Westamerica Bancorporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; comparisons are primarily with Q1 2018 and, where noted, December 31, 2018. Amounts below are in millions unless stated otherwise. Net interest income on an FTE basis is adjusted for tax-exempt income.
Financial performance and position
- Profitability: Net income was $19.6 million, up 12% from $17.5 million; diluted EPS was $0.73 versus $0.66. Return on assets was 1.42% and return on common equity was 12.16%.
- Revenue and margin: Net interest and loan fee income (FTE) increased to $40.2 million from $37.3 million. Net interest margin (FTE) rose to 3.12% from 2.89%, mainly as earning-asset yields improved. Noninterest income declined to $11.6 million from $12.0 million. The efficiency ratio improved to 48.6% from 52.9%.
- Expenses and credit costs: Noninterest expense fell to $25.2 million from $26.0 million. The company recorded no loan-loss provision; net chargeoffs were $0.9 million. The allowance for loan losses was $20.5 million at quarter-end, down from $21.4 million at year-end.
- Cash flow: Operating activities provided $23.4 million, versus $26.5 million in Q1 2018. Investing activities provided $50.2 million, compared with $89.9 million used in the prior-year quarter. Financing activities used $72.2 million, versus $44.1 million provided. Cash and due from banks ended the quarter at $421.8 million.
- Balance sheet and liquidity: Total assets were $5.56 billion. Deposits were $4.79 billion, down $74.3 million from year-end; short-term borrowings were $58.3 million, up from $51.2 million. The company reported $2.70 billion of available-for-sale debt securities and $923.2 million of held-to-maturity securities. Customer deposits and equity funded 98% of average assets, according to management.
- Capital and shareholder returns: Shareholders’ equity was $656.8 million, or 11.82% of assets. Total risk-based capital was 17.49% at the company and 13.94% at the bank; both exceeded stated regulatory minimums. The quarterly dividend was $0.40 per share, totaling $10.7 million paid. No shares were repurchased in Q1.
Material changes versus comparable periods
- Compared with Q1 2018, higher investment balances and earning-asset yields lifted FTE net interest income by about $3.0 million; average loans were lower by $38 million. Funding costs remained low, and checking and savings represented 96% of average deposits.
- Nonperforming assets fell to $4.4 million from $7.8 million a year earlier and $5.8 million at year-end. Classified loans declined $5 million during the quarter. Loans outstanding were $1.20 billion, down from $1.23 billion at March 31, 2018 and $1.21 billion at year-end.
- Available-for-sale securities’ gross unrealized losses narrowed to $29.4 million at March 31 from $60.4 million at year-end. This contributed to other comprehensive income of $28.7 million for the quarter and reduced accumulated other comprehensive loss to $11.2 million from $40.0 million.
- Net income was $19.6 million versus $19.1 million in Q4 2018; FTE net interest income was nearly unchanged quarter over quarter. Deposits decreased $74.3 million from year-end.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expects to maintain regulatory capital above the highest effective standard and pay quarterly dividends, subject to board discretion and ongoing evaluation.
- Management described credit quality as solid and the allowance as adequate, while cautioning that classified and nonperforming assets may fluctuate and that future increases cannot be ruled out. One commercial real estate loan of $3.7 million was on nonaccrual status.
- The company was slightly asset-sensitive at quarter-end. Interest-rate simulations estimated first-year net interest income changes of -7.5%/+5.3% for an immediate parallel rate decrease/increase of 1 percentage point, and -3.6%/+2.8% for a corresponding gradual move over one year. These are model estimates, not forecasts.
- Key stated risks include changing interest rates, competition for deposits, liquidity and asset/liability management, credit and collateral values, securities-market and issuer conditions, operational and cybersecurity events, regulation, natural disasters, and legal contingencies. Management said recent liquidity and capital stress tests were satisfactory but gave no assurance against future deterioration.
- Accounting and other items: Adoption of lease accounting recognized a $15.3 million right-of-use asset and lease liability at implementation; quarter-end balances were $17.9 million each. The company also adopted a callable-debt premium amortization change, reducing securities carrying value by $3.1 million and retained earnings by $2.8 million after tax. CECL adoption is planned for January 1, 2020; the eventual adjustment had not been finalized.
- A $3.5 million liability for a prior lawsuit settlement was paid in Q1. A separate estimated $5.5 million customer-refund liability relating to revenue recognized before 2017 remains subject to revision. Management did not expect pending routine legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether margin benefits from asset repricing persist and how deposit competition affects funding costs and deposit balances.
- Loan trends, delinquencies, nonaccruals, chargeoffs, and the adequacy of the $20.5 million allowance, including the impact of CECL adoption.
- Investment-portfolio valuation and credit exposure, including the disclosed below-investment-grade corporate bond and sensitivity to interest rates or market deterioration.
- The final CECL adoption effect and any decision on the three-year regulatory-capital phase-in.
- Developments in the $5.5 million customer-refund estimate, capital and liquidity conditions, and the board’s continued dividend decisions.