Westamerica Bancorporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparison with the corresponding 2018 periods. Amounts are in U.S. dollars. Westamerica is a bank holding company whose principal revenue is net interest and loan fee income.
Financial performance and condition
- Q3 net income: $20.4 million, up 20.0% from $17.0 million; diluted EPS was $0.75 versus $0.63. For the first nine months, net income was $59.7 million, up 13.6%, and diluted EPS was $2.21 versus $1.96.
- Net interest income: Fully taxable-equivalent (FTE) net interest and loan fee income was $40.3 million in Q3, up 2.2%; nine-month income was $120.9 million, up 5.0%. FTE net interest margin rose to 3.11% from 3.00% in Q3 and to 3.12% from 2.95% for nine months.
- Other income and expenses: Q3 noninterest income was $11.8 million, down $0.7 million year over year. Noninterest expense was $24.0 million, down $5.3 million, largely because Q3 2018 included a $3.5 million loss contingency. Nine-month noninterest expense fell $6.4 million to $74.8 million; noninterest income declined $0.6 million to $35.7 million.
- Credit costs: No loan-loss provision was recorded in Q3 or the first nine months, in either 2019 or 2018. The allowance was $19.8 million, 1.75% of loans, versus $21.4 million at year-end 2018. Nine-month net charge-offs were $1.5 million, compared with $1.0 million in 2018.
- Assets and funding: Total assets were $5.62 billion, up from $5.57 billion at December 31, 2018. Loans were $1.13 billion, down from $1.21 billion; investment securities were $3.78 billion, up from $3.64 billion including equity securities at year-end. Deposits were $4.80 billion, down from $4.87 billion. Noninterest-bearing deposits were $2.27 billion.
- Liquidity and debt: Cash and due from banks totaled $415.6 million. Short-term borrowings were $45.6 million, down from $51.2 million at year-end; the parent company reported no debt. The company said deposits and shareholders’ equity supplied 98% of average asset funding during the first nine months. Approximately $722 million of securities were pledged as collateral.
- Cash flow, nine months: Operating activities provided $64.7 million, investing activities provided $28.7 million, and financing activities used $98.0 million. Cash declined $4.6 million to $415.6 million. Financing outflows included $32.8 million in dividends and a $70.2 million net decline in deposits.
- Capital and returns: Shareholders’ equity was $713.4 million, versus $615.6 million at year-end 2018; total risk-based capital was 17.20% at the holding company and 12.98% at the bank. Q3 dividends were $0.41 per share; nine-month dividends were $1.22 per share.
Material changes versus comparable periods
- Earnings improved as higher earning-asset yields and investment balances lifted net interest income; average loan balances were lower. Management attributed margin improvement to assets repricing at higher yields while deposit funding costs remained low.
- Reported expense comparisons benefited from the absence of the $3.5 million Q3 2018 lawsuit settlement contingency, as well as lower FDIC assessments, employee benefit costs and intangible amortization. The 2019 nine-month period included $553,000 of loss contingencies.
- Nonperforming assets were $4.7 million, down from $5.8 million at December 31, 2018 and $6.5 million at September 30, 2018. Total loans declined about 6% from year-end, while the securities portfolio expanded.
- Accumulated other comprehensive income improved to $20.5 million from a $40.0 million loss at year-end, principally reflecting unrealized gains on available-for-sale debt securities.
Outlook, risks and unusual items
- The filing provides no earnings or revenue guidance. Management expects to maintain regulatory capital above the highest applicable standard and anticipates quarterly dividends, subject to Board discretion and ongoing assessments of capital, earnings, asset quality and other factors.
- Management described credit quality as reasonably stable but cautioned that classified and nonperforming assets can fluctuate and that future increases cannot be ruled out. One commercial real-estate loan of $3.7 million was on nonaccrual; one corporate bond with $15.0 million amortized cost was below investment grade. Management said substantially all other securities were investment grade and it did not expect to have to sell securities before recovering amortized cost.
- Interest-rate simulations showed a slightly asset-sensitive position: a 100-basis-point increase was estimated to raise first-year net interest income 4.6% under the static model and 2.0% under the dynamic model; a 100-basis-point decrease was estimated to reduce it 6.5% and 3.6%, respectively. These are model estimates, not guidance. The company does not use derivatives to manage interest-rate risk.
- The company accrued $5.843 million for expected customer refunds related to revenue recognized before 2018, increasing the estimate by $301,000 in Q2 2019. It also paid $252,000 to settle a lawsuit. Management said it did not anticipate additional losses on these matters and expected no material adverse effect from other routine legal proceedings.
- CECL, the expected-credit-loss accounting standard, was scheduled for adoption January 1, 2020. Management was developing an aggregate estimate and had not determined whether to elect the three-year regulatory-capital transition. The company also adopted lease accounting in 2019, recognizing $19.7 million of operating lease assets and liabilities at quarter-end; the expense effect was described as not material.
- Disclosed risks include economic and market conditions, interest-rate and liquidity risk, competition, regulatory changes, cybersecurity and operational risk, natural disasters, securities-market changes and legal contingencies.
Important facts for investors to verify
- Whether net interest margin and earnings hold up following the Federal Reserve’s 2019 rate cuts and any further repricing of assets or deposits.
- Whether loan contraction, deposit outflows and the shift toward securities continue, and how that affects yields, liquidity and growth.
- Subsequent credit quality, especially the commercial real-estate nonaccrual, consumer charge-offs, the allowance and the planned CECL adoption adjustment.
- Whether the $5.843 million customer-refund estimate remains adequate and whether any further legal or other contingencies arise.
- The final CECL estimate and any effect on retained earnings, regulatory capital and dividend capacity.