Business Context and Reporting Period
Westamerica Bancorporation is a California-focused bank holding company serving customers in Northern and Central California. This unaudited Form 10-Q covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013 unless otherwise noted. Amounts are in U.S. dollars; financial-statement amounts below are in millions unless stated.
Financial Performance and Position
- Earnings: Net income was $15.3 million, or $0.58 diluted EPS, versus $17.3 million and $0.64 in Q1 2013. Return on average assets was 1.27% and return on average equity 11.64%.
- Net interest: GAAP net interest income was $34.7 million, down from $39.2 million. Fully taxable-equivalent (FTE, a non-GAAP measure) net interest and fee income was $38.9 million versus $43.8 million. FTE net interest margin was 3.83%, down from 4.27%.
- Other income and costs: Noninterest income was $13.0 million, down from $14.3 million. Noninterest expense declined to $26.9 million from $28.7 million; the efficiency ratio increased to 51.8% from 49.3%.
- Credit costs: The provision for loan losses was $1.0 million versus $2.8 million. Net loan losses were $0.6 million, or 0.13% of average loans, compared with $2.7 million, or 0.52%. The allowance for loan losses was $32.1 million; total allowance for credit losses, including off-balance-sheet exposures, was $34.8 million.
- Balance sheet and liquidity: Total assets were $4.92 billion; loans were $1.82 billion and deposits $4.21 billion. Deposits increased $51.0 million during the quarter, while loans declined $11.4 million. Cash and due from banks was $428.8 million. Investment securities totaled approximately $2.35 billion, including $1.24 billion available for sale and $1.11 billion held to maturity.
- Cash flow: Operating activities provided $33.7 million; investing activities used $107.3 million and financing activities provided $30.4 million. Cash and due from banks decreased $43.2 million during the quarter.
- Debt and capital: Short-term borrowings were $64.4 million, FHLB advances $20.4 million and a term repurchase agreement $10.0 million; the $35 million unsecured credit line had no balance outstanding. Shareholders’ equity was $540.9 million. Company total risk-based capital was 15.19%; the Bank’s was 14.07%. Both exceeded the stated well-capitalized thresholds.
- Shareholder returns: The company paid $0.38 per share in dividends and repurchased 437,000 shares for $22.7 million during the quarter.
Material Changes Versus Comparable Periods
- Year-over-year net income declined $2.0 million. Lower net interest and fee income and noninterest income more than offset reduced credit provision, operating expense and taxes.
- Management attributed the $5.0 million year-over-year decrease in FTE net interest and fee income mainly to lower average loan balances and lower earning-asset yields. Average loans fell $256 million, and the average yield on earning assets declined to 3.92% from 4.39%.
- Year-over-year noninterest income decreased $1.3 million, including lower deposit service charges and merchant-processing fees. Noninterest expense fell $1.8 million, reflecting lower personnel, loan-administration, professional-fee and other real-estate-owned costs.
- Total nonperforming assets were $30.0 million, down from $35.0 million at December 31, 2013 and $52.9 million at March 31, 2013. The quarter-end mix shifted: purchased non-covered nonperforming assets rose to $18.9 million from $3.6 million at year-end, while purchased covered nonperforming assets fell to $0.7 million from $20.1 million.
- Total risk-based capital at the company declined from 16.18% at year-end to 15.19%, partly reflecting the February 2014 expiration of FDIC loss indemnification on certain non-single-family residential assets and the associated increase in risk-weighted assets.
Outlook, Commentary, Risks and Unusual Items
- Management cited persistently low market rates, declining yields on newly originated loans and securities, and runoff of older, higher-yielding assets as pressure on net interest income. It said its most likely earnings forecast for the twelve months ending March 31, 2015 assumes market rates remain relatively stable.
- The company has not pursued aggressive loan growth, citing competitive pricing and limited forward earnings potential. It has increased securities holdings as loans declined, while buying shorter-duration securities to reduce exposure to rising rates and reducing mortgage-related holdings to manage extension risk.
- Management said credit quality continued to improve and considered the allowance adequate, but cautioned that classified and nonperforming assets may fluctuate and that future credit deterioration or provisions cannot be ruled out. FDIC loss-sharing coverage remains for specified single-family residential assets through 2019; coverage for non-single-family residential losses expired February 6, 2014.
- Management reported adequate liquidity and capital based on its stress tests, but provided no assurance against future reductions. It expects dividends to continue subject to Board discretion and ongoing evaluation. New regulatory capital requirements generally begin taking effect in 2015; management reported pro forma capital above the cited fully phased-in standards.
- Interest-rate, liquidity, credit, securities-valuation, competition, operational and cyber risks are among the disclosed risks. The company does not currently use derivatives to manage interest-rate risk. Securities had unrealized losses, which management attributed mainly to interest-rate conditions; it said it neither intended nor expected to be required to sell them before recovery and did not consider them other-than-temporarily impaired.
- Unusual or notable items include a $350,000 net credit to other-real-estate-owned expense, reflecting gains on dispositions, and the FDIC indemnification expiration and loan reclassification. The filing states that pending or threatened legal matters were not expected to have a material adverse effect.
Most Important Facts for Investors to Verify
- Whether net interest margin and earning-asset yields stabilize, given continued loan runoff and management’s rate assumptions.
- Whether the increase in purchased non-covered nonperforming assets persists, and how credit performance changes after the FDIC coverage expiration.
- The sensitivity of the securities portfolio, including unrealized losses and mortgage extension risk, to changing rates and market conditions.
- Whether capital, liquidity and earnings support planned dividends and share repurchases under new regulatory requirements and potential stress.
- The sustainability of lower noninterest income and expense, including the impact of transaction activity and nonrecurring OREO disposition gains.