UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| ☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
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:
WESTAMERICA BANCORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (
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.
| 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).
| 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):
| |
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 |
| |
|
|
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 July 29, 2019 | |||||
| Common Stock, | ||||||
| No Par Value |
TABLE OF CONTENTS
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.
PART I - FINANCIAL INFORMATION
| WESTAMERICA BANCORPORATION |
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| CONSOLIDATED BALANCE SHEETS |
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| (Unaudited) |
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At June 30, 2019 |
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At December 31, 2018 |
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| (In thousands) |
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| Assets: |
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| Cash and due from banks |
$ | $ | ||||||
| Equity securities |
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| Debt securities available for sale |
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| Debt securities held to maturity, with fair values of: |
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| $872,976 at June 30, 2019 and $971,445 at December 31, 2018 |
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| Loans |
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| Allowance for loan losses |
( |
) | ( |
) | ||||
| Loans, net of allowance for loan losses |
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| Other real estate owned |
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| Premises and equipment, net |
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| Identifiable intangibles, net |
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| Goodwill |
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| Other assets |
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| Total Assets |
$ | $ | ||||||
| Liabilities: |
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| Noninterest-bearing deposits |
$ | $ | ||||||
| Interest-bearing deposits |
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| Total deposits |
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| Short-term borrowed funds |
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| Other liabilities |
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| Total Liabilities |
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Contingencies (Note 10) |
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| Shareholders' Equity: |
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| Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,962 at June 30, 2019 and 26,730 at December 31, 2018 |
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| Deferred compensation |
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| Accumulated other comprehensive income (loss) |
( |
) | ||||||
| Retained earnings |
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| Total Shareholders' Equity |
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| Total Liabilities and Shareholders' Equity |
$ | $ | ||||||
| See accompanying notes to unaudited consolidated financial statements. |
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| WESTAMERICA BANCORPORATION |
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| CONSOLIDATED STATEMENTS OF INCOME |
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| (unaudited) |
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| For the Three Months |
For the Six Months |
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| Ended June 30, |
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| 2019 |
2018 |
2019 |
2018 |
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| (In thousands, except per share data) |
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| Interest and Loan Fee Income: |
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| Loans |
$ | $ | $ | $ | ||||||||||||
| Equity securities |
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| Debt securities available for sale |
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| Debt securities held to maturity |
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| Interest-bearing cash |
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| Total Interest and Loan Fee Income |
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| Interest Expense: |
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| Deposits |
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| Short-term borrowed funds |
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| Total Interest Expense |
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| Net Interest and Loan Fee Income |
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| Provision for Loan Losses |
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| Net Interest and Loan Fee Income After Provision for Loan Losses |
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| Noninterest Income: |
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| Service charges on deposit accounts |
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| Merchant processing services |
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| Debit card fees |
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| Trust fees |
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| ATM processing fees |
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| Other service fees |
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| Life insurance gains |
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| Financial services commissions |
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| Equity securities gains (losses) |
( |
) | ( |
) | ||||||||||||
| Other noninterest income |
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| Total Noninterest Income |
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| Noninterest Expense: |
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| Salaries and related benefits |
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| Occupancy and equipment |
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| Outsourced data processing services |
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| Loss contingency |
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| Professional fees |
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| Courier service |
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| Amortization of identifiable intangibles |
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| Other noninterest expense |
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| Total Noninterest Expense |
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| Income Before Income Taxes |
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| Provision for income taxes |
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| Net Income |
$ | $ | $ | $ | ||||||||||||
| Average Common Shares Outstanding |
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| Average Diluted Common Shares Outstanding |
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| Per Common Share Data: |
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| Basic earnings |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings |
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| Dividends paid |
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| See accompanying notes to unaudited consolidated financial statements. |
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| WESTAMERICA BANCORPORATION |
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| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
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| (unaudited) |
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| For the Three Months |
For the Six Months |
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| Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 | |||||||||
| (In thousands) |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): |
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| Changes in net unrealized gains (losses) on debt securities available for sale |
( |
) | ( |
) | ||||||||||||
| Deferred tax (expense) benefit |
( |
) | ( |
) | ||||||||||||
| Changes in net unrealized gains (losses) on debt securities available for sale, net of tax |
( |
) | ( |
) | ||||||||||||
| Total comprehensive income |
$ | $ | $ | $ | ||||||||||||
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| See accompanying notes to unaudited consolidated financial statements. |
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| WESTAMERICA BANCORPORATION |
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| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
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| (unaudited) |
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| Accumulated |
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| Common |
Other |
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| Shares |
Common |
Deferred |
Comprehensive |
Retained |
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| Outstanding |
Stock |
Compensation |
(Loss) Income |
Earnings |
Total |
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| (In thousands) |
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| Balance, December 31, 2017 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Cumulative effect of equity securities losses reclassified |
( |
) | - | |||||||||||||||||||||
| Adjusted Balance, January 1, 2018 | ( |
) | ||||||||||||||||||||||
| Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act |
( |
) | - | |||||||||||||||||||||
| Net income for the period |
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| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Exercise of stock options |
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| Stock based compensation |
- | |||||||||||||||||||||||
| Stock awarded to employees |
- | |||||||||||||||||||||||
| Dividends ($0.40 per share) |
( |
) | ( |
) | ||||||||||||||||||||
| Balance, March 31, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net income for the period |
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| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Exercise of stock options |
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| Restricted stock activity |
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| Stock based compensation |
- | |||||||||||||||||||||||
| Stock awarded to employees |
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| Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Dividends ($0.40 per share) |
( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Cumulative effect of bond premium amortization adjustment, net of tax |
( |
) | ( |
) | ||||||||||||||||||||
| Adjusted Balance, January 1, 2019 |
( |
) | ||||||||||||||||||||||
| Net income for the period |
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| Other comprehensive income |
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| Shares issued from stock warrant exercise, net of repurchase |
- | |||||||||||||||||||||||
| Exercise of stock options |
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| Restricted stock activity |
( |
) | - | |||||||||||||||||||||
| Stock based compensation |
- | |||||||||||||||||||||||
| Stock awarded to employees |
- | |||||||||||||||||||||||
| Dividends ($0.40 per share) |
( |
) | ( |
) | ||||||||||||||||||||
| Balance, March 31, 2019 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net income for the period |
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| Other comprehensive income |
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| Exercise of stock options |
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| Restricted stock activity |
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| Stock based compensation |
- | |||||||||||||||||||||||
| Stock awarded to employees |
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| Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Dividends ($0.41 per share) |
( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | $ | $ | |||||||||||||||||||
| See accompanying notes to unaudited consolidated financial statements. |
| WESTAMERICA BANCORPORATION |
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| CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| (unaudited) |
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| For the Six Months |
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| Ended June 30, |
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| 2019 |
2018 |
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| (In thousands) |
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| Operating Activities: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization/accretion |
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| Provision for loan losses |
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| Net amortization of deferred loan fees |
( |
) | ( |
) | ||||
| Increase in interest income receivable |
( |
) | ( |
) | ||||
| (Increase) decrease in income taxes receivable |
( |
) | ||||||
| Decrease (increase) in net deferred tax asset |
( |
) | ||||||
| Increase in other assets |
( |
) | ( |
) | ||||
| Stock option compensation expense |
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| Increase in interest expense payable |
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| (Decrease) increase in other liabilities |
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| Equity securities (gains) losses |
( |
) | ||||||
| Life insurance gains |
( |
) | ||||||
| Net writedown of premises and equipment |
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| Net gain on sale of foreclosed assets |
( |
) | ||||||
| Writedown of foreclosed assets |
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| Net Cash Provided by Operating Activities |
$ | |||||||
| Investing Activities: |
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| Net repayments of loans |
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| Proceeds from life insurance policies |
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| Purchases of debt securities available for sale |
( |
) | ( |
) | ||||
| Proceeds from sale/maturity/calls of debt securities available for sale |
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| Proceeds from maturity/calls of debt securities held to maturity |
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| Purchases of premises and equipment |
( |
) | ( |
) | ||||
| Proceeds from sale of foreclosed assets |
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| Net Cash Provided by (Used in) Investing Activities |
( |
) | ||||||
| Financing Activities: |
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| Net change in deposits |
( |
) | ||||||
| Net change in short-term borrowings |
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| Exercise of stock options |
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| Retirement of common stock |
( |
) | ( |
) | ||||
| Common stock dividends paid |
( |
) | ( |
) | ||||
| Net Cash (Used in) Provided by Financing Activities |
( |
) | ||||||
| Net Change In Cash and Due from Banks | ( |
) | ||||||
| Cash and Due from Banks at Beginning of Period |
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| Cash and Due from Banks at End of Period |
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| Supplemental Cash Flow Disclosures: |
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| Supplemental disclosure of non cash activities: |
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| Right-of-use assets acquired in exchange for operating lease liabilities |
$ | $ | ||||||
| Amount recognized upon initial adoption of ASU 2016-02 included above |
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| Loan collateral transferred to other real estate owned |
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| Securities purchases pending settlement |
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| Supplemental disclosure of cash flow activities: |
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| Cash paid for amounts included in operating lease liabilities |
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| Interest paid for the period |
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| Income tax payments for the period |
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See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and six months ended June 30, 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 six months ended June 30, 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 $
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 $
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 aligns 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. Management has also segmented debt securities held to maturity, selected methods to estimate losses for each segment, and preliminarily measured a loss estimate. The ultimate adjustment to the allowance for loan losses will be accomplished through an offsetting after-tax adjustment to shareholders’ equity. Economic conditions and the composition of the Company’s loan portfolio 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 the “Fair Value Measurements” note to the unaudited 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.
