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, 2020

For the quarterly period ended September 30, 2019

or

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

For the transition period from __________ to __________.

 

For the transition period from __________ to __________.                                                                                             

Commission file number: 001-09383001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

California94-2156203

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

1108 Fifth Avenue, San Rafael, California 94901

(Address of Principal Executive Offices) (Zip Code)

 

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

WABC

The Nasdaq Stock Market, LLC

 

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

 

Yes                                                                                        No ☐

 

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

 

Yes                                                                                        No ☐

 

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

 

Large accelerated filer 

Accelerated filer ☐

    Non-accelerated filer ☐ 

Smaller reporting company ☐

Emerging growth company ☐

 

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

 

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

 

Yes ☐                                                                                        No 

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

 

Title of ClassShares outstanding as of October 28, 2019July 29, 2020

Common Stock,

27,055,059

No Par Value

26,932,929

 

 

 

 

TABLE OF CONTENTS

 

Page

Forward Looking Statements

3

PART I - FINANCIAL INFORMATION

Item 1

Financial Statements

4

Notes to Unaudited Consolidated Financial Statements

 9

Item 2

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

2933

Item 3

Quantitative and Qualitative Disclosures about Market Risk

5056

Item 4

Controls and Procedures

5156

PART II - OTHER INFORMATION

Item 1

Legal Proceedings

5156

Item 1A

Risk Factors

5156

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

5158

Item 3

Defaults upon Senior Securities

5258

Item 4

Mine Safety Disclosures

5258

Item 5

Other Information

5258

Item 6

Exhibits

5259

Signatures

53

Exhibit Index

54

Exhibit 10.1 - Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Stock Option Agreement Form

55

Exhibit 10.2 - Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement Form

63

Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

69

Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

70

Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350

71

Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350

7260

 

-2-

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by riots, terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the nationallocal, regional and regionalnational economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including a failure or breach in data processing or security systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, fire, flood, drought, pandemics and other disasters on the Company, including on the uninsured value of the Company’s assets and of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values; (13) changes in the securities marketsmarkets; and (14) the duration and severity of the COVID-19 pandemic and governmental responses to the pandemic; and (15) the outcome of contingencies, such as legal proceedings. However, the reader should not consider the above-mentioned factors to be a complete set of all potential risks or uncertainties.

 

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's Form 8-K filed on April 16, 2020, and the annual report on Form 10-K for the year ended December 31, 2018,2019, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

 

-3-

 

PART I - FINANCIAL INFORMATION

Item 1      Financial Statements

 

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

At September 30,

 

At December 31,

  

At June 30,

 

At December 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(In thousands)

  

(In thousands)

 

Assets:

                

Cash and due from banks

 $415,639  $420,284  $500,820  $373,421 

Equity securities

 -  1,747 

Debt securities available for sale

 2,983,767  2,654,670  3,708,370  3,078,846 

Debt securities held to maturity, with fair values of: $799,241 at September 30, 2019 and $971,445 at December 31, 2018

 793,216  984,609 

Debt securities held to maturity, net of allowance for credit losses of $16 at June 30, 2020 and $ - at December 31, 2019 (Fair value of $656,390 at June 30, 2020 and $744,296 at December 31, 2019)

 638,281  738,072 

Loans

 1,133,229  1,207,202  1,316,359  1,126,664 

Allowance for loan losses

  (19,828)  (21,351)

Loans, net of allowance for loan losses

 1,113,401  1,185,851 

Allowance for credit losses on loans

  (24,529)  (19,484)

Loans, net of allowance for credit losses on loans

 1,291,830  1,107,180 

Other real estate owned

 43  350  43  43 

Premises and equipment, net

 34,080  34,507  34,061  34,597 

Identifiable intangibles, net

 1,464  1,929  1,245  1,391 

Goodwill

 121,673  121,673  121,673  121,673 

Other assets

  152,772   162,906   167,566   164,332 

Total Assets

 $5,616,055  $5,568,526  $6,463,889  $5,619,555 
  

Liabilities:

                

Noninterest-bearing deposits

 $2,265,640  $2,243,251  $2,702,885  $2,240,112 

Interest-bearing deposits

  2,530,983   2,623,588   2,765,527   2,572,509 

Total deposits

 4,796,623  4,866,839  5,468,412  4,812,621 

Short-term borrowed funds

 45,646  51,247  86,170  30,928 

Other liabilities

  60,408   34,849   101,231   44,589 

Total Liabilities

  4,902,677   4,952,935   5,655,813   4,888,138 
  

Contingencies (Note 10)

                  
  

Shareholders' Equity:

                
Common stock (no par value), authorized - 150,000 shares      

Issued and outstanding: 27,014 at September 30, 2019 and 26,730 at December 31, 2018

 462,653  448,351 

Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,933 at June 30, 2020 and 27,062 at December 31, 2019

 467,351  465,460 

Deferred compensation

 771  1,395  35  771 

Accumulated other comprehensive income (loss)

 20,454  (39,996)

Accumulated other comprehensive income

 93,732  26,051 

Retained earnings

  229,500   205,841   246,958   239,135 

Total Shareholders' Equity

  713,378   615,591   808,076   731,417 

Total Liabilities and Shareholders' Equity

 $5,616,055  $5,568,526  $6,463,889  $5,619,555 

 

See accompanying notes to unaudited consolidated financial statements.

 

-4-

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

For the Three Months

 

For the Nine Months

  

For the Three Months

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
 

(In thousands, except per share data)

  

(In thousands, except per share data)

 

Interest and Loan Fee Income:

                                

Loans

 $14,431  $14,593  $44,050  $44,247  $15,278  $14,822  $29,087  $29,619 

Equity securities

 92  85  289  256  103  99  206  197 

Debt securities available for sale

 18,736  15,644  54,080  43,518  22,429  17,823  43,744  35,344 

Debt securities held to maturity

 4,535  5,931  14,788  18,321  3,616  4,924  7,524  10,253 

Interest-bearing cash

  1,901   2,361   5,597   5,933   113   1,958   969   3,696 

Total Interest and Loan Fee Income

  39,695   38,614   118,804   112,275   41,539   39,626   81,530   79,109 

Interest Expense:

                                

Deposits

 447  518  1,410  1,417  424  478  858  963 

Short-term borrowed funds

  8   9   27   28  10  9  18  18 

Other borrowed funds

  1   -   1   - 

Total Interest Expense

  455   527   1,437   1,445   435   487   877   981 

Net Interest and Loan Fee Income

 39,240  38,087  117,367  110,830  41,104  39,139  80,653  78,128 

Provision for Loan Losses

  -   -   -   - 

Net Interest and Loan Fee Income After Provision for Loan Losses

  39,240   38,087   117,367   110,830 

Provision for Credit Losses

  -   -   4,300   - 

Net Interest and Loan Fee Income After Provision for Credit Losses

  41,104   39,139   76,353   78,128 

Noninterest Income:

                                

Service charges on deposit accounts

 4,510  4,615  13,508  14,012  3,151  4,493  7,399  8,997 

Merchant processing services

 2,494  2,464  7,708  7,190  2,277  2,657  4,635  5,215 

Debit card fees

 1,641  1,656  4,789  4,959  1,459  1,641  2,927  3,148 

Trust fees

 733  733  2,199  2,202  714  749  1,491  1,466 

ATM processing fees

 725  687  2,080  2,049  518  722  1,097  1,355 

Other service fees

 580  665  1,742  1,946  420  585  926  1,162 

Financial services commissions

 75  132  270  387  123  93  248  194 

Securities gains

 71  26  71  50 

Life insurance gains

 -  585  433  585  -  433  -  433 

Equity securities(losses) gains

 -  (16) 50  (66)

Other noninterest income

  1,051   1,007   2,897   2,988   821   889   2,408   1,847 

Total Noninterest Income

  11,809   12,528   35,676   36,252   9,554   12,288   21,202   23,867 

Noninterest Expense:

                                

Salaries and related benefits

 12,559  13,415  38,757  39,952  12,900  13,090  25,918  26,198 

Occupancy and equipment

 5,199  4,809  15,163  14,365  4,791  4,916  9,723  9,964 

Outsourced data processing services

 2,374  2,292  7,110  6,930  2,324  2,367  4,729  4,736 

Professional fees

 645  621  1,791  2,277  643  481  1,032  1,146 

Courier service

 456  448  1,349  1,333  508  451  999  893 

Amortization of identifiable intangibles

 76  451  465  1,474  73  79  146  389 

Loss contingency

 -  3,500  553  3,500  -  553  -  553 

Other noninterest expense

  2,724   3,830   9,589   11,298   3,515   3,624   6,871   6,865 

Total Noninterest Expense

  24,033   29,366   74,777   81,129   24,754   25,561   49,418   50,744 

Income Before Income Taxes

 27,016  21,249  78,266  65,953  25,904  25,866  48,137  51,251 

Provision for income taxes

  6,626   4,256   18,605   13,444   6,342   6,241   11,613   11,980 

Net Income

 $20,390  $16,993  $59,661  $52,509  $19,562  $19,625  $36,524  $39,271 
  

Average Common Shares Outstanding

 26,986  26,701  26,924  26,622  26,935  26,942  27,001  26,892 

Average Diluted Common Shares Outstanding

 27,027  26,815  26,976  26,736  26,951  26,987  27,024  26,950 

Per Common Share Data:

                                

Basic earnings

 $0.76  $0.64  $2.22  $1.97  $0.72  $0.73  $1.35  $1.46 

Diluted earnings

 0.75  0.63  2.21  1.96  0.72  0.73  1.35  1.46 

Dividends paid

 0.41  0.40  1.22  1.20  0.41  0.41  0.82  0.81 

 

See accompanying notes to unaudited consolidated financial statements.

 

-5-

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 

Net income

 $20,390  $16,993  $59,661  $52,509 

Other comprehensive income (loss):

                

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

  10,407   (5,915)  85,822   (47,915)

Deferred tax (expense) benefit

  (3,077)  1,749   (25,372)  14,164 

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

  7,330   (4,166)  60,450   (33,751)

Total comprehensive income

 $27,720  $12,827  $120,111  $18,758 
  

For the Three Months

  

For the Six Months

 
  

Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

(In thousands)

 

Net income

 $19,562  $19,625  $36,524  $39,271 

Other comprehensive income:

                

Changes in net unrealized gains on debt securities available for sale

  132,902   34,602   96,158   75,415 

Deferred tax expense

  (39,291)  (10,229)  (28,427)  (22,295)

Reclassification of gains included in net income

  (71)  -   (71)  - 

Deferred tax expense on gains included in net income

  21   -   21   - 

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

  93,561   24,373   67,681   53,120 

Total comprehensive income

 $113,123  $43,998  $104,205  $92,391 

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

  

Income (Loss)

  

Earnings

  

Total

 
  

(In thousands except dividend per share)

 
                         

Balance, March 31, 2020

  26,932  $465,701  $771  $171  $238,903  $705,546 

Net income for the period

                  19,562   19,562 

Other comprehensive income

              93,561       93,561 

Exercise of stock options

  13   572               572 

Restricted stock activity

  -   736   (736)          - 

Stock based compensation

      525               525 

Stock awarded to employees

  1   45               45 

Retirement of common stock

  (13)  (228)          (391)  (619)

Dividends ($0.41 per share)

                  (11,116)  (11,116)

Balance, June 30, 2020

  26,933  $467,351  $35  $93,732  $246,958  $808,076 
                         

Balance, December 31, 2019

  27,062  $465,460  $771  $26,051  $239,135  $731,417 

Adoption of ASU 2016-13

                  52   52 

Adjusted Balance, January 1, 2020

  27,062   465,460   771   26,051   239,187   731,469 

Net income for the period

                  36,524   36,524 

Other comprehensive income

              67,681       67,681 

Exercise of stock options

  53   2,838               2,838 

Restricted stock activity

  10   1,270   (736)          534 

Stock based compensation

      1,050               1,050 

Stock awarded to employees

  1   66               66 

Retirement of common stock

  (193)  (3,333)          (6,533)  (9,866)

Dividends ($0.82 per share)

                  (22,220)  (22,220)

Balance, June 30, 2020

  26,933  $467,351  $35  $93,732  $246,958  $808,076 
                         

Balance, March 31, 2019

  26,901  $455,304  $771  $(11,249) $211,941  $656,767 

Net income for the period

                  19,625   19,625 

Other comprehensive income

              24,373       24,373 

Exercise of stock options

  50   2,539               2,539 

Restricted stock activity

  18   1,073               1,073 

Stock based compensation

  -   541               541 

Stock awarded to employees

  1   48               48 

Retirement of common stock

  (8)  (136)          (352)  (488)

Dividends ($0.41 per share)

                  (11,041)  (11,041)

Balance, June 30, 2019

  26,962  $459,369  $771  $13,124  $220,173  $693,437 
                         

Balance, December 31, 2018

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

Cumulative effect of bond premium amortization adjustment, net of tax

                  (2,801)  (2,801)

Adjusted Balance, January 1, 2019

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

Net income for the period

                  39,271   39,271 

Other comprehensive income

              53,120       53,120 

Shares issued from stock warrant exercise, net of repurchase

  51                   - 

Exercise of stock options

  170   8,310               8,310 

Restricted stock activity

  18   1,697   (624)          1,073 

Stock based compensation

  -   1,082               1,082 

Stock awarded to employees

  1   65               65 

Retirement of common stock

  (8)  (136)          (352)  (488)

Dividends ($0.81 per share)

                  (21,786)  (21,786)

Balance, June 30, 2019

  26,962  $459,369  $771  $13,124  $220,173  $693,437 

 

See accompanying notes to unaudited consolidated financial statements.

 

-6-
-7-

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

              

Accumulated

         
  

Common

          

Other

         
  

Shares

  

Common

  

Deferred

  

Comprehensive

  

Retained

     
  

Outstanding

  

Stock

  

Compensation

  

Income (Loss)

  

Earnings

  

Total

 
  

(In thousands)

 
                         

Balance, June 30, 2019

  26,962  $459,369  $771  $13,124  $220,173  $693,437 

Net income for the period

                  20,390   20,390 

Other comprehensive income

              7,330       7,330 

Exercise of stock options

  52   2,867               2,867 

Stock based compensation

  -   402               402 

Stock awarded to employees

  -   15               15 

Dividends ($0.41 per share)

                  (11,063)  (11,063)

Balance, September 30, 2019

  27,014  $462,653  $771  $20,454  $229,500  $713,378 
                         

Balance, June 30, 2018

  26,649  $443,338  $1,533  $(49,900) $191,167  $586,138 

Net income for the period

                  16,993   16,993 

Other comprehensive loss

              (4,166)      (4,166)

Exercise of stock options

  77   3,762               3,762 

Restricted stock activity

  -   138   (138)          - 

Stock based compensation

  -   525               525 

Stock awarded to employees

  1   22               22 

Dividends ($0.40 per share)

                  (10,683)  (10,683)

Balance, September 30, 2018

  26,727  $447,785  $1,395  $(54,066) $197,477  $592,591 
                         

Balance, December 31, 2018

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

Cumulative effect of bond premium amortization adjustment, net of tax

                  (2,801)  (2,801)

Adjusted Balance, January 1, 2019

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

Net income for the period

                  59,661   59,661 

Other comprehensive income

              60,450       60,450 

Shares issued from stock warrant exercise, net of repurchase

  51   -               - 

Exercise of stock options

  222   11,177               11,177 

Restricted stock activity

  18   1,697   (624)          1,073 

Stock based compensation

  -   1,484               1,484 

Stock awarded to employees

  1   80               80 

Retirement of common stock

  (8)  (136)          (352)  (488)

Dividends ($1.22 per share)

                  (32,849)  (32,849)

Balance, September 30, 2019

  27,014  $462,653  $771  $20,454  $229,500  $713,378 
                         

Balance, December 31, 2017

  26,425  $431,734  $1,533  $(16,832) $173,804  $590,239 

Cumulative effect of equity securities losses reclassified

              142   (142)  - 

Adjusted Balance, January 1, 2018

  26,425   431,734   1,533   (16,690)  173,662   590,239 

Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act

              (3,625)  3,625   - 

Net income for the period

                  52,509   52,509 

Other comprehensive loss

              (33,751)      (33,751)

Exercise of stock options

  289   13,245               13,245 

Restricted stock activity

  20   1,281   (138)          1,143 

Stock based compensation

  -   1,575               1,575 

Stock awarded to employees

  2   99               99 

Retirement of common stock

  (9)  (149)          (375)  (524)

Dividends ($1.20 per share)

                  (31,944)  (31,944)

Balance, September 30, 2018

  26,727  $447,785  $1,395  $(54,066) $197,477  $592,591 

See accompanying notes to unaudited consolidated financial statements.

-7-

 

 

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(unaudited)

 

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

  

2018

  

2020

  

2019

 
 

(In thousands)

  

(In thousands)

 

Operating Activities:

            

Net income

 $59,661  $52,509  $36,524  $39,271 

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

      

Depreciation and amortization

 15,178  18,964 

Provision for loan losses

 -  - 

Net amortization of deferred loan fees

 (215) (181)

Decrease (increase) in interest income receivable

 323  (177)

Increase in other assets

 (2,073) (1,896)

(Decrease) increase in income taxes payable

 (3,386) 7,760 

Decrease (increase) in net deferred tax asset

 6,386  (1,345)

Depreciation and amortization/accretion

 12,361  9,852 

Provision for credit losses

 4,300  - 

Stock option compensation expense

 1,484  1,575  1,050  1,082 

Increase in interest expense payable

 19  5 

(Decrease) increase in other liabilities

 (12,233) 3,793 

Securities gains

 (71) (50)

Life insurance gains

 (433) (585) -  (433)

Equity securities (gains) losses

 (50) 66 

Net writedown of premises and equipment

 -  3 

Net gain on sale of foreclosed assets

 -  (94)

Writedown of foreclosed assets

  -   27 

Net change in:

     

Amortization of deferred loan fees

 (1,057) (215)

Interest income receivable

 (3,526) (673)

Income taxes receivable

 -  (6,549)

Income taxes payable

 (585) - 

Deferred income taxes

 478  4,902 

Other assets

 (12,478) (20,013)

Interest expense payable

 52  44 

Other liabilities

  28,875   12,323 

Net Cash Provided by Operating Activities

  64,661   80,424   65,923   39,541 
 

Investing Activities:

            

Net repayments of loans

 73,026  91,594 

Net (disbursements) repayments of loans

 (189,704) 44,721 

Proceeds from life insurance policies

 1,273  1,183  -  1,273 

Purchases of debt securities available for sale

 (732,690) (634,113) (869,942) (418,223)

Proceeds from sale of equity securities

 1,797  - 

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

 502,928  290,663  343,170  368,216 

Proceeds from maturity/calls of debt securities held to maturity

 184,525  127,578  97,555  111,099 

Purchases of premises and equipment

 (2,495) (2,830) (1,389) (1,425)

Proceeds from sale of foreclosed assets

  307   873   -   307 

Net Cash Provided by (Used in) Investing Activities

  28,671   (125,052)

Net Cash (Used in) Provided by Investing Activities

  (620,310)  105,968 
 

Financing Activities:

            

Net change in deposits

 (70,216) 8,224 

Net change in short-term borrowings

 (5,601) 3,285 

Net change in:

        

Deposits

 655,791  (136,577)

Short-term borrowings

 55,243  3,334 

Exercise of stock options

 11,177  13,245  2,838  8,310 

Retirement of common stock

 (488) (524) (9,866) (488)

Common stock dividends paid

  (32,849)  (31,944)  (22,220)  (21,786)

Net Cash Used in Financing Activities

  (97,977)  (7,714)

Net Cash Provided by (Used in) Financing Activities

  681,786   (147,207)

Net Change In Cash and Due from Banks

 (4,645) (52,342) 127,399  (1,698)

Cash and Due from Banks at Beginning of Period

  420,284   575,002   373,421   420,284 

Cash and Due from Banks at End of Period

 $415,639  $522,660  $500,820  $418,586 
  

Supplemental Cash Flow Disclosures:

            

Supplemental disclosure of non cash activities:

      

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

 $23,587  $-  $1,639  $23,087 

Amount recognized upon initial adoption of ASU 2016-02 included above

 15,325  - 

Loan collateral transferred to other real estate owned

 -  - 

Amount recognized upon initial adoption of ASU 2016-02

 -  15,325 

Securities purchases pending settlement

 20,114  -  13,632  - 

Supplemental disclosure of cash flow activities:

      

Cash paid for amounts included in operating lease liabilities

 5,123  -  3,276  3,411 

Interest paid for the period

 1,417  1,440  825  874 

Income tax payments for the period

 16,021  7,028  11,900  12,910 

 

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 ninesix months ended SeptemberJune 30, 20192020 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, 2018.2019.

 

 

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, 2018.2019. 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.

 

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

 

Certain amounts in prior periods have been reclassified to conform to the current presentation.

 

Recently Adopted Accounting Standards

 

In the ninesix months ended SeptemberJune 30, 2019,2020, the Company adopted the following new accounting guidance:

FASB ASU 2016-02,Leases (Topic 842), was issued February 25, 2016. The provisions of the new standard require lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP.


The Company adopted the ASU provisions effective
January 1, 2019, and elected the modified retrospective transition approach. The Company elected the package of practical expedients provided in the ASU, which allowed the Company to rely on lease classification determinations made under prior accounting guidance and forego reevaluation of (i) whether any existing contracts are or contain a lease, (ii) whether existing leases are operating or finance leases, and (iii) the initial direct cost for any existing leases. The Company also elected to combine lease and non-lease components and exempt short-term leases with an original term of one year or less from on-balance sheet recognition. The implementing entry recognized a lease liability of $15.3 million and right-of-use asset of $15.3 million for facilities leases. The change in occupancy and equipment expense was not material.

-9-

FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The Company adopted the ASU provisions on January 1, 2019. The implementing entry reduced the carrying value of investment securities, specifically obligations of states and political subdivisions, by $3.1 million and reduced retained earnings by $2.8 million, net of tax. The change in premium amortization method was not material to revenue recognition.

FASB ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, was issued August 2017.  The ASU expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.  The ASU also provides for a one-time reclassification of prepayable assets from held-to-maturity (HTM) to available for sale (AFS) regardless of derivative use.

The Company adopted the ASU provisions on January 1, 2019. 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. The Company evaluated the prepayable assets in the HTM portfolio and did not effect a one-time reclassification of prepayable assets from HTM to the AFS upon implementation.

Recently Issued Accounting Standards

 

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

 

The Company will be required to adoptadopted the ASU provisions on a modified retrospective basis on January 1, 2020. Management has evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management has preliminarily measured historical loss rates for each portfolio segment. Management has also segmented debt securities held to maturity, selected methods to estimate losses for each segment, and preliminarily measured a loss estimate. Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. The ultimate adjustment to the allowance for loancredit losses will be accomplishedwas recorded through an offsetting after-tax adjustment to shareholders’ equity. EconomicThe implementing entry increased allowance for credit losses by $2,017 thousand, reduced allowance for credit losses for unfunded credit commitments by $2,107 thousand and increased retained earnings by $52 thousand.

- 9-

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

  

January 1, 2020

 
  

Balance,

  

Impact of

  

As reported

 
  

prior to adoption

  

adoption of

  

under

 
  

of ASU 2016-13

  

ASU 2016-13

  

ASU 2016-13

 
  

(In thousands)

 

Assets:

            

Allowance for credit losses on loans:

            

Commercial

 $4,959  $3,385  $8,344 

Commercial real estate

  4,064   618   4,682 

Construction

  109   (31)  78 

Residential real estate

  206   (132)  74 

Consumer and other installment loans

  6,445   1,878   8,323 

Unallocated

  3,701   (3,701)  - 

Allowance for credit losses on loans

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

Allowance for credit losses on debt securities held to maturity

  -   16   16 
             

Liabilities:

            

Allowance for credit losses for unfunded commitments 

  2,160   (2,107)  53 

Debt Securities. Debt securities consist of the U.S. Treasury, securities of government sponsored entities, states, counties, municipalities, corporations, agency and non-agency mortgage-backed securities, 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.

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 onethird-party source. When third-party information is not available, valuation adjustments are estimated in good faith by Management and classified as Level 3 in the fair value hierarchy.

The Company follows the guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance when performing investment security pre-purchase analysis or evaluating investment securities for credit loss. Credit ratings issued by recognized rating agencies are considered in the Company’s analysis only as a guide to the historical default rate associated with similarly-rated bonds.

To the extent that debt securities in the held-to-maturity portfolio share common risk characteristics, estimated expected credit losses are calculated in a manner like that used for loans held for investment. That is, for pools of such securities with common risk characteristics, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the securities on those historical credit losses. Expected credit loss on each security in the held-to-maturity portfolio that do not share common risk characteristics with any of the pools of debt securities is individually evaluated and a reserve for credit losses is established at the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the security. For certain classes of debt securities, the bank considers the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the compositionexpectation that nonpayment of the amortized cost basis is or continues to be zero. Therefore, for those securities, the bank does not record expected credit losses.

- 10-

AFS debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. For AFS 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 securities are included in earnings using the specific identification method.

Nonmarketable Equity Securities. Nonmarketable equity securities include securities that are not publicly traded, such as Visa Class B common stock, and securities acquired to meet regulatory requirements, such as Federal Reserve Bank stock, which are restricted. These restricted securities are accounted for under the cost method and are included in other assets. The Company reviews those assets accounted for under the cost method at least quarterly. The Company’s review typically includes an analysis of the facts and circumstances of each investment, the expectations for the investment’s cash flows and capital needs, the viability of its business model and any exit strategy. When the review indicates that impairment exists the asset value is reduced to fair value. The Company recognizes the estimated loss in noninterest income.

Loans. Loans are stated at the principal amount outstanding, net of unearned discount and unamortized deferred fees and costs. Interest is accrued daily on the outstanding principal balances and included in other assets. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, some loans secured by real estate and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans on a cost-recovery method until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Nonaccrual loans are reinstated to accrual status when none of the loan’s principal and interest is past due and improvements in credit quality eliminate doubt as to the full collectability of both principal and interest, or the loan otherwise becomes well secured and in the process of collection. Certain consumer loans or auto receivables are charged off against the allowance for credit losses when they become 120 days past due.

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

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.

- 11-

The preparation of these financial statements requires Management to estimate the amount of expected losses over the expected contractual life of our 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 portfolioreview system, adequacy of lending Management and debt securities heldstaff, 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 maturitythe 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 time of adoption will influencedifference between the extentamortized cost basis in the loan and the fair value of the adopting accounting adjustment.underlying collateral adjusted for costs to sell. For other individually evaluated loans that are not collateral dependent, a credit loss reserve is established at the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate. The impact of an expected TDR modification is included in the allowance for credit losses when management determines a TDR modification is likely.

