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Note 4 - Loans, Allowance for Loan Losses/Credit Losses and Other Real Estate Owned

6 Months Ended

Jun. 30, 2020

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

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

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

	At June 30,		At December 31,
	2020		2019
	(In thousands)
Commercial:
Paycheck Protection Program ("PPP") loans	$	240,815	$	-
Other		198,978		222,085
Total commercial		439,793		222,085
Commercial Real Estate		572,421		578,758
Construction		151		1,618
Residential Real Estate		27,147		32,748
Consumer Installment & Other		276,847		291,455
Total	$	1,316,359	$	1,126,664

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

	Allowance for Credit Losses
	For the Three Months Ended June 30, 2020
													Consumer
				Commercial						Residential			Installment
	Commercial			Real Estate			Construction			Real Estate			and Other			Total
	(In thousands)
Allowance for credit losses:
Balance at beginning of period	$	8,336		$	4,753		$	107		$	70		$	11,538		$	24,804
(Reversal) provision		(357	)		(142	)		(100	)		(13	)		612			-
Chargeoffs		-			-			-			-			(804	)		(804	)
Recoveries		93			12			-			-			424			529
Total allowance for credit losses	$	8,072		$	4,623		$	7		$	57		$	11,770		$	24,529

	Allowance for Credit Losses
	For the Six Months Ended June 30, 2020
													Consumer
				Commercial						Residential			Installment
	Commercial			Real Estate			Construction			Real Estate			and Other			Unallocated			Total
	(In thousands)
Allowance for credit losses:
Balance at beginning of period, prior to adoption of ASU 2016-13	$	4,959		$	4,064		$	109		$	206		$	6,445		$	3,701		$	19,484
Impact of adopting ASU 2016-13		3,385			618			(31	)		(132	)		1,878			(3,701	)		2,017
Adjusted beginning balance		8,344			4,682			78			74			8,323			-			21,501
(Reversal) provision		(330	)		(84	)		(71	)		(17	)		4,802			-			4,300
Chargeoffs		(178	)		-			-			-			(2,199	)		-			(2,377	)
Recoveries		236			25			-			-			844			-			1,105
Total allowance for credit losses	$	8,072		$	4,623		$	7		$	57		$	11,770		$	-		$	24,529

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

	Allowance for Loan Losses
	For the Three Months Ended June 30, 2019
											Consumer
				Commercial				Residential			Installment
	Commercial			Real Estate		Construction		Real Estate			and Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	6,506		$	3,927	$	853	$	261		$	5,481		$	3,449	$	20,477
(Reversal) provision		(1,346	)		116		264		(23	)		386			603		-
Chargeoffs		(48	)		-		-		-			(925	)		-		(973	)
Recoveries		123			14		-		-			476			-		613
Total allowance for loan losses	$	5,235		$	4,057	$	1,117	$	238		$	5,418		$	4,052	$	20,117

	Allowance for Loan Losses
	For the Six Months Ended June 30, 2019
												Consumer
				Commercial					Residential			Installment
	Commercial			Real Estate		Construction			Real Estate			and Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	6,311		$	3,884	$	1,465		$	869		$	5,645		$	3,177	$	21,351
(Reversal) provision		(1,221	)		147		(348	)		(631	)		1,178			875		-
Chargeoffs		(71	)		-		-			-			(2,293	)		-		(2,364	)
Recoveries		216			26		-			-			888			-		1,130
Total allowance for loan losses	$	5,235		$	4,057	$	1,117		$	238		$	5,418		$	4,052	$	20,117

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

	Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
	At December 31, 2019
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	2,413	$	-	$	-	$	-	$	-	$	-	$	2,413
Collectively evaluated for impairment		2,546		4,064		109		206		6,445		3,701		17,071
Total	$	4,959	$	4,064	$	109	$	206	$	6,445	$	3,701	$	19,484
Carrying value of loans:
Individually evaluated for impairment	$	8,182	$	7,409	$	-	$	190	$	43	$	-	$	15,824
Collectively evaluated for impairment		213,903		571,349		1,618		32,558		291,412		-		1,110,840
Total	$	222,085	$	578,758	$	1,618	$	32,748	$	291,455	$	-	$	1,126,664

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

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

	Credit Risk Profile by Internally Assigned Grade
	At June 30, 2020
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total
	(In thousands)
Grade:
Pass	$	431,326	$	561,272	$	151	$	25,750	$	274,325	$	1,292,824
Substandard		8,467		11,149		-		1,397		1,712		22,725
Doubtful		-		-		-		-		401		401
Loss		-		-		-		-		409		409
Total	$	439,793	$	572,421	$	151	$	27,147	$	276,847	$	1,316,359

