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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 June 30, 2024

 

or

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from __________ to __________.

 

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

California 94-2156203

(State or Other Jurisdiction of 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.

 

Large accelerated filer ☑

Accelerated filer ☐

 Non-accelerated filer ☐ 

  

Smaller reporting company ☐

Emerging growth company ☐

    
       

 

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

 

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

 

Yes ☐                                                                                                                 No ☑

 

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

 

Title of Class Shares outstanding as of July 30, 2024

Common Stock, No Par Value

 26,685,789

 

 
 
 

 

 

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 values 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 civil unrest, 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 Part II – Item 1A “Risk Factors” of this report and other risk factors discussed elsewhere in the Company's annual report on Form 10-K for the year ended December 31, 2023, 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 June 30,

    

At December 31,

  
   

2024

    

2023

  
   

(In thousands)

  

Assets:

                

Cash and due from banks

   $ 486,124     $ 190,314  

Debt securities available for sale

     3,699,318       3,999,801  

Debt securities held to maturity, net of allowance for credit losses of $1 at June 30, 2024 and December 31, 2023 (Fair value of $817,071 at June 30, 2024 and $849,562 at December 31, 2023)

     860,868       878,396  

Loans

     831,842       866,602  

Allowance for credit losses on loans

     (15,952 )     (16,867 )

Loans, net of allowance for credit losses on loans

     815,890       849,735  

Premises and equipment, net

     26,275       27,016  

Identifiable intangibles, net

     234       347  

Goodwill

     121,673       121,673  

Other assets

     301,763       297,310  

Total Assets

   $ 6,312,145     $ 6,364,592  
                 

Liabilities:

                

Noninterest-bearing deposits

   $ 2,459,467     $ 2,605,844  

Interest-bearing deposits

     2,671,973       2,868,423  

Total deposits

     5,131,440       5,474,267  

Bank Term Funding Program borrowings

     200,000       -  

Securities sold under repurchase agreements

     100,167       58,162  

Other liabilities

     64,938       59,269  

Total Liabilities

     5,496,545       5,591,698  
                 

Contingencies (Note 10)

                
                 

Shareholders' Equity:

                

Common stock (no par value), authorized: 150,000 shares issued and outstanding: 26,683 at June 30, 2024 and 26,671 at December 31, 2023

     474,583       473,136  

Deferred compensation

     35       35  

Accumulated other comprehensive loss

     (197,300 )     (190,282 )

Retained earnings

     538,282       490,005  

Total Shareholders' Equity

     815,600       772,894  

Total Liabilities and Shareholders' Equity

   $ 6,312,145     $ 6,364,592  

 

See accompanying notes to unaudited consolidated financial statements.

 

- 4 -
 

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands, except per share data)

  

Interest and Loan Fee Income:

                                

Loans

   $ 11,354     $ 11,845     $ 22,678     $ 23,585  

Equity securities

     175       152       349       304  

Debt securities available for sale

     43,927       47,452       90,170       94,262  

Debt securities held to maturity

     8,655       8,930       17,377       17,910  

Interest-bearing cash

     4,961       2,110       7,244       4,052  

Total Interest and Loan Fee Income

     69,072       70,489       137,818       140,113  

Interest Expense:

                                

Deposits

     2,460       582       4,566       1,040  

Bank Term Funding Program borrowings

     2,692       -       3,535       -  

Securities sold under repurchase agreements

     155       25       207       38  

Total Interest Expense

     5,307       607       8,308       1,078  

Net Interest and Loan Fee Income

     63,765       69,882       129,510       139,035  

Provision (Reversal of Provision) for Credit Losses

     -       -       300       (1,550 )

Net Interest and Loan Fee Income After

                                

Provision (Reversal of Provision) for Credit Losses

     63,765       69,882       129,210       140,585  

Noninterest Income:

                                

Service charges on deposit accounts

     3,469       3,459       6,939       6,924  

Merchant processing services

     2,733       2,869       5,240       5,506  

Debit card fees

     1,706       1,759       3,249       3,401  

Trust fees

     811       810       1,605       1,575  

ATM processing fees

     540       702       1,131       1,356  

Other service fees

     450       458       888       857  

Securities losses

     -       (125 )     -       (125 )

Other noninterest income

     791       768       1,545       1,755  

Total Noninterest Income

     10,500       10,700       20,597       21,249  

Noninterest Expense:

                                

Salaries and related benefits

     12,483       11,828       25,069       23,895  

Occupancy and equipment

     5,158       5,012       10,198       10,497  

Outsourced data processing services

     2,511       2,488       5,047       4,932  

Limited partnership operating losses

     1,440       1,440       2,880       2,874  

Courier service

     686       611       1,335       1,226  

Professional fees

     362       485       764       961  

Other noninterest expense

     3,490       3,975       6,936       7,664  

Total Noninterest Expense

     26,130       25,839       52,229       52,049  

Income Before Income Taxes

     48,135       54,743       97,578       109,785  

Provision for income taxes

     12,673       14,495       25,699       29,086  

Net Income

   $ 35,462     $ 40,248     $ 71,879     $ 80,699  
                                 

Average Common Shares Outstanding

     26,680       26,648       26,677       26,753  

Average Diluted Common Shares Outstanding

     26,681       26,648       26,678       26,756  

Per Common Share Data:

                                

Basic earnings

   $ 1.33     $ 1.51     $ 2.69     $ 3.02  

Diluted earnings

     1.33       1.51       2.69       3.02  

Dividends paid

     0.44       0.42       0.88       0.84  

 

See accompanying notes to unaudited consolidated financial statements.

 

- 5 -
 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands)

  

Net income

   $ 35,462     $ 40,248     $ 71,879     $ 80,699  

Other comprehensive (loss) income:

                                

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

     (629 )     (29,063 )     (9,964 )     5,767  

Deferred tax benefit (expense)

     186       8,593       2,946       (1,705 )

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

     (443 )     (20,470 )     (7,018 )     4,062  

Total comprehensive income

   $ 35,019     $ 19,778     $ 64,861     $ 84,761  

 

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, March 31, 2024

     26,678     $ 473,954     $ 35     $ (196,857 )   $ 514,559     $ 791,691  

Net income for the period

                                     35,462       35,462  

Other comprehensive loss

                             (443 )             (443 )

Exercise of stock options

     5       203                               203  

Stock based compensation

     -       409                               409  

Stock awarded to employees

     -       17                               17  

Dividends ($0.44 per share)

                                     (11,739 )     (11,739 )

Balance, June 30, 2024

     26,683     $ 474,583     $ 35     $ (197,300 )   $ 538,282     $ 815,600  
                                                 

Balance, December 31, 2023

     26,671     $ 473,136     $ 35     $ (190,282 )   $ 490,005     $ 772,894  

Net income for the period

                                     71,879       71,879  

Other comprehensive loss

                             (7,018 )             (7,018 )

Exercise of stock options

     5       203                               203  

Restricted stock activity

     11       505                               505  

Stock based compensation

     -       773                               773  

Stock awarded to employees

     -       48                               48  

Retirement of common stock

     (4 )     (82 )                     (128 )     (210 )

Dividends ($0.88 per share)

                                     (23,474 )     (23,474 )

Balance, June 30, 2024

     26,683     $ 474,583     $ 35     $ (197,300 )   $ 538,282     $ 815,600  
                                                 

Balance, March 31, 2023

     26,648     $ 471,124     $ 35     $ (231,573 )   $ 403,339     $ 642,925  

Net income for the period

                                     40,248       40,248  

Other comprehensive loss

                             (20,470 )             (20,470 )

Stock based compensation

     -       339                               339  

Stock awarded to employees

     -       12                               12  

Dividends ($0.42 per share)

                                     (11,192 )     (11,192 )

Balance, June 30, 2023

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

Balance, December 31, 2022

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

Net income for the period

                                     80,699       80,699  

Other comprehensive income

                             4,062               4,062  

Restricted stock activity

     9       508                               508  

Stock based compensation

     -       678                               678  

Stock awarded to employees

     -       47                               47  

Retirement of common stock

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

Dividends ($0.84 per share)

                                     (22,495 )     (22,495 )

Balance, June 30, 2023

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

 

See accompanying notes to unaudited consolidated financial statements.

 

- 7 -
 

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

  
   

(In thousands)

  
Operating Activities:                

Net income

   $ 71,879     $ 80,699  

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

                

Depreciation and amortization/accretion

     5,816       5,752  

Provision (reversal of provision) for credit losses

     300       (1,550 )

Stock option compensation expense

     773       678  

Amortization of deferred loan fees

     (306 )     (269 )

Securities losses

     -       125  

Net change in:

                

Interest income receivable

     4,234       (222 )

Income taxes payable

     (11,555 )     28,144  

Deferred income taxes

     3,000       942  

Other assets

     (48 )     173  

Interest expense payable

     3,711       38  

Other liabilities

     (6,558 )     (6,848 )

Net Cash Provided by Operating Activities

     71,246       107,662  
                 
Investing Activities:                

Net repayments of loans

     33,851       37,370  

Purchases of debt securities available for sale

     (4,767 )     -  

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

     299,754       286,702  

Proceeds from maturity/calls of debt securities held to maturity

     20,612       18,525  

Purchases of Federal Reserve Bank stock

     -       (2,326 )

Purchases of premises and equipment

     (583 )     (590 )

Net Cash Provided by Investing Activities

     348,867       339,681  
                 
Financing Activities:                

Net change in:

                

Deposits

     (342,827 )     (519,363 )

Short-term borrowings

     242,005       80,213  

Exercise of stock options

     203       -  

Retirement of common stock

     (210 )     (13,747 )

Common stock dividends paid

     (23,474 )     (22,495 )

Net Cash Used in Financing Activities

     (124,303 )     (475,392 )

Net Change in Cash and Due from Banks

     295,810       (28,049 )

Cash and Due from Banks at Beginning of Period

     190,314       294,236  

Cash and Due from Banks at End of Period

   $ 486,124     $ 266,187  
                 
Supplemental Cash Flow Disclosures:                

Supplemental disclosure of non cash activities:

                

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

   $ 2,970     $ 3,934  

Securities purchases pending settlement

     9,051       -  

Supplemental disclosure of cash flow activities:

                

Cash paid for amounts included in operating lease liabilities

     3,269       3,052  

Interest paid for the period

     4,597       1,040  

Income tax payments for the period

     34,255       -  

 

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 six months ended June 30, 2024 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, 2023.

 
 

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, 2023. 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, 2023 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 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 several regional bank failures. Industrywide concerns developed related to liquidity, deposit outflows and unrealized losses on investment debt securities. These recent events and concerns 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, 2023.

 

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-1 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. See Note 6 to the unaudited consolidated financial statements for additional information related to nonmarketable equity securities.

 

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 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. As of March 31, 2024, all contracts and transactions within the scope of ASU 2020-04 have transitioned to alternative reference rates. The accounting effects of the transition to alternative reference rates were applied prospectively as an adjustment to the effective interest rate and did not have a material impact on the Company’s 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 adopted the ASU on January 1, 2024 on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards

 

FASB ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, was issued December 14, 2023. The ASU enhances the transparency and decision usefulness of income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. The ASU primarily requires additional disclosures as part of the reconciliation of the effective tax rate to statutory tax rate, the amount of income taxes paid, net of refunds received, and income tax expense disaggregated between federal and state jurisdictions. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and is to be applied prospectively, with retrospective application permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

FASB ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, was issued November 27, 2023. The ASU requires disclosure of certain significant segment expenses and other items, the title and position of the chief operating decision maker and information about how the reported measures of segment profit or loss are used in assessing segment performance. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of this ASU is not expected to have a material impact on the Company’s 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 June 30, 2024 and December 31, 2023, 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 June 30, 2024

  
           

Gross

    

Gross

          
   

Amortized

    

Unrealized

    

Unrealized

    

Fair

  
   

Cost

    

Gains

    

Losses

    

Value

  
   

(In thousands)

  

Debt securities available for sale:

                                

Agency residential mortgage-backed securities ("MBS")

   $ 243,230     $ 1     $ (20,425 )   $ 222,806  

Securities of U.S. Government sponsored entities

     309,985       -       (18,779 )     291,206  

U.S. Treasury Securities

     4,820       -       -       4,820  

Obligations of states and political subdivisions

     72,192       4       (2,438 )     69,758  

Corporate securities

     2,084,391       356       (229,129 )     1,855,618  

Collateralized loan obligations

     1,264,811       468       (10,169 )     1,255,110  

Total debt securities available for sale

     3,979,429       829       (280,940 )     3,699,318  

Debt securities held to maturity:

                                

Agency residential MBS

     67,777       17       (5,219 )     62,575  

Obligations of states and political subdivisions

     61,043       7       (802 )     60,248  

Corporate securities

     732,049       -       (37,801 )     694,248  

Total debt securities held to maturity

     860,869       24       (43,822 )     817,071  

Total

   $ 4,840,298     $ 853     $ (324,762 )   $ 4,516,389  

 

 

   

At December 31, 2023

  
           

Gross

    

Gross

          
   

Amortized

    

Unrealized

    

Unrealized

    

Fair

  
   

Cost

    

Gains

    

Losses

    

Value

  
   

(In thousands)

  

Debt securities available for sale:

                                

