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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.                                                      

 

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

California

 

94-2156203

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

1108 Fifth Avenue, San Rafael, California 94901

(Address of Principal Executive Offices) (Zip Code)

 

Registrant's Telephone Number, Including Area Code (707) 863-6000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

WABC

The Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒                                               No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒                                               No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☒

Accelerated filer ☐

 Non-accelerated filer ☐  

Smaller reporting company ☐

Emerging growth company ☐

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐                                               No ☒

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

 

Title of Class

 

Shares outstanding as of October 28, 2021

Common Stock,

 

26,866,108

No Par Value

  
 
 

 

 

 

TABLE OF CONTENTS

 

 

 

 

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

30

Item 3

Quantitative and Qualitative Disclosures about Market Risk

53

Item 4

Controls and Procedures

53

PART II - OTHER INFORMATION

  

Item 1

Legal Proceedings

53

Item 1A

Risk Factors

53

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 3

Defaults upon Senior Securities

54

Item 4

Mine Safety Disclosures

54

Item 5

Other Information

54

Item 6

Exhibits

54

Signatures

  

 

 

 

 

 

 

 

 

 

- 2 -
 

 

 

FORWARD-LOOKING STATEMENTS

 

This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation (the “Company”) for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, future credit quality and performance, the appropriateness of the allowance for credit losses, loan growth or reduction, mitigation of risk in the Company’s loan and investment securities portfolios, income or loss, earnings or loss per share, the payment or nonpayment of dividends, stock repurchases, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", “estimates”, "intends", "targeted", "projected", “forecast”, "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of any difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by riots, terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the local, regional and national economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including a failure or breach in data processing or security systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, hurricanes, fire, flood, drought, and other disasters, on the uninsured value of the Company’s assets and of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values; (13) changes in the securities markets; (14) the duration and severity of the COVID-19 pandemic and governmental responses to the pandemic; (15) the performance of loans deferred under the CARES Act following their respective deferral periods;  and (16) the outcome of contingencies, such as legal proceedings. However, the reader should not consider the above-mentioned factors to be a complete set of all potential risks or uncertainties.

 

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2020, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

 

- 3 -
 

 

 

PART I - FINANCIAL INFORMATION

Item 1    Financial Statements

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 
         
  

At September 30,

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Assets:

        

Cash and due from banks

 $1,011,048  $621,275 

Debt securities available for sale

  4,602,706   4,063,185 

Debt securities held to maturity, net of allowance for credit losses of

$7 at September 30, 2021 and $9 at December 31, 2020 (Fair value of $364,741 at September 30, 2021 and $529,678 at December 31, 2020)

  356,106   515,589 

Loans

  1,132,472   1,256,243 

Allowance for credit losses on loans

  (23,882)  (23,854)

Loans, net of allowance for credit losses on loans

  1,108,590   1,232,389 

Premises and equipment, net

  31,603   32,813 

Identifiable intangibles, net

  900   1,104 

Goodwill

  121,673   121,673 

Other assets

  170,947   159,903 

Total Assets

 $7,403,573  $6,747,931 
         

Liabilities:

        

Noninterest-bearing deposits

 $2,988,329  $2,725,177 

Interest-bearing deposits

  3,300,632   2,962,802 

Total deposits

  6,288,961   5,687,979 

Short-term borrowed funds

  119,102   102,545 

Other liabilities

  157,557   112,598 

Total Liabilities

  6,565,620   5,903,122 
         

Contingencies (Note 10)

          
         

Shareholders' Equity:

        

Common stock (no par value), authorized: 150,000 shares Issued and outstanding: 26,866 at September 30, 2021 and 26,807 at December 31, 2020

  470,676   466,006 

Deferred compensation

  35   35 

Accumulated other comprehensive income

  71,284   114,412 

Retained earnings

  295,958   264,356 

Total Shareholders' Equity

  837,953   844,809 

Total Liabilities and Shareholders' Equity

 $7,403,573  $6,747,931 

 

See accompanying notes to unaudited consolidated financial statements.

 

- 4 -
 

 

 

WESTAMERICA BANCORPORATION

  

CONSOLIDATED STATEMENTS OF INCOME

  

(unaudited)

  
                                 
   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2021

    

2020

    

2021

    

2020

  
   

(In thousands, except per share data)

  

Interest and Loan Fee Income:

                                

Loans

   $ 14,789     $ 15,291     $ 44,434     $ 44,378  

Equity securities

     109       103       329       309  

Debt securities available for sale

     26,452       22,652       77,822       66,396  

Debt securities held to maturity

     2,091       3,235       7,051       10,759  

Interest-bearing cash

     369       84       766       1,053  

Total Interest and Loan Fee Income

     43,810       41,365       130,402       122,895  

Interest Expense:

                                

Deposits

     473       450       1,398       1,308  

Short-term borrowed funds

     19       16       53       34  

Other borrowed funds

     -       -       -       1  

Total Interest Expense

     492       466       1,451       1,343  

Net Interest and Loan Fee Income

     43,318       40,899       128,951       121,552  

Provision for Credit Losses

     -       -       -       4,300  

Net Interest and Loan Fee Income After Provision for Credit Losses

     43,318       40,899       128,951       117,252  

Noninterest Income:

                                

Service charges on deposit accounts

     3,578       3,298       10,117       10,697  

Merchant processing services

     3,159       2,860       8,998       7,495  

Debit card fees

     1,740       1,611       5,132       4,538  

Trust fees

     839       756       2,467       2,247  

ATM processing fees

     573       606       1,792       1,703  

Other service fees

     475       454       1,435       1,380  

Financial services commissions

     95       58       260       306  

Securities gains

     -       -       34       71  

Other noninterest income

     823       833       2,268       3,241  

Total Noninterest Income

     11,282       10,476       32,503       31,678  

Noninterest Expense:

                                

Salaries and related benefits

     11,813       12,540       36,575       38,458  

Occupancy and equipment

     4,759       5,014       14,447       14,737  

Outsourced data processing services

     2,429       2,338       7,244       7,067  

Professional fees

     724       669       2,496       1,701  

Courier service

     534       500       1,605       1,499  

Amortization of identifiable intangibles

     67       72       204       218  

Other noninterest expense

     4,371       3,470       11,323       10,341  

Total Noninterest Expense

     24,697       24,603       73,894       74,021  

Income Before Income Taxes

     29,903       26,772       87,560       74,909  

Provision for income taxes

     7,840       6,721       22,771       18,334  

Net Income

   $ 22,063     $ 20,051     $ 64,789     $ 56,575  
                                 

Average Common Shares Outstanding

     26,866       26,930       26,851       26,977  

Average Diluted Common Shares Outstanding

     26,875       26,946       26,868       26,998  

Per Common Share Data:

                                

Basic earnings

   $ 0.82     $ 0.74     $ 2.41     $ 2.10  

Diluted earnings

     0.82       0.74       2.41       2.10  

Dividends paid

     0.41       0.41       1.23       1.23  

 

See accompanying notes to unaudited consolidated financial statements.

 

- 5 -
 

 

 

 

WESTAMERICA BANCORPORATION

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  

(unaudited)

  
                                 
   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2021

    

2020

    

2021

    

2020

  
   

(In thousands)

  

Net income

   $ 22,063     $ 20,051     $ 64,789     $ 56,575  

Other comprehensive income:

                                

Changes in unrealized gains on debt securities available for sale

     (22,200 )     14,042       (61,196 )     110,200  

Deferred tax benefits (expense)

     6,563       (4,151 )     18,092       (32,578 )

Reclassification of gains included in net income

     -       -       (34 )     (71 )

Deferred tax expense on gains included in net income

     -       -       10       21  

Changes in net unrealized gains on debt securities available for sale, net of tax

     (15,637 )     9,891       (43,128 )     77,572  

Total comprehensive income

   $ 6,426     $ 29,942     $ 21,661     $ 134,147  

 

See accompanying notes to unaudited consolidated financial statements.

 

- 6 -
 

 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 

(unaudited)

 
                         
              

Accumulated

         
  

Common

          

Other

         
  

Shares

  

Common

  

Deferred

  

Comprehensive

  

Retained

     
  

Outstanding

  

Stock

  

Compensation

  

Income (Loss)

  

Earnings

  

Total

 
  

(In thousands except dividend per share)

 
                         

Balance, June 30, 2021

  26,865  $470,330  $35  $86,921  $284,910  $842,196 

Net income for the period

                  22,063   22,063 

Other comprehensive loss

              (15,637)      (15,637)

Exercise of stock options

  -   -               - 

Stock based compensation

  -   324               324 

Stock awarded to employees

  1   22               22 

Dividends ($0.41 per share)

                  (11,015)  (11,015)

Balance, September 30, 2021

  26,866  $470,676  $35  $71,284  $295,958  $837,953 
                         

Balance, December 31, 2020

  26,807  $466,006  $35  $114,412  $264,356  $844,809 

Net income for the period

                  64,789   64,789 

Other comprehensive loss

            (43,128)     (43,128)

Exercise of stock options

  53   3,017               3,017 

Restricted stock activity

  9   526               526 

Stock based compensation

  -   1,100               1,100 

Stock awarded to employees

  1   93               93 

Retirement of common stock

  (4)  (66)          (166)  (232)

Dividends ($1.23 per share)

                  (33,021)  (33,021)

Balance, September 30, 2021

  26,866  $470,676  $35  $71,284  $295,958  $837,953 
                         

Balance, June 30, 2020

  26,933  $467,351  $35  $93,732  $246,958  $808,076 

Net income for the period

                  20,051   20,051 

Other comprehensive income

              9,891       9,891 

Stock based compensation

  -   450               450 

Stock awarded to employees

  -   19               19 

Retirement of common stock

  (35)  (619)          (1,249)  (1,868)

Dividends ($0.41 per share)

                  (11,043)  (11,043)

Balance, September 30, 2020

  26,898  $467,201  $35  $103,623  $254,717  $825,576 
                         

Balance, December 31, 2019

  27,062  $465,460  $771  $26,051  $239,135  $731,417 

Adoption of ASU 2016-13

                  52   52 

Adjusted Balance, January 1, 2020

  27,062   465,460   771   26,051   239,187   731,469 

Net income for the period

                  56,575   56,575 

Other comprehensive income

              77,572       77,572 

Exercise of stock options

  53   2,838               2,838 

Restricted stock activity

  10   1,270   (736)          534 

Stock based compensation

  -   1,500               1,500 

Stock awarded to employees

  1   85               85 

Retirement of common stock

  (228)  (3,952)          (7,782)  (11,734)

Dividends ($1.23 per share)

                  (33,263)  (33,263)

Balance, September 30, 2020

  26,898  $467,201  $35  $103,623  $254,717  $825,576 

 

See accompanying notes to unaudited consolidated financial statements.

 

- 7 -
 

 

 

WESTAMERICA BANCORPORATION

  

CONSOLIDATED STATEMENTS OF CASH FLOWS

  

(unaudited)

  
             
 

For the Nine Months

  
 

Ended September 30,

  
 

2021

  

2020

  
 

(In thousands)

  

Operating Activities:

            

Net income

 $ 64,789   $ 56,575  

Adjustments to reconcile net income to net cash provided by operating activities:

            

Depreciation and amortization

   11,748     18,482  

Provision for credit losses

   -     4,300  

Net amortization of deferred loan fees

   (4,671 )   (2,803 )

Stock option compensation expense

   1,100     1,500  

Securities gains

   (34 )   (71 )

Net changes in:

            

Interest income receivable

   (282 )   (1,982 )

Other assets

   (13,255 )   (4,397 )

Income taxes payable

   4,580     (520 )

Net deferred tax asset

   (3,109 )   325  

Interest expense payable

   (8 )   33  

Other liabilities

   10,272     24,798  

Net Cash Provided by Operating Activities

   71,130     96,240  

Investing Activities:

            

Net repayments (disbursements) of loans

   128,791     (181,894 )

Purchases of debt securities available for sale

   (1,593,799 )   (1,612,633 )

Proceeds from sale/maturity/calls of debt securities available for sale

   1,040,179     807,064  

Proceeds from maturity/calls of debt securities held to maturity

   157,221     156,993  

Purchases of premises and equipment

   (1,052 )   (1,682 )

Net Cash Used in Investing Activities

   (268,660 )   (832,152 )

Financing Activities:

            

Net change in deposits

   600,982     726,569  

Net change in short-term borrowings

   16,557     77,045  

Exercise of stock options

   3,017     2,838  

Retirement of common stock

   (232 )   (11,734 )

Common stock dividends paid

   (33,021 )   (33,263 )

Net Cash Provided by Financing Activities

   587,303     761,455  

Net Change In Cash and Due from Banks

   389,773     25,543  

Cash and Due from Banks at Beginning of Period

   621,275     373,421  

Cash and Due from Banks at End of Period

 $ 1,011,048   $ 398,964  
             

Supplemental Cash Flow Disclosures:

            

Supplemental disclosure of non cash activities:

            

Right-of-use assets acquired in exchange for operating lease liabilities

 $ 4,972   $ 6,457  

Securities purchases pending settlement

   81,618     -  

Supplemental disclosure of cash flow activities:

            

Cash paid for amounts included in operating lease liabilities

   4,791     4,905  

Interest paid for the period

   1,459     1,310  

Income tax payments for the period

   21,300     18,708  

 

See accompanying notes to unaudited consolidated financial statements.

