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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)                  

 

☑

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

For the quarterly period ended September 30, 2023

or

 

☐

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

For the transition period from __________ to __________.

 

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

California94-2156203

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

1108 FIFTH AVENUE, SAN RAFAEL, California 94901

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

WABC

The Nasdaq Stock Market, LLC

 

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

 

Yes ☑                                                       No ☐

 

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

 

Yes ☑                                                      No ☐

 

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

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐  

Smaller reporting company ☐

Emerging growth company ☐

 

 

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

 

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

 

Yes ☐                                                      No ☑

 

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

 

Title of ClassShares outstanding as of October 30, 2023

Common Stock, No Par Value

26,649,036

 

 
 

 

 

TABLE OF CONTENTS

 

 

Page

Forward Looking Statements

 3

PART I - FINANCIAL INFORMATION

  

Item 1

Financial Statements

 4
 

Notes to Unaudited Consolidated Financial Statements

 9

Item 2

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

 29

Item 3

Quantitative and Qualitative Disclosures about Market Risk

 57

Item 4

Controls and Procedures

 57

PART II - OTHER INFORMATION

  

Item 1

Legal Proceedings

 58

Item 1A

Risk Factors

 58

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 58

Item 3

Defaults upon Senior Securities

 59

Item 4

Mine Safety Disclosures

 59

Item 5

Other Information

 59

Item 6

Exhibits

 59

Signatures

 60

 

 

 

 

 

 

-2-
 

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

These forward-looking statements are based on the current knowledge and belief of the management (“Management”) of Westamerica Bancorporation (the “Company”) 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 and monetary policy; (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, particularly the impact of rising interest rates on the Company’s securities portfolio; (11) asset/liability management risks; (12) liquidity risks including the impact of recent adverse developments in the banking industry; (13) 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; (14) changes in the securities markets; (15) the duration and severity of pandemics and governmental and customer responses; (16) inflation and (17) the outcome of contingencies, such as legal proceedings. However, the reader should not consider the above-mentioned factors to be a complete set of all potential risks or uncertainties.

 

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2022 and Item 1A of 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.

 

-3-
 

 

 

PART I - FINANCIAL INFORMATION

Item 1          Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

  

At September 30,

  

At December 31,

 
  

2023

  

2022

 
  

(In thousands)

 

Assets:

        

Cash and due from banks

 $420,550  $294,236 

Debt securities available for sale

  3,906,233   4,331,743 

Debt securities held to maturity, net of allowance for credit losses of $1 at September 30, 2023 and December 31, 2022 (Fair value of $818,395 at September 30, 2023 and $873,511 at December 31, 2022)

  888,856   915,913 

Loans

  885,850   958,488 

Allowance for credit losses on loans

  (17,744)  (20,284)

Loans, net of allowance for credit losses on loans

  868,106   938,204 

Premises and equipment, net

  27,490   28,819 

Identifiable intangibles, net

  404   583 

Goodwill

  121,673   121,673 

Other assets

  333,976   319,146 

Total Assets

 $6,567,288  $6,950,317 
         

Liabilities:

        

Noninterest-bearing deposits

 $2,723,403  $2,947,277 

Interest-bearing deposits

  2,975,610   3,278,013 

Total deposits

  5,699,013   6,225,290 

Short-term borrowed funds

  115,341   57,792 

Other liabilities

  104,511   65,125 

Total Liabilities

  5,918,865   6,348,207 
         

Contingencies (Note 10)

          
         

Shareholders' Equity:

        

Common stock (no par value), authorized: 150,000 shares issued and outstanding: 26,649 at September 30, 2023 and 26,913 at December 31, 2022

  471,827   475,086 

Deferred compensation

  35   35 

Accumulated other comprehensive loss

  (285,709)  (256,105)

Retained earnings

  462,270   383,094 

Total Shareholders' Equity

  648,423   602,110 

Total Liabilities and Shareholders' Equity

 $6,567,288  $6,950,317 

 

See accompanying notes to unaudited consolidated financial statements.

 

-4-
 

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(In thousands, except per share data)

  

Interest and Loan Fee Income:

                                

Loans

   $ 11,925     $ 12,208     $ 35,510     $ 37,481  

Equity securities

     152       127       456       384  

Debt securities available for sale

     47,994       39,100       142,256       99,430  

Debt securities held to maturity

     8,848       6,625       26,758       10,040  

Interest-bearing cash

     3,929       2,742       7,981       5,223  

Total Interest and Loan Fee Income

     72,848       60,802       212,961       152,558  

Interest Expense:

                                

Deposits

     1,095       470       2,135       1,383  

Short-term borrowed funds

     38       17       76       67  

Total Interest Expense

     1,133       487       2,211       1,450  

Net Interest and Loan Fee Income

     71,715       60,315       210,750       151,108  

Provision (Reversal of Provision) for Credit Losses

     400       -       (1,150 )     -  

Net Interest and Loan Fee Income After Provision (Reversal of Provision) for Credit Losses

     71,315       60,315       211,900       151,108  

Noninterest Income:

                                

Service charges on deposit accounts

     3,705       3,737       10,629       11,006  

Merchant processing services

     2,911       2,925       8,417       8,922  

Debit card fees

     1,717       1,594       5,118       6,175  

Trust fees

     783       810       2,358       2,462  

ATM processing fees

     640       594       1,996       1,514  

Other service fees

     463       463       1,320       1,392  

Financial services commissions

     78       79       270       314  

Life insurance gains

     278       923       278       923  

Securities losses

     -       -       (125 )     -  

Other noninterest income

     706       693       2,269       1,950  

Total Noninterest Income

     11,281       11,818       32,530       34,658  

Noninterest Expense:

                                

Salaries and related benefits

     11,820       11,311       35,715       34,643  

Occupancy and equipment

     5,065       5,064       15,562       14,666  

Outsourced data processing services

     2,473       2,434       7,405       7,294  

Limited partnership operating losses

     1,440       1,431       4,314       4,293  

Courier service

     745       671       1,971       1,914  

Professional fees

     401       582       1,362       2,054  

Other noninterest expense

     3,706       3,274       11,370       9,407  

Total Noninterest Expense

     25,650       24,767       77,699       74,271  

Income Before Income Taxes

     56,946       47,366       166,731       111,495  

Provision for income taxes

     15,345       12,606       44,431       28,805  

Net Income

   $ 41,601     $ 34,760     $ 122,300     $ 82,690  
                                 

Average Common Shares Outstanding

     26,648       26,906       26,718       26,889  

Average Diluted Common Shares Outstanding

     26,650       26,916       26,721       26,901  

Per Common Share Data:

                                

Basic earnings

   $ 1.56     $ 1.29     $ 4.58     $ 3.08  

Diluted earnings

     1.56       1.29       4.58       3.07  

Dividends paid

     0.44       0.42       1.28       1.26  

 

See accompanying notes to unaudited consolidated financial statements.

 

-5-
 

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(In thousands)

  

Net income

   $ 41,601     $ 34,760     $ 122,300     $ 82,690  

Other comprehensive (loss) income:

                                

Changes in net unrealized losses/gains on debt securities available for sale

     (47,797 )     (145,907 )     (42,030 )     (483,359 )

Deferred tax benefit

     14,131       43,135       12,426       142,898  

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

     (33,666 )     (102,772 )     (29,604 )     (340,461 )

Total comprehensive income (loss)

   $ 7,935     $ (68,012 )   $ 92,696     $ (257,771 )

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-6-
 

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

 

              

Accumulated

         
  

Common

          

Other

         
  

Shares

  

Common

  

Deferred

  

Comprehensive

  

Retained

     
  

Outstanding

  

Stock

  

Compensation

  

(Loss) Income

  

Earnings

  

Total

 
  

(In thousands except dividend per share)

 
                         

Balance, June 30, 2023

  26,648  $471,475  $35  $(252,043) $432,395  $651,862 

Net income for the period

                  41,601   41,601 

Other comprehensive loss

              (33,666)      (33,666)

Stock based compensation

  -   339               339 

Stock awarded to employees

  1   13               13 

Dividends ($0.44 per share)

                  (11,726)  (11,726)

Balance, September 30, 2023

  26,649  $471,827  $35  $(285,709) $462,270  $648,423 
                         

Balance, December 31, 2022

  26,913  $475,086  $35  $(256,105) $383,094  $602,110 

Net income for the period

                  122,300   122,300 

Other comprehensive loss

              (29,604)      (29,604)

Restricted stock activity

  9   508               508 

Stock based compensation

  -   1,017               1,017 

Stock awarded to employees

  1   60               60 

Retirement of common stock

  (274)  (4,844)          (8,903)  (13,747)

Dividends ($1.28 per share)

                  (34,221)  (34,221)

Balance, September 30, 2023

  26,649  $471,827  $35  $(285,709) $462,270  $648,423 
                         

Balance, June 30, 2022

  26,896  $473,520  $35  $(188,025) $331,596  $617,126 

Net income for the period

                  34,760   34,760 

Other comprehensive loss

              (102,772)      (102,772)

Exercise of stock options

  15   816               816 

Stock based compensation

  -   339               339 

Stock awarded to employees

  -   22               22 

Dividends ($0.42 per share)

                  (11,303)  (11,303)

Balance, September 30, 2022

  26,911  $474,697  $35  $(290,797) $355,053  $538,988 
                         

Balance, December 31, 2021

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

Net income for the period

                  82,690   82,690 

Other comprehensive loss

              (340,461)      (340,461)

Exercise of stock options

  39   2,171               2,171 

Restricted stock activity

  8   492               492 

Stock based compensation

  -   1,017               1,017 

Stock awarded to employees

  1   74               74 

Retirement of common stock

  (3)  (65)          (153)  (218)

Dividends ($1.26 per share)

                  (33,879)  (33,879)

Balance, September 30, 2022

  26,911  $474,697  $35  $(290,797) $355,053  $538,988 

 

See accompanying notes to unaudited consolidated financial statements.

 

-7-
 

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(unaudited)

 

   

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

  
   

(In thousands)

  

Operating Activities:

                

Net income

   $ 122,300     $ 82,690  

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

                

Depreciation and amortization

     8,760       13,736  

Reversal of credit provision for credit losses

     (1,150 )     -  

Net amortization of deferred loan fees

     (424 )     (1,445 )

Stock option compensation expense

     1,017       1,017  

Life insurance gains

     (278 )     (923 )

Securities losses

     125       -  

Net changes in:

                

Interest income receivable

     (2,039 )     (13,985 )

Other assets

     (336 )     (5,317 )

Income taxes payable

     43,323       3,055  

Net deferred tax asset

     1,107       510  

Interest expense payable

     53       21  

Other liabilities

     (6,269 )     (7,476 )

Net Cash Provided by Operating Activities

     166,189       71,883  

Investing Activities:

                

Net repayments of loans

     71,672       88,242  

Purchases of debt securities available for sale

     -       (619,601 )

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

     376,842       391,548  

Purchases of debt securities held to maturity

     -       (718,940 )

Proceeds from maturity/calls of debt securities held to maturity

     31,530       89,246  

Purchases of Federal Reserve Bank stock

     (2,326 )     -  

Purchases of premises and equipment

     (897 )     (812 )

Net Cash Provided by (Used in) Investing Activities

     476,821       (770,317 )

Financing Activities:

                

Net change in deposits

     (526,277 )     81,300  

Net change in short-term borrowings

     57,549       (69,360 )

Exercise of stock options

     -       2,171  

Retirement of common stock

     (13,747 )     (218 )

Common stock dividends paid

     (34,221 )     (33,879 )

Net Cash Used in Financing Activities

     (516,696 )     (19,986 )

Net Change In Cash and Due from Banks

     126,314       (718,420 )

Cash and Due from Banks at Beginning of Period

     294,236       1,132,085  

Cash and Due from Banks at End of Period

   $ 420,550     $ 413,665  
                 

Supplemental Cash Flow Disclosures:

                

Supplemental disclosure of non cash activities:

                

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

   $ 7,160     $ 2,925  

Supplemental disclosure of cash flow activities:

                

Cash paid for amounts included in operating lease liabilities

     4,604       4,553  

Interest paid for the period

     2,158       1,429  

Income tax payments for the period

     -       25,240  

 

See accompanying notes to unaudited consolidated financial statements.

 

-8-
 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

 

 

Note 2: Accounting Policies         

 

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, it is reasonably possible conditions could change materially affecting results of operations and financial conditions. Certain risks, uncertainties and other factors, including those discussed in “Risk Factors” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 may cause actual future results to differ materially from the results discussed in this report on Form 10-Q. Management continues to evaluate the impacts of the inflation, the Federal Reserve’s monetary policy and climate changes on the Company’s business. During the first half of 2023, the banking industry experienced significant volatility with recent bank failures. Industrywide concerns developed related to liquidity, deposit outflows and unrealized losses on investment debt securities. These recent events could adversely affect the Company’s ability to effectively fund its operations. Any one or a combination of such risk factors, or other factors, could materially adversely affect the Company's business, financial condition, results of operations and prospects. The extent of the impact on the Company’s results of operations, cash flow, liquidity, and financial performance, as well as the Company’s ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted. Furthermore, the effects could have a material impact on the Company’s results of operations and heighten many of the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

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

 

Debt Securities. Debt securities consist of securities of government sponsored entities, states, counties, municipalities, corporations, agency mortgage-backed securities and collateralized loan obligations. 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.