Agency residential MBS

   $ 258,150     $ 6     $ (18,702 )   $ 239,454  

Securities of U.S. Government sponsored entities

     308,768       2       (13,851 )     294,919  

Obligations of states and political subdivisions

     72,679       42       (1,438 )     71,283  

Corporate securities

     2,129,103       480       (220,035 )     1,909,548  

Collateralized loan obligations

     1,501,248       830       (17,481 )     1,484,597  

Total debt securities available for sale

     4,269,948       1,360       (271,507 )     3,999,801  

Debt securities held to maturity:

                                

Agency residential MBS

     78,565       17       (5,270 )     73,312  

Obligations of states and political subdivisions

     71,182       47       (335 )     70,894  

Corporate securities

     728,650       84       (23,378 )     705,356  

Total debt securities held to maturity

     878,397       148       (28,983 )     849,562  

Total

   $ 5,148,345     $ 1,508     $ (300,490 )   $ 4,849,363  

 

 

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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 June 30, 2024

  
   

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

   $ 122,825     $ 121,872     $ 12,626     $ 12,568  

Over 1 to 5 years

     869,312       817,287       356,026       346,397  

Over 5 to 10 years

     1,479,251       1,282,243       424,440       395,531  

Subtotal

     2,471,388       2,221,402       793,092       754,496  

Collateralized loan obligations

     1,264,811       1,255,110       -       -  

Agency residential MBS

     243,230       222,806       67,777       62,575  

Total

   $ 3,979,429     $ 3,699,318     $ 860,869     $ 817,071  

 

 

   

At December 31, 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

   $ 52,703     $ 52,357     $ 15,117     $ 15,095  

Over 1 to 5 years

     756,658       721,179       312,847       307,557  

Over 5 to 10 years

     1,701,189       1,502,214       471,868       453,598  

Subtotal

     2,510,550       2,275,750       799,832       776,250  

Collateralized loan obligations

     1,501,248       1,484,597       -       -  

Agency residential MBS

     258,150       239,454       78,565       73,312  

Total

   $ 4,269,948     $ 3,999,801     $ 878,397     $ 849,562  

 

Expected amortizing principal payments of collateralized loan obligations can differ from actual cash flows because the securities can be called and paid-off. 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 June 30, 2024

  
   

No. of

    

Less than 12 months

    

No. of

    

12 months or longer

    

No. of

    

Total

  
   

Investment

            

Unrealized

    

Investment

            

Unrealized

    

Investment

            

Unrealized

  
   

Positions

    

Fair Value

    

Losses

    

Positions

    

Fair Value

    

Losses

    

Positions

    

Fair Value

    

Losses

  
   

($ in thousands)

  

Agency residential MBS

     1     $ 498     $ (8 )     105     $ 213,122     $ (20,417 )     106     $ 213,620     $ (20,425 )

Securities of U.S.
Government sponsored
entities

     2       6,842       (89 )     21       284,364       (18,690 )     23       291,206       (18,779 )

U.S. Treasury securities

     1       4,820       -       -       -       -       1       4,820       -  

Obligations of states
and political
subdivisions

     4       4,698       (51 )     51       57,076       (2,387 )     55       61,774       (2,438 )

Corporate securities

     -       -       -       144       1,843,918       (229,129 )     144       1,843,918       (229,129 )

Collateralized loan
obligations

     14       143,567       (1,214 )     49       506,511       (8,955 )     63       650,078       (10,169 )

Total

     22     $ 160,425     $ (1,362 )     370     $ 2,904,991     $ (279,578 )     392     $ 3,065,416     $ (280,940 )

 

- 14 -
 

 

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

 

   

Debt Securities Held to Maturity

  
   

At June 30, 2024

  
   

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

     -     $ -     $ -       80     $ 61,517     $ (5,219 )     80     $ 61,517     $ (5,219 )

Obligations of states
and political
subdivisions

     31       17,928       (164 )     38       35,328       (638 )     69       53,256       (802 )

Corporate securities

     4       36,339       (907 )     48       657,909       (36,894 )     52       694,248       (37,801 )

Total

     35     $ 54,267     $ (1,071 )     166     $ 754,754     $ (42,751 )     201     $ 809,021     $ (43,822 )

 

Based upon the Company’s June 30, 2024 evaluation, the unrealized losses on debt securities were caused by market conditions for these types of securities. Higher levels of 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. 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 June 30, 2024.

 

The Company does not intend to sell any debt securities available for sale with a material 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 evaluated each issuer’s historical financial performance and ability to service debt payments, including throughout and following the 2008-2009 recession. 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 June 30, 2024 and December 31, 2023, the Company’s debt securities pledged to secure public deposits, Bank Term Funding program borrowings and securities sold under repurchase agreements had a carrying amount of $2,339,848 thousand and $2,034,706 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, 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

     1     $ 115     $ (2 )     107     $ 238,642     $ (18,700 )     108     $ 238,757     $ (18,702 )

Securities of U.S.
Government sponsored
entities

     2       9,746       (15 )     19       278,265       (13,836 )     21       288,011       (13,851 )

Obligations of states
and political
subdivisions

     2       2,280       (15 )     50       57,614       (1,423 )     52       59,894       (1,438 )

Corporate securities

     -       -       -       151       1,894,602       (220,035 )     151       1,894,602       (220,035 )

Collateralized loan
obligations

     34       428,363       (8,914 )     67       578,643       (8,567 )     101       1,007,006       (17,481 )

Total

     39     $ 440,504     $ (8,946 )     394     $ 3,047,766     $ (262,561 )     433     $ 3,488,270     $ (271,507 )

 

- 15 -
 

 

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

 

   

Debt Securities Held to Maturity

  
   

At December 31, 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

     1     $ -     $ -       93     $ 72,376     $ (5,270 )     94     $ 72,376     $ (5,270 )

Obligations of states
and political
subdivisions

     23       18,599       (90 )     26       25,466       (245 )     49       44,065       (335 )

Corporate securities

     3       26,567       (1,184 )     46       641,598       (22,194 )     49       668,165       (23,378 )

Total

     27     $ 45,166     $ (1,274 )     165     $ 739,440     $ (27,709 )     192     $ 784,606     $ (28,983 )

 

The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, collateral levels and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

 

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

 

   

For the Six Months Ended June 30,

  
   

2024

    

2023

  
   

(In thousands)

  

Allowance for credit losses:

                

Beginning balance

   $ 1     $ 1  

Provision

     -       -  

Chargeoffs

     -       -  

Recoveries

     -       -  

Total ending balance

   $ 1     $ 1  

 

Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. Corporate securities held to maturity were individually evaluated for expected credit loss by evaluating the issuer’s financial condition, profitability, cash flows, and credit ratings. At June 30, 2024, no credit loss allowance was assigned to corporate securities held to maturity.

 

The following table summarizes the amortized cost of debt securities held to maturity at June 30, 2024, aggregated by credit rating:

 

   

Credit Risk Profile by Credit Rating

  
   

At June 30, 2024

  
   

AAA/AA/A

    

BBB+

    

Not Rated

    

Total

  
   

(In thousands)

  

Agency residential MBS

   $ 67,271     $ -     $ 506     $ 67,777  

Obligations of states and political subdivisions

     60,318       -       725       61,043  

Corporate securities

     527,065       204,984       -       732,049  

Total

   $ 654,654     $ 204,984     $ 1,231     $ 860,869  

 

There were no debt securities held to maturity on nonaccrual status or past due 30 days or more as of June 30, 2024.

 

- 16 -
 

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands)

  
                                 

Taxable

   $ 51,804     $ 55,371     $ 105,949     $ 110,120  

Tax-exempt from regular federal income tax

     953       1,163       1,947       2,356  

Total interest income from investment securities

   $ 52,757     $ 56,534     $ 107,896     $ 112,476  

 
 

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

 

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

 

   

At June 30,

    

At December 31,

  
   

2024

    

2023

  
   

(In thousands)

  
                 

Commercial

   $ 128,269     $ 136,550  

Commercial real estate

     488,760       487,523  

Construction

     5,064       5,063  

Residential real estate

     9,096       9,935  

Consumer installment & other

     200,653       227,531  

Total

   $ 831,842     $ 866,602  

 

The following summarizes activity in the allowance for credit losses:

 

   

Allowance for Credit Losses

  
   

For the Three Months Ended June 30, 2024

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 3,765     $ 5,758     $ 242     $ 22     $ 6,092     $ 15,879  

Provision (reversal)

     148       32       1       2       (183 )     -  

Chargeoffs

     (28 )     -       -       -       (1,513 )     (1,541 )

Recoveries

     11       132       -       -       1,471       1,614  

Total allowance for credit losses

   $ 3,896     $ 5,922     $ 243     $ 24     $ 5,867     $ 15,952  

 

 

   

Allowance for Credit Losses

  
   

For the Six Months Ended June 30, 2024

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 4,216     $ 5,925     $ 245     $ 26     $ 6,455     $ 16,867  

(Reversal) provision

     (315 )     (180 )     (2 )     (2 )     799       300  

Chargeoffs

     (28 )     -       -       -       (3,516 )     (3,544 )

Recoveries

     23       177       -       -       2,129       2,329  

Total allowance for credit losses

   $ 3,896     $ 5,922     $ 243     $ 24     $ 5,867     $ 15,952  

 

 

   

Allowance for Credit Losses

  
   

For theThree Months Ended June 30, 2023

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 5,746     $ 6,258     $ 200     $ 38     $ 7,267     $ 19,509  

(Reversal) provision

     (1,001 )     (190 )     2       (6 )     1,195       -  

Chargeoffs

     -       -       -       -       (1,661 )     (1,661 )

Recoveries

     19       15       -       -       598       632  

Total allowance for credit losses

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

 

- 17 -
 

 

   

Allowance for Credit Losses

  
   

For the Six Months Ended June 30, 2023

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

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

(Reversal) provision

     (3,410 )     165       52       -       1,643       (1,550 )

Chargeoffs

     (148 )     -       -       -       (3,552 )     (3,700 )

Recoveries

     2,184       30       -       -       1,232       3,446  

Total allowance for credit losses

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

 

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

 

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

 

   

Credit Risk Profile by Internally Assigned Grade

  
   

At June 30, 2024

  
   

Commercial

    

Commercial Real Estate

    

Construction

    

Residential Real Estate

    

Consumer Installment and Other

    

Total

  
   

(In thousands)

  

Grade:

                                                

Pass

   $ 121,814     $ 476,897     $ -     $ 8,731     $ 197,937     $ 805,379  

Substandard

     6,455       11,863       5,064       365       1,381       25,128  

Doubtful

     -       -       -       -       745       745  

Loss

     -       -       -       -       590       590  

Total

   $ 128,269     $ 488,760     $ 5,064     $ 9,096     $ 200,653     $ 831,842  

 

 

   

Credit Risk Profile by Internally Assigned Grade

  
   

At December 31, 2023

  
   

Commercial

    

Commercial Real Estate

    

Construction

    

Residential Real Estate

    

Consumer Installment and Other

    

Total

  
   

(In thousands)

  

Grade:

                                                

Pass

   $ 130,001     $ 475,870     $ 5,063     $ 9,606     $ 225,089     $ 845,629  

Substandard

     6,549       11,653       -       329       377       18,908  

Doubtful

     -       -       -       -       1,479       1,479  

Loss

     -       -       -       -       586       586  

Total

   $ 136,550     $ 487,523     $ 5,063     $ 9,935     $ 227,531     $ 866,602  

 

 

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- 18 -
 

 

The following tables summarize loans by delinquency and nonaccrual status:

 

   

Summary of Loans by Delinquency and Nonaccrual Status

  
   

At June 30, 2024

  
   

Current and Accruing

    

30-59 Days Past Due and Accruing

    

60-89 Days Past Due and Accruing

    

Past Due 90 Days or More and Accruing

    

Nonaccrual

    

Total Loans

  
   

(In thousands)

  

Commercial

   $ 127,590     $ 665     $ -     $ -     $ 14     $ 128,269  

Commercial real estate

     487,803       -       -       -       957       488,760  

Construction

     5,064       -       -       -       -       5,064  

Residential real estate

     9,037       3       56       -       -       9,096  

Consumer installment and other

     194,478       4,090       1,505       580       -       200,653  

Total

   $ 823,972     $ 4,758     $ 1,561     $ 580     $ 971     $ 831,842  

 

 

   

Summary of Loans by Delinquency and Nonaccrual Status

  
   

At December 31, 2023

  
   

Current and Accruing

    

30-59 Days Past Due and Accruing

    

60-89 Days Past Due and Accruing

    

Past Due 90 Days or More and Accruing

    

Nonaccrual

    

Total Loans

  
   

(In thousands)

  

Commercial

   $ 136,421     $ 58     $ -     $ -     $ 71     $ 136,550  

Commercial real estate

     485,476       951       766       -       330       487,523  

Construction

     5,063       -       -       -       -       5,063  

Residential real estate

     9,933       -       -       -       2       9,935  

Consumer installment and other

     220,357       5,544       1,242       388       -       227,531  

Total

   $ 857,250     $ 6,553     $ 2,008     $ 388     $ 403     $ 866,602  

 

There was no allowance for credit losses allocated to loans on nonaccrual status as of June 30, 2024 or December 31, 2023. There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2024 or December 31, 2023.

 

There were no loan modifications made to borrowers experiencing financial difficulty during the six months ended June 30, 2024 and June 30, 2023.

