Westamerica Bancorporation(WABC) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Unaudited consolidated financial statements for Westamerica Bancorporation as of June 30, 2019, are presented, including balance sheets, income statements, and cash flows Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2019 (In thousands) | December 31, 2018 (In thousands) | | :--- | :--- | :--- | | Total Assets | $5,523,448 | $5,568,526 | | Loans, net | $1,141,595 | $1,185,851 | | Total Deposits | $4,730,262 | $4,866,839 | | Total Liabilities | $4,830,011 | $4,952,935 | | Total Shareholders' Equity | $693,437 | $615,591 | Consolidated Income Statement Highlights (Unaudited) | Metric | Q2 2019 (In thousands) | Q2 2018 (In thousands) | H1 2019 (In thousands) | H1 2018 (In thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $39,139 | $36,887 | $78,128 | $72,743 | | Provision for Loan Losses | $0 | $0 | $0 | $0 | | Net Income | $19,625 | $18,010 | $39,271 | $35,516 | | Diluted EPS | $0.73 | $0.67 | $1.46 | $1.33 | Consolidated Cash Flow Highlights (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2019 (In thousands) | Six Months Ended June 30, 2018 (In thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $39,541 | $49,900 | | Net Cash Provided by (Used in) Investing Activities | $105,968 | $(53,386) | | Net Cash (Used in) Provided by Financing Activities | $(147,207) | $57,630 | Note 2: Accounting Policies The company adopted new accounting standards in H1 2019 for leases and callable debt securities, recognizing a $15.3 million lease asset and liability, and is preparing for the CECL model - Effective January 1, 2019, the company adopted ASU 2016-02 (Leases), recognizing a lease liability and a corresponding right-of-use asset of $15.3 million for facilities leases[29][30] - The company adopted ASU 2017-08, which shortens the amortization period for certain callable debt securities held at a premium, resulting in a $3.1 million reduction in investment securities and a $2.8 million reduction in retained earnings, net of tax[31][33] - The company is preparing to adopt the new CECL standard (ASU 2016-13) on January 1, 2020, and expects to determine an aggregate loss estimate by year-end 2019[36][37] Note 3: Investment Securities The investment securities portfolio totaled $3.63 billion at June 30, 2019, with no other-than-temporary impairments, primarily influenced by market interest rates Debt Securities Portfolio Summary (Amortized Cost) | Security Type | June 30, 2019 (In thousands) | December 31, 2018 (In thousands) | | :--- | :--- | :--- | | Debt securities available for sale | $2,757,267 | $2,711,453 | | Debt securities held to maturity | $867,989 | $984,609 | | Total | $3,625,256 | $3,696,062 | - Unrealized losses on debt securities were primarily caused by changes in market interest rates, with no intent or requirement to sell before recovery of amortized cost basis[47][48] Note 4: Loans, Allowance for Loan Losses and Other Real Estate Owned The loan portfolio decreased to $1.16 billion at June 30, 2019, with the allowance for loan losses at $20.1 million and improved credit quality metrics Loan Portfolio Composition | Loan Category | June 30, 2019 (In thousands) | December 31, 2018 (In thousands) | | :--- | :--- | :--- | | Commercial | $243,577 | $275,080 | | Commercial Real Estate | $577,665 | $580,480 | | Construction | $5,482 | $3,982 | | Residential Real Estate | $37,813 | $44,866 | | Consumer Installment & Other | $297,175 | $302,794 | | Total | $1,161,712 | $1,207,202 | Allowance for Loan Losses Activity (H1 2019) | Metric | Amount (In thousands) | | :--- | :--- | | Balance at Dec 31, 2018 | $21,351 | | Provision for loan losses | $0 | | Net Charge-offs | $(1,234) | | Balance at June 30, 2019 | $20,117 | - Total nonaccrual loans decreased to $3.8 million at June 30, 2019, from $4.9 million at December 31, 2018[62][63] Note 10: Commitments and Contingent Liabilities The company reported $276.2 million in unfunded loan commitments, settled a lawsuit for $252 thousand, and increased customer refund liability to $5.84 million - Unfunded loan commitments stood at $276.2 million at June 30, 2019[115] - In Q2 2019, the company settled a lawsuit, paying a liability of $252 thousand[117][240] - The company increased its liability for customer refunds related to prior years by $301 thousand, bringing the total estimated obligation to $5.84 million[118][240] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2019 financial performance, highlighting a 9% net income increase to $19.6 million driven by an expanded net interest margin of 3.13%, strong credit quality, and robust capital Key Financial Performance Ratios | Ratio | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Return