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WABC Westamerica Bancorporation

Filed: 5 May 21, 12:42pm
 

 

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 March 31, 2021

 

or

 

 

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

 For the transition period from __________ to __________.

 

Commission file number: 001-09383

 

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

California94-2156203

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

1108 Fifth Avenue, San Rafael, California 94901 

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

WABC

The Nasdaq Stock Market, LLC

 

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

 

Yes ☒                                                                                                                  No ☐

 

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

 

Yes ☒                                                                                                                  No ☐

 

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

 

Large accelerated filer ☒

Accelerated filer ☐

 Non-accelerated filer ☐  

 

Smaller reporting company ☐

Emerging growth company ☐

 

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

 

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

 

Yes ☐                                                                                                                 No ☒

 

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

 

Title of ClassShares outstanding as of April 29, 2020

Common Stock,

No Par Value

26,865,423

 

 

 

 

 

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

30

Item 3

Quantitative and Qualitative Disclosures about Market Risk

51

Item 4

Controls and Procedures

52

PART II - OTHER INFORMATION

 

Item 1

Legal Proceedings

52

Item 1A

Risk Factors

52

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3

Defaults upon Senior Securities

53

Item 4

Mine Safety Disclosures

53

Item 5

Other Information

53

Item 6

Exhibits

54

Signatures

55

 

 

 

 

 

 

 

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 credit losses, loan growth or reduction, mitigation of risk in the Company’s loan and investment securities portfolios, income or loss, earnings or loss per share, the payment or nonpayment of dividends, 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 any difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by riots, terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the local, regional and national economies; (6) changes in the interest rate environment; (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, hurricanes, fire, flood, drought, and other disasters, on the uninsured value of the Company’s assets and of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values; (13) changes in the securities markets; (14) the duration and severity of the COVID-19 pandemic and governmental 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 annual report on Form 10-K for the year ended December 31, 2020 and Part II – Item 1A of this report, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

 

 

 

 

 

 

 

 

 

3

 
 

 

PART I - FINANCIAL INFORMATION

 

Item 1   Financial Statements

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 
         
  

At March 31,

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Assets:

        

Cash and due from banks

 $866,457  $621,275 

Debt securities available for sale

  3,990,570   4,063,185 

Debt securities held to maturity, net of allowance for credit losses of $9 at March 31, 2021 and $9 at December 31, 2020 (Fair value of $480,549 at March 31, 2021 and $529,678 at December 31, 2020)

  469,259   515,589 

Loans

  1,293,756   1,256,243 

Allowance for credit losses on loans

  (23,483)  (23,854)

Loans, net of allowance for credit losses on loans

  1,270,273   1,232,389 

Premises and equipment, net

  32,216   32,813 

Identifiable intangibles, net

  1,035   1,104 

Goodwill

  121,673   121,673 

Other assets

  160,998   159,903 

Total Assets

 $6,912,481  $6,747,931 
         

Liabilities:

        

Noninterest-bearing deposits

 $2,798,542  $2,725,177 

Interest-bearing deposits

  3,125,291   2,962,802 

Total deposits

  5,923,833   5,687,979 

Short-term borrowed funds

  95,479   102,545 

Other borrowed funds

  1,681   0 

Other liabilities

  79,356   112,598 

Total Liabilities

  6,100,349   5,903,122 
         

Contingencies (Note 10)

          
         

Shareholders' Equity:

        

Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,864 at March 31, 2021 and 26,807 at December 31, 2020

  469,850   466,006 

Deferred compensation

  35   35 

Accumulated other comprehensive income

  68,901   114,412 

Retained earnings

  273,346   264,356 

Total Shareholders' Equity

  812,132   844,809 

Total Liabilities and Shareholders' Equity

 $6,912,481  $6,747,931 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED STATEMENTS OF INCOME

 

(unaudited)

 
  

For the

 
  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
  

(In thousands,

 
  

except per share data)

 

Interest and Fee Income:

        

Loans

 $14,581  $13,809 

Equity securities

  110   103 

Debt securities available for sale

  24,889   21,315 

Debt securities held to maturity

  2,598   3,908 

Interest-bearing cash

  138   856 

Total Interest and Fee Income

  42,316   39,991 

Interest Expense:

        

Deposits

  459   434 

Short-term borrowed funds

  16   8 

Total Interest Expense

  475   442 

Net Interest and Fee Income

  41,841   39,549 

Provision for Credit Losses

  0   4,300 

Net Interest and Fee Income After Provision For Credit Losses

  41,841   35,249 

Noninterest Income:

        

Service charges on deposit accounts

  3,304   4,248 

Merchant processing services

  2,560   2,358 

Debit card fees

  1,601   1,468 

Trust fees

  801   777 

ATM processing fees

  601   579 

Other service fees

  469   506 

Financial services commissions

  70   125 

Other noninterest income

  783   1,587 

Total Noninterest Income

  10,189   11,648 

Noninterest Expense:

        

Salaries and related benefits

  12,665   13,018 

Occupancy and equipment

  4,880   4,932 

Outsourced data processing services

  2,390   2,405 

Professional fees

  942   389 

Courier service

  504   491 

Amortization of identifiable intangibles

  69   73 

Other noninterest expense

  3,456   3,356 

Total Noninterest Expense

  24,906   24,664 

Income Before Income Taxes

  27,124   22,233 

Provision for income taxes

  6,977   5,271 

Net Income

 $20,147  $16,962 
         

Average Common Shares Outstanding

  26,821   27,068 

Average Diluted Common Shares Outstanding

  26,842   27,139 

Per Common Share Data:

        

Basic earnings

 $0.75  $0.63 

Diluted earnings

  0.75   0.63 

Dividends paid

  0.41   0.41 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(unaudited)

 
         
  

For the Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Net income

 $20,147  $16,962 

Other comprehensive loss:

        

Changes in net unrealized gains on debt securities available for sale

  (64,614)  (36,744)

Deferred tax benefit

  19,103   10,864 

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

  (45,511)  (25,880)

Total comprehensive loss

 $(25,364) $(8,918)

 

 

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 per share data)

 
                         

Balance, December 31, 2019

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

Adoption of ASU 2016-13

      0   0   0   52   52 

Adjusted Balance, January 1, 2020

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

Net income for the period

      0   0   0   16,962   16,962 

Other comprehensive loss

      0   0   (25,880)  0   (25,880)

Exercise of stock options

  40   2,266   0   0   0   2,266 

Restricted stock activity

  10   534   0   0   0   534 

Stock based compensation

  -   525   0   0   0   525 

Stock awarded to employees

  -   21   0   0   0   21 

Retirement of common stock

  (180)  (3,105)  0   0   (6,142)  (9,247)

Dividends ($0.41 per share)

      0   0   0   (11,104)  (11,104)

Balance, March 31, 2020

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

Balance, December 31, 2020

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

Net income for the period

      0   0   0   20,147   20,147 

Other comprehensive loss

      0   0   (45,511)  0   (45,511)

Exercise of stock options

  52   2,960   0   0   0   2,960 

Restricted stock activity

  9   526   0   0   0   526 

Stock based compensation

  -   368   0   0   0   368 

Stock awarded to employees

  -   56   0   0   0   56 

Retirement of common stock

  (4)  (66)  0   0   (166)  (232)

Dividends ($0.41 per share)

      0   0   0   (10,991)  (10,991)

Balance, March 31, 2021

  26,864  $469,850  $35  $68,901  $273,346  $812,132 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

7

 

 

WESTAMERICA BANCORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 
  

For the Three Months

 
  

Ended March 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Operating Activities:

        

Net income

 $20,147  $16,962 

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

        

Depreciation and amortization/accretion

  4,256   6,304 

Credit loss provision

  0   4,300 

Net amortization of deferred net loan fees

  (1,246)  (18)

Decrease (increase) in interest income receivable

  1,961   (201)

Increase in income taxes payable

  7,450   4,572 

(Increase) decrease in deferred tax asset

  (472)  879 

Increase in other assets

  (3,004)  (3,625)

Stock option compensation expense

  368   525 

Increase in interest expense payable

  16   10 

Increase in other liabilities

  2,796   24,743 

Net Cash Provided by Operating Activities

  32,272   54,451 
         

Investing Activities:

        

Net (disbursements) repayments of loans

  (36,544)  4,545 

Purchases of debt securities available for sale

  (385,553)  (438,122)

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

  367,499   266,561 

Proceeds from maturity/calls of debt securities held to maturity

  45,447   55,112 

Purchases of premises and equipment

  (145)  (1,796)

Net Cash Used in Investing Activities

  (9,296)  (113,700)
         

Financing Activities:

        

Net change in deposits

  235,854   (13,195)

Net change in borrowings

  (5,385)  21,736 

Exercise of stock options

  2,960   2,266 

Retirement of common stock

  (232)  (9,247)

Common stock dividends paid

  (10,991)  (11,104)

Net Cash Provided by (Used in) Financing Activities

  222,206   (9,544)

Net Change In Cash and Due from Banks

  245,182   (68,793)

Cash and Due from Banks at Beginning of Period

  621,275   373,421 

Cash and Due from Banks at End of Period

 $866,457  $304,628 
         

Supplemental Cash Flow Disclosures:

        

Supplemental disclosure of noncash activities:

        

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

 $3,301  $0 

Securities purchases pending settlement

  5,000   607 

Supplemental disclosure of cash flow activities:

        

Cash paid for amounts included in operating lease liabilities

  1,618   1,659 

Interest paid for the period

  459   432 

 

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 months ended March 31, 2021 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, 2020.

 

 

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, 2020. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, it is reasonably possible conditions could change materially affecting results of operations and financial conditions. Certain risks, uncertainties and other factors, including those discussed in Note 20 “Impact of COVID-19” to the consolidated financial statements and “Risk Factors” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 may cause actual future results to differ materially from the results discussed in this report on Form 10-Q.