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

Liability for Off-Balance Sheet Credit Exposures. Off-balance sheet credit exposures relate to letters of credit and unfunded loan commitments for commercial, construction and consumer loans. The Company maintains a separate allowance for credit losses from off-balance-sheet credit exposures, which is included within other liabilities on the consolidated statements of financial condition. Increases or reductions to the Company’s allowance for credit losses from off-balance sheet credit exposures are recorded in other expenses. Management expectsestimates 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 develop an aggregateestimate 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 December 31, 2019.may be drawn prior to the cancellation of the arrangement.

 

- 12-

FASB ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The ASU is part of the disclosure framework project, where the primary focus is to improve the effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to Fair Value Measurements.

 

The provisions of the ASU arewere effective January 1, 2020 with the option to early adopt any removed or modified disclosures upon issuance of the ASU. The Company early adopted the provisions to remove and/or modify relevant disclosures in the “Fair Value Measurements” note to the unaudited consolidated financial statements. The requirement to include additional disclosures will bewas adopted by the Company January 1, 2020. The additional disclosures willdid not affect the financial results upon adoption.

Recently Issued Accounting Standards

FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, was issued December 2019. The ASU is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This guidance effective for public entities for fiscal years beginning after December 15, 2020, and for interim period within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning January 1, 2021. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

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

 

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-10-
- 13-

 

 

Note 3:3: Investment Securities

 

Effective January 1, 2018, upon adoption of ASU 2016-01, equity securities included in the Company’s available for sale portfolio of $1,800 thousand were reclassified to equity securities. The reclassificationmarket value of equity securities resultedwas $1,797 thousand at June 30, 2019. During the six months ended June 30, 2019, the Company recognized gross unrealized holding gains of $50 thousand in recording a cumulative effect adjustment to decrease retained earnings by $142 thousand, net of tax.

earnings. The Company had no0 equity securities at SeptemberJune 30, 2020 and December 31, 2019 due to the sales of such securities during the third quarter 2019. The market value of equity securities was $1,747 thousand at December 31, 2018.

During the quarter and ninesix months ended SeptemberJune 30, 2019,2020, the Company recognized gross unrealized holding gains of $50 thousand in earnings. During theprovided nineno months ended September 30, 2018, the Company recognized gross unrealized holding losses of $66 thousand in earnings.

provision for credit loss on debt securities held to maturity. 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 cumulative other comprehensive income, and debt securities held to maturity, which are carried at amortized cost, before allowance for credit losses of $16 thousand, follows:

 

 

At September 30, 2019

  

At June 30, 2020

 
   

Gross

 

Gross

      

Gross

 

Gross

   
 

Amortized

 

Unrealized

 

Unrealized

 

Fair

  

Amortized

 

Unrealized

 

Unrealized

 

Fair

 
 

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

 
 

(In thousands)

  

(In thousands)

 

Debt securities available for sale

Debt securities available for sale

 

Debt securities available for sale

       

U.S. Treasury securities

 $44,758  $68  $-  $44,826 

Securities of U.S. Government sponsored entities

 122,245  23  (160) 122,108 

Agency residential mortgage-backed securities (MBS)

 976,066  10,294  (6,609) 979,751 

Non-agency residential MBS

 101  3  -  104 

Agency residential mortgage-backed securities ("MBS")

 $811,331  $28,755  $(1) $840,085 

Agency commercial MBS

 3,748  3  -  3,751  3,638  -  (9) 3,629 

Securities of U.S. Government entities

 786  -  (9) 777  171  -  -  171 

Obligations of states and political subdivisions

 161,506  3,944  (47) 165,403  147,260  4,932  (38) 152,154 

Corporate securities

  1,645,518   24,520   (2,991)  1,667,047  2,170,503  100,018  (1,110) 2,269,411 

Commercial paper

 299,742  45  (205) 299,582 

Collateralized Loan Obligations

  142,652   738   (52)  143,338 

Total debt securities available for sale

  2,954,728   38,855   (9,816)  2,983,767   3,575,297   134,488   (1,415)  3,708,370 

Debt securities held to maturity

Debt securities held to maturity

 

Debt securities held to maturity

       

Agency residential MBS

 377,995  817  (2,647) 376,165  304,439  9,364  (45) 313,758 

Non-agency residential MBS

 2,471  62  -  2,533  2,112  14  -  2,126 

Obligations of states and political subdivisions

  412,750   7,804   (11)  420,543   331,746   8,760   -   340,506 

Total debt securities held to maturity

  793,216   8,683   (2,658)  799,241   638,297   18,138   (45)  656,390 

Total

 $3,747,944  $47,538  $(12,474) $3,783,008  $4,213,594  $152,626  $(1,460) $4,364,760 

 

 

At December 31, 2018

  

At December 31, 2019

 
   

Gross

 

Gross

      

Gross

 

Gross

   
 

Amortized

 

Unrealized

 

Unrealized

 

Fair

  

Amortized

 

Unrealized

 

Unrealized

 

Fair

 
 

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

 
 

(In thousands)

  

(In thousands)

 

Debt securities available for sale

Debt securities available for sale

 

Debt securities available for sale

    

U.S. Treasury securities

 $139,572  $5  $(3) $139,574  $19,999  $1  $-  $20,000 

Securities of U.S. Government sponsored entities

 167,228  65  (3,275) 164,018  111,251  14  (98) 111,167 

Agency residential MBS

 883,715  595  (30,439) 853,871 

Non-agency residential MBS

 113  1  -  114 

Agency residential mortgage-backed securities (MBS)

 934,592  10,996  (5,838) 939,750 

Agency commercial MBS

 1,869  -  (27) 1,842  3,711  -  (3) 3,708 

Securities of U.S. Government entities

 1,128  -  (9) 1,119  553  -  (9) 544 

Obligations of states and political subdivisions

 180,220  1,856  (2,985) 179,091  159,527  3,656  (44) 163,139 

Corporate securities

  1,337,608   1,075   (23,642)  1,315,041  1,805,479  29,183  (879) 1,833,783 

Collateralized Loan Obligations

  6,748   7   -   6,755 

Total debt securities available for sale

  2,711,453   3,597   (60,380)  2,654,670   3,041,860   43,857   (6,871)  3,078,846 

Debt securities held to maturity

Debt securities held to maturity

 

Debt securities held to maturity

       

Agency residential MBS

 447,332  249  (14,129) 433,452  353,937  766  (2,235) 352,468 

Non-agency residential MBS

 3,387  40  -  3,427  2,354  22  -  2,376 

Obligations of states and political subdivisions

  533,890   3,403   (2,727)  534,566   381,781   7,672   (1)  389,452 

Total debt securities held to maturity

  984,609   3,692   (16,856)  971,445   738,072   8,460   (2,236)  744,296 

Total

 $3,696,062  $7,289  $(77,236) $3,626,115  $3,779,932  $52,317  $(9,107) $3,823,142 

 

-11-
- 14-

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

 

 

At September 30, 2019

  

At June 30, 2020

 
 

Debt Securities Available

 

Debt Securities Held

  

Debt Securities Available

 

Debt Securities Held

 
 

for Sale

  

to Maturity

  

for Sale

  

to Maturity

 
 

Amortized

 

Fair

 

Amortized

 

Fair

  

Amortized

 

Fair

 

Amortized

 

Fair

 
 

Cost

  

Value

  

Cost

  

Value

  

Cost

  

Value

  

Cost

  

Value

 
 

(In thousands)

  

(In thousands)

 

Maturity in years:

Maturity in years:

       

Maturity in years:

       

1 year or less

 $284,550  $285,060  $64,092  $64,247  $528,253  $529,421  $57,015  $57,392 

Over 1 to 5 years

 1,182,895  1,199,153  179,576  182,635  1,062,469  1,116,754  146,003  149,824 

Over 5 to 10 years

 471,434  478,841  169,082  173,661  1,142,837  1,190,058  128,728  133,290 

Over 10 years

  35,934   37,107   -   -   26,769   28,423   -   - 

Subtotal

 1,974,813  2,000,161  412,750  420,543  2,760,328  2,864,656  331,746  340,506 

MBS

  979,915   983,606   380,466   378,698   814,969   843,714   306,551   315,884 

Total

 $2,954,728  $2,983,767  $793,216  $799,241  $3,575,297  $3,708,370  $638,297  $656,390 

 

  

At December 31, 2018

 
  

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

 $262,418  $261,976  $86,172  $86,148 

Over 1 to 5 years

  1,438,849   1,414,020   214,137   213,829 

Over 5 to 10 years

  85,817   85,877   232,544   233,515 

Over 10 years

  38,672   36,970   1,037   1,074 

Subtotal

  1,825,756   1,798,843   533,890   534,566 

MBS

  885,697   855,827   450,719   436,879 

Total

 $2,711,453  $2,654,670  $984,609  $971,445 

  

At December 31, 2019

 
  

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

 $294,698  $295,255  $70,378  $70,602 

Over 1 to 5 years

  1,104,775   1,122,391   161,911   165,126 

Over 5 to 10 years

  670,595   683,277   149,492   153,724 

Over 10 years

  33,489   34,465   -   - 

Subtotal

  2,103,557   2,135,388   381,781   389,452 

MBS

  938,303   943,458   356,291   354,844 

Total

 $3,041,860  $3,078,846  $738,072  $744,296 

 

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. At SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had 0no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

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-12-

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

 

 

Debt Securities Available for Sale

  

Debt Securities Available for Sale

 
 

At September 30, 2019

  

At June 30, 2020

 
 

No. of

 

Less than 12 months

  

No. of

 

12 months or longer

  

No. of

 

Total

  

No. of

 

Less than 12 months

  

No. of

  

12 months or longer

  

No. of

 

Total

 
 

Investment

   

Unrealized

 

Investment

   

Unrealized

 

Investment

   

Unrealized

  

Investment

   

Unrealized

 

Investment

    

Unrealized

 

Investment

   

Unrealized

 
 

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

 
 

($ in thousands)

  

($ in thousands)

 

Securities of U.S. Government sponsored entities

 2  $19,970  $(30) 4  $55,794  $(130) 6  $75,764  $(160)

Agency residential MBS

 1  3,750  (62) 49  400,690  (6,547) 50  404,440  (6,609) -  $-  $-  2  $337  $(1) 2  $337  $(1)

Agency commercial MBS

 1  3,629  (9) -  -  -  1  3,629  (9)

Securities of U.S. Government entities

 -  -  -  2  777  (9) 2  777  (9) 1  171  -  -  -  -  1  171  - 

Obligations of states and political subdivisions

 -  -  -  9  4,692  (47) 9  4,692  (47) -  -  -  2  2,169  (38) 2  2,169  (38)

Corporate securities

  16   146,067   (1,196)  21   166,633   (1,795)  37   312,700   (2,991) 5  44,582  (749) 4  20,409  (361) 9  64,991  (1,110)

Commercial paper

 6  149,670  (205) -  -  -  6  149,670  (205)

Collateralized Loan
Obligations

  3   28,812   (52)  -   -   -   3   28,812   (52)

Total

  19  $169,787  $(1,288)  85  $628,586  $(8,528)  104  $798,373  $(9,816)  16  $226,864  $(1,015)  8  $22,915  $(400)  24  $249,779  $(1,415)

- 15-

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

  

Debt Securities Held to Maturity

 
  

At June 30, 2020

 
  

No. of

  

Less than 12 months

  

No. of

  

12 months or longer

  

No. of

  

Total

 
  

Investment

      

Unrecognized

  

Investment

      

Unrecognized

  

Investment

      

Unrecognized

 
  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

 
  

($ in thousands)

 

Agency residential MBS

  3  $179  $-   4  $1,883  $(45)  7  $2,062  $(45)

Non-agency residential
MBS

  1   507   -   -   -   -   1   507   - 

Total

  4  $686  $-   4  $1,883  $(45)  8  $2,569  $(45)

Based upon the most recent evaluation, the unrealized losses on the Company’s debt securities available for sale were most likely caused by market conditions for these types of investments, particularly changes in risk-free interest rates and/or market bid-ask spreads. The Company does not intend to sell any debt securities available for sale and has concluded that it is more likely than not that it will not be required to sell the debt securities prior to recovery of the amortized cost basis. Therefore, the Company does not consider these debt securities to have credit related loss as of June 30, 2020.

The fair values of debt securities available for sale could decline in the future if the general economy deteriorates inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for debt securities declines. As a result, significant credit loss on debt securities available for sale may occur in the future.

As of June 30, 2020 and December 31, 2019, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $868,665 thousand and $760,365 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, 2019

 
  

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)

 

Securities of U.S.
Government
sponsored entities

  1  $9,951  $(49)  3  $45,877  $(49)  4  $55,828  $(98)

Agency residential MBS

  6   11,674   (100)  47   347,384   (5,738)  53   359,058   (5,838)

Agency commercial MBS

  1   3,708   (3)  -   -   -   1   3,708   (3)

Securities of U.S.
Government entities

  -   -   -   2   544   (9)  2   544   (9)

Obligations of states
and political
subdivisions

  -   -   -   7   4,163   (44)  7   4,163   (44)

Corporate securities

  8   71,577   (162)  11   64,380   (717)  19   135,957   (879)

Total

  16  $96,910  $(314)  70  $462,348  $(6,557)  86  $559,258  $(6,871)

 

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

 

 

Debt Securities Held to Maturity

  

Debt Securities Held to Maturity

 
 

At September 30, 2019

  

At December 31, 2019

 
 

No. of

 

Less than 12 months

  

No. of

 

12 months or longer

  

No. of

 

Total

  

No. of

 

Less than 12 months

  

No. of

 

12 months or longer

  

No. of

 

Total

 
 

Investment

   

Unrecognized

 

Investment

   

Unrecognized

 

Investment

   

Unrecognized

  

Investment

   

Unrecognized

 

Investment

   

Unrecognized

 

Investment

   

Unrecognized

 
 

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

 
 

($ in thousands)

  

($ in thousands)

 

Agency residential MBS

 7  $13,020  $(90) 57  $306,728  $(2,557) 64  $319,748  $(2,647) 6  $12,098  $(87) 54  $277,203  $(2,148) 60  $289,301  $(2,235)

Obligations of states and political subdivisions

  -   -   -   9   8,562   (11)  9   8,562   (11)  -   -   -   1   251   (1)  1   251   (1)

Total

  7  $13,020  $(90)  66  $315,290  $(2,568)  73  $328,310  $(2,658)  6  $12,098  $(87)  55  $277,454  $(2,149)  61  $289,552  $(2,236)

 

- 16-

The unrealized losses on the Company’s debt securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, 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. Substantially all of these securities continue to be investment grade rated by a major rating agency. One corporate bond with an amortized cost of $15.0 million and a fair value of $13.7$14.7 million at SeptemberJune 30, 2019,2020, is rated below investment grade. The $14.7 million corporate bond was issued by a pharmaceutical company which develops, manufactures and markets generic and branded human pharmaceuticals, as well as active pharmaceutical ingredients, to customers worldwide. The bond matures in 2021, and the issuing Company has refinanced much of its debt obligations beyond the maturity date. 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 does not intend to sell anyfollowing table presents the activity in the allowance for credit losses for debt securities held to maturity:

  

For

 
  

the Six Months

 
  

Ended June 30,

 
  

2020

 
  

(In thousands)

 

Allowance for credit losses:

    

Beginning balance, prior to adoption of ASU 2016-13

 $- 

Impact of adopting ASU 2016-13

  16 

Provision

  - 

Chargeoffs

  - 

Recoveries

  - 

Total ending balance

 $16 

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 has concluded that it is more likely than not that it will not be requiredremaining term to sellmaturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the debt securities priorassumed defaulted principal amounts to recovery ofestimate the amount for credit loss allowance.

The following table summarizes the amortized cost basis. Therefore, the Company does not consider these debt securities to be other-than-temporarily impaired as ofSeptember 30, 2019.

The fair values of the debt securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for debt securities declines. As a result, other than temporary impairments may occur in the future.

As of September 30, 2019 and December 31, 2018, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $721,741 thousand and $728,161 thousand, respectively.

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-13-

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

  

Debt Securities Available for Sale

 
  

At December 31, 2018

 
  

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)

 

U.S. Treasury securities

  2  $54,805  $(3)  -  $-  $-   2  $54,805  $(3)

Securities of U.S. Government sponsored entities

  1   990   (5)  9   117,963   (3,270)  10   118,953   (3,275)

Agency residential MBS

  8   107,497   (507)  58   640,210   (29,932)  66   747,707   (30,439)

Agency commercial MBS

  1   1,842   (27)  -   -   -   1   1,842   (27)

Securities of U.S. Government entities

  -   -   -   2   1,119   (9)  2   1,119   (9)

Obligations of states and political subdivisions

  32   26,452   (166)  71   67,121   (2,819)  103   93,573   (2,985)

Corporate securities

  38   308,157   (3,403)  79   722,740   (20,239)  117   1,030,897   (23,642)

Total

  82  $499,743  $(4,111)  219  $1,549,153  $(56,269)  301  $2,048,896  $(60,380)

 An analysis of gross unrecognized losses of the debt securities held to maturity portfolio follows:at June 30, 2020, aggregated by credit rating:

 

 

Debt Securities Held to Maturity

 
 

At December 31, 2018

  

Credit Risk Profile by Credit Rating

 
 

No. of

 

Less than 12 months

  

No. of

 

12 months or longer

  

No. of

 

Total

  

At June 30, 2020

 
 

Investment

   

Unrecognized

 

Investment

   

Unrecognized

 

Investment

   

Unrecognized

  

(In thousands)

 
 

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

AAA/AA/A

  

BBB

  

BB/B

  

Total

 
 

($ in thousands)

  �� 

Agency residential MBS

 16  $8,495  $(34) 78  $412,574  $(14,095) 94  $421,069  $(14,129) $304,439  $-  $-  $304,439 

Non-agency residential MBS

 1  26  -  -  -  -  1  26  -  1,082  -  1,030  2,112 

Obligations of states and political subdivisions

  97   83,633   (271)  142   151,546   (2,456)  239   235,179   (2,727)  331,645   101   -   331,746 

Total

  114  $92,154  $(305)  220  $564,120  $(16,551)  334  $656,274  $(16,856) $637,166  $101  $1,030  $638,297 

There were 0 debt securities held to maturity on nonaccrual status or past due 30 days or more as of June 30, 2020.

 

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

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 
                 

Taxable

 $19,586  $16,780  $56,992  $47,327 

Tax-exempt from federal income tax

  3,777   4,880   12,165   14,768 

Total interest income from investment securities

 $23,363  $21,660  $69,157  $62,095 

[The remainder of this page intentionally left blank]

  

For the Three Months

  

For the Six Months

 
  

Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

(In thousands)

 
                 

Taxable

 $22,920  $18,773  $44,884  $37,406 

Tax-exempt from regular federal income tax

  3,228   4,073   6,590   8,388 

Total interest income from investment securities

 $26,148  $22,846  $51,474  $45,794 

 

-14-
- 17-

 

Note 4:4: Loans, Allowance for Loan Losses/CreditLossesand Other Real Estate Owned

At December 31, 2018, the Company had $5,713 thousand in loans secured by residential real estate which are indemnified from loss by the FDIC up to 80% of principal; the indemnification expired February 6, 2019.

 

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

 

  

At September 30,

  

At December 31,

 
  

2019

  

2018

 
  

(In thousands)

 

Commercial

 $216,273  $275,080 

Commercial Real Estate

  579,227   580,480 

Construction

  6,678   3,982 

Residential Real Estate

  35,348   44,866 

Consumer Installment & Other

  295,703   302,794 

Total

 $1,133,229  $1,207,202 

Changes in the accretable yield for purchased loans were as follows:

  

For the

  

For the

 
  

Nine Months Ended

  

Year Ended

 
  

September 30, 2019

  

December 31, 2018

 

Accretable yield:

 

(In thousands)

 

Balance at the beginning of the period

 $182  $738 

Reclassification from nonaccretable difference

  1,103   1,119 

Accretion

  (368)  (1,675)

Balance at the end of the period

 $917  $182 
         

Accretion

 $(368) $(1,675)

Change in FDIC indemnification

  -   2 

(Increase) in interest income

 $(368) $(1,673)
     

At June 30,

  

At December 31,

 
     

2020

  

2019

 
     

(In thousands)

 

Commercial:

          

Paycheck Protection Program ("PPP") loans

 $240,815  $- 

Other

  198,978   222,085 

Total commercial

  439,793   222,085 

Commercial Real Estate

  572,421   578,758 

Construction

  151   1,618 

Residential Real Estate

  27,147   32,748 

Consumer Installment & Other

  276,847   291,455 

Total

 $1,316,359  $1,126,664 

 

The following summarizes activity in the allowance for loan losses/credit losses:

 

  

Allowance for Loan Losses

 
  

For the Three Months Ended September 30, 2019

 
                  

Consumer

         
      

Commercial

      

Residential

  

Installment

         
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for loan losses:

                            

Balance at beginning of period

 $5,235  $4,057  $1,117  $238  $5,418  $4,052  $20,117 

(Reversal) provision

  (596)  (1)  482   (16)  655   (524)  - 

Chargeoffs

  -   -   -   -   (1,039)  -   (1,039)

Recoveries

  233   12   -   -   505   -   750 

Total allowance for loan losses

 $4,872  $4,068  $1,599  $222  $5,539  $3,528  $19,828 

 

Allowance for Loan Losses

  

Allowance for Credit Losses

 
 

For the Nine Months Ended September 30, 2019

  

For the Three Months Ended June 30, 2020

 
         

Consumer

              

Consumer

   
   

Commercial

   

Residential

 

Installment

        

Commercial

   

Residential

 

Installment

   
 

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
 

(In thousands)

  

(In thousands)

 

Allowance for loan losses:

 

Allowance for credit losses:

             

Balance at beginning of period

 $6,311  $3,884  $1,465  $869  $5,645  $3,177  $21,351  $8,336  $4,753  $107  $70  $11,538  $24,804 

(Reversal) provision

 (1,817) 146  134  (647) 1,833  351  -  (357) (142) (100) (13) 612  - 

Chargeoffs

 (71) -  -  -  (3,332) -  (3,403) -  -  -  -  (804) (804)

Recoveries

  449   38   -   -   1,393   -   1,880   93   12   -   -   424   529 

Total allowance for loan losses

 $4,872  $4,068  $1,599  $222  $5,539  $3,528  $19,828 

Total allowance for credit losses

 $8,072  $4,623  $7  $57  $11,770  $24,529 

 

 

  

Allowance for Credit Losses

 
  

For the Six Months Ended June 30, 2020

 
                  

Consumer

         
      

Commercial

      

Residential

  

Installment

         
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                            

Balance at beginning of period, prior to adoption of ASU 2016-13

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

Impact of adopting ASU 2016-13

  3,385   618   (31)  (132)  1,878   (3,701)  2,017 

Adjusted beginning balance

  8,344   4,682   78   74   8,323   -   21,501 

(Reversal) provision

  (330)  (84)  (71)  (17)  4,802   -   4,300 

Chargeoffs

  (178)  -   -   -   (2,199)  -   (2,377)

Recoveries

  236   25   -   -   844   -   1,105 

Total allowance for credit losses

 $8,072  $4,623  $7  $57  $11,770  $-  $24,529 

The significant increase in the allowance for credit losses for consumer installment and other loans was due to expected credit losses associated with forecasted unemployment impacted by the COVID-19 pandemic. The growth in commercial loans was due to originations of PPP loans which are 100% guaranteed by the Small Business Administration (“SBA”). Loan proceeds used for eligible payroll and certain other operating costs are to be forgiven with repayment of loan principal and accrued interest made by the SBA. Management does not expect credit losses on PPP loans.

  

Allowance for Loan Losses

 
  

For the Three Months Ended June 30, 2019

 
                  

Consumer

         
      

Commercial

      

Residential

  

Installment

         
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for loan losses:

                         

Balance at beginning of period

 $6,506  $3,927  $853  $261  $5,481  $3,449  $20,477 

(Reversal) provision

  (1,346)  116   264   (23)  386   603   - 

Chargeoffs

  (48)  -   -   -   (925)  -   (973)

Recoveries

  123   14   -   -   476   -   613 

Total allowance for loan losses

 $5,235  $4,057  $1,117  $238  $5,418  $4,052  $20,117 

-15-
- 18-

 

  

Allowance for Loan Losses

 
  

For the Three Months Ended September 30, 2018

 
                  

Consumer

         
      

Commercial

      

Residential

  

Installment

         
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for loan losses:

                            

Balance at beginning of period

 $8,275  $3,789  $210  $1,064  $5,943  $3,759  $23,040 

(Reversal) provision

  (184)  372   44   (120)  (137)  25   - 

Chargeoffs

  (384)  (240)  -   -   (845)  -   (1,469)

Recoveries

  103   -   -   -   353   -   456 

Total allowance for loan losses

 $7,810  $3,921  $254  $944  $5,314  $3,784  $22,027 

 

 

Allowance for Loan Losses

  

Allowance for Loan Losses

 
 

For the Nine Months Ended September 30, 2018

  

For the Six Months Ended June 30, 2019

 
         

Consumer

              

Consumer

     
   

Commercial

   

Residential

 

Installment

        

Commercial

   

Residential

 

Installment

     
 

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
 

(In thousands)

  

(In thousands)

 

Allowance for loan losses:

 

Allowance for loan losses:

             

Balance at beginning of period

 $7,746  $3,849  $335  $995  $6,418  $3,666  $23,009  $6,311  $3,884  $1,465  $869  $5,645  $3,177  $21,351 

(Reversal) provision

 (863) 312  (81) (51) 565  118  -  (1,221) 147  (348) (631) 1,178  875  - 

Chargeoffs

 (425) (240) -  -  (3,015) -  (3,680) (71) -  -  -  (2,293) -  (2,364)

Recoveries

  1,352   -   -   -   1,346   -   2,698   216   26   -   -   888   -   1,130 

Total allowance for loan losses

 $7,810  $3,921  $254  $944  $5,314  $3,784  $22,027  $5,235  $4,057  $1,117  $238  $5,418  $4,052  $20,117 

 

The allowance for loan losses and recorded investment in loans evaluated for impairment were as follows:

 

  

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

 
  

At September 30, 2019

 
  

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for loan losses:

                            

Individually evaluated for impairment

 $2,550  $-  $-  $-  $-  $-  $2,550 

Collectively evaluated for impairment

  2,322   4,068   1,599   222   5,539   3,528   17,278 

Total

 $4,872  $4,068  $1,599  $222  $5,539  $3,528  $19,828 

Carrying value of loans:

                            

Individually evaluated for impairment

 $8,647  $7,445  $-  $193  $44  $-  $16,329 

Collectively evaluated for impairment

  207,626   571,782   6,678   35,155   295,659   -   1,116,900 

Total

 $216,273  $579,227  $6,678  $35,348  $295,703  $-  $1,133,229 

 

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

  

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

 
 

At December 31, 2018

  

At December 31, 2019

 
 

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Unallocated

  

Total

  

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Unallocated

  

Total

 
 

(In thousands)

  

(In thousands)

 

Allowance for loan losses:

                

Individually evaluated for impairment

 $2,752  $-  $-  $-  $-  $-  $2,752  $2,413  $-  $-  $-  $-  $-  $2,413 

Collectively evaluated for impairment

  3,559   3,884   1,465   869   5,645   3,177   18,599   2,546   4,064   109   206   6,445   3,701   17,071 

Total

 $6,311  $3,884  $1,465  $869  $5,645  $3,177  $21,351  $4,959  $4,064  $109  $206  $6,445  $3,701  $19,484 

Carrying value of loans:

                

Individually evaluated for impairment

 $9,944  $8,438  $-  $717  $143  $-  $19,242  $8,182  $7,409  $-  $190  $43  $-  $15,824 

Collectively evaluated for impairment

  265,136   572,042   3,982   44,149   302,651   -   1,187,960   213,903   571,349   1,618   32,558   291,412   -   1,110,840 

Total

 $275,080  $580,480  $3,982  $44,866  $302,794  $-  $1,207,202  $222,085  $578,758  $1,618  $32,748  $291,455  $-  $1,126,664 

 

The Company’s customers are small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Company’s subsidiary, Westamerica Bank (the “Bank”) maintains a Loan Review Department which reports directly to the Audit Committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans and validates management assigned credit risk grades on evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” 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.

