Westamerica Bancorporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparative results are for 2013 and 2012. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Westamerica is a California bank holding company serving Northern and Central California through Westamerica Bank, with a focus on small-business banking.
Key financial results and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income (GAAP) | $136.8 | $149.7 | Down 8.7% |
| Net interest income, fully taxable equivalent (FTE) | $152.7 | $167.7 | Down 9.0% |
| Net interest margin (FTE) | 3.70% | 4.08% | Down 38 bps |
| Noninterest income | $51.8 | $57.0 | Down 9.2% |
| Noninterest expense | $106.8 | $112.6 | Down 5.2% |
| Provision for loan losses | $2.8 | $8.0 | Down 65% |
| Net income | $60.6 | $67.2 | Down 9.7% |
| Diluted earnings per share | $2.32 | $2.50 | Down 7.2% |
| Return on average assets / common equity | 1.22% / 11.57% | 1.38% / 12.48% | Both lower |
| Efficiency ratio | 52.24% | 50.11% | Higher (less favorable) |
| Net loan losses / average loans | 0.17% | 0.33% | Improved |
At year-end, total assets were $5.04 billion, deposits $4.35 billion, loans $1.70 billion, investment securities $2.64 billion, and shareholders’ equity $526.6 million. Cash and due from banks was $380.8 million. Total period-end borrowings were about $109.8 million: $89.8 million of short-term repurchase-agreement funding and $20.0 million of FHLB advances. The $10 million term repurchase agreement was repaid in August 2014; debt financing was zero at year-end.
Operating cash flow was $82.3 million, compared with $85.3 million in 2013. Investing activities used $295.3 million, largely reflecting securities purchases; financing activities provided $121.8 million, including deposit growth. Cash and due from banks declined $91.2 million to $380.8 million. The filing describes liquidity as adequate; deposits and equity funded 97% of average assets in 2014 and 2013. Securities of approximately $757.6 million were pledged as collateral.
Material changes versus the prior period
- Net income fell $6.5 million, primarily as lower loan balances and yields reduced interest income; lower noninterest income also contributed. Lower loan-loss provision, expenses, and taxes partly offset the decline.
- Average loans fell $182 million and year-end loans declined 7.0%, while the investment securities portfolio increased $427.8 million, or 19.3%, to $2.64 billion. Management said loan contraction reflected workouts and subdued originations, and that competitive loan pricing did not offer adequate prospective returns.
- Credit indicators improved overall: nonperforming assets declined about 30% to $24.5 million, net loan losses fell to $3.0 million from $6.5 million, and the allowance for loan losses was $31.5 million. Total allowance for credit losses, including off-balance-sheet exposures, was $34.2 million.
- Deposits rose $185.4 million. Noninterest-bearing demand deposits increased to $1.91 billion, and lower-cost checking and savings made up about 90% of average deposits. Total time deposits declined to $385.1 million.
- Year-end equity declined to $526.6 million from $542.9 million. The company paid $39.8 million in dividends and repurchased and retired $52.7 million of shares during 2014.
Outlook, management commentary, risks, and contingencies
- Management’s most likely 2015 earnings forecast assumed relatively stable market rates and that new or refinanced loans and purchased securities would yield less than older assets. Management described the balance sheet as slightly asset-sensitive, while emphasizing that results depend on interest-rate assumptions and actual balance-sheet mix. No numerical earnings guidance was provided.
- Management has been favoring shorter-duration and floating-rate securities to manage exposure to rising rates and extension risk. It expects to monitor liquidity, loan demand, deposits, and capital through 2015; quarterly dividends were expected to continue, subject to board discretion and regulatory constraints.
- Key exposures include persistent low rates and margin compression, competition for loans and deposits, credit losses, securities valuation changes, and California-specific economic conditions. Real estate was the principal collateral for about 52% of loans; about 27% of loans were to Central Valley borrowers. Drought and natural disasters, including earthquakes and fires, are also identified risks.
- FDIC loss-sharing protection for County Bank non-single-family residential loans expired for losses on February 6, 2014; single-family residential coverage continues through February 6, 2019. The change increased risk-weighted assets and reduced reported capital ratios. The company stated it remained above regulatory capital requirements, including under its assessment of the fully phased-in revised capital rules.
- Unfunded loan commitments were $312.7 million and standby letters of credit were $29.0 million at year-end. Management reported no material pending legal proceeding expected to adversely affect the company. The 2014 statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether net interest margin and earnings stabilize as loan balances continue to contract and low-yield assets remain significant.
- Whether improving nonperforming assets and net charge-offs persist, and whether the $34.2 million total credit-loss allowance remains adequate as FDIC coverage winds down.
- The duration, rate sensitivity, unrealized losses, and liquidity of the $2.64 billion securities portfolio, including the effect of rising rates and securities pledged as collateral.
- The sustainability and cost of deposit growth, the high share of low-cost deposits, and dependence on overnight repurchase funding.
- Capital headroom under revised regulatory rules and the capacity to sustain dividends and share repurchases; the 2014 common dividend payout ratio was 66%.
- Potential effects of California economic conditions, Central Valley and real-estate concentrations, drought or other disasters, and operational or cybersecurity disruptions.