Westamerica Bancorporation — Q1 2013 Form 10-Q
Business context and reporting period. Westamerica Bancorporation is a California banking company serving customers primarily in Northern and Central California. This unaudited filing covers the three months ended March 31, 2013; comparisons below are with Q1 2012 unless otherwise noted. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 / Mar. 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net income | $17.3; diluted EPS $0.64 | Q1 2012: $21.0; $0.75 per diluted share |
| Net interest income, GAAP | $39.2 | Q1 2012: $46.7 |
| Net interest and fee income, FTE | $43.8; net interest margin 4.27% | Q1 2012: $51.7; 5.12% |
| Noninterest income / expense | $14.3 / $28.7 | Q1 2012: $14.7 / $30.0 |
| Provision for loan losses | $2.8 | Unchanged from Q1 2012 |
| Operating cash flow | $22.5 | Q1 2012: $33.0 |
| Total assets | $4,887.8 | Dec. 31, 2012: $4,952.2 |
| Total loans, net of allowance | $2,006.6 | Dec. 31, 2012: $2,081.1 |
| Total deposits | $4,162.0 | Dec. 31, 2012: $4,232.5 |
| Shareholders’ equity | $559.0 | Dec. 31, 2012: $560.1 |
| Regulatory capital ratios, company | Tier 1 14.71%; total capital 15.99%; leverage 8.56% | Dec. 31, 2012: 14.83%; 16.09%; 8.56% |
The FTE figures are non-GAAP measures; the company’s filing describes the adjustment as bringing tax-exempt income to a fully taxable equivalent basis. Return on assets was 1.43%, return on common equity 12.93%, and the efficiency ratio 49.3% (45.3% in Q1 2012). The company paid a $0.37 per-share dividend.
Material changes versus prior periods
- Net income declined $3.7 million year over year. Management attributed the decrease chiefly to lower net interest and fee income, reflecting lower average loan balances and lower earning-asset yields; lower noninterest income also contributed. Reduced expenses and income taxes partly offset the decline.
- FTE net interest and fee income fell $7.9 million year over year, and the FTE margin contracted 0.85 percentage points to 4.27%. Average loans were down about $390 million, while average investment securities rose about $465 million. The average yield on earning assets fell to 4.39% from 5.27%.
- Noninterest expense declined $1.4 million year over year, mainly on lower personnel costs, loan administration expense, intangible amortization, and professional fees. Noninterest income declined $0.4 million, including lower deposit service charges and ATM fees, partly offset by higher debit card fees.
- Compared with Q4 2012, net income decreased $1.9 million to $17.3 million, and FTE net interest and fee income fell $2.4 million. Total deposits fell $70.5 million from year-end; loans declined $74.5 million. Available-for-sale securities increased $146.5 million.
- Cash and due from banks declined $135.9 million during the quarter to $355.5 million. Operating activities provided $22.5 million, investing activities used $76.6 million, and financing activities used $81.8 million; investing outflows included substantial securities purchases.
Credit, liquidity, debt, outlook and risks
- Credit quality: The allowance for credit losses was $33.0 million, including $30.4 million for loan losses and $2.7 million for off-balance-sheet exposure. Net loan losses were $2.7 million, versus $3.5 million in Q1 2012. Nonperforming assets across originated, covered, and non-covered portfolios totaled about $52.9 million, versus $59.3 million at Dec. 31, 2012. Management considered the allowance adequate but cautioned that credit quality may fluctuate.
- FDIC-covered assets: The FDIC generally absorbs 80% of covered-asset losses within the first tier, subject to agreement terms; indemnification for covered non-residential assets expires February 6, 2014 for losses. Covered assets are concentrated in a California Central Valley region Management describes as economically weak. Covered non-residential balances will therefore require continued monitoring as indemnification expires.
- Liquidity and funding: Management reported that deposits and equity supplied 97% of average-asset funding in Q1 2013 and said recent liquidity stress testing supported its view that liquidity was adequate. Cash, securities, and amortizing loans support liquidity; about $872 million of investment securities were pledged as collateral. The filing cautions that reduced liquidity cannot be ruled out.
- Debt and commitments: Borrowings included $61.9 million of overnight repurchase-agreement funding, $25.7 million of FHLB advances, a $10.0 million term repurchase agreement, and $15.0 million of debt financing. The $15.0 million note matures October 31, 2013. An unused $35.0 million line of credit was available through March 19, 2014. Unfunded loan commitments were $328.9 million and standby letters of credit were $31.8 million.
- Management outlook: No specific earnings guidance was provided. Management’s most likely 12-month forecast assumed market interest rates remained relatively stable, with newly originated or refinanced loans and new securities yielding below older assets. Management described its interest-rate position as neutral to slightly liability-sensitive and said it was biased toward stable rates near term and ultimately rising rates. Management expects to maintain capital above regulatory standards and expects to continue quarterly dividends, while stating plans could change.
- Other risks and contingencies: Principal risks include low interest rates and margin pressure, loan and collateral credit risk, liquidity and asset-liability risks, economic and competitive conditions, regulation, operational failures or fraud, and natural disasters. The company disclosed threatened or filed legal matters, including loan collection, transaction processing/overdraft fees, and employment practices; it did not expect them to have a material adverse effect and accrues liabilities when probable and estimable. Available-for-sale securities had $1.6 million of gross unrealized losses; management did not consider them other-than-temporarily impaired and said it did not expect to need to sell before cost recovery.
Most important facts for investors to verify
- Whether loan runoff and lower asset yields continue to pressure net interest income and the 4.27% FTE margin.
- Trends in deposits, cash, pledged securities, and other liquidity sources, particularly alongside the quarter’s cash decline.
- Whether nonperforming assets, charge-offs, and the allowance remain consistent with management’s credit-loss estimates.
- The financial and credit effects as FDIC loss indemnification for covered non-residential assets expires in February 2014.
- The company’s ability to address the $15.0 million note maturity in October 2013 while sustaining dividends and share repurchases.
- Progress and potential effects of proposed regulatory capital rules; the filing says the proposals had not been finalized as of March 31, 2013.