 

-16-

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

 

 

Credit Risk Profile by Internally Assigned Grade

  

Credit Risk Profile by Internally Assigned Grade

 
 

At September 30, 2019

  

At June 30, 2020

 
 

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Total

  

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Total

 
 

(In thousands)

  

(In thousands)

 

Grade:

                          

Pass

 $207,350  $568,009  $6,678  $33,629  $293,893  $1,109,559  $431,326  $561,272  $151  $25,750  $274,325  $1,292,824 

Substandard

 8,923  11,218  -  1,719  1,395  23,255  8,467  11,149  -  1,397  1,712  22,725 

Doubtful

 -  -  -  -  111  111  -  -  -  -  401  401 

Loss

  -   -   -   -   304   304   -   -   -   -   409   409 

Total

 $216,273  $579,227  $6,678  $35,348  $295,703  $1,133,229  $439,793  $572,421  $151  $27,147  $276,847  $1,316,359 

 

 

Credit Risk Profile by Internally Assigned Grade

  

Credit Risk Profile by Internally Assigned Grade

 
 

At December 31, 2018

  

At December 31, 2019

 
 

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Total

  

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Total

 
 

(In thousands)

  

(In thousands)

 

Grade:

                          

Pass

 $264,634  $567,578  $3,982  $43,112  $300,553  $1,179,859  $213,542  $567,525  $1,618  $31,055  $289,424  $1,103,164 

Substandard

 10,446  12,902  -  1,754  1,556  26,658  8,543  11,233  -  1,693  1,329  22,798 

Doubtful

 -  -  -  -  135  135  -  -  -  -  308  308 

Loss

  -   -   -   -   550   550   -   -   -   -   394   394 

Total

 $275,080  $580,480  $3,982  $44,866  $302,794  $1,207,202  $222,085  $578,758  $1,618  $32,748  $291,455  $1,126,664 

 

Credit risk profile reflects internally assigned grades of purchased covered loans without regard to FDIC indemnification on $5,713 thousand in loans secured by residential real estate at

- December 31, 2018. 19The indemnification expired February 6, 2019.

-

The following tables summarize loans by delinquency and nonaccrual status:

 

 

Summary of Loans by Delinquency and Nonaccrual Status

  

Summary of Loans by Delinquency and Nonaccrual Status

 
 

At September 30, 2019

  

At June 30, 2020

 
 

Current and Accruing

  

30-59 Days Past Due and Accruing

  

60-89 Days Past Due and Accruing

  

Past Due 90 Days or More and Accruing

  

Nonaccrual

  

Total Loans

  

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)

  

(In thousands)

 

Commercial

 $215,787  $339  $119  $2  $26  $216,273  $439,449  $220  $9  $-  $115  $439,793 

Commercial real estate

 574,321  729  -  -  4,177  579,227  564,554  3,675  357  -  3,835  572,421 

Construction

 6,678  -  -  -  -  6,678  151  -  -  -  -  151 

Residential real estate

 34,064  828  456  -  -  35,348  26,204  521  422  -  -  27,147 

Consumer installment and other

  291,638   2,879   737   349   100   295,703   274,349   1,480   445   290   283   276,847 

Total

 $1,122,488  $4,775  $1,312  $351  $4,303  $1,133,229  $1,304,707  $5,896  $1,233  $290  $4,233  $1,316,359 

 

 

Summary of Loans by Delinquency and Nonaccrual Status

  

Summary of Loans by Delinquency and Nonaccrual Status

 
 

At December 31, 2018

  

At December 31, 2019

 
 

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

  

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)

  

(In thousands)

 

Commercial

 $274,045  $781  $254  $-  $-  $275,080  $221,199  $531  $158  $-  $197  $222,085 

Commercial real estate

 574,853  617  785  -  4,225  580,480  573,809  432  421  -  4,096  578,758 

Construction

 3,982  -  -  -  -  3,982  1,618  -  -  -  -  1,618 

Residential real estate

 43,372  789  189  -  516  44,866  31,934  274  540  -  -  32,748 

Consumer installment and other

  297,601   3,408   1,107   551   127   302,794   286,391   2,960   1,517   440   147   291,455 

Total

 $1,193,853  $5,595  $2,335  $551  $4,868  $1,207,202  $1,114,951  $4,197  $2,636  $440  $4,440  $1,126,664 

 

There was 0 allowance for credit losses allocated to loans on nonaccrual status as of June 30, 2020. There were 0 commitments to lend additional funds to borrowers whose loans were on nonaccrual status at SeptemberJune 30, 20192020 and December 31, 2018.2019.

-17-

 

The following summarizes impaired loans:loans as of December 31, 2019:

 

 

Impaired Loans

 
 

Impaired Loans

  

At December 31,

 
 

At September 30, 2019

  

At December 31, 2018

  

2019

 
   

Unpaid

     

Unpaid

      

Unpaid

   
 

Recorded

 

Principal

 

Related

 

Recorded

 

Principal

 

Related

  

Recorded

 

Principal

 

Related

 
 

Investment

  

Balance

  

Allowance

  

Investment

  

Balance

  

Allowance

  

Investment

  

Balance

  

Allowance

 
 

(In thousands)

  

With no related allowance recorded:

                    

Commercial

 $72  $72  $-  $755  $759  $-  $21  $21  $- 

Commercial real estate

 7,953  9,400  -  8,438  10,373  -  7,408  8,856  - 

Residential real estate

 193  224  -  717  747  -  190  220  - 

Consumer installment and other

  144   178   -   270   377   -   43   43   - 

Total with no related allowance recorded

  8,362   9,874   -   10,180   12,256   -   7,662   9,140   - 
  

With an allowance recorded:

                    

Commercial

  8,600   8,600   2,550   9,189   9,189   2,752   8,160   8,160   2,413 

Total with an allowance recorded

  8,600   8,600   2,550   9,189   9,189   2,752   8,160   8,160   2,413 

Total

 $16,962  $18,474  $2,550  $19,369  $21,445  $2,752  $15,822  $17,300  $2,413 

 

Impaired loans include troubled debt restructured loans. Impaired loans at September 30,December 31, 2019, included $6,754$6,713 thousand of restructured loans, $3,670 thousand of which were on nonaccrual status. Impaired loans at December 31, 2018, included $8,579 thousand of restructured loans, $4,225 thousand of which were on nonaccrual status.

 

  

Impaired Loans

 
  

For the Three Months Ended September 30,

  

For the Nine Months Ended September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

Average

  

Recognized

  

Average

  

Recognized

  

Average

  

Recognized

  

Average

  

Recognized

 
  

Recorded

  

Interest

  

Recorded

  

Interest

  

Recorded

  

Interest

  

Recorded

  

Interest

 
  

Investment

  

Income

  

Investment

  

Income

  

Investment

  

Income

  

Investment

  

Income

 
  

(In thousands)

 

Commercial

 $8,701  $144  $10,426  $175  $9,404  $476  $10,671  $495 

Commercial real estate

  7,968   60   11,282   189   7,133   333   12,291   615 

Residential real estate

  194   4   203   4   196   10   205   12 

Consumer installment and other

  99   -   173   4   103   -   261   10 

Total

 $16,962  $208  $22,084  $372  $16,836  $819  $23,428  $1,132 
- 20-

 
  

Impaired Loans

 
  

For the Three Months

  

For the Six Months

 
  

Ended June 30, 2019

 
  

Average

  

Recognized

  

Average

  

Recognized

 
  

Recorded

  

Interest

  

Recorded

  

Interest

 
  

Investment

  

Income

  

Investment

  

Income

 
  

(In thousands)

 

Commercial

 $9,662  $165  $9,755  $332 

Commercial real estate

  6,539   126   6,716   273 

Residential real estate

  196   3   197   6 

Consumer installment and other

  77   -   105   - 

Total

 $16,474  $294  $16,773  $611 

 

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

 

 

Troubled Debt Restructurings

  

Troubled Debt Restructurings

 
 

At September 30, 2019

  

At June 30, 2020

 
       

Period-End

        

Period-End

 
       

Individual

        

Individual

 
 

Number of

 

Pre-Modification

 

Period-End

 

Impairment

  

Number of

 

Pre-Modification

 

Period-End

 

Impairment

 
 

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

  

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

 
 

($ in thousands)

  

($ in thousands)

 

Commercial

 3  $327  $44  $18 

Commercial real estate

 6  8,830  6,517  -  6  $8,367  $6,139  $- 

Residential real estate

  1   241   193   -   1   241   185   - 

Total

  10  $9,398  $6,754  $18   7  $8,608  $6,324  $- 

 

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-18-

 

Troubled Debt Restructurings

  

Troubled Debt Restructurings

 
 

At December 31, 2018

  

At December 31, 2019

 
       

Period-End

        

Period-End

 
       

Individual

        

Individual

 
 

Number of

 

Pre-Modification

 

Period-End

 

Impairment

  

Number of

 

Pre-Modification

 

Period-End

 

Impairment

 
 

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

  

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

 
 

($ in thousands)

  

($ in thousands)

 

Commercial

 4  $2,274  $811  $19  2  $278  $32  $11 

Commercial real estate

 8  9,237  7,568  -  6  8,367  6,492  - 

Residential real estate

  1   241   200   -   1   241   189   - 

Total

  13  $11,752  $8,579  $19   9  $8,886  $6,713  $11 

 

During the three and ninesix months ended SeptemberJune 30, 2019 and September 30, 2018,2020, the Company did not modify any loans that were considered troubled debt restructurings,TDRs. Section 4013 of the CARES Act allowed certain loan modifications for borrowers impacted by the COVID-19 pandemic to be excluded from TDR accounting. During the three and hadsix months ended June 30, 2020, the Company modified loans under Section 4013 of the CARES Act, generally granting 90 day deferrals of principal and interest payments. Automobile and other consumer loan deferrals were $29 million and $5 million, respectively. Commercial real estate loans with deferred payments totaled $66 million, primarily for hospitality and retail properties. Commercial loans with deferred payments totaled $3 million. During the three and six months ended June 30, 2019, the Company did not modify any loans that were considered TDRs. There were 0 chargeoffs related to TDRs made during the three and six months ended June 30, 2020 and 2019. During the three and six months ended June 30, 2020 and 2019, 0 troubled debt restructured loans that defaulted within 12 months of the modification date. A troubled debt restructuringTDR is considered to be in default when payments are ninety days or more past due.

 

TDRs of $6,324 thousand included loans of $3,420 thousand on nonaccrual status at June 30, 2020. No allowance for credit losses was allocated to one commercial real estate loan secured by real property with a balance of $3,240 thousand, which was considered collateral-dependent at June 30, 2020. At June 30, 2020, $281 thousand of indirect consumer installment loans secured by personal property were past due 90 days or more and considered collateral-dependent and 2 residential real estate loans totaling $283 thousand secured by real property were considered collateral-dependent. There were 0no other collateral-dependent loans restricted dueat June 30, 2020. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to collateral requirements atbe provided substantially through the operation or sale of the collateral.

- September 30, 2019 21-

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

  

At June 30, 2020

 
                                  

Revolving

     
                                  

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2015

  

2016

  

2017

  

2018

  

2019

  

2020

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial loans by grade

                                 

Pass

 $22,973  $5,962  $27,294  $12,096  $22,572  $45,375  $259,214  $395,486  $35,840  $431,326 

Substandard

  80   -   2   -   -   -   7,932   8,014   453   8,467 

Doubtful

  -   -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   -   - 

Total

 $23,053  $5,962  $27,296  $12,096  $22,572  $45,375  $267,146  $403,500  $36,293  $439,793 

  

At June 30, 2020

 
                                  

Revolving

     
                                  

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2015

  

2016

  

2017

  

2018

  

2019

  

2020

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial real estate loans by grade

                                     

Pass

 $98,947  $51,492  $50,154  $104,502  $95,509  $95,999  $64,669  $561,272  $-  $561,272 

Substandard

  3,136   1,321   5,735   109   -   -   848   11,149   -   11,149 

Doubtful

  -   -   -   -   -   -      -   -   - 

Loss

  -   -   -   -   -   -      -   -   - 

Total

 $102,083  $52,813  $55,889  $104,611  $95,509  $95,999  $65,517  $572,421  $-  $572,421 

  

At June 30, 2020

 
                                  

Revolving

     
                                  

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2015

  

2016

  

2017

  

2018

  

2019

  

2020

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Construction loans by grade

                                     

Pass

 $-  $-  $-  $-  $-  $-  $-  $-  $151  $151 

Substandard

  -   -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   -   - 

Total

 $-  $-  $-  $-  $-  $-  $-  $-  $151  $151 

  

At June 30, 2020

 
                                  

Revolving

     
                                  

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2015

  

2016

  

2017

  

2018

  

2019

  

2020

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Residential Real Estate loans by grade

                                     

Pass

 $25,750  $-  $-  $-  $-  $-  $-  $25,750  $-  $25,750 

Substandard

  1,397   -   -   -   -   -   -   1,397   -   1,397 

Doubtful

  -   -   -   -   -   -   -   -   -   - 

Loss

  -   -   -   -   -   -   -   -   -   - 

Total

 $27,147  $-  $-  $-  $-  $-  $-  $27,147  $-  $27,147 

The Company considers the delinquency and December 31, 2018.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, 2020

 
                                  

Revolving

     
                                  

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2015

  

2016

  

2017

  

2018

  

2019

  

2020

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Consumer installment and other loans by delinquency and nonaccrual status

                             

Current

 $5,699  $7,230  $20,962  $24,868  $51,487  $67,430  $64,259  $241,935  $32,414  $274,349 

30-59 days past due

  31   61   102   206   200   316   248   1,164   316   1,480 

60-89 days past due

  8   23   30   32   59   153   20   325   120   445 

Past due 90 days or more

  6   35   29   50   79   85   3   287   3   290 

Nonaccrual

  -   -   -   -   -   -   -   -   283   283 

Total

 $5,744  $7,349  $21,123  $25,156  $51,825  $67,984  $64,530  $243,711  $33,136  $276,847 

 

There were 0no loans held for sale at SeptemberJune 30, 20192020 and December 31, 2018.2019.

 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company held total other real estate owned (OREO) of $43 thousand net ofthousand. There was no reserve of $-0- thousand applied against OREO at June 30, 2020 and $350 thousand net of reserve of $-0-  thousand, respectively. December 31, 2019. There were 0no foreclosed residential real estate properties at June 30, 2020 and 0 covered OREO at December 31, 2018.2019. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $114$283 thousand at SeptemberJune 30, 20192020 and $516$124 thousand at December 31, 2018.2019.

 

- 22-

 

Note 5:5: Concentration of Credit Risk

 

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loancredit losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loancredit losses, capital notes, and debentures of the bank. At SeptemberJune 30, 2019,2020, the Bank did not have credit extended to any one entity exceeding these limits. At SeptemberJune 30, 2019,2020, the Bank had 3331 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 $44,964$40,267 thousand and $53,891$43,129 thousand at SeptemberJune 30, 20192020 and December 31, 2018,2019, 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 SeptemberJune 30, 2019,2020, the Bank held corporate bonds in 88100 issuing entities and commercial paper in 12 issuing entities that exceeded $5 million for each issuer.

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-19-

 

Note 6:6: Other Assets and Other Liabilities

 

Other assets consisted of the following:

 

 

At September 30,

 

At December 31,

  

At June 30,

 

At December 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(In thousands)

  

(In thousands)

 

Cost method equity investments:

          

Federal Reserve Bank stock (1)

 $14,069  $14,069  $14,069  $14,069 

Other investments

  158   158   158   158 

Total cost method equity investments

 14,227  14,227  14,227  14,227 

Life insurance cash surrender value

 57,169  56,083  59,182  57,810 

Net deferred tax asset

 11,947  42,256  -  11,085 

Right-of-use asset

 19,721  -  15,757  17,136 

Limited partnership investments

 8,143  10,219  19,535  20,773 

Interest receivable

 25,511  25,834  32,322  28,797 

Prepaid assets

 3,530  4,658  4,140  3,737 

Other assets

  12,524   9,629   22,403   10,767 

Total other assets

 $152,772  $162,906  $167,566  $164,332 

 

(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 net deferred tax asset at September 30, 2019 of $11,947 thousand was net of deferred tax obligations of $8,585 thousand related to available for sale debt securities unrealized gains. The net deferred tax asset at December 31, 2018 of $42,256 thousand included deferred tax benefits of $16,787 thousand related to available for sale debt securities unrealized losses.

 

The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. On September 30, 2019, Visa Inc. announced a revised conversion rate applicable to its class B common stock resulting from its September 27, 2019 deposit of funds into its litigation escrow account. This funding reduced the conversion rate of class B common stock into class A common stock, which is unrestricted and trades actively on the New York Stock Exchange, from 1.6298 to 1.6228 per share, effective as of September 27, 2019. Visa Inc. class A common stock had a closing price of $172.01$193.17 per share on SeptemberJune 30, 2019,2020, the last day of stock market trading for the thirdsecond quarter 2019.2020. The ultimate value of the Company’s Visa Inc. class B shares is subject to the extent of Visa Inc.’s future litigation escrow fundings, the resulting conversion rate to class A common stock, and current and future trading restrictions on the class B common stock.

 

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At SeptemberJune 30, 2019,2020, this investment totaled $8,143$19,535 thousand and $4,754$15,054 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2018,2019, this investment totaled $10,219$20,773 thousand and $4,799$16,231 thousand of this amount representedrepresents outstanding equity capital commitments.commitments that are included in other liabilities. At SeptemberJune 30, 2019,2020, the $4,754$15,054 thousand of outstanding equity capital commitments are expected to be paid as follows, $601$3,831 thousand in the remainder of 2019, $2,027 thousand in 2020, $138$4,071 thousand in 2021, $261$5,983 thousand in 2022, $134$295 thousand in 2023, $1,041$24 thousand in 2024, and $552$302 thousand in 2025, $74 thousand in 2026 and $474 thousand in 2027or thereafter.

 

- 23-

The amounts recognized in net income for these investments include:

 

 

For the Three Months Ended

 

For the Nine Months Ended

  

For the Three Months Ended

 

For the Six Months Ended

 
 

September 30,

  

June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
 

(In thousands)

  

(In thousands)

 

Investment loss included in pre-tax income

 $600  $900  $1,800  $2,200  $600  $600  $1,200  $1,200 

Tax credits recognized in provision for income taxes

 225  336  675  1,008  225  225  450  450 

 

-20-

Other liabilities consisted of the following:

 

 

At September 30,

 

At December 31,

  

At June 30,

 

At December 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(In thousands)

  

(In thousands)

 

Net deferred tax liability

 $17,821  $- 

Operating lease liability

 $19,721  $-  15,757  17,136 

Securities purchases pending settlement

 13,632  - 

Other liabilities

  40,687   34,849   54,021   27,453 

Total other liabilities

 $60,408  $34,849  $101,231  $44,589 

The deferred tax liability at June 30, 2020 of $17,821 thousand, net of deferred tax benefits of $21,789 thousand, included deferred tax obligations of $39,341 thousand related to unrealized gains of $133,073 thousand on available for sale debt securities. The net deferred tax asset at December 31, 2019 of $11,085 thousand was net of deferred tax obligations of $10,934 thousand related to available for sale debt securities unrealized gains.

 

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 5five years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional 5five 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 SeptemberJune 30, 2019.2020.

 

As of SeptemberJune 30, 2019,2020, the Company recorded a lease liability of $19,721$15,757 thousand and a right-of-use asset of $19,721$15,757 thousand, respectively. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 3.823.8 years and 2.93%2.80%, respectively, at SeptemberJune 30, 2019.2020. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of SeptemberJune 30, 2019.2020.

 

Total lease costs during the three and ninesix months ended SeptemberJune 30, 2019,2020, of $1,726$1,657 thousand and $5,145$3,317 thousand, respectively, were recorded within occupancy and equipment expense. The Company did not have any material short-term or variable leases costs or sublease income during the ninesix months ended SeptemberJune 30, 2019.    2020.

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- 24-

 

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

 

  

Minimum
future lease
payments

 
  

At September 30,

 
  

2019

 
  

(In thousands)

 

Remaining three months of 2019

 $2,719 

2020

  6,283 

2021

  4,574 

2022

  3,632 

2023

  2,912 

Thereafter

  2,057 

Total minimum lease payments

  22,177 

Less: discount

  (2,456)

Present value of lease liability

 $19,721 

Minimum future rental payments under noncancelable operating leases as of December 31, 2018, prior to adoption of ASU 2016-02, were as follows:

[The remainder of this page intentionally left blank]

-21-

 

Minimum
future rental
payments

  

Minimum
future lease
payments

 
 

(In thousands)

  

At June 30,

 

2019

 $5,996 

2020

 4,409 
 

2020

 
 

(In thousands)

 

The remaining six months of 2020

 $3,046 

2021

 2,741  4,645 

2022

 1,921  3,703 

2023

 1,223  2,980 

2024

 1,565 

Thereafter

  1,044   708 

Total minimum lease payments

 $17,334   16,647 

Less: discount

  (890)

Present value of lease liability

 $15,757 

 

 

Note 7:7: 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 three and ninesix months ended SeptemberJune 30, 20192020 and year ended December 31, 2018.2019. 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 three and ninesix months ended SeptemberJune 30, 20192020 and year ended December 31, 20182019 0 such adjustments were recorded.

 

The carrying values of goodwill were:

 

  

At September 30, 2019

  

At December 31, 2018

 
  

(In thousands)

 

Goodwill

 $121,673  $121,673 
  

At June 30, 2020

  

At December 31, 2019

 
  

(In thousands)

 

Goodwill

 $121,673  $121,673 

 

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

 

  

At September 30, 2019

  

At December 31, 2018

 
  

Gross

      

Gross

     
  

Carrying

  

Accumulated

  

Carrying

  

Accumulated

 
  

Amount

  

Amortization

  

Amount

  

Amortization

 
  

(In thousands)

 

Core deposit intangibles

 $56,808  $(55,344) $56,808  $(54,879)

    

At June 30, 2020

  

At December 31, 2019

 
    

Gross

      

Gross

     
    

Carrying

  

Accumulated

  

Carrying

  

Accumulated

 
    

Amount

  

Amortization

  

Amount

  

Amortization

 
    

(In thousands)

 

Core deposit intangibles

 $56,808  $(55,563) $56,808  $(55,417)

 

As of SeptemberJune 30, 2019,2020, the current period and estimated future amortization expense for identifiable intangible assets was:

  

Total

 
  

Core

 
  

Deposit

 
  

Intangibles

 
  

(In thousands)

 

For the nine months ended September 30, 2019 (actual)

 $465 

Estimate for the remainder of year ending December 31, 2019

  73 

Estimate for year ending December 31, 2020

  287 

   2021

  269 

   2022

  252 

   2023

  236 

   2024

  222 

  

Total

 
  

Core

 
  

Deposit

 
  

Intangibles

 
  

(In thousands)

 

For the six months ended June 30, 2020 (actual)

 $146 

Estimate for the remainder of year ending December 31, 2020

  141 

Estimate for year ending December 31, 2021

  269 

   2022

  252 

   2023

  236 

   2024

  222 

   2025

  125 

 

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Note 8:8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

 

Deposits

  

Deposits

 
 

At September 30,

 

At December 31,

  

At June 30,

 

At December 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(In thousands)

  

(In thousands)

 

Noninterest-bearing

 $2,265,640  $2,243,251  $2,702,885  $2,240,112 

Interest-bearing:

          

Transaction

 910,566  929,346  997,593  931,888 

Savings

 1,445,210  1,498,991  1,605,169  1,471,284 

Time deposits less than $100 thousand

 92,300  102,654  84,717  88,355 

Time deposits $100 thousand through $250 thousand

 56,066  64,512  52,084  54,874 

Time deposits more than $250 thousand

  26,841   28,085   25,964   26,108 

Total deposits

 $4,796,623  $4,866,839  $5,468,412  $4,812,621 

 

Demand deposit overdrafts of $1,078$1,517 thousand and $980$1,055 thousand were included as loan balances at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $81$79 thousand and $246$158 thousand for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, and $91$82 thousand and $283$164 thousand for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively.

 

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

 

 

Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings

  

Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings

 
 

Remaining Contractual Maturity of the Agreements

  

Remaining Contractual Maturity of the Agreements

 
 

Overnight and Continuous

  

Overnight and Continuous

 
 

At September 30,

 

At December 31,

  

At June 30,

 

At December 31,

 
 

2019

  

2018

  

2020

  

2019

 

Repurchase agreements:

 

(In thousands)

  

(In thousands)

 

Collateral securing borrowings:

          

Securities of U.S. Government sponsored entities

 $75,784  $73,803  $-  $65,833 

Agency residential MBS

 55,013  58,380  86,143  52,485 

Corporate securities

  115,018   91,837   182,308   146,253 

Total collateral carrying value

 $245,815  $224,020  $268,451  $264,571 

Total short-term borrowed funds

 $45,646  $51,247  $86,170  $30,928 

 

 

Note 9:9: 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. Equity securities and debtDebt 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, impaired loans individually evaluated for credit loss, certain loans held for investment, debt securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.