[The remainder of this page intentionally left blank]
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 $
The market value of equity securities was $
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:
| At June 30, 2019 |
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| Gross |
Gross |
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| Amortized |
Unrealized |
Unrealized |
Fair |
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| Cost |
Gains |
Losses |
Value |
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| (In thousands) |
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| Debt securities available for sale |
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| U.S. Treasury securities |
$ | $ | $ | $ | ||||||||||||
| Securities of U.S. Government sponsored entities |
( |
) | ||||||||||||||
| Agency residential mortgage-backed securities (MBS) |
( |
) | ||||||||||||||
| Non-agency residential MBS |
||||||||||||||||
| Agency commercial MBS |
( |
) | ||||||||||||||
| Securities of U.S. Government entities |
( |
) | ||||||||||||||
| Obligations of states and political subdivisions |
( |
) | ||||||||||||||
| Corporate securities |
( |
) | ||||||||||||||
| Total debt securities available for sale |
( |
) | ||||||||||||||
| Debt securities held to maturity |
||||||||||||||||
| Agency residential MBS |
( |
) | ||||||||||||||
| Non-agency residential MBS |
||||||||||||||||
| Obligations of states and political subdivisions |
( |
) | ||||||||||||||
| Total debt securities held to maturity |
( |
) | ||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ||||||||||
| At December 31, 2018 |
||||||||||||||||
| Gross |
Gross |
|||||||||||||||
| Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
| Cost |
Gains |
Losses |
Value |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Debt securities available for sale |
||||||||||||||||
| U.S. Treasury securities |
$ | $ | $ | ( |
) | $ | ||||||||||
| Securities of U.S. Government sponsored entities |
( |
) | ||||||||||||||
| Agency residential MBS |
( |
) | ||||||||||||||
| Non-agency residential MBS |
||||||||||||||||
| Agency commercial MBS |
( |
) | ||||||||||||||
| Securities of U.S. Government entities |
( |
) | ||||||||||||||
| Obligations of states and political subdivisions |
( |
) | ||||||||||||||
| Corporate securities |
( |
) | ||||||||||||||
| Total debt securities available for sale |
( |
) | ||||||||||||||
| Debt securities held to maturity |
||||||||||||||||
| Agency residential MBS |
( |
) | ||||||||||||||
| Non-agency residential MBS |
||||||||||||||||
| Obligations of states and political subdivisions |
( |
) | ||||||||||||||
| Total debt securities held to maturity |
( |
) | ||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ||||||||||
The amortized cost and fair value of debt securities by contractual maturity are shown in the following tables at the dates indicated:
| At June 30, 2019 |
||||||||||||||||
| Debt Securities Available |
Debt Securities Held |
|||||||||||||||
| for Sale |
to Maturity |
|||||||||||||||
| Amortized |
Fair |
Amortized |
Fair |
|||||||||||||
| Cost |
Value |
Cost |
Value |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Maturity in years: |
||||||||||||||||
| 1 year or less |
$ | $ | $ | $ | ||||||||||||
| Over 1 to 5 years |
||||||||||||||||
| Over 5 to 10 years |
||||||||||||||||
| Over 10 years |
||||||||||||||||
| Subtotal |
||||||||||||||||
| MBS |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| At December 31, 2018 |
||||||||||||||||
| Debt Securities Available |
Debt Securities Held |
|||||||||||||||
| for Sale |
to Maturity |
|||||||||||||||
| Amortized |
Fair |
Amortized |
Fair |
|||||||||||||
| Cost |
Value |
Cost |
Value |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Maturity in years: |
||||||||||||||||
| 1 year or less |
$ | $ | $ | $ | ||||||||||||
| Over 1 to 5 years |
||||||||||||||||
| Over 5 to 10 years |
||||||||||||||||
| Over 10 years |
||||||||||||||||
| Subtotal |
||||||||||||||||
| MBS |
||||||||||||||||
| Total |
$ | $ | $ | $ |
|
|||||||||||
Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At June 30, 2019 and December 31, 2018, the Company had
[The remainder of this page intentionally left blank]
An analysis of the gross unrealized losses of the debt securities available for sale portfolio follows:
| Debt Securities Available for Sale |
||||||||||||||||||||||||||||||||||||
| At June 30, 2019 |
||||||||||||||||||||||||||||||||||||
| No. of |
Less than 12 months |
No. of |
12 months or longer |
No. of |
Total |
|||||||||||||||||||||||||||||||
| Investment |
Unrealized |
Investment |
Unrealized |
Investment |
Unrealized |
|||||||||||||||||||||||||||||||
| Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
||||||||||||||||||||||||||||
| ($ in thousands) |
||||||||||||||||||||||||||||||||||||
| Securities of U.S. Government sponsored entities |
$ | $ | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||||
| Agency residential MBS |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Agency commercial MBS |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Securities of U.S. Government entities |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Corporate securities |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||
An analysis of gross unrecognized losses of the debt securities held to maturity portfolio follows:
| Debt Securities Held to Maturity |
||||||||||||||||||||||||||||||||||||
| At June 30, 2019 |
||||||||||||||||||||||||||||||||||||
| No. of |
Less than 12 months |
No. of |
12 months or longer |
No. of |
Total |
|||||||||||||||||||||||||||||||
| Investment |
Unrecognized |
Investment |
Unrecognized |
Investment |
Unrecognized |
|||||||||||||||||||||||||||||||
| Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
||||||||||||||||||||||||||||
| ($ in thousands) |
||||||||||||||||||||||||||||||||||||
| Agency residential MBS |
$ | $ | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||||
| Obligations of states |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||||
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 an amortized cost of $
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 June 30, 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 June 30, 2019 and December 31, 2018, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $
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 |
Unrealized |
Investment |
Unrealized |
Investment |
Unrealized |
|||||||||||||||||||||||||||||||
| Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
||||||||||||||||||||||||||||
| ($ in thousands) |
||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities |
$ | $ | ( |
) | $ | $ | $ | $ | ( |
) | ||||||||||||||||||||||||||
| Securities of U.S. |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Agency residential MBS |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Agency commercial |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Securities of U.S. |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Obligations of states |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Corporate securities |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||
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 |
Unrecognized |
Investment |
Unrecognized |
Investment |
Unrecognized |
|||||||||||||||||||||||||||||||
| Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
Positions |
Fair Value |
Losses |
||||||||||||||||||||||||||||
| ($ in thousands) |
||||||||||||||||||||||||||||||||||||
| Agency residential MBS |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||
| Non-agency residential |
||||||||||||||||||||||||||||||||||||
| Obligations of states |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||
The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax:
| For the Three Months |
For the Six Months |
|||||||||||||||
| Ended June 30, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Taxable |
$ | $ | $ | $ | ||||||||||||
| Tax-exempt from regular federal income tax |
||||||||||||||||
| Total interest income from investment securities |
$ | $ | $ | $ | ||||||||||||
[The remainder of this page intentionally left blank]
Note 4: Loans, Allowance for Loan Losses and Other Real Estate Owned
At December 31, 2018, the Company had $
A summary of the major categories of loans outstanding is shown in the following tables at the dates indicated.
| At June 30, |
At December 31, |
|||||||
| 2019 |
2018 |
|||||||
| (In thousands) |
||||||||
| Commercial |
$ | $ | ||||||
| Commercial Real Estate |
||||||||
| Construction |
||||||||
| Residential Real Estate |
||||||||
| Consumer Installment & Other |
||||||||
| Total |
$ | $ | ||||||
Total loans outstanding at December 31, 2018, reported above, include loans purchased from the FDIC of $
Changes in the accretable yield for purchased loans were as follows:
| For the |
For the |
|||||||
| Six Months Ended |
Year Ended |
|||||||
| June 30, 2019 |
December 31, 2018 |
|||||||
| Accretable yield: |
(In thousands) |
|||||||
| Balance at the beginning of the period |
$ | $ | ||||||
| Reclassification from nonaccretable difference |
||||||||
| Accretion |
( |
) | ( |
) | ||||
| Balance at the end of the period |
$ | $ | ||||||
| Accretion |
$ | ( |
) | $ | ( |
) | ||
| Change in FDIC indemnification |
||||||||
| (Increase) in interest income |
$ | ( |
) | $ | ( |
) | ||
The following summarizes activity in the allowance for loan losses:
| Allowance for Loan Losses |
||||||||||||||||||||||||||||
| For the Three Months Ended June 30, 2019 |
||||||||||||||||||||||||||||
| 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 |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Reversal) provision |
( |
) | ( |
) | ||||||||||||||||||||||||
| Chargeoffs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Recoveries |
||||||||||||||||||||||||||||
| Total allowance for loan losses |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Allowance for Loan Losses |
||||||||||||||||||||||||||||
| For the Six Months Ended June 30, 2019 |
||||||||||||||||||||||||||||
| 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 |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Reversal) provision |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Chargeoffs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Recoveries |
||||||||||||||||||||||||||||
| Total allowance for loan losses |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Allowance for Loan Losses |
||||||||||||||||||||||||||||
| For the Three Months Ended June 30, 2018 |
||||||||||||||||||||||||||||
| 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 |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Reversal) provision |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Chargeoffs |
( |
) | ( |
) | ||||||||||||||||||||||||
| Recoveries |
||||||||||||||||||||||||||||
| Total allowance for loan losses |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Allowance for Loan Losses |
||||||||||||||||||||||||||||
| For the Six Months Ended June 30, 2018 |
||||||||||||||||||||||||||||
| 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 |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Reversal) provision |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Chargeoffs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Recoveries |
||||||||||||||||||||||||||||
| Total allowance for loan losses |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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 June 30, 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 |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Collectively evaluated for impairment |
||||||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Carrying value of loans: |
||||||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Collectively evaluated for impairment |
||||||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 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 |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Collectively evaluated for impairment |
||||||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Carrying value of loans: |
||||||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Collectively evaluated for impairment |
||||||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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.