 

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Loans that were considered collateral dependent at June 30, 2024 included the following: ten commercial real estate loans totaling $11.3 million secured by real property and $470 thousand of indirect consumer installment loans secured by personal property. There were no other collateral dependent loans at June 30, 2024. Loans that were considered collateral dependent at December 31, 2023 included the following: nine commercial real estate loans totaling $10.9 million secured by real property and $377 thousand of indirect consumer installment loans secured by personal property. There were no other collateral dependent loans at December 31, 2023.

 

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

 

   

At June 30, 2024

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2020

    

2021

    

2022

    

2023

    

2024

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Commercial loans by grade:

                                                                        

Pass

   $ 21,863     $ 10,647     $ 22,682     $ 14,678     $ 16,720     $ 15,496     $ 102,086     $ 19,728     $ 121,814  

Substandard

     2,442       -       2,835       -       -       -       5,277       1,178       6,455  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ 24,305     $ 10,647     $ 25,517     $ 14,678     $ 16,720     $ 15,496     $ 107,363     $ 20,906     $ 128,269  
                                                                         

Current gross chargeoffs on commercial loans:

                                                                  
For the three months ended June 30, 2024   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 28     $ 28  
For the six months ended June 30, 2024     -       -       -       -       -       -       -       28       28  

 

- 19 -
 

 

   

At December 31, 2023

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2019

    

2020

    

2021

    

2022

    

2023

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Commercial loans by grade:

                                                                        

Pass

   $ 20,554     $ 4,471     $ 12,601     $ 31,770     $ 22,146     $ 13,112     $ 104,654     $ 25,347     $ 130,001  

Substandard

     12       2,492       -       2,835       -       -       5,339       1,210       6,549  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ 20,566     $ 6,963     $ 12,601     $ 34,605     $ 22,146     $ 13,112     $ 109,993     $ 26,557     $ 136,550  
                                                                         

Current gross chargeoffs on commercial loans:

                                                                  
For the year ended December 31, 2023   $ -     $ -     $ 3     $ 135     $ -     $ -     $ 138     $ 272     $ 410  

 

 

   

At June 30, 2024

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2020

    

2021

    

2022

    

2023

    

2024

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Commercial real estate loans by grade:

                                                                        

Pass

   $ 226,096     $ 67,855     $ 65,389     $ 50,012     $ 43,965     $ 23,580     $ 476,897     $ -     $ 476,897  

Substandard

     11,086       777       -       -       -       -       11,863       -       11,863  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ 237,182     $ 68,632     $ 65,389     $ 50,012     $ 43,965     $ 23,580     $ 488,760     $ -     $ 488,760  
                                                                         

Current gross chargeoffs on commercial real estate loans:

                                                                  
For the three months ended June 30, 2024   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
For the six months ended June 30, 2024     -       -       -       -       -       -       -       -       -  

 

 

   

At December 31, 2023

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2019

    

2020

    

2021

    

2022

    

2023

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Commercial real estate loans by grade:

                                                                        

Pass

   $ 172,925     $ 68,156     $ 69,324     $ 68,891     $ 50,899     $ 45,675     $ 475,870     $ -     $ 475,870  

Substandard

     10,056       811       786       -       -       -       11,653       -       11,653  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ 182,981     $ 68,967     $ 70,110     $ 68,891     $ 50,899     $ 45,675     $ 487,523     $ -     $ 487,523  
                                                                         

Current gross chargeoffs on commercial real estate loans:

                                                                  
For the year ended December 31, 2023   $ 45     $ -     $ -     $ -     $ -     $ -     $ 45     $ -     $ 45  

 

 

   

At June 30, 2024

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2020

    

2021

    

2022

    

2023

    

2024

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Residential real estate loans by grade:

                                                                        

Pass

   $ 8,731     $ -     $ -     $ -     $ -     $ -     $ 8,731     $ -     $ 8,731  

Substandard

     365       -       -       -       -       -       365       -       365  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ 9,096     $ -     $ -     $ -     $ -     $ -     $ 9,096     $ -     $ 9,096  
                                                                         

Current gross chargeoffs on residential real estate loans:

                                                                  
For the three months ended June 30, 2024   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
For the six months ended June 30, 2024     -       -       -       -       -       -       -       -       -  

 

 

   

At December 31, 2023

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2019

    

2020

    

2021

    

2022

    

2023

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Residential real estate loans by grade:

                                                                        

Pass

   $ 9,606     $ -     $ -     $ -     $ -     $ -     $ 9,606     $ -     $ 9,606  

Substandard

     329       -       -       -       -       -       329       -       329  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ 9,935     $ -     $ -     $ -     $ -     $ -     $ 9,935     $ -     $ 9,935  
                                                                         

Current gross chargeoffs on residential real estate loans:

                                                                  
For the year ended December 31, 2023   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

 

- 20 -
 

 

   

At June 30, 2024

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2020

    

2021

    

2022

    

2023

    

2024

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Construction loans by grade:

                                                                        

Pass

   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

Substandard

     -       -       -       -       -       -       -       5,064       5,064  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 5,064     $ 5,064  
                                                                         

Current gross chargeoffs on construction loans:

                                                                  
For the three months ended June 30, 2024   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
For the six months ended June 30, 2024     -       -       -       -       -       -       -       -       -  

 

 

   

At December 31, 2023

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2019

    

2020

    

2021

    

2022

    

2023

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

  

Construction loans by grade:

                                                                        

Pass

   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 5,063     $ 5,063  

Substandard

     -       -       -       -       -       -       -       -       -  

Doubtful

     -       -       -       -       -       -       -       -       -  

Loss

     -       -       -       -       -       -       -       -       -  

Total

   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 5,063     $ 5,063  
                                                                         

Current gross chargeoffs on construction loans:

                                                                  
For the year ended December 31, 2023   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

 

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

 

   

At June 30, 2024

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2020

    

2021

    

2022

    

2023

    

2024

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

          

Consumer installment and other loans by delinquency and nonaccrual status:

                                                          

Current

   $ 11,183     $ 17,401     $ 40,994     $ 59,913     $ 32,580     $ 16,039     $ 178,110     $ 16,368     $ 194,478  

30-59 days past due

     281       427       1,529       1,357       422       38       4,054       36       4,090  

60-89 days past due

     76       100       661       327       198       32       1,394       111       1,505  

Past due 90 days or more

     45       20       225       111       69       -       470       110       580  

Nonaccrual

     -       -       -       -       -       -       -       -       -  

Total

   $ 11,585     $ 17,948     $ 43,409     $ 61,708     $ 33,269     $ 16,109     $ 184,028     $ 16,625     $ 200,653  
                                                                         

Current gross chargeoffs on consumer installment and other loans:

                                                          
For the three months ended June 30, 2024   $ 99     $ 104     $ 707     $ 350     $ 198     $ -     $ 1,458     $ 55     $ 1,513  
For the six months ended June 30, 2024     179       266       1,382       1,107       452       -       3,386       130       3,516  

 

 

   

At December 31, 2023

  
                                                           

Line of

          
                                                           

Credit

          
   

Term Loans Amortized Cost Basis by Origination Year

    

Total

    

Amortized

          
   

Prior

    

2019

    

2020

    

2021

    

2022

    

2023

    

Term Loans

    

Cost Basis

    

Total

  
   

(In thousands)

          

Consumer installment and other loans by delinquency and nonaccrual status:

                                                          

Current

   $ 6,545     $ 12,144     $ 22,700     $ 51,055     $ 71,388     $ 38,699     $ 202,531     $ 17,826     $ 220,357  

30-59 days past due

     160       277       600       2,345       1,733       332       5,447       97       5,544  

60-89 days past due

     31       51       153       410       430       122       1,197       45       1,242  

Past due 90 days or more

     -       8       88       143       138       -       377       11       388  

Nonaccrual

     -       -       -       -       -       -       -       -       -  

Total

   $ 6,736     $ 12,480     $ 23,541     $ 53,953     $ 73,689     $ 39,153     $ 209,552     $ 17,979     $ 227,531  
                                                                         

Current gross chargeoffs on consumer installment and other loans:

                                                          
For the year ended December 31, 2023   $ 246     $ 161     $ 843     $ 2,329     $ 3,191     $ 453     $ 7,223     $ 276     $ 7,499  

 

There were no loans held for sale at June 30, 2024 and December 31, 2023.

 

The Company held no other real estate owned (OREO) at June 30, 2024 and December 31, 2023. At June 30, 2024 and December 31, 2023, there were no consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process.

 

- 21 -
 

 
 

Note 5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person at any one time shall not exceed the following limitations: (a) unsecured credits shall not exceed 15 percent of the sum of the Bank’s shareholders’ equity, allowance for loan losses, capital notes, and debentures, or (b) secured and unsecured credits in all shall not exceed 25 percent of the sum of the Bank’s shareholders’ equity, allowance for loan losses, capital notes, and debentures. At June 30, 2024, the Bank did not have credit extended to any one entity exceeding these limits. At June 30, 2024, the Bank had 24 lending relationships each with aggregate amounts of $5 million or more. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $30,171 thousand and $30,888 thousand at June 30, 2024 and December 31, 2023, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At June 30, 2024, the Bank held corporate bonds in 106 issuing entities that exceeded $5 million for each issuer.

 
 

Note 6: Other Assets and Other Liabilities

 

Other assets consisted of the following:

 

   

At June 30,

    

At December 31,

  
   

2024

    

2023

  
   

(In thousands)

  

Cost method equity investments:

                

Federal Reserve Bank stock (1)

   $ 14,069     $ 14,069  

Other investments

     158       158  

Total cost method equity investments

     14,227       14,227  

Life insurance cash surrender value

     68,056       66,611  

Net deferred tax asset

     100,828       99,507  

Right-of-use asset

     18,832       18,814  

Limited partnership investments

     25,787       28,667  

Interest receivable

     50,334       54,568  

Prepaid assets

     4,496       5,200  

Other assets

     19,203       9,716  

Total other assets

   $ 301,763     $ 297,310  

 

(1)

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

 

The Company owns 211 thousand shares of Visa Inc. (“Visa”) Class B-1 common stock, which have transfer restrictions; the carrying value is $-0 - thousand. Following the resolution of certain litigation at Visa, shares of Visa’s Class B-1 stock will convert to shares of Visa Class A common stock based on a conversion factor ( 1.5875 as of September 28, 2023), which is periodically adjusted to  reflect Visa’s ongoing litigation costs. Given the trading restrictions and continuing uncertainty regarding the likelihood, ultimate timing and eventual conversion of Visa Class B-1 common stock for shares of Visa Class A common stock or other marketable classes of Visa common stock, these shares are not considered to have a readily determinable fair value and have no carrying value. Visa Class A common stock trades on the New York Stock Exchange and had a closing price of $262.47 per share on June 28, 2024, the last trading day for the second quarter 2024. The ultimate value of the Company’s Visa Class B-1 shares is subject to the extent of Visa’s future litigation escrow fundings, the resulting conversion rate to Visa Class A common stock, and current and future trading restrictions on the Visa Class B-1 common stock. Effective January 24, 2024, all outstanding shares of Visa Class B common stock, including the 211 thousand shares then held by the Company, were redenominated as Visa Class B-1 common stock. During the quarter ended June 30, 2024, Visa conducted an exchange offer under which Visa Class B-1 stockholders could elect to exchange a portion of their Visa Class B-1 shares for a combination of Visa Class C common stock, which is convertible into publicly traded Visa Class A common stock, and Visa Class B-2 common stock, which remains restricted. As a condition to the exchange, Visa Class B-1 stockholders were required to execute an indemnification agreement with Visa related to Visa’s unresolved litigation. The Company did not exchange any Visa Class B-1 shares in the exchange offer, which expired on May 3, 2024. At June 30, 2024, the Company did not record an adjustment to the carrying value of the Visa Class B-1 shares.

 

- 22 -
 

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At June 30, 2024, these investments totaled $25,787 thousand and $12,614 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2023, these investments totaled $28,667 thousand and $15,561 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At June 30, 2024, the $12,614 thousand of outstanding equity capital commitments are expected to be paid as follows: $11,130 thousand in the remainder of 2024, $600 thousand in 2025, $145 thousand in 2026, $189 thousand in 2027, and $550 thousand in 2028 or thereafter.

 

The amounts recognized in net income for these investments include:

 

   

For the Three Months Ended

    

For the Six Months Ended

  
   

June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands)

  

Investment loss included in pre-tax income

   $ 1,440     $ 1,440     $ 2,880     $ 2,874  

Tax credits recognized in provision for income taxes

     975       1,035       1,950       2,055  

 

Other liabilities consisted of the following:

 

   

At June 30,

    

At December 31,

  
   

2024

    

2023

  
   

(In thousands)

  

Operating lease liability

   $ 18,832     $ 18,814  

Securities payable

     9,051       -  

Other liabilities

     37,055       40,455  

Total other liabilities

   $ 64,938     $ 59,269  

 

The Company has entered into leases for most branch locations and certain other offices that were classified as operating leases primarily with original terms of five years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional five year terms. Unexercised extension options are not considered reasonably certain of exercise and have not been included in the lease term used to determine the lease liability or right-of-use asset. The Company did not have any finance leases as of June 30, 2024.

 

As of June 30, 2024, the Company’s lease liability and right-of-use asset were $18,832 thousand. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 3.8 years and 3.18%, respectively, at June 30, 2024.  The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of June 30, 2024.

