Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and nine months ended September 30, ~~2017~~ 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~~10-K for the year ended December 31, ~~2016.~~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~~10-K for the year ended December 31, ~~2016.~~ 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, ~~Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments,~~it is reasonably possible conditions could change materially affecting results of operations and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses is included in the “Provision for Loan Losses,” “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” discussion below. Certain amounts in prior periods have been reclassified to conform to the current presentation.financial conditions.

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

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

Recently Adopted Accounting Standards

~~FASB Accounting Standards Update (ASU) 2016-09,~~~~Improvements to Employee Share-Based Payment Accounting,~~ ~~was issued March~~In the nine months ended September 30, ~~2016. The provisions of~~ 2019, the new standard changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. The Company adopted the ASU provisions effective January 1, 2017, which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or expire. During the first nine months of 2017,~~403~~ ~~thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1.6~~ ~~million. The first nine months of 2017 income tax provision was $688~~ ~~thousand lower than would have been under~~following new accounting ~~standards prior to the adoption of ASU 2016-09. The Company elected to account for forfeitures as they occur.~~guidance:

~~Recently Issued Accounting Standards~~

FASB ASU ~~2014-09~~,~~Revenue (Topic 606): Revenue from Contracts with Customers,~~ was issued May 2014. The ASU specifies a standardized approach for revenue recognition across industries and transactions. The scope of the ASU does not include revenue streams covered by other ASU topics; thus, Topic 606 does not apply to revenue related to financial instruments, guarantees and leases, such as the Company’s net interest income.

~~- 9 -~~

Approximately 73% of our revenue, including all of our net interest income and a portion of our noninterest income, is out of scope of the guidance. The contracts that are in scope of the guidance are primarily related to service charges and fees on deposit accounts, merchant processing fees, trust fees and other service charges, commissions and fees. We have created an implementation team that is analyzing the individual contracts in scope to determine if our current accounting will change. This review is expected be completed in the fourth quarter of 2017.

The Company will be required to adopt the ASU on January 1, 2018. The Company intends to adopt the accounting standard during the first quarter of 2018, as required. The Company has not yet selected a transition method. The Company’s preliminary analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the Company’s consolidated financial statements.

~~FASB ASU 2016-01~~,~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,~~was issued January 2016. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

The Company will be required to adopt the ASU provisions on January 1, 2018, and for those equity securities with readily determinable fair values, the Company plans to elect the retrospective transition approach with a cumulative effect adjustment to the balance sheet and for those equity securities that do not have readily determinable fair values, the Company plans to elect the prospective transition approach. The adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments.

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

The Company ~~will be required to adopt~~adopted the ASU provisions effective January 1, 2019, and ~~plans to elect~~elected the modified retrospective transition approach. ~~Management is evaluating~~The Company elected the ~~impact that~~package of practical expedients provided in the ASU, ~~will have~~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 ~~Company’s~~initial direct cost for any existing leases. The Company also elected to combine lease and non-lease components and exempt short-term leases with an original term of one year or less from on-balance sheet recognition. The implementing entry recognized a lease liability of $15.3 million and right-of-use asset of $15.3 million for facilities leases. The change in occupancy and equipment expense was not material.

-9-

FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.
The Company adopted the ASU provisions on January 1, 2019. The implementing entry reduced the carrying value of investment securities, specifically obligations of states and political subdivisions, by $3.1 million and reduced retained earnings by $2.8 million, net of tax. The change in premium amortization method was not material to revenue recognition.
FASB ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, was issued August 2017. The ASU expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. AsThe ASU also provides for a one-time reclassification of ~~December 31, 2016,~~prepayable assets from held-to-maturity (HTM) to available for sale (AFS) regardless of derivative use.
The Company adopted the ~~Company leased 61 of its operating facilities; the remaining minimum lease payments were $20.8 million.~~ ASU provisions on January 1, 2019. The Company does not ~~expect a material change~~ currently engage in ~~noninterest expenses upon adoption~~trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the ~~new standard.~~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,~~2016-13,Financial Instruments – Credit Losses (Topic ~~326)~~326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changes estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with the current expected credit loss (CECL) model, which will accelerate recognition of credit losses. Additionally, credit losses relating to ~~available-for-sale~~ debt securities available-for-sale will be recorded through an allowance for credit losses under the new standard. The Company will also be required to provide additional disclosures related to the financial assets within the scope of the new standard.

The Company will be required to adopt the ASU provisions on January 1, 2020. Management ~~is evaluating the impact that the ASU will have on the Company’s consolidated financial statements.~~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. ~~Management expects the Company and the Bank to meet all regulatory capital adequacy requirements to which they are subject following adoption of the new standard.~~ 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 ~~2017-08~~2018-13,~~Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20)~~Fair Value Measurements (Topic 820): ~~Premium Amortization on Purchased Callable Debt Securities~~Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued ~~March 2017.~~ August 2018. The ASU ~~will shorten~~is part of the ~~amortization period for certain callable debt securities held at a premium. Specifically,~~disclosure framework project, where the ~~amendments require~~primary focus is to improve the ~~premium~~effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to ~~be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.~~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 ~~required to adopt~~adopted by the ~~ASU provisions on~~ Company January 1, ~~2019. Management is evaluating~~2020. The additional disclosures will not affect the ~~impact the ASU will have on the Company’s~~ financial ~~statements.~~

~~- 10 -~~

results upon adoption.

~~Note 3: Investment Securities~~

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

Investment Securities Available for Sale
At September 30, 2017
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Securities of U.S. Government sponsored entities $ 122,280 $ 19 $ (1,840 ) $ 120,459
Agency residential mortgage-backed securities (MBS) 754,138 1,091 (16,011 ) 739,218
Non-agency residential MBS 164 1 - 165
Agency commercial MBS 1,916 - (14 ) 1,902
Securities of U.S. Government entities 1,783 - (14 ) 1,769
Obligations of states and political subdivisions 176,182 4,929 (1,610 ) 179,501
FHLMC⁽¹⁾ and FNMA⁽²⁾ stock 749 8,811 - 9,560
Corporate securities 1,037,173 2,943 (4,027 ) 1,036,089
Other securities 2,000 - (186 ) 1,814
Total $ 2,096,385 $ 17,794 $ (23,702 ) $ 2,090,477

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

⁽²⁾ ~~Federal National Mortgage Association~~

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

Investment Securities Held to Maturity
At September 30, 2017
Gross Gross
Amortized Unrecognized Unrecognized Fair
Cost Gains Losses Value
(In thousands)
Agency residential MBS $ 574,017 $ 949 $ (6,802 ) $ 568,164
Non-agency residential MBS 4,628 67 - 4,695
Agency commercial MBS 9,114 1 (82 ) 9,033
Obligations of states and political subdivisions 616,481 10,999 (1,093 ) 626,387
Total $ 1,204,240 $ 12,016 $ (7,977 ) $ 1,208,279

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~~- 11 -~~

-10-

~~An analysis~~Note 3: Investment Securities

Effective January 1, 2018, upon adoption of ASU 2016-01, equity securities included in the ~~amortized cost, gross unrealized gains and losses accumulated in other comprehensive income, and fair value of the~~Company’s available for sale ~~investment~~portfolio of $1,800 thousand were reclassified to equity securities. The reclassification of equity securities ~~portfolio follows:~~

Investment Securities Available for Sale
At December 31, 2016
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Securities of U.S. Government sponsored entities $ 141,599 $ 35 $ (2,974 ) $ 138,660
Agency residential MBS 711,623 921 (21,045 ) 691,499
Non-agency residential MBS 272 - (1 ) 271
Securities of U.S. Government entities 2,041 - (16 ) 2,025
Obligations of states and political subdivisions 182,230 5,107 (3,926 ) 183,411
Asset-backed securities 696 - (1 ) 695
FHLMC⁽¹⁾ and FNMA⁽²⁾ stock 749 10,120 - 10,869
Corporate securities 866,835 1,690 (7,668 ) 860,857
Other securities 2,034 621 (184 ) 2,471
Total $ 1,908,079 $ 18,494 $ (35,815 ) $ 1,890,758

resulted in recording a cumulative effect adjustment to decrease retained earnings by $142 thousand, net of tax.

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

⁽²⁾ ~~Federal National Mortgage Association~~The Company had no equity securities at September 30, 2019 due to the sales of such securities during the third quarter 2019. The market value of equity securities was $1,747 thousand at December 31, 2018. During the nine months ended September 30, 2019, the Company recognized gross unrealized holding gains of $50 thousand in earnings. During the nine months ended September 30, 2018, the Company recognized gross unrealized holding losses of $66 thousand in earnings.

An analysis of the amortized cost ~~gross unrecognized gains and losses,~~ and fair value by major categories of ~~the~~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, ~~investment securities portfolio~~which are carried at amortized cost, follows:

At September 30, 2019

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(In thousands)

Debt securities available for sale

U.S. Treasury securities
$ 44,758 $ 68 $ - $ 44,826
Securities of U.S. Government sponsored entities
122,245 23 (160 ) 122,108
Agency residential mortgage-backed securities (MBS)
976,066 10,294 (6,609 ) 979,751
Non-agency residential MBS
101 3 - 104
Agency commercial MBS
3,748 3 - 3,751
Securities of U.S. Government entities
786 - (9 ) 777
Obligations of states and political subdivisions
161,506 3,944 (47 ) 165,403
Corporate securities
1,645,518 24,520 (2,991 ) 1,667,047
Total debt securities available for sale
2,954,728 38,855 (9,816 ) 2,983,767
Debt securities held to maturity

Agency residential MBS
377,995 817 (2,647 ) 376,165
Non-agency residential MBS
2,471 62 - 2,533
Obligations of states and political subdivisions
412,750 7,804 (11 ) 420,543
Total debt securities held to maturity
793,216 8,683 (2,658 ) 799,241
Total
$ 3,747,944 $ 47,538 $ (12,474 ) $ 3,783,008

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
$ 139,572 $ 5 $ (3 ) $ 139,574
Securities of U.S. Government sponsored entities
167,228 65 (3,275 ) 164,018
Agency residential MBS
883,715 595 (30,439 ) 853,871
Non-agency residential MBS
113 1 - 114
Agency commercial MBS
1,869 - (27 ) 1,842
Securities of U.S. Government entities
1,128 - (9 ) 1,119
Obligations of states and political subdivisions
180,220 1,856 (2,985 ) 179,091
Corporate securities
1,337,608 1,075 (23,642 ) 1,315,041
Total debt securities available for sale
2,711,453 3,597 (60,380 ) 2,654,670
Debt securities held to maturity

Agency residential MBS
447,332 249 (14,129 ) 433,452
Non-agency residential MBS
3,387 40 - 3,427
Obligations of states and political subdivisions
533,890 3,403 (2,727 ) 534,566
Total debt securities held to maturity
984,609 3,692 (16,856 ) 971,445
Total
$ 3,696,062 $ 7,289 $ (77,236 ) $ 3,626,115
Investment Securities Held to Maturity
At December 31, 2016
Gross Gross
Amortized Unrecognized Unrecognized Fair
Cost Gains Losses Value
(In thousands)
Securities of U.S. Government sponsored entities $ 581 $ 1 $ - $ 582
Agency residential MBS 668,235 1,122 (8,602 ) 660,755
Non-agency residential MBS 5,370 76 - 5,446
Agency commercial MBS 9,332 11 (143 ) 9,200
Obligations of states and political subdivisions 662,794 6,031 (4,067 ) 664,758
Total $ 1,346,312 $ 7,241 $ (12,812 ) $ 1,340,741
-11-

The amortized cost and fair value of ~~investment~~debt securities by contractual maturity are shown in the following ~~tables~~table s at the dates indicated:
At September 30, 2017
At September 30, 2019

Securities Available Securities Held
Debt Securities Available

Debt Securities Held

for Sale to Maturity
for Sale

to Maturity

Amortized Fair Amortized Fair
Amortized

Fair

Amortized

Fair

Cost Value Cost Value
Cost

Value

Cost

Value

(In thousands)
(In thousands)

Maturity in years:
Maturity in years:

1 year or less $ 208,391 $ 208,764 $ 37,548 $ 38,399 $ 284,550 $ 285,060 $ 64,092 $ 64,247
Over 1 to 5 years 861,895 860,966 278,240 281,577 1,182,895 1,199,153 179,576 182,635
Over 5 to 10 years 219,648 221,949 290,869 296,357 471,434 478,841 169,082 173,661
Over 10 years 45,701 44,370 9,824 10,054 35,934 37,107 - -
Subtotal 1,335,635 1,336,049 616,481 626,387 1,974,813 2,000,161 412,750 420,543
MBS 758,001 743,054 587,759 581,892 979,915 983,606 380,466 378,698
Other securities 2,749 11,374 - -
Total $ 2,096,385 $ 2,090,477 $ 1,204,240 $ 1,208,279 $ 2,954,728 $ 2,983,767 $ 793,216 $ 799,241

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
$ 262,418 $ 261,976 $ 86,172 $ 86,148
Over 1 to 5 years
1,438,849 1,414,020 214,137 213,829
Over 5 to 10 years
85,817 85,877 232,544 233,515
Over 10 years
38,672 36,970 1,037 1,074
Subtotal
1,825,756 1,798,843 533,890 534,566
MBS
885,697 855,827 450,719 436,879
Total
$ 2,711,453 $ 2,654,670 $ 984,609 $ 971,445

~~- 12 -~~
At December 31, 2016
Securities Available Securities Held
for Sale to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
Maturity in years:
1 year or less $ 154,693 $ 154,835 $ 14,961 $ 15,639
Over 1 to 5 years 750,834 745,219 292,024 292,062
Over 5 to 10 years 238,077 239,153 318,580 319,587
Over 10 years 47,756 44,416 37,810 38,052
Subtotal 1,191,360 1,183,623 663,375 665,340
MBS 713,936 693,795 682,937 675,401
Other securities 2,783 13,340 - -
Total $ 1,908,079 $ 1,890,758 $ 1,346,312 $ 1,340,741

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 September 30, ~~2017~~ 2019 and December 31, ~~2016,~~ 2018, the Company had no0 high-risk collateralized mortgage obligations as defined by regulatory guidelines.

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-12-
An analysis of the gross unrealized losses of the debt securities available for sale ~~investment securities~~ portfolio follows:

Investment Securities Available for Sale
At September 30, 2017
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 6 $ 89,046 $ (1,169 ) 2 $ 29,328 $ (671 ) 8 $ 118,374 $ (1,840 )
Agency residential MBS 15 336,023 (8,283 ) 37 202,746 (7,728 ) 52 538,769 (16,011 )
Non-agency residential MBS 1 6 - - - - 1 6 -
Agency commercial MBS 1 1,902 (14 ) - - - 1 1,902 (14 )
Securities of U.S. Government entities 1 896 (6 ) 2 873 (8 ) 3 1,769 (14 )
Obligations of states and political subdivisions 35 28,910 (592 ) 24 35,329 (1,018 ) 59 64,239 (1,610 )
Corporate securities 36 299,545 (1,672 ) 26 166,386 (2,355 ) 62 465,931 (4,027 )
Other securities - - - 1 1,814 (186 ) 1 1,814 (186 )
Total 95 $ 756,328 $ (11,736 ) 92 $ 436,476 $ (11,966 ) 187 $ 1,192,804 $ (23,702 )

Debt Securities Available for Sale

At September 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
2 $ 19,970 $ (30 ) 4 $ 55,794 $ (130 ) 6 $ 75,764 $ (160 )
Agency residential MBS
1 3,750 (62 ) 49 400,690 (6,547 ) 50 404,440 (6,609 )
Securities of U.S. Government entities
- - - 2 777 (9 ) 2 777 (9 )
Obligations of states and political subdivisions
- - - 9 4,692 (47 ) 9 4,692 (47 )
Corporate securities
16 146,067 (1,196 ) 21 166,633 (1,795 ) 37 312,700 (2,991 )
Total
19 $ 169,787 $ (1,288 ) 85 $ 628,586 $ (8,528 ) 104 $ 798,373 $ (9,816 )

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

Investment Securities Held to Maturity
At September 30, 2017
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 64 $ 494,096 $ (6,320 ) 8 $ 19,092 $ (482 ) 72 $ 513,188 $ (6,802 )
Agency commercial MBS - - - 1 7,101 (82 ) 1 7,101 (82 )
Obligations of states and political subdivisions 42 40,023 (417 ) 26 27,693 (676 ) 68 67,716 (1,093 )
Total 106 $ 534,119 $ (6,737 ) 35 $ 53,886 $ (1,240 ) 141 $ 588,005 $ (7,977 )

Debt Securities Held to Maturity

At September 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
7 $ 13,020 $ (90 ) 57 $ 306,728 $ (2,557 ) 64 $ 319,748 $ (2,647 )
Obligations of states and political subdivisions
- - - 9 8,562 (11 ) 9 8,562 (11 )
Total
7 $ 13,020 $ (90 ) 66 $ 315,290 $ (2,568 ) 73 $ 328,310 $ (2,658 )

~~- 13 -~~

The unrealized losses on the Company’s ~~investment~~debt securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. One corporate bond with an amortized cost of $15.0 million and a fair value of $13.7 million at September 30, 2019, is rated below investment grade. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

The Company does not intend to sell any ~~investments~~debt securities and has concluded that it is more likely than not that it will not be required to sell the ~~investments~~debt securities prior to recovery of the amortized cost basis. Therefore, the Company does not consider these ~~investments~~debt securities to be other-than-temporarily impaired as of September 30, ~~2017.~~2019.

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

As of September 30, ~~2017, $771,257~~ ~~thousand of investment~~2019 and December 31, 2018, the Company had debt securities ~~were~~ pledged to secure public deposits and short-term borrowed ~~funds. As~~funds of ~~December 31, 2016, $768,845~~$721,741 thousand ~~of investment securities were pledged to secure public deposits~~ and ~~short-term borrowed funds.~~$728,161 thousand, respectively.

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-13-
An analysis of the gross unrealized losses of ~~investment~~the debt securities available for sale portfolio follows:

Investment Securities Available for Sale
At December 31, 2016
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 8 $ 117,227 $ (2,974 ) - $ - $ - 8 $ 117,227 $ (2,974 )
Agency residential MBS 21 524,269 (16,494 ) 28 122,901 (4,551 ) 49 647,170 (21,045 )
Non-agency residential MBS 2 246 (1 ) - - - 2 246 (1 )
Securities of U.S. Government entities 2 1,253 (9 ) 1 772 (7 ) 3 2,025 (16 )
Obligations of states and political subdivisions 43 57,989 (3,905 ) 3 1,117 (21 ) 46 59,106 (3,926 )
Asset-backed securities - - - 1 695 (1 ) 1 695 (1 )
Corporate securities 53 385,175 (6,551 ) 27 96,145 (1,117 ) 80 481,320 (7,668 )
Other securities - - - 1 1,816 (184 ) 1 1,816 (184 )
Total 129 $ 1,086,159 $ (29,934 ) 61 $ 223,446 $ (5,881 ) 190 $ 1,309,605 $ (35,815 )

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
2 $ 54,805 $ (3 ) - $ - $ - 2 $ 54,805 $ (3 )
Securities of U.S. Government sponsored entities
1 990 (5 ) 9 117,963 (3,270 ) 10 118,953 (3,275 )
Agency residential MBS
8 107,497 (507 ) 58 640,210 (29,932 ) 66 747,707 (30,439 )
Agency commercial MBS
1 1,842 (27 ) - - - 1 1,842 (27 )
Securities of U.S. Government entities
- - - 2 1,119 (9 ) 2 1,119 (9 )
Obligations of states and political subdivisions
32 26,452 (166 ) 71 67,121 (2,819 ) 103 93,573 (2,985 )
Corporate securities
38 308,157 (3,403 ) 79 722,740 (20,239 ) 117 1,030,897 (23,642 )
Total
82 $ 499,743 $ (4,111 ) 219 $ 1,549,153 $ (56,269 ) 301 $ 2,048,896 $ (60,380 )

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

Investment Securities Held to Maturity
At December 31, 2016
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 66 $ 569,876 $ (8,285 ) 3 $ 10,480 $ (317 ) 69 $ 580,356 $ (8,602 )
Agency commercial MBS - - - 1 7,214 (143 ) 1 7,214 (143 )
Obligations of states and political subdivisions 295 272,496 (3,710 ) 12 13,126 (357 ) 307 285,622 (4,067 )
Total 361 $ 842,372 $ (11,995 ) 16 $ 30,820 $ (817 ) 377 $ 873,192 $ (12,812 )

~~- 14 -~~

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
16 $ 8,495 $ (34 ) 78 $ 412,574 $ (14,095 ) 94 $ 421,069 $ (14,129 )
Non-agency residential MBS
1 26 - - - - 1 26 -
Obligations of states and political subdivisions
97 83,633 (271 ) 142 151,546 (2,456 ) 239 235,179 (2,727 )
Total
114 $ 92,154 $ (305 ) 220 $ 564,120 $ (16,551 ) 334 $ 656,274 $ (16,856 )

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

For the Three Months For the Nine Months
Ended September 30,
2017 2016 2017 2016
(In thousands)

Taxable $ 12,957 $ 11,024 $ 37,584 $ 31,256
Tax-exempt from regular federal income tax 5,106 5,476 15,718 16,682
Total interest income from investment securities $ 18,063 $ 16,500 $ 53,302 $ 47,938

For the Three Months

For the Nine Months

Ended September 30,

2019

2018

2019

2018

(In thousands)

Taxable
$ 19,586 $ 16,780 $ 56,992 $ 47,327
Tax-exempt from federal income tax
3,777 4,880 12,165 14,768
Total interest income from investment securities
$ 23,363 $ 21,660 $ 69,157 $ 62,095

[The remainder of this page intentionally left blank]

-14-

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

At December 31, 2018, the Company had $5,713 thousand in loans secured by residential real estate which are indemnified from loss by the FDIC up to 80% of principal; the indemnification expired February 6, 2019.

