Westamerica Bancorporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. Westamerica is a bank holding company whose principal revenue comes from loans and investment securities, funded mainly by customer deposits.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior quarter-end |
|---|---|---|
| Net income | $15.0 million; diluted EPS $0.57 | $14.2 million and $0.56 in Q1 2016 |
| Net interest and loan fee income, FTE | $36.0 million; net interest margin 3.14% | $36.4 million and 3.34% in Q1 2016 |
| Noninterest income / expense | $11.7 million / $24.6 million | $11.7 million / $25.9 million in Q1 2016 |
| Provision for loan losses | None | None in Q1 2016 |
| Operating cash flow | $25.3 million | $18.2 million in Q1 2016 |
| Cash and due from banks | $546.8 million | $462.3 million at December 31, 2016 |
| Total assets / shareholders’ equity | $5,395.9 million / $584.9 million | $5,366.1 million / $561.4 million at December 31, 2016 |
| Loans, net of allowance | $1,326.2 million | $1,326.8 million at December 31, 2016 |
| Deposits | $4,698.0 million | $4,704.7 million at December 31, 2016 |
| Short-term borrowed funds | $73.6 million | $59.1 million at December 31, 2016 |
The available-for-sale and held-to-maturity investment portfolios totaled approximately $3.19 billion at carrying value. Total risk-based capital was 16.91% at the company and 13.24% at the bank; the bank’s leverage ratio was 6.64%. The company reported a 10.84% equity-to-assets ratio. The filing provides no long-term debt balance in the presented balance sheet.
Material changes versus comparable periods
- Net income rose $0.8 million, or about 6%, year over year, while diluted EPS increased from $0.56 to $0.57. Results included a $671,000 reduction in the income tax provision from adopting share-based payment accounting guidance; management said EPS was $0.02 higher than under prior accounting rules.
- FTE net interest income declined $0.4 million year over year and margin contracted 20 basis points. Lower average loan balances and lower earning-asset yields were partly offset by higher investment balances and reduced interest expense.
- Noninterest expense decreased $1.2 million year over year, while noninterest income was down $0.1 million. Merchant processing income increased, partly offset by lower deposit service charges.
- Average loans declined about $145 million year over year, while average investment balances increased about $384 million. Period-end deposits were nearly unchanged from year-end; short-term borrowings increased $14.5 million.
- Nonperforming assets fell to $9.2 million from $12.0 million at year-end and $26.4 million a year earlier. The allowance for loan losses declined to $24.9 million from $26.0 million at year-end. Net charge-offs were $1.0 million, or 0.31% of average loans annualized, compared with $0.3 million, or 0.08%, in Q1 2016.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management’s most likely forecast assumed gradually rising interest rates over the 12 months ending March 31, 2018, with short-term rates rising more than long-term rates. The company described its balance sheet as neutral to slightly asset-sensitive, depending on model assumptions.
- Management cited historically low rates and asset mix as pressures on net interest margin. It has favored shorter-duration securities to support liquidity and expects higher yields on reinvestment only if market rates rise above yields on maturing and prepaid securities. Loan demand and deposit growth remain uncertain; management anticipates time deposits may decline.
- Management considered the $24.9 million loan-loss allowance adequate but cautioned that classified and nonperforming assets may fluctuate and future credit deterioration or provisions may occur. Real-estate collateral, borrower conditions, economic conditions and concentrations are credit risks.
- Available-for-sale securities had $33.7 million of gross unrealized losses and held-to-maturity securities had $11.3 million of gross unrecognized losses at quarter-end. Management attributed losses mainly to market interest rates, said substantially all securities remained investment grade, and did not consider them other-than-temporarily impaired; future impairment remains possible.
- Liquidity is supported by deposits, cash and securities; approximately $774 million of securities were pledged as collateral. Unfunded loan commitments were $305.5 million and standby letters of credit were $19.8 million. The company reported no material pending legal proceedings and said ordinary-course cases were not expected to have a material adverse effect.
- The adoption of ASU 2016-09 produced a tax benefit related to stock-option exercises and may make the book tax provision more volatile. Management expects quarterly dividends to continue subject to board discretion and capital, earnings and asset-quality considerations. No shares were repurchased in Q1; an authorization for up to 1.75 million shares was in place through September 1, 2017.
- Other cited risks include interest-rate and liquidity changes, competition, regulatory developments, cyber and operational risks, natural disasters, securities-market movements and legal contingencies. Management stated that risk factors had not materially changed from the 2016 Form 10-K.
Important facts for investors to verify
- Whether the Q1 tax benefit from stock-option exercises is recurring; compare reported earnings with results under the prior tax-accounting treatment.
- Whether the fall in nonperforming assets is sustained and whether elevated net charge-offs affect future provisions or allowance adequacy.
- How loan growth, investment reinvestment yields and funding costs affect the net interest margin as rates and deposit mix change.
- The duration, credit exposure and pledged portion of the securities portfolio, and any subsequent changes in unrealized losses or impairment assessments.
- Capital and liquidity trends, including short-term borrowing, deposit composition, commitments, dividend capacity and the status of the share-repurchase authorization.