 

Total lease costs were $1,679 thousand and $3,357 thousand in the three and six months ended June 30, 2024, respectively, and were recorded within occupancy and equipment expense. Total lease costs were $1,660 thousand and $3,316 thousand in the three and six months ended June 30, 2023, respectively, and were recorded within occupancy and equipment expense. The Company did not have any material short-term or variable leases costs or sublease income during the six months ended June 30, 2024 and June 30, 2023.

 

 

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- 23 -
 

 

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

 

   

Minimum
future lease
payments

  
   

At June 30,

  
   

2024

  
   

(In thousands)

  

The remainder of 2024

   $ 3,166  

2025

     5,759  

2026

     4,110  

2027

     3,227  

2028

     2,487  

Thereafter

     1,432  

Total minimum lease payments

     20,181  

Less: discount

     (1,349 )

Present value of lease liability

   $ 18,832  

 
 

Note 7: Goodwill and Identifiable Intangible Assets

 

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the six months ended June 30, 2024 and year ended December 31, 2023, as no triggering events occurred during such periods. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the six months ended June 30, 2024 and year ended December 31, 2023, no such adjustments were recorded.

 

The carrying values of goodwill were:

 

   

At June 30, 2024

    

At December 31, 2023

  
   

(In thousands)

  

Goodwill

   $ 121,673     $ 121,673  

 

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

 

   

At June 30, 2024

    

At December 31, 2023

  
   

Gross

            

Gross

          
   

Carrying

    

Accumulated

    

Carrying

    

Accumulated

  
   

Amount

    

Amortization

    

Amount

    

Amortization

  
   

(In thousands)

  

Core deposit intangibles

   $ 56,808     $ (56,574 )   $ 56,808     $ (56,461 )

 

As of June 30, 2024, the current period and estimated future amortization expense for identifiable intangible assets, to be fully amortized in 2025, was: 

 

   

Total

  
   

Core

  
   

Deposit

  
   

Intangibles

  
   

(In thousands)

  

For the six months ended June 30, 2024 (actual)

   $ 113  

The remainder of 2024

     109  

2025

     125  

 

- 24 -
 

 
 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

   

Deposits

  
   

At June 30,

    

At December 31,

  
   

2024

    

2023

  
   

(In thousands)

  

Noninterest-bearing

   $ 2,459,467     $ 2,605,844  

Interest-bearing:

                

Transaction

     936,186       1,072,233  

Savings

     1,646,781       1,699,388  

Time deposits less than $100 thousand

     51,964       56,100  

Time deposits $100 thousand through $250 thousand

     27,497       31,107  

Time deposits more than $250 thousand

     9,545       9,595  

Total deposits

   $ 5,131,440     $ 5,474,267  

 

Demand deposit overdrafts of $1,053 thousand and $620 thousand were included as loan balances at June 30, 2024 and December 31, 2023, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $20 thousand and $41 thousand for the three and six months ended June 30, 2024, respectively, and $31 thousand and $65 thousand for the three and six months ended June 30, 2023, respectively.

 

The following table provides additional detail regarding securities sold under repurchase agreements:

 

   

Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings

  
   

Remaining Contractual Maturity of the Agreements

  
   

Overnight and Continuous

  
   

At June 30,

    

At December 31,

  
   

2024

    

2023

  

Repurchase agreements:

   (In thousands)  

Collateral securing borrowings:

                

Agency residential MBS

   $ 23,270     $ 25,669  

Corporate securities

     371,013       233,947  

Total collateral carrying value

   $ 394,283     $ 259,616  

Securities sold under repurchase agreements

   $ 100,167     $ 58,162  

 

At June 30, 2024, the Company had access to borrowing from the Federal Reserve up to $867,510 thousand based on the collateral pledged at June 30, 2024. Federal Reserve Bank Term Funding Program borrowings were $200,000 thousand at June 30, 2024. For the six months ended June 30, 2024, the average balances of Federal Reserve Bank Term Funding Program borrowings were $131,291 thousand. Federal Reserve Bank Term Funding Program borrowings consist of multiple advances, $80,000 thousand of which matures in February 2025, and the remaining $120,000 thousand matures in March 2025. At June 30, 2024, the Company’s estimated unpledged collateral qualifying debt securities totaled $1,462,966 thousand.

 
 

Note 9:  Fair Value Measurements

 

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

 

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

 

- 25 -
 

 

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

 

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

 

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

 

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

 

The Company relies on independent vendor pricing services to measure fair value for equity securities, debt securities available for sale and debt securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote most closely reflecting the market generally used as the fair value estimate. In addition, the Company evaluates debt securities for credit losses on a quarterly basis. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair value estimates may not be realized in an actual sale of the securities.

 

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3.

 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

   

At June 30, 2024

  
   

Fair Value

    

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

    

Significant Other Observable Inputs
(Level 2)

    

Significant Unobservable Inputs
(Level 3) (1)

  
   

(In thousands)

  

Debt securities available for sale:

                                

Agency residential MBS

   $ 222,806     $ -     $ 222,806     $ -  

Securities of U.S. Government sponsored entities

     291,206       -       291,206       -  

U.S. Treasury securities

     4,820       4,820       -       -  

Obligations of states and political subdivisions

     69,758       -       69,758       -  

Corporate securities

     1,855,618       -       1,855,618       -  

Collateralized loan obligations

     1,255,110       -       1,255,110       -  

Total debt securities available for sale

   $ 3,699,318     $ 4,820     $ 3,694,498     $ -  

 

(1)

There were no transfers into or out of level 3 during the six months ended June 30, 2024.

 

- 26 -
 

 

   

At December 31, 2023

  
   

Fair Value

    

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

    

Significant Other Observable Inputs
(Level 2)

    

Significant Unobservable Inputs
(Level 3) (1)

  
   

(In thousands)

  

Debt securities available for sale:

                                

Agency residential MBS

   $ 239,454     $ -     $ 239,454     $ -  

Securities of U.S. Government sponsored entities

     294,919       -       294,919       -  

Obligations of states and political subdivisions

     71,283       -       71,283       -  

Corporate securities

     1,909,548       -       1,909,548       -  

Collateralized loan obligations

     1,484,597       -       1,484,597       -  

Total debt securities available for sale

   $ 3,999,801     $ -     $ 3,999,801     $ -  

 

(1)

There were no transfers into or out of level 3 during the year ended December 31, 2023.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at June 30, 2024 and December 31, 2023, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

 

                                   

For the Six

  
                                   

Months Ended

  
   

At June 30, 2024

    

June 30, 2024

  
   

Carrying Value

    

Level 1

    

Level 2

    

Level 3

    

Total Losses

  
   

(In thousands)

  

Loans:

                                        

Commercial real estate

   $ 14     $ -     $ -     $ 14     $ -  

Total assets measured at fair value on a nonrecurring basis

   $ 14     $ -     $ -     $ 14     $ -  

 

                                   

For the

  
                                   

Year Ended

  
   

At December 31, 2023

    

December 31, 2023

  
   

Carrying Value

    

Level 1

    

Level 2

    

Level 3

    

Total Losses

  
   

(In thousands)

  

Loans:

                                        

Commercial real estate

   $ 110     $ -     $ -     $ 110     $ -  

Total assets measured at fair value on a nonrecurring basis

   $ 110     $ -     $ -     $ 110     $ -  

 

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

 

Disclosures about Fair Value of Financial Instruments

 

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

 

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

 

- 27 -
 

 

   

At June 30, 2024

  
   

Carrying Amount

    

Estimated Fair Value

    

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

    

Significant Other Observable Inputs
(Level 2 )

    

Significant Unobservable Inputs
(Level 3 )

  

Financial Assets:

  

 

(In thousands)

 

  

Cash and due from banks

   $ 486,124     $ 486,124     $ 486,124     $ -     $ -  

Debt securities held to maturity

     860,868       817,071       -       817,071       -  

Loans

     815,890       813,272       -       -       813,272  
                                         

Financial Liabilities:

                                        

Deposits

   $ 5,131,440     $ 5,129,495     $ -     $ 5,042,434     $ 87,061  

Bank Term Funding Program borrowings

     200,000       200,112       -       200,112       -  

Securities sold under repurchase agreements

     100,167       100,167       -       100,167          

 

 

   

At December 31, 2023

  
   

Carrying Amount

    

Estimated Fair Value

    

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

    

Significant Other Observable Inputs
(Level 2 )

    

Significant Unobservable Inputs
(Level 3 )

  

Financial Assets:

  

 

(In thousands)

 

  

Cash and due from banks

   $ 190,314     $ 190,314     $ 190,314     $ -     $ -  

Debt securities held to maturity

     878,396       849,562       -       849,562       -  

Loans

     849,735       847,031       -       -       847,031  
                                         

Financial Liabilities:

                                        

Deposits

   $ 5,474,267     $ 5,474,012     $ -     $ 5,377,465     $ 96,547  

Securities sold under repurchase agreements

     58,162       58,162       -       58,162       -  

 

The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.

 
 

Note 10: Commitments and Contingent Liabilities

 

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Certain agreements provide the Company the right to cancel or reduce its obligations to lend to customers. The portions that are not unconditionally cancellable by the Company aggregated $29,241 thousand at June 30, 2024 and $29,958 thousand at December 31, 2023. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $194,702 thousand at June 30, 2024 and $206,028 thousand at December 31, 2023. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled $1,871 thousand at June 30, 2024 and $2,044 thousand at December 31, 2023. Commitments for commercial and similar letters of credit totaled $95 thousand at June 30, 2024 and December 31, 2023, respectively. The Company had $1,000 thousand in outstanding full recourse guarantees to a third party credit card company at June 30, 2024 and December 31, 2023, respectively. At June 30, 2024, the Company had a reserve for unfunded commitments of $201 thousand for the above-mentioned loan commitments of $29,241 thousand that are not unconditionally cancellable by the Company. The Company’s reserve for unfunded commitments was $201 thousand at December 31, 2023. The reserve for unfunded commitments is included in other liabilities.

 

- 28 -
 

 

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

 
 

Note 11: Earnings Per Common Share

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands, except per share data)

  

Net income applicable to common equity (numerator)

   $ 35,462     $ 40,248     $ 71,879     $ 80,699  

Basic earnings per common share

                                

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

     26,680       26,648       26,677       26,753  

Basic earnings per common share

   $ 1.33     $ 1.51     $ 2.69     $ 3.02  

Diluted earnings per common share

                                

Weighted average number of common shares outstanding - basic

     26,680       26,648       26,677       26,753  

Add common stock equivalents for options

     1       -       1       3  

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

     26,681       26,648       26,678       26,756  

Diluted earnings per common share

   $ 1.33     $ 1.51     $ 2.69     $ 3.02  

 

For the three and six months ended June 30, 2024, options to purchase 1,101 thousand and 1,005 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

For the three and six months ended June 30, 2023, options to purchase 1,031 thousand and 1,004 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

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- 29 -
 

 
 

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

 

WESTAMERICA BANCORPORATION

  

FINANCIAL SUMMARY

  
                                 
   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands, except per share data)

  

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

   $ 64,100     $ 70,281     $ 130,194     $ 139,843  

Provision (Reversal of Provision) for Credit Losses

     -       -       300       (1,550 )

Noninterest Income:

                                

Securities Losses

     -       (125 )     -       (125 )

Other Noninterest Income

     10,500       10,825       20,597       21,374  

Total Noninterest Income

     10,500       10,700       20,597       21,249  

Noninterest Expense

     26,130       25,839       52,229       52,049  

Income Before Income Taxes (FTE) (1)

     48,470       55,142       98,262       110,593  

Income Tax Provision (FTE) (1)

     13,008       14,894       26,383       29,894  

Net Income

   $ 35,462     $ 40,248     $ 71,879     $ 80,699  
                                 

Average Common Shares Outstanding

     26,680       26,648       26,677       26,753  

Average Diluted Common Shares Outstanding

     26,681       26,648       26,678       26,756  

Common Shares Outstanding at Period End

     26,683       26,648                  
                                 

Per Common Share:

                                

Basic Earnings

   $ 1.33     $ 1.51     $ 2.69     $ 3.02  

Diluted Earnings

     1.33       1.51       2.69       3.02  

Book Value

     30.57       24.46                  
                                 

Financial Ratios:

                                

Return on Assets

     2.18 %     2.35 %     2.21 %     2.33 %

Return on Common Equity

     14.39 %     18.39 %     14.77 %     18.74 %

Net Interest Margin (FTE) (1)

     4.15 %     4.34 %     4.23 %     4.26 %

Net Loan (Recoveries) Losses to Average Loans

     (0.04 )%     0.45 %     0.29 %     0.05 %

Efficiency Ratio (2)

     35.0 %     31.9 %     34.6 %     32.3 %
                                 

Average Balances:

                                

Assets

   $ 6,549,203     $ 6,865,591     $ 6,537,562     $ 6,988,272  

Loans

     838,016       926,795       845,785       936,277  

Investment Securities

     4,944,191       5,365,377       5,021,365       5,456,572  

Deposits

     5,202,620       5,797,504       5,290,840       5,928,983  

Shareholders' Equity

     990,927       877,964       978,384       868,272  
                                 

Period End Balances:

                                

Assets

   $ 6,312,145     $ 6,582,740                  

Loans

     831,842       919,583                  

Investment Securities

     4,560,187       4,946,815                  

Deposits

     5,131,440       5,705,927                  

Shareholders' Equity

     815,600       651,862                  
                                 

Capital Ratios at Period End:

                                

Total Risk Based Capital

     21.07 %     17.56 %                

Tangible Equity to Tangible Assets

     11.21 %     8.20 %                
                                 

Dividends Paid Per Common Share

   $ 0.44     $ 0.42     $ 0.88     $ 0.84  

Common Dividend Payout Ratio

     33 %     28 %     33 %     28 %

 

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

 

(1)

Yields on securities and certain loans have been adjusted upward to an FTE basis in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.