 

- 9-
 
 

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 does not share common risk characteristics with any of the pools of debt securities is individually evaluated and a reserve for credit losses is established based on the Company’s consideration of the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero. Therefore, for those securities, the Company does not record expected credit losses.

 

Available for sale debt securities in unrealized loss positions are evaluated for credit related 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.

 

- 10-
 
 

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 the 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.

 

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 modification to be made to loans to borrowers experiencing financial difficulty is included in the allowance for credit losses when management determines such modification is likely.

 

- 11-
 
 

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

 

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

 

Recently Adopted Accounting Standards

 

FASB ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, issued March 2022, eliminates the recognition and measurement guidance for troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This ASU also requires enhanced disclosure for loans that have been charged off. The ASU became effective January 1, 2023 under a prospective approach. The Company adopted the provisions to remove the recognition and measurement guidance for troubled debt restructurings and/or modify relevant disclosures in the “Loans” note to the unaudited consolidated financial statements. The requirement to include additional disclosures was adopted by the Company January 1, 2023. The additional disclosures did not affect the financial results upon adoption.

 

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. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” The ASU 2022-06 deferred the sunset date of ASU 2020-04 to December 2024. 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.

 

FASB ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, was issued June 2022. The ASU clarifies the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. Additionally, the ASU requires specific disclosures related to equity securities that are subject to contractual sale restrictions. The required disclosures include (1) the fair value of such equity securities reflected in the balance sheet, (2) the nature and remaining duration of the corresponding restrictions, and (3) any circumstances that could cause a lapse in the restrictions. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

FASB ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323):Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, was issued March 2023. The ASU expands the use of the proportional amortization method of accounting, currently only available to investments in low-income housing tax credit structures, to equity investments in other tax credit structures that meet certain criteria. The ASU also requires additional disclosures for any tax credit program where the proportional amortization method is elected. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

- 12-
 
 
 

Note 3: 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 $1 thousand at September 30, 2023 and December 31, 2022, follows. In accordance with GAAP, unrealized gains and losses on held to maturity securities have not been recognized in the Company’s financial statements.

 

  

At September 30, 2023

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale:

                

Agency residential mortgage-backed securities ("MBS")

 $269,883  $-  $(30,155) $239,728 

Securities of U.S. Government sponsored entities

  308,160   -   (28,796)  279,364 

Obligations of states and political subdivisions

  73,614   4   (3,979)  69,639 

Corporate securities

  2,134,535   625   (320,736)  1,814,424 

Collateralized loan obligations

  1,525,669   702   (23,293)  1,503,078 

Total debt securities available for sale

  4,311,861   1,331   (406,959)  3,906,233 

Debt securities held to maturity:

                

Agency residential MBS

  84,347   9   (8,116)  76,240 

Obligations of states and political subdivisions

  77,559   4   (1,957)  75,606 

Corporate securities

  726,951   -   (60,402)  666,549 

Total debt securities held to maturity

  888,857   13   (70,475)  818,395 

Total

 $5,200,718  $1,344  $(477,434) $4,724,628 

 

  

At December 31, 2022

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale:

                

Agency residential MBS

 $311,089  $4  $(25,045) $286,048 

Securities of U.S. Government sponsored entities

  306,336   3   (15,486)  290,853 

Obligations of states and political subdivisions

  84,024   59   (2,079)  82,004 

Corporate securities

  2,406,566   1,032   (307,643)  2,099,955 

Collateralized loan obligations

  1,587,326   527   (14,970)  1,572,883 

Total debt securities available for sale

  4,695,341   1,625   (365,223)  4,331,743 

Debt securities held to maturity:

                

Agency residential MBS

  104,852   13   (7,503)  97,362 

Obligations of states and political subdivisions

  89,208   73   (538)  88,743 

Corporate securities

  721,854   -   (34,448)  687,406 

Total debt securities held to maturity

  915,914   86   (42,489)  873,511 

Total

 $5,611,255  $1,711  $(407,712) $5,205,254 

 

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- 13-
 
 

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

 

  

At September 30, 2023

 
  

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

 $45,005  $44,479  $17,851  $17,714 

Over 1 to 5 years

  773,732   715,554   273,548   259,494 

Over 5 to 10 years

  2,667,773   2,362,742   513,111   464,947 

Over 10 years

  555,468   543,730   -   - 

Subtotal

  4,041,978   3,666,505   804,510   742,155 

MBS

  269,883   239,728   84,347   76,240 

Total

 $4,311,861  $3,906,233  $888,857  $818,395 

 

  

At December 31, 2022

 
  

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

 $251,578  $250,317  $12,676  $12,659 

Over 1 to 5 years

  584,707   554,596   161,653   158,409 

Over 5 to 10 years

  2,869,559   2,570,159   636,733   605,081 

Over 10 years

  678,408   670,623   -   - 

Subtotal

  4,384,252   4,045,695   811,062   776,149 

MBS

  311,089   286,048   104,852   97,362 

Total

 $4,695,341  $4,331,743  $915,914  $873,511 

 

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 September 30, 2023

 
  

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

  5  $803  $(26)  108  $238,914  $(30,129)  113  $239,717  $(30,155)

Securities of U.S.
Government sponsored
entities

  4   16,293   (365)  19   263,071   (28,431)  23   279,364   (28,796)

Obligations of states
and political
subdivisions

  8   8,887   (227)  51   55,722   (3,752)  59   64,609   (3,979)

Corporate securities

  -   -   -   152   1,799,419   (320,736)  152   1,799,419   (320,736)

Collateralized loan
obligations

  36   441,715   (12,234)  67   594,769   (11,059)  103   1,036,484   (23,293)

Total

  53  $467,698  $(12,852)  397  $2,951,895  $(394,107)  450  $3,419,593  $(406,959)

 

- 14-
 
 

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

 

  

Debt Securities Held to Maturity

 
  

At September 30, 2023

 
  

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

  5  $3  $-   93  $75,493  $(8,116)  98  $75,496  $(8,116)

Obligations of states
and political
subdivisions

  64   40,812   (1,109)  28   27,638   (848)  92   68,450   (1,957)

Corporate securities

  3   25,930   (1,792)  48   640,619   (58,610)  51   666,549   (60,402)

Total

  72  $66,745  $(2,901)  169  $743,750  $(67,574)  241  $810,495  $(70,475)

 

Based upon the Company’s September 30, 2023 evaluation, the unrealized losses on debt securities were caused by market conditions for these types of securities. Increasing risk-free interest rates have caused large declines in bond values generally. Additionally, market rates for non-Treasury bonds are determined by the risk-free interest rate plus a risk premium spread; such spreads for investment grade, fixed rate, taxable corporate bonds have increased, also broadly reducing corporate bond values. The Company continually monitors interest rate changes, risk premium spread changes, credit rating changes for issuers of bonds owned, collateralized loan obligations’ collateral levels, and corporate bond issuers’ common stock price changes. All collateralized loan obligations and corporate securities were investment grade rated at September 30, 2023.

 

The Company does not intend to sell any debt securities available for sale with an unrealized loss 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.

 

The Company evaluates held to maturity corporate securities individually, monitoring each issuer’s financial condition, profitability, cash flows and credit rating agency conclusions. The Company has an expectation that nonpayment of the amortized cost basis continues to be zero.

 

The fair values of debt securities could decline in the future if interest rates increase, 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 may occur in the future.

 

As of September 30, 2023 and December 31, 2022, the Company’s debt securities pledged to secure public deposits, Federal Reserve Bank borrowings and short-term borrowed funds had a carrying amount of $1,962,357 thousand and $1,180,010 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, 2022

 
  

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

  107  $279,139  $(24,222)  9  $6,110  $(823)  116  $285,249  $(25,045)

Securities of U.S.
Government sponsored
entities

  22   289,067   (15,486)  -   -   -   22   289,067   (15,486)

Obligations of states
and political
subdivisions

  56   65,633   (1,902)  8   3,265   (177)  64   68,898   (2,079)

Corporate securities

  133   1,521,294   (170,453)  56   555,727   (137,190)  189   2,077,021   (307,643)

Collateralized loan
obligations

  58   518,074   (13,772)  20   192,692   (1,198)  78   710,766   (14,970)

Total

  376  $2,673,207  $(225,835)  93  $757,794  $(139,388)  469  $3,431,001  $(365,223)

 

- 15-
 
 

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

 

  

Debt Securities Held to Maturity

 
  

At December 31, 2022

 
  

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

  97  $95,814  $(7,404)  2  $682  $(99)  99  $96,496  $(7,503)

Obligations of states
and political
subdivisions

  54   53,536   (538)  -   -   -   54   53,536   (538)

Corporate securities

  49   672,406   (34,448)  -   -   -   49   672,406   (34,448)

Total

  200  $821,756  $(42,390)  2  $682  $(99)  202  $822,438  $(42,489)

 

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.

 

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

 

  

For the Nine Months Ended September 30,

 
  

2023

  

2022

 
  

(In thousands)

 

Allowance for credit losses:

        

Beginning balance

 $1  $7 

Provision

  -   - 

Chargeoffs

  -   - 

Recoveries

  -   - 

Total ending balance

 $1  $7 

 

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. Corporate securities held to maturity were individually evaluated for expected credit loss by evaluating the issuer’s financial condition, profitability, cash flows, and credit ratings. At September 30, 2023, no credit loss allowance was assigned to corporate securities held to maturity.

 

There were no debt securities held to maturity on nonaccrual status or past due 30 days or more as of September 30, 2023.

 

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

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 
  

(In thousands)

 
                 

Taxable

 $55,911  $44,461  $166,031  $105,286 

Tax-exempt from federal income tax

  1,083   1,391   3,439   4,568 

Total interest income from investment securities

 $56,994  $45,852  $169,470  $109,854 

 

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- 16-
 
 
 

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

 

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

 

  

At September 30,

  

At December 31,

 
  

2023

  

2022

 
  

(In thousands)

 
         

Commercial

 $135,575  $169,617 

Commercial real estate

  494,282   491,107 

Construction

  5,043   3,088 

Residential real estate

  11,283   13,834 

Consumer installment & other

  239,667   280,842 

Total

 $885,850  $958,488 

 

  

Allowance for Credit Losses

 
  

For the Three Months Ended September 30, 2023

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $4,764  $6,083  $202  $32  $7,399  $18,480 

(Reversal) provision

  (345)  (194)  40   (6)  905   400 

Chargeoffs

  (262)  -   -   -   (1,827)  (2,089)

Recoveries

  10   15   -   -   928   953 

Total allowance for credit losses

 $4,167  $5,904  $242  $26  $7,405  $17,744 

 

 

  

Allowance for Credit Losses

 
  

For the Nine Months Ended September 30, 2023

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $6,138  $5,888  $150  $32  $8,076  $20,284 

(Reversal) provision

  (3,755)  (29)  92   (6)  2,548   (1,150)

Chargeoffs

  (410)  -   -   -   (5,379)  (5,789)

Recoveries

  2,194   45   -   -   2,160   4,399 

Total allowance for credit losses

 $4,167  $5,904  $242  $26  $7,405  $17,744 

 

  

Allowance for Credit Losses

 
  

For the Three Months Ended September 30, 2022

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $6,536  $5,916  $96  $35  $9,730  $22,313 

(Reversal) provision

  (164)  14   32   -   118   - 

Chargeoffs

  -   -   -   -   (1,917)  (1,917)

Recoveries

  72   14   -   -   736   822 

Total allowance for credit losses

 $6,444  $5,944  $128  $35  $8,667  $21,218 

 

  

Allowance for Credit Losses

 
  

For the Nine Months Ended September 30, 2022

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

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

(Reversal) provision

  (837)  (631)  126   (10)  1,352   - 

Chargeoffs

  (20)  -   -   -   (4,522)  (4,542)

Recoveries

  335   46   -   -   1,865   2,246 

Total allowance for credit losses

 $6,444  $5,944  $128  $35  $8,667  $21,218 

 

 

- 17-
 
 

The Company’s customers are primarily small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Bank maintains a Loan Review Department which reports directly to the 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.