 

- 8 -
 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and nine months ended September 30, 2021 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, 2020.

 

 

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, 2020. 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. Certain risks, uncertainties and other factors, including those discussed in Note 20 “Impact of COVID-19” to the consolidated financial statements and “Risk Factors” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 may cause actual future results to differ materially from the results discussed in this report on Form 10-Q. Management continues to evaluate the impact of the pandemic on the Company’s business. The extent of the impact on the Company’s results of operations, cash flow liquidity, and financial performance, as well as the Company’s ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted.

 

Application of accounting 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 a 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.

 

Debt Securities. Debt securities consist of U.S. Treasury, government sponsored entities, states, counties, municipalities, corporations, agency and non-agency mortgage-backed securities, collateralized loan obligations and commercial paper. Securities transactions are recorded on a trade date basis. The Company classifies its debt securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at fair value with unrealized gains and losses included in net income. Held to maturity debt securities are those securities which the Company has the ability and intent to hold until maturity. Held to maturity debt securities are recorded at cost, adjusted for the amortization of premiums or accretion of discounts. Securities not included in trading or held to maturity are classified as available for sale debt securities. Available for sale debt securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale debt securities are included in accumulated other comprehensive income. Accrued interest is recorded within other assets and reversed against interest income if it is not received. 

 

The Company utilizes third-party sources to value its investment securities; securities individually valued using quoted prices in active markets are classified as Level 1 assets in the fair value hierarchy, and securities valued using quoted prices in active markets for similar securities (commonly referred to as “matrix” pricing) are classified as Level 2 assets in the fair value hierarchy. The Company validates the reliability of third-party provided values by comparing individual security pricing for securities between more than one third-party source. When third-party information is not available, valuation adjustments are estimated in good faith by Management and classified as Level 3 in the fair value hierarchy.

 

- 9 -
 
 

The Company follows the 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 when performing investment security pre-purchase analysis or evaluating investment securities for credit loss. Credit ratings issued by recognized rating agencies are considered in the Company’s analysis only as a guide to the historical default rate associated with similarly-rated bonds.

 

To the extent that debt securities in the held-to-maturity portfolio share common risk characteristics, estimated expected credit losses are calculated in a manner like that used for loans held for investment. That is, for pools of such securities with common risk characteristics, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the securities on those historical credit losses. Expected credit loss on each security in the held-to-maturity portfolio that do not share common risk characteristics with any of the pools of debt securities is individually evaluated and a reserve for credit losses is established at the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the security. For certain classes of debt securities, the bank considers the history of credit losses, current conditions, and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is, or continues to be, zero. Therefore, for those securities, the Company does not record expected credit losses.

 

Available for sale debt securities in unrealized loss positions are evaluated for credit related losses at least quarterly. For available for sale debt securities, a decline in fair value due to credit losses results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered not to be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis. 

 

If the Company intends to sell a debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses with any incremental loss reported in earnings.

 

Purchase premiums are amortized to the earliest call date and purchase discounts are amortized to maturity as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized as a component of gain or loss on sale upon disposition of the related security. Interest and dividend income are recognized when earned. Realized gains and losses from the sale of available for sale debt securities are included in earnings using the specific identification method.

 

Nonmarketable Equity Securities. Nonmarketable equity securities include securities that are not publicly traded, such as the Company’s Visa Class B common stock, and securities acquired to meet regulatory requirements, such as Federal Reserve Bank stock, which are restricted. These restricted securities are accounted for under the cost method and are included in other assets. The Company reviews those assets accounted for under the cost method at least quarterly. The Company’s review typically includes an analysis of the facts and circumstances of each investment, the expectations for the investment’s cash flows and capital needs, the viability of its business model and any exit strategy. When the review indicates that impairment exists the asset value is reduced to fair value. The Company recognizes the estimated loss in noninterest income.

 

Loans. Loans are stated at the principal amount outstanding, net of unearned discount and unamortized deferred fees and costs. Interest is accrued daily on the outstanding principal balances and included in other assets. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, some loans secured by real estate and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans on a cost-recovery method until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Nonaccrual loans are reinstated to accrual status when none of the loan’s principal and interest is past due and improvements in credit quality eliminate doubt as to the full collectability of both principal and interest, or the loan otherwise becomes well secured and in the process of collection. Certain consumer loans or auto receivables are charged off against the allowance for credit losses when they become 120 days past due.

 

- 10 -
 
 

A troubled debt restructuring (“TDR”) occurs when the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower it would not otherwise consider. The Company follows its general nonaccrual policy for TDRs. Performing TDRs are reinstated to accrual status when improvements in credit quality eliminate the doubt as to full collectability of both principal and interest. Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), banks may elect to deem that loan modifications do not result in TDRs if they are (1) related to the novel coronavirus disease; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the COVID-19 national emergency or (B) December 31, 2020. The Consolidated Appropriations Act, 2021, extended the period during which banks may elect to deem that qualified loan modifications do not result in TDR classification through January 1, 2022.  

 

Allowance for Credit Losses. The Company extends loans to commercial and consumer customers primarily in Northern and Central California. These lending activities expose the Company to the risk borrowers will default, causing loss. 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 these financial statements requires Management to estimate the amount of expected losses over the expected contractual life of our existing loan portfolio and establish an allowance for credit losses. Loan agreements generally include a maturity date, and the Company considers the contractual life of a loan agreement to extend from the date of origination to the contractual maturity date. In estimating credit losses, Management must exercise significant judgment in evaluating information deemed relevant. 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 allowance for credit losses is established through provisions for credit losses charged to income. Losses on loans are charged to the allowance for credit losses when all or a portion of the recorded amount of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. The Company’s allowance for credit losses is maintained at a level considered adequate to provide for expected losses based on historical loss rates adjusted for current and expected conditions over a forecast period. These include conditions unique to individual borrowers, as well as overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions, or credit protection agreements and other factors.

 

Loans that share common risk characteristics are segregated into pools based on common characteristics, which is primarily determined by loan, borrower, or collateral type. Historical loss rates are determined for each pool. For consumer installment loans, primarily secured by automobiles, historical loss rates are determined using a vintage methodology, which tracks losses based on period of origination. For commercial, construction, and commercial real estate, historical loss rates are determined using an open pool methodology where losses are tracked over time for all loans included in the pool at the historical measurement date. Historical loss rates are adjusted for factors that are not reflected in the historical loss rates that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in past loan charge-off history, estimated losses based on management’s reasonable and supportable expectation of economic trends over a forecast horizon of up to two years, and other factors that impact credit loss expectations that are not reflected in the historical loss rates. Other factors include, but are not limited to, the effectiveness of the Company’s loan review system, adequacy of lending Management and staff, loan policies and procedures, problem loan trends, and concentrations of credit. At the end of the two-year forecast period loss rates revert immediately to the historical loss rates. The results of this analysis are applied to the amortized cost of the loans included within each pool. 

 

Loans that do not share risk characteristics with other loans in the pools are evaluated individually. A loan is considered ‘collateral dependent’ when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. A credit loss reserve for collateral dependent loans is established at the difference between the amortized cost basis in the loan and the fair value of the underlying collateral adjusted for costs to sell. For other individually evaluated loans that are not collateral dependent, a credit loss reserve is established at the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate. The impact of an expected TDR modification is included in the allowance for credit losses when management determines a TDR modification is likely.

 

- 11 -
 
 

Accrued interest is recorded in other assets and is excluded from the estimation of expected credit loss.  Accrued interest is reversed through interest income when amounts are determined to be uncollectible, which generally occurs when the underlying receivable is placed on nonaccrual status or charged off.

 

Liability for Off-Balance Sheet Credit Exposures. Off-balance sheet credit exposures relate to letters of credit and unfunded loan commitments for commercial, construction and consumer loans. The Company maintains a separate allowance for credit losses from off-balance-sheet credit exposures, which is included within other liabilities on the consolidated statements of financial condition. Increases or reductions to the Company’s allowance for credit losses from off-balance sheet credit exposures are recorded in other expenses. Management estimates the amount of expected losses by estimating expected usage exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the allowance for credit loss methodology to estimate the liability for credit losses related to unfunded commitments. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement.

 

Recently Adopted Accounting Standards

 

In the nine months ended September 30, 2021, the Company adopted the following new accounting guidance:

 

FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, was issued December 2019.  The ASU is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This guidance effective for public entities for fiscal years beginning after December 15, 2020, and for interim period within those fiscal years, with early adoption permitted. The Company adopted the ASU provisions on January 1, 2021 and the adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards

 

FASB ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. The ASU provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company does not expect any material impact on its consolidated financial statements since the Company has an insignificant number of financial instruments applicable to this ASU.

 

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- 12 -
 
 
 

Note 3:  Investment Securities

 

Effective January 1, 2020, the Company adopted FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Upon adoption of the ASU the Company recorded an allowance for credit losses for debt securities held to maturity of $16 thousand. During the fourth quarter ended December 31, 2020, the Company recorded a $7 thousand reversal of the provision for credit losses on debt securities held to maturity, resulting in the balance of $9 thousand allowance for credit losses for debt securities held to maturity. During the third quarter ended September 30, 2021, the Company recorded a $2 thousand reversal of the provision for credit losses on debt securities held to maturity, resulting in the balance of $7 thousand allowance for credit losses for debt securities held to maturity.

 

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, before allowance for credit losses of $7 thousand at September 30, 2021 and $9 thousand at December 31, 2020, follows:

 

  

At September 30, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential mortgage-backed securities ("MBS")

 $441,863  $16,190  $-  $458,053 

Securities of U.S. Government entities

  128   -   -   128 

Obligations of states and political subdivisions

  92,623   3,984   (4)  96,603 

Corporate securities

  2,588,376   86,488   (6,475)  2,668,389 

Collateralized loan obligations

  1,378,512   1,780   (759)  1,379,533 

Total debt securities available for sale

  4,501,502   108,442   (7,238)  4,602,706 

Debt securities held to maturity

                

Agency residential MBS

  165,922   4,786   (17)  170,691 

Non-agency residential MBS

  1,033   12   (12)  1,033 

Obligations of states and political subdivisions

  189,158   3,866   -   193,024 

Total debt securities held to maturity

  356,113   8,664   (29)  364,748 

Total

 $4,857,615  $117,106  $(7,267) $4,967,454 

 

  

At December 31, 2020

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential MBS

 $630,174  $22,779  $(1) $652,952 

Securities of U.S. Government entities

  154   -   -   154 

Obligations of states and political subdivisions

  105,679   5,332   (1)  111,010 

Corporate securities

  1,986,995   131,025   (42)  2,117,978 

Commercial paper

  24,983   7   -   24,990 

Collateralized loan obligations

  1,152,766   4,433   (1,098)  1,156,101 

Total debt securities available for sale

  3,900,751   163,576   (1,142)  4,063,185 

Debt securities held to maturity

                

Agency residential MBS

  240,332   6,852   (32)  247,152 

Non-agency residential MBS

  1,344   26   -   1,370 

Obligations of states and political subdivisions

  273,922   7,243   -   281,165 

Total debt securities held to maturity

  515,598   14,121   (32)  529,687 

Total

 $4,416,349  $177,697  $(1,174) $4,592,872 

 

- 13 -
 
 

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

 

  

At September 30, 2021

 
  

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

 $241,684  $244,492  $23,830  $23,966 

Over 1 to 5 years

  780,844   822,330   126,644   129,311 

Over 5 to 10 years

  2,240,994   2,283,056   38,684   39,747 

Over 10 years

  796,117   794,775   -   - 

Subtotal

  4,059,639   4,144,653   189,158   193,024 

MBS

  441,863   458,053   166,955   171,724 

Total

 $4,501,502  $4,602,706  $356,113  $364,748 

 

  

At December 31, 2020

 
  

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

 $212,140  $213,715  $54,526  $54,927 

Over 1 to 5 years

  922,170   974,438   129,786   133,195 

Over 5 to 10 years

  1,767,747   1,851,184   89,610   93,043 

Over 10 years

  368,520   370,896   -   - 

Subtotal

  3,270,577   3,410,233   273,922   281,165 

MBS

  630,174   652,952   241,676   248,522 

Total

 $3,900,751  $4,063,185  $515,598  $529,687 

 

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, 2021 and December 31, 2020, 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:

 

  

Debt Securities Available for Sale

 
  

At September 30, 2021

 
  

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)

 

Agency residential MBS

  -  $-  $-   2  $92  $-   2  $92  $- 

Securities of U.S.
Government entities

  -   -   -   1   128   -   1   128   - 

Obligations of states
and political
subdivisions

  2   1,440   (3)  2   675   (1)  4   2,115   (4)

Corporate securities

  37   436,490   (6,475)  -   -   -   37   436,490   (6,475)

Collateralized loan
obligations

  22   203,700   (606)  6   35,839   (153)  28   239,539   (759)

Total

  61  $641,630  $(7,084)  11  $36,734  $(154)  72  $678,364  $(7,238)

 

- 14 -
 
 

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

 

  

Debt Securities Held to Maturity

 
  

At September 30, 2021

 
  

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

  3  $112  $-   3  $618  $(17)  6  $730  $(17)

Non-agency residential
MBS

  1   596   (12)  -   -   -   1   596   (12)

Total

  4  $708  $(12)  3  $618  $(17)  7  $1,326  $(29)

 

Based upon the most recent evaluation, the unrealized losses on the Company’s debt securities available for sale were most likely caused by market conditions for these types of investments, particularly changes in risk-free interest rates and/or market bid-ask spreads. The Company does not intend to sell any debt securities available for sale 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 have credit related losses as of September 30, 2021.

