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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended 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   - 

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

    -       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

               52   52 

Adjusted Balance, January 1, 2020

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

Net income for the period

               16,962   16,962 

Other comprehensive loss

            (25,880)     (25,880)

Exercise of stock options

  40   2,266            2,266 

Restricted stock activity

  10   534            534 

Stock based compensation

  -   525            525 

Stock awarded to employees

  -   21            21 

Retirement of common stock

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

Dividends ($0.41 per share)

               (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

               20,147   20,147 

Other comprehensive loss

            (45,511)     (45,511)

Exercise of stock options

  52   2,960            2,960 

Restricted stock activity

  9   526            526 

Stock based compensation

  -   368            368 

Stock awarded to employees

  -   56            56 

Retirement of common stock

  (4)  (66)        (166)  (232)

Dividends ($0.41 per share)

               (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

    -       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     $ -  

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  $-  $577,490 

Securities of U.S. Government entities

  146   -   (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   -   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   -   -   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   -   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   -   1,370 

Obligations of states and political subdivisions

  273,922   7,243   -   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   -   - 

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   -   - 

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 no 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  $-   1  $15  $-   2  $110  $- 

Securities of U.S.
Government entities

  1   145   (1)  -   -   -   1   145   (1)

Obligations of states
and political
subdivisions

  5   2,420   (10)  -   -   -   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)  -   -   -   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  $-   3  $686  $(19)  5  $886  $(19)

Non-agency residential
MBS

  1   680   (7)  -   -   -   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  $-   2  $113  $(1)

Securities of U.S.
Government entities

  1   154   -   -   -   -   1   154   - 

Obligations of states
and political
subdivisions

  2   692   (1)  -   -   -   2   692   (1)

Corporate securities

  -   -   -   1   14,963   (42)  1   14,963   (42)

Collateralized loan
obligations

  36   268,584   (1,098)  -   -   -   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  $- 

Impact of adopting ASU 2016-13

  -   16 

Beginning balance

  9   16 

Provision

  -   - 

Chargeoffs

  -   - 

Recoveries

  -   - 

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  $-  $