 

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

 

  

Credit Risk Profile by Internally Assigned Grade

 
  

At September 30, 2023

 
  

Commercial

  

Commercial
Real Estate

  

Construction

  

Residential
Real Estate

  

Consumer
Installment and
Other

  

Total

 
  

(In thousands)

 

Grade:

                        

Pass

 $128,392  $482,539  $5,043  $10,943  $236,232  $863,149 

Substandard

  7,183   11,743   -   340   863   20,129 

Doubtful

  -   -   -   -   1,422   1,422 

Loss

  -   -   -   -   1,150   1,150 

Total

 $135,575  $494,282  $5,043  $11,283  $239,667  $885,850 

 

 

  

Credit Risk Profile by Internally Assigned Grade

 
  

At December 31, 2022

 
  

Commercial

  

Commercial
Real Estate

  

Construction

  

Residential
Real Estate

  

Consumer
Installment and
Other

  

Total

 
  

(In thousands)

 

Grade:

                        

Pass

 $169,040  $477,842  $3,088  $13,457  $278,223  $941,650 

Substandard

  577   13,265   -   377   1,079   15,298 

Doubtful

  -   -   -   -   752   752 

Loss

  -   -   -   -   788   788 

Total

 $169,617  $491,107  $3,088  $13,834  $280,842  $958,488 

 

The following tables summarize loans by delinquency and nonaccrual status:

 

  

Summary of Loans by Delinquency and Nonaccrual Status

 
  

At September 30, 2023

 
  

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

 $135,477  $-  $25  $73  $-  $135,575 

Commercial real estate

  493,537   443   110   -   192   494,282 

Construction

  5,043   -   -   -   -   5,043 

Residential real estate

  11,280   -   -   -   3   11,283 

Consumer installment and other

  232,558   5,014   1,125   956   14   239,667 

Total

 $877,895  $5,457  $1,260  $1,029  $209  $885,850 

 

  

Summary of Loans by Delinquency and Nonaccrual Status

 
  

At December 31, 2022

 
  

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

 $169,337  $172  $58  $-  $50  $169,617 

Commercial real estate

  490,354   508   192   -   53   491,107 

Construction

  3,088   -   -   -   -   3,088 

Residential real estate

  13,430   377   -   -   27   13,834 

Consumer installment and other

  273,247   5,101   1,850   628   16   280,842 

Total

 $949,456  $6,158  $2,100  $628  $146  $958,488 

 

- 18-
 
 

There was no allowance for credit losses allocated to loans on nonaccrual status as of September 30, 2023 or December 31, 2022. There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2023 or December 31, 2022.

 

There were no loan modifications made to borrowers experiencing financial difficulty during the nine months ended September 30, 2023 and September 30, 2022.

 

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. Loans that were considered collateral dependent at September 30, 2023 included the following: seven commercial real estate loans totaling $8.8 million secured by real property, one commercial loan with a balance of $600 thousand secured by business assets and $891 thousand of indirect consumer installment loans secured by personal property. There were no other collateral dependent loans at September 30, 2023. Loans that were considered collateral dependent at December 31, 2022 included the following: five commercial real estate loans totaling $8.1 million secured by real property, and $625 thousand of indirect consumer installment loans secured by personal property. There were no other collateral dependent loans at December 31, 2022.

 

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

 

  

At September 30, 2023

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2019

  

2020

  

2021

  

2022

  

2023

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial loans by grade:

                     

Pass

 $21,499  $5,086  $13,435  $34,779  $23,546  $11,429  $109,774  $18,618  $128,392 

Substandard

  12   2,525   -   2,835   -   600   5,972   1,211   7,183 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $21,511  $7,611  $13,435  $37,614  $23,546  $12,029  $115,746  $19,829  $135,575 
                                     

Current gross chargeoffs on commercial loans:

                     

Three months ended September 30, 2023

 $-  $-  $3  $135  $-  $-  $138  $124  $262 

Nine months ended September 30, 2023

  -   -   3   135   -   -   138   272   410 

 

  

At December 31, 2022

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2018

  

2019

  

2020

  

2021

  

2022

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial loans by grade:

                     

Pass

 $23,891  $5,549  $12,557  $17,293  $53,928  $23,966  $137,184  $31,856  $169,040 

Substandard

  12   -   -   -   -   -   12   565   577 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $23,903  $5,549  $12,557  $17,293  $53,928  $23,966  $137,196  $32,421  $169,617 

 

  

At September 30, 2023

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2019

  

2020

  

2021

  

2022

  

2023

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial real estate loans by grade:

                     

Pass

 $183,073  $69,055  $70,037  $69,569  $51,476  $39,329  $482,539  $-  $482,539 

Substandard

  10,137   815   791   -   -   -   11,743   -   11,743 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $193,210  $69,870  $70,828  $69,569  $51,476  $39,329  $494,282  $-  $494,282 
                                     

Current gross chargeoffs on commercial real estate loans:

                     

Three months ended

September 30, 2023

 $-  $-  $-  $-  $-  $-  $-  $-  $- 

Nine months ended September 30, 2023

  -   -   -   -   -   -   -   -   - 

 

[The remainder of this page intentionally left blank]

 

- 19-
 
 
  

At December 31, 2022

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2018

  

2019

  

2020

  

2021

  

2022

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial real estate loans by grade:

                     

Pass

 $146,588  $58,473  $71,440  $74,016  $71,618  $55,707  $477,842  $-  $477,842 

Substandard

  8,083   -   2,112   806   -   2,264   13,265   -   13,265 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $154,671  $58,473  $73,552  $74,822  $71,618  $57,971  $491,107  $-  $491,107 

 

  

At September 30, 2023

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2019

  

2020

  

2021

  

2022

  

2023

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Residential real estate loans by grade:

                     

Pass

 $10,943  $-  $-  $-  $-  $-  $10,943  $-  $10,943 

Substandard

  340   -   -   -   -   -   340   -   340 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $11,283  $-  $-  $-  $-  $-  $11,283  $-  $11,283 
                                     

Current gross chargeoffs on residential real estate loans:

                     

Three months ended

September 30, 2023

 $-  $-  $-  $-  $-  $-  $-  $-  $- 

Nine months ended

September 30, 2023

  -   -   -   -   -   -   -   -   - 

 

  

At December 31, 2022

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2018

  

2019

  

2020

  

2021

  

2022

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Residential real estate loans by grade:

                     

Pass

 $13,457  $-  $-  $-  $-  $-  $13,457  $-  $13,457 

Substandard

  377   -   -   -   -   -   377   -   377 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $13,834  $-  $-  $-  $-  $-  $13,834  $-  $13,834 

 

  

At September 30, 2023

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2019

  

2020

  

2021

  

2022

  

2023

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Construction loans by grade:

                     

Pass

 $-  $-  $-  $-  $-  $-  $-  $5,043  $5,043 

Substandard

  -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $-  $-  $-  $-  $-  $-  $-  $5,043  $5,043 
                                     

Current gross chargeoffs on construction loans:

                     

Three months ended
September 30, 2023

 $-  $-  $-  $-  $-  $-  $-  $-  $- 

Nine months ended
September 30, 2023

  -   -   -   -   -   -   -   -   - 

 

  

At December 31, 2022

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2018

  

2019

  

2020

  

2021

  

2022

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Construction loans by grade:

                     

Pass

 $-  $-  $-  $-  $-  $-  $-  $3,088  $3,088 

Substandard

  -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   - 

Total

 $-  $-  $-  $-  $-  $-  $-  $3,088  $3,088 

 

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- 20-
 
 

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

 

  

At September 30, 2023

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2019

  

2020

  

2021

  

2022

  

2023

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

     

Consumer installment and other loans by delinquency and nonaccrual status:

                     

Current

 $8,841  $14,395  $25,746  $56,758  $77,347  $31,708  $214,795  $17,763  $232,558 

30-59 days past due

  235   280   331   2,006   1,736   399   4,987   27   5,014 

60-89 days past due

  14   12   114   512   382   84   1,118   7   1,125 

Past due 90 days or more

  27   39   76   423   175   172   912   44   956 

Nonaccrual

  -   -   -   -   -   -   -   14   14 

Total

 $9,117  $14,726  $26,267  $59,699  $79,640  $32,363  $221,812  $17,855  $239,667 
                                     

Current gross chargeoffs on consumer installment and other loans:

                     

Three months ended
September 30, 2023

 $43  $18  $209  $618  $672  $177   1,737  $90  $1,827 

Nine months ended
September 30, 2023

  208   135   717   1,529   2,414   177   5,180   199   5,379 

 

  

At December 31, 2022

 
                              

Line of

     
                              

Credit

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2018

  

2019

  

2020

  

2021

  

2022

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

     

Consumer installment and other loans by delinquency and nonaccrual status:

                     

Current

 $6,017  $13,147  $22,330  $35,783  $76,126  $99,414  $252,817  $20,430  $273,247 

30-59 days past due

  117   268   572   1,014   1,709   1,359   5,039   62   5,101 

60-89 days past due

  42   65   67   275   635   750   1,834   16   1,850 

Past due 90 days or more

  3   20   16   61   284   241   625   3   628 

Nonaccrual

  -   -   -   -   -   -   -   16   16 

Total

 $6,179  $13,500  $22,985  $37,133  $78,754  $101,764  $260,315  $20,527  $280,842 

 

There were no loans held for sale at September 30, 2023 and December 31, 2022.

 

The Company held no other real estate owned (OREO) at September 30, 2023 and December 31, 2022. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $-0- thousand at September 30, 2023 and December 31, 2022.

 

 

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person at any one time shall not exceed the following limitations: (a) unsecured credits shall not exceed 15 percent of the sum of the Bank’s shareholders’ equity, allowance for loan losses, capital notes, and debentures, or (b) secured and unsecured credits in all shall not exceed 25 percent of the sum of the Bank’s shareholders’ equity, allowance for loan losses, capital notes, and debentures. At September 30, 2023, the Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2023, the Bank had 26 lending relationships each with aggregate amounts of $5 million or more. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $31,145 thousand and $34,790 thousand at September 30, 2023 and December 31, 2022, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At September 30, 2023, the Bank held corporate bonds in 107 issuing entities that exceeded $5 million for each issuer.

 

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- 21-
 
 
 

Note 6: Other Assets and Other Liabilities

 

Other assets consisted of the following:

 

  

At September 30,

  

At December 31,

 
  

2023

  

2022

 
  

(In thousands)

 

Cost method equity investments:

        

Federal Reserve Bank stock (1)

 $14,069  $11,743 

Other investments

  158   158 

Total cost method equity investments

  14,227   11,901 

Life insurance cash surrender value

  65,606   63,816 

Net deferred tax asset

  136,458   125,140 

Right-of-use asset

  18,593   15,746 

Limited partnership investments

  30,107   34,421 

Interest receivable

  55,597   53,558 

Prepaid assets

  4,447   4,894 

Other assets

  8,941   9,670 

Total other assets

 $333,976  $319,146 

 

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

 

The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. Visa Inc. disclosed a revised conversion rate applicable to its class B common stock in its Form 8-K dated October 2, 2023. 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 1.5902 to 1.5875 per share, effective as of September 28, 2023. Visa Inc. class A common stock had a closing price of $230.01 per share on September 29, 2023, the last day of stock market trading for the third quarter 2023. The ultimate value of the Company’s Visa Inc. class B shares is subject to the extent of Visa Inc.’s future litigation escrow fundings, the resulting conversion rate to class A common stock, and current and future trading restrictions on the class B common stock.

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At September 30, 2023, these investments totaled $30,107 thousand and $16,138 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2022, these investments totaled $34,421 thousand and $22,647 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At September 30, 2023, the $16,138 thousand of outstanding equity capital commitments are expected to be paid as follows: $4,483 thousand in the remainder of 2023, $10,499 thousand in 2024, $359 thousand in 2025, $59 thousand in 2026, $190 thousand in 2027, and $548 thousand in 2028 or thereafter.

 

The amounts recognized in net income for these investments include:

 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 
  

(In thousands)

 

Investment loss included in pre-tax income

 $1,440  $1,431  $4,314  $4,293 

Tax credits recognized in provision for income taxes

  765   804   2,820   2,412 

 

Other liabilities consisted of the following:

 

  

At September 30,

  

At December 31,

 
  

2023

  

2022

 
  

(In thousands)

 

Operating lease liability

 $18,593  $15,746 

Other liabilities

  85,918   49,379 

Total other liabilities

 $104,511  $65,125 

 

- 22-
 
 

The Company has entered into leases for most branch locations and certain other offices that were classified as operating leases primarily with original terms of five years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional five year terms. Unexercised extension options are not considered reasonably certain of exercise and have not been included in the lease term used to determine the lease liability or right-of-use asset. The Company did not have any finance leases as of September 30, 2023.

 

As of September 30, 2023, the Company’s lease liability and right-of-use asset were $18,593 thousand. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 3.6 years and 2.78%, respectively, at September 30, 2023. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of September 30, 2023.

 

Total lease costs were $1,633 thousand and $4,949 thousand in the three and nine months ended September 30, 2023, respectively, and were recorded within occupancy and equipment expense. During the three and nine months ended September 30, 2022, total lease costs of $1,664 thousand and $4,934 thousand, respectively, were recorded within occupancy and equipment expense. The Company did not have any material short-term or variable lease costs or sublease income during the nine months ended September 30, 2023 and September 30, 2022.