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

At September 30,

At December 31,

2019

2018

(In thousands)

Commercial
$ 216,273 $ 275,080
Commercial Real Estate
579,227 580,480
Construction
6,678 3,982
Residential Real Estate
35,348 44,866
Consumer Installment & Other
295,703 302,794
Total
$ 1,133,229 $ 1,207,202

At September 30, 2017 At December 31, 2016
(In thousands)
Commercial $ 316,891 $ 354,697
Commercial Real Estate 573,717 542,171
Construction 4,992 2,555
Residential Real Estate 69,124 87,724
Consumer Installment & Other 320,058 365,564
Total $ 1,284,782 $ 1,352,711
~~Total loans outstanding reported above include loans purchased from the FDIC of $90,708~~ thousand and $121,210 thousand at September 30, 2017 and December 31, 2016, respectively. Loans purchased from the FDIC were separately reported in prior periods and have been reclassified into their respective categories in the current presentation.

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

For the

For the

Nine Months Ended

Year Ended

September 30, 2019

December 31, 2018

Accretable yield:

(In thousands)

Balance at the beginning of the period
$ 182 $ 738
Reclassification from nonaccretable difference
1,103 1,119
Accretion
(368 ) (1,675 )
Balance at the end of the period
$ 917 $ 182

Accretion
$ (368 ) $ (1,675 )
Change in FDIC indemnification
- 2
(Increase) in interest income
$ (368 ) $ (1,673 )

For the For the
Nine Months Ended Year Ended
September 30, 2017 December 31, 2016
Accretable yield: (In thousands)
Balance at the beginning of the period $ 1,237 $ 1,259
Reclassification from nonaccretable difference 1,504 3,912
Accretion (1,862 ) (3,934 )
Balance at the end of the period $ 879 $ 1,237

Accretion $ (1,862 ) $ (3,934 )
Change in FDIC indemnification 192 1,053
(Increase) in interest income $ (1,670 ) $ (2,881 )
The following summarizes activity in the allowance for loan losses:

Allowance for Loan Losses
For the Three Months Ended September 30, 2017
Consumer
Commercial Residential Installment
Commercial Real Estate Construction Real Estate and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Balance at beginning of period $ 8,167 $ 3,545 $ 160 $ 1,105 $ 7,215 $ 3,911 $ 24,103
Additions:
(Reversal) provision (391 ) 288 136 (50 ) 167 (150 ) -
Deductions:
Chargeoffs (132 ) - - - (886 ) - (1,018 )
Recoveries 128 - - - 415 - 543
Net loan losses (4 ) - - - (471 ) - (475 )
Total allowance for loan losses $ 7,772 $ 3,833 $ 296 $ 1,055 $ 6,911 $ 3,761 $ 23,628

Allowance for Loan Losses

For the Three Months Ended September 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
$ 5,235 $ 4,057 $ 1,117 $ 238 $ 5,418 $ 4,052 $ 20,117
(Reversal) provision
(596 ) (1 ) 482 (16 ) 655 (524 ) -
Chargeoffs
- - - - (1,039 ) - (1,039 )
Recoveries
233 12 - - 505 - 750
Total allowance for loan losses
$ 4,872 $ 4,068 $ 1,599 $ 222 $ 5,539 $ 3,528 $ 19,828

~~- 15 -~~

Allowance for Loan Losses

For the Nine Months Ended September 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
(1,817 ) 146 134 (647 ) 1,833 351 -
Chargeoffs
(71 ) - - - (3,332 ) - (3,403 )
Recoveries
449 38 - - 1,393 - 1,880
Total allowance for loan losses
$ 4,872 $ 4,068 $ 1,599 $ 222 $ 5,539 $ 3,528 $ 19,828

Allowance for Loan Losses
For the Nine Months Ended September 30, 2017
Consumer
Commercial Residential Installment
Commercial Real Estate Construction Real Estate and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Balance at beginning of period $ 8,327 $ 3,330 $ 152 $ 1,330 $ 7,980 $ 4,835 $ 25,954
Additions:
(Reversal) provision (220 ) 415 (1,755 ) (275 ) 1,009 (1,074 ) (1,900 )
Deductions:
Chargeoffs (961 ) - - - (3,783 ) - (4,744 )
Recoveries 626 88 1,899 - 1,705 - 4,318
Net loan (losses) recoveries (335 ) 88 1,899 - (2,078 ) - (426 )
Total allowance for loan losses $ 7,772 $ 3,833 $ 296 $ 1,055 $ 6,911 $ 3,761 $ 23,628
-15-

Allowance for Loan Losses

For the Three Months Ended September 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
$ 8,275 $ 3,789 $ 210 $ 1,064 $ 5,943 $ 3,759 $ 23,040
(Reversal) provision
(184 ) 372 44 (120 ) (137 ) 25 -
Chargeoffs
(384 ) (240 ) - - (845 ) - (1,469 )
Recoveries
103 - - - 353 - 456
Total allowance for loan losses
$ 7,810 $ 3,921 $ 254 $ 944 $ 5,314 $ 3,784 $ 22,027

Allowance for Loan Losses
For the Three Months Ended September 30, 2016
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 $ 10,402 $ 3,912 $ 167 $ 1,636 $ 7,651 $ 5,142 $ 28,910
Additions:
(Reversal) provision (3,642 ) (822 ) (22 ) (193 ) 1,777 (298 ) (3,200 )
Deductions:
Chargeoffs (88 ) - - - (1,848 ) - (1,936 )
Recoveries 1,739 509 - - 337 - 2,585
Net loan recoveries (losses) 1,651 509 - - (1,511 ) - 649
Total allowance for loan losses $ 8,411 $ 3,599 $ 145 $ 1,443 $ 7,917 $ 4,844 $ 26,359
Allowance for Loan Losses
For the Nine Months Ended September 30, 2016
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 $ 9,559 $ 4,212 $ 235 $ 1,801 $ 8,001 $ 5,963 $ 29,771
Additions:
(Reversal) provision (2,827 ) (1,152 ) (90 ) (358 ) 2,346 (1,119 ) (3,200 )
Deductions:
Chargeoffs (2,024 ) - - - (3,568 ) - (5,592 )
Recoveries 3,703 539 - - 1,138 - 5,380
Net loan recoveries (losses) 1,679 539 - - (2,430 ) - (212 )
Total allowance for loan losses $ 8,411 $ 3,599 $ 145 $ 1,443 $ 7,917 $ 4,844 $ 26,359

Allowance for Loan Losses

For the Nine Months Ended September 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
$ 7,746 $ 3,849 $ 335 $ 995 $ 6,418 $ 3,666 $ 23,009
(Reversal) provision
(863 ) 312 (81 ) (51 ) 565 118 -
Chargeoffs
(425 ) (240 ) - - (3,015 ) - (3,680 )
Recoveries
1,352 - - - 1,346 - 2,698
Total allowance for loan losses
$ 7,810 $ 3,921 $ 254 $ 944 $ 5,314 $ 3,784 $ 22,027

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 September 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
$ 2,550 $ - $ - $ - $ - $ - $ 2,550
Collectively evaluated for impairment
2,322 4,068 1,599 222 5,539 3,528 17,278
Total
$ 4,872 $ 4,068 $ 1,599 $ 222 $ 5,539 $ 3,528 $ 19,828
Carrying value of loans:

Individually evaluated for impairment
$ 8,647 $ 7,445 $ - $ 193 $ 44 $ - $ 16,329
Collectively evaluated for impairment
207,626 571,782 6,678 35,155 295,659 - 1,116,900
Total
$ 216,273 $ 579,227 $ 6,678 $ 35,348 $ 295,703 $ - $ 1,133,229

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At September 30, 2017
Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment $ 4,922 $ 154 $ - $ - $ - $ - $ 5,076
Collectively evaluated for impairment 2,850 3,679 296 1,055 6,911 3,761 18,552
Purchased loans with evidence of credit deterioration - - - - - - -
Total $ 7,772 $ 3,833 $ 296 $ 1,055 $ 6,911 $ 3,761 $ 23,628
Carrying value of loans:
Individually evaluated for impairment $ 10,749 $ 13,973 $ - $ 211 $ - $ - $ 24,933
Collectively evaluated for impairment 306,113 559,182 4,992 68,913 319,889 - 1,259,089
Purchased loans with evidence of credit deterioration 29 562 - - 169 - 760
Total $ 316,891 $ 573,717 $ 4,992 $ 69,124 $ 320,058 $ - $ 1,284,782

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

At December 31, 2018

Commercial

Commercial Real Estate

Construction

Residential Real Estate

Consumer Installment and Other

Unallocated

Total

(In thousands)

Allowance for loan losses:

Individually evaluated for impairment
$ 2,752 $ - $ - $ - $ - $ - $ 2,752
Collectively evaluated for impairment
3,559 3,884 1,465 869 5,645 3,177 18,599
Total
$ 6,311 $ 3,884 $ 1,465 $ 869 $ 5,645 $ 3,177 $ 21,351
Carrying value of loans:

Individually evaluated for impairment
$ 9,944 $ 8,438 $ - $ 717 $ 143 $ - $ 19,242
Collectively evaluated for impairment
265,136 572,042 3,982 44,149 302,651 - 1,187,960
Total
$ 275,080 $ 580,480 $ 3,982 $ 44,866 $ 302,794 $ - $ 1,207,202

[The ~~remainder of this page intentionally left blank]~~
~~- 16 -~~
Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At December 31, 2016
Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment $ 5,048 $ - $ - $ - $ - $ - $ 5,048
Collectively evaluated for impairment 3,279 3,330 152 1,330 7,980 4,835 20,906
Purchased loans with evidence of credit deterioration - - - - - - -
Total $ 8,327 $ 3,330 $ 152 $ 1,330 $ 7,980 $ 4,835 $ 25,954
Carrying value of loans:
Individually evaluated for impairment $ 11,174 $ 12,706 $ - $ 835 $ - $ - $ 24,715
Collectively evaluated for impairment 343,494 528,957 2,555 86,889 365,236 - 1,327,131
Purchased loans with evidence of credit deterioration 29 508 - - 328 - 865
Total $ 354,697 $ 542,171 $ 2,555 $ 87,724 $ 365,564 $ - $ 1,352,711
~~The Bank’s~~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 ~~assigns~~validates management assigned credit risk grades toon evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” Loan Review Department performs continuous evaluations ~~occur every calendar quarter.~~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.

-16-
The following summarizes the credit risk profile by internally assigned grade:

Credit Risk Profile by Internally Assigned Grade

At September 30, 2019

Commercial

Commercial Real Estate

Construction

Residential Real Estate

Consumer Installment and Other

Total

(In thousands)

Grade:

Pass
$ 207,350 $ 568,009 $ 6,678 $ 33,629 $ 293,893 $ 1,109,559
Substandard
8,923 11,218 - 1,719 1,395 23,255
Doubtful
- - - - 111 111
Loss
- - - - 304 304
Total
$ 216,273 $ 579,227 $ 6,678 $ 35,348 $ 295,703 $ 1,133,229
Credit Risk Profile by Internally Assigned Grade
At September 30, 2017
Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Total
(In thousands)
Grade:
Pass $ 304,710 $ 551,222 $ 4,992 $ 66,164 $ 317,933 $ 1,245,021
Substandard 12,181 22,495 - 2,960 1,603 39,239
Doubtful - - - - 6 6
Loss - - - - 516 516
Total $ 316,891 $ 573,717 $ 4,992 $ 69,124 $ 320,058 $ 1,284,782

Credit Risk Profile by Internally Assigned Grade

At December 31, 2018

Commercial

Commercial Real Estate

Construction

Residential Real Estate

Consumer Installment and Other

Total

(In thousands)

Grade:

Pass
$ 264,634 $ 567,578 $ 3,982 $ 43,112 $ 300,553 $ 1,179,859
Substandard
10,446 12,902 - 1,754 1,556 26,658
Doubtful
- - - - 135 135
Loss
- - - - 550 550
Total
$ 275,080 $ 580,480 $ 3,982 $ 44,866 $ 302,794 $ 1,207,202

Credit risk profile reflects internally assigned ~~grade~~grades of purchased covered loans without regard to FDIC ~~indemnification.~~
Credit Risk Profile by Internally Assigned Grade
At December 31, 2016
Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Total
(In thousands)
Grade:
Pass $ 340,973 $ 515,045 $ 2,555 $ 84,384 $ 362,597 $ 1,305,554
Substandard 13,724 25,830 - 3,340 2,477 45,371
Doubtful - 1,296 - - 10 1,306
Loss - - - - 480 480
Total $ 354,697 $ 542,171 $ 2,555 $ 87,724 $ 365,564 $ 1,352,711
~~Credit risk profile reflects internally assigned grade of purchased covered~~indemnification on $5,713 thousand in loans ~~without regard to FDIC indemnification.~~
[secured by residential real estate at December 31, 2018. The ~~remainder of this page intentionally left blank]~~
~~- 17 -~~
indemnification expired February 6, 2019.
The following tables summarize loans by delinquency and nonaccrual status:

Summary of Loans by Delinquency and Nonaccrual Status

At September 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
$ 215,787 $ 339 $ 119 $ 2 $ 26 $ 216,273
Commercial real estate
574,321 729 - - 4,177 579,227
Construction
6,678 - - - - 6,678
Residential real estate
34,064 828 456 - - 35,348
Consumer installment and other
291,638 2,879 737 349 100 295,703
Total
$ 1,122,488 $ 4,775 $ 1,312 $ 351 $ 4,303 $ 1,133,229

Summary of Loans by Delinquency and Nonaccrual Status
At September 30, 2017
Current and Accruing 30-59 Days
Past Due and Accruing 60-89 Days
Past Due and Accruing Past Due 90 Days or More and Accruing Nonaccrual Total Loans
(In thousands)
Commercial $ 316,150 $ 404 $ 66 $ - $ 271 $ 316,891
Commercial real estate 565,377 2,820 8 - 5,512 573,717
Construction 4,992 - - - - 4,992
Residential real estate 69,124 - - - - 69,124
Consumer installment and other 315,520 3,351 753 434 - 320,058
Total $ 1,271,163 $ 6,575 $ 827 $ 434 $ 5,783 $ 1,284,782
Summary of Loans by Delinquency and Nonaccrual Status
At December 31, 2016
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 $ 353,497 $ 966 $ 40 $ - $ 194 $ 354,697
Commercial real estate 533,377 1,460 445 - 6,889 542,171
Construction 2,329 226 - - - 2,555
Residential real estate 86,098 528 37 - 1,061 87,724
Consumer installment and other 360,549 3,288 989 497 241 365,564
Total $ 1,335,850 $ 6,468 $ 1,511 $ 497 $ 8,385 $ 1,352,711

Summary of Loans by Delinquency and Nonaccrual Status

At December 31, 2018

Current and Accruing

30-59 Days Past Due and Accruing

60-89 Days Past Due and Accruing

Past Due 90 Days or More and Accruing

Nonaccrual

Total Loans

(In thousands)

Commercial
$ 274,045 $ 781 $ 254 $ - $ - $ 275,080
Commercial real estate
574,853 617 785 - 4,225 580,480
Construction
3,982 - - - - 3,982
Residential real estate
43,372 789 189 - 516 44,866
Consumer installment and other
297,601 3,408 1,107 551 127 302,794
Total
$ 1,193,853 $ 5,595 $ 2,335 $ 551 $ 4,868 $ 1,207,202

There were no0 commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, ~~2017~~ 2019 and December 31, ~~2016.~~2018.
-17-

The following summarizes impaired loans:
Impaired Loans Impaired Loans
At September 30, 2017 At December 31, 2016
Unpaid Unpaid
Recorded Principal Related Recorded Principal Related
Investment Balance Allowance Investment Balance Allowance
(In thousands) (In thousands)
With no related allowance recorded:
Commercial $ 1,246 $ 1,308 $ - $ 1,234 $ 1,303 $ -
Commercial real estate 12,726 14,817 - 13,233 15,610 -
Residential real estate 211 241 - 1,279 1,309 -
Consumer installment and other 169 276 - 569 675 -
Total with no related allowance recorded 14,352 16,642 - 16,315 18,897 -

With an allowance recorded:
Commercial 9,803 9,803 4,922 10,163 10,172 5,048
Commercial real estate 1,809 1,811 154 - - -
Total with an allowance recorded 11,612 11,614 5,076 10,163 10,172 5,048
Total $ 25,964 $ 28,256 $ 5,076 $ 26,478 $ 29,069 $ 5,048

Impaired Loans

At September 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
$ 72 $ 72 $ - $ 755 $ 759 $ -
Commercial real estate
7,953 9,400 - 8,438 10,373 -
Residential real estate
193 224 - 717 747 -
Consumer installment and other
144 178 - 270 377 -
Total with no related allowance recorded
8,362 9,874 - 10,180 12,256 -

With an allowance recorded:

Commercial
8,600 8,600 2,550 9,189 9,189 2,752
Total with an allowance recorded
8,600 8,600 2,550 9,189 9,189 2,752
Total
$ 16,962 $ 18,474 $ 2,550 $ 19,369 $ 21,445 $ 2,752

Impaired loans include troubled debt restructured loans. Impaired loans at September 30, ~~2017,~~ 2019, included $~~12,365~~$6,754 thousand of restructured loans, $~~5,044~~$3,670 thousand of which were on nonaccrual status. Impaired loans at December 31, ~~2016,~~ 2018, included ~~$12,381~~$8,579 thousand of restructured loans, ~~$5,302~~$4,225 thousand of which were on nonaccrual status.

Impaired Loans

For the Three Months Ended September 30,

For the Nine Months Ended September 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
$ 8,701 $ 144 $ 10,426 $ 175 $ 9,404 $ 476 $ 10,671 $ 495
Commercial real estate
7,968 60 11,282 189 7,133 333 12,291 615
Residential real estate
194 4 203 4 196 10 205 12
Consumer installment and other
99 - 173 4 103 - 261 10
Total
$ 16,962 $ 208 $ 22,084 $ 372 $ 16,836 $ 819 $ 23,428 $ 1,132
The following tables provide information on troubled debt restructurings:

Troubled Debt Restructurings

At September 30, 2019

Period-End

Individual

Number of

Pre-Modification

Period-End

Impairment

Contracts

Carrying Value

Carrying Value

Allowance

($ in thousands)

Commercial
3 $ 327 $ 44 $ 18
Commercial real estate
6 8,830 6,517 -
Residential real estate
1 241 193 -
Total
10 $ 9,398 $ 6,754 $ 18

[The remainder of this page intentionally left blank]

~~- 18 -~~
-18-

Impaired Loans
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
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 $ 11,125 $ 130 $ 12,858 $ 126 $ 11,203 $ 366 $ 13,454 $ 394
Commercial real estate 14,681 208 14,486 188 14,826 669 17,991 549
Construction - - - - - - 136 -
Residential real estate 365 4 530 4 494 13 693 13
Consumer installment and other 340 3 545 6 466 17 435 18
Total $ 26,511 $ 345 $ 28,419 $ 324 $ 26,989 $ 1,065 $ 32,709 $ 974
~~The following table provides information on troubled debt restructurings:~~
Troubled Debt Restructurings
At September 30, 2017
Period-End
Individual
Number of Pre-Modification Period-End Impairment
Contracts Carrying Value Carrying Value Allowance
($ in thousands)
Commercial 7 $ 2,393 $ 1,140 $ 49
Commercial real estate 11 11,847 11,014 -
Residential real estate 1 241 211 -
Total 19 $ 14,481 $ 12,365 $ 49
Troubled Debt Restructurings
At December 31, 2016
Period-End
Individual
Number of Pre-Modification Period-End Impairment
Contracts Carrying Value Carrying Value Allowance
($ in thousands)
Commercial 7 $ 2,719 $ 1,489 $ 113
Commercial real estate 10 11,257 10,673 -
Residential real estate 1 241 219 -
Total 18 $ 14,217 $ 12,381 $ 113

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
4 $ 2,274 $ 811 $ 19
Commercial real estate
8 9,237 7,568 -
Residential real estate
1 241 200 -
Total
13 $ 11,752 $ 8,579 $ 19

During the three and nine months ended September 30, ~~2017,~~ 2019 and September 30, 2018, the Company ~~modifiedone~~ ~~loan with a carrying value of $~~50 ~~thousand andfour~~did not modify any loans ~~with a carrying value of $699~~ ~~thousand, respectively,~~ that were considered troubled debt ~~restructurings. Thefour~~ ~~concessions granted in the first nine months of 2017 consisted of modifications ofpayment terms to extend the maturity date to allow for deferred principal repayment~~restructurings, and ~~under-market terms.~~ During the three and nine months ended September 30, 2016, the Company modified zero loans and four loans with a total carrying value of $4,843 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the four restructurings completed in the first nine months of 2016 consisted of three modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms and one court order requiring under-market terms.~~During the three and nine months ended September 30, 2017, one troubled debt restructured loan with a carrying value of $58 thousand was charged off.~~ ~~There were no chargeoffs related to troubled debt restructurings made during the three and nine months ended September 30, 2016. During the three and nine months ended September 30, 2017 and 2016, no~~had 0 troubled debt restructured loans that defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

There were no0 loans restricted due to collateral requirements at September 30, ~~2017~~ 2019 and December 31, ~~2016.~~2018.