 

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

 

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

 

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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, asset-backedcommercial paper, collateralized loan obligations, municipal bonds and securities and municipal bonds.of U.S government entities.

 

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

 

The Company relies on independent vendor pricing services to measure fair value for equity securities, debt securities available for sale and debt securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote most closely reflecting the market generally used as the fair value estimate. In addition, the Company conducts “other than temporary impairment (OTTI)” analysisevaluates debt securities for credit loss on a quarterly basis; debt securities selected for OTTI analysis include all debt securities at a market price below 95% of par value.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 September 30, 2019

  

At June 30, 2020

 
 

Fair Value

  

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

  

Significant Other Observable Inputs
(Level 2)

  

Significant Unobservable Inputs
(Level 3) (1)

  

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)

  

(In thousands)

 

Debt securities available for sale

                  

U.S. Treasury securities

 $44,826  $44,826  $-  $- 

Securities of U.S. Government sponsored entities

 122,108  -  122,108  - 

Agency residential MBS

 979,751  -  979,751  - 

Non-agency residential MBS

 104  -  104  - 

Agency residential mortgage-backed securities (MBS)

 $840,085  $-  $840,085  $- 

Agency commercial MBS

 3,751  -  3,751  -  3,629  -  3,629  - 

Securities of U.S. Government entities

 777  -  777  -  171  -  171  - 

Obligations of states and political subdivisions

 165,403  -  165,403  -  152,154  -  152,154  - 

Corporate securities

  1,667,047   -   1,667,047   -  2,269,411  -  2,269,411  - 

Commercial paper

 299,582    299,582   

Collateralized loan obligations (CLO)

  143,338   -   143,338   - 

Total debt securities available for sale

 $2,983,767  $44,826  $2,938,941  $-  $3,708,370  $-  $3,708,370  $- 

 

(1) There were no transfers in to or out of level 3 during the ninesix months ended SeptemberJune 30, 2019.2020.

 

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At December 31, 2018

 
  

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)

 

Equity securities

                

Mutual funds

 $1,747  $-  $1,747  $- 

Total equity securities

  1,747   -   1,747   - 

Debt securities available for sale

                

U.S. Treasury securities

  139,574   139,574   -   - 

Securities of U.S. Government sponsored entities

  164,018   -   164,018   - 

Agency residential MBS

  853,871   -   853,871   - 

Non-agency residential MBS

  114   -   114   - 

Agency commercial MBS

  1,842   -   1,842   - 

Securities of U.S. Government entities

  1,119   -   1,119   - 

Obligations of states and political subdivisions

  179,091   -   179,091   - 

Corporate securities

  1,315,041   -   1,315,041   - 

Total debt securities available for sale

  2,654,670   139,574   2,515,096   - 

Total

 $2,656,417  $139,574  $2,516,843  $- 
 
  

At December 31, 2019

 
  

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

                

U.S. Treasury securities

 $20,000  $20,000  $-  $- 

Securities of U.S. Government sponsored entities

  111,167   -   111,167   - 

Agency residential MBS

  939,750   -   939,750   - 

Agency commercial MBS

  3,708   -   3,708   - 

Securities of U.S. Government entities

  544   -   544   - 

Obligations of states and political subdivisions

  163,139   -   163,139   - 

Corporate securities

  1,833,783   -   1,833,783   - 

CLO

  6,755   -   6,755   - 

Total debt securities available for sale

 $3,078,846  $20,000  $3,058,846  $- 

 

(1) There were no transfers in to or out of level 3 during the yeartwelve months ended December 31, 2018.2019.

 

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 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, 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

          

For the

 
         

Nine Months Ended

          

Three Months Ended

 
 

At September 30, 2019

  

September 30, 2019

  

At June 30, 2020

  

March 31, 2020

 
 

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

 
 

(In thousands)

  

(In thousands)

 

Other real estate owned

 $43  $-  $-  $43  $-  $43  $-  $-  $43  $- 

Impaired loans:

           

Loans:

           

Commercial

 6,050  -  -  6,050  -  5,401  -  -  5,401  - 

Commercial real estate

 4,099  -  -  4,099  -  3,773  -  -  3,773  - 

Residential real estate

 193  -  -  193  -   186   -   -   186   - 

Consumer installment and other

  77   -   -   77   (34)

Total assets measured at fair value on a nonrecurring basis

 $10,462  $-  $-  $10,462  $(34) $9,403  $-  $-  $9,403  $- 

 

         

For the

          

For the

 
         

Year Ended

          

Twelve Months Ended

 
 

At December 31, 2018

  

December 31, 2018

  

At December 31, 2019

  

December 31, 2019

 
 

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

 
 

(In thousands)

  

(In thousands)

 

Other real estate owned

 $350  $-  $-  $350  $- 

Other real estate owned

 $43  $-  $-  $43  $- 

Impaired loans:

           

Impaired loans:

           

Commercial

 6,437  -  -  6,437  - 

Commercial

 5,747  -  -  5,747  - 

Commercial real estate

  3,870   -   -   3,870   (240)

Commercial real estate

 4,091  -  -  4,091  - 

Residential real estate

Residential real estate

  190   -   -   190   - 

Total assets measured at fair value on a nonrecurring basis

 $10,657  $-  $-  $10,657  $(240)

Total assets measured at fair value on a nonrecurring basis

 $10,071  $-  $-  $10,071  $- 

 

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. Level 3 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral individually evaluated for credit loss where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets. The unobservable inputs and qualitative information about the unobservable inputs are not presented as the inputs were not developed by the Company.

 

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Disclosures about Fair Value of Financial Instruments

The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value in the balance sheet.

Cash and Due from Banks  Cash and due from banks represent U.S. dollar denominated coin and currency, deposits at the Federal Reserve Bank and correspondent banks, and amounts being settled with other banks to complete the processing of  customers’ daily transactions. Collectively, the Federal Reserve Bank and financial institutions operate in a market in which cash and due from banks transactions are processed continuously in significant daily volumes honoring the face value of the U.S. dollar.

Equity Securities  The fair values of equity securities were estimated using quoted prices as describe above for Level 2 valuation.

Debt Securities Held to Maturity  The fair values of debt securities were estimated using quoted prices as described above for Level 1 and Level 2 valuation.

Loans  Loans are valued using the exit price notion. The Company uses a net present value of cash flows methodology that seeks to incorporate interest rate, credit, liquidity and prepayment risks in the fair market value estimation. Inputs to the calculation include market rates for similarly offered products, market interest rate projections, credit spreads, estimated credit losses and prepayment assumptions.

Deposit Liabilities  Deposits with no stated maturity such as checking accounts, savings accounts and money market accounts can be readily converted to cash or used to settle transactions at face value through the broad financial system operated by the Federal Reserve Banks and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair value of time deposits was estimated using a net present value of cash flows methodology, incorporating market interest rate projections and rates on alternative funding sources.

Short-Term Borrowed Funds  The carrying amount of securities sold under agreement to repurchase and other short-term borrowed funds approximate fair value due to the relatively short period of time between their origination and their expected realization.

 

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.

 

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At June 30, 2020

 
  

Carrying Amount

  

Estimated Fair Value

  

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

  

Significant Other Observable Inputs
(Level 2 )

  

Significant Unobservable Inputs
(Level 3 )

 

Financial Assets:

 

(In thousands)

 

Cash and due from banks

 $500,820  $500,820  $500,820  $-  $- 

Debt securities held to maturity

  638,281   656,374   -   656,374   - 

Loans

  1,291,830   1,362,955   -   -   1,362,955 
                     

Financial Liabilities:

                    

Deposits

 $5,468,412  $5,468,734  $-  $5,305,647  $163,087 

Short-term borrowed funds

  86,170   86,170   -   86,170   - 

 

-26-

  

At September 30, 2019

 
  

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

 $415,639  $415,639  $415,639  $-  $- 

Debt securities held to maturity

  793,216   799,241   -   799,241   - 

Loans

  1,113,401   1,178,305   -   -   1,178,305 
                     

Financial Liabilities:

                    

Deposits

 $4,796,623  $4,794,970  $-  $4,621,416  $173,554 

Short-term borrowed funds

  45,646   45,646   -   45,646   - 

 

At December 31, 2018

  

At December 31, 2019

 
 

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 )

  

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)

  

(In thousands)

 

Cash and due from banks

 $420,284  $420,284  $420,284  $-  $-  $373,421  $373,421  $373,421  $-  $- 

Debt securities held to maturity

 984,609  971,445  -  971,445  -  738,072  744,296  -  744,296  - 

Loans

 1,185,851  1,184,770  -  -  1,184,770  1,107,180  1,152,949  -  -  1,152,949 
  

Financial Liabilities:

                                        

Deposits

 $4,866,839  $4,862,668  $-  $4,671,588  $191,080  $4,812,621  $4,810,934  $-  $4,643,284  $167,650 

Short-term borrowed funds

 51,247  51,247  -  51,247  -  30,928  30,928  -  30,928  - 

 

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.

 

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- 29-

 

Note 10:10: 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 cancellable unconditionally by the Company aggregated $40,267 thousand at June 30, 2020. 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 $286,876$289,785 thousand at SeptemberJune 30, 20192020 and $278,598$265,311 thousand at December 31, 2018.2019. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled $3,099$2,355 thousand at SeptemberJune 30, 20192020 and $2,772$3,099 thousand at December 31, 2018.2019. The Company had 0 commitments outstanding for commercial and similar letters of credit at SeptemberJune 30, 20192020 and December 31, 2018.2019. The Company had $550$580 thousand and $75$550 thousand in outstanding full recourse guarantees to a 3rd party credit card company at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. The Company had a reserve for unfunded commitments of $2,308$53 thousand at SeptemberJune 30, 20192020 and $2,160 thousand at December 31, 2018,2019, included in other liabilities.

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated. In the second quarter 2019, the Company achieved a mediated settlement to dismiss a lawsuit and paid the resulting liability of $252 thousand.

 

The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2018 to some customers. The Company initially estimated the probable amount of these obligations to be $5,542 thousand and accrued a liability for such amount in 2017; based on additional information received in the second quarter 2019, the Company increased such liability to $5,843 thousand by recognizing an expense of $301 thousand.

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.

 

-27-

 

Note 11:11: Earnings Per Common Share

 

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

 

 

For the Three Months

 

For the Nine Months

  

For the Three Months

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
 

(In thousands, except per share data)

  

(In thousands, except per share data)

 

Net income applicable to common equity (numerator)

 $20,390  $16,993  $59,661  $52,509  $19,562  $19,625  $36,524  $39,271 

Basic earnings per common share

                

Basic earnings per common share

            

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

  26,986   26,701   26,924   26,622   26,935   26,942   27,001   26,892 

Basic earnings per common share

 $0.76  $0.64  $2.22  $1.97  $0.72  $0.73  $1.35  $1.46 

Diluted earnings per common share

                                

Weighted average number of common shares outstanding - basic

 26,986  26,701  26,924  26,622  26,935  26,942  27,001  26,892 

Add common stock equivalents for options

  41   114   52   114   16   45   23   58 

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

  27,027   26,815   26,976   26,736   26,951   26,987   27,024   26,950 

Diluted earnings per common share

 $0.75  $0.63  $2.21  $1.96  $0.72  $0.73  $1.35  $1.46 

 

For the three and ninesix months ended SeptemberJune 30, 2019,2020, options to purchase 379599 thousand and 425556 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 ninesix months ended SeptemberJune 30, 2018,2019, options to purchase 326436 thousand and 432449 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.

 

- 30-

 

Note 12: Income TaxesImpact of COVID-19

 

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

The COVID-19 coronavirus pandemic caused escalating infections in the United States beginning in the first quarter of 2020 that continued through the second quarter of 2020 and may continue for some time. The spread of the outbreak has disrupted the United States economy including banking and other financial activity in the market areas in which the Company and its banking subsidiary, Westamerica Bank (the "Bank"), operate.  Regions and states of the United States of America have implemented varying degrees of "stay at home" directives in an effort to prevent the spread of the virus. On March 19, 2020, the Governor of the State of California ordered all individuals living in the State of California to stay within their residence to prevent the spread of the novel coronavirus and many businesses have suspended or reduced business activities. The California "stay at home" directive excludes essential businesses, including banks, and the Bank remains open and fully operational. These "stay at home" directives have, however, significantly reduced economic activity in the United States and the State of California. In the second quarter of 2019,2020 the Company decreased unrecognized tax benefits by $909 thousand related to settlements“stay at home” directives were gradually lifted in varying stages in counties of the State of California. Counties with taxing authorities. The settlements incorporated amended tax returnshigh infection rates have delayed reopening and restrictions on certain economic activity remains. California-based initial claims for which the Company had recognized a deferred tax asset in the amount of $1,003 thousand.

Inunemployment have risen considerably during the second quarter of 2019,2020.

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

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

In response to the pandemic, the Federal Reserve has engaged significant levels of monetary policy to provide liquidity and credit facilities to the financial markets. On March 15, 2020, the Federal Open Market Committee ("FOMC") reduced the target range for the federal funds rate to 0 to 0.25 percent; relatedly, the FOMC reduced the interest rate paid on deposit balances to 0.10 percent effective March 16, 2020, all of which may negatively impact net interest income. The Bank maintains deposit balances at the Federal Reserve Bank; the amount that earns interest is identified in the Company's financial statements as "interest-bearing cash".

In response to the pandemic, the United States federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") on March 27, 2020, providing an estimated $2 trillion fiscal stimulus to the United States economy. The CARES Act established the Paycheck Protection Program (PPP) with $350 billion to provide businesses with federally guaranteed loans to support payroll and certain operating expenses. The loans were guaranteed by the United States Small Business Administration (“SBA”) and funded through banks. In April 2020, the PPP program was expanded with an additional $310 billion. At June 30, 2020, the Bank funded $249 million in government guaranteed PPP loans which meaningfully increased interest-earning assets and related interest and fee income.

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

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

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

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Any one or a combination of the factors identified above, or other factors, could materially adversely affect the Company's business, financial condition, results of operations and prospects.

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

Oil prices have declined considerably in the first half of 2020. The decline in oil prices could negatively affect the financial results of industrial sector-based and energy sector-based corporate issuers of corporate bonds owned by the Company. The Company’s corporate debt securities include 14 issuers in industrial and energy sectors with aggregate amortized cost of $275.6 million and fair value of $287.4 million at June 30, 2020. These securities continue to be investment grade rated by a major rating agency.

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

The Company establishedis a $269 thousand valuation allowanceparticipating lender in the PPP. The SBA guarantees 100% of loans funded under the PPP. Loan proceeds used for eligible payroll and certain other operating costs are forgiven with repayment of loan principal and accrued interest made by the SBA. There is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to potential risks relating to noncompliance with the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation or regulatory enforcement could have a material adverse impact on the Company’s business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If the SBA identifies a deficiency, it could deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deferred tax asset.deficiency from the Company.

 

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

 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

 

For the Three Months

 

For the Nine Months

  

For the Three Months

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

 

2018

 

2019

 

2018

  

2020

  

2019

  

2020

  

2019

 
 

(In thousands, except per share data)

  

(In thousands, except per share data)

 

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

 $40,349  $39,498  $120,925  $115,122  $42,063  $40,330  $82,610  $80,577 

Provision for Loan Losses

 -  -  -  -  -  -  4,300  - 

Noninterest Income:

                

Life Insurance Gains

 -  585  433  585 

Other Noninterest income

  11,809  11,943  35,243  35,667 

Total Noninterest Income

 11,809  12,528  35,676  36,252 

Noninterest Expense:

                

Loss Contingency

 -  3,500  553  3,500 

Other Noninterest Expense

  24,033  25,866  74,224  77,629 

Total Noninterest Expense

  24,033  29,366  74,777  81,129 

Noninterest Income

 9,554  12,288  21,202  23,867 

Noninterest Expense

  24,754   25,561   49,418   50,744 

Income Before Income Taxes (FTE)(1)

 28,125  22,660  81,824  70,245  26,863  27,057  50,094  53,700 

Income Tax Provision (FTE)(1)

  7,735  5,667  22,163  17,736   7,301   7,432   13,570   14,429 

Net Income

 $20,390  $16,993  $59,661  $52,509  $19,562  $19,625  $36,524  $39,271 
  

Average Common Shares Outstanding

 26,986  26,701  26,924  26,622  26,935  26,942  27,001  26,892 

Average Diluted Common Shares Outstanding

 27,027  26,815  26,976  26,736  26,951  26,987  27,024  26,950 

Common Shares Outstanding at Period End

 27,014  26,727       26,933  26,962  

 

 

 

 
  

Per Common Share:

                

Per Common Share:

            

Basic Earnings

 $0.76  $0.64  $2.22  $1.97  $0.72  $0.73  $1.35  $1.46 

Diluted Earnings

 0.75  0.63  2.21  1.96  0.72  0.73  1.35  1.46 

Book Value

 $26.41  $22.17        30.00   25.72      
  

Financial Ratios:

                

Financial Ratios:

            

Return on Assets

 1.45% 1.19% 1.43% 1.25% 1.30% 1.42% 1.25% 1.42%

Return on Common Equity

 11.87% 10.58% 11.92% 11.22% 11.15% 11.75% 10.41% 11.95%

Net Interest Margin (FTE)(1)

 3.11% 3.00% 3.12% 2.95% 2.99% 3.13% 3.04% 3.12%

Net Loan Losses to Average Loans

 0.10% 0.34% 0.17% 0.11%

Net Loan Losses (Recoveries) to Average Loans

 0.09% 0.12% 0.22% 0.21%

Efficiency Ratio(2)

 46.1% 56.4% 47.8% 53.6% 48.0% 48.6% 47.6% 48.6%
  

Average Balances:

                

Average Balances:

            

Assets

 $5,570,843  $5,648,004  $5,580,965  $5,600,499  $6,058,365  $5,560,740  $5,856,913  $5,586,110 

Loans

 1,142,668  1,194,874  1,177,057  1,215,712  1,232,073  1,183,539  1,178,004  1,194,536 

Investment securities

 3,687,049  3,591,637  3,675,102  3,538,724 

Investment Securities

 3,957,851  3,648,436  3,901,868  3,669,029 

Deposits

 4,770,976  4,893,859  4,789,084  4,856,639  5,200,475  4,762,286  5,014,731  4,798,288 

Shareholders' Equity

 681,513  636,965  669,043  625,496  705,882  669,947  705,606  662,704 
  

Period End Balances:

                

Period End Balances:

            

Assets

 $5,616,055  $5,529,463       $6,463,889  $5,523,448  

 

 

 

 

Loans

 1,133,229  1,196,955       1,316,359  1,161,712  

 

 

 

 

Investment securities

 3,776,983  3,506,341      

Investment Securities

 4,346,667  3,645,685  

 

 

 

 

Deposits

 4,796,623  4,835,837       5,468,412  4,730,262  

 

 

 

 

Shareholders' Equity

 713,378  592,591       808,076  693,437    

 

 
  

Capital Ratios at Period End:

                

Capital Ratios at Period End:

            

Total Risk Based Capital

 17.20% 16.99%      14.88% 17.88% 

 

 

 

 

Tangible Equity to Tangible Assets

 10.75% 8.67%      10.81% 10.56% 

 

   
  

Dividends Paid Per Common Share

 $0.41  $0.40  $1.22  $1.20  $0.41  $0.41  $0.82  $0.81 

Common Dividend Payout Ratio

 55% 63% 55% 61% 57% 56% 61% 55%

 

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

 

(1) Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE")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).

 

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Financial Overview

 

Westamerica Bancorporation and subsidiaries’ (collectively, the “Company”) reported net income of $20.4$19.6 million or $0.75$0.72 diluted earnings per common share (“EPS”) for the second quarter 2020 and net income of $36.5 million or $1.35 diluted earnings per common share for the thirdsix months ended June 30, 2020. The COVID-19 coronavirus pandemic began in the United States and California in the first quarter 20192020 and continued to cause escalating infections in the United States during the second quarter of 2020. In response to the pandemic, the Company’s primary and wholly-owned subsidiary bank, Westamerica Bank (the “Bank”), funded $249 million Paycheck Protection Program (“PPP”) loans for the Bank’s customers during the second quarter 2020. PPP loans meaningfully increased interest-earning assets and related interest and fee income. the Bank has been actively working with consumer and commercial borrowers requesting deferral of loan payments. At June 30, 2020, automobile loans and other consumer loans granted loan deferrals totaled $29 million and $5 million, respectively, commercial real estate loans with deferred payments totaled $66 million, primarily for hospitality and retail properties, and commercial loans with deferred payments totals $3 million. The results for the six months ended June 30, 2020 included a provision for credit losses of $4.3 million, which reduced EPS $0.11, representing Management’s estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk from deteriorating economic conditions caused by the COVID-19 pandemic. These results compare to net income of $59.7$19.6 million or $2.21$0.73 diluted earnings per common share for the ninesecond quarter 2019 and net income of $39.3 million or $1.46 diluted earnings per common share for the six months ended SeptemberJune 30, 2019. Results for the ninesecond quarter 2019 and six months ended SeptemberJune 30, 2019 include a tax-exempt life insurance gain of $433 thousand and $553 thousand in loss contingencies. The loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit. Although loss contingencies represent estimated liabilities, which are subject to revision, the Company does not anticipate additional losses for either of these matters. These results compare to net income of $17.0 million or $0.63 diluted earnings per common share for the third quarter 2018 and net income of $52.5 million or $1.96 diluted earnings per common share for the nine months ended September 30, 2018. The third quarter 2018 results include a $585 thousand tax-exempt life insurance gain and a $3.5 million loss contingency resulting from a mediated settlement to dismiss a lawsuit.

 

Regions and states of the United States of America, including California implemented varying degrees of “stay at home” directives in an effort to prevent the spread of the virus in the first quarter of 2020. These directives have significantly reduced economic activity in the United States and the State of California. In the second quarter 2020 the “stay at home” directives were gradually lifted in varying stages in counties of the State of California. Counties with high infection rates have delayed reopening and restrictions on certain economic activity remained. The Company’s principal sourceunemployment claims rose considerably in the second quarter 2020. The California “stay at home” directive excludes essential businesses including banks. The Bank remains open and fully operational.

In response to the pandemic, the Federal Reserve has engaged significant levels of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). Market interest rates declined considerably following the recession of 2008 and 2009. Interest rates remained historically low through 2016 as the monetary policy ofto provide liquidity and credit facilities to the financial markets. On March 15, 2020, the Federal Open Market Committee (the “FOMC”(“FOMC”) was highly accommodative. During this period, Management avoided originating long-dated, low-yielding loans givenreduced the potential impact of such assets on forward earning potential; as a result, loans declined and investment securities increased. The changed composition of the earning assets and low market interest rates pressured the net interest margin to lower levels. The FOMC began removing monetary stimulus in December 2016 and increasedtarget range for the federal funds rate by 2.00% to 2.50% through June 2019, although longer-term rates did not increase by a similar magnitude.0 to 0.25 percent; relatedly, the FOMC reduced the interest rate paid on deposit balances to 0.10 percent effective March 16, 2020. The increaseBank maintains deposit balances at the Federal Reserve Bank; the amount that earns interest is identified in market interest rates benefited the Company’s earning asset yields until the FOMC cut the federal funds rate in July 2019 by 0.25% and in September 2019 by 0.25%financial statements as “interest-bearing cash”.

 

The funding sourceextent of the spread of the coronavirus and its ultimate containment are uncertain at this time. The effectiveness of the Federal Reserve Bank’s monetary policies and the federal government’s fiscal policies in stimulating the United States economy is uncertain at this time. Management expects the Company’s earning assetsnet interest margin and non-interest income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to the coronavirus. The amount of impact on the Company’s financial results is primarily customer deposits. The Company’s long-term strategy includes maximizing checkinguncertain. Please refer to Note 12 and savings deposits as these types of deposits are lower-cost and less sensitive to changesPart II, Item 1A “Risk factors” in interest rates compared to time deposits. During the three and nine months ended September 30, 2019 the average volume of checking and savings deposits was 96.2% and 96.1%, respectively, of average total deposits.

Credit quality remained solid with nonperforming assets totaling $4.7 million at September 30, 2019 compared with $5.8 million at December 31, 2018 and $6.5 million at September 30, 2018. The Company did not recognize a provision for loan losses in the three months and nine months ended September 30, 2019.this Form 10-Q.

 

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

 

The Company’s significant accounting policies (see Note 1, “Summary of Significant Accounting Policies,” to Financial Statements in the Company’s 20182019 Form 10-K)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 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The remainderASU significantly changed estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB replaced the incurred loss model with the current expected credit loss (CECL) model, which accelerated recognition of this page intentionally left blank]credit losses. Additionally, credit losses relating to debt securities available-for-sale are recorded through an allowance for credit losses under the new standard. The Company is also required to provide additional disclosures related to the financial assets within the scope of the new standard.

 

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The Company adopted the ASU provisions on January 1, 2020. Management evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management measured historical loss rates for each portfolio segment. Management also segmented debt securities held to maturity, selected methods to estimate losses for each segment, and measured a loss estimate. Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. The adjustment to the allowance for credit losses was recorded through an offsetting after-tax adjustment to shareholders’ equity. The implementing entry increased allowance for credit losses by $2,017 thousand, reduced allowance for unfunded credit commitments by $2,107 thousand and increased retained earnings by $52 thousand.

FASB ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The ASU is part of the disclosure framework project, where the primary focus is to improve the effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to Fair Value Measurements.

The provisions of the ASU were effective January 1, 2020 with the option to early adopt any removed or modified disclosures upon issuance of the ASU. The Company early adopted the provisions to remove and/or modify relevant disclosures in the “Fair Value Measurements” note to the unaudited consolidated financial statements. The requirement to include additional disclosures was adopted by the Company January 1, 2020. The additional disclosures did not affect the financial results upon adoption.