 

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

 

  

Minimum
future lease
payments

 
  

At September 30,

 
  

2023

 
  

(In thousands)

 

The remainder of 2023

 $1,612 

2024

  5,914 

2025

  4,765 

2026

  3,095 

2027

  2,200 

Thereafter

  2,154 

Total minimum lease payments

  19,740 

Less: discount

  (1,147)

Present value of lease liability

 $18,593 

 
 

Note 7: Goodwill and Identifiable Intangible Assets

 

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the nine months ended September 30, 2023 and year ended December 31, 2022, as no triggering events occurred during such periods. 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 nine months ended September 30, 2023 and the year ended December 31, 2022, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

  

At September 30, 2023

  

At December 31, 2022

 
  

(In thousands)

 

Goodwill

 $121,673  $121,673 

 

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- 23-
 
 

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

 

  

At September 30, 2023

  

At December 31, 2022

 
  

Gross

      

Gross

     
  

Carrying

  

Accumulated

  

Carrying

  

Accumulated

 
  

Amount

  

Amortization

  

Amount

  

Amortization

 
  

(In thousands)

 

Core deposit intangibles

 $56,808  $(56,404) $56,808  $(56,225)

 

As of September 30, 2023, the current period and estimated future amortization expense for identifiable intangible assets, to be fully amortized in 2025, was:

 

  

Total

 
  

Core

 
  

Deposit

 
  

Intangibles

 
  

(In thousands)

 

For the nine months ended September 30, 2023 (actual)

 $179 

The remainder of 2023

  57 

2024

  222 

2025

  125 

 
 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

  

Deposits

 
  

At September 30,

  

At December 31,

 
  

2023

  

2022

 
  

(In thousands)

 

Noninterest-bearing

 $2,723,403  $2,947,277 

Interest-bearing:

        

Transaction

  1,138,220   1,273,143 

Savings

  1,732,849   1,874,115 

Time deposits less than $100 thousand

  59,505   65,962 

Time deposits $100 thousand through $250 thousand

  33,400   42,733 

Time deposits more than $250 thousand

  11,636   22,060 

Total deposits

 $5,699,013  $6,225,290 

 

Demand deposit overdrafts of $699 thousand and $995 thousand were included as loan balances at September 30, 2023 and December 31, 2022, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $26 thousand and $91 thousand for the three and nine months ended September 30, 2023, respectively, and $39 thousand and $120 thousand for the three and nine months ended September 30, 2022, respectively.

 

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

 

 

  

Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings

 
  

Remaining Contractual Maturity of the Agreements

 
  

Overnight and Continuous

 
  

At September 30,

  

At December 31,

 
  

2023

  

2022

 

Repurchase agreements:

 

(In thousands)

 

Collateral securing borrowings:

        

Agency residential MBS

 $25,725  $30,108 

Corporate securities

  203,553   203,774 

Total collateral carrying value

 $229,278  $233,882 

Total short-term borrowed funds

 $115,341  $57,792 

 

- 24-
 
 

At September 30, 2023, the Company had uncommitted lines of credit for overnight borrowings from correspondent banks totaling $100 million. Additionally, the Company had access to borrowing from the Federal Reserve up to $964 million based on the collateral pledged at September 30, 2023. There were no outstanding amounts under the above-mentioned borrowings at September 30, 2023. For the nine months ended September 30, 2023, the average balances of the above-mentioned borrowings were $-0- thousand. At September 30, 2023, the Company’s estimated unpledged debt securities collateral qualifying for Federal Reserve borrowing totaled $1,930,927 thousand.

 

 

Note 9: Fair Value Measurements

 

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

 

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

 

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

 

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 and U.S. government sponsored 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.

 

- 25-
 
 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

  

At September 30, 2023

 
  

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

 $239,728  $-  $239,728  $- 

Securities of U.S. Government sponsored entities

  279,364   -   279,364   - 

Obligations of states and political subdivisions

  69,639   -   69,639   - 

Corporate securities

  1,814,424   -   1,814,424   - 

Collateralized loan obligations

  1,503,078   -   1,503,078   - 

Total debt securities available for sale

 $3,906,233  $-  $3,906,233  $- 

 

(1) There were no transfers in to or out of level 3 during the nine months ended September 30, 2023.

 

  

At December 31, 2022

 
  

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

 $286,048  $-  $286,048  $- 

Securities of U.S. Government sponsored entities

  290,853   -   290,853   - 

Obligations of states and political subdivisions

  82,004   -   82,004   - 

Corporate securities

  2,099,955   -   2,099,955   - 

Collateralized loan obligations

  1,572,883   -   1,572,883   - 

Total debt securities available for sale

 $4,331,743  $-  $4,331,743  $- 

 

(1) There were no transfers in to or out of level 3 during the year ended December 31, 2022.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at September 30, 2023 and December 31, 2022, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

 

                  

For the Nine

 
                  

Months Ended

 
  

At September 30, 2023

  

September 30, 2023

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

 
  

(In thousands)

 

Loans:

                    

Commercial real estate

 $110  $-  $-  $110  $- 

Total assets measured at fair value on a nonrecurring basis

 $110  $-  $-  $110  $- 

 

[The remainder of this page intentionally left blank]

 

- 26-
 
 
                  

For the

 
                  

Year Ended

 
  

At December 31, 2022

  

December 31, 2022

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

 
  

(In thousands)

 

Loans:

                    

Commercial real estate

 $225  $-  $-  $225  $- 

Total assets measured at fair value on a nonrecurring basis

 $225  $-  $-  $225  $- 

 

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.

 

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

 

  

At September 30, 2023

 
  

Carrying
Amount

  

Estimated Fair
Value

  

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

  

Significant
Other
Observable
Inputs
(Level 2 )

  

Significant
Unobservable
Inputs
(Level 3 )

 

Financial Assets:

 

(In thousands)

 

Cash and due from banks

 $420,550  $420,550  $420,550  $-  $- 

Debt securities held to maturity

  888,856   818,395   -   818,395   - 

Loans

  868,106   851,354   -   -   851,354 
                     

Financial Liabilities:

                    

Deposits

 $5,699,013  $5,698,126  $-  $5,594,472  $103,654 

Short-term borrowed funds

  115,341   115,341   -   115,341   - 

 

  

At December 31, 2022

 
  

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

 $294,236  $294,236  $294,236  $-  $- 

Debt securities held to maturity

  915,913   873,511   -   873,511   - 

Loans

  938,204   905,720   -   -   905,720 
                     

Financial Liabilities:

                    

Deposits

 $6,225,290  $6,224,791  $-  $6,094,535  $130,256 

Short-term borrowed funds

  57,792   57,792   -   57,792   - 

 

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.

 

- 27-
 
 
 

Note 10: Commitments and Contingent Liabilities

 

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Certain agreements provide the Company the right to cancel or reduce its obligations to lend to customers. The portions that are not unconditionally cancellable by the Company aggregated $30,195 thousand at September 30, 2023 and $31,889 thousand at December 31, 2022. 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 $201,468 thousand at September 30, 2023 and $202,696 thousand at December 31, 2022. 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 $2,106 thousand at September 30, 2023 and $1,948 thousand at December 31, 2022. Commitments for commercial and similar letters of credit totaled $95 thousand at September 30, 2023 and at December 31, 2022. The Company had $950 thousand in outstanding full recourse guarantees to a third party credit card company at September 30, 2023 and at December 31, 2022. At September 30, 2023, the Company had a reserve for unfunded commitments of $201 thousand for the above-mentioned loan commitments of $30,195 thousand that are not unconditionally cancellable by the Company. The Company’s reserve for unfunded commitments was $201 thousand at December 31, 2022. The reserve for unfunded commitments is included in other liabilities.

 

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

 

 

Note 11: Earnings Per Common Share

 

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

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 
  

(In thousands, except per share data)

 

Net income applicable to common equity (numerator)

 $41,601  $34,760  $122,300  $82,690 

Basic earnings per common share

                

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

  26,648   26,906   26,718   26,889 

Basic earnings per common share

 $1.56  $1.29  $4.58  $3.08 

Diluted earnings per common share

                

Weighted average number of common shares outstanding - basic

  26,648   26,906   26,718   26,889 

Add common stock equivalents for options

  2   10   3   12 

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

  26,650   26,916   26,721   26,901 

Diluted earnings per common share

 $1.56  $1.29  $4.58  $3.07 

 

For the three and nine months ended September 30, 2023, options to purchase 964 thousand and 991 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

For the three and nine months ended September 30, 2022, options to purchase 812 thousand and 809 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.

 

- 28-
 
 
 

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

 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(In thousands, except per share data)

  

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

   $ 72,092     $ 60,780     $ 211,935     $ 152,620  

Provision (Reversal of Provision) for Credit Losses

     400       -       (1,150 )     -  

Noninterest Income:

                                

Life Insurance Gains

     278       923       278       923  

Securities Losses

     -       -       (125 )     -  

Other Noninterest Income

     11,003       10,895       32,377       33,735  

Total Noninterest Income

     11,281       11,818       32,530       34,658  

Noninterest Expense

     25,650       24,767       77,699       74,271  

Income Before Income Taxes (FTE)(1)

     57,323       47,831       167,916       113,007  

Income Tax Provision (FTE)(1)

     15,722       13,071       45,616       30,317  

Net Income

   $ 41,601     $ 34,760     $ 122,300     $ 82,690  
                                 

Average Common Shares Outstanding

     26,648       26,906       26,718       26,889  

Average Diluted Common Shares Outstanding

     26,650       26,916       26,721       26,901  

Common Shares Outstanding at Period End

     26,649       26,911                  
                                 

Per Common Share:

                                

Basic Earnings

   $ 1.56     $ 1.29     $ 4.58     $ 3.08  

Diluted Earnings

     1.56       1.29       4.58       3.07  

Book Value

     24.33       20.03                  
                                 

Financial Ratios:

                                

Return on Assets

     2.41 %     1.85 %     2.36 %     1.49 %

Return on Common Equity

     18.29 %     17.08 %     18.59 %     13.98 %

Net Interest Margin (FTE)(1)

     4.43 %     3.44 %     4.32 %     2.90 %

Net Loan Losses to Average Loans

     0.50 %     0.44 %     0.20 %     0.30 %

Efficiency Ratio(2)

     30.8 %     34.1 %     31.8 %     39.7 %
                                 

Average Balances:

                                

Assets

   $ 6,847,691     $ 7,472,304     $ 6,940,897     $ 7,433,140  

Loans

     903,854       989,033       925,351       1,009,314  

Investment Securities

     5,247,118       5,552,588       5,385,986       5,172,003  

Deposits

     5,722,817       6,495,051       5,859,506       6,437,943  

Shareholders' Equity

     902,300       807,428       879,740       790,691  
                                 

Period End Balances:

                                

Assets

   $ 6,567,288     $ 7,177,025                  

Loans

     885,850       979,033                  

Investment Securities

     4,795,090       5,312,605                  

Deposits

     5,699,013       6,495,256                  

Shareholders' Equity

     648,423       538,988                  
                                 

Capital Ratios at Period End:

                                

Total Risk Based Capital

     18.60 %     14.67 %                

Tangible Equity to Tangible Assets

     8.17 %     5.91 %                
                                 

Dividends Paid Per Common Share

   $ 0.44     $ 0.42     $ 1.28     $ 1.26  

Common Dividend Payout Ratio

     28 %     33 %     28 %     41 %

 

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

 

(1) Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.

 

(2) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis and noninterest income).

 

-29-
 

 

Financial Overview

 

Westamerica Bancorporation and subsidiaries (collectively, the “Company”) reported net income of $41.6 million or $1.56 diluted earnings per common share (“EPS”) in the third quarter 2023 compared with net income of $34.8 million or $1.29 EPS for the third quarter of 2022. The Company reported net income of $122.3 million or $4.58 EPS for the nine months ended September 30, 2023, including a $1.2 million reversal of provision for credit losses, net of a $400 thousand provision for credit losses in the third quarter 2023. Third quarter 2023 results also include a $278 thousand life insurance gain compared with a $923 thousand life insurance gain in the third quarter 2022. The Company reported net income of $82.7 million or $3.07 EPS for the nine months ended September 30, 2022, including a $1.2 million reconciling payment from a payments network and a $923 thousand life insurance gain.

 

The Federal Open Market Committee of the Federal Reserve Board (“FOMC”) has tightened monetary policy through increases to the overnight federal funds interest rate starting in March 2022. On November 1, 2023, the FOMC decided to maintain the target range for the federal funds rate to the range of 5.25% to 5.50%. The November 1, 2023 Federal Reserve press release stated, “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks… the Committee decided to maintain the target range for the federal funds rate at 5.25% to 5.50%. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments… The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.” The interest rate paid on reserve balances at the Federal Reserve Bank remained at 5.40%. The Bank maintains reserve balances at the Federal Reserve Bank; the amount that earns interest is identified as “interest-bearing cash”.

 

Management continues to evaluate the impacts of inflation, the Federal Reserve’s monetary policy and climate changes on the Company’s business and its customers. Recently, the banking industry experienced significant volatility with several regional bank failures in the first half of 2023. Industrywide concerns developed related to liquidity, deposit outflows and unrealized losses on debt securities. These recent events could adversely affect the Company’s funding of its operations. The extent of the impact on the Company’s results of operations, cash flow liquidity, and financial performance, as well as the Company’s ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are uncertain and cannot be reasonably predicted.

 

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 municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks, therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on an FTE basis.

 

The Company’s significant accounting policies (see Note 1, “Summary of Significant Accounting Policies,” to Financial Statements in the Company’s 2022 Form 10-K and Note 2 “Summary of Significant Accounting Policies” in this Form 10-Q) are fundamental to understanding the Company’s results of operations and financial condition. The Company adopted the following new accounting guidance:

 

FASB ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, issued March 2022, eliminates the recognition and measurement guidance for troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This ASU also requires enhanced disclosure for loans that have been charged off. The ASU became effective January 1, 2023 under a prospective approach. The Company adopted the provisions to remove the recognition and measurement guidance for troubled debt restructurings and/or modify relevant disclosures in the “Loans” note to the unaudited consolidated financial statements. The requirement to include additional disclosures was adopted by the Company January 1, 2023. The additional disclosures did not affect the financial results upon adoption.