 

The fair values of debt securities available for sale could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuers’ financial condition deteriorates, or the liquidity for debt securities declines. As a result, significant credit losses on debt securities available for sale may occur in the future.

 

As of September 30, 2021 and December 31, 2020, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $899,099 thousand and $888,577 thousand, respectively.

 

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

 

  

Debt Securities Available for Sale

 
  

At December 31, 2020

 
  

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)

 

Agency residential MBS

  1  $96  $(1)  1  $17  $-   2  $113  $(1)

Securities of U.S.
Government entities

  1   154   -   -   -   -   1   154   - 

Obligations of states
and political
subdivisions

  2   692   (1)  -   -   -   2   692   (1)

Corporate securities

  -   -   -   1   14,963   (42)  1   14,963   (42)

Collateralized loan
obligations

  36   268,584   (1,098)  -   -   -   36   268,584   (1,098)

Total

  40  $269,526  $(1,100)  2  $14,980  $(42)  42  $284,506  $(1,142)

 

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

 

  

Debt Securities Held to Maturity

 
  

At December 31, 2020

 
  

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

  3  $377  $(1)  3  $788  $(31)  6  $1,165  $(32)

 

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, collateral levels, 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 were investment grade rated by a major rating agency as of September 30, 2021. 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.

 

- 15 -
 
 

The following table presents the activity in the allowance for credit losses for debt securities held to maturity:

 

  

For the Nine Months Ended September 30,

 
  

2021

  

2020

 
  

(In thousands)

 

Allowance for credit losses:

        

Balance, end of prior period

 $9  $- 

Impact of adopting ASU 2016-13

  -   16 

Beginning balance

  9   16 

Reversal of provision

  (2)  - 

Chargeoffs

  -   - 

Recoveries

  -   - 

Total ending balance

 $7  $16 

 

Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance.

 

The following table summarizes the amortized cost of debt securities held to maturity at September 30, 2021, aggregated by credit rating:

 

  

Credit Risk Profile by Credit Rating

 
  

At September 30, 2021

 
  

AAA/AA/A

  

BB/B

  

Not Rated

  

Total

 
  

(In thousands)

 

Agency residential MBS

 $165,922  $-  $-  $165,922 

Non-agency residential MBS

  176   607   250   1,033 

Obligations of states and political subdivisions

  185,168   -   3,990   189,158 

Total

 $351,266  $607  $4,240  $356,113 

 

There were no debt securities held to maturity on nonaccrual status or past due 30 days or more as of September 30, 2021.

 

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

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(In thousands)

 

Taxable

 $26,674  $23,079  $78,564  $67,963 

Tax-exempt from federal income tax

  1,978   2,911   6,638   9,501 

Total interest income from investment securities

 $28,652  $25,990  $85,202  $77,464 

 

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

 

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,

 
  

2021

  

2020

 
  

(In thousands)

 

Commercial:

        

Paycheck Protection Program ("PPP") loans

 $102,977  $186,945 

Other

  186,752   207,861 

Total Commercial

  289,729   394,806 

Commercial Real Estate

  540,541   564,300 

Construction

  50   129 

Residential Real Estate

  18,540   23,471 

Consumer Installment & Other

  283,612   273,537 

Total

 $1,132,472  $1,256,243 

 

PPP loans are 100% guaranteed by the Small Business Administration (“SBA”). PPP loan proceeds used for eligible payroll and certain other operating costs are eligible for forgiveness, with repayment of loan principal and accrued interest made by the SBA. Management does not expect credit losses on PPP loans. Therefore, there is not an allowance for such loans. The following summarizes activity in the allowance for credit losses:

 

  

Allowance for Credit Losses

 
  

For the Three Months Ended September 30, 2021

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $6,858  $6,752  $5  $57  $10,065  $23,737 

Provision (reversal)

  10   (754)  (3)  (7)  756   2 

Chargeoffs

  (56)  -   -   -   (916)  (972)

Recoveries

  80   705   -   -   330   1,115 

Total allowance for credit losses

 $6,892  $6,703  $2  $50  $10,235  $23,882 

 

  

Allowance for Credit Losses

 
  

For the Nine Months Ended September 30, 2021

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $9,205  $5,660  $6  $47  $8,936  $23,854 

(Reversal) provision

  (2,425)  314   (4)  3   2,114   2 

Chargeoffs

  (56)  -   -   -   (2,176)  (2,232)

Recoveries

  168   729   -   -   1,361   2,258 

Total allowance for credit losses

 $6,892  $6,703  $2  $50  $10,235  $23,882 

 

  

Allowance for Credit Losses

 
  

For the Three Months Ended September 30, 2020

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $8,072  $4,623  $7  $57  $11,770  $24,529 

Provision (reversal)

  867   1,030   -   (5)  (1,892)  - 

Chargeoffs

  -   -   -   -   (872)  (872)

Recoveries

  46   12   -   -   427   485 

Total allowance for credit losses

 $8,985  $5,665  $7  $52  $9,433  $24,142 

 

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- 17 -
 
 
  

Allowance for Credit Losses

 
  

For the Nine Months Ended September 30, 2020

 
                  

Consumer

         
      

Commercial

      

Residential

  

Installment

         
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                            

Balance at beginning of period, prior to adoption of ASU 2016-13

 $4,959  $4,064  $109  $206  $6,445  $3,701  $19,484 

Impact of adopting ASU 2016-13

  3,385   618   (31)  (132)  1,878   (3,701)  2,017 

Adjusted beginning balance

  8,344   4,682   78   74   8,323   -   21,501 

Provision (reversal)

  537   946   (71)  (22)  2,910   -   4,300 

Chargeoffs

  (178)  -   -   -   (3,071)  -   (3,249)

Recoveries

  282   37   -   -   1,271   -   1,590 

Total allowance for credit losses

 $8,985  $5,665  $7  $52  $9,433  $-  $24,142 

 

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

 

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

 

  

Credit Risk Profile by Internally Assigned Grade

 
  

At September 30, 2021

 
  

Commercial

  

Commercial
Real Estate

  

Construction

  

Residential
Real Estate

  

Consumer
Installment and
Other

  

Total

 
  

(In thousands)

 

Grade:

                        

Pass

 $289,225  $527,191  $50  $17,259  $280,850  $1,114,575 

Substandard

  504   13,350   -   1,281   1,362   16,497 

Doubtful

  -   -   -   -   809   809 

Loss

  -   -   -   -   591   591 

Total

 $289,729  $540,541  $50  $18,540  $283,612  $1,132,472 

 

  

Credit Risk Profile by Internally Assigned Grade

 
  

At December 31, 2020

 
  

Commercial

  

Commercial
Real Estate

  

Construction

  

Residential
Real Estate

  

Consumer
Installment and
Other

  

Total

 
  

(In thousands)

 

Grade:

                        

Pass

 $386,144  $545,398  $129  $22,105  $270,925  $1,224,701 

Substandard

  8,662   18,902   -   1,366   1,498   30,428 

Doubtful

  -   -   -   -   543   543 

Loss

  -   -   -   -   571   571 

Total

 $394,806  $564,300  $129  $23,471  $273,537  $1,256,243 

 

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- 18 -
 
 

The following tables summarize loans by delinquency and nonaccrual status:

 

  

Summary of Loans by Delinquency and Nonaccrual Status

 
  

At September 30, 2021

 
  

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

 $289,529  $-  $-  $-  $200  $289,729 

Commercial real estate

  539,749   -   244   -   548   540,541 

Construction

  50   -   -   -   -   50 

Residential real estate

  18,103   294   -   -   143   18,540 

Consumer installment and other

  280,059   1,828   842   537   346   283,612 

Total

 $1,127,490  $2,122  $1,086  $537  $1,237  $1,132,472 

 

 

  

Summary of Loans by Delinquency and Nonaccrual Status

 
  

At December 31, 2020

 
  

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

 $394,004  $713  $6  $-  $83  $394,806 

Commercial real estate

  560,580   -   -   -   3,720   564,300 

Construction

  129   -   -   -   -   129 

Residential real estate

  22,269   770   271   -   161   23,471 

Consumer installment and other

  270,240   2,010   472   450   365   273,537 

Total

 $1,247,222  $3,493  $749  $450  $4,329  $1,256,243 

 

 

There was no allowance for credit losses allocated to loans on nonaccrual status as of September 30, 2021 and December 31, 2020. There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2021 and December 31, 2020.

 

The following tables provide information on troubled debt restructurings (TDRs):

 

  

Troubled Debt Restructurings

 
  

At September 30, 2021

 
              

Period-End

 
              

Individual

 
  

Number of

  

Pre-Modification

  

Period-End

  

Credit Loss

 
  

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

 
  

($ in thousands)

 

Commercial real estate

  2  $2,785  $1,868  $- 

Residential real estate

  1   241   173   - 

Total

  3  $3,026  $2,041  $- 

 

  

Troubled Debt Restructurings

 
  

At December 31, 2020

 
              

Period-End

 
              

Individual

 
  

Number of

  

Pre-Modification

  

Period-End

  

Credit Loss

 
  

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

 
  

($ in thousands)

 

Commercial real estate

  6  $8,367  $6,040  $- 

Residential real estate

  1   241   181   - 

Total

  7  $8,608  $6,221  $- 

 

 

- 19 -
 
 

During the three and nine months ended September 30, 2021 and September 30, 2020, the Company did not modify any loans that were considered troubled debt restructurings for accounting purposes. Section 4013 of the CARES Act allowed certain loan modifications for borrowers impacted by the COVID-19 pandemic to be excluded from TDR accounting. During the three and nine months ended September 30, 2021, the Company modified loans under Section 4013 of the CARES Act, granting 90 day deferrals of principal and interest payments. As of September 30, 2021, loans deferred under the CARES Act that are not considered TDRs consisted of consumer loans totaling $1.0 million. There were no chargeoffs related to troubled debt restructurings made during the three and nine months ended September 30, 2021 and September 30, 2020. During the three and nine months ended September 30, 2021 and September 30, 2020, 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 90 days or more past due.

 

TDRs of $2,041 thousand included no loans on nonaccrual status at September 30, 2021. TDRs of $6,221 thousand included a loan with a balance of $3,420 thousand on nonaccrual status at December 31, 2020; no allowance for credit losses was allocated to this commercial real estate loan secured by real property.

 

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following loans were considered collateral dependent at September 30, 2021: five commercial real estate loans totaling $8.5 million secured by real property, $1.6 million of indirect consumer installment loans secured by personal property, one commercial loan with a balance of $87 thousand secured by business assets, and four residential real estate loans totaling $519 thousand secured by real property. There were no other collateral dependent loans at September 30, 2021. The following loans were considered collateral dependent at December 31, 2020: five commercial real estate loans totaling $11.1 million secured by real property, $446 thousand of indirect consumer installment loans secured by personal property and two residential real estate loans totaling $346 thousand secured by real property. There were no other collateral dependent loans at December 31, 2020. 

 

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

  

At September 30, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial loans by grade

                               

Pass

 $39,166  $5,312  $10,392  $32,780  $47,492  $120,340  $255,482  $33,743  $289,225 

Substandard

  33   -   -   -   -   87   120   384   504 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $39,199  $5,312  $10,392  $32,780  $47,492  $120,427  $255,602  $34,127  $289,729

 

 

 

  

At September 30, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial real estate loans by grade

                             

Pass

 $128,404  $89,190  $78,940  $79,412  $84,384  $66,861  $527,191  $-  $527,191 

Substandard

  10,244   256   -   2,023   827   -   13,350   -   13,350 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $138,648  $89,446  $78,940  $81,435  $85,211  $66,861  $540,541  $-  $540,541 

 

 

  

At September 30, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Construction loans by grade

                               

Pass

 $-  $-  $-  $-  $-  $-  $-  $50  $50 

Substandard

  -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $-  $-  $-  $-  $-  $-  $-  $50  $50 

 

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- 20 -
 
 
  

At September 30, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Residential Real Estate loans by grade

                             

Pass

 $17,259  $-  $-  $-  $-  $-  $17,259  $-  $17,259 

Substandard

  1,281   -   -   -   -   -   1,281   -   1,281 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $18,540  $-  $-  $-  $-  $-  $18,540  $-  $18,540 

 

The Company considers the delinquency and nonaccrual status of the consumer loan portfolio and its impact on the allowance for credit losses. The following table presents the amortized cost in consumer installment and other loans based on delinquency and nonaccrual status:

 

  

At September 30, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

     

Consumer installment and other loans by delinquency and nonaccrual status

                   

Current

 $10,707  $12,593  $31,160  $43,128  $65,362  $94,335  $257,285  $22,774  $280,059 

30-59 days past due

  134   80   325   250   609   422   1,820   8   1,828 

60-89 days past due

  29   38   46   244   172   310   839   3   842 

Past due 90 days or more

  21   21   12   182   143   158   537   -   537 

Nonaccrual

  -   -   -   -   -   -   -   346   346 

Total

 $10,891  $12,732  $31,543  $43,804  $66,286  $95,225  $260,481  $23,131  $283,612 

 

There were no loans held for sale at September 30, 2021, and December 31, 2020.

