WABC 10-Q Quarter ended March 31, 2018

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		At March 31,				At December 31,
		2018				2017
		(In thousands)
Assets:
Cash and due from banks		$	555,607			$	575,002
Equity securities			1,764				1,800
Debt securities available for sale			2,351,970				2,191,707
Debt securities held to maturity, with fair values of: $1,098,895 at March 31, 2018 and $1,155,342 at December 31, 2017			1,114,287				1,158,864
Loans			1,228,584				1,287,982
Allowance for loan losses			(23,081	)			(23,009	)
Loans, net of allowance for loan losses			1,205,503				1,264,973
Other real estate owned			1,376				1,426
Premises and equipment, net			35,790				35,301
Identifiable intangibles, net			3,280				3,850
Goodwill			121,673				121,673
Other assets			159,786				158,450
Total Assets		$	5,551,036			$	5,513,046
Liabilities:
Noninterest-bearing deposits		$	2,179,157			$	2,197,526
Interest-bearing deposits			2,688,710				2,630,087
Total deposits			4,867,867				4,827,613
Short-term borrowed funds			65,356				58,471
Other liabilities			35,730				36,723
Total Liabilities			4,968,953				4,922,807
Contingencies (Note 10)
Shareholders' Equity:
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,591 at March 31, 2018 and 26,425 at December 31, 2017			439,817				431,734
Deferred compensation			1,533				1,533
Accumulated other comprehensive loss			(43,452	)			(16,832	)
Retained earnings			184,185				173,804
Total Shareholders' Equity			582,083				590,239
Total Liabilities and  Shareholders' Equity		$	5,551,036			$	5,513,046

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		For the Three Months Ended March 31,
		2018				2017
		(In thousands, except per share data)
Interest and Fee Income:
Loans		$	14,697			$	15,780
Equity securities			85				74
Debt securities available for sale			13,551				10,175
Debt securities held to maturity			6,174				7,295
Total Interest and Fee Income			34,507				33,324
Interest Expense:
Deposits			450				469
Short-term borrowed funds			9				11
Total Interest Expense			459				480
Net Interest and Fee Income			34,048				32,844
Provision for Loan Losses			-				-
Net Interest and Fee Income After Provision For Loan Losses			34,048				32,844
Noninterest Income:
Service charges on deposit accounts			4,752				4,923
Merchant processing services			2,420				1,875
Debit card fees			1,605				1,481
Trust fees			743				702
ATM processing fees			664				575
Other service fees			631				650
Financial services commissions			114				195
Equity securities losses			(36	)			-
Other noninterest income			1,062				1,256
Total Noninterest Income			11,955				11,657
Noninterest Expense:
Salaries and related benefits			13,351				13,070
Occupancy and equipment			4,691				4,887
Outsourced data processing services			2,340				2,139
Professional fees			785				611
Amortization of identifiable intangibles			570				800
Courier service			463				421
Other noninterest expense			2,014				2,687
Total Noninterest Expense			24,214				24,615
Income Before Income Taxes			21,789				19,886
Provision for income taxes			4,283				4,837
Net Income		$	17,506			$	15,049
Average Common Shares Outstanding			26,532				26,171
Average Diluted Common Shares Outstanding			26,665				26,329
Per Common Share Data:
Basic earnings		$	0.66			$	0.58
Diluted earnings			0.66				0.57
Dividends paid			0.40				0.39

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		For the Three Months Ended
		March 31,
		2018				2017
		(In thousands)
Net income		$	17,506			$	15,049
Other comprehensive (loss) income:
Changes in net unrealized gains on debt securities available for sale			(32,846	)			1,074
Deferred tax benefit (expense)			9,709				(452	)
Changes in net unrealized gains on debt securities available for sale, net of tax			(23,137	)			622
Post-retirement benefit transition obligation amortization			-				15
Deferred tax expense			-				(6	)
Post-retirement benefit transition obligation amortization, net of tax			-				9
Total other comprehensive (loss) income			(23,137	)			631
Total comprehensive (loss) income		$	(5,631	)		$	15,680