 

-30-
 

 

Net Income         

 

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

 

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(In thousands, except per share data)

  

Net interest and loan fee income (FTE)

   $ 72,092     $ 60,780     $ 211,935     $ 152,620  

Provision (Reversal of provision) for credit losses

     400       -       (1,150 )     -  

Noninterest income

     11,281       11,818       32,530       34,658  

Noninterest expense

     25,650       24,767       77,699       74,271  

Income before taxes (FTE)

     57,323       47,831       167,916       113,007  

Income tax provision (FTE)

     15,722       13,071       45,616       30,317  

Net income

   $ 41,601     $ 34,760     $ 122,300     $ 82,690  
                                 

Average diluted common shares

     26,650       26,916       26,721       26,901  

Diluted earnings per common share

   $ 1.56     $ 1.29     $ 4.58     $ 3.07  
                                 

Average total assets

   $ 6,847,691     $ 7,472,304     $ 6,940,897     $ 7,433,140  

Net income to average total assets (annualized)

     2.41 %     1.85 %     2.36 %     1.49 %

Net income to average common shareholders' equity (annualized)

     18.29 %     17.08 %     18.59 %     13.98 %

 

Net income for the third quarter 2023 increased $6.8 million compared with the third quarter 2022. Net interest and loan fee income (FTE) increased $11.3 million in the third quarter 2023 compared with the third quarter 2022 due to higher yield on interest-earning assets, partially offset by lower average balances of interest-earning assets and higher rate on interest-bearing liabilities. The Company provided a $400 thousand provision for credit losses in the third quarter of 2023 and no provision for credit losses in the third quarter of 2022, based on Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. Third quarter 2023 noninterest income decreased $537 thousand compared with the third quarter 2022 primarily due to lower gains on life insurance. Third quarter 2023 noninterest expense increased $883 thousand compared with the third quarter 2022 primarily due to an increase in salaries and benefits and increased FDIC insurance assessments for all insured depository institutions. The tax rate (FTE) was 27.4% for the third quarter 2023 and 27.3% for the third quarter 2022.

 

Net income for the nine months ended September 30, 2023 increased $39.6 million compared with the nine months ended September 30, 2022. Net interest and loan fee income (FTE) increased $59.3 million in the nine months ended September 30, 2023 compared with nine months ended September 30, 2022 due to higher yield on interest-earning assets and higher average balances of investment debt securities, partially offset by lower average balances of loans and interest-bearing cash and higher rate on interest-bearing liabilities. The Company recorded a $1.2 million reversal of provision for credit losses in the nine months ended September 30, 2023, reflecting a $2.2 million recovery on a previously charged off loan in the first quarter 2023. The Company provided no provision for credit losses in the nine months ended September 30, 2022, based on Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. Noninterest income for the nine months ended September 30, 2023 decreased $2.1 million compared with the nine months ended September 30, 2022 primarily because the nine months ended September 30, 2022 included a $1.2 million reconciling payment from a payments network and higher gains on life insurance. Noninterest expense in the nine months ended September 30, 2023 increased $3.4 million compared with the nine months ended September 30, 2022 primarily due to increases in salaries and benefits, occupancy and equipment expenses, and increased FDIC insurance assessments for all insured depository institutions. Lower professional fees partially offset the increases in noninterest expense in the nine months ended September 30, 2023 compared with the same period in 2022. The tax rate (FTE) was 27.2% for the nine months ended September 30, 2023 and 26.8% for the nine months ended September 30, 2022.

 

 

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-31-
 

 

Net Interest and Loan Fee Income (FTE)                                    

 

Following is a summary of the components of net interest and loan fee income (FTE) for the periods indicated:

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

($ in thousands)

  

Interest and loan fee income

   $ 72,848     $ 60,802     $ 212,961     $ 152,558  

FTE adjustment

     377       465       1,185       1,512  

Interest expense

     1,133       487       2,211       1,450  

Net interest and loan fee income (FTE)

   $ 72,092     $ 60,780     $ 211,935     $ 152,620  
                                 

Average earning assets

   $ 6,438,411     $ 7,041,313     $ 6,519,448     $ 7,013,627  

Net interest margin (FTE) (annualized)

     4.43 %     3.44 %     4.32 %     2.90 %

 

Net interest and loan fee income (FTE) increased $11.3 million in the third quarter 2023 compared with the third quarter 2022 due to higher yield on interest-earning assets (up 1.03%), partially offset by lower average balances of interest-earning assets (down $603 million) and higher rate on interest-bearing liabilities (up 0.09%).

 

Net interest and loan fee income (FTE) increased $59.3 million in the nine months ended September 30, 2023 compared with nine months ended September 30, 2022 due to higher yield on interest-earning assets (up 1.43%) and higher average balances of investment debt securities (up $214 million), partially offset by lower average balances of loans (down $84 million) and interest-bearing cash (down $624 million) and higher rate on interest-bearing liabilities (up 0.04%).

 

The annualized net interest margin (FTE) was 4.43% in the third quarter 2023 and 4.32% in the nine months ended September 30, 2023 compared with 3.44% in the third quarter 2022 and 2.90% in the first nine months of 2022.

 

The Company’s annualized funding costs were 0.07% in the third quarter 2023 compared with 0.03% in the third quarter 2022, and 0.04% in the nine months ended September 30, 2023 and 0.03% in the nine months ended September 30, 2022. Noninterest bearing deposits represented 47% of average deposits in the nine months ended September 30, 2023 and 47% in the nine months ended September 30, 2022, while higher-cost time deposits represented 2% for both periods. Average balances of time deposits in the nine months ended September 30, 2023 declined $20 million from the nine months ended September 30, 2022. Average balances of checking and saving deposits accounted for 97.9% of average total deposits in the nine months ended September 30, 2023 compared with 97.8% of average total deposits in the first nine months of 2022. The customer deposits and shareholders’ equity fully funded the Company’s interest earning assets for the nine months ended September 30, 2023 and September 30, 2022: there was no borrowing from the Federal Reserve Bank or correspondent banks.

 

Net Interest Margin (FTE)

 

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

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
                                 

Yield on earning assets (FTE)

     4.50 %     3.47 %     4.36 %     2.93 %

Rate paid on interest-bearing liabilities

     0.14 %     0.05 %     0.09 %     0.05 %

Net interest spread (FTE)

     4.36 %     3.42 %     4.27 %     2.88 %

Impact of noninterest-bearing demand deposits

     0.07 %     0.02 %     0.05 %     0.02 %

Net interest margin (FTE)

     4.43 %     3.44 %     4.32 %     2.90 %

 

-32-
 

 

The increase in the Company’s yield on earning assets has been generated primarily by collateralized loan obligations (CLOs), held in debt securities available for sale portfolio, and interest-bearing cash. The CLOs have interest coupons that change once every three months by the amount of change in the three-month SOFR base rate. The average balances and yields of CLOs for the three months ended September 30, 2023 was $1,531 million yielding 7.16% and $1,554 million yielding 6.77% for the nine months ended September 30, 2023. The average balances and yields of CLOs for the three months ended September 30, 2022 was $1,601 million yielding 4.00% and $1,559 million yielding 2.87% for the nine months ended September 30, 2022. The interest-bearing cash yield changes by the amount of change in the overnight federal funds rate on the effective date declared by the FOMC. The average balance and yields of interest-bearing cash for the third quarter 2023 and nine months ended September 30, 2023 were $287 million yielding 5.35% and $208 million yielding 5.06%, respectively. The average balance and yields of interest-bearing cash for the third quarter 2022 and nine months ended September 30, 2022 were $500 million yielding 2.15% and $832 million yielding 0.83%, respectively. The Company has other earning assets with variable yields such as commercial loans and lines of credit, consumer lines of credit and adjustable rate residential real estate loans, which are included in “other taxable loans” in the following “Summary of Average Balances, Yields/Rates and Interest Differential.”

 

 

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-33-
 

 

Summary of Average Balances, Yields/Rates and Interest Differential

 

The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates. Average loan balances include nonperforming loans. Interest income includes the reversal of previously accrued interest on loans placed on nonaccrual status during the period, proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income, and accretion of purchased loan discounts. Yields, rates and interest margins are annualized. 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 Three Months Ended September 30, 2023

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 5,093,715     $ 55,911       4.39 %

Tax-exempt (1)

     153,403       1,369       3.57 %

Total investments (1)

     5,247,118       57,280       4.32 %

Loans:

                        

Taxable

     860,371       11,580       5.34 %

Tax-exempt (1)

     43,483       436       3.98 %

Total loans (1)

     903,854       12,016       5.27 %

Total interest-bearing cash

     287,439       3,929       5.35 %

Total interest-earning assets (1)

     6,438,411       73,225       4.50 %

Other assets

     409,280                  

Total assets

   $ 6,847,691                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,721,358     $ -       - %

Savings and interest-bearing transaction

     2,891,477       1,017       0.14 %

Time less than $100,000

     66,909       52       0.31 %

Time $100,000 or more

     43,073       26       0.24 %

Total interest-bearing deposits

     3,001,459       1,095       0.14 %

Short-term borrowed funds

     117,173       38       0.13 %

Total interest-bearing liabilities

     3,118,632       1,133       0.14 %

Other liabilities

     105,401                  

Shareholders' equity

     902,300                  

Total liabilities and shareholders' equity

   $ 6,847,691                  

Net interest spread (1) (2)

                     4.36 %

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

           $ 72,092       4.43 %

 

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

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

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

 

-34-
 

 

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

 

   

For the Three Months Ended September 30, 2022

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 5,356,955     $ 44,461       3.32 %

Tax-exempt (1)

     195,633       1,766       3.61 %

Total investments (1)

     5,552,588       46,227       3.33 %

Loans:

                        

Taxable

     943,293       11,865       4.99 %

Tax-exempt (1)

     45,740       433       3.76 %

Total loans (1)

     989,033       12,298       4.93 %

Total interest-bearing cash

     499,692       2,742       2.15 %

Total Interest-earning assets (1)

     7,041,313       61,267       3.47 %

Other assets

     430,991                  

Total assets

   $ 7,472,304                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 3,058,662     $ -       - %

Savings and interest-bearing transaction

     3,297,585       384       0.05 %

Time less than $100,000

     76,790       47       0.24 %

Time $100,000 or more

     62,014       39       0.25 %

Total interest-bearing deposits

     3,436,389       470       0.05 %

Short-term borrowed funds

     83,694       17       0.08 %

Total interest-bearing liabilities

     3,520,083       487       0.05 %

Other liabilities

     86,131                  

Shareholders' equity

     807,428                  

Total liabilities and shareholders' equity

   $ 7,472,304                  

Net interest spread (1) (2)

                     3.42 %

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

           $ 60,780       3.44 %

 

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

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

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

 

 

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-35-
 

 

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

 

   

For the Nine Months Ended September 30, 2023

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 5,223,319     $ 166,031       4.24 %

Tax-exempt (1)

     162,667       4,347       3.56 %

Total investments (1)

     5,385,986       170,378       4.20 %

Loans:

                        

Taxable

     880,711       34,470       5.23 %

Tax-exempt (1)

     44,640       1,317       3.94 %

Total loans (1)

     925,351       35,787       5.17 %

Total interest-bearing cash

     208,111       7,981       5.06 %

Total interest-earning assets (1)

     6,519,448       214,146       4.36 %

Other assets

     421,449                  

Total assets

   $ 6,940,897                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,774,282     $ -       - %

Savings and interest-bearing transaction

     2,964,442       1,891       0.09 %

Time less than $100,000

     69,301       153       0.30 %

Time $100,000 or more

     51,481       91       0.24 %

Total interest-bearing deposits

     3,085,224       2,135       0.09 %

Short-term borrowed funds

     97,510       76       0.10 %

Total interest-bearing liabilities

     3,182,734       2,211       0.09 %

Other liabilities

     104,141                  

Shareholders' equity

     879,740                  

Total liabilities and shareholders' equity

   $ 6,940,897                  

Net interest spread (1) (2)

                     4.27 %

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

           $ 211,935       4.32 %

 

(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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-36-
 

 

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

 

 

 

   

For the Nine Months Ended September 30, 2022

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 4,951,926     $ 105,286       2.83 %

Tax-exempt (1)

     220,077       5,799       3.51 %

Total investments (1)

     5,172,003       111,085       2.86 %

Loans:

                        

Taxable

     962,556       36,419       5.06 %

Tax-exempt (1)

     46,758       1,343       3.84 %

Total loans (1)

     1,009,314       37,762       5.00 %

Total interest-bearing cash

     832,310       5,223       0.83 %

Total Interest-earning assets (1)

     7,013,627       154,070       2.93 %

Other assets

     419,513                  

Total assets

   $ 7,433,140                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 3,020,892     $ -       - %

Savings and interest-bearing transaction

     3,275,781       1,134       0.05 %

Time less than $100,000

     77,952       129       0.22 %

Time $100,000 or more

     63,318       120       0.25 %

Total interest-bearing deposits

     3,417,051       1,383       0.05 %

Short-term borrowed funds

     121,310       67       0.07 %

Total interest-bearing liabilities

     3,538,361       1,450       0.05 %

Other liabilities

     83,196                  

Shareholders' equity

     790,691                  

Total liabilities and shareholders' equity

   $ 7,433,140                  

Net interest spread (1) (2)

                     2.88 %

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

           $ 152,620       2.90 %

 

