly liquid assets to meet the assumed higher levels of outflows. Highly liquid assets include cash and amounts due from
other banks from daily transaction settlements, reduced by branch cash needs and Federal Reserve Bank reserve requirements, and
investment securities based on regulatory risk-weighting guidelines. Based on the results of the most recent liquidity stress
test, Management is satisfied with the liquidity condition of the Bank and the Company. However, no assurance can be given the
Bank or Company will not experience a period of reduced liquidity.
Management continually monitors the Company’s cash levels.
Loan demand from credit worthy borrowers will be dictated by economic and competitive conditions. The Company aggressively solicits
non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest
rates. The growth of these deposit balances is subject to heightened competition, the success of the Company's sales efforts,
delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing
time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising
interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and
a variety of other conditions, deposit growth may be used to fund loans or purchase investment securities. However, due to possible
volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not
certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital
levels, earnings, asset quality and other factors.
Westamerica Bancorporation ("Parent Company") is a separate
entity apart from Westamerica Bank (“Bank”) and must provide for its own liquidity. In addition to its operating expenses,
the Parent Company is responsible for the payment of dividends declared for its shareholders, and interest and principal on any
outstanding debt. The Parent Company currently has no debt. Substantially all of the Parent Company's revenues are obtained from
subsidiary dividends and service fees.
The Bank’s dividends paid to the Parent Company, proceeds
from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder
dividends of $20 million in the first half of 2017 and $40 million in 2016, and retire common stock in the amount of $314 thousand
in the first half of 2017 and $6 million in 2016. Payment of dividends to the Parent Company by the Bank is limited under California
and Federal laws. The Company believes these regulatory dividend restrictions will not have an impact on the Parent Company's
ability to meet its ongoing cash obligations.
Capital Resources
The Company has historically generated high levels of earnings,
which provide a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return
on equity” or “ROE”) has been 10.6% in the first half of 2017 and 10.9% in 2016. The Company also raises capital
as employees exercise stock options. Capital raised through the exercise of stock options was $18 million in the first half of
2017 and $24 million in 2016.
The Company paid common dividends totaling $20 million in the first
half of 2017 and $40 million in 2016, which represent dividends per common share of $0.78 and $1.56, respectively. The Company's
earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the
Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth
opportunities, the Company has repurchased and retired its common stock as another means to return earnings to shareholders. The
Company repurchased and retired 6 thousand shares valued at $314 thousand in the first half of 2017 and 137 thousand shares valued
at $6 million in 2016.
The Company's primary capital resource is shareholders' equity,
which was $596 million at June 30, 2017 compared with $561 million at December 31, 2016. The Company's ratio of equity to total
assets was 11.04% at June 30, 2017 and 10.46% at December 31, 2016.
The Company performs capital stress tests on a periodic basis to
evaluate the sustainability of its capital. Under the stress testing, the Company assumes various scenarios such as deteriorating
economic and operating conditions, unanticipated asset devaluations, and significant operational lapses. The Company measures
the impact of these scenarios on its earnings and capital. Based on the results of the most recent stress tests, Management is
satisfied with the capital condition of the Bank and the Company. However, no assurance can be given the Bank or Company will
not experience a period of reduced earnings or a reduction in capital from unanticipated events and circumstances.
Capital to Risk-Adjusted Assets
On July 2, 2013, the Federal Reserve Board approved a final rule
that implements changes to the regulatory capital framework for all banking organizations. The rule’s provisions which most
affected the regulatory capital requirements of the Company and the Bank:
|
·
|
Introduced
a new “Common Equity Tier 1” capital measurement,
|
|
·
|
Established
higher minimum levels of capital,
|
|
·
|
Introduced
a “capital conservation buffer,”
|
|
·
|
Increased
the risk-weighting of certain assets, and
|
|
·
|
Established
limits on the amount of deferred tax assets with any excess treated as a deduction from
Tier 1 capital.
|
Under the final rule, a banking organization that is not subject
to the “advanced approaches rule” may make a one-time election not to include most elements of Accumulated Other Comprehensive
Income, including net-of-tax unrealized gains and losses on available for sale investment securities, in regulatory capital. Neither
the Company nor the Bank is subject to the “advanced approaches rule” and both made the election not to include most
elements of Accumulated Other Comprehensive Income in regulatory capital.