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														Accumulated
		Common												Other
		Shares				Common				Deferred				Comprehensive				Retained
		Outstanding				Stock				Compensation				(Loss) Income				Earnings				Total
		(In thousands)
Balance, December 31, 2016			25,907			$	404,606			$	1,533			$	(10,074	)		$	165,302			$	561,367
Net income for the period																			15,049				15,049
Other comprehensive income															631								631
Exercise of stock options			376				17,593																17,593
Stock based compensation							456																456
Stock awarded to employees			-				15																15
Dividends																			(10,223	)			(10,223	)
Balance, March 31, 2017			26,283			$	422,670			$	1,533			$	(9,443	)		$	170,128			$	584,888
Balance, December 31, 2017			26,425			$	431,734			$	1,533			$	(16,832	)		$	173,804			$	590,239
Cumulative effect of equity securities losses reclassified															142				(142	)			-
Adjusted Balance, January 1, 2018			26,425				431,734				1,533				(16,690	)			173,662				590,239
Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act															(3,625	)			3,625				-
Net income for the period																			17,506				17,506
Other comprehensive loss															(23,137	)							(23,137	)
Exercise of stock options			166				7,534																7,534
Stock based compensation							525																525
Stock awarded to employees			-				24																24
Dividends																			(10,608	)			(10,608	)
Balance, March 31, 2018			26,591			$	439,817			$	1,533			$	(43,452	)		$	184,185			$	582,083

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		For the Three Months Ended March 31,
		2018				2017
		(In thousands)
Operating Activities:
Net income		$	17,506			$	15,049
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization/accretion			1,643				5,754
Net amortization of deferred net loan (fees) cost			(40	)			26
Decrease in interest income receivable			1,019				1,744
Life insurance premiums paid			(203	)			(126	)
Increase in income taxes payable			4,302				2,896
(Increase) decrease in deferred tax asset			(20	)			1,441
Decrease in other assets			2,676				895
Stock option compensation expense			525				456
Increase in interest expense payable			15				8
Decrease in other liabilities			(984	)			(2,864	)
Equity securities losses			36				-
Writedown of premises and equipment			1				50
Net gain on sale of foreclosed assets			-				(55	)
Net Cash Provided by Operating Activities			26,476				25,274
Investing Activities:
Net repayments of loans			59,959				1,526
Net receipts under FDIC (1) indemnification agreements			-				129
Purchases of debt securities available for sale			(279,327	)			(51,297	)
Proceeds from sale/maturity/calls of debt securities available for sale			86,218				47,600
Proceeds from maturity/calls of debt securities held to maturity			44,577				45,640
Purchases of premises and equipment			(1,413	)			(501	)
Proceeds from sale of FRB (2) stock			-				24
Proceeds from sale of foreclosed assets			50				1,014
Net Cash (Used in) Provided by Investing Activities			(89,936	)			44,135
Financing Activities:
Net change in deposits			40,254				(6,768	)
Net change in short-term borrowings			6,885				14,533
Exercise of stock options/issuance of shares			7,534				17,593
Common stock dividends paid			(10,608	)			(10,223	)
Net Cash Provided by Financing Activities			44,065				15,135
Net Change In Cash and Due from Banks			(19,395	)			84,544
Cash and Due from Banks at Beginning of Period			575,002				462,271
Cash and Due from Banks at End of Period		$	555,607			$	546,815
Supplemental Cash Flow Disclosures:
Supplemental disclosure of noncash activities:
Loan collateral transferred to other real estate owned		$	-			$	-
Securities purchases pending settlement			-				-
Supplemental disclosure of cash flow activities:
Interest paid for the period			444				504
Income tax payments for the period			-				500

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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 months ended March 31, 2018 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, 2017.

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, 2017. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, it is reasonably possible conditions could change materially affecting results of operations and financial conditions.

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

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

Recently Adopted Accounting Standards

In the three months ended March 31, 2018, the Company adopted the following new accounting guidance:

FASB Accounting Standard Update (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 ASU also requires additional disclosures. 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, debit card fees, ATM processing fees, trust fees and other service charges, commissions and fees. We have completed analyzing the individual contracts in scope and determined our revenue recognition practices within the scope of the ASU as described below did not change in any material regard upon adoption of the ASU.