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

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

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

 

 

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-37-
 

 

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

 

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

 

Summary of Changes in Interest Income and Expense

 

   

For the Three Months Ended September 30, 2023

  
   

Compared with

  
   

For the Three Months Ended September 30, 2022

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

(Decrease) increase in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ (2,185 )   $ 13,635     $ 11,450  

Tax-exempt (1)

     (381 )     (16 )     (397 )

Total investments (1)

     (2,566 )     13,619       11,053  

Loans:

                        

Taxable

     (1,043 )     758       (285 )

Tax-exempt (1)

     (21 )     24       3  

Total loans (1)

     (1,064 )     782       (282 )

Total interest-bearing cash

     (1,165 )     2,352       1,187  

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

     (4,795 )     16,753       11,958  

(Decrease) increase in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     (47 )     680       633  

Time less than $100,000

     (6 )     11       5  

Time $100,000 or more

     (12 )     (1 )     (13 )

Total interest-bearing deposits

     (65 )     690       625  

Short-term borrowed funds

     7       14       21  

Total (decrease) increase in interest expense

     (58 )     704       646  

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

   $ (4,737 )   $ 16,049     $ 11,312  

 

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

 

 

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-38-
 

 

Summary of Changes in Interest Income and Expense

 

   

For the Nine Months Ended September 30, 2023

  
   

Compared with

  
   

For the Nine Months Ended September 30, 2022

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

Increase (decrease) in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ 5,770     $ 54,975     $ 60,745  

Tax-exempt (1)

     (1,513 )     61       (1,452 )

Total investments (1)

     4,257       55,036       59,293  

Loans:

                        

Taxable

     (3,097 )     1,148       (1,949 )

Tax-exempt (1)

     (61 )     35       (26 )

Total loans (1)

     (3,158 )     1,183       (1,975 )

Total interest-bearing cash

     (3,917 )     6,675       2,758  

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

     (2,818 )     62,894       60,076  

(Decrease) increase in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     (108 )     865       757  

Time less than $100,000

     (14 )     38       24  

Time $100,000 or more

     (22 )     (7 )     (29 )

Total interest-bearing deposits

     (144 )     896       752  

Short-term borrowed funds

     (13 )     22       9  

Total (decrease) increase in interest expense

     (157 )     918       761  

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

   $ (2,661 )   $ 61,976     $ 59,315  

 

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

 

Provision for Credit Losses

 

The Company manages credit risk by 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 portfolio during each of the periods presented.

 

The Company provided a $400 thousand provision for credit losses in the third quarter of 2023, based on the results of the CECL model and Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. The Company recorded a $1.2 million reversal of provision for credit losses in the nine months ended September 30, 2023 which reflected a $2.2 million recovery on a previously charged off loan in the first quarter 2023. The Company provided no provision for credit losses in the third quarter of 2022 and nine months ended September 30, 2022, based on Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. For further information regarding credit risk, net credit losses, and the allowance for credit losses, see the “Loan Portfolio Credit Risk” and “Allowance for Credit Losses” sections of this Report.

 

 

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-39-
 

 

Noninterest Income

 

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

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(In thousands)

  
                                 

Service charges on deposit accounts

   $ 3,705     $ 3,737     $ 10,629     $ 11,006  

Merchant processing services

     2,911       2,925       8,417       8,922  

Debit card fees

     1,717       1,594       5,118       6,175  

Trust fees

     783       810       2,358       2,462  

ATM processing fees

     640       594       1,996       1,514  

Other service fees

     463       463       1,320       1,392  

Financial services commissions

     78       79       270       314  

Life insurance gains

     278       923       278       923  

Securities losses

     -       -       (125 )     -  

Other noninterest income

     706       693       2,269       1,950  

Total

   $ 11,281     $ 11,818     $ 32,530     $ 34,658  

 

Third quarter 2023 noninterest income decreased $537 thousand compared with the third quarter 2022 primarily due to lower gains on life insurance. Debit card fees increased in the third quarter 2023 compared with the third quarter 2022 primarily due to higher transaction volumes.

 

Noninterest income for the nine months ended September 30, 2023 decreased $2.1 million compared with the nine months ended September 30, 2022 primarily due to lower gains on life insurance and because debit card fees in the nine months ended September 30, 2022 included a $1.2 million reconciling payment from a payments network. Merchant processing service fees decreased in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 primarily due to lower transaction volumes and increased lower-margin transactions. Service charges on deposit accounts decreased in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 primarily due to lower fee income on analyzed deposit accounts. ATM processing fee income increased in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 and partially offset the decreases in the other components of noninterest income. Other noninterest income in the nine months ended September 30, 2023 included higher recoveries of interest and fees on previously charged off loans compared with nine months ended September 30, 2022.

 

Noninterest Expense

 

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

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(In thousands)

  
                                 

Salaries and related benefits

   $ 11,820     $ 11,311     $ 35,715     $ 34,643  

Occupancy and equipment

     5,065       5,064       15,562       14,666  

Outsourced data processing services

     2,473       2,434       7,405       7,294  

Limited partnership operating losses

     1,440       1,431       4,314       4,293  

Professional fees

     401       582       1,362       2,054  

Courier service

     745       671       1,971       1,914  

Other noninterest expense

     3,706       3,274       11,370       9,407  

Total

   $ 25,650     $ 24,767     $ 77,699     $ 74,271  

 

-40-
 

 

Third quarter 2023 noninterest expense increased $883 thousand compared with the third quarter 2022. Salaries and benefits increased in the third quarter 2023 compared with the third quarter 2022 due to increased staff, annual merit increases and higher group health insurance costs for the employees. Other noninterest expense increased in the third quarter 2023 compared with third quarter 2022 primarily due to higher FDIC insurance assessments for all insured depository institutions. Professional fees decreased in the third quarter 2023 compared with the third quarter 2022 primarily due to lower legal fees.

 

Noninterest expense in the nine months ended September 30, 2023 increased $3.4 million compared with the nine months ended September 30, 2022. Salaries and benefits increased in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 due to increased staff, annual merit increases and higher group health insurance costs for the employees. Occupancy and equipment expenses increased in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 primarily due to increases in repair and maintenance. Other noninterest expense increased in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 primarily due to higher FDIC insurance assessments for all insured depository institutions and losses on unauthorized transactions of customer debit and ATM cards. Professional fees decreased in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 primarily due to lower legal fees.

 

Provision for Income Tax

 

The Company’s income tax provision (FTE) was $15.7 million for the third quarter 2023 and $45.6 million for the nine months ended September 30, 2023 compared with $13.1 million for the third quarter 2022 and $30.3 million for the nine months ended September 30, 2022. The effective tax rates (FTE) were 27.4% for the third quarter 2023 and 27.2% for the nine months ended September 30, 2023 compared with 27.3% for the third quarter 2022 and 26.8% for the nine months ended September 30, 2022.

 

Investment Securities Portfolio

 

The Company maintains an investment securities portfolio consisting of securities issued by U.S. Government sponsored entities, state and political subdivisions, corporations, collateralized loan obligations and agency mortgage-backed securities. The Company had no marketable equity securities at September 30, 2023 and December 31, 2022.

 

Management manages the investment securities portfolio in response to anticipated changes in interest rates, and changes in deposit and loan volumes. The carrying value of the Company’s investment securities portfolio was $4.8 billion at September 30, 2023 and $5.2 billion at December 31, 2022. The following table lists debt securities in the Company’s portfolio by type as of the dates indicated. Debt securities held to maturity are listed at amortized cost before related reserve for expected credit losses of $1 thousand at September 30, 2023 and December 31, 2022. Debt securities available for sale are listed at fair value.

 

   

At September 30, 2023

    

At December 31, 2022

  
   

Carrying Value

    

As a percent of total investment securities

    

Carrying Value

    

As a percent of total investment securities

  
   

($ in thousands)

  

Securities of U.S. Government sponsored entities

   $ 279,364       6 %   $ 290,853       6 %

Agency residential mortgage-backed securities ("MBS")

     324,075       7 %     390,900       7 %

Obligations of states and political subdivisions

     147,198       3 %     171,212       3 %

Corporate securities

     2,541,375       53 %     2,821,809       54 %

Collateralized loan obligations

     1,503,078       31 %     1,572,883       30 %

Total

   $ 4,795,090       100 %   $ 5,247,657       100 %
                                 

Debt securities available for sale

   $ 3,906,233             $ 4,331,743          

Debt securities held to maturity

     888,857               915,914          

Total

   $ 4,795,090             $ 5,247,657          

 

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.

 

-41-
 

 

At September 30, 2023, substantially all of the Company’s investment securities were investment grade as rated by one or more major rating agency. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’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.

 

The following table summarizes the amortized cost of debt securities held to maturity at September 30, 2023, aggregated by credit rating:

 

   

Credit Risk Profile by Credit Rating

  
   

At September 30, 2023

  
   

AAA/AA/A

    

BBB+

    

Not Rated

    

Total

  
   

(In thousands)

  

Agency residential MBS

   $ 83,863     $ -     $ 484     $ 84,347  

Obligations of states and political subdivisions

     77,379       -       180       77,559  

Corporate securities

     505,421       221,530       -       726,951  

Total

   $ 666,663     $ 221,530     $ 664     $ 888,857  

 

The Company had corporate securities as shown below at the dates indicated:

 

   

Corporate securities

  
   

At September 30, 2023

    

At December 31, 2022

  
   

Amortized

    

Fair

    

Amortized

    

Fair

  
   

Cost

    

Value

    

Cost

    

Value

  
   

(In thousands)

  

Debt securities available for sale

   $ 2,134,535     $ 1,814,424     $ 2,406,566     $ 2,099,955  

Debt securities held to maturity

     726,951       666,549       721,854       687,406  

Total corporate securities

   $ 2,861,486     $ 2,480,973     $ 3,128,420     $ 2,787,361  

 

The following table summarizes total corporate securities by credit rating:

 

   

At September 30, 2023

    

At December 31, 2022

  
   

Fair value

    

As a percent of total corporate securities

    

Fair value

    

As a percent of total corporate securities

  
   

($ in thousands)

  

AAA

   $ -       - %   $ 20,667       1 %

AA+

     -       - %     19,840       1 %

AA

     -       - %     19,234       1 %

AA-

     68,324       3 %     110,552       4 %

A+

     235,646       9 %     255,381       9 %

A

     362,091       14 %     503,437       18 %

A-

     784,259       32 %     695,865       25 %

BBB+

     707,790       29 %     821,102       29 %

BBB

     322,863       13 %     304,957       11 %

BBB-

     -       - %     36,326       1 %

Total corporate securities

   $ 2,480,973       100 %   $ 2,787,361       100 %

 

 

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-42-
 

 

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

 

   

At September 30, 2023

    

At December 31, 2022

  
   

Fair value

    

As a percent of total corporate securities

    

Fair value

    

As a percent of total corporate securities

  
   

($ in thousands)

  

Financial

   $ 1,436,503       58 %   $ 1,539,361       55 %

Utilities

     262,148       11 %     285,016       10 %

Industrial

     202,117       8 %     237,554       9 %

Consumer, Non-cyclical

     160,735       6 %     173,736       6 %

Communications

     151,816       6 %     162,270       6 %

Basic Materials

     97,123       4 %     98,072       3 %

Energy

     65,891       3 %     86,431       3 %

Technology

     60,665       2 %     101,255       4 %

Consumer, Cyclical

     43,975       2 %     103,666       4 %

Total corporate securities

   $ 2,480,973       100 %   $ 2,787,361       100 %

 

The following table summarizes total corporate securities by the location of the issuers’ headquarters; all the bonds are denominated in United States dollars:

 

   

At September 30, 2023

    

At December 31, 2022

  
   

Fair value

    

As a percent of total corporate securities

    

Fair value

    

As a percent of total corporate securities

  
   

($ in thousands)

  

United States of America

   $ 1,720,693       69 %   $ 1,997,328       72 %

Canada

     184,151       7 %     192,475       7 %

United Kingdom

     157,270       6 %     171,819       6 %

Japan

     153,681       6 %     161,804       6 %

Switzerland

     89,717       4 %     86,396       3 %

France

     87,227       4 %     87,781       3 %

Netherlands

     32,647       1 %     33,216       1 %

Australia

     23,580       1 %     23,870       1 %

Belgium

     19,820       1 %     20,243       1 %

Germany

     12,187       1 %     12,429       - %

Total corporate securities

   $ 2,480,973       100 %   $ 2,787,361       100 %

 

The following table summarizes the above corporate securities with issuer’s headquarters located outside of the United States of America by the industry sector in which the issuing companies operate; all the bonds are denominated in United States dollars:

 

   

At September 30, 2023

    

At December 31, 2022

  
   

Fair value

    

As a percent of total foreign corporate securities

    

Fair value

    

As a percent of total foreign corporate securities

  
   

($ in thousands)

  

Financial

   $ 665,173       87 %   $ 680,956       86 %

Energy

     30,174       4 %     30,600       4 %

Basic materials

     23,580       3 %     23,870       3 %

Consumer, Non-cyclical

     19,820       3 %     32,684       4 %

Consumer, Cyclical

     12,187       2 %     12,429       2 %

Utilities

     9,346       1 %     9,494       1 %

Total foreign corporate securities

   $ 760,280       100 %   $ 790,033       100 %

 

-43-
 

 

The Company’s $1.5 billion (fair value) in collateralized loan obligations at September 30, 2023, consist of investments in 143 issues that are within the senior tranches of their respective fund securitization structures. The following table summarizes total collateralized loan obligations by credit rating:

 

   

At September 30, 2023

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

AAA

   $ 545,632     $ 540,315  

AA

     980,037       962,763  

Total

   $ 1,525,669     $ 1,503,078  

 

The Company’s $1.6 billion (fair value) in collateralized loan obligations at December 31, 2022, consist of investments in 169 issues that are within the senior tranches of their respective fund securitization structures. The following table summarizes total collateralized loan obligations by credit rating:

 

 

   

At December 31, 2022

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

AAA

   $ 559,239     $ 553,673  

AA

     1,028,087       1,019,210  

Total

   $ 1,587,326     $ 1,572,883  

 

 

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-44-
 

 

The following tables summarize the total general obligation and revenue bonds issued by states and political subdivisions held in the Company’s investment securities portfolios as of the dates indicated, identifying the state in which the issuing government municipality or agency operates.

