Westamerica Bancorporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company is a bank holding company whose earnings primarily come from net interest and loan fee income.
Financial performance
- Second quarter: Net interest and loan fee income was $35.1 million, up from $32.7 million a year earlier; net income was $18.0 million versus $15.8 million; diluted EPS was $0.67 versus $0.60.
- First half: Net interest and loan fee income was $69.2 million versus $65.5 million; net income was $35.5 million versus $30.8 million; diluted EPS was $1.33 versus $1.17.
- Margins and returns: FTE net interest margin was 3.08% for Q2 and 3.05% for the first half, compared with 3.12% and 3.13%, respectively, in 2017. First-half return on assets was 1.28% and return on common equity was 11.56%.
- Income and expense: Q2 noninterest income declined 2.9% to $11.8 million; noninterest expense declined 1.7% to $24.0 million. First-half noninterest income was broadly flat at $23.7 million, while expense fell to $48.2 million from $49.0 million.
- Cash flow: For the first half, operating activities provided $49.9 million; investing activities used $53.4 million; financing activities provided $57.6 million. Cash and due from banks increased $54.1 million to $629.1 million.
Financial position, liquidity and credit
- At June 30, total assets were $5.58 billion, deposits $4.89 billion, loans $1.20 billion, and shareholders’ equity $586.1 million. Compared with December 31, 2017, loans declined from $1.29 billion, deposits increased from $4.83 billion, and equity declined from $590.2 million.
- Investment securities totaled approximately $3.44 billion: $2.36 billion available for sale and $1.08 billion held to maturity. Short-term borrowed funds were $68.9 million; the parent company reported no debt.
- Nonperforming assets were $6.0 million, down from $7.9 million at year-end. The allowance for loan losses was $23.0 million, approximately 1.9% of loans. The company recorded no loan-loss provision in the first half and reported $31,000 in net recoveries.
- Company and bank total risk-based capital ratios were 16.97% and 14.19%, respectively. The company’s equity-to-assets ratio was 10.51%; tangible equity to tangible assets was 8.47%.
Material changes and unusual items
- Higher investment balances and earning-asset yields supported net interest income, partly offset by lower average loan balances. Management cited the rise in market rates; deposit funding costs remained low.
- 2017 comparison periods included a $1.9 million reversal of loan-loss provision, while 2018 had no provision or reversal. The 2018 increase in net income also reflected lower taxes following the federal corporate tax-rate reduction; effective tax rates were 21.4% for Q2 and 20.6% for the first half, versus 29.2% and 26.9% in 2017.
- Unrealized losses on debt securities increased as market interest rates changed. At June 30, gross unrealized losses were $74.3 million on available-for-sale debt securities and $22.3 million on held-to-maturity securities. Management said substantially all securities remained investment grade, it did not intend to sell them, and it was not more likely than not to be required to sell before cost recovery. One corporate bond, with $15.0 million carrying value, was rated below investment grade and had a $13.9 million market value.
- The company accrued a $5.5 million liability for estimated customer refunds related to revenue recognized in prior years; the estimate may change. Unfunded loan commitments were $295.0 million, with a $2.3 million reserve; standby letters of credit totaled $2.8 million.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management’s most likely earnings forecast assumed gradually rising interest rates, with short-term rates increasing more than long-term rates. The balance sheet was described as slightly asset-sensitive, dependent on model assumptions.
- Management said it was satisfied with liquidity and capital based on internal stress tests, but cautioned that reduced liquidity, earnings, or capital could occur. It expected to maintain regulatory capital above the highest effective standard and continue quarterly dividends, subject to board discretion and ongoing evaluation.
- Key risks identified include interest-rate and liquidity changes, competition for deposits and loans, credit deterioration and collateral values, securities market or issuer declines, operational and cybersecurity events, regulatory changes, natural disasters, and legal contingencies. The filing said risk factors had not materially changed from the 2017 Form 10-K.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. The filing did not provide a quantified outlook for future loan growth, deposit growth, or earnings.
Important facts for investors to verify
- Whether loan balances continue to contract and whether the low provision and stable allowance remain appropriate as variable-rate borrower debt-service costs rise.
- How interest-rate changes affect the FTE margin, securities valuations, and the company’s slightly asset-sensitive position.
- The ultimate amount and timing of the estimated $5.5 million customer refunds, and any related developments.
- Whether deposit growth, liquidity stress-test results, capital ratios, and dividend plans remain consistent with management’s stated expectations.