Westamerica Bancorporation — Q2 2019 Form 10-Q
Business context and reporting period
Westamerica Bancorporation is a California bank holding company. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons below are with the corresponding 2018 periods unless otherwise stated. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net income | $19.6 million | $18.0 million | $39.3 million | $35.5 million |
| Diluted EPS | $0.73 | $0.67 | $1.46 | $1.33 |
| Net interest income, FTE | $40.3 million | $38.3 million | $80.6 million | $75.6 million |
| Noninterest income | $12.3 million | $11.8 million | $23.9 million | $23.7 million |
| Noninterest expense | $25.6 million | $25.7 million | $50.7 million | $51.8 million |
| Net interest margin, FTE | 3.13% | 2.97% | 3.12% | 2.93% |
At June 30, 2019, total assets were $5.52 billion, loans net of allowance were $1.14 billion, deposits were $4.73 billion, and shareholders’ equity was $693.4 million. Cash and due from banks totaled $418.6 million; investment securities totaled $3.65 billion. Short-term borrowed funds were $54.6 million; the parent company reported no debt. The allowance for loan losses was $20.1 million. No loan-loss provision was recorded in the quarter or first half.
For the six months, operating cash flow was $39.5 million, investing cash flow was positive $106.0 million, and financing cash flow was negative $147.2 million. Cash declined $1.7 million to $418.6 million. Period-end total risk-based capital was 17.88% at the company and 13.94% at the bank; the bank’s leverage ratio was 7.69%. The company’s tangible equity to tangible assets ratio was 10.56%.
Material changes versus comparable periods
- Q2 net income increased about 9% and first-half net income about 11%; diluted EPS rose to $0.73 and $1.46, respectively.
- Higher earning-asset yields drove higher net interest income and margin. Management attributed the improvement to repricing at higher yields and increased average investment balances, partly offset by lower average loans and interest-bearing cash.
- Period-end loans fell $45.5 million from December 31, 2018, while deposits declined $136.6 million and total assets declined $45.1 million. Investment securities increased approximately $4.3 million from year-end; their fair-value gains contributed to the rise in equity.
- Nonperforming assets declined to $4.1 million from $5.8 million at year-end 2018 and $6.0 million at June 30, 2018. Classified loans declined from $27 million at year-end to $25 million.
- Shareholders’ equity rose to $693.4 million from $615.6 million at year-end, including a substantial improvement in accumulated other comprehensive income as unrealized securities losses reversed.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expects regulatory capital to remain above the highest effective regulatory standard and expects to continue quarterly dividends, subject to board discretion and ongoing evaluation.
- Management described credit quality as reasonably stable and the $20.1 million allowance as adequate, while cautioning that classified and nonperforming assets can fluctuate and future increases cannot be ruled out.
- The company was slightly asset-sensitive at quarter-end. Its simulations estimated first-year net interest income changes of -7.4% for an immediate 100-basis-point rate decline and +4.8% for a 100-basis-point increase under a static balance sheet; dynamic estimates were -3.7% and +2.9%, respectively. These are model estimates, not forecasts.
- Q2 results included a $433,000 life-insurance gain and $553,000 in loss contingencies: a $301,000 increase in estimated refunds for revenue recognized before 2018 and a $252,000 lawsuit settlement. The company said it does not anticipate additional losses on these matters, though estimates remain subject to revision.
- CECL is scheduled for adoption on January 1, 2020. Management was developing its aggregate estimate and had not provided a quantified adoption impact; economic conditions and portfolio composition at adoption will affect the adjustment. The company had not decided whether to use the three-year regulatory capital phase-in.
- Key risks cited include changes in interest rates, liquidity and funding conditions, competition, credit and collateral quality, economic conditions, operational and cybersecurity risks, natural disasters, regulation, and legal contingencies. Management said the risk factors had not materially changed from the 2018 Form 10-K.
- The company adopted lease accounting in 2019, recognizing a $20.5 million operating lease liability and right-of-use asset at June 30. The initial adoption entry was $15.3 million; the effect on occupancy expense was described as immaterial.
Important facts for investors to verify
- Whether deposit outflows and loan contraction continue, and how they affect liquidity, asset mix, and future net interest income.
- Whether higher asset yields persist and deposit funding costs rise; review the interest-rate sensitivity assumptions alongside actual rate and balance changes.
- Credit trends, especially the $3.7 million commercial real estate nonaccrual loan, charge-offs, recoveries, classified loans, and adequacy of the allowance despite zero provision.
- The final CECL allowance adjustment, retained-earnings effect, and any decision on the regulatory capital phase-in.
- Developments in the $5.843 million accrued customer-refund liability, the settled lawsuit, and other legal or contingent matters.
- Dividend sustainability and capital levels, including the effect of dividends, repurchases, and any changes in earnings or asset quality.