There were no0 loans held for sale at September 30, ~~2017~~ 2019 and December 31, ~~2016.~~2018.

At September 30, ~~2017~~ 2019 and December 31, ~~2016,~~ 2018, the Company held total other real estate owned (OREO) of $~~1,426~~$43 thousand net of reserve of $~~1,905~~$-0- thousand and ~~$3,095~~$350 thousand net of reserve of ~~$1,816 thousand, respectively, of which~~ $-0- thousand, ~~was~~respectively. There were 0 foreclosed residential real estate properties orand 0 covered OREO at ~~both dates. There were no~~December 31, 2018. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $114 thousand at September 30, ~~2017~~ 2019 and $516 thousand at December 31, ~~2016.~~2018.

Note 5: Concentration of Credit Risk

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At September 30, ~~2017, Westamerica~~2019, the Bank did not have credit extended to any one entity exceeding these limits. At September 30, ~~2017, Westamerica~~2019, the Bank had38 33 lending relationships each with aggregate ~~loans exceeding~~amounts of $5 ~~million.~~million or more. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $~~58,046~~$44,964 thousand and ~~$57,721~~$53,891 thousand at September 30, ~~2017~~ 2019 and December 31, ~~2016,~~ 2018, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At September 30, ~~2017, Westamerica~~2019, the Bank held corporate bonds in66 88 issuing entities that exceeded $5 million for each issuer.

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-19-

Note 6: Other Assets and Other Liabilities

Other assets consisted of the following:

At September 30, 2017 At December 31, 2016
(In thousands)
Cost method equity investments:
Federal Reserve Bank stock⁽¹⁾ $ 14,068 $ 14,069
Other investments 159 201
Total cost method equity investments 14,227 14,270
Life insurance cash surrender value 53,459 51,535
Net deferred tax asset 49,514 55,417
Limited partnership investments 11,241 12,591
Interest receivable 20,776 21,489
Prepaid assets 3,969 4,825
Other assets 11,783 11,597
Total other assets $ 164,969 $ 171,724

At September 30,

At December 31,

2019

2018

(In thousands)

Cost method equity investments:

Federal Reserve Bank stock ⁽¹⁾
$ 14,069 $ 14,069
Other investments
158 158
Total cost method equity investments
14,227 14,227
Life insurance cash surrender value
57,169 56,083
Net deferred tax asset
11,947 42,256
Right-of-use asset
19,721 -
Limited partnership investments
8,143 10,219
Interest receivable
25,511 25,834
Prepaid assets
3,530 4,658
Other assets
12,524 9,629
Total other assets
$ 152,772 $ 162,906

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

The net deferred tax asset at September 30, 2019 of $11,947 thousand was net of deferred tax obligations of $8,585 thousand related to available for sale debt securities unrealized gains. The net deferred tax asset at December 31, 2018 of $42,256 thousand included deferred tax benefits of $16,787 thousand related to available for sale debt securities unrealized losses.
The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. On September 30, 2019, Visa Inc. announced a revised conversion rate applicable to its class B common stock resulting from its September 27, 2019 deposit of funds into its litigation escrow account. This funding reduced the conversion rate of class B common stock into class A common stock, which is unrestricted and trades actively on the New York Stock Exchange, from 1.6298 to 1.6228 per share, effective as of September 27, 2019. Visa Inc. class A common stock had a closing price of $172.01 per share on September 30, 2019, the last day of stock market trading for the third quarter 2019. The ultimate value of the Company’s Visa Inc. class B shares is subject to the extent of Visa Inc.’s future litigation escrow fundings, the resulting conversion rate to class A common stock, and current and future trading restrictions on the class B common stock.
The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At September 30, ~~2017,~~ 2019, this investment totaled $~~11,241~~$8,143 thousand and $~~2,299~~$4,754 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, ~~2016,~~ 2018, this investment totaled ~~$12,591~~$10,219 thousand and ~~$2,299~~$4,799 thousand of this amount represented outstanding equity capital commitments. At September 30, ~~2017,~~ 2019, the $~~2,299~~$4,754 thousand of outstanding equity capital commitments are expected to be paid as follows, ~~$722~~$601 thousand in ~~2020, $131~~the remainder of 2019, $2,027 thousand in ~~2023, $90~~2020, $138 thousand in ~~2024 and $1,356~~2021, $261 thousand in 2022, $134 thousand in 2023, $1,041 thousand in 2024 and $552 thousand in 2025 or thereafter.

The amounts recognized in net income for these investments include:

For the Three Months Ended

For the Nine Months Ended

September 30,

2019

2018

2019

2018

(In thousands)

Investment loss included in pre-tax income
$ 600 $ 900 $ 1,800 $ 2,200
Tax credits recognized in provision for income taxes
225 336 675 1,008
For the Three Months Ended For the Nine Months Ended
September 30,
2017 2016 2017 2016
(In thousands)
Investment loss included in pre-tax income $ 450 $ 675 $ 1,350 $ 2,025
Tax credits recognized in provision for income taxes 463 562 1,388 1,723

-20-
Other liabilities consisted of the following:

At September 30,

At December 31,

2019

2018

(In thousands)

Operating lease liability
$ 19,721 $ -
Other liabilities
40,687 34,849
Total other liabilities
$ 60,408 $ 34,849
The Company has entered into leases for most branch locations and certain other offices that were classified as operating leases primarily with original terms of 5 years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional 5 year terms. Unexercised extension options are not considered reasonably certain of exercise and have not been included in the lease term used to determine the lease liability or right-of-use asset. The Company did not have any finance leases as of September 30, 2019.
As of September 30, 2019, the Company recorded a lease liability of $19,721 thousand and a right-of-use asset of $19,721 thousand, respectively. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 3.82 years and 2.93%, respectively, at September 30, 2019. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of September 30, 2019.
Total lease costs during the three and nine months ended September 30, 2019, of $1,726 thousand and $5,145 thousand, respectively, were recorded within occupancy and equipment expense. The Company did not have any material short-term or variable leases costs or sublease income during the nine months ended September 30, 2019.
The following table summarizes the remaining lease payments of operating lease liabilities:

Minimum
future lease
payments

At September 30,

2019

(In thousands)

Remaining three months of 2019
$ 2,719
2020
6,283
2021
4,574
2022
3,632
2023
2,912
Thereafter
2,057
Total minimum lease payments
22,177
Less: discount
(2,456 )
Present value of lease liability
$ 19,721
Minimum future rental payments under noncancelable operating leases as of December 31, 2018, prior to adoption of ASU 2016-02, were as follows:
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~~- 20 -~~
-21-

Minimum
future rental
payments

(In thousands)

2019
$ 5,996
2020
4,409
2021
2,741
2022
1,921
2023
1,223
Thereafter
1,044
Total minimum lease payments
$ 17,334
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 nine months ended September 30, ~~2017~~ 2019 and year ended December 31, ~~2016.~~ 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 nine months ended September 30, ~~2017~~ 2019 and year ended December 31, ~~2016, no~~2018 0 such adjustments were recorded.

The carrying values of goodwill were:
At September 30, 2017 At December 31, 2016
(In thousands)
Goodwill $ 121,673 $ 121,673

At September 30, 2019

At December 31, 2018

(In thousands)

Goodwill
$ 121,673 $ 121,673

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

At September 30, 2019

At December 31, 2018

Gross

Gross

Carrying

Accumulated

Carrying

Accumulated

Amount

Amortization

Amount

Amortization

(In thousands)

Core deposit intangibles
$ 56,808 $ (55,344 ) $ 56,808 $ (54,879 )

At September 30, 2017 At December 31, 2016
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
(In thousands)
Core Deposit Intangibles $ 56,808 $ (52,271 ) $ 56,808 $ (50,074 )
Merchant Draft Processing Intangible 10,300 (10,232 ) 10,300 (10,107 )
Total Identifiable Intangible Assets $ 67,108 $ (62,503 ) $ 67,108 $ (60,181 )

As of September 30, ~~2017,~~ 2019, the current period and estimated future amortization expense for identifiable intangible assets was:

Total

Core

Deposit

Intangibles

(In thousands)

For the nine months ended September 30, 2019 (actual)
$ 465
Estimate for the remainder of year ending December 31, 2019
73
Estimate for year ending December 31, 2020
287
2021
269
2022
252
2023
236
2024
222

Merchant
Core Draft
Deposit Processing
Intangibles Intangible Total
(In thousands)
For the Nine Months ended September 30, 2017 (actual) $ 2,197 $ 125 $ 2,322
Estimate for the remainder of year ending December 31, 2017 716 39 755
Estimate for year ending December 31, 2018 1,892 29 1,921
2019 538 - 538
2020 287 - 287
2021 269 - 269
2022 252 - 252
-22-
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~~- 21 -~~

Note 8: Deposits and Borrowed Funds

The following table provides additional detail regarding deposits.

Deposits
At September 30, 2017 At December 31, 2016
(In thousands)
Noninterest-bearing $ 2,128,342 $ 2,089,443
Interest-bearing:
Transaction 873,145 865,701
Savings 1,491,168 1,493,427
Time deposits less than $100 thousand 124,252 133,712
Time deposits $100 thousand through $250 thousand 79,614 84,925
Time deposits more than $250 thousand 38,059 37,533
Total deposits $ 4,734,580 $ 4,704,741

Deposits

At September 30,

At December 31,

2019

2018

(In thousands)

Noninterest-bearing
$ 2,265,640 $ 2,243,251
Interest-bearing:

Transaction
910,566 929,346
Savings
1,445,210 1,498,991
Time deposits less than $100 thousand
92,300 102,654
Time deposits $100 thousand through $250 thousand
56,066 64,512
Time deposits more than $250 thousand
26,841 28,085
Total deposits
$ 4,796,623 $ 4,866,839

Demand deposit overdrafts of $~~1,179~~$1,078 thousand and ~~$2,679~~$980 thousand were included as loan balances at September 30, ~~2017~~ 2019 and December 31, ~~2016,~~ 2018, respectively. Interest expense for aggregate time deposits with individual account balances in excess of ~~$100~~$100 thousand was $~~103~~$81 thousand and $~~314~~$246 thousand for the three and nine months ended September 30, ~~2017,~~ 2019, respectively, and ~~$124~~$91 thousand and ~~$395~~$283 thousand for the three and nine months ended September 30, ~~2016,~~ 2018, respectively.

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

Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
Remaining Contractual Maturity of the Agreements
Overnight and Continuous
At September 30, 2017 At December 31, 2016
Repurchase agreements: (In thousands)
Collateral securing borrowings:
Securities of U.S. Government sponsored entities $ 74,852 $ 74,031
Agency residential MBS 60,023 63,277
Corporate securities 105,698 90,554
Total collateral carrying value $ 240,573 $ 227,862
Total short-term borrowed funds $ 66,337 $ 59,078

Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings

Remaining Contractual Maturity of the Agreements

Overnight and Continuous

At September 30,

At December 31,

2019

2018

Repurchase agreements:

(In thousands)

Collateral securing borrowings:

Securities of U.S. Government sponsored entities
$ 75,784 $ 73,803
Agency residential MBS
55,013 58,380
Corporate securities
115,018 91,837
Total collateral carrying value
$ 245,815 $ 224,020
Total short-term borrowed funds
$ 45,646 $ 51,247

Note 9: Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ~~Available~~Equity securities and debt securities available for sale ~~investment securities~~ are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, impaired loans, certain loans held for investment, ~~investment~~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~~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:

-23-
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.

~~- 22 -~~
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mutual funds, federal agency securities, mortgage-backed securities, corporate securities, asset-backed securities, and municipal bonds.

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

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

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1,2 or 3. When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur.~~For the nine months ended September 30, 2017~~ ~~and year ended December 31, 2016, there were no transfers in or out of levels 1, 2 or 3.~~

Assets Recorded at Fair Value on a Recurring Basis

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

At September 30, 2019

Fair Value

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3) ⁽¹⁾

(In thousands)

Debt securities available for sale

U.S. Treasury securities
$ 44,826 $ 44,826 $ - $ -
Securities of U.S. Government sponsored entities
122,108 - 122,108 -
Agency residential MBS
979,751 - 979,751 -
Non-agency residential MBS
104 - 104 -
Agency commercial MBS
3,751 - 3,751 -
Securities of U.S. Government entities
777 - 777 -
Obligations of states and political subdivisions
165,403 - 165,403 -
Corporate securities
1,667,047 - 1,667,047 -
Total debt securities available for sale
$ 2,983,767 $ 44,826 $ 2,938,941 $ -

At September 30, 2017
Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3)
(In thousands)
Securities of U.S. Government sponsored entities $ 120,459 $ - $ 120,459 $ -
Agency residential MBS 739,218 - 739,218 -
Non-agency residential MBS 165 - 165 -
Agency commercial MBS 1,902 - 1,902 -
Securities of U.S. Government entities 1,769 - 1,769 -
Obligations of states and political subdivisions 179,501 - 179,501 -
FHLMC and FNMA stock 9,560 13 9,547 -
Corporate securities 1,036,089 - 1,036,089 -
Other securities 1,814 - 1,814 -
Total securities available for sale $ 2,090,477 $ 13 $ 2,090,464 $ -
⁽¹⁾There were no transfers in to or out of level 3 during the nine months ended September 30, 2019.

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~~- 23 -~~
-24-

At December 31, 2018

Fair Value

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3) ⁽¹⁾

(In thousands)

Equity securities

Mutual funds
$ 1,747 $ - $ 1,747 $ -
Total equity securities
1,747 - 1,747 -
Debt securities available for sale

U.S. Treasury securities
139,574 139,574 - -
Securities of U.S. Government sponsored entities
164,018 - 164,018 -
Agency residential MBS
853,871 - 853,871 -
Non-agency residential MBS
114 - 114 -
Agency commercial MBS
1,842 - 1,842 -
Securities of U.S. Government entities
1,119 - 1,119 -
Obligations of states and political subdivisions
179,091 - 179,091 -
Corporate securities
1,315,041 - 1,315,041 -
Total debt securities available for sale
2,654,670 139,574 2,515,096 -
Total
$ 2,656,417 $ 139,574 $ 2,516,843 $ -

At December 31, 2016
Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3)
(In thousands)
Securities of U.S. Government sponsored entities $ 138,660 $ - $ 138,660 $ -
Agency residential MBS 691,499 - 691,499 -
Non-agency residential MBS 271 - 271 -
Securities of U.S. Government entities 2,025 - 2,025 -
Obligations of states and political subdivisions 183,411 - 183,411 -
Asset-backed securities 695 - 695 -
FHLMC and FNMA stock 10,869 17 10,852 -
Corporate securities 860,857 - 860,857 -
Other securities 2,471 656 1,815 -
Total securities available for sale $ 1,890,758 $ 673 $ 1,890,085 $ -
⁽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~~lower of cost or ~~fair-value~~fair value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at September 30, ~~2017~~ 2019 and December 31, ~~2016,~~ 2018, the following ~~table provides~~tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

For the

Nine Months Ended

At September 30, 2019

September 30, 2019

Carrying Value

Level 1

Level 2

Level 3

Total Losses

(In thousands)

Other real estate owned
$ 43 $ - $ - $ 43 $ -
Impaired loans:

Commercial
6,050 - - 6,050 -
Commercial real estate
4,099 - - 4,099 -
Residential real estate
193 - - 193 -
Consumer installment and other
77 - - 77 (34 )
Total assets measured at fair value on a nonrecurring basis
$ 10,462 $ - $ - $ 10,462 $ (34 )

For the
Nine Months Ended
At September 30, 2017 September 30, 2017
Carrying Value Level 1 Level 2 Level 3 Total Losses
(In thousands)
Other real estate owned $ 1,426 $ - $ - $ 1,426 $ (219 )
Impaired loans 10,821 - - 10,821 -
Total assets measured at fair value on a nonrecurring basis $ 12,247 $ - $ - $ 12,247 $ (219 )
For the
Year Ended
At December 31, 2016 December 31, 2016
Carrying Value Level 1 Level 2 Level 3 Total Losses
(In thousands)
Other real estate owned $ 3,095 $ - $ - $ 3,095 $ (705 )
Impaired loans 9,525 - - 9,525 -
Total assets measured at fair value on a nonrecurring basis $ 12,620 $ - $ - $ 12,620 $ (705 )

For the

Year Ended

At December 31, 2018

December 31, 2018

Carrying Value

Level 1

Level 2

Level 3

Total Losses

(In thousands)

Other real estate owned
$ 350 $ - $ - $ 350 $ -
Impaired loans:

Commercial
6,437 - - 6,437 -
Commercial real estate
3,870 - - 3,870 (240 )
Total assets measured at fair value on a nonrecurring basis
$ 10,657 $ - $ - $ 10,657 $ (240 )

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

~~- 24 -~~
-25-

Disclosures about Fair Value of Financial Instruments

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

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

~~Investment~~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 ~~investment~~debt securities were estimated using quoted prices as described above for Level 1 and Level 2 valuation.

Loans Loans ~~were separated into two groups for valuation. Variable~~are valued using the exit price notion. The Company uses a net present value of cash flows methodology that seeks to incorporate interest rate, ~~loans, except for those described below, which reprice frequently with changes~~credit, liquidity and prepayment risks in the fair market value estimation. Inputs to the calculation include market rates ~~were valued using historical cost. Fixed~~for similarly offered products, market interest rate ~~loans~~projections, credit spreads, estimated credit losses and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of $~~23,628~~ thousand at September 30, 2017 and $25,954 thousand at December 31, 2016 was applied against the estimated fair values to recognize estimated future defaults of contractual cash flows. The Company does not consider these values to be a liquidation price for the loans.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 ~~Bank~~Banks and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair ~~values~~value of time deposits ~~were~~was estimated ~~by discounting estimated future contractual~~using a net present value of cash flows ~~using current~~methodology, incorporating market interest rate projections and rates ~~for financial instruments with similar characteristics.~~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 ~~table~~tables below isare a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled in larger quantities. The carrying amounts in the following ~~table~~tables are recorded in the balance sheet under the indicated captions.

The Company has not included assets and liabilities that are not financial instruments, such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company.
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At September 30, 2017
Carrying Amount Estimated Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2 ) Significant Unobservable Inputs
(Level 3 )
Financial Assets: (In thousands)
Cash and due from banks $ 561,757 $ 561,757 $ 561,757 $ - $ -
Investment securities held to maturity 1,204,240 1,208,279 - 1,208,279 -
Loans 1,261,154 1,264,503 - - 1,264,503

Financial Liabilities:
Deposits $ 4,734,580 $ 4,731,990 $ - $ 4,492,655 $ 239,335
Short-term borrowed funds 66,337 66,337 - 66,337 -
-26-
~~- 25 -~~

At September 30, 2019

Carrying Amount

Estimated Fair Value

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2 )

Significant Unobservable Inputs
(Level 3 )

Financial Assets:

(In thousands)

Cash and due from banks
$ 415,639 $ 415,639 $ 415,639 $ - $ -
Debt securities held to maturity
793,216 799,241 - 799,241 -
Loans
1,113,401 1,178,305 - - 1,178,305

Financial Liabilities:

Deposits
$ 4,796,623 $ 4,794,970 $ - $ 4,621,416 $ 173,554
Short-term borrowed funds
45,646 45,646 - 45,646 -

At December 31, 2016
Carrying Amount Estimated Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2 ) Significant Unobservable Inputs
(Level 3 )
Financial Assets: (In thousands)
Cash and due from banks $ 462,271 $ 462,271 $ 462,271 $ - $ -
Investment securities held to maturity 1,346,312 1,340,741 - 1,340,741 -
Loans 1,326,757 1,337,774 - - 1,337,774

Financial Liabilities:
Deposits $ 4,704,741 $ 4,702,797 $ - $ 4,448,571 $ 254,226
Short-term borrowed funds 59,078 59,078 - 59,078 -

At December 31, 2018

Carrying Amount

Estimated Fair Value

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2 )

Significant Unobservable Inputs
(Level 3 )

Financial Assets:

(In thousands)

Cash and due from banks
$ 420,284 $ 420,284 $ 420,284 $ - $ -
Debt securities held to maturity
984,609 971,445 - 971,445 -
Loans
1,185,851 1,184,770 - - 1,184,770

Financial Liabilities:

Deposits
$ 4,866,839 $ 4,862,668 $ - $ 4,671,588 $ 191,080
Short-term borrowed funds
51,247 51,247 - 51,247 -

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

Note 10: Commitments and Contingent Liabilities

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $~~307,269~~ ~~thousand and $304,508~~$286,876 thousand at September 30, ~~2017~~ 2019 and $278,598 thousand at December 31, ~~2016, respectively.~~ 2018. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled $~~19,956~~ ~~thousand and $21,732~~$3,099 thousand at September 30, ~~2017~~ 2019 and $2,772 thousand at December 31, ~~2016, respectively.~~ 2018. The Company had no0 commitments outstanding for commercial and similar letters of credit at September 30, ~~2017~~ 2019 and December 31, ~~2016.~~2018. The Company had $550 thousand and $75 thousand in outstanding full recourse guarantees to a 3^rd party credit card company at September 30, 2019 and December 31, 2018, respectively. The Company had a reserve for unfunded commitments of $~~2,308~~$2,308 thousand at September 30, ~~2017~~ 2019 and ~~$2,408 thousand at~~ December 31, ~~2016,~~ 2018, included in other liabilities.