 

(2)

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

 

- 30 -
 

 

Financial Overview

 

Westamerica Bancorporation and subsidiaries (collectively, the “Company”) reported net income of $35.5 million or $1.33 diluted earnings per common share (“EPS”) in the second quarter 2024 compared with net income of $40.2 million or $1.51 EPS in the second quarter 2023. The Company reported net income of $71.9 million or $2.69 EPS for the six months ended June 30, 2024. The Company reported net income of $80.7 million or $3.02 EPS for the six months ended June 30, 2023, including a $1.6 million reversal of provision for credit losses, which increased EPS $0.04.

 

The Federal Open Market Committee of the Federal Reserve Board (“FOMC”) adopted tightening monetary policy, including increasing the federal funds rate, beginning in March 2022 as a means to reduce inflation. Inflation has receded toward the FOMC’s inflation goal of 2 percent, although inflation has not yet reached 2 percent. The unemployment rate has recently increased. These economic conditions have caused market-based expectations for the FOMC to begin loosening monetary policy at some point in the third or fourth quarter of 2024, by reducing the federal funds rate. The interest rate paid on reserve balances at the Federal Reserve Bank was 5.40% as of June 30, 2024. The Bank maintains reserve balances at the Federal Reserve Bank; the amount that earns interest is identified as “interest-bearing cash”.

 

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

 

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

 

The Company’s significant accounting policies (see Note 1, “Summary of Significant Accounting Policies,” to Financial Statements in the Company’s 2023 Form 10-K and Note 2 “Summary of Significant Accounting Policies” in this Form 10-Q) are fundamental to understanding the Company’s results of operations and financial condition. The Company adopted the following new accounting guidance:

 

FASB ASU 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. As of March 31, 2024, all contracts and transactions within the scope of ASU 2020-04 have transitioned to alternative reference rates. The accounting effects of the transition to alternative reference rates were applied prospectively as an adjustment to the effective interest rate and did not have a material impact on the Company’s 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 became effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. The Company adopted the ASU on January 1, 2024 on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements.

 

- 31 -
 

 

Net Income         

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands, except per share data)

  

Net interest and loan fee income (FTE)

   $ 64,100     $ 70,281     $ 130,194     $ 139,843  

Provision (Reversal of provision) for credit losses

     -       -       300       (1,550 )

Noninterest income

     10,500       10,700       20,597       21,249  

Noninterest expense

     26,130       25,839       52,229       52,049  

Income before taxes (FTE)

     48,470       55,142       98,262       110,593  

Income tax provision (FTE)

     13,008       14,894       26,383       29,894  

Net income

   $ 35,462     $ 40,248     $ 71,879     $ 80,699  
                                 

Average diluted common shares

     26,681       26,648       26,678       26,756  

Diluted earnings per common share

   $ 1.33     $ 1.51     $ 2.69     $ 3.02  
                                 

Average total assets

   $ 6,549,203     $ 6,865,591     $ 6,537,562     $ 6,988,272  

Net income to average total assets (annualized)

     2.18 %     2.35 %     2.21 %     2.33 %

Net income to average common shareholders' equity (annualized)

     14.39 %     18.39 %     14.77 %     18.74 %

 

Net income for the second quarter 2024 decreased $4.8 million compared with the second quarter 2023 primarily due to decreased net interest and loan fee income. Net interest and loan fee income (FTE) decreased $6.2 million in the second quarter 2024 compared with the second quarter 2023 due to lower average balances of investment debt securities and loans, higher average balances of Bank Term Funding Program borrowings and higher rate on interest-bearing liabilities, partially offset by higher yield on interest-earning assets and higher average balances of interest-bearing cash. With $73 thousand of net loan recoveries in the second quarter 2024 and $1.6 million in nonperforming loans at June 30, 2024, the Company recorded no provision for credit losses based on the results of its current expected credit losses (“CECL”) model and Management’s estimate of credit losses over the remaining life of its loans. The Company provided no provision for credit losses in the second quarter 2023, based on Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. Second quarter 2024 noninterest income decreased compared with the second quarter 2023 primarily due to lower income from merchant processing services and ATM processing fees. Second quarter 2024 noninterest expense increased compared with the second quarter 2023 primarily due to higher salaries and benefits, partially offset by lower losses from unauthorized debit card use. The tax rate (FTE) was 26.8% for the second quarter 2024 and 27.0% for the second quarter 2023.

 

Net income for the six months ended June 30, 2024 decreased $8.8 million compared with the six months ended June 30, 2023 primarily due to decreased net interest and loan fee income. Net interest and loan fee income (FTE) decreased $9.6 million in the six months ended June 30, 2024 compared with the six months ended June 30, 2023 due to lower average balances of investment debt securities and loans, higher average balances of Bank Term Funding Program borrowings and higher rates on interest-bearing liabilities, partially offset by higher yield on interest-earning assets and higher average balances of interest-bearing cash. During the six months ended June 30, 2024, the Company provided $300 thousand for credit losses, which was recorded in the first quarter, based on the results of the CECL model and Management’s estimate of credit losses over the remaining life of its loans. The Company recorded a $1.6 million reversal of provision for credit losses in the six months ended June 30, 2023 as a result of a $2.2 million recovery on a previously charged off loan. Noninterest income for the six months ended June 30, 2024 decreased compared with the six months ended June 30, 2023 due to lower income from merchant processing services, ATM processing fees and debit card fees and because the six months ended June 30, 2023 included higher recoveries in excess of principal charged off on loans. Noninterest expense for the six months ended June 30, 2024 increased compared with the six months ended June 30, 2023 primarily due to annual merit increases and higher group health insurance costs for employees, partially offset by lower losses from unauthorized debit card use. The tax rate (FTE) was 26.8% for the six months ended June 30, 2024 and 27.0% for the six months ended June 30, 2023.

 

- 32 -
 

 

Net Interest and Loan Fee Income (FTE) 

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

($ in thousands)

  

Interest and loan fee income

   $ 69,072     $ 70,489     $ 137,818     $ 140,113  

Interest expense

     5,307       607       8,308       1,078  

FTE adjustment

     335       399       684       808  

Net interest and loan fee income (FTE)

   $ 64,100     $ 70,281     $ 130,194     $ 139,843  
                                 

Average earning assets

   $ 6,145,626     $ 6,457,270     $ 6,132,497     $ 6,560,639  

Net interest margin (FTE) (annualized)

     4.15 %     4.34 %     4.23 %     4.26 %

 

Net interest and loan fee income (FTE) decreased $6.2 million in the second quarter 2024 compared with the second quarter 2023 due to lower average balances of investment debt securities (down $421 million) and loans (down $89 million), higher average balances of Bank Term Funding Program borrowings (up $200 million) and higher rate on interest-bearing liabilities (up 0.63%), partially offset by higher yield on interest-earning assets (up 0.12%) and higher average balances of interest-bearing cash (up $198 million).

 

Net interest and loan fee income (FTE) decreased $9.6 million in the six months ended June 30, 2024 compared with the six months ended June 30, 2023 due to lower average balances of investment debt securities (down $435 million) and loans (down $90 million), higher average balances of Bank Term Funding Program borrowings (up $131 million) and higher rate on interest-bearing liabilities (up 0.49%), partially offset by higher yield on interest-earning assets (up 0.21%) and higher average balances of interest-bearing cash (up $98 million).

 

The annualized net interest margin (FTE) was 4.15% in the second quarter 2024 and 4.23% in the six months ended June 30, 2024 compared with 4.34% in the second quarter 2023 and 4.26% in the six months ended June 30, 2023.

 

The Company’s funding costs were 0.35% in the second quarter 2024 compared with 0.04% in the second quarter 2023, and 0.27% in the six months ended June 30, 2024 and 0.03% in the six months ended June 30, 2023. Noninterest bearing deposits represented 47% of average deposits in the six months ended June 30, 2024 and the six months ended June 30, 2023. Higher-cost time deposits represented 2% of average deposits for both periods. Average balances of time deposits in the six months ended June 30, 2024 declined $31 million from the six months ended June 30, 2023. Average balances of checking and saving deposits accounted for 98% of average total deposits in the six months ended June 30, 2024 and the six months ended June 30, 2023.

 

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- 33 -
 

 

Net Interest Margin (FTE)

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
                                 

Yield on earning assets (FTE)

     4.50 %     4.38 %     4.50 %     4.29 %

Rate paid on interest-bearing liabilities

     0.71 %     0.08 %     0.56 %     0.07 %

Net interest spread (FTE)

     3.79 %     4.30 %     3.94 %     4.22 %

Impact of noninterest-bearing demand deposits

     0.36 %     0.04 %     0.29 %     0.04 %

Net interest margin (FTE)

     4.15 %     4.34 %     4.23 %     4.26 %

 

The Company’s yield on earning assets during the second quarter 2024 and the six months ended June 30, 2024 increased compared with the second quarter 2023 and the six months ended June 30, 2023.The Company’s yield on earning assets has been primarily affected by collateralized loan obligations (CLOs), held in debt securities available for sale portfolio, and interest-bearing cash. The CLOs have interest coupons that change once every three months by the amount of change in the three-month SOFR base rate. The average balances and yields of CLOs for the three months ended June 30, 2024 was $1,347 million yielding 7.23% and $1,404 million yielding 7.23% for the six months ended June 30, 2024. The average balances and yields of CLOs for the three months ended June 30, 2023 was $1,555 million yielding 6.81% and $1,566 million yielding 6.57% for the six months ended June 30, 2023. The interest-bearing cash yield changes by the amount of change in the overnight federal funds rate on the effective date declared by the FOMC. The average balance and yields of interest-bearing cash for the second quarter 2024 and six months ended June 30, 2024 were $363 million yielding 5.40% and $265 million yielding 5.40%, respectively. The average balance and yields of interest-bearing cash for the second quarter 2023 and six months ended June 30, 2023 were $165 million yielding 5.06% and $168 million yielding 4.80%, respectively. The Company has other earning assets with variable yields such as commercial loans and lines of credit, consumer lines of credit and adjustable rate residential real estate loans, which are included in “other taxable loans” in the following “Summary of Average Balances, Yields/Rates and Interest Differential.” The rate paid on interest-bearing liabilities increased in the six months ended June 30, 2024 compared with the six months ended June 30, 2023 primarily due to competitive deposit pricing and higher volume on Bank Term Funding Program borrowings.

 

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- 34 -
 

 

Summary of Average Balances, Yields/Rates and Interest Differential

 

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

 

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

 

   

For the Three Months Ended June 30, 2024

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 4,811,465     $ 51,804       4.31 %

Tax-exempt (1)

     132,726       1,201       3.62 %

Total investments (1)

     4,944,191       53,005       4.27 %

Loans:

                        

Taxable

     796,903       11,021       5.56 %

Tax-exempt (1)

     41,113       420       4.11 %

Total loans (1)

     838,016       11,441       5.49 %

Total interest-bearing cash

     363,419       4,961       5.40 %

Total interest-earning assets (1)

     6,145,626       69,407       4.50 %

Other assets

     403,577                  

Total assets

   $ 6,549,203                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,485,023     $ -       - %

Savings and interest-bearing transaction

     2,624,509       2,391       0.37 %

Time less than $100,000

     58,367       49       0.34 %

Time $100,000 or more

     34,721       20       0.23 %

Total interest-bearing deposits

     2,717,597       2,460       0.36 %

Bank term funding program borrowings

     200,000       2,692       5.40 %

Securities sold under repurchase agreements

     84,189       155       0.74 %

Total interest-bearing liabilities

     3,001,786       5,307       0.71 %

Other liabilities

     71,467                  

Shareholders' equity

     990,927                  

Total liabilities and shareholders' equity

   $ 6,549,203                  

Net interest spread (1) (2)

                     3.79 %

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

           $ 64,100       4.15 %

 

(1)

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

(2)

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

(3)

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

 

- 35 -
 

 

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

 

   

For the Three Months Ended June 30, 2023

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 5,200,105     $ 55,371       4.26 %

Tax-exempt (1)

     165,272       1,470       3.56 %

Total investments (1)

     5,365,377       56,841       4.22 %

Loans:

                        

Taxable

     882,015       11,500       5.23 %

Tax-exempt (1)

     44,780       437       3.91 %

Total loans (1)

     926,795       11,937       5.17 %

Total interest-bearing cash

     165,098       2,110       5.06 %

Total interest-earning assets (1)

     6,457,270       70,888       4.38 %

Other assets

     408,321                  

Total assets

   $ 6,865,591                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,751,319     $ -       - %

Savings and interest-bearing transaction

     2,923,063       500       0.07 %

Time less than $100,000

     69,221       51       0.30 %

Time $100,000 or more

     53,901       31       0.23 %

Total interest-bearing deposits

     3,046,185       582       0.08 %

Securities sold under repurchase agreements

     98,079       25       0.10 %

Total interest-bearing liabilities

     3,144,264       607       0.08 %

Other liabilities

     92,044                  

Shareholders' equity

     877,964                  

Total liabilities and shareholders' equity

   $ 6,865,591                  

Net interest spread (1) (2)