 

Net Income

 

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

 

 

For the Three Months

 

For the Nine Months

  

For the Three Months

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
 

(In thousands, except per share data)

  

(In thousands, except per share data)

 

Net interest and loan fee income (FTE)

 $40,349  $39,498  $120,925  $115,122  $42,063  $40,330  $82,610  $80,577 

Provision for loan losses

 -  -  -  -  -  -  4,300  - 

Noninterest income

 11,809  12,528  35,676  36,252  9,554  12,288  21,202  23,867 

Noninterest expense

  24,033   29,366   74,777   81,129   24,754   25,561   49,418   50,744 

Income before taxes (FTE)

 28,125  22,660  81,824  70,245  26,863  27,057  50,094  53,700 

Income tax provision (FTE)

  7,735   5,667   22,163   17,736   7,301   7,432   13,570   14,429 

Net income

 $20,390  $16,993  $59,661  $52,509  $19,562  $19,625  $36,524  $39,271 
  

Average diluted common shares

 27,027  26,815  26,976  26,736  26,951  26,987  27,024  26,950 

Diluted earnings per common share

 $0.75  $0.63  $2.21  $1.96  $0.72  $0.73  $1.35  $1.46 
  

Average total assets

 $5,570,843  $5,648,004  $5,580,965  $5,600,499  $6,058,365  $5,560,740  $5,856,913  $5,586,110 

Net income to average total assets (annualized)

 1.45% 1.19% 1.43% 1.25% 1.30% 1.42% 1.25% 1.42%

Net income to average common shareholders' equity (annualized)

 11.87% 10.58% 11.92% 11.22% 11.15% 11.75% 10.41% 11.95%

 

Net income for the thirdsecond quarter 2019 was $3.4 million more than2020 decreased $63 thousand compared with the thirdsecond quarter 2018.2019. Net interest and loan fee income (FTE) increased $851 thousand$1.7 million in the thirdsecond quarter 20192020 compared with the thirdsecond quarter 20182019 mainly due to a higher net yield on earning assets and higher average balances of investments, higher net yield on those investments and PPP loans funded during the second quarter 2020, partially offset by lower average balances ofyield on interest-bearing cash and loans.loan payoffs and paydowns. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent incredit risk over the loan portfolio. Noninterestremaining life of loans and bonds. Second quarter 2020 noninterest income decreased $719 thousand from the third quarter 2018 primarily$2.7 million due to lower income from service charges on deposit accounts ineconomic activity related to the thirdCOVID-19 pandemic. Second quarter 2020 noninterest expense decreased $807 thousand mostly because second quarter 2019 and a life insurance gain of $585included $533 thousand in the third quarter 2018. Noninterest expense decreased $5.3 million in the third quarter 2019 compared with the third quarter 2018 due to a $3.5 million loss contingency recognized in the third quarter 2018 and lower FDIC insurance assessments, employee benefit costs, and intangible amortization in the third quarter 2019. The lower third quarter 2019 FDIC assessments are due to application of the Bank’s assessment credit described in the Company’s December 31, 2018 Form 10-K, Part 1, Item 1, “Premiums for Deposit Insurance.”contingency. The tax rate (FTE) for the thirdsecond quarter 2020 was 27.2% compared with 27.5% for the second quarter 2019. In the second quarter 2019, was 27.5% comparedthe Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with 25.0% for the third quarter 2018. The higher tax rate in the third quarter 2019 is due to lower levels of tax-exempt interest income and stock compensation tax deductions in the third quarter 2019 and the tax exempt nature of the life insurance gains realized inand excess tax benefits of $83 thousand from stock options, increased the third quarter 2018.tax rate (FTE) by 0.3%.

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Comparing the ninesix months ended SeptemberJune 30, 2020 with the six months ended June 30, 2019 with the nine months ended September 30, 2018 net income increased $7.2decreased $2.7 million. Net interest and loan fee (FTE) income increased $5.8$2.0 million due to a higher net yield on earning assets and higher average balances of investments, higher net yield on those investments and PPP loans funded during the second quarter 2020, partially offset by lower average balances ofyield on interest-bearing cash and loans. Theloan payoffs and paydowns. Results for the six months ended June 30, 2020, include a provision of credit losses of $4.3 million, which reduced EPS $0.11, representing Management estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk form deteriorating economic conditions caused by the COVID-19 pandemic. In the six months ended June 30, 2019, the provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. In the ninesix months ended SeptemberJune 30, 2019,2020, noninterest income decreased $576 thousand compared with the nine months ended September 30, 2018$2.7 million primarily due to lower income from service chargeseconomic activity related to the COVID-19 pandemic, partially offset by a $603 thousand recovery on deposit accounts, other service charges and debit card fees, offseta previously charged off loan in part by an increase in merchant processing services.the first six months of 2020. In the ninesix months ended SeptemberJune 30, 20192020 noninterest expense decreased $6.4$1.3 million compared with the ninesix months ended SeptemberJune 30, 2018 primarily2019 due to decreases in loss contingencies,lower salaries, occupancy and equipment expenses, lower FDIC insurance assessments employee benefit costs, and lower amortization of intangible amortization inassets, and because the ninesix months ended SeptemberJune 30, 2019.2019 included $553 thousand in loss contingency. The effective tax rates (FTE) was 27.1% for the ninesix months ended SeptemberJune 30, 2019 compared with 25.2% for2020 included a $246 thousand FDIC assessment credit; the nine months ended September 30, 2018.Company’s credit is fully exhausted. The higher effective tax rate (FTE) infor the ninesix months ended SeptemberJune 30, 2020 was 27.1% compared with 26.9% for the six months ended June 30, 2019. In the six months ended June 30, 2019, comparedthe Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the same period in 2018 is due to lower levelstax exempt nature of tax-exempt interest incomethe life insurance gains and excess tax benefits of $367 thousand from stock compensationoptions, decreased the tax deductions.rate (FTE) 0.4%.

 

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Net Interest and Loan Fee Income (FTE)

 

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

 

 

For the Three Months

 

For the Nine Months

  

For the Three Months

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
 

($ in thousands)

  

($ in thousands)

 

Interest and loan fee income

 $39,695  $38,614  $118,804  $112,275  $41,539  $39,626  $81,530  $79,109 

Interest expense

 435  487  877  981 

FTE adjustment

 1,109  1,411  3,558  4,292   959   1,191   1,957   2,449 

Interest expense

  455   527   1,437   1,445 

Net interest and loan fee income (FTE)

 $40,349  $39,498  $120,925  $115,122  $42,063  $40,330  $82,610  $80,577 
  

Average earning assets

 $5,176,744  $5,231,257  $5,173,581  $5,191,664  $5,635,014  $5,159,112  $5,438,578  $5,171,973 

Net interest margin (FTE) (annualized)

 3.11% 3.00% 3.12% 2.95% 2.99% 3.13% 3.04% 3.12%

 

Net interest and loan fee income (FTE) increased $851 thousand$1.7 million in the thirdsecond quarter 20192020 compared with the thirdsecond quarter 20182019 mainly due to higher average balances of investment securities (up $309 million), a higher net yield on earning assetsthose investment securities (up 0.11%) and higher average balances of investments (up $95 million), partially$133 million of PPP loans funded in the second quarter 2020, offset by lower yield on interest-bearing cash (down 2.27%) and lower average balances of interest-bearing cash (down $98 million) andother loans (down $52$84 million).

 

Comparing the first nine months ended September 30, 2019 with the nine months ended September 30, 2018, netNet interest and loan fee (FTE) income increased $5.8$2.0 million in the first six months of 2020 compared with the first six months of 2019 due to higher average balances of investment securities (up $233 million), a higher net yield on earning assetsinvestment securities (up 0.17%0.02%) and higher average balances of investments (up $136 million), partially$66 million of PPP loans funded in the second quarter 2020, offset by lower yield on interest-bearing cash (down 1.84%) and lower average balances of interest-bearing cash (down $116 million) andother loans (down $39$72 million).

 

The annualized net interest margin (FTE) increased to 3.11%was 2.99% in the thirdsecond quarter 2020 and 3.04% in the first six months of 2020 compared with 3.13% in the second quarter 2019 and 3.12% in the ninefirst six months ended September 30, 2019 from 3.00%of 2019. The lower yield in in the thirdsecond quarter 20182020 and 2.95%the first six months of 2020 compared with 2019 is primarily due to lower yield on interest-bearing cash which made up a higher percentage of total earning assets in the ninecurrent periods (7.9% in the second quarter 2020 compared with 6.3% in the second quarter 2019 and 6.6% in the first six months ended September 30, 2018. The net interest margin (FTE) increasedof 2020 compared with 6.0% in 2019, reflecting earning assets repriced to higher yields. the first six months of 2019).

 

The Company’s funding costs were 0.03% in the second quarter 2020 and in the first six months of 2020 compared with 0.04% in the thirdsecond quarter 2019 and ninein the first six months ended September 30, 2019, unchanged from the same periods in 2018.of 2019. Average balances of time deposits in the second quarter 2020 declined $34$21 million from the ninesecond quarter 2019 and $22 million in the first six months ended September 30, 2018 toof 2020 from the ninefirst six months ended September 30,of 2019. Average balances of checking and saving deposits accounted for 96.1%96.8% of average total deposits in the ninesecond quarter 2020 and 96.7% in the first six months ended September 30, 2019of 2020 compared with 95.5%96.1% in the ninesecond quarter 2019 and in the first six months ended September 30, 2018.of 2019.

-36-

 

Net Interest Margin (FTE)

 

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

 

 

For the Three Months

 

For the Nine Months

  

For the Three Months

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
  

Yield on earning assets (FTE)

 3.15% 3.04% 3.16% 2.99%

Yield on earning assets (FTE)

 3.02% 3.17% 3.07% 3.16%

Rate paid on interest-bearing liabilities

  0.07%  0.08%  0.07%  0.07%

Rate paid on interest-bearing liabilities

  0.06%  0.08%  0.07%  0.08%

Net interest spread (FTE)

 3.08% 2.96% 3.09% 2.92%

Net interest spread (FTE)

 2.96% 3.09% 3.00% 3.08%

Impact of noninterest-bearing demand deposits

  0.03%  0.04%  0.03%  0.03%

Impact of noninterest-bearing demand deposits

  0.03%  0.04%  0.04%  0.04%

Net interest margin (FTE)

  3.11%  3.00%  3.12%  2.95%

Net interest margin (FTE)

  2.99%  3.13%  3.04%  3.12%

 

[The FOMC increased the federal funds rate between December 2016 and December 2018. In the third quarter and first nine monthsremainder of 2019 the yield on earning assets increased compared with the comparable periods of 2018 as earning assets repriced to higher yields. Rates on interest-bearing liabilities were kept low by reducing the volume of higher-cost time deposits and managing rates paid on checking and savings deposits.this page intentionally left blank]

 

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-37-

 

Summary of Average Balances, Yields/Rates and Interest Differential

 

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

 

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

 

 

For the Three Months Ended September 30, 2019

  

For the Three Months Ended June 30, 2020

 
   

Interest

      

Interest

   
 

Average

 

Income/

 

Yields/

  

Average

 

Income/

 

Yields/

 
 

Balance

  

Expense

  

Rates

  

Balance

  

Expense

  

Rates

 
 

($ in thousands)

  

($ in thousands)

 

Assets

              

Investment securities:

              

Taxable

 $3,096,255  $19,586  2.53% $3,469,925  $22,920  2.64%

Tax-exempt (1)

  590,794   4,782  3.24%  487,926   4,089  3.35%

Total investments (1)

 3,687,049  24,368  2.64% 3,957,851  27,009  2.73%

Loans:

              

Taxable

 1,094,107  14,038  5.09%       

Paycheck Protection Program ("PPP") loans

 132,500  1,673  5.07%

Other

  1,053,420   13,235  5.05%

Total taxable

 1,185,920  14,908  5.06%

Tax-exempt (1)

  48,561   497  4.06%  46,153   468  4.08%

Total loans (1)

 1,142,668  14,535  5.05% 1,232,073  15,376  5.02%

Total interest-bearing cash

  347,027   1,901  2.14%  445,090   113  0.10%

Total Interest-earning assets (1)

 5,176,744  40,804  3.15% 5,635,014  42,498  3.02%

Other assets

  394,099        423,351      

Total assets

 $5,570,843       $6,058,365      
  

Liabilities and shareholders' equity

              

Noninterest-bearing demand

 $2,234,494  $-  -% $2,496,840  $-  -%

Savings and interest-bearing transaction

 2,357,462  302  0.05% 2,539,073  298  0.05%

Time less than $100,000

 101,452  64  0.25% 92,295  47  0.20%

Time $100,000 or more

  77,568   81  0.41%  72,267   79  0.44%

Total interest-bearing deposits

 2,536,482  447  0.07% 2,703,635  424  0.06%

Short-term borrowed funds

  50,398   8  0.06% 70,116  10  0.06%

Other borrowed funds

 699  1  0.35%

Total interest-bearing liabilities

 2,586,880  455  0.07% 2,774,450  435  0.06%

Other liabilities

 67,956       81,193      

Shareholders' equity

  681,513        705,882      

Total liabilities and shareholders' equity

 $5,570,843       $6,058,365      

Net interest spread (1) (2)

      3.08%      2.96%

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

    $40,349  3.11%    $42,063  2.99%

(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.

-38-

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

  

For the Three Months Ended June 30, 2019

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,006,905  $18,773   2.50%

Tax-exempt (1)

  641,531   5,157   3.22%

Total investments (1)

  3,648,436   23,930   2.62%

Loans:

            

Taxable

  1,133,168   14,417   5.10%

Tax-exempt (1)

  50,371   512   4.08%

Total loans (1)

  1,183,539   14,929   5.06%

Total interest-bearing cash

  327,137   1,958   2.37%

Total Interest-earning assets (1)

  5,159,112   40,817   3.17%

Other assets

  401,628         

Total assets

 $5,560,740         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,172,207  $-   -%

Savings and interest-bearing transaction

  2,404,415   331   0.06%

Time less than $100,000

  105,544   65   0.25%

Time $100,000 or more

  80,120   82   0.41%

Total interest-bearing deposits

  2,590,079   478   0.07%

Short-term borrowed funds

  56,602   9   0.06%

Total interest-bearing liabilities

  2,646,681   487   0.08%

Other liabilities

  71,905         

Shareholders' equity

  669,947         

Total liabilities and shareholders' equity

 $5,560,740         

Net interest spread (1) (2)

          3.09%

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

     $40,330   3.13%

(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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-39-

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

  

For the Six Months Ended June 30, 2020

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,399,930  $44,884   2.64%

Tax-exempt (1)

  501,938   8,348   3.33%

Total investments (1)

  3,901,868   53,232   2.73%

Loans:

            

Taxable:

            

PPP loans

  66,250   1,673   5.07%

Other

  1,065,395   26,666   5.03%

Total taxable

  1,131,645   28,339   5.04%

Tax-exempt (1)

  46,359   947   4.11%

Total loans (1)

  1,178,004   29,286   5.00%

Total interest-bearing cash

  358,706   969   0.53%

Total Interest-earning assets (1)

  5,438,578   83,487   3.07%

Other assets

  418,335         

Total assets

 $5,856,913         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,359,788  $-   -%

Savings and interest-bearing transaction

  2,488,577   599   0.05%

Time less than $100,000

  93,308   101   0.22%

Time $100,000 or more

  73,058   158   0.44%

Total interest-bearing deposits

  2,654,943   858   0.06%

Short-term borrowed funds

  56,223   18   0.07%

Other borrowed funds

  349   1   0.35%

Total interest-bearing liabilities

  2,711,515   877   0.07%

Other liabilities

  80,004         

Shareholders' equity

  705,606         

Total liabilities and shareholders' equity

 $5,856,913         

Net interest spread (1) (2)

          3.00%

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

     $82,610   3.04%

 

(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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-40-

 

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

 

 

For the Three Months Ended September 30, 2018

  

For the Six Months Ended June 30, 2019

 
   

Interest

      

Interest

   
 

Average

 

Income/

 

Yields/

  

Average

 

Income/

 

Yields/

 
 

Balance

  

Expense

  

Rates

  

Balance

  

Expense

  

Rates

 
 

($ in thousands)

  

($ in thousands)

 

Assets

              

Investment securities:

              

Taxable

 $2,849,187  $16,780  2.36% $3,007,970  $37,406  2.49%

Tax-exempt (1)

  742,450   6,177  3.33%  661,059   10,619  3.21%

Total investments (1)

 3,591,637  22,957  2.56% 3,669,029  48,025  2.62%

Loans:

              

Taxable

 1,140,448  14,161  4.93% 1,143,516  28,795  5.08%

Tax-exempt (1)

  54,426   546  3.98%  51,020   1,042  4.12%

Total loans (1)

 1,194,874  14,707  4.88% 1,194,536  29,837  5.04%

Total interest-bearing cash

  444,746   2,361  1.98%  308,408   3,696  2.38%

Total Interest-earning assets (1)

 5,231,257  40,025  3.04% 5,171,973  81,558  3.16%

Other assets

  416,747         414,137      

Total assets

 $5,648,004        $5,586,110      
  

Liabilities and shareholders' equity

              

Noninterest-bearing demand

 $2,223,678  $-  -% $2,188,131  $-  -%

Savings and interest-bearing transaction

 2,461,357  358  0.06% 2,421,392  668  0.06%

Time less than $100,000

 118,156  69  0.23% 107,314  131  0.25%

Time $100,000 or more

  90,668   91  0.40%  81,451   164  0.41%

Total interest-bearing deposits

 2,670,181  518  0.08% 2,610,157  963  0.07%

Short-term borrowed funds

  63,489   9  0.06%  57,906   18  0.06%

Total interest-bearing liabilities

 2,733,670  527  0.08% 2,668,063  981  0.08%

Other liabilities

 53,691       67,212      

Shareholders' equity

  636,965         662,704      

Total liabilities and shareholders' equity

 $5,648,004        $5,586,110      

Net interest spread (1) (2)

      2.96%      3.08%

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

    $39,498  3.00%    $80,577  3.12%

 

(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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-34-

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

  

For the Nine Months Ended September 30, 2019

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,037,722  $56,992   2.50%

Tax-exempt (1)

  637,380   15,401   3.22%

Total investments (1)

  3,675,102   72,393   2.63%

Loans:

            

Taxable

  1,126,866   42,834   5.08%

Tax-exempt (1)

  50,191   1,538   4.10%

Total loans (1)

  1,177,057   44,372   5.04%

Total interest-bearing cash

  321,422   5,597   2.30%

Total Interest-earning assets (1)

  5,173,581   122,362   3.16%

Other assets

  407,384         

Total assets

 $5,580,965         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,203,755  $-   -%

Savings and interest-bearing transaction

  2,399,848   970   0.05%

Time less than $100,000

  105,339   194   0.25%

Time $100,000 or more

  80,142   246   0.41%

Total interest-bearing deposits

  2,585,329   1,410   0.07%

Short-term borrowed funds

  55,376   27   0.06%

Total interest-bearing liabilities

  2,640,705   1,437   0.07%

Other liabilities

  67,462         

Shareholders' equity

  669,043         

Total liabilities and shareholders' equity

 $5,580,965         

Net interest spread (1) (2)

          3.09%

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

     $120,925   3.12%

(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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-41-

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

  

For the Nine Months Ended September 30, 2018

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $2,781,814  $47,327   2.27%

Tax-exempt (1)

  756,910   18,697   3.29%

Total investments (1)

  3,538,724   66,024   2.49%

Loans:

            

Taxable

  1,159,049   42,876   4.95%

Tax-exempt (1)

  56,663   1,734   4.09%

Total loans (1)

  1,215,712   44,610   4.91%

Total interest-bearing cash

  437,228   5,933   1.74%

Total Interest-earning assets (1)

  5,191,664   116,567   2.99%

Other assets

  408,835         

Total assets

 $5,600,499         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,186,250  $-   -%

Savings and interest-bearing transaction

  2,450,893   924   0.05%

Time less than $100,000

  121,619   210   0.23%

Time $100,000 or more

  97,877   283   0.39%

Total interest-bearing deposits

  2,670,389   1,417   0.07%

Short-term borrowed funds

  62,131   28   0.06%

Total interest-bearing liabilities

  2,732,520   1,445   0.07%

Other liabilities

  56,233         

Shareholders' equity

  625,496         

Total liabilities and shareholders' equity

 $5,600,499         

Net interest spread (1) (2)

          2.92%

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

     $115,122   2.95%

(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-

 

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 inNoninterest Income

9,55412,28821,20223,867

Noninterest Expense

24,75425,56149,41850,744

Income Before Income Taxes (FTE)(1)

26,86327,05750,09453,700

Income Tax Provision (FTE)(1)

7,3017,43213,57014,429

Net Income

$19,562$19,625$36,524$39,271

Average Common Shares Outstanding

26,93526,94227,00126,892

Average Diluted Common Shares Outstanding

26,95126,98727,02426,950

Common Shares Outstanding at Period End

26,93326,962

Per Common Share:

Basic Earnings

$0.72$0.73$1.35$1.46

Diluted Earnings

0.720.731.351.46

Book Value

30.0025.72

Financial Ratios:

Return on Assets

1.30%1.42%1.25%1.42%

Return on Common Equity

11.15%11.75%10.41%11.95%

Net Interest Income and ExpenseMargin (FTE)(1)

2.99%3.13%3.04%3.12%

Net Loan Losses (Recoveries) to Average Loans

0.09%0.12%0.22%0.21%

Efficiency Ratio(2)

48.0%48.6%47.6%48.6%

Average Balances:

Assets

$6,058,365$5,560,740$5,856,913$5,586,110

Loans

1,232,0731,183,5391,178,0041,194,536

Investment Securities

3,957,8513,648,4363,901,8683,669,029

Deposits

5,200,4754,762,2865,014,7314,798,288

Shareholders' Equity

705,882669,947705,606662,704

Period End Balances:

Assets

$6,463,889$5,523,448

 

  

For the Three Months Ended September 30, 2019

 
  

Compared with

 
  

For the Three Months Ended September 30, 2018

 
  

Volume

  

Yield/Rate

  

Total

 
  

(In thousands)

 

Increase (decrease) in interest and loan fee income:

            

Investment securities:

            

Taxable

 $1,455  $1,351  $2,806 

Tax-exempt (1)

  (1,262)  (133)  (1,395)

Total investments (1)

  193   1,218   1,411 

Loans:

            

Taxable

  (575)  452   (123)

Tax-exempt (1)

  (59)  10   (49)

Total loans (1)

  (634)  462   (172)

Total interest-bearing cash

  (585)  125   (460)

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

  (1,026)  1,805   779 

(Decrease) increase in interest expense:

            

Deposits:

            

Savings and interest-bearing transaction

  (15)  (41)  (56)

Time less than $100,000

  (10)  5   (5)

Time $100,000 or more

  (13)  3   (10)

Total interest-bearing deposits

  (38)  (33)  (71)

Short-term borrowed funds

  (2)  1   (1)

Total decrease in interest expense

  (40)  (32)  (72)

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

 $(986) $1,837  $851 

 

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

1,316,3591,161,712

 

 

[The remainder of this page intentionally left blank]Investment Securities

4,346,6673,645,685

 

 

Deposits

5,468,4124,730,262

 

 

Shareholders' Equity

808,076693,437

 

Capital Ratios at Period End:

Total Risk Based Capital

14.88%17.88%

 

Tangible Equity to Tangible Assets

10.81%10.56%

Dividends Paid Per Common Share

$0.41$0.41$0.82$0.81

Common Dividend Payout Ratio

57%56%61%55%

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).

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Summary of Changes in Interest Income and Expense

  

For the Nine Months Ended September 30, 2019

 
  

Compared with

 
  

For the Nine Months Ended September 30, 2018

 
  

Volume

  

Yield/Rate

  

Total

 
  

(In thousands)

 

Increase (decrease) in interest and loan fee income:

            

Investment securities:

            

Taxable

 $4,354  $5,311  $9,665 

Tax-exempt (1)

  (2,953)  (343)  (3,296)

Total investments (1)

  1,401   4,968   6,369 

Loans:

            

Taxable

  (1,191)  1,149   (42)

Tax-exempt (1)

  (198)  2   (196)

Total loans (1)

  (1,389)  1,151   (238)

Total interest-bearing cash

  (1,623)  1,287   (336)

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

  (1,611)  7,406   5,795 

(Decrease) increase in interest expense:

            

Deposits:

            

Savings and interest-bearing transaction

  (19)  65   46 

Time less than $100,000

  (28)  12   (16)

Time $100,000 or more

  (51)  14   (37)

Total interest-bearing deposits

  (98)  91   (7)

Short-term borrowed funds

  (3)  2   (1)

Total (decrease) increase in interest expense

  (101)  93   (8)

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

 $(1,510) $7,313  $5,803 

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

Provision for Loan Losses

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

The Company provided no provision for loan losses in the third quarters of 2019 and 2018 and the nine months ended September 30, 2019 and September 30, 2018. Classified loans declined from $27 million at December 31, 2018 to $24 million at September 30, 2019. Nonaccrual loans were $4 million at September 30, 2019 compared with $5 million at September 30, 2018 and December 31, 2018. These factors were reflected in Management’s evaluation of credit quality, the level of the provision for loan losses, and the adequacy of the allowance for loan losses at September 30, 2019. For further information regarding credit risk, net credit losses and the allowance for loan losses, see the “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” sections of this Report.

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Financial Overview

Westamerica Bancorporation and subsidiaries’ (collectively, the “Company”) reported net income of $19.6 million or $0.72 diluted earnings per common share (“EPS”) for the second quarter 2020 and net income of $36.5 million or $1.35 diluted earnings per common share for the six months ended June 30, 2020. The COVID-19 coronavirus pandemic began in the United States and California in the first quarter 2020 and continued to cause escalating infections in the United States during the second quarter of 2020. In response to the pandemic, the Company’s primary and wholly-owned subsidiary bank, Westamerica Bank (the “Bank”), funded $249 million Paycheck Protection Program (“PPP”) loans for the Bank’s customers during the second quarter 2020. PPP loans meaningfully increased interest-earning assets and related interest and fee income. the Bank has been actively working with consumer and commercial borrowers requesting deferral of loan payments. At June 30, 2020, automobile loans and other consumer loans granted loan deferrals totaled $29 million and $5 million, respectively, commercial real estate loans with deferred payments totaled $66 million, primarily for hospitality and retail properties, and commercial loans with deferred payments totals $3 million. The results for the six months ended June 30, 2020 included a provision for credit losses of $4.3 million, which reduced EPS $0.11, representing Management’s estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk from deteriorating economic conditions caused by the COVID-19 pandemic. These results compare to net income of $19.6 million or $0.73 diluted earnings per common share for the second quarter 2019 and net income of $39.3 million or $1.46 diluted earnings per common share for the six months ended June 30, 2019. Results for the second quarter 2019 and six months ended June 30, 2019 include a life insurance gain of $433 thousand and $553 thousand in loss contingencies. The loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit.

