Westamerica Bancorporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. The filing is unaudited. Westamerica is a California banking company serving Northern and Central California.
Financial performance and condition
- Profit: Net income was $14.6 million, or $0.57 per diluted share, versus $15.3 million and $0.58 in Q1 2014. Return on assets was 1.17% and return on common equity was 11.44%.
- Revenue and margin: GAAP net interest income was $33.3 million, down from $34.7 million; noninterest income was $12.3 million, down from $13.0 million. Fully taxable-equivalent (FTE) net interest and fee income, a non-GAAP measure, was $36.9 million versus $38.9 million. FTE net interest margin declined to 3.43% from 3.83%.
- Expenses and credit costs: Noninterest expense was $26.7 million, compared with $26.9 million. The loan-loss provision was zero, versus $1.0 million in Q1 2014. Net loan losses were $298,000, versus $584,000. The allowance for credit losses, including off-balance-sheet exposures, was $33.9 million; management considered it adequate.
- Cash flow: Operating cash flow was $17.3 million, down from $33.7 million. Investing activities used $136.3 million, mainly reflecting securities purchases; financing activities used $14.4 million. Cash and due from banks decreased $133.4 million to $247.5 million.
- Balance sheet and liquidity: Total assets were $5.04 billion, essentially unchanged from year-end. Deposits rose $30.9 million to $4.38 billion, while loans declined $16.4 million to $1.68 billion. Investment securities totaled $2.79 billion, up about $153 million since year-end. Management said deposits and equity funded 97% of average assets in the quarter. About $720 million of securities were pledged as collateral.
- Debt and capital: Short-term repurchase-agreement borrowings were $83.0 million and mature overnight; $20.0 million of FHLB advances were repaid in January. The $35 million unsecured credit line was undrawn. Shareholders’ equity was $527.4 million. At March 31, the Company’s total risk-based capital ratio was 13.08% and leverage ratio 7.88%; the Bank’s corresponding ratios were 12.05% and 7.09%.
Material changes and management commentary
- Year over year, net income declined $750,000. Management attributed pressure mainly to lower loan balances and yields, plus lower deposit service charges and merchant-processing fees; lower funding costs and the absence of a loan-loss provision partly offset the declines.
- Compared with Q4 2014, net income decreased $471,000. Lower asset yields, two fewer accrual days, reduced average loan balances, lower service-charge income, and higher personnel costs contributed.
- Management described credit quality as improving: nonperforming assets were $22.8 million, down 24% from $30.0 million a year earlier, although up from $24.5 million at December 31, 2014. Nonaccrual and delinquent loans may nevertheless fluctuate.
- Management said it was not aggressively pursuing loan growth because competitive pricing did not provide adequate expected returns. It has added shorter-duration and floating-rate securities to manage interest-rate exposure and liquidity, while reducing mortgage-related securities to limit extension risk.
- Management’s most likely earnings forecast for the 12 months ending March 31, 2016 assumes rates remain relatively stable or short-term rates rise gradually. It expects to maintain capital above the highest applicable regulatory standard and expects quarterly dividends to continue, subject to Board discretion and other factors. The filing provides no specific earnings or revenue guidance.
Risks, contingencies, and unusual items
- Interest-rate risk is significant: low rates and lower yields on earning assets have compressed margins. The Company was slightly asset-sensitive, but results depend on assumptions and actual balance-sheet changes. It does not use derivatives to manage interest-rate risk.
- Credit risks include borrower performance, real-estate collateral values, and economic conditions. One purchased non-covered nonaccrual commercial real-estate loan had a $6.3 million carrying value. Management cautioned that future increases in delinquent or nonaccrual loans and additional loan-loss provisions remain possible.
- Available-for-sale securities had $7.5 million of gross unrealized losses at quarter-end. Management attributed losses principally to market conditions and interest rates, said substantially all securities remained investment grade, and concluded it was not more likely than not that the Company would have to sell before recovery; no other-than-temporary impairment was recorded.
- Unfunded loan commitments were $320.3 million; standby letters of credit were $27.5 million. These are contingent funding exposures, not necessarily expected draws. The reserve for unfunded commitments was $2.7 million.
- Thirteen troubled debt restructurings had a period-end carrying value of $6.5 million; $998,000 was on nonaccrual status. No restructured loans defaulted during the quarter.
- OREO-related expense was $315,000, compared with a $350,000 net gain in Q1 2014; quarter-end OREO was $9.2 million. The filing reports routine legal proceedings but says none is expected to have a material adverse effect. Risk factors were reported as not materially changed from the 2014 Form 10-K.
Important facts for investors to verify
- Whether net interest margin and FTE net interest income continue to decline, and how asset yields respond to market-rate changes.
- Whether loan balances stabilize and credit quality remains sound; monitor nonperforming assets, charge-offs, restructurings, and allowance adequacy.
- How securities portfolio growth, unrealized losses, pledged collateral, and cash balances affect liquidity and interest-rate risk.
- Whether deposit growth and low funding costs persist, and whether overnight borrowing or contingent commitment draws change materially.
- Whether capital ratios, dividends, and share repurchases remain consistent with regulatory requirements and management’s stated expectations.