The following summarizes the credit risk profile by internally assigned grade:
| Credit Risk Profile by Internally Assigned Grade |
||||||||||||||||||||||||
| At June 30, 2019 |
||||||||||||||||||||||||
| Commercial |
Commercial Real Estate |
Construction |
Residential Real Estate |
Consumer Installment and Other |
Total |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| Grade: |
||||||||||||||||||||||||
| Pass |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Substandard |
||||||||||||||||||||||||
| Doubtful |
||||||||||||||||||||||||
| Loss |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Substandard |
||||||||||||||||||||||||
| Doubtful |
||||||||||||||||||||||||
| Loss |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Credit risk profile reflects internally assigned grades of purchased covered loans without regard to FDIC indemnification on $
The following tables summarize loans by delinquency and nonaccrual status:
| Summary of Loans by Delinquency and Nonaccrual Status |
||||||||||||||||||||||||
| At June 30, 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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial real estate |
||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||
| Residential real estate |
||||||||||||||||||||||||
| Consumer installment and other |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial real estate |
||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||
| Residential real estate |
||||||||||||||||||||||||
| Consumer installment and other |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
There were
The following summarizes impaired loans:
| Impaired Loans |
||||||||||||||||||||||||
| At June 30, 2019 |
At December 31, 2018 |
|||||||||||||||||||||||
| Unpaid |
Unpaid |
|||||||||||||||||||||||
| Recorded |
Principal |
Related |
Recorded |
Principal |
Related |
|||||||||||||||||||
| Investment |
Balance |
Allowance |
Investment |
Balance |
Allowance |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| With no related allowance recorded: |
||||||||||||||||||||||||
| Commercial |
$ | $ | $ | - | $ | $ | $ | - | ||||||||||||||||
| Commercial real estate |
- | - | ||||||||||||||||||||||
| Residential real estate |
- | - | ||||||||||||||||||||||
| Consumer installment and other |
- | - | ||||||||||||||||||||||
| Total with no related allowance recorded |
- | - | ||||||||||||||||||||||
| With an allowance recorded: |
||||||||||||||||||||||||
| Commercial |
||||||||||||||||||||||||
| Commercial real estate |
||||||||||||||||||||||||
| Total with an allowance recorded |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Impaired loans include troubled debt restructured loans. Impaired loans at June 30, 2019, included $
| Impaired Loans |
||||||||||||||||||||||||||||||||
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||||||||||||||||||
| Average |
Recognized |
Average |
Recognized |
Average |
Recognized |
Average |
Recognized |
|||||||||||||||||||||||||
| Recorded |
Interest |
Recorded |
Interest |
Recorded |
Interest |
Recorded |
Interest |
|||||||||||||||||||||||||
| Investment |
Income |
Investment |
Income |
Investment |
Income |
Investment |
Income |
|||||||||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||||||||||
| Commercial |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial real estate |
$ | |||||||||||||||||||||||||||||||
| Residential real estate |
$ | |||||||||||||||||||||||||||||||
| Consumer installment and other |
$ | |||||||||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following tables provide information on troubled debt restructurings:
| Troubled Debt Restructurings |
||||||||||||||||
| At June 30, 2019 |
||||||||||||||||
| Period-End |
||||||||||||||||
| Individual |
||||||||||||||||
| Number of |
Pre-Modification |
Period-End |
Impairment |
|||||||||||||
| Contracts |
Carrying Value |
Carrying Value |
Allowance |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Commercial |
$ | $ | $ | |||||||||||||
| Commercial real estate |
||||||||||||||||
| Residential real estate |
||||||||||||||||
| Total |
$ | $ | $ | |||||||||||||
| Troubled Debt Restructurings |
||||||||||||||||
| At December 31, 2018 |
||||||||||||||||
| Period-End |
||||||||||||||||
| Individual |
||||||||||||||||
| Number of |
Pre-Modification |
Period-End |
Impairment |
|||||||||||||
| Contracts |
Carrying Value |
Carrying Value |
Allowance |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Commercial |
$ | $ | $ | |||||||||||||
| Commercial real estate |
||||||||||||||||
| Residential real estate |
||||||||||||||||
| Total |
$ | $ | $ | |||||||||||||
During the three and six months ended June 30, 2019 and June 30, 2018, the Company did not modify any loans that were considered troubled debt restructurings, and had
There were
There were
At June 30, 2019 and December 31, 2018, the Company held total other real estate owned (OREO) of $
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
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Note 6: Other Assets and Other Liabilities
Other assets consisted of the following:
| At June 30, |
At December 31, |
|||||||
| 2019 |
2018 |
|||||||
| (In thousands) |
||||||||
| Cost method equity investments: |
||||||||
| Federal Reserve Bank stock (1) |
$ | $ | ||||||
| Other investments |
||||||||
| Total cost method equity investments |
||||||||
| Life insurance cash surrender value |
||||||||
| Net deferred tax asset |
||||||||
| Right-of-use asset |
||||||||
| Limited partnership investments |
||||||||
| Interest receivable |
||||||||
| Prepaid assets |
||||||||
| Other assets |
||||||||
| Total other assets |
$ | $ | ||||||
(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
The net deferred tax asset at June 30, 2019 of $
The Company owns
The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At June 30, 2019, this investment totaled $
The amounts recognized in net income for these investments include:
| For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
| June 30, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Investment loss included in pre-tax income |
$ | $ | $ | $ | ||||||||||||
| Tax credits recognized in provision for income taxes |
||||||||||||||||
Other liabilities consisted of the following:
| At June 30, |
At December 31, |
|||||||
| 2019 |
2018 |
|||||||
| (In thousands) |
||||||||
| Operating lease liability |
$ | $ | ||||||
| Other liabilities |
||||||||
| Total other liabilities |
$ | $ | ||||||
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
As of June 30, 2019, the Company recorded a lease liability of $
Total lease costs during the three and six months ended June 30, 2019, of $
The following table summarizes the remaining lease payments of operating lease liabilities:
| Minimum |
||||
| At June 30, |
||||
| 2019 |
||||
| (In thousands) |
||||
| Remaining six months of 2019 |
$ | |||
| 2020 |
||||
| 2021 |
||||
| 2022 |
||||
| 2023 |
||||
| Thereafter |
||||
| Total minimum lease payments |
||||
| Less: discount |
( |
) | ||
| Present value of lease liability |
$ | |||
Minimum future rental payments under noncancelable operating leases as of December 31, 2018, prior to adoption of ASU 2016-02, are as follows:
| Minimum |
||||
| (In thousands) |
||||
| 2019 |
$ | |||
| 2020 |
||||
| 2021 |
||||
| 2022 |
||||
| 2023 |
||||
| Thereafter |
||||
| Total minimum lease payments |
$ | |||
Note 7: Goodwill and Identifiable Intangible Assets
The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the three and six months ended June 30, 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 and six months ended June 30, 2019 and year ended December 31, 2018
The carrying values of goodwill were:
| At June 30, 2019 |
At December 31, 2018 |
|||||||
| (In thousands) |
||||||||
| Goodwill |
$ | $ | ||||||
The gross carrying amount of identifiable intangible assets and accumulated amortization was:
| At June 30, |
At December 31, |
|||||||||||||||
| 2019 |
2018 |
|||||||||||||||
| Gross |
Gross |
|||||||||||||||
| Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||
| Amount |
Amortization |
Amount |
Amortization |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Core Deposit Intangibles |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
As of June 30, 2019, the current period and estimated future amortization expense for identifiable intangible assets was:
| Total |
||||
| Core |
||||
| Deposit |
||||
| Intangibles |
||||
| (In thousands) |
||||
| For the Six Months ended June 30, 2019 (actual) |
$ | |||
| Estimate for the remainder of year ending December 31, 2019 |
||||
| Estimate for year ending December 31, 2020 |
||||
| 2021 |
||||
| 2022 |
||||
| 2023 |
||||
| 2024 |
||||
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Note 8: Deposits and Borrowed Funds
The following table provides additional detail regarding deposits.
| Deposits |
||||||||
| At June 30, |
At December 31, |
|||||||
| 2019 |
2018 |
|||||||
| (In thousands) |
||||||||
| Noninterest-bearing |
$ | $ | ||||||
| Interest-bearing: |
||||||||
| Transaction |
||||||||
| Savings |
||||||||
| Time deposits less than $100 thousand |
||||||||
| Time deposits $100 thousand through $250 thousand |
||||||||
| Time deposits more than $250 thousand |
||||||||
| Total deposits |
$ | $ | ||||||
Demand deposit overdrafts of $
The following table provides additional detail regarding short-term borrowed funds.
| Repurchase Agreements (Sweep) |
||||||||
| Remaining Contractual Maturity of the Agreements |
||||||||
| Overnight and Continuous |
||||||||
| At June 30, |
At December 31, |
|||||||
| 2019 |
2018 |
|||||||
| Repurchase agreements: |
(In thousands) |
|||||||
| Collateral securing borrowings: |
||||||||
| Securities of U.S. Government sponsored entities |
$ | $ | ||||||
| Agency residential MBS |
||||||||
| Corporate securities |
||||||||
| Total collateral carrying value |
$ | $ | ||||||
| Total short-term borrowed funds |
$ | $ | ||||||
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.
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
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 June 30, 2019 |
||||||||||||||||
| Fair Value |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Mutual funds |
$ | $ | $ | $ | ||||||||||||
| Total equity securities |
||||||||||||||||
| Debt securities available for sale |
||||||||||||||||
| U.S. Treasury securities |
||||||||||||||||
| Securities of U.S. Government sponsored entities |
||||||||||||||||
| Agency residential MBS |
||||||||||||||||
| Non-agency residential MBS |
||||||||||||||||
| Agency commercial MBS |
||||||||||||||||
| Securities of U.S. Government entities |
||||||||||||||||
| Obligations of states and political subdivisions |
||||||||||||||||
| Corporate securities |
||||||||||||||||
| Total debt securities available for sale |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
(1) There were no transfers in to or out of level 3 during the six months ended June 30, 2019.
| At December 31, 2018 |
||||||||||||||||
| Fair Value |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Mutual funds |
$ | $ | $ | $ | ||||||||||||
| Total equity securities |
||||||||||||||||
| Debt securities available for sale |
||||||||||||||||
| U.S. Treasury securities |
||||||||||||||||
| Securities of U.S. Government sponsored entities |
||||||||||||||||
| Agency residential MBS |
||||||||||||||||
| Non-agency residential MBS |
||||||||||||||||
| Agency commercial MBS |
||||||||||||||||
| Securities of U.S. Government entities |
||||||||||||||||
| Obligations of states and political subdivisions |
||||||||||||||||
| Corporate securities |
||||||||||||||||
| Total debt securities available for sale |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
(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 June 30, 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 |
||||||||||||||||||||
| Six Months Ended |
||||||||||||||||||||
| At June 30, 2019 |
June 30, 2019 |
|||||||||||||||||||
| Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total Losses |
||||||||||||||||
| (In thousands) |
||||||||||||||||||||
| Other real estate owned |
$ | $ | $ | $ | $ | |||||||||||||||
| Impaired loans: |
||||||||||||||||||||
| Commercial |
||||||||||||||||||||
| Commercial real estate |
||||||||||||||||||||
| Residential real estate |
||||||||||||||||||||
| Consumer installment and other |
||||||||||||||||||||
| Total assets measured at fair value on a nonrecurring basis |
$ | $ | $ | $ | $ | |||||||||||||||
| 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 |
$ | $ | $ | $ | $ | |||||||||||||||
| Impaired loans: |
||||||||||||||||||||
| Commercial |
||||||||||||||||||||
| Commercial real estate |
( |
) | ||||||||||||||||||
| Total assets measured at fair value on a nonrecurring basis |
$ | $ | $ | $ | $ | ( |
) | |||||||||||||
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
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.
| At June 30, 2019 |
||||||||||||||||||||
| Carrying Amount |
Estimated Fair Value |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||||
| Financial Assets: |
(In thousands) |
|||||||||||||||||||
| Cash and due from banks |
$ | $ | $ | $ | $ | |||||||||||||||
| Debt securities held to maturity |
||||||||||||||||||||
| Loans |
||||||||||||||||||||
| Financial Liabilities: |
||||||||||||||||||||
| Deposits |
$ | $ | $ | $ | $ | |||||||||||||||
| Short-term borrowed funds |
||||||||||||||||||||
| At December 31, 2018 |
||||||||||||||||||||
| Carrying Amount |
Estimated Fair Value |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||||
| Financial Assets: |
(In thousands) |
|||||||||||||||||||
| Cash and due from banks |
$ | $ | $ | $ | $ | |||||||||||||||
| Debt securities held to maturity |
||||||||||||||||||||
| Loans |
||||||||||||||||||||
| Financial Liabilities: |
||||||||||||||||||||
| Deposits |
$ | $ | $ | $ | $ | |||||||||||||||
| Short-term borrowed funds |
||||||||||||||||||||
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 $
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 second quarter 2019, the Company achieved a mediated settlement to dismiss a lawsuit and paid the resulting liability of $
The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2018 to some customers. The Company initially estimated the probable amount of these obligations to be $
Note 11: Earnings Per Common Share
The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period plus the impact of common stock equivalents.
