WABC 10-Q Quarter ended June 30, 2017

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- 3 -

		At June 30, 2017				At December 31, 2016
		(In thousands)
Assets:
Cash and due from banks		$	529,362			$	462,271
Investment securities available for sale			1,976,156				1,890,758
Investment securities held to maturity, with fair values of: $1,264,759 at June 30, 2017 and $1,340,741 at December 31, 2016			1,261,321				1,346,312
Loans			1,318,341				1,352,711
Allowance for loan losses			(24,103	)			(25,954	)
Loans, net of allowance for loan losses			1,294,238				1,326,757
Other real estate owned			1,645				3,095
Premises and equipment, net			35,564				36,566
Identifiable intangibles, net			5,365				6,927
Goodwill			121,673				121,673
Other assets			168,026				171,724
Total Assets		$	5,393,350			$	5,366,083
Liabilities:
Noninterest-bearing deposits		$	2,079,608			$	2,089,443
Interest-bearing deposits			2,602,962				2,615,298
Total deposits			4,682,570				4,704,741
Short-term borrowed funds			75,769				59,078
Other liabilities			39,417				40,897
Total Liabilities			4,797,756				4,804,716
Contingencies (Note 10)
Shareholders' Equity:
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,304 at June 30, 2017 and 25,907 at December 31, 2016			424,479				404,606
Deferred compensation			1,533				1,533
Accumulated other comprehensive loss			(5,864	)			(10,074	)
Retained earnings			175,446				165,302
Total Shareholders' Equity			595,594				561,367
Total Liabilities and Shareholders' Equity		$	5,393,350			$	5,366,083

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		For the Three Months								For the Six Months
		Ended June 30,
		2017				2016				2017				2016
		(In thousands, except per share data)
Interest and Loan Fee Income:
Loans		$	15,468			$	17,583			$	31,248			$	35,936
Investment securities available for sale			10,709				8,091				20,958				16,058
Investment securities held to maturity			6,986				8,053				14,281				15,380
Total Interest and Loan Fee Income			33,163				33,727				66,487				67,374
Interest Expense:
Deposits			465				531				934				1,074
Short-term borrowed funds			11				10				22				19
Total Interest Expense			476				541				956				1,093
Net Interest and Loan Fee Income			32,687				33,186				65,531				66,281
Reversal of Provision for Loan Losses			(1,900	)			-				(1,900	)			-
Net Interest and Loan Fee Income After Reversal of Provision for Loan Losses			34,587				33,186				67,431				66,281
Noninterest Income:
Service charges on deposit accounts			4,945				5,239				9,868				10,487
Merchant processing services			2,052				1,638				3,927				3,167
Debit card fees			1,586				1,621				3,067				3,137
Trust fees			716				657				1,418				1,318
Other service fees			662				650				1,312				1,279
ATM processing fees			654				603				1,229				1,261
Financial services commissions			142				137				337				293
Other noninterest income			1,366				1,157				2,622				2,489
Total Noninterest Income			12,123				11,702				23,780				23,431
Noninterest Expense:
Salaries and related benefits			12,981				12,887				26,051				26,004
Occupancy			3,509				3,400				7,142				6,798
Outsourced data processing services			2,188				2,130				4,327				4,260
Furniture and equipment			1,267				1,187				2,521				2,400
Amortization of identifiable intangibles			762				870				1,562				1,775
Courier service			438				462				859				1,007
Professional fees			410				758				1,021				1,490
Other real estate owned			(126	)			(392	)			(166	)			(281	)
Other noninterest expense			2,967				3,927				5,694				7,634
Total Noninterest Expense			24,396				25,229				49,011				51,087
Income Before Income Taxes			22,314				19,659				42,200				38,625
Provision for income taxes			6,515				5,113				11,352				9,853
Net Income		$	15,799			$	14,546			$	30,848			$	28,772
Average Common Shares Outstanding			26,299				25,586				26,235				25,516
Average Diluted Common Shares Outstanding			26,402				25,630				26,366				25,549
Per Common Share Data:
Basic earnings		$	0.60			$	0.57			$	1.18			$	1.13
Diluted earnings			0.60				0.57				1.17				1.13
Dividends paid			0.39				0.39				0.78				0.78