                     4.30 %

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

           $ 70,281       4.34 %

 

(1)

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

(2)

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

(3)

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

 

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- 36 -
 

 

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

 

   

For the Six Months Ended June 30, 2024

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 4,885,409     $ 105,949       4.34 %

Tax-exempt (1)

     135,956       2,455       3.61 %

Total investments (1)

     5,021,365       108,404       4.30 %

Loans:

                        

Taxable

     804,161       22,005       5.50 %

Tax-exempt (1)

     41,624       849       4.10 %

Total loans (1)

     845,785       22,854       5.43 %

Total interest-bearing cash

     265,347       7,244       5.40 %

Total interest-earning assets (1)

     6,132,497       138,502       4.50 %

Other assets

     405,065                  

Total assets

   $ 6,537,562                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,508,702     $ -       - %

Savings and interest-bearing transaction

     2,687,259       4,427       0.33 %

Time less than $100,000

     59,452       98       0.33 %

Time $100,000 or more

     35,427       41       0.24 %

Total interest-bearing deposits

     2,782,138       4,566       0.33 %

Bank term funding program borrowings

     131,291       3,535       5.40 %

Securities sold under repurchase agreements

     65,247       207       0.64 %

Total interest-bearing liabilities

     2,978,676       8,308       0.56 %

Other liabilities

     71,800                  

Shareholders' equity

     978,384                  

Total liabilities and shareholders' equity

   $ 6,537,562                  

Net interest spread (1) (2)

                     3.94 %

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

           $ 130,194       4.23 %

 

(1)

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

(2)

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

(3)

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

 

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

 

   

For the Six Months Ended June 30, 2023

  
           

Interest

          
   

Average

    

Income/

    

Yields/

  
   

Balance

    

Expense

    

Rates

  
   

($ in thousands)

  

Assets

                        

Investment securities:

                        

Taxable

   $ 5,289,195     $ 110,120       4.16 %

Tax-exempt (1)

     167,377       2,978       3.56 %

Total investments (1)

     5,456,572       113,098       4.13 %

Loans:

                        

Taxable

     891,049       22,890       5.18 %

Tax-exempt (1)

     45,228       881       3.93 %

Total loans (1)

     936,277       23,771       5.12 %

Total interest-bearing cash

     167,790       4,052       4.80 %

Total interest-earning assets (1)

     6,560,639       140,921       4.29 %

Other assets

     427,633                  

Total assets

   $ 6,988,272                  
                         

Liabilities and shareholders' equity

                        

Noninterest-bearing demand

   $ 2,801,183     $ -       - %

Savings and interest-bearing transaction

     3,001,529       874       0.06 %

Time less than $100,000

     70,516       101       0.29 %

Time $100,000 or more

     55,755       65       0.23 %

Total interest-bearing deposits

     3,127,800       1,040       0.07 %

Securities sold under repurchase agreements

     87,516       38       0.09 %

Total interest-bearing liabilities

     3,215,316       1,078       0.07 %

Other liabilities

     103,501                  

Shareholders' equity

     868,272                  

Total liabilities and shareholders' equity

   $ 6,988,272                  

Net interest spread (1) (2)

                     4.22 %

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

           $ 139,843       4.26 %

 

(1)

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

(2)

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

(3)

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

 

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

 

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

 

Summary of Changes in Interest Income and Expense

 

   

For the Three Months Ended June 30, 2024

  
   

Compared with

  
   

For the Three Months Ended June 30, 2023

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

(Decrease) increase in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ (4,138 )   $ 571     $ (3,567 )

Tax-exempt (1)

     (289 )     20       (269 )

Total investments (1)

     (4,427 )     591       (3,836 )

Loans:

                        

Taxable

     (1,135 )     656       (479 )

Tax-exempt (1)

     (37 )     20       (17 )

Total loans (1)

     (1,172 )     676       (496 )

Total interest-bearing cash

     2,541       310       2,851  

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

     (3,058 )     1,577       (1,481 )

(Decrease) increase in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     (52 )     1,943       1,891  

Time less than $100,000

     (8 )     6       (2 )

Time $100,000 or more

     (11 )     -       (11 )

Total interest-bearing deposits

     (71 )     1,949       1,878  

Bank term funding program borrowings

     2,692       -       2,692  

Securities sold under repurchase agreements

     (4 )     134       130  

Total increase in interest expense

     2,617       2,083       4,700  

Decrease in net interest and loan fee income (1)

   $ (5,675 )   $ (506 )   $ (6,181 )

 

(1)

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

 

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- 39 -
 

 

Summary of Changes in Interest Income and Expense

 

   

For the Six Months Ended June 30, 2024

  
   

Compared with

  
   

For the Six Months Ended June 30, 2023

  
   

Volume

    

Yield/Rate

    

Total

  
   

(In thousands)

  

(Decrease) increase in interest and loan fee income:

                        

Investment securities:

                        

Taxable

   $ (8,407 )   $ 4,236     $ (4,171 )

Tax-exempt (1)

     (559 )     36       (523 )

Total investments (1)

     (8,966 )     4,272       (4,694 )

Loans:

                        

Taxable

     (2,196 )     1,311       (885 )

Tax-exempt (1)

     (69 )     37       (32 )

Total loans (1)

     (2,265 )     1,348       (917 )

Total interest-bearing cash

     2,382       810       3,192  

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

     (8,849 )     6,430       (2,419 )

(Decrease) increase in interest expense:

                        

Deposits:

                        

Savings and interest-bearing transaction

     (91 )     3,644       3,553  

Time less than $100,000

     (16 )     13       (3 )

Time $100,000 or more

     (25 )     1       (24 )

Total interest-bearing deposits

     (132 )     3,658       3,526  

Bank term funding program borrowings

     3,535       -       3,535  

Securities sold under repurchase agreements

     (10 )     179       169  

Total increase in interest expense

     3,393       3,837       7,230  

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

   $ (12,242 )   $ 2,593     $ (9,649 )

 

(1)

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

 

Provision for Credit Losses

 

The Company manages credit risk by enforcing conservative underwriting and administration procedures and aggressively pursuing collection efforts with debtors experiencing financial difficulties. The provision for credit losses reflects Management's assessment of credit risk in the loan portfolio and debt securities held to maturity portfolio during each of the periods presented.

 

With $73 thousand of net loan recoveries in the second quarter 2024 and $1.6 million in nonperforming loans at June 30, 2024, the Company provided no provision for credit losses in the second quarter of 2024 based on Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. During the six months ended June 30, 2024, the Company provided $300 thousand for credit losses, which was recorded in the first quarter, based on the results of the CECL model and Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. The Company provided no provision for credit losses in the second quarter of 2023, based on Management’s estimate of credit losses over the remaining life of its loans and debt securities held to maturity. The Company recorded a $1.6 million reversal of provision for credit losses in the six months ended June 30, 2023 as a result of a $2.2 million recovery on a previously charged off loan. For further information regarding credit risk, net credit losses, and the allowance for credit losses, see the “Loan Portfolio Credit Risk” and “Allowance for Credit Losses” sections of this Report.

 

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- 40 -
 

 

Noninterest Income

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands)

  
                                 

Service charges on deposit accounts

   $ 3,469     $ 3,459     $ 6,939     $ 6,924  

Merchant processing services

     2,733       2,869       5,240       5,506  

Debit card fees

     1,706       1,759       3,249       3,401  

Trust fees

     811       810       1,605       1,575  

ATM processing fees

     540       702       1,131       1,356  

Other service fees

     450       458       888       857  

Securities losses

     -       (125 )     -       (125 )

Other noninterest income

     791       768       1,545       1,755  

Total

   $ 10,500     $ 10,700     $ 20,597     $ 21,249  

 

Second quarter 2024 noninterest income decreased $200 thousand compared with the second quarter 2023. Merchant processing services fee income and ATM processing fees decreased in the second quarter 2024 compared with the second quarter 2023 primarily due to lower processing volumes.

 

Noninterest income for the six months ended June 30, 2024 decreased $652 thousand compared with the six months ended June 30, 2023. Merchant processing services fees and ATM processing fees declined in the six months ended June 30, 2024 compared with six months ended June 30, 2023 due to reduced processing volumes. Debit card fees declined in the six months ended June 30, 2024 compared with six months ended June 30, 2023 primarily due to lower transaction volumes. Other noninterest income decreased in the six months ended June 30, 2024 compared with six months ended June 30, 2023 primarily because the prior period included higher recoveries in excess of principal charged off on loans.

 

Noninterest Expense

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

(In thousands)

  
                                 

Salaries and related benefits

   $ 12,483     $ 11,828     $ 25,069     $ 23,895  

Occupancy and equipment

     5,158       5,012       10,198       10,497  

Outsourced data processing services

     2,511       2,488       5,047       4,932  

Limited partnership operating losses

     1,440       1,440       2,880       2,874  

Courier service

     686       611       1,335       1,226  

Professional fees

     362       485       764       961  

Other noninterest expense

     3,490       3,975       6,936       7,664  

Total

   $ 26,130     $ 25,839     $ 52,229     $ 52,049  

 

Second quarter 2024 noninterest expense increased $291 thousand compared with the second quarter 2023. Salaries and benefits increased in the second quarter 2024 compared with the second quarter 2023 primarily due to annual merit increases and higher group health insurance costs for employees. Other noninterest expense decreased in the second quarter 2024 compared with the second quarter 2023 primarily because the prior period included higher losses from unauthorized debit card use.

 

Noninterest expense for the six months ended June 30, 2024 increased $180 thousand compared with the six months ended June 30, 2023. Salaries and benefits increased in the six months ended June 30, 2024 compared with the six months ended June 30, 2023 primarily due to annual merit increases and higher group health insurance costs for employees. Occupancy and equipment expense decreased in the six months ended June 30, 2024 compared with the six months ended June 30, 2023 primarily due to lower maintenance costs. Professional fees decreased in the six months ended June 30, 2024 compared with the six months ended June 30, 2023 primarily due to lower legal fees. Other noninterest expense decreased in the six months ended June 30, 2024 compared with the six months ended June 30, 2023 primarily because the prior period included higher losses from unauthorized debit card use.

 

- 41 -
 

 

Provision for Income Tax

 

The Company’s income tax provision (FTE) was $13.0 million for the second quarter 2024 and $26.4 million for the six months ended June 30, 2024 compared with $14.9 million for the second quarter 2023 and $29.9 million for the six months ended June 30, 2023. The effective tax rates (FTE) were 26.8% for the second quarter 2024 and the six months ended June 30, 2024 compared with 27.0% for the second quarter 2023 and the six months ended June 30, 2023.

 

Investment Securities Portfolio

 

The Company maintains an investment securities portfolio consisting of securities issued by U.S. Treasury securities, U.S. Government sponsored entities, state and political subdivisions, corporations, collateralized loan obligations and agency mortgage-backed securities. The Company had no marketable equity securities at June 30, 2024 and December 31, 2023.

 

Management manages the investment securities portfolio in response to anticipated changes in interest rates, and changes in deposit and loan volumes. The carrying value of the Company’s investment securities portfolio was $4.6 billion at June 30, 2024 and $4.9 billion at December 31, 2023. The following table lists debt securities in the Company’s portfolio by type as of the dates indicated. Debt securities held to maturity are listed at amortized cost before related reserve for expected credit losses of $1 thousand at June 30, 2024 and December 31, 2023. Debt securities available for sale are listed at fair value.

 

   

At June 30, 2024

    

At December 31, 2023

  
   

Carrying Value

    

As a percent of total investment securities

    

Carrying Value

    

As a percent of total investment securities

  
   

($ in thousands)

  

Securities of U.S. Government sponsored entities

   $ 291,206       6 %   $ 294,919       6 %

Agency residential mortgage-backed securities ("MBS")

     290,583       6 %     318,019       7 %

U.S. Treasury securities

     4,820       - %     -       - %

Obligations of states and political subdivisions

     130,801       3 %     142,465       3 %

Corporate securities

     2,587,667       57 %     2,638,198       54 %

Collateralized loan obligations

     1,255,110       28 %     1,484,597       30 %

Total

   $ 4,560,187       100 %   $ 4,878,198       100 %
                                 

Debt securities available for sale

   $ 3,699,318             $ 3,999,801          

Debt securities held to maturity

     860,869               878,397          

Total

   $ 4,560,187             $ 4,878,198          

 

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

 

At June 30, 2024, substantially all of the Company’s investment securities were investment grade as rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance.

