Westamerica Bancorporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unaudited consolidated results. Balance-sheet comparisons are to December 31, 2009 unless otherwise noted. Dollar amounts below are in millions except per-share data and ratios.
Business context
Westamerica is a California banking company. On August 20, 2010, its bank acquired substantially all assets and assumed substantially all liabilities of failed Sonoma Valley Bank from the FDIC, adding three Sonoma County branches. The acquisition contributed $0.178 million of bargain-purchase gain; acquired loans were recorded at estimated fair value and were not FDIC loss-share covered.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income, FTE | $56.7 | $61.6 | $170.3 | $183.3 |
| Net income | $23.7 | $25.3 | $70.8 | $101.3 |
| Net income applicable to common equity | $23.7 | $23.8 | $70.8 | $98.1 |
| Diluted EPS | $0.81 | $0.81 | $2.40 | $3.35 |
| Provision for loan losses | $2.8 | $2.8 | $8.4 | $7.2 |
| Noninterest income | $15.1 | $16.0 | $46.3 | $96.3 |
| Noninterest expense | $31.5 | $35.2 | $95.6 | $107.9 |
- Q3 net interest margin (FTE) was 5.54%, versus 5.48%; nine-month margin was 5.59%, versus 5.39%. Q3 efficiency ratio was 43.9%, versus 45.3%; the nine-month ratio rose to 44.2% from 38.6%.
- At September 30, total assets were $4,977.9; loans, net of allowance, were $2,970.7; deposits were $4,072.7; and shareholders’ equity was $541.2. Cash and due from banks totaled $344.2.
- Borrowings included $193.2 of short-term funds, $66.9 of FHLB advances, and $26.4 of debt financing and notes payable. Total liabilities were $4,436.7.
- Nine-month operating cash flow was $90.0, investing cash flow was $285.8, and financing cash flow was negative $392.8; cash declined $17.0 to $344.2.
- Company capital ratios were 13.59% Tier 1, 14.88% total capital, and 8.52% leverage. All exceeded regulatory “well-capitalized” thresholds. The Bank’s respective ratios were 13.49%, 14.95%, and 8.42%.
- Common dividends paid were $0.36 per share in Q3 and $1.08 for the first nine months. The company repurchased and retired 404,000 shares for $22.2 during the nine months.
Material changes versus comparable periods
- Q3 common-equity earnings were nearly flat year over year, while nine-month common-equity earnings fell $27.3. The 2009 nine-month comparison included a $48.8 acquisition gain from County Bank, which increased 2009 net income by $28.3 and diluted EPS by $0.97.
- Q3 FTE net interest income fell 8.0%, mainly from a $402 decrease in average earning assets and lower investment yields; lower deposit costs partly offset the decline. For nine months, FTE net interest income fell 7.1% as average earning assets declined $471.
- Q3 noninterest expense declined 10.4%, reflecting lower personnel, occupancy, equipment, and other costs. Nine-month expense declined 11.4%, largely after County Bank integration, branch consolidations, and lower FDIC assessments.
- Deposit service charges fell in Q3, including a $0.680 reduction in overdraft fees following new regulations. Nine-month noninterest income was sharply lower primarily because the prior-year County Bank gain did not recur.
- Originated loans were $2,077.9, down from $2,201.1 at year-end 2009; the Sonoma acquisition added $212.3 of purchased non-covered loans. Total deposits increased modestly from year-end, to $4,072.7 from $4,060.2.
- Nine-month net charge-offs rose to $11.3 from $9.0; the allowance for loan losses was $38.1, or 1.83% of originated loans, versus $41.0 and 1.88% at year-end.
Outlook, risks, contingencies, and unusual items
- Management expected weak demand from creditworthy borrowers through 2010 and early 2011, subject to economic and competitive conditions. It anticipated maintaining cash levels and expected quarterly dividends to continue, subject to Board discretion and capital, earnings, and asset quality.
- Management described liquidity as strong. It projected $68.5 of investment-security paydowns and maturities in Q4 2010, reported more than $700 of overnight borrowing lines with none drawn, and had access to Federal Reserve borrowing. Management considered additional long-term financing or asset liquidation unnecessary for ongoing needs.
- Management characterized interest-rate exposure as neutral to slightly asset-sensitive. Modeling estimated no meaningful earnings change under either unchanged rates or a scenario with the federal funds rate up 100 basis points and the 10-year Treasury yield up 60 basis points over the following 12 months. The company did not use derivatives to manage interest-rate risk.
- County Bank covered assets remain subject to FDIC loss-sharing agreements. Covered assets were $744 net of a $66 credit-risk discount; covered nonperforming assets were $81.5, or 10.96% of covered assets. Management considered the discount adequate, but cited potential exposure if losses exceed estimates. Sonoma loans have no FDIC loss-share protection.
- Nonperforming originated assets increased to $39.4 from $33.3 at year-end, or 1.88% of originated assets. Management considered originated portfolio quality reasonably stable but cautioned that delinquencies and nonaccrual loans could rise.
- Unrealized losses on investment securities were not considered other-than-temporary; management said it did not intend, and was not more likely than not required, to sell before recovery. Future impairment remains possible if the economy, ratings, or market liquidity deteriorate.
- Unfunded loan commitments were $409.8; standby letters of credit were $25.5 and commercial letters of credit $3.3. Management did not expect pending or threatened legal matters to have a material adverse effect.
- The filing identifies potential effects of the Dodd-Frank Act, including deposit-insurance assessments and pressure on debit interchange revenue. Management noted uncertainty about the ultimate impact. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How Sonoma’s acquired loans perform, and whether preliminary acquisition-date fair values and the $5.3 core-deposit intangible require material refinement.
- Whether credit losses, delinquencies, and foreclosed assets continue to rise, particularly for originated loans and Sonoma’s non-covered portfolio; assess the adequacy of reserves and purchase discounts.
- Whether loan and deposit trends, deposit-service-fee changes, and investment yields sustain net interest income and earnings.
- Whether FDIC loss-sharing reimbursements, covered-asset losses, and the timing and limits of those agreements match management’s assumptions.
- Whether liquidity, capital ratios, dividend plans, and share repurchases remain consistent with management’s outlook and regulatory requirements.
- How securities valuations, market liquidity, regulatory changes, and weak regional economic conditions affect earnings, capital, and credit quality.