Banking organizations that are not subject to the “advanced
approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject
to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments
and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total
risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations
began on January 1, 2016 and will end January 1, 2019. Any bank subject to the rule which is unable to maintain its “capital
conservation buffer” will be restricted in the payment of discretionary executive compensation and shareholder distributions,
such as dividends and share repurchases.
The final rule did not supersede provisions of the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) requiring federal banking agencies to take prompt corrective action (PCA) to resolve
problems of insured depository institutions. The final rule revised the PCA thresholds to incorporate the higher minimum levels
of capital, including the “common equity tier 1” ratio.
The capital ratios for the Company and the Bank under the new capital
framework are presented in the table below, on the dates indicated.
|
|
|
|
|
|
|
|
|
|
To Be
|
|
|
|
|
|
|
Required for
|
|
Well-capitalized
|
|
|
|
|
|
|
Capital Adequacy Purposes
|
|
Under Prompt
|
|
|
At June 30, 2017
|
|
Effective
|
|
Effective
|
|
Corrective Action
|
|
|
Company
|
|
Bank
|
|
January 1, 2017
|
|
January 1, 2019
|
|
Regulations (Bank)
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier I Capital
|
|
|
15.72
|
%
|
|
|
12.23
|
%
|
|
|
5.75
|
%
(1)
|
|
|
7.00
|
%
(2)
|
|
|
6.50
|
%
|
Tier I Capital
|
|
|
15.72
|
%
|
|
|
12.23
|
%
|
|
|
7.25
|
%
(1)
|
|
|
8.50
|
%
(2)
|
|
|
8.00
|
%
|
Total Capital
|
|
|
16.69
|
%
|
|
|
13.41
|
%
|
|
|
9.25
|
%
(1)
|
|
|
10.50
|
%
(2)
|
|
|
10.00
|
%
|
Leverage Ratio
|
|
|
9.00
|
%
|
|
|
6.96
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
(1)
Includes 1.25% capital conservation buffer.
(2)
Includes 2.5% capital conservation buffer.
|
|
|
|
|
|
|
|
|
|
To Be
|
|
|
|
|
|
|
Required for
|
|
Well-capitalized
|
|
|
|
|
|
|
Capital Adequacy Purposes
|
|
Under Prompt
|
|
|
At December 31, 2016
|
|
Effective
|
|
Effective
|
|
Corrective Action
|
|
|
Company
|
|
Bank
|
|
January 1, 2016
|
|
January 1, 2019
|
|
Regulations (Bank)
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier I Capital
|
|
|
14.85
|
%
|
|
|
11.70
|
%
|
|
|
5.125
|
%
(3)
|
|
|
7.00
|
%
(4)
|
|
|
6.50
|
%
|
Tier I Capital
|
|
|
14.85
|
%
|
|
|
11.70
|
%
|
|
|
6.625
|
%
(3)
|
|
|
8.50
|
%
(4)
|
|
|
8.00
|
%
|
Total Capital
|
|
|
15.95
|
%
|
|
|
13.02
|
%
|
|
|
8.625
|
%
(3)
|
|
|
10.50
|
%
(4)
|
|
|
10.00
|
%
|
Leverage Ratio
|
|
|
8.46
|
%
|
|
|
6.63
|
%
|
|
|
4.000
|
%
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
(3)
Includes 0.625% capital conservation buffer.
(4)
Includes 2.5% capital conservation buffer.
The Company and the Bank routinely project capital levels by analyzing
forecasted earnings, credit quality, securities valuations, shareholder dividends, asset volumes, share repurchase activity, stock
option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain
regulatory capital levels exceeding the highest effective regulatory standard and pay quarterly dividends to shareholders. No
assurance can be given that changes in capital management plans will not occur.