Westamerica Bancorporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income, FTE | $41.2 | $48.7 | $127.7 | $150.7 |
| Noninterest income | $14.4 | $14.6 | $43.0 | $42.8 |
| Noninterest expense | $27.8 | $29.3 | $84.6 | $88.7 |
| Net income | $16.7 | $20.0 | $51.1 | $62.0 |
| Diluted EPS | $0.63 | $0.73 | $1.90 | $2.23 |
| Net interest margin, FTE | 4.01% | 4.67% | 4.13% | 4.89% |
| Efficiency ratio | 49.9% | 46.2% | 49.6% | 45.8% |
FTE (fully taxable equivalent) is a non-GAAP measure. GAAP net interest income was $36.8 million in Q3 2013 and $114.0 million for the first nine months.
- Lower net interest income was the principal earnings headwind: Q3 FTE net interest income declined $7.5 million year over year, and the nine-month amount declined $23.1 million. Management attributed the decreases mainly to lower loan balances and earning-asset yields; reduced funding costs only partly offset the pressure.
- Q3 net income fell $3.3 million year over year; nine-month net income fell $10.9 million. Lower loan-loss provision and operating expenses partly offset weaker interest income.
- Q3 provision for loan losses was $1.8 million versus $2.8 million; nine-month provision was $6.4 million versus $8.4 million. Nine-month net loan losses decreased to $4.7 million from $10.0 million.
Balance sheet, liquidity and capital
- At September 30, total assets were $4.81 billion, down from $4.95 billion at year-end 2012. Total loans before the allowance were $1.88 billion, down from $2.11 billion; net loans were $1.85 billion versus $2.08 billion.
- Total deposits were $4.11 billion, down from $4.23 billion. Noninterest-bearing deposits rose to $1.69 billion from $1.68 billion, while interest-bearing deposits declined. Cash and due from banks was $388.6 million, down from $491.4 million.
- Investment securities totaled approximately $2.20 billion, up $219.8 million from year-end. Available-for-sale securities increased to $1.06 billion; held-to-maturity securities were $1.14 billion.
- Nine-month operating cash flow was $77.1 million, versus $89.7 million in 2012. Investing activities provided $10.6 million, while financing activities used $190.5 million, including deposit outflows, $39.8 million of share repurchases and $29.9 million of dividends. Cash declined $102.8 million during the period.
- Total risk-based capital was 15.99% for the Company and 14.97% for the Bank; both exceeded the filing’s stated well-capitalized thresholds. The Company’s tangible equity-to-tangible-assets ratio was 8.58%. The quarterly dividend was $0.37 per share, unchanged year over year.
- The Company’s $15 million debt note matured October 31, 2013; management said it intended to retire the note with cash. The Company reported compliance with its covenants at September 30. It also had an unused $35 million line of credit.
Material changes, outlook and risks
- Management said loan balances declined because of problem-loan workouts, especially purchased loans, and reduced originations. It was not pursuing aggressive loan growth, citing inadequate prospective returns from competitive loan pricing, and increased securities investments as loans contracted.
- Average earning-asset yield fell to 4.12% in Q3 from 4.80%; the average rate paid on interest-bearing liabilities declined to 0.18% from 0.21%. Management described the balance sheet as slightly to modestly liability-sensitive, depending on model assumptions.
- Management’s most likely earnings forecast for the 12 months ending September 30, 2014 assumed relatively stable market rates; new or refinanced loans and securities were expected to yield less than older assets. This is an assumption, not specific earnings guidance. Management expected to maintain capital above regulatory standards and stated an expectation of quarterly dividends, subject to change.
- Interest-rate increases during 2013 contributed to securities valuation declines. Available-for-sale securities had $14.4 million of gross unrealized losses at September 30, compared with $1.6 million at year-end; held-to-maturity securities had $21.4 million of gross unrealized losses versus $1.8 million. Management did not consider the securities other-than-temporarily impaired and said it did not expect to need to sell them before recovery, but future impairment remained possible.
- FDIC loss-sharing protection for covered non-residential assets expires February 6, 2014 as to losses. Covered loans represented 16% of the loan portfolio at September 30. Management warned that credit exposure after coverage expires will depend on borrower performance, collateral, remaining purchase discounts and the allowance. Covered non-residential assets were concentrated in a California region described as having weak economic conditions.
- Nonperforming originated assets declined from year-end, while nonaccrual purchased covered loans increased. Management considered overall loan quality reasonably stable but cautioned that classified and nonperforming assets could fluctuate and further deterioration could occur.
- Unusual comparability items: the first nine months of 2012 included a $1.3 million securities-sale loss and a $968,000 tax refund. California enterprise-zone tax incentives were also changing; management did not expect a significant change in the tax provision, but was evaluating the impact.
- The Company disclosed various threatened or filed legal matters and did not expect them to have a material adverse effect, based on advice of counsel. It reported no material change in its previously disclosed risk factors.
Important facts for investors to verify
- Whether loan runoff, lower asset yields and the compressed net interest margin persist, and how that affects earnings and efficiency.
- Credit trends in covered and originated loans, allowance adequacy, and the effect of the February 2014 expiration of non-residential FDIC loss protection.
- Interest-rate sensitivity and potential effects of unrealized securities losses, including whether any losses become other-than-temporary.
- Completion and funding of the $15 million note repayment, liquidity after cash outflows and buybacks, and continued capital capacity for dividends and repurchases.