0000311094 WESTAMERICA BANCORPORATION false --12-31 FY 2021 7 9 312,562 529,678 0 0 150,000 150,000 26,866 26,866 26,807 26,807 2,801 2,801 1.63 1.64 1.65 0 0 0 0 0 0 0 0 0 1 2 0 0 6 5 5 17,980 0 0 0 3 10 3 3 0 1000000 5 0 0 2019 2018 2017 2016 580 0 Measured using daily price changes of Company's stock over respective expected term of the option and the implied volatility derived from the market prices of the Company's stock and traded options. The number of years that the Company estimates that the options will be outstanding prior to exercise. There were no transfers in to or out of level 3 during the year ended December 31, 2021. The risk-free rate over the expected life based on the US Treasury yield curve in effect at the time of the grant. There were no transfers in to or out of level 3 during the year ended December 31, 2020. 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. 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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

☒

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

 

For the fiscal year ended December 31, 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 the registrant as specified in its charter)

 

California

94-2156203

(State or Other Jurisdiction

(I.R.S. Employer

of Incorporation or Organization)

Identification Number)

 

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

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

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 if whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 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.

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2021 as reported on the NASDAQ Global Select Market, was $885,440,863.36. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

Number of shares outstanding of each of the registrant’s classes of common stock, as of the close of business on February 18, 2022: 26,867,644 Shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement relating to registrant’s Annual Meeting of Shareholders, to be held on April 28, 2022, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III to the extent described therein.

 

 
 

 

 

TABLE OF CONTENTS

 

 

Page

PART I

  

Item 1

Business

 2

Item 1A

Risk Factors

 10

Item 1B

Unresolved Staff Comments

 16

Item 2

Properties

 16

Item 3

Legal Proceedings

 16

Item 4

Mine Safety Disclosures

 16

PART II

  

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 17

Item 6

Selected Financial Data

 20

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 21

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

 49

Item 8

Financial Statements and Supplementary Data

 49

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 94

Item 9A

Controls and Procedures

 94

Item 9B

Other Information

 94

PART III

  

Item 10

Directors, Executive Officers and Corporate Governance

 94

Item 11

Executive Compensation

 94

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 95

Item 13

Certain Relationships, Related Transactions and Director Independence

 95

Item 14

Principal Accountant Fees and Services

 95

PART IV

  

Item 15

Exhibits, Financial Statement Schedules

 95

Signatures

 98

 

 

 

 

 

 

 

 

 

 

 

- 1 -
 
 

 

 

FORWARD-LOOKING STATEMENTS

 

This Report on Form 10-K contains forward-looking statements about Westamerica Bancorporation 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, 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 climate change, 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 and customer responses to the pandemic; and (15) 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 Part II – Item 1A “Risk Factors” of this report and other risk factors discussed elsewhere in this report, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

 

PART I

 

ITEM 1. BUSINESS

 

Westamerica Bancorporation (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Its legal headquarters are located at 1108 Fifth Avenue, San Rafael, California 94901. Its principal administrative offices are located at 4550 Mangels Boulevard, Fairfield, California 94534, its telephone number is (707) 863-6000 and its website address is www.westamerica.com. The Company provides a full range of banking services to individual and commercial customers in Northern and Central California through its subsidiary bank, Westamerica Bank (“WAB” or the “Bank”). The Bank is a California-chartered commercial bank whose deposit are insurance by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable limits. The principal communities served are located in Northern and Central California, from Mendocino, Lake and Nevada Counties in the north to Kern County in the south. The Company’s strategic focus is on the banking needs of small businesses. In addition, the Bank owns 100% of the capital stock of Community Banker Services Corporation (“CBSC”), a company engaged in providing the Company and its subsidiaries with data processing services and other support functions.

 

The Company was incorporated under the laws of the State of California in 1972 as “Independent Bankshares Corporation” pursuant to a plan of reorganization among three previously unaffiliated Northern California banks. The Company operated as a multi-bank holding company until mid-1983, at which time the then six subsidiary banks were merged into a single bank named Westamerica Bank and the name of the holding company was changed to Westamerica Bancorporation.

 

- 2 -
 

 

The Company acquired five banks within its immediate market area during the early to mid 1990’s. In April 1997, the Company acquired ValliCorp Holdings, Inc., parent company of ValliWide Bank, the largest independent bank holding company headquartered in Central California. Under the terms of all of the merger agreements, the Company issued shares of its common stock in exchange for all of the outstanding shares of the acquired institutions. The subsidiary banks acquired were merged with and into WAB. These six aforementioned business combinations were accounted for as poolings-of-interests.

 

During the period 2000 through 2005, the Company acquired three additional banks. These acquisitions were accounted for using the purchase accounting method.

 

On February 6, 2009, Westamerica Bank acquired the banking operations of County Bank (“County”) from the Federal Deposit Insurance Corporation (“FDIC”). On August 20, 2010, Westamerica Bank acquired assets and assumed liabilities of the former Sonoma Valley Bank (“Sonoma”) from the FDIC. The County and Sonoma acquired assets and assumed liabilities were measured at estimated fair values, as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations.

 

At December 31, 2021, the Company had consolidated assets of approximately $7.5 billion, deposits of approximately $6.4 billion and shareholders’ equity of approximately $827 million.

 

The Company assesses and is careful to address potential health, safety, and environmental risks. The Company cares for the environment and works to mitigate pollution and the potential risks related to climate change by implementing practices such as recycling and reusing materials, and controlling energy usage.

 

The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as beneficial ownership reports on Forms 3, 4 and 5 are available through the SEC’s website (https://www.sec.gov). Such documents as well as the Company’s director, officer and employee Code of Conduct and Ethics are also available free of charge from the Company by request to:

 

Westamerica Bancorporation

Corporate Secretary A-2M

Post Office Box 1200

Suisun City, California 94585-1200

 

Human Capital Resources

 

The Company and its subsidiaries employed 640 full-time equivalent staff (or 534 full-time employees and 169 part-term and on-call employees) as of December 31, 2021. The employees are not represented by a collective bargaining unit, and the Company believes its relationship with its employees is good.

 

The Company’s ability to attract and retain employees is a key to its success. Employees receive a comprehensive benefits package that includes paid time off, sick time, company contributions of up to 6% to qualified retirement plans, discretionary profit-sharing retirement plan contributions, and other health and wellness benefits including participation in Company paid or subsidized medical, dental, term-life, accidental death and dismemberment (AD&D), long-term disability, and employee assistance programs. Certain employees participate in one of the Company’s performance-based incentive programs, which may include additional bonus and incentive compensation, company contributions to supplemental retirement plans, and equity-based awards. Certain benefits are subject to eligibility, vesting, and performance requirements. Employee performance is measured at least quarterly and formal performance evaluations are conducted at least annually.

 

The Company’s code of ethics prohibits discrimination or harassment. The Company requires all employees to agree to the code of ethics and participate in harassment prevention training annually.

 

- 3 -
 

 

Supervision and Regulation

 

The following is not intended to be an exhaustive description of the statutes and regulations applicable to the Company’s or the Bank’s business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions. Moreover, major new legislation and other regulatory changes affecting the Company, the Bank, and the financial services industry in general have occurred in the last several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted.

 

Regulation and Supervision of Bank Holding Companies

 

The Company is a bank holding company that is subject to the BHCA. The Company files reports with and is subject to examination and supervision by the Board of Governors of the Federal Reserve System (“FRB”). The FRB also has the authority to examine the Company’s subsidiaries. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and the Bank are subject to examination by, and may be required to file reports with, the Commissioner of the California Department of Financial Protection and Innovation (the “Commissioner”).

 

The FRB has significant supervisory and regulatory authority over the Company and its affiliates. Among other things, the FRB requires the Company to maintain certain levels of capital. See “Capital Standards.” The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. Under the BHCA, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank or bank holding company. Any company seeking to acquire control of or to merge or consolidate with the Company also would be required to obtain the prior approval of the FRB.

 

The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of any class of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. However, a bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be closely related to banking or managing or controlling banks. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity.

 

The FRB generally prohibits a bank holding company from declaring or paying a cash dividend that would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements which might adversely affect a bank holding company’s financial position. Under the FRB policy, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. See the section entitled “Restrictions on Dividends and Other Distributions” for additional restrictions on the ability of the Company and the Bank to pay dividends.

 

Transactions between the Company and the Bank are restricted under the FRB’s Regulation W and Sections 23A and 23B of the Federal Reserve Act. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates: (a) to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and (b) to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates. The Company is considered to be an affiliate of the Bank. A “covered transaction” includes, among other things, a loan or extension of credit to an affiliate; a purchase of securities issued by an affiliate; a purchase of assets from an affiliate, with some exceptions; and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

 

Federal regulations governing bank holding companies and change in bank control (Regulation Y) provide for a streamlined and expedited review process for bank acquisition proposals submitted by well-run bank holding companies. These provisions of Regulation Y are subject to numerous qualifications, limitations and restrictions. In order for a bank holding company to qualify as “well-run,” both it and the insured depository institutions which it controls must meet the “well capitalized” and “well managed” criteria set forth in Regulation Y.

 

The Gramm-Leach-Bliley Act (the “GLBA”), or the Financial Services Act of 1999, repealed provisions of the Glass-Steagall Act, which had prohibited commercial banks and securities firms from affiliating with each other and engaging in each other’s businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated.

 

- 4 -
 

 

The BHCA was also amended by the GLBA to allow new “financial holding companies” (“FHCs”) to offer banking, insurance, securities and other financial products to consumers. Specifically, the GLBA amended section 4 of the BHCA in order to provide for a framework for the engagement in new financial activities. A bank holding company (“BHC”) may elect to become an FHC if all its subsidiary depository institutions are well capitalized and well managed. If these requirements are met, a BHC may file a certification to that effect with the FRB and declare that it elects to become an FHC. After the certification and declaration is filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the FRB to be financial in nature or incidental to such financial activity. BHCs may engage in financial activities without prior notice to the FRB if those activities qualify under the list of permissible activities in section 4(k) of the BHCA. However, notice must be given to the FRB within 30 days after an FHC has commenced one or more of the financial activities. The Company has not elected to become an FHC.

 

Regulation and Supervision of Banks

 

The Bank is a California state-chartered Federal Reserve member bank and its deposits are insured by the FDIC. The Bank is subject to regulation, supervision and regular examination by the California Department of Financial Protection and Innovation and the FRB. The regulations of these agencies affect most aspects of the Bank’s business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of its activities and various other requirements.

 

In addition to federal banking law, the Bank is also subject to applicable provisions of California law. Under California law, the Bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital requirements, deposits and borrowings, and investment and lending activities.

 

In addition, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes limitations on the activities and equity investments of state chartered, federally insured banks. FDICIA also prohibits a state bank from making an investment or engaging in any activity as a principal that is not permissible for a national bank, unless the Bank is adequately capitalized and the FDIC approves the investment or activity after determining that such investment or activity does not pose a significant risk to the deposit insurance fund.

 

On July 21, 2010, financial regulatory reform legislation entitled the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

 

 

●

Centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and (as to banks with $10 billion or more in assets) enforcing compliance with federal consumer financial laws.
 

●

Required large, publicly traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management.
 

●

Made permanent the $250 thousand limit for federal deposit insurance.
 

●

Amended the Electronic Fund Transfer Act ("EFTA") to, among other things, give the FRB the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. While the Company’s assets were less than $10 billion as of December 31, 2021, interchange fees charged by larger institutions may dictate the level of fees smaller institutions will be able to charge to remain competitive.

 

Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees may increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

 

Capital Standards

 

The federal banking agencies have adopted pursuant the Dodd-Frank Act, which are risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions resulting in assets being recognized on the balance sheet as assets, and the extension of credit facilities such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 1250% for assets with relatively higher credit risk, such as certain securitizations. A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items.

 

- 5 -
 

 

The federal banking agencies take into consideration concentrations of credit risk and risks from nontraditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. The federal banking agencies also consider interest rate risk (related to the interest rate sensitivity of an institution’s assets and liabilities, and its off balance sheet financial instruments) in the evaluation of a bank’s capital adequacy.

 

On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations over a transitional period 2015 through 2018. As of December 31, 2021, the Company’s and the Bank’s respective regulatory capital ratios exceeded applicable regulatory minimum capital requirements. See Note 9 to the consolidated financial statements included in this Report for capital ratios of the Company and the Bank, compared to minimum capital requirements and for the Bank the standards for well capitalized depository institutions.

 

In November 2019, the federal banking regulators published final rules implementing community bank leverage ratio, which is a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The Company does not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.

 

See the sections entitled “Capital Resources and Capital to Risk-Adjusted Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

 

Prompt Corrective Action and Other Enforcement Mechanisms

 

FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios.

 

An institution that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.

 

Safety and Soundness Standards

 

FDICIA has implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.

 

Federal banking agencies require banks to maintain adequate valuation allowances for potential credit losses. The Company has an internal staff that continually reviews loan quality and reports to the Board of Directors. This analysis includes a detailed review of the classification and categorization of problem loans, assessment of the overall quality and collectability of the loan portfolio, consideration of loan loss experience, trends in problem loans, concentration of credit risk, and current economic conditions, particularly in the Bank’s market areas. Based on this analysis, Management, with the review and approval of the Board, determines the adequate level of allowance required. The allowance is allocated to different segments of the loan portfolio, but the entire allowance is available for the loan portfolio in its entirety.

 

- 6 -
 

 

Restrictions on Dividends and Other Distributions

 

The Company’s ability to pay dividends to its shareholders is subject to the restrictions set forth in the California General Corporation Law (“CGCL”). The CGCL provides that a corporation may make a distribution to its shareholders if (i) the corporation’s retained earnings equal or exceed the amount of the proposed distribution plus unpaid accrued dividends (if any) on securities with a dividend preference, or (ii) immediately after the dividend, the corporation’s total assets equal or exceed total liabilities plus unpaid accrued dividends (if any) on securities with a dividend preference.

 

The Company’s ability to pay dividends depends in part on the Bank’s ability to pay cash dividends to the Company. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized.

 

In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank’s net income for its last three fiscal years (less any distributions to shareholders during this period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner in an amount not exceeding the greatest of the bank’s retained earnings, the bank’s net income for its last fiscal year or the bank’s net income for its current fiscal year.

 

The federal banking agencies also have the authority to prohibit a depository institution or its holding company from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. The Federal Reserve Board has issued guidance indicating its expectations that a bank holding company will inform and consult with Federal Reserve supervisory staff sufficiently in advance of (i) declaring and paying a dividend that could raise safety and soundness concerns (e.g., declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid); (ii) redeeming or repurchasing regulatory capital instruments when the bank holding company is experiencing financial weaknesses; or (iii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of the quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.

 

Premiums for Deposit Insurance and FDIC Regulation

 

Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level, asset quality and supervisory rating.

 

In July 2010, Congress in the Dodd-Frank Act increased the minimum for the DIF reserve ratio, the ratio of the amount in the fund to insured deposits, from 1.15% to 1.35% and required that the ratio reach that level by September 30, 2020. Further, the Dodd-Frank Act made banks with $10 billion or more in assets responsible for the increase from 1.15% to 1.35%, among other provisions.

 

In August, 2016, the FDIC announced the DIF reserve ratio surpassed the 1.15% reserve ratio target, triggering three major changes:

 

 

(1)

The decline in the range of initial assessment rates for all banks from 5-35 basis points to 3-30 basis points;
 

(2)

The assessment of a quarterly surcharge on large banks equal to an annual rate of 4.5 basis points in addition to regular assessments; and
 

(3)

A revised method to calculate risk-based assessment rates for established small banks (under $1 billion in assets) pursuant to an FDIC final rule issued April, 2016.

 

In September 2018, the DIF reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35% ahead of the September 30, 2020, deadline required under the Dodd-Frank Act. FDIC regulations provide for two changes to deposit insurance assessments upon reaching the minimum: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large banks) will cease; and (2) small banks will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. In January 2019, the Bank, which meets the definition of a “small bank”, was advised by the FDIC its assessment credit to be applied when the reserve ratio is at or above 1.38% was $1.4 million. The Bank received notification from the FDIC during the third quarter 2019 that the reserve ratio exceeded 1.38%, and the FDIC applied the Bank’s assessment credits against the Bank’s second and third quarter 2019 deposit insurance premiums. The Company applied FDIC assessment credits against the Bank’s fourth quarter 2019 deposit insurance premiums and the remaining assessment credits against the Bank’s first quarter 2020 deposit insurance premiums. Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to decline below the statutory minimum of 1.35%. The Federal Deposit Insurance Act (the “FDI Act”) requires that the FDIC’s Board of Directors adopt a restoration plan when the DIF reserve ratio falls below 1.35% or is expected to within 6 months. Under the FDI Act, the restoration plan must restore the reserve ratio to at least 1.35% within 8 years of establishing the Plan, absent extraordinary circumstances. The FDIC established the following Restoration Plan (the “Plan”) on September 15, 2020.

 

- 7 -
 

 

 

•

The FDIC will monitor deposit balance trends, potential losses, and other factors that affect the reserve ratio;
 

•

The FDIC will maintain the current schedule of assessment rates for all insured depository institutions; and
 

•

At least semiannually, the FDIC will update its analysis and projections for the DIF and, if necessary, recommend any modifications to the Plan, such as increasing assessment rates.

 

A significant increase in DIF insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank. The Company cannot provide any assurance as to the effect of any future changes in its deposit insurance premium rates.

 

While the FDIC is not Bank's primary federal regulator, as the insurer of the Bank's deposits, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order poses a serious risk to the DIF. The FDIC also has authority to initiate enforcement actions against any FDIC-insured institution after giving its primary federal regulator the opportunity to take such action, and may seek to terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Finally, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

 

Economic Growth, Regulatory Relief and Consumer Protection Act

 

On May 24, 2018, President Trump signed into law the first major financial services reform bill since the enactment of the Dodd-Frank Act. The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Relief Act”) modifies or eliminates certain requirements on community and regional banks and nonbank financial institutions.  For instance, under the Relief Act and related rule making:

 

 

•

banks that have less than $10 billion in total consolidated assets and total trading assets and trading liabilities of less than five percent of total consolidated assets are exempt from Section 619 of the Dodd-Frank Act, known as the “Volcker Rule”, which prohibits “proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds”; and
 

•

a new “community bank leverage ratio” was adopted, which is applicable to certain banks and bank holding companies with total assets of less than $10 billion (as described above under “Capital Requirements”).

 

Community Reinvestment Act and Fair Lending Laws

 

The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities including merger applications. In September 2020, the FRB released for public comment its proposed rules to modernize CRA regulations. The Company continues to evaluate the impact of any changes to the CRA regulations.

 

 

- 8 -
 

 

Financial Privacy Legislation and Customer Information Security

 

The GLBA, in addition to the previously described changes in permissible nonbanking activities permitted to banks, BHCs and FHCs, also required the federal banking agencies, among other federal regulatory agencies, to adopt regulations governing the privacy of consumer financial information. The Bank is subject to the FRB’s regulations in this area. The federal bank regulatory agencies have established standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

 

Anti-Money Laundering Laws

 

The Bank Secrecy Act, as amended by the USA PATRIOT Act, gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers and mandatory transaction reporting obligations. The Bank Secrecy Act and related regulations require financial institutions to report currency transactions that exceed certain thresholds and transactions determined to be suspicious, establish due diligence requirements for accounts and take certain steps to verify customer identification when accounts are opened. The Bank Secrecy Act also requires financial institutions to develop and maintain a program reasonably designed to ensure and monitor compliance with its requirements, to train employees to comply with and to test the effectiveness of the program. Any failure to meet the requirements of the Bank Secrecy Act can result in the imposition of substantial penalties and in adverse regulatory action against the offending bank.

 

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act, was enacted in January 2021. The AMLA is a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for Bank Secrecy Act compliance; expands enforcement and investigative authority, including increasing available sanctions for certain Bank Secrecy Act violations and instituting Bank Secrecy Act whistleblower incentives and protections.

 

Programs To Mitigate Identity Theft

 

In November 2007, federal banking agencies together with the National Credit Union Administration and Federal Trade Commission adopted regulations under the Fair and Accurate Credit Transactions Act of 2003 to require financial institutions and other creditors to develop and implement a written identity theft prevention program to detect, prevent and mitigate identity theft in connection with certain new and existing accounts. Covered accounts generally include consumer accounts and other accounts that present a reasonably foreseeable risk of identity theft. Each institution’s program must include policies and procedures designed to: (i) identify indicators, or “red flags,” of possible risk of identity theft; (ii) detect the occurrence of red flags; (iii) respond appropriately to red flags that are detected; and (iv) ensure that the program is updated periodically as appropriate to address changing circumstances. The regulations include guidelines that each institution must consider and, to the extent appropriate, include in its program.

 

Pending Legislation

 

Changes to state laws and regulations (including changes in interpretation or enforcement) can affect the operating environment of BHCs and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and the Company’s operating environment in substantial and unpredictable ways. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon its financial condition or results of operations. It is likely, however, that the current level of enforcement and compliance-related activities of federal and state authorities will continue and potentially increase.

 

Competition

 

The Bank’s principal competitors for deposits and loans are major banks and smaller community banks, savings and loan associations and credit unions. To a lesser extent, competitors include thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and certain retail establishments offer investment vehicles that also compete with banks for deposit business. Federal legislation in recent years has encouraged competition between different types of financial institutions and fostered new entrants into the financial services market.

 

- 9 -
 

 

Legislative changes, as well as technological and economic factors, can be expected to have an ongoing impact on competitive conditions within the financial services industry. While the future impact of regulatory and legislative changes cannot be predicted with certainty, the business of banking will remain highly competitive.