| For the Three Months |
For the Six Months |
|||||||||||||||
| Ended June 30, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (In thousands, except per share data) |
||||||||||||||||
| Net income applicable to common equity (numerator) |
$ | $ | $ | $ | ||||||||||||
| Basic earnings per common share |
||||||||||||||||
| Weighted average number of common shares outstanding - basic (denominator) |
||||||||||||||||
| Basic earnings per common share |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share |
||||||||||||||||
| Weighted average number of common shares outstanding - basic |
||||||||||||||||
| Add common stock equivalents for options |
||||||||||||||||
| Weighted average number of common shares outstanding - diluted (denominator) |
||||||||||||||||
| Diluted earnings per common share |
$ | $ | $ | $ | ||||||||||||
For the three and six months ended June 30, 2019, options to purchase
For the three and six months ended June 30, 2018, options to purchase
Note 12: Income Taxes
In the second quarter 2019, the Company decreased unrecognized tax benefits by $
In the second quarter 2019, the Company re-assessed its ability to realize benefits from California capital loss carryforwards. The Company established a $
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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 |
For the Six Months |
|||||||||||||||
| Ended June 30, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (In thousands, except per share data) |
||||||||||||||||
| Net Interest and Loan Fee Income (FTE)(1) |
$ | 40,330 | $ | 38,349 | $ | 80,577 | $ | 75,624 | ||||||||
| Provision for Loan Losses |
- | - | - | - | ||||||||||||
| Noninterest Income |
12,288 | 11,769 | 23,867 | 23,724 | ||||||||||||
| Noninterest Expense |
25,561 | 25,741 | 50,744 | 51,763 | ||||||||||||
| Income Before Income Taxes (FTE)(1) |
27,057 | 24,377 | 53,700 | 47,585 | ||||||||||||
| Income Tax Provision (FTE)(1) |
7,432 | 6,367 | 14,429 | 12,069 | ||||||||||||
| Net Income |
$ | 19,625 | $ | 18,010 | $ | 39,271 | $ | 35,516 | ||||||||
| Average Common Shares Outstanding |
26,942 | 26,630 | 26,892 | 26,581 | ||||||||||||
| Average Diluted Common Shares Outstanding |
26,987 | 26,728 | 26,950 | 26,696 | ||||||||||||
| Common Shares Outstanding at Period End |
26,962 | 26,649 | ||||||||||||||
| Per Common Share: |
||||||||||||||||
| Basic Earnings |
$ | 0.73 | $ | 0.68 | $ | 1.46 | $ | 1.34 | ||||||||
| Diluted Earnings |
0.73 | 0.67 | 1.46 | 1.33 | ||||||||||||
| Book Value |
$ | 25.72 | $ | 21.99 | ||||||||||||
| Financial Ratios: |
||||||||||||||||
| Return on Assets |
1.42 | % | 1.29 | % | 1.42 | % | 1.28 | % | ||||||||
| Return on Common Equity |
11.75 | % | 11.55 | % | 11.95 | % | 11.56 | % | ||||||||
| Net Interest Margin (FTE)(1) |
3.13 | % | 2.97 | % | 3.12 | % | 2.93 | % | ||||||||
| Net Loan Losses (Recoveries) to Average Loans |
0.12 | % | 0.01 | % | 0.21 | % | (0.01 | %) | ||||||||
| Efficiency Ratio(2) |
48.6 | % | 51.4 | % | 48.6 | % | 52.1 | % | ||||||||
| Average Balances: |
||||||||||||||||
| Assets |
$ | 5,560,740 | $ | 5,587,871 | $ | 5,586,110 | $ | 5,576,352 | ||||||||
| Loans |
1,183,539 | 1,209,049 | 1,194,536 | 1,226,304 | ||||||||||||
| Investment Securities |
3,648,435 | 3,543,838 | 3,669,029 | 3,511,828 | ||||||||||||
| Deposits |
4,762,286 | 4,846,986 | 4,798,288 | 4,837,721 | ||||||||||||
| Shareholders' Equity |
669,947 | 625,409 | 662,704 | 619,666 | ||||||||||||
| Period End Balances: |
||||||||||||||||
| Assets |
$ | 5,523,448 | $ | 5,577,844 | ||||||||||||
| Loans |
1,161,712 | 1,200,192 | ||||||||||||||
| Investment Securities |
3,645,685 | 3,441,400 | ||||||||||||||
| Deposits |
4,730,262 | 4,887,122 | ||||||||||||||
| Shareholders' Equity |
693,437 | 586,138 | ||||||||||||||
| Capital Ratios at Period End: |
||||||||||||||||
| Total Risk Based Capital |
17.88 | % | 16.97 | % | ||||||||||||
| Tangible Equity to Tangible Assets |
10.56 | % | 8.47 | % | ||||||||||||
| Dividends Paid Per Common Share |
$ | 0.41 | $ | 0.40 | $ | 0.81 | $ | 0.80 | ||||||||
| Common Dividend Payout Ratio |
56 | % | 60 | % | 55 | % | 60 | % | ||||||||
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’ (collectively, the “Company”) reported net income of $19.6 million or $0.73 diluted earnings per common share for the second quarter 2019 and net income of $39.3 million or $1.46 diluted earnings per common share for the six months ended June 30, 2019. These results compare to net income of $18.0 million or $0.67 diluted earnings per common share for the second quarter 2018 and net income of $35.5 million or $1.33 diluted earnings per common share for the six months ended June 30, 2018. Results for the second quarter 2019 and six months ended June 30, 2019 include a life insurance gain of $433 thousand and $553 thousand in loss contingencies. The loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit. Although loss contingencies represent estimated liabilities, which are subject to revision, the Company does not anticipate additional losses for either of these matters.
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% to 2.50% through June 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 resulted in a 0.01% increase in 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 and six months ended June 30, 2019 the average volume of checking and savings deposits was 96.1% of average total deposits. Net interest income (FTE) was $40.3 million and $80.6 million for the three months and six months ended June 30, 2019, respectively, compared with $38.3 million and $75.6 million for the three months and six months ended June 30, 2018, respectively. The increase in net interest income (FTE) in 2019 is primarily due to higher asset yields.
Credit quality remained solid with nonperforming assets totaling $4.1 million at June 30, 2019 compared with $5.8 million at December 31, 2018 and $6.0 million at June 30, 2018. The Company did not recognize a provision for loan losses in the three months and six months ended June 30, 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 |
For the Six Months |
|||||||||||||||
| Ended June 30, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (In thousands, except per share data) |
||||||||||||||||
| Net interest and loan fee income (FTE) |
$ | 40,330 | $ | 38,349 | $ | 80,577 | $ | 75,624 | ||||||||
| Provision for loan losses |
- | - | - | - | ||||||||||||
| Noninterest income |
12,288 | 11,769 | 23,867 | 23,724 | ||||||||||||
| Noninterest expense |
25,561 | 25,741 | 50,744 | 51,763 | ||||||||||||
| Income before taxes (FTE) |
27,057 | 24,377 | 53,700 | 47,585 | ||||||||||||
| Income tax provision (FTE) |
7,432 | 6,367 | 14,429 | 12,069 | ||||||||||||
| Net income |
$ | 19,625 | $ | 18,010 | $ | 39,271 | $ | 35,516 | ||||||||
| Average diluted common shares |
26,987 | 26,728 | 26,950 | 26,696 | ||||||||||||
| Diluted earnings per common share |
$ | 0.73 | $ | 0.67 | $ | 1.46 | $ | 1.33 | ||||||||
| Average total assets |
$ | 5,560,740 | $ | 5,587,871 | $ | 5,586,110 | $ | 5,576,352 | ||||||||
| Net income to average total assets (annualized) |
1.42 | % | 1.29 | % | 1.42 | % | 1.28 | % | ||||||||
| Net income to average common shareholders' equity (annualized) |
11.75 | % | 11.55 | % | 11.95 | % | 11.56 | % | ||||||||
Net income for the second quarter 2019 was $1.6 million more than the second quarter 2018. Net interest and loan fee income (FTE) increased $2.0 million in the second quarter 2019 compared with the second quarter 2018 mainly due to higher yield on earning assets and higher average balances of investments, partially offset by lower average balances of interest-bearing cash and loans. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income increased $519 thousand in the second quarter 2019 compared with the second quarter 2018 primarily due to a life insurance gain of $433 thousand. Noninterest expense decreased $180 thousand in the second quarter 2019 compared with the second quarter 2018 due to lower professional fees and amortization of intangible assets, offset in part by $553 thousand in loss contingencies. The loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit. Although loss contingencies represent estimated liabilities, which are subject to revision, the Company does not anticipate additional losses for either of these matters. The tax rate for the second quarter 2019 was 27.5% on an FTE basis and 24.1% on a non-FTE basis compared with 26.1% on an FTE basis and 21.4% on a non-FTE basis for the second quarter 2018. In the second quarter 2019, the Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the tax exempt nature of the life insurance gains and excess tax benefits of $83 thousand from stock options, increased the tax rate on an FTE and non-FTE basis by 0.3%.
Comparing the six months ended June 30, 2019 with the six months ended June 30, 2018 net income increased $3.8 million. Net interest and loan fee (FTE) income increased $5.0 million due to higher yield on earning assets and higher average balances of investments, partially offset by lower average balances of interest-bearing cash and loans. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. In the six months ended June 30, 2019 noninterest expense decreased $1.0 million compared with the six months ended June 30, 2018 due to lower legal expenses and lower amortization of intangible assets, partially offset by $553 thousand in loss contingencies. The tax rate for the six months ended June 30, 2019 was 26.9% on an FTE basis and 23.4% on a non-FTE basis compared with 25.4% on an FTE basis and 20.6% on a non-FTE basis for the six months ended June 30, 2018. In the six months ended June 30, 2019, the Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the tax exempt nature of the life insurance gains and excess tax benefits of $367 thousand from stock options, decreased the tax rate on an FTE and non-FTE basis by 0.4%.
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Net Interest and Loan Fee Income (FTE)
Following is a summary of the components of net interest and loan fee income (FTE) for the periods indicated:
| For the Three Months |
For the Six Months |
|||||||||||||||
| Ended June 30, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Interest and loan fee income |
$ | 39,626 | $ | 37,346 | $ | 79,109 | $ | 73,661 | ||||||||
| Interest expense |
487 | 459 | 981 | 918 | ||||||||||||
| Net interest and loan fee income |
39,139 | 36,887 | 78,128 | 72,743 | ||||||||||||
| FTE adjustment |
1,191 | 1,462 | 2,449 | 2,881 | ||||||||||||
| Net interest and loan fee income (FTE) |
$ | 40,330 | $ | 38,349 | $ | 80,577 | $ | 75,624 | ||||||||
| Average earning assets |
$ | 5,159,112 | $ | 5,180,524 | $ | 5,171,973 | $ | 5,171,312 | ||||||||
| Net interest margin (FTE) (annualized) |
3.13 | % | 2.97 | % | 3.12 | % | 2.93 | % | ||||||||
Net interest and loan fee income (FTE) increased $2.0 million in the second quarter 2019 compared with the second quarter 2018 mainly due to higher yield on earning assets (up 0.16%) and higher average balances of investments (up $105 million), partially offset by interest-bearing cash (down $100 million) and lower average balances of loans (down $26 million).