Service Charges on Deposit Accounts : The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Merchant Processing Services and Debit Card Fees : The Company earns interchange fees from cardholder transactions conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Trust Fees : The Company earns trust fees from its contracts with customers to manage assets for investment or custody services. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Other related services provided, which are based on a fixed fee schedule, are recognized when the services are rendered.

Gains/Losses on Sales of OREO : The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. The Company does not finance the sale of OREO.

The Company adopted the ASU on January 1, 2018 and no cumulative adjustment was required.

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 (Note 9).

The Company was required to adopt the ASU provisions on January 1, 2018, and for those equity securities with readily determinable fair values, the Company elected 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 elected the prospective transition approach. The impact of the adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments. As a result of implementing the ASU provisions, effective January 1, 2018, the Company recorded a cumulative effect adjustment to retained earnings of $142 thousand.

FASB ASU 2018-02 , Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, was issued February 2018. The ASU eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company early adopted the provisions of the ASU effective January 1, 2018, by reclassifying the Company’s $3,625 thousand stranded tax effect.

Recently Issued Accounting Standards

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, and plans to elect 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, 2017, the Company leased 58 of its operating facilities; the remaining minimum lease payments were $17.5 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 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. The ultimate adjustment to the allowance for loan losses will be accomplished through an offsetting after-tax adjustment to shareholders’ equity. Economic conditions and the composition of the Company’s loan portfolio 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.

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

The Company will be required to adopt the ASU provisions January 1, 2019. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company’s Board of Directors. However, the Company is currently evaluating the prepayable assets in the HTM portfolio to determine if a one-time reclassification of prepayable assets from HTM to the AFS will occur upon implementation.

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Note 3: Investment Securities

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

At March 31, 2018, the market value of equity securities was $1,764 thousand. During the three months ended March 31, 2018, the Company recognized gross unrealized holding losses of $36 thousand in earnings.

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

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The amortized cost and fair value of debt 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 March 31, 2018 and December 31, 2017, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

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

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

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

The Company does not intend to sell any debt securities and has concluded that it is more likely than not that it will not be required to sell the debt securities prior to recovery of the amortized cost basis. Therefore, the Company does not consider these debt securities to be other-than-temporarily impaired as of March 31, 2018.

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

As of March 31, 2018 and December 31, 2017, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $ 696,058 thousand and $715,774 thousand, respectively.

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

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

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Note 4: Loans and Allowance for Loan Losses

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

Total loans outstanding reported above include loans purchased from the FDIC of $ 75,476 thousand and $83,478 thousand at March 31, 2018 and December 31, 2017, 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:

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 Audit Committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans and validates management assigned credit risk grades on evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” Loan Review Department 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 management and validated by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

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

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

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 March 31, 2018 and December 31, 2017.

The following summarizes impaired loans:

Impaired loans include troubled debt restructured loans. Impaired loans at March 31, 2018, included $ 9,550 thousand of restructured loans, $ 4,110 thousand of which were on nonaccrual status. Impaired loans include troubled debt restructured loans. Impaired loans at December 31, 2017, included $12,081 thousand of restructured loans, $4,285 thousand of which were on nonaccrual status.

The following tables provide information on troubled debt restructurings:

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During the three months ended March 31, 2018, the Company did not modify any loans that were considered troubled debt restructurings. During the three months ended March 31, 2017, the Company modified two loans with a carrying value of $273 thousand that were considered troubled debt restructurings. The two concessions granted in the three months ended March 31, 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. There were no chargeoffs related to troubled debt restructurings made during the three months ended March 31, 2018 and March 31, 2017. During the three months ended March 31, 2018 and 2017, no troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

There were no loans restricted due to collateral requirements at March 31, 2018 and December 31, 2017.

There were no loans held for sale at March 31, 2018 and December 31, 2017.

At March 31, 2018 and December 31, 2017, the Company held total other real estate owned (OREO) of $ 1,376 thousand net of reserve of $ 1,905 thousand and $1,426 thousand net of reserve of $1,905 thousand, respectively, of which $ -0- thousand was foreclosed residential real estate properties or covered OREO at both dates, respectively. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $196 thousand at March 31, 2018 and December 31, 2017.