 

ITEM 1A. RISK FACTORS

 

Readers and prospective investors in the Company’s securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this Report.

 

The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that Management is not aware of or focused on or that Management currently deems immaterial may also impair the Company’s business operations. This Report is qualified in its entirety by these risk factors.

 

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the company’s securities could decline significantly, and investors could lose all or part of their investment in the Company’s common stock.

 

The COVID-19 Coronavirus Pandemic Will Have an Uncertain Impact on the Company's Financial Condition and Results of Operations

 

The COVID-19 coronavirus pandemic caused escalating infections in the United States beginning in the first quarter of 2020 that continued through the fourth quarter of 2021 and may continue for some time. The spread of the outbreak has disrupted the United States economy including banking and other financial activity in the market areas in which the Company and the Bank operate. 

 

The Bank's deposits are exclusively sourced within California and its loans are primarily to borrowers domiciled within California. Demand for the Bank's products and services, such as loans and deposits, could be affected as a result of the decline in economic activity within the state. 

 

The Bank's investment portfolio contains bonds for which the source of repayment is domestic mortgage repayments, domestic municipalities throughout the United States, and domestic and global corporations. The value of the Bank's investment portfolio may decline if, for example, the general economy deteriorates, inflation increases, credit ratings decline, the issuers’ financial condition deteriorates or the liquidity for debt securities declines.

 

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, all of which may negatively impact net interest income. 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".

 

In response to the pandemic, the United States federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") on March 27, 2020, providing an estimated $2 trillion fiscal stimulus to the United States economy. The CARES Act established the Paycheck Protection Program (PPP) with $350 billion to provide businesses with federally guaranteed loans to support payroll and certain operating expenses. The loans were guaranteed by the United States Small Business Administration (“SBA”) and funded through banks. During 2020 and the first six months of 2021, the Bank processed government guaranteed PPP loans which meaningfully increased interest-earning assets and related interest and fee income. PPP loans, net of deferred fees and costs, were $46 million at December 31, 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 continues to work with loan customers requesting deferral of loan payments due to economic weakness caused by the pandemic. At December 31, 2021, loans granted loan deferrals totaled $84 thousand, all of which were consumer automobile loans.

 

- 10 -
 

 

On December 27, 2020, the United States federal government enacted the Consolidated Appropriations Act, 2020 (CAA), which provided $900 billion in additional federal stimulus. Among other provisions, the CAA provided $284 billion for the PPP program and allowed businesses to apply for a second PPP loan.

 

The extent of the spread of the coronavirus, its ultimate containment and its continuing effects on the economy and the Company are uncertain at this time. The effectiveness of the Federal Reserve Board's monetary policies and the federal government's fiscal policies in stimulating the United States economy is uncertain at this time.

 

The Company's net interest margin and non-interest income could decline and credit-related losses could increase for an uncertain period given the decline in economic activity occurring due to the coronavirus. The amount of impact on the Company's financial results is uncertain.

 

In addition, the Company's future success and profitability substantially depends upon the skills and experience of its executive officers and directors, many of whom have held positions with the Company for many years. The unanticipated loss or unavailability of key employees due to the outbreak could adversely affect the Company's ability to operate its business or execute its business strategy.

 

There are no comparable recent events that provide guidance as to the effect the spread of the COVID-19 pandemic may have, and, as a result, the Company cannot accurately predict the full extent of the impacts on the Company’s business, operations or the economy as a whole. However, the effects could have a material impact on the Company’s results of operations and heighten many of the other risks factors described in this Report. Any one or a combination of the factors identified above, or other factors, could materially adversely affect the Company's business, financial condition, results of operations and prospects.

 

Declines in Oil Prices Could Have an Impact on the Company's Financial Condition and Results of Operations

 

Declines in oil prices could negatively affect the financial results of industrial sector-based and energy sector-based corporate issuers of corporate bonds owned by the Company. The Company’s corporate debt securities include 14 issuers in industrial and energy sectors with aggregate amortized cost of $308.4 million and fair value of $315.8 million at December 31, 2021. These securities continue to be investment grade rated by a major rating agency.

 

The Company’s participation in the SBA PPP loan program exposes it to risks of noncompliance with the PPP and litigation, which could have a material adverse impact on the Company’s business, financial condition and results of operations.

 

The Company is a participating lender in the PPP. The SBA guarantees loans funded under the PPP. Loan proceeds used for eligible payroll and certain other operating costs are forgiven with repayment of loan principal and accrued interest made by the SBA. There is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to potential risks relating to noncompliance with the PPP. Any financial liability, litigation costs or reputational damage related to the PPP or related litigation or regulatory enforcement actions could have a material adverse impact on the Company’s business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If the SBA identifies a deficiency, it could deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

 

Climate Change and the Transition to Renewable Energy and a Net Zero Emissions Economy Pose Operational, Commercial and Regulatory Risks.

 

Climate change may increase the frequency or severity of extreme weather events, and if the Bank is not adequately resilient to deal with acute climate events, its operations may be impacted. Extreme weather events could also impact the activities of its customers or third-party vendors. The physical commodities and assets underlying some of its markets or investments may also be impacted by climate change.

 

In addition, the transition to renewable energy and a net zero emissions economy involves changes to consumer and institutional preferences for energy consumption,and other products and services, and the possible failure of its services to facilitate the needs of customers during the transition to renewable energy and changes in customer preferences could adversely impact its business and revenues. Changing preferences could also have an adverse impact on the operations or financial condition of its customers, which could result in reduced revenues from those customers. The Bank is also subject to risks relating to new or heightened climate change-related regulations or legislation, which could impact its customers.

 

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The risks associated with climate change and the transition to renewable energy and a net zero emissions economy continue to evolve rapidly, and climate change-related risks may change or increase over time.

 

Market and Interest Rate Risk

 

Changes in interest rates could reduce income and cash flow.

 

The Company’s income and cash flow depend to a great extent on the difference between the interest earned on loans and investment securities and the interest paid on deposits and other borrowings, and the Company’s success in competing for loans and deposits. The Company cannot control or prevent changes in the level of interest rates which fluctuate in response to general economic conditions, the policies of various governmental and regulatory agencies, in particular, the FRB’s FOMC, and pricing practices of the Company’s competitors. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and other borrowings, and the rates received on loans and investment securities and paid on deposits and other liabilities. The discussion in this Report under “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset, Liability and Market Risk Management” and “- Liquidity and Funding” and “Item 7A Quantitative and Qualitative Disclosures About Market Risk” is incorporated by reference in this paragraph.

 

Changes in capital market conditions could reduce asset valuations.

 

Capital market conditions, including interest rates, liquidity, investor confidence, bond issuer credit worthiness, perceived counter-party risk, the supply of and demand for financial instruments, the financial strength of market participants, and other factors can materially impact the value of the Company’s assets. An impairment in the value of the Company’s assets could result in asset write-downs, reducing the Company’s asset values, earnings, and equity.

 

The value of securities in the Company’s investment securities portfolio may be negatively affected by disruptions in securities markets.

 

The market for some of the investment securities held in the Company’s portfolio can be extremely volatile. Volatile market conditions may detrimentally affect the value of these securities, such as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that the declines in market value will not result in other than temporary impairments of these assets, which would lead to loss recognition that could have a material adverse effect on the Company’s net income and capital levels.

 

The weakness of other financial institutions could adversely affect the Company.

 

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of default of the Company’s counterparty or client. In addition, the Company’s credit risk may be increased when the collateral the Company holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the secured obligation. There is no assurance that any such losses would not materially and adversely affect the Company’s results of operations or earnings.

 

Shares of Company common stock eligible for future sale or grant of stock options and other equity awards could have a dilutive effect on the market for Company common stock and could adversely affect the market price.

 

The Articles of Incorporation of the Company authorize the issuance of 150 million shares of common stock (and two additional classes of 1 million shares each, denominated “Class B Common Stock” and “Preferred Stock”, respectively) of which approximately 26.9 million shares of common stock were outstanding at December 31, 2021. Pursuant to its stock option plans, at December 31, 2021, the Company had outstanding options for 793 thousand shares of common stock, of which 446 thousand were currently exercisable. As of December 31, 2021, 967 thousand shares of Company common stock remained available for grants under the Company’s equity incentive plans. Sales of substantial amounts of Company common stock in the public market could adversely affect the market price of its common stock.

 

- 12 -
 

 

The Company’s payment of dividends on common stock could be eliminated or reduced.

 

Holders of the Company’s common stock are entitled to receive dividends only when, as, and if declared by the Company’s Board of Directors. The Company’s ability to pay dividends is limited by banking and corporate laws, and depends, among other things, on the Company’s regulatory capital levels and earnings prospectus, as well as the Bank’s ability to pay cash dividends to the Company. Although the Company has historically paid cash dividends on the Company’s common stock, the Company is not required to do so and the Company’s Board of Directors could reduce or eliminate the Company’s common stock dividend in the future.

 

The Company could repurchase shares of its common stock at price levels considered excessive.

 

The Company repurchases and retires its common stock in accordance with Board of Directors-approved share repurchase programs. At December 31, 2021, 1.75 million shares remained available to repurchase under such plans. The Company has been active in repurchasing and retiring shares of its common stock when alternative uses of excess capital, such as acquisitions, have been limited. The Company could repurchase shares of its common stock at price levels considered excessive, thereby spending more cash on such repurchases as deemed reasonable and effectively retiring fewer shares than would be retired if repurchases were effected at lower prices.

 

Risks Related to the Nature and Geographical Location of the Company’s Business

 

The Company invests in loans that contain inherent credit risks that may cause the Company to incur losses.

 

The risk that borrowers may not pay interest or repay their loans as agreed is an inherent risk of the banking business. The Company strives to mitigate this risk by adhering to sound and proven underwriting practices, managed by experienced and knowledgeable credit professionals. Nonetheless, the Company may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as reserves. The Company can provide no assurance that the credit quality of the loan portfolio will not deteriorate in the future and that such deterioration will not adversely affect the Company or its results of operations.

 

The Company’s operations are concentrated geographically in California, and poor economic conditions may cause the Company to incur losses.

 

Substantially all of the Company’s business is located in California. A portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2021, real estate served as the principal source of collateral with respect to approximately 53% of the Company’s loan portfolio. The Company’s financial condition and operating results will be subject to changes in economic conditions in California. The California economy was severely affected by the recessionary period of 2008 to 2009. Much of the California real estate market experienced a decline in values of varying degrees. This decline had an adverse impact on the business of some of the Company’s borrowers and on the value of the collateral for many of the Company’s loans. Generally, the counties surrounding and near San Francisco Bay recovered more soundly from the recent recession than counties in the California “Central Valley,” from Sacramento in the north to Bakersfield in the south, where man of the Bank’s customers are located . Approximately 20% of the Company’s loans were to borrowers in the California “Central Valley” as of December 31, 2021. Economic conditions in California’s diverse geographic markets can be vastly different and are subject to various uncertainties, including the condition of the construction and real estate sectors, the effect of drought on the agricultural sector and its infrastructure, and the California state and municipal governments’ budgetary and fiscal conditions. The Company can provide no assurance that conditions in any sector or geographic market of the California economy will not deteriorate in the future and that such deterioration will not adversely affect the Company.

 

The markets in which the Company operates are subject to the risk of earthquakes, fires, storms and other natural disasters.

 

All of the properties of the Company are located in California. Also, most of the real and personal properties which currently secure a majority of the Company’s loans are located in California. Further, the Company invests in securities issued by companies and municipalities operating throughout the United States, and in mortgage-backed securities collateralized by real property located throughout the United States. California and other regions of the United States are prone to earthquakes, brush and wildfires, flooding, drought and other natural disasters. In addition to possibly sustaining uninsured damage to its own properties, if there is a major earthquake, flood, drought, fire or other natural disaster, the Company faces the risk that many of its debtors may experience uninsured property losses, or sustained business or employment interruption and/or loss which may materially impair their ability to meet the terms of their debt obligations. A major earthquake, flood, prolonged drought, fire or other natural disaster in California or other regions of the United States could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

 

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Adverse changes in general business or economic conditions, including inflation, could have a material adverse effect on the Company’s financial condition and results of operations.

 

A sustained or continuing weakness or weakening in business and economic conditions generally or specifically in the principal markets in which the Company does business could have one or more of the following adverse impacts on the Company’s business:

 

 

●

a decrease in the demand for loans and other products and services offered by the Company;
 

●

an increase or decrease in the usage of unfunded credit commitments;
 

●

an increase or decrease in the amount of deposits;
 

●

a decrease in non-depository funding available to the Company;
 

●

an impairment of certain intangible assets, including goodwill;
 

●

an increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Company, which could result in a higher level of nonperforming assets, net charge-offs, provision for credit losses, reduced interest revenue and cash flows, and valuation adjustments on assets;
 

●

an impairment in the value of investment securities;
 

●

an impairment in the value of life insurance policies owned by the Company;
 

●

an impairment in the value of real estate owned by the Company; and
 

●

an increase in operating costs

 

The 2008 - 2009 financial crisis led to the failure or merger of a number of financial institutions. Financial institution failures can result in further losses as a consequence of defaults on securities issued by them and defaults under contracts entered into with such entities as counterparties. The failure of institutions with FDIC insured deposits can cause the DIF reserve ratio to decline, resulting in increased deposit insurance assessments on surviving FDIC insured institutions. Weak economic conditions can significantly weaken the strength and liquidity of financial institutions.

 

The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where the Company operates, in the State of California and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, healthy labor markets, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, high rates of unemployment, deflation, pandemics, declines in business activity or consumer, investor or business confidence; limitations on the availability of or increases in the cost of credit and capital; increases in inflation; natural disasters; or a combination of these or other factors.

 

Such business conditions could adversely affect the credit quality of the Company’s loans, the demand for loans, loan volumes and related revenue, securities valuations, amounts of deposits, availability of funding, results of operations and financial condition.

 

Regulatory Risks

 

Restrictions on dividends and other distributions could limit amounts payable to the Company.

 

As a holding company, a substantial portion of the Company’s cash flow typically comes from dividends paid by the Bank. Various statutory provisions restrict the amount of dividends the Company’s subsidiaries can pay to the Company without regulatory approval. A reduction in subsidiary dividends paid to the Company could limit the capacity of the Company to pay dividends. In addition, if any of the Company’s subsidiaries were to liquidate, that subsidiary’s creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before the Company, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary.

 

 

 

 

- 14 -
 

 

Adverse effects of changes in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect the Company.

 

The Company is subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of the Company’s customers and not for the benefit of investors. In the past, the Company’s business has been materially affected by these regulations.

 

Laws, regulations or policies, including accounting standards and interpretations currently affecting the Company and the Company’s subsidiaries, may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, the Company’s business may be adversely affected by any future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement including future acts of terrorism, major U.S. corporate bankruptcies and reports of accounting irregularities at U.S. public companies.

 

Additionally, the Company’s business is affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States of America. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in U.S. government securities, (b) changing the discount rates of borrowings by depository institutions, (c) changing interest rates paid on balances financial institutions deposit with the FRB, and (d) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on the Company’s business, results of operations and financial condition. Under long- standing policy of the FRB, a BHC is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, the Company may be required to commit financial and other resources to its subsidiary bank in circumstances where the Company might not otherwise do so.

 

Federal and state governments could pass legislation detrimental to the Company’s performance.

 

As an example, the Company could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank's borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Company could experience higher credit losses because of federal or state legislation or regulatory action that limits or delays the Bank's ability to foreclose on property or other collateral or makes foreclosure less economically feasible. Federal, state and local governments could pass tax legislation causing the Company to pay higher levels of taxes.

 

The FDIC insures deposits at insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. The FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund.

 

The behavior of depositors in regard to the level of FDIC insurance could cause the Bank’s existing customers to reduce the amount of deposits held at the Bank, and could cause new customers to open deposit accounts at the Bank. The level and composition of the Bank's deposit portfolio directly impacts the Bank's funding cost and net interest margin.

 

Systems, Accounting and Internal Control Risks

 

The accuracy of the Company’s judgments and estimates about financial and accounting matters will impact operating results and financial condition.

 

The discussion under “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in this Report and the information referred to in that discussion is incorporated by reference in this paragraph. The Company makes certain estimates and judgments in preparing its financial statements. For example, the Company maintains a reserve for potential loan defaults and non-performance. There is no precise method of predicting loans losses and determining the adequacy of the reserve requires the Company’s management to make a number of estimates and judgments. If the estimates or judgments prove to be incorrect, the Company could be required to increase its provisions for credit losses, which could reduce its income or could cause it to incur operating losses in the future. Therefore, the quality and accuracy of management’s estimates and judgments will have an impact on the Company’s operating results and financial condition.

 

 

- 15 -
 

 

The Company’s information systems may experience an interruption or breach in security.

 

The Company relies heavily on communications and information systems, including those of third party vendors and other service providers, to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s data processing, accounting, customer relationship management and other systems. Communication and information systems failures can result from a variety of risks including, but not limited to, events that are wholly or partially out of the Company’s control, such as telecommunication line integrity, weather, terrorist acts, natural disasters, accidental disasters, unauthorized breaches of security systems, energy delivery systems, cyber attacks, and other events. Although the Company devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Company’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to the Company and its customers, there is no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately corrected by the Company or its vendors. The occurrence of any such failures, interruptions or security breaches could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

 

The Company’s controls and procedures may fail or be circumvented.

 

Management regularly reviews and updates the Company’s internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. The Company maintains controls and procedures to mitigate against risks such as processing system failures and errors, and customer or employee fraud, and maintains insurance coverage for certain of these risks. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Events could occur which are not prevented or detected by the Company’s internal controls or are not insured against or are in excess of the Company’s insurance limits or insurance underwriters’ financial capacity. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2. PROPERTIES

 

Branch Offices and Facilities

 

Westamerica Bank is engaged in the banking business through 78 branch offices in 21 counties in Northern and Central California. WAB believes all of its offices are constructed and equipped to meet prescribed security requirements.

 

The Company owns 28 banking office locations and one centralized administrative service center facility and leases 55 facilities. Most of the leases contain renewal options and provisions for rental increases, principally for changes in the cost of living index, and for changes in other operating costs such as property taxes and maintenance.

 

ITEM 3. 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 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

- 16 -
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is traded on the NASDAQ Stock Market (“NASDAQ”) under the symbol “WABC”. As of January 31, 2022, there were approximately 5,000 shareholders of record of the Company’s common stock.

 

The Company has paid cash dividends on its common stock in every quarter since its formation in 1972. See Item 8, Financial Statements and Supplementary Data, Note 19 to the consolidated financial statements for recent quarterly dividend information. It is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, cash balances, financial condition and capital requirements of the Company and its subsidiaries as well as policies of the FRB pursuant to the BHCA. See Item 1, “Business - Supervision and Regulation.”

 

The notes to the consolidated financial statements included in this Report contain additional information regarding the Company’s capital levels, capital structure, regulations affecting subsidiary bank dividends paid to the Company, the Company’s earnings, financial condition and cash flows, and cash dividends declared and paid on common stock.

 

Stock performance

 

The following chart compares the cumulative return on the Company’s stock during the ten years ended December 31, 2021 with the cumulative return on the S&P 500 composite stock index and NASDAQ’S Bank Index. The comparison assumes $100 invested in each on December 31, 2011 and reinvestment of all dividends.

 

perf10.jpg

 

   

December 31,

  
   

2011

    

2012

    

2013

    

2014

    

2015

    

2016

  

Westamerica Bancorporation (WABC)

   $ 100.00     $ 100.23     $ 137.08     $ 122.75     $ 121.03     $ 167.97  

S&P 500 (SPX)

     100.00       115.80       153.22       174.01       176.34       197.39  

NASDAQ Bank Index (CBNK)

     100.00       118.23       167.68       175.82       191.19       263.47  

 

- 17 -
 

 

   

December 31,

  
   

2017

    

2018

    

2019

    

2020

    

2021

  

Westamerica Bancorporation (WABC)

   $ 163.51     $ 156.98     $ 196.09     $ 164.54     $ 176.74  

S&P 500 (SPX)

     240.40       229.75       301.84       357.60       460.07  

NASDAQ Bank Index (CBNK)

     277.52       232.25       288.47       266.79       381.08  

 

The following chart compares the cumulative return on the Company’s stock during the five years ended December 31, 2021 with the cumulative return on the S&P 500 composite stock index and NASDAQ’S Bank Index. The comparison assumes $100 invested in each on December 31, 2016 and reinvestment of all dividends.

 

perf5.jpg

 

 

   

December 31,

  
   

2016

    

2017

    

2018

    

2019

    

2020

    

2021

  

Westamerica Bancorporation (WABC)

   $ 100.00     $ 97.34     $ 93.46     $ 116.74     $ 97.96     $ 105.22  

S&P 500 (SPX)

     100.00       121.79       116.39       152.91       181.16       233.08  

NASDAQ Bank Index (CBNK)

     100.00       105.33       88.15       109.49       101.26       144.64  

 

 

 

 

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- 18 -
 

 

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 December 31, 2021 (in thousands, except per share data).

 

   

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 exercise price)

  

October 1 through October 31

     -     $ -       -       1,750  

November 1 through November 30

     -       -       -       1,750  

December 1 through December 31

     -       -       -       1,750  

Total

     -     $ -       -       1,750  

 

 

The Company repurchases shares of its common stock in the open market to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares under stock option plans, and other ongoing requirements. No shares were repurchased during the period from October 1, 2021 through December 31, 2021. The current repurchase program was approved by the Board of Directors 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.

 

 

 

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- 19 -
 

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following financial information for the five years ended December 31, 2021 has been derived from the Company’s audited consolidated financial statements. This information should be read in conjunction with those statements, notes and other information included elsewhere herein.