 

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 a writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

 

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

 

The Company utilizes third-party sources to value its investment securities; securities individually valued using quoted prices in active markets are classified as Level 1 assets in the fair value hierarchy, and securities valued using quoted prices in active markets for similar securities (commonly referred to as “matrix” pricing) are classified as Level 2 assets in the fair value hierarchy. The Company validates the reliability of third-party provided values by comparing individual security pricing for securities between more than one third-party source. When third-party information is not available, valuation adjustments are estimated in good faith by Management and classified as Level 3 in the fair value hierarchy.

 

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

 

9

 

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 expectation 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.

 

Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. For available for sale debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.

 

If the Company intends to sell a debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses with any incremental loss reported in earnings.

 

Purchase premiums are amortized to the earliest call date and purchase discounts are amortized to maturity as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized as a component of gain or loss on sale upon disposition of the related security. Interest and dividend income are recognized when earned. Realized gains and losses from the sale of available for sale debt securities are included in earnings using the specific identification method.

 

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

 

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

 

10

 

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

 

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

 

The preparation of 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 review system, adequacy of lending Management and staff, loan policies and procedures, problem loan trends, and concentrations of credit. At the end of the two-year forecast period loss rates revert immediately to the historical loss rates. The results of this analysis are applied to the amortized cost of the loans included within each pool.

 

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

 

11

 

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

 

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

 

Recently Adopted Accounting Standards

 

In the three months ended March 31, 2021, the Company adopted the following new accounting guidance:

 

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. The Company adopted the ASU provisions on January 1, 2021 and the adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards

 

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

 

 

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12

 

 

 

 

Note 3: Investment Securities

 

Effective January 1, 2020, the Company adopted FASB ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Upon adoption of the ASU the Company recorded allowance for credit losses for debt securities held to maturity of $16 thousand. During the fourth quarter ended December 31, 2020, the Company recorded $7 thousand of reversal of provision for credit loss on debt securities held to maturity, resulting in the balance of $9 thousand allowance for credit losses for 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 $9 thousand, follows:

 

  

At March 31, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential mortgage-backed securities ("MBS")

 $558,366  $19,124  $0  $577,490 

Securities of U.S. Government entities

  146   0   (1)  145 

Obligations of states and political subdivisions

  101,817   4,310   (10)  106,117 

Corporate securities

  2,076,354   79,548   (6,536)  2,149,366 

Collateralized loan obligations

  1,156,067   2,596   (1,211)  1,157,452 

Total debt securities available for sale

  3,892,750   105,578   (7,758)  3,990,570 

Debt securities held to maturity

                

Agency residential MBS

  212,463   5,623   (19)  218,067 

Non-agency residential MBS

  1,266   10   (7)  1,269 

Obligations of states and political subdivisions

  255,539   5,683   0   261,222 

Total debt securities held to maturity

  469,268   11,316   (26)  480,558 

Total

 $4,362,018  $116,894  $(7,784) $4,471,128 

 

 

 

  

At December 31, 2020

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential MBS

 $630,174  $22,779  $(1) $652,952 

Securities of U.S. Government entities

  154   0   0   154 

Obligations of states and political subdivisions

  105,679   5,332   (1)  111,010 

Corporate securities

  1,986,995   131,025   (42)  2,117,978 

Commercial paper

  24,983   7   0   24,990 

Collateralized loan obligations

  1,152,766   4,433   (1,098)  1,156,101 

Total debt securities available for sale

  3,900,751   163,576   (1,142)  4,063,185 

Debt securities held to maturity

                

Agency residential MBS

  240,332   6,852   (32)  247,152 

Non-agency residential MBS

  1,344   26   0   1,370 

Obligations of states and political subdivisions

  273,922   7,243   0   281,165 

Total debt securities held to maturity

  515,598   14,121   (32)  529,687 

Total

 $4,416,349  $177,697  $(1,174) $4,592,872 

 

 

 

 

 

 

13

 

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

 

  

At March 31, 2021

 
  

Debt Securities Available

  

Debt Securities Held

 
  

for Sale

  

to Maturity

 
  

Amortized

  

Fair

  

Amortized

  

Fair

 
  

Cost

  

Value

  

Cost

  

Value

 
  

(In thousands)

 

Maturity in years:

                

1 year or less

 $222,016  $224,112  $49,319  $49,593 

Over 1 to 5 years

  851,915   894,939   129,579   132,526 

Over 5 to 10 years

  1,829,139   1,861,379   76,641   79,103 

Over 10 years

  431,314   432,650   0   0 

Subtotal

  3,334,384   3,413,080   255,539   261,222 

MBS

  558,366   577,490   213,729   219,336 

Total

 $3,892,750  $3,990,570  $469,268  $480,558 

 

  

At December 31, 2020

 
  

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

 $212,140  $213,715  $54,526  $54,927 

Over 1 to 5 years

  922,170   974,438   129,786   133,195 

Over 5 to 10 years

  1,767,747   1,851,184   89,610   93,043 

Over 10 years

  368,520   370,896   0   0 

Subtotal

  3,270,577   3,410,233   273,922   281,165 

MBS

  630,174   652,952   241,676   248,522 

Total

 $3,900,751  $4,063,185  $515,598  $529,687 

 

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 March 31, 2021 and December 31, 2020, the Company had 0 high-risk collateralized mortgage obligations as defined by regulatory guidelines.

 

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

 

  

Debt Securities Available for Sale

 
  

At March 31, 2021

 
  

No. of

  

Less than 12 months

  

No. of

  

12 months or longer

  

No. of

  

Total

 
  

Investment

      

Unrealized

  

Investment

      

Unrealized

  

Investment

      

Unrealized

 
  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

 
  

($ in thousands)

 

Agency residential MBS

  1  $95  $0   1  $15  $0   2  $110  $0 

Securities of U.S.
Government entities

  1   145   (1)  0   0   0   1   145   (1)

Obligations of states
and political
subdivisions

  5   2,420   (10)  0   0   0   5   2,420   (10)

Corporate securities

  19   210,618   (6,515)  1   14,981   (21)  20   225,599   (6,536)

Collateralized loan
obligations

  49   359,104   (1,211)  0   0   0   49   359,104   (1,211)

Total

  75  $572,382  $(7,737)  2  $14,996  $(21)  77  $587,378  $(7,758)

 

 

 

14

 
 

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

 

  

Debt Securities Held to Maturity

 
  

At March 31, 2021

 
  

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

  2  $200  $0   3  $686  $(19)  5  $886  $(19)

Non-agency residential
MBS

  1   680   (7)  0   0   0   1   680   (7)

Total

  3  $880  $(7)  3  $686  $(19)  6  $1,566  $(26)

 

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 March 31, 2021.

 

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 March 31, 2021 and December 31, 2020, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $844,502 thousand and $888,577 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, 2020

 
  

No. of

  

Less than 12 months

  

No. of

  

12 months or longer

  

No. of

  

Total

 
  

Investment

      

Unrealized

  

Investment

      

Unrealized

  

Investment

      

Unrealized

 
  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

  

Positions

  

Fair Value

  

Losses

 
  

($ in thousands)

 

Agency residential MBS

  1  $96  $(1)  1  $17  $0   2  $113  $(1)

Securities of U.S.
Government entities

  1   154   0   0   0   0   1   154   0 

Obligations of states
and political
subdivisions

  2   692   (1)  0   0   0   2   692   (1)

Corporate securities

  0   0   0   1   14,963   (42)  1   14,963   (42)

Collateralized loan
obligations

  36   268,584   (1,098)  0   0   0   36   268,584   (1,098)

Total

  40  $269,526  $(1,100)  2  $14,980  $(42)  42  $284,506  $(1,142)

 

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

 

  

Debt Securities Held to Maturity

 
  

At December 31, 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  $377  $(1)  3  $788  $(31)  6  $1,165  $(32)

 

The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, collateral levels, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. 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 $14.98 million at March 31, 2021, is rated below investment grade. The $14.98 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 July 2021. 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.

 

15

 

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

 

  

For the Three Months Ended March 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Allowance for credit losses:

        

Balance, end of prior period

 $9  $0 

Impact of adopting ASU 2016-13

  0   16 

Beginning balance

  9   16 

Provision

  0   0 

Chargeoffs

  0   0 

Recoveries

  0   0 

Total ending balance

 $9  $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 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 following table summarizes the amortized cost of debt securities held to maturity at March 31, 2021, aggregated by credit rating:

 

  

Credit Risk Profile by Credit Rating

 
  

At March 31, 2021

 
  

AAA/AA/A

  

BBB

  

BB/B/NR

  

Total

 
  

(In thousands)

 

Agency residential MBS

 $212,463  $0  $0  $212,463 

Non-agency residential MBS

  325   0   941   1,266 

Obligations of states and political subdivisions

  227,479   21,821   6,239   255,539 

Total

 $440,267  $21,821  $7,180  $469,268 

 

There were 0 debt securities held to maturity on nonaccrual status or past due 30 days or more as of March 31, 2021.

