Westamerica Bancorporation — Q3 2018 Form 10-Q
Business context and reporting period. Westamerica Bancorporation is a California-based bank holding company. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts below are in millions of dollars except per-share data and ratios.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest and loan fee income | $35.7 | $32.7 | $104.9 | $98.2 |
| Noninterest income | $12.5 | $12.5 | $36.3 | $36.3 |
| Noninterest expense | $27.0 | $24.1 | $75.2 | $73.1 |
| Net income | $17.0 | $15.0 | $52.5 | $45.9 |
| Diluted EPS | $0.63 | $0.57 | $1.96 | $1.74 |
| Net interest margin (FTE) | 3.10% | 3.10% | 3.07% | 3.12% |
- Q3 net income rose about 13%; nine-month net income rose about 14%. Lower effective tax rates—20.0% for Q3 and 20.4% year to date, versus 28.8% and 27.6%—reflect the federal tax-rate reduction and other tax items.
- Q3 return on assets was 1.19% and return on common equity 10.58%; nine-month figures were 1.25% and 11.22%, respectively. The Q3 efficiency ratio was 54.4%, compared with 50.0%.
- At September 30, total assets were $5,529, deposits $4,836, loans $1,197, and shareholders’ equity $593. Loans declined from $1,288 at year-end 2017, while deposits were broadly stable at $4,836 versus $4,828. Noninterest-bearing deposits were $2,211.
- Cash and due from banks was $523, down from $575 at year-end. Short-term borrowings were $62; the filing reports no parent-company debt. Total risk-based capital ratios were 16.99% for the company and 14.03% for the bank; the bank’s leverage ratio was 7.53%.
- For the first nine months, operating cash flow was $80.4, investing cash outflow $125.1, and financing cash outflow $7.7; cash declined $52.3. Net loan repayments were $91.6, securities purchases exceeded proceeds, and dividends paid were $31.9.
Material changes versus the prior comparable period
- Higher investment balances and asset yields lifted net interest income; lower average loan balances partly offset the increase. The average earning-asset balance was higher, while average loans declined. Interest expense remained low, and management said checking and savings deposits grew while time deposits fell.
- Q3 net interest margin was unchanged year over year at 3.10%; the nine-month margin eased to 3.07% from 3.12%, in part because the lower 2018 federal tax rate reduced the FTE adjustment.
- Noninterest income was nearly flat. Merchant-processing fees increased, offset by lower deposit service charges and other income. Noninterest expense rose, chiefly due to a $3.5 legal settlement accrual; excluding that item, expenses were lower year over year in Q3.
- There was no loan-loss provision in 2018. The 2017 nine-month comparison included a $1.9 reversal of provision, so reported earnings comparisons include that prior-period benefit.
- Available-for-sale securities had $79.3 of gross unrealized losses at September 30 versus $34.3 at December 31, 2017; held-to-maturity securities had $25.8 of gross unrecognized losses versus $11.9. Management attributed the losses primarily to interest-rate movements and said it did not expect to sell the securities before recovery.
Outlook, risks, contingencies, and unusual items
- Management’s most-likely earnings forecast for the 12 months ending September 30, 2019 assumes short-term rates rise gradually; long-term rate movements are uncertain. The company was described as slightly asset-sensitive, subject to model assumptions. No specific earnings or revenue guidance was provided.
- Management expects quarterly dividends to continue, subject to board discretion and ongoing assessment of capital, earnings, asset quality, and other factors. The company and bank expected to maintain capital above the highest effective regulatory standard based on current projections.
- Credit quality was described as solid. Nonperforming assets were $6.5 at September 30, down from $7.9 at year-end; classified loans declined $6.6 to $30.0 over the first nine months. Net loan losses were $1.0 for Q3 and $1.0 for the nine-month period; the allowance was $22.0. Management cautioned that classified and nonperforming assets may fluctuate and that further deterioration cannot be ruled out.
- A mediated settlement to dismiss a lawsuit, subject to court approval, resulted in a $3.5 accrued liability. Separately, the company accrued an estimated $5.542 liability for refunds of revenue recognized before 2017; the estimate is subject to revision.
- Interest-rate, liquidity, credit, securities-valuation, competition, operational, cybersecurity, regulatory, and natural-disaster risks are disclosed. About $740 of securities were pledged as collateral. Unfunded loan commitments were $292.7; standby letters of credit were $2.9.
- The company reported one corporate bond with $15.0 carrying value and $14.1 market value rated below investment grade; substantially all other securities were described as investment grade. Adoption of the expected-credit-loss standard was planned for January 1, 2020; management was still evaluating its impact.
Important facts for investors to verify
- Confirm the court’s approval and final terms of the $3.5 settlement, and whether the separate $5.542 customer-refund estimate changes.
- Track loan balances, classified and nonperforming assets, net charge-offs, and whether the $22.0 allowance remains adequate as conditions change.
- Assess sensitivity of earnings and capital to rising rates and further securities valuation declines, including the difference between available-for-sale and held-to-maturity marks.
- Monitor deposit mix, liquidity, pledged securities, and the company’s ability to fund commitments and sustain dividends.
- Consider that 2018 year-to-date results had no loan-loss provision, while 2017 included a $1.9 provision reversal; also distinguish recurring performance from the legal settlement and $0.585 life-insurance gain.