Regions and states of the United States of America, including California implemented varying degrees of “stay at home” directives in an effort to prevent the spread of the virus in the first quarter of 2020. These directives have significantly reduced economic activity in the United States and the State of California. In the second quarter 2020 the “stay at home” directives were gradually lifted in varying stages in counties of the State of California. Counties with high infection rates have delayed reopening and restrictions on certain economic activity remained. The unemployment claims rose considerably in the second quarter 2020. The California “stay at home” directive excludes essential businesses including banks. The Bank remains open and fully operational.

In response to the pandemic, the Federal Reserve has engaged significant levels of monetary policy to provide liquidity and credit facilities to the financial markets. On March 15, 2020, the Federal Open Market Committee (“FOMC”) reduced the target range for the federal funds rate to 0 to 0.25 percent; relatedly, the FOMC reduced the interest rate paid on deposit balances to 0.10 percent effective March 16, 2020. The Bank maintains deposit balances at the Federal Reserve Bank; the amount that earns interest is identified in the Company’s financial statements as “interest-bearing cash”.

The extent of the spread of the coronavirus and its ultimate containment are uncertain at this time. The effectiveness of the Federal Reserve Bank’s monetary policies and the federal government’s fiscal policies in stimulating the United States economy is uncertain at this time. Management expects the Company’s net interest margin and non-interest income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to the coronavirus. The amount of impact on the Company’s financial results is uncertain. Please refer to Note 12 and Part II, Item 1A “Risk factors” in this Form 10-Q.

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

The Company’s significant accounting policies (see Note 1, “Summary of Significant Accounting Policies,” to Financial Statements in the Company’s 2019 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 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changed estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB replaced the incurred loss model with the current expected credit loss (CECL) model, which accelerated recognition of credit losses. Additionally, credit losses relating to debt securities available-for-sale are recorded through an allowance for credit losses under the new standard. The Company is also required to provide additional disclosures related to the financial assets within the scope of the new standard.

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The Company adopted the ASU provisions on January 1, 2020. Management evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management measured historical loss rates for each portfolio segment. Management also segmented debt securities held to maturity, selected methods to estimate losses for each segment, and measured a loss estimate. Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. The adjustment to the allowance for credit losses was recorded through an offsetting after-tax adjustment to shareholders’ equity. The implementing entry increased allowance for credit losses by $2,017 thousand, reduced allowance for unfunded credit commitments by $2,107 thousand and increased retained earnings by $52 thousand.

FASB ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The ASU is part of the disclosure framework project, where the primary focus is to improve the effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to Fair Value Measurements.

The provisions of the ASU were effective January 1, 2020 with the option to early adopt any removed or modified disclosures upon issuance of the ASU. The Company early adopted the provisions to remove and/or modify relevant disclosures in the “Fair Value Measurements” note to the unaudited consolidated financial statements. The requirement to include additional disclosures was adopted by the Company January 1, 2020. The additional disclosures did not affect the financial results upon adoption.

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,

 
  

2020

  

2019

  

2020

  

2019

 
  

(In thousands, except per share data)

 

Net interest and loan fee income (FTE)

 $42,063  $40,330  $82,610  $80,577 

Provision for loan losses

  -   -   4,300   - 

Noninterest income

  9,554   12,288   21,202   23,867 

Noninterest expense

  24,754   25,561   49,418   50,744 

Income before taxes (FTE)

  26,863   27,057   50,094   53,700 

Income tax provision (FTE)

  7,301   7,432   13,570   14,429 

Net income

 $19,562  $19,625  $36,524  $39,271 
                 

Average diluted common shares

  26,951   26,987   27,024   26,950 

Diluted earnings per common share

 $0.72  $0.73  $1.35  $1.46 
                 

Average total assets

 $6,058,365  $5,560,740  $5,856,913  $5,586,110 

Net income to average total assets (annualized)

  1.30%  1.42%  1.25%  1.42%

Net income to average common shareholders' equity (annualized)

  11.15%  11.75%  10.41%  11.95%

Net income for the second quarter 2020 decreased $63 thousand compared with the second quarter 2019. Net interest and loan fee income (FTE) increased $1.7 million in the second quarter 2020 compared with the second quarter 2019 mainly due to higher average balances of investments, higher net yield on those investments and PPP loans funded during the second quarter 2020, partially offset by lower yield on interest-bearing cash and loan payoffs and paydowns. The provision for loan losses remained zero, reflecting Management's evaluation of credit risk over the remaining life of loans and bonds. Second quarter 2020 noninterest income decreased $2.7 million due to lower economic activity related to the COVID-19 pandemic. Second quarter 2020 noninterest expense decreased $807 thousand mostly because second quarter 2019 included $533 thousand in loss contingency. The tax rate (FTE) for the second quarter 2020 was 27.2% compared with 27.5% for the second quarter 2019. In the second quarter 2019, the Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the tax exempt nature of the life insurance gains and excess tax benefits of $83 thousand from stock options, increased the tax rate (FTE) by 0.3%.

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Comparing the six months ended June 30, 2020 with the six months ended June 30, 2019 net income decreased $2.7 million. Net interest and loan fee (FTE) income increased $2.0 million due to higher average balances of investments, higher net yield on those investments and PPP loans funded during the second quarter 2020, partially offset by lower yield on interest-bearing cash and loan payoffs and paydowns. Results for the six months ended June 30, 2020, include a provision of credit losses of $4.3 million, which reduced EPS $0.11, representing Management estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk form deteriorating economic conditions caused by the COVID-19 pandemic. In the six months ended June 30, 2019, the provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. In the six months ended June 30, 2020, noninterest income decreased $2.7 million primarily due to lower economic activity related to the COVID-19 pandemic, partially offset by a $603 thousand recovery on a previously charged off loan in the first six months of 2020. In the six months ended June 30, 2020 noninterest expense decreased $1.3 million compared with the six months ended June 30, 2019 due to lower salaries, occupancy and equipment expenses, lower FDIC insurance assessments and lower amortization of intangible assets, and because the six months ended June 30, 2019 included $553 thousand in loss contingency. The six months ended June 30, 2020 included a $246 thousand FDIC assessment credit; the Company’s credit is fully exhausted. The tax rate (FTE) for the six months ended June 30, 2020 was 27.1% compared with 26.9% for the six months ended June 30, 2019. In the six months ended June 30, 2019, the Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the tax exempt nature of the life insurance gains and excess tax benefits of $367 thousand from stock options, decreased the tax rate (FTE) 0.4%.

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,

 
  

2020

  

2019

  

2020

  

2019

 
  

($ in thousands)

 

Interest and loan fee income

 $41,539  $39,626  $81,530  $79,109 

Interest expense

  435   487   877   981 

FTE adjustment

  959   1,191   1,957   2,449 

Net interest and loan fee income (FTE)

 $42,063  $40,330  $82,610  $80,577 
                 

Average earning assets

 $5,635,014  $5,159,112  $5,438,578  $5,171,973 

Net interest margin (FTE) (annualized)

  2.99%  3.13%  3.04%  3.12%

Net interest and loan fee income (FTE) increased $1.7 million in the second quarter 2020 compared with the second quarter 2019 mainly due to higher average balances of investment securities (up $309 million), a higher net yield on those investment securities (up 0.11%) and average balances of $133 million of PPP loans funded in the second quarter 2020, offset by lower yield on interest-bearing cash (down 2.27%) and lower average balances of other loans (down $84 million).

Net interest and loan fee (FTE) income increased $2.0 million in the first six months of 2020 compared with the first six months of 2019 due to higher average balances of investment securities (up $233 million), a higher net yield on investment securities (up 0.02%) and average balances of $66 million of PPP loans funded in the second quarter 2020, offset by lower yield on interest-bearing cash (down 1.84%) and lower average balances of other loans (down $72 million).

The annualized net interest margin (FTE) was 2.99% in the second quarter 2020 and 3.04% in the first six months of 2020 compared with 3.13% in the second quarter 2019 and 3.12% in the first six months of 2019. The lower yield in in the second quarter 2020 and the first six months of 2020 compared with 2019 is primarily due to lower yield on interest-bearing cash which made up a higher percentage of total earning assets in the current periods (7.9% in the second quarter 2020 compared with 6.3% in the second quarter 2019 and 6.6% in the first six months of 2020 compared with 6.0% in the first six months of 2019).

The Company’s funding costs were 0.03% in the second quarter 2020 and in the first six months of 2020 compared with 0.04% in the second quarter 2019 and in the first six months of 2019. Average balances of time deposits in the second quarter 2020 declined $21 million from the second quarter 2019 and $22 million in the first six months of 2020 from the first six months of 2019. Average balances of checking and saving deposits accounted for 96.8% of average total deposits in the second quarter 2020 and 96.7% in the first six months of 2020 compared with 96.1% in the second quarter 2019 and in the first six months of 2019.

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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,

 
   

2020

  

2019

  

2020

  

2019

 
                  

Yield on earning assets (FTE)

  3.02%  3.17%  3.07%  3.16%

Rate paid on interest-bearing liabilities

  0.06%  0.08%  0.07%  0.08%

Net interest spread (FTE)

  2.96%  3.09%  3.00%  3.08%

Impact of noninterest-bearing demand deposits

  0.03%  0.04%  0.04%  0.04%

Net interest margin (FTE)

  2.99%  3.13%  3.04%  3.12%

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Summary of Average Balances, Yields/Rates and Interest Differential

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

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

  

For the Three Months Ended June 30, 2020

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,469,925  $22,920   2.64%

Tax-exempt (1)

  487,926   4,089   3.35%

Total investments (1)

  3,957,851   27,009   2.73%

Loans:

            

Taxable

            

Paycheck Protection Program ("PPP") loans

  132,500   1,673   5.07%

Other

  1,053,420   13,235   5.05%

Total taxable

  1,185,920   14,908   5.06%

Tax-exempt (1)

  46,153   468   4.08%

Total loans (1)

  1,232,073   15,376   5.02%

Total interest-bearing cash

  445,090   113   0.10%

Total Interest-earning assets (1)

  5,635,014   42,498   3.02%

Other assets

  423,351         

Total assets

 $6,058,365         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,496,840  $-   -%

Savings and interest-bearing transaction

  2,539,073   298   0.05%

Time less than $100,000

  92,295   47   0.20%

Time $100,000 or more

  72,267   79   0.44%

Total interest-bearing deposits

  2,703,635   424   0.06%

Short-term borrowed funds

  70,116   10   0.06%

Other borrowed funds

  699   1   0.35%

Total interest-bearing liabilities

  2,774,450   435   0.06%

Other liabilities

  81,193         

Shareholders' equity

  705,882         

Total liabilities and shareholders' equity

 $6,058,365         

Net interest spread (1) (2)

          2.96%

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

     $42,063   2.99%

(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 Three Months Ended June 30, 2019

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,006,905  $18,773   2.50%

Tax-exempt (1)

  641,531   5,157   3.22%

Total investments (1)

  3,648,436   23,930   2.62%

Loans:

            

Taxable

  1,133,168   14,417   5.10%

Tax-exempt (1)

  50,371   512   4.08%

Total loans (1)

  1,183,539   14,929   5.06%

Total interest-bearing cash

  327,137   1,958   2.37%

Total Interest-earning assets (1)

  5,159,112   40,817   3.17%

Other assets

  401,628         

Total assets

 $5,560,740         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,172,207  $-   -%

Savings and interest-bearing transaction

  2,404,415   331   0.06%

Time less than $100,000

  105,544   65   0.25%

Time $100,000 or more

  80,120   82   0.41%

Total interest-bearing deposits

  2,590,079   478   0.07%

Short-term borrowed funds

  56,602   9   0.06%

Total interest-bearing liabilities

  2,646,681   487   0.08%

Other liabilities

  71,905         

Shareholders' equity

  669,947         

Total liabilities and shareholders' equity

 $5,560,740         

Net interest spread (1) (2)

          3.09%

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

     $40,330   3.13%

(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, 2020

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,399,930  $44,884   2.64%

Tax-exempt (1)

  501,938   8,348   3.33%

Total investments (1)

  3,901,868   53,232   2.73%

Loans:

            

Taxable:

            

PPP loans

  66,250   1,673   5.07%

Other

  1,065,395   26,666   5.03%

Total taxable

  1,131,645   28,339   5.04%

Tax-exempt (1)

  46,359   947   4.11%

Total loans (1)

  1,178,004   29,286   5.00%

Total interest-bearing cash

  358,706   969   0.53%

Total Interest-earning assets (1)

  5,438,578   83,487   3.07%

Other assets

  418,335         

Total assets

 $5,856,913         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,359,788  $-   -%

Savings and interest-bearing transaction

  2,488,577   599   0.05%

Time less than $100,000

  93,308   101   0.22%

Time $100,000 or more

  73,058   158   0.44%

Total interest-bearing deposits

  2,654,943   858   0.06%

Short-term borrowed funds

  56,223   18   0.07%

Other borrowed funds

  349   1   0.35%

Total interest-bearing liabilities

  2,711,515   877   0.07%

Other liabilities

  80,004         

Shareholders' equity

  705,606         

Total liabilities and shareholders' equity

 $5,856,913         

Net interest spread (1) (2)

          3.00%

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

     $82,610   3.04%

(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, 2019

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,007,970  $37,406   2.49%

Tax-exempt (1)

  661,059   10,619   3.21%

Total investments (1)

  3,669,029   48,025   2.62%

Loans:

            

Taxable

  1,143,516   28,795   5.08%

Tax-exempt (1)

  51,020   1,042   4.12%

Total loans (1)

  1,194,536   29,837   5.04%

Total interest-bearing cash

  308,408   3,696   2.38%

Total Interest-earning assets (1)

  5,171,973   81,558   3.16%

Other assets

  414,137         

Total assets

 $5,586,110         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,188,131  $-   -%

Savings and interest-bearing transaction

  2,421,392   668   0.06%

Time less than $100,000

  107,314   131   0.25%

Time $100,000 or more

  81,451   164   0.41%

Total interest-bearing deposits

  2,610,157   963   0.07%

Short-term borrowed funds

  57,906   18   0.06%

Total interest-bearing liabilities

  2,668,063   981   0.08%

Other liabilities

  67,212         

Shareholders' equity

  662,704         

Total liabilities and shareholders' equity

 $5,586,110         

Net interest spread (1) (2)

          3.08%

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

     $80,577   3.12%

(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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-41-

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.

Noninterest Income

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

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 
                 

Service charges on deposit accounts

 $4,510  $4,615  $13,508  $14,012 

Merchant processing services

  2,494   2,464   7,708   7,190 

Debit card fees

  1,641   1,656   4,789   4,959 

Trust fees

  733   733   2,199   2,202 

ATM processing fees

  725   687   2,080   2,049 

Other service fees

  580   665   1,742   1,946 

Financial services commissions

  75   132   270   387 

Life insurance gains

  -   585   433   585 

Equity securities (losses) gains

  -   (16)  50   (66)

Other noninterest income

  1,051   1,007   2,897   2,988 

Total

 $11,809  $12,528  $35,676  $36,252 

Noninterest income for the third quarter 2019 decreased by $719 thousand from the third quarter 2018 primarily due to lower income from service charges on deposit accounts in the third quarter 2019 and a life insurance gain of $585 thousand in the third quarter 2018. Service charges on deposit accounts decreased due to declines in overdraft fees in the third quarter 2019.

In the nine months ended September 30, 2019, noninterest income decreased $576 thousand compared with the nine months ended September 30, 2018. Income from service charges on deposit accounts decreased due to lower overdraft fees in the nine months ended September 30, 2019. Other service charges decreased due to lower income from internet banking. Debit card fees and financial services commissions decreased in the nine months ended September 30, 2019. An increase in merchant processing services partially offset the decrease in noninterest income in the nine months ended September 30, 2019 compared with nine months ended September 30, 2018.

9,55412,28821,20223,867

Noninterest Expense

24,75425,56149,41850,744

Income Before Income Taxes (FTE)(1)

26,86327,05750,09453,700

Income Tax Provision (FTE)(1)

7,3017,43213,57014,429

Net Income

$19,562$19,625$36,524$39,271

Average Common Shares Outstanding

26,93526,94227,00126,892

Average Diluted Common Shares Outstanding

26,95126,98727,02426,950

Common Shares Outstanding at Period End

26,93326,962

 

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

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 
                 

Salaries and related benefits

 $12,559  $13,415  $38,757  $39,952 

Occupancy and equipment

  5,199   4,809   15,163   14,365 

Outsourced data processing services

  2,374   2,292   7,110   6,930 

Professional fees

  645   621   1,791   2,277 

Courier service

  456   448   1,349   1,333 

Amortization of identifiable intangibles

  76   451   465   1,474 

Loss contingency

  -   3,500   553   3,500 

Other noninterest expense

  2,724   3,830   9,589   11,298 

Total

 $24,033  $29,366  $74,777  $81,129 

Per Common Share:

Basic Earnings

$0.72$0.73$1.35$1.46

Diluted Earnings

0.720.731.351.46

Book Value

30.0025.72

Financial Ratios:

Return on Assets

1.30%1.42%1.25%1.42%

Return on Common Equity

11.15%11.75%10.41%11.95%

Net Interest Margin (FTE)(1)

2.99%3.13%3.04%3.12%

Net Loan Losses (Recoveries) to Average Loans

0.09%0.12%0.22%0.21%

Efficiency Ratio(2)

48.0%48.6%47.6%48.6%

Average Balances:

Assets

$6,058,365$5,560,740$5,856,913$5,586,110

Loans

1,232,0731,183,5391,178,0041,194,536

Investment Securities

3,957,8513,648,4363,901,8683,669,029

Deposits

5,200,4754,762,2865,014,7314,798,288

Shareholders' Equity

705,882669,947705,606662,704

Period End Balances:

Assets

$6,463,889$5,523,448

 

 

Noninterest expense decreased $5.3 million in the third quarter 2019 compared with the third quarter 2018 dueLoans

1,316,3591,161,712

Investment Securities

4,346,6673,645,685

Deposits

5,468,4124,730,262

Shareholders' Equity

808,076693,437

Capital Ratios at Period End:

Total Risk Based Capital

14.88%17.88%

Tangible Equity to a loss contingency recognized in the third quarter 2018 and lower FDIC insurance assessments, employee benefit costs, and intangible amortization in the third quarter 2019. The lower third quarter 2019 FDIC assessments are due to application of Westamerica Bank’s assessment credit described in the Company’s December 31, 2018 Form 10-K, Part 1, Item 1, “Premiums for Deposit Insurance.” Tangible Assets

10.81%10.56%

 

-39-

Dividends Paid Per Common Share

$0.41$0.41$0.82$0.81

In the nine months ended September 30, 2019 noninterest expense decreased $6.4 million compared with the nine months ended September 30, 2018 primarily due to decreases in loss contingencies, FDIC insurance assessments, employee benefit costs, and intangible amortization in the nine months ended SeptemberCommon Dividend Payout Ratio

57%56%61%55%

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).

-33-

Financial Overview

Westamerica Bancorporation and subsidiaries’ (collectively, the “Company”) reported net income of $19.6 million or $0.72 diluted earnings per common share (“EPS”) for the second quarter 2020 and net income of $36.5 million or $1.35 diluted earnings per common share for the six months ended June 30, 2020. The COVID-19 coronavirus pandemic began in the United States and California in the first quarter 2020 and continued to cause escalating infections in the United States during the second quarter of 2020. In response to the pandemic, the Company’s primary and wholly-owned subsidiary bank, Westamerica Bank (the “Bank”), funded $249 million Paycheck Protection Program (“PPP”) loans for the Bank’s customers during the second quarter 2020. PPP loans meaningfully increased interest-earning assets and related interest and fee income. the Bank has been actively working with consumer and commercial borrowers requesting deferral of loan payments. At June 30, 2020, automobile loans and other consumer loans granted loan deferrals totaled $29 million and $5 million, respectively, commercial real estate loans with deferred payments totaled $66 million, primarily for hospitality and retail properties, and commercial loans with deferred payments totals $3 million. The results for the six months ended June 30, 2020 included a provision for credit losses of $4.3 million, which reduced EPS $0.11, representing Management’s estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk from deteriorating economic conditions caused by the COVID-19 pandemic. These results compare to net income of $19.6 million or $0.73 diluted earnings per common share for the second quarter 2019 and net income of $39.3 million or $1.46 diluted earnings per common share for the six months ended June 30, 2019. Results for the second quarter 2019 and six months ended June 30, 2019 include a life insurance gain of $433 thousand and $553 thousand in loss contingencies. The loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit.

Regions and states of the United States of America, including California implemented varying degrees of “stay at home” directives in an effort to prevent the spread of the virus in the first quarter of 2020. These directives have significantly reduced economic activity in the United States and the State of California. In the second quarter 2020 the “stay at home” directives were gradually lifted in varying stages in counties of the State of California. Counties with high infection rates have delayed reopening and restrictions on certain economic activity remained. The unemployment claims rose considerably in the second quarter 2020. The California “stay at home” directive excludes essential businesses including banks. The Bank remains open and fully operational.

In response to the pandemic, the Federal Reserve has engaged significant levels of monetary policy to provide liquidity and credit facilities to the financial markets. On March 15, 2020, the Federal Open Market Committee (“FOMC”) reduced the target range for the federal funds rate to 0 to 0.25 percent; relatedly, the FOMC reduced the interest rate paid on deposit balances to 0.10 percent effective March 16, 2020. The Bank maintains deposit balances at the Federal Reserve Bank; the amount that earns interest is identified in the Company’s financial statements as “interest-bearing cash”.

The extent of the spread of the coronavirus and its ultimate containment are uncertain at this time. The effectiveness of the Federal Reserve Bank’s monetary policies and the federal government’s fiscal policies in stimulating the United States economy is uncertain at this time. Management expects the Company’s net interest margin and non-interest income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to the coronavirus. The amount of impact on the Company’s financial results is uncertain. Please refer to Note 12 and Part II, Item 1A “Risk factors” in this Form 10-Q.

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

The Company’s significant accounting policies (see Note 1, “Summary of Significant Accounting Policies,” to Financial Statements in the Company’s 2019 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 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changed estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB replaced the incurred loss model with the current expected credit loss (CECL) model, which accelerated recognition of credit losses. Additionally, credit losses relating to debt securities available-for-sale are recorded through an allowance for credit losses under the new standard. The Company is also required to provide additional disclosures related to the financial assets within the scope of the new standard.

-34-

The Company adopted the ASU provisions on January 1, 2020. Management evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management measured historical loss rates for each portfolio segment. Management also segmented debt securities held to maturity, selected methods to estimate losses for each segment, and measured a loss estimate. Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. The adjustment to the allowance for credit losses was recorded through an offsetting after-tax adjustment to shareholders’ equity. The implementing entry increased allowance for credit losses by $2,017 thousand, reduced allowance for unfunded credit commitments by $2,107 thousand and increased retained earnings by $52 thousand.

FASB ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The ASU is part of the disclosure framework project, where the primary focus is to improve the effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to Fair Value Measurements.

The provisions of the ASU were effective January 1, 2020 with the option to early adopt any removed or modified disclosures upon issuance of the ASU. The Company early adopted the provisions to remove and/or modify relevant disclosures in the “Fair Value Measurements” note to the unaudited consolidated financial statements. The requirement to include additional disclosures was adopted by the Company January 1, 2020. The additional disclosures did not affect the financial results upon adoption.

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,

 
  

2020

  

2019

  

2020

  

2019

 
  

(In thousands, except per share data)

 

Net interest and loan fee income (FTE)

 $42,063  $40,330  $82,610  $80,577 

Provision for loan losses

  -   -   4,300   - 

Noninterest income

  9,554   12,288   21,202   23,867 

Noninterest expense

  24,754   25,561   49,418   50,744 

Income before taxes (FTE)

  26,863   27,057   50,094   53,700 

Income tax provision (FTE)

  7,301   7,432   13,570   14,429 

Net income

 $19,562  $19,625  $36,524  $39,271 
                 

Average diluted common shares

  26,951   26,987   27,024   26,950 

Diluted earnings per common share

 $0.72  $0.73  $1.35  $1.46 
                 

Average total assets

 $6,058,365  $5,560,740  $5,856,913  $5,586,110 

Net income to average total assets (annualized)

  1.30%  1.42%  1.25%  1.42%

Net income to average common shareholders' equity (annualized)

  11.15%  11.75%  10.41%  11.95%

Net income for the second quarter 2020 decreased $63 thousand compared with the second quarter 2019. Net interest and loan fee income (FTE) increased $1.7 million in the second quarter 2020 compared with the second quarter 2019 mainly due to higher average balances of investments, higher net yield on those investments and PPP loans funded during the second quarter 2020, partially offset by lower yield on interest-bearing cash and loan payoffs and paydowns. The provision for loan losses remained zero, reflecting Management's evaluation of credit risk over the remaining life of loans and bonds. Second quarter 2020 noninterest income decreased $2.7 million due to lower economic activity related to the COVID-19 pandemic. Second quarter 2020 noninterest expense decreased $807 thousand mostly because second quarter 2019 included $533 thousand in loss contingency. The tax rate (FTE) for the second quarter 2020 was 27.2% compared with 27.5% for the second quarter 2019. In the second quarter 2019, the Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the tax exempt nature of the life insurance gains and excess tax benefits of $83 thousand from stock options, increased the tax rate (FTE) by 0.3%.

-35-

Comparing the six months ended June 30, 2020 with the six months ended June 30, 2019 net income decreased $2.7 million. Net interest and loan fee (FTE) income increased $2.0 million due to higher average balances of investments, higher net yield on those investments and PPP loans funded during the second quarter 2020, partially offset by lower yield on interest-bearing cash and loan payoffs and paydowns. Results for the six months ended June 30, 2020, include a provision of credit losses of $4.3 million, which reduced EPS $0.11, representing Management estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk form deteriorating economic conditions caused by the COVID-19 pandemic. In the six months ended June 30, 2019, the provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. In the six months ended June 30, 2020, noninterest income decreased $2.7 million primarily due to lower economic activity related to the COVID-19 pandemic, partially offset by a $603 thousand recovery on a previously charged off loan in the first six months of 2020. In the six months ended June 30, 2020 noninterest expense decreased $1.3 million compared with the six months ended June 30, 2019 due to lower salaries, occupancy and equipment expenses, lower FDIC insurance assessments and lower amortization of intangible assets, and because the six months ended June 30, 2019 included $553 thousand in loss contingency. The six months ended June 30, 2020 included a $246 thousand FDIC assessment credit; the Company’s credit is fully exhausted. The tax rate (FTE) for the six months ended June 30, 2020 was 27.1% compared with 26.9% for the six months ended June 30, 2019. In the six months ended June 30, 2019, the Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the tax exempt nature of the life insurance gains and excess tax benefits of $367 thousand from stock options, decreased the tax rate (FTE) 0.4%.