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated. In the second quarter 2019, the Company achieved a mediated settlement to dismiss a lawsuit and paid the resulting liability of $252 thousand.

The Company ~~has~~ determined that it will be obligated to provide refunds of revenue recognized in years prior ~~years~~to 2018 to some customers. The Company ~~is not yet able to quantify the amount of refunds and has therefore not accrued a liability. The Company will provide additional information and accrue a liability when a determination of~~initially estimated the probable amount of these obligations ~~is made.~~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 October 2017 California wildfires have disrupted operations in the Company's geographic footprint mainly due to temporary power outages, unhealthy air quality, and evacuations affecting some branches and an operations center. The Company maintains secondary power generation capability at its principal operations center. The Company maintains, and regularly tests, disaster recovery plans and protocols to be prepared for disasters such as these wildfires. The Company has not experienced a casualty loss as of the date of this report, but does carry customary casualty insurance to protect against such risk.
Management has performed an initial evaluation of loss exposure caused by the wildfires within the Company's loan portfolio and investment portfolio; Management has not identified any increased risk of loss, however, continuing Management evaluations and further wildfire developments could result in identification of losses which are not currently apparent.
-27-

~~- 26 -~~

Note 11: Earnings Per Common Share

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

For the Three Months For the Nine Months
Ended September 30,
2017 2016 2017 2016
(In thousands, except per share data)
Net income applicable to common equity (numerator) $ 15,017 $ 15,628 $ 45,865 $ 44,400
Basic earnings per common share
Weighted average number of common shares outstanding - basic
(denominator) 26,309 25,641 26,260 25,558
Basic earnings per common share $ 0.57 $ 0.61 $ 1.75 $ 1.74
Diluted earnings per common share
Weighted average number of common shares outstanding - basic 26,309 25,641 26,260 25,558
Add common stock equivalents for options 95 46 119 37
Weighted average number of common shares outstanding - diluted
(denominator) 26,404 25,687 26,379 25,595
Diluted earnings per common share $ 0.57 $ 0.61 $ 1.74 $ 1.73

For the Three Months

For the Nine Months

Ended September 30,

2019

2018

2019

2018

(In thousands, except per share data)

Net income applicable to common equity (numerator)
$ 20,390 $ 16,993 $ 59,661 $ 52,509
Basic earnings per common share

Weighted average number of common shares outstanding - basic (denominator)
26,986 26,701 26,924 26,622
Basic earnings per common share
$ 0.76 $ 0.64 $ 2.22 $ 1.97
Diluted earnings per common share

Weighted average number of common shares outstanding - basic
26,986 26,701 26,924 26,622
Add common stock equivalents for options
41 114 52 114
Weighted average number of common shares outstanding - diluted (denominator)
27,027 26,815 26,976 26,736
Diluted earnings per common share
$ 0.75 $ 0.63 $ 2.21 $ 1.96

For the three and nine months ended September 30, ~~2017,~~ 2019, options to purchase~~376~~ 379 thousand and~~343~~ 425 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

For the three and nine months ended September 30, ~~2016,~~ 2018, options to purchase ~~771~~326 thousand and ~~948~~432 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted ~~net income~~earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

Note 12: Income Taxes

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.
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 related to the deferred tax asset.

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-28-

~~- 27 -~~

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

WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY

For the Three Months For the Nine Months
For the Three Months

For the Nine Months

Ended September 30,
Ended September 30,

2017 2016 2017 2016
2019

2018

2019

2018

(In thousands, except per share data)
(In thousands, except per share data)

Net Interest and Loan Fee Income (FTE)⁽¹⁾ $ 35,680 $ 36,176 $ 107,474 $ 109,118 $ 40,349 $ 39,498 $ 120,925 $ 115,122
Reversal of Provision for Loan Losses - (3,200 ) (1,900 ) (3,200 )
Noninterest Income 12,548 11,598 36,328 35,029
Noninterest Expense 24,114 26,088 73,125 77,175
Provision for Loan Losses
- - - -
Noninterest Income:

Life Insurance Gains
- 585 433 585
Other Noninterest income
11,809 11,943 35,243 35,667
Total Noninterest Income
11,809 12,528 35,676 36,252
Noninterest Expense:

Loss Contingency
- 3,500 553 3,500
Other Noninterest Expense
24,033 25,866 74,224 77,629
Total Noninterest Expense
24,033 29,366 74,777 81,129
Income Before Income Taxes (FTE)⁽¹⁾ 24,114 24,886 72,577 70,172 28,125 22,660 81,824 70,245
Income Tax Provision (FTE)⁽¹⁾ 9,097 9,258 26,712 25,772 7,735 5,667 22,163 17,736
Net Income $ 15,017 $ 15,628 $ 45,865 $ 44,400 $ 20,390 $ 16,993 $ 59,661 $ 52,509

Average Common Shares Outstanding 26,309 25,641 26,260 25,558 26,986 26,701 26,924 26,622
Average Diluted Common Shares Outstanding 26,404 25,687 26,379 25,595 27,027 26,815 26,976 26,736
Common Shares Outstanding at Period End 26,319 25,665 27,014 26,727

Per Common Share:
Basic Earnings $ 0.57 $ 0.61 $ 1.75 $ 1.74 $ 0.76 $ 0.64 $ 2.22 $ 1.97
Diluted Earnings 0.57 0.61 1.74 1.73 0.75 0.63 2.21 1.96
Book Value $ 22.95 $ 21.94 $ 26.41 $ 22.17

Financial Ratios:
Return on Assets 1.09 % 1.18 % 1.13 % 1.14 % 1.45 % 1.19 % 1.43 % 1.25 %
Return on Common Equity 9.94 % 11.39 % 10.36 % 11.04 % 11.87 % 10.58 % 11.92 % 11.22 %
Net Interest Margin (FTE)⁽¹⁾ 3.10 % 3.21 % 3.12 % 3.27 % 3.11 % 3.00 % 3.12 % 2.95 %
Net Loan Losses (Recoveries) to Average Loans 0.15 % (0.19 %) 0.04 % 0.02 %
Net Loan Losses to Average Loans
0.10 % 0.34 % 0.17 % 0.11 %
Efficiency Ratio⁽²⁾ 50.0 % 54.6 % 50.9 % 53.5 % 46.1 % 56.4 % 47.8 % 53.6 %

Average Balances:
Assets $ 5,441,612 $ 5,253,502 $ 5,407,661 $ 5,204,418 $ 5,570,843 $ 5,648,004 $ 5,580,965 $ 5,600,499
Earning Assets 4,587,848 4,489,317 4,601,931 4,448,261
Loans 1,287,740 1,386,186 1,325,128 1,447,061 1,142,668 1,194,874 1,177,057 1,215,712
Investment securities
3,687,049 3,591,637 3,675,102 3,538,724
Deposits 4,714,579 4,588,762 4,692,330 4,552,819 4,770,976 4,893,859 4,789,084 4,856,639
Shareholders' Equity 599,473 545,771 591,691 537,010 681,513 636,965 669,043 625,496

Period End Balances:
Assets $ 5,445,808 $ 5,306,778 $ 5,616,055 $ 5,529,463
Earning Assets 4,579,499 4,537,756
Loans 1,284,782 1,364,329 1,133,229 1,196,955
Investment securities
3,776,983 3,506,341
Deposits 4,734,580 4,644,870 4,796,623 4,835,837
Shareholders' Equity 603,957 562,996 713,378 592,591

Capital Ratios at Period End:
Total Risk Based Capital 16.71 % 15.16 % 17.20 % 16.99 %
Tangible Equity to Tangible Assets 8.98 % 8.37 % 10.75 % 8.67 %

Dividends Paid Per Common Share $ 0.39 $ 0.39 $ 1.17 $ 1.17 $ 0.41 $ 0.40 $ 1.22 $ 1.20
Common Dividend Payout Ratio 68 % 64 % 67 % 68 % 55 % 63 % 55 % 61 %

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

⁽¹⁾ Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis 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).

~~- 28 -~~
-29-

Financial Overview

Westamerica Bancorporation and subsidiaries’ ~~(the~~(collectively, the “Company”) reported net income of $20.4 million or $0.75 diluted earnings per common share for the third quarter 2019 and net income of $59.7 million or $2.21 diluted earnings per common share for the nine months ended September 30, 2019. Results for the nine months ended September 30, 2019 include a tax-exempt 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. These results compare to net income of $17.0 million or $0.63 diluted earnings per common share for the third quarter 2018 and net income of $52.5 million or $1.96 diluted earnings per common share for the nine months ended September 30, 2018. The third quarter 2018 results include a $585 thousand tax-exempt life insurance gain and a $3.5 million loss contingency resulting from a mediated settlement to dismiss a lawsuit.
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’s (“FOMC”~~Committee (the “FOMC”) ~~monetary policy~~ was highly accommodative. During this period, Management avoided originating long-dated, low-yielding loans given the potential impact of such assets on forward earning potential; as a result, loans declined and investment securities increased. The ~~changing~~changed composition of the earning assets and low market interest rates ~~has~~ pressured the net interest margin to lower levels. The ~~FOMC’s first post-recession increase~~FOMC began removing monetary stimulus in December 2016 and increased the federal funds rate ~~occurred in December 2015,~~by 2.00% to 2.50% through June 2019, although longer-term rates ~~declined. The FOMC’s successive post-recession increases in the federal funds rate occurred between December 2016 and June 2017, although longer-term rates have~~did not ~~increased~~increase by a similar magnitude. The ~~more recent~~ increase in market interest rates ~~has resulted~~benefited the Company’s earning asset yields until the FOMC cut the federal funds rate in ~~competitive loan yields which are more appealing from a profitability perspective,~~July 2019 by 0.25% and in ~~Management’s opinion.~~September 2019 by 0.25%.

The funding source of the Company’s earning assets is primarily customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. ~~The first~~During the three and nine months ~~of 2017~~ended September 30, 2019 the average volume of checking and savings deposits was95 ~~percent~~ 96.2% and 96.1%, respectively, of average total deposits.

Credit quality remained solid with nonperforming assets totaling $4.7 million at September 30, 2019 compared with $5.8 million at December 31, 2018 and $6.5 million at September 30, 2018. The Company ~~recognized~~did not recognize a ~~reversal of the~~ provision for loan losses ~~of $1.9 million~~ in the ~~first~~three months and nine months ~~of 2017. Credit quality improved during the first nine months of 2017 with nonperforming assets declining $~~4 ~~million to $~~8 ~~million at~~ended September 30, 2017. The Company’s net losses were $426 thousand for the first nine months of 2017. These developments were reflected in Management’s evaluation of credit quality, the level of the provision for loan losses, and the adequacy of the allowance for loan losses at September 30, 2017.
~~The Company’s long-term strategy also includes controlling operating costs, or “noninterest expense.” Noninterest expense of $73.1~~ ~~million for the first nine months of 2017 was $4.1~~ ~~million lower than for the first nine months of 2016.~~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~~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~~“Summary of Significant Accounting ~~Policies”)~~Policies,” to Financial Statements in the Company’s ~~2016~~2018 Form 10-K) are fundamental to understanding the Company’s results of operations and financial condition. ~~The Company adopted theFASB ASU 2016-09,~~~~Improvements to Employee Share-Based Payment Accounting~~ ~~effective January 1, 2017.~~
~~The Company reported net income of $15.0~~ ~~million or $0.57~~ ~~diluted earnings per common share for the third quarter 2017 and net income of $45.9~~ ~~million or $1.74~~ diluted earnings per common share for the nine months ended September 30, 2017. Second quarter 2017 results included a $1.9 million reversal of provision for loan losses which accounted for $0.04 of the quarter’s diluted earnings per common share. Third quarter and first nine months of 2017 results reflect the Company’s prospective adoption of ASU 2016-09; first quarter 2017 diluted earnings per common share measured $0.02 higher than would have been measured under accounting standards applied in 2016. The adoption of ASU 2016-09 did not affect second or third quarter 2017 results by a meaningful amount. Third quarter and first nine months of 2017 results compare to net income of $15.6 million or $0.61 diluted earnings per common share for the third quarter 2016 and net income of $44.4 million or $1.73 diluted earnings per common share for the nine months ended September 30, 2016.

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~~- 29 -~~
-30-

Net Income

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

For the Three Months For the Nine Months
Ended September 30,
2017 2016 2017 2016
(In thousands, except per share data)
Net interest and fee income (FTE) $ 35,680 $ 36,176 $ 107,474 $ 109,118
Reversal of provision for loan losses - 3,200 1,900 3,200
Noninterest income 12,548 11,598 36,328 35,029
Noninterest expense (24,114 ) (26,088 ) (73,125 ) (77,175 )
Income before income taxes (FTE) 24,114 24,886 72,577 70,172
Income tax provision (FTE) (9,097 ) (9,258 ) (26,712 ) (25,772 )
Net income $ 15,017 $ 15,628 $ 45,865 $ 44,400

Average diluted common shares 26,404 25,687 26,379 25,595
Diluted earnings per common share $ 0.57 $ 0.61 $ 1.74 $ 1.73

Average total assets $ 5,441,612 $ 5,253,502 $ 5,407,661 $ 5,204,418
Net income to average total assets (annualized) 1.09 % 1.18 % 1.13 % 1.14 %
Net income to average common shareholders' equity (annualized) 9.94 % 11.39 % 10.36 % 11.04 %

For the Three Months

For the Nine Months

Ended September 30,

2019

2018

2019

2018

(In thousands, except per share data)

Net interest and loan fee income (FTE)
$ 40,349 $ 39,498 $ 120,925 $ 115,122
Provision for loan losses
- - - -
Noninterest income
11,809 12,528 35,676 36,252
Noninterest expense
24,033 29,366 74,777 81,129
Income before taxes (FTE)
28,125 22,660 81,824 70,245
Income tax provision (FTE)
7,735 5,667 22,163 17,736
Net income
$ 20,390 $ 16,993 $ 59,661 $ 52,509

Average diluted common shares
27,027 26,815 26,976 26,736
Diluted earnings per common share
$ 0.75 $ 0.63 $ 2.21 $ 1.96

Average total assets
$ 5,570,843 $ 5,648,004 $ 5,580,965 $ 5,600,499
Net income to average total assets (annualized)
1.45 % 1.19 % 1.43 % 1.25 %
Net income to average common shareholders' equity (annualized)
11.87 % 10.58 % 11.92 % 11.22 %

Net income for the third quarter ~~2017~~2019 was ~~$611 thousand less~~$3.4 million more than the third quarter 2016, the net result of a reversal of provision for loan losses in the third quarter 2016 and lower net interest and fee income (FTE) in the third quarter 2017, partially offset by higher noninterest income and lower noninterest expense and lower income tax provision (FTE) in the third quarter 2017. The decline in net2018. Net interest and loan fee income (FTE) increased $851 thousand in the third quarter ~~2017~~2019 compared with the third quarter ~~2016 was mostly attributable~~2018 mainly due to ~~lower average balances of loans and lower~~a higher net yield on ~~those loans, partially offset by~~earning assets and higher average balances of investments, partially offset by lower average balances of interest-bearing cash and ~~higher net yield on those investments.~~loans. The ~~Company recorded no~~ provision for loan losses ~~in the current quarter and a $3.2 million reversal of provision for loan losses for the third quarter 2016,~~remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. Noninterest income ~~increased~~decreased $719 thousand from the third quarter 2018 primarily due to ~~higher merchant processing services and debit card fees, partially offset by~~ lower income from service charges on deposit ~~accounts.~~accounts in the third quarter 2019 and a life insurance gain of $585 thousand in the third quarter 2018. Noninterest expense decreased $5.3 million in the third quarter 2019 compared with the third quarter 2018 due to ~~reductions~~a $3.5 million loss contingency recognized in ~~professional fees, limited partnership operating losses,~~the third quarter 2018 and lower FDIC insurance assessments, employee benefit costs, and intangible amortization ~~correspondent service charges, offset~~ in ~~part by higher outsourced data processing and other real estate owned expenses. Third quarter 2017 tax provision (FTE) was lower than~~the third quarter ~~2016 primarily~~2019. The lower third quarter 2019 FDIC assessments are due to application of the Bank’s assessment credit described in the Company’s December 31, 2018 Form 10-K, Part 1, Item 1, “Premiums for Deposit Insurance.” The tax rate (FTE) for the third quarter 2019 was 27.5% compared with 25.0% for the third quarter 2018. The higher tax rate in the third quarter 2019 is due to lower ~~pre-tax income, higher~~ levels of ~~federally~~ tax-exempt interest income ~~on interest-earning assets relative to pre-tax income. The ASU 2016-09 did not affect~~and stock compensation tax deductions in the third quarter ~~2017 results by a meaningful amount.~~2019 and the tax exempt nature of the life insurance gains realized in the third quarter 2018.

Comparing the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 with the ~~first~~ nine months ~~of 2016,~~ended September 30, 2018 net income increased $1.5 million due to higher noninterest income and lower noninterest expense, partially offset by lower net interest and fee income (FTE), a lower reversal of provision for loan losses, and higher income tax provision (FTE).$7.2 million. Net interest and loan fee (FTE) income ~~(FTE) decreased in the first nine months~~increased $5.8 million due to a higher net yield on earning assets and higher average balances of ~~2017 compared with first nine months of 2016 mostly attributable to~~investments, partially offset by lower average balances of ~~loans~~interest-bearing cash and ~~lower net yield on those loans, partially offset by higher average balances of investments.~~loans. The ~~Company recorded a $1.9 million reversal of~~ provision for loan losses ~~for the first nine months of 2017 and a $3.2 million reversal of provision for loan losses for the first nine months of 2016,~~remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. ~~Noninterest~~In the nine months ended September 30, 2019, noninterest income ~~increased primarily~~decreased $576 thousand compared with the nine months ended September 30, 2018 due to ~~higher merchant processing services fees, partially offset by~~ lower income from service charges on deposit ~~accounts. Noninterest~~accounts, other service charges and debit card fees, offset in part by an increase in merchant processing services. In the nine months ended September 30, 2019 noninterest expense decreased $6.4 million compared with the nine months ended September 30, 2018 primarily due to ~~reductions~~decreases in ~~professional fees, correspondent service charges,~~loss contingencies, FDIC insurance ~~premiums, limited partnership operating losses~~assessments, employee benefit costs, and intangible amortization ~~partially offset by higher outsourced data processing and other real estate owned expenses.~~in the nine months ended September 30, 2019. The effective tax ~~provision~~rates (FTE) was 27.1% for the ~~first~~ nine months ~~of 2017 was~~ended September 30, 2019 compared with 25.2% for the nine months ended September 30, 2018. The higher ~~than~~effective tax rate (FTE) in the ~~first~~ nine months ~~of 2016 primarily~~ended September 30, 2019 compared with the same period in 2018 is due to ~~higher pre-tax income, reduced~~lower levels of ~~federally~~ tax-exempt ~~income on interest-earning assets relative to pre-tax~~interest income and ~~lower~~stock compensation tax ~~credits. The first nine months of 2017 income tax provision was $688~~ ~~thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09.~~
deductions.

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~~- 30 -~~
-31-

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 Nine Months
Ended September 30,
2017 2016 2017 2016
($ in thousands)
Interest and loan fee income $ 33,145 $ 33,468 $ 99,632 $ 100,842
Interest expense (473 ) (523 ) (1,429 ) (1,616 )
FTE adjustment 3,008 3,231 9,271 9,892
Net interest and loan fee income (FTE) $ 35,680 $ 36,176 $ 107,474 $ 109,118

Average earning assets $ 4,587,848 $ 4,489,317 $ 4,601,931 $ 4,448,261
Net interest margin (FTE) (annualized) 3.10 % 3.21 % 3.12 % 3.27 %

For the Three Months

For the Nine Months

Ended September 30,

2019

2018

2019

2018

($ in thousands)

Interest and loan fee income
$ 39,695 $ 38,614 $ 118,804 $ 112,275
FTE adjustment
1,109 1,411 3,558 4,292
Interest expense
455 527 1,437 1,445
Net interest and loan fee income (FTE)
$ 40,349 $ 39,498 $ 120,925 $ 115,122

Average earning assets
$ 5,176,744 $ 5,231,257 $ 5,173,581 $ 5,191,664
Net interest margin (FTE) (annualized)
3.11 % 3.00 % 3.12 % 2.95 %

Net interest and loan fee income (FTE) ~~decreased $496~~increased $851 thousand in the third quarter ~~2017~~2019 compared with the third quarter ~~2016 mostly attributable~~2018 mainly due to ~~lower average balances of loans (down $~~98 ~~million) and lower~~a higher net yield on ~~those loans (down0.22~~%earning assets (up 0.11%)~~, partially offset by~~ and higher average balances of investments (up $~~197~~$95 million), partially offset by lower average balances of interest-bearing cash (down $98 million) and ~~higher net yield on those investments (up0.01~~%)loans (down $52 million).

