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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, 2022

 

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 26, 2022

Common Stock,

No Par Value

26,912,487

 

 

 

 

 

TABLE OF CONTENTS

 

 

Page   

Forward Looking Statements

3

PART I - FINANCIAL INFORMATION

4

Item 1

Financial Statements

4
 

Notes to Unaudited Consolidated Financial Statements

9

Item 2

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

30

Item 3

Quantitative and Qualitative Disclosures about Market Risk

52

Item 4

Controls and Procedures

52

PART II - OTHER INFORMATION

 

Item 1

Legal Proceedings

53

Item 1A

Risk Factors

53

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3

Defaults upon Senior Securities

54

Item 4

Mine Safety Disclosures

54

Item 5

Other Information

54

Item 6

Exhibits

54

Signatures

55

 

 

 

 

-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; (11) asset/liability management risks and liquidity risks; (12) the effect of climate change, natural disasters, including earthquakes, hurricanes, fire, flood, drought, and other disasters, on the uninsured value of the Company’s assets and of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values; (13) changes in the securities markets; (14) the duration and severity of the COVID-19 pandemic and governmental and customer responses to the pandemic; (15) inflation and (16) the outcome of contingencies, such as legal proceedings. However, the reader should not consider the above-mentioned factors to be a complete set of all potential risks or uncertainties.

 

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2021, 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,

 
  

2022

  

2021

 
  

(In thousands)

 

Assets:

        

Cash and due from banks

 $413,665  $1,132,085 

Debt securities available for sale

  4,376,331   4,638,855 

Debt securities held to maturity, net of allowance for credit losses of $7 at September 30, 2022 and December 31, 2021 (Fair value of $878,462 at September 30, 2022 and $312,562 at December 31, 2021)

  936,267   306,396 

Loans

  979,033   1,068,126 

Allowance for credit losses on loans

  (21,218)  (23,514)

Loans, net of allowance for credit losses on loans

  957,815   1,044,612 

Premises and equipment, net

  29,756   31,155 

Identifiable intangibles, net

  644   835 

Goodwill

  121,673   121,673 

Other assets

  340,874   185,415 

Total Assets

 $7,177,025  $7,461,026 
         

Liabilities:

        

Noninterest-bearing deposits

 $3,069,907  $3,069,080 

Interest-bearing deposits

  3,425,349   3,344,876 

Total deposits

  6,495,256   6,413,956 

Short-term borrowed funds

  76,886   146,246 

Other liabilities

  65,895   73,722 

Total Liabilities

  6,638,037   6,633,924 
         

Contingencies (Note 10)

          
         

Shareholders' Equity:

        

Common stock (no par value), authorized: 150,000 shares Issued and outstanding: 26,911 at September 30, 2022 and 26,866 at December 31, 2021

  474,697   471,008 

Deferred compensation

  35   35 

Accumulated other comprehensive (loss) income

  (290,797)  49,664 

Retained earnings

  355,053   306,395 

Total Shareholders' Equity

  538,988   827,102 

Total Liabilities and Shareholders' Equity

 $7,177,025  $7,461,026 

 

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,

 
  

2022

  

2021

  

2022

  

2021

 
  

(In thousands, except per share data)

 

Interest and Loan Fee Income:

                

Loans

 $12,208  $14,789  $37,481  $44,434 

Equity securities

  127   109   384   329 

Debt securities available for sale

  39,100   26,452   99,430   77,822 

Debt securities held to maturity

  6,625   2,091   10,040   7,051 

Interest-bearing cash

  2,742   369   5,223   766 

Total Interest and Loan Fee Income

  60,802   43,810   152,558   130,402 

Interest Expense:

                

Deposits

  470   473   1,383   1,398 

Short-term borrowed funds

  17   19   67   53 

Total Interest Expense

  487   492   1,450   1,451 

Net Interest and Loan Fee Income

  60,315   43,318   151,108   128,951 

Provision for Credit Losses

  -   -   -   - 

Net Interest and Loan Fee Income After Provision for Credit Losses

  60,315   43,318   151,108   128,951 

Noninterest Income:

                

Service charges on deposit accounts

  3,737   3,578   11,006   10,117 

Merchant processing services

  2,925   3,159   8,922   8,998 

Debit card fees

  1,594   1,740   6,175   5,132 

Trust fees

  810   839   2,462   2,467 

ATM processing fees

  594   573   1,514   1,792 

Other service fees

  463   475   1,392   1,435 

Financial services commissions

  79   95   314   260 

Life insurance gains

  923   -   923   - 

Securities gains

  -   -   -   34 

Other noninterest income

  693   823   1,950   2,268 

Total Noninterest Income

  11,818   11,282   34,658   32,503 

Noninterest Expense:

                