	Credit Risk Profile by Internally Assigned Grade
	At December 31, 2019
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total
	(In thousands)
Grade:
Pass	$	213,542	$	567,525	$	1,618	$	31,055	$	289,424	$	1,103,164
Substandard		8,543		11,233		-		1,693		1,329		22,798
Doubtful		-		-		-		-		308		308
Loss		-		-		-		-		394		394
Total	$	222,085	$	578,758	$	1,618	$	32,748	$	291,455	$	1,126,664

The following tables summarize loans by delinquency and nonaccrual status:

	Summary of Loans by Delinquency and Nonaccrual Status
	At June 30, 2020
	Current and Accruing		30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Loans
	(In thousands)
Commercial	$	439,449	$	220	$	9	$	-	$	115	$	439,793
Commercial real estate		564,554		3,675		357		-		3,835		572,421
Construction		151		-		-		-		-		151
Residential real estate		26,204		521		422		-		-		27,147
Consumer installment and other		274,349		1,480		445		290		283		276,847
Total	$	1,304,707	$	5,896	$	1,233	$	290	$	4,233	$	1,316,359

	Summary of Loans by Delinquency and Nonaccrual Status
	At December 31, 2019
	Current and Accruing		30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Loans
	(In thousands)
Commercial	$	221,199	$	531	$	158	$	-	$	197	$	222,085
Commercial real estate		573,809		432		421		-		4,096		578,758
Construction		1,618		-		-		-		-		1,618
Residential real estate		31,934		274		540		-		-		32,748
Consumer installment and other		286,391		2,960		1,517		440		147		291,455
Total	$	1,114,951	$	4,197	$	2,636	$	440	$	4,440	$	1,126,664

There was no allowance for credit losses allocated to loans on nonaccrual status as of June 30, 2020. There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2020 and December 31, 2019.

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

	Impaired Loans
	At December 31,
	2019
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance

With no related allowance recorded:
Commercial	$	21	$	21	$	-
Commercial real estate		7,408		8,856		-
Residential real estate		190		220		-
Consumer installment and other		43		43		-
Total with no related allowance recorded		7,662		9,140		-

With an allowance recorded:
Commercial		8,160		8,160		2,413
Total with an allowance recorded		8,160		8,160		2,413
Total	$	15,822	$	17,300	$	2,413

Impaired loans at December 31, 2019, included $6,713 thousand of restructured loans, $3,670 thousand of which were on nonaccrual status.

	Impaired Loans
	For the Three Months				For the Six Months
	Ended June 30, 2019
	Average		Recognized		Average		Recognized
	Recorded		Interest		Recorded		Interest
	Investment		Income		Investment		Income
	(In thousands)
Commercial	$	9,662	$	165	$	9,755	$	332
Commercial real estate		6,539		126		6,716		273
Residential real estate		196		3		197		6
Consumer installment and other		77		-		105		-
Total	$	16,474	$	294	$	16,773	$	611

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

	Troubled Debt Restructurings
	At June 30, 2020
							Period-End
							Individual
	Number of		Pre-Modification		Period-End		Impairment
	Contracts		Carrying Value		Carrying Value		Allowance
	($ in thousands)
Commercial real estate		6	$	8,367	$	6,139	$	-
Residential real estate		1		241		185		-
Total		7	$	8,608	$	6,324	$	-

	Troubled Debt Restructurings
	At December 31, 2019
							Period-End
							Individual
	Number of		Pre-Modification		Period-End		Impairment
	Contracts		Carrying Value		Carrying Value		Allowance
	($ in thousands)
Commercial		2	$	278	$	32	$	11
Commercial real estate		6		8,367		6,492		-
Residential real estate		1		241		189		-
Total		9	$	8,886	$	6,713	$	11

During the three and six months ended June 30, 2020, the Company did not modify any loans that were considered TDRs. Section 4013 of the CARES Act allowed certain loan modifications for borrowers impacted by the COVID-19 pandemic to be excluded from TDR accounting. During the three and six months ended June 30, 2020, the Company modified loans under Section 4013 of the CARES Act, generally granting 90 day deferrals of principal and interest payments. Automobile and other consumer loan deferrals were $29 million and $5 million, respectively. Commercial real estate loans with deferred payments totaled $66 million, primarily for hospitality and retail properties. Commercial loans with deferred payments totaled $3 million. During the three and six months ended June 30, 2019, the Company did not modify any loans that were considered TDRs. There were no chargeoffs related to TDRs made during the three and six months ended June 30, 2020 and 2019. During the three and six months ended June 30, 2020 and 2019, no troubled debt restructured loans defaulted within 12 months of the modification date. A TDR is considered to be in default when payments are ninety days or more past due.