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,

 
  

2020

  

2019

  

2020

  

2019

 
  

($ in thousands)

 

Interest and loan fee income

 $41,539  $39,626  $81,530  $79,109 

Interest expense

  435   487   877   981 

FTE adjustment

  959   1,191   1,957   2,449 

Net interest and loan fee income (FTE)

 $42,063  $40,330  $82,610  $80,577 
                 

Average earning assets

 $5,635,014  $5,159,112  $5,438,578  $5,171,973 

Net interest margin (FTE) (annualized)

  2.99%  3.13%  3.04%  3.12%

Net interest and loan fee income (FTE) increased $1.7 million in the second quarter 2020 compared with the second quarter 2019 mainly due to higher average balances of investment securities (up $309 million), a higher net yield on those investment securities (up 0.11%) and average balances of $133 million of PPP loans funded in the second quarter 2020, offset by lower yield on interest-bearing cash (down 2.27%) and lower average balances of other loans (down $84 million).

Net interest and loan fee (FTE) income increased $2.0 million in the first six months of 2020 compared with the first six months of 2019 due to higher average balances of investment securities (up $233 million), a higher net yield on investment securities (up 0.02%) and average balances of $66 million of PPP loans funded in the second quarter 2020, offset by lower yield on interest-bearing cash (down 1.84%) and lower average balances of other loans (down $72 million).

The annualized net interest margin (FTE) was 2.99% in the second quarter 2020 and 3.04% in the first six months of 2020 compared with 3.13% in the second quarter 2019 and 3.12% in the first six months of 2019. The lower yield in in the second quarter 2020 and the first six months of 2020 compared with 2019 is primarily due to lower yield on interest-bearing cash which made up a higher percentage of total earning assets in the current periods (7.9% in the second quarter 2020 compared with 6.3% in the second quarter 2019 and 6.6% in the first six months of 2020 compared with 6.0% in the first six months of 2019).

The Company’s funding costs were 0.03% in the second quarter 2020 and in the first six months of 2020 compared with 0.04% in the second quarter 2019 and in the first six months of 2019. Average balances of time deposits in the second quarter 2020 declined $21 million from the second quarter 2019 and $22 million in the first six months of 2020 from the first six months of 2019. Average balances of checking and saving deposits accounted for 96.8% of average total deposits in the second quarter 2020 and 96.7% in the first six months of 2020 compared with 96.1% in the second quarter 2019 and in the first six months of 2019.

 

-36-

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,

 
   

2020

  

2019

  

2020

  

2019

 
                  

Yield on earning assets (FTE)

  3.02%  3.17%  3.07%  3.16%

Rate paid on interest-bearing liabilities

  0.06%  0.08%  0.07%  0.08%

Net interest spread (FTE)

  2.96%  3.09%  3.00%  3.08%

Impact of noninterest-bearing demand deposits

  0.03%  0.04%  0.04%  0.04%

Net interest margin (FTE)

  2.99%  3.13%  3.04%  3.12%

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-37-

Summary of Average Balances, Yields/Rates and Interest Differential

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

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

  

For the Three Months Ended June 30, 2020

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,469,925  $22,920   2.64%

Tax-exempt (1)

  487,926   4,089   3.35%

Total investments (1)

  3,957,851   27,009   2.73%

Loans:

            

Taxable

            

Paycheck Protection Program ("PPP") loans

  132,500   1,673   5.07%

Other

  1,053,420   13,235   5.05%

Total taxable

  1,185,920   14,908   5.06%

Tax-exempt (1)

  46,153   468   4.08%

Total loans (1)

  1,232,073   15,376   5.02%

Total interest-bearing cash

  445,090   113   0.10%

Total Interest-earning assets (1)

  5,635,014   42,498   3.02%

Other assets

  423,351         

Total assets

 $6,058,365         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,496,840  $-   -%

Savings and interest-bearing transaction

  2,539,073   298   0.05%

Time less than $100,000

  92,295   47   0.20%

Time $100,000 or more

  72,267   79   0.44%

Total interest-bearing deposits

  2,703,635   424   0.06%

Short-term borrowed funds

  70,116   10   0.06%

Other borrowed funds

  699   1   0.35%

Total interest-bearing liabilities

  2,774,450   435   0.06%

Other liabilities

  81,193         

Shareholders' equity

  705,882         

Total liabilities and shareholders' equity

 $6,058,365         

Net interest spread (1) (2)

          2.96%

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

     $42,063   2.99%

(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.

-38-

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

  

For the Three Months Ended June 30, 2019

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,006,905  $18,773   2.50%

Tax-exempt (1)

  641,531   5,157   3.22%

Total investments (1)

  3,648,436   23,930   2.62%

Loans:

            

Taxable

  1,133,168   14,417   5.10%

Tax-exempt (1)

  50,371   512   4.08%

Total loans (1)

  1,183,539   14,929   5.06%

Total interest-bearing cash

  327,137   1,958   2.37%

Total Interest-earning assets (1)

  5,159,112   40,817   3.17%

Other assets

  401,628         

Total assets

 $5,560,740         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,172,207  $-   -%

Savings and interest-bearing transaction

  2,404,415   331   0.06%

Time less than $100,000

  105,544   65   0.25%

Time $100,000 or more

  80,120   82   0.41%

Total interest-bearing deposits

  2,590,079   478   0.07%

Short-term borrowed funds

  56,602   9   0.06%

Total interest-bearing liabilities

  2,646,681   487   0.08%

Other liabilities

  71,905         

Shareholders' equity

  669,947         

Total liabilities and shareholders' equity

 $5,560,740         

Net interest spread (1) (2)

          3.09%

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

     $40,330   3.13%

(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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-39-

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

  

For the Six Months Ended June 30, 2020

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,399,930  $44,884   2.64%

Tax-exempt (1)

  501,938   8,348   3.33%

Total investments (1)

  3,901,868   53,232   2.73%

Loans:

            

Taxable:

            

PPP loans

  66,250   1,673   5.07%

Other

  1,065,395   26,666   5.03%

Total taxable

  1,131,645   28,339   5.04%

Tax-exempt (1)

  46,359   947   4.11%

Total loans (1)

  1,178,004   29,286   5.00%

Total interest-bearing cash

  358,706   969   0.53%

Total Interest-earning assets (1)

  5,438,578   83,487   3.07%

Other assets

  418,335         

Total assets

 $5,856,913         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,359,788  $-   -%

Savings and interest-bearing transaction

  2,488,577   599   0.05%

Time less than $100,000

  93,308   101   0.22%

Time $100,000 or more

  73,058   158   0.44%

Total interest-bearing deposits

  2,654,943   858   0.06%

Short-term borrowed funds

  56,223   18   0.07%

Other borrowed funds

  349   1   0.35%

Total interest-bearing liabilities

  2,711,515   877   0.07%

Other liabilities

  80,004         

Shareholders' equity

  705,606         

Total liabilities and shareholders' equity

 $5,856,913         

Net interest spread (1) (2)

          3.00%

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

     $82,610   3.04%

(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, 2019

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,007,970  $37,406   2.49%

Tax-exempt (1)

  661,059   10,619   3.21%

Total investments (1)

  3,669,029   48,025   2.62%

Loans:

            

Taxable

  1,143,516   28,795   5.08%

Tax-exempt (1)

  51,020   1,042   4.12%

Total loans (1)

  1,194,536   29,837   5.04%

Total interest-bearing cash

  308,408   3,696   2.38%

Total Interest-earning assets (1)

  5,171,973   81,558   3.16%

Other assets

  414,137         

Total assets

 $5,586,110         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,188,131  $-   -%

Savings and interest-bearing transaction

  2,421,392   668   0.06%

Time less than $100,000

  107,314   131   0.25%

Time $100,000 or more

  81,451   164   0.41%

Total interest-bearing deposits

  2,610,157   963   0.07%

Short-term borrowed funds

  57,906   18   0.06%

Total interest-bearing liabilities

  2,668,063   981   0.08%

Other liabilities

  67,212         

Shareholders' equity

  662,704         

Total liabilities and shareholders' equity

 $5,586,110         

Net interest spread (1) (2)

          3.08%

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

     $80,577   3.12%

(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, 2020

 
  

Compared with

 
  

For the Three Months Ended June 30, 2019

 
  

Volume

  

Yield/Rate

  

Total

 
  

(In thousands)

 

Increase (decrease) in interest and loan fee income:

            

Investment securities:

            

Taxable

 $2,891  $1,256  $4,147 

Tax-exempt (1)

  (1,235)  167   (1,068)

Total investments (1)

  1,656   1,423   3,079 

Loans:

            

Taxable:

            

PPP loans

  1,673   -   1,673 

Other

  (1,061)  (121)  (1,182)

Total taxable

  612   (121)  491 

Tax-exempt (1)

  (44)  -   (44)

Total loans (1)

  568   (121)  447 

Total interest-bearing cash

  714   (2,559)  (1,845)

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

  2,938   (1,257)  1,681 

(Decrease) increase in interest expense:

            

Deposits:

            

Savings and interest-bearing transaction

  19   (52)  (33)

Time less than $100,000

  (8)  (10)  (18)

Time $100,000 or more

  (8)  5   (3)

Total interest-bearing deposits

  3   (57)  (54)

Short-term borrowed funds

  1   -   1 

Other borrowed funds

  1   -   1 

Total increase (decrease) in interest expense

  5   (57)  (52)

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

 $2,933  $(1,200) $1,733 

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

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Summary of Changes in Interest Income and Expense

  

For the Six Months Ended June 30, 2020

 
  

Compared with

 
  

For the Six Months Ended June 30, 2019

 
  

Volume

  

Yield/Rate

  

Total

 
  

(In thousands)

 

Increase (decrease) in interest and loan fee income:

            

Investment securities:

            

Taxable

 $4,874  $2,604  $7,478 

Tax-exempt (1)

  (2,556)  285   (2,271)

Total investments (1)

  2,318   2,889   5,207 

Loans:

            

Taxable:

            

PPP loans

  1,673   -   1,673 

Other

  (1,902)  (227)  (2,129)

Total taxable

  (229)  (227)  (456)

Tax-exempt (1)

  (93)  (2)  (95)

Total loans (1)

  (322)  (229)  (551)

Total interest-bearing cash

  606   (3,333)  (2,727)

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

  2,602   (673)  1,929 

Increase (decrease) in interest expense:

            

Deposits:

            

Savings and interest-bearing transaction

  19   (88)  (69)

Time less than $100,000

  (17)  (13)  (30)

Time $100,000 or more

  (19)  13   (6)

Total interest-bearing deposits

  (17)  (88)  (105)

Short-term borrowed funds

  (1)  1   0 

Other borrowed funds

  1   -   1 

Total decrease in interest expense

  (17)  (87)  (104)

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

 $2,619  $(586) $2,033 

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

Provision for Credit Losses

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

The Company’s first six months of 2020 results include a provision of credit losses of $4.3 million recorded in the first quarter 2020. The provision represents Management’s estimate of additional reserves needed over the remaining life of its loans due to increased credit-risk from deteriorating economic conditions caused by the COVID-19 pandemic. The Company provided no provision for credit losses in the second quarter 2020, the second quarter 2019 and the first six months of 2019 based on Management’s evaluation of credit quality and the adequacy of the allowance for credit losses. 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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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,

 
  

2020

  

2019

  

2020

  

2019

 
  

(In thousands)

 
                 

Service charges on deposit accounts

 $3,151  $4,493  $7,399  $8,997 

Merchant processing services

  2,277   2,657   4,635   5,215 

Debit card fees

  1,459   1,641   2,927   3,148 

Trust fees

  714   749   1,491   1,466 

ATM processing fees

  518   722   1,097   1,355 

Other service fees

  420   585   926   1,162 

Financial services commissions

  123   93   248   194 

Life insurance gains

  -   433   -   433 

Securities gains

  71   26   71   50 

Other noninterest income

  821   889   2,408   1,847 

Total

 $9,554  $12,288  $21,202  $23,867 

Second quarter 2020 noninterest income decreased $2.7 million due to lower activity based fees from reduced economic activity related to the COVID-19 pandemic. Additionally, the second quarter 2019 included a life insurance gain of $433 thousand.

In the first six months of 2020, noninterest income decreased $2.7 million compared with the first six months of 2019 due to lower income from activity based fees due to reduced economic activity related to the COVID-19 pandemic. Additionally, the first six months of 2019 included a life insurance gain of $433 thousand. The decrease was offset by a $603 thousand recovery on a previously charged off loan in the first six months of 2020.

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,

 
  

2020

  

2019

  

2020

  

2019

 
  

(In thousands)

 
                 

Salaries and related benefits

 $12,900  $13,090  $25,918  $26,198 

Occupancy and equipment

  4,791   4,916   9,723   9,964 

Outsourced data processing services

  2,324   2,367   4,729   4,736 

Professional fees

  643   481   1,032   1,146 

Courier service

  508   451   999   893 

Amortization of identifiable intangibles

  73   79   146   389 

Loss contingency

  -   553   -   553 

Other noninterest expense

  3,515   3,624   6,871   6,865 

Total

 $24,754  $25,561  $49,418  $50,744 

Noninterest expense decreased $807 thousand in the second quarter 2020 compared with the second quarter 2019 primarily due to $553 thousand of loss contingency in the second quarter 2019. Additionally, lower salaries, related benefits, occupancy and equipment costs also contributed to reducing noninterest expense in the second quarter 2020. The decrease was partially offset by higher professional fees.

-44-

In the first six months of 2020, noninterest expense decreased $1.3 million compared with the six months ended June 30, 2019 due to lower salaries, occupancy and equipment expenses, lower FDIC insurance assessments and lower amortization of intangible assets, and because the six months ended June 30, 2019 included $553 thousand of loss contingency. The six months ended June 30, 2020 included a $246 thousand FDIC assessment credit; the Company’s credit is fully exhausted.

Provision for Income Tax

 

The Company’s income tax provision (FTE) was $7.7$7.3 million for the thirdsecond quarter 2020 and $13.6 million for the six months ended June 30, 2020 compared with $7.4 million for the second quarter 2019 and $22.2$14.4 million for the ninesix months ended SeptemberJune 30, 2019 compared with $5.7 million for the third quarter 2018 and $17.7 million for the nine months ended September 30, 2018.2019. The effective tax rates (FTE) of 27.5%27.2% for the thirdsecond quarter 20192020 and 27.1% for the ninesix months ended SeptemberJune 30, 20192020 compared with 25.0%27.5% for the thirdsecond quarter 20182019 and 25.2%26.9% for the ninesix months ended SeptemberJune 30, 2018.2019.

 

The higher effective tax rate (FTE) inIn the thirdsecond quarter 2019, comparedthe Company re-assessed its ability to realize benefits from California capital loss carryforwards. The Company established a $269 thousand valuation allowance against certain deferred tax assets, which, combined with the same period in 2018 is due to lower levels of tax-exempt interest income and stock compensation tax deductions in the third quarter 2019 and the tax exempt nature of the life insurance gains realized in the third quarter 2018. The tax provisions (FTE) for the third quarter 2019 and the third quarter 2018 includeexcess tax benefits of $-0-$83 thousand and $152 thousand, respectively, for tax deductions from the exercise of employee stock options, which exceed related compensation expenses recognized inincreased the financial statements.

The higher effective tax rate (FTE) in the nine months ended September 30, 2019 compared with the same period in 2018 is due to lower levels of tax-exempt interest income and stock compensation tax deductions in the nine months ended September 30, 2019. The tax provisions (FTE) for the nine months ended September 30, 2019 and September 30, 2018 include tax benefits of $365 thousand and $731 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements.by 0.3%.

 

In the nine months ended September 30,second quarter 2019, the Company decreased unrecognized tax benefits by $909 thousand related to settlements with taxing authorities. The settlements incorporated amended tax returns for which the Company had recognized a deferred tax asset in the amount of $1,003 thousand.

 

Investment Securities Portfolio

 

The Company maintains an investment securities portfolio consisting of securities issued by the U.S. Treasury, U.S. Government sponsored entities, agency and non-agency mortgage backed securities, state and political subdivisions, corporations, collateralized loan obligations, commercial paper and other securities.

 

Management has managed the investment securities portfolio in response to changes in deposit and loan volumes. The following table indicates the carrying valuevalues of investment securities in the Company’s portfolio by type as of the Company’s investment securities portfolio was $3.8 billion at September 30, 2019 and $3.6 billion at December 31, 2018.indicated dates.

  

At June 30, 2020

  

At December 31, 2019

 
  

($ in thousands)

 
  

Carrying Value

  

As a percent of total investment securities

  

Carrying Value

  

As a percent of total investment securities

 

Agency mortgage-backed securities

 $1,148,153   27% $1,297,395   34%

Obligations of states and political subdivisions

  483,884   11%  544,920   14%

Corporate securities

  2,269,411   52%  1,833,783   48%

Commercial paper

  299,582   7%  -   -%

Collateralized loan obligations

  143,338   3%  6,755   -%

U.S. Treasuries and agencies

  -   -%  131,167   4%

Other

  2,283   -%  2,898   -%

Total

 $4,346,651   100% $3,816,918   100%
                 

Debt securities available for sale

 $3,708,370      $3,078,846     

Debt securities held to maturity

  638,281       738,072     

Total

 $4,346,651      $3,816,918     

 

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 SeptemberJune 30, 2019,2020, substantially all of the Company’s investment securities continue to be investment grade rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. There have been no significant differences in the Company’s internal analyses compared with the ratings assigned by the third party credit rating agencies.

 

The Company had no equity securities at September 30, 2019. All of the equity securities were sold with no gains or losses from the sale during the third quarter 2019. The market value of the equity securities was $1,747 thousand at December 31, 2018. During the nine months ended September 30, 2019, the Company recognized gross unrealized holding gains of $50 thousand in earnings.

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-45-

 

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

 

 

At September 30, 2019

  

At December 31, 2018

  

At June 30, 2020

  

At December 31, 2019

 
 

Market value

  

As a percent of total corporate securities

  

Market value

  

As a percent of total corporate securities

  

Market value

  

As a percent of total corporate securities

  

Market value

  

As a percent of total corporate securities

 
 

($ in thousands)

  

($ in thousands)

 

Financial

 $719,601  43% $531,512  40% $1,006,385  44% $772,852  42%

Utilities

 223,428  14% 197,568  15% 237,758  11% 222,951  12%

Consumer, Non-cyclical

 184,859  11% 169,851  13% 198,418  9% 185,784  10%

Industrial

 151,452  9% 152,636  12% 188,029  8% 177,051  10%

Technology

 123,107  7% 105,324  8%

Communications

 89,559  5% 49,642  4% 173,280  8% 128,635  7%

Basic Materials

 66,978  4% 30,410  2% 139,826  6% 76,434  4%

Technology

 133,775  6% 107,632  6%

Energy

 99,396  4% 86,883  5%

Consumer, Cyclical

 61,053  4% 58,430  5%  92,544   4%  75,561   4%

Energy

  47,010   3%  19,668   1%

Total Corporate securities

 $1,667,047   100% $1,315,041   100% $2,269,411   100% $1,833,783   100%

 

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

  

At June 30, 2020

 
  

Market value

 
  

($ in thousands)

 

Hotels

 $- 

Restaurants

  21,286 

Department Stores

  - 

Casinos

  - 

Airlines

  - 

Other

  71,258 

Total Consumer, Cyclical

 $92,544 

The Company’s $21.3 million in corporate bonds to issuers operating in the consumer cyclical – restaurant subsector represent bonds of one company which retails, roasts and provides its own brand of specialty coffee and other complimentary products through retail locations worldwide and sells coffee through several distribution channels. The bonds mature in 2023. At June 30, 2020, the bonds were rated BBB and priced with an unrealized gain of $1.3 million.

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The following table summarizes total corporate securities by credit rating:

  

At June 30, 2020

  

At December 31, 2019

 
  

Market value

  

As a percent of total corporate securities

  

Market value

  

As a percent of total corporate securities

 
  

($ in thousands)

 

AAA

 $21,980   1% $26,148   1%

AA+

  21,141   1%  45,697   2%

AA

  41,460   2%  19,776   1%

AA-

  47,301   2%  46,099   3%

A+

  181,562   8%  179,217   10%

A

  459,201   20%  439,017   24%

A-

  392,375   17%  351,909   19%

BBB+

  528,320   23%  384,788   21%

BBB

  517,703   23%  314,868   17%

BBB-

  43,673   2%  11,737   1%

Investment grade

  2,254,716   99%  1,819,256   99%

BB

  14,695   1%  14,527   1%

Total Corporate securities

 $2,269,411   100% $1,833,783   100%

The Company’s $14.7 million corporate bond rated BB represents a bond of one pharmaceutical company which develops, manufactures and markets generic and branded human pharmaceuticals, as well as active pharmaceutical ingredients, to customers worldwide. The bond matures in 2021; the issuing company has refinanced much of its debt obligations beyond the maturity date.

 

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

 

At SeptemberJune 30, 2020, the Company’s investment securities portfolios included securities issued by 404 state and local government municipalities and agencies located within 41 states. The largest exposure to any one municipality or agency was $9.0 million (fair value) represented by one general obligation bond.

  

At June 30, 2020

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Obligations of states and political subdivisions:

     

General obligation bonds:

     

California

 $81,033  $83,861 

New Jersey

  27,548   27,914 

Texas

  24,656   25,312 

Washington

  23,140   23,967 

Other (32 states)

  186,131   192,000 

Total general obligation bonds

 $342,508  $353,054 

 

        

Revenue bonds:

        

California

 $29,222  $29,655 

Colorado

  12,147   12,440 

Kentucky

  11,329   11,745 

Indiana

  9,367   9,629 

Washington

  9,345   9,579 

Virginia

  8,013   8,433 

Arizona

  7,126   7,256 

Other (23 states)

  49,949   50,869 

Total revenue bonds

 $136,498  $139,606 

Total obligations of states and political subdivisions

 $479,006  $492,660 

-47-

At December 31, 2019, the Company’s investment securities portfolios included securities issued by 481451 state and local government municipalities and agencies located within 42 states. The largest exposure to any one municipality or agency was $9.0 million (fair value) represented by one general obligation bond.

 

  

At September 30, 2019

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Obligations of states and political subdivisions:

        

General obligation bonds:

        

California

 $84,879  $87,392 

Texas

  38,245   38,698 

New Jersey

  29,798   30,150 

Washington

  23,924   24,626 

Minnesota

  20,661   20,918 

Other (33 states)

  203,785   207,899 

Total general obligation bonds

 $401,292  $409,683 
         

Revenue bonds:

        

California

 $32,277  $32,787 

Kentucky

  16,399   16,680 

Colorado

  12,917   13,243 

Washington

  11,223   11,567 

Indiana

  9,944   10,149 

Other (28 states)

  90,204   91,837 

Total revenue bonds

 $172,964  $176,263 

Total obligations of states and political subdivisions

 $574,256  $585,946 

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-41-

  

At December 31, 2019

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Obligations of states and political subdivisions:

     

General obligation bonds:

     

California

 $83,984  $86,527 

Texas

  36,396   36,815 

New Jersey

  29,347   29,688 

Washington

  23,862   24,516 

Minnesota

  20,624   20,871 

Other (33 states)

  189,286   193,302 

Total general obligation bonds

 $383,499  $391,719 
         

Revenue bonds:

        

California

 $31,829  $32,278 

Kentucky

  16,384   16,680 

Colorado

  12,176   12,479 

Washington

  11,208   11,509 

Indiana

  9,935   10,145 

Virginia

  8,027   8,328 

Arizona

  7,912   8,106 

Other (25 states)

  60,338   61,347 

Total revenue bonds

 $157,809  $160,872 

Total obligations of states and political subdivisions

 $541,308  $552,591 

 

At December 31, 2018, the Company’s investment securities portfolios included securities issued by 583 state and local government municipalities and agencies located within 43 states. The largest exposure to any one municipality or agency was $9.3 million (fair value) represented by eight general obligation bonds.

  

At December 31, 2018

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Obligations of states and political subdivisions:

        

General obligation bonds:

        

California

 $104,607  $105,730 

Texas

  56,653   56,286 

New Jersey

  35,501   35,527 

Minnesota

  29,609   29,593 

Other (35 states)

  267,402   266,136 

Total general obligation bonds

 $493,772  $493,272 
         

Revenue bonds:

        

California

 $35,164  $35,399 

Kentucky

  19,320   19,328 

Colorado

  14,564   14,539 

Washington

  13,034   13,228 

Iowa

  13,202   13,052 

Indiana

  12,007   12,034 

Other (28 states)

  113,047   112,805 

Total revenue bonds

 $220,338  $220,385 

Total obligations of states and political subdivisions

 $714,110  $713,657 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 1920 revenue sources at SeptemberJune 30, 20192020 and 22 revenue sourcesat December 31, 2018.2019. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

  

At September 30, 2019

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Revenue bonds by revenue source:

        

Water

 $39,657  $40,489 

Sales tax

  23,030   23,532 

Sewer

  19,667   20,196 

Lease (renewal)

  15,368   15,656 

Lease (abatement)

  10,924   11,190 

Other (14 sources)

  64,318   65,200 

Total revenue bonds by revenue source

 $172,964  $176,263 

  

At June 30, 2020

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Revenue bonds by revenue source:

        

Water

 $30,609  $31,215 

Sewer

  17,584   18,191 

Sales tax

  14,989   15,341 

Lease (renewal)

  9,846   10,209 

Lease (abatement)

  8,820   9,058 

Other (15 sources)

  54,650   55,592 

Total revenue bonds by revenue source

 $136,498  $139,606 

 

 

[The remainder of this page intentionally left blank]

 

-42-
-48-

 

  

At December 31, 2018

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Revenue bonds by revenue source:

        

Water

 $46,326  $46,671 

Sales tax

  28,264   28,517 

Sewer

  28,335   28,502 

Lease (renewal)

  17,013   17,051 

College & University

  13,919   13,714 

Other (17 sources)

  86,481   85,930 

Total revenue bonds by revenue source

 $220,338  $220,385 

  

At December 31, 2019

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Revenue bonds by revenue source:

        

Water

 $36,960  $37,699 

Sewer

  19,039   19,545 

Sales tax

  15,695   16,101 

Lease (renewal)

  15,230   15,539 

Lease (abatement)

  10,913   11,160 

Other (15 sources)

  59,972   60,828 

Total revenue bonds by revenue source

 $157,809  $160,872 

 

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 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 Bank processed customer Paycheck Protection Program loan (“PPP loan”) applications as established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The United States Small Business Administration guarantees PPP loans; given this guarantee, the PPP loans are not considered to have default risk. The Company funded $249 million PPP loans in the second quarter 2020.