on Assets | 1.42% | 1.29% | | Return on Common Equity | 11.75% | 11.55% | | Net Interest Margin (FTE) | 3.13% | 2.97% | | Efficiency Ratio | 48.6% | 51.4% | - Net income for Q2 2019 was $19.6 million, an increase of $1.6 million from Q2 2018, primarily due to a $2.0 million increase in net interest and loan fee income (FTE)[127][134] - Credit quality remained solid, with nonperforming assets declining to $4.1 million at June 30, 2019, from $6.0 million at June 30, 2018, and no provision for loan losses recognized in H1 2019[129][162] Net Interest and Loan Fee Income (FTE) Net interest income (FTE) increased by $2.0 million in Q2 2019, with the net interest margin expanding to 3.13% due to higher asset yields and low funding costs Net Interest Margin (FTE) Components | Component | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Yield on earning assets (FTE) | 3.17% | 3.01% | | Rate paid on interest-bearing liabilities | 0.08% | 0.07% | | Net interest margin (FTE) | 3.13% | 2.97% | - The increase in net interest income was primarily driven by higher yields on assets (rate effect), which contributed $2.4 million, while changes in asset volume had a negative impact of $0.4 million[158] Loan Portfolio Credit Risk The company's conservative credit risk management resulted in nonperforming assets decreasing to $4.1 million and an adequate allowance for loan losses of $20.1 million Nonperforming Assets Trend | Category | June 30, 2019 (In thousands) | Dec 31, 2018 (In thousands) | | :--- | :--- | :--- | | Total nonaccrual loans | $3,847 | $4,868 | | Accruing loans 90+ days past due | $249 | $551 | | Other real estate owned | $43 | $350 | | Total nonperforming assets | $4,139 | $5,769 | - The allowance for loan losses decreased to $20.1 million at June 30, 2019, from $21.4 million at December 31, 2018, reflecting management's assessment of decreasing risk in several loan segments[197][201] Liquidity and Funding The company maintains a strong liquidity position, primarily funded by stable, low-cost deposits and a $3.6 billion investment portfolio as a secondary source - The company's funding is highly stable, with customer deposits and shareholders' equity providing 98% of funding for average total assets in H1 2019[215] - The investment securities portfolio of $3.6 billion provides a substantial secondary source of liquidity, with approximately $747 million pledged as collateral at June 30, 2019[216] Capital Resources The company maintains a robust capital position, with shareholders' equity at $693 million and all regulatory capital ratios significantly exceeding 'well-capitalized' thresholds Regulatory Capital Ratios (Company) at June 30, 2019 | Ratio | Company Actual | Required for Adequacy* | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 17.18% | 7.00% | | Tier 1 Capital | 17.18% | 8.50% | | Total Capital | 17.88% | 10.50% | | Leverage Ratio | 10.19% | 4.00% | *Includes 2.5% capital conservation buffer - In the first six months of 2019, the company paid common dividends of $22 million ($0.81 per share) and repurchased 8,000 shares for $488 thousand[223] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are credit and interest rate risk, with no current use of derivative instruments for risk management - The most significant market risks are credit risk and interest rate risk[237] - The company does not currently engage in trading activities or use derivative instruments to control interest rate risk[236] Controls and Procedures The company's disclosure controls and procedures were deemed effective as of June 30, 2019, with no material changes to internal control over financial reporting - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of June 30, 2019[239] PART II - OTHER INFORMATION Legal Proceedings The company is not involved in material legal proceedings, having settled a lawsuit for $252 thousand and increased customer refund liability by $301 thousand in Q2 2019 - In Q2 2019, the Company settled a lawsuit for $252 thousand and increased a liability for customer refunds by $301 thousand[240] Risk Factors No material changes to the company's risk factors have occurred since the Form 10-K filing for the year ended December 31, 2018 - There have been no material changes to the Company's risk factors since the Form 10-K was filed for the year ended December 31, 2018[241] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2019, the company repurchased 8,000 shares of common stock at an average price of $61.98 per share under its repurchase program Issuer Purchases of Equity Securities (Q2 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | 8,000 | $61.98 | | May 2019 | 0 | - | | June 2019 | 0 | - | | Total | 8,000 | $61.98 |