 

At September 30, 2023, the Company’s investment securities portfolios included securities issued by 129 state and local government municipalities and agencies located within 31 states. The largest exposure to any one municipality or agency was $4.7 million (fair value) represented by two general obligation bonds.

 

   

At September 30, 2023

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Obligations of states and political subdivisions:

                

General obligation bonds:

                

California

   $ 23,806     $ 23,191  

Washington

     11,362       10,989  

Texas

     8,162       7,777  

Massachusetts

     8,123       7,752  

Michigan

     7,067       6,763  

Minnesota

     6,626       6,468  

Other (21 states)

     53,353       50,543  

Total general obligation bonds

   $ 118,499     $ 113,483  
                 

Revenue bonds:

                

California

   $ 10,425     $ 10,043  

Kentucky

     5,059       4,972  

Virginia

     3,659       3,487  

Colorado

     3,156       3,085  

Washington

     2,070       2,041  

Utah

     1,930       1,922  

Other (7 states)

     6,375       6,212  

Total revenue bonds

   $ 32,674     $ 31,762  

Total obligations of states and political subdivisions

   $ 151,173     $ 145,245  

 

 

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-45-
 

 

At December 31, 2022, the Company’s investment securities portfolios included securities issued by 142 state and local government municipalities and agencies located within 32 states. The largest exposure to any one municipality or agency was $4.8 million (fair value) represented by three general obligation bonds.

 

   

At December 31, 2022

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Obligations of states and political subdivisions:

                

General obligation bonds:

                

California

   $ 34,621     $ 34,252  

Washington

     11,445       11,332  

Texas

     8,561       8,405  

Massachusetts

     8,214       8,073  

Michigan

     7,126       7,017  

Other (23 states)

     63,818       62,679  

Total general obligation bonds

   $ 133,785     $ 131,758  
                 

Revenue bonds:

                

California

   $ 13,917     $ 13,620  

Kentucky

     7,605       7,556  

Virginia

     3,684       3,618  

Colorado

     3,155       3,124  

Washington

     2,070       2,068  

Other (8 states)

     9,016       9,003  

Total revenue bonds

   $ 39,447     $ 38,989  

Total obligations of states and political subdivisions

   $ 173,232     $ 170,747  

 

At September 30, 2023 and December 31, 2022, 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 11 revenue sources at September 30, 2023 and December 31, 2022. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

 

   

At September 30, 2023

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Revenue bonds by revenue source:

                

Water

   $ 5,023     $ 4,956  

Sewer

     4,853       4,698  

Lease (appropriation)

     4,554       4,469  

Special Assessment

     3,695       3,359  

Lease (renewal)

     3,044       2,972  

Lease (abatement)

     2,863       2,843  

Sales tax

     2,185       2,150  

Lease (non-terminable)

     1,930       1,898  

Appropriations

     1,982       1,880  

Other (2 sources)

     2,545       2,537  

Total revenue bonds by revenue source

   $ 32,674     $ 31,762  

 

 

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-46-
 

 

   

At December 31, 2022

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

Revenue bonds by revenue source:

                

Water

   $ 6,105     $ 6,115  

Lease (renewal)

     5,590       5,536  

Sewer

     5,523       5,480  

Lease (appropriation)

     4,556       4,518  

Special Assessment

     4,080       3,788  

Lease (abatement)

     3,702       3,694  

Sales tax

     3,185       3,187  

Other (4 sources)

     6,706       6,671  

Total revenue bonds by revenue source

   $ 39,447     $ 38,989  

 

See Note 3 to the unaudited consolidated financial statements for additional information related to the investment securities.

 

Loan Portfolio Credit Risk

 

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

 

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 organizational 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”).

 

-47-
 

 

Nonperforming Loans

 

   

At September 30,

    

At December 31,

  
   

2023

    

2022

    

2022

  
   

(In thousands)

  
                         

Nonperforming nonaccrual loans

   $ 205     $ 131     $ 146  

Performing nonaccrual loans

     4       66       -  

Total nonaccrual loans

     209       197       146  

Accruing loans 90 or more days past due

     1,029       769       628  

Total nonperforming loans

   $ 1,238     $ 966     $ 774  

 

At September 30, 2023, nonaccrual loans consisted of four loans with an average carrying value of $52 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

 

The following table summarizes allowance for credit losses at the dates indicated:

 

   

At September 30,

    

At December 31,

  
   

2023

    

2022

  
   

(In thousands)

  
                 

Allowance for credit losses on loans

   $ 17,744     $ 20,284  

Allowance for credit losses on held to maturity debt securities

     1       1  

Total allowance for credit losses

   $ 17,745     $ 20,285  
                 

Allowance for unfunded credit commitments

   $ 201     $ 201  

 

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. Corporate securities held to maturity were individually evaluated for expected credit loss by evaluating the issuer’s financial condition, profitability, cash flows, and credit ratings. At September 30, 2023, no credit loss allowance was assigned to corporate securities held to maturity based on evaluation of each individual issuer’s financial performance throughout full business cycles. 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. Allowance for credit losses related to debt securities held to maturity was $1 thousand related to municipal securities at September 30, 2023 and December 31, 2022, reflecting 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 current expected credit loss 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.

 

-48-
 

 

The preparation of the 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.

 

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 modification to be made to loans to borrowers experiencing financial difficulty is included in the allowance for credit losses when management determines such 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.

 

 

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-49-
 

 

The following table summarizes the allowance for credit losses, chargeoffs and recoveries for the periods indicated.

 

   

For the Three Months

    

For the Nine Months

  
   

Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

($ in thousands)

  

Analysis of the allowance for credit losses

                                

Balance, beginning of period

   $ 18,480     $ 22,313     $ 20,284     $ 23,514  

Provision (reversal of provision) for credit losses

     400       -       (1,150 )     -  

Loans charged off

                                

Commercial

     (262 )     -       (410 )     (20 )

Consumer installment and other

     (1,827 )     (1,917 )     (5,379 )     (4,522 )

Total chargeoffs

     (2,089 )     (1,917 )     (5,789 )     (4,542 )

Recoveries of loans previously charged off

                                

Commercial

     10       72       2,194       335  

Commercial real estate

     15       14       45       46  

Consumer installment and other

     928       736       2,160       1,865  

Total recoveries

     953       822       4,399       2,246  

Net loan losses

     (1,136 )     (1,095 )     (1,390 )     (2,296 )

Balance, end of period

   $ 17,744     $ 21,218     $ 17,744     $ 21,218  
                                 

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

     0.50 %     0.44 %     0.20 %     0.30 %

 

Selected financial data: (At the dates indicated)

                        
   

At September 30,

    

At December 31,

  
   

2023

    

2022

    

2022

  
   

($ in thousands)

  

Loans

   $ 885,850     $ 979,033     $ 958,488  

Nonaccrual loans

     209       197       146  

Allowance for credit losses as a percentage of loans

     2.00 %     2.17 %     2.12 %

Nonaccrual loans as a percentage of loans

     0.02 %     0.02 %     0.02 %

Allowance for credit losses to nonaccrual loans

     8489.95 %     10770.56 %     13893.15 %

 

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

 

   

For the Three Months Ended

    

For the Nine Months Ended

  
   

September 30, 2023

  
                   

As a Percentage

                    

As a Percentage

  
           

Average

    

of Net Chargeoffs

            

Average

    

of Net (Recoveries)

  
   

Net (Chargeoffs)

    

Loan

    

(Recoveries)

    

Net Recoveries

    

Loan

    

Chargeoffs

  
   

Recoveries

    

Balances

    

to Average Loans

    

(Chargeoffs)

    

Balances

    

to Average Loans

  
   

($ in thousands)

  
                                                 

Commercial

   $ (252 )   $ 146,478       0.17 %   $ 1,784     $ 154,078       (1.16 )%

Commercial real estate

     15       493,072       - %     45       492,702       (0.01 )%

Construction

     -       4,953       - %     -       4,126       - %

Residential real estate

     -       11,703       - %     -       12,593       - %

Consumer and other installment

     (899 )     247,648       0.36 %     (3,219 )     261,852       1.23 %

Total

   $ (1,136 )   $ 903,854       0.13 %   $ (1,390 )   $ 925,351       0.15 %

 

 

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-50-
 

 

   

For the Three Months Ended

    

For the Nine Months Ended

  
   

September 30, 2022

  
                   

As a percentage

                    

As a percentage

  
           

Average

    

of Net chargeoffs

            

Average

    

of Net chargeoffs

  
   

Net (chargeoffs)

    

Loan

    

(recoveries)

    

Net (chargeoffs)

    

Loan

    

(recoveries)

  
   

Recoveries

    

Balances

    

to Average loans

    

Recoveries

    

Balances

    

to Average loans

  
   

($ in thousands)

  
                                                 

Commercial

   $ 72     $ 187,941       (0.04 )%   $ 315     $ 198,950       (0.16 )%

Commercial real estate

     14       494,717       - %     46       508,812       (0.01 )%

Construction

     -       2,384       - %     -       1,256       - %

Residential real estate

     -       15,144       - %     -       16,157       - %

Consumer and other installment

     (1,181 )     288,847       0.41 %     (2,657 )     284,139       0.94 %

Total

   $ (1,095 )   $ 989,033       0.11 %   $ (2,296 )   $ 1,009,314       0.23 %

 

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 are primarily determined by loan, borrower, or collateral type. Historical loss rates are determined for each pool. Loans that do not share risk characteristics with other loans in the pools are evaluated individually. See Note 2 to the unaudited consolidated financial statements for additional information.

 

   

Allowance for Credit Losses

  
   

For the Three Months Ended September 30, 2023

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 4,764     $ 6,083     $ 202     $ 32     $ 7,399     $ 18,480  

(Reversal) provision

     (345 )     (194 )     40       (6 )     905       400  

Chargeoffs

     (262 )     -       -       -       (1,827 )     (2,089 )

Recoveries

     10       15       -       -       928       953  

Total allowance for credit losses

   $ 4,167     $ 5,904     $ 242     $ 26     $ 7,405     $ 17,744  

 

 

   

Allowance for Credit Losses

  
   

For the Nine Months Ended September 30, 2023

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 6,138     $ 5,888     $ 150     $ 32     $ 8,076     $ 20,284  

(Reversal) provision

     (3,755 )     (29 )     92       (6 )     2,548       (1,150 )

Chargeoffs

     (410 )     -       -       -       (5,379 )     (5,789 )

Recoveries

     2,194       45       -       -       2,160       4,399  

Total allowance for credit losses

   $ 4,167     $ 5,904     $ 242     $ 26     $ 7,405     $ 17,744  

 

Management considers the $17.7 million allowance for credit losses on loans to be adequate as a reserve against current expected credit losses in the loan portfolio as of September 30, 2023.

 

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

 

Climate-Related Financial Risk

 

Climate change presents risk to the Company, our critical vendors and our customers. Our risk management practices incorporate the challenges brought about by climate change. The operations conducted in our centralized facilities and branch locations can be disrupted by acute physical risks such as flooding and windstorms, and by chronic physical risks such as rising sea levels, sustained higher temperatures, drought, and increased wildfires. Over the intermediate and longer-term, the Company can be subject to transition risks such as market demand, and policy and law changes.

 

None of the Company’s physical locations are located near sea level, and only a limited number of branches are located in flood zones. Our principal electricity supplier reports a Power Content Label of 100% greenhouse gas free using the California Energy Commission’s methodology. Our principal information technology vendor’s goal is to achieve 100 percent carbon neutrality for Scope 1 and 2 greenhouse gas emissions by 2025. The Company and its critical vendors maintain property and casualty insurance, and maintain and regularly test disaster recovery plans, which include redundant operational locations and power sources. The Company’s operations do not use a significant amount of water in producing our products and services.

 

-51-
 

 

The Company monitors the climate risks of our loan customers. Borrowers with real estate loan collateral located in flood zones must carry flood insurance under the loans’ terms. At September 30, 2023, the Company had $19 million in loans to agricultural borrowers; Management continuously monitors these customers’ access to adequate water sources as well as their ability to sustain low crop yields without encountering financial hardship. The Company makes automobile loans; changes in consumer demand, or governmental laws or policies, regarding gasoline, electric and hybrid vehicles are not considered to be material risks to the Company’s automobile lending practices.