 

The Company held no other real estate owned (OREO) at September 30, 2021 and December 31, 2020. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $346 thousand at September 30, 2021 and at December 31, 2020.

 

 

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 credit 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 credit losses, capital notes, and debentures of the bank. At September 30, 2021, the Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2021, the Bank had 32 lending relationships each with aggregate amounts of $5 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 $36,287 thousand and $37,456 thousand at September 30, 2021 and December 31, 2020, 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, 2021, the Bank held corporate bonds in 110 issuing entities that exceeded $5 million for each issuer.

 

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- 21 -
 
 
 

Note 6: Other Assets and Other Liabilities 

 

Other assets consisted of the following:

 

  

At September 30,

  

At December 31,

 
  

2021

  

2020

 
  

(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

  62,421   60,444 

Right-of-use asset

  19,285   18,832 

Limited partnership investments

  27,997   18,335 

Interest receivable

  33,304   33,022 

Prepaid assets

  3,526   4,572 

Other assets

  10,187   10,471 

Total other assets

 $170,947  $159,903 

 

(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 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 $222.75 per share on September 30, 2021, the last day of stock market trading for the third quarter 2021. 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, 2021, this investment totaled $27,997 thousand and $20,228 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2020, this investment totaled $18,335 thousand and $12,202 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At September 30, 2021, the $20,228 thousand of outstanding equity capital commitments are expected to be paid as follows, $2,025 thousand in the remainder of 2021, $7,032 thousand in 2022, $8,039 thousand in 2023, $2,323 thousand in 2024, $179 thousand in 2025, $77 thousand in 2026, and $553 thousand in 2027 or thereafter. 

 

The amounts recognized in net income for these investments include:

 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(In thousands)

 

Investment loss included in pre-tax income

 $620  $640  $1,820  $1,840 

Tax credits recognized in provision for income taxes

  200   225   650   675 

 

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- 22 -
 
 

Other liabilities consisted of the following:

 

  

At September 30,

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Net deferred tax liability

 $4,567  $25,778 

Operating lease liability

  19,285   18,832 

Securities purchases pending settlement

  81,618   29,000 

Other liabilities

  52,087   38,988 

Total other liabilities

 $157,557  $112,598 

 

The net deferred tax liability at September 30, 2021 of $4,567 thousand was net of deferred tax benefits of $25,353 thousand, and included deferred tax obligations of $29,920 thousand related to unrealized gains of $101,204 thousand on available for sale debt securities. The deferred tax liability at December 31, 2020 of $25,778 thousand, net of deferred tax benefits of $22,805 thousand, included deferred tax obligations of $48,021 thousand related to unrealized gains of $162,434 thousand on available for sale debt securities. 

 

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 five years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional five 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, 2021. 

 

As of September 30, 2021, the Company recorded a lease liability of $19,285 thousand and a right-of-use asset of $19,285 thousand. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 4.3 years and 1.70%, respectively, at September 30, 2021. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of September 30, 2021.

 

Total lease costs during the three and nine months ended September 30, 2021, of $1,637 thousand  and $4,949 thousand, respectively, were recorded within occupancy and equipment expense. Total lease costs during the three and nine months ended September 30, 2020, of $1,671 thousand and $4,988 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, 2021 and September 30, 2020.    

 

The following table summarizes the remaining lease payments of operating lease liabilities:

 

  

Minimum
future lease
payments

 
  

At September 30,

 
  

2021

 
  

(In thousands)

 

2021

 $1,525 

2022

  5,660 

2023

  4,952 

2024

  3,364 

2025

  2,173 

Thereafter

  2,251 

Total minimum lease payments

  19,925 

Less: discount

  (640)

Present value of lease liability

 $19,285 

 

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- 23 -
 
 
 

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, 2021 and year ended December 31, 2020. 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, 2021 and year ended December 31, 2020 no such adjustments were recorded.

 

The carrying values of goodwill were:

 

  

At September 30, 2021

  

At December 31, 2020

 
  

(In thousands)

 

Goodwill

 $121,673  $121,673 

 

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

 

  

At September 30, 2021

  

At December 31, 2020

 
  

Gross

      

Gross

     
  

Carrying

  

Accumulated

  

Carrying

  

Accumulated

 
  

Amount

  

Amortization

  

Amount

  

Amortization

 
  

(In thousands)

 

Core deposit intangibles

 $56,808  $(55,908) $56,808  $(55,704)

 

As of September 30, 2021, the current period and estimated future amortization expense for identifiable intangible assets, to be fully amortized in 2025, was:

 

  

Total

 
  

Core

 
  

Deposit

 
  

Intangibles

 
  

(In thousands)

 

For the nine months ended September 30, 2021 (actual)

 $204 

Estimate for the remainder of 2021

  65 

Estimate for year ending December 31, 2022

  252 

2023

  236 

2024

  222 

2025

  125 

 

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- 24 -
 
 
 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   

Deposits

  
   

At September 30,

    

At December 31,

  
   

2021

    

2020

  
   

(In thousands)

  

Noninterest-bearing

   $ 2,988,329     $ 2,725,177  

Interest-bearing:

                

Transaction

     1,257,460       1,102,601  

Savings

     1,894,290       1,703,812  

Time deposits less than $100 thousand

     75,776       79,825  

Time deposits $100 thousand through $250 thousand

     48,550       49,323  

Time deposits more than $250 thousand

     24,556       27,241  

Total deposits

   $ 6,288,961     $ 5,687,979  

 

Demand deposit overdrafts of $870 thousand and $682 thousand were included as loan balances at September 30, 2021 and December 31, 2020, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $58 thousand and $204 thousand for the three and nine months ended September 30, 2021, respectively, and $80 thousand and $238 thousand for the three and nine months ended September 30, 2020, 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,

    

At December 31,

  
   

2021

    

2020

  

Repurchase agreements:

  

(In thousands)

  

Collateral securing borrowings:

                

Agency residential MBS

   $ 46,984     $ 67,019  

Corporate securities

     185,493       188,195  

Total collateral carrying value

   $ 232,477     $ 255,214  

Total short-term borrowed funds

   $ 119,102     $ 102,545  

 
 

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. Debt securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, loans individually evaluated for credit loss, certain loans held for investment, debt securities held to maturity, and other assets.  These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.

 

In accordance with the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.

 

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. When the valuation assumptions used to measure the fair value of the asset or liability are categorized within different levels of the fair value hierarchy, the asset or liability is categorized in its entirety within the lowest level of the hierarchy. These levels are:

 

- 25 -
 
 

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury and equity securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. 

 

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mutual funds, federal agency securities, mortgage-backed securities, corporate securities, commercial paper, collateralized loan obligations, municipal bonds and securities of U.S government entities.

 

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

 

The Company relies on independent vendor pricing services to measure fair value for equity securities, debt securities available for sale and debt securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote most closely reflecting the market generally used as the fair value estimate. In addition, the Company evaluates debt securities for credit losses on a quarterly basis. 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.

 

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, 2021

  
   

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

                                

Agency residential mortgage-backed securities (MBS)

   $ 458,053     $ -     $ 458,053     $ -  

Securities of U.S. Government entities

     128       -       128       -  

Obligations of states and political subdivisions

     96,603       -       96,603       -  

Corporate securities

     2,668,389       -       2,668,389       -  

Collateralized loan obligations

     1,379,533       -       1,379,533       -  

Total debt securities available for sale

   $ 4,602,706     $ -     $ 4,602,706     $ -  

 

(1)   There were no transfers in to or out of level 3 during the nine months ended September 30, 2021.

 

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- 26 -
 
 

 

   

At December 31, 2020

  
   

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

                                

Agency residential MBS

   $ 652,952     $ -     $ 652,952     $ -  

Securities of U.S. Government entities

     154       -       154       -  

Obligations of states and political subdivisions

     111,010       -       111,010       -  

Corporate securities

     2,117,978       -       2,117,978       -  

Commercial paper

     24,990       -       24,990       -  

Collateralized loan obligations

     1,156,101       -       1,156,101       -  

Total debt securities available for sale

   $ 4,063,185     $ -     $ 4,063,185     $ -  

 

(1)   There were no transfers in to or out of level 3 during the year ended December 31, 2020. 
 

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 the application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at September 30, 2021 and December 31, 2020, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

 

                                   

For the Nine

  
                                   

Months Ended

  
   

At September 30, 2021

    

September 30, 2021

  
   

Carrying Value

    

Level 1

    

Level 2

    

Level 3

    

Total Losses

  
   

(In thousands)

  

Loans:

                                        

Commercial real estate

   $ 290     $ -     $ -     $ 290     $ -  

Residential real estate

     173       -       -       173       -  

Total assets measured at fair value on a nonrecurring basis

   $ 463     $ -     $ -     $ 463     $ -  

 

                                   

For the

  
                                   

Year Ended

  
   

At December 31, 2020

    

December 31, 2020

  
   

Carrying Value

    

Level 1

    

Level 2

    

Level 3

    

Total Losses

  
   

(In thousands)

  

Loans:

                                        

Commercial

   $ 5,270     $ -     $ -     $ 5,270     $ -  

Commercial real estate

     3,710       -       -       3,710       -  

Residential real estate

     181       -       -       181       -  

Total assets measured at fair value on a nonrecurring basis

   $ 9,161     $ -     $ -     $ 9,161     $ -  

 

Level 3 – Valuation is based upon present value of expected future cash flows, independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. The unobservable inputs and qualitative information about the unobservable inputs are not presented as the inputs were not developed by the Company.

 

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- 27 -
 
 

Disclosures about Fair Value of Financial Instruments 

 

The tables below are a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled in larger quantities.  The carrying amounts in the following tables are recorded in the balance sheet under the indicated captions.

 

The Company has not included assets and liabilities that are not financial instruments such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes, and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company. 

 

   

At September 30, 2021

  
   

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

   $ 1,011,048     $ 1,011,048     $ 1,011,048     $ -     $ -  

Debt securities held to maturity

     356,106       364,741       -       364,741       -  

Loans

     1,108,590       1,128,250       -       -       1,128,250  
                                         

Financial Liabilities:

                                        

Deposits

   $ 6,288,961     $ 6,288,843     $ -     $ 6,140,079     $ 148,764  

Short-term borrowed funds

     119,102       119,102       -       119,102       -  

 

   

At December 31, 2020

  
   

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

   $ 621,275     $ 621,275     $ 621,275     $ -     $ -  

Debt securities held to maturity

     515,589       529,678       -       529,678       -  

Loans

     1,232,389       1,290,938       -       -       1,290,938  
                                         

Financial Liabilities:

                                        

Deposits

   $ 5,687,979     $ 5,688,049     $ -     $ 5,531,590     $ 156,459  

Short-term borrowed funds

     102,545       102,545       -       102,545       -  

 

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. Certain agreements provide the Company the right to cancel or reduce its obligations to lend to customers. The portions that are not cancellable unconditionally by the Company aggregated $36,287 thousand at September 30, 2021. 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 $234,089 thousand at September 30, 2021 and $277,878 thousand at December 31, 2020. 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 $3,403 thousand at September 30, 2021 and $2,357 thousand at December 31, 2020. Commitments for commercial and similar letters of credit totaled $95 thousand at September 30, 2021 and there were no such outstanding commitments at December 31, 2020. The Company had $580 thousand in outstanding full recourse guarantees to a 3rd party credit card company at September 30, 2021 and December 31, 2020. At September 30, 2021, the Company had a reserve for unfunded commitments of $101 thousand for the above-mentioned loan commitments of $36,287 thousand that are not cancellable unconditionally by the Company. The Company’s reserve for unfunded commitments was $101 thousand at December 31, 2020. The reserve for unfunded commitments is included in other liabilities.

 

- 28 -
 
 

The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2018 to some customers. The Company initially estimated the probable amount of these obligations to be $5,542 thousand and accrued a liability for such amount in 2017; based on additional information received in the second quarter 2019, the Company increased such liability to $5,843 thousand by recognizing an expense of $301 thousand. The Company paid $13 thousand and $452 thousand during the three and nine months ended September 30, 2021, respectively, and $4,410 thousand during the year ended December 31, 2020 to customers eligible for refunds. The remaining accrued obligations at September 30, 2021 totaled $981 thousand, 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. 

