Westamerica Bancorporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. Westamerica Bancorporation provides banking services through Westamerica Bank, focused on small businesses and consumers in Northern and Central California.
Financial performance and condition
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Net income | $50.0 million | $58.9 million | Down 15.0% |
| Diluted earnings per share | $1.89 | $2.29 | Down 17.5% |
| Interest and loan fee income | $133.8 million | $134.1 million | Nearly unchanged |
| Net interest income, FTE | $144.1 million | $145.1 million | Down $1.0 million |
| Net interest margin, FTE | 3.12% | 3.24% | Down 12 basis points |
| Noninterest income | $56.6 million | $46.6 million | Up $10.1 million, largely from securities gains |
| Noninterest expense | $103.3 million | $101.8 million | Up $1.5 million |
| Cash from operating activities | $80.8 million | $77.6 million | Cash and due from banks ended at $575.0 million |
At year-end, total assets were $5.51 billion, deposits $4.83 billion, loans $1.29 billion, investment securities $3.35 billion, and shareholders’ equity $590.2 million. Loans declined from $1.35 billion a year earlier while deposits grew 2.6%. Short-term borrowings were $58.5 million; the parent company reported no debt. Cash, deposits and equity funded 98% of average assets in 2017 and 2016, according to management.
Capital remained above regulatory requirements: company total risk-based capital was 16.17%, and the Bank’s was 13.52%; the Bank’s leverage ratio was 7.16%. The Bank was classified as well capitalized. The common dividend was $1.57 per share, with an 83% payout ratio.
Material changes and notable items
- Net income fell despite higher pretax income, primarily because the Tax Cuts and Jobs Act prompted a $12.3 million charge to remeasure deferred tax assets. Management said this reduced 2017 EPS by $0.48.
- A $5.5 million accrued loss contingency for estimated customer refunds relating to revenue recognized in prior years reduced EPS by $0.12. The estimate remains subject to revision.
- $8.0 million of securities gains increased EPS by $0.18. The gains followed the sale of FHLMC and FNMA shares for $8.7 million in the fourth quarter.
- The 2017 reversal of loan-loss provision was $1.9 million, versus a $3.2 million reversal in 2016. Net loan losses were $1.0 million, or 0.08% of average loans.
- Credit quality improved: nonperforming assets declined to $7.9 million from $12.0 million; classified loans fell $10.5 million. The allowance for loan losses was $23.0 million, down from $26.0 million.
- The investment portfolio grew as loans declined. Management attributed margin pressure to low rates and the shift toward securities; investment income represented 57% of FTE interest income in 2017.
Outlook, risks and contingencies
Management’s most likely forecast for the twelve months ending December 31, 2018 assumes market rates gradually rise, with short-term rates increasing more than long-term rates. The company was slightly asset-sensitive at year-end, but results depend on rate assumptions and balance-sheet mix. No numerical earnings or revenue guidance is provided. Management expects to maintain capital above regulatory standards and continue quarterly dividends, subject to board discretion and financial and regulatory constraints.
Key risks include interest-rate and liquidity exposure, California economic and real-estate concentration, borrower credit deterioration, securities valuation changes, competition and regulatory change, and operational, cybersecurity and third-party service-provider risks. Real estate was the principal collateral for about 53% of loans; about 22% of loans were to Central Valley borrowers. Management reported no material pending legal proceeding and no material wildfire-related loss identified as of the filing, but said further evaluation or wildfire developments could reveal losses.
Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2017. The auditor issued an unqualified opinion on the financial statements and controls.
Investor verification priorities
- Assess recurring earnings excluding the deferred-tax remeasurement, customer-refund contingency and securities gains.
- Review the deferred tax asset impact of the tax-law change and the sustainability of the effective tax rate.
- Track net interest margin, deposit pricing and mix, and how rising rates affect securities values and funding costs.
- Evaluate loan contraction, credit trends, allowance adequacy and the remaining $7.8 million of FDIC-indemnified residential loans, whose indemnification expires February 6, 2019.
- Examine the securities portfolio’s unrealized losses and corporate-sector exposure; management said substantially all securities were investment grade and did not expect the hurricane-affected bonds to be impaired.
- Confirm dividend capacity, capital levels, and the effects of loan commitments and other contingent obligations; unfunded loan commitments were $272.6 million and standby letters of credit $19.3 million.