Comparing the first nine months ~~of 2017~~ended September 30, 2019 with the ~~first~~ nine months ~~of 2016,~~ended September 30, 2018, net interest and loan fee (FTE) income ~~(FTE) decreased $1.6~~increased $5.8 million ~~mostly~~ due to ~~lower average balances of loans (down $122~~ ~~million) and lower~~a higher net yield on ~~those loans (down0.21~~%earning assets (up 0.17%)~~, partially offset by~~ and higher average balances of investments (up $~~276~~$136 million), partially offset by lower average balances of interest-bearing cash (down $116 million) and loans (down $39 million).

~~Yields on interest-earning assets declined due to relatively low interest rates prevailing in the market.~~ The annualized net interest margin (FTE) ~~was3.10~~%increased to 3.11% in the third quarter ~~2017~~2019 and~~3.12~~% 3.12% in the ~~first~~ nine months ~~of 2017 compared with 3.21%~~ended September 30, 2019 from 3.00% in the third quarter ~~2016~~2018 and ~~3.27%~~2.95% in the ~~first~~ nine months ~~of 2016.~~ended September 30, 2018. The ~~volume of older-dated higher-yielding loans and municipal bonds declined due~~net interest margin (FTE) increased in 2019, reflecting earning assets repriced to principal maturities and paydowns. The Company, in anticipation of rising interest rates, has been purchasing shorter-duration investment securities with lower yields than longer-duration securities to increase liquidity. The Company’s high levels of liquidity will provide an opportunity to invest in higher ~~yielding assets assuming market interest rates increase to levels higher than yields on maturing securities and security paydowns.~~yields.

The ~~Company has been replacing higher-cost~~Company’s funding ~~sources with low-cost deposits~~costs were 0.04% in the third quarter and ~~interest expense has declined to offset some of~~nine months ended September 30, 2019, unchanged from the ~~decline~~same periods in ~~interest income.~~2018. Average balances of time deposits declined $28$34 million from the ~~first~~ nine months ~~of 2016~~ended September 30, 2018 to ~~first~~the nine months ~~of 2017 while lower-cost checking and savings deposits grew~~4~~% in the same period.~~ended September 30, 2019. Average balances of checking and saving deposits accounted for~~94.7~~% 96.1% of average total deposits in the nine months ~~of 2017~~ended September 30, 2019 compared with ~~93.9%~~95.5% in the ~~first~~ nine months ~~of 2016.~~ended September 30, 2018.

Net Interest Margin (FTE)

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

For the Three Months For the Nine Months
Ended September 30,
2017 2016 2017 2016

Yield on earning assets (FTE) 3.14 % 3.26 % 3.16 % 3.32 %
Rate paid on interest-bearing liabilities 0.07 % 0.08 % 0.07 % 0.08 %
Net interest spread (FTE) 3.07 % 3.18 % 3.09 % 3.24 %
Impact of noninterest-bearing demand deposits 0.03 % 0.03 % 0.03 % 0.03 %
Net interest margin (FTE) 3.10 % 3.21 % 3.12 % 3.27 %

For the Three Months

For the Nine Months

Ended September 30,

2019

2018

2019

2018

Yield on earning assets (FTE)
3.15 % 3.04 % 3.16 % 2.99 %
Rate paid on interest-bearing liabilities
0.07 % 0.08 % 0.07 % 0.07 %
Net interest spread (FTE)
3.08 % 2.96 % 3.09 % 2.92 %
Impact of noninterest-bearing demand deposits
0.03 % 0.04 % 0.03 % 0.03 %
Net interest margin (FTE)
3.11 % 3.00 % 3.12 % 2.95 %

~~During~~The FOMC increased the federal funds rate between December 2016 and ~~through~~December 2018. In the third quarter ~~2017,~~and first nine months of 2019 the ~~net interest margin (FTE) was affected by historically low market interest rates. The changing composition~~yield on earning assets increased compared with the comparable periods of ~~interest-earning~~2018 as earning assets ~~and low market rates has pressured the net interest margin.~~repriced to higher yields. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost time deposits and ~~increasing balances of~~managing rates paid on checking and savings ~~deposits, which earn relatively low interest rates and are less volatile than time deposits during periods of rising market interest rates.~~deposits.

~~- 31 -~~
-32-

Summary of Average Balances, Yields/Rates and Interest Differential

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

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

For the Three Months Ended September 30, 2017
For the Three Months Ended September 30, 2019

Interest
Interest

Average Income/ Yields/
Average

Income/

Yields/

Balance Expense Rates
Balance

Expense

Rates

($ in thousands)
($ in thousands)

Assets
Investment securities:
Taxable $ 2,496,470 $ 12,957 2.08 % $ 3,096,255 $ 19,586 2.53 %
Tax-exempt⁽¹⁾ 803,638 7,847 3.91 % 590,794 4,782 3.24 %
Total investments⁽¹⁾ 3,300,108 20,804 2.52 % 3,687,049 24,368 2.64 %
Loans:
Taxable 1,225,937 14,586 4.72 % 1,094,107 14,038 5.09 %
Tax-exempt⁽¹⁾ 61,803 763 4.90 % 48,561 497 4.06 %
Total loans⁽¹⁾ 1,287,740 15,349 4.73 % 1,142,668 14,535 5.05 %
Total interest-bearing cash
347,027 1,901 2.14 %
Total Interest-earning assets⁽¹⁾ 4,587,848 36,153 3.14 % 5,176,744 40,804 3.15 %
Other assets 853,764 394,099
Total assets $ 5,441,612 $ 5,570,843

Liabilities and shareholders' equity
Noninterest-bearing demand $ 2,103,042 $ - - % $ 2,234,494 $ - - %
Savings and interest-bearing transaction 2,367,501 280 0.05 % 2,357,462 302 0.05 %
Time less than $100,000 135,363 78 0.23 % 101,452 64 0.25 %
Time $100,000 or more 108,673 103 0.38 % 77,568 81 0.41 %
Total interest-bearing deposits 2,611,537 461 0.07 % 2,536,482 447 0.07 %
Short-term borrowed funds 76,083 12 0.06 % 50,398 8 0.06 %
Total interest-bearing liabilities 2,687,620 473 0.07 % 2,586,880 455 0.07 %
Other liabilities 51,477 67,956
Shareholders' equity 599,473 681,513
Total liabilities and shareholders' equity $ 5,441,612 $ 5,570,843
Net interest spread^{(1) (2)} 3.07 % 3.08 %
Net interest and fee income and interest margin^{(1) (3)} $ 35,680 3.10 % $ 40,349 3.11 %

⁽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-bearingliabilities.~~
⁽³⁾~~Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balanceof interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.~~
~~- 32 -~~
~~Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin~~
For the Three Months Ended September 30, 2016
Interest
Average Income/ Yields/
Balance Expense Rates
($ in thousands)
Assets
Investment securities:
Taxable $ 2,265,883 $ 11,024 1.95 %
Tax-exempt⁽¹⁾ 837,248 8,415 4.02 %
Total investments⁽¹⁾ 3,103,131 19,439 2.51 %
Loans:
Taxable 1,320,635 16,424 4.95 %
Tax-exempt⁽¹⁾ 65,551 836 5.07 %
Total loans⁽¹⁾ 1,386,186 17,260 4.95 %
Total Interest-earning assets⁽¹⁾ 4,489,317 36,699 3.26 %
Other assets 764,185
Total assets $ 5,253,502

Liabilities and shareholders' equity
Noninterest-bearing demand $ 2,041,045 $ - - %
Savings and interest-bearing transaction 2,277,462 293 0.05 %
Time less than $100,000 152,142 95 0.25 %
Time $100,000 or more 118,113 124 0.42 %
Total interest-bearing deposits 2,547,717 512 0.08 %
Short-term borrowed funds 68,640 11 0.06 %
Total interest-bearing liabilities 2,616,357 523 0.08 %
Other liabilities 50,329
Shareholders' equity 545,771
Total liabilities and shareholders' equity $ 5,253,502
Net interest spread^{(1) (2)} 3.18 %
Net interest and fee income and interest margin^{(1) (3)} $ 36,176 3.21 %
~~(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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~~- 33 -~~
-33-

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

For the Nine Months Ended September 30, 2017
For the Three Months Ended September 30, 2018

Interest
Interest

Average Income/ Yields/
Average

Income/

Yields/

Balance Expense Rates
Balance

Expense

Rates

($ in thousands)
($ in thousands)

Assets
Investment securities:
Taxable $ 2,459,360 $ 37,584 2.04 % $ 2,849,187 $ 16,780 2.36 %
Tax-exempt⁽¹⁾ 817,443 24,154 3.94 % 742,450 6,177 3.33 %
Total investments⁽¹⁾ 3,276,803 61,738 2.51 % 3,591,637 22,957 2.56 %
Loans:
Taxable 1,261,726 44,777 4.74 % 1,140,448 14,161 4.93 %
Tax-exempt⁽¹⁾ 63,402 2,388 5.04 % 54,426 546 3.98 %
Total loans⁽¹⁾ 1,325,128 47,165 4.76 % 1,194,874 14,707 4.88 %
Total interest-bearing cash
444,746 2,361 1.98 %
Total Interest-earning assets⁽¹⁾ 4,601,931 108,903 3.16 % 5,231,257 40,025 3.04 %
Other assets 805,730 416,747
Total assets $ 5,407,661 $ 5,648,004

Liabilities and shareholders' equity
Noninterest-bearing demand $ 2,069,521 $ - - % $ 2,223,678 $ - - %
Savings and interest-bearing transaction 2,373,814 839 0.05 % 2,461,357 358 0.06 %
Time less than $100,000 138,483 242 0.23 % 118,156 69 0.23 %
Time $100,000 or more 110,512 314 0.38 % 90,668 91 0.40 %
Total interest-bearing deposits 2,622,809 1,395 0.07 % 2,670,181 518 0.08 %
Short-term borrowed funds 71,976 34 0.06 % 63,489 9 0.06 %
Total interest-bearing liabilities 2,694,785 1,429 0.07 % 2,733,670 527 0.08 %
Other liabilities 51,664 53,691
Shareholders' equity 591,691 636,965
Total liabilities and shareholders' equity $ 5,407,661 $ 5,648,004
Net interest spread^{(1) (2)} 3.09 % 2.96 %
Net interest and fee income and interest margin^{(1) (3)} $ 107,474 3.12 % $ 39,498 3.00 %

⁽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-bearingliabilities.
⁽³⁾Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balanceof interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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~~- 34 -~~
-34-

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

For the Nine Months Ended September 30, 2016
For the Nine Months Ended September 30, 2019

Interest
Interest

Average Income/ Yields/
Average

Income/

Yields/

Balance Expense Rates
Balance

Expense

Rates

($ in thousands)
($ in thousands)

Assets
Investment securities:
Taxable $ 2,165,463 $ 31,256 1.92 % $ 3,037,722 $ 56,992 2.50 %
Tax-exempt⁽¹⁾ 835,737 25,632 4.09 % 637,380 15,401 3.22 %
Total investments⁽¹⁾ 3,001,200 56,888 2.53 % 3,675,102 72,393 2.63 %
Loans:
Taxable 1,378,593 51,150 4.96 % 1,126,866 42,834 5.08 %
Tax-exempt⁽¹⁾ 68,468 2,696 5.26 % 50,191 1,538 4.10 %
Total loans⁽¹⁾ 1,447,061 53,846 4.97 % 1,177,057 44,372 5.04 %
Total interest-bearing cash
321,422 5,597 2.30 %
Total Interest-earning assets⁽¹⁾ 4,448,261 110,734 3.32 % 5,173,581 122,362 3.16 %
Other assets 756,157 407,384
Total assets $ 5,204,418 $ 5,580,965

Liabilities and shareholders' equity
Noninterest-bearing demand $ 2,010,058 $ - - % $ 2,203,755 $ - - %
Savings and interest-bearing transaction 2,265,775 878 0.05 % 2,399,848 970 0.05 %
Time less than $100,000 156,568 313 0.27 % 105,339 194 0.25 %
Time $100,000 or more 120,418 395 0.44 % 80,142 246 0.41 %
Total interest-bearing deposits 2,542,761 1,586 0.08 % 2,585,329 1,410 0.07 %
Short-term borrowed funds 62,823 30 0.06 % 55,376 27 0.06 %
Total interest-bearing liabilities 2,605,584 1,616 0.08 % 2,640,705 1,437 0.07 %
Other liabilities 51,766 67,462
Shareholders' equity 537,010 669,043
Total liabilities and shareholders' equity $ 5,204,418 $ 5,580,965
Net interest spread^{(1) (2)} 3.24 % 3.09 %
Net interest and fee income and interest margin^{(1) (3)} $ 109,118 3.27 % $ 120,925 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-bearingliabilities.
⁽³⁾Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balanceof 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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-35-

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

For the Nine Months Ended September 30, 2018

Interest

Average

Income/

Yields/

Balance

Expense

Rates

($ in thousands)

Assets

Investment securities:

Taxable
$ 2,781,814 $ 47,327 2.27 %
Tax-exempt ⁽¹⁾
756,910 18,697 3.29 %
Total investments ⁽¹⁾
3,538,724 66,024 2.49 %
Loans:

Taxable
1,159,049 42,876 4.95 %
Tax-exempt ⁽¹⁾
56,663 1,734 4.09 %
Total loans ⁽¹⁾
1,215,712 44,610 4.91 %
Total interest-bearing cash
437,228 5,933 1.74 %
Total Interest-earning assets ⁽¹⁾
5,191,664 116,567 2.99 %
Other assets
408,835
Total assets
$ 5,600,499

Liabilities and shareholders' equity

Noninterest-bearing demand
$ 2,186,250 $ - - %
Savings and interest-bearing transaction
2,450,893 924 0.05 %
Time less than $100,000
121,619 210 0.23 %
Time $100,000 or more
97,877 283 0.39 %
Total interest-bearing deposits
2,670,389 1,417 0.07 %
Short-term borrowed funds
62,131 28 0.06 %
Total interest-bearing liabilities
2,732,520 1,445 0.07 %
Other liabilities
56,233
Shareholders' equity
625,496
Total liabilities and shareholders' equity
$ 5,600,499
Net interest spread ^{(1) (2)}
2.92 %
Net interest and fee income and interest margin ^{(1) (3)}
$ 115,122 2.95 %
⁽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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~~- 35 -~~
-36-

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

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

Summary of Changes in Interest Income and Expense

For the Three Months Ended September 30, 2017
For the Three Months Ended September 30, 2019

Compared with
Compared with

For the Three Months Ended September 30, 2016
For the Three Months Ended September 30, 2018

Volume Yield/Rate Total
Volume

Yield/Rate

Total

(In thousands)
(In thousands)

Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable $ 1,122 $ 811 $ 1,933 $ 1,455 $ 1,351 $ 2,806
Tax-exempt⁽¹⁾ (338 ) (230 ) (568 ) (1,262 ) (133 ) (1,395 )
Total investments⁽¹⁾ 784 581 1,365 193 1,218 1,411
Loans:
Taxable (1,154 ) (684 ) (1,838 ) (575 ) 452 (123 )
Tax-exempt⁽¹⁾ (47 ) (26 ) (73 ) (59 ) 10 (49 )
Total loans⁽¹⁾ (1,201 ) (710 ) (1,911 ) (634 ) 462 (172 )
Total decrease in interest and loan fee income⁽¹⁾ (417 ) (129 ) (546 )
Increase (decrease) in interest expense:
Total interest-bearing cash
(585 ) 125 (460 )
Total (decrease) increase in interest and loan fee income ⁽¹⁾
(1,026 ) 1,805 779
(Decrease) increase in interest expense:

Deposits:
Savings and interest-bearing transaction 12 (25 ) (13 ) (15 ) (41 ) (56 )
Time less than $100,000 (10 ) (7 ) (17 ) (10 ) 5 (5 )
Time $100,000 or more (10 ) (11 ) (21 ) (13 ) 3 (10 )
Total interest-bearing deposits (8 ) (43 ) (51 ) (38 ) (33 ) (71 )
Short-term borrowed funds 1 - 1 (2 ) 1 (1 )
Total decrease in interest expense (7 ) (43 ) (50 ) (40 ) (32 ) (72 )
Decrease in net interest and loan fee income⁽¹⁾ $ (410 ) $ (86 ) $ (496 )
(Decrease) increase in net interest and loan fee income ⁽¹⁾
$ (986 ) $ 1,837 $ 851

⁽¹⁾ Amounts calculated on an FTE basis using the current statutory federal tax rate.

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~~- 36 -~~
-37-

Summary of Changes in Interest Income and Expense

For the Nine Months Ended September 30, 2019

Compared with

For the Nine Months Ended September 30, 2018

Volume

Yield/Rate

Total

(In thousands)

Increase (decrease) in interest and loan fee income:

Investment securities:

Taxable
$ 4,354 $ 5,311 $ 9,665
Tax-exempt ⁽¹⁾
(2,953 ) (343 ) (3,296 )
Total investments ⁽¹⁾
1,401 4,968 6,369
Loans:

Taxable
(1,191 ) 1,149 (42 )
Tax-exempt ⁽¹⁾
(198 ) 2 (196 )
Total loans ⁽¹⁾
(1,389 ) 1,151 (238 )
Total interest-bearing cash
(1,623 ) 1,287 (336 )
Total (decrease) increase in interest and loan fee income ⁽¹⁾
(1,611 ) 7,406 5,795
(Decrease) increase in interest expense:

Deposits:

Savings and interest-bearing transaction
(19 ) 65 46
Time less than $100,000
(28 ) 12 (16 )
Time $100,000 or more
(51 ) 14 (37 )
Total interest-bearing deposits
(98 ) 91 (7 )
Short-term borrowed funds
(3 ) 2 (1 )
Total (decrease) increase in interest expense
(101 ) 93 (8 )
(Decrease) increase in net interest and loan fee income ⁽¹⁾
$ (1,510 ) $ 7,313 $ 5,803
For the Nine Months Ended September 30, 2017
Compared with
For the Nine Months Ended September 30, 2016
Volume Yield/Rate Total
(In thousands)
Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable $ 4,242 $ 2,086 $ 6,328
Tax-exempt⁽¹⁾ (561 ) (917 ) (1,478 )
Total investments⁽¹⁾ 3,681 1,169 4,850
Loans:
Taxable (4,363 ) (2,010 ) (6,373 )
Tax-exempt⁽¹⁾ (201 ) (107 ) (308 )
Total loans⁽¹⁾ (4,564 ) (2,117 ) (6,681 )
Total decrease in interest and loan fee income⁽¹⁾ (883 ) (948 ) (1,831 )
Increase (decrease) in interest expense:
Deposits:
Savings and interest-bearing transaction 42 (81 ) (39 )
Time less than $100,000 (36 ) (35 ) (71 )
Time $100,000 or more (33 ) (48 ) (81 )
Total interest-bearing deposits (27 ) (164 ) (191 )
Short-term borrowed funds 4 - 4
Total decrease in interest expense (23 ) (164 ) (187 )
Decrease in net interest and loan fee income⁽¹⁾ $ (860 ) $ (784 ) $ (1,644 )
⁽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 ~~three months ended September 30, 2017~~third quarters of 2019 and ~~recorded a reversal of the provision for loan losses of $1.9 million in~~2018 and the nine months ended September 30, ~~2017. The Company recorded a reversal of the provision for loan losses of $3.2 million in the three~~2019 and ~~nine months ended~~ September 30, ~~2016. During the nine months ended~~2018. Classified loans declined from $27 million at December 31, 2018 to $24 million at September 30, ~~2017, classified~~2019. Nonaccrual loans ~~declined $7.4~~were $4 million ~~to $39.8~~at September 30, 2019 compared with $5 million ~~(total classified loans included nonperforming loans of $6.4~~ ~~million). The Company realized net loan losses of $426 thousand for the first nine months of 2017; these developments~~at September 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 September 30, 2017. Management’s evaluation of credit quality includes originated and purchased loans. The Company recorded purchased loans at estimated fair value upon the acquisition dates. Such estimated fair values were recognized for individual loans, although small balance homogenous loans were pooled for valuation purposes. The valuation discounts recorded for purchased loans included Management’s assessment of the risk of principal loss under economic and borrower conditions prevailing on the dates of purchase. The purchased County Bank loans secured by single-family residential real estate are “covered” through February 6, 2019 by loss-sharing agreements the Company entered with the FDIC which mitigates losses during the term of the agreements. Any deterioration in estimated value related to principal loss subsequent to the acquisition dates requires additional loss recognition through a provision for loan losses. No assurance can be given future provisions for loan losses related to purchased loans will not be necessary.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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~~- 37 -~~
-38-

Noninterest Income

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

For the Three Months For the Nine Months
Ended September 30,
2017 2016 2017 2016
(In thousands)

Service charges on deposit accounts $ 4,989 $ 5,303 $ 14,857 $ 15,790
Merchant processing services 2,153 1,532 6,080 4,699
Debit card fees 1,784 1,587 4,851 4,724
Trust fees 718 686 2,136 2,004
ATM processing fees 684 600 1,914 1,860
Other service fees 652 671 1,964 1,951
Financial services commissions 148 118 484 411
Other noninterest income 1,420 1,101 4,042 3,590
Total $ 12,548 $ 11,598 $ 36,328 $ 35,029

For the Three Months

For the Nine Months

Ended September 30,

2019

2018

2019

2018

(In thousands)

Service charges on deposit accounts
$ 4,510 $ 4,615 $ 13,508 $ 14,012
Merchant processing services
2,494 2,464 7,708 7,190
Debit card fees
1,641 1,656 4,789 4,959
Trust fees
733 733 2,199 2,202
ATM processing fees
725 687 2,080 2,049
Other service fees
580 665 1,742 1,946
Financial services commissions
75 132 270 387
Life insurance gains
- 585 433 585
Equity securities (losses) gains
- (16 ) 50 (66 )
Other noninterest income
1,051 1,007 2,897 2,988
Total
$ 11,809 $ 12,528 $ 35,676 $ 36,252

Noninterest income for the third quarter ~~2017 increased~~2019 decreased by $~~950~~$719 thousand from the third quarter ~~2016. Merchant processing services fees increased $621~~ ~~thousand~~2018 primarily due to ~~increased transaction volumes.~~lower income from service charges on deposit accounts in the third quarter 2019 and a life insurance gain of $585 thousand in the third quarter 2018. Service charges on deposit accounts decreased $~~314~~ ~~thousand~~ due to declines in overdraft fees ~~charged on overdrawn and insufficient funds accounts (down $255~~ ~~thousand) and lower fees on analyzed accounts (down $~~60 ~~thousand).~~in the third quarter 2019.