 

 

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,

  
   

2021

    

2020

    

2021

    

2020

  
   

(In thousands, except per share data)

  

Net income applicable to common equity (numerator)

   $ 22,063     $ 20,051     $ 64,789     $ 56,575  

Basic earnings per common share

                                

Weighted average number of common shares outstanding - basic (denominator)

     26,866       26,930       26,851       26,977  

Basic earnings per common share

   $ 0.82     $ 0.74     $ 2.41     $ 2.10  

Diluted earnings per common share

                                

Weighted average number of common shares outstanding - basic

     26,866       26,930       26,851       26,977  

Add common stock equivalents for options

     9       16       17       21  

Weighted average number of common shares outstanding - diluted (denominator)

     26,875       26,946       26,868       26,998  

Diluted earnings per common share

   $ 0.82     $ 0.74     $ 2.41     $ 2.10  

 

For the three and nine months ended September 30, 2021, options to purchase 744 thousand and 618 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 Company’s common stock such that their inclusion would have had an anti-dilutive effect. 

 

For the three and nine months ended September 30, 2020, options to purchase 567 thousand and 560 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 Company’s common stock such that their inclusion would have had an anti-dilutive effect.

 

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- 29 -
 
 
 

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

  
   

Ended September 30,

  
   

2021

    

2020

    

2021

    

2020

  
   

(In thousands, except per share data)

  

Net Interest and Loan Fee Income (FTE)(1)

   $ 43,952     $ 41,780     $ 131,034     $ 124,390  

Provision for Credit Losses

     -       -       -       4,300  

Noninterest Income

     11,282       10,476       32,503       31,678  

Noninterest Expense

     24,697       24,603       73,894       74,021  

Income Before Income Taxes (FTE)(1)

     30,537       27,653       89,643       77,747  

Income Tax Provision (FTE)(1)

     8,474       7,602       24,854       21,172  

Net Income

   $ 22,063     $ 20,051     $ 64,789     $ 56,575  
                                 

Average Common Shares Outstanding

     26,866       26,930       26,851       26,977  

Average Diluted Common Shares Outstanding

     26,875       26,946       26,868       26,998  

Common Shares Outstanding at Period End

     26,866       26,898                  
                                 

Per Common Share:

                                

Basic Earnings

   $ 0.82     $ 0.74     $ 2.41     $ 2.10  

Diluted Earnings

     0.82       0.74       2.41       2.10  

Book Value

     31.19       30.69                  
                                 

Financial Ratios:

                                

Return on Assets

     1.22 %     1.24 %     1.25 %     1.25 %

Return on Common Equity

     11.58 %     11.17 %     11.62 %     10.67 %

Net Interest Margin (FTE)(1)

     2.60 %     2.78 %     2.67 %     2.95 %

Net Loan (Recoveries) Losses to Average Loans

     (0.05 %)     0.12 %     0.00 %     0.18 %

Efficiency Ratio(2)

     44.7 %     47.1 %     45.2 %     47.4 %
                                 

Average Balances:

                                

Assets

   $ 7,158,462     $ 6,414,399     $ 6,939,636     $ 6,044,098  

Loans

     1,176,114       1,312,758       1,227,971       1,223,250  

Investment Securities

     4,615,540       4,360,119       4,484,084       4,055,733  

Deposits

     6,223,500       5,533,144       6,017,175       5,188,797  

Shareholders' Equity

     755,682       714,400       745,382       708,559  
                                 

Period End Balances:

                                

Assets

   $ 7,403,573     $ 6,563,215                  

Loans

     1,132,472       1,310,009                  

Investment Securities

     4,958,819       4,561,805                  

Deposits

     6,288,961       5,539,190                  

Shareholders' Equity

     837,953       825,576                  
                                 

Capital Ratios at Period End:

                                

Total Risk Based Capital

     15.54 %     15.42 %                

Tangible Equity to Tangible Assets

     9.83 %     10.91 %                
                                 

Dividends Paid Per Common Share

   $ 0.41     $ 0.41     $ 1.23     $ 1.23  

Common Dividend Payout Ratio

     50 %     55 %     51 %     59 %

 

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).

 

- 30 -
 

 

Financial Overview 

 

Westamerica Bancorporation and subsidiaries (collectively, the “Company”) reported net income of $22.1 million or $0.82 diluted earnings per common share (“EPS”) for the third quarter 2021 and net income of $64.8 million or $2.41 EPS for the nine months ended September 30, 2021. Results for 2021 include “make-whole” interest income on corporate bonds redeemed prior to maturity of $732 thousand for the third quarter 2021, which increased EPS $0.02, and $2.8 million for the first nine months of 2021, which increased EPS $0.07. These results compare with net income of $20.1 million or $0.74 EPS for the third quarter 2020 and net income of $56.6 million or $2.10 diluted earnings per common share for the nine months ended September 30, 2020. 

 

The Company’s primary and wholly-owned subsidiary, Westamerica Bank (the “Bank”), continued to support its customers during the pandemic. The Bank originated $106 million in loans under the second round of the Paycheck Protection Program (“PPP”) during the first six months of 2021. PPP loans meaningfully increased interest-earning assets and related interest and fee income. The Bank continues to work with loan customers requesting deferral of loan payments due to economic weakness caused by the pandemic. At September 30, 2021, loans granted deferrals under the CARES Act included $1.0 million, all of which were consumer automobile loans. The results for the nine months ended September 30, 2020 included a provision for credit losses of $4.3 million, which reduced EPS $0.11, representing Management’s estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk from deteriorating economic conditions caused by the COVID-19 pandemic.

 

In response to the pandemic, the Federal Reserve has engaged significant levels of monetary policy to provide liquidity and credit facilities to the financial markets. On March 15, 2020, the Federal Open Market Committee (“FOMC”) reduced the target range for the federal funds rate to 0 to 0.25 percent; relatedly, the FOMC reduced the interest rate paid on deposit balances to 0.10 percent effective March 16, 2020. Effective June 17, 2021, FOMC increased the interest rate paid on excess reserve balances to 0.15%. The Bank maintains deposit balances at the Federal Reserve Bank; the amount that earns interest is identified in the Company’s financial statements as “interest-bearing cash”.

 

The Company presents its net interest margin and net interest income on a fully taxable equivalent (“FTE”) basis using the current statutory federal tax rate. Management believes the FTE basis is valuable to the reader because the Company’s loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks, therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on an FTE basis.

 

The Company’s significant accounting policies (see Note 1, “Summary of Significant Accounting Policies,” to Financial Statements in the Company’s 2020 Form 10-K and Note 2 “Summary of Significant Accounting Policies” in this Form 10-Q) are fundamental to understanding the Company’s results of operations and financial condition. Certain risks, uncertainties and other factors, including those discussed in Note 20 “Impact of COVID-19” to the consolidated financial statements and “Risk Factors” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 may cause actual future results to differ materially from the results discussed in this report on Form 10-Q. Management continues to evaluate the impact of the pandemic on the Company’s business. The extent of the impact on the Company’s results of operations, cash flow liquidity, and financial performance, as well as the Company’s ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted.

 

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- 31 -
 

 

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,

  
   

2021

    

2020

    

2021

    

2020

  
   

(In thousands, except per share data)

  

Net interest and loan fee income (FTE)

   $ 43,952     $ 41,780     $ 131,034     $ 124,390  

Provision for credit losses

     -       -       -       4,300  

Noninterest income

     11,282       10,476       32,503       31,678  

Noninterest expense

     24,697       24,603       73,894       74,021  

Income before taxes (FTE)

     30,537       27,653       89,643       77,747  

Income tax provision (FTE)

     8,474       7,602       24,854       21,172  

Net income

   $ 22,063     $ 20,051     $ 64,789     $ 56,575  
                                 

Average diluted common shares

     26,875       26,946       26,868       26,998  

Diluted earnings per common share

   $ 0.82     $ 0.74     $ 2.41     $ 2.10  
                                 

Average total assets

   $ 7,158,462     $ 6,414,399     $ 6,939,636     $ 6,044,098  

Net income to average total assets (annualized)

     1.22 %     1.24 %     1.25 %     1.25 %

Net income to average common shareholders' equity (annualized)

     11.58 %     11.17 %     11.62 %     10.67 %

 

Net income for the third quarter 2021 increased $2.0 million compared with the third quarter 2020. Net interest and loan fee income (FTE) increased $2.2 million in the third quarter 2021 compared with the third quarter 2020 due to higher average balances of investments and interest-bearing cash, partially offset by lower average balances of loans and the mix of interest-earning assets. Additionally, third quarter 2021 results include “make-whole” interest income on corporate bonds redeemed prior to maturity of $732 thousand. The provision for credit losses was zero for the third quarter 2021 and the third quarter 2020, reflecting Management's evaluation of credit risk over the remaining life of loans and bonds. Third quarter 2021 noninterest income increased $806 thousand compared with third quarter 2020 due to higher levels of merchant processing services fees, deposit related fees and debit card fees. Third quarter 2021 noninterest expense remained at the same level compared with the third quarter 2020. The tax rate (FTE) was 27.8% for the third quarter 2021 and 27.5% for the third quarter 2020. 

 

Comparing the first nine months of 2021 with the first nine months of 2020, net income increased $8.2 million. Net interest and loan fee (FTE) income increased $6.6 million due to higher average balances of investments and interest-bearing cash, partially offset by lower yield on interest-earning assets. Results for the first nine months of 2021 include “make-whole” interest income on corporate bonds redeemed prior to maturity of $2.8 million. The provision for credit losses was zero in the first nine months of 2021, reflecting Management's evaluation of credit risk over the remaining life of loans and bonds. Results for the first quarter 2020 include a provision of credit losses of $4.3 million, representing Management’s estimate of additional reserves needed over the remaining life of its loans due to credit-risk from economic weakness caused by the COVID-19 pandemic. Noninterest income increased $825 thousand in the first nine months of 2021 compared with the first nine months of 2020 due to higher fee income from merchant card processing, debit cards and trust accounts, offset by lower deposit services charges. Additionally, the first nine months of 2020 results included a $603 thousand recovery on previously charged off loans. In the first nine months of 2021 noninterest expense decreased $127 thousand compared with the first nine months of 2020 due to lower salaries and related benefits offset by higher professional fees and other noninterest expense. The tax rate (FTE) was 27.7% for the first nine months of 2021 and 27.2% for the first nine months of 2020.

 

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- 32 -
 

 

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,

  
   

2021

    

2020

    

2021

    

2020

  
   

($ in thousands)

  

Interest and loan fee income

   $ 43,810     $ 41,365     $ 130,402     $ 122,895  

FTE adjustment

     634       881       2,083       2,838  

Interest expense

     492       466       1,451       1,343  

Net interest and loan fee income (FTE)

   $ 43,952     $ 41,780     $ 131,034     $ 124,390  
                                 

Average earning assets

   $ 6,754,281     $ 6,001,287     $ 6,535,949     $ 5,627,517  

Net interest margin (FTE) (annualized)

     2.60 %     2.78 %     2.67 %     2.95 %

 

Net interest and loan fee income (FTE) increased $2.2 million in the third quarter 2021 compared with the third quarter 2020 due to higher average balances of investments (up $255 million) and interest-bearing cash (up $634 million), partially offset by lower average balances of loans (down $137 million) and increases in average balances of lower-yielding of interest-earning assets. Results for the third quarter 2021 results include “make-whole” interest income on corporate bonds redeemed prior to maturity of $732 thousand. 

 

Net interest and loan fee (FTE) income increased $6.6 million in the first nine months of 2021 compared with the first nine months of 2020 due to higher average balances of investments (up $428 million) and interest-bearing cash (up $475 million), partially offset by lower yield on interest-earning assets (down 0.28%). Results for the first nine months of 2021 include “make-whole” interest income on corporate bonds redeemed prior to maturity of $2.8 million.

 

The annualized net interest margin (FTE) was 2.60% in the third quarter 2021 and 2.67% in the first nine months of 2021 compared with 2.78% in the third quarter 2020 and 2.95% in the first nine months of 2020. The lower yield in the third quarter 2021 and the first nine months of 2021 compared with the same periods of 2020 is primarily due to low yield on interest-bearing cash which made up a higher percentage of total earning assets in the current periods (14.3% in the third quarter 2021 compared with 5.5% in the third quarter 2020 and 12.6% in the first nine months of 2021 compared with 6.2% in the first nine months of 2020).

 

The Company’s funding costs were 0.03% in the third quarter 2021 and 2020 and in the first nine months of 2021 and 2020. Average balances of higher costing time deposits in the first nine months of 2021 declined $10 million from the first nine months of 2020. Average balances of lower costing checking and saving deposits increased $839 million in the first nine months of 2021 compared with the first nine months of 2020. Average balances of those checking and saving deposits accounted for 97.4% of average total deposits in the first nine months of 2021 compared with 96.8% in the first nine months of 2020.

 

Net Interest Margin (FTE)

 

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

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2021

    

2020

    

2021

    

2020

  
                                 

Yield on earning assets (FTE)

     2.63 %     2.81 %     2.70 %     2.98 %

Rate paid on interest-bearing liabilities

     0.06 %     0.06 %     0.06 %     0.06 %

Net interest spread (FTE)

     2.57 %     2.75 %     2.64 %     2.92 %

Impact of noninterest-bearing demand deposits

     0.03 %     0.03 %     0.03 %     0.03 %

Net interest margin (FTE)

     2.60 %     2.78 %     2.67 %     2.95 %

 

- 33 -
 

 

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 the reversal of previously accrued interest on loans placed on non-accrual status during the period, proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income, and accretion of purchased loan discounts. Yields, rates and interest margins are annualized.

