Westamerica Bancorporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Westamerica is a California bank holding company serving customers primarily in Northern and Central California. The unaudited interim results are not necessarily indicative of full-year results. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income, FTE | $54.7 | $56.7 | $165.5 | $170.3 |
| Noninterest income | $15.2 | $15.1 | $45.2 | $46.3 |
| Provision for loan losses | $2.8 | $2.8 | $8.4 | $8.4 |
| Noninterest expense | $31.4 | $31.5 | $97.0 | $95.6 |
| Net income | $22.4 | $23.7 | $66.1 | $70.8 |
| Diluted EPS | $0.79 | $0.81 | $2.29 | $2.40 |
| Net interest margin, FTE | 5.32% | 5.54% | 5.35% | 5.59% |
| Return on assets | 1.81% | 1.95% | 1.79% | 1.98% |
| Return on common equity | 16.44% | 17.90% | 16.24% | 18.32% |
FTE (fully taxable equivalent) figures are non-GAAP measures as defined by the company. The efficiency ratio was 44.9% for Q3 2011 versus 43.9% a year earlier, and 46.0% for the first nine months versus 44.2%.
Financial position, cash flow and capital
- At September 30, total assets were $4.97 billion, up from $4.93 billion at December 31, 2010. Deposits were $4.19 billion, compared with $4.13 billion; noninterest-bearing deposits were $1.53 billion.
- Net loans were $2.60 billion, down from $2.89 billion at year-end. Investment securities totaled $1.44 billion: $683.6 million available for sale and $755.9 million held to maturity. Held-to-maturity securities had a disclosed fair value of $778.3 million.
- Cash and due from banks increased to $459.8 million from $338.8 million. Nine-month operating cash flow was $87.0 million; investing activities provided $75.2 million and financing activities used $41.2 million. Cash increased $121.0 million during the period.
- Period-end borrowings included $120.9 million of short-term borrowed funds, $26.1 million of FHLB advances and $15.0 million of debt financing and notes payable. The company redeemed $10 million of subordinated debt in August.
- Shareholders’ equity was $554.0 million. Company regulatory capital ratios were 14.34% Tier 1, 15.65% total risk-based capital and 8.44% leverage; the Bank also exceeded regulatory well-capitalized thresholds. Tangible equity to tangible assets was 8.35%.
- The company paid $1.08 per share in dividends during the first nine months and repurchased 956,000 shares for $45.1 million.
Changes versus comparable periods
- Net income declined 5.4% in Q3 and 6.7% for the first nine months year over year. Diluted EPS was down from $0.81 to $0.79 in Q3 and from $2.40 to $2.29 year to date.
- Management attributed weaker results principally to lower asset yields and reduced average loan balances. Higher average investment balances and lower funding costs partly offset the pressure. FTE net interest margin contracted 22 basis points in Q3 and 24 basis points year to date.
- Year-to-date noninterest income decreased $1.1 million, primarily from lower deposit service charges, including reduced overdraft-related fees following regulatory changes. Noninterest expense increased $1.4 million, largely reflecting a $2.1 million litigation settlement accrual.
- Credit indicators improved in several measures: total past-due-and-accruing loans fell to $41.8 million from $72.5 million at year-end, and nonaccrual loans declined to $58.9 million from $107.2 million. Non-covered other real estate owned rose to $24.7 million from $13.6 million.
Outlook, risks and unusual items
- Management provided no specific earnings or EPS guidance. It expected to maintain cash levels for the rest of 2011 and projected $206.2 million of investment-security paydowns and maturities over the twelve months ending September 30, 2012. Management described liquidity as strong, citing more than $700 million of available overnight borrowing lines with no balance outstanding, as well as Federal Reserve access.
- Management expected capital to remain above well-capitalized standards and quarterly dividends to continue, subject to Board discretion and ongoing review of capital, earnings, asset quality and other factors. Loan demand and deposit growth remained uncertain amid economic, competitive and regulatory conditions.
- Credit remains a key risk. The allowance for credit losses was $32.9 million for loans, with an additional $2.7 million liability for off-balance-sheet credit exposure. Management considered the combined $35.6 million allowance adequate, but cautioned that future provisions and increases in delinquent or nonaccrual loans could occur.
- FDIC-covered loans were $575.4 million, about 22% of total loans; FDIC loss-sharing arrangements reduce, but do not eliminate, exposure. Management estimated first-tier covered-loan risk to the Bank at up to $21.6 million pre-tax if losses exceed recognized discounts, and stated the likelihood of second-tier losses was remote.
- The Bank reached a preliminary mediated settlement in an overdraft-fee lawsuit, subject to court approval, and accrued a liability in Q2. The filing also reports $2.1 million of year-to-date settlement expense and $393,000 after tax of Sonoma integration costs. Sonoma operations were fully integrated in February 2011.
- Management described the balance-sheet position as neutral to slightly asset-sensitive, depending on model assumptions. A modeled increase of 100 basis points in the federal funds rate and 60 basis points in the 10-year Treasury yield was not expected to change projected earnings meaningfully for the twelve months ending September 30, 2012. The company does not use derivatives to manage interest-rate risk.
- Other stated risks include economic weakness, real-estate collateral values, interest-rate changes, deposit competition, regulatory changes, operational failures or fraud, and market-value declines in securities. Management reported no goodwill impairment in the first nine months of 2011; it did not consider disclosed unrealized securities losses other-than-temporary at quarter-end.
Most important facts for investors to verify
- Whether margin pressure and loan contraction continue, and how they affect earnings and returns.
- Whether the improvement in delinquencies and nonaccrual loans persists, and whether the allowance and purchased-loan discounts remain adequate.
- The final court approval and financial consequences of the overdraft-fee settlement.
- Deposit trends, liquidity usage, and the company’s capacity to sustain dividends and share repurchases while maintaining capital levels.
- Changes in securities valuations, real-estate-owned assets and FDIC-covered loan losses, including the assumptions behind management’s interest-rate sensitivity analysis.