Westamerica Bancorporation — Q3 2012 Form 10-Q
Business context and period. California-based bank holding company reporting unaudited results for the quarter and nine months ended September 30, 2012. Comparative income and cash-flow figures are for the corresponding 2011 periods; balance-sheet comparisons are with December 31, 2011. Unless noted, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2012 / September 30, 2012 | Prior comparable period / date |
|---|---|---|
| Net income | $20.0 million; diluted EPS $0.73 | Q3 2011: $22.4 million; $0.79 |
| Nine-month net income and diluted EPS | $62.0 million; $2.23 | Nine months 2011: $66.1 million; $2.29 |
| Net interest income, fully taxable equivalent (FTE) | $48.7 million; net interest margin 4.67% | Q3 2011: $54.7 million; 5.32% |
| Nine-month net interest income (FTE) and margin | $150.7 million; 4.89% | Nine months 2011: $165.5 million; 5.35% |
| Noninterest income / expense | $14.6 million / $29.3 million | Q3 2011: $15.2 million / $31.4 million |
| Total assets | $4.860 billion | December 31, 2011: $5.042 billion |
| Deposits | $4.131 billion | December 31, 2011: $4.250 billion |
| Loans, net of allowance | $2.178 billion | December 31, 2011: $2.491 billion |
| Investment securities | $1.897 billion carrying value; held-to-maturity fair value was $1.190 billion | December 31, 2011: $1.562 billion carrying value |
| Shareholders’ equity | $558.8 million; book value per share $20.40 | December 31, 2011: $558.6 million |
For the first nine months, operating activities provided $89.7 million of cash; investing activities used $6.2 million and financing activities used $245.6 million. Cash and due from banks fell $162.1 million to $368.0 million. Management estimated approximately $290 million of excess cash liquidity, or 7% of deposits, after branch cash and Federal Reserve requirements. The reported efficiency ratio was 46.2% in Q3 versus 44.9% a year earlier; annualized return on assets was 1.63% and return on common equity was 14.68%.
At September 30, borrowings included $55.6 million of short-term funds, $25.9 million of Federal Home Loan Bank advances, a $10.0 million term repurchase agreement and $15.0 million of debt financing. Combined, these were about $106.5 million, down from about $166.7 million at year-end 2011. The $15 million parent-company note matures October 31, 2013. Company total risk-based capital was 16.22%; tangible equity to tangible assets was 8.75%.
Material changes versus comparable periods
- Q3 net income declined 10.7%; nine-month net income declined 6.2%. Lower net interest income was the primary operating pressure, reflecting reduced average loan balances and lower yields on earning assets.
- Q3 net interest margin fell 0.65 percentage point year over year. Lower funding costs partly offset lower asset yields, but did not prevent net interest income from falling.
- Gross loan balances by portfolio category were $2.209 billion at September 30, down from $2.524 billion at year-end 2011. Management cited weak loan demand, economic pressures and a cautious commercial lending posture. Securities holdings increased over the same balance-sheet comparison.
- Noninterest expense declined $2.1 million in Q3 and $8.4 million for the first nine months. The year-to-date comparison benefited from a $2.1 million litigation settlement accrual and Sonoma integration costs in 2011, as well as lower costs of managing nonperforming assets.
- Nonaccrual loans were $43.7 million, down from $53.1 million at year-end 2011. Nine-month net loan losses were $10.0 million versus $11.1 million in 2011; the allowance for loan losses was $31.0 million, with a further $2.7 million liability for off-balance-sheet credit exposure.
Outlook, risks and unusual items
- Outlook: Management’s most likely earnings plan assumed relatively stable interest rates over the following 12 months, with new or refinanced loans and securities yielding less than older assets. The filing cites the Federal Reserve’s expectation that exceptionally low federal funds rates would likely continue at least through mid-2015. No specific earnings or revenue guidance was provided.
- Management commentary: The company was not pursuing aggressive loan growth, expected higher-cost time deposits to decline, and described liquidity and capital as strong. It expected quarterly dividends to continue subject to Board discretion and ongoing evaluation.
- Credit and FDIC exposure: Purchased covered loans were $418 million, about 19% of the loan portfolio, and are subject to FDIC loss-sharing agreements. Management estimated first-tier covered-asset loss exposure to the Bank of about $12.5 million after tax if losses exceed recognized discounts; it described second-tier losses as remote, with maximum after-tax exposure of $9 million if covered assets generated no future cash flows. Covered-asset agreements have different expiration dates, including 2014 for non-residential losses and 2019 for residential losses.
- Unusual items: Nine-month 2012 results included a $1.287 million pretax loss on sale of a collateralized mortgage obligation, reducing net income by $750,000, and a $968,000 tax refund benefit. Nine-month 2011 included a $2.1 million settlement accrual and $393,000 of after-tax Sonoma integration expense.
- Other risks and contingencies: Management identified interest-rate, credit, liquidity, securities valuation, economic and operational risks. Approximately $834 million of securities were pledged as collateral. Unfunded loan commitments were $323.0 million; standby letters of credit were $25.9 million. The company reported routine threatened or filed legal matters and did not expect them to have a material adverse effect. Management said risk factors had not materially changed since the 2011 Form 10-K.
Important facts for investors to verify
- Whether loan balances, yields and net interest margin continue to decline, and how much further cost reductions can offset that pressure.
- Trends in nonaccrual loans, classified credits, charge-offs and allowance adequacy, including losses in purchased non-covered loans and construction lending.
- Actual performance and remaining duration of FDIC loss-sharing agreements, including the company’s exposure as covered assets run off or indemnification expires.
- Deposit trends, pledged collateral, liquidity availability and the October 2013 maturity of the parent-company note.
- Whether dividends and share repurchases remain sustainable alongside earnings, capital needs and any final changes to regulatory capital requirements.