 

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

 

   

For the Three Months Ended September 30, 2021

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 4,322,464     $ 26,674       2.47 %

Tax-exempt (1)

     293,076       2,508       3.42 %

Total investments (1)

     4,615,540       29,182       2.53 %

Loans:

                        

Taxable

                        

Paycheck Protection Program ("PPP") loans

     144,641       1,865       5.12 %

Other taxable

     981,074       12,534       5.07 %

Total taxable

     1,125,715       14,399       5.08 %

Tax-exempt (1)

     50,399       494       3.89 %

Total loans (1)

     1,176,114       14,893       5.02 %

Total interest-bearing cash

     962,627       369       0.15 %

Total Interest-earning assets (1)

     6,754,281       44,444       2.63 %

Other assets

     404,181                  

Total assets

   $ 7,158,462                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,960,207     $ -       - %

Savings and interest-bearing transaction

     3,111,068       373       0.05 %

Time less than $100,000

     83,414       42       0.20 %

Time $100,000 or more

     68,811       58       0.33 %

Total interest-bearing deposits

     3,263,293       473       0.06 %

Short-term borrowed funds

     107,547       19       0.07 %

Total interest-bearing liabilities

     3,370,840       492       0.06 %

Other liabilities

     71,733                  

Shareholders' equity

     755,682                  

Total liabilities and shareholders' equity

   $ 7,158,462                  

Net interest spread (1) (2)

                     2.57 %

Net interest and fee income and interest margin (1) (3)

           $ 43,952       2.60 %

 

(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.

  

 

- 34 -
 

 

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

 

   

For the Three Months Ended September 30, 2020

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 3,918,846     $ 23,079       2.36 %

Tax-exempt (1)

     441,273       3,689       3.34 %

Total investments (1)

     4,360,119       26,768       2.46 %

Loans:

                        

Taxable

                        

PPP loans

     243,104       2,501       4.08 %

Other

     1,020,270       12,403       4.84 %

Total taxable

     1,263,374       14,904       4.69 %

Tax-exempt (1)

     49,384       490       3.95 %

Total loans (1)

     1,312,758       15,394       4.67 %

Total interest-bearing cash

     328,410       84       0.10 %

Total Interest-earning assets (1)

     6,001,287       42,246       2.81 %

Other assets

     413,112                  

Total assets

   $ 6,414,399                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,695,458     $ -       - %

Savings and interest-bearing transaction

     2,674,647       323       0.05 %

Time less than $100,000

     90,994       47       0.21 %

Time $100,000 or more

     72,045       80       0.44 %

Total interest-bearing deposits

     2,837,686       450       0.06 %

Short-term borrowed funds

     94,031       16       0.07 %

Total interest-bearing liabilities

     2,931,717       466       0.06 %

Other liabilities

     72,824                  

Shareholders' equity

     714,400                  

Total liabilities and shareholders' equity

   $ 6,414,399                  

Net interest spread (1) (2)

                     2.75 %

Net interest and fee income and interest margin (1) (3)

           $ 41,780       2.78 %

 

(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 -
 

 

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

 

 

   

For the Nine Months Ended September 30, 2021

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 4,154,211     $ 78,564       2.52 %

Tax-exempt (1)

     329,873       8,410       3.40 %

Total investments (1)

     4,484,084       86,974       2.59 %

Loans:

                        

Taxable

                        

PPP loans

     180,214       6,431       4.77 %

Other taxable

     996,584       36,833       4.94 %

Total taxable

     1,176,798       43,264       4.92 %

Tax-exempt (1)

     51,173       1,481       3.87 %

Total loans (1)

     1,227,971       44,745       4.87 %

Total interest-bearing cash

     823,894       766       0.12 %

Total Interest-earning assets (1)

     6,535,949       132,485       2.70 %

Other assets

     403,687                  

Total assets

   $ 6,939,636                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,854,936     $ -       - %

Savings and interest-bearing transaction

     3,007,473       1,068       0.05 %

Time less than $100,000

     84,508       126       0.20 %

Time $100,000 or more

     70,258       204       0.39 %

Total interest-bearing deposits

     3,162,239       1,398       0.06 %

Short-term borrowed funds

     105,001       53       0.07 %

Other borrowed funds

     71       -       0.35 %

Total interest-bearing liabilities

     3,267,311       1,451       0.06 %

Other liabilities

     72,007                  

Shareholders' equity

     745,382                  

Total liabilities and shareholders' equity

   $ 6,939,636                  

Net interest spread (1) (2)

                     2.64 %

Net interest and fee income and interest margin (1) (3)

           $ 131,034       2.67 %

 

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

  

(2) Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.

  

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

  

 

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

 

   

For the Nine Months Ended September 30, 2020

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 3,574,164     $ 67,963       2.54 %

Tax-exempt (1)

     481,569       12,037       3.33 %

Total investments (1)

     4,055,733       80,000       2.63 %

Loans:

                        

Taxable:

                        

PPP loans

     125,632       4,174       4.43 %

Other

     1,050,243       39,069       4.97 %

Total taxable

     1,175,875       43,243       4.91 %

Tax-exempt (1)

     47,375       1,437       4.05 %

Total loans (1)

     1,223,250       44,680       4.88 %

Total interest-bearing cash

     348,534       1,053       0.40 %

Total Interest-earning assets (1)

     5,627,517       125,733       2.98 %

Other assets

     416,581                  

Total assets

   $ 6,044,098                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,472,495     $ -       - %

Savings and interest-bearing transaction

     2,551,053       922       0.05 %

Time less than $100,000

     92,531       148       0.21 %

Time $100,000 or more

     72,718       238       0.44 %

Total interest-bearing deposits

     2,716,302       1,308       0.06 %

Short-term borrowed funds

     68,917       34       0.07 %

Other borrowed funds

     232       1       0.35 %

Total interest-bearing liabilities

     2,785,451       1,343       0.06 %

Other liabilities

     77,593                  

Shareholders' equity

     708,559                  

Total liabilities and shareholders' equity

   $ 6,044,098                  

Net interest spread (1) (2)

                     2.92 %

Net interest and fee income and interest margin (1) (3)

           $ 124,390       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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- 37 -
 

 

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, 2021

  
   

Compared with

  
   

For the Three Months Ended September 30, 2020

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

Increase (decrease) in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ 2,377     $ 1,218     $ 3,595  

Tax-exempt (1)

     (1,239 )     58       (1,181 )

Total investments (1)

     1,138       1,276       2,414  

Loans:

                        

Taxable:

                        

PPP loans

     (1,013 )     377       (636 )

Other

     (450 )     581       131  

Total taxable

     (1,463 )     958       (505 )

Tax-exempt (1)

     11       (7 )     4  

Total loans (1)

     (1,452 )     951       (501 )

Total interest-bearing cash

     162       123       285  

Total (decrease) increase in interest and loan fee income (1)

     (152 )     2,350       2,198  

Increase (decrease) in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     54       (4 )     50  

Time less than $100,000

     (4 )     (1 )     (5 )

Time $100,000 or more

     (3 )     (19 )     (22 )

Total interest-bearing deposits

     47       (24 )     23  

Short-term borrowed funds

     2       1       3  

Total increase (decrease) in interest expense

     49       (23 )     26  

(Decrease) increase in net interest and loan fee income (1)

   $ (201 )   $ 2,373     $ 2,172  

 

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

                  

 

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- 38 -
 

 

Summary of Changes in Interest Income and Expense

 

 

   

For the Nine Months Ended September 30, 2021

  
   

Compared with

  
   

For the Nine Months Ended September 30, 2020

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

Increase (decrease) in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ 11,030     $ (429 )   $ 10,601  

Tax-exempt (1)

     (3,792 )     165       (3,627 )

Total investments (1)

     7,238       (264 )     6,974  

Loans:

                        

Taxable:

                        

PPP loans

     1,793       464       2,257  

Other

     (2,027 )     (209 )     (2,236 )

Total taxable

     (234 )     255       21  

Tax-exempt (1)

     114       (70 )     44  

Total loans (1)

     (120 )     185       65  

Total interest-bearing cash

     1,432       (1,719 )     (287 )

Total increase (decrease) in interest and loan fee income (1)

     8,550       (1,798 )     6,752  

Increase (decrease) in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     164       (18 )     146  

Time less than $100,000

     (13 )     (9 )     (22 )

Time $100,000 or more

     (8 )     (26 )     (34 )

Total interest-bearing deposits

     143       (53 )     90  

Short-term borrowed funds

     18       1       19  

Other borrowed funds

     (1 )     -       (1 )

Total increase (decrease) in interest expense

     160       (52 )     108  

Increase (decrease) in net interest and loan fee income (1)

   $ 8,390     $ (1,746 )   $ 6,644  

 

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

 

Provision for Credit 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 credit losses reflects Management's assessment of credit risk in the loan portfolio and debt securities held to maturity during each of the periods presented.

 

The Company provided no provision for credit losses in the third quarter and first nine months of 2021, and the third quarter 2020, based on Management’s evaluation of credit quality and the adequacy of the allowance for credit losses. The Company’s first nine months of 2020 results include a provision for credit losses of $4.3 million recorded in the first quarter of 2020, which represented Management’s estimate of additional reserves needed over the remaining life of its loans due to the credit-risk from weakened economic conditions caused by the COVID-19 pandemic. For further information regarding credit risk, net credit losses, and the allowance for credit losses, see the “Loan Portfolio Credit Risk” and “Allowance for Credit Losses” sections of this Report.

 

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- 39 -
 

 

Noninterest Income

 

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

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2021

    

2020

    

2021

    

2020

  
   

(In thousands)

  
                                 

Service charges on deposit accounts

   $ 3,578     $ 3,298     $ 10,117     $ 10,697  

Merchant processing services

     3,159       2,860       8,998       7,495  

Debit card fees

     1,740       1,611       5,132       4,538  

Trust fees

     839       756       2,467       2,247  

ATM processing fees

     573       606       1,792       1,703  

Other service fees

     475       454       1,435       1,380  

Financial services commissions

     95       58       260       306  

Securities gains

     -       -       34       71  

Other noninterest income

     823       833       2,268       3,241  

Total

   $ 11,282     $ 10,476     $ 32,503     $ 31,678  

 

Third quarter 2021 noninterest income increased $806 thousand compared with third quarter 2020 due to increases in service charges on deposits accounts and higher transaction volumes from merchant processing services and debit cards.

 

Noninterest income increased $825 thousand in the first nine months of 2021 compared with the first nine months of 2020. Higher transaction volumes from merchant processing services and debit cards and increases in trust fees were offset by decreases in service charges on deposits accounts. Additionally, the first nine months of 2020 included a $603 thousand recovery in excess of previously charged off loan amounts.

 

Noninterest Expense

 

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

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2021

    

2020

    

2021

    

2020

  
   

(In thousands)

  
                                 

Salaries and related benefits

   $ 11,813     $ 12,540     $ 36,575     $ 38,458  

Occupancy and equipment

     4,759       5,014       14,447       14,737  

Outsourced data processing services

     2,429       2,338       7,244       7,067  

Professional fees

     724       669       2,496       1,701  

Courier service

     534       500       1,605       1,499  

Amortization of identifiable intangibles

     67       72       204       218  

Other noninterest expense

     4,371       3,470       11,323       10,341  

Total

   $ 24,697     $ 24,603     $ 73,894     $ 74,021  

 

Noninterest expense increased $94 thousand in the third quarter 2021 compared with the third quarter 2020. An increase in other noninterest expense was partially offset by decreases in salaries and related benefits due to attrition. Additionally, occupancy and equipment expenses decreased due to lower depreciation expenses.

 

In the first nine months of 2021 noninterest expense decreased $127 thousand compared with the first nine months of 2020. Lower salaries and related benefits are attributable to attrition. Occupancy and equipment expenses decreased due to lower depreciation expenses. These decreases were partially offset by higher professional fees and other noninterest expense.

 

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Provision for Income Tax 

 

The Company’s income tax provision (FTE) was $8.5 million for the third quarter 2021 and $24.9 million for the nine months ended September 30, 2021 compared with $7.6 million for the third quarter 2020 and $21.2 million for the nine months ended September 30, 2020. The effective tax rates (FTE) were 27.8% for the third quarter 2021 and 27.7% for the nine months ended September 30, 2021 compared with 27.5% for the third quarter 2020 and 27.2% for the nine months ended September 30, 2020. 

 

Investment Securities Portfolio 

 

The Company maintains an investment securities portfolio consisting of securities issued by state and political subdivisions and corporations, collateralized loan obligations, agency and non-agency issued mortgage backed securities, and other securities. 

 

Management managed the investment securities portfolio in response to changes in deposit and loan volumes. The carrying value of the Company’s investment securities portfolio was $5.0 billion at September 30, 2021 and $4.6 billion at December 31, 2020. The following table indicates the carrying values of investment securities in the Company’s portfolio by type as of the indicated dates. The Company adopted ASU 2016-13 effective January 1, 2020. Debt securities held to maturity of $356,113 thousand at September 30, 2021 and $515,598 thousand at December 31, 2020, are listed at amortized cost before related reserve for expected credit losses of $7 thousand and $9 thousand, respectively.