 

WESTAMERICA BANCORPORATION

  

FINANCIAL SUMMARY

  
                                         
   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

    

2018

    

2017

  
   

(In thousands, except per share data and ratios)

  

Interest and loan fee income

   $ 173,443     $ 165,856     $ 158,682     $ 151,723     $ 138,312  

Interest expense

     1,955       1,824       1,888       1,959       1,900  

Net interest and loan fee income

     171,488       164,032       156,794       149,764       136,412  

Provision (reversal) for credit losses

     -       4,300       -       -       (1,900 )

Noninterest income:

                                        

Gains on sales of property

     -       3,536       -       216       332  

Securities gains (losses)

     34       71       217       (52 )     7,955  

Other noninterest income

     43,311       42,030       47,191       47,985       48,341  

Total noninterest income

     43,345       45,637       47,408       48,149       56,628  

Noninterest expense:

                                        

Loss contingency

     -       -       553       3,500       5,542  

Other noninterest expense

     97,806       98,566       98,433       103,416       102,226  

Total noninterest expense

     97,806       98,566       98,986       106,916       107,768  

Income before income taxes

     117,027       106,803       105,216       90,997       87,172  

Income tax provision

     30,518       26,390       24,827       19,433       37,147  

Net income

   $ 86,509     $ 80,413     $ 80,389     $ 71,564     $ 50,025  
                                         

Average common shares outstanding

     26,855       26,942       26,956       26,649       26,291  

Average diluted common shares outstanding

     26,870       26,960       27,006       26,756       26,419  

Common shares outstanding at December 31,

     26,866       26,807       27,062       26,730       26,425  
                                         

Per common share:

                                        

Basic earnings

   $ 3.22     $ 2.98     $ 2.98     $ 2.69     $ 1.90  

Diluted earnings

     3.22       2.98       2.98       2.67       1.89  

Book value at December 31,

     30.79       31.51       27.03       23.03       22.34  
                                         

Financial ratios:

                                        

Return on assets

     1.23 %     1.30 %     1.44 %     1.27 %     0.92 %

Return on common equity

     11.52 %     11.30 %     11.90 %     11.35 %     8.39 %

Net interest margin (FTE)(1)

     2.62 %     2.91 %     3.11 %     2.98 %     2.95 %

Net loan losses to average loans

     0.03 %     0.16 %     0.16 %     0.14 %     0.08 %

Efficiency ratio(2)

     45.0 %     46.2 %     47.4 %     52.5 %     52.5 %

Equity to assets

     11.09 %     12.52 %     13.02 %     11.05 %     10.71 %
                                         

Period end balances:

                                        

Assets

   $ 7,461,026     $ 6,747,931     $ 5,619,555     $ 5,568,526     $ 5,513,046  

Loans

     1,068,126       1,256,243       1,126,664       1,207,202       1,287,982  

Allowance for credit losses

     23,514       23,854       19,484       21,351       23,009  

Investment securities

     4,945,258       4,578,783       3,816,918       3,641,026       3,352,371  

Deposits

     6,413,956       5,687,979       4,812,621       4,866,839       4,827,613  

Identifiable intangible assets and goodwill

     122,508       122,777       123,064       123,602       125,523  

Short-term borrowed funds

     146,246       102,545       30,928       51,247       58,471  

Shareholders' equity

     827,102       844,809       731,417       615,591       590,239  
                                         

Capital ratios at period end:

                                        

Total risk based capital

     15.47 %     16.68 %     16.83 %     17.03 %     16.17 %

Tangible equity to tangible assets

     9.60 %     10.90 %     11.07 %     9.04 %     8.63 %
                                         

Dividends paid per common share

   $ 1.65     $ 1.64     $ 1.63     $ 1.60     $ 1.57  

Common dividend payout ratio

     51 %     55 %     55 %     60 %     83 %

 

(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).

 

- 20 -
 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion addresses information pertaining to the financial condition and results of operations of Westamerica Bancorporation and subsidiaries (the “Company”) that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes found on pages 51 through 90, as well as with the other information presented throughout this Report.

 

Critical Accounting Policies

 

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

 

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for credit losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for credit losses and purchased loans is included in the “Loan Portfolio Credit Risk” discussion below. Certain amounts in prior periods have been reclassified to conform to current presentation.

 

Financial Overview

 

Westamerica Bancorporation and subsidiaries’ (collectively, the “Company”) reported net income of $86.5 million or $3.22 diluted earnings per common share in 2021 compared with net income of $80.4 million or $2.98 diluted earnings per common share in 2020. 2021 results included “make-whole” interest income on corporate bonds redeemed prior to maturity of $2.8 million. 2020 results 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, and $3. 5 million gain on sales of a closed branch building

 

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 who requested deferral of loan payments due to economic weakness caused by the pandemic. At December 31, 2021, loans granted deferrals under the CARES Act included $84 thousand, all of which were consumer automobile loans.

 

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”.

 

 

- 21 -
 

 

The extent of the spread of the coronavirus and its ultimate containment are uncertain at this time. The effectiveness of the Federal Reserve Bank’s monetary policies and the federal government’s fiscal policies in stimulating the United States economy is uncertain at this time. Management expects the Company’s net interest margin and non-interest income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to the coronavirus. The amount of impact on the Company’s financial results is uncertain.

 

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 the Consolidated Financial Statements below) are fundamental to understanding the Company’s results of operations and financial condition. The Company adopted the following new accounting guidance:

 

FASB Accounting Standards Update (“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.

 

FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changed estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB replaced the incurred loss model with the current expected credit loss (CECL) model, which accelerated recognition of credit losses. Additionally, credit losses relating to debt securities available-for-sale are recorded through an allowance for credit losses under the new standard. The Company is also required to provide additional disclosures related to the financial assets within the scope of the new standard.

 

The Company adopted the ASU provisions on January 1, 2020. Management evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management measured historical loss rates for each portfolio segment. Management also 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 adjustment to the allowance for credit losses was recorded through an offsetting after-tax adjustment to shareholders’ equity. The implementing entry increased allowance for credit losses on loans by $2,017 thousand, reduced allowance for unfunded credit commitments by $2,107 thousand and increased retained earnings by $52 thousand.

 

 

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- 22 -
 

 

Net Income

 

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

 

   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

($ in thousands, except per share data)

  

Net interest and loan fee income

   $ 171,488     $ 164,032     $ 156,794  

FTE adjustment

     2,663       3,650       4,612  

Net interest and loan fee income (FTE)

     174,151       167,682       161,406  

Provision for credit losses

     -       (4,300 )     -  

Noninterest income

     43,345       45,637       47,408  

Noninterest expense

     (97,806 )     (98,566 )     (98,986 )

Income before income taxes (FTE)

     119,690       110,453       109,828  

Income taxes (FTE)

     (33,181 )     (30,040 )     (29,439 )

Net income

   $ 86,509     $ 80,413     $ 80,389  
                         

Net income per average fully-diluted common share

   $ 3.22     $ 2.98     $ 2.98  

Net income as a percentage of average shareholders' equity

     11.52 %     11.30 %     11.90 %

Net income as a percentage of average total assets

     1.23 %     1.30 %     1.44 %

 

Comparing 2021 with 2020, net income increased $6.1 million. Net interest and loan fee (FTE) income increased $6.5 million due to higher average balances of investments, higher average balances of interest-bearing cash and higher yield on PPP loans, partially offset by lower yield on investments, interest-earning cash and loans excluding PPP loans. Results for 2021 included “make-whole” interest income on corporate bonds redeemed prior to maturity of $2.8 million. The Company provided no provision for credit losses in 2021, reflecting Management's evaluation of credit risk over the remaining life of loans and bonds. Results for 2020 included 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 decreased $2.3 million in 2021 compared with 2020 primarily because 2020 included $3.5 million in gains on sales of a closed branch building and a $603 thousand recovery on previously charged off loans. Fee income from merchant card processing, debit cards and trust accounts increased in 2021 compared with 2020. In 2021 noninterest expense decreased $760 thousand compared with 2020 due to lower salaries and related benefits, partially offset by higher professional fees and other noninterest expense. The tax rate (FTE) was 27.7% for and 27.2% for 2020.

 

Net income remained at the same level in 2020 and 2019. Net interest and loan fee (FTE) income increased $6.3 million due to higher average balances of investments and average balances of $151 million of PPP loans, partially offset by lower yield on interest-bearing earning assets and lower average balances of other loans. Results for 2020 include a provision of credit losses of $4.3 million, representing Management 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 decreased $1.8 million compared with 2019 due to lower income from activity based fees due to reduced economic activity related to the COVID-19 pandemic. Additionally, the results for 2019 included a life insurance gain of $433 thousand. The decrease in noninterest income from 2019 to 2020 was partially offset by $3.5 million in gains on sales of a closed branch building in 2020. In 2020 noninterest expense decreased $420 thousand compared with 2019 due to lower salaries, occupancy and equipment expenses, and lower amortization of intangible assets, and because the results for 2019 included $553 thousand of loss contingency. The decrease was partially offset by higher FDIC assessments (included in “other noninterest expense”) in 2020 because FDIC assessments in 2019 were reduced by application of the Bank’s FDIC assessment credit described in Part 1, Item 1, “Premiums for Deposit Insurance and FDIC Regulation”. The effective tax rate (FTE) was 27.2% for 2020 compared with 26.8% for 2019.

 

 

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- 23 -
 

 

Net Interest and Loan Fee Income (FTE)

 

The Company's primary source of revenue is net interest income, or the difference between interest income earned on loans and investment securities and interest expense paid on interest-bearing deposits and other borrowings.

 

Components of Net Interest and Loan Fee Income (FTE)

 

   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

($ in thousands)

  

Interest and loan fee income

   $ 173,443     $ 165,856     $ 158,682  

FTE adjustment

     2,663       3,650       4,612  

Net interest and loan fee income (FTE)

     176,106       169,506       163,294  

Interest expense

     (1,955 )     (1,824 )     (1,888 )

Net interest and loan fee income (FTE)

   $ 174,151     $ 167,682     $ 161,406  
                         

Net interest margin (FTE)

     2.62 %     2.91 %     3.11 %

 

Net interest and loan fee income (FTE) increased $6.5 million in 2021 compared with 2020 due to higher average balances of investments (up $431 million), higher average balances of interest-bearing cash (up $486 million) and higher yield on PPP loans (up 0.71%), partially offset by lower yield on investments (down 0.20%), interest-earning cash (down 0.18%) and loans excluding PPP loans. Results for 2021 included “make-whole” interest income on corporate bonds redeemed prior to maturity of $2.8 million.

 

Net interest and loan fee income (FTE) increased $6.3 million in 2020 compared with 2019 due to higher average balances of investments (up $445 million) and average balances of $151 million of PPP loans, partially offset by lower yield on interest-bearing earning assets (down 0.20%) and lower average balances of other loans (down $74 million).

 

The net interest margin (FTE) was 2.62% in 2021, 2.91% in 2020 and 3.11% in 2019. The yield on earning assets (FTE) was 2.65% in 2021, 2.94% in 2020 and 3.14% in 2019. Market interest rates declined in 2020 compared with 2019. Additionally, interest-bearing cash balances, which carry lower yield than loans and investments, made up a higher percentage of total earning assets in 2021 than in prior periods. (12.9% in 2021 compared with 6.4% in 2020 and 6.3% in 2019).

 

The Company’s funding costs were 0.03% in 2021, 2020 and 2019. Average balances of time deposits in 2021 declined $11 million from 2020. Average balances of lower-cost checking and savings deposits grew 16% from 2020 to 2021. Average balances of checking and saving deposits accounted for 97.5% of average total deposits in 2021 compared with 96.9% in 2020 and 96.2% in 2019.

 

Net Interest Margin (FTE)

 

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

 

   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
                         

Yield on earning assets (FTE)

     2.65 %     2.94 %     3.14 %

Rate paid on interest-bearing liabilities

     0.06 %     0.06 %     0.07 %

Net interest spread (FTE)

     2.59 %     2.88 %     3.07 %

Impact of noninterest-bearing demand deposits

     0.03 %     0.03 %     0.04 %

Net interest margin (FTE)

     2.62 %     2.91 %     3.11 %

 

 

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Summary of Average Balances, Yields/Rates and Interest Differential

 

The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates. Average loan balances include nonperforming loans. Interest income includes reversal of previously accrued interest on loans placed on non-accrual status during the period and proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income and accretion of purchased loan discounts. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the federal statutory tax rate of 21 percent.

 

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

 

   

For the Year Ended December 31, 2021

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 4,267,522     $ 106,329       2.49 %

Tax-exempt (1)

     312,946       10,677       3.41 %

Total investments (1)

     4,580,468       117,006       2.55 %

Loans:

                        

Taxable:

                        

PPP loans

     152,149       7,639       5.02 %

Other

     992,454       48,376       4.87 %

Total taxable

     1,144,603       56,015       4.89 %

Tax-exempt (1)

     50,532       1,953       3.87 %

Total loans (1)

     1,195,135       57,968       4.85 %

Total interest-bearing cash

     857,029       1,132       0.13 %

Total Interest-earning assets (1)

     6,632,632       176,106       2.65 %

Other assets

     406,652                  

Total assets

   $ 7,039,284                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,897,244     $ -       - %

Savings and interest-bearing transaction

     3,050,859       1,445       0.05 %

Time less than $100,000

     83,580       167       0.20 %

Time $100,000 or more

     69,165       265       0.38 %

Total interest-bearing deposits

     3,203,604       1,877       0.06 %

Securities sold under agreements to repurchase

     114,266       78       0.07 %

Federal Funds purchased

     1       -       0.87 %

Other borrowed funds

     53       -       0.35 %

Total interest-bearing liabilities

     3,317,924       1,955       0.06 %

Other liabilities

     73,447                  

Shareholders' equity

     750,669                  

Total liabilities and shareholders' equity

   $ 7,039,284                  

Net interest spread (1) (2)

                     2.59 %

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

           $ 174,151       2.62 %

 

(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.

 

- 25 -
 

 

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

 

   

For the Year Ended December 31, 2020

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 3,689,769     $ 93,163       2.52 %

Tax-exempt (1)

     460,191       15,395       3.35 %

Total investments (1)

     4,149,960       108,558       2.62 %

Loans:

                        

Taxable:

                        

PPP loans

     151,320       6,516       4.31 %

Other

     1,039,724       51,336       4.94 %

Total taxable

     1,191,044       57,852       4.86 %

Tax-exempt (1)

     48,100       1,931       4.01 %

Total loans (1)

     1,239,144       59,783       4.82 %

Total interest-bearing cash

     371,444       1,165       0.31 %

Total Interest-earning assets (1)

     5,760,548       169,506       2.94 %

Other assets

     413,922                  

Total assets

   $ 6,174,470                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,538,819     $ -       - %

Savings and interest-bearing transaction

     2,603,476       1,258       0.05 %

Time less than $100,000

     91,519       193       0.21 %

Time $100,000 or more

     72,363       319       0.44 %

Total interest-bearing deposits

     2,767,358       1,770       0.06 %

Securities sold under agreements to repurchase

     80,455       53       0.07 %

Federal funds purchased

     1       -       0.88 %

Other borrowed funds

     174       1       0.35 %

Total interest-bearing liabilities

     2,847,988       1,824       0.06 %

Other liabilities

     76,109                  

Shareholders' equity

     711,554                  

Total liabilities and shareholders' equity

   $ 6,174,470                  

Net interest spread (1) (2)

                     2.88 %

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

           $ 167,682       2.91 %

 

(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 Year Ended December 31, 2019

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 3,089,099     $ 77,800       2.52 %

Tax-exempt (1)

     615,665       19,923       3.24 %

Total investments (1)

     3,704,764       97,723       2.64 %

Loans:

                        

Taxable

     1,112,250       56,550       5.08 %

Tax-exempt (1)

     49,529       2,028       4.10 %

Total loans (1)

     1,161,779       58,578       5.04 %

Total interest bearing cash

     324,733       6,993       2.15 %

Total interest-earning assets(1)

     5,191,276       163,294       3.14 %

Other assets

     405,833                  

Total assets

   $ 5,597,109                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,222,876     $ -       - %

Savings and interest-bearing transaction

     2,396,604       1,274       0.05 %

Time less than $100,000

     103,399       254       0.25 %

Time $100,000 or more

     78,925       326       0.41 %

Total interest-bearing deposits

     2,578,928       1,854       0.07 %

Securities sold under agreements to repurchase

     51,441       34       0.07 %

Federal funds purchased

     1       -       1.98 %

Total interest-bearing liabilities

     2,630,370       1,888       0.07 %

Other liabilities

     68,351                  

Shareholders' equity

     675,512                  

Total liabilities and shareholders' equity

   $ 5,597,109                  

Net interest spread (1) (2)

                     3.07 %

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

           $ 161,406       3.11 %

 

(1)

Amounts calculated on a fully taxable equivalent 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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- 27 -
 

 

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 Year Ended December 31, 2021

  
   

Compared with

  
   

For the Year Ended December 31, 2020

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

Increase (decrease) in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ 14,588     $ (1,422 )   $ 13,166  

Tax-exempt (1)

     (4,926 )     208       (4,718 )

Total investments (1)

     9,662       (1,214 )     8,448  

Loans:

                        

Taxable:

                        

PPP loans

     42       1,081       1,123  

Other

     (2,334 )     (626 )     (2,960 )

Total taxable

     (2,292 )     455       (1,837 )

Tax-exempt (1)

     98       (76 )     22  

Total loans (1)

     (2,194 )     379       (1,815 )

Total interest-bearing cash

     1,523       (1,556 )     (33 )

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

     8,991       (2,391 )     6,600  

Increase (decrease) in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     216       (29 )     187  

Time less than $100,000

     (17 )     (9 )     (26 )

Time $100,000 or more

     (14 )     (40 )     (54 )

Total interest-bearing deposits

     185       (78 )     107  

Securities sold under agreements to repurchase

     22       3       25  

Other borrowed funds

     (1 )     -       (1 )

Total increase (decrease) in interest expense

     206       (75 )     131  

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

   $ 8,785     $ (2,316 )   $ 6,469  

 

(1)

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

 

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- 28 -
 

 

Summary of Changes in Interest Income and Expense

 

   

For the Year Ended December 31, 2020

  
   

Compared with

  
   

For the Year Ended December 31, 2019

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

Increase (decrease) in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ 15,128     $ 235     $ 15,363  

Tax-exempt (1)

     (5,031 )     503       (4,528 )

Total investments (1)

     10,097       738       10,835  

Loans:

                        

Taxable:

                        

PPP loans

     6,516       -       6,516  

Other

     (3,687 )     (1,527 )     (5,214 )

Total taxable

     2,829       (1,527 )     1,302  

Tax-exempt (1)

     (59 )     (38 )     (97 )

Total loans (1)

     2,770       (1,565 )     1,205  

Total interest-bearing cash

     1,006       (6,834 )     (5,828 )

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

     13,873       (7,661 )     6,212  

Increase (decrease) in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     110       (126 )     (16 )

Time less than $100,000

     (29 )     (32 )     (61 )

Time $100,000 or more

     (27 )     20       (7 )

Total interest-bearing deposits

     54       (138 )     (84 )

Securities sold under agreements to repurchase

     19       -       19  

Other borrowed funds

     1       -       1  

Total increase (decrease) in interest expense

     74       (138 )     (64 )

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

   $ 13,799     $ (7,523 )   $ 6,276  

 

(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 2021 based on Management’s estimate of reserves needed over the remaining life of its loans and investments. The Company provided a provision for credit losses of $4.3 million recorded in 2020. The 2020 provision represented Management’s estimate of additional reserves needed over the remaining life of its loans and investments due to credit-risk from weakened economic conditions caused by the COVID-19 pandemic. The Company provided no provision for loan losses in 2019 based on Management’s evaluation of credit quality, the level of the provision for loan losses in 2019, and the adequacy of the allowance for loan losses at December 31, 2019. 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.

 

- 29 -
 

 

Noninterest Income

 

Components of Noninterest Income

 

   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

(In thousands)

  

Service charges on deposit accounts

   $ 13,697     $ 14,149     $ 17,882  

Merchant processing services

     11,998       10,208       10,132  

Debit card fees

     6,859       6,181       6,357  

Trust fees

     3,311       3,012       2,963  

ATM processing fees

     2,280       2,273       2,776  

Other service fees

     1,884       1,837       2,255  

Financial services commissions

     356       372       392  

Gains on sales of real property

     -       3,536       -  

Life insurance gains

     -       -       433  

Securities gains

     34       71       217  

Other noninterest income

     2,926       3,998       4,001  

Total Noninterest Income

   $ 43,345     $ 45,637     $ 47,408  

 

In 2021, noninterest income decreased $2.3 million compared with 2020 primarily because 2020 results included a $3.5 million gain on the sale of a closed branch building, a $603 thousand recovery in excess of previously charged off loan amounts, and higher service charges on deposit accounts. Decreases in 2021 results, compared with 2020, were partially offset by higher transaction volumes from merchant processing services and debit cards, and increases in trust fees.

 

In 2020, noninterest income decreased $1.8 million compared with 2019 due to lower income from activity based fees due to reduced economic activity related to the COVID-19 pandemic. Additionally, the results for 2019 included a life insurance gain of $433 thousand. The decrease was partially offset by a $3.5 million gain on the sale of a closed branch building in 2020.

