Westamerica Bancorporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are primarily with 2012. The filing also reports fourth-quarter results. Westamerica provides banking services to individuals and businesses, with a small-business focus, through 92 branches in Northern and Central California.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets at year-end | $4.847 billion | $4.952 billion |
| Net interest income (GAAP) | $149.7 million | $177.6 million |
| Net interest and loan fee income (FTE, non-GAAP) | $167.7 million | $197.0 million |
| Net interest margin (FTE) | 4.08% | 4.79% |
| Net income | $67.2 million | $81.1 million |
| Diluted earnings per share | $2.50 | $2.93 |
| Operating cash flow | $85.3 million | $119.5 million |
| Deposits at year-end | $4.164 billion | $4.232 billion |
| Shareholders’ equity at year-end | $542.9 million | $560.1 million |
- Revenue and earnings: GAAP interest and loan fee income was $154.4 million; noninterest income was $57.0 million. Income before taxes was $86.1 million. Net income declined 17.2% year over year. Return on average assets was 1.38% and return on common equity was 12.48%.
- Costs and credit: Provision for loan losses fell to $8.0 million from $11.2 million. Net loan losses were $6.5 million, down from $13.6 million; the year-end allowance for credit losses was $34.4 million. Nonperforming assets declined to $35.0 million from $59.3 million.
- Loan and securities mix: Net loans were $1.796 billion, down from $2.081 billion; originated loans fell to $1.523 billion from $1.664 billion. Investment securities totaled $2.212 billion, up from $1.982 billion, as management shifted assets toward securities while loan balances contracted.
- Liquidity and debt: Cash and due from banks was $472.0 million. Deposits remained the primary funding source; lower-cost checking and savings deposits were 86.3% of average deposits. Year-end borrowings included $62.7 million of short-term funds, $20.6 million of FHLB advances and a $10.0 million term repurchase agreement. The $15.0 million parent-company note was repaid in October 2013. Management said stress tests supported its liquidity position; $778.6 million of securities were pledged as collateral.
- Capital and shareholder returns: The Company’s total risk-based capital ratio was 16.18%, and the Bank’s was 14.93%; both exceeded applicable “well-capitalized” thresholds. The Company paid $40.1 million in dividends and repurchased $57.3 million of stock during 2013. Dividend payout ratio rose to 60% from 51%.
- Cash flows: Investing activities provided $50.9 million, while financing activities used $155.6 million, including share repurchases, dividends and net deposit outflows. Cash declined $19.4 million during the year. These bank cash-flow movements reflect lending, securities and deposit activity and should be read in that context.
- Fourth quarter: Net income was $16.1 million and diluted EPS was $0.60, versus $19.1 million and $0.70 in fourth-quarter 2012. Net interest income was $35.7 million, down from $41.6 million.
Material changes and management commentary
- FTE net interest and loan fee income fell 14.9%, driven by a $360 million lower average loan balance and a 74-basis-point decline in earning-asset yields. Average investment balances increased $355 million, partly offsetting the decline.
- The average yield on earning assets declined to 4.19% from 4.93%; the FTE net interest margin compressed to 4.08% from 4.79%. Management attributed the pressure to low market rates and its deliberate shift toward lower-yielding securities amid loan pricing it considered insufficient to support attractive forward returns.
- Noninterest income was essentially unchanged. Lower deposit service charges and some processing fees were offset by higher debit-card fees, trust fees, commissions and other income. Noninterest expense declined 3.7% to $112.6 million, reflecting lower personnel and other operating costs.
- Management’s most likely 2014 earnings forecast assumed relatively stable market rates, with yields on new or refinanced loans and securities below those on older assets. This is an assumption, not formal earnings guidance. Management anticipated time deposits would decline and said deposit growth, loan demand and shareholder dividends remained dependent on market conditions and other factors.
- The Federal Reserve began reducing its asset-purchase activity in late 2013. Management described the Company as slightly to modestly liability-sensitive, making results vulnerable to interest-rate changes. The Company did not use derivatives to manage interest-rate risk.
Risks, contingencies and unusual items
- FDIC loss-sharing transition: County Bank purchased covered loans were $250.7 million at year-end. Loss-sharing on non-residential covered assets expired as to losses on February 6, 2014; residential coverage continues to February 6, 2019. The filing warns that losses may become more consequential as indemnification expires. Management reported $146 million of aggregate indemnified losses since the 2009 acquisition.
- Geographic and credit concentration: Business is concentrated in California; real estate was principal collateral for about 58% of loans, and about 27% of loans were to Central Valley borrowers. California economic conditions, drought, property values and natural disasters could affect borrowers and collateral. Management cautioned that credit quality could worsen despite improved nonperforming assets.
- Market and securities exposure: Rising rates reduced the value of securities and produced a $10.3 million after-tax other comprehensive loss in 2013. Held-to-maturity securities had fair value $19.6 million below amortized cost; management did not consider the declines other-than-temporary and said it did not expect to sell before recovery. Further rate increases, credit deterioration or reduced market liquidity could lead to losses.
- Other matters: The Company reported no material pending legal proceedings and no unresolved SEC staff comments. It disclosed unfunded loan commitments of $320.9 million and standby letters of credit of $31.8 million. The 2013 tax provision included California hiring credits and tax-exempt life-insurance proceeds; California enterprise-zone tax benefits were changing from 2014, with management not expecting a significant overall tax-provision change.
- Controls and audit: Management and KPMG concluded internal control over financial reporting was effective at year-end; KPMG issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether margin and net interest income stabilize, given the ongoing decline in loan balances and earning-asset yields.
- Credit performance and remaining purchase discounts on acquired loans, particularly after the February 2014 expiration of most non-residential FDIC loss coverage.
- Changes in California and Central Valley economic conditions, real-estate collateral values and drought-related borrower risk.
- Investment portfolio sensitivity to rates and credit conditions, including unrealized losses and securities classified as held to maturity.
- Deposit trends, the cost and availability of funding, and capital after dividends and share repurchases; dividend continuation is at the Board’s discretion and subject to regulatory limits.
- Actual 2014 results versus management’s stable-rate assumption; the filing provides no specific numerical earnings or revenue guidance.