Westamerica Bancorporation — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020. Westamerica is a California-focused bank; deposits are sourced exclusively in California and loans are primarily to California borrowers. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2020 | Comparable period |
|---|---|---|
| Net interest and loan-fee income, FTE | $40.5 million | $40.2 million in Q1 2019 |
| Noninterest income | $11.6 million | $11.6 million in Q1 2019 |
| Net income | $17.0 million; diluted EPS $0.63 | $19.6 million; diluted EPS $0.73 in Q1 2019 |
| Provision for credit losses | $4.3 million | None in Q1 2019 |
| Net interest margin, FTE | 3.10% | 3.12% in Q1 2019 |
| Return on assets / common equity | 1.21% / 9.67% | 1.42% / 12.16% in Q1 2019 |
| Operating cash flow | $54.5 million | $23.4 million in Q1 2019 |
Net income fell $2.7 million year over year, while diluted EPS declined $0.10. The $4.3 million credit-loss provision reduced EPS by an estimated $0.11. FTE is the company’s tax-equivalent presentation; reported GAAP net interest and fee income was $39.5 million.
At March 31, total assets were $5.63 billion, loans $1.12 billion, and deposits $4.80 billion. Loans were down $5.4 million and deposits down $13.2 million from year-end 2019. Cash and due from banks was $304.6 million, down $68.8 million during the quarter. Investing activities used $113.7 million, largely reflecting net purchases of available-for-sale securities; financing activities used $9.5 million.
Total shareholders’ equity was $705.5 million, down from $731.4 million at year-end, including a $25.9 million after-tax decline in accumulated other comprehensive income tied to available-for-sale securities. The company reported a 15.81% total risk-based capital ratio and 10.48% leverage ratio; the Bank’s respective ratios were 12.28% and 7.90%. Short-term borrowings were $52.7 million; the parent company reported no debt. The company paid $0.41 per share in dividends and repurchased 180,000 shares for $9.2 million.
Material changes and notable items
- Net interest and loan-fee income, FTE, rose $0.3 million year over year, mainly due to higher investment-security yields and balances; lower average loan balances and yields and lower interest-bearing cash yields partly offset the increase.
- Noninterest income included a $603,000 recovery on a previously charged-off loan. Management said activity-based fees were reduced by pandemic-related economic disruption.
- Noninterest expense fell $519,000 year over year, including a $246,000 FDIC assessment credit; the company said that credit was fully exhausted.
- The company adopted CECL on January 1, 2020. Adoption increased the loan-loss allowance by $2.0 million, established a $16,000 allowance for held-to-maturity securities, reduced the unfunded-commitment allowance by $2.1 million, and increased retained earnings by $52,000 after tax. The loan allowance ended the quarter at $24.8 million, up from $19.5 million at year-end, reflecting adoption, the provision, charge-offs and recoveries.
- Comprehensive loss was $8.9 million, despite net income of $17.0 million, due to the after-tax unrealized loss on available-for-sale securities. Management attributed securities losses primarily to market conditions and interest rates, and said it did not intend, nor expect to be required, to sell before recovery of cost.
Outlook, risks and contingencies
Management expects net interest income and noninterest income to decline and credit-related losses to increase for an uncertain period as COVID-19 reduces economic activity. The Federal Reserve cut the federal funds target range to 0%–0.25%; management noted that lower rates may pressure net interest income. The Bank remained open and fully operational. It was processing Paycheck Protection Program applications but had funded no PPP loans by March 31.
Key risks include the duration and severity of the pandemic, higher unemployment and borrower distress, California concentration, securities-market and issuer-credit deterioration, lower oil prices’ effect on certain corporate bond issuers, interest-rate and liquidity risk, and possible disruption from loss of key employees. One $14.3 million corporate bond was below investment grade; management noted the issuer had refinanced much of its debt beyond the bond’s 2021 maturity. The company reported $4.4 million of nonaccrual loans and $4.6 million of total nonperforming assets at quarter-end. It reported no COVID-related loan modifications or TDR modifications in the quarter.
Unfunded loan commitments were $264.3 million; $14.9 million was not unconditionally cancellable. Management said liquidity and capital stress tests were satisfactory, but gave no assurance against future deterioration. Routine legal proceedings were not expected to have a material adverse effect. No specific earnings guidance or quantified full-year forecast was provided.
Important facts for investors to verify
- How COVID-19 assumptions, unemployment forecasts and CECL modeling affect subsequent provisions, allowance levels and credit quality.
- Whether management’s expected declines in interest and fee income and increase in credit losses materialize, particularly after the sharp rate cuts.
- Changes in California borrower performance, nonaccrual and delinquency trends, loan modifications, and PPP loan funding.
- Valuation, credit quality and concentration risks in the $3.9 billion investment portfolio, including corporate exposures and unrealized losses.
- Liquidity, deposits, capital ratios and shareholder distributions as operating conditions evolve; the filing’s results for one quarter are not necessarily indicative of full-year results.