 

Noninterest Expense

 

Components of Noninterest Expense

 

   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

(In thousands)

  

Salaries and related benefits

   $ 48,011     $ 50,749     $ 51,054  

Occupancy and equipment

     19,139       19,637       20,240  

Outsourced data processing services

     9,601       9,426       9,471  

Professional fees

     3,253       2,423       2,465  

Courier service

     2,177       2,001       1,878  

Amortization of identifiable intangibles

     269       287       538  

Loss Contingency

     -       -       553  

Other noninterest expense

     15,356       14,043       12,787  

Total Noninterest Expense

   $ 97,806     $ 98,566     $ 98,986  

 

In 2021, noninterest expense decreased $760 thousand compared with 2020. The decrease in salaries and related benefits in 2021 compared with 2020 was attributable to attrition. Occupancy and equipment expenses decreased due to lower depreciation expense. These decreases were partially offset by higher professional fees and other noninterest expense.

 

In 2020, noninterest expense decreased $420 thousand compared with 2019 due to lower salaries, occupancy and equipment expenses, and lower amortization of intangible assets, and because the results for 2019 included $553 thousand of loss contingency. The decrease was partially offset by higher FDIC assessments (included in “other noninterest expense”) in 2020 because FDIC assessments in 2019 were reduced by application of the Bank’s FDIC assessment credit described in Part 1, Item 1, “Premiums for Deposit Insurance and FDIC Regulation”.

 

- 30 -
 

 

Provision for Income Tax

 

The Company’s income tax provision (FTE) was $33.2 million in 2021 compared with $30.0 million in 2020 and $29.4 million in 2019. The effective tax rates (FTE) were 27.7% in 2021 compared with 27.2% in 2020 and 26.8% in 2019.

 

The higher effective tax rates (FTE) in 2021 and 2020 compared with 2019 are due to lower levels of tax-exempt interest income and stock compensation tax deductions in 2020. The tax provisions (FTE) for 2021, 2020 and 2019 include tax benefits of $-0- thousand, $87 thousand and $435 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements. In 2019, the Company decreased unrecognized tax benefits by $909 thousand related to settlements with taxing authorities. The settlements incorporated amended tax returns for which the Company had recognized a deferred tax asset in the amount of $1,003 thousand.

 

Investment 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 $4.9 billion at December 31, 2021 and $4.6 billion at December 31, 2020. The following table lists debt 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 $306,403 thousand at December 31, 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. Debt securities available for sale are listed at fair value.

 

   

At December 31, 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 mortgage-backed securities

   $ 559,358       11 %   $ 893,284       20 %

Obligations of states and political subdivisions

     251,933       5 %     384,932       8 %

Corporate securities

     2,746,735       56 %     2,117,978       46 %

Commercial paper

     -       - %     24,990       1 %

Collateralized loan obligations

     1,386,355       28 %     1,156,101       25 %

Other

     877       - %     1,498       - %

Total

   $ 4,945,258       100 %   $ 4,578,783       100 %
                                 

Debt securities available for sale

   $ 4,638,855             $ 4,063,185          

Debt securities held to maturity

     306,403               515,598          

Total

   $ 4,945,258             $ 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 December 31, 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.

 

The Company had no marketable equity securities at December 31, 2021, December 31, 2020 and December 31, 2019. All of the marketable equity securities were sold with no gains or losses from the sale during the third quarter 2019. The market value of the marketable equity securities was $1,747 thousand at December 31, 2018. The Company recognized gross unrealized holding gains of $50 thousand in earnings in 2019.

 

- 31 -
 

 

The following table shows the fair value carrying amount of the Company’s equity securities and debt securities available for sale as of the dates indicated:

 

   

At December 31,

  
   

2021

    

2020

    

2019

  
   

(In thousands)

  

Debt securities available for sale:

                        

U.S. Treasury securities

   $ -     $ -     $ 20,000  

Securities of U.S. Government sponsored entities

     -       -       111,167  

Agency residential mortgage-backed securities (MBS)

     411,726       652,952       939,750  

Agency commercial MBS

     -       -       3,708  

Securities of U.S. Government entities

     119       154       544  

Obligations of states and political subdivisions

     93,920       111,010       163,139  

Corporate securities

     2,746,735       2,117,978       1,833,783  

Commercial paper

     -       24,990       -  

Collateralized Loan Obligations

     1,386,355       1,156,101       6,755  

Total debt securities available for sale

   $ 4,638,855     $ 4,063,185     $ 3,078,846  

 

The following table sets forth the relative maturities and contractual yields of the Company’s debt securities available for sale (stated at fair value) at December 31, 2021. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current federal statutory rate. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years.

 

Debt Securities Available for Sale Maturity Distribution

 

   

At December 31, 2021

  
   

Within one year

    

After one but
within five
years

    

After five but
within ten
years

    

After ten years

    

Mortgage- backed

    

Total

  
   

($ in thousands)

  

Securities of U.S. Government entities

   $ -     $ 119     $ -     $ -     $ -     $ 119  

Interest rate

     - %     2.59 %     - %     - %     - %     2.59 %

Obligations of states and political subdivisions

     3,576       35,705       54,639       -       -       93,920  

Interest rate

     4.10 %     3.41 %     2.92 %     - %     - %     3.07 %

Corporate securities

     305,681       697,595       1,528,846       214,613       -       2,746,735  

Interest rate

     2.61 %     3.24 %     2.62 %     2.36 %     - %     2.72 %

Collaterized loan obligations

     -       4,638       763,757       617,960       -       1,386,355  

Interest rate

     - %     2.12 %     1.76 %     1.83 %     - %     1.79 %

Subtotal

     309,257       738,057       2,347,242       832,573       -       4,227,129  

Interest rate

     2.63 %     3.24 %     2.35 %     1.97 %     - %     2.42 %

MBS

     -       -       -       -       411,726       411,726  

Interest rate

     - %     - %     - %     - %     1.86 %     1.86 %

Total

   $ 309,257     $ 738,057     $ 2,347,242     $ 832,573     $ 411,726     $ 4,638,855  

Interest rate

     2.63 %     3.24 %     2.35 %     1.97 %     1.86 %     2.37 %

 

 

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The following table shows the amortized cost carrying amount and fair value before related reserve for expected credit losses of $7 thousand at December 31, 2021 and $9 thousand at December 31, 2020, of the Company’s debt securities held to maturity as of the dates indicated:

 

   

At December 31,

  
   

2021

    

2020

    

2019

  
   

(In thousands)

  

Agency residential MBS

   $ 147,632     $ 240,332     $ 353,937  

Non-agency residential MBS

     758       1,344       2,354  

Obligations of states and political subdivisions

     158,013       273,922       381,781  

Total

   $ 306,403     $ 515,598     $ 738,072  

Fair value

   $ 312,562     $ 529,687     $ 744,296  

 

The following table sets forth the relative maturities and contractual yields of the Company’s debt securities held to maturity at December 31, 2021. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current federal statutory rate. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years.         

 

Debt Securities Held to Maturity Maturity Distribution

 

   

At December 31, 2021

  
   

Within one year

    

After one but
within five
years

    

After five but within ten
years

    

After ten years

    

Mortgage- backed

    

Total

  
   

($ in thousands)

  

Obligations of states and political subdivisions

   $ 15,836     $ 125,001     $ 17,176     $ -     $ -     $ 158,013  

Interest rate

     3.01 %     3.38 %     3.59 %     - %     - %     3.40 %

MBS

     -       -       -       -       148,390       148,390  

Interest rate

     - %     - %     - %     - %     1.68 %     1.68 %

Total

   $ 15,836     $ 125,001     $ 17,176     $ -     $ 148,390     $ 306,403  

Interest rate

     3.01 %     3.38 %     3.59 %     - %     1.68 %     2.57 %

 

The following table summarizes total corporate securities by credit rating:

 

   

At December 31, 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

   $ 21,400       1 %   $ 21,905       1 %

AA+

     20,479       1 %     20,979       1 %

AA

     19,781       1 %     41,232       2 %

AA-

     105,373       4 %     46,969       2 %

A+

     128,325       5 %     153,917       7 %

A

     539,062       19 %     374,155       18 %

A-

     628,089       23 %     385,642       18 %

BBB+

     797,860       29 %     489,677       23 %

BBB

     474,648       17 %     486,108       23 %

BBB-

     11,718       - %     82,431       4 %

Investment grade

     2,746,735       100 %     2,103,015       99 %

Below investment grade

     -       - %     14,963       1 %

Total Corporate securities

   $ 2,746,735       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.

 

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

 

   

At December 31, 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

   $ 1,421,317       52 %   $ 938,222       44 %

Consumer, Non-cyclical

     271,069       10 %     184,069       9 %

Industrial

     217,065       8 %     188,803       9 %

Utilities

     208,522       7 %     185,486       9 %

Communications

     161,537       6 %     173,483       8 %

Technology

     127,853       5 %     130,725       6 %

Consumer, Cyclical

     125,686       4 %     93,330       4 %

Basic Materials

     114,964       4 %     120,811       6 %

Energy

     98,722       4 %     103,049       5 %

Total Corporate securities

   $ 2,746,735       100 %   $ 2,117,978       100 %

 

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

 

   

At December 31, 2021

  
   

Market value

  
   

($ in thousands)

  

Hotels

   $ -  

Restaurants

     20,478  

Department Stores

     -  

Casinos

     -  

Airlines

     -  

Other

     105,208  

Total Consumer, Cyclical

   $ 125,686  

 

The Company’s $20.5 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 December 31, 2021, the bonds were rated BBB and priced with an unrealized gain of $480 thousand.

 

   

At December 31, 2021

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Energy

   $ 95,380     $ 98,722  

Industrial

     213,017       217,065  

Total

   $ 308,397     $ 315,787  

 

The $98.7 million (fair value) in corporate bonds in the energy sector are issued by 4 issuers at December 31, 2021. The $217.1 million (fair value) in corporate bonds in the industrial sector are issued by 10 issuers at December 31, 2021.

 

The Company’s $1.4 billion (fair value) in collateralized loan obligations at December 31, 2021, consist of investments in 157 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 December 31, 2021.

 

- 34 -
 

 

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 December 31, 2021, the Company’s investment securities portfolios included securities issued by 197 state and local government municipalities and agencies located within 33 states. The largest exposure to any one municipality or agency was $7.4 million (fair value) represented by five general obligation bonds.

 

   

At December 31, 2021

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Obligations of states and political subdivisions:

                

General obligation bonds:

                

California

   $ 48,332     $ 49,829  

Washington

     13,460       13,924  

Texas

     11,653       12,024  

Other (27 states)

     110,722       114,132  

Total general obligation bonds

   $ 184,167     $ 189,909  
                 

Revenue bonds:

                

California

   $ 14,912     $ 15,208  

Kentucky

     8,846       9,093  

Virginia

     7,576       7,809  

Colorado

     6,158       6,241  

Indiana

     5,747       5,821  

Other (12 states)

     20,714       20,934  

Total revenue bonds

   $ 63,953     $ 65,106  

Total obligations of states and political subdivisions

   $ 248,120     $ 255,015  

 

 

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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 municipality or agency 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 December 31, 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 utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 14 revenue sources at December 31, 2021 and 19 revenue sources at December 31, 2020. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

 

   

At December 31, 2021

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Revenue bonds by revenue source:

                

Water

   $ 10,123     $ 10,222  

Sewer

     8,525       8,828  

Sales tax

     8,203       8,304  

Lease (renewal)

     6,969       7,175  

Lease (abatement)

     6,922       7,010  

Lease (appropriation)

     4,564       4,618  

Special Assessment

     4,080       4,197  

Intergovernmental Agreement

     3,860       3,926  

Other (6 sources)

     10,707       10,826  

Total revenue bonds by revenue source

   $ 63,953     $ 65,106  

 

 

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- 36 -
 

 

   

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 2 to the consolidated financial statements for additional information related to the investment securities.

 

Loan Portfolio         

 

The Company originates loans with the intent to hold such assets until principal is repaid. Management follows written loan underwriting policies and procedures which are approved by the Bank’s Board of Directors. Loans are underwritten following approved underwriting standards and lending authorities within a formalized organizational structure. The Board of Directors also approves independent real estate appraisers to be used in obtaining estimated values for real property serving as loan collateral. Prevailing economic trends and conditions are also taken into consideration in loan underwriting practices.

 

All loan applications must be for clearly defined legitimate purposes with a determinable primary source of repayment, and as appropriate, secondary sources of repayment. All loans are supported by appropriate documentation such as current financial statements, tax returns, credit reports, collateral information, guarantor asset verification, title reports, appraisals, and other relevant documentation.

 

During 2020 and the first six months of 2021, the Bank processed customer PPP loan applications as established by the Coronavirus Aid, Relief, and Economic Security Act (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. PPP loans, net of deferred fees and costs, were $46 million at December 31, 2021 and $187 million at December 31, 2020.

 

Commercial loans represent term loans used to acquire durable business assets or revolving lines of credit used to finance working capital. Underwriting practices evaluate each borrower’s cash flow as the principal source of loan repayment. Commercial loans are generally secured by the borrower’s business assets as a secondary source of repayment. Commercial loans are evaluated for credit-worthiness based on prior loan performance and borrower financial information including cash flow, borrower net worth and aggregate debt. PPP loans are included in commercial loans.

 

Commercial real estate loans represent term loans used to acquire or refinance real estate to be operated by the borrower in a commercial capacity. Underwriting practices evaluate each borrower’s global cash flow as the principal source of loan repayment, independent appraisal of value of the property, and other relevant factors. Commercial real estate loans are generally secured by a first lien on the property as a secondary source of repayment.

 

Real estate construction loans represent the financing of real estate development. Loan principal disbursements are controlled through the use of project budgets, and disbursements are approved based on construction progress, which is validated by project site inspections. A first lien on the real estate serves as collateral to secure the loan.

 

Residential real estate loans generally represent first lien mortgages used by the borrower to purchase or refinance a principal residence. For interest-rate risk purposes, the Company offers only fully-amortizing, adjustable-rate mortgages. In underwriting first lien mortgages, the Company evaluates each borrower’s ability to repay the loan, an independent appraisal of the value of the property, and other relevant factors. The Company does not offer riskier mortgage products, such as non-amortizing “interest-only” mortgages and “negative amortization” mortgages.

 

For loans secured by real estate, the Bank requires title insurance to insure the status of its lien and each borrower is obligated to insure the real estate collateral, naming the Company as loss payee, in an amount sufficient to repay the principal amount outstanding in the event of a property casualty loss.

 

- 37 -
 

 

Consumer installment and other loans are predominantly comprised of indirect automobile loans with underwriting based on credit history and scores, personal income, debt service capacity, and collateral values.

 

Loan volumes have declined due to payoffs and problem loan workout activities, particularly with purchased loans, and reduced volumes of loan originations. The Company did not take an aggressive posture relative to loan portfolio growth during the post-recession period of historically low interest rates. Management increased investment securities as loan volumes declined.

 

The following table shows the composition of the loan portfolio of the Company by type of loan and type of borrower, on the dates indicated:

 

Loan Portfolio

 

   

At December 31,

  
   

2021

    

2020

    

2019

    

2018

    

2017

  
   

(In thousands)

  

PPP loans

   $ 45,888     $ 186,945     $ -     $ -     $ -  

Other commercial

     187,202       207,861       222,085       275,080       335,996  

Total commercial

     233,090       394,806       222,085       275,080       335,996  

Commercial real estate

     535,261       564,300       578,758       580,480       568,584  

Construction

     48       129       1,618       3,982       5,649  

Residential real estate

     18,133       23,471       32,748       44,866       65,183  

Consumer installment and other

     281,594       273,537       291,455       302,794       312,570  

Total loans

     1,068,126       1,256,243       1,126,664       1,207,202       1,287,982  

 

The following table shows the maturity distribution and interest rate sensitivity of loans at December 31, 2021. There were no loans with a remaining maturity of over fifteen years as of December 31, 2021.

 

Loan Maturity Distribution

 

   

At December 31, 2021

  
   

Within One Year

    

One to Five Years

    

Five to Fifteen Years

    

Total

  
   

(In thousands)

  

Commercial

   $ 89,429     $ 99,755     $ 43,906     $ 233,090  

Commercial real estate

     94,763       283,307       157,191       535,261  

Construction

     48       -       -       48  

Residential real estate

     5,105       10,444       2,584       18,133  

Consumer and other installment

     78,914       196,958       5,722       281,594  

Total

   $ 268,259     $ 590,464     $ 209,403     $ 1,068,126  

Loans with fixed interest rates

     182,201       288,172       32,284       502,657  

Loans with floating or adjustable interest rates

     86,058       302,292       177,119       565,469  

Total

   $ 268,259     $ 590,464     $ 209,403     $ 1,068,126  

 

Commitments and Letters of Credit

 

The Company issues formal commitments on lines of credit to well-established and financially responsible commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of letters of credit to facilitate the customers’ particular business transactions. Commitment fees are generally charged for commitments and letters of credit. Commitments on lines of credit and letters of credit typically mature within one year. For further information, see the accompanying notes to the consolidated financial statements.

 

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.

 

- 38 -
 

 

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 $46 million at December 31, 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 December 31, 2021, loans granted loan deferrals totaled $84 thousand, 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.

 

 

●

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”).

 

 

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- 39 -
 

 

Nonperforming Assets

 

   

At December 31,

  
   

2021

    

2020

    

2019

    

2018

    

2017

  
   

(In thousands)

  
                                         

Nonperforming nonaccrual loans

   $ 265     $ 526     $ 659     $ 998     $ 1,641  

Performing nonaccrual loans

     427       3,803       3,781       3,870       4,285  

Total nonaccrual loans

     692       4,329       4,440       4,868       5,926  

Accruing loans 90 or more days past due

     339       450       440       551       531  

Total nonperforming loans

     1,031       4,779       4,880       5,419       6,457  

Other real estate owned

     -       -       43       350       1,426  

Total nonperforming assets

   $ 1,031     $ 4,779     $ 4,923     $ 5,769     $ 7,883  

 

At December 31, 2021, nonaccrual loans consisted of five loans with an average carrying value of $138 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 December 31,

  
   

2021

    

2020

  
   

(In thousands)

  
                 

Allowance for Credit Losses on Loans

   $ 23,514     $ 23,854  

Allowance for Credit Losses on Held to Maturity Debt Securities

     7       9  

Total Allowance for Credit Losses

   $ 23,521     $ 23,863  
                 

Allowance for unfunded credit commitments

     201       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 establishment of allowance for credit losses related to debt securities held to maturity of $16 thousand. It was reduced to $7 thousand at December 31, 2021 and $9 thousand at December 31, 2020 to reflect the expected credit losses on debt securities held to maturity.

 

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 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.

 

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The following table summarizes the allowance for credit losses, chargeoffs and recoveries for the periods indicated. The allowance for loan losses for 2017, 2018 and 2019 is shown under legacy GAAP.

 

   

At and For the Years Ended December 31,

  
   

2021

    

2020

    

2019

    

2018

    

2017

  
   

($ in thousands)

  

Analysis of the Allowance for Credit Losses

                                        

Balance, end of prior period

   $ 23,854     $ 19,484     $ 21,351     $ 23,009     $ 25,954  

Adoption of ASU 2016-13

     -       2,017       -       -       -  

Balance, beginning of period

     23,854       21,501       21,351       23,009       25,954  

Provision for (reversal of) credit losses on loans

     2       4,307       -       -       (1,900 )

Loans charged off:

                                        

Commercial

     (56 )     (236 )     (97 )     (513 )     (961 )

Commercial real estate

     -       -       -       (240 )     -  

Consumer and other installment

     (3,192 )     (3,963 )     (4,473 )     (4,124 )     (4,957 )

Total chargeoffs

     (3,248 )     (4,199 )     (4,570 )     (4,877 )     (5,918 )

Recoveries of loans previously charged off:

                                        

Commercial

     228       351       768       1,447       762  

Commercial real estate

     743       49       196       -       88  

Construction

     -       -       -       -       1,899  

Consumer and other installment

     1,935       1,845       1,739       1,772       2,124  

Total recoveries

     2,906       2,245       2,703       3,219       4,873  

Net loan losses

     (342 )     (1,954 )     (1,867 )     (1,658 )     (1,045 )

Balance, end of period

   $ 23,514     $ 23,854     $ 19,484     $ 21,351     $ 23,009  
                                         

Net loan losses as a percentage of average loans

     0.03 %     0.16 %     0.16 %     0.14 %     0.08 %
                                         

Selected financial data:

                                        

Loans

   $ 1,068,126     $ 1,256,243     $ 1,126,664     $ 1,207,202     $ 1,287,982  

Nonaccrual loans

     692       4,329       4,440       4,868       5,926  

Allowance for credit losses as a percentage of loans

     2.20 %     1.90 %     1.73 %     1.77 %     1.79 %

Nonaccrual loans as a percentage of loans

     0.06 %     0.34 %     0.39 %     0.40 %     0.46 %

Allowance for credit losses to nonaccrual loans

     3397.98 %     551.03 %     438.83 %     438.60 %     388.27 %

 

The following table summarizes net (chargeoffs) recoveries and the ratio of net (charge-offs) recoveries to average loans for the periods indicated:

 

   

For the Years ended December 31,

  
   

2021

    

2020

    

2019

  
           

As a percentage

            

As a percentage

            

As a percentage

  
           

of Net chargeoffs

            

of Net chargeoffs

            

of Net chargeoffs

  
   

Net (chargeoffs)

    

(recoveries)

    

Net (chargeoffs)

    

(recoveries)

    

Net (chargeoffs)

    

(recoveries)

  
   

Recoveries

    

to Average loans

    

Recoveries

    

to Average loans

    

Recoveries

    

to Average loans

  
   

($ in thousands)

  
                                                 

Commercial

   $ 172       (0.05 )%   $ 115       (0.03 )%   $ 671       (0.28 )%

Commercial real estate

     743       (0.14 )%     49       (0.01 )%     196       (0.03 )%

Construction

     -       - %     -       - %     -       - %

Residential real estate

     -       - %     -       - %     -       - %

Consumer and other installment

     (1,257 )     0.45 %     (2,118 )     0.76 %     (2,734 )     0.92 %

Total

   $ (342 )     0.03 %   $ (1,954 )     0.16 %   $ (1,867 )     0.16 %

 

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 loan 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 1 to the consolidated financial statements for additional information.