 

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

 
  

Ended March 31,

 
  

2021

  

2020

 
  

(In thousands)

 
         

Taxable

 $25,198  $21,964 

Tax-exempt from regular federal income tax

  2,399   3,362 

Total interest income from investment securities

 $27,597  $25,326 

 

 

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16

 

 

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

 

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

 

  

At March 31,

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Commercial:

        

Paycheck Protection Program ("PPP") loans

 $232,898  $186,945 

Other

  215,744   207,861 

Total Commercial

  448,642   394,806 

Commercial Real Estate

  548,802   564,300 

Construction

  115   129 

Residential Real Estate

  21,552   23,471 

Consumer Installment & Other

  274,645   273,537 

Total

 $1,293,756  $1,256,243 

 

The following summarizes activity in the allowance for credit losses:

 

  

Allowance for Credit Losses

 
  

For the Three Months Ended March 31, 2021

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $9,205  $5,660  $6  $47  $8,936  $23,854 

Provision (reversal)

  336   (167)  0   (4)  (165)  0 

Chargeoffs

  0   0   0   0   (929)  (929)

Recoveries

  13   12   0   0   533   558 

Total allowance for credit losses

 $9,554  $5,505  $6  $43  $8,375  $23,483 

 

The growth in commercial loan balances was due to originations of Paycheck Protection Program (“PPP”) loans which are 100% guaranteed by the Small Business Administration (“SBA”). PPP 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 Credit Losses

 
  

For the Three Months Ended March 31, 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   0   21,501 

Provision (reversal)

  27   59   29   (4)  4,189   0   4,300 

Chargeoffs

  (178)  0   0   0   (1,395)  0   (1,573)

Recoveries

  143   12   0   0   421   0   576 

Total allowance for credit losses

 $8,336  $4,753  $107  $70  $11,538  $0  $24,804 

 

The significant increase in the first quarter 2020 in the allowance for credit losses for consumer installment and other loans was due to expected credit losses associated with forecasted unemployment.

 

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.

 

17

 

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

 

  

Credit Risk Profile by Internally Assigned Grade

 
  

At March 31, 2021

 
  

Commercial

  

Commercial

Real Estate

  

Construction

  

Residential

Real Estate

  

Consumer

Installment and

Other

  

Total

 
  

(In thousands)

 

Grade:

                        

Pass

 $440,277  $531,702  $115  $20,215  $272,291  $1,264,600 

Substandard

  8,365   17,100   0   1,337   1,520   28,322 

Doubtful

  0   0   0   0   596   596 

Loss

  0   0   0   0   238   238 

Total

 $448,642  $548,802  $115  $21,552  $274,645  $1,293,756 

 

  

Credit Risk Profile by Internally Assigned Grade

 
  

At December 31, 2020

 
  

Commercial

  

Commercial

Real Estate

  

Construction

  

Residential

Real Estate

  

Consumer

Installment and

Other

  

Total

 
  

(In thousands)

 

Grade:

                        

Pass

 $386,144  $545,398  $129  $22,105  $270,925  $1,224,701 

Substandard

  8,662   18,902   0   1,366   1,498   30,428 

Doubtful

  0   0   0   0   543   543 

Loss

  0   0   0   0   571   571 

Total

 $394,806  $564,300  $129  $23,471  $273,537  $1,256,243 

 

The following tables summarize loans by delinquency and nonaccrual status:

 

  

Summary of Loans by Delinquency and Nonaccrual Status

 
  

At March 31, 2021

 
  

Current and

Accruing

  

30-59 Days

Past Due and

Accruing

  

60-89 Days

Past Due and

Accruing

  

Past Due 90

Days or More

and Accruing

  

Nonaccrual

  

Total Loans

 
  

(In thousands)

 

Commercial

 $448,428  $214  $0  $0  $0  $448,642 

Commercial real estate

  543,356   2,028   0   0   3,418   548,802 

Construction

  115   0   0   0   0   115 

Residential real estate

  20,863   538   0   0   151   21,552 

Consumer installment and other

  272,039   1,590   482   132   402   274,645 

Total

 $1,284,801  $4,370  $482  $132  $3,971  $1,293,756 

 

  

Summary of Loans by Delinquency and Nonaccrual Status

 
  

At December 31, 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

 
  

(In thousands)

 

Commercial

 $394,004  $713  $6  $0  $83  $394,806 

Commercial real estate

  560,580   0   0   0   3,720   564,300 

Construction

  129   0   0   0   0   129 

Residential real estate

  22,269   770   271   0   161   23,471 

Consumer installment and other

  270,240   2,010   472   450   365   273,537 

Total

 $1,247,222  $3,493  $749  $450  $4,329  $1,256,243 

 

There was 0 allowance for credit losses allocated to loans on nonaccrual status as of March 31, 2021 and December 31, 2020. There were 0 commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2021 and December 31, 2020.

 

18

 

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

 

  

Troubled Debt Restructurings

 
  

At March 31, 2021

 
              

Period-End

 
              

Individual

 
  

Number of

  

Pre-Modification

  

Period-End

  

Credit Loss

 
  

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

 
  

($ in thousands)

 

Commercial real estate

  4  $7,545  $5,049  $0 

Residential real estate

  1   241   178   0 

Total

  5  $7,786  $5,227  $0 

 

  

Troubled Debt Restructurings

 
  

At December 31, 2020

 
              

Period-End

 
              

Individual

 
  

Number of

  

Pre-Modification

  

Period-End

  

Credit Loss

 
  

Contracts

  

Carrying Value

  

Carrying Value

  

Allowance

 
  

($ in thousands)

 

Commercial real estate

  6  $8,367  $6,040  $0 

Residential real estate

  1   241   181   0 

Total

  7  $8,608  $6,221  $0 

 

During the three months ended March 31, 2021, the Company did not modify any loans that were considered troubled debt restructurings for accounting purposes. 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 months ended March 31, 2021, the Company modified loans under Section 4013 of the CARES Act, granting 90 day deferrals of principal and interest payments. As of March 31, 2021,loans deferred under the CARES Act that are not considered TDRs included 1 commercial real estate loan with deferred payments totaling $2.3 million for a borrower in the hospitality industry, and consumer loans totaling $1.8 million. During the three months ended March 31, 2020, the Company did not modify any loans that were considered troubled debt restructurings including those under the CARES Act. There were 0 chargeoffs related to troubled debt restructurings made during the three months ended March 31, 2021 and March 31, 2020. During the three months ended March 31, 2021 and March 31, 2020, 0 troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

 

TDRs of $5,227 thousand included a loan with a balance of $3,120 thousand on nonaccrual status at March 31, 2021. NaN allowance for credit losses was allocated to 1 commercial real estate loan secured by real property with a balance of $3,120 thousand, which was considered collateral-dependent at March 31, 2021. Four other commercial real estate loans totaling $7.6 million were secured by real property and considered collateral-dependent at March 31, 2021. At March 31, 2021, $108 thousand of indirect consumer installment loans secured by personal property were past due 90 days or more and considered collateral-dependent and 4 residential real estate loans totaling $365 thousand secured by real property were considered collateral-dependent. There were no other collateral-dependent loans at March 31, 2021. 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.

 

TDRs of $6,221 thousand included a loan with a balance of $3,420 thousand on nonaccrual status at December 31, 2020. NaN allowance for credit losses was allocated to 1 commercial real estate loan secured by real property with a balance of $3,420 thousand, which was considered collateral-dependent at December 31, 2020. Four other commercial real estate loans totaling $7.6 million were secured by real property and considered collateral-dependent at December 31, 2020. At December 31, 2020, $446 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 $346 thousand secured by real property were considered collateral-dependent. There were no other collateral-dependent loans at December 31, 2020.

 

 

 

19

 

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

 

  

At March 31, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial loans by grade

                         

Pass

 $43,588  $9,477  $18,031  $35,795  $174,758  $117,247  $398,896  $41,381  $440,277 

Substandard

  38   0   0   0   7,409   0   7,447   918   8,365 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $43,626  $9,477  $18,031  $35,795  $182,167  $117,247  $406,343  $42,299  $448,642 

 

  

At March 31, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Commercial real estate loans by grade

                         

Pass

 $157,240  $97,374  $84,990  $82,072  $89,094  $20,932  $531,702  $0  $531,702 

Substandard

  14,124   104   0   2,036   836   0   17,100   0   17,100 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $171,364  $97,478  $84,990  $84,108  $89,930  $20,932  $548,802  $0  $548,802 

 

  

At March 31, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Construction loans by grade

                         

Pass

 $0  $0  $0  $0  $0  $0  $0  $115  $115 

Substandard

  0   0   0   0   0   0   0   0   0 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $0  $0  $0  $0  $0  $0  $0  $115  $115 

 

  

At March 31, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

 

Residential Real Estate loans by grade

                         

Pass

 $20,215  $0  $0  $0  $0  $0  $20,215  $0  $20,215 

Substandard

  1,337   0   0   0   0   0   1,337   0   1,337 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $21,552  $0  $0  $0  $0  $0  $21,552  $0  $21,552 

 

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

 

  

At March 31, 2021

 
                              

Revolving

     
                              

Loans

     
  

Term Loans Amortized Cost Basis by Origination Year

  

Total

  

Amortized

     
  

Prior

  

2017

  

2018

  

2019

  

2020

  

2021

  

Term Loans

  

Cost Basis

  

Total

 
  

(In thousands)

     

Consumer installment and other loans by delinquency and nonaccrual status

 

Current

 $18,845  $18,423  $41,914  $56,114  $81,237  $29,526  $246,059  $25,980  $272,039 

30-59 days past due

  133   99   390   358   427   51   1,458   132   1,590 

60-89 days past due

  48   39   21   223   106   0   437   45   482 

Past due 90 days or more

  21   0   41   13   53   0   128   4   132 

Nonaccrual

  37   0   0   0   0   0   37   365   402 

Total

 $19,084  $18,561  $42,366  $56,708  $81,823  $29,577  $248,119  $26,526  $274,645 

 

There were 0 loans held for sale at March 31, 2021, and December 31, 2020.

 

The Company held 0 other real estate owned (OREO) at March 31, 2021 and December 31, 2020. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $365 thousand at March 31, 2021 and $346 thousand at December 31, 2020.

 

20

 
 
 

Note 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 credit 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 credit losses, capital notes, and debentures of the bank. At March 31, 2021, the Bank did not have credit extended to any one entity exceeding these limits. At March 31, 2021, the Bank had 31 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 $36,082 thousand and $37,456 thousand at March 31, 2021 and December 31, 2020, 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 March 31, 2021, the Bank held corporate bonds in 94 issuing entities that exceeded $5 million for each issuer.

