Westamerica Bancorporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020; comparisons are primarily with the third quarter and first nine months of 2019. Westamerica is a California-based bank holding company. The filing is unaudited.
Financial performance and condition
| Metric | Q3 2020 / September 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net interest and loan fee income, FTE | $41.8 million | $40.3 million in Q3 2019 |
| Net interest margin, FTE | 2.78% | 3.11% in Q3 2019 |
| Noninterest income | $10.5 million | $11.8 million in Q3 2019 |
| Noninterest expense | $24.6 million | $24.0 million in Q3 2019 |
| Net income / diluted EPS | $20.1 million / $0.74 | $20.4 million / $0.75 in Q3 2019 |
| Assets | $6.56 billion | $5.62 billion at December 31, 2019 |
| Loans / allowance for loan credit losses | $1.31 billion / $24.1 million | $1.13 billion / $19.5 million at December 31, 2019 |
| Deposits | $5.54 billion | $4.81 billion at December 31, 2019 |
| Cash and due from banks | $399.0 million | $373.4 million at December 31, 2019 |
| Shareholders’ equity | $825.6 million | $731.4 million at December 31, 2019 |
For the first nine months of 2020, net interest and loan fee income (FTE) was $124.4 million, provision for credit losses was $4.3 million, noninterest income was $31.7 million, noninterest expense was $74.0 million, net income was $56.6 million, and diluted EPS was $2.10. The comparable 2019 figures were $120.9 million, no provision, $35.7 million, $74.8 million, $59.7 million, and $2.21, respectively.
For the nine months ended September 30, 2020, operating activities provided $96.2 million of cash; investing activities used $832.2 million, mainly reflecting purchases of securities; and financing activities provided $761.5 million, principally from deposit growth and short-term borrowing. Cash increased by $25.5 million over the period.
At September 30, the company reported $107.97 million in short-term borrowed funds and no parent-company debt. The Bank’s total risk-based capital ratio was 12.65%, and its leverage ratio was 7.57%. The company reported a 10.91% tangible equity-to-tangible-assets ratio and a 47.1% Q3 efficiency ratio.
Material changes versus comparable periods
- Q3 net income declined $0.3 million year over year; nine-month net income declined $3.1 million. Nine-month 2020 results included the $4.3 million credit-loss provision, which management said reduced EPS by $0.11.
- Net interest and loan fee income (FTE) increased, supported by larger investment balances and PPP lending. However, lower asset yields and a greater share of lower-yielding securities reduced the net interest margin.
- Noninterest income fell $1.3 million in Q3 and $4.0 million for the first nine months, primarily due to reduced activity-related fees amid the pandemic. Noninterest expense rose $0.6 million in Q3 but fell $0.8 million for the nine-month period.
- Assets, deposits, and loans increased from year-end 2019. The $244 million of PPP loans outstanding at September 30 was the main driver of commercial loan growth; the SBA guarantees PPP loans, subject to the compliance risks described below.
- Available-for-sale securities increased to $3.98 billion from $3.08 billion at year-end 2019. Accumulated other comprehensive income rose to $103.6 million from $26.1 million, primarily reflecting unrealized securities gains.
Outlook, risks, contingencies, 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 pandemic-related economic weakness. It provided no quantified earnings guidance, and states interim results are not necessarily indicative of full-year results.
- At September 30, loan payment deferrals included $19.1 million of commercial real estate loans, primarily hospitality and retail; $5.0 million of consumer loans; and $209,000 of commercial loans. The company reported $4.38 million of nonaccrual loans and $4.78 million of total nonperforming assets.
- The company adopted CECL on January 1, 2020. Adoption increased the loan allowance by $2.017 million, reduced the allowance for unfunded commitments by $2.107 million, and increased retained earnings by $52,000. The September 30 allowance for credit losses included $24.142 million on loans and $16,000 on held-to-maturity securities.
- PPP loans are federally guaranteed, but the filing warns that program-rule ambiguity or deficiencies in origination, funding, or servicing could lead to litigation, regulatory action, reputational harm, or loss of SBA guarantee protection.
- The securities portfolio is exposed to issuer credit deterioration, market liquidity, interest-rate movements, and economic weakness. One $15.0 million-cost corporate bond, with a $14.9 million fair value, was rated below investment grade. Management identified $288.7 million fair value of corporate securities in industrial and energy sectors as potentially exposed to lower oil prices.
- The company reported $39.8 million of commitments not unconditionally cancellable, $279.3 million of unfunded loan commitments, and $2.4 million of standby letters of credit. Management stated ordinary-course legal matters were not expected to have a material adverse effect. A previously accrued customer-refund liability was $5.843 million, based on the latest disclosed estimate.
- Interest-rate simulations showed mixed sensitivity: a static parallel 100-basis-point increase was estimated to raise first-year net interest income 5.70%, while a zero-rate scenario was estimated to reduce it 6.00%; dynamic estimates were +2.60% and -1.75%, respectively. Management characterized the position as slightly asset-sensitive, subject to model assumptions.
Important facts for investors to verify
- Whether loan deferrals, especially in hospitality and retail commercial real estate, convert into higher delinquencies, nonaccruals, charge-offs, or additional provisioning.
- How quickly PPP loans are forgiven or repaid, and whether the SBA honors guarantees without material disputes or compliance costs.
- Whether margin pressure and pandemic-related declines in fee income persist, and how changes in rates affect actual net interest income versus the company’s simulations.
- The adequacy of the CECL allowance under changing economic forecasts and the credit quality, valuation, and concentration risks in the enlarged securities portfolio.
- Deposit stability, liquidity needs, capital ratios, and the company’s capacity to sustain dividends and any share repurchases as conditions evolve.