 

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- 41 -
 

 

The following table presents the allocation of the allowance for credit losses as of December 31 for the periods indicated. The allowance for loan losses for 2017, 2018 and 2019 is shown under legacy GAAP.

 

   

At December 31,

  
   

2021

    

2020

    

2019

    

2018

    

2017

  
   

Allocation of the Allowance Balance

    

Loans as Percent of Total Loans

    

Allocation of the Allowance Balance

    

Loans as Percent of Total Loans

    

Allocation of the Allowance Balance

    

Loans as Percent of Total Loans

    

Allocation of the Allowance Balance

    

Loans as Percent of Total Loans

    

Allocation of the Allowance Balance

    

Loans as Percent of Total Loans

  
   

($ in thousands)

  

Commercial

   $ 6,966       22 %   $ 9,205       31 %   $ 4,959       20 %   $ 6,311       23 %   $ 7,746       26 %

Commercial real estate

     6,529       50 %     5,660       45 %     4,064       51 %     3,884       48 %     3,849       44 %

Construction

     2       - %     6       - %     109       - %     1,465       - %     335       1 %

Residential real estate

     45       2 %     47       2 %     206       3 %     869       4 %     995       5 %

Consumer installment and other

     9,972       26 %     8,936       22 %     6,445       26 %     5,645       25 %     6,418       24 %

Unallocated portion

     -       - %     -       - %     3,701       - %     3,177       - %     3,666       - %

Total

   $ 23,514       100 %   $ 23,854       100 %   $ 19,484       100 %   $ 21,351       100 %   $ 23,009       100 %

 

   

Allowance for Credit Losses

  
   

For the Year Ended December 31, 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

     (2,411 )     126       (4 )     (2 )     2,293       2  

Chargeoffs

     (56 )     -       -       -       (3,192 )     (3,248 )

Recoveries

     228       743       -       -       1,935       2,906  

Total allowance for credit losses

   $ 6,966     $ 6,529     $ 2     $ 45     $ 9,972     $ 23,514  

 

Management considers the $23.5 million allowance for credit losses on loans to be adequate as a reserve against current expected credit losses in the loan portfolio as of December 31, 2021.

 

See Note 3 to the consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, and allowance for credit losses.

 

Asset/Liability and Market Risk Management

 

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

 

Interest Rate Risk

 

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

 

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

 

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

 

- 42 -
 

 

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 given the assumed change in market interest rates. Both simulations are used to measure expected changes in net interest income assuming various levels of change in market interest rates.

 

The Company’s asset and liability position was slightly “asset sensitive” at December 31, 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.

 

At December 31, 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

  

+13.2%

  
         

Dynamic Simulation (balance sheet composition changes):

        

Assumed Change in Interest Rates Over 1 Year

  

+1.00%

  

First Year Change in Net Interest Income

  

+7.9%

  

 

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 Bank's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Bank achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Bank'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.

 

- 43 -
 

 

In recent years, the Bank's deposit base has provided the majority of the Bank'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 year ended December 31, 2021 and December 31, 2020. The stability of the Bank’s funding from customer deposits is in part reliant on the confidence clients have in the Bank. The Bank 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 Bank's investment securities portfolio provides a substantial secondary source of liquidity. The Bank held $4.9 billion in total investment securities at December 31, 2021. Under certain deposit, borrowing and other arrangements, the Bank must hold and pledge investment securities as collateral. At December 31, 2021, such collateral requirements totaled approximately $1.0 billion.

 

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 $46 million at December 31, 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 PPPLF borrowings at December 31, 2021.

 

Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. The Bank performs liquidity stress tests on a periodic basis to evaluate the sustainability of its liquidity. Under the stress testing, the Bank assumes outflows of funds increase beyond expected levels. Measurement of such heightened outflows considers the composition of the Bank’s deposit base, including any concentration of deposits, non-deposit funding such as short-term borrowings, and unfunded lending commitments. The Bank 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. However, no assurance can be given the Bank will not experience a period of reduced liquidity.

 

Management continually monitors the Bank’s cash levels. Loan demand from credit worthy borrowers will be dictated by economic and competitive conditions. The Bank 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 Bank's sales efforts, delivery of superior customer service, new regulations and market conditions. The Bank 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 $44 million each in the year ended December 31, 2021 and 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 11.5% for the year ended December 31, 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 year ended December 31, 2021 and $2.8 million in the year ended December 31, 2020.

 

- 44 -
 

 

The Company paid common dividends totaling $44 million each in the year ended December 31, 2021 and December 31, 2020, which represent dividends per common share of $1.65 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 year ended December 31, 2021 and 319 thousand shares valued at $16 million in the year ended December 31, 2020.

 

The Company's primary capital resource is shareholders' equity, which was $827 million at December 31, 2021 compared with $845 million at December 31, 2020. The Company's ratio of equity to total assets was 11.1% at December 31, 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 1 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 December 31, 2021

    

Capital Adequacy

    

Corrective Action

  
   

Company

    

Bank

    

Purposes

    

Regulations (Bank)

  
                                 

Common Equity Tier I Capital

     14.93 %     12.48 %     7.00 %     6.50 %

Tier I Capital

     14.93 %     12.48 %     8.50 %     8.00 %

Total Capital

     15.47 %     13.17 %     10.50 %     10.00 %

Leverage Ratio

     9.06 %     7.55 %     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” for more information on the CECL methodology.

 

- 45 -
 

 

PPP loans are zero percent risk weighted for regulatory capital purposes; average PPP loans of $69 million did not affect regulatory capital ratios. The changes in the Leverage ratio would have been insignificant for both 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.

 

Deposit Categories

 

The Company primarily attracts deposits from local businesses and professionals, as well as through retail savings and checking accounts, and, to a more limited extent, certificates of deposit.

 

The following table summarizes the Company’s average daily amount of deposits and the rates paid for the periods indicated:

 

Deposit Distribution and Average Rates Paid

 

   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

Average Balance

    

Percentage of Total Deposits

    

Rate

    

Average Balance

    

Percentage of Total Deposits

    

Rate

    

Average Balance

    

Percentage of Total Deposits

    

Rate

  
   

($ In thousands)

  
                                                                         

Noninterest-bearing demand

   $ 2,897,244       47.5 %     - %   $ 2,538,819       47.8 %     - %   $ 2,222,876       46.3 %     - %

Interest bearing:

                                                                        

Transaction

     1,208,269       19.8 %     0.03 %     1,008,758       19.0 %     0.03 %     932,524       19.4 %     0.05 %

Savings

     1,842,590       30.2 %     0.06 %     1,594,718       30.1 %     0.06 %     1,464,080       30.5 %     0.06 %

Time less than $100 thousand

     83,580       1.4 %     0.20 %     91,519       1.7 %     0.21 %     103,399       2.2 %     0.25 %

Time $100 thousand or more

     69,165       1.1 %     0.38 %     72,363       1.4 %     0.44 %     78,925       1.6 %     0.41 %

Total (1)

   $ 6,100,848       100.0 %     0.06 %   $ 5,306,177       100.0 %     0.06 %   $ 4,801,804       100.0 %     0.07 %

 

(1)

The rates for total deposits were calculated using the average balances of interest-bearing deposits.

 

The Company’s strategy includes building the value of its deposit base by building balances of lower-costing deposits and avoiding reliance on higher-costing time deposits. Average balances of higher costing time deposits declined 16% to $153 million from 2019 to 2021. The Company’s average balances of checking and savings accounts represented 97% of average balances of total deposits in 2021 and 2020 compared with 96% in 2019.

 

Estimated uninsured deposits were $3.1 billion at December 31, 2021 and $2.5 billion at December 31, 2020.

 

Total time deposits were $144 million and $156 million at December 31, 2021 and December 31, 2020, respectively. The following table sets forth, by time remaining to maturity, the Company’s total domestic time deposits. The Company has no foreign time deposits.

 

Time Deposits Maturity Distribution

 

   

At December 31, 2021

  
   

(In thousands)

  

2022

   $ 108,459  

2023

     15,006  

2024

     11,750  

2025

     5,435  

2026

     2,939  

Thereafter

     23  

Total

   $ 143,612  

 

- 46 -
 

 

The standard FDIC deposit insurance amount is $250,000 per depositor, for each account ownership category. The following table shows the time remaining to maturity of the Company’s time deposits with a balance greater than $250,000:

 

   

At December 31, 2021

  
   

(In thousands)

  

Three months or less

   $ 9,379  

Over three through six months

     3,170  

Over six through twelve months

     3,504  

Over twelve months

     7,366  

Total

   $ 23,419  

 

Short-term Borrowings

 

The following table sets forth the short-term borrowings of the Company:

 

Short-Term Borrowings Distribution

 

   

At December 31,

  
   

2021

    

2020

    

2019

  
   

(In thousands)

  

Securities sold under agreements to repurchase the securities

   $ 146,246     $ 102,545     $ 30,928  

Total short-term borrowings

   $ 146,246     $ 102,545     $ 30,928  

 

Further detail of federal funds purchased and other borrowed funds is as follows:

 

   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

($ in thousands)

  

Federal funds purchased balances and rates paid on outstanding amount:

                        

Average balance for the year

   $ 1     $ 1     $ 1  

Maximum month-end balance during the year

     -       -       -  

Average interest rate for the year

     0.87 %     0.88 %     1.98 %

Average interest rate at period end

     - %     - %     - %

Securities sold under agreements to repurchase the securities balances and rates paid on outstanding amount:

                        

Average balance for the year

   $ 114,266     $ 80,455     $ 51,441  

Maximum month-end balance during the year

     146,552       110,846       61,411  

Average interest rate for the year

     0.07 %     0.07 %     0.07 %

Average interest rate at period end

     0.07 %     0.07 %     0.06 %

PPPLF balances and rates paid on outstanding amount:

                        

Average balance for the year

   $ 53     $ 174     $ -  

Maximum month-end balance during the year

     -       -       -  

Average interest rate for the year

     0.35 %     0.35 %     - %

Average interest rate at period end

     - %     - %     - %

 

 

[The remainder of this page intentionally left blank]

 

 

 

- 47 -
 

 

Financial Ratios         

 

The following table shows key financial ratios for the periods indicated:

 

   

At and For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  

Return on average total assets

     1.23 %     1.30 %     1.44 %

Return on average common shareholders' equity

     11.52 %     11.30 %     11.90 %

Average shareholders' equity as a percentage of:

                        

Average total assets

     10.66 %     11.52 %     12.07 %

Average total loans

     62.81 %     57.42 %     58.14 %

Average total deposits

     12.30 %     13.41 %     14.07 %

Common dividend payout ratio

     51 %     55 %     55 %

 

 

 

 

 

[The remainder of this page intentionally left blank]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 48 -
 

 

ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO FINANCIAL STATEMENTS

 

 

Page

Management’s Report on Internal Control Over Financial Reporting

 50

Consolidated Balance Sheets as of December 31, 2021 and 2020

 51

Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019

 52

Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019

 53

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019

 54

Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019

 55

Notes to the Consolidated Financial Statements

 56

Report of Independent Registered Public Accounting Firm (PCAOB ID 173)

 91

 

 

 

 

 

 

 

 

 

- 49 -
 

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management of Westamerica Bancorporation and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2021. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based upon criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, Management determined that the Company’s internal control over financial reporting was effective as of December 31, 2021 based on the criteria in Internal Control - Integrated Framework (2013) issued by COSO.

 

The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting. Their opinion and attestation on internal control over financial reporting appear on page 91.

 

Dated: February 25, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 50 -
 

 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED BALANCE SHEETS

 
         
  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Assets:

        

Cash and due from banks

 $1,132,085  $621,275 

Debt securities available for sale

  4,638,855   4,063,185 

Debt securities held to maturity, net of allowance for credit losses of $7 at December 31, 2021 and $9 at December 31, 2020 (Fair value of $312,562 at December 31, 2021 and $529,678 at December 31, 2020)

  306,396   515,589 

Loans

  1,068,126   1,256,243 

Allowance for credit losses on loans

  (23,514)  (23,854)

Loans, net of allowance for credit losses on loans

  1,044,612   1,232,389 

Premises and equipment, net

  31,155   32,813 

Identifiable intangibles, net

  835   1,104 

Goodwill

  121,673   121,673 

Other assets

  185,415   159,903 

Total Assets

 $7,461,026  $6,747,931 
         

Liabilities:

        

Noninterest-bearing deposits

 $3,069,080  $2,725,177 

Interest-bearing deposits

  3,344,876   2,962,802 

Total deposits

  6,413,956   5,687,979 

Short-term borrowed funds

  146,246   102,545 

Other liabilities

  73,722   112,598 

Total Liabilities

  6,633,924   5,903,122 
         

Contingencies (Note 12)

          
         

Shareholders' Equity:

        

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

  471,008   466,006 

Deferred compensation

  35   35 

Accumulated other comprehensive income

  49,664   114,412 

Retained earnings

  306,395   264,356 

Total Shareholders' Equity

  827,102   844,809 

Total Liabilities and Shareholders' Equity

 $7,461,026  $6,747,931 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

- 51 -
 

 

 

WESTAMERICA BANCORPORATION

  

CONSOLIDATED STATEMENTS OF INCOME

  
                         
   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

(In thousands, except per share data)

  

Interest and Loan Fee Income:

                        

Loans

   $ 57,558     $ 59,377     $ 58,153  

Equity securities

     458       419       392  

Debt securities available for sale

     105,420       91,343       74,147  

Debt securities held to maturity

     8,875       13,552       18,997  

Interest-bearing cash

     1,132       1,165       6,993  

Total Interest and Loan Fee Income

     173,443       165,856       158,682  

Interest Expense:

                        

Deposits

     1,877       1,770       1,854  

Short-term borrowed funds

     78       53       34  

Other borrowed funds

     -       1       -  

Total Interest Expense

     1,955       1,824       1,888  

Net Interest and Loan Fee Income

     171,488       164,032       156,794  

Provision for Credit Losses

     -       4,300       -  

Net Interest and Loan Fee Income After Provision For Credit Losses

     171,488       159,732       156,794  

Noninterest Income:

                        

Service charges on deposit accounts

     13,697       14,149       17,882  

Merchant processing services

     11,998       10,208       10,132  

Debit card fees

     6,859       6,181       6,357  

Trust fees

     3,311       3,012       2,963  

ATM processing fees

     2,280       2,273       2,776  

Other service fees

     1,884       1,837       2,255  

Financial services commissions

     356       372       392  

Gains on sales of real property

     -       3,536       -  

Life insurance gains

     -       -       433  

Securities gains

     34       71       217  

Other noninterest income

     2,926       3,998       4,001  

Total Noninterest Income

     43,345       45,637       47,408  

Noninterest Expense:

                        

Salaries and related benefits

     48,011       50,749       51,054  

Occupancy and equipment

     19,139       19,637       20,240  

Outsourced data processing services

     9,601       9,426       9,471  

Professional fees

     3,253       2,423       2,465  

Courier service

     2,177       2,001       1,878  

Loss contingency

     -       -       553  

Amortization of identifiable intangibles

     269       287       538  

Other noninterest expense

     15,356       14,043       12,787  

Total Noninterest Expense

     97,806       98,566       98,986  

Income Before Income Taxes

     117,027       106,803       105,216  

Provision for income taxes

     30,518       26,390       24,827  

Net Income

   $ 86,509     $ 80,413     $ 80,389  
                         

Average Common Shares Outstanding

     26,855       26,942       26,956  

Diluted Average Common Shares Outstanding

     26,870       26,960       27,006  

Per Common Share Data:

                        

Basic earnings

   $ 3.22     $ 2.98     $ 2.98  

Diluted earnings

     3.22       2.98       2.98  

Dividends paid

     1.65       1.64       1.63  

 

See accompanying notes to consolidated financial statements.

 

- 52 -
 

 

 

WESTAMERICA BANCORPORATION

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  
                         
                         
   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  
   

(In thousands)

  

Net Income

   $ 86,509     $ 80,413     $ 80,389  

Other comprehensive income (loss):

                        

Changes in net unrealized gains on debt securities available for sale

     (91,891 )     125,519       93,936  

Deferred tax benefit (expense)

     27,167       (37,108 )     (27,771 )

Reclassification of gains included in net income

     (34 )     (71 )     (167 )

Deferred tax expense on gains included in net income

     10       21       49  

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

     (64,748 )     88,361       66,047  

Total Comprehensive Income

   $ 21,761     $ 168,774     $ 146,436  

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 53 -
 

 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 
                         
              

Accumulated

         
  

Common

          

Other

         
  

Shares

  

Common

  

Deferred

  

Comprehensive

  

Retained

     
  

Outstanding

  

Stock

  

Compensation

  

Income (Loss)

  

Earnings

  

Total

 
  

(In thousands, except per share data)

 
                         

Balance, December 31, 2018

  26,730  $448,351  $1,395  $(39,996) $205,841  $615,591 

Cumulative effect of bond premium amortization adjustment, net of tax

                  (2,801)  (2,801)

Adjusted Balance, January 1, 2019

  26,730   448,351   1,395   (39,996)  203,040   612,790 

Net income for the year 2019

                  80,389   80,389 

Other comprehensive income

              66,047       66,047 

Shares issued from stock warrant exercise, net of repurchase

  51   -               - 

Exercise of stock options

  269   13,699               13,699 

Restricted stock activity

  18   1,697   (624)          1,073 

Stock based compensation

  -   1,744               1,744 

Stock awarded to employees

  2   105               105 

Retirement of common stock

  (8)  (136)          (352)  (488)

Dividends ($1.63 per share)

                  (43,942)  (43,942)

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 year 2020

                  80,413   80,413 

Other comprehensive income

              88,361       88,361 

Exercise of stock options

  52   2,838               2,838 

Restricted stock activity

  10   1,270   (736)          534 

Stock based compensation

  -   1,875               1,875 

Stock awarded to employees

  2   100               100 

Retirement of common stock

  (319)  (5,537)          (10,959)  (16,496)

Dividends ($1.64 per share)

                  (44,285)  (44,285)

Balance, December 31, 2020

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

Net income for the year 2021

                  86,509   86,509 

Other comprehensive loss

              (64,748)      (64,748)

Exercise of stock options

  53   3,017               3,017 

Restricted stock activity

  9   526               526 

Stock based compensation

  -   1,419               1,419 

Stock awarded to employees

  1   106               106 

Retirement of common stock

  (4)  (66)          (166)  (232)

Dividends ($1.65 per share)

                  (44,304)  (44,304)

Balance, December 31, 2021

  26,866  $471,008  $35  $49,664  $306,395  $827,102 

 

See accompanying notes to consolidated financial statements.

 

- 54 -
 

 

 

WESTAMERICA BANCORPORATION

  

CONSOLIDATED STATEMENTS OF CASH FLOWS

  
                         
   

For the Years Ended December 31,

  
   

2021

    

2020

    

2019

  

Operating Activities:

  

(In thousands)

  

Net income

   $ 86,509     $ 80,413     $ 80,389  

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

                        

Depreciation and amortization/accretion

     16,617       22,647       20,626  

Provision for credit losses

     -       4,300       -  

Net amortization of deferred loan fees

     (5,576 )     (4,442 )     (260 )

Stock option compensation expense

     1,419       1,875       1,744  

Life insurance gains

     -       -       (433 )

Securities gains

     (34 )     (71 )     (217 )

Gains on sales of premises and equipment

     -       (3,536 )     -  

Gain on disposal of premises and equipment

     -       (71 )     -  

Net changes in:

                        

Interest income receivable

     (2,499 )     (4,225 )     (2,963 )

Net deferred tax liability

     3,899       (246 )     3,662  

Other assets

     (3,534 )     (3,528 )     (14,806 )

Income taxes payable

     (1,054 )     353       (1,733 )

Interest expense payable

     (72 )     (5 )     (9 )

Other liabilities

     (6,940 )     14,280       (5,298 )

Net Cash Provided by Operating Activities

     88,735       107,744       80,702  

Investing Activities:

                        

Net repayments (disbursements) of loans

     193,755       (126,682 )     79,396  

Proceeds from life insurance policies

     -       -       1,273  

Purchases of debt securities available for sale

     (1,909,370 )     (2,102,983 )     (970,542 )

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

     1,204,455       1,260,846       631,016  

Proceeds from maturity/calls of debt securities held to maturity

     206,400       218,164       238,450  

Proceeds from sale of equity securities

     -       -       1,797  

Purchases of premises and equipment

     (1,324 )     (2,200 )     (3,994 )

Proceeds from sale of premises and equipment

     -       3,819       -  

Proceeds from sale of foreclosed assets

     -       114       307  

Net Cash Used in Investing Activities

     (306,084 )     (748,922 )     (22,297 )

Financing Activities:

                        

Net change in deposits

     725,977       875,358       (54,218 )

Net change in short-term borrowings

     43,701       71,617       (20,319 )

Exercise of stock options

     3,017       2,838       13,699  

Retirement of common stock

     (232 )     (16,496 )     (488 )

Common stock dividends paid

     (44,304 )     (44,285 )     (43,942 )

Net Cash Provided by (Used in) Financing Activities

     728,159       889,032       (105,268 )

Net Change In Cash and Due from Banks

     510,810       247,854       (46,863 )

Cash and Due from Banks at Beginning of Period

     621,275       373,421       420,284  

Cash and Due from Banks at End of Period

   $ 1,132,085     $ 621,275     $ 373,421  

Supplemental Cash Flow Disclosures:

                        

Supplemental disclosure of noncash activities:

                        

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

   $ 5,105     $ 7,697     $ 23,587  

Amount recognized upon initial adoption of ASU 2016-02

     -       -       15,325  

Securities purchases pending settlement

     -       29,000       -  

Supplemental disclosure of cash flow activities:

                        

Cash paid for amounts included in operating lease liabilities

     6,309       6,516       5,123  

Interest paid for the period

     2,027       1,830       1,898  

Income tax payments for the period

     27,673       26,462       24,491  

 

See accompanying notes to consolidated financial statements.