Comparing the first six months ended June 30, 2019 with the six months ended June 30, 2018, net interest and loan fee (FTE) income increased $5.0 million due to higher yield on earning assets (up 0.19%) and higher average balances of investments (up $157 million), partially offset by interest-bearing cash (down $125 million) and lower average balances of loans (down $32 million).
The annualized net interest margin (FTE) increased to 3.13% in the second quarter 2019 and 3.12% in the six months ended June 30, 2019 from 2.97% in the second quarter 2018 and 2.93% in the six months ended June 30, 2018. The net interest margin (FTE) increased in 2019, reflecting earning assets repriced to higher yield.
The Company’s funding costs were 0.04% in the second quarter and six months ended June 30, 2019, unchanged from the same periods in 2018. Average balances of time deposits declined $36 million from the six months ended June 30, 2018 to the six months ended June 30, 2019. Average balances of checking and saving deposits accounted for 96.1% of average total deposits in the six months ended June 30, 2019 compared with 95.4% in the six months ended June 30, 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 |
For the Six Months |
||||||||||||||||
| Ended June 30, |
|||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
||||||||||||||
| Yield on earning assets (FTE) |
3.17 | % | 3.01 | % | 3.16 | % | 2.97 | % | |||||||||
| Rate paid on interest-bearing liabilities |
0.08 | % | 0.07 | % | 0.08 | % | 0.07 | % | |||||||||
| Net interest spread (FTE) |
3.09 | % | 2.94 | % | 3.08 | % | 2.90 | % | |||||||||
| Impact of noninterest-bearing demand deposits |
0.04 | % | 0.03 | % | 0.04 | % | 0.03 | % | |||||||||
| Net interest margin (FTE) |
3.13 | % | 2.97 | % | 3.12 | % | 2.93 | % | |||||||||
The FOMC increased the federal funds rate between December 2016 and December 2018. In the second quarter and first six months of 2019 the yield on earning assets increased compared with the comparable periods 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 rates paid on checking and savings deposits.
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 June 30, 2019 |
||||||||||||
| Interest |
||||||||||||
| Average |
Income/ |
Yields/ |
||||||||||
| Balance |
Expense |
Rates |
||||||||||
| ($ in thousands) |
||||||||||||
| Assets |
||||||||||||
| Investment securities: |
||||||||||||
| Taxable |
$ | 3,006,905 | $ | 18,773 | 2.50 | % | ||||||
| Tax-exempt (1) |
641,531 | 5,157 | 3.22 | % | ||||||||
| Total investments (1) |
3,648,436 | 23,930 | 2.62 | % | ||||||||
| Loans: |
||||||||||||
| Taxable |
1,133,168 | 14,417 | 5.10 | % | ||||||||
| Tax-exempt (1) |
50,371 | 512 | 4.08 | % | ||||||||
| Total loans (1) |
1,183,539 | 14,929 | 5.06 | % | ||||||||
| Total interest-bearing cash |
327,137 | 1,958 | 2.37 | % | ||||||||
| Total Interest-earning assets (1) |
5,159,112 | 40,817 | 3.17 | % | ||||||||
| Other assets |
401,628 | |||||||||||
| Total assets |
$ | 5,560,740 | ||||||||||
| Liabilities and shareholders' equity |
||||||||||||
| Noninterest-bearing demand |
$ | 2,172,207 | $ | - | - | % | ||||||
| Savings and interest-bearing transaction |
2,404,415 | 331 | 0.06 | % | ||||||||
| Time less than $100,000 |
105,544 | 65 | 0.25 | % | ||||||||
| Time $100,000 or more |
80,120 | 82 | 0.41 | % | ||||||||
| Total interest-bearing deposits |
2,590,079 | 478 | 0.07 | % | ||||||||
| Short-term borrowed funds |
56,602 | 9 | 0.06 | % | ||||||||
| Total interest-bearing liabilities |
2,646,681 | 487 | 0.08 | % | ||||||||
| Other liabilities |
71,905 | |||||||||||
| Shareholders' equity |
669,947 | |||||||||||
| Total liabilities and shareholders' equity |
$ | 5,560,740 | ||||||||||
| Net interest spread (1) (2) |
3.09 | % | ||||||||||
| Net interest and fee income and interest margin (1) (3) |
$ | 40,330 | 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.
Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
| For the Three Months Ended June 30, 2018 |
||||||||||||
| Interest |
||||||||||||
| Average |
Income/ |
Yields/ |
||||||||||
| Balance |
Expense |
Rates |
||||||||||
| ($ in thousands) |
||||||||||||
| Assets |
||||||||||||
| Investment securities: |
||||||||||||
| Taxable |
$ | 2,785,079 | $ | 15,598 | 2.24 | % | ||||||
| Tax-exempt (1) |
758,759 | 6,365 | 3.36 | % | ||||||||
| Total investments (1) |
3,543,838 | 21,963 | 2.48 | % | ||||||||
| Loans: |
||||||||||||
| Taxable |
1,152,469 | 14,492 | 5.04 | % | ||||||||
| Tax-exempt (1) |
56,580 | 589 | 4.17 | % | ||||||||
| Total loans (1) |
1,209,049 | 15,081 | 5.00 | % | ||||||||
| Total interest-bearing cash |
427,637 | 1,764 | 1.77 | % | ||||||||
| Total Interest-earning assets (1) |
5,180,524 | 38,808 | 3.01 | % | ||||||||
| Other assets |
407,347 | |||||||||||
| Total assets |
$ | 5,587,871 | ||||||||||
| Liabilities and shareholders' equity |
||||||||||||
| Noninterest-bearing demand |
$ | 2,177,708 | $ | - | - | % | ||||||
| Savings and interest-bearing transaction |
2,447,566 | 284 | 0.05 | % | ||||||||
| Time less than $100,000 |
121,757 | 70 | 0.23 | % | ||||||||
| Time $100,000 or more |
99,955 | 95 | 0.38 | % | ||||||||
| Total interest-bearing deposits |
2,669,278 | 449 | 0.07 | % | ||||||||
| Short-term borrowed funds |
60,393 | 10 | 0.06 | % | ||||||||
| Total interest-bearing liabilities |
2,729,671 | 459 | 0.07 | % | ||||||||
| Other liabilities |
55,083 | |||||||||||
| Shareholders' equity |
625,409 | |||||||||||
| Total liabilities and shareholders' equity |
$ | 5,587,871 | ||||||||||
| Net interest spread (1) (2) |
2.94 | % | ||||||||||
| Net interest and fee income and interest margin (1) (3) |
$ | 38,349 | 2.97 | % | ||||||||
(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 Six Months Ended June 30, 2019 |
||||||||||||
| Interest |
||||||||||||
| Average |
Income/ |
Yields/ |
||||||||||
| Balance |
Expense |
Rates |
||||||||||
| ($ in thousands) |
||||||||||||
| Assets |
||||||||||||
| Investment securities: |
||||||||||||
| Taxable |
$ | 3,007,970 | $ | 37,406 | 2.49 | % | ||||||
| Tax-exempt (1) |
661,059 | 10,619 | 3.21 | % | ||||||||
| Total investments (1) |
3,669,029 | 48,025 | 2.62 | % | ||||||||
| Loans: |
||||||||||||
| Taxable |
1,143,516 | 28,795 | 5.08 | % | ||||||||
| Tax-exempt (1) |
51,020 | 1,042 | 4.12 | % | ||||||||
| Total loans (1) |
1,194,536 | 29,837 | 5.04 | % | ||||||||
| Total interest-bearing cash |
308,408 | 3,696 | 2.38 | % | ||||||||
| Total Interest-earning assets (1) |
5,171,973 | 81,558 | 3.16 | % | ||||||||
| Other assets |
414,137 | |||||||||||
| Total assets |
$ | 5,586,110 | ||||||||||
| Liabilities and shareholders' equity |
||||||||||||
| Noninterest-bearing demand |
$ | 2,188,131 | $ | - | - | % | ||||||
| Savings and interest-bearing transaction |
2,421,392 | 668 | 0.06 | % | ||||||||
| Time less than $100,000 |
107,314 | 131 | 0.25 | % | ||||||||
| Time $100,000 or more |
81,451 | 164 | 0.41 | % | ||||||||
| Total interest-bearing deposits |
2,610,157 | 963 | 0.07 | % | ||||||||
| Short-term borrowed funds |
57,906 | 18 | 0.06 | % | ||||||||
| Total interest-bearing liabilities |
2,668,063 | 981 | 0.08 | % | ||||||||
| Other liabilities |
67,212 | |||||||||||
| Shareholders' equity |
662,704 | |||||||||||
| Total liabilities and shareholders' equity |
$ | 5,586,110 | ||||||||||
| Net interest spread (1) (2) |
3.08 | % | ||||||||||
| Net interest and fee income and interest margin (1) (3) |
$ | 80,577 | 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 Six Months Ended June 30, 2018 |
||||||||||||
| Interest |
||||||||||||
| Average |
Income/ |
Yields/ |
||||||||||
| Balance |
Expense |
Rates |
||||||||||
| ($ in thousands) |
||||||||||||
| Assets |
||||||||||||
| Investment securities: |
||||||||||||
| Taxable |
$ | 2,747,569 | $ | 30,547 | 2.22 | % | ||||||
| Tax-exempt (1) |
764,259 | 12,520 | 3.28 | % | ||||||||
| Total investments (1) |
3,511,828 | 43,067 | 2.45 | % | ||||||||
| Loans: |
||||||||||||
| Taxable |
1,168,503 | 28,715 | 4.96 | % | ||||||||
| Tax-exempt (1) |
57,801 | 1,188 | 4.15 | % | ||||||||
| Total loans (1) |
1,226,304 | 29,903 | 4.92 | % | ||||||||
| Total interest-bearing cash |
433,180 | 3,572 | 1.63 | % | ||||||||
| Total Interest-earning assets (1) |
5,171,312 | 76,542 | 2.97 | % | ||||||||
| Other assets |
405,040 | |||||||||||
| Total assets |
$ | 5,576,352 | ||||||||||
| Liabilities and shareholders' equity |
||||||||||||
| Noninterest-bearing demand |
$ | 2,167,226 | $ | - | - | % | ||||||
| Savings and interest-bearing transaction |
2,445,574 | 566 | 0.05 | % | ||||||||
| Time less than $100,000 |
123,380 | 141 | 0.23 | % | ||||||||
| Time $100,000 or more |
101,541 | 192 | 0.38 | % | ||||||||
| Total interest-bearing deposits |
2,670,495 | 899 | 0.07 | % | ||||||||
| Short-term borrowed funds |
61,441 | 19 | 0.06 | % | ||||||||
| Total interest-bearing liabilities |
2,731,936 | 918 | 0.07 | % | ||||||||
| Other liabilities |
57,524 | |||||||||||
| Shareholders' equity |
619,666 | |||||||||||
| Total liabilities and shareholders' equity |
$ | 5,576,352 | ||||||||||
| Net interest spread (1) (2) |
2.90 | % | ||||||||||
| Net interest and fee income and interest margin (1) (3) |
$ | 75,624 | 2.93 | % | ||||||||
(1) Amounts calculated on an FTE basis using the current statutory federal tax rate.
