Westamerica Bancorporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Westamerica is a California-based banking company serving Northern and Central California. Financial statements are unaudited; amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2012 | Comparable period |
|---|---|---|
| Net interest income, GAAP | $46.7 million | $50.2 million in Q1 2011 |
| Net interest income, fully taxable equivalent (FTE) | $51.7 million | $55.0 million in Q1 2011 |
| Provision for loan losses | $2.8 million | $2.8 million in Q1 2011 |
| Noninterest income | $14.7 million | $14.7 million in Q1 2011 |
| Noninterest expense | $30.0 million | $31.3 million in Q1 2011 |
| Net income | $21.0 million | $22.4 million in Q1 2011; $21.8 million in Q4 2011 |
| Diluted earnings per share | $0.75 | $0.77 in Q1 2011 and Q4 2011 |
| Dividends per share | $0.37 | $0.36 in Q1 2011 |
Financial position, credit and liquidity
- At March 31, total assets were $5.06 billion, total deposits $4.25 billion, shareholders’ equity $559.5 million, and total loans net of allowance $2.39 billion. Deposits were essentially unchanged from year-end; net loans declined from $2.49 billion.
- Cash and due from banks totaled $541.1 million. Management estimated approximately $460 million was excess cash after branch cash and Federal Reserve reserve needs, equivalent to about 11% of deposits. The company also had more than $700 million in customary overnight borrowing lines, none outstanding.
- Borrowings included $106.7 million of short-term funds, $26.0 million of Federal Home Loan Bank advances, a $10.0 million term repurchase agreement and $15.0 million of debt financing. The senior note bears 5.31% interest and matures October 31, 2013.
- Q1 cash flows were $33.0 million provided by operations, $9.2 million provided by investing activities and $31.1 million used in financing activities; cash increased $11.1 million.
- FTE net interest margin was 5.12%, versus 5.35% in Q1 2011 and 5.24% in Q4 2011. Return on assets was 1.68%; return on common equity was 15.45%; efficiency ratio was 45.3%.
- Net loan losses were $3.5 million, down from $4.1 million in Q1 2011. The loan-loss allowance was $31.9 million; total allowance for credit losses, including off-balance-sheet exposure, was $34.6 million. Nonaccrual loans were $44.0 million, compared with $53.1 million at year-end; total past-due and accruing loans were $46.4 million.
- Company total risk-based capital was 16.09%, Tier 1 capital 14.83%, and leverage ratio 8.36%. Management stated capital exceeded regulatory “well-capitalized” standards.
Material changes and management commentary
- Year over year, net income decreased 6.2%. Management attributed the decline mainly to lower net interest income, reflecting lower average loan balances and investment yields; reduced noninterest expense and income-tax expense partly offset the decrease.
- Average loans fell about $402 million year over year, while average investments increased about $310 million. Lower market rates reduced earning-asset yields; lower deposit costs helped offset some of the pressure.
- Noninterest expense declined 4.1%, principally due to lower deposit insurance assessments and the absence of Sonoma Valley Bank integration costs incurred in Q1 2011. The Sonoma integration was completed in February 2011.
- Loan demand remained cautious amid economic uncertainty and competition. Management said it was not pursuing aggressive loan growth and expected higher-cost time deposits to gradually decline. No specific earnings or revenue guidance was provided.
- Management described liquidity as strong and said asset sales or additional long-term debt were not needed for ongoing liquidity needs. It projected $213 million of securities paydowns and maturities over the next 12 months. Management expected to maintain capital above well-capitalized levels and anticipated quarterly dividends, subject to board discretion and ongoing review.
- Interest-rate exposure was assessed as neutral to slightly asset-sensitive, depending on model assumptions. A modeled increase of 100 basis points in federal funds and 60 basis points in the 10-year Treasury yield was not expected to change earnings meaningfully over the following 12 months. The company does not use derivatives to manage interest-rate risk.
Risks, contingencies and unusual items
- Purchased covered loans represented about 20% of loans and are subject to FDIC loss-sharing agreements. The FDIC generally absorbs 80% of covered losses in the first tier and 95% above the specified loss threshold, subject to agreement terms and expiration dates. Management estimated a maximum after-tax first-tier exposure of about $12.5 million beyond recognized discounts, and a separate maximum after-tax second-tier exposure of $12 million only in an extreme no-future-cash-flow scenario; management considered triggering second-tier reimbursement remote.
- Covered assets are concentrated in California’s Central Valley, an area management described as having weak economic conditions and declining real estate values. Management cautioned that future provisions and increases in nonaccrual or delinquent loans remain possible.
- Unfunded loan commitments were $348.0 million, standby letters of credit $26.6 million, and commercial letters of credit $0.5 million. These amounts do not necessarily represent future funding requirements.
- The company reported various threatened or filed legal matters, including loan collection, deposit transaction posting and overdraft-fee, and employment-practice matters. Based on counsel’s advice, it did not expect a material adverse effect. The filing does not quantify a clear aggregate litigation exposure.
- Unrealized losses on securities were attributed to market conditions. The company said substantially all affected securities remained investment grade and it neither intended nor expected to be required to sell them before recovery; it therefore recorded no other-than-temporary impairment. Further declines could result in future impairment.
- The company repurchased 249,000 shares for approximately $11.7 million during the quarter. Its $0.37 per-share dividend and buybacks returned capital while net income declined.
Important facts for investors to verify
- Whether loan balances, delinquency and nonaccrual trends continue to improve, and whether allowance levels remain adequate as covered-loan protections expire.
- The sustainability of net interest income and margin given shrinking loan balances, low market rates and continued reliance on investment securities.
- Actual timing and amount of projected securities cash flows, available borrowing capacity, and the effect of pledged collateral on usable liquidity.
- Future results under FDIC loss-sharing agreements, including covered-asset credit performance, indemnification receivables and agreement deadlines.
- Whether dividends and share repurchases remain consistent with earnings, capital needs and regulatory restrictions.