TDRs of $6,324 thousand included loans of $3,420 thousand on nonaccrual status at June 30, 2020. No allowance for credit losses was allocated to one commercial real estate loan secured by real property with a balance of $3,240 thousand, which was considered collateral-dependent at June 30, 2020. At June 30, 2020, $281 thousand of indirect consumer installment loans secured by personal property were past due 90 days or more and considered collateral-dependent and two residential real estate loans totaling $283 thousand secured by real property were considered collateral-dependent. There were no other collateral-dependent loans at June 30, 2020. 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.

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

	At June 30, 2020
																	Revolving
																	Loans
	Term Loans Amortized Cost Basis by Origination Year														Total		Amortized
	Prior		2015		2016		2017		2018		2019		2020		Term Loans		Cost Basis		Total
	(In thousands)
Commercial loans by grade
Pass	$	22,973	$	5,962	$	27,294	$	12,096	$	22,572	$	45,375	$	259,214	$	395,486	$	35,840	$	431,326
Substandard		80		-		2		-		-		-		7,932		8,014		453		8,467
Doubtful		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	23,053	$	5,962	$	27,296	$	12,096	$	22,572	$	45,375	$	267,146	$	403,500	$	36,293	$	439,793

	At June 30, 2020
																	Revolving
																	Loans
	Term Loans Amortized Cost Basis by Origination Year														Total		Amortized
	Prior		2015		2016		2017		2018		2019		2020		Term Loans		Cost Basis		Total
	(In thousands)
Commercial real estate loans by grade
Pass	$	98,947	$	51,492	$	50,154	$	104,502	$	95,509	$	95,999	$	64,669	$	561,272	$	-	$	561,272
Substandard		3,136		1,321		5,735		109		-		-		848		11,149		-		11,149
Doubtful		-		-		-		-		-		-				-		-		-
Loss		-		-		-		-		-		-				-		-		-
Total	$	102,083	$	52,813	$	55,889	$	104,611	$	95,509	$	95,999	$	65,517	$	572,421	$	-	$	572,421

	At June 30, 2020
																	Revolving
																	Loans
	Term Loans Amortized Cost Basis by Origination Year														Total		Amortized
	Prior		2015		2016		2017		2018		2019		2020		Term Loans		Cost Basis		Total
	(In thousands)
Construction loans by grade
Pass	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	151	$	151
Substandard		-		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	151	$	151

	At June 30, 2020
																	Revolving
																	Loans
	Term Loans Amortized Cost Basis by Origination Year														Total		Amortized
	Prior		2015		2016		2017		2018		2019		2020		Term Loans		Cost Basis		Total
	(In thousands)
Residential Real Estate loans by grade
Pass	$	25,750	$	-	$	-	$	-	$	-	$	-	$	-	$	25,750	$	-	$	25,750
Substandard		1,397		-		-		-		-		-		-		1,397		-		1,397
Doubtful		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	27,147	$	-	$	-	$	-	$	-	$	-	$	-	$	27,147	$	-	$	27,147

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

	At June 30, 2020
																	Revolving
																	Loans
	Term Loans Amortized Cost Basis by Origination Year														Total		Amortized
	Prior		2015		2016		2017		2018		2019		2020		Term Loans		Cost Basis		Total
	(In thousands)
Consumer installment and other loans by delinquency and nonaccrual status
Current	$	5,699	$	7,230	$	20,962	$	24,868	$	51,487	$	67,430	$	64,259	$	241,935	$	32,414	$	274,349
30-59 days past due		31		61		102		206		200		316		248		1,164		316		1,480
60-89 days past due		8		23		30		32		59		153		20		325		120		445
Past due 90 days or more		6		35		29		50		79		85		3		287		3		290
Nonaccrual		-		-		-		-		-		-		-		-		283		283
Total	$	5,744	$	7,349	$	21,123	$	25,156	$	51,825	$	67,984	$	64,530	$	243,711	$	33,136	$	276,847

There were no loans held for sale at June 30, 2020 and December 31, 2019.

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