 

- 42 -
 

 

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

 

   

Corporate securities

  
   

At June 30, 2024

    

At December 31, 2023

  
   

Amortized

    

Fair

    

Amortized

    

Fair

  
   

Cost

    

Value

    

Cost

    

Value

  
   

(In thousands)

  

Debt securities available for sale

   $ 2,084,391     $ 1,855,618     $ 2,129,103     $ 1,909,548  

Debt securities held to maturity

     732,049       694,248       728,650       705,356  

Total corporate securities

   $ 2,816,440     $ 2,549,866     $ 2,857,753     $ 2,614,904  

 

The following table summarizes total corporate securities by credit rating:

 

   

At June 30, 2024

    

At December 31, 2023

  
   

Fair value

    

As a percent of total corporate securities

    

Fair value

    

As a percent of total corporate securities

  
   

($ in thousands)

  

AA-

   $ 71,543       3 %   $ 73,016       3 %

A+

     243,082       10 %     250,322       9 %

A

     340,341       13 %     380,257       14 %

A-

     845,489       33 %     825,882       32 %

BBB+

     629,466       25 %     723,767       28 %

BBB

     419,945       16 %     361,660       14 %

Total corporate securities

   $ 2,549,866       100 %   $ 2,614,904       100 %

 

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

 

   

At June 30, 2024

    

At December 31, 2023

  
   

Fair value

    

As a percent of total corporate securities

    

Fair value

    

As a percent of total corporate securities

  
   

($ in thousands)

  

Financial

   $ 1,470,499       58 %   $ 1,516,147       58 %

Utilities

     270,630       11 %     274,929       10 %

Industrial

     210,921       8 %     215,428       8 %

Consumer, Non-cyclical

     167,196       7 %     170,423       7 %

Communications

     154,054       5 %     158,495       6 %

Basic Materials

     99,727       4 %     100,693       4 %

Energy

     68,350       3 %     69,331       3 %

Technology

     62,907       2 %     63,185       2 %

Consumer, Cyclical

     45,582       2 %     46,273       2 %

Total corporate securities

   $ 2,549,866       100 %   $ 2,614,904       100 %

 

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- 43 -
 

 

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

 

   

At June 30, 2024

    

At December 31, 2023

  
   

Fair value

    

As a percent of total corporate securities

    

Fair value

    

As a percent of total corporate securities

  
   

($ in thousands)

  

United States of America

   $ 1,766,656       69 %   $ 1,811,463       69 %

Canada

     191,155       8 %     195,979       7 %

Japan

     164,369       6 %     164,948       6 %

United Kingdom

     150,925       6 %     162,794       6 %

Switzerland

     93,814       4 %     93,898       4 %

France

     91,028       4 %     91,726       4 %

Netherlands

     34,852       1 %     35,381       1 %

Australia

     24,500       1 %     24,800       1 %

Belgium

     19,719       1 %     20,894       1 %

Germany

     12,848       - %     13,021       1 %

Total corporate securities

   $ 2,549,866       100 %   $ 2,614,904       100 %

 

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

 

   

At June 30, 2024

    

At December 31, 2023

  
   

Fair value

    

As a percent of total foreign corporate securities

    

Fair value

    

As a percent of total foreign corporate securities

  
   

($ in thousands)

  

Financial

   $ 684,871       87 %   $ 702,892       87 %

Energy

     31,620       4 %     31,970       4 %

Basic materials

     24,500       3 %     24,800       3 %

Consumer, Non-cyclical

     19,719       3 %     20,895       3 %

Consumer, Cyclical

     12,848       2 %     13,021       2 %

Utilities

     9,652       1 %     9,863       1 %

Total foreign corporate securities

   $ 783,210       100 %   $ 803,441       100 %

 

The Company’s $1.3 billion (fair value) in collateralized loan obligations at June 30, 2024, consist of investments in 120 issues that are within the senior tranches of their respective fund securitization structures. The following table summarizes total collateralized loan obligations by credit rating:

 

   

At June 30, 2024

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

AAA

   $ 410,262     $ 408,185  

AA

     854,549       846,925  

Total

   $ 1,264,811     $ 1,255,110  

 

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- 44 -
 

 

The Company’s $1.5 billion (fair value) in collateralized loan obligations at December 31, 2023, consist of investments in 142 issues that are within the senior tranches of their respective fund securitization structures. The following table summarizes total collateralized loan obligations by credit rating:

 

   

At December 31, 2023

  
   

Amortized

    

Fair

  
   

Cost

    

Value

  
   

(In thousands)

  

AAA

   $ 536,185     $ 532,729  

AA

     965,063       951,868  

Total

   $ 1,501,248     $ 1,484,597  

 

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

 

Loan Portfolio Credit Risk

 

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

 

The preparation of the financial statements requires Management to estimate the amount of expected losses in the loan portfolio and establish an allowance for credit losses. The allowance for credit losses is maintained by assessing or reversing a provision for credit losses through the Company’s earnings. In estimating credit losses, Management must exercise judgment in evaluating information deemed relevant, such as financial information regarding individual borrowers, overall loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses.

 

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

 

 

●

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

 

 

●

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

 

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

 

- 45 -
 

 

Nonperforming Loans

 

   

At June 30,

    

At December 31,

  
   

2024

    

2023

    

2023

  
   

(In thousands)

  
                         

Nonperforming nonaccrual loans

   $ 971     $ 192     $ 401  

Performing nonaccrual loans

     -       5       2  

Total nonaccrual loans

     971       197       403  

Accruing loans 90 or more days past due

     580       656       388  

Total nonperforming loans

   $ 1,551     $ 853     $ 791  

 

At June 30, 2024, nonaccrual loans consisted of three loans including the addition of a commercial real estate loan with a carrying value of $766 thousand. Its collateral value exceeds the loan balance.

 

Management believes the overall credit quality of the loan portfolio is reasonably stable; however, classified and nonperforming assets could fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, pandemics, and collateral values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent loans will not occur in the future.

 

Allowance for Credit Losses

 

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

 

   

At June 30,

    

At December 31,

  
   

2024

    

2023

  
   

(In thousands)

  
                 

Allowance for credit losses on loans

   $ 15,952     $ 16,867  

Allowance for credit losses on debt securities held to maturity

     1       1  

Total allowance for credit losses

   $ 15,953     $ 16,868  
                 

Allowance for unfunded credit commitments

   $ 201     $ 201  

 

Allowance for Credit Losses on Debt Securities Held to Maturity

 

Management segmented debt securities held to maturity, selected methods to estimate losses for each segment, and measured a loss estimate. Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Corporate securities held to maturity were individually evaluated for expected credit loss by evaluating the issuer’s financial condition, profitability, cash flows, and credit ratings. The Company has evaluated each issuer’s historical financial performance and ability to service debt payments, including throughout and following the 2008-2009 recession. The Company has an expectation that nonpayment of the amortized cost basis continues to be zero. At June 30, 2024, no credit loss allowance was assigned to corporate securities held to maturity based on evaluation of each individual issuer’s historical financial performance throughout full business cycles. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. Allowance for credit losses related to debt securities held to maturity was $1 thousand related to municipal securities at June 30, 2024 and December 31, 2023, respectively, reflecting the expected credit losses on debt securities held to maturity.

 

Allowance for Credit Losses on Loans

 

The Company’s allowance for credit losses on loans represents Management’s estimate of forecasted credit losses in the loan portfolio based on the current expected credit loss model. In evaluating credit risk for loans, Management measures the loss potential of the carrying value of loans. As described above, payments received on nonaccrual loans may be applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected.

 

- 46 -
 

 

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

 

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

 

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

 

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

 

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

 

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- 47 -
 

 

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

 

   

For the Three Months

    

For the Six Months

  
   

Ended June 30,

  
   

2024

    

2023

    

2024

    

2023

  
   

($ in thousands)

  

Analysis of the allowance for loan losses/credit losses

                                

Balance, beginning of period

   $ 15,879     $ 19,509     $ 16,867     $ 20,284  

Reversal of provision for credit losses

     -       -       300       (1,550 )

Loans charged off

                                

Commercial

     (28 )     -       (28 )     (148 )

Consumer installment and other

     (1,513 )     (1,661 )     (3,516 )     (3,552 )

Total chargeoffs

     (1,541 )     (1,661 )     (3,544 )     (3,700 )

Recoveries of loans previously charged off

                                

Commercial

     11       19       23       2,184  

Commercial real estate

     132       15       177       30  

Consumer installment and other

     1,471       598       2,129       1,232  

Total recoveries

     1,614       632       2,329       3,446  

Net loan recoveries (losses)

     73       (1,029 )     (1,215 )     (254 )

Balance, end of period

   $ 15,952     $ 18,480     $ 15,952     $ 18,480  
                                 

Net loan (recoveries) losses as a percentage of

average total loans (annualized)

     (0.04 )%     0.45 %     0.29 %     0.05 %

 

Selected financial data ($ in thousands): (At the dates indicated)

 

   

At June 30,

    

At December 31,

  
   

2024

    

2023

    

2023

  

Loans

   $ 831,842     $ 919,583     $ 866,602  

Nonaccrual loans

     971       197       403  

Allowance for credit losses as a percentage of loans

     1.92 %     2.01 %     1.95 %

Nonaccrual loans as a percentage of loans

     0.12 %     0.02 %     0.05 %

Allowance for credit losses to nonaccrual loans

     1642.84 %     9380.71 %     4185.36 %

 

 

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

 

   

For the Three Months Ended

    

For the Six Months Ended

  
   

June 30, 2024

  
                   

As a Percentage

                    

As a Percentage

  
           

Average

    

of Net Chargeoffs

            

Average

    

of Net Chargeoffs

  
   

Net (Chargeoffs)

    

Loan

    

(Recoveries)

    

Net (Chargeoffs)

    

Loan

    

(Recoveries)

  
   

Recoveries

    

Balance

    

to Average Loans

    

Recoveries

    

Balance

    

to Average Loans

  
   

($ in thousands)

  
                                                 

Commercial

   $ (17 )   $ 128,541       0.01 %   $ (5 )   $ 128,450       - %

Commercial real estate

     132       487,209       (0.03 )%     177       488,099       (0.04 )%

Construction

     -       5,064       - %     -       5,064       - %

Residential real estate

     -       9,448       - %     -       9,640       - %

Consumer and other installment

     (42 )     207,754       0.02 %     (1,387 )     214,532       0.65 %

Total

   $ 73     $ 838,016       (0.01 )%   $ (1,215 )   $ 845,785       0.14 %

 

- 48 -
 

 

   

For the Three Months Ended

    

For the Six Months Ended

  
   

June 30, 2023

  
                   

As a Percentage

                    

As a Percentage

  
           

Average

    

of Net Chargeoffs

            

Average

    

of Net Chargeoffs

  
   

Net (Chargeoffs)

    

Loan

    

(Recoveries)

    

Net (Chargeoffs)

    

Loan

    

(Recoveries)

  
   

Recoveries

    

Balance

    

to Average Loans

    

Recoveries

    

Balance

    

to Average Loans

  
   

($ in thousands)

  
                                                 

Commercial

   $ 19     $ 153,852       (0.01 )%   $ 2,036     $ 157,941       (1.29 )%

Commercial real estate

     15       491,902       - %     30       492,514       (0.01 )%

Construction

     -       4,123       - %     -       3,706       - %

Residential real estate

     -       12,455       - %     -       13,046       - %

Consumer and other installment

     (1,063 )     264,463       0.40 %     (2,320 )     269,070       0.86 %

Total

   $ (1,029 )   $ 926,795       0.11 %   $ (254 )   $ 936,277       0.03 %

 

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

 

The following summarizes activity in the allowance for credit losses:

 

   

Allowance for Credit Losses

  
   

For the Three Months Ended June 30, 2024

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 3,765     $ 5,758     $ 242     $ 22     $ 6,092     $ 15,879  

Provision (reversal)

     148       32       1       2       (183 )     -  

Chargeoffs

     (28 )     -       -       -       (1,513 )     (1,541 )

Recoveries

     11       132       -       -       1,471       1,614  

Total allowance for credit losses

   $ 3,896     $ 5,922     $ 243     $ 24     $ 5,867     $ 15,952  

 

 

   

Allowance for Credit Losses

  
   

For the Six Months Ended June 30, 2024

  
                                   

Consumer

          
           

Commercial

            

Residential

    

Installment

          
   

Commercial

    

Real Estate

    

Construction

    

Real Estate

    

and Other

    

Total

  
   

(In thousands)

  

Allowance for credit losses:

                                                

Balance at beginning of period

   $ 4,216     $ 5,925     $ 245     $ 26     $ 6,455     $ 16,867  

(Reversal) provision

     (315 )     (180 )     (2 )     (2 )     799       300  

Chargeoffs

     (28 )     -       -       -       (3,516 )     (3,544 )

Recoveries

     23       177       -       -       2,129       2,329  

Total allowance for credit losses

   $ 3,896     $ 5,922     $ 243     $ 24     $ 5,867     $ 15,952  

 

Management considers the $16.0 million allowance for credit losses on loans to be adequate as a reserve against current expected credit losses in the loan portfolio as of June 30, 2024.

 

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

 

Climate-Related Financial Risk

 

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

 

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

 

- 49 -
 

 

The Company monitors the climate risks of our loan customers. Borrowers with real estate loan collateral located in flood zones must carry flood insurance under the loans’ terms. At June 30, 2024, the Company had $6 million in loans to agricultural borrowers; Management continuously monitors these customers’ access to adequate water sources as well as their ability to sustain low crop yields and volatile commodity prices without encountering financial hardship. The Company makes automobile loans; changes in consumer demand, or governmental laws or policies, regarding gasoline, electric and hybrid vehicles are not considered to be material risks to the Company’s automobile lending practices.

 

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

 

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

 

Asset/Liability and Market Risk Management

 

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

 

Interest Rate Risk

 

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

 

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

 

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

 

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

 

The Company’s asset and liability position was generally “asset sensitive” at June 30, 2024, based on the interest rate assumptions applied to the simulation model. An “asset sensitive” position results in a larger change in interest income than in interest expense resulting from application of assumed interest rate changes. However, in the dynamic simulation, an assumed decline in interest rates is expected to result in improved deposit balances funding higher earning asset levels. Further, in the dynamic simulation, no change in interest rates is expected to result in a decline in net interest income as asset yields remain stable and deposit costs rise as the Bank negotiates deposit rates with customers in the current environment.

