Westamerica Bancorporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless noted. The company is a bank holding company whose revenue is principally generated from net interest and fee income.
Financial performance and position
- Q2 earnings: Net income was $14.5 million, or $0.57 diluted EPS, versus $14.8 million and $0.58 a year earlier. For the first half, net income was $28.8 million, or $1.13 diluted EPS, compared with $29.3 million and $1.15.
- Net interest: Q2 GAAP net interest and fee income was $33.2 million versus $33.8 million; FTE net interest and fee income was $36.5 million versus $37.4 million. FTE net interest margin was 3.27%, down from 3.37%. First-half FTE net interest and fee income was $72.9 million versus $74.3 million, with a 3.30% margin versus 3.40%.
- Other income and costs: Q2 noninterest income declined 4.6% to $11.7 million, while noninterest expense declined 6.2% to $25.2 million. First-half amounts were $23.4 million and $51.1 million, respectively. No loan-loss provision was recorded in either 2016 comparison period.
- Cash flow: For the first half, operating cash flow was $35.8 million, investing cash flow was positive $28.8 million, and financing cash flow was negative $55.9 million. Cash and due from banks increased $8.7 million to $441.8 million.
- Balance sheet and funding: At June 30, total assets were $5.18 billion, loans net of allowance were $1.40 billion, investment securities were $3.00 billion, deposits were $4.49 billion, short-term borrowings were $67.9 million, and shareholders’ equity was $558.3 million. There was no long-term debt shown on the balance sheet. Total deposits declined $55.3 million from year-end 2015.
- Credit and capital: The allowance for loan losses was $28.9 million, down from $29.8 million at year-end; first-half net charge-offs were $0.9 million. Nonperforming assets were $18.1 million, down from $25.7 million a year earlier and $24.6 million at year-end 2015. Company total risk-based capital was 14.76%; the Bank’s was 12.43%. The company reported an 8.48% tangible-equity-to-tangible-assets ratio.
Changes, outlook, and risks
- Management attributed lower net interest income principally to reduced average loan balances, partly offset by growth in investments and lower-cost funding. Average loans fell about $201 million year over year in Q2, while average investments rose about $238 million.
- Management said it was avoiding long-dated, low-yield loans and buying shorter-duration securities to limit exposure to rising rates and maintain liquidity. It described underwriting as conservative and said high liquidity could provide an opportunity to invest in higher-yielding assets if rates rise.
- Lower service charges and merchant-processing fees weighed on noninterest income. Lower insurance costs, employee attrition, branch closures, and gains on sales of foreclosed properties reduced expenses; professional fees rose with legal work relating to nonperforming assets.
- Management’s most likely 12-month earnings forecast assumed rates would remain relatively low or short-term rates would rise gradually. It described the balance sheet as slightly asset-sensitive, subject to model assumptions. The filing gives no numerical earnings or revenue guidance. Dividends were expected to continue subject to Board review; management expected capital to remain above regulatory standards.
- Key risks include interest-rate and liquidity changes, competition and uncertain loan/deposit demand, borrower and collateral deterioration, securities valuation changes, operational and cyber risks, regulatory changes, and natural disasters. Management said it was not aware of pending legal proceedings expected to have a material adverse effect.
- Unusual and accounting items: First-half other comprehensive income was $11.2 million, largely reflecting after-tax unrealized securities gains. Other-real-estate expense included gains on foreclosed-property sales. The company noted that the new CECL credit-loss standard would require adoption in 2020 and could accelerate credit-loss recognition; its impact was still under evaluation.
Important facts for investors to verify
- Whether loan contraction and the shift toward securities continue to pressure net interest income and margin.
- Whether nonperforming assets, charge-offs, and the allowance remain consistent with management’s credit-quality assessment, particularly for commercial real estate and purchased loans.
- How securities duration, unrealized gains or losses, and interest-rate sensitivity affect earnings, liquidity, and capital.
- Whether deposit trends, funding costs, and liquidity remain favorable; the $35 million unsecured credit line expired in March 2016 and was not renewed.
- Whether dividends and repurchases remain supportable as earnings, capital needs, and regulatory requirements evolve.