(2) Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.
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Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income and interest expense due to changes in average assets and liability balances (volume) and changes in average interest yields/rates for the periods indicated. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.
Summary of Changes in Interest Income and Expense
| For the Three Months Ended June 30, 2019 |
||||||||||||
| Compared with |
||||||||||||
| For the Three Months Ended June 30, 2018 |
||||||||||||
| Volume |
Yield/Rate |
Total |
||||||||||
| (In thousands) |
||||||||||||
| Increase (decrease) in interest and loan fee income: |
||||||||||||
| Investment securities: |
||||||||||||
| Taxable |
$ | 1,242 | $ | 1,933 | $ | 3,175 | ||||||
| Tax-exempt (1) |
(983 | ) | (225 | ) | (1,208 | ) | ||||||
| Total investments (1) |
259 | 1,708 | 1,967 | |||||||||
| Loans: |
||||||||||||
| Taxable |
(243 | ) | 168 | (75 | ) | |||||||
| Tax-exempt (1) |
(66 | ) | (11 | ) | (77 | ) | ||||||
| Total loans (1) |
(309 | ) | 157 | (152 | ) | |||||||
| Total interest-bearing cash |
(357 | ) | 551 | 194 | ||||||||
| Total (decrease) increase in interest and loan fee income (1) |
(407 | ) | 2,416 | 2,009 | ||||||||
| (Decrease) increase in interest expense: |
||||||||||||
| Deposits: |
||||||||||||
| Savings and interest-bearing transaction |
(5 | ) | 52 | 47 | ||||||||
| Time less than $100,000 |
(9 | ) | 4 | (5 | ) | |||||||
| Time $100,000 or more |
(19 | ) | 6 | (13 | ) | |||||||
| Total interest-bearing deposits |
(33 | ) | 62 | 29 | ||||||||
| Short-term borrowed funds |
(1 | ) | - | (1 | ) | |||||||
| Total (decrease) increase in interest expense |
(34 | ) | 62 | 28 | ||||||||
| (Decrease) increase in net interest and loan fee income (1) |
$ | (373 | ) | $ | 2,354 | $ | 1,981 | |||||
(1) Amounts calculated on an FTE basis using the current statutory federal tax rate.
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Summary of Changes in Interest Income and Expense
| For the Six Months Ended June 30, 2019 |
||||||||||||
| Compared with |
||||||||||||
| For the Six Months Ended June 30, 2018 |
||||||||||||
| Volume |
Yield/Rate |
Total |
||||||||||
| (In thousands) |
||||||||||||
| Increase (decrease) in interest and loan fee income: |
||||||||||||
| Investment securities: |
||||||||||||
| Taxable |
$ | 2,895 | $ | 3,964 | $ | 6,859 | ||||||
| Tax-exempt (1) |
(1,691 | ) | (210 | ) | (1,901 | ) | ||||||
| Total investments (1) |
1,204 | 3,754 | 4,958 | |||||||||
| Loans: |
||||||||||||
| Taxable |
(614 | ) | 694 | 80 | ||||||||
| Tax-exempt (1) |
(140 | ) | (6 | ) | (146 | ) | ||||||
| Total loans (1) |
(754 | ) | 688 | (66 | ) | |||||||
| Total interest-bearing cash |
(1,036 | ) | 1,160 | 124 | ||||||||
| Total (decrease) increase in interest and loan fee income (1) |
(586 | ) | 5,602 | 5,016 | ||||||||
| (Decrease) increase in interest expense: |
||||||||||||
| Deposits: |
||||||||||||
| Savings and interest-bearing transaction |
(6 | ) | 108 | 102 | ||||||||
| Time less than $100,000 |
(18 | ) | 8 | (10 | ) | |||||||
| Time $100,000 or more |
(38 | ) | 10 | (28 | ) | |||||||
| Total interest-bearing deposits |
(62 | ) | 126 | 64 | ||||||||
| Short-term borrowed funds |
(1 | ) | - | (1 | ) | |||||||
| Total (decrease) increase in interest expense |
(63 | ) | 126 | 63 | ||||||||
| (Decrease) increase in net interest and loan fee income (1) |
$ | (523 | ) | $ | 5,476 | $ | 4,953 | |||||
(1) Amounts calculated on an FTE basis using the current statutory federal tax rate.
Provision for Loan Losses
The Company manages credit costs by consistently enforcing conservative underwriting and administration procedures and aggressively pursuing collection efforts with debtors experiencing financial difficulties. The provision for loan losses reflects Management's assessment of credit risk in the loan portfolio during each of the periods presented.
The Company provided no provision for loan losses in the second quarters of 2019 and 2018 and the six months ended June 30, 2019 and June 30, 2018. Classified loans declined from $27 million at December 31, 2018 to $25 million at June 30, 2019. Nonperforming loans were $4 million at June 30, 2019 compared with $5 million at June 30, 2018 and December 31, 2018. These factors 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, 2019. 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.
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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, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Service charges on deposit accounts |
$ | 4,493 | $ | 4,645 | $ | 8,997 | $ | 9,397 | ||||||||
| Merchant processing services |
2,657 | 2,305 | 5,215 | 4,725 | ||||||||||||
| Debit card fees |
1,641 | 1,698 | 3,148 | 3,303 | ||||||||||||
| Trust fees |
749 | 726 | 1,466 | 1,469 | ||||||||||||
| ATM processing fees |
722 | 698 | 1,355 | 1,362 | ||||||||||||
| Other service fees |
585 | 650 | 1,162 | 1,281 | ||||||||||||
| Life insurance gains |
433 | - | 433 | - | ||||||||||||
| Financial services commissions |
93 | 141 | 194 | 255 | ||||||||||||
| Equity securities gains (losses) |
26 | (14 | ) | 50 | (50 | ) | ||||||||||
| Other noninterest income |
889 | 920 | 1,847 | 1,982 | ||||||||||||
| Total |
$ | 12,288 | $ | 11,769 | $ | 23,867 | $ | 23,724 | ||||||||
Noninterest income for the second quarter 2019 increased by $519 thousand from the second quarter 2018 primarily due to a life insurance gain of $433 thousand. Merchant processing services increased due to higher transaction volumes. Service charges on deposit accounts decreased due to declines in overdraft fees.
In the six months ended June 30, 2019, noninterest income increased $143 thousand compared with the six months ended June 30, 2018 due to a life insurance gain of $433 thousand and higher income from merchant processing services. The increases were partially offset by decreases in overdraft fees (which are included in service charges on deposit accounts), debit card fees, and internet banking income (which is included in other service charges).
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, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Salaries and related benefits |
$ | 13,090 | $ | 13,186 | $ | 26,198 | $ | 26,537 | ||||||||
| Occupancy and equipment |
4,916 | 4,864 | 9,964 | 9,555 | ||||||||||||
| Outsourced data processing services |
2,367 | 2,299 | 4,736 | 4,639 | ||||||||||||
| Loss contingencies |
553 | - | 553 | - | ||||||||||||
| Professional fees |
481 | 871 | 1,146 | 1,656 | ||||||||||||
| Courier service |
451 | 453 | 893 | 1,023 | ||||||||||||
| Amortization of identifiable intangibles |
79 | 422 | 389 | 885 | ||||||||||||
| Other noninterest expense |
3,624 | 3,646 | 6,865 | 7,468 | ||||||||||||
| Total |
$ | 25,561 | $ | 25,741 | $ | 50,744 | $ | 51,763 | ||||||||
Noninterest expense decreased $180 thousand in the second quarter 2019 compared with the second quarter 2018. Professional fees decreased due to lower legal and consulting fees. Amortization of intangibles decreased as assets are amortized on a declining balance method. The decreases were partially offset by $553 thousand in loss contingencies. The loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit. Although loss contingencies represent estimated liabilities, which are subject to revision, the Company does not anticipate additional losses for either of these matters.
In the six months ended June 30, 2019 noninterest expense decreased $1.0 million compared with the six months ended June 30, 2018 primarily due to lower legal expenses and lower amortization of intangible assets, partially offset by $553 thousand in loss contingencies.
Provision for Income Tax
The Company’s income tax provision (FTE) was $7.4 million for the second quarter 2019 and $14.4 million for the six months ended June 30, 2019 compared with $6.4 million for the second quarter 2018 and $12.1 million for the six months ended June 30, 2018. The effective tax rates (FTE) of 27.5% for the second quarter 2019 and 26.9% for the six months ended June 30, 2019 compared with 26.1% for the second quarter 2018 and 25.4% for the six months ended June 30, 2018.
In the second quarter 2019, the Company re-assessed its ability to realize benefits from California capital loss carryforwards. The Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the tax exempt nature of the life insurance gains and excess tax benefits of $83 thousand from stock options, increased the tax rate on an FTE and non-FTE basis by 0.3%.
In the second quarter 2019, the Company decreased unrecognized tax benefits by $909 thousand related to settlements with taxing authorities. The settlements incorporated amended tax returns for which the Company had recognized a deferred tax asset in the amount of $1,003 thousand.
Investment Portfolio
The Company maintains an investment securities portfolio consisting of securities issued by the U.S. Treasury, U.S. Government sponsored entities, agency and non-agency mortgage backed securities, state and political subdivisions, corporations, and other securities.
Management has managed the investment securities portfolio in response to deposit growth and loan volume declines. The carrying value of the Company’s investment securities portfolio was $3.6 billion at June 30, 2019 and December 31, 2018.
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.
At June 30, 2019, 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 the Company’s internal analyses compared with the ratings assigned by the third party credit rating agencies.
The market value of equity securities was $1,797 thousand at June 30, 2019 and $1,747 thousand at December 31, 2018. During the six months ended June 30, 2019, the Company recognized gross unrealized holding gains of $50 thousand in earnings.
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The following table summarizes total corporate securities by the industry sector in which the issuing companies operate:
| At June 30, 2019 |
At December 31, 2018 |
|||||||||||||||
| Market value |
As a percent of total corporate securities |
Market value |
As a percent of total corporate securities |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Financial |
$ | 547,680 | 39 | % | $ | 531,512 | 40 | % | ||||||||
| Utilities |
223,247 | 16 | % | 197,568 | 15 | % | ||||||||||
| Consumer, Non-cyclical |
184,521 | 13 | % | 169,851 | 13 | % | ||||||||||
| Industrial |
154,437 | 11 | % | 152,636 | 12 | % | ||||||||||
| Technology |
122,284 | 9 | % | 105,324 | 8 | % | ||||||||||
| Consumer, Cyclical |
60,717 | 5 | % | 58,430 | 5 | % | ||||||||||
| Communications |
50,654 | 4 | % | 49,642 | 4 | % | ||||||||||
| Basic Materials |
31,081 | 2 | % | 30,410 | 2 | % | ||||||||||
| Energy |
20,426 | 1 | % | 19,668 | 1 | % | ||||||||||
| Total Corporate securities |
$ | 1,395,047 | 100 | % | $ | 1,315,041 | 100 | % | ||||||||
The following tables summarize the total general obligation and revenue bonds issued by states and political subdivisions held in the Company’s investment securities portfolios as of the dates indicated, identifying the state in which the issuing government municipality or agency operates.
