Why You Should Dump Westamerica

Summary

Most of the operating metrics for Westamerica are ugly.

Based on two key valuation metrics - the P/E ratio and the price to book ratio - the valuations are high.

It appears to be a good move to dump this stock and move elsewhere.

Westamerica Bancorporation (NASDAQ:WABC) qualifies as a very good bank based on several important metrics. It did not cut its dividend during the credit crisis. Westamerica has even had dividend growth in the last twelve months. It continues to have very strong asset quality. Westamerica has one of the lowest nonperforming assets to total asset ratios that I have seen. And it has a double digit return on equity. Most of the banks that I follow do not. Those are three very strong reasons to buy and hold Westamerica.

The two key reasons to sell are (1) the operating metrics and (2) the current valuations. Given the Westamerica has just reported in Q1-14 earnings - let's take a good look at those before we go on.

Westamerica Reports $0.58 vs. $0.64 in Q1-13
San Rafael, California's Westamerica Bancorporation reported Q1-14 net income of $15.307 million [$0.58/share] compared with $17.271 million [$0.64/share] in Q1-13. ROA was 1.27%. ROE was 11.6%. Book value ("common equity per share") was $20.57 compared to $20.48 last quarter and $20.58 at the end of Q4-12. Tier I Capital/Total Assets ratio was 8.3x%. Tier I Capital/Risk-Adjusted Assets ratio was 13.74%. Total Regulatory Capital/Risk-Adjusted Assets ratio was 15.19%.

FTE Net interest income was $38.864 million compared to $43.835 million in Q1-13. The provision for loan losses was $1.000 million compared with $1.600 million in Q1-13, resulting in NII after provision of $37.864 million compared with $38.450 million in Q3-12. The provision to NII ratio was 3.99% compared with 4.49% last quarter. The FTE net interest margin was 3.83% compared with 3.92% last quarter and 4.27% in Q1-13. Average earning assets of $4.093 billion earned $39.762 million at an average yield of 3.92%. The yield was 5.19% on $1.822 billion in loans (44.5% of earning assets) and 2.89% on $2.271 billion in investments (55.5% of earning assets). Average interest bearing liabilities of $2.534 billion cost $0.898 million at an average yield of 0.14%.

Year over year income from earning assets

Q1-2014 Q1-2013
volume income rate volume income rate
Total Investments 2,271,022 16,403 2.89% 2,057,874 17,098 3.32%
Commercial Loans 388,997 5,575 5.81% 404,892 6,254 6.26%
Commercial RE Loans 788,270 11,923 6.13% 904,841 14,128 6.33%
Consumer Loans 644,798 5,861 3.67% 768,256 7,607 4.02%
Total Loans 1,822,065 23,359 5.19% 2,077,989 27,989 5.46%
Total Earning Assets 4,093,087 39,762 3.92% 4,135,863 45,087 4.39%
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There are no one time flukes in these numbers. The downward trends were evident in the numbers from the last quarter. Here are those numbers:

Year over year income from earning assets

Q4-2013 Q4-2012
volume income rate volume income rate
Total Investments 2,216,276 16,630 3.00% 1,956,911 17,347 3.54%
Commercial Loans 364,534 5,679 6.18% 425,035 6,983 6.54%
Commercial RE Loans 817,090 12,486 6.06% 939,943 15,067 6.38%
Consumer Loans 665,076 6,279 3.75% 790,081 8,217 4.14%
Total Loans 1,846,700 24,444 5.25% 2,155,059 30,267 5.59%
Total Earning Assets 4,062,976 41,074 4.02% 4,111,970 47,614 4.62%
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From the Q1-14 earnings release in April of 2014: "The Company is reducing its exposure to rising interest rates by purchasing shorter-duration investment securities which carry lower yields..." It appears logical that this should result in lower year over year income from securities in the coming quarters of 2014.

From the Q4-13 earnings release in January of 2014: "In Management's opinion, current levels of competitive loan pricing do not provide adequate forward earnings potential, and competitive loan underwriting standards have loosened which increases credit risk. Management is avoiding low-yielding higher-risk loans." Loans are now 44.5% of earning assets. Loans were 45.5% of assets at the end of Q4-13 and 46.4% of earning assets at the end of Q3-13. Loans are where WABC procures the better yields - and that component is falling.

