Westamerica Bancorporation — 2016 Form 10-K
Business context and reporting period. Westamerica Bancorporation is a California bank holding company serving individuals and businesses, with a strategic focus on small businesses in Northern and Central California through Westamerica Bank. This annual filing covers the year ended December 31, 2016; quarterly figures below identify the fourth quarter where relevant. The company reported approximately $5.37 billion in assets, $4.70 billion in deposits, and 783 full-time-equivalent employees at year-end.
Financial performance and condition
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Net interest income (GAAP) | $131.9 million | $134.1 million | Down 1.6% |
| Net interest income (FTE, non-GAAP) | $145.1 million | $148.3 million | Down $3.2 million; FTE net interest margin was 3.24%, versus 3.36% |
| Noninterest income | $46.6 million | $47.9 million | Down 2.7% |
| Noninterest expense | $101.8 million | $105.3 million | Down 3.4%; efficiency ratio improved to 53.09% from 53.69% |
| Net income | $58.9 million | $58.8 million | Up $0.1 million; diluted EPS was $2.29 versus $2.30 |
| Return on average assets / equity | 1.12% / 10.85% | 1.16% / 11.32% | Both declined |
| Year-end assets / loans / deposits | $5.37 billion / $1.35 billion / $4.70 billion | $5.17 billion / $1.53 billion / $4.54 billion | Assets and deposits grew; loans declined |
| Allowance for loan losses | $26.0 million | $29.8 million | Reduced after a $3.2 million provision reversal |
| Shareholders’ equity | $561.4 million | $532.2 million | Equity-to-assets ratio was 10.46%, up from 10.30% |
Fourth-quarter 2016 net income was $14.5 million and diluted EPS was $0.56, compared with $14.6 million and $0.57 in fourth-quarter 2015. Fourth-quarter net interest income was $32.7 million, versus $33.3 million.
Cash flow and liquidity. Net cash provided by operating activities was $77.6 million, compared with $70.4 million in 2015. Investing activities used $197.3 million, primarily reflecting net purchases of securities; financing activities provided $148.9 million. Cash and due from banks ended the year at $462.3 million. Deposits and shareholders’ equity supplied 98% of funding for average assets in 2016. Investment securities totaled $3.24 billion, of which approximately $769 million was pledged as collateral. Management reported satisfactory liquidity stress-test results; the filing does not provide a single liquidity ratio.
Debt and capital. Year-end short-term borrowed funds were $59.1 million, consisting of repurchase agreements; the company reported no year-end FHLB advances or term repurchase agreement. The Bank’s year-end total risk-based capital ratio was 13.02%, Common Equity Tier 1 ratio 11.70%, and leverage ratio 6.63%; it remained classified as well capitalized. Company total risk-based capital was 15.95%.
Dividends and shareholder returns. The company paid $1.56 per common share in dividends during 2016, a 68% payout ratio. It repurchased and retired 137,000 shares for approximately $6 million during the year; no shares were repurchased in the fourth quarter. The Board intended to continue quarterly dividends, subject to its discretion, financial results, capital, and regulatory limits.
Material changes versus the prior comparable period
- Loans fell by $180.7 million, or about 11.8%, while investment securities increased by approximately $350.8 million. Management attributed the loan decline to paydowns, workouts, reduced originations, and a deliberate decision not to pursue competitively priced loans with insufficient expected returns.
- Net interest margin (FTE) continued to compress, from 3.36% to 3.24%, as lower average loan balances and yields outweighed growth in securities. Lower interest expense and growth in lower-cost deposits partly offset the pressure.
- Credit measures improved: nonperforming assets declined to $12.0 million from $24.6 million; net charge-offs fell to $0.6 million from $1.7 million. The allowance declined to $26.0 million, and the company recorded a $3.2 million reversal of provision.
- Noninterest income declined, chiefly because of lower deposit service charges and financial services commissions. Noninterest expense fell, reflecting lower personnel, occupancy, and other operating costs, partly offset by higher legal and technology-related costs.
- Unrealized losses on available-for-sale securities increased: accumulated other comprehensive loss was $10.1 million at year-end, compared with accumulated other comprehensive income of $0.7 million a year earlier. Management attributed the securities valuation declines mainly to interest-rate market conditions and did not consider them other-than-temporary at year-end.
Outlook, commentary, risks, and unusual items
- Management’s most likely 12-month earnings forecast assumed market rates would rise gradually, with short-term rates increasing more than long-term rates. This was an assumption, not quantified earnings or revenue guidance. The company was neutral to slightly asset-sensitive at year-end, depending on model assumptions.
- Management planned to monitor cash levels, pursue lower-cost checking and savings deposits, and expected higher-cost time deposits to decline. It anticipated dividends would continue, subject to ongoing review of capital, earnings, asset quality, and other factors.
- Key risks include continued margin pressure, changes in interest rates and securities values, competition for loans and deposits, credit deterioration, and the company’s geographic concentration in California. Real estate was principal collateral for approximately 50% of loans; about 23% of loans were to Central Valley borrowers. California drought and other natural disasters are also identified risks.
- At year-end, available-for-sale securities had $35.8 million of gross unrealized losses and held-to-maturity securities had $12.8 million of gross unrecognized losses. The company stated it did not intend, and was not more likely than not required, to sell the securities before recovery of amortized cost; future impairment remains possible.
- Loss-sharing protection for certain acquired County Bank single-family residential assets runs through February 6, 2019. The filing cautions that future credit provisions may still be required.
- Unfunded loan commitments were $304.5 million and standby letters of credit totaled $21.7 million. Management did not expect pending or threatened legal matters to have a material adverse effect; no material pending legal proceeding was reported.
- The filing identifies the expected credit-loss standard (CECL) as a potentially significant accounting change, with adoption required January 1, 2020; management was evaluating its impact. Management reported effective internal control over financial reporting, and the independent auditor gave unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Whether loan balances and originations stabilize, and whether growth in securities can sustain net interest income as rates and asset yields change.
- Whether the $3.2 million provision reversal and improved nonperforming assets reflect durable credit improvement; review allowance adequacy, classified loans, and charge-offs.
- The sensitivity of earnings and securities values to rate changes, including the $10.1 million year-end accumulated other comprehensive loss and the portfolio’s duration and prepayment assumptions.
- Deposit growth, deposit mix, and the Bank’s capacity to pay dividends upstream, given regulatory approval requirements noted for 2016.
- Future credit and reimbursement exposure as FDIC loss-sharing coverage approaches expiration, and the eventual balance-sheet and earnings effects of CECL adoption.
- Execution of the stated expense-control and liquidity plans, and the level of future dividends and share repurchases relative to earnings and capital needs.