 

The Company considers climate risk in its underwriting of corporate bonds, and avoids purchasing bonds of issuers, which, in Management’s judgement, have elevated climate risk.

 

While the Company follows risk management practices related to climate risk, the Company may experience financial losses due to climate risk despite these precautions.

 

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 bond portfolio volumes, accumulated other comprehensive (loss) income, 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 demand for loans and growth of 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.

 

Management monitors the Company’s interest rate risk using a purchased simulation model, which is periodically assessed 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 a dynamic composition simulation and static simulation. 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. Within the static simulation, cash flows are assumed redeployed into like financial instruments at prevailing rates and yields. 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 generally “asset sensitive” at September 30, 2023, based on the interest rate assumptions applied to the simulation model. An “asset sensitive” position results in a larger change in interest income than in interest expense resulting from application of assumed interest rate changes. However, in the dynamic simulation, an assumed decline in interest rates is expected to result in improved deposit balances funding higher earning asset levels. Further, in the dynamic simulation, no change in interest rates is expected to result in a decline in net interest income as asset yields remain stable and deposit costs rise as the Bank negotiates deposit rates with customers in the current environment.

 

-52-
 

 

At September 30, 2023, Management’s most recent measurements of estimated changes in net interest income were:

 

Dynamic simulation (balance sheet composition changes):                    
Assumed change in interest rates over 1 year -2.00 % -1.00 % 0.00 % +1.00 % +2.00 %
First year change in net interest income -1.1 % +1.4 % -0.8 % +1.5 % +2.9 %

 

Static simulation (balance sheet composition unchanged):                    
Assumed immediate change in interest rates  -2.00 % -1.00 % 0.00 % +1.00 % +2.00 %
First year change in net interest income -12.0 % -5.4 % 0.0 % +6.3 % +12.2 %

                 

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. Assumptions made in the simulation may not materialize and unanticipated events and circumstances may occur. In addition, the simulation does not take into account any future actions Management may undertake to mitigate the impact of interest rate changes, loan prepayment estimates and spread relationships, which may change regularly.

 

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 expected 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 borrowing from correspondent banks or in the wholesale markets, or by selling debt securities available for sale.

 

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 nine months ended September 30, 2023 and 97% in the year ended December 31, 2022. 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.

 

Total deposits were $5,699 million at September 30, 2023 and $6,225 million at December 31, 2022. Total time deposits were $105 million at September 30, 2023 and $131 million at December 31, 2022. The Company has no foreign time deposits. The standard FDIC deposit insurance amount is $250,000 per depositor, for each account ownership category. At September 30, 2023, estimated federally uninsured deposits and time deposits were $2,671 million and $12 million, respectively. Estimated federally uninsured time deposits included $650 thousand in deposits by public entities that are secured by the Company’s debt securities as collateral.

 

-53-
 

 

Banking industry deposits, including for Westamerica Bank, grew rapidly in 2020 and 2021 due to the injection of fiscal stimulus into the United States economy, including Paycheck Protection Program loans, and an easing of Federal Reserve monetary policy, both in response to the COVID pandemic. Federal Reserve monetary policy easing included reduction in the federal funds rate to a range of 0.00% to 0.25% and net purchases of Treasury securities and agency mortgage-backed securities, which increase the money supply and aggregate bank deposits. Subsequently, inflation rose considerably while employment conditions remained strong. In 2022 and 2023, the Federal Reserve’s monetary policy reversed to tightening, in an effort to reduce inflation. The monetary policy tightening included increasing the federal funds rate to a range of 5.25% to 5.50% and net reductions of Treasury securities and agency mortgage-backed securities, which reduce the money supply and aggregate bank deposits. Westamerica Bank’s deposit totals are subject to both the fiscal policies of the United States government and monetary policies of the Federal Reserve; the 2023 decline in Westamerica Bank deposits is influenced by these fiscal and monetary policies. In addition, the Internal Revenue Service (“IRS”) declared every county in which Westamerica Bank operates as Natural Disaster Areas due to 2022-2023 winter storms; the IRS and California Franchise Tax Board extended the 2022 tax filing deadline and 2023 tax installment payment due dates to November 16, 2023. Westamerica Bank management expects this deferment of tax payment deadlines will impact deposit totals in the fourth quarter 2023 as customers pay their federal and California tax obligations.

 

The following table shows the time remaining to maturity of the Company’s estimated federally uninsured time deposits with a balance greater than $250,000 per depositor per category:

 

   

At September 30, 2023

  
   

(In thousands)

  

Three months or less

   $ 7,272  

Over three through six months

     2,291  

Over six through twelve months

     1,155  

Over twelve months

     918  

Total

   $ 11,636  

 

Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. At September 30, 2023, the Company had $420,550 thousand in cash balances. During the twelve months ending September 30, 2024, the Company expects to receive $257,000 thousand in principal payments from its debt securities. If additional operational liquidity is required, the Company can pledge debt securities as collateral for borrowing purposes; at September 30, 2023, the Company’s debt securities which qualify as collateral for borrowing totaled $3,810,723 thousand. In the ordinary course of business, the Company pledges debt securities as collateral for certain depository customers; at September 30, 2023, the Company had pledged $680,735 thousand in debt securities for depository customers. In the ordinary course of business, the Company pledges debt securities as collateral for borrowing from the Federal Reserve Bank; at September 30, 2023, the Company had pledged $964,139 thousand in debt securities at the Federal Reserve Bank. During the nine months ended September 30, 2023, the Company’s average borrowings from the Federal Reserve Bank and other correspondent banks were $-0- thousand, respectively, and at September 30, 2023, the Company’s borrowings from the Federal Reserve Bank and other correspondent banks were $-0- thousand. At September 30, 2023, the Company’s estimated unpledged collateral qualifying debt securities totaled $1,930,927 thousand based on the Federal Reserve Bank borrowing programs. Debt securities eligible as collateral are shown at market value unless otherwise noted:

 

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-54-
 

 

   

At September 30, 2023

  
   

(in thousands)

  

Debt Securities Eligible as Collateral:

        

Corporate Securities

   $ 2,480,972  

Collateralized Loan Obligations rated AAA

     540,315  

Obligations of States and Political Subdivisions

     145,246  

Agency Mortgage Backed Securities

     317,357  

Securities of U.S. Government Sponsored Entities (Par Value)

     326,833  

Total Debt Securities Eligible as Collateral

   $ 3,810,723  
         

Debt Securities Pledged as Collateral:

        

Deposits by Public Entities

   $ (680,735 )

Short-term Borrowed Funds (Deposit Sweep)

     (229,278 )

Other

     (5,644 )

Total Debt Securities Pledged as Collateral

   $ (915,657 )
         

Debt Securities Pledged at the Federal Reserve Bank

   $ (964,139 )
         

Estimated Debt Securities Available to Pledge

   $ 1,930,927  

 

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 composition of the Bank’s deposits is considered including the broad industry and geographic diversification in the Bank’s market area. 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 any 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 $34 million in the nine months ended September 30, 2023 and $45 million in the year ended December 31, 2022 and retire common stock in the amounts of $14 million and $218 thousand, respectively. Payment of dividends to the Parent Company by the Bank is limited under California and Federal laws. The Company believes these regulatory dividend restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations. The Parent Company’s cash balance was $126 million at September 30, 2023 and $99 million at December 31, 2022.

 

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-55-
 

 

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”) was annualized 18.6% for the nine months ended September 30, 2023 and 15.2% for the year ended December 31, 2022. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $2.3 million in the year ended December 31, 2022.

 

The Company paid common dividends totaling $34 million in the nine months ended September 30, 2023 and $45 million in the year ended December 31, 2022, which represent dividends per common share of $1.28 and $1.68, 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 274 thousand shares valued at $14 million in the nine months ended September 30, 2023 and 3 thousand shares valued at $218 thousand in the year ended December 31, 2022.

 

The Company's primary capital resource is shareholders' equity, which was $648 million at September 30, 2023 compared with $602 million at December 31, 2022. The Company's ratio of equity to total assets was 9.9% at September 30, 2023 and 8.7% at December 31, 2022.

 

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 September 30, 2023

    

Capital Adequacy

    

Corrective Action

  
   

Company

    

Bank

    

Purposes

    

Regulations (Bank)

  
                                 

Common Equity Tier I Capital

     18.20 %     14.57 %     7.00 %     6.50 %

Tier I Capital

     18.20 %     14.57 %     8.50 %     8.00 %

Total Capital

     18.60 %     15.12 %     10.50 %     10.00 %

Leverage Ratio

     12.08 %     9.63 %     4.00 %     5.00 %

 

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To Be

  
                           

Well-capitalized

  
                   

Required for

    

Under Prompt

  
   

At December 31, 2022

    

Capital Adequacy

    

Corrective Action

  
   

Company

    

Bank

    

Purposes

    

Regulations (Bank)

  
                                 

Common Equity Tier I Capital

     15.22 %     12.37 %     7.00 %     6.50 %

Tier I Capital

     15.22 %     12.37 %     8.50 %     8.00 %

Total Capital

     15.64 %     12.93 %     10.50 %     10.00 %

Leverage Ratio

     10.18 %     8.26 %     4.00 %     5.00 %

 

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 Bank expects to maintain regulatory capital levels in excess of the minimum required to be considered well-capitalized under the prompt corrective action framework. The Company expects to continue paying quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

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

 

Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, people (including human errors or misconduct), or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business.

 

During the second quarter 2023, the Company was notified that there may have been a compromise of a specific set of files processed by a third party vendor that could have affected a limited number of customers. This incident did not occur on a Company system and the Company does not use the software that may have been compromised. The Company has implemented data security safeguards with its third party vendors designed to quickly identify and contain improper access to sensitive information. The Company notified the affected customers as required by law. As of September 30, 2023, to the Company’s knowledge, there is no indication that any information has been subject to misuse as a result of the incident.

 

Item 4. Controls and Procedures

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of September 30, 2023.

 

Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, other than ordinary routine legal proceedings arising in the ordinary course of the Company’s business. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its business, financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated.

 

Item 1A. Risk Factors

 

The Company’s Annual Report on Form 10-K for the year ended December 31, 2022 includes detailed disclosure about the risks faced by the Company’s business. The following risk factors supplement, and should be read in conjunction with, the risk factors described in the Company’s Annual Report on Form 10-K.

 

Recent negative developments affecting the banking industry, such as bank failures, may have a material adverse effect on the Company.

 

The banking industry continued to experience significant volatility with recent multiple bank failures. Industrywide concerns have developed related to liquidity, deposit outflows and unrealized losses on investment debt securities. While the Company cannot predict with certainty whether or how these developments may affect the banking industry, the Company faces the risks of increased FDIC deposit insurance premium expenses; increased regulation or supervisory scrutiny; and decreased confidence in banks among depositors and investors, any of which could, adversely affect the trading price of the Company’s common stock or its ability to effectively fund its operations. Any one or a combination of such risk factors, or other factors, could materially adversely affect the Company's business, financial condition, results of operations and prospects.

 

The Company could realize losses if it were required to sell securities in its held-to-maturity securities portfolio to meet liquidity needs.

 

As a result of increases in interest rates over the last year, the market value of previously issued government and other debt securities has declined significantly, resulting in unrealized losses in the held-to-maturity portion of the Company’s securities portfolios. While the Company does not currently expect or intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital financial condition and results of operations. Further, while the Company has taken actions to maximize its funding sources, there is no guarantee that such funding sources will be available or sufficient in the event of sudden liquidity needs.

 

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

 

(a) None

(b) None

(c) Issuer Purchases of Equity Securities

 

The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of common stock during the quarter ended September 30, 2023.

 

   

2023

  

Period

  

(a) Total Number of Shares Purchased

    

(b) Average Price Paid per Share

    

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

    

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

  
   

(In thousands, except price paid)

  

July 1 through July 31

     -     $ -       -       1,750  

August 1 through August 31

     -       -       -       1,750  

September 1 through September 30

     -       -       -       1,750  

Total

     -     $ -       -       1,750  

 

The Company repurchases shares of its common stock in the open market on a discretionary basis from time to time to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares under equity incentive plans, and other ongoing requirements.

 

No shares were repurchased during the period from July 1, 2023 through September 30, 2023. A share repurchase program was approved by the Board of Directors on July 28, 2022 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2023. A replacement program was approved by the Board of Directors on July 27, 2023 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2024.

 

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Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5. Other Information

 

Rule 10b5-1 Trading Plans

 

During the quarter ended September 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” as defined in Item 408 of Regulation S-K.
 

Item 6. Exhibits

 

Exhibit No.   Description of Exhibit
   
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
   
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
   
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
Exhibit 101.INS XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
   
Exhibit 101.SCH Inline XBRL Taxonomy Extension Schema Document
   
Exhibit 101.CAL  Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
Exhibit 101.DEF Inline XBRL Taxonomy Extension Definitions Linkbase Document
   
Exhibit 101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document
   
Exhibit 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
Exhibit 104. The Cover page of Westamerica Bancorporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (contained in Exhibit 101)

 

 

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-59-
 

 

SIGNATURES

 

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

 

WESTAMERICA BANCORPORATION

(Registrant)

 

/s/ John “Robert” Thorson
John “Robert” Thorson
Senior Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
 
Date: November 8, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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