 

   

At September 30, 2021

    

At December 31, 2020

  
   

Carrying Value

    

As a percent
of total
investment
securities

    

Carrying Value

    

As a percent
of total
investment
securities

  
   

($ in thousands)

  

Agency residential mortgage-backed securities

   $ 623,975       12 %   $ 893,284       20 %

Obligations of states and political subdivisions

     285,761       6 %     384,932       8 %

Corporate securities

     2,668,389       54 %     2,117,978       46 %

Commercial paper

     -       - %     24,990       1 %

Collateralized loan obligations

     1,379,533       28 %     1,156,101       25 %

Other

     1,161       - %     1,498       - %

Total

   $ 4,958,819       100 %   $ 4,578,783       100 %
                                 

Debt securities available for sale

   $ 4,602,706             $ 4,063,185          

Debt securities held to maturity

     356,113               515,598          

Total

   $ 4,958,819             $ 4,578,783          

 

Management continually evaluates the Company’s investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, liquidity, and the level of interest rate risk to which the Company is exposed. These evaluations may cause Management to change the level of funds the Company deploys into investment securities and change the composition of the Company’s investment securities portfolio. 

 

At September 30, 2021, substantially all of the Company’s investment securities were investment grade as rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. There have been no significant differences in the Company’s internal analyses compared with the ratings assigned by the third party credit rating agencies.

 

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The following table summarizes total corporate securities by credit rating:

 

 

   

At September 30, 2021

    

At December 31, 2020

  
   

Market value

    

As a percent of
total corporate
securities

    

Market value

    

As a percent of
total corporate
securities

  
   

($ in thousands)

  

AAA

   $ 21,619       1 %   $ 21,905       1 %

AA+

     20,646       1 %     20,979       1 %

AA

     19,916       1 %     41,232       2 %

AA-

     116,233       4 %     46,969       2 %

A+

     129,426       5 %     153,917       7 %

A

     502,617       19 %     374,155       18 %

A-

     575,395       21 %     385,642       18 %

BBB+

     744,553       28 %     489,677       23 %

BBB

     526,184       20 %     486,108       23 %

BBB-

     11,800       - %     82,431       4 %

Investment grade

     2,668,389       100 %     2,103,015       99 %

Below investment grade

     -       - %     14,963       1 %

Total Corporate securities

   $ 2,668,389       100 %   $ 2,117,978       100 %

 

The Company’s below investment grade corporate bond with a balance of $14.96 million at December 31, 2020 paid off in full at maturity in July 2021. 

 

The following table summarizes total corporate securities by the industry sector in which the issuing companies operate:

 

   

At September 30, 2021

    

At December 31, 2020

  
   

Market value

    

As a percent of
total corporate
securities

    

Market value

    

As a percent of
total corporate
securities

  
   

($ in thousands)

  

Financial

   $ 1,329,371       50 %   $ 938,222       44 %

Consumer, Non-cyclical

     272,870       10 %     184,069       9 %

Utilities

     221,331       8 %     185,486       9 %

Industrial

     219,183       8 %     188,803       9 %

Communications

     178,594       7 %     173,483       8 %

Consumer, Cyclical

     126,760       5 %     93,330       4 %

Basic Materials

     116,744       4 %     120,811       6 %

Technology

     103,214       4 %     130,725       6 %

Energy

     100,322       4 %     103,049       5 %

Total Corporate securities

   $ 2,668,389       100 %   $ 2,117,978       100 %

 

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The following table summarizes total consumer, cyclical by sub-sector:

 

   

At September 30, 2021

  
   

Market value

  
   

(In thousands)

  

Hotels

   $ -  

Restaurants

     20,718  

Department Stores

     -  

Casinos

     -  

Airlines

     -  

Other

     106,042  

Total Consumer, Cyclical

   $ 126,760  

 

The Company’s $20.7 million (fair value) in corporate bonds to issuers operating in the consumer cyclical – restaurant subsector represent bonds of one company which retails, roasts and provides its own brand of specialty coffee and other complementary products through retail locations worldwide and sells coffee through several distribution channels. The bonds mature in 2023. At September 30, 2021, the bonds were rated BBB and priced with an unrealized gain of $722 thousand.

 

   

At September 30, 2021

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Energy

   $ 95,446     $ 100,322  

Industrial

     213,308       219,183  

Total

   $ 308,754     $ 319,505  

 

The $100.3 million (fair value) in corporate bonds in the energy sector are issued by four issuers at September 30, 2021. The $219.2 million (fair value) in corporate bonds in the industrial sector are issued by 10 issuers at September 30, 2021.

 

The Company’s $1.4 billion (fair value) in collateralized loan obligations at September 30, 2021, include investments in 166 issues that are within the senior tranches of their respective fund securitization structures. All of the Company’s collateralized loan obligation investments are rated AAA or AA at September 30, 2021.

 

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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, 2021, the Company’s investment securities portfolios included securities issued by 225 state and local government municipalities and agencies located within 33 states. The largest exposure to any one single municipality or agency issuer was $7.5 million (fair value) represented by five general obligation bonds.

 

   

At September 30, 2021

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Obligations of states and political subdivisions:

                

General obligation bonds:

                

California

   $ 49,507     $ 51,258  

Washington

     15,603       16,127  

Texas

     11,688       12,075  

Other (28 states)

     127,543       131,284  

Total general obligation bonds

   $ 204,341     $ 210,744  
                 

Revenue bonds:

                

California

   $ 16,065     $ 16,395  

Kentucky

     10,317       10,610  

Indiana

     8,251       8,355  

Virginia

     7,583       7,850  

Colorado

     6,299       6,419  

Maryland

     5,975       6,011  

Washington

     4,558       4,585  

Other (10 states)

     18,392       18,658  

Total revenue bonds

     77,440       78,883  

Total obligations of states and political subdivisions

   $ 281,781     $ 289,627  

 

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At December 31, 2020, the Company’s investment securities portfolios included securities issued by 317 state and local government municipalities and agencies located within 40 states. The largest exposure to any one single municipality or agency issuer was $8.2 million (fair value) represented by six general obligation bonds.

 

   

At December 31, 2020

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Obligations of states and political subdivisions:

                

General obligation bonds:

                

California

   $ 67,386     $ 70,075  

Texas

     20,644       21,283  

New Jersey

     17,403       17,629  

Washington

     16,226       17,000  

Other (32 states)

     159,019       164,764  

Total general obligation bonds

   $ 280,678     $ 290,751  
                 

Revenue bonds:

                

California

   $ 17,587     $ 18,054  

Kentucky

     10,822       11,210  

Indiana

     9,350       9,565  

Virginia

     7,604       8,019  

Colorado

     6,302       6,519  

Washington

     6,225       6,358  

Maryland

     5,972       6,043  

Other (19 states)

     35,061       35,656  

Total revenue bonds

     98,923       101,424  

Total obligations of states and political subdivisions

   $ 379,601     $ 392,175  

 

At September 30, 2021 and December 31, 2020, 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 utilities, sewer utilities, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 16 revenue sources at September 30, 2021 and 19 revenue sources December 31, 2020. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

 

   

At September 30, 2021

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Revenue bonds by revenue source:

                

Water

   $ 12,227     $ 12,360  

Sewer

     11,601       11,936  

Sales tax

     9,620       9,770  

Lease (renewal)

     8,705       8,953  

Lease (abatement)

     6,932       7,042  

Lease (appropriation)

     4,566       4,644  

Special Assessment

     4,080       4,216  

Fuel Sales Tax

     3,999       4,006  

Lease Revenue

     3,859       3,947  

Other (7 sources)

     11,851       12,009  

Total revenue bonds by revenue source

   $ 77,440     $ 78,883  

 

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- 45 -
 

 

   

At December 31, 2020

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Revenue bonds by revenue source:

                

Water

   $ 22,731     $ 23,095  

Sewer

     12,447       12,989  

Sales tax

     10,738       11,013  

Lease (renewal)

     9,209       9,545  

Lease (abatement)

     8,483       8,674  

Other (14 sources)

     35,315       36,108  

Total revenue bonds by revenue source

   $ 98,923     $ 101,424  

 

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 that the borrowers will default, causing loss. 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. 

 

During 2020 and the first six months of 2021, the Bank processed customer PPP loan applications pursuant to the CARES Act. The United States Small Business Administration guarantees PPP loans; given this guarantee, the PPP loans are not considered to have default risk and do not carry an allowance for credit losses. The outstanding balances of PPP loans, net of deferred fees and costs, were $103 million at September 30, 2021. 

 

On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the CARES Act. The Bank has been actively working with consumer and commercial borrowers requesting deferral of loan payments, granting deferrals of principal and interest payments for 90 days. At September 30, 2021, loans granted loan deferrals totaled $1.0 million, all of which were consumer automobile loans. 

 

The preparation of the financial statements requires Management to estimate the amount of expected losses 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 credit 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 loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses. 

 

The Company closely monitors the markets in which it conducts its lending operations and follows a strategy to control exposure to loans with high credit risk. The Bank’s organization structure separates the functions of business development and loan underwriting; Management believes this segregation of duties avoids inherent conflicts of combining business development and loan approval functions. In measuring and managing credit risk, the Company adheres to the following practices:

 

 

●

The Bank maintains a Loan Review Department which reports directly to the audit committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans to challenge the credit risk grades assigned by Management, using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated Management attention in order to maximize collection.

 

- 46 -
 

 

 

●

The Bank maintains two loan administration offices whose sole responsibility is to manage and collect classified loans.

 

Classified loans with higher levels of credit risk are further designated as “nonaccrual loans.” Management places classified loans on nonaccrual status when full collection of contractual interest and principal payments is in doubt. Uncollected interest previously accrued on loans placed on nonaccrual status is reversed as a charge against interest income. The Company does not accrue interest income on loans following placement on nonaccrual status. Interest payments received on nonaccrual loans are applied to reduce the carrying amount of the loan unless the carrying amount is well secured by loan collateral. “Nonperforming assets” include nonaccrual loans, loans 90 or more days past due and still accruing, and repossessed loan collateral (commonly referred to as “Other Real Estate Owned”).

 

Nonperforming Assets

                        
   

At September 30,

    

At December 31,

  
   

2021

    

2020

    

2020

  
   

(In thousands)

  
                         

Nonperforming nonaccrual loans

   $ 801     $ 409     $ 526  

Performing nonaccrual loans

     436       3,971       3,803  

Total nonaccrual loans

     1,237       4,380       4,329  

Accruing loans 90 or more days past due

     537       360       450  

Total nonperforming loans

     1,774       4,740       4,779  

Other real estate owned

     -       43       -  

Total nonperforming assets

   $ 1,774     $ 4,783     $ 4,779  

 

At September 30, 2021, nonaccrual loans consisted of seven loans with an average carrying value of $177 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, pandemics, and collateral values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent loans will not occur in the future. 

 

Allowance for Credit Losses

 

Effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”). The following table summarizes allowance for credit losses at the dates indicated:

 

   

At September 30,

    

At December 31,

  
   

2021

    

2020

    

2020

  
   

(In thousands)

  

Allowance for Credit Losses on Loans

   $ 23,882     $ 24,142     $ 23,854  

Allowance for Credit Losses on Held to Maturity Debt Securities

     7       16       9  

Total Allowance for Credit Losses

   $ 23,889     $ 24,158     $ 23,863  
                         

Allowance for unfunded credit commitments

   $ 101     $ 53     $ 101  

 

Allowance for Credit Losses on Debt Securities Held to Maturity 

 

Management segmented debt securities held to maturity, selected methods to estimate losses for each segment, and measured a loss estimate. Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. The adoption of the ASU resulted in the establishment of an allowance for credit losses related to debt securities held to maturity of $16 thousand. It was reduced to $9 thousand at December 31, 2020, and $7 thousand at September 30, 2021. 

 

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Allowance for Credit Losses on Loans

 

The Company’s allowance for credit losses on loans represents Management’s estimate of forecasted credit losses in the loan portfolio based on the current expected credit loss (CECL) model. In evaluating credit risk for loans, Management measures the 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 credit losses, chargeoffs and recoveries for the periods indicated:

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2021

    

2020

    

2021

    

2020

  
   

($ in thousands)

  

Analysis of the Allowance for Credit Losses

                                

Balance, beginning of period

   $ 23,737     $ 24,529     $ 23,854     $ 19,484  

Adoption of ASU 2016-13

     -       -       -       2,017  

Balance, beginning of period

     23,737       24,529       23,854       21,501  

Provision for credit losses

     2       -       2       4,300  

Loans charged off

                                

Commercial

     (56 )     -       (56 )     (178 )

Consumer installment and other

     (916 )     (872 )     (2,176 )     (3,071 )

Total chargeoffs

     (972 )     (872 )     (2,232 )     (3,249 )

Recoveries of loans previously charged off

                                

Commercial

     80       46       168       282  

Commercial real estate

     705       12       729       37  

Consumer installment and other

     330       427       1,361       1,271  

Total recoveries

     1,115       485       2,258       1,590  

Net loan recoveries (losses)

     143       (387 )     26       (1,659 )

Balance, end of period

   $ 23,882     $ 24,142     $ 23,882     $ 24,142  
                                 

Net loan (recoveries) losses as a percentage of average total loans (annualized)

     (0.05 %)     0.12 %     0.00 %     0.18 %

 

The Company's allowance for credit losses on loans is maintained at a level considered adequate to provide for expected losses based on historical loss rates adjusted for current and expected conditions over a forecast period. These include conditions unique to individual borrowers as well as overall loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing and forecasted economic conditions, or credit protection agreements and other factors. Loans that share common risk characteristics are segregated into pools based on common characteristics, which is primarily determined by loan, borrower, or collateral type. Historical loss rates are determined for each pool. Loans that do not share risk characteristics with other loans in the pools are evaluated individually. See Note 2 to the unaudited consolidated financial statements for additional information.