 

- 55 -
 

 

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1: Business and Accounting Policies

 

Westamerica Bancorporation, a registered bank holding company (the “Company”), provides a full range of banking services to corporate and individual customers in Northern and Central California through its wholly-owned subsidiary bank, Westamerica Bank (the “Bank”). The Bank is subject to competition from both financial and nonfinancial institutions and to the regulations of certain agencies and undergoes periodic examinations by those regulatory authorities. All of the financial service operations are considered by management to be aggregated in one reportable operating segment.

 

The Company has evaluated events and transactions subsequent to the balance sheet date. Based on this evaluation, the Company is not aware of any events or transactions that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in its consolidated financial statements. Certain amounts in prior periods have been reclassified to conform to the current presentation.

 

Impact of COVID-19 Pandemic

 

The COVID-19 coronavirus pandemic caused escalating infections in the United States beginning in the first quarter of 2020 that continued through the fourth quarter of 2021 and may continue for some time. The spread of the outbreak has disrupted the United States economy including banking and other financial activity in the market areas in which the Company and the Bank operate. 

 

The Bank's deposits are exclusively sourced within California and its loans are primarily to borrowers domiciled within California. Demand for the Bank's products and services, such as loans and deposits, could be affected as a result of the decline in economic activity within the state. 

 

The Bank's investment portfolio contains bonds for which the source of repayment is domestic mortgage repayments, domestic municipalities throughout the United States, and domestic and global corporations. The value of the Bank's investment portfolio may decline if, for example, the general economy deteriorates, inflation increases, credit ratings decline, the issuers’ financial condition deteriorates or the liquidity for debt securities declines.

 

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, all of which may negatively impact net interest income. 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".

 

In response to the pandemic, the United States federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") on March 27, 2020, providing an estimated $2 trillion fiscal stimulus to the United States economy. The CARES Act established the Paycheck Protection Program (PPP) with $350 billion to provide businesses with federally guaranteed loans to support payroll and certain operating expenses. The loans were guaranteed by the United States Small Business Administration (“SBA”) and funded through banks. During 2020 and the first six months of 2021, the Bank processed government guaranteed PPP loans which meaningfully increased interest-earning assets and related interest and fee income. PPP loans, net of deferred fees and costs, were $46 million at December 31, 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 continues to work with loan customers requesting deferral of loan payments due to economic weakness caused by the pandemic. At December 31, 2021, loans granted loan deferrals totaled $84 thousand, all of which were consumer automobile loans.

 

On December 27, 2020, the United States federal government enacted the Consolidated Appropriations Act, 2020 (CAA), which provided $900 billion in additional federal stimulus. Among other provisions, the CAA provided $284 billion for the PPP program and allowed businesses to apply for a second PPP loan.

 

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The extent of the spread of the coronavirus, its ultimate containment and its continuing effects on the economy and the Company are uncertain at this time. The effectiveness of the Federal Reserve Board's monetary policies and the federal government's fiscal policies in stimulating the United States economy is uncertain at this time.

 

The Company's net interest margin and non-interest income could decline and credit-related losses could increase for an uncertain period given the decline in economic activity occurring due to the coronavirus. The amount of impact on the Company's financial results is uncertain.

 

In addition, the Company's future success and profitability substantially depends upon the skills and experience of its executive officers and directors, many of whom have held positions with the Company for many years. The unanticipated loss or unavailability of key employees due to the outbreak could adversely affect the Company's ability to operate its business or execute its business strategy.

 

There are no comparable recent events that provide guidance as to the effect the spread of the COVID-19 pandemic may have, and, as a result, the Company cannot accurately predict the full extent of the impacts on the Company’s business, operations or the economy as a whole. However, the effects could have a material impact on the Company’s results of operations and heighten many of the other risks factors described in this Report. Any one or a combination of the factors identified above, or other factors, could materially adversely affect the Company's business, financial condition, results of operations and prospects.

 

Summary of Significant Accounting Policies

 

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The following is a summary of significant policies used in the preparation of the accompanying financial statements.

 

Accounting Estimates. Certain accounting policies underlying the preparation of these financial statements require Management to make 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 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 fair value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. The allowance for credit losses accounting is an area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting the accounting for the allowance for credit losses on loans is included in the following “Loans” and “Allowance for Credit Losses” sections. Carrying assets and liabilities at fair value inherently results in 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. The “Securities” section discusses the factors that may affect the valuation of the Company’s securities. Although the estimates contemplate current conditions actual results can change.

 

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all the Company’s subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The Company does not maintain or conduct transactions with any unconsolidated special purpose entities.

 

Cash. Cash includes Due From Banks balances which are readily convertible to known amounts of cash and are generally 90 days or less from maturity at the time of initiation, presenting insignificant risk of changes in value due to interest rate changes.

 

Equity Securities. Equity securities consist of marketable equity securities and mutual funds which are recorded at fair value. Unrealized gains and losses are included in net income. There were no equity securities at December 31, 2021 and December 31, 2020.

 

Debt Securities. Debt securities consist of the U.S. Treasury, securities of 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.

 

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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.

 

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 bank does not record expected credit losses.

 

Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. For available for sale debt securities, a decline in fair value due to credit loss 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 to not 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 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.

 

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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 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 loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans.

 

The preparation of these financial statements requires Management to estimate the amount of expected losses over the expected contractual life of the Bank’s 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.

 

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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.

 

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.

 

Nonrefundable fees and certain costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income over the contractual loan lives. Upon prepayment, unamortized loan fees, net of costs, are immediately recognized in interest income. Other fees, including those collected upon principal prepayments, are included in interest income when received. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an aggregate loan basis.

 

Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and, if applicable, vacated bank properties. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses. Other real estate owned is recorded at the fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Losses incurred subsequent to acquisition due to any decline in annual independent property appraisals are recognized as noninterest expense. Routine holding costs, such as property taxes, insurance and maintenance, and losses from sales and dispositions, are recognized as noninterest expense.

 

Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter.

 

Revenue Recognition. The Company recognizes revenue as it is earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. In certain circumstances, noninterest income is reported net of associated expenses that are directly related to variable volume-based sales or revenue sharing arrangements or when the Company acts on an agency basis for others.

 

Life Insurance Cash Surrender Value. The Company has purchased life insurance policies on certain directors and officers as well as acquired such assets as part of the acquisition of other banks. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. These assets are included in other assets on the consolidated balance sheets.

 

Intangible Assets. Intangible assets are comprised of goodwill, core deposit intangibles and other identifiable intangibles acquired in business combinations. Intangible assets with finite useful lives are amortized on an accelerated basis over their respective estimated useful lives not exceeding 15 years. Intangible assets with a finite useful life are reviewed at least annually for impairment. Any goodwill and any intangible asset acquired in a business combination determined to have an indefinite useful life is not amortized and is reviewed at least annually for impairment. If management determines, based on a qualitative review of events and circumstances, that it is more likely than not that the carrying value of the intangible asset will not be realized, an impairment test is performed to determine whether the asset’s fair value is less than the carrying amount of the asset.

 

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Impairment of Long-Lived Assets. The Company reviews its long-lived and certain intangible assets for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

Income Taxes. The Company and its subsidiaries file consolidated tax returns. The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. The Company determines deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to Management’s judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. Interest and penalties are recognized as a component of income tax expense.

 

Stock-based Compensation. The Company applies FASB ASC 718 – Compensation – Stock Compensation, to account for stock based awards granted to employees using the fair value method. The Company recognizes compensation expense for restricted performance share grants over the relevant attribution period. Restricted performance share grants have no exercise price, therefore, the intrinsic value is measured using an estimated per share price at the vesting date for each restricted performance share. The estimated per share price is adjusted during the attribution period to reflect actual stock price performance. The Company’s obligation for unvested outstanding restricted performance share grants is classified as a liability until the vesting date due to a cash settlement feature, at which time the issued shares become classified as shareholders’ equity.

 

Other. Securities and other property held by the Bank in a fiduciary or agency capacity are not included in the financial statements since such items are not assets of the Company or its subsidiaries.

 

Recently Adopted Accounting Standards

 

In the year ended December 31, 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.

 

In 2020, the Company adopted the following new accounting guidance:

 

FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changed estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB replaced the incurred loss model with the current expected credit loss (CECL) model, which accelerated recognition of credit losses. Additionally, credit losses relating to debt securities available-for-sale are recorded through an allowance for credit losses under the new standard. The Company is also required to provide additional disclosures related to the financial assets within the scope of the new standard.

 

The Company adopted the ASU provisions on a modified retrospective basis on January 1, 2020. Management evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management measured historical loss rates for each portfolio segment. Management also 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 adjustment to the allowance for credit losses was recorded through an offsetting after-tax adjustment to shareholders’ equity. The implementing entry increased allowance for credit losses by $2,017 thousand, reduced allowance for credit losses for unfunded credit commitments by $2,107 thousand and increased retained earnings by $52 thousand.

 

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The following table summarizes the impact of adoption of ASU 2016-13.

 

  

January 1, 2020

 
  

Balance,

  

Impact of

  

As reported

 
  

prior to adoption

  

adoption of

  

under

 
  

of ASU 2016-13

  

ASU 2016-13

  

ASU 2016-13

 
  

(In thousands)

 

Assets:

            

Allowance for credit losses on loans:

            

Commercial

 $4,959  $3,385  $8,344 

Commercial real estate

  4,064   618   4,682 

Construction

  109   (31)  78 

Residential real estate

  206   (132)  74 

Consumer and other installment loans

  6,445   1,878   8,323 

Unallocated

  3,701   (3,701)  - 

Allowance for credit losses on loans:

 $19,484  $2,017  $21,501 
             

Allowance for credit losses on debt securities held to maturity

  -   16   16 
             

Liabilities:

            

Allowance for credit losses for unfunded commitments

  2,160   (2,107)  53 

 

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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Note 2: Investment Securities

 

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 accumulated other comprehensive income, and debt securities held to maturity, which are carried at amortized cost, before allowance for credit losses of $7 thousand at December 31, 2021 and $9 thousand at December 31, 2020, follows:

 

  

At December 31, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential mortgage-backed securities ("MBS")

 $399,997  $11,766  $(37) $411,726 

Securities of U.S. Government entities

  119   -   -   119 

Obligations of states and political subdivisions

  90,107   3,842   (29)  93,920 

Corporate securities

  2,692,792   63,573   (9,630)  2,746,735 

Collateralized loan obligations

  1,385,331   1,743   (719)  1,386,355 

Total debt securities available for sale

  4,568,346   80,924   (10,415)  4,638,855 

Debt securities held to maturity

                

Agency residential MBS

  147,632   3,112   (18)  150,726 

Non-agency residential MBS

  758   2   (19)  741 

Obligations of states and political subdivisions

  158,013   3,082   -   161,095 

Total debt securities held to maturity

  306,403   6,196   (37)  312,562 

Total

 $4,874,749  $87,120  $(10,452) $4,951,417 

 

 

  

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 

 

 

 

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- 63 -
 

 

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

 

  

At December 31, 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

 $306,333  $309,257  $15,836  $15,941 

Over 1 to 5 years

  707,062   738,057   125,001   127,539 

Over 5 to 10 years

  2,320,559   2,347,242   17,176   17,615 

Over 10 years

  834,395   832,573   -   - 

Subtotal

  4,168,349   4,227,129   158,013   161,095 

MBS

  399,997   411,726   148,390   151,467 

Total

 $4,568,346  $4,638,855  $306,403  $312,562 

 

  

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.

 

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

 

  

Debt Securities Available for Sale

 
  

At December 31, 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

  7  $8,900  $(37)  2  $47  $-   9  $8,947  $(37)

Securities of U.S.
Government entities

  -   -   -   1   119   -   1   119   - 

Obligations of states
and political
subdivisions

  6   2,859   (27)  2   669   (2)  8   3,528   (29)

Corporate securities

  56   691,555   (9,630)  -   -   -   56   691,555   (9,630)

Collateralized loan
obligations

  19   208,199   (521)  8   51,523   (198)  27   259,722   (719)

Total

  88  $911,513  $(10,215)  13  $52,358  $(200)  101  $963,871  $(10,415)

 

- 64 -
 
 

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

 

  

Debt Securities Held to Maturity

 
  

At December 31, 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  $530  $(18)  3  $530  $(18)

Non-agency residential
MBS

  1   542   (19)  -   -   -   1   542   (19)

Total

  1  $542  $(19)  3  $530  $(18)  4  $1,072  $(37)

 

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 December 31, 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 December 31, 2021 and December 31, 2020, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $1,021,566 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. 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.

 

- 65 -
 
 

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

 

  

For the Year Ended December 31,

 
  

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)  (7)

Chargeoffs

  -   - 

Recoveries

  -   - 

Total ending balance

 $7  $9 

 

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 December 31, 2021, aggregated by credit rating:

 

  

Credit Risk Profile by Credit Rating

 
  

At December 31, 2021

 
  

AAA/AA/A

  

B-

  

Not Rated

  

Total

 
  

(In thousands)

 

Agency residential MBS

 $177  $-  $147,455  $147,632 

Non-agency residential MBS

  149   561   48   758 

Obligations of states and political subdivisions

  155,268   -   2,745   158,013 

Total

 $155,594  $561  $150,248  $306,403 

 

There were no debt securities held to maturity on nonaccrual status or past due 30 days or more as of December 31, 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 Years Ended December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands)

 
             

Taxable

 $106,329  $93,163  $77,800 

Tax-exempt from regular federal income tax

  8,424   12,151   15,736 

Total interest income from investment securities

 $114,753  $105,314  $93,536 

 

 

 

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- 66 -
 
 
 

Note 3: Loans and Allowance for Credit Losses          

 

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

 

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Commercial:

        

Paycheck Protection Program ("PPP") loans

 $45,888  $186,945 

Other

  187,202   207,861 

Total Commercial

  233,090   394,806 

Commercial Real Estate

  535,261   564,300 

Construction

  48   129 

Residential Real Estate

  18,133   23,471 

Consumer Installment & Other

  281,594   273,537 

Total

 $1,068,126  $1,256,243 

 

PPP loans are 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 no allowance for such loans. The following summarizes activity in the allowance for credit losses. The allowance for loan losses is shown under legacy GAAP for 2019.

 

  

Allowance for Credit Losses

 
  

For the Year Ended December 31, 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

  (2,411)  126   (4)  (2)  2,293   2 

Chargeoffs

  (56)  -   -   -   (3,192)  (3,248)

Recoveries

  228   743   -   -   1,935   2,906 

Total allowance for credit losses

 $6,966  $6,529  $2  $45  $9,972  $23,514 

 

  

Allowance for Credit Losses

 
  

For the Year Ended December 31, 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)

  746   929   (72)  (27)  2,731   -   4,307 

Chargeoffs

  (236)  -   -   -   (3,963)  -   (4,199)

Recoveries

  351   49   -   -   1,845   -   2,245 

Total allowance for credit losses

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

 

  

Allowance for Loan Losses

 
  

For the Twelve Months Ended December 31, 2019

 
                  

Consumer

         
      

Commercial

      

Residential

  

Installment

         
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for loan losses:

                            

Balance at beginning of period

 $6,311  $3,884  $1,465  $869  $5,645  $3,177  $21,351 

(Reversal) provision

  (2,023)  (16)  (1,356)  (663)  3,534   524   - 

Chargeoffs

  (97)  -   -   -   (4,473)  -   (4,570)

Recoveries

  768   196   -   -   1,739   -   2,703 

Total allowance for loan losses

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

 

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.” The 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.

 

- 67 -
 
 

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

 

  

Credit Risk Profile by Internally Assigned Grade

 
  

At December 31, 2021

 
  

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Total

 
  

(In thousands)

 

Grade:

                        

Pass

 $232,710  $521,300  $48  $16,874  $278,922  $1,049,854 

Substandard

  380   13,961   -   1,259   1,207   16,807 

Doubtful

  -   -   -   -   931   931 

Loss

  -   -   -   -   534   534 

Total

 $233,090  $535,261  $48  $18,133  $281,594  $1,068,126 

 

 

  

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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- 68 -
 
 

The following tables summarize loans by delinquency and nonaccrual status:

 

  

Summary of Loans by Delinquency and Nonaccrual Status

 
  

At December 31, 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

 $232,444  $383  $263  $-  $-  $233,090 

Commercial real estate

  534,748   223   -   -   290   535,261 

Construction

  48   -   -   -   -   48 

Residential real estate

  17,855   141   -   -   137   18,133 

Consumer installment and other

  276,793   3,184   1,013   339   265   281,594 

Total

 $1,061,888  $3,931  $1,276  $339  $692  $1,068,126 

 

  

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 December 31, 2021 and December 31, 2020. There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2021 and December 31, 2020.

 

The following tables provide information on impaired loans during the year ended December 31, 2019:

 

  

Impaired Loans

 
  

For the Year Ended

 
  

December 31, 2019

 
  

Average

  

Recognized

 
  

Recorded

  

Interest

 
  

Investment

  

Income

 
  

(In thousands)

 

Commercial

 $8,412  $140 

Commercial real estate

  7,428   139 

Residential real estate

  191   3 

Consumer installment and other

  44   1 

Total

 $16,075  $283 

 

 

 

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- 69 -
 
 

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

 

  

Troubled Debt Restructurings

 
  

At December 31, 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  $1,793  $- 

Residential real estate

  1   241   172   - 

Total

  3  $3,026  $1,965  $- 

 

  

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  $- 

 

During the year ended December 31 2021 and December 31, 2020, the Company did not modify any loans that were considered TDRs 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 year ended December 31, 2021 and December 31, 2020, the Company modified loans under Section 4013 of the CARES Act, granting 90 day deferrals of principal and interest payments. As of December 31, 2021, loans deferred under the CARES Act that are not considered TDRs consisted of consumer loans totaling $84 thousand. As of December 31, 2020, commercial real estate loans with deferred payments totaled $7.8 million, primarily for hospitality and retail properties. As of December 31, 2020, consumer and commercial loan deferrals were $2.5 million and $33 thousand, respectively. There were no chargeoffs related to TDRs made during the year ended December 31, 2021 and December 31, 2020. During the year ended December 31, 2021 and December 31, 2020, no TDR loans defaulted within 12 months of the modification date. A TDR is considered to be in default when payments are 90 days or more past due.

 

TDRs of $1,965 thousand included no loans on nonaccrual status at December 31, 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 December 31, 2021: five commercial real estate loans totaling $8.4 million secured by real property, $394 thousand of indirect consumer installment loans secured by personal property, one commercial loan with a balance of $57 thousand secured by business assets, and three residential real estate loans totaling $420 thousand secured by real property. There were no other collateral dependent loans at December 31, 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.

 

 

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- 70 -
 

 

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

 

 

  

At December 31, 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

 $34,784  $3,999  $8,690  $16,919  $30,694  $98,799  $193,885  $38,825  $232,710 

Substandard

  32   -   -   -   -   57   89   291   380 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $34,816  $3,999  $8,690  $16,919  $30,694  $98,856  $193,974  $39,116  $233,090 

 

  

At December 31, 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

 $116,181  $87,921  $78,200  $78,647  $83,642  $76,709  $521,300  $-  $521,300 

Substandard

  10,993   -   -   2,016   823   129   13,961   -   13,961 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $127,174  $87,921  $78,200  $80,663  $84,465  $76,838  $535,261  $-  $535,261 

 

  

At December 31, 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

 $-  $-  $-  $-  $-  $-  $-  $48  $48 

Substandard

  -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $-  $-  $-  $-  $-  $-  $-  $48  $48 

 

  

At December 31, 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

 $16,874  $-  $-  $-  $-  $-  $16,874  $-  $16,874 

Substandard

  1,259   -   -   -   -   -   1,259   -   1,259 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $18,133  $-  $-  $-  $-  $-  $18,133  $-  $18,133 

 

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 December 31, 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

 $7,884  $10,162  $25,932  $37,999  $58,178  $113,899  $254,054  $22,739  $276,793 

30-59 days past due

  197   139   634   504   662   1,034   3,170   14   3,184 

60-89 days past due

  5   20   156   150   186   408   925   88   1,013 

Past due 90 days or more

  1   17   81   62   109   40   310   29   339 

Nonaccrual

  -   -   -   -   -   -   -   265   265 

Total

 $8,087  $10,338  $26,803  $38,715  $59,135  $115,381  $258,459  $23,135  $281,594 

 

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

 

The Company held no other real estate owned (OREO) at December 31, 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 $247 thousand at December 31, 2021 and $346 thousand at December 31, 2020.

 

- 71 -
 
 
 

Note 4: 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 December 31, 2021, the Bank did not have credit extended to any one entity exceeding these limits. At December 31, 2021, the Bank had 33 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 3, the Company had loan commitments related to real estate loans of $34,226 thousand and $37,456 thousand at December 31, 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 December 31, 2021, the Bank held corporate bonds in 112 issuing entities that exceeded $5 million for each issuer.