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		For the Three Months								For the Six Months
		Ended June 30,
		2017				2016				2017				2016
		(In thousands)
Net income		$	15,799			$	14,546			$	30,848			$	28,772
Other comprehensive income:
Changes in unrealized gains and losses on securities available for sale			6,160				9,070				7,234				19,311
Deferred tax expense			(2,590	)			(3,813	)			(3,042	)			(8,119	)
Changes in unrealized gains and losses on securities available for sale, net of tax			3,570				5,257				4,192				11,192
Post-retirement benefit transition obligation amortization			15				15				30				30
Deferred tax expense			(6	)			(6	)			(12	)			(12	)
Post-retirement benefit transition obligation amortization, net of tax			9				9				18				18
Total other comprehensive income			3,579				5,266				4,210				11,210
Total comprehensive income		$	19,378			$	19,812			$	35,058			$	39,982

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		Common Shares Outstanding				Common Stock				Deferred Compensation				Accumulated Other Comprehensive Income (loss)				Retained Earnings				Total
		(In thousands)
Balance, December 31, 2015			25,528			$	378,858			$	2,578			$	675			$	150,094			$	532,205
Net income for the period																			28,772				28,772
Other comprehensive income															11,210								11,210
Exercise of stock options			225				10,060																10,060
Tax benefit increase upon exercise and expiration of stock options							211																211
Restricted stock activity			15				1,798				(1,045	)											753
Stock based compensation							752																752
Stock awarded to employees			1				60																60
Retirement of common stock			(137	)			(2,059	)											(3,721	)			(5,780	)
Dividends																			(19,916	)			(19,916	)
Balance, June 30, 2016			25,632			$	389,680			$	1,533			$	11,885			$	155,229			$	558,327
Balance, December 31, 2016			25,907			$	404,606			$	1,533			$	(10,074	)		$	165,302			$	561,367
Net income for the period																			30,848				30,848
Other comprehensive income															4,210								4,210
Exercise of stock options			389				18,290																18,290
Restricted stock activity			13				707																707
Stock based compensation							912																912
Stock awarded to employees			1				54																54
Retirement of common stock			(6	)			(90	)											(224	)			(314	)
Dividends																			(20,480	)			(20,480	)
Balance, June 30, 2017			26,304			$	424,479			$	1,533			$	(5,864	)		$	175,446			$	595,594

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		For the Six Months Ended June 30,
		2017				2016
		(In thousands)
Operating Activities:
Net income		$	30,848			$	28,772
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			12,068				8,618
Reversal of provision for loan losses			(1,900	)			-
Net amortization of deferred loan cost (fees)			21				(157	)
(Increase) decrease in interest income receivable			(415	)			171
Life insurance premiums paid			(126	)			(126	)
Increase (decrease) in income taxes payable			91				(1,469	)
Decrease in net deferred tax asset			262				2,066
Tax benefit increase upon exercise and expiration of stock options			-				(211	)
Decrease (increase) in other assets			1,155				(4,211	)
Stock option compensation expense			912				752
Increase in interest expense payable			33				46
(Decrease) increase in other liabilities			(2,553	)			1,849
Net writedown of premises and equipment			60				7
Net gain on sale of foreclosed assets			(72	)			(1,017	)
Writedown of foreclosed assets			-				758
Net Cash Provided by Operating Activities			40,384				35,848
Investing Activities:
Net repayments of loans			35,852				104,975
Net (payments) receipts under FDIC (1) indemnification agreements			(63	)			98
Purchases of investment securities available for sale			(253,658	)			(260,587	)
Proceeds from sale/maturity/calls of securities available for sale			171,632				344,393
Purchases of investment securities held to maturity			-				(246,956	)
Proceeds from maturity/calls of securities held to maturity			80,433				82,059
Purchases of premises and equipment			(1,050	)			(991	)
Net change in FRB (2) stock			24				-
Proceeds from sale of foreclosed assets			1,521				5,848
Net Cash Provided by Investing Activities			34,691				28,839
Financing Activities:
Net change in deposits			(22,171	)			(55,345	)
Net change in short-term borrowings			16,691				14,824
Exercise of stock options			18,290				10,060
Tax benefit increase upon exercise and expiration of stock options			-				211
Retirement of common stock			(314	)			(5,780	)
Common stock dividends paid			(20,480	)			(19,916	)
Net Cash Used in Financing Activities			(7,984	)			(55,946	)
Net Change In Cash and Due from Banks			67,091				8,741
Cash and Due from Banks at Beginning of Period			462,271				433,044
Cash and Due from Banks at End of Period		$	529,362			$	441,785
Supplemental Cash Flow Disclosures:
Supplemental disclosure of non cash activities:
Loan collateral transferred to other real estate owned		$	-			$	488
Securities purchases pending settlement			649				26,488
Supplemental disclosure of cash flow activities:
Interest paid for the period			955				1,046
Income tax payments for the period			10,998				9,922