 

   

Allowance for Credit Losses

  
   

For the Three Months Ended September 30, 2021

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 6,858     $ 6,752     $ 5     $ 57     $ 10,065     $ 23,737  

Provision (reversal)

     10       (754 )     (3 )     (7 )     756       2  

Chargeoffs

     (56 )     -       -       -       (916 )     (972 )

Recoveries

     80       705       -       -       330       1,115  

Total allowance for credit losses

   $ 6,892     $ 6,703     $ 2     $ 50     $ 10,235     $ 23,882  

 

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Allowance for Credit Losses

  
   

For the Nine Months Ended September 30, 2021

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 9,205     $ 5,660     $ 6     $ 47     $ 8,936     $ 23,854  

(Reversal) provision

     (2,425 )     314       (4 )     3       2,114       2  

Chargeoffs

     (56 )     -       -       -       (2,176 )     (2,232 )

Recoveries

     168       729       -       -       1,361       2,258  

Total allowance for credit losses

   $ 6,892     $ 6,703     $ 2     $ 50     $ 10,235     $ 23,882  

 

The allowance for credit losses on consumer loans increased due to a higher than average volume of loans in the first nine months of 2021, which increased the size of the total consumer loan portfolio. The allowance for credit losses on commercial loans decreased in the first nine months of 2021, due to the pay down of a previously individually evaluated loan, resulting in lower future expected losses. Management considers the $23.9 million allowance for credit losses on loans to be adequate as a reserve against current expected credit losses in the loan portfolio as of September 30, 2021.

 

See Note 4 to the unaudited consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, allowance for credit losses on loans, and other real estate owned. 

 

Asset/Liability and Market Risk Management 

 

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk. 

 

Interest Rate Risk 

 

Interest rate risk is a significant market risk affecting the Company. Many factors affect the Company’s exposure to interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Financial instruments may mature or re-price at different times. Financial instruments may re-price at the same time but by different amounts. Short-term and long-term market interest rates may change by different amounts. The timing and amount of cash flows of various financial instruments may change as interest rates change. In addition, the changing levels of interest rates may have an impact on loan demand and demand for various deposit products. 

 

The Company’s earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States government and its agencies, particularly the FOMC. The monetary policies of the FOMC can influence the overall growth of loans, investment securities, and deposits, and the level of interest rates earned on loans, investment securities, and paid for deposits and other borrowings. The nature and impact of future changes in monetary policies are generally not predictable. 

 

Management attempts to manage interest rate risk while enhancing the net interest margin and net interest income. At times, depending on expected increases or decreases in market interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, Management may adjust the Company's interest rate risk position. The Company's results of operations and net portfolio values remain subject to changes in interest rates and to fluctuations in the difference between long and short-term interest rates. 

 

Management monitors the Company’s interest rate risk using a purchased simulation model, which is periodically validated using supervisory guidance issued by the Board of Governors of the Federal Reserve System, SR 11-7 “Guidance on Model Risk Management.” Management measures its exposure to interest rate risk using both a static and dynamic composition of financial instruments. Within the static composition simulation, cash flows are assumed redeployed into like financial instruments at prevailing rates and yields, except cash flows from PPP loans are reinvested into interest-bearing cash. Within the dynamic composition simulation, Management makes assumptions regarding the expected change in the volume of financial instruments. Both simulations are used to measure expected changes in net interest income assuming various levels of change in market interest rates. 

 

The Company’s asset and liability position was “asset sensitive” at September 30, 2021, depending on the interest rate assumptions applied to each simulation model. An “asset sensitive” position results in a slightly larger change in interest income than in interest expense resulting from application of assumed interest rate changes. 

 

- 49 -
 

 

At September 30, 2021, 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%

First Year Change in Net Interest Income

+13.6%
   

Dynamic Simulation (balance sheet composition changes):

  

Assumed Change in Interest Rates Over 1 Year

+1.00%

First Year Change in Net Interest Income

+8.8%

 

Simulation estimates depend on, and will change with, the size and mix of the actual and projected composition of financial instruments at the time of each simulation. 

 

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

 

Market Risk - Equity Markets 

 

Equity price risk can affect the Company. Preferred or common stock holdings, as permitted by banking regulations, can fluctuate in value. Changes in value of preferred or common stock holdings are recognized in the Company's income statement.

 

Fluctuations in the Company's common stock price can impact the Company's financial results in several ways. First, the Company has at times repurchased and retired its common stock; the market price paid to retire the Company's common stock affects the level of the Company's shareholders' equity, cash flows and shares outstanding. Second, the Company's common stock price impacts the number of dilutive equivalent shares used to compute diluted earnings per share. Third, fluctuations in the Company's common stock price can motivate holders of options to purchase Company common stock through the exercise of such options thereby increasing the number of shares outstanding and potentially adding volatility to the book tax provision. Finally, the amount of compensation expense and tax deductions associated with share based compensation fluctuates with changes in and the volatility of the Company's common stock price. 

 

Market Risk - Other  

 

Market values of loan collateral can directly impact the level of loan chargeoffs and the provision for credit 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 establish or increase reserves for credit losses. Other types of market risk, such as foreign currency exchange risk, are not significant in the normal course of the Company's business activities.

 

Liquidity and Funding

 

The objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds as needed by selling debt securities available-for-sale or borrowing in the wholesale markets.

 

In recent years, the Company's deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 97% of funding for average total assets in the quarter ended September 30, 2021 and in the year ended December 31, 2020. The stability of the Company’s funding from customer deposits is in part reliant on the confidence clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate level of liquidity.

 

Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides a substantial secondary source of liquidity. The Company held $5.0 billion in total investment securities at September 30, 2021. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At September 30, 2021, such collateral requirements totaled approximately $899 million.

 

- 50 -
 

 

The Bank funded $249 million in PPP loans in the second quarter 2020 and $106 million in the first six months of 2021 by crediting loan proceeds to the borrower’s deposit accounts. PPP loans, net of deferred fees and costs, were $103 million at September 30, 2021. The Federal Reserve Board established the Paycheck Protection Program Liquidity Facility (“PPPLF”) to provide funding for eligible firms extending PPP loans. Under the PPPLF, the Bank must pledge PPP loans as collateral for PPPLF borrowings. Principal reductions on the pledged PPP loans must immediately result in principal reduction of the PPPLF borrowing. The Bank had no PPLF borrowings at September 30,  2021. 

 

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. Changes in interest rates, most notably rising interest rates or increased consumer spending, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, deposit growth may be used to fund loans or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors. 

 

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

 

The Bank’s dividends paid to the Parent Company, proceeds from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder dividends of $33 million in the nine months ended September 30, 2021 and $44 million in the year ended December 31, 2020 and retire common stock in the amounts of $232 thousand and $16 million, 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 11.6% for the nine months ended September 30, 2021 and 11.3% for the year ended December 31, 2020. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $3.0 million in the nine months ended September 30, 2021 and $2.8 million in the year ended December 31, 2020.

 

The Company paid common dividends totaling $33 million in the nine months ended September 30, 2021 and $44 million in the year ended December 31, 2020, which represent dividends per common share of $1.23 and $1.64, 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 capital to shareholders. The Company repurchased and retired 4 thousand shares valued at $232 thousand in the nine months ended September 30, 2021 and 319 thousand shares valued at $16 million in the year ended December 31, 2020.

 

- 51 -
 

 

The Company's primary capital resource is shareholders' equity, which was $838 million at September 30, 2021 compared with $845 million at December 31, 2020. The Company's ratio of equity to total assets was 11.3% at September 30, 2021 and 12.5% at December 31, 2020. 

 

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, and unanticipated asset devaluations. The Company measures the impact of these scenarios on its earnings and capital. Based on the results of the most recent stress tests, Management is satisfied with the capital condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced earnings or a reduction in capital from unanticipated events and circumstances. 

 

Capital to Risk-Adjusted Assets 

 

The capital ratios for the Company and the Bank under current regulatory capital standards are presented in the tables below, on the dates indicated. For Common Equity Tier I Capital, Tier I Capital and Total Capital, the minimum percentage required for regulatory capital adequacy purposes include a 2.5% “capital conservation buffer.”

 

                           

To Be

  
                           

Well-capitalized

  
                   

Required for

    

Under Prompt

  
   

At September 30, 2021

    

Capital Adequacy

    

Corrective Action

  
   

Company

    

Bank

    

Purposes

    

Regulations (Bank)

  
                                 

Common Equity Tier I Capital

     14.98 %     12.37 %     7.00 %     6.50 %

Tier I Capital

     14.98 %     12.37 %     8.50 %     8.00 %

Total Capital

     15.54 %     13.08 %     10.50 %     10.00 %

Leverage Ratio

     9.13 %     7.52 %     4.00 %     5.00 %

 

                           

To Be

  
                           

Well-capitalized

  
                   

Required for

    

Under Prompt

  
   

At December 31, 2020

    

Capital Adequacy

    

Corrective Action

  
   

Company

    

Bank

    

Purposes

    

Regulations (Bank)

  
                                 

Common Equity Tier I Capital

     16.04 %     13.00 %     7.00 %     6.50 %

Tier I Capital

     16.04 %     13.00 %     8.50 %     8.00 %

Total Capital

     16.68 %     13.80 %     10.50 %     10.00 %

Leverage Ratio

     9.40 %     7.58 %     4.00 %     5.00 %

 

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 replaced the existing incurred loss methodology for certain financial assets. The Company adopted the CECL methodology effective January 1, 2020, which involved an implementing accounting entry to retained earnings on a net-of-tax basis. The adoption of the CECL methodology did not have a material adverse day-one impact to capital ratios and the Company did not adopt the phase in regulatory capital relief. See Note 1 to consolidated financial statements, “Recently Adopted Accounting Standards” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for more information on the CECL methodology. 

 

PPP loans are zero percent risk weighted for regulatory capital purposes; average PPP loans of $145 million did not affect regulatory capital ratios. The Leverage ratio would have been approximately 0.2% higher for the Company and the Bank without PPP loans. To the extent funding of PPP loans is through excess cash balances or PPPLF borrowings, the Leverage ratio is unaffected. However, PPP loans funded by increased non-PPPLF borrowings reduces the leverage ratio. 

 

The Company and the Bank routinely project capital levels by analyzing forecasted earnings, credit quality, shareholder dividends, asset volumes, share repurchase activity, stock option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain regulatory capital levels in excess of the minimum required to be considered well-capitalized under the prompt corrective action framework while continuing to pay quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur. 

 

- 52 -
 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk  

 

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

 

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

 

Item 4. Controls and Procedures 

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of September 30, 2021. 

 

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, 2021 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 

 

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. 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. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its business, financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated.

 

Item 1A. Risk Factors

 

The Company’s Annual Report on Form 10-K for the year ended December 31, 2020 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.

 

[The remainder of this page intentionally left blank]

 

 

- 53 -
 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) None

(b) None

(c) Issuer Purchases of Equity Securities

 

The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of common stock during the quarter ended September 30, 2021.

 

   

2021

  

Period

  

(a) Total Number of
Shares Purchased

    

(b) Average Price Paid
per Share

    

(c) Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

    

(d) Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs

  
   

(In thousands, except price paid)

  

July 1 through July 31

     -     $ -       -       1,750  

August 1 through August 31

     -       -       -       1,750  

September 1 through September 30

     -       -       -       1,750  

Total

     -     $ -       -       1,750  

 

The Company repurchases shares of its common stock in the open market on a discretionary basis from time to time 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 equity incentive plans, and other ongoing requirements.

 

No shares were repurchased during the period from July 1, 2021 through September 30, 2021. A repurchase program was approved by the Board of Directors on July 23, 2020 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2021. The Board of Directors approved and adopted a replacement program on July 22, 2021 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2022.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

- 54 -
 

 

Item 6. Exhibits

 

Exhibit No.   

Description of Exhibit
   

Exhibit 31.1 

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
   

Exhibit 31.2 

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

Exhibit 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 

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.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

Inline XBRL Taxonomy Extension Schema Document
   

Exhibit 101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document
   

Exhibit 101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document
   

Exhibit 101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document
   

Exhibit 101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document
   

Exhibit 104.

The Cover page of Westamerica Bancorporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (contained in Exhibit 101)

 

[The remainder of this page intentionally left blank]

 

 

- 55 -
 

 

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 thereunto duly authorized.

 

WESTAMERICA BANCORPORATION

(Registrant)

 

 

/s/ Jesse Leavitt

  

Jesse Leavitt

 

Senior Vice President and Chief Financial Officer

  

(Principal Financial and Chief Accounting Officer)

  

 

Date: November 3, 2021

 

 

 

- 56 -