Salaries and related benefits

  11,311   11,813   34,643   36,575 

Occupancy and equipment

  5,064   4,759   14,666   14,447 

Outsourced data processing services

  2,434   2,429   7,294   7,244 

Limited partnership operating losses

  1,431   620   4,293   1,820 

Professional fees

  582   724   2,054   2,496 

Courier service

  671   534   1,914   1,605 

Other noninterest expense

  3,274   3,818   9,407   9,707 

Total Noninterest Expense

  24,767   24,697   74,271   73,894 

Income Before Income Taxes

  47,366   29,903   111,495   87,560 

Provision for income taxes

  12,606   7,840   28,805   22,771 

Net Income

 $34,760  $22,063  $82,690  $64,789 
                 

Average Common Shares Outstanding

  26,906   26,866   26,889   26,851 

Average Diluted Common Shares Outstanding

  26,916   26,875   26,901   26,868 

Per Common Share Data:

                

Basic earnings

 $1.29  $0.82  $3.08  $2.41 

Diluted earnings

  1.29   0.82   3.07   2.41 

Dividends paid

  0.42   0.41   1.26   1.23 

 

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,

 
  

2022

  

2021

  

2022

  

2021

 
  

(In thousands)

 

Net income

 $34,760  $22,063  $82,690  $64,789 

Other comprehensive (loss) income:

                

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

  (145,907)  (22,200)  (483,359)  (61,196)

Deferred tax benefit

  43,135   6,563   142,898   18,092 

Reclassification of gains included in net income

  -   -   -   (34)

Deferred tax expense on gains included in net income

  -   -   -   10 

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

  (102,772)  (15,637)  (340,461)  (43,128)

Total comprehensive (loss) income

 $(68,012) $6,426  $(257,771) $21,661 

 

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, 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 
                         

Balance, June 30, 2021

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

Net income for the period

               22,063   22,063 

Other comprehensive loss

            (15,637)     (15,637)

Exercise of stock options

  -   -            - 

Stock based compensation

  -   324            324 

Stock awarded to employees

  1   22            22 

Dividends ($0.41 per share)

               (11,015)  (11,015)

Balance, September 30, 2021

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

Balance, December 31, 2020

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

Net income for the period

               64,789   64,789 

Other comprehensive loss

            (43,128)     (43,128)

Exercise of stock options

  53   3,017            3,017 

Restricted stock activity

  9   526              526 

Stock based compensation

  -   1,100            1,100 

Stock awarded to employees

  1   93            93 

Retirement of common stock

  (4)  (66)          (166)  (232)

Dividends ($1.23 per share)

               (33,021)  (33,021)

Balance, September 30, 2021

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

 

See accompanying notes to unaudited consolidated financial statements. 

 

-7-

 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 
         
  

For the Nine Months

 
  

Ended September 30,

 
  

2022

  

2021

 
  

(In thousands)

 

Operating Activities:

        

Net income

 $82,690  $64,789 

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

        

Depreciation and amortization

  13,736   11,748 

Provision for credit losses

  -   - 

Net amortization of deferred loan fees

  (1,445)  (4,671)

Stock option compensation expense

  1,017   1,100 

Life insurance gains

  (923)  - 

Securities gains

  -   (34)

Net changes in:

        

Interest income receivable

  (13,985)  (282)

Other assets

  (5,317)  (13,255)

Income taxes payable

  3,055   4,580 

Net deferred tax asset

  510   (3,109)

Interest expense payable

  21   (8)

Other liabilities

  (7,476)  10,272 

Net Cash Provided by Operating Activities

  71,883   71,130 

Investing Activities:

        

Net repayments of loans

  88,242   128,791 

Purchases of debt securities available for sale

  (619,601)  (1,593,799)

Purchases of debt securities held to maturity

  (718,940)  - 

Proceeds from maturity/calls of debt securities available for sale

  391,548   1,040,179 

Proceeds from maturity/calls of debt securities held to maturity

  89,246   157,221 

Purchases of premises and equipment

  (812)  (1,052)

Net Cash Used in Investing Activities

  (770,317)  (268,660)

Financing Activities:

        

Net change in deposits

  81,300   600,982 

Net change in short-term borrowings

  (69,360)  16,557 

Exercise of stock options

  2,171   3,017 

Retirement of common stock

  (218)  (232)

Common stock dividends paid

  (33,879)  (33,021)

Net Cash (Used in) Provided by Financing Activities

  (19,986)  587,303 

Net Change In Cash and Due from Banks

  (718,420)  389,773 

Cash and Due from Banks at Beginning of Period

  1,132,085   621,275 

Cash and Due from Banks at End of Period

 $413,665  $1,011,048 
         

Supplemental Cash Flow Disclosures:

        

Supplemental disclosure of non cash activities:

        

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

 $2,925  $4,972 

Securities purchases pending settlement

  -   81,618 

Supplemental disclosure of cash flow activities:

        

Cash paid for amounts included in operating lease liabilities

  4,553   4,791 

Interest paid for the period

  1,429   1,459 

Income tax payments for the period

  25,240   21,300 

 

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, 2022 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, 2021.

 

 

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, 2021. 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, 2021 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 COVID-19 pandemic, inflation and the Federal Reserve’s monetary policy, climate changes and the war in Ukraine on the Company’s business. The extent of the impact on the Company’s results of operations, cash flow liquidity, and financial performance, as well as the Company’s ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted. However, 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, 2021. 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.