At June 30, 2019, the Company’s investment securities portfolios included securities issued by 528 state and local government municipalities and agencies located within 42 states. The largest exposure to any one municipality or agency was $8.9 million (fair value) represented by seven general obligation bonds.
| At June 30, 2019 |
||||||||
| Amortized |
Fair |
|||||||
| Cost |
Value |
|||||||
| (In thousands) |
||||||||
| Obligations of states and political subdivisions: |
||||||||
| General obligation bonds: |
||||||||
| California |
$ | 105,597 | $ | 108,146 | ||||
| Texas |
43,577 | 43,962 | ||||||
| New Jersey |
32,619 | 33,007 | ||||||
| Washington |
23,985 | 24,623 | ||||||
| Other (34 states) |
240,597 | 244,534 | ||||||
| Total general obligation bonds |
$ | 446,375 | $ | 454,272 | ||||
| Revenue bonds: |
||||||||
| California |
$ | 31,885 | $ | 32,384 | ||||
| Kentucky |
17,204 | 17,481 | ||||||
| Colorado |
12,934 | 13,269 | ||||||
| Indiana |
11,962 | 12,151 | ||||||
| Washington |
11,669 | 12,037 | ||||||
| Iowa |
10,853 | 10,887 | ||||||
| Other (28 states) |
91,804 | 93,519 | ||||||
| Total revenue bonds |
$ | 188,311 | $ | 191,728 | ||||
| Total obligations of states and political subdivisions |
$ | 634,686 | $ | 646,000 | ||||
At December 31, 2018, the Company’s investment securities portfolios included securities issued by 583 state and local government municipalities and agencies located within 43 states. The largest exposure to any one municipality or agency was $9.3 million (fair value) represented by eight general obligation bonds.
| At December 31, 2018 |
||||||||
| Amortized |
Fair |
|||||||
| Cost |
Value |
|||||||
| (In thousands) |
||||||||
| Obligations of states and political subdivisions: |
||||||||
| General obligation bonds: |
||||||||
| California |
$ | 104,607 | $ | 105,730 | ||||
| Texas |
56,653 | 56,286 | ||||||
| New Jersey |
35,501 | 35,527 | ||||||
| Minnesota |
29,609 | 29,593 | ||||||
| Other (35 states) |
267,402 | 266,136 | ||||||
| Total general obligation bonds |
$ | 493,772 | $ | 493,272 | ||||
| Revenue bonds: |
||||||||
| California |
$ | 35,164 | $ | 35,399 | ||||
| Kentucky |
19,320 | 19,328 | ||||||
| Colorado |
14,564 | 14,539 | ||||||
| Washington |
13,034 | 13,228 | ||||||
| Iowa |
13,202 | 13,052 | ||||||
| Indiana |
12,007 | 12,034 | ||||||
| Other (28 states) |
113,047 | 112,805 | ||||||
| Total revenue bonds |
$ | 220,338 | $ | 220,385 | ||||
| Total obligations of states and political subdivisions |
$ | 714,110 | $ | 713,657 | ||||
At June 30, 2019 and December 31, 2018, 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 21 revenue sources at June 30, 2019 and 22 revenue sources December 31, 2018. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.
| At June 30, 2019 |
||||||||
| Amortized |
Fair |
|||||||
| Cost |
Value |
|||||||
| (In thousands) |
||||||||
| Revenue bonds by revenue source: |
||||||||
| Water |
$ | 45,406 | $ | 46,313 | ||||
| Sales tax |
25,970 | 26,502 | ||||||
| Sewer |
21,711 | 22,225 | ||||||
| Lease (renewal) |
16,167 | 16,446 | ||||||
| Other (17 sources) |
79,057 | 80,242 | ||||||
| Total revenue bonds by revenue source |
$ | 188,311 | $ | 191,728 | ||||
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| At December 31, 2018 |
||||||||
| Amortized |
Fair |
|||||||
| Cost |
Value |
|||||||
| (In thousands) |
||||||||
| Revenue bonds by revenue source: |
||||||||
| Water |
$ | 46,326 | $ | 46,671 | ||||
| Sales tax |
28,264 | 28,517 | ||||||
| Sewer |
28,335 | 28,502 | ||||||
| Lease (renewal) |
17,013 | 17,051 | ||||||
| College & University |
13,919 | 13,714 | ||||||
| Other (17 sources) |
86,481 | 85,930 | ||||||
| Total revenue bonds by revenue source |
$ | 220,338 | $ | 220,385 | ||||
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 audit committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans to challenge the credit risk grades assigned by Management using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated Management attention to maximize collection. |
| ● |
The Bank maintains two loan administration offices whose sole responsibility is to manage and collect classified loans. |
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, |
|||||||||||
| 2019 |
2018 |
2018 |
||||||||||
| (In thousands) |
||||||||||||
| Nonperforming nonaccrual loans |
$ | 177 | $ | 783 | $ | 998 | ||||||
| Performing nonaccrual loans |
3,670 | 4,110 | 3,870 | |||||||||
| Total nonaccrual loans |
3,847 | 4,893 | 4,868 | |||||||||
| Accruing loans 90 or more days past due |
249 | 193 | 551 | |||||||||
| Total nonperforming loans |
4,096 | 5,086 | 5,419 | |||||||||
| Other real estate owned |
43 | 939 | 350 | |||||||||
| Total nonperforming assets |
$ | 4,139 | $ | 6,025 | $ | 5,769 | ||||||
Nonperforming assets have declined at June 30, 2019 compared with June 30, 2018 due to payoffs, chargeoffs and sale of Other Real Estate Owned. At June 30, 2019, one loan secured by commercial real estate with a balance of $3.7 million was on nonaccrual status. The remaining two nonaccrual loans held at June 30, 2019 had carrying values of $100 thousand and $77 thousand.
Management believes the overall credit quality of the loan portfolio is reasonably stable; however, classified and nonperforming assets could fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, and collateral values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent loans will not occur in the future.
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Allowance for Loan Losses
The Company’s allowance for loan losses represents Management’s estimate of loan losses inherent in the loan portfolio. In evaluating credit risk for loans, Management measures loss potential of the carrying value of loans. As described above, payments received on nonaccrual loans may be applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected.
The following table summarizes the allowance for loan losses, chargeoffs and recoveries for the periods indicated:
| For the Three Months |
For the Six Months |
|||||||||||||||
| Ended June 30, |
||||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Analysis of the Allowance for Loan Losses |
||||||||||||||||
| Balance, beginning of period |
$ | 20,477 | $ | 23,081 | $ | 21,351 | $ | 23,009 | ||||||||
| Provision for loan losses |
- | - | - | - | ||||||||||||
| Loans charged off |
||||||||||||||||
| Commercial |
(48 | ) | - | (71 | ) | (41 | ) | |||||||||
| Consumer installment and other |
(925 | ) | (805 | ) | (2,293 | ) | (2,170 | ) | ||||||||
| Total chargeoffs |
(973 | ) | (805 | ) | (2,364 | ) | (2,211 | ) | ||||||||
| Recoveries of loans previously charged off |
||||||||||||||||
| Commercial |
123 | 420 | 216 | 1,249 | ||||||||||||
| Commercial real estate |
14 | - | 26 | - | ||||||||||||
| Construction |
- | - | - | - | ||||||||||||
| Consumer installment and other |
476 | 344 | 888 | 993 | ||||||||||||
| Total recoveries |
613 | 764 | 1,130 | 2,242 | ||||||||||||
| Net loan (losses) recoveries |
(360 | ) | (41 | ) | (1,234 | ) | 31 | |||||||||
| Balance, end of period |
$ | 20,117 | $ | 23,040 | $ | 20,117 | $ | 23,040 | ||||||||
| Net loan losses (recoveries) as a percentage of average total loans (annualized) |
0.12 | % | 0.01 | % | 0.21 | % | (0.01% | ) | ||||||||
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 all loans with outstanding principal balances in excess of $500 thousand that are classified or on nonaccrual status and all “troubled debt restructured” loans for impairment. The remainder of the loan portfolio is collectively evaluated for impairment based in part on quantitative analyses of historical loan loss experience of loan portfolio segments to determine standard loss rates for each segment. The loss rate for each loan portfolio segment reflects both the historical loss experience during a look-back period and 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, 2019 is economic and business conditions $0.5 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: concentrations of credit at $1.3 million, adequacy of lending Management and staff at $1.2 million, and loan review system at $1.1 million.
| Allowance for Loan Losses |
||||||||||||||||||||||||||||
| For the Three Months Ended June 30, 2019 |
||||||||||||||||||||||||||||
| 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 |
$ | 6,506 | $ | 3,927 | $ | 853 | $ | 261 | $ | 5,481 | $ | 3,449 | $ | 20,477 | ||||||||||||||
| (Reversal) provision |
(1,346 | ) | 116 | 264 | (23 | ) | 386 | 603 | - | |||||||||||||||||||
| Chargeoffs |
(48 | ) | - | - | - | (925 | ) | - | (973 | ) | ||||||||||||||||||
| Recoveries |
123 | 14 | - | - | 476 | - | 613 | |||||||||||||||||||||
| Total allowance for loan losses |
$ | 5,235 | $ | 4,057 | $ | 1,117 | $ | 238 | $ | 5,418 | $ | 4,052 | $ | 20,117 | ||||||||||||||
| Allowance for Loan Losses |
||||||||||||||||||||||||||||
| For the Six Months Ended June 30, 2019 |
||||||||||||||||||||||||||||
| 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 |
$ | 6,311 | $ | 3,884 | $ | 1,465 | $ | 869 | $ | 5,645 | $ | 3,177 | $ | 21,351 | ||||||||||||||
| (Reversal) provision |
(1,221 | ) | 147 | (348 | ) | (631 | ) | 1,178 | 875 | - | ||||||||||||||||||
| Chargeoffs |
(71 | ) | - | - | - | (2,293 | ) | - | (2,364 | ) | ||||||||||||||||||
| Recoveries |
216 | 26 | - | - | 888 | - | 1,130 | |||||||||||||||||||||
| Total allowance for loan losses |
$ | 5,235 | $ | 4,057 | $ | 1,117 | $ | 238 | $ | 5,418 | $ | 4,052 | $ | 20,117 | ||||||||||||||
| Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment |
||||||||||||||||||||||||||||
| At June 30, 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 |
$ | 2,587 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 2,587 | ||||||||||||||
| Collectively evaluated for impairment |
2,648 | 4,057 | 1,117 | 238 | 5,418 | 4,052 | 17,530 | |||||||||||||||||||||
| Total |
$ | 5,235 | $ | 4,057 | $ | 1,117 | $ | 238 | $ | 5,418 | $ | 4,052 | $ | 20,117 | ||||||||||||||
| Carrying value of loans: |
||||||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | 9,268 | $ | 6,592 | $ | - | $ | 195 | $ | 77 | $ | - | $ | 16,132 | ||||||||||||||
| Collectively evaluated for impairment |
234,309 | 571,073 | 5,482 | 37,618 | 297,098 | - | 1,145,580 | |||||||||||||||||||||
| Total |
$ | 243,577 | $ | 577,665 | $ | 5,482 | $ | 37,813 | $ | 297,175 | $ | - | $ | 1,161,712 | ||||||||||||||
The portion of the allowance for loan losses ascribed to commercial loans decreased from December 31, 2018 to June 30, 2019 based on Management’s judgment of decreasing risk from debt service requirements for borrowers with variable rate loans. The allowance for loan losses ascribed to construction loans decreased from December 31, 2018 to June 30, 2019 based on a reduced level of credit exposure relative to real property values. The allowance for loan losses ascribed to residential real estate loans declined from December 31, 2018 to June 30, 2019 due to Management’s evaluation of collateral values and loan amortization. The increase in unallocated loan loss allowance was due to reassessment of qualitative factors associated with the Company’s lending activity.
