Westamerica Bancorporation — Q3 2014 Form 10-Q
Business context and reporting period. Westamerica Bancorporation is a California bank holding company serving customers primarily in Northern and Central California. This unaudited filing covers the quarter and nine months ended September 30, 2014; income and cash flow comparisons are against the same 2013 periods. Balance-sheet comparisons are primarily with December 31, 2013. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q3 earnings: Net income was $15.2 million, or $0.58 diluted EPS, versus $16.7 million and $0.63 a year earlier. For the first nine months, net income was $45.6 million, or $1.74 per diluted share, versus $51.1 million and $1.90.
- Revenue and net interest: Q3 net interest income on a fully taxable equivalent (FTE) basis, a non-GAAP measure, was $37.9 million versus $41.2 million; total noninterest income was $13.1 million versus $14.4 million. Nine-month FTE net interest income was $115.4 million versus $127.7 million, and noninterest income was $39.2 million versus $43.0 million. GAAP net interest income was $34.1 million for Q3 and $103.2 million year to date.
- Margins and efficiency: FTE net interest margin was 3.66% for Q3 and 3.75% for the first nine months, down from 4.01% and 4.13%, respectively. The efficiency ratio rose to 52.2% for Q3 and 52.0% year to date, from 49.9% and 49.6%. Return on assets was 1.21% for Q3 and 1.24% year to date; return on common equity was 11.55% and 11.59%.
- Expenses and credit costs: Q3 noninterest expense was $26.6 million, down from $27.8 million; nine-month expense was $80.4 million, down from $84.6 million. Loan-loss provision was $0.6 million for Q3 and $2.6 million year to date, versus $1.8 million and $6.4 million. Net loan losses were $1.2 million in Q3 versus $0.8 million; nine-month net losses were $2.5 million versus $4.7 million.
- Balance sheet and liquidity: At September 30, assets were $4,993.7 million, deposits $4,321.6 million, loans $1,732.4 million, and shareholders’ equity $533.4 million. Since year-end 2013, deposits increased $157.9 million while loans declined $95.4 million. Cash and due from banks totaled $524.3 million; investment securities totaled about $2.4 billion.
- Cash flow, nine months: Operating activities provided $58.3 million, investing activities used $105.1 million, and financing activities provided $99.2 million. Cash and due from banks increased $52.3 million to $524.3 million; in the 2013 period cash decreased $102.8 million.
- Debt and capital: Short-term repurchase borrowings were $76.9 million and FHLB advances were $20.2 million; the $10.0 million term repurchase agreement outstanding at year-end was repaid in August. The company had no balance on its $35 million unsecured credit line. Company total risk-based capital was 15.03%, Tier 1 capital 13.61%, and leverage 8.12%; the Bank’s corresponding ratios were 14.00%, 12.36%, and 7.33%.
- Shareholder returns: The company paid $0.38 per share in Q3 dividends and $1.14 per share year to date. It repurchased and retired 883,000 shares for $44.8 million during the first nine months.
Material changes and management commentary
- Management attributed lower earnings chiefly to reduced loan balances and lower yields on earning assets, which outweighed lower funding costs, reduced provision, and lower expenses. It cited low market rates and said competitive loan pricing did not offer adequate expected returns; it was not pursuing aggressive loan growth.
- Average loans fell $142 million in Q3 and $196 million year to date versus 2013. Investment securities increased to offset declining loan volumes. Lower yields on earning assets contributed to the margin decline despite lower funding costs.
- Noninterest income declined, particularly from merchant-processing fees and deposit service charges. Management also noted that 2013 included a loan principal recovery above its purchase-date fair value, making the comparison less favorable.
- Management reported improving credit quality: nonperforming assets were $26.0 million at September 30, 2014, versus $51.9 million a year earlier. The allowance for credit losses was $34.5 million, which management considered adequate. However, nonperforming assets increased from $11.3 million at December 31, 2013, including a rise in purchased non-covered problem assets.
- The FDIC loss-sharing protection on County Bank non-single-family residential loans expired February 6, 2014; affected loans were reclassified as purchased non-covered loans. Coverage for qualifying single-family residential assets continues through February 6, 2019.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management’s most likely 12-month forecast assumed relatively stable market rates and indicated that yields on new or refinanced loans and purchased securities would generally be below yields on older assets. Management described its near-term interest-rate posture as biased toward stable rates and ultimately rising rates; its modeled position ranged from neutral to slightly liability-sensitive.
- Management said it expected to maintain capital above the highest regulatory standard and expected to continue quarterly dividends, subject to Board discretion and ongoing evaluation. Revised bank capital rules generally begin applying January 1, 2015; the company and Bank reported capital above the fully phased-in requirements based on a pro forma assessment.
- Key exposures include persistent low rates and margin pressure, changes in interest rates and securities values, credit deterioration and collateral values, liquidity or deposit outflows, competition, regulation, operational and cybersecurity risks, and economic conditions in California. Management cautioned that credit quality and liquidity can worsen and that results may differ materially from forward-looking statements.
- Available-for-sale securities had $14.1 million of gross unrealized losses at September 30. Management attributed losses principally to market-rate movements, said substantially all securities remained investment grade, and did not consider them other-than-temporarily impaired because it did not intend, and expected it would not be required, to sell before recovery. Future impairment remains possible.
- Unfunded loan commitments were $314.9 million; standby letters of credit were $28.7 million. The company is subject to threatened or filed legal matters; management did not expect them to have a material adverse effect. No material subsequent event requiring disclosure was identified before filing.
Important facts for investors to verify
- Whether loan contraction and lower asset yields continue to pressure FTE net interest margin and earnings.
- Trends in purchased non-covered nonperforming loans, charge-offs, and the adequacy of the $34.5 million allowance, particularly after the FDIC coverage expiration.
- Performance and valuation sensitivity of the expanded securities portfolio, including unrealized losses and exposure to changing interest rates.
- Deposit stability, liquidity under stress, short-term repurchase funding, and the maturity of $20.0 million of FHLB advances in January 2015.
- Capital levels and dividend/share-repurchase capacity as revised regulatory capital standards take effect.