 

 

Note 6: Other Assets and Other Liabilities

 

Other assets consisted of the following:

 

  

At March 31,

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Cost method equity investments:

        

Federal Reserve Bank stock (1)

 $14,069  $14,069 

Other investments

  158   158 

Total cost method equity investments

  14,227   14,227 

Life insurance cash surrender value

  61,070   60,444 

Right-of-use asset

  20,609   18,832 

Limited partnership investments

  17,637   18,335 

Interest receivable

  31,061   33,022 

Prepaid assets

  4,197   4,572 

Other assets

  12,197   10,471 

Total other assets

 $160,998  $159,903 

 

(1)

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

 

The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. 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 $211.73 per share on March 31, 2021, the last day of stock market trading for the first quarter 2021. 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 March 31, 2021, this investment totaled $17,637 thousand and $11,240 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2020, this investment totaled $18,335 thousand and $12,202 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At March 31, 2021, the $11,240 thousand of outstanding equity capital commitments are expected to be paid as follows, $2,098 thousand in the remainder of 2021, $4,908 thousand in 2022, $3,485 thousand in 2023, $96 thousand in 2024, $81 thousand in 2025, $74 thousand in 2026, and $498 thousand in 2027 or thereafter.

 

 

 

 

21

 

The amounts recognized in net income for these investments include:

 

  

For the Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Investment loss included in pre-tax income

 $600  $600 

Tax credits recognized in provision for income taxes

  200   225 

 

Other liabilities consisted of the following:

 

  

At March 31,

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Net deferred tax liability

 $6,204  $25,778 

Operating lease liability

  20,609   18,832 

Securities purchases pending settlement

  5,000   29,000 

Other liabilities

  47,543   38,988 

Total other liabilities

 $79,356  $112,598 

 

The net deferred tax liability at March 31, 2021 of $6,204 thousand was net of deferred tax benefits of $22,715 thousand, included deferred tax obligations of $28,919 thousand related to unrealized gains of $97,820 thousand on available for sale debt securities. The deferred tax liability at December 31, 2020 of $25,778 thousand, net of deferred tax benefits of $22,805 thousand, included deferred tax obligations of $48,021 thousand related to unrealized gains of $162,434 thousand on available for sale debt securities.

 

The Company has entered into leases for most branch locations and certain other offices that were classified as operating leases primarily with original terms of five years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional five year terms. Unexercised extension options are not considered reasonably certain of exercise and have not been included in the lease term used to determine the lease liability or right-of-use asset. The Company did not have any finance leases as of March 31, 2021.

 

As of March 31, 2021, the Company recorded a lease liability of $20,609 thousand and a right-of-use asset of $20,609 thousand. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 4.6 years and 1.83%, respectively, at March 31, 2021. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of March 31, 2021.

 

Total lease costs were $1,654 thousand and $1,659 thousand in the three months ended March 31, 2021 and March 31, 2020, respectively, and were recorded within occupancy and equipment expense. The Company did not have any material short-term or variable leases costs or sublease income during the three months ended March 31, 2021 and March 31, 2020.

 

 

 

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22

 
 

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

 

  

Minimum
future lease
payments

 
  

At March 31,

 
  

2021

 
  

(In thousands)

 

2021

 $4,503 

2022

  5,331 

2023

  4,619 

2024

  3,025 

2025

  1,795 

Thereafter

  2,114 

Total minimum lease payments

  21,387 

Less: discount

  (778)

Present value of lease liability

 $20,609 

 

 

Note 7: Goodwill and Identifiable Intangible Assets

 

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the three months ended March 31, 2021 and year ended December 31, 2020. 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 months ended March 31, 2021 and year ended December 31, 2020 no such adjustments were recorded.

 

The carrying values of goodwill were:

 

  

At March 31, 2021

  

At December 31, 2020

 
  

(In thousands)

 

Goodwill

 $121,673  $121,673 

 

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

 

  

At March 31, 2021

  

At December 31, 2020

 
  

Gross

      

Gross

     
  

Carrying

  

Accumulated

  

Carrying

  

Accumulated

 
  

Amount

  

Amortization

  

Amount

  

Amortization

 
  

(In thousands)

 

Core deposit intangibles

 $56,808  $(55,773) $56,808  $(55,704)

 

 

 

 

 

 

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23


 
 

As of March 31, 2021, the current period and estimated future amortization expense for identifiable intangible assets, to be fully amortized in 2025, was:

 

  

Total

 
  

Core

 
  

Deposit

 
  

Intangibles

 
  

(In thousands)

 

For the three months ended March 31, 2021 (actual)

 $69 

Estimate for the remainder of 2021

  200 

Estimate for year ending December 31, 2022

  252 

2023

  236 

2024

  222 

2025

  125 

 

 

Note 8: Deposits and Borrowed Funds

 

The following table provides additional detail regarding deposits.

 

  

Deposits

 
  

At March 31,

  

At December 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Noninterest-bearing

 $2,798,542  $2,725,177 

Interest-bearing:

        

Transaction

  1,179,484   1,102,601 

Savings

  1,791,636   1,703,812 

Time deposits less than $100 thousand

  78,180   79,825 

Time deposits $100 thousand through $250 thousand

  49,657   49,323 

Time deposits more than $250 thousand

  26,334   27,241 

Total deposits

 $5,923,833  $5,687,979 

 

Demand deposit overdrafts of $1,194 thousand and $682 thousand were included as loan balances at March 31, 2021 and December 31, 2020, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $78 thousand in the three months ended March 31, 2021 and $79 thousand in the three months ended March 31, 2020.

 

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

 

  

Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings

 
  

Remaining Contractual Maturity of the Agreements

 
  

Overnight and Continuous

 
  

At March 31,

  

At December 31,

 
  

2021

  

2020

 

Repurchase agreements:

 

(In thousands)

 

Collateral securing borrowings:

        

Agency residential MBS

 $58,799  $67,019 

Corporate securities

  181,119   188,195 

Total collateral carrying value

 $239,918  $255,214 

Total short-term borrowed funds

 $95,479  $102,545 

 

 

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24


 
 

Note 9: Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

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25


 

Assets Recorded at Fair Value on a Recurring Basis

 

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

 

  

At March 31, 2021

 
  

Fair Value

  

Quoted Prices

in Active

Markets for

Identical

Assets
(Level 1)

  

Significant

Other

Observable

Inputs
(Level 2)

  

Significant

Unobservable

Inputs
(Level 3) (1)

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential mortgage-backed securities (MBS)

 $577,490  $0  $577,490  $0 

Securities of U.S. Government entities

  145   0   145   0 

Obligations of states and political subdivisions

  106,117   0   106,117   0 

Corporate securities

  2,149,366   0   2,149,366   0 

Collateralized loan obligations

  1,157,452   0   1,157,452   0 

Total debt securities available for sale

 $3,990,570  $0  $3,990,570  $0 

 

(1)

There were no transfers in to or out of level 3 during the three months ended March 31, 2021.

 

  

At December 31, 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)

 
  

(In thousands)

 

Debt securities available for sale

                

Agency residential MBS

 $652,952  $0  $652,952  $0 

Securities of U.S. Government entities

  154   0   154   0 

Obligations of states and political subdivisions

  111,010   0   111,010   0 

Corporate securities

  2,117,978   0   2,117,978   0 

Commercial paper

  24,990   0   24,990   0 

Collateralized loan obligations

  1,156,101   0   1,156,101   0 

Total debt securities available for sale

 $4,063,185  $0  $4,063,185  $0 

 

 

(1)

There were no transfers in to or out of level 3 during the year ended December 31, 2020.

 

 

 

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26

 
 

 

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 March 31, 2021 and December 31, 2020, 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 Three

 
                  

Months Ended

 
  

At March 31, 2021

  

March 31, 2021

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

 
  

(In thousands)

 

Loans:

                    

Commercial

 $5,186  $0  $0  $5,186  $0 

Commercial real estate

  3,410   0   0   3,410   0 

Residential real estate

  177   0   0   177   0 

Total assets measured at fair value on a nonrecurring basis

 $8,773  $0  $0  $8,773  $0 

 

                  

For the

 
                  

Year Ended

 
  

At December 31, 2020

  

December 31, 2020

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Losses

 
  

(In thousands)

 

Loans:

                    

Commercial

 $5,270  $0  $0  $5,270  $0 

Commercial real estate

  3,710   0   0   3,710   0 

Residential real estate

  181   0   0   181   0 

Total assets measured at fair value on a nonrecurring basis

 $9,161  $0  $0  $9,161  $0 

 

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 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.

 

Disclosures about Fair Value of Financial Instruments

 

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

 

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

 

 

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27

 
  

At March 31, 2021

 
  

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

 $866,457  $866,457  $866,457  $0  $0 

Debt securities held to maturity

  469,259   480,549   0   480,549   0 

Loans

  1,270,273   1,288,836   0   0   1,288,836 
                     

Financial Liabilities:

                    

Deposits

 $5,923,833  $5,923,808  $0  $5,769,662  $154,146 

Short-term borrowed funds

  95,479   95,479   0   95,479   0 

Other borrowed funds

  1,681   1,681   0   1,681   0 

 

  

At December 31, 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

 $621,275  $621,275  $621,275  $0  $0 

Debt securities held to maturity

  515,589   529,678   0   529,678   0 

Loans

  1,232,389   1,290,938   0   0   1,290,938 
                     

Financial Liabilities:

                    

Deposits

 $5,687,979  $5,688,049  $0  $5,531,590  $156,459 

Short-term borrowed funds

  102,545   102,545   0   102,545   0 

 

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

 

 

Note 10: Commitments and Contingent Liabilities

 

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Certain agreements provide the Company the right to cancel or reduce its obligations to lend to customers. The portions that are not cancellable unconditionally by the Company aggregated $36,082 thousand at March 31, 2021. 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 $264,131 thousand at March 31, 2021 and $277,878 thousand at December 31, 2020. 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 $4,062 thousand at March 31, 2021 and $2,357 thousand at December 31, 2020. The Company had 0 commitments outstanding for commercial and similar letters of credit at March 31, 2021 and December 31, 2020. The Company had $580 thousand in outstanding full recourse guarantees to a 3rd party credit card company at March 31, 2021 and December 31, 2020. At March 31, 2021, the Company had a reserve for unfunded commitments of $101 thousand for the above-mentioned loan commitments of $36,082 thousand that are not cancellable unconditionally by the Company. The Company’s reserve for unfunded commitments was $101 thousand at December 31, 2020. The reserve for unfunded commitments is included in other liabilities.