 

 

Note 5: Premises, Equipment, Other Assets and Other Liabilities

 

Premises and equipment consisted of the following:

 

  

At December 31,

 
  

Cost

  

Accumulated Depreciation and Amortization

  

Net Book Value

 
  

(In thousands)

 

2021

            

Land

 $11,453  $-  $11,453 

Building and improvements

  43,009   (30,069)  12,940 

Leasehold improvements

  7,567   (5,967)  1,600 

Furniture and equipment

  26,642   (21,480)  5,162 

Total

 $88,671  $(57,516) $31,155 

2020

            

Land

 $11,453  $-  $11,453 

Building and improvements

  42,960   (28,922)  14,038 

Leasehold improvements

  6,944   (5,528)  1,416 

Furniture and equipment

  26,227   (20,321)  5,906 

Total

 $87,584  $(54,771) $32,813 

 

Depreciation and amortization of premises and equipment included in noninterest expense amounted to $2,978 thousand in 2021, $3,683 thousand in 2020 and $3,879 thousand in 2019.

 

Other assets consisted of the following:

 

  

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

  63,107   60,444 

Right-of-use asset

  17,980   18,832 

Limited partnership investments

  37,145   18,335 

Interest receivable

  35,521   33,022 

Prepaid assets

  4,757   4,572 

Other assets

  12,678   10,471 

Total other assets

 $185,415  $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.

 

- 72 -
 
 

The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. On January 28, 2022, Visa Inc. disclosed a revised conversion rate applicable to its class B common stock in its filed Form 10-Q for the quarterly period ended December 31, 2021. 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, was reduced from 1.6228 to 1.6181 per share, effective as of December 29, 2021. Visa Inc. class A common stock had a closing price of $216.71 per share on December 31, 2021, the last day of stock market trading for the fourth 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 December 31, 2021, this investment totaled $37,145 thousand and $26,485 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 December 31, 2021, the $26,485 thousand of outstanding equity capital commitments are expected to be paid as follows, $6,830 thousand in 2022, $11,826 thousand in 2023, $6,769 thousand in 2024, $241 thousand in 2025, $125 thousand in 2026, $203 thousand in 2027, and $491 thousand in 2028 or thereafter.

 

The amounts recognized in net income for these investments include:

 

  

For the Years Ended December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands)

 

Investment loss included in pre-tax income

 $2,620  $2,440  $2,400 

Tax credits recognized in provision for income taxes

  2,300   900   875 

 

Other liabilities consisted of the following:

 

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Net deferred tax liability

 $2,501  $25,778 

Operating lease liability

  17,980   18,832 

Securities purchases pending settlement

  -   29,000 

Other liabilities

  53,241   38,988 

Total other liabilities

 $73,722  $112,598 

 

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 December 31, 2021.

 

As of December 31, 2021, the Company’s lease liability and right-of-use asset were $17,980 thousand. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 4.2 years and 1.67%, respectively, at December 31, 2021. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of December 31, 2021.

 

Total lease costs during the year ended December 31, 2021 and December 31, 2020, of $6,581 thousand and $6,699 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 year ended December 31, 2021 and December 31, 2020.

 

 

 

 

- 73 -
 
 

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

 

  

Minimum
future lease
payments

 
  

At December 31,

 
  

2021

 
  

(In thousands)

 

2022

 $5,698 

2023

  4,984 

2024

  3,393 

2025

  2,201 

2026

  786 

Thereafter

  1,478 

Total minimum lease payments

  18,540 

Less: discount

  (560)

Present value of lease liability

 $17,980 

 

See Note 10 to the consolidated financial statements for additional information related to the net deferred tax liability.

 

 

Note 6: 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 year ended December 31, 2021 and 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 year ended December 31, 2021 and December 31, 2020, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

  

At December 31, 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 December 31, 2021

  

At December 31, 2020

 
  

Gross

      

Gross

     
  

Carrying

  

Accumulated

  

Carrying

  

Accumulated

 
  

Amount

  

Amortization

  

Amount

  

Amortization

 
  

(In thousands)

 

Core deposit intangibles

 $56,808  $(55,973) $56,808  $(55,704)

 

As of December 31, 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 year ended Decptember 31, 2021 (actual)

 $269 

Estimate for year ending December 31, 2022

  252 

2023

  236 

2024

  222 

2025

  125 

 

- 74 -
 
 
 

Note 7: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   

Deposits

  
   

At December 31,

    

At December 31,

  
   

2021

    

2020

  
   

(In thousands)

  

Noninterest-bearing

   $ 3,069,080     $ 2,725,177  

Interest-bearing:

                

Transaction

     1,260,869       1,102,601  

Savings

     1,940,395       1,703,812  

Time deposits less than $100 thousand

     72,527       79,825  

Time deposits $100 thousand through $250 thousand

     47,666       49,323  

Time deposits more than $250 thousand

     23,419       27,241  

Total deposits

   $ 6,413,956     $ 5,687,979  

 

Demand deposit overdrafts of $611 thousand and $682 thousand were included as loan balances at December 31, 2021 and December 31, 2020, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $265 thousand in 2021, $319 thousand in 2020 and $326 thousand in 2019.

 

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 December 31,

    

At December 31,

  
   

2021

    

2020

  

Repurchase agreements:

  

(In thousands)

  

Collateral securing borrowings:

                

Agency residential MBS

   $ 42,295     $ 67,019  

Corporate securities

     254,005       188,195  

Total collateral carrying value

   $ 296,300     $ 255,214  

Total short-term borrowed funds

   $ 146,246     $ 102,545  

 

  

For the Years Ended December 31,

 
  

2021

  

2020

 
  

Highest Balance at Any Month-end

 
  

(In thousands)

 

Securities sold under repurchase agreements

 $146,552  $110,846 

 
 

Note 8: Shareholders’ Equity

 

The Company grants stock options and restricted performance shares to employees in exchange for employee services, pursuant to the shareholder-approved 2019 Omnibus Equity Incentive Plan. Prior to shareholder approval of the 2019 Omnibus Equity Incentive Plan on April 25, 2019, the Company granted stock options and restricted performance shares under its 1995 Stock Option Plan, which was last amended and restated in 2012. Nonqualified stock option grants (“NQSO”) are granted with an exercise price equal to the fair market value of the related common stock on the grant date. NQSO generally become exercisable in equal annual installments over a three-year period with each installment vesting on the anniversary date of the grant. Each NQSO has a maximum ten-year term. A restricted performance share grant becomes vested after three years of being awarded, provided the Company has attained its performance goals for such three-year period.

 

 

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- 75 -
 
 

The following table summarizes information about stock options granted under the Plan as of December 31, 2021. The intrinsic value is calculated as the difference between the market value as of December 31, 2021 and the exercise price of the shares. The market value as of December 31, 2021 was $57.73 as reported by the NASDAQ Global Select Market:

 

 

    

Options Outstanding

  

Options Exercisable

 
    

At December 31, 2021

  

For the Year Ended December 31, 2021

  

At December 31, 2021

  

For the Year Ended December 31, 2021

 

Range of Exercise Price

  

Number Outstanding

  

Aggregate Intrinsic Value

  

Weighted Average Remaining Contractual Life

  

Weighted Average Exercise Price

  

Number Exercisable

  

Aggregate Intrinsic Value

  

Weighted Average Remaining Contractual Life

  

Weighted Average Exercise Price

 
    

(In thousands)

  

(Years)

      

(In thousands)

  

(Years)

     
 400 -455   34  $527   3.8  $42   34  $527   3.8  $42 
 45 - 50   -   -   -   -   -   -   -   - 
 50 - 55   15   67   2.1   53   15   67   2.1   53 
 55 - 60   260   161   7.8   57   83   46   5.1   57 
 60 - 65   316       6.6   62   258       6.5   62 
 65 - 70   168   -   8.1   66   56   -   8   66 
 400 -700   793  $755   7.1   60   446  $640   6.1   60 

 

The Company applies the Roll-Geske option pricing model (Modified Roll) to determine grant date fair value of stock option grants. This model modifies the Black-Scholes Model to take into account dividends and American options. During the year ended December 31, 2021, 2020 and 2019, the Company granted 193 thousand, 184 thousand and 250 thousand stock options, respectively. The following weighted average assumptions were used in the option pricing to value stock options granted in the periods indicated:

 

  

For the Years Ended December 31,

 
  

2021

  

2020

  

2019

 

Expected volatility (1)

  20%  20%  20%

Expected life in years (2)

  4.7   3.5   4.7 

Risk-free interest rate (3)

  0.46%  1.52%  2.67%

Expected dividend yield

  2.79%  2.59%  2.55%

Fair value per award

 $7.50  $8.64  $10.19 

 

(1)

Measured using daily price changes of Company’s stock over respective expected term of the option and the implied volatility derived from the market prices of the Company’s stock and traded options.

(2)

The number of years that the Company estimates that the options will be outstanding prior to exercise.

(3)

The risk-free rate over the expected life based on the US Treasury yield curve in effect at the time of the grant.

 

Employee stock option grants are being expensed by the Company over the grants’ three year vesting period. The Company issues new shares upon the exercise of options. The number of shares authorized to be issued for options at December 31, 2021 is 967 thousand.

 

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- 76 -
 
 

A summary of option activity during the year ended December 31, 2021 is presented below:

 

  

Shares

  

Weighted Average Exercise Price

  

Weighted Average Remaining Contractual Term

 
  

(In thousands)

      

(Years)

 

Outstanding at January 1, 2021

  693  $61.25     

Granted

  193   57.08     

Exercised

  (53)  56.82     

Forfeited or expired

  (40)  62.14     

Outstanding at December 31, 2021

  793   60.48   7.1 

Exercisable at December 31, 2021

  446   60.07   6.1 

 

A summary of the Company’s nonvested option activity during the year ended December 31, 2021 is presented below:

 

  

Shares

  

Weighted Average Grant Date Fair Value

 
  

(In thousands)

     

Nonvested at January 1, 2021

  373  $9.39 

Granted

  193   7.50 

Vested

  (185)  9.61 

Forfeited

  (34)  8.42 

Nonvested at December 31, 2021

  347  $8.31 

 

The estimated grant date fair value for options granted under the Company’s stock option plan during the twelve months ended December 31, 2021, 2020 and 2019 was $7.50, $8.64 and $10.19 per share, respectively. The total remaining unrecognized compensation cost related to nonvested awards as of December 31, 2021 is $2,494 thousand and the weighted average period over which the cost is expected to be recognized is 1.8 years.

 

The total intrinsic value of options exercised during the twelve months ended December 31, 2021, 2020 and 2019 was $454 thousand, $693 thousand and $3,398 thousand, respectively. The total fair value of Restricted Performance Shares (“RPSs”) that vested during the twelve months ended December 31, 2021, 2020 and 2019 was $527 thousand, $534 thousand and $1,073 thousand, respectively. The total fair value of options vested during the twelve months ended December 31, 2021, 2020 and 2019 was $1,783 thousand, $1,735 thousand and $1,980 thousand, respectively. During the twelve months of 2021, 53 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction equal to the related share based compensation expense. During the twelve months of 2020, 52 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $295 thousand. During the twelve months of 2019, 516 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1,485 thousand. The excess deductions resulting from the exercise of nonqualified stock options reduced the income tax provision by $-0- thousand in 2021, $87 thousand in 2020 and $435 thousand in 2019.

 

A summary of the status of the Company’s restricted performance shares as of December 31, 2021 and 2020 and changes during the twelve months ended on those dates, follows:

 

  

2021

  

2020

 
  

(In thousands)

 

Outstanding at January 1,

  28   27 

Granted

  13   10 

Issued upon vesting

  (9)  (9)

Forfeited

  (2)  - 

Outstanding at December 31,

  30   28 

 

As of December 31, 2021 and 2020, the restricted performance shares had a weighted-average contractual life of 1.4 years and 1.3 years, respectively. The compensation cost that was charged against income for the Company’s restricted performance shares granted was $610 thousand, $533 thousand and $758 thousand for the year ended December 31, 2021, 2020 and 2019, respectively. There were no stock appreciation rights or incentive stock options granted in the year ended December 31, 2021 and 2020.

 

- 77 -
 
 

On February 13, 2009, the Company issued a warrant to purchase 246,640 shares of the Company’s common stock at an exercise price of $50.92 per share. The warrants may be exercised in a manner wherein the Company withholds shares of common stock issuable upon exercise of the warrant equal in value to the aggregate exercise price, in which case the warrant holder would not deliver cash for the aggregate exercise price and the Company would issue a number of shares equal to the intrinsic value on the exercise date. On January 29, 2019, the warrants were exercised in a cashless transaction resulting in the issuance of 50,788 shares of the Company’s common stock.

 

The Company repurchases and retires its common stock in accordance with Board of Directors approved share repurchase programs. At December 31, 2021, 1,750 thousand shares remained available to repurchase under such plans.

 

Shareholders have authorized two additional classes of stock of one million shares each, to be denominated “Class B Common Stock” and “Preferred Stock,” respectively, in addition to the 150 million shares of common stock presently authorized. At December 31, 2021, no shares of Class B Common Stock or Preferred Stock were outstanding.

 

 

Note 9: Regulatory Capital

 

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) require the Company to maintain a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios to avoid restrictions on dividends and equity repurchases and other payments such as discretionary bonuses to executive officers. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2021 and December 31, 2020, the Company and Bank met all capital adequacy requirements to which they are subject.

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2021 and 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

The capital ratios for the Company and the Bank as of the dates indicated are presented in the table below. For Common Equity Tier 1 Capital, Tier 1 Capital and Total Capital, the required percentages for capital adequacy purposes include the 2.5% capital conservation buffer.

 

  

At December 31, 2021

  

Required
for Capital
Adequacy Purposes

  

To Be Well-capitalized
Under Prompt Corrective
Action Regulations

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

($ in thousands)

 

Common Equity Tier 1 Capital

                        

Company

 $653,026   14.93% $306,277   7.00%  N/A   N/A 

Bank

  540,538   12.48%  303,111   7.00% $281,460   6.50%

Tier 1 Capital

                        

Company

  653,026   14.93%  371,908   8.50%  N/A   N/A 

Bank

  540,538   12.48%  368,063   8.50%  346,412   8.00%

Total Capital

                        

Company

  676,749   15.47%  459,416   10.50%  N/A   N/A 

Bank

  570,260   13.17%  454,666   10.50%  433,016   10.00%

Leverage Ratio (1)

                        

Company

  653,026   9.06%  288,423   4.00%  N/A   N/A 

Bank

  540,538   7.55%  286,432   4.00%  358,040   5.00%

 

(1)

The leverage ratio consists of Tier 1capital divided by the most recent quarterly average total assets, excluding certain intangible assets.

 

- 78 -
 
 
  

At December 31, 2020

  

Required
for Capital
Adequacy Purposes

  

To Be Well-capitalized
Under Prompt Corrective
Action Regulations

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

($ in thousands)

 

Common Equity Tier 1 Capital

                        

Company

 $604,833   16.04% $263,903   7.00%  N/A   N/A 

Bank

  484,270   13.00%  260,755   7.00% $242,130   6.50%

Tier 1 Capital

                        

Company

  604,833   16.04%  320,454   8.50%  N/A   N/A 

Bank

  484,270   13.00%  316,632   8.50%  298,006   8.00%

Total Capital

                        

Company

  628,797   16.68%  395,855   10.50%  N/A   N/A 

Bank

  514,234   13.80%  391,133   10.50%  372,508   10.00%

Leverage Ratio (1)

                        

Company

  604,833   9.40%  257,488   4.00%  N/A   N/A 

Bank

  484,270   7.58%  255,560   4.00%  319,451   5.00%

 

(1)

The leverage ratio consists of Tier 1capital divided by the most recent quarterly average total assets, excluding certain intangible assets.

 

 

Note 10: Income Taxes

 

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amounts reported in the financial statements of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Amounts for the current year are based upon estimates and assumptions as of the date of these financial statements and could vary significantly from amounts shown on the tax returns as filed. Net deferred tax assets are included with other assets in the consolidated balance sheets.

 

The components of the net deferred tax liability are as follows:

 

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Deferred tax asset

        

Allowance for credit losses

 $6,852  $6,789 

State franchise taxes

  2,518   2,262 

Deferred compensation

  4,524   4,789 

Purchased assets and assumed liabilities

  475   552 

Post-retirement benefits

  445   480 

Employee benefit accruals

  2,792   2,353 

VISA Class B shares

  348   284 

Limited partnership investments

  -   1,066 

Impaired capital assets

  2,673   2,429 

Accrued liabilities

  748   416 

Premises and equipment

  1,001   585 

Lease liability

  5,263   5,513 

Other

  103   800 

Sub total deferred tax asset

  27,742   28,318 

Tax valuation

  (1,776)  - 

Total deferred tax asset

  25,966   28,318 

Deferred tax liability

        

Net deferred loan fees

  196   106 

Securities available for sale

  20,845   48,021 

Right-of-use asset

  5,263   5,513 

Intangible assets

  459   456 

Limited partnership investments

  1,704   - 

Total deferred tax liability

  28,467   54,096 

Net deferred tax liability

 $(2,501) $(25,778)

 

- 79 -
 
 

At December 31, 2021 and December 31, 2020, the Company had $2,673 thousand and $2,429 thousand, respectively, deferred tax asset related to California capital loss carryforwards, which will expire if unutilized within five years of the year incurred. At December 31, 2021 and December 31, 2020, a valuation allowance recorded for the portion of the tax benefit that was expected to expire was $1,776 thousand and $-0-, respectively.

 

The provision for federal and state income taxes consists of amounts currently payable and amounts deferred as follows:

 

  

For the Years Ended December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands)

 

Current income tax expense:

            

Federal

 $15,299  $15,982  $11,570 

State

  11,320   10,654   9,595 

Total current

  26,619   26,636   21,165 

Deferred income tax expense (benefit):

            

Federal

  1,281   (538)  2,411 

State

  842   292   982 

Total deferred

  2,123   (246)  3,393 

Change in valuation reserve:

            

Federal

  (472)  -   (71)

State

  2,248   -   340 

Total change in valuation reserve

  1,776   -   269 

Provision for income taxes

 $30,518  $26,390  $24,827 

 

The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate to income before taxes, as follows:

 

  

For the Years Ended December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands)

 

Federal income taxes due at statutory rate

 $24,576  $22,429  $22,095 

Additions (reductions) in income taxes resulting from:

            

Interest on state and municipal securities and loans not taxable for federal income tax purposes

  (2,070)  (2,808)  (3,584)

State franchise taxes, net of federal income tax benefit

  9,757   8,647   8,625 

Change in valuation reserve

  1,776   -   269 

Stock compensation deduction in excess of book expense

  -   (62)  (312)

Tax credits

  (2,621)  (1,061)  (1,040)

Dividend received deduction

  (48)  (44)  (38)

Cash value life insurance

  (389)  (383)  (464)

Other

  (463)  (328)  (724)

Provision for income taxes

 $30,518  $26,390  $24,827 

 

At December 31, 2021 and December 31, 2020, the Company had no uncertain tax positions related to previous years’ tax returns which were under examination.

 

The Company classifies interest and penalties as a component of the provision for income taxes. For tax years 2021 and 2020, no interest or penalties were recognized as a component of the provision for income taxes. At December 31, 2021, the tax years ended December 31, 2020, 2019 and 2018 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2020, 2019, 2018 and 2017 remain subject to examination by the California Franchise Tax Board.

 

 

Note 11: 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.

 

- 80 -
 
 

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

 

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

 

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

 

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mutual funds, federal agency securities, mortgage-backed securities, corporate securities, 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 December 31, 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)

 $411,726  $-  $411,726  $- 

Securities of U.S. Government entities

  119   -   119   - 

Obligations of states and political subdivisions

  93,920   -   93,920   - 

Corporate securities

  2,746,735   -   2,746,735   - 

Collateralized loan obligations

  1,386,355   -   1,386,355   - 

Total debt securities available for sale

 $4,638,855  $-  $4,638,855  $- 

 

(1)

There were no transfers in to or out of level 3 during the year ended December 31, 2021.

 

- 81 -
 
 
  

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 December 31, 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

 
                  

Year Ended

 
  

At December 31, 2021

  

December 31, 2021

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

 
  

(In thousands)

 

Loans:

                    

Commercial real estate

 $225  $-  $-  $225  $- 

Residential real estate

  172   -   -   172   - 

Total assets measured at fair value on a nonrecurring basis

 $397  $-  $-  $397  $- 

 

                  

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.

 

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.

 

- 82 -
 
 

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 December 31, 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

 $1,132,085  $1,132,085  $1,132,085  $-  $- 

Debt securities held to maturity

  306,396   312,562   -   312,562   - 

Loans

  1,044,612   1,059,072   -   -   1,059,072 
                     

Financial Liabilities:

                    

Deposits

 $6,413,956  $6,413,244  $-  $6,270,344  $142,900 

Short-term borrowed funds

  146,246   146,246   -   146,246   - 

 

  

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 12: 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 $34,226 thousand at December 31, 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 $233,850 thousand at December 31, 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 $3,693 thousand at December 31, 2021 and $2,357 thousand at December 31, 2020. Commitments for commercial and similar letters of credit totaled $95 thousand at December 31, 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 December 31, 2021 and December 31, 2020. At December 31, 2021, the Company had a reserve for unfunded commitments of $201 thousand for the above-mentioned loan commitments of $34,226 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.

 

- 83 -
 
 

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 $452 thousand and $4,410 thousand during the year ended December 31, 2021 and December 31, 2020, respectively, to customers eligible for refunds. The remaining accrued obligations at December 31, 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 13: Retirement Benefit Plans

 

The Company sponsors a qualified defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. The costs charged to noninterest expense related to discretionary Company contributions to the Deferred Profit-Sharing Plan were $1,028 thousand in 2021, $917 thousand in 2020 and $1,000 thousand in 2019.

