Westamerica Bancorporation — Q1 2018 Form 10-Q
Business context and period: Westamerica Bancorporation is a bank holding company whose revenue is driven primarily by net interest and fee income on loans and investment securities, funded mainly by customer deposits. This unaudited report covers the three months ended March 31, 2018; balance-sheet figures are compared with December 31, 2017 unless otherwise stated. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 2018 | Comparable period / change |
|---|---|---|
| Net interest and fee income | $34.0 | $32.8 in Q1 2017; $33.7 in Q4 2017 |
| Net interest and fee income, FTE | $35.5 | $36.0 in Q1 2017; $36.6 in Q4 2017 |
| Net income | $17.5 | $15.0 in Q1 2017; $4.2 in Q4 2017 |
| Diluted EPS | $0.66 | $0.57 in Q1 2017; $0.16 in Q4 2017 |
| Noninterest income / expense | $12.0 / $24.2 | $11.7 / $24.6 in Q1 2017 |
| Net interest margin, FTE | 3.02% | 3.14% in Q1 2017; 3.12% in Q4 2017 |
| Efficiency ratio | 51.1% | 51.6% in Q1 2017; 53.0% in Q4 2017 |
| Total assets | $5,551 | $5,513 at December 31, 2017 |
| Total loans / deposits | $1,229 / $4,868 | Loans down $59 from year-end; deposits up $40 |
| Cash and due from banks | $556 | $575 at December 31, 2017 |
| Shareholders’ equity | $582 | $590 at December 31, 2017 |
| Total risk-based capital ratio | 16.53% company; 13.98% bank | Both above stated regulatory requirements |
Net income increased 16% year over year. Net interest and fee income rose as higher investment balances and earning-asset yields offset lower average loan balances. The FTE net interest margin declined, with management attributing much of the year-over-year and sequential comparison to the lower FTE adjustment following the federal tax-rate reduction. The reported book tax provision was $4.3 million, an effective rate of 19.7%, versus $4.8 million and 24.3% in Q1 2017.
Operating cash flow was $26.5 million; investing activities used $89.9 million, including substantial purchases of available-for-sale securities; financing activities provided $44.1 million. Cash declined $19.4 million during the quarter. Short-term borrowed funds were $65.4 million, up from $58.5 million at year-end. The company reported no parent-company debt. Checking and savings balances represented about 95% of average deposits.
Material changes and credit quality
- Loan balances fell about 4.6% from year-end, while deposits grew about 0.8%. The investment securities portfolio increased to approximately $3.5 billion.
- The allowance for loan losses was $23.1 million, with no provision recorded in Q1. Net recoveries were $72,000, compared with net charge-offs of $1.0 million in Q1 2017.
- Nonperforming assets were $7.8 million, down from $9.2 million a year earlier and $7.9 million at year-end. Nonaccrual loans were $6.1 million. Management described overall credit quality as reasonably stable but cautioned that problem assets may fluctuate.
- Gross unrealized losses on available-for-sale debt securities were $65.6 million at quarter-end, compared with $34.3 million at year-end; held-to-maturity unrealized losses were $20.2 million, versus $11.9 million. Management attributed losses mainly to market interest-rate changes, stated it did not intend to sell and did not expect forced sales before recovery, and did not classify the securities as other-than-temporarily impaired.
- Other comprehensive loss was $23.1 million after tax, principally reflecting unrealized available-for-sale securities losses. This contributed to the decline in reported shareholders’ equity.
Outlook, unusual items and risks
- Outlook: Management’s most likely earnings forecast for the 12 months ending March 31, 2019 assumes market rates rise gradually, with short-term rates increasing more than long-term rates. The company was slightly asset-sensitive at March 31, 2018, depending on simulation assumptions. No specific earnings or revenue guidance was provided.
- Management expects quarterly dividends to continue, subject to Board discretion and ongoing evaluation of capital, earnings, asset quality and other factors. The Q1 dividend was $0.40 per share. The company repurchased no shares during the quarter.
- Q4 2017 comparisons were affected by unusual items: an $8.0 million securities gain, a $5.5 million loss-contingency accrual, a $625,000 tax-credit investment impairment, and a $12.3 million deferred-tax-asset remeasurement charge arising from the Tax Cuts and Jobs Act. These items explain much of the Q1 sequential increase in net income.
- The company accrued $5.542 million for estimated refunds owed to some customers for revenue recognized in prior years; management said the estimate remains subject to revision. Routine legal matters were not expected to have a material adverse effect.
- Key risks include interest-rate and liquidity changes, competition for deposits, credit deterioration and collateral values, securities valuation and credit risk, operational and cybersecurity events, regulatory change, and natural disasters. The company said risk factors had not materially changed since its 2017 Form 10-K.
- Upcoming accounting changes include CECL, required in 2020; management was evaluating its impact. Management also evaluated potential effects of other forthcoming accounting standards.
Important facts for investors to verify
- Whether loan contraction persists and whether deposit growth remains concentrated in lower-cost checking and savings accounts.
- How rising rates affect net interest margin, deposit costs and the market value of the large securities portfolio; assess the significant unrealized securities losses and management’s ability to hold securities until recovery.
- Whether credit quality and the $23.1 million allowance remain adequate as nonperforming and classified loans change; review the largest nonaccrual commercial real estate exposure.
- The ultimate amount and timing of the $5.542 million customer-refund liability, and any resulting revisions.
- Capital and liquidity trends, including pledged securities, $282.4 million of unfunded loan commitments, and the sustainability of dividends.