Management considers the $20.1 million allowance for loan losses to be adequate as a reserve against probable incurred loan losses in the loan portfolio as of June 30, 2019.
See Note 4 to the unaudited consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, allowance for loan losses and other real estate owned.
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. Financial instruments may mature or re-price at different times. Financial instruments 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 financial instruments may change as interest rates change. In addition, the changing levels of interest rates may have an impact on loan demand and demand for various deposit products.
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 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 loans and investment securities and paid for deposits and other borrowings. The nature and impact of future changes in monetary policies are generally not predictable.
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 market 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. 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.
Management monitors the Company’s interest rate risk using a purchased simulation model, which is periodically validated using supervisory guidance issued by the Board of Governors of the Federal Reserve System, SR 11-7 “Guidance on Model Risk Management.” Management measures its exposure to interest rate risk using both a static and dynamic composition of financial instruments. Within the static composition simulation, cash flows are assumed redeployed into like financial instruments at prevailing rates and yields. Within the dynamic composition simulation, Management makes assumptions regarding the expected change in the volume of financial instruments given the assumed change in market interest rates. Both simulations are used to measure expected changes in net interest income assuming various levels of change in market interest rates.
The Company’s asset and liability position was slightly “asset sensitive” at June 30, 2019, depending on the interest rate assumptions applied to each simulation model. 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.
At June 30, 2019, Management’s most recent measurements of estimated changes in net interest income were:
Static Simulation (balance sheet composition unchanged):
| Assumed Immediate Parallel Shift in Interest Rates |
|
-1.00% |
|
0.00% |
|
+1.00% |
| First Year Change in Net Interest Income |
|
-7.40% |
|
0.00% |
|
+4.80% |
Dynamic Simulation (balance sheet composition changes):
| Assumed Change in Interest Rates Over 1 Year |
|
-1.00% |
|
0.00% |
|
+1.00% |
| First Year Change in Net Interest Income |
|
-3.70% |
|
0.00% |
|
+2.90% |
Simulation estimates depend on, and will change with, the size and mix of the actual and projected composition of financial instruments at the time of each simulation.
The Company does not currently engage in trading activities or use derivative instruments to manage 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. Preferred or common stock holdings, as permitted by banking regulations, can fluctuate in value. Changes in value of preferred or common stock holdings are recognized 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 at times 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 and tax deductions 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% of funding for average total assets in the six months ended June 30, 2019 and the year ended December 31, 2018. 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.
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 source of liquidity. The Company held $3.6 billion in total investment securities at June 30, 2019. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At June 30, 2019, such collateral requirements totaled approximately $747 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 the 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 $22 million and $43 million in the six months ended June 30, 2019 and in the year ended December 31, 2018, respectively, and retire common stock in the amount of $488 thousand and $524 thousand, respectively. 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 12.0% in the six months ended June 30, 2019 and 11.3% in the year ended December 31, 2018. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $8 million in the six months ended June 30, 2019 and $13 million in the year ended December 31, 2018.
The Company paid common dividends totaling $22 million in the six months ended June 30, 2019 and $43 million in the year ended December 31, 2018, which represent dividends per common share of $0.81 and $1.60, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has at times repurchased and retired its common stock as another means to return earnings to shareholders. The Company repurchased and retired 8 thousand shares valued at $488 thousand in the six months ended June 30, 2019 and 9 thousand shares valued at $524 thousand in the year ended December 31, 2018.
The Company's primary capital resource is shareholders' equity, which was $693 million at June 30, 2019 compared with $616 million at December 31, 2018. The Company's ratio of equity to total assets was 12.6% at June 30, 2019 and 11.1% at December 31, 2018.
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 debt securities available for sale, 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 ended January 1, 2019, when the 2.5% capital conservation buffer was fully implemented. Any bank subject to the rule which is unable to maintain its “capital conservation buffer” above the minimum regulatory capital ratios 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 tables below, on the dates indicated.
| To Be |
||||||||||||||||
| Well-capitalized |
||||||||||||||||
| Required for |
Under Prompt |
|||||||||||||||
| At June 30, 2019 |
Capital Adequacy |
Corrective Action |
||||||||||||||
| Company |
Bank |
Purposes |
Regulations (Bank) |
|||||||||||||
| Common Equity Tier I Capital |
17.18 | % | 13.05 | % | 7.00 | %(1) | 6.50 | % | ||||||||
| Tier I Capital |
17.18 | % | 13.05 | % | 8.50 | %(1) | 8.00 | % | ||||||||
| Total Capital |
17.88 | % | 13.94 | % | 10.50 | %(1) | 10.00 | % | ||||||||
| Leverage Ratio |
10.19 | % | 7.69 | % | 4.00 | % | 5.00 | % | ||||||||
(1) Includes 2.5% capital conservation buffer.
| To Be |
||||||||||||||||||||
| Required for |
Well-capitalized |
|||||||||||||||||||
| Capital Adequacy Purposes |
Under Prompt |
|||||||||||||||||||
| At December 31, 2018 |
Effective |
Effective |
Corrective Action |
|||||||||||||||||
| Company |
Bank |
January 1, 2018 |
January 1, 2019 |
Regulations (Bank) |
||||||||||||||||
| Common Equity Tier I Capital |
16.30 | % | 13.01 | % | 6.375 | %(2) | 7.00 | %(3) | 6.50 | % | ||||||||||
| Tier I Capital |
16.30 | % | 13.01 | % | 7.875 | %(2) | 8.50 | %(3) | 8.00 | % | ||||||||||
| Total Capital |
17.03 | % | 13.94 | % | 9.875 | %(2) | 10.50 | %(3) | 10.00 | % | ||||||||||
| Leverage Ratio |
9.51 | % | 7.55 | % | 4.000 | % | 4.00 | % | 5.00 | % | ||||||||||
(2) Includes 1.875% capital conservation buffer.
(3) Includes 2.5% capital conservation buffer.
In June 2016, the Financial Accounting Standards Board issued an update to the accounting standards for credit losses known as the "Current Expected Credit Losses" (CECL) methodology, which replaces the existing incurred loss methodology for certain financial assets. The Company intends to timely adopt the CECL methodology January 1, 2020, which involves an implementing accounting entry to retained earnings. In December 2018, the federal bank regulatory agencies approved a final rule which became effective April 1, 2019 modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of implementing the CECL methodology. The Company has not determined whether it will elect the three year phase in period for the day-one regulatory capital effects. See Note 1 to the consolidated financial statements, “Summary of Significant Accounting Policies: Recently Issued Accounting Standards” for more information on the CECL methodology.
The Company and the Bank routinely project capital levels by analyzing forecasted earnings, credit quality, shareholder dividends, asset volumes, share repurchase activity, stock option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain regulatory capital levels exceeding the highest effective regulatory standard and pay quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company’s Board of Directors.
Credit risk and interest rate risk are the most significant market risks affecting the Company, and equity price risk can also affect the Company’s financial results. These risks are described in the preceding sections regarding “Loan Portfolio Credit Risk,” and “Asset/Liability and Market Risk Management.” Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company’s business activities.
Item 4. Controls and Procedures
The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of June 30, 2019.
Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, other than ordinary routine legal proceedings arising in the ordinary course of the Company’s business. None of these proceedings is expected to have a material adverse impact upon the Company’s business, financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated. In the second quarter 2019, the Company achieved a mediated settlement to dismiss a lawsuit and paid the resulting liability of $252 thousand. The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2018 to some customers. The Company initially estimated the probable amount of these obligations to be $5,542 thousand and accrued a liability for such amount in 2017; based on additional information received in the second quarter 2019, the Company increased such liability to $5,843 thousand by recognizing an expense of $301 thousand.
The Company’s Form 10-K as of December 31, 2018 includes detailed disclosure about the risks faced by the Company’s business; such risks have not materially changed since the Form 10-K was filed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c) Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended June 30, 2019.
| 2019 |
||||||||||||||||
| Period |
(a) Total Number of Shares Purchased |
(b) Average Price Paid per Share |
(c) Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| (In thousands, except price paid) |
||||||||||||||||
| April 1 through April 30 |
8 | $ | 61.98 | 8 | 1,742 | |||||||||||
| May 1 through May 31 |
- | - | - | 1,742 | ||||||||||||
| June 1 through June 30 |
- | - | - | 1,742 | ||||||||||||
| Total |
8 | $ | 61.98 | 8 | 1,742 | |||||||||||
The Company repurchases shares of its common stock in the open market on a discretionary basis to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares under stock option plans, and other ongoing requirements.
Shares were repurchased during the period April 1, 2019 through June 30, 2019 pursuant to a program approved by the Board of Directors on July 26, 2018, which authorizes the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2019.
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
(a) Submission of Matters to a Vote of Security Holders
The information required by this item is incorporated by reference to Item 5.07 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on April 29, 2019.
(b) Entry into a Material Definitive Agreement
The information required by this item is incorporated by reference to Item 1.01 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on June 27, 2019.
The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESTAMERICA BANCORPORATION
(Registrant)
/s/ JOHN "ROBERT" THORSON
John "Robert" Thorson
Senior Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Date: August 5, 2019
Exhibit 101.INS: XBRL Instance Document
Exhibit 101.SCH: XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL: XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF: XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB: XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE: XBRL Taxonomy Extension Presentation Linkbase Document
[The remainder of this page intentionally left blank]
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