In the ~~first~~ nine months ~~of 2017,~~ended September 30, 2019, noninterest income ~~increased $1.3~~ ~~million~~decreased $576 thousand compared with the ~~first~~ nine months ~~of 2016. Merchant processing services fees increased $1.4~~ ~~million primarily due to higher transaction volumes. Trust fees increased $132~~ ~~thousand due to successful sales efforts. Offsetting the increase were~~ended September 30, 2018. Income from service charges on ~~deposits which~~deposit accounts decreased $~~933~~ ~~thousand~~ due to ~~declines~~lower overdraft fees in the nine months ended September 30, 2019. Other service charges decreased due to lower income from internet banking. Debit card fees ~~charged on overdrawn~~ and ~~insufficient funds accounts (down $746~~ ~~thousand) and lower fees on analyzed accounts (down $212~~ ~~thousand).~~
financial services commissions decreased in the nine months ended September 30, 2019. An increase in merchant processing services partially offset the decrease in noninterest income in the nine months ended September 30, 2019 compared with nine months ended September 30, 2018.

Noninterest Expense

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

For the Three Months For the Nine Months
For the Three Months

For the Nine Months

Ended September 30,
Ended September 30,

2017 2016 2017 2016
2019

2018

2019

2018

(In thousands)
(In thousands)

Salaries and related benefits $ 12,816 $ 13,063 $ 38,867 $ 39,067 $ 12,559 $ 13,415 $ 38,757 $ 39,952
Occupancy 3,665 3,749 10,807 10,546
Occupancy and equipment
5,199 4,809 15,163 14,365
Outsourced data processing services 2,383 2,114 6,710 6,375 2,374 2,292 7,110 6,930
Furniture and equipment 1,242 1,211 3,764 3,611
Amortization of identifiable intangibles 760 867 2,322 2,642
Professional fees 512 1,693 1,533 3,183 645 621 1,791 2,277
Courier service 451 451 1,310 1,458 456 448 1,349 1,333
Other real estate owned 221 (206 ) 54 (487 )
Amortization of identifiable intangibles
76 451 465 1,474
Loss contingency
- 3,500 553 3,500
Other noninterest expense 2,064 3,146 7,758 10,780 2,724 3,830 9,589 11,298
Total $ 24,114 $ 26,088 $ 73,125 $ 77,175 $ 24,033 $ 29,366 $ 74,777 $ 81,129

Noninterest expense decreased $~~2.0~~$5.3 million in the third quarter ~~2017~~2019 compared with the third quarter ~~2016. Professional fees decreased $1.2~~ ~~million~~2018 due to a loss contingency recognized in the third quarter 2018 and lower ~~legal fees associated with nonperforming assets. Other~~FDIC insurance assessments, employee benefit costs, and intangible amortization in the third quarter 2019. The lower third quarter 2019 FDIC assessments are due to application of Westamerica Bank’s assessment credit described in the Company’s December 31, 2018 Form 10-K, Part 1, Item 1, “Premiums for Deposit Insurance.”
-39-
In the nine months ended September 30, 2019 noninterest expense decreased $~~1.1~~$6.4 million compared with the nine months ended September 30, 2018 primarily due to decreases in ~~correspondent bank service charges~~loss contingencies, FDIC insurance assessments, employee benefit costs, and ~~limited partnership operating losses. Salaries and related benefits decreased $247~~ ~~thousand mostly due to attrition. Amortization of intangibles decreased $107~~ thousand as assets are amortized on a declining balance method. Offsetting the decrease were higher expenses for other real estate owned and outsourced data processing. Expenses of other real estate owned increased $~~427~~ ~~thousand due to a writedown of a foreclosed property~~intangible amortization in the ~~current quarter and gains on sale of foreclosed assets in the third quarter 2016.~~
~~- 38 -~~
~~In the first~~ nine months ~~of 2017, noninterest expense decreased $4.1~~ ~~million compared with the first nine months of 2016. Other noninterest expense decreased $3.0~~ ~~million primarily due to decreases in correspondent bank service charges, limited partnership operating losses and insurance premiums. Professional fees decreased $1.7~~ ~~million due to lower legal fees associated with nonperforming assets. Amortization of intangibles decreased $320~~ ~~thousand as assets are amortized on a declining balance method. Salaries and related benefits decreased $200~~ thousand mostly due to attrition, partially offset by higher stock option expense. Offsetting the decrease were higher expenses for other real estate owned, outsourced data processing, occupancy and furniture and equipment. Expenses of other real estate owned increased $~~541~~ ~~thousand due to lower gains on sale of foreclosed assets. Expenses for occupancy and furniture and equipment increased due to technology upgrades.~~ended September 30, 2019.

Provision for Income Tax

The ~~Company recorded an~~Company’s income tax provision (FTE) ~~of $9.1~~was $7.7 million for the third quarter ~~2017~~2019 and $~~26.7~~$22.2 million for the ~~first~~ nine months of 2017. Effective January 1, 2017, the Company adopted ASU 2016-09 which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or expire. During the first nine months of 2017,~~403~~ ~~thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1.6~~ ~~million. The first nine months of 2017 income tax provision was $688~~ ~~thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09. Third quarter and first nine months of 2017 income tax provision (FTE)~~ended September 30, 2019 compared with ~~$9.3 million and $25.8~~$5.7 million for the third quarter 2018 and ~~first~~$17.7 million for the nine months ~~of 2016, respectively.~~ended September 30, 2018. The effective tax rates (FTE) of~~37.7% and36.8~~% 27.5% for the third quarter 2019 and ~~first~~27.1% for the nine months ~~of 2017, respectively,~~ended September 30, 2019 compared with ~~37.2% and 36.7%~~25.0% for the third quarter 2018 and ~~first~~25.2% for the nine months ~~of 2016, respectively.~~ ended September 30, 2018.
The higher effective tax rate (FTE) in the third quarter 2019 compared with the same period in 2018 is due to lower levels of tax-exempt interest income and ~~first~~stock compensation tax deductions in the third quarter 2019 and the tax exempt nature of the life insurance gains realized in the third quarter 2018. The tax provisions (FTE) for the third quarter 2019 and the third quarter 2018 include tax benefits of $-0- thousand and $152 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements.
The higher effective tax rate (FTE) in the nine months ended September 30, 2019 compared with the same period in 2018 is due to lower levels of ~~2017 effective~~tax-exempt interest income and stock compensation tax ~~rates~~deductions in the nine months ended September 30, 2019. The tax provisions (FTE) ~~would have been37.8~~%for the nine months ended September 30, 2019 and~~37.8~~%, September 30, 2018 include tax benefits of $365 thousand and $731 thousand, respectively, ~~under accounting rules applied~~for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in ~~2016.~~the financial statements.

In the nine months ended September 30, 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 ~~increased~~managed the investment securities portfolio in response to changes in deposit ~~growth~~ and loan ~~volume declines.~~volumes. The carrying value of the Company’s investment securities portfolio was $~~3.3~~$3.8 billion ~~as of~~at September 30, ~~2017~~2019 and ~~$3.2~~$3.6 billion ~~as of~~at December 31, ~~2016.~~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. ~~In 2016 Management reduced securities of U.S. Government sponsored entities to reduce call optionality and increased agency residential MBS to develop more reliable cash flows.~~

~~As of~~At September 30, ~~2017,~~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 ~~our~~the Company’s internal analyses compared with the ratings assigned by the third party credit rating agencies.

~~During~~The Company had no equity securities at September 30, 2019. All of the equity securities were sold with no gains or losses from the sale during the third quarter 2017, the Atlantic hurricane season caused severe damage within many US States and Territories. Management has evaluated investment security exposures within the counties receiving disaster designations. The Company’s exposures are limited to municipal and corporate bond investment securities from issuers within Texas, Florida and Georgia counties. The Company holds municipal bonds of $19 ~~million issued by seventeen municipalities within Texas counties, $~~9 ~~million issued by nine municipalities within Florida counties and $6 million issued by four municipalities within Georgia counties.~~2019. The market value of the ~~bonds~~equity securities was $1,747 thousand at December 31, 2018. During the nine months ended September 30, ~~2017 was $~~20 ~~million, $~~10 ~~million and $~~7 ~~million, respectively. The bonds mature as follows:~~2019, the Company recognized gross unrealized holding gains of $50 thousand in earnings.

~~- 39 -~~
-40-

2018 2019 2020 2022 2023 2024 2025 2026 2027 Total
(In thousands)

Texas $ 280 $ 4,285 $ 3,220 $ - $ 4,460 $ 710 $ 4,435 $ 1,625 $ 350 $ 19,365
Florida 1,000 2,185 - - 1,755 1,910 340 635 1,405 9,230
Georgia - - - - - - 1,325 4,880 - 6,205
$ 1,280 $ 6,470 $ 3,220 $ - $ 6,215 $ 2,620 $ 6,100 $ 7,140 $ 1,755 $ 34,800
The following table summarizes total corporate securities by the industry sector in which the issuing companies operate:

In Management’s judgement, each municipality’s financial resources and the availability of federal and state disaster funds mitigates the risk exposure of the bonds, particularly for intermediate-term and longer-term bonds.

At September 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
$ 719,601 43 % $ 531,512 40 %
Utilities
223,428 14 % 197,568 15 %
Consumer, Non-cyclical
184,859 11 % 169,851 13 %
Industrial
151,452 9 % 152,636 12 %
Technology
123,107 7 % 105,324 8 %
Communications
89,559 5 % 49,642 4 %
Basic Materials
66,978 4 % 30,410 2 %
Consumer, Cyclical
61,053 4 % 58,430 5 %
Energy
47,010 3 % 19,668 1 %
Total Corporate securities
$ 1,667,047 100 % $ 1,315,041 100 %

~~In addition, the Company holds one $12.3~~ million (market value) corporate bond maturing in 2021 issued by a regulated utility in a Texas county which can recapture capital expenditures through rates charged customers; the market value of this corporate bond at September 30, 2017 was~~121.5% of its par value, which reflects the bond’s 9.15% coupon rate.~~
Based on currently available information, Management does not expect any of the bonds affected by the hurricanes to become impaired; Management will continue to monitor the value of these bonds for impairment.

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 September 30, ~~2017,~~2019, the Company’s investment securities portfolios included securities issued by~~662~~ 481 state and local government municipalities and agencies located within45 42 states. ~~None of the Company’s investment securities were issued by Puerto Rican government entities.~~ The largest exposure to any one municipality or agency was $~~10.1~~$9.0 million (fair value) represented by ~~nine~~one general obligation ~~bonds.~~bond.

At September 30, 2019

Amortized

Fair

Cost

Value

(In thousands)

Obligations of states and political subdivisions:

General obligation bonds:

California
$ 84,879 $ 87,392
Texas
38,245 38,698
New Jersey
29,798 30,150
Washington
23,924 24,626
Minnesota
20,661 20,918
Other (33 states)
203,785 207,899
Total general obligation bonds
$ 401,292 $ 409,683

Revenue bonds:

California
$ 32,277 $ 32,787
Kentucky
16,399 16,680
Colorado
12,917 13,243
Washington
11,223 11,567
Indiana
9,944 10,149
Other (28 states)
90,204 91,837
Total revenue bonds
$ 172,964 $ 176,263
Total obligations of states and political subdivisions
$ 574,256 $ 585,946
[The remainder of this page intentionally left blank]

At September 30, 2017
Amortized Fair
Cost Value
(In thousands)
Obligations of states and political subdivisions:
General obligation bonds:
California $ 94,536 $ 97,251
Texas 66,823 67,200
New Jersey 39,474 40,073
Minnesota 30,558 30,937
Other (36 states) 298,187 302,140
Total general obligation bonds $ 529,578 $ 537,601

Revenue bonds:
California $ 41,261 $ 42,389
Kentucky 22,724 23,155
Iowa 17,322 17,472
Colorado 15,512 15,816
Washington 13,523 14,140
Indiana 13,363 13,606
Other (29 states) 139,380 141,709
Total revenue bonds $ 263,085 $ 268,287
Total obligations of states and political subdivisions $ 792,663 $ 805,888
-41-

At December 31, ~~2016,~~2018, the Company’s investment securities portfolios included securities issued by ~~698~~583 state and local government municipalities and agencies located within 4443 states. ~~None of the Company’s investment securities were issued by Puerto Rican government entities.~~ The largest exposure to any one municipality or agency was ~~$10.0~~$9.3 million (fair value) represented by ~~nine~~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

~~- 40 -~~
At December 31, 2016
Amortized Fair
Cost Value
(In thousands)
Obligations of states and political subdivisions:
General obligation bonds:
California $ 105,129 $ 106,391
Texas 69,017 68,671
New Jersey 40,111 40,102
Pennsylvania 37,384 37,543
Minnesota 32,946 32,847
Other (36 states) 280,488 279,571
Total general obligation bonds $ 565,075 $ 565,125

Revenue bonds:
California $ 47,415 $ 48,429
Kentucky 22,854 22,902
Pennsylvania 18,568 18,683
Iowa 18,086 18,302
Colorado 15,574 15,674
Other (30 states) 157,452 159,054
Total revenue bonds $ 279,949 $ 283,044
Total obligations of states and political subdivisions $ 845,024 $ 848,169
At September 30, ~~2017~~2019 and December 31, ~~2016,~~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 from22 19 revenue sources at September 30, ~~2017~~2019 and 2322 revenue sources December 31, ~~2016.~~2018. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

At September 30, 2019

Amortized

Fair

Cost

Value

(In thousands)

Revenue bonds by revenue source:

Water
$ 39,657 $ 40,489
Sales tax
23,030 23,532
Sewer
19,667 20,196
Lease (renewal)
15,368 15,656
Lease (abatement)
10,924 11,190
Other (14 sources)
64,318 65,200
Total revenue bonds by revenue source
$ 172,964 $ 176,263

At September 30, 2017
Amortized Fair
Cost Value
(In thousands)
Revenue bonds by revenue source:
Water $ 53,416 $ 55,155
Sewer 34,754 35,600
Sales tax 30,255 31,133
Lease (renewal) 20,991 21,379
College & University 17,705 17,695
Other (17 sources) 105,964 107,325
Total revenue bonds by revenue source $ 263,085 $ 268,287

[The remainder of this page intentionally left blank]

~~- 41 -~~
-42-

At December 31, 2016
Amortized Fair
Cost Value
(In thousands)
Revenue bonds by revenue source:
Water $ 55,401 $ 56,826
Sewer 37,996 38,497
Sales tax 31,146 31,835
Lease (renewal) 24,242 24,235
College & University 17,856 17,762
Other (18 sources) 113,308 113,889
Total revenue bonds by revenue source $ 279,949 $ 283,044

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 ~~and assigns~~to challenge the credit risk grades ~~to evaluated loans~~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~~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.
~~- 42 -~~
~~“Nonperforming~~ “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”).

-43-
Nonperforming Assets
At September 30, At December 31,
2017 2016 2016
�� (In thousands)

Nonperforming nonaccrual loans $ 1,498 $ 1,861 $ 3,956
Performing nonaccrual loans 4,285 4,432 4,429
Total nonaccrual loans 5,783 6,293 8,385
Accruing loans 90 or more days past due 434 487 497
Total nonperforming loans 6,217 6,780 8,882
Other real estate owned 1,426 3,032 3,095
Total nonperforming assets $ 7,643 $ 9,812 $ 11,977
Nonperforming Assets

At September 30,

At December 31,

2019

2018

2018

(In thousands)

Nonperforming nonaccrual loans
$ 633 $ 1,611 $ 998
Performing nonaccrual loans
3,670 3,870 3,870
Total nonaccrual loans
4,303 5,481 4,868
Accruing loans 90 or more days past due
351 361 551
Total nonperforming loans
4,654 5,842 5,419
Other real estate owned
43 620 350
Total nonperforming assets
$ 4,697 $ 6,462 $ 5,769

Nonperforming assets have declined ~~during 2016 and the first nine months of 2017~~at September 30, 2019 compared with September 30, 2018 due to payoffs, chargeoffs and sale of Other Real Estate Owned. At September 30, ~~2017,~~2019, one loan secured by commercial real estate with a balance of $~~4.3~~$3.7 million was on nonaccrual status. The remaining ~~four~~five nonaccrual loans held at September 30, ~~2017~~2019 had an average carrying value of ~~$375 thousand and the largest carrying value was $573~~$127 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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-44-

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 Nine Months

Ended September 30,

2019

2018

2019

2018

($ in thousands)

Analysis of the Allowance for Loan Losses

Balance, beginning of period
$ 20,117 $ 23,040 $ 21,351 $ 23,009
Provision for loan losses
- - - -
Loans charged off

Commercial
- (384 ) (71 ) (425 )
Commercial real estate
- (240 ) - (240 )
Consumer installment and other
(1,039 ) (845 ) (3,332 ) (3,015 )
Total chargeoffs
(1,039 ) (1,469 ) (3,403 ) (3,680 )
Recoveries of loans previously charged off

Commercial
233 103 449 1,352
Commercial real estate
12 - 38 -
Consumer installment and other
505 353 1,393 1,346
Total recoveries
750 456 1,880 2,698
Net loan losses
(289 ) (1,013 ) (1,523 ) (982 )
Balance, end of period
$ 19,828 $ 22,027 $ 19,828 $ 22,027

Net loan losses as a percentage of average total loans (annualized)
0.10 % 0.34 % 0.17 % 0.11 %

For the Three Months For the Nine Months
Ended September 30,
2017 2016 2017 2016
($ in thousands)
Analysis of the Allowance for Loan Losses
Balance, beginning of period $ 24,103 $ 28,910 $ 25,954 $ 29,771
Reversal of provision for loan losses - (3,200 ) (1,900 ) (3,200 )
Loans charged off
Commercial (132 ) (88 ) (961 ) (2,024 )
Real estate residential - - - -
Consumer installment and other (886 ) (1,848 ) (3,783 ) (3,568 )
Total chargeoffs (1,018 ) (1,936 ) (4,744 ) (5,592 )
Recoveries of loans previously charged off
Commercial 128 1,739 626 3,703
Commercial real estate - 509 88 539
Construction - - 1,899 -
Consumer installment and other 415 337 1,705 1,138
Total recoveries 543 2,585 4,318 5,380
Net loan (losses) recoveries (475 ) 649 (426 ) (212 )
Balance, end of period $ 23,628 $ 26,359 $ 23,628 $ 26,359

Net loan losses (recoveries) as a percentage of average total loans (annualized) 0.15 % (0.19 %) 0.04 % 0.02 %
~~- 43 -~~
The Company's allowance for loan losses is maintained at a level considered appropriate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall loan loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is individually allocated to impaired loans whose full collectability of principal is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. The Company evaluates ~~for impairment~~ all loans with outstanding principal balances in excess of $500 thousand ~~which~~that are classified or on nonaccrual status and all “troubled debt restructured” ~~loans.~~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 September 30, ~~2017~~2019 is economic and business conditions $~~0.7~~$0.4 million. Also included in the unallocated allowance is the risk of losses attributable to general attributes of the Company's loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management are: ~~loan review system $1.1~~concentrations of credit at $1.0 million, adequacy of lending Management and staff $~~0.4~~at $1.1 million, and ~~concentrations of credit $1.3~~loan review system at $1.0 million.
-45-

