Business context and reporting period
Westamerica Bancorporation is a California bank holding company serving individuals and businesses, primarily small businesses, across Northern and Central California. This Form 10-K covers the fiscal year ended December 31, 2010; the filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars.
In August 2010, Westamerica Bank acquired substantially all assets and assumed substantially all liabilities of failed Sonoma Valley Bank from the FDIC. The filing also reflects the ongoing management of the 2009 County Bank acquisition, whose covered assets have FDIC loss-sharing protection.
Financial performance and condition
| Metric | 2010 | 2009 |
|---|---|---|
| Net income applicable to common equity | $94.6 million | $121.5 million |
| Diluted earnings per share | $3.21 | $4.14 |
| Net interest income, fully taxable equivalent | $226.7 million | $242.2 million |
| Net interest margin, fully taxable equivalent | 5.54% | 5.42% |
| Provision for loan losses | $11.2 million | $10.5 million |
| Net loan losses / average originated loans | 0.79% | 0.60% |
| Noninterest expense | $127.1 million | $140.8 million |
| Efficiency ratio | 44.1% | 39.7% |
For fourth-quarter 2010, net income was $23.7 million and diluted EPS was $0.81, compared with net income of $24.2 million and diluted EPS of $0.79 in fourth-quarter 2009.
At December 31, 2010, total assets were $4.93 billion, deposits $4.13 billion, shareholders’ equity $545.3 million and net loans $2.89 billion. Cash and due from banks totaled $338.8 million; investment securities totaled $1.25 billion. Year-end borrowings included $107.4 million in short-term funds, $61.7 million in FHLB advances and $26.4 million in debt financing and notes payable. The equity-to-assets ratio was 11.06%, up from 10.16%.
Operating activities provided $115.0 million of cash in 2010. Investing activities provided $298.5 million and financing activities used $435.8 million; cash and due from banks declined $22.3 million to $338.8 million. The company paid $42.1 million in common dividends and repurchased $28.7 million of stock.
Regulatory capital remained above “well capitalized” thresholds: the company reported a 15.50% total risk-based capital ratio and an 8.44% leverage ratio; the Bank reported 15.33% and 8.19%, respectively.
Material changes versus the prior comparable period
- Common-equity net income fell $26.9 million, or about 22%, and diluted EPS declined from $4.14 to $3.21. A major factor was the $48.8 million County Bank bargain-purchase gain recognized in 2009; 2010 included only a $178,000 Sonoma acquisition gain.
- Net interest income (FTE) declined 6.4%, chiefly as average interest-earning assets fell $378 million and investment yields decreased. Lower interest expense, higher loan yields and a slightly higher net interest margin partly offset the decline.
- Provision expense increased $700,000 and net loan losses rose to $16.6 million from $13.9 million. Management attributed the provision to credit losses and its assessment of losses in originated loans not covered by FDIC agreements.
- Noninterest expense declined 9.7%, mainly reflecting post-County integration savings, branch consolidations and lower FDIC assessments. The efficiency ratio nevertheless worsened, with lower revenue and the absence of the prior-year acquisition gain affecting comparison.
- Year-end deposits increased about 1.8%, while total assets declined about 0.9%. Originated loans declined to $2.03 billion from $2.20 billion; the portfolio also included $693 million of covered purchased loans and $200 million of purchased non-covered loans.
- Covered purchased assets performed better on reported problem-asset measures: nonperforming covered assets decreased to $69.3 million from $108.7 million. Sonoma purchased non-covered assets were riskier: nonperforming assets totaled $41.4 million, or 20.5% of that portfolio at year-end.
Outlook, risks and unusual items
Management described its interest-rate position as neutral and projected no meaningful change in earnings under the cited base scenario or a scenario with a 100-basis-point federal funds rate increase and a 60-basis-point increase in the 10-year Treasury yield. It expected to maintain cash levels during 2011 and projected $196 million of investment-security maturities and paydowns over the year. Management said liquidity was strong, with more than $700 million of customary overnight borrowing lines available and none outstanding at year-end. It expected quarterly dividends to continue, subject to the board’s review of earnings, capital and asset quality; this is not a guaranteed commitment.
Management cited subdued loan demand and a cautious commercial lending stance amid weak economic conditions. Principal risks include California’s economic and real-estate weakness, deterioration in collateral values and borrower credit, concentration in California (real estate was principal collateral for approximately 55% of loans), interest-rate and liquidity shifts, securities valuation changes, regulatory changes, and operational or information-security failures.
Purchased-loan fair values and the allowance for credit losses depend on management estimates. The filing warns that losses on County or Sonoma acquired assets could exceed acquisition-date estimates; County assets have FDIC loss-sharing protection, while Sonoma loans were not covered by that agreement. The filing reports no material pending legal proceeding and no troubled debt restructurings at year-end. The 2009 Treasury preferred stock was fully redeemed in 2009. The 2010 annual financial statements received an unqualified audit opinion, and the auditor also opined that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether subsequent credit performance supports the allowance, purchased-loan discounts and Sonoma fair-value estimates, particularly for non-covered acquired loans.
- Trends in net charge-offs, criticized and nonperforming loans, foreclosed assets, and California commercial-real-estate collateral values.
- Whether earnings can stabilize without a large acquisition gain, given lower average loan balances, pressure on fee income and the higher reported efficiency ratio.
- How FDIC loss-sharing recoveries, terms and reimbursement assumptions affect covered-asset results and liquidity.
- Whether management’s 2011 liquidity, interest-rate and dividend expectations remain consistent with actual deposit flows, loan demand, capital levels and regulatory requirements.