 

The Company also sponsors a qualified defined contribution Tax Deferred Savings/Retirement Plan (ESOP) covering salaried employees who become eligible to participate upon completion of a 90-day introductory period. The Tax Deferred Savings/ Retirement Plan (ESOP) allows employees to defer, on a pretax or after-tax basis, a portion of their salaries as contributions to this Plan. Participants may invest in several funds, including one fund that invests primarily in Westamerica Bancorporation common stock. The Company funds contributions to match participating employees’ contributions, subject to certain limits. The matching contributions charged to compensation expense were $972 thousand in 2021, $995 thousand in 2020 and $986 thousand in 2019.

 

The Company offers a continuation of group insurance coverage to eligible employees electing early retirement, for the period from the date of retirement until age 65. For eligible employees the Company pays a portion of these early retirees’ group insurance premiums. The Company also reimburses a portion of Medicare Part B premiums for all qualifying retirees over age 65 and, if eligible, their spouses. Eligibility for post-retirement medical benefits is based on age and years of service, and restricted to employees hired prior to February 1, 2006 who elect early retirement prior to January 1, 2021. The Company uses an actuarial-based accrual method of accounting for post-retirement benefits. The Company used a December 31 measurement date for determining post-retirement medical benefit calculations.

 

The following tables set forth the net periodic post-retirement benefit cost and the change in the benefit obligation for the year ended December 31 and the funded status of the post-retirement benefit plan as of December 31:

 

Net Periodic Benefit Cost

 

  

At December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands)

 

Service benefit

 $(15) $(35) $(57)

Interest cost

  30   52   72 

Net periodic cost

 $15  $17  $15 

 

 

 

 

 

 

 

 

 

- 84 -
 
 

Obligation and Funded Status

 

  

At December 31,

 
  

2021

  

2020

  

2019

 

Change in benefit obligation

 

(In thousands)

 

Benefit obligation at beginning of year

 $1,654  $1,782  $1,913 

Service benefit

  (15)  (35)  (57)

Interest cost

  30   52   72 

Benefits paid

  (142)  (145)  (146)

Benefit obligation at end of year

 $1,527  $1,654  $1,782 

Accumulated post-retirement benefit obligation attributable to:

            

Retirees

 $1,527  $1,654  $1,782 

Other

  -   -   - 

Total

 $1,527  $1,654  $1,782 

Fair value of plan assets

  -   -   - 

Accumulated post-retirement benefit obligation in excess of plan assets

 $1,527  $1,654  $1,782 

 

Additional Information

 

Assumptions

 

  

At December 31,

 
  

2021

  

2020

  

2019

 
             

Weighted-average assumptions used to determine benefit obligations

            

Discount rate

  2.46%  1.80%  2.90%

Weighted-average assumptions used to determine net periodic benefit cost

            

Discount rate

  1.80%  2.90%  3.76%

 

The above discount rate is based on the expected return of a portfolio of Corporate Aa debt, the term of which approximates the term of the benefit obligations. The Company reserves the right to terminate or alter post-employment health benefits. Post-retirement medical benefits are currently fixed amounts without provision for future increases; as a result, the assumed annual average rate of inflation used to measure the expected cost of benefits covered by this program is zero percent for 2022 and beyond.

 

  

Estimated future benefit payments

 
  

(In thousands)

 

2022

 $143 

2023

  143 

2024

  142 

2025

  142 

2026

  135 

Years 2027-2031

  534 

 

 

[The remainder of this page intentionally left blank]

 

 

 

 

- 85 -
 

 
 

Note 14: Related Party Transactions

 

Certain of the Directors, executive officers and their associates have had banking transactions with subsidiaries of the Company in the ordinary course of business. The table below reflects information concerning loans to certain directors and executive officers and/or family members during 2021 and 2020:

 

  

2021

  

2020

 
  

($ in thousands)

 
         

Balance at January 1,

 $499  $533 

Originations

  -   - 

Principal reductions

  (45)  (34)

Balance at December 31,

 $454  $499 

Percent of total loans outstanding.

  0.04%  0.04%

 

 

Note 15: Regulatory Matters

 

Payment of dividends to the Company by the Bank is limited under regulations for state chartered banks. The amount that can be paid in any calendar year, without prior approval from regulatory agencies, cannot exceed the net profits (as defined) for the preceding three calendar years less dividends paid. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972.

 

 

Note 16: Other Comprehensive Income (loss)

 

The components of other comprehensive income (loss) and other related tax effects were:

 

  

2021

 
  

Before tax

  

Tax effect

  

Net of tax

 
  

(In thousands)

 

Debt securities available for sale:

            

Changes in net unrealized gains arising during the year

 $(91,891) $27,167  $(64,724)

Reclassification of gains included in net income

  (34)  10   (24)

Other comprehensive income

 $(91,925) $27,177  $(64,748)

 

  

2020

 
  

Before tax

  

Tax effect

  

Net of tax

 
  

(In thousands)

 

Debt securities available for sale:

            

Changes in net unrealized gains arising during the year

 $125,519  $(37,108) $88,411 

Reclassification of gains included in net income

  (71)  21   (50)

Other comprehensive income

 $125,448  $(37,087) $88,361 

 

  

2019

 
  

Before tax

  

Tax effect

  

Net of tax

 
  

(In thousands)

 

Debt securities available for sale:

            

Changes in net unrealized gains arising during the year

 $93,936  $(27,771) $66,165 

Reclassification of gains included in net income

  (167)  49   (118)

Other comprehensive income

 $93,769  $(27,722) $66,047 

 

- 86 -
 
 

Accumulated other comprehensive income (loss) balances were:

 

  

Accumulated Other Comprehensive (Loss) Income

 
  

(In thousands)

 

Balance, December 31, 2018

 $(39,996)

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

  66,047 

Balance, December 31, 2019

  26,051 

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

  88,361 

Balance, December 31, 2020

  114,412 

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

  (64,748)

Balance, December 31, 2021

 $49,664 

 
 

Note 17: 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 Years Ended December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands, except per share data)

 

Net income (numerator)

 $86,509  $80,413  $80,389 

Basic earnings per common share

            

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

  26,855   26,942   26,956 

Basic earnings per common share

 $3.22  $2.98  $2.98 

Diluted earnings per common share

            

Weighted average number of common shares outstanding - basic

  26,855   26,942   26,956 

Add common stock equivalents for options

  15   18   50 

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

  26,870   26,960   27,006 

Diluted earnings per common share

 $3.22  $2.98  $2.98 

 

For the years ended December 31, 2021, 2020 and 2019, options to purchase 649 thousand, 577 thousand and 382 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

 

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-
87 -
 
 
 

Note 18: Westamerica Bancorporation (Parent Company Only Condensed Financial Information)

 

Statements of Income and Comprehensive Income

 

  

For the Years Ended December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands)

 

Dividends from subsidiaries

 $29,279  $10,783  $80,067 

Interest income

  44   56   54 

Other income

  11,608   11,438   8,778 

Total income

  40,931   22,277   88,899 

Salaries and benefits

  6,612   7,107   6,978 

Other expense

  2,279   2,206   3,729 

Total expense

  8,891   9,313   10,707 

Income before taxes and equity in undistributed income of subsidiaries

  32,040   12,964   78,192 

Income tax (expense) benefit

  (645)  (454)  636 

Earnings of subsidiaries greater than subsidiary dividends

  55,114   67,903   1,561 

Net income

  86,509   80,413   80,389 

Other comprehensive (loss) income, net of tax

  (64,748)  88,361   66,047 

Comprehensive income

 $21,761  $168,774  $146,436 

 

Balance Sheets

 

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Assets

        

Cash

 $69,943  $78,364 

Investment in Westamerica Bank

  720,614   730,248 

Investment in non-bank subsidiaries

  454   455 

Premises and equipment, net

  9,968   10,459 

Accounts receivable from Westamerica Bank

  224   257 

Other assets

  42,026   40,852 

Total assets

 $843,229  $860,635 

Liabilities

        

Accounts payable to Westamerica Bank

 $62  $29 

Other liabilities

  16,065   15,797 

Total liabilities

  16,127   15,826 

Shareholders' equity

  827,102   844,809 

Total liabilities and shareholders' equity

 $843,229  $860,635 

 

 

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- 88 -
 
 

Statements of Cash Flows

 

  

For the Years Ended December 31,

 
  

2021

  

2020

  

2019

 
  

(In thousands)

 

Operating Activities

            

Net income

 $86,509  $80,413  $80,389 

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

            

Depreciation and amortization

  569   608   449 

Decrease (increase) in accounts receivable from affiliates

  117   (150)  80 

Increase in other assets

  (1,223)  (2,421)  (71)

Stock option compensation expense

  1,419   1,875   1,744 

Provision (benefit) for deferred income tax

  645   428   (315)

Increase in other liabilities

  254   855   856 

Earnings of subsidiaries greater than subsidiary dividends

  (55,114)  (67,903)  (1,561)

Gain on disposal of premises and equipment

  -   (61)  (1,055)

Net Cash Provided by Operating Activities

  33,176   13,644   80,516 

Investing Activities

            

Purchases of equipment

  (78)  -   - 

Net Cash Used by Investing Activities

  (78)  -   - 

Financing Activities

            

Exercise of stock options

  3,017   2,838   13,699 

Retirement of common stock

  (232)  (16,496)  (488)

Common stock dividends paid

  (44,304)  (44,285)  (43,942)

Net Cash Used in Financing Activities

  (41,519)  (57,943)  (30,731)

Net change in cash and due from banks

  (8,421)  (44,299)  49,785 

Cash and due from banks at beginning of period

  78,364   122,663   72,878 

Cash and due from banks at end of period

 $69,943  $78,364  $122,663 

Supplemental Cash Flow Disclosures:

            

Supplemental disclosure of cash flow activities:

            

Interest paid for the period

 $-  $-  $- 

Income tax payments for the period

  27,673   26,462   24,491 

 

 

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- 89 -
 
 
 

Note 19: Quarterly Financial Information (Unaudited)

 

  

For the Three Months Ended

 
  

March 31,

  

June 30,

  

September 30,

  

December 31,

 
  

(In thousands, except per share data and

 
  

price range of common stock)

 

2021

                

Interest and loan fee income

 $42,316  $44,276  $43,810  $43,041 

Net interest income

  41,841   43,792   43,318   42,537 

Provision for loan losses

  -   -   -   - 

Noninterest income

  10,189   11,032   11,282   10,842 

Noninterest expense

  24,906   24,291   24,697   23,912 

Income before taxes

  27,124   30,533   29,903   29,467 

Net income

  20,147   22,579   22,063   21,720 

Basic earnings per common share

  0.75   0.84   0.82   0.81 

Diluted earnings per common share

  0.75   0.84   0.82   0.81 

Dividends paid per common share

  0.41   0.41   0.41   0.42 

Price range, common stock

  55.82-66.43   57.67-64.80   54.03-58.55   53.78-58.00 

2020

                

Interest and loan fee income

 $39,991  $41,539  $41,365  $42,961 

Net interest income

  39,549   41,104   40,899   42,480 

Provision for loan losses

  4,300   -   -   - 

Noninterest income

  11,648   9,554   10,476   13,959 

Noninterest expense

  24,664   24,754   24,603   24,545 

Income before taxes

  22,233   25,904   26,772   31,894 

Net income

  16,962   19,562   20,051   23,838 

Basic earnings per common share

  0.63   0.72   0.74   0.89 

Diluted earnings per common share

  0.63   0.72   0.74   0.89 

Dividends paid per common share

  0.41   0.41   0.41   0.41 

Price range, common stock

  47.37-68.01   53.40-64.86   51.84-63.58   51.49-59.70 

2019

                

Interest and loan fee income

 $39,483  $39,626  $39,695  $39,878 

Net interest income

  38,989   39,139   39,240   39,427 

Provision for loan losses

  -   -   -   - 

Noninterest income

  11,579   12,288   11,809   11,732 

Noninterest expense

  25,183   25,561   24,033   24,209 

Income before taxes

  25,385   25,866   27,016   26,950 

Net income

  19,646   19,625   20,390   20,728 

Basic earnings per common share

  0.73   0.73   0.76   0.77 

Diluted earnings per common share

  0.73   0.73   0.75   0.77 

Dividends paid per common share

  0.40   0.41   0.41   0.41 

Price range, common stock

  56.82-64.48   59.51-64.82   59.26-64.56   60.65-68.58 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Shareholders and the Board of Directors of

Westamerica Bancorporation

San Rafael, California

 

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

 

Change in Accounting Principle

 

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standard Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method provided in ASC 326 such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

 

Basis for Opinions

 

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

(Continued)

 

- 91 -
 

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Credit Losses on Loans – Reasonable and Supportable Forecasts - Refer to Notes 1 and 3 to the financial statements

 

The allowance for credit losses is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures. ASC 326, Financial Instruments – Credit Losses, requires a financial asset (or a group of financial assets), including the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. The allowance for credit losses on loans as of December 31, 2021 was $23,514,000.

 

The Company estimates the amount of expected losses over the life of its existing loan portfolio and establishes an allowance for credit losses. Loans that share common risk characteristics are segregated into pools based on those characteristics. Historical loss rates are determined for each pool. Historical loss rates are adjusted for estimated losses based on current conditions and management’s reasonable and supportable forecasts of economic trends over a forecast horizon of up to two years. Significant management judgments are required in the development and application of reasonable and supportable forecasts.

 

We identified the development and application of reasonable and supportable forecasts as a critical audit matter because of the significant auditor judgment and audit effort to evaluate the subject judgments made by management, including the need to involve more experienced audit personnel.

 

The primary procedures we performed to address this critical audit matter included:

 

 

●

Testing the effectiveness of controls over the development and application of reasonable and supportable forecasts, including controls addressing:
 

o

The conceptual design of the reasonable and supportable forecasts methodology,
 

o

Significant judgments and assumptions in the reasonable and supportable forecasts methodology, including the selection and application of economic variables,
 

o

The accuracy of the reasonable and supportable forecasts calculation, including the completeness, accuracy and relevance of underlying data.

 

 

(Continued)

 

- 92 -
 

 

 

●

Substantively testing management’s process for the development and application of reasonable and supportable forecasts, including:
 

o

Evaluation of the conceptual design of the reasonable and supportable forecasts methodology,
 

o

Evaluation of significant judgments and assumptions in the reasonable and supportable forecasts methodology, including the selection and application of economic variables,
 

o

Evaluation of the accuracy of the reasonable and supportable forecasts calculation, including the completeness, accuracy and relevance of underlying data.

 

 

 

 

 

/s/ Crowe LLP                                             

Crowe LLP

 

We have served as the Company's auditor since 2015.

 

Sacramento, California

February 25, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 93 -
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of December 31, 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 December 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting and the attestation Report of Independent Registered Public Accounting Firm are found on pages 50 and 91, respectively.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

 

The information required by this Item 10 of this Annual Report on Form 10-K is incorporated by reference from the information contained in the Company’s Proxy Statement for its 2022 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

 

The Company has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K of the Securities Act of 1933) that is applicable to its senior financial officers including its chief executive officer, chief financial officer, and principal accounting officer.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by this Item 11 of this Annual Report on Form 10-K is incorporated by reference from the information contained in the Company’s Proxy Statement for its 2022 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

 

 

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- 94 -
 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this Item 12 of this Annual Report on Form 10-K is incorporated by reference from the information contained in the Company’s Proxy Statement for its 2022 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table summarizes the status of the Company’s equity compensation plans as of December 31, 2021:

 

   

At December 31, 2021

  

Plan category

  

Number of securities to be issued upon exercise of outstanding options, warrants and rights

    

Weighted-average exercise price of outstanding options, warrants and rights

    

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

  
   

(In thousands, except exercise price)

  
   

(a)

    

(b)

    

(c)

  

Equity compensation plans approved by security holders

     793     $ 60       967  

Equity compensation plans not approved by security holders

     -       N/A       -  

Total

     793     $ 60       967  

 

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

The information required by this Item 13 of this Annual Report on Form 10-K is incorporated by reference from the information contained in the Company’s Proxy Statement for its 2022 Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A of the Exchange Act.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this Item 14 of this Annual Report on Form 10-K is incorporated by reference from the information contained in the Company’s Proxy Statement for its 2022 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)

1.

Financial Statements:

See Index to Financial Statements on page 49. The consolidated financial statements included in Item 8 are filed as part of this Report.

(a)

2.

Financial statement schedules required. No financial statement schedules are filed as part of this Report since the required information is included in the consolidated financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present.

(a)

3.

Exhibits:

The following documents are included or incorporated by reference in this Annual Report on Form 10‑K.

 

- 95 -
 

 

Exhibit

Number

 

3(a)

Restated Articles of Incorporation (composite copy), incorporated by reference to Exhibit 3(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission on March 30, 1998.

3(b)

By-laws, as amended (composite copy), incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on March 26, 2018.

3(c)

Certificate of Determination of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Westamerica Bancorporation dated February 10, 2009, incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 13, 2009.

4.1

Description of registered securities, incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission on February 28, 2020.

10(a)*

Amended and Restated Stock Option Plan of 1995, incorporated by reference to Exhibit A to the Registrant’s definitive Proxy Statement pursuant to Regulation 14(a) filed with the Securities and Exchange Commission on March 17, 2003.

10(d)*

Westamerica Bancorporation Chief Executive Officer Deferred Compensation Agreement by and between Westamerica Bancorporation and David L. Payne, dated December 18, 1998 incorporated by reference to Exhibit 10(e) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the Securities and Exchange Commission on March 29, 2000.

10(e)*

Description of Executive Cash Bonus Program incorporated by reference to Exhibit 10(e) to Exhibit 2.1 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on March 14, 2005.

10(f)*

Non-Qualified Annuity Performance Agreement with David L. Payne dated November 19, 1997 incorporated by reference to Exhibit 10(f) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005.

10(g)*

Amended and Restated Westamerica Bancorporation Stock Option Plan of 1995 Nonstatutory Stock Option Agreement Form incorporated by reference to Exhibit 10(g) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005.

10(h)*

Amended and Restated Westamerica Bancorporation Stock Option Plan of 1995 Restricted Performance Share Grant Agreement Form incorporated by reference to Exhibit 10(h) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005.

10(i)*

Amended Westamerica Bancorporation and Subsidiaries Deferred Compensation Plan (As restated effective January 1, 2005) dated December 31, 2008 incorporated by reference to Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009.

10(j)*

Amended and Restated Westamerica Bancorporation Deferral Plan (Adopted October 26, 1995) dated December 31, 2008 incorporated by reference to Exhibit 10(j) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009.

10(k)*

Form of Restricted Performance Share Deferral Election pursuant to the Westamerica Bancorporation Deferral Plan incorporated by reference to Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on March 10, 2006.

10(l)

Purchase and Assumption Agreement by and between Federal Deposit Insurance Corporation and Westamerica Bank dated February 6, 2009, incorporated by reference to Exhibit 99.2 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 11, 2009.

10(s)*

Amended and Restated Stock Option Plan of 1995, incorporated by reference to Exhibit A to the Registrant’s definitive Proxy Statement pursuant to Regulation 14(a) filed with the Securities and Exchange Commission on March 13, 2012.

10(u)*

Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan, incorporated by reference to Exhibit 4 to the Registrant’s Form S-8, filed with the Securities and Exchange Commission on September 27, 2019.

10(v)*

Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Stock Option Agreement Form, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q, filed with the Securities and Exchange Commission on November 4, 2019.

 

- 96 -
 

 

10(w)*

Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement Form, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q, filed with the Securities and Exchange Commission on November 4, 2019.

11.1

Statement re computation of per share earnings incorporated by reference to Note 17 of the notes to the consolidated financial statements of this Report.

14

Code of Ethics incorporated by reference to Exhibit 14 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 10, 2004.

21

Subsidiaries of the registrant.

23.1

Consent of Crowe LLP

31.1

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

31.2

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

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

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

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.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

The Cover page of Westamerica Bancorporation’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (contained in Exhibit 101)

____________

*         Indicates management contract or compensatory plan or arrangement.

 

 

The exhibits listed above are available through the SEC’s website (https://www.sec.gov). Alternatively, the Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to the Office of the Corporate Secretary A-2M, Westamerica Bancorporation, P.O. Box 1200, Suisun City, California 94585-1200, and payment to the Company of $.25 per page.

 

 

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- 97 -
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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         

 

/s/ Jesse Leavitt          

Jesse Leavitt

Senior Vice President

and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Date: February 25, 2022

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

Signature         

 Title          

 Date         
     

/s/ David L. Payne          

David L. Payne

Chairman of the Board and Directors

President and Chief Executive Officer

(Principal Executive Officer)

February 25, 2022
     

/s/ Jesse Leavitt          

Jesse Leavitt

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

February 25, 2022
     

/s/ Louis E. Bartolini         

Louis E. Bartolini

Director

February 25, 2022
     

/s/ E. Joseph Bowler         

E. Joseph Bowler

Director

February 25, 2022
     

/s/ Melanie Martella Chiesa         

Melanie Martella Chiesa

Director

February 25, 2022
     

/s/ Michele Hassid         

Michele Hassid

Director

February 25, 2022
     

/s/ Catherine C. MacMillan         

Catherine C. MacMillan

Director

February 25, 2022
     

/s/ Ronald A. Nelson         

Ronald A. Nelson

Director

February 25, 2022
     

/s/ Edward B. Sylvester         

Edward B. Sylvester

Lead Independent Director

February 25, 2022
     

/s/ Inez Wondeh         

Inez Wondeh

Director

February 25, 2022

 

 

 

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