 

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. The Company paid $385 thousand during the quarter ended March 31, 2021 and $4,410 thousand during the year ended December 31, 2020 to customers eligible for refunds. The remaining accrued obligations at March 31, 2021 totaled $1,048 thousand, included in other liabilities.

 

28

 

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

 

 

Note 11: Earnings Per Common Share

 

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

 

 

  

For the Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
  

(In thousands, except per share data)

 

Net income (numerator)

 $20,147  $16,962 

Basic earnings per common share

        

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

  26,821   27,068 

Basic earnings per common share

 $0.75  $0.63 

Diluted earnings per common share

        

Weighted average number of common shares outstanding - basic

  26,821   27,068 

Add common stock equivalents for options

  21   71 

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

  26,842   27,139 

Diluted earnings per common share

 $0.75  $0.63 

 

For the three months ended March 31, 2021 and 2020, options to purchase 598 thousand and 514 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

 

 

 

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29

 
 
 

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

 

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

 

  

For the Three Months Ended

 
  

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands, except per share data)

 

Net Interest and Fee Income (FTE)(1)

 $42,583  $40,547  $43,292 

Provision for Credit Losses

  -   4,300   - 

Noninterest Income

  10,189   11,648   13,959 

Noninterest Expense

  24,906   24,664   24,545 

Income Before Income Taxes (FTE)(1)

  27,866   23,231   32,706 

Provision for Income Taxes (FTE)(1)

  7,719   6,269   8,868 

Net Income

 $20,147  $16,962  $23,838 
             

Average Common Shares Outstanding

  26,821   27,068   26,838 

Average Diluted Common Shares Outstanding

  26,842   27,139   26,849 

Common Shares Outstanding at Period End

  26,864   26,932   26,807 
             

Per Common Share:

            

Basic Earnings

 $0.75  $0.63  $0.89 

Diluted Earnings

  0.75   0.63   0.89 

Book Value Per Common Share

  30.23   26.20   31.51 
             

Financial Ratios:

            

Return On Assets

  1.23%  1.21%  1.44%

Return On Common Equity

  11.11%  9.67%  13.16%

Net Interest Margin (FTE)(1)

  2.74%  3.10%  2.81%

Net Loan Chargeoffs to Average Loans

  0.12%  0.36%  0.09%

Efficiency Ratio(2)

  47.2%  47.3%  42.9%
             

Average Balances:

            

Assets

 $6,650,164  $5,655,460  $6,562,753 

Loans

  1,251,540   1,123,934   1,286,480 

Investments

  4,440,621   3,845,885   4,430,592 

Deposits

  5,748,070   4,828,988   5,655,768 

Shareholders' Equity

  735,496   705,330   720,473 
             

Period End Balances:

            

Assets

 $6,912,481  $5,628,126  $6,747,931 

Loans

  1,293,756   1,121,243   1,256,243 

Investments

  4,459,838   3,892,526   4,578,783 

Deposits

  5,923,833   4,799,426   5,687,979 

Shareholders' Equity

  812,132   705,546   844,809 
             

Capital Ratios at Period End:

            

Total Risk Based Capital

  16.88%  15.81%  16.68%

Tangible Equity to Tangible Assets

  10.15%  10.58%  10.90%
             

Dividends Paid Per Common Share

 $0.41  $0.41  $0.41 

Common Dividend Payout Ratio

  55%  66%  46%

 

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

 

(1)

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

 

(2)

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

 

30

 

 

Financial Overview

 

Westamerica Bancorporation and subsidiaries’ (collectively, the “Company”) reported net income of $20.1 million or $0.75 diluted earnings per common share (“EPS”), including “make-whole” interest income on corporate bonds redeemed prior to maturity of $700 thousand. First quarter 2021 results compare with net income of $17.0 million or $0.63 EPS for the first quarter 2020 and $23.8 million or $0.89 EPS for the fourth quarter 2020.

 

The Company’s primary and wholly-owned subsidiary bank, Westamerica Bank (the “Bank”), continued to support the Bank’s customers during the pandemic. The Bank originated $91 million in loans under the second round of the Paycheck Protection Program (“PPP”) during the first quarter 2021. PPP loans meaningfully increased interest-earning assets and related interest and fee income. The Bank continues to work with loan customers requesting deferral of loan payments due to economic weakness caused by the pandemic. At March 31, 2021, loans granted deferrals under the CARES Act included consumer loans totaling $1.8 million and one hospitality industry commercial real estate loan with a balance of $2.3 million. The results for the first quarter 2020 include 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. Results for the fourth quarter 2020 include a $3.5 million gain on sale of a closed branch building, “make-whole” interest income of $1.9 million on corporate bonds redeemed before maturity, and a customary adjustment to the tax provision for filed 2019 tax returns, which increased EPS $0.15.

 

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 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 2020 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. Certain risks, uncertainties and other factors, including those discussed in Note 20 “Impact of COVID-19” to the consolidated financial statements included in, and “Risk Factors” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 may cause actual future results to differ materially from the results discussed in this report on Form 10-Q.

 

 

 

 

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31

 

 

Net Income

 

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

 

  

For the Three Months Ended

 
  

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands, except per share data)

 

Net interest and loan fee income (FTE)

 $42,583  $40,547  $43,292 

Provision for credit losses

  -   4,300   - 

Noninterest income

  10,189   11,648   13,959 

Noninterest expense

  24,906   24,664   24,545 

Income before taxes (FTE)

  27,866   23,231   32,706 

Income tax provision (FTE)

  7,719   6,269   8,868 

Net income

 $20,147  $16,962  $23,838 
             

Average diluted common shares

  26,842   27,139   26,849 

Diluted earnings per common share

 $0.75  $0.63  $0.89 
             

Average total assets

 $6,650,164  $5,655,460  $6,562,753 

Net income to average total assets (annualized)

  1.23%  1.21%  1.44%

Net income to average common shareholders' equity (annualized)

  11.11%  9.67%  13.16%

 

Net income for the first quarter 2021 increased $3.2 million compared with the first quarter 2020. Net interest and loan fee income (FTE) increased $2.0 million in the first quarter 2021 compared with the first quarter 2020 mainly due to higher average balances of investments and PPP loans, partially offset by lower yield on interest-earning assets and loan payoffs and paydowns. Additionally, first quarter 2021 results include “make-whole” interest income on corporate bonds redeemed prior to maturity of $700 thousand. The first quarter 2021 provision for credit losses was zero, reflecting Management's evaluation of credit risk over the remaining life of loans and bonds. Results for the first quarter 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 credit-risk from economic weakness caused by the COVID-19 pandemic. First quarter 2021 noninterest income decreased $1.5 million compared with first quarter 2020 due to lower fees on overdrawn accounts and analyzed accounts and because first quarter 2020 included $603 thousand in excess of amounts charged-off in prior periods on a purchased loan. First quarter 2021 noninterest expense increased $242 thousand due to higher professional fees and FDIC assessments. First quarter 2020 FDIC assessments were reduced by a $246 thousand FDIC assessment credit. The increases were partially offset by lower salaries due to attrition. The tax rate (FTE) was 27.7% for the first quarter 2021 and 27.0% for the first quarter 2020.

 

Comparing the first quarter 2021 with the fourth quarter 2020 net income decreased $3.7 million. Net interest and loan fee (FTE) income decreased $709 thousand due to lower average balances of PPP loans and lower yield on interest-earning assets. Results for the first quarter include “make-whole” interest income on corporate bonds redeemed prior to maturity of $700 thousand compared with $1.9 million for the fourth quarter. The provision for credit losses remained zero in the first quarter 2021 and the fourth quarter 2020, reflecting Management's evaluation of credit risk over the remaining life of loans and bonds. In the first quarter 2021 noninterest income decreased $3.8 million primarily because fourth quarter 2020 results include a $3.5 million gain on sale of a closed branch building. In the first quarter 2021 noninterest expense increased $361 thousand compared with the fourth quarter 2020 due to higher payroll taxes, employee benefits, and professional fees. The tax rate (FTE) was 27.7% for the first quarter 2021 and 27.1% for the fourth quarter 2020.

 

 

 

 

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32

 

Net Interest and Loan Fee Income (FTE)                                    

 

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

 

  

For the Three Months Ended

 
  

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands)

 

Interest and loan fee income

 $42,316  $39,991  $42,961 

Interest expense

  475   442   481 

FTE adjustment

  742   998   812 

Net interest and loan fee income (FTE)

 $42,583  $40,547  $43,292 
             

Average earning assets

 $6,244,622  $5,242,142  $6,156,749 

Net interest margin (FTE) (annualized)

  2.74%  3.10%  2.81%

 

Net interest and loan fee income (FTE) increased $2.0 million in the first quarter 2021 compared with the first quarter 2020 mainly due to higher average balances of investments (up $595 million) and PPP loans (up $189 million), partially offset by lower yield on interest-earning assets (down 0.36%) and loan payoffs and paydowns. First quarter 2021 results include “make-whole” interest income on corporate bonds redeemed prior to maturity of $700 thousand.

