Westamerica Bancorporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; comparisons are to the corresponding 2019 periods unless otherwise noted. Westamerica is a California-focused bank holding company.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest and loan fee income, FTE | $42.1 million | $40.3 million | $82.6 million | $80.6 million |
| Noninterest income | $9.6 million | $12.3 million | $21.2 million | $23.9 million |
| Noninterest expense | $24.8 million | $25.6 million | $49.4 million | $50.7 million |
| Provision for credit losses | $0 | $0 | $4.3 million | $0 |
| Net income | $19.6 million | $19.6 million | $36.5 million | $39.3 million |
| Diluted EPS | $0.72 | $0.73 | $1.35 | $1.46 |
| Net interest margin, FTE | 2.99% | 3.13% | 3.04% | 3.12% |
- Balance sheet at June 30: Assets were $6.46 billion, up from $5.62 billion at December 31, 2019. Deposits were $5.47 billion, up from $4.81 billion; loans were $1.32 billion, up from $1.13 billion. Cash and due from banks totaled $500.8 million. Investment securities totaled approximately $4.35 billion.
- Credit and funding: The loan allowance was $24.5 million; nonperforming assets were $4.6 million, versus $4.9 million at year-end 2019. Short-term borrowings were $86.2 million, versus $30.9 million. The parent company reported no debt.
- Cash flow, first six months: Operating activities provided $65.9 million; investing activities used $620.3 million, primarily reflecting securities purchases and net loan funding; financing activities provided $681.8 million, largely from deposit growth and short-term borrowing. Cash increased $127.4 million.
- Capital and shareholder returns: Shareholders’ equity was $808.1 million, compared with $731.4 million at year-end. Company total risk-based capital was 14.88%; Bank total risk-based capital was 11.86%. Dividends were $0.41 per share in Q2 and $0.82 per share for the six months. The company repurchased and retired 193,000 shares for $9.9 million in the first half.
Material changes versus comparable periods
- Q2 net income was nearly unchanged, while six-month net income declined $2.7 million. Higher FTE net interest income was outweighed in the first half by the $4.3 million credit-loss provision and lower noninterest income.
- Net interest income benefited from larger investment balances and PPP lending, but lower yields on interest-bearing cash and loan paydowns weighed on results. The FTE net interest margin declined year over year in both comparison periods.
- Noninterest income fell $2.7 million in both Q2 and the first half, reflecting lower activity-based fees amid pandemic-related disruption; prior-year comparisons also included a $433,000 life-insurance gain.
- Noninterest expense declined, partly because 2019 included $553,000 in loss-contingency expense. First-half 2020 expense also benefited from a $246,000 FDIC assessment credit, which the company said was fully exhausted.
- Unrealized gains on available-for-sale securities increased accumulated other comprehensive income; total comprehensive income was $113.1 million in Q2. The filing attributes the securities valuation changes primarily to market conditions, including interest rates.
Outlook, risks and unusual items
- Management expects net interest margin and noninterest income to decline and credit-related losses to increase for an uncertain period because of COVID-19 and weaker economic activity. It provided no quantified earnings or full-year guidance.
- The Bank funded $249 million of SBA-guaranteed PPP loans during Q2; the balance sheet reports $240.8 million of PPP loans at June 30. Management expects no credit losses on these loans, but warns that PPP rule ambiguity, compliance issues, litigation, or an SBA challenge to a loan’s guarantee could create financial, reputational, or credit risk.
- Payment deferrals included $29 million of automobile loans, $5 million of other consumer loans, $66 million of commercial real estate loans—primarily hospitality and retail—and $3 million of commercial loans. The company used CARES Act relief for certain modifications not treated as troubled debt restructurings.
- CECL was adopted January 1, 2020. Adoption increased the loan allowance by $2.0 million, reduced the allowance for unfunded commitments by $2.1 million, and increased retained earnings by $52,000. The first-half $4.3 million provision reflected management’s estimate of higher expected losses under deteriorating conditions.
- COVID-19, California’s economic conditions, low interest rates, borrower and issuer credit deterioration, securities market liquidity, and declining oil prices are identified risks. Fourteen industrial and energy-sector bond issuers represented $275.6 million amortized cost and $287.4 million fair value. One $14.7 million corporate bond was below investment grade.
- Interest-rate simulations estimated first-year net interest income changes of -7.9% and +6.2% for an immediate parallel -1% and +1% shift under a static balance sheet; dynamic estimates were -3.8% and +1.9%. These are model estimates, not forecasts.
- The company reported no material pending legal proceeding expected to have a material adverse effect. It had previously accrued $5.843 million for potential customer refunds relating to revenue recognized before 2018.
Key facts for investors to verify
- How pandemic-related borrower stress, deferrals, unemployment, and the CECL forecast assumptions affect future provisions, delinquencies, and charge-offs.
- Reconcile the $249 million of PPP loans funded with the $240.8 million reported loan balance, and monitor SBA forgiveness, guarantee compliance, and related fee income.
- Whether deposit growth and liquidity remain durable, and how increased short-term borrowings and pledged securities affect funding flexibility.
- How lower rates, elevated cash balances, and the large securities portfolio affect net interest margin, realized results, and accumulated other comprehensive income.
- Whether capital ratios, dividends, and share repurchases remain consistent with the company’s stated capital and liquidity priorities.