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Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and six months ended June 30, 2017 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Note 2: Accounting Policies

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses 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.

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

Recently Adopted Accounting Standards

FASB Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, was issued March 30, 2016. The provisions of 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 six months of 2017, 389 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1.6 million. The first six months of 2017 income tax provision was $666 thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09. The Company elected to account for forfeitures as they occur.

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.

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 as substantially all of the Company’s revenues are excluded from the scope of the new standard.

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. Management is evaluating the impact that the ASU will have on the Company’s financial statements.

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

The Company will be required to adopt the ASU provisions January 1, 2019, utilizing the modified retrospective transition approach. Management is evaluating the impact that the ASU will have on the Company’s financial statements. As of December 31, 2016, the Company leased 61 of its operating facilities; the remaining minimum lease payments were $20.8 million. The Company does not expect a material change in noninterest expenses upon adoption of the new standard.

FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changes estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with the current expected credit loss (CECL) model, which will accelerate recognition of credit losses. Additionally, credit losses relating to available-for-sale debt securities 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. 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 at the time of adoption will influence the extent of the adopting accounting adjustment.

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 will shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium 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.

The Company will be required to adopt the ASU provisions on January 1, 2019. Management is evaluating the impact the ASU will have on the Company’s financial statements.

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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:

⁽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:

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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:

⁽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:

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

Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At June 30, 2017 and December 31, 2016, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

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

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

The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates securities on a quarterly basis including changes in security ratings issued by 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. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

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

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

As of June 30, 2017, $795,007  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2016, $768,845  thousand of investment securities were pledged to secure public deposits and short-term borrowed funds.

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

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

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:

Note 4: Loans and Allowance for Loan Losses

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

Total loans outstanding reported above include loans purchased from the FDIC of $104,481 thousand and $121,210 thousand at June 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:

The following summarizes activity in the allowance for loan losses:

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

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

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

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

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

The following tables summarize loans by delinquency and nonaccrual status:

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2017 and December 31, 2016.

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The following summarizes impaired loans:

Impaired loans include troubled debt restructured loans. Impaired loans at June 30, 2017, included $12,419 thousand of restructured loans, $5,106 thousand of which were on nonaccrual status. Impaired loans at December 31, 2016, included $12,381 thousand of restructured loans, $5,302 thousand of which were on nonaccrual status.

The following table provides information on troubled debt restructurings:

During the three and six months ended June 30, 2017, the Company modified one loan with a carrying value of $407 thousand and three loans with a carrying value of $680 thousand, respectively, that were considered troubled debt restructurings. The three concessions granted in the first six months of 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. During the three and six months ended June 30, 2016, the Company modified one loan with a carrying value of $242 thousand 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 six 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. There were no chargeoffs related to troubled debt restructurings made during the three and six months ended June 30, 2017 and June 30, 2016. During the three and six months ended June 30, 2017 and 2016, no troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

There were no loans restricted due to collateral requirements at June 30, 2017 and December 31, 2016.

There were no loans held for sale at June 30, 2017 and December 31, 2016.

At June 30, 2017 and December 31, 2016, the Company held total other real estate owned (OREO) of $1,645 thousand net of reserve of $1,685 thousand and $3,095 thousand net of reserve of $1,816 thousand, respectively, of which $-0-  thousand was foreclosed residential real estate properties or covered OREO at both dates. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $195  thousand at June 30, 2017 and $-0- thousand at December 31, 2016.