 

Net interest and loan fee (FTE) income decreased $709 thousand due to lower average balances of PPP loans (down $39 million), lower yield on interest-earning assets (down 0.07%) and loan payoffs and paydowns. Results for the first quarter include “make-whole” interest income on corporate bonds redeemed prior to maturity of $700 thousand compared with $1.9 million for the fourth quarter.

 

The annualized net interest margin (FTE) was 2.74% in the first quarter 2021, 3.10% in the first quarter 2020 and 2.81% in the fourth quarter 2020.

 

The Company’s funding costs were 0.03% in the first quarter 2021 and the first and fourth quarters of 2020. Average balances of checking and saving deposits accounted for 97.3% of average total deposits in the first quarter 2021, 96.5% in the first quarter 2020 and 97.2% in the fourth quarter 2020.

 

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 Ended

 
  

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

 
             

Yield on earning assets (FTE)

  2.77%  3.13%  2.84%

Rate paid on interest-bearing liabilities

  0.06%  0.07%  0.06%

Net interest spread (FTE)

  2.71%  3.06%  2.78%

Impact of noninterest-bearing funds

  0.03%  0.04%  0.03%

Net interest margin (FTE)

  2.74%  3.10%  2.81%

 

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33

 

 

Summary of Average Balances, Yields/Rates and Interest Differential

 

The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates. Average loan balances include nonperforming loans. Interest income includes 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 March 31, 2021

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $4,079,472  $25,198   2.47%

Tax-exempt (1)

  361,149   3,038   3.36%

Total investments (1)

  4,440,621   28,236   2.54%

Loans:

            

Taxable

            

Paycheck Protection Program ("PPP") loans

  188,971   1,853   3.98%

Other taxable

  1,011,975   12,339   4.95%

Total taxable

  1,200,946   14,192   4.79%

Tax-exempt (1)

  50,594   492   3.94%

Total loans (1)

  1,251,540   14,684   4.76%

Total interest-bearing cash

  552,461   138   0.10%

Total Interest-earning assets (1)

  6,244,622   43,058   2.77%

Other assets

  405,542         

Total assets

 $6,650,164         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,713,632  $-   -%

Savings and interest-bearing transaction

  2,877,575   339   0.05%

Time less than $100,000

  85,622   42   0.20%

Time $100,000 or more

  71,241   78   0.44%

Total interest-bearing deposits

  3,034,438   459   0.06%

Short-term borrowed funds

  95,575   16   0.07%

Other borrowed funds

  214   -   0.35%

Total interest-bearing liabilities

  3,130,227   475   0.06%

Other liabilities

  70,809         

Shareholders' equity

  735,496         

Total liabilities and shareholders' equity

 $6,650,164         

Net interest spread (1) (2)

          2.71%

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

     $42,583   2.74%

 

(1)

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

(2)

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

(3)

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

 

34

 

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

 

  

For the Three Months Ended March 31, 2020

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $3,329,935  $21,964   2.64%

Tax-exempt (1)

  515,950   4,259   3.30%

Total investments (1)

  3,845,885   26,223   2.73%

Loans:

            

Taxable

  1,077,370   13,431   5.01%

Tax-exempt (1)

  46,564   479   4.14%

Total loans (1)

  1,123,934   13,910   4.98%

Total interest-bearing cash

  272,323   856   1.24%

Total Interest-earning assets (1)

  5,242,142   40,989   3.13%

Other assets

  413,318         

Total assets

 $5,655,460         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,222,737  $-   -%

Savings and interest-bearing transaction

  2,438,082   301   0.05%

Time less than $100,000

  94,320   54   0.23%

Time $100,000 or more

  73,849   79   0.43%

Total interest-bearing deposits

  2,606,251   434   0.07%

Short-term borrowed funds

  42,330   8   0.07%

Total interest-bearing liabilities

  2,648,581   442   0.07%

Other liabilities

  78,812         

Shareholders' equity

  705,330         

Total liabilities and shareholders' equity

 $5,655,460         

Net interest spread (1) (2)

          3.06%

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

     $40,547   3.10%

 

(1)

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

(2)

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

(3)

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

 

 

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35

 

 

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

 

  

For the Three Months Ended December 31, 2020

 
      

Interest

     
  

Average

  

Income/

  

Yields/

 
  

Balance

  

Expense

  

Rates

 
  

($ in thousands)

 

Assets

            

Investment securities:

            

Taxable

 $4,034,072  $25,200   2.50%

Tax-exempt (1)

  396,520   3,358   3.39%

Total investments (1)

  4,430,592   28,558   2.58%

Loans:

            

Taxable

            

PPP loans

  227,828   2,342   4.08%

Other taxable

  1,008,393   12,267   4.84%

Total taxable

  1,236,221   14,609   4.70%

Tax-exempt (1)

  50,259   494   3.91%

Total loans (1)

  1,286,480   15,103   4.67%

Total interest-bearing cash

  439,677   112   0.10%

Total Interest-earning assets (1)

  6,156,749   43,773   2.84%

Other assets

  406,004         

Total assets

 $6,562,753         
             

Liabilities and shareholders' equity

            

Noninterest-bearing demand

 $2,736,348  $-   -%

Savings and interest-bearing transaction

  2,759,607   336   0.05%

Time less than $100,000

  88,507   45   0.20%

Time $100,000 or more

  71,306   81   0.45%

Total interest-bearing deposits

  2,919,420   462   0.06%

Short-term borrowed funds

  114,820   19   0.07%

Total interest-bearing liabilities

  3,034,240   481   0.06%

Other liabilities

  71,692         

Shareholders' equity

  720,473         

Total liabilities and shareholders' equity

 $6,562,753         

Net interest spread (1) (2)

          2.78%

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

     $43,292   2.81%

 

(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 in Interest Income and Expense

 

  

For the Three Months Ended March 31, 2021

 
  

Compared with

 
  

For the Three Months Ended March 31, 2020

 
  

Volume

  

Yield/Rate

  

Total

 
  

(In thousands)

 

Increase (decrease) in interest and loan fee income:

            

Investment securities:

            

Taxable

 $4,944  $(1,710) $3,234 

Tax-exempt (1)

  (1,278)  57   (1,221)

Total investments (1)

  3,666   (1,653)  2,013 

Loans:

            

Taxable:

            

PPP loans

  1,853   -   1,853 

Other

  (899)  (193)  (1,092)

Total taxable

  954   (193)  761 

Tax-exempt (1)

  39   (26)  13 

Total loans (1)

  993   (219)  774 

Total interest-bearing cash

  868   (1,586)  (718)

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

  5,527   (3,458)  2,069 

Increase (decrease) in interest expense:

            

Deposits:

            

Savings and interest-bearing transaction

  52   (14)  38 

Time less than $100,000

  (5)  (7)  (12)

Time $100,000 or more

  (3)  2   (1)

Total interest-bearing deposits

  44   (19)  25 

Short-term borrowed funds

  10   (2)  8 

Other borrowed funds

  -   -   - 

Total increase (decrease) in interest expense

  54   (21)  33 

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

 $5,473  $(3,437) $2,036 

 

(1)

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

 

 

 

 

 

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37

 

 

Summary of Changes in Interest Income and Expense

 

  

For the Three Months Ended March 31, 2021

 
  

Compared with

 
  

For the Three Months Ended December 31, 2020

 
  

Volume

  

Yield/Rate

  

Total

 
  

(In thousands)

 

Increase (decrease) in interest and loan fee income:

            

Investment securities:

            

Taxable

 $284  $(286) $(2)

Tax-exempt (1)

  (300)  (20)  (320)

Total investments (1)

  (16)  (306)  (322)

Loans:

            

Taxable:

            

PPP loans

  (418)  (71)  (489)

Other

  10   62   72 

Total taxable

  (408)  (9)  (417)

Tax-exempt (1)

  (1)  (1)  (2)

Total loans (1)

  (409)  (10)  (419)

Total interest-bearing cash

  27   (1)  26 

Total decrease in interest and loan fee income (1)

  (398)  (317)  (715)

Increase (decrease) in interest expense:

            

Deposits:

            

Savings and interest-bearing transaction

  9   (6)  3 

Time less than $100,000

  (3)  -   (3)

Time $100,000 or more

  -   (3)  (3)

Total interest-bearing deposits

  6   (9)  (3)

Short-term borrowed funds

  (3)  -   (3)

Other borrowed funds

  -   -   - 

Total increase (decrease) in interest expense

  3   (9)  (6)

Decrease in net interest and loan fee income (1)

 $(401) $(308) $(709)

 

(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 provided no provision for credit losses in the first quarter 2021 based on Management’s evaluation of credit quality and the adequacy of the allowance for credit losses. The Company recorded a provision of credit losses of $4.3 million in the first quarter 2020, which represented Management’s estimate of additional reserves needed over the remaining life of its loans due to credit-risk from weakened economic conditions caused by the COVID-19 pandemic. 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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38

 

Noninterest Income

 

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

 

  

For the Three Months Ended

 
  

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands)

 
             

Service charges on deposit accounts

 $3,304  $4,248  $3,452 

Merchant processing services

  2,560   2,358   2,713 

Debit card fees

  1,601   1,468   1,643 

Trust fees

  801   777   765 

ATM processing fees

  601   579   570 

Other service fees

  469   506   457 

Financial services commissions

  70   125   66 

Gains on sales of real property

  -   -   3,536 

Other noninterest income

  783   1,587   757 

Total

 $10,189  $11,648  $13,959 

 

First quarter 2021 noninterest income decreased $1.5 million compared with first quarter 2020 due to lower service charges on deposit accounts and because other noninterest income in the first quarter 2020 included $603 thousand in excess of amounts charged-off in prior periods on a purchased loan. Service charges on deposit accounts decreased $944 thousand due to declines in fees on overdrawn accounts and analyzed accounts. The decreases were partially offset by fees generated from increased transactions of merchant processing services and debit card.

