Westamerica Bancorporation — Q3 2015 Form 10-Q
Business context and period: California-based banking company reporting unaudited results for the three and nine months ended September 30, 2015. Comparisons are with the corresponding 2014 periods, except balance-sheet comparisons, which are with December 31, 2014. Amounts below are in millions unless stated otherwise. The filing cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
- Profit: Q3 net income was $14.9 million, down 2.0% from $15.2 million; diluted EPS was $0.58, unchanged. Nine-month net income was $44.2 million, down 3.2% from $45.6 million; diluted EPS was $1.73 versus $1.74.
- Revenue and margin: Q3 net interest income on a fully taxable equivalent (FTE) basis, a non-GAAP measure, was $37.2 million, down 1.9%; nine-month FTE net interest income was $111.5 million, down 3.3%. Net interest margin (FTE) fell to 3.31% from 3.66% in Q3 and to 3.37% from 3.75% for nine months. GAAP net interest income was $33.7 million for Q3 and $100.8 million for nine months. Noninterest income fell 8.1% in Q3 to $12.0 million and 6.8% for nine months to $36.6 million.
- Expenses and returns: Noninterest expense declined 1.7% to $26.2 million in Q3 and 0.8% to $79.8 million for nine months. Q3 return on assets was 1.16% and return on equity 11.33%, versus 1.21% and 11.55%; nine-month figures were 1.17% and 11.42%, versus 1.24% and 11.59%. Efficiency ratio increased to 53.2% for Q3 and 53.9% for nine months, from 52.2% and 52.0%.
- Credit costs: No loan-loss provision was recorded in Q3 or the first nine months, compared with $0.6 million and $2.6 million in 2014. Nine-month net loan losses were $1.45 million, down from $2.52 million; the allowance was $30.0 million, versus $31.5 million at year-end.
- Assets and lending: Total assets were $5.00 billion, down 0.7% from year-end. Loans were $1.57 billion, down 7.6%; management cited lower originations and problem-loan workouts and said current competitive pricing did not offer adequate forward earnings potential. Investment securities totaled about $2.85 billion, up about $211 million from year-end.
- Funding and liquidity: Deposits were $4.37 billion, up 0.4% from year-end, including $1.94 billion in noninterest-bearing deposits. Cash and due from banks was $268.6 million, down from $380.8 million. Short-term borrowings were $57.1 million; $20.0 million of FHLB advances were repaid in January, leaving none outstanding. The company had an undrawn $35 million unsecured credit line. Management reported satisfactory liquidity stress-test results; about $716 million of securities were pledged as collateral.
- Cash flows, nine months: Operating activities provided $57.7 million; investing activities used $94.4 million; financing activities used $75.5 million. Cash declined $112.2 million. Investing included $124.6 million in net loan repayments and substantial securities purchases and maturities. Financing included $29.2 million of dividends and $15.0 million of share repurchases.
- Capital and shareholder returns: Shareholders’ equity was $533.9 million, or 10.68% of assets. Company regulatory ratios were 12.79% Common Equity Tier 1, 12.79% Tier 1, 13.39% total capital and 8.06% leverage; Bank ratios were 11.15%, 11.15%, 11.88% and 6.99%, respectively. Dividends were $0.38 per share in Q3 and $1.14 for nine months, unchanged year over year.
Material changes and management commentary
- Management attributed lower FTE net interest income chiefly to declining loan balances and earning-asset yields, partly offset by growth in investments and lower-cost funding. Average earning-asset yield fell 38 basis points in Q3 and 41 basis points for nine months; lower funding costs only partly offset the pressure.
- Lower service charges and merchant-processing fees drove much of the decline in noninterest income. Lower personnel expense helped reduce noninterest expense; higher OREO costs partly offset savings.
- Management said credit quality had improved: nonperforming loans were down 9.6% from September 30, 2014, and net loan losses remained relatively low. However, total nonperforming assets were $26.2 million, versus $26.0 million a year earlier, including $9.3 million of OREO. Nonaccrual loans were $16.4 million. Troubled debt restructurings were $12.9 million at quarter-end, up from $5.9 million at September 30, 2014; no modified TDR loans defaulted within 12 months of modification during the periods reported.
- Management’s most likely 12-month interest-rate forecast assumed rates would remain relatively stable or short-term rates would rise gradually. The company was slightly asset-sensitive, depending on model assumptions, and was positioning for potential rate increases with floating-rate and shorter-duration securities. It provided no specific earnings or revenue guidance.
- Management expected to monitor cash and deposit levels, anticipated time deposits would decline, and said dividends were expected to continue subject to Board discretion and capital, earnings and asset-quality considerations. It expected capital to remain above the highest applicable regulatory standards, while noting no assurance could be given.
Risks, contingencies and unusual items
- Key disclosed risks include prolonged low rates and further margin compression, interest-rate and liquidity risk, credit deterioration and collateral-value declines, competition, regulatory changes, cybersecurity and operational failures, and natural disasters. Management cautioned that credit quality and liquidity could worsen and future loan-loss provisions may be needed.
- Available-for-sale securities had $8.0 million of gross unrealized losses at September 30, 2015, mainly attributed to market conditions and interest rates. Management said it did not intend, and was not likely to be required, to sell the securities before recovery; it therefore recorded no other-than-temporary impairment. Future impairments remain possible. Substantially all securities were investment-grade rated.
- Unfunded loan commitments were $316.9 million; standby letters of credit were $27.1 million. The company recorded a $2.6 million reserve for unfunded commitments. Management did not expect pending ordinary-course legal matters to have a material adverse effect.
- The 2015 regulatory capital framework introduced revised capital measures and requirements; the capital conservation buffer transition begins in 2016. Failure to maintain the buffer could restrict dividends and repurchases. Management stated the company and Bank expected to exceed applicable standards.
- Forward-looking statements are subject to economic, market, interest-rate, regulatory, competitive, technology, fraud and disaster risks. Management stated that the risks in the 2014 Form 10-K had not materially changed. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether net interest margin and loan yields continue to decline, and how the shift toward shorter-duration securities affects earnings and sensitivity to rate changes.
- Whether the allowance remains adequate as TDRs, nonaccrual loans and OREO evolve, given zero provision despite ongoing net chargeoffs.
- The credit quality, valuation sensitivity and liquidity of the expanded securities portfolio, including unrealized losses and pledged securities.
- Deposit stability, cash needs and capacity to meet unfunded commitments under stress; distinguish reported cash balances from broader available liquidity.
- Capital ratios under the phased-in regulatory rules and the sustainability of dividends and repurchases if earnings or asset quality weaken.
- FTE measures are non-GAAP; compare them with reported GAAP results and the company’s stated definitions.