On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the CARES Act. The Bank has been actively working with consumer and commercial borrowers requesting deferral of loan payments, granting deferrals of principal and interest payments for 90 days. At June 30, 2020, automobile loans and other consumer loans granted loan deferrals totaled $29 million and $5 million, respectively. Commercial real estate loans with deferred payments totaled $66 million, primarily for hospitality and retail properties. Commercial loans with deferred payments totaled $3 million.

The preparation of the financial statements requires Management to estimate the amount of expected losses inherent 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 loan 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 credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses.

 

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

-49-

 

 

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 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”).

 

-43-

Nonperforming Assets

              
 

At September 30,

 

At December 31,

  

At June 30,

 

At December 31,

 
 

2019

  

2018

  

2018

  

2020

  

2019

  

2019

 
 

(In thousands)

  

(In thousands)

 
  

Nonperforming nonaccrual loans

 $633  $1,611  $998  $590  $177  $659 

Performing nonaccrual loans

  3,670   3,870   3,870   3,643   3,670   3,781 

Total nonaccrual loans

 4,303  5,481  4,868  4,233  3,847  4,440 

Accruing loans 90 or more days past due

  351   361   551   290   249   440 

Total nonperforming loans

 4,654  5,842  5,419  4,523  4,096  4,880 

Other real estate owned

  43   620   350   43   43   43 

Total nonperforming assets

 $4,697  $6,462  $5,769  $4,566  $4,139  $4,923 

 

Nonperforming assets have declined at SeptemberAt June 30, 2019 compared with September 30, 2018 due to payoffs, chargeoffs and sale of Other Real Estate Owned. At September 30, 2019,2020, one loan secured by commercial real estate with a balance of $3.7$3.4 million was on nonaccrual status. The remaining fivesix nonaccrual loans held at SeptemberJune 30, 20192020 had an average carrying value of $127$136 thousand.

 

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

 

Allowance for Credit Losses

[

Effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”). The remainder of this page intentionally left blank]following table summarizes allowance for credit losses at the dates indicated:

  

At June 30,

  

At December 31,

 
  

2020

  

2019

  

2019

 
  

(In thousands)

 
             

Allowance for Credit Losses on Loans

 $24,529  $20,117  $19,484 

Allowance for Credit Losses on Held to Maturity Debt Securities

  16   -   - 

Total Allowance for Credit Losses

 $24,545  $20,117  $19,484 

 

 

Allowance for Credit Losses on Debt Securities Held to Maturity

 

Management segmented debt securities held to maturity, selected methods to estimate losses for each segment, and measured a loss estimate. Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. The adoption of the ASU resulted in establishment of allowance for credit losses related to debt securities held to maturity of $16 thousand.

 

-44-
-50-

 

Allowance for LoanCredit Losseson Loans

 

The Company’s allowance for loancredit losses on loans represents Management’s estimate of loanforecasted credit losses inherent in the loan portfolio.portfolio based on the current expected credit loss (CECL) model. In evaluating credit risk for loans, Management measures 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.

 

The following table summarizes the allowance for loan losses/credit losses on loans, chargeoffs and recoveries for the periods indicated:

 

 

For the Three Months

 

For the Nine Months

  

For the Three Months

 

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
 

($ in thousands)

  

($ in thousands)

 

Analysis of the Allowance for Loan Losses

 

Analysis of the Allowance for Loan Losses/Credit Losses

Analysis of the Allowance for Loan Losses/Credit Losses

       

Balance, end of prior period

 $24,804  $20,477  $19,484  $21,351 

Adoption of ASU 2016-13

  -   -   2,017   - 

Balance, beginning of period

 $20,117  $23,040  $21,351  $23,009  24,804  20,477  21,501  21,351 

Provision for loan losses

 -  -  -  - 

Provision for credit losses

 -  -  4,300  - 

Loans charged off

          

Commercial

 -  (384) (71) (425) -  (48) (178) (71)

Commercial real estate

 -  (240) -  (240)

Consumer installment and other

  (1,039)  (845)  (3,332)  (3,015)  (804)  (925)  (2,199)  (2,293)

Total chargeoffs

  (1,039)  (1,469)  (3,403)  (3,680)  (804)  (973)  (2,377)  (2,364)

Recoveries of loans previously charged off

          

Commercial

 233  103  449  1,352  93  123  236  216 

Commercial real estate

 12  -  38  -  12  14  25  26 

Consumer installment and other

  505   353   1,393   1,346   424   476   844   888 

Total recoveries

  750   456   1,880   2,698   529   613   1,105   1,130 

Net loan losses

  (289)  (1,013)  (1,523)  (982)  (275)  (360)  (1,272)  (1,234)

Balance, end of period

 $19,828  $22,027  $19,828  $22,027  $24,529  $20,117  $24,529  $20,117 
  

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

 0.10% 0.34% 0.17% 0.11% 0.09% 0.12% 0.22% 0.21%

 

The Company's allowance for loancredit losses on loans is maintained at a level considered appropriateadequate to provide for expected losses that can be estimated based upon specificon historical loss rates adjusted for current and general conditions.expected conditions over a forecast period. These include conditions unique to individual borrowers, as well as overall loancredit 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. A portion of the allowanceLoans that share common risk characteristics are segregated into pools based on common characteristics, which is individually allocated to impaired loans whose full collectability of principal is uncertain. Such allocations areprimarily determined by Management based on loan-by-loan analyses. The Company evaluates all loans with outstanding principal balances in excess of $500 thousand that are classifiedloan, borrower, or on nonaccrual status and all “troubled debt restructured” loans for impairment. The remainder of the loan portfolio is collectively evaluated for impairment based in part on quantitative analyses of historical loan loss experience of loan portfolio segments to determine standard loss rates for each segment. The loss rate for each loan portfolio segment reflects both the historical loss experience during a look-back period and a loss emergence period. Liquidating purchased consumer installment loans are evaluated separately by applying historical loss rates to forecasted liquidating principal balances to measure losses inherent in this portfolio segment. Thecollateral type. Historical loss rates are applied to segmented loan balances to allocatedetermined for each pool. Loans that do not share risk characteristics with other loans in the allowancepools are evaluated individually. See Note 2 to the segments of the loan portfolio. unaudited consolidated financial statements for additional information.

 

  

Allowance for Credit Losses

 
  

For the Three Months Ended June 30, 2020

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $8,336  $4,753  $107  $70  $11,538  $24,804 

(Reversal) provision

  (357)  (142)  (100)  (13)  612   - 

Chargeoffs

  -   -   -   -   (804)  (804)

Recoveries

  93   12   -   -   424   529 

Total allowance for credit losses

 $8,072  $4,623  $7  $57  $11,770  $24,529 

The remainder of the allowance is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. The unallocated allowance addresses additional qualitative factors consistent with Management's analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company's general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in loan chargeoff history (external factors). The primary external factor evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management as of September 30, 2019 is economic and business conditions $0.4 million. Also included in the unallocated allowance is the risk of losses attributable to general attributes of the Company's loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management are: concentrations of credit at $1.0 million, adequacy of lending Management and staff at $1.1 million, and loan review system at $1.0 million.

 

-45-
-51-

  

Allowance for Loan Losses

 
  

For the Three Months Ended September 30, 2019

 
                  

Consumer

         
      

Commercial

      

Residential

  

Installment

         
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for loan losses:

                            

Balance at beginning of period

 $5,235  $4,057  $1,117  $238  $5,418  $4,052  $20,117 

(Reversal) provision

  (596)  (1)  482   (16)  655   (524)  - 

Chargeoffs

  -   -   -   -   (1,039)  -   (1,039)

Recoveries

  233   12   -   -   505   -   750 

Total allowance for loan losses

 $4,872  $4,068  $1,599  $222  $5,539  $3,528  $19,828 

 

 

 

Allowance for Loan Losses

  

Allowance for Credit Losses

 
 

For the Nine Months Ended September 30, 2019

  

For the Six Months Ended June 30, 2020

 
         

Consumer

              

Consumer

     
   

Commercial

   

Residential

 

Installment

        

Commercial

   

Residential

 

Installment

     
 

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Unallocated

  

Total

 
 

(In thousands)

  

(In thousands)

 

Allowance for loan losses:

               

Balance at beginning of period

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

Allowance for credit losses:

               

Balance at beginning of period, prior to adoption of ASU 2016-13

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

Impact of adopting ASU 2016-13

  3,385   618   (31)  (132)  1,878   (3,701)  2,017 

Adjusted beginning balance

 8,344  4,682  78  74  8,323  -  21,501 

(Reversal) provision

 (1,817) 146  134  (647) 1,833  351  -  (330) (84) (71) (17) 4,802  -  4,300 

Chargeoffs

 (71) -  -  -  (3,332) -  (3,403) (178) -  -  -  (2,199) -  (2,377)

Recoveries

  449   38   -   -   1,393   -   1,880   236   25   -   -   844   -   1,105 

Total allowance for loan losses

 $4,872  $4,068  $1,599  $222  $5,539  $3,528  $19,828 

Total allowance for credit losses

 $8,072  $4,623  $7  $57  $11,770  $-  $24,529 

 

  

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

 
  

At September 30, 2019

 
  

Commercial

  

Commercial Real Estate

  

Construction

  

Residential Real Estate

  

Consumer Installment and Other

  

Unallocated

  

Total

 
  

(In thousands)

 

Allowance for loan losses:

                            

Individually evaluated for impairment

 $2,550  $-  $-  $-  $-  $-  $2,550 

Collectively evaluated for impairment

  2,322   4,068   1,599   222   5,539   3,528   17,278 

Total

 $4,872  $4,068  $1,599  $222  $5,539  $3,528  $19,828 

Carrying value of loans:

                            

Individually evaluated for impairment

 $8,672  $7,953  $-  $193  $144  $-  $16,962 

Collectively evaluated for impairment

  207,601   571,274   6,678   35,155   295,559   -   1,116,267 

Total

 $216,273  $579,227  $6,678  $35,348  $295,703  $-  $1,133,229 

 

Management considers the $19.8$24.5 million allowance for loancredit losses on loans to be adequate as a reserve against probable incurred loancurrent expected credit losses in the loan portfolio as of SeptemberJune 30, 2019.2020.

 

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

 

Asset/Liability and Market Risk Management

 

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

 

Interest Rate Risk

 

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

 

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

-46-

 

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 and short-term interest rates.

 

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

 

The Company’s asset and liability position was slightly “asset sensitive” at SeptemberJune 30, 2019,2020, depending on the interest rate assumptions applied to each simulation model. An “asset sensitive” position results in a slightly larger change in interest income than in interest expense resulting from application of assumed interest rate changes.

 

-52-

At SeptemberJune 30, 2019,2020, Management’s most recent measurements of estimated changes in net interest income were:

 

Static Simulation (balance sheet composition unchanged):

            

Assumed Immediate Parallel Shift in Interest Rates

  -1.00%  0.00%  +1.00%

First Year Change in Net Interest Income

  -6.50%  0.00%  +4.60%

Static Simulation (balance sheet composition unchanged):

Assumed Immediate Parallel Shift in Interest Rates -1.00%0.00% +1.00% 
First Year Change in Net Interest Income-7.90% 0.00%+6.20%

 

Dynamic Simulation (balance sheet composition changes):

            

Assumed Change in Interest Rates Over 1 Year

  -1.00%  0.00%  +1.00%

First Year Change in Net Interest Income

  -3.60%  0.00%  +2.00%

Dynamic Simulation (balance sheet composition changes):

Assumed Change in Interest Rates Over 1 Year-1.00% 0.00% +1.00%
First Year Change in Net Interest Income-3.80%0.00%

+1.90%

 

Simulation estimates depend on, and will change with, the size and mix of the actual and projected composition of financial instruments at the time of each simulation.

 

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

 

Market Risk - Equity Markets

 

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

 

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

 

Market Risk - Other

 

Market values of loan collateral can directly impact the level of loan chargeoffs and the provision for loancredit 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 recognize other than temporary impairment charges.establish or increase reserves for credit losses. Other types of market risk, such as foreign currency exchange risk, are not significant in the normal course of the Company's business activities.

-47-

 

Liquidity and Funding

 

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

 

In recent years, the Company's deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 98% of funding for average total assets in the ninesix months ended SeptemberJune 30, 20192020 and the yeartwelve months ended December 31, 2018.2019. The stability of the Company’s funding from customer deposits is in part reliant on the confidence clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate level of liquidity.

 

Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides a substantial secondary source of liquidity. The Company held $3.8$4.3 billion in total investment securities at SeptemberJune 30, 2019.2020. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At SeptemberJune 30, 2019,2020, such collateral requirements totaled approximately $722$869 million.

The Bank funded $249 million in PPP loans by crediting loan proceeds to the borrower’s deposit accounts. The Federal Reserve Bank established the Paycheck Protection Program Liquidity Facility (“PPPLF”) to provide funding for eligible firms extending PPP loans. Under the PPPLF, the Bank must pledge PPP loans as collateral for PPPLF borrowings. Principal reductions on the pledged PPP loans must immediately result in principal reduction of the PPPLF borrowing.

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

 

Management continually monitors the Company’s cash levels. Loan demand from credit worthy borrowers will be dictated by economic and competitive conditions. The Company 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 Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline.deposits. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, deposit growth may be used to fund loans or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

 

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

 

The Bank’s dividends paid to the Parent Company, proceeds from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder dividends of $33$22 million and $43$44 million in the ninesix months ended SeptemberJune 30, 20192020 and in the yeartwelve months ended December 31, 2018,2019, respectively, and retire common stock in the amount of $488 thousand$9.9 million and $524$488 thousand, respectively. Payment of dividends to the Parent Company by the Bank is limited under California and Federal laws. The Company believes these regulatory dividend restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations.

 

Capital Resources

 

The Company has historically generated high levels of earnings, which provide a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been 11.9%10.4% in the ninesix months ended SeptemberJune 30, 20192020 and 11.3%11.9% in the year ended December 31, 2018.2019. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $11$2.8 million in the ninethree months ended SeptemberJune 30, 20192020 and $13$14 million in the year ended December 31, 2018.2019.

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The Company paid common dividends totaling $33$22 million in the ninesix months ended SeptemberJune 30, 20192020 and $43$44 million in the year ended December 31, 2018,2019, which represent dividends per common share of $1.22$0.82 and $1.60,$1.63, 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 earnings to shareholders. The Company repurchased and retired 193 thousand shares valued at 9.9 million in the six months ended June 30, 2020 and 8 thousand shares valued at $488 thousand in the nine months ended September 30, 2019 and 9 thousand shares valued at $524 thousand in the year ended December 31, 2018.2019.

 

The Company's primary capital resource is shareholders' equity, which was $713$808 million at SeptemberJune 30, 20192020 compared with $616$731 million at December 31, 2018.2019. The Company's ratio of equity to total assets was 12.7%12.5% at SeptemberJune 30, 20192020 and 11.1%13.0% at December 31, 2018.2019.

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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, unanticipated asset devaluations, and significant operational lapses. 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

 

On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The rule’s provisions which most affected the regulatory capital requirements of the Company and the Bank:

Introduced a new “Common Equity Tier 1” capital measurement,

Established higher minimum levels of capital,

Introduced a “capital conservation buffer,”

Increased the risk-weighting of certain assets, and

Established limits on the amount of deferred tax assets with any excess treated as a deduction from Tier 1 capital.

Under the final rule, a banking organization that is not subject to the “advanced approaches rule” may make a one-time election not to include most elements of Accumulated Other Comprehensive Income, including net-of-tax unrealized gains and losses on debt securities available for sale, in regulatory capital. Neither the Company nor the Bank is subject to the “advanced approaches rule” and both made the election not to include most elements of Accumulated Other Comprehensive Income in regulatory capital.

Banking organizations that are not subject to the “advanced approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations began on January 1, 2016 and ended January 1, 2019, when the 2.5% capital conservation buffer was fully implemented. Any bank subject to the rule which is unable to maintain its “capital conservation buffer” above the minimum regulatory capital ratios will be restricted in the payment of discretionary executive compensation and shareholder distributions, such as dividends and share repurchases.

The final rule did not supersede provisions of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) requiring federal banking agencies to take prompt corrective action (PCA) to resolve problems of insured depository institutions. The final rule revised the PCA thresholds to incorporate the higher minimum levels of capital, including the “common equity tier 1” ratio.

The capital ratios for the Company and the Bank under the newcurrent regulatory capital frameworkstandards are presented in the tables below, on the dates indicated.

 

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To Be

        

To Be

 
       

Well-capitalized

        

Well-capitalized

 
     

Required for

 

Under Prompt

      

Required for

 

Under Prompt

 
 

At September 30, 2019

  

Capital Adequacy

 

Corrective Action

  

At June 30, 2020

  

Capital Adequacy

 

Corrective Action

 
 

Company

  

Bank

  

Purposes

  

Regulations (Bank)

  

Company

  

Bank

  

Purposes

  

Regulations (Bank)

 
  

Common Equity Tier I Capital

 16.55% 12.14% 7.00% (1) 6.50% 14.28% 11.11% 7.00% 6.50%

Tier I Capital

 16.55% 12.14% 8.50% (1)  8.00% 14.28% 11.11% 8.50% 8.00%

Total Capital

 17.20% 12.98% 10.50% (1)  10.00% 14.88% 11.86% 10.50% 10.00%

Leverage Ratio

 10.41% 7.60% 4.00%  5.00% 9.92% 7.69% 4.00% 5.00%

 

(1) Includes 2.5% capital conservation buffer.

 

                  

To Be

 
          

Required for

  

Well-capitalized

 
          

Capital Adequacy Purposes

  

Under Prompt

 
  

At December 31, 2018

  

Effective

  

Effective

  

Corrective Action

 
  

Company

  

Bank

  

January 1, 2018

  

January 1, 2019

  

Regulations (Bank)

 
                     

Common Equity Tier I Capital

  16.30%  13.01%  6.375% (2)  7.00% (3)  6.50%

Tier I Capital

  16.30%  13.01%  7.875% (2)  8.50% (3)  8.00%

Total Capital

  17.03%  13.94%  9.875% (2)  10.50% (3)  10.00%

Leverage Ratio

  9.51%  7.55%  4.000%   4.00%   5.00%

(2) Includes 1.875% capital conservation buffer.

(3) Includes 2.5% capital conservation buffer.

              

To Be

 
              

Well-capitalized

 
          

Required for

  

Under Prompt

 
  

At December 31, 2019

  

Capital Adequacy

  

Corrective Action

 
  

Company

  

Bank

  

Purposes

  

Regulations (Bank)

 
                 

Common Equity Tier I Capital

  16.22%  11.80%  7.00%  6.50%

Tier I Capital

  16.22%  11.80%  8.50%  8.00%

Total Capital

  16.83%  12.58%  10.50%  10.00%

Leverage Ratio

  10.50%  7.60%  4.00%  5.00%

 

In June 2016, the Financial Accounting Standards Board issued an update to the accounting standards for credit losses known as the "Current Expected Credit Losses" (CECL) methodology, which replacesreplaced the existing incurred loss methodology for certain financial assets. The Company intends to timely adoptadopted the CECL methodology effective January 1, 2020, which involvesinvolved an implementing accounting entry to retained earnings on a net-of-tax basis. In December 2018,The adoption of the federal bank regulatory agencies approvedCECL methodology did not have a final rule which became effective April 1, 2019 modifying theirmaterial adverse day-one impact to capital ratios and the Company did not adopt the phase in regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of implementing the CECL methodology. The Company has not determined whether it will elect the three-year phase in period for the day-one regulatory capital effects.relief. See Note 2 to the unaudited consolidated financial statements, “Recently IssuedAdopted Accounting Standards” for more information on the CECL methodology.

PPP loans are zero percent risk weighted for regulatory capital purposes; average PPP loans of $133 million did not affect regulatory capital ratios, other than an insignificant impact on the Leverage ratio. To the extent funding of PPP loans is through excess cash balances or PPPLF borrowings, the Leverage ratio is unaffected. However, PPP loans funded by increased non-PPPLF borrowings reduces the leverage ratio.

 

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

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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.

 

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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 SeptemberJune 30, 2019.2020.

 

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 SeptemberJune 30, 20192020 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. NoneBased on the advice of these proceedings is expected tolegal counsel, the Company does not expect such cases will have a material, adverse impact upon the Company’seffect on its business, financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated. In the second quarter 2019, the Company achieved a mediated settlement to dismiss a lawsuit and paid the resulting liability of $252 thousand. The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2018 to some customers. The Company initially estimated the probable amount of these obligations to be $5,542 thousand and accrued a liability for such amount in 2017; based on additional information received in the second quarter 2019, the Company increased such liability to $5,843 thousand by recognizing an expense of $301 thousand.

 

Item 1A. Risk Factors

 

The Company’s Form 10-K as of December 31, 20182019 includes detailed disclosure about the risks faced by the Company’s business; such risksbusiness. The following is an update on risk factors that have not materially changed since the Form 10-K was filed.

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

The COVID-19 coronavirus pandemic caused escalating infections in the United States beginning in the first quarter of 2020 that continued through the second quarter of 2020 and may continue for some time. The spread of the outbreak has disrupted the United States economy including banking and other financial activity in the market areas in which the Company and its banking subsidiary, Westamerica Bank (the "Bank"), operate.  Regions and states of the United States of America have implemented varying degrees of "stay at home" directives in an effort to prevent the spread of the virus. On March 19, 2020, the Governor of the State of California ordered all individuals living in the State of California to stay within their residence to prevent the spread of the novel coronavirus and many businesses have suspended or reduced business activities. The California "stay at home" directive excludes essential businesses, including banks, and the Bank remains open and fully operational. These "stay at home" directives have, however, significantly reduced economic activity in the United States and the State of California. In the second quarter of 2020 the “stay at home” directives were gradually lifted in varying stages in counties of the State of California. Counties with high infection rates have delayed reopening and restrictions on certain economic activity remains. California-based initial claims for unemployment have risen considerably during the second quarter of 2020.

-56-

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

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

In response to the pandemic, the Federal Reserve has engaged significant levels of monetary policy to provide liquidity and credit facilities to the financial markets. On March 15, 2020, the Federal Open Market Committee ("FOMC") reduced the target range for the federal funds rate to 0 to 0.25 percent; relatedly, the FOMC reduced the interest rate paid on deposit balances to 0.10 percent effective March 16, 2020, all of which may negatively impact net interest income. The Bank maintains deposit balances at the Federal Reserve Bank; the amount that earns interest is identified in the Company's financial statements as "interest-bearing cash".

In response to the pandemic, the United States federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") on March 27, 2020, providing an estimated $2 trillion fiscal stimulus to the United States economy. The CARES Act established the Paycheck Protection Program (PPP) with $350 billion to provide businesses with federally guaranteed loans to support payroll and certain operating expenses. The loans were guaranteed by the United States Small Business Administration (“SBA”) and funded through banks. In April 2020, the PPP program was expanded with an additional $310 billion. At June 30, 2020, the Bank funded $249 million in government guaranteed PPP loans which meaningfully increased interest-earning assets and related interest and fee income.

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

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

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

Any one or a combination of the factors identified above, or other factors, could materially adversely affect the Company's business, financial condition, results of operations and prospects.

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

Oil prices have declined considerably in the first half of 2020. The decline in oil prices could negatively affect the financial results of industrial sector-based and energy sector-based corporate issuers of corporate bonds owned by the Company. The Company’s corporate debt securities include 14 issuers in industrial and energy sectors with aggregate amortized cost of $275.6 million and fair value of $287.4 million at June 30, 2020. These securities continue to be investment grade rated by a major rating agency.

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

The Company is a participating lender in the PPP. The SBA guarantees 100% of loans funded under the PPP. Loan proceeds used for eligible payroll and certain other operating costs are forgiven with repayment of loan principal and accrued interest made by the SBA. There is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to potential risks relating to noncompliance with the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation or regulatory enforcement could have a material adverse impact on the Company’s business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If the SBA identifies a deficiency, it could deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

-57-

 

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

 

(a) None

(b) None

(c) Issuer Purchases of Equity Securities

 

The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any “affiliated purchaser” (as, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934)1934, as amended (the “Exchange Act”), of common stock during the quarter ended SeptemberJune 30, 2019.2020.

 

2019

Period

(a) Total Number of Shares Purchased

(b) Average Price Paid per Share

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

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

(In thousands, except price paid)

July 1 through July 31

-$--1,750

August 1 through August 31

---1,750

September 1 through September 30

---1,750

Total

-$--1,750

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2020

 

Period

 

(a) Total Number of Shares Purchased

  

(b) Average Price Paid per Share

  

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

  

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

 
  

(In thousands, except price paid)

 

April 1 through April 30

  -  $-   -   1,570 

May 1 through May 31

  13   52.27   13   1,557 

June 1 through June 30

  -       -   1,557 

Total

  13  $52.27   13   1,557 

 

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

 

No sharesShares were repurchased during the period JulyApril 1, 20192020 through SeptemberJune 30, 2019. A program approved by the Board of Directors on July 26, 2018 authorizing the purchase of up2020 pursuant to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2019 was replaced by a program approved by the Board of Directors on July 25, 2019 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2020.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

-58-

Item 6. Exhibits

 

The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report.

[The remainder of this page intentionally left blank]

Exhibit No.Description of Exhibit
Exhibit 31.1Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1Certification 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 32.2Certification 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.SCHXBRL Taxonomy Extension Schema Document
Exhibit 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LABXBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PREXBRL Taxonomy Extension Presentation Linkbase Document

 

 

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-59-

 

 

SIGNATURES

 

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

 

WESTAMERICA BANCORPORATION

(Registrant)

 

 

 

/s/ JOHN "ROBERT" THORSONJesse Leavitt                                                                           

John "Robert" ThorsonJesse Leavitt

Senior Vice President and Chief Financial Officer

(Principal Financial and Chief Accounting Officer)

 

Date: November 4, 2019

August 5, 2020

 

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-60-

EXHIBIT INDEX

Exhibit 10.1*: Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Stock Option Agreement Form

Exhibit 10.2*: Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement Form

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: XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL: XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEF: XBRL Taxonomy Extension Definitions Linkbase Document

Exhibit 101.LAB: XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE: XBRL Taxonomy Extension Presentation Linkbase Document

* Indicates management contract, compensatory plan or arrangement.

[The remainder of this page intentionally left blank]

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