Allowance for Loan Losses

For the Three Months Ended September 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
$ 5,235 $ 4,057 $ 1,117 $ 238 $ 5,418 $ 4,052 $ 20,117
(Reversal) provision
(596 ) (1 ) 482 (16 ) 655 (524 ) -
Chargeoffs
- - - - (1,039 ) - (1,039 )
Recoveries
233 12 - - 505 - 750
Total allowance for loan losses
$ 4,872 $ 4,068 $ 1,599 $ 222 $ 5,539 $ 3,528 $ 19,828

Allowance for Loan Losses
For the Three Months Ended September 30, 2017
Consumer
Commercial Residential Installment
Commercial Real Estate Construction Real Estate and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Balance at beginning of period $ 8,167 $ 3,545 $ 160 $ 1,105 $ 7,215 $ 3,911 $ 24,103
Additions:
(Reversal) provision (391 ) 288 136 (50 ) 167 (150 ) -
Deductions:
Chargeoffs (132 ) - - - (886 ) - (1,018 )
Recoveries 128 - - - 415 - 543
Net loan losses (4 ) - - - (471 ) - (475 )
Total allowance for loan losses $ 7,772 $ 3,833 $ 296 $ 1,055 $ 6,911 $ 3,761 $ 23,628
Allowance for Loan Losses
For the Nine Months Ended September 30, 2017
Consumer
Commercial Residential Installment
Commercial Real Estate Construction Real Estate and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Balance at beginning of period $ 8,327 $ 3,330 $ 152 $ 1,330 $ 7,980 $ 4,835 $ 25,954
Additions:
(Reversal) provision (220 ) 415 (1,755 ) (275 ) 1,009 (1,074 ) (1,900 )
Deductions:
Chargeoffs (961 ) - - - (3,783 ) - (4,744 )
Recoveries 626 88 1,899 - 1,705 - 4,318
Net loan (losses) recoveries �� (335 ) 88 1,899 - (2,078 ) - (426 )
Total allowance for loan losses $ 7,772 $ 3,833 $ 296 $ 1,055 $ 6,911 $ 3,761 $ 23,628

Allowance for Loan Losses

For the Nine Months Ended September 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
(1,817 ) 146 134 (647 ) 1,833 351 -
Chargeoffs
(71 ) - - - (3,332 ) - (3,403 )
Recoveries
449 38 - - 1,393 - 1,880
Total allowance for loan losses
$ 4,872 $ 4,068 $ 1,599 $ 222 $ 5,539 $ 3,528 $ 19,828

~~[The remainder of this page intentionally left blank]~~
~~- 44 -~~
Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
At September 30, 2017
Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Unallocated Total
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment $ 4,922 $ 154 $ - $ - $ - $ - $ 5,076
Collectively evaluated for impairment 2,850 3,679 296 1,055 6,911 3,761 18,552
Purchased loans with evidence of credit deterioration - - - - - - -
Total $ 7,772 $ 3,833 $ 296 $ 1,055 $ 6,911 $ 3,761 $ 23,628
Carrying value of loans:
Individually evaluated for impairment $ 10,749 $ 13,973 $ - $ 211 $ - $ - $ 24,933
Collectively evaluated for impairment 306,113 559,182 4,992 68,913 319,889 - 1,259,089
Purchased loans with evidence of credit deterioration 29 562 - - 169 - 760
Total $ 316,891 $ 573,717 $ 4,992 $ 69,124 $ 320,058 $ - $ 1,284,782
The portion of the allowance for loan losses ascribed to loan segments declined from September 30, 2016 to September 30, 2017 due to declines in classified loans, delinquent loans, and the overall loan portfolio. The decline in the unallocated portion was due to improved economic conditions within the Company’s geographic markets.

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

At September 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
$ 2,550 $ - $ - $ - $ - $ - $ 2,550
Collectively evaluated for impairment
2,322 4,068 1,599 222 5,539 3,528 17,278
Total
$ 4,872 $ 4,068 $ 1,599 $ 222 $ 5,539 $ 3,528 $ 19,828
Carrying value of loans:

Individually evaluated for impairment
$ 8,672 $ 7,953 $ - $ 193 $ 144 $ - $ 16,962
Collectively evaluated for impairment
207,601 571,274 6,678 35,155 295,559 - 1,116,267
Total
$ 216,273 $ 579,227 $ 6,678 $ 35,348 $ 295,703 $ - $ 1,133,229

Management considers the $~~23.6~~$19.8 million allowance for loan losses to be adequate as a reserve against probable incurred loan losses ~~inherent~~ in the loan portfolio as of September 30, ~~2017.~~2019.

See Note 4 to the unaudited consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, ~~and~~ allowance for loan ~~losses.~~
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. ~~Assets and liabilities~~Financial instruments may mature or re-price at different times. ~~Assets and liabilities~~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 ~~assets or liabilities~~financial instruments may ~~shorten or lengthen~~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, credit losses, and other elements of earnings such as account analysis fees on commercial deposit accounts and correspondent bank service charges.~~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 ~~Federal Open Market Committee (the “FOMC”).~~FOMC. The monetary policies of the FOMC can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on ~~assets~~loans and investment securities and paid for ~~liabilities.~~deposits and other borrowings. The nature and impact of future changes in monetary policies are generally not predictable.

Management expects a high level of uncertainty in regard to interest rate levels in the immediate term, and Management’s most likely earnings forecast for the twelve months ending September 30, 2018 assumes market interest rates will gradually rise, with short-term rates rising more than long-term rates.
-46-

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

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.
~~- 45 -~~

The Company’s asset and liability position was ~~“neutral” to~~ slightly “asset sensitive” at September 30, ~~2017,~~2019, depending on the interest rate assumptions applied to ~~the~~each simulation ~~model employed by Management to measure interest rate risk.~~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 September 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
-6.50 % 0.00 % +4.60 %
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
-3.60 % 0.00 % +2.00 %
Simulation estimates depend on, and will change with, the size and mix of the actual and projected ~~balance sheet~~composition of financial instruments at the time of each simulation. ~~Management continues to monitor the interest rate environment as well as economic conditions and other factors it deems relevant in managing the Company's exposure to interest rate risk.~~

The Company does not currently engage in trading activities or use derivative instruments to ~~control~~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. ~~As an example, any preferred~~Preferred or common stock holdings, as permitted by banking regulations, can fluctuate in value. Management regularly assesses the extent and duration of any declines in market value, the causes of such declines, the likelihood of a recovery in market value, and its intent to hold securities until a recovery in value occurs. DeclinesChanges in value of preferred or common stock holdings ~~that~~ are ~~deemed “other than temporary” could result in loss recognition~~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 ~~regularly~~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.

-47-
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, provided98 ~~percent~~ 98% of funding for average total assets in the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 and ~~in 2016.~~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 reserves.~~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 ~~liquidity reserve.~~source of liquidity. The Company held $~~3.3~~$3.8 billion in total investment securities at September 30, ~~2017.~~2019. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At September 30, ~~2017,~~2019, such collateral requirements totaled approximately $~~771~~$722 million.
~~- 46 -~~
Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. The Company performs liquidity stress tests on a periodic basis to evaluate the sustainability of its liquidity. Under the stress testing, the Company assumes outflows of funds increase beyond expected levels. Measurement of such heightened outflows considers the composition of the Company’s deposit base, including any concentration of deposits, non-deposit funding such as short-term borrowings, and unfunded lending commitments. The Company evaluates its stock of highly liquid assets to meet the assumed higher levels of outflows. Highly liquid assets include cash and amounts due from other banks from daily transaction settlements, reduced by branch cash needs and Federal Reserve Bank reserve requirements, and investment securities based on regulatory risk-weighting guidelines. Based on the results of the most recent liquidity stress test, Management is satisfied with the liquidity condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced liquidity.

Management continually monitors the Company’s cash levels. Loan demand from credit worthy borrowers will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of these deposit balances is subject to heightened competition, the success of the Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, deposit growth may be used to fund loans or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

Westamerica Bancorporation ("Parent Company") is a separate entity apart from ~~Westamerica~~the Bank ~~(“Bank”)~~ and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends declared for its shareholders, and interest and principal on any outstanding debt. The Parent Company currently has no debt. Substantially all of the Parent Company's revenues are obtained from subsidiary dividends and service fees.

The Bank’s dividends paid to the Parent Company, proceeds from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder dividends of $31$33 million and $43 million in the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 and ~~$40 million~~ in ~~2016,~~the year ended December 31, 2018, respectively, and retire common stock in the amount of $~~314~~$488 thousand ~~in the first nine months of 2017~~ and ~~$6 million in 2016.~~$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~~10.4~~% 11.9% in the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 and ~~10.9%~~11.3% in ~~2016.~~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 $19$11 million in the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 and ~~$24~~$13 million in ~~2016.~~the year ended December 31, 2018.
-48-

The Company paid common dividends totaling $31$33 million in the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 and ~~$40~~$43 million in ~~2016,~~the year ended December 31, 2018, which represent dividends per common share of ~~$1.17~~$1.22 and ~~$1.56,~~$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 retired6 8 thousand shares valued at $~~314~~$488 thousand in the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 and ~~137~~9 thousand shares valued at ~~$6 million~~$524 thousand in ~~2016.~~the year ended December 31, 2018.

The Company's primary capital resource is shareholders' equity, which was $~~604~~$713 million at September 30, ~~2017~~2019 compared with ~~$561~~$616 million at December 31, ~~2016.~~2018. The Company's ratio of equity to total assets was~~11.09~~% 12.7% at September 30, ~~2017~~2019 and ~~10.46%~~11.1% at December 31, ~~2016.~~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.
~~- 47 -~~
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, ~~investment securities,~~ in regulatory capital. Neither the Company nor the Bank is subject to the “advanced approaches rule” and both made the election not to include most elements of Accumulated Other Comprehensive Income in regulatory capital.

Banking organizations that are not subject to the “advanced approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations began on January 1, 2016 and ~~will end~~ended January 1, ~~2019.~~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 ~~table~~tables below, on the dates indicated.
-49-

To Be
Required for Well-capitalized
Capital Adequacy Purposes Under Prompt
At September 30, 2017 Effective Effective Corrective Action
Company Bank January 1, 2017 January 1, 2019 Regulations (Bank)

Common Equity Tier I Capital 15.73 % 12.59 % 5.75 %⁽¹⁾ 7.00 %⁽²⁾ 6.50 %
Tier I Capital 15.73 % 12.59 % 7.25 %⁽¹⁾ 8.50 %⁽²⁾ 8.00 %
Total Capital 16.71 % 13.78 % 9.25 %⁽¹⁾ 10.50 %⁽²⁾ 10.00 %
Leverage Ratio 9.03 % 7.18 % 4.00 % 4.00 % 5.00 %

To Be

Well-capitalized

Required for

Under Prompt

At September 30, 2019

Capital Adequacy

Corrective Action

Company

Bank

Purposes

Regulations (Bank)

Common Equity Tier I Capital
16.55 % 12.14 % 7.00% ⁽¹⁾ 6.50 %
Tier I Capital
16.55 % 12.14 % 8.50% ⁽¹⁾ 8.00 %
Total Capital
17.20 % 12.98 % 10.50% ⁽¹⁾ 10.00 %
Leverage Ratio
10.41 % 7.60 % 4.00% 5.00 %

⁽¹⁾ Includes ~~1.25%~~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 ~~remainder~~Company intends to timely adopt the CECL methodology January 1, 2020, which involves an implementing accounting entry to retained earnings on a net-of-tax basis. 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 ~~this page intentionally left blank]~~
~~- 48 -~~
To Be
Required for Well-capitalized
Capital Adequacy Purposes Under Prompt
At December 31, 2016 Effective Effective Corrective Action
Company Bank January 1, 2016 January 1, 2019 Regulations (Bank)

Common Equity Tier I Capital 14.85 % 11.70 % 5.125 %⁽³⁾ 7.00 %⁽⁴⁾ 6.50 %
Tier I Capital 14.85 % 11.70 % 6.625 %⁽³⁾ 8.50 %⁽⁴⁾ 8.00 %
Total Capital 15.95 % 13.02 % 8.625 %⁽³⁾ 10.50 %⁽⁴⁾ 10.00 %
Leverage Ratio 8.46 % 6.63 % 4.000 % 4.00 % 5.00 %
⁽³⁾ ~~Includes 0.625%~~three years the day-one regulatory capital ~~conservation buffer.~~
⁽⁴⁾ ~~Includes 2.5%~~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 ~~conservation buffer.~~effects. See Note 2 to the unaudited consolidated financial statements, “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, ~~securities valuations,~~ shareholder dividends, asset volumes, share repurchase activity, stock option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain regulatory capital levels exceeding the highest effective regulatory standard and pay quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Credit risk and interest rate risk are the most significant market risks affecting the Company, and equity price risk can also affect the Company’s financial results. These risks are described in the preceding sections regarding “Loan Portfolio Credit Risk,” and “Asset/Liability and Market Risk Management.” Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company’s business activities.
-50-

Item 4. Controls and Procedures

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of September 30, ~~2017.~~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 September 30, ~~2017~~2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, other than ordinary routine legal proceedings arising in the ordinary course of the Company’s business. None of these proceedings is expected to have a material adverse impact upon the Company’s business, financial position or results of operations. 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.
~~- 49 -~~

Item 1A. Risk Factors

The Company’s Form 10-K as of December 31, ~~2016~~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) ~~Previously reported on Form 8-K.~~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 September 30, ~~2017 (in thousands, except per share data).~~
2019.

~~2017~~
2019
Period

(a) Total Number of ~~shares~~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)
July 1 through July 31
- $ - - 1,750
August 1 through August 31
- - - 1,750
September 1 through September 30
- - - 1,750
Total
- $ - - $ -1,750 - ~~1,750~~
-51-

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.

No shares were repurchased during the period ~~from~~ July 1, ~~2017~~2019 through September 30, ~~2017.~~2019. A ~~replacement~~ program approved by the Board of Directors on July ~~28, 2017 authorizes~~26, 2018 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, ~~2018.~~2019 was replaced by a program approved by the Board of Directors on July 25, 2019 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2020.

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

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

[The remainder of this page intentionally left blank]
~~- 50 -~~
-52-

SIGNATURES

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

WESTAMERICA BANCORPORATION
(Registrant)

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

Date: November ~~3, 2017~~4, 2019

~~- 51 -~~
-53-

EXHIBIT INDEX

Exhibit ~~31.1~~10.1*: Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Stock Option Agreement Form
Exhibit 10.2*: Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement Form
Exhibit 31.1: Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

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

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

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

Exhibit ~~101: Pursuant to Rule 405~~101.INS: XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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
* Indicates management contract, compensatory plan or arrangement.
[The remainder of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016; (ii) Consolidated Balance Sheets at September 30, 2017, and December 31, 2016; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (vi) Notes to the Unaudited Consolidated Financial Statements.this page intentionally left blank]

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

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

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

Title of Class		Shares outstanding as of October ~~26, 2017~~
		28, 2019
Common Stock,		~~26,345,570~~27,055,059
No Par Value

	Page
Forward Looking Statements	3
PART I - FINANCIAL INFORMATION
Item 1	Financial Statements	4
	Notes to Unaudited Consolidated Financial Statements	9
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	2829
Item 3	Quantitative and Qualitative Disclosures about Market Risk	4950
Item 4	Controls and Procedures	4951
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	4951
Item 1A	Risk Factors	5051
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	5051
Item 3	Defaults upon Senior Securities	5052
Item 4	Mine Safety Disclosures	5052
Item 5	Other Information	5052
Item 6	Exhibits	5052
Signatures	5153
Exhibit Index	5254
Exhibit 10.1 - Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Stock Option Agreement Form	55
Exhibit 10.2 - Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement Form	63
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)	5369
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)	5470
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350	5571
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350	5672

	At September 30,			At December 31,			At September 30,			At December 31,
	2017			2016			2019			2018
	(In thousands)						(In thousands)
Assets:
Cash and due from banks	$	561,757		$	462,271		$	415,639		$	420,284
Investment securities available for sale		2,090,477			1,890,758
Investment securities held to maturity, with fair values of: $1,208,279 at September 30, 2017 and $1,340,741 at December 31, 2016		1,204,240			1,346,312
Equity securities								-			1,747
Debt securities available for sale								2,983,767			2,654,670
Debt securities held to maturity, with fair values of: $799,241 at September 30, 2019 and $971,445 at December 31, 2018								793,216			984,609
Loans		1,284,782			1,352,711			1,133,229			1,207,202
Allowance for loan losses		(23,628	)		(25,954	)		(19,828	)		(21,351	)
Loans, net of allowance for loan losses		1,261,154			1,326,757			1,113,401			1,185,851
Other real estate owned		1,426			3,095			43			350
Premises and equipment, net		35,507			36,566			34,080			34,507
Identifiable intangibles, net		4,605			6,927			1,464			1,929
Goodwill		121,673			121,673			121,673			121,673
Other assets		164,969			171,724			152,772			162,906
Total Assets	$	5,445,808		$	5,366,083		$	5,616,055		$	5,568,526

Liabilities:
Noninterest-bearing deposits	$	2,128,342		$	2,089,443		$	2,265,640		$	2,243,251
Interest-bearing deposits		2,606,238			2,615,298			2,530,983			2,623,588
Total deposits		4,734,580			4,704,741			4,796,623			4,866,839
Short-term borrowed funds		66,337			59,078			45,646			51,247
Other liabilities		40,934			40,897			60,408			34,849
Total Liabilities		4,841,851			4,804,716			4,902,677			4,952,935

Contingencies (Note 10)

Shareholders' Equity:
Common stock (no par value), authorized - 150,000 shares Issued and outstanding:26,319at September 30, 2017 and 25,907 at December 31, 2016		425,655			404,606
Common stock (no par value), authorized - 150,000 shares
Issued and outstanding: 27,014 at September 30, 2019 and 26,730 at December 31, 2018								462,653			448,351
Deferred compensation		1,533			1,533			771			1,395
Accumulated other comprehensive loss		(3,433	)		(10,074	)
Accumulated other comprehensive income (loss)								20,454			(39,996	)
Retained earnings		180,202			165,302			229,500			205,841
Total Shareholders' Equity		603,957			561,367			713,378			615,591
Total Liabilities and Shareholders' Equity	$	5,445,808		$	5,366,083		$	5,616,055		$	5,568,526

	For the Three Months					For the Nine Months						For the Three Months					For the Nine Months
	Ended September 30,											Ended September 30,
	2017		2016			2017			2016			2019		2018			2019		2018
	(In thousands, except per share data)											(In thousands, except per share data)
Interest and Loan Fee Income:
Loans	$	15,082	$	16,968		$	46,330		$	52,904		$	14,431	$	14,593		$	44,050	$	44,247
Investment securities available for sale		11,347		8,796			32,305			24,855
Investment securities held to maturity		6,716		7,704			20,997			23,083
Equity securities													92		85			289		256
Debt securities available for sale													18,736		15,644			54,080		43,518
Debt securities held to maturity													4,535		5,931			14,788		18,321
Interest-bearing cash													1,901		2,361			5,597		5,933
Total Interest and Loan Fee Income		33,145		33,468			99,632			100,842			39,695		38,614			118,804		112,275
Interest Expense:
Deposits		461		512			1,395			1,586			447		518			1,410		1,417
Short-term borrowed funds		12		11			34			30			8		9			27		28
Total Interest Expense		473		523			1,429			1,616			455		527			1,437		1,445
Net Interest and Loan Fee Income		32,672		32,945			98,203			99,226			39,240		38,087			117,367		110,830
Reversal of Provision for Loan Losses		-		(3,200	)		(1,900	)		(3,200	)
Net Interest and Loan Fee Income After Reversal of Provision for Loan Losses		32,672		36,145			100,103			102,426
Provision for Loan Losses													-		-			-		-
Net Interest and Loan Fee Income After Provision for Loan Losses													39,240		38,087			117,367		110,830
Noninterest Income:
Service charges on deposit accounts		4,989		5,303			14,857			15,790			4,510		4,615			13,508		14,012
Merchant processing services		2,153		1,532			6,080			4,699			2,494		2,464			7,708		7,190
Debit card fees		1,784		1,587			4,851			4,724			1,641		1,656			4,789		4,959
Trust fees		718		686			2,136			2,004			733		733			2,199		2,202
ATM processing fees		684		600			1,914			1,860			725		687			2,080		2,049
Other service fees		652		671			1,964			1,951			580		665			1,742		1,946
Financial services commissions		148		118			484			411			75		132			270		387
Life insurance gains													-		585			433		585
Equity securities(losses) gains													-		(16	)		50		(66	)
Other noninterest income		1,420		1,101			4,042			3,590			1,051		1,007			2,897		2,988
Total Noninterest Income		12,548		11,598			36,328			35,029			11,809		12,528			35,676		36,252
Noninterest Expense:
Salaries and related benefits		12,816		13,063			38,867			39,067			12,559		13,415			38,757		39,952
Occupancy		3,665		3,749			10,807			10,546
Occupancy and equipment													5,199		4,809			15,163		14,365
Outsourced data processing services		2,383		2,114			6,710			6,375			2,374		2,292			7,110		6,930
Furniture and equipment		1,242		1,211			3,764			3,611
Amortization of identifiable intangibles		760		867			2,322			2,642
Professional fees		512		1,693			1,533			3,183			645		621			1,791		2,277
Courier service		451		451			1,310			1,458			456		448			1,349		1,333
Other real estate owned		221		(206	)		54			(487	)
Amortization of identifiable intangibles													76		451			465		1,474
Loss contingency													-		3,500			553		3,500
Other noninterest expense		2,064		3,146			7,758			10,780			2,724		3,830			9,589		11,298
Total Noninterest Expense		24,114		26,088			73,125			77,175			24,033		29,366			74,777		81,129
Income Before Income Taxes		21,106		21,655			63,306			60,280			27,016		21,249			78,266		65,953
Provision for income taxes		6,089		6,027			17,441			15,880			6,626		4,256			18,605		13,444
Net Income	$	15,017	$	15,628		$	45,865		$	44,400		$	20,390	$	16,993		$	59,661	$	52,509