 

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- 50 -
 

 

At June 30, 2024, Management’s most recent measurements of estimated changes in net interest income were:

 

Dynamic simulation (balance sheet composition changes):
Assumed change in interest rates over 1 year  -2.0% -1.0% 0.0% +1.0% +2.0%
First year change in net interest income -2.3% -0.5% -0.9% +1.9% +3.3%

 

Static simulation (balance sheet composition unchanged):
Assumed immediate change in interest rates   -2.0% -1.0% 0.00% +1.0% +2.0%
First year change in net interest income -11.7% -5.8% 0.00% +5.9% +11.2%

 

Simulation estimates depend on, and will change with, the size and mix of the actual and projected composition of financial instruments at the time of each simulation. Assumptions made in the simulation may not materialize and unanticipated events and circumstances may occur. In addition, the simulation does not take into account any future actions Management may undertake to mitigate the impact of interest rate changes, loan prepayment estimates and spread relationships, which may change regularly.

 

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

 

Market Risk - Equity Markets

 

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

 

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

 

Market Risk - Other

 

Market values of loan collateral can directly impact the level of loan chargeoffs and the provision for credit losses. The financial condition and liquidity of debtors issuing bonds and debtors whose mortgages or other obligations are securitized can directly impact the credit quality of the Company’s investment securities portfolio requiring the Company to establish or increase reserves for expected credit losses. Other types of market risk, such as foreign currency exchange risk, are not significant in the normal course of the Company's business activities.

 

Liquidity and Funding

 

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

 

In recent years, the Bank's deposit base has provided the majority of the Bank's funding requirements. This low-cost source of funds, along with shareholders' equity, provided 96% of funding for average total assets in the six months ended June 30, 2024 and 97% for the year ended December 31, 2023, respectively. The Bank’s funding from customer deposits is in part reliant on the confidence clients have in the Bank. The Bank places a very high priority in maintaining this confidence through conservative credit risk and capital management practices and by maintaining an appropriate level of liquidity.

 

Total deposits were $5,131 million at June 30, 2024 and $5,474 million at December 31, 2023. Total time deposits were $89 million at June 30, 2024 and $97 million at December 31, 2023. The Company has no foreign time deposits. The standard FDIC deposit insurance amount is $250,000 per depositor, for each account ownership category. At June 30, 2024, estimated federally uninsured total deposits and time deposits were $2,441 million and $4 million, respectively.

 

- 51 -
 

 

Banking industry deposits, including for Westamerica Bank, grew rapidly in 2020 and 2021 due to the injection of fiscal stimulus into the United States economy, including Paycheck Protection Program loans, and an easing of Federal Reserve monetary policy, both in response to the COVID pandemic. Federal Reserve monetary policy easing included reduction in the federal funds rate to a range of 0.00% to 0.25% and net purchases of Treasury securities and agency mortgage-backed securities, which increase the money supply and aggregate bank deposits. Subsequently, inflation rose considerably while employment conditions remained strong. In 2022 and 2023, the Federal Reserve’s monetary policy reversed to tightening, in an effort to reduce inflation. The monetary policy tightening included increasing and keeping the federal funds rate to a range of 5.25% to 5.50% and net reductions of Treasury securities and agency mortgage-backed securities, which reduce the money supply and aggregate bank deposits. Westamerica Bank’s deposit totals are subject to both the fiscal policies of the United States government and monetary policies of the Federal Reserve; the decline in Westamerica Bank deposits during 2023 and the six months ended June 30, 2024 was influenced by these fiscal and monetary policies. In addition, the Internal Revenue Service (“IRS”) declared every county in which Westamerica Bank operates as Natural Disaster Areas due to 2022-2023 winter storms; the IRS and California Franchise Tax Board extended the 2022 tax filing deadline and 2023 tax installment payment due dates to November 16, 2023. Management believes this deferment of tax payment deadlines impacted deposit totals in the fourth quarter 2023 as customers paid their federal and California tax obligations. Total deposits declined $342,827 thousand from December 31, 2023 to June 30, 2024 due to competitive deposit pricing.

 

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

 

   

At June 30, 2024

  
   

(In thousands)

  

Three months or less

   $ 1,994  

Over three through six months

     1,802  

Over six through twelve months

     399  

Over twelve months

     101  

Total

   $ 4,296  

 

Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, and principal and interest payments from debt securities and loans. At June 30, 2024, the Company had $486,124 thousand in cash balances. During the twelve months ending June 30, 2025, the Company expects to receive $309,000 thousand in principal payments from its debt securities. If additional operational liquidity is required, the Company can pledge debt securities as collateral for borrowing purposes; at June 30, 2024, the Company’s debt securities which qualify as collateral for borrowing totaled $3,693,459 thousand. In the ordinary course of business, the Company pledges debt securities as collateral for certain depository customers; at June 30, 2024, the Company had pledged $759,338 thousand in debt securities for depository customers. In the ordinary course of business, the Company pledges debt securities as collateral for borrowing from the Federal Reserve Bank; at June 30, 2024, the Company had pledged $1,067,510 thousand in debt securities at the Federal Reserve Bank. During the six months ended June 30, 2024, the Company’s average borrowings from the Federal Reserve Bank and other correspondent banks were $131,291 thousand and $-0- thousand, respectively, and at June 30, 2024, the Company’s borrowings from the Federal Reserve Bank and other correspondent banks were $200,000 thousand and $-0- thousand, respectively. At June 30, 2024, the Company had access to borrowing from the Federal Reserve up to $867,510 thousand based on collateral pledged at June 30, 2024. At June 30, 2024, the Company’s estimated unpledged collateral qualifying debt securities totaled $1,462,966 thousand based on the Federal Reserve Bank borrowing programs. The Federal Reserve’s Bank Term Funding Program ceased making new loans on March 11, 2024. Debt securities eligible as collateral are shown at market value unless noted otherwise:

 

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- 52 -
 

 

   

At June 30, 2024

  
   

(in thousands)

  

Debt Securities Eligible as Collateral:

        

Corporate Securities

   $ 2,549,866  

Collateralized Loan Obligations rated AAA

     405,308  

Obligations of States and Political Subdivisions

     130,006  

Agency Mortgage Backed Securities

     286,771  

Securities of U.S. Government Sponsored Entities

     116,688  

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

     200,000  

U.S. Treasury Securities

     4,820  

Total Debt Securities Eligible as Collateral

   $ 3,693,459  
         

Debt Securities Pledged as Collateral:

        

Deposits by Public Entities

   $ (759,338 )

Short-term Borrowed Funds (Deposit Sweep)

     (394,283 )

Debt Securities Pledged at the Federal Reserve Bank

     (1,067,510 )

Other

     (9,362 )

Total Debt Securities Pledged as Collateral

   $ (2,230,493 )
         

Estimated Debt Securities Available to Pledge

   $ 1,462,966  

 

Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. The Bank performs liquidity stress tests on a periodic basis to evaluate the sustainability of its liquidity. Under the stress testing, the Bank assumes outflows of funds increase beyond expected levels. Measurement of such heightened outflows considers the composition of the Bank’s deposit base, including any concentration of deposits, non-deposit funding such as short-term borrowings, and unfunded lending commitments. The composition of the Bank’s deposits is considered including the broad industry and geographic diversification in the Bank’s market area. The Bank evaluates its stock of highly liquid assets to meet the assumed higher levels of outflows. Highly liquid assets include cash and amounts due from other banks from daily transaction settlements, reduced by branch cash needs and any Federal Reserve Bank reserve requirements, and investment securities based on regulatory guidelines. Based on the results of the most recent liquidity stress test, Management is satisfied with the liquidity condition of the Bank. However, no assurance can be given the Bank will not experience a period of reduced liquidity.

 

Management continually monitors the Bank’s cash levels. Loan demand from credit worthy borrowers will be dictated by economic and competitive conditions. The Bank aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of these deposit balances is subject to heightened competition, the success of the Bank's sales efforts, delivery of superior customer service, new regulations and market conditions. The Bank does not aggressively solicit higher-costing time deposits. Changes in interest rates, most notably rising or elevated interest rates or increased consumer spending, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, any deposit growth may be used to fund loans or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

 

Westamerica Bancorporation ("Parent Company") is a separate entity apart from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends declared for its shareholders, and interest and principal on any outstanding debt. The Parent Company had no debt as of June 30, 2024. Substantially all of the Parent Company's revenues are obtained from subsidiary dividends and service fees.

 

The Bank’s dividends paid to the Parent Company, proceeds from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder dividends of $23 million in the six months ended June 30, 2024 and $46 million in the year ended December 31, 2023 and retire common stock in the amounts of $210 thousand in the six months ended June 30, 2024 and $14 million in the year ended December 31, 2023. Payment of dividends to the Parent Company by the Bank is limited under California and Federal laws. The Company believes these regulatory dividend restrictions will not impact Parent Company's ability to meet its ongoing cash obligations. Parent Company’s cash balance was $202 million at June 30, 2024 and $155 million at December 31, 2023.

 

Capital Resources

 

The Company has historically generated high levels of earnings, which provide a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) was annualized 14.8% for the six months ended June 30, 2024 and 18.1% for the year ended December 31, 2023. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $203 thousand in the six months ended June 30, 2024 and $950 thousand in the year ended December 31, 2023.

 

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The Company paid common dividends totaling $23 million in the six months ended June 30, 2024 and $46 million in the year ended December 31, 2023, which represent dividends per common share of $0.88 and $1.72, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has at times repurchased and retired its common stock as another means to return capital to shareholders. The Company repurchased and retired 4 thousand shares valued at $210 thousand in the six months ended June 30, 2024 and 274 thousand shares valued at $14 million in the year ended December 31, 2023.

 

The Company's primary capital resource is shareholders' equity, which was $816 million at June 30, 2024 compared with $773 million at December 31, 2023. The Company's ratio of equity to total assets was 12.92% at June 30, 2024 and 12.14% at December 31, 2023.

 

The Company performs capital stress tests on a periodic basis to evaluate the sustainability of its capital. Under the stress testing, the Company assumes various scenarios such as deteriorating economic and operating conditions, and unanticipated asset devaluations. The Company measures the impact of these scenarios on its earnings and capital. Based on the results of the most recent stress tests, Management is satisfied with the capital condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced earnings or a reduction in capital from unanticipated events and circumstances.

 

Capital to Risk-Adjusted Assets

 

The capital ratios for the Company and the Bank under current regulatory capital standards are presented in the tables below, on the dates indicated. For Common Equity Tier I Capital, Tier 1 Capital and Total Capital, the minimum percentage required for regulatory capital adequacy purposes include a 2.5% “capital conservation buffer.”

 

                           

To Be

  
                           

Well-capitalized

  
                   

Required for

    

Under Prompt

  
   

At June 30, 2024

    

Capital Adequacy

    

Corrective Action

  
   

Company

    

Bank

    

Purposes

    

Regulations (Bank)

  
                                 

Common Equity Tier I Capital

     20.69 %     15.10 %     7.00 %     6.50 %

Tier I Capital

     20.69 %     15.10 %     8.50 %     8.00 %

Total Capital

     21.07 %     15.62 %     10.50 %     10.00 %

Leverage Ratio

     13.87 %     10.08 %     4.00 %     5.00 %

 

                           

To Be

  
                           

Well-capitalized

  
                   

Required for

    

Under Prompt

  
   

At December 31, 2023

    

Capital Adequacy

    

Corrective Action

  
   

Company

    

Bank

    

Purposes

    

Regulations (Bank)

  
                                 

Common Equity Tier I Capital

     18.76 %     14.46 %     7.00 %     6.50 %

Tier I Capital

     18.76 %     14.46 %     8.50 %     8.00 %

Total Capital

     19.15 %     14.98 %     10.50 %     10.00 %

Leverage Ratio

     12.86 %     9.88 %     4.00 %     5.00 %

 

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

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

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

 

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

 

Item 4. Controls and Procedures

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of June 30, 2024.

 

Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

The Company’s Annual Report on Form 10-K for the year ended December 31, 2023 includes detailed disclosure about the risks faced by the Company’s business.

 

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

 

(a) None

(b) None

(c) Issuer Purchases of Equity Securities

 

No shares were repurchased during the period from April 1, 2024 through June 30, 2024.

 

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The Company may repurchase shares of its common stock in the open market from time to time to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares under stock option plans, and other ongoing requirements. The Company’s most recent repurchase plan was approved on July 28, 2022 and expired on September 1, 2023. There is no stock repurchase plan in place currently. 

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5. Other Information

 

Rule 10b5-1 Trading Plans

 

During the quarter ended June 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” as defined in Item 408 of Regulation S‑K.

   

Item 6. Exhibits

 

Exhibit No.

Description of Exhibit
   

Exhibit 31.1

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

Exhibit 31.2

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

Exhibit 32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   

Exhibit 32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   

Exhibit 101.INS

XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
   

Exhibit 101.SCH

Inline XBRL Taxonomy Extension Schema Document
   

Exhibit 101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document
   

Exhibit 101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document
   

Exhibit 101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document
   

Exhibit 101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document
   

Exhibit 104.

The Cover page of Westamerica Bancorporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline XBRL (contained in Exhibit 101)

 

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SIGNATURES

 

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

 

WESTAMERICA BANCORPORATION
(Registrant)
 
 
/s/ Anela Jonas
Anela Jonas
Senior Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
 
Date: August 8, 2024

 

 

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