 

First quarter 2021 noninterest income decreased $3.8 million compared with fourth quarter 2020 due to lower service charges on deposit accounts and because fourth quarter 2020 results included a $3.5 million gain on sale of a closed branch building.

 

Noninterest Expense

 

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

 

 

  

For the Three Months Ended

 
  

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands)

 
             

Salaries and related benefits

 $12,665  $13,018  $12,291 

Occupancy and equipment

  4,880   4,932   4,900 

Outsourced data processing services

  2,390   2,405   2,359 

Professional fees

  942   389   722 

Courier service

  504   491   502 

Amortization of identifiable intangibles

  69   73   69 

Other noninterest expense

  3,456   3,356   3,702 

Total

 $24,906  $24,664  $24,545 

 

First quarter 2021 noninterest expense increased $242 thousand compared with first quarter 2020 due to higher professional fees and FDIC assessments. First quarter 2020 FDIC assessments were reduced by a $246 thousand FDIC assessment credit. The increases were partially offset by lower salaries due to attrition.

 

In the first quarter 2021 noninterest expense increased $361 thousand compared with the fourth quarter 2020 due to higher payroll taxes, employee benefits, and professional fees.

 

39

 

Provision for Income Tax

 

The Company’s income tax provision (FTE) was $7.7 million for the first quarter 2021 compared with $6.3 million for the first quarter 2020 and $8.9 million for the fourth quarter 2020, representing effective tax rates (FTE) of 27.7%, 27.0% and 27.1%, respectively.

 

Investment Securities Portfolio

 

The Company maintains an investment securities portfolio consisting of securities issued by agency and non-agency mortgage backed securities, state and political subdivisions, corporations, collateralized loan obligations, and other securities.

 

Management managed the investment securities portfolio in response to changes in deposit and loan volumes. The carrying value of the Company’s investment securities portfolio was $4.5 billion at March 31, 2021 and $4.6 billion at December 31, 2020. The following table indicates the carrying values of investment securities in the Company’s portfolio by type as of the indicated dates. The Company adopted ASU 2016-13 effective January 1, 2020. Debt securities held to maturity of $469,268 thousand at December 31, 2021 and $515,598 thousand at December 31, 2020, are amortized cost before related reserve for expected credit losses of $9 thousand.

 

  

At March 31, 2021

  

At December 31, 2020

 
  

Carrying Value

  

As a percent

of total

investment

securities

  

Carrying Value

  

As a percent

of total

investment

securities

 
  

($ in thousands)

 

Agency residential mortgage-backed securities

 $789,953   18% $893,284   20%

Obligations of states and political subdivisions

  361,656   8%  384,932   8%

Corporate securities

  2,149,366   48%  2,117,978   46%

Commercial paper

  -   -%  24,990   1%

Collateralized loan obligations

  1,157,452   26%  1,156,101   25%

Other

  1,411   -%  1,498   -%

Total

 $4,459,838   100% $4,578,783   100%
                 

Debt securities available for sale

 $3,990,570      $4,063,185     

Debt securities held to maturity

  469,268       515,598     

Total

 $4,459,838      $4,578,783     

 

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 March 31, 2021, 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.

 

 

 

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40

 

The following table summarizes total corporate securities by credit rating:

 

  

At March 31, 2021

  

At December 31, 2020

 
  

Market value

  

As a percent of

total corporate

securities

  

Market value

  

As a percent of

total corporate

securities

 
  

($ in thousands)

 

AAA

 $21,772   1% $21,905   1%

AA+

  20,893   1%  20,979   1%

AA

  20,150   1%  41,232   2%

AA-

  77,527   3%  46,969   2%

A+

  152,735   7%  153,917   7%

A

  466,316   22%  374,155   18%

A-

  338,379   16%  385,642   18%

BBB+

  474,978   22%  489,677   23%

BBB

  481,913   22%  486,108   23%

BBB-

  79,722   4%  82,431   4%

Investment grade

  2,134,385   99%  2,103,015   99%

Below investment grade

  14,981   1%  14,963   1%

Total Corporate securities

 $2,149,366   100% $2,117,978   100%

 

The Company’s $14.98 million below investment grade corporate bond rated BB- at March 31, 2021 and $14.96 million corporate bond rated BB- at December 31, 2020, 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 July 2021.

 

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

 

  

At March 31, 2021

  

At December 31, 2020

 
  

Market value

  

As a percent of

total corporate

securities

  

Market value

  

As a percent of

total corporate

securities

 
  

($ in thousands)

 

Financial

 $1,026,283   48% $938,222   44%

Consumer, Non-cyclical

  181,918   8%  184,069   9%

Utilities

  173,378   8%  185,486   9%

Communications

  167,294   8%  173,483   8%

Industrial

  165,268   8%  188,803   9%

Technology

  128,407   6%  130,725   6%

Basic Materials

  116,312   5%  120,811   6%

Energy

  99,098   5%  103,049   5%

Consumer, Cyclical

  91,408   4%  93,330   4%

Total Corporate securities

 $2,149,366   100% $2,117,978   100%

 

 

 

 

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41

 

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

 

  

At March 31, 2021

 
  

Market value

 
  

($ in thousands)

 

Hotels

 $- 

Restaurants

  20,975 

Department Stores

  - 

Casinos

  - 

Airlines

  - 

Other

  70,433 

Total Consumer, Cyclical

 $91,408 

 

The Company’s $21.0 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 complementary products through retail locations worldwide and sells coffee through several distribution channels. The bonds mature in 2023. At March 31, 2021, the bonds were rated BBB and priced with an unrealized gain of $1.0 million.

 

  

At March 31, 2021

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Energy

 $95,579  $99,098 

Industrial

  158,979   165,268 

Total

 $254,558  $264,366 

 

The $99.1 million (fair value) in corporate bonds in the energy sector are issued by four issuers at March 31, 2021. The $165.3 million (fair value) in corporate bonds in the industrial sector are issued by nine issuers at March 31, 2021.

 

The Company’s $1.2 billion (fair value) in collateralized loan obligations at March 31, 2021, include investments in 133 issues that are within the senior tranches of their respective fund securitization structures. All of the Company’s collateralized loan obligation investments are rated AAA or AA at March 31, 2021.

 

 

 

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42

 

 

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 March 31, 2021, the Company’s investment securities portfolios included securities issued by 297 state and local government municipalities and agencies located within 40 states. The largest exposure to any one municipality or agency was $8.1 million (fair value) represented by six general obligation bonds.

 

  

At March 31, 2021

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Obligations of states and political subdivisions:

        

General obligation bonds:

        

California

 $66,059  $68,275 

Texas

  18,917   19,389 

Washington

  16,184   16,791 

Other (31 states)

  158,999   163,630 

Total general obligation bonds

 $260,159  $268,085 
         

Revenue bonds:

        

California

 $17,575  $17,977 

Kentucky

  10,819   11,152 

Indiana

  9,342   9,498 

Virginia

  7,597   7,944 

Colorado

  6,301   6,488 

Washington

  6,221   6,318 

Maryland

  5,972   6,026 

Other (19 states)

  33,370   33,851 

Total revenue bonds

  97,197   99,254 

Total obligations of states and political subdivisions

 $357,356  $367,339 

 

 

 

 

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43

 

 

At December 31, 2020, the Company’s investment securities portfolios included securities issued by 317 state and local government municipalities and agencies located within 40 states. The largest exposure to any one municipality or agency was $8.2 million (fair value) represented by six general obligation bonds.

 

  

At December 31, 2020

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Obligations of states and political subdivisions:

        

General obligation bonds:

        

California

 $67,386  $70,075 

Texas

  20,644   21,283 

New Jersey

  17,403   17,629 

Washington

  16,226   17,000 

Other (32 states)

  159,019   164,764 

Total general obligation bonds

 $280,678  $290,751 
         

Revenue bonds:

        

California

 $17,587  $18,054 

Kentucky

  10,822   11,210 

Indiana

  9,350   9,565 

Virginia

  7,604   8,019 

Colorado

  6,302   6,519 

Washington

  6,225   6,358 

Maryland

  5,972   6,043 

Other (19 states)

  35,061   35,656 

Total revenue bonds

  98,923   101,424 

Total obligations of states and political subdivisions

 $379,601  $392,175 

 

At March 31, 2021 and December 31, 2020, 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 19 revenue sources at March 31, 2021 and December 31, 2020. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

 

  

At March 31, 2021

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Revenue bonds by revenue source:

        

Water

 $21,058  $21,325 

Sewer

  12,424   12,868 

Sales tax

  10,729   10,977 

Lease (renewal)

  9,206   9,489 

Lease (abatement)

  8,471   8,615 

Other (14 sources)

  35,309   35,980 

Total revenue bonds by revenue source

 $97,197  $99,254 

 

 

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44

 

  

At December 31, 2020

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In thousands)

 

Revenue bonds by revenue source:

        

Water

 $22,731  $23,095 

Sewer

  12,447   12,989 

Sales tax

  10,738   11,013 

Lease (renewal)

  9,209   9,545 

Lease (abatement)

  8,483   8,674 

Other (14 sources)

  35,315   36,108 

Total revenue bonds by revenue source

 $98,923  $101,424 

 

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

 

During 2020 and the first quarter of 2021, the Bank processed customer PPP loan applications pursuant to 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 and $91 million loans during the first quarter 2021 under the second round of the PPP. The outstanding balances of PPP loans, net of deferred fees and costs, were $233 million at March 31, 2021.

 

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 March 31, 2021, consumer loans granted loan deferrals totaled $1.8 million and one commercial real estate loan with deferred payments totaled $2.3 million, in the hospitality industry.