Average Common Shares Outstanding		26,309		25,641			26,260			25,558			26,986		26,701			26,924		26,622
Average Diluted Common Shares Outstanding		26,404		25,687			26,379			25,595			27,027		26,815			26,976		26,736
Per Common Share Data:
Basic earnings	$	0.57	$	0.61		$	1.75		$	1.74		$	0.76	$	0.64		$	2.22	$	1.97
Diluted earnings		0.57		0.61			1.74			1.73			0.75		0.63			2.21		1.96
Dividends paid		0.39		0.39			1.17			1.17			0.41		0.40			1.22		1.20

										Accumulated
	Common									Other
	Shares			Common			Deferred			Comprehensive			Retained
	Outstanding			Stock			Compensation			Income (loss)			Earnings			Total
	(In thousands)

Balance, December 31, 2015		25,528		$	378,858		$	2,578		$	675		$	150,094		$	532,205
Net income for the period														44,400			44,400
Other comprehensive income											8,326						8,326
Exercise of stock options		258			11,588												11,588
Tax benefit increase upon exercise and expiration of stock options					199												199
Restricted stock activity		15			1,798			(1,045	)								753
Stock based compensation					1,142												1,142
Stock awarded to employees		1			75												75
Retirement of common stock		(137	)		(2,059	)								(3,721	)		(5,780	)
Dividends														(29,912	)		(29,912	)
Balance, September 30, 2016		25,665		$	391,601		$	1,533		$	9,001		$	160,861		$	562,996

Balance, December 31, 2016		25,907		$	404,606		$	1,533		$	(10,074	)	$	165,302		$	561,367
Net income for the period														45,865			45,865
Other comprehensive income											6,641						6,641
Exercise of stock options		403			18,988												18,988
Restricted stock activity		13			707												707
Stock based compensation					1,368												1,368
Stock awarded to employees		2			76												76
Retirement of common stock		(6	)		(90	)								(224	)		(314	)
Dividends														(30,741	)		(30,741	)
Balance, September 30, 2017		26,319		$	425,655		$	1,533		$	(3,433	)	$	180,202		$	603,957

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

										Accumulated
	Common									Other
	Shares			Common			Deferred			Comprehensive			Retained
	Outstanding			Stock			Compensation			Income (Loss)			Earnings			Total
	(In thousands)

Balance, June 30, 2019		26,962		$	459,369		$	771		$	13,124		$	220,173		$	693,437
Net income for the period														20,390			20,390
Other comprehensive income											7,330						7,330
Exercise of stock options		52			2,867												2,867
Stock based compensation		-			402												402
Stock awarded to employees		-			15												15
Dividends ($0.41 per share)														(11,063	)		(11,063	)
Balance, September 30, 2019		27,014		$	462,653		$	771		$	20,454		$	229,500		$	713,378

Balance, June 30, 2018		26,649		$	443,338		$	1,533		$	(49,900	)	$	191,167		$	586,138
Net income for the period														16,993			16,993
Other comprehensive loss											(4,166	)					(4,166	)
Exercise of stock options		77			3,762												3,762
Restricted stock activity		-			138			(138	)								-
Stock based compensation		-			525												525
Stock awarded to employees		1			22												22
Dividends ($0.40 per share)														(10,683	)		(10,683	)
Balance, September 30, 2018		26,727		$	447,785		$	1,395		$	(54,066	)	$	197,477		$	592,591

Balance, December 31, 2018		26,730		$	448,351		$	1,395		$	(39,996	)	$	205,841		$	615,591
Cumulative effect of bond premium amortization adjustment, net of tax														(2,801	)		(2,801	)
Adjusted Balance, January 1, 2019		26,730			448,351			1,395			(39,996	)		203,040			612,790
Net income for the period														59,661			59,661
Other comprehensive income											60,450						60,450
Shares issued from stock warrant exercise, net of repurchase		51			-												-
Exercise of stock options		222			11,177												11,177
Restricted stock activity		18			1,697			(624	)								1,073
Stock based compensation		-			1,484												1,484
Stock awarded to employees		1			80												80
Retirement of common stock		(8	)		(136	)								(352	)		(488	)
Dividends ($1.22 per share)														(32,849	)		(32,849	)
Balance, September 30, 2019		27,014		$	462,653		$	771		$	20,454		$	229,500		$	713,378

Balance, December 31, 2017		26,425		$	431,734		$	1,533		$	(16,832	)	$	173,804		$	590,239
Cumulative effect of equity securities losses reclassified											142			(142	)		-
Adjusted Balance, January 1, 2018		26,425			431,734			1,533			(16,690	)		173,662			590,239
Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act											(3,625	)		3,625			-
Net income for the period														52,509			52,509
Other comprehensive loss											(33,751	)					(33,751	)
Exercise of stock options		289			13,245												13,245
Restricted stock activity		20			1,281			(138	)								1,143
Stock based compensation		-			1,575												1,575
Stock awarded to employees		2			99												99
Retirement of common stock		(9	)		(149	)								(375	)		(524	)
Dividends ($1.20 per share)														(31,944	)		(31,944	)
Balance, September 30, 2018		26,727		$	447,785		$	1,395		$	(54,066	)	$	197,477		$	592,591

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	Ended September 30,
	2019			2018
	(In thousands)
Operating Activities:
Net income	$	59,661		$	52,509
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,178			18,964
Provision for loan losses		-			-
Net amortization of deferred loan fees		(215	)		(181	)
Decrease (increase) in interest income receivable		323			(177	)
Increase in other assets		(2,073	)		(1,896	)
(Decrease) increase in income taxes payable		(3,386	)		7,760
Decrease (increase) in net deferred tax asset		6,386			(1,345	)
Stock option compensation expense		1,484			1,575
Increase in interest expense payable		19			5
(Decrease) increase in other liabilities		(12,233	)		3,793
Life insurance gains		(433	)		(585	)
Equity securities (gains) losses		(50	)		66
Net writedown of premises and equipment		-			3
Net gain on sale of foreclosed assets		-			(94	)
Writedown of foreclosed assets		-			27
Net Cash Provided by Operating Activities		64,661			80,424
Investing Activities:
Net repayments of loans		73,026			91,594
Proceeds from life insurance policies		1,273			1,183
Purchases of debt securities available for sale		(732,690	)		(634,113	)
Proceeds from sale of equity securities		1,797			-
Proceeds from sale/maturity/calls of debt securities available for sale		502,928			290,663
Proceeds from maturity/calls of debt securities held to maturity		184,525			127,578
Purchases of premises and equipment		(2,495	)		(2,830	)
Proceeds from sale of foreclosed assets		307			873
Net Cash Provided by (Used in) Investing Activities		28,671			(125,052	)
Financing Activities:
Net change in deposits		(70,216	)		8,224
Net change in short-term borrowings		(5,601	)		3,285
Exercise of stock options		11,177			13,245
Retirement of common stock		(488	)		(524	)
Common stock dividends paid		(32,849	)		(31,944	)
Net Cash Used in Financing Activities		(97,977	)		(7,714	)
Net Change In Cash and Due from Banks		(4,645	)		(52,342	)
Cash and Due from Banks at Beginning of Period		420,284			575,002
Cash and Due from Banks at End of Period	$	415,639		$	522,660

Supplemental Cash Flow Disclosures:
Supplemental disclosure of non cash activities:
Right-of-use assets acquired in exchange for operating lease liabilities	$	23,587		$	-
Amount recognized upon initial adoption of ASU 2016-02 included above		15,325			-
Loan collateral transferred to other real estate owned		-			-
Securities purchases pending settlement		20,114			-
Supplemental disclosure of cash flow activities:
Cash paid for amounts included in operating lease liabilities		5,123			-
Interest paid for the period		1,417			1,440
Income tax payments for the period		16,021			7,028

	Investment Securities Available for Sale
	At September 30, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Securities of U.S. Government sponsored entities	$	122,280	$	19	$	(1,840	)	$	120,459
Agency residential mortgage-backed securities (MBS)		754,138		1,091		(16,011	)		739,218
Non-agency residential MBS		164		1		-			165
Agency commercial MBS		1,916		-		(14	)		1,902
Securities of U.S. Government entities		1,783		-		(14	)		1,769
Obligations of states and political subdivisions		176,182		4,929		(1,610	)		179,501
FHLMC⁽¹⁾ and FNMA⁽²⁾ stock		749		8,811		-			9,560
Corporate securities		1,037,173		2,943		(4,027	)		1,036,089
Other securities		2,000		-		(186	)		1,814
Total	$	2,096,385	$	17,794	$	(23,702	)	$	2,090,477

	Investment Securities Available for Sale
	At December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Securities of U.S. Government sponsored entities	$	141,599	$	35	$	(2,974	)	$	138,660
Agency residential MBS		711,623		921		(21,045	)		691,499
Non-agency residential MBS		272		-		(1	)		271
Securities of U.S. Government entities		2,041		-		(16	)		2,025
Obligations of states and political subdivisions		182,230		5,107		(3,926	)		183,411
Asset-backed securities		696		-		(1	)		695
FHLMC⁽¹⁾ and FNMA⁽²⁾ stock		749		10,120		-			10,869
Corporate securities		866,835		1,690		(7,668	)		860,857
Other securities		2,034		621		(184	)		2,471
Total	$	1,908,079	$	18,494	$	(35,815	)	$	1,890,758

	At September 30, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Debt securities available for sale
U.S. Treasury securities	$	44,758	$	68	$	-		$	44,826
Securities of U.S. Government sponsored entities		122,245		23		(160	)		122,108
Agency residential mortgage-backed securities (MBS)		976,066		10,294		(6,609	)		979,751
Non-agency residential MBS		101		3		-			104
Agency commercial MBS		3,748		3		-			3,751
Securities of U.S. Government entities		786		-		(9	)		777
Obligations of states and political subdivisions		161,506		3,944		(47	)		165,403
Corporate securities		1,645,518		24,520		(2,991	)		1,667,047
Total debt securities available for sale		2,954,728		38,855		(9,816	)		2,983,767
Debt securities held to maturity
Agency residential MBS		377,995		817		(2,647	)		376,165
Non-agency residential MBS		2,471		62		-			2,533
Obligations of states and political subdivisions		412,750		7,804		(11	)		420,543
Total debt securities held to maturity		793,216		8,683		(2,658	)		799,241
Total	$	3,747,944	$	47,538	$	(12,474	)	$	3,783,008

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

	At September 30, 2017									At September 30, 2019
	Securities Available				Securities Held					Debt Securities Available				Debt Securities Held
	for Sale				to Maturity					for Sale				to Maturity
	Amortized		Fair		Amortized		Fair			Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value			Cost		Value		Cost		Value
	(In thousands)									(In thousands)
Maturity in years:									Maturity in years:
1 year or less	$	208,391	$	208,764	$	37,548	$	38,399		$	284,550	$	285,060	$	64,092	$	64,247
Over 1 to 5 years		861,895		860,966		278,240		281,577			1,182,895		1,199,153		179,576		182,635
Over 5 to 10 years		219,648		221,949		290,869		296,357			471,434		478,841		169,082		173,661
Over 10 years		45,701		44,370		9,824		10,054			35,934		37,107		-		-
Subtotal		1,335,635		1,336,049		616,481		626,387			1,974,813		2,000,161		412,750		420,543
MBS		758,001		743,054		587,759		581,892			979,915		983,606		380,466		378,698
Other securities		2,749		11,374		-		-
Total	$	2,096,385	$	2,090,477	$	1,204,240	$	1,208,279		$	2,954,728	$	2,983,767	$	793,216	$	799,241

	Investment Securities Available for Sale
	At September 30, 2017
	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		6	$	89,046	$	(1,169	)		2	$	29,328	$	(671	)		8	$	118,374	$	(1,840	)
Agency residential MBS		15		336,023		(8,283	)		37		202,746		(7,728	)		52		538,769		(16,011	)
Non-agency residential MBS		1		6		-			-		-		-			1		6		-
Agency commercial MBS		1		1,902		(14	)		-		-		-			1		1,902		(14	)
Securities of U.S. Government entities		1		896		(6	)		2		873		(8	)		3		1,769		(14	)
Obligations of states and political subdivisions		35		28,910		(592	)		24		35,329		(1,018	)		59		64,239		(1,610	)
Corporate securities		36		299,545		(1,672	)		26		166,386		(2,355	)		62		465,931		(4,027	)
Other securities		-		-		-			1		1,814		(186	)		1		1,814		(186	)
Total		95	$	756,328	$	(11,736	)		92	$	436,476	$	(11,966	)		187	$	1,192,804	$	(23,702	)

	For the			For the
	Nine Months Ended			Year Ended
	September 30, 2019			December 31, 2018
Accretable yield:	(In thousands)
Balance at the beginning of the period	$	182		$	738
Reclassification from nonaccretable difference		1,103			1,119
Accretion		(368	)		(1,675	)
Balance at the end of the period	$	917		$	182

Accretion	$	(368	)	$	(1,675	)
Change in FDIC indemnification		-			2
(Increase) in interest income	$	(368	)	$	(1,673	)

	Allowance for Loan Losses
	For the Three Months Ended September 30, 2017
											Consumer
				Commercial				Residential			Installment
	Commercial			Real Estate		Construction		Real Estate			and Other			Unallocated			Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	8,167		$	3,545	$	160	$	1,105		$	7,215		$	3,911		$	24,103
Additions:
(Reversal) provision		(391	)		288		136		(50	)		167			(150	)		-
Deductions:
Chargeoffs		(132	)		-		-		-			(886	)		-			(1,018	)
Recoveries		128			-		-		-			415			-			543
Net loan losses		(4	)		-		-		-			(471	)		-			(475	)
Total allowance for loan losses	$	7,772		$	3,833	$	296	$	1,055		$	6,911		$	3,761		$	23,628

	Allowance for Loan Losses
	For the Nine Months Ended September 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		(1,817	)		146		134		(647	)		1,833			351		-
Chargeoffs		(71	)		-		-		-			(3,332	)		-		(3,403	)
Recoveries		449			38		-		-			1,393			-		1,880
Total allowance for loan losses	$	4,872		$	4,068	$	1,599	$	222		$	5,539		$	3,528	$	19,828

	Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
	At September 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	$	2,550	$	-	$	-	$	-	$	-	$	-	$	2,550
Collectively evaluated for impairment		2,322		4,068		1,599		222		5,539		3,528		17,278
Total	$	4,872	$	4,068	$	1,599	$	222	$	5,539	$	3,528	$	19,828
Carrying value of loans:
Individually evaluated for impairment	$	8,647	$	7,445	$	-	$	193	$	44	$	-	$	16,329
Collectively evaluated for impairment		207,626		571,782		6,678		35,155		295,659		-		1,116,900
Total	$	216,273	$	579,227	$	6,678	$	35,348	$	295,703	$	-	$	1,133,229

	Credit Risk Profile by Internally Assigned Grade
	At September 30, 2019
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total
	(In thousands)
Grade:
Pass	$	207,350	$	568,009	$	6,678	$	33,629	$	293,893	$	1,109,559
Substandard		8,923		11,218		-		1,719		1,395		23,255
Doubtful		-		-		-		-		111		111
Loss		-		-		-		-		304		304
Total	$	216,273	$	579,227	$	6,678	$	35,348	$	295,703	$	1,133,229

	Summary of Loans by Delinquency and Nonaccrual Status
	At September 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	$	215,787	$	339	$	119	$	2	$	26	$	216,273
Commercial real estate		574,321		729		-		-		4,177		579,227
Construction		6,678		-		-		-		-		6,678
Residential real estate		34,064		828		456		-		-		35,348
Consumer installment and other		291,638		2,879		737		349		100		295,703
Total	$	1,122,488	$	4,775	$	1,312	$	351	$	4,303	$	1,133,229

	Impaired Loans						Impaired Loans
	At September 30, 2017						At December 31, 2016
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)						(In thousands)
With no related allowance recorded:
Commercial	$	1,246	$	1,308	$	-	$	1,234	$	1,303	$	-
Commercial real estate		12,726		14,817		-		13,233		15,610		-
Residential real estate		211		241		-		1,279		1,309		-
Consumer installment and other		169		276		-		569		675		-
Total with no related allowance recorded		14,352		16,642		-		16,315		18,897		-

With an allowance recorded:
Commercial		9,803		9,803		4,922		10,163		10,172		5,048
Commercial real estate		1,809		1,811		154		-		-		-
Total with an allowance recorded		11,612		11,614		5,076		10,163		10,172		5,048
Total	$	25,964	$	28,256	$	5,076	$	26,478	$	29,069	$	5,048

	Impaired Loans
	For the Three Months Ended September 30,								For the Nine Months Ended September 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	$	8,701	$	144	$	10,426	$	175	$	9,404	$	476	$	10,671	$	495
Commercial real estate		7,968		60		11,282		189		7,133		333		12,291		615
Residential real estate		194		4		203		4		196		10		205		12
Consumer installment and other		99		-		173		4		103		-		261		10
Total	$	16,962	$	208	$	22,084	$	372	$	16,836	$	819	$	23,428	$	1,132

	Troubled Debt Restructurings
	At September 30, 2019
							Period-End
							Individual
	Number of		Pre-Modification		Period-End		Impairment
	Contracts		Carrying Value		Carrying Value		Allowance
	($ in thousands)
Commercial		3	$	327	$	44	$	18
Commercial real estate		6		8,830		6,517		-
Residential real estate		1		241		193		-
Total		10	$	9,398	$	6,754	$	18

	For the Three Months Ended				For the Nine Months Ended
	September 30,
	2019		2018		2019		2018
	(In thousands)
Investment loss included in pre-tax income	$	600	$	900	$	1,800	$	2,200
Tax credits recognized in provision for income taxes		225		336		675		1,008

	Minimum future lease payments
	At September 30,
	2019
	(In thousands)
Remaining three months of 2019	$	2,719
2020		6,283
2021		4,574
2022		3,632
2023		2,912
Thereafter		2,057
Total minimum lease payments		22,177
Less: discount		(2,456	)
Present value of lease liability	$	19,721

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

	Total
	Core
	Deposit
	Intangibles
	(In thousands)
For the nine months ended September 30, 2019 (actual)	$	465
Estimate for the remainder of year ending December 31, 2019		73
Estimate for year ending December 31, 2020		287
2021		269
2022		252
2023		236
2024		222

			Merchant
	Core		Draft
	Deposit		Processing
	Intangibles		Intangible		Total
	(In thousands)
For the Nine Months ended September 30, 2017 (actual)	$	2,197	$	125	$	2,322
Estimate for the remainder of year ending December 31, 2017		716		39		755
Estimate for year ending December 31, 2018		1,892		29		1,921
2019		538		-		538
2020		287		-		287
2021		269		-		269
2022		252		-		252

	Repurchase Agreements (Sweep) Accounted for as Secured Borrowings
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous
	At September 30, 2017		At December 31, 2016
Repurchase agreements:	(In thousands)
Collateral securing borrowings:
Securities of U.S. Government sponsored entities	$	74,852	$	74,031
Agency residential MBS		60,023		63,277
Corporate securities		105,698		90,554
Total collateral carrying value	$	240,573	$	227,862
Total short-term borrowed funds	$	66,337	$	59,078

	At September 30, 2019
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3) ⁽¹⁾
	(In thousands)
Debt securities available for sale
U.S. Treasury securities	$	44,826	$	44,826	$	-	$	-
Securities of U.S. Government sponsored entities		122,108		-		122,108		-
Agency residential MBS		979,751		-		979,751		-
Non-agency residential MBS		104		-		104		-
Agency commercial MBS		3,751		-		3,751		-
Securities of U.S. Government entities		777		-		777		-
Obligations of states and political subdivisions		165,403		-		165,403		-
Corporate securities		1,667,047		-		1,667,047		-
Total debt securities available for sale	$	2,983,767	$	44,826	$	2,938,941	$	-

	At September 30, 2017
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2 )		Significant Unobservable Inputs (Level 3 )
Financial Assets:	(In thousands)
Cash and due from banks	$	561,757	$	561,757	$	561,757	$	-	$	-
Investment securities held to maturity		1,204,240		1,208,279		-		1,208,279		-
Loans		1,261,154		1,264,503		-		-		1,264,503

Financial Liabilities:
Deposits	$	4,734,580	$	4,731,990	$	-	$	4,492,655	$	239,335
Short-term borrowed funds		66,337		66,337		-		66,337		-