Westamerica Bancorporation — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; quarterly information includes the fourth quarter. Westamerica is a California bank holding company serving individuals and businesses, with a strategic focus on small businesses in Northern and Central California.
Financial results and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Interest and fee income | $183.4 million | $208.0 million |
| Net interest income | $177.6 million | $199.6 million |
| Net interest margin (FTE) | 4.79% | 5.32% |
| Noninterest income | $57.0 million | $60.1 million |
| Noninterest expense | $116.9 million | $127.7 million |
| Net income | $81.1 million | $87.9 million |
| Diluted earnings per share | $2.93 | $3.06 |
| Operating cash flow | $119.5 million | $120.4 million |
Net income fell 7.7%. Management attributed the decline primarily to lower net interest income and a $1.3 million securities-sale loss, partly offset by lower expenses and taxes. The net interest margin declined amid low rates, lower loan balances and reduced yields. The efficiency ratio was 46.01%, versus 45.77% in 2011.
Fourth-quarter 2012 net income was $19.1 million and diluted EPS was $0.70, compared with $21.8 million and $0.77 in fourth-quarter 2011. Quarterly net interest income also decreased, from $48.6 million to $41.6 million.
At year-end, total assets were $4.95 billion, deposits $4.23 billion, loans net of allowance $2.08 billion, investment securities $1.98 billion and shareholders’ equity $560.1 million. Deposits declined 0.4% and net loans declined from $2.49 billion in 2011. Equity-to-assets was 11.31%; total risk-based capital was 16.33% at the company and 15.62% at the bank, both above applicable “well-capitalized” thresholds.
Cash and due from banks totaled $491.4 million. Management reported approximately $410 million of excess cash liquidity after estimated branch and reserve needs, plus $160 million in overnight borrowing lines with none outstanding. Total deposits were $4.23 billion. Year-end borrowings included $53.7 million short-term, $25.8 million of FHLB advances, a $10.0 million term repurchase agreement and $15.0 million of notes payable. The $15 million parent-company note matures October 31, 2013.
Material changes and notable items
- Net interest and fee income on a fully taxable equivalent basis fell 10.0% to $197.0 million. Average loans decreased $422 million, while average investments increased $424 million; lower asset yields were only partly offset by lower funding costs.
- Loan balances continued to contract as acquired-loan workouts and reduced originations outweighed new lending. Management said competitive loan pricing did not provide adequate forward earnings potential and it was not pursuing aggressive loan growth.
- Noninterest expense fell 8.5%, including the absence of a $2.1 million settlement accrual recorded in 2011 and lower personnel, legal and nonperforming-asset costs. Deposit service charges also declined, partly reflecting lower overdraft and insufficient-funds fees.
- The company recorded a $1.3 million loss after selling a residential collateralized mortgage obligation whose underlying support tranches suffered escalating losses. It concluded the remaining reported securities losses were not other-than-temporary as of year-end.
- Nonperforming assets across originated, covered and non-covered portfolios totaled approximately $59.3 million, down from approximately $101.0 million in 2011. Net loan losses were $13.6 million; the allowance for loan losses was $30.2 million, or $32.9 million including the liability for off-balance-sheet credit exposure.
- Cash dividends were $1.48 per share, totaling $41.0 million. The company repurchased $51.5 million of stock and ended 2012 with 1.488 million shares authorized for future repurchase.
Outlook, risks and contingencies
No formal earnings guidance was provided. Management’s most likely 2013 earnings forecast assumed relatively stable market interest rates, with yields on new or refinanced loans and new securities below yields on older assets. The company projected $278 million of investment-security paydowns and maturities during 2013 and expected quarterly dividends to continue, subject to board discretion and financial conditions.
- FDIC loss-sharing runoff: At year-end, $372.3 million of purchased covered loans remained. Coverage on non-residential assets expires February 6, 2014 for losses; residential coverage continues to February 6, 2019. The decline in coverage could increase credit exposure and affect regulatory risk-weightings.
- Geographic and credit concentration: Operations are concentrated in California; real estate was principal collateral for about 55% of loans, and about 29% of loans were to Central Valley borrowers. A weakened regional economy, lower collateral values or natural disasters could increase losses.
- Interest-rate and securities risk: Prolonged low rates can pressure asset yields and margins; rising rates may affect funding costs, liquidity and securities values. Management described its position as neutral to slightly liability-sensitive, depending on model assumptions.
- Purchased-asset estimates: Loan fair values, credit-loss allowances and FDIC reimbursements depend on estimates and judgments; actual collections could be lower than anticipated.
- Liquidity and funding: Management judged liquidity strong but noted deposits, loan demand and funding needs remain sensitive to competition and economic conditions. Unfunded loan commitments were $339.7 million and standby letters of credit $32.3 million.
- Other disclosures: The company reported no material pending legal proceeding expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at December 31, 2012.
Key investor verification points
- Track whether the net interest margin and earnings stabilize as loans run off and the investment portfolio grows.
- Review FDIC-covered asset balances, loss-sharing expirations, recoveries and the remaining credit discount, particularly ahead of the 2014 coverage expiration.
- Verify trends in nonperforming assets, charge-offs, troubled debt restructurings and allowance adequacy against regional economic and collateral conditions.
- Assess the credit quality, duration and liquidity of the expanded securities portfolio, including the rationale and possible consequences of the CMO sale.
- Confirm the 2013 note maturity is refinanced or repaid and monitor deposits, pledged collateral and available borrowing capacity.
- Evaluate continued dividends and repurchases against earnings, capital requirements and the company’s declining loan base.