Westamerica Bancorporation — 2015 Form 10-K
Business context and reporting period. This is the annual report for the year ended December 31, 2015, not a standalone fourth-quarter filing. Westamerica is a California bank holding company focused on small-business banking, operating through Westamerica Bank across Northern and Central California.
Financial performance and condition
- Earnings: Net income was $58.8 million, or $2.30 diluted per share, versus $60.6 million and $2.32 in 2014 (down 3.1%). Return on assets was 1.16% and return on equity 11.32%, both lower than in 2014.
- Revenue and margin: Reported net interest income was $134.1 million and noninterest income was $47.9 million. Fully taxable equivalent (FTE) net interest income was $148.3 million, down 2.9%; FTE net interest margin declined to 3.36% from 3.70%. The efficiency ratio increased to 53.69% from 52.24%.
- Other income and costs: Noninterest income declined 7.6% to $47.9 million, mainly from lower deposit service charges and merchant processing fees. Noninterest expense fell 1.4% to $105.3 million, helped by lower personnel costs.
- Credit: The provision for loan losses was zero, compared with $2.8 million in 2014. Net charge-offs declined to $1.7 million from $3.0 million. Total loans fell to $1.53 billion from $1.70 billion. Nonperforming loans were about $15.3 million, down from $18.1 million; total nonperforming assets were $24.6 million, nearly unchanged year over year. The allowance was $29.8 million.
- Cash flow: Operating cash flow was $70.4 million, investing cash outflow $102.3 million, and financing cash inflow $84.1 million. Cash and due from banks increased to $433.0 million from $380.8 million.
- Balance sheet and liquidity: Assets were $5.17 billion, deposits $4.54 billion, and shareholders’ equity $532.2 million. Investment securities totaled $2.89 billion and loans $1.53 billion. Management reported that deposits and equity funded 97% of average assets. A $35 million unsecured credit line was undrawn at year-end.
- Debt and capital: Year-end short-term borrowings were $53.0 million; there were no FHLB advances, term repurchase agreement, or debt financing outstanding. Company and Bank total risk-based capital ratios were 13.39% and 11.68%, respectively; both exceeded applicable regulatory requirements.
- Shareholder returns: Dividends paid were $1.53 per share. The company repurchased and retired 344,000 shares for $15 million during 2015, versus $53 million of repurchases in 2014.
Changes versus prior periods
- Profit and FTE net interest income continued to decline, reflecting lower average loan balances and lower earning-asset yields. FTE margin fell 34 basis points.
- Loans declined about 9.8%, while securities increased to $2.89 billion from $2.64 billion and deposits grew to $4.54 billion from $4.35 billion.
- Credit costs improved substantially: the loan-loss provision fell to zero and net charge-offs decreased. However, total nonperforming assets edged up to $24.6 million from $24.5 million, including higher OREO.
- Fourth-quarter 2015 net income was $14.6 million, or $0.57 diluted per share, versus $15.0 million, or $0.58, in fourth-quarter 2014.
Outlook, commentary and risks
- Management’s most likely 2016 earnings forecast assumed market rates would remain relatively low or short-term rates would rise gradually. Management cited substantial near-term interest-rate uncertainty; this was an assumption, not formal earnings guidance.
- Management said competitive loan pricing did not offer adequate forward earnings potential and therefore it was not pursuing aggressive loan growth. It expected higher-cost time deposits to decline and anticipated continued quarterly dividends, subject to Board discretion and capital, earnings, asset quality and regulatory limits.
- Key risks include California economic and real-estate concentration, drought exposure in the agricultural sector, borrower and collateral credit quality, interest-rate and securities valuation changes, deposit competition, regulatory change, and operational, vendor and cyber-security risks. Real estate was the principal collateral for about 53% of loans; roughly 25% of loans were to Central Valley borrowers.
- County Bank single-family residential acquired loans remained covered by FDIC loss-sharing through February 6, 2019. The non-single-family loss-sharing coverage for losses had expired in 2014, though recovery coverage continued through February 6, 2017.
- The filing reported no material pending litigation expected to adversely affect the company. The independent auditor gave an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether net interest margin and earnings stabilize as rates change and the loan portfolio continues to contract.
- Whether the zero loan-loss provision remains supportable, given nonperforming assets, OREO and the allowance estimate.
- The credit quality and valuation sensitivity of the enlarged securities portfolio, including unrealized losses and securities pledged as collateral.
- Deposit growth, mix and cost, plus the bank’s capacity to upstream dividends under regulatory restrictions.
- The assumptions behind management’s 2016 rate outlook and the effects of California economic, agricultural and natural-disaster risks.