Westamerica Bancorporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with fiscal 2010. Quarterly figures are unaudited. Westamerica provides banking services to individuals and businesses in Northern and Central California, with a strategic focus on small businesses.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets, year-end | $5.04 billion | $4.93 billion |
| Deposits, year-end | $4.25 billion | $4.13 billion |
| Net interest income | $199.6 million | $208.3 million |
| Net interest income, fully taxable equivalent (FTE) | $218.9 million | $226.7 million |
| Net interest margin, FTE | 5.32% | 5.54% |
| Noninterest income | $60.1 million | $61.5 million |
| Provision for loan losses | $11.2 million | $11.2 million |
| Noninterest expense | $127.7 million | $127.1 million |
| Net income | $87.9 million | $94.6 million |
| Diluted EPS | $3.06 | $3.21 |
| Return on average assets / common equity | 1.78% / 16.14% | 1.95% / 18.11% |
Operating activities provided $120.4 million of cash in 2011. Cash and due from banks rose to $530.0 million at year-end. The company paid $41.7 million in common dividends and repurchased $60.5 million of stock. Year-end shareholders’ equity was $558.6 million.
Material changes and drivers
- Net income applicable to common equity fell $6.7 million, or 7.1%. Lower loan balances and asset yields reduced interest income; growth in investments and lower funding costs partly offset that decline.
- Average yield on earning assets declined to 5.52% from 5.85%; rates paid on interest-bearing liabilities fell to 0.29% from 0.45%. Average loans fell $217 million, while average investments rose $236 million.
- Noninterest income declined 2.2%, mainly as deposit service charges fell by $4.0 million. Management cited lower overdraft-related fees, including the effects of regulatory restrictions.
- Noninterest expense edged up $0.5 million. A $2.1 million litigation-settlement accrual and higher other-real-estate-owned and professional expenses were partly offset by lower salaries and deposit-insurance assessments.
- Total loans, net of the allowance, declined to $2.49 billion from $2.89 billion. Originated loans fell to $1.86 billion; deposits increased $117 million year over year.
- The allowance for credit losses ended at $35.3 million, down from $38.3 million. Net charge-offs were $14.2 million, versus $16.6 million in 2010. Nonaccrual loans declined to $53.1 million from $107.2 million.
Capital, debt and liquidity
Westamerica and the Bank met regulatory capital requirements and were categorized as well capitalized. At year-end, the consolidated company’s total risk-based capital ratio was 15.83%, Tier 1 ratio 14.54%, and leverage ratio 8.38%; the Bank’s corresponding ratios were 15.32%, 13.84%, and 7.93%.
Year-end borrowings included $115.7 million of short-term borrowed funds, $26.0 million of Federal Home Loan Bank advances, a $10.0 million term repurchase agreement, and $15.0 million of debt financing and notes payable. The company redeemed a $10 million subordinated note in August 2011. Management characterized liquidity as strong, citing approximately $450 million of excess cash after branch and Federal Reserve needs, more than $700 million in overnight borrowing lines with none outstanding, and projected $209 million of security maturities and paydowns during 2012. Approximately $904 million of securities were pledged as collateral.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said loan demand would depend on economic and competitive conditions, expected higher-cost time deposits to gradually decline, and planned to monitor cash levels. It expected to maintain well-capitalized status and continue quarterly dividends, subject to Board discretion and conditions.
- Management described the interest-rate position as neutral to slightly asset-sensitive. Its model estimated no meaningful earnings change under a specified scenario of a 100-basis-point increase in the federal funds rate and a 60-basis-point increase in the 10-year Treasury yield. The company does not use derivatives to manage interest-rate risk.
- Credit risk remains material: California economic weakness and real-estate collateral values affect borrowers, and real estate was principal collateral for approximately 56% of loans. Purchased FDIC-covered loans were $535 million, about 21% of the loan portfolio. The FDIC generally absorbs 80% of covered losses up to the stated threshold and 95% above it, subject to agreement terms and expiration dates.
- Management identified uncertainty in purchased-loan cash-flow estimates, the allowance for credit losses, securities valuations, interest rates, deposit competition, regulation, and operational and information-security controls as risks. It warned actual 2012 conditions could be worse than assumptions.
- Other notable items: the $2.1 million settlement accrual reduced 2011 net income by $1.2 million; Sonoma integration costs were $679,000 before tax. The 2010 results included a $178,000 acquisition gain. Management reported no material pending legal proceeding expected to materially affect results, and KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether loan contraction and lower asset yields continue to pressure net interest income and margin.
- Credit trends in California, especially commercial real estate, purchased loans, foreclosed property, and the adequacy of the allowance.
- FDIC loss-sharing coverage, remaining covered balances, reimbursement estimates, and agreement expiration dates.
- Liquidity and deposit mix, collateral requirements, and the company’s ability to maintain capital while funding dividends and repurchases.
- The nature and resolution of the litigation settlement accrual and the assumptions behind loan, securities, and other real-estate valuations.