Westamerica Bancorporation — Q3 2017 Form 10-Q
Business context and reporting period. Westamerica Bancorporation is a California bank holding company. This unaudited filing covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest and loan fee income, FTE | $35.7 million | $36.2 million | $107.5 million | $109.1 million |
| Noninterest income | $12.5 million | $11.6 million | $36.3 million | $35.0 million |
| Noninterest expense | $24.1 million | $26.1 million | $73.1 million | $77.2 million |
| Net income | $15.0 million | $15.6 million | $45.9 million | $44.4 million |
| Diluted earnings per share | $0.57 | $0.61 | $1.74 | $1.73 |
| Net interest margin, FTE | 3.10% | 3.21% | 3.12% | 3.27% |
- Third-quarter net income fell $0.6 million year over year, while nine-month net income increased $1.5 million. The nine-month improvement reflected higher noninterest income and lower expenses, partly offset by lower net interest income and a smaller loan-loss provision reversal.
- Q3 noninterest income rose mainly on merchant-processing and debit-card fees; service charges declined. Nine-month merchant-processing income increased $1.4 million, while deposit service charges fell $0.9 million.
- Loan-loss provision was zero in Q3 2017, compared with a $3.2 million reversal in Q3 2016. For the first nine months, the reversal was $1.9 million versus $3.2 million in 2016. Nine-month net loan losses were $0.4 million.
- At September 30, total assets were $5.45 billion, loans were $1.28 billion, investment securities were about $3.29 billion, deposits were $4.73 billion, and shareholders’ equity was $604.0 million. Since year-end 2016, loans declined about $67.9 million while deposits increased $29.8 million.
- Cash and due from banks were $561.8 million. Short-term borrowed funds were $66.3 million; the parent company reported no debt. The filing reports no other parent-company debt, but does not provide a single consolidated long-term-debt total.
- For the first nine months, operating cash flow was $65.1 million, investing cash flow was $9.4 million provided, and financing cash flow was $25.0 million provided. Cash increased $99.5 million to $561.8 million.
- Capital remained strong: company total risk-based capital was 16.71% and the bank’s was 13.78%; company and bank leverage ratios were 9.03% and 7.18%, respectively. The company’s equity-to-assets ratio was 11.09%.
Material changes and management commentary
- Net interest margin declined year over year as lower average loan balances and yields outweighed growth in investment balances. Management attributed pressure to low market rates and runoff of older, higher-yielding loans and municipal bonds. Lower funding costs provided some offset.
- Management said it was buying shorter-duration, lower-yielding securities in anticipation of rising rates and to support liquidity. Its most likely earnings forecast for the 12 months ending September 30, 2018 assumes rates rise gradually, with short-term rates increasing more than long-term rates. The balance sheet was described as neutral to slightly asset-sensitive, depending on model assumptions.
- Credit indicators improved: nonperforming assets declined to $7.6 million from $12.0 million at year-end 2016; classified loans fell $7.4 million to $39.8 million. The allowance for loan losses was $23.6 million, which management considered adequate. Management cautioned that credit conditions and classified or nonperforming assets can fluctuate.
- Expense reductions reflected lower professional fees, correspondent charges, limited-partnership losses and insurance costs; technology-related occupancy, equipment and data-processing expenses increased. The efficiency ratio improved to 50.0% for Q3 from 54.6% a year earlier.
- The company paid $30.7 million in dividends in the first nine months, or $1.17 per share, unchanged per share year over year. It repurchased no shares in Q3; a new authorization permits repurchases of up to 1.75 million shares through September 1, 2018.
Risks, contingencies and unusual items
- October 2017 California wildfires disrupted some branch and operations-center activity. Management’s initial review had identified no increased portfolio loss risk or casualty loss, but further developments could reveal losses not then apparent.
- The company expects it may owe refunds to some customers for revenue recognized in prior years. The amount was not yet quantifiable and no liability had been accrued.
- Routine legal matters were not expected to have a material adverse effect. Unfunded loan commitments were $307.3 million, standby letters of credit were $20.0 million, and a $2.3 million reserve for unfunded commitments was recorded.
- Available-for-sale securities had $23.7 million of gross unrealized losses and held-to-maturity securities had $8.0 million of gross unrecognized losses. Management attributed losses principally to interest-rate movements, said substantially all securities remained investment grade, and did not expect to be required to sell them before recovery.
- Management identified interest-rate, liquidity, credit, competitive, regulatory, operational/cybersecurity, economic and natural-disaster risks. The filing states that risk factors had not materially changed from the 2016 Form 10-K.
- Accounting developments include adoption of share-based-payment guidance in 2017, which reduced nine-month tax expense by $0.7 million versus prior rules. Management expected no material impact from the 2018 revenue-recognition standard; it was still evaluating other forthcoming standards, including CECL, which is scheduled for adoption in 2020.
Important facts for investors to verify
- Whether loan balances stabilize and whether the decline in net interest margin continues as rates and asset yields change.
- Whether credit quality and the $23.6 million allowance remain adequate, particularly given loan losses, classified loans and commercial real estate exposures.
- The eventual amount and timing of the customer refunds for prior-period revenue, which were not yet estimable or accrued.
- Any subsequent effects of California wildfires or other disasters on operations, borrowers, collateral and securities.
- Whether the company’s gradual-rate-increase assumption, liquidity position and capital projections remain consistent with actual conditions.