Westamerica Bancorporation — Q3 2016 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Westamerica is a California-based bank whose principal revenue source is net interest and fee income. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net income | $15.6 | $14.9 | $44.4 | $44.2 |
| Diluted EPS | $0.61 | $0.58 | $1.73 | $1.73 |
| Net interest income, GAAP | $32.9 | $33.7 | $99.2 | $100.8 |
| Net interest and fee income, FTE | $36.2 | $37.2 | $109.1 | $111.5 |
| Noninterest income | $11.6 | $12.0 | $35.0 | $36.6 |
| Noninterest expense | $26.1 | $26.2 | $77.2 | $79.8 |
| Net interest margin, FTE | 3.21% | 3.31% | 3.27% | 3.37% |
FTE (fully taxable equivalent) is a non-GAAP measure. The company reported a $3.2 million reversal of loan-loss provision in both the quarter and year-to-date period; there was no provision in the comparable 2015 periods. Q3 return on assets was 1.18%, return on common equity 11.39%, and efficiency ratio 54.6%.
At September 30, 2016, total assets were $5.31 billion; loans were $1.36 billion, net of a $26.4 million allowance; investment securities totaled about $3.17 billion; deposits were $4.64 billion; short-term borrowed funds were $56.4 million; and shareholders’ equity was $563.0 million. There was no long-term debt value presented in the supplied filing text. Cash and due from banks were $471.4 million. Total risk-based capital was 15.16% at the holding company and 12.64% at the bank; the tangible equity-to-tangible assets ratio was 8.37%.
For the first nine months, operating cash flow was $59.2 million, investing cash outflow was $104.5 million, and financing cash inflow was $83.6 million. Cash increased $38.3 million to $471.4 million. Dividends paid were $29.9 million year to date, or $1.17 per share.
Material changes versus comparable periods
- Q3 net income rose $0.8 million year over year, while nine-month net income increased $0.2 million. The Q3 improvement primarily reflected the loan-loss reversal, partly offset by lower FTE net interest and fee income, lower noninterest income, and higher taxes.
- FTE net interest and fee income fell 2.7% in Q3 and 2.2% year to date. Average loans declined $206 million in Q3 and $196 million year to date, partly offset by higher average investments and lower average balances of higher-cost time deposits.
- Loans declined from $1.53 billion at year-end 2015 to $1.36 billion at September 30, 2016; deposits rose from $4.54 billion to $4.64 billion. The investment portfolio increased $287 million from year-end.
- Credit measures improved: nonperforming assets were $9.8 million, versus $26.2 million at September 30, 2015. The quarter recorded $649,000 of net loan recoveries; year-to-date net loan losses were $212,000.
- Nine-month noninterest expense declined 3.3%, mainly from lower foreclosed-property costs, personnel, occupancy, and other expenses; higher legal fees partly offset the reduction. Noninterest income fell 4.2%, mainly due to lower deposit service charges and merchant processing fees.
Outlook, risks, and unusual items
- Management’s most likely earnings forecast for the 12 months ending September 30, 2017 assumes rates remain relatively low or short-term rates rise gradually. The filing gives no specific earnings or revenue guidance.
- Management has avoided long-dated, low-yielding loans and favored shorter-duration securities to manage rising-rate exposure and increase liquidity. It states that higher rates could provide an opportunity to reinvest liquidity in higher-yielding assets, while low rates and asset mix continue to pressure margins.
- Management expects deposits to remain an important funding source and anticipates higher-cost time deposits will decline. Dividends are expected to continue, subject to board discretion and capital, earnings, asset quality, and other factors. The company repurchased no shares in Q3; a new authorization permits purchases of up to 1.75 million shares through September 1, 2017.
- Key risks include interest-rate and liquidity risk, economic and collateral-value changes, credit deterioration, competition, regulatory changes, cyber or operational incidents, and legal contingencies. Management describes liquidity and capital as adequate based on stress testing, but gives no assurance against future deterioration.
- Loan commitments were $312.6 million, standby letters of credit $21.1 million, and the reserve for unfunded commitments $2.6 million. Routine legal proceedings were not expected to have a material adverse effect. Investment securities had $4.4 million of gross unrealized losses in available-for-sale holdings and $0.7 million of unrecognized losses in held-to-maturity holdings; management did not consider them other-than-temporarily impaired and did not expect to be required to sell before recovery.
- The allowance reversal and substantial decline in nonperforming assets are notable period items. Management cautions that interim results are not necessarily indicative of full-year results and that future provisions may be necessary.
Important facts for investors to verify
- Whether loan balances and originations stabilize, and whether credit-quality improvements and recoveries persist.
- How loan-loss reserve adequacy changes against classified loans, delinquencies, charge-offs, and the evolving loan mix.
- Whether margin pressure continues as older higher-yielding assets run off, and how earnings respond to actual interest-rate changes.
- Liquidity and deposit trends, including concentration, reliance on short-term borrowings, and the company’s ability to fund commitments.
- The sustainability of dividends and capital ratios, including the impact of any share repurchases and regulatory capital-buffer requirements.