 

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

 

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

 

- 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 do not share common risk characteristics with any of the pools of debt securities is individually evaluated and a reserve for credit losses is established 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-

 

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

 

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

 

The preparation of these financial statements requires Management to estimate the amount of expected losses over the expected contractual life of the Bank’s existing loan portfolio and establish an allowance for credit losses. Loan agreements generally include a maturity date, and the Company considers the contractual life of a loan agreement to extend from the date of origination to the contractual maturity date. In estimating credit losses, Management must exercise significant judgment in evaluating information deemed relevant. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses.

 

The allowance for credit losses is established through provisions for credit losses charged to income. Losses on loans are charged to the allowance for credit losses when all or a portion of the recorded amount of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. The Company’s allowance for credit losses is maintained at a level considered adequate to provide for expected losses based on historical loss rates adjusted for current and expected conditions over a forecast period. These include conditions unique to individual borrowers, as well as overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions, or credit protection agreements and other factors.

 

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

 

- 11-

 

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

 

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

 

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

 

Recently Issued Accounting Standards

 

FASB ASU 2022-02, Financial Instruments Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, was issued March 2022. The ASU eliminates the accounting guidance for Troubled Debt Restructurings (“TDR”) Loans by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Upon adoption of this ASU, an entity is required to disclose current period gross chargeoffs by year of origination for loans. The ASU is to be applied prospectively, with the exception of the guidance related to the recognition and measurement of TDR loans that may be applied by recording a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This guidance is effective for reporting periods beginning after December 15, 2022, with early adoption permitted, for public entities that have adopted ASU 2016-13, Financial Instruments Credit Losses (Topic 326). The Company adopted ASU 2016-13 effective January 1, 2020. FASB ASU 2022-02 is applicable to the Company’s fiscal year beginning January 1, 2023. The Company is currently evaluating the impact of adopting this standard.

 

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

 

-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 $7 thousand at September 30, 2022 and December 31, 2021, follows:

 

  

At September 30, 2022

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential mortgage-backed securities ("MBS")

 $326,577  $3  $(29,891) $296,689 

Securities of U.S. Government sponsored entities

  289,105   -   (16,580)  272,525 

Obligations of states and political subdivisions

  85,178   50   (4,241)  80,987 

Corporate securities

  2,491,591   1,085   (354,168)  2,138,508 

Collateralized loan obligations

  1,596,730   497   (9,605)  1,587,622 

Total debt securities available for sale

  4,789,181   1,635   (414,485)  4,376,331 

Debt securities held to maturity

                

Agency residential MBS

  112,371   20   (8,278)  104,113 

Obligations of states and political subdivisions

  103,749   29   (1,654)  102,124 

Corporate securities

  720,154   -   (47,929)  672,225 

Total debt securities held to maturity

  936,274   49   (57,861)  878,462 

Total

 $5,725,455  $1,684  $(472,346) $5,254,793 

 

  

At December 31, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential MBS

 $399,997  $11,766  $(37) $411,726 

Securities of U.S. Government entities

  119   -   -   119 

Obligations of states and political subdivisions

  90,107   3,842   (29)  93,920 

Corporate securities

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

Collateralized loan obligations

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

Total debt securities available for sale

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

Debt securities held to maturity

                

Agency residential MBS

  148,390   3,114   (37)  151,467 

Obligations of states and political subdivisions

  158,013   3,082   -   161,095 

Total debt securities held to maturity

  306,403   6,196   (37)  312,562 

Total

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

 

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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, 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

 $331,756  $329,956  $14,686  $14,634 

Over 1 to 5 years

  557,420   523,563   170,979   165,738 

Over 5 to 10 years

  2,823,019   2,482,869   638,238   593,977 

Over 10 years

  750,409   743,254   -   - 

Subtotal

  4,462,604   4,079,642   823,903   774,349 

MBS

  326,577   296,689   112,371   104,113 

Total

 $4,789,181  $4,376,331  $936,274  $878,462 

 

  

At December 31, 2021

 
  

Debt Securities Available

  

Debt Securities Held

 
  

for Sale

  

to Maturity

 
  

Amortized

  

Fair

  

Amortized

  

Fair

 
  

Cost

  

Value

  

Cost

  

Value

 
  

(In thousands)

 

Maturity in years:

                

1 year or less

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

Over 1 to 5 years

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

Over 5 to 10 years

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

Over 10 years

  834,395   832,573   -   - 

Subtotal

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

MBS

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

Total

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

 

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, 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

  114  $295,984  $(29,890)  2  $39  $(1)  116  $296,023  $(29,891)

Securities of U.S.
Government sponsored
entities

  19   272,525   (16,580)  -   -   -   19   272,525   (16,580)

Obligations of states
and political
subdivisions

  63   66,998   (4,148)  3   1,309   (93)  66   68,307   (4,241)

Corporate securities

  156   1,787,045   (256,786)  36   323,597   (97,382)  192   2,110,642   (354,168)

Collateralized loan
obligations

  58   535,175   (8,768)  16   151,448   (837)  74   686,623