10-Q 1 wabc20230930_10q.htm FORM 10-Q wabc20230930_10q.htm
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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

 

 
 

 

 
 

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