 

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

 

45

 

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.

 

 

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”).

 

  

At March 31,

  

At December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands)

 
             

Nonperforming nonaccrual loans

 $402  $419  $526 

Performing nonaccrual loans

  3,569   3,933   3,803 

Total nonaccrual loans

  3,971   4,352   4,329 

Accruing loans 90 or more days past due

  132   178   450 

Total nonperforming loans

  4,103   4,530   4,779 

Other real estate owned

  -   43   - 

Total nonperforming assets

 $4,103  $4,573  $4,779 

 

At March 31, 2021, one loan secured by commercial real estate with a balance of $3.1 million was on nonaccrual status. The remaining seven nonaccrual loans held at March 31, 2021 had an average carrying value of $122 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 following table summarizes allowance for credit losses at the dates indicated:

 

  

At March 31,

  

At December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands)

 
             

Allowance for Credit Losses on Loans

 $23,483  $24,804  $23,854 

Allowance for Credit Losses on Held to Maturity Debt Securities

  9   16   9 

Total Allowance for Credit Losses

 $23,492  $24,820  $23,863 

 

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. It was reduced to $9 thousand at December 31, 2020, and at March 31, 2021, the outstanding amount for credit losses on debt securities held to maturity was $9 thousand.

 

46

 

Allowance for Credit Losses on Loans

 

The Company’s allowance for credit losses on loans represents Management’s estimate of forecasted credit losses in the loan portfolio based on the current expected credit loss (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 credit losses, chargeoffs and recoveries for the periods indicated:

 

  

For the Three Months Ended

 
  

March 31,

  

December 31,

 
  

2021

  

2020

  

2020

 
  

(In thousands)

 

Analysis of the Allowance for Credit Losses on Loans

            

Balance, end of prior period

 $23,854  $19,484  $24,142 

Adoption of ASU 2016-13

  -   2,017   - 

Balance, beginning of period

  23,854   21,501   24,142 

Provision for credit losses

  -   4,300   7 

Loans charged off:

            

Commercial

  -   (178)  (58)

Consumer installment and other

  (929)  (1,395)  (892)

Total chargeoffs

  (929)  (1,573)  (950)

Recoveries of loans previously charged off:

            

Commercial

  13   143   69 

Commercial real estate

  12   12   12 

Consumer installment and other

  533   421   574 

Total recoveries

  558   576   655 

Net chargeoffs

  (371)  (997)  (295)

Balance, end of period

 $23,483  $24,804  $23,854 
             

Net chargeoffs as a percentage of average total loans (annualized)

  0.12%  0.36%  0.09%
             

Allowance for unfunded credit commitments

  101   53   101 

 

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

 

  

Allowance for Credit Losses

 
  

For the Three Months Ended March 31, 2021

 
                  

Consumer

     
      

Commercial

      

Residential

  

Installment

     
  

Commercial

  

Real Estate

  

Construction

  

Real Estate

  

and Other

  

Total

 
  

(In thousands)

 

Allowance for credit losses:

                        

Balance at beginning of period

 $9,205  $5,660  $6  $47  $8,936  $23,854 

Provision (reversal)

  336   (167)  -   (4)  (165)  - 

Chargeoffs

  -   -   -   -   (929)  (929)

Recoveries

  13   12   -   -   533   558 

Total allowance for credit losses

 $9,554  $5,505  $6  $43  $8,375  $23,483 

 

 

 

47

 

Management considers the $23.5 million allowance for credit losses on loans to be adequate as a reserve against current expected credit losses in the loan portfolio as of March 31, 2021.

 

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

 

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.

 

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, except cash flows from PPP loans are reinvested into interest-bearing cash. Within the dynamic composition simulation, Management makes assumptions regarding the expected change in the volume of financial instruments. 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 March 31, 2021, 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.

 

At March 31, 2021, 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%

First Year Change in Net Interest Income

  +13.0%

 

Dynamic Simulation (balance sheet composition changes):

    

Assumed Change in Interest Rates Over 1 Year

  +1.00%

First Year Change in Net Interest Income

  +6.9%

 

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.

 

48

 

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

 

Market Risk - Equity Markets

 

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

 

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

 

Market Risk - Other

 

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

 

Liquidity and Funding

 

The objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the 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 97% of funding for average total assets in the quarter ended March 31, 2021 and in the year ended December 31, 2020. 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 $4.5 billion in total investment securities at March 31, 2021. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At March 31, 2021, such collateral requirements totaled approximately $845 million.

 

The Bank funded $249 million in PPP loans in the second quarter 2020 and $91 million in the first quarter 2021 by crediting loan proceeds to the borrower’s deposit accounts. PPP loans, net of deferred fees and costs, were $233 million at March 31, 2021. The Federal Reserve Board 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.

 

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.

 

49

 

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, PPP loan originations, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits. Changes in interest rates, most notably rising interest rates or increased consumer spending, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, deposit growth may be used to fund loans or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

 

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

 

The Bank’s dividends paid to the Parent Company, proceeds from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder dividends of $11 million in the quarter ended March 31, 2021 and $44 million in the year ended December 31, 2020 and retire common stock in the amount of $232 thousand and $16 million, 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 11.1% for the quarter ended March 31, 2021 and 11.3% for the year ended December 31, 2020. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $3.0 million in the quarter ended March 31, 2021 and $2.8 million in year ended December 31, 2020.

 

The Company paid common dividends totaling $11 million in the quarter ended March 31, 2021 and $44 million in the year ended December 31, 2020, which represent dividends per common share of $0.41 and $1.64, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has at times repurchased and retired its common stock as another means to return capital to shareholders. The Company repurchased and retired 4 thousand shares valued at $232 thousand in the quarter ended March 31, 2021 and 319 thousand shares valued at $16 million in the year ended December 31, 2020.

 

The Company's primary capital resource is shareholders' equity, which was $812 million and March 31, 2021 compared with $845 million at December 31, 2020. The Company's ratio of equity to total assets was 11.7% at March 31, 2021 and 12.5% at December 31, 2020.

 

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

 

 

[The remainder of this page intentionally left blank]

 

 

50

 

Capital to Risk-Adjusted Assets

 

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

 

              

To Be

 
          Required for  

Well-capitalized

 
          Capital  

Under Prompt

 
  

At March 31, 2021

  

Adequacy

  

Corrective Action

 
  

Company

  

Bank

  

Purposes

  

Regulations (Bank)

 
                 

Common Equity Tier I Capital

  16.26%  12.94%  7.00%  6.50%

Tier I Capital

  16.26%  12.94%  8.50%  8.00%

Total Capital

  16.88%  13.72%  10.50%  10.00%

Leverage Ratio

  9.48%  7.51%  4.00%  5.00%

 

              

To Be

 
          Required for  

Well-capitalized

 
          Capital  

Under Prompt

 
  

At December 31, 2020

  

Adequacy

  

Corrective Action

 
  

Company

  

Bank

  

Purposes

  

Regulations (Bank)

 
                 

Common Equity Tier I Capital

  16.04%  13.00%  7.00%  6.50%

Tier I Capital

  16.04%  13.00%  8.50%  8.00%

Total Capital

  16.68%  13.80%  10.50%  10.00%

Leverage Ratio

  9.40%  7.58%  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 replaced the existing incurred loss methodology for certain financial assets. The Company adopted the CECL methodology effective January 1, 2020, which involved an implementing accounting entry to retained earnings on a net-of-tax basis. The adoption of the CECL methodology did not have a material adverse day-one impact to capital ratios and the Company did not adopt the phase in regulatory capital relief. See Note 1 to consolidated financial statements, “Recently Adopted Accounting Standards” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for more information on the CECL methodology.

 

PPP loans are zero percent risk weighted for regulatory capital purposes; average PPP loans of $189 million did not affect regulatory capital ratios. The Leverage ratio would have been approximately 0.3% higher for the Company and 0.2% higher for the Bank without PPP loans. 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 in excess of the minimum 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.

 

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.

 

51

 

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.

 

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 March 31, 2021.

 

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 March 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

The Company’s Form 10-K as of December 31, 2020 includes detailed disclosure about the risks faced by the Company’s business; such risks have not materially changed since the Form 10-K was filed.

 

 

 

[The remainder of this page intentionally left blank]

 

 

 

52

 

 

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

 

(a) None

(b) None

(c) Issuer Purchases of Equity Securities

 

The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of common stock during the quarter ended March 31, 2021.

 

  

2021

 

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)

 

January 1 through January 31

  -  $-   -   1,624 

February 1 through February 28

  -   -   -   1,624 

March 1 through March 31

  4   61.09   4   1,620 

Total

  4  $61.09   4   1,620 

 

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

 

Shares repurchased during the period from January 1, 2021 through March 31, 2021 were pursuant to a program approved by the Board of Directors on July 23, 2020 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2021.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

53

 

Item 6. Exhibits

 

Exhibit No.   

 

Description of Exhibit

   

Exhibit 31.1

 

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

   

Exhibit 31.2

 

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

   

Exhibit 32.1

 

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

   

Exhibit 32.2

 

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

   

Exhibit 101.INS

 

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

   

Exhibit 101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

   

Exhibit 101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

   

Exhibit 101.DEF

 

Inline XBRL Taxonomy Extension Definitions Linkbase Document

   

Exhibit 101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

   

Exhibit 101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

   

Exhibit 104.

 

The Cover page of Westamerica Bancorporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (contained in Exhibit 101)

 

 

 

 

 

 

 

[The remainder of this page intentionally left blank]

 

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SIGNATURES

 

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

 

WESTAMERICA BANCORPORATION

(Registrant)

 

 

 

 

/s/ Jesse Leavitt 

Jesse Leavitt

Senior Vice President and Chief Financial Officer

(Principal Financial and Chief Accounting Officer)

 

 

 

 

Date: May 5, 2021

 

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