Non-interest income totaled $12.990 million compared to $14.278 million for Q1-13. Service charges on deposits generated $6.010 million compared to $6.542 million in Q1-13 - a fall of 8.1%. Merchant Processing Service fees were $1.924 million compared to $2.409 million in Q1-13 - a fall of 20.2%. Non-interest expense was $26.873 million compared to $28.667 million for Q1-13. The income tax provision was $8.674 million compared to $9.365 million in Q1-13.

Total non-performing loans not covered by FDIC loss-sharing agreements ('nonperforming nonaccrual' plus 'performing nonaccrual') were $4.823 million, while non-covered OREO was $5.347 million and loans 90+ days past due still accruing were $0.196 million, resulting in non-covered Total non-performing assets of $10.366 million compared to $11.313 million last quarter. Total NPAs (including covered assets) were $29.980 million compared with $35.032 million last quarter. With Total Assets of $4.921 billion, non-covered NPAs were 0.21% of assets. WABC did not disclose "charge-offs", but did disclose "net loan losses" of $0.584 million compared to $1.800 million last quarter.

Let's now look at valuation. My year to date stats show the price to book ratios based on the Q4-13 ending price to book ratios. I do not change the book numbers until all of the banks have updated. So to keep the comparisons apples to apples, these stats use an out of date book for WABC.

South-East, South-West & Pacific Regional Banks 04-25-14

The Q1-14 div is used for yield calculations. The Q4-13 book value is used in the price/book ratios - and the change in book is from Q4-12 to Q4-13. CBSH at times pays dividends in new shares or stock splits of 105 for 100 shares. This results in a shrinking book per share metric. LTM = last twelve months.


12-31-13 Current Dividend Current Div/EPS Pr/Bk Percent Change LTM % Change
Comp Price Price /Quarter Yield Ratio Ratio Price Pr+Div EPS Target Div Book NPAs

BOK Financial Corporation (NASDAQ:BOKF) 66.32 66.10 0.400 2.42 37.74 1.51 -0.33 0.27 -4.93 0.00 5.26 1.36 17.95
Bank of Hawaii Corporation (NYSE:BOH) 59.14 55.60 0.450 3.24 49.59 2.44 -5.99 -5.22 2.54 8.93 0.00 -0.35 5.17
BancorpSouth, Inc. (NYSE:BXS) 25.42 23.21 0.050 0.86 15.04 1.46 -8.69 -8.50 6.40 11.41 400.00 3.59 -48.04
Cathay General Bancorp (NASDAQ:CATY) 26.73 24.05 0.050 0.83 12.12 1.32 -10.03 -9.84 0.00 3.23 400.00 6.60 -16.79
Commerce Bancshares (NASDAQ:CBSH) 44.91 43.21 0.225 2.08 32.61 1.87 -3.79 -3.28 -2.47 4.88 0.00 -2.78 -33.33
Cullen/Frost Bankers, Inc. (NYSE:CFR) 74.43 76.93 0.500 2.60 48.66 1.97 3.36 4.03 1.23 6.87 4.17 -0.48 -42.11
City National Corporation (NYSE:CYN) 79.22 73.84 0.330 1.79 32.51 1.62 -6.79 -6.37 -1.93 7.65 32.00 4.01 -27.91
East West Bancorp, Inc. (NASDAQ:EWBC) 34.97 35.15 0.180 2.05 31.17 2.05 0.51 1.03 0.00 7.58 20.00 4.82 -15.87
First Horizon National (NYSE:FHN) 11.65 11.46 0.050 1.75 28.17 1.28 -1.63 -1.20 -10.13 5.69 0.00 -1.87 11.59
F.N.B. Corporation (NYSE:FNB) 12.62 12.45 0.120 3.86 57.14 1.18 -1.35 -0.40 -3.45 5.00 0.00 5.29 -10.58
Glacier Bancorp, Inc. (NASDAQ:GBCI) 29.79 26.30 0.160 2.43 41.29 2.03 -11.72 -11.18 0.00 2.33 14.29 3.43 -25.67
Hancock Holding Comp (NASDAQ:HBHC) 36.68 34.14 0.240 2.81 40.85 1.16 -6.92 -6.27 -0.84 5.28 0.00 2.01 -14.49
Prosperity Bancshares Inc. (NYSE:PB) 63.39 59.17 0.240 1.62 23.24 1.40 -6.66 -6.28 3.51 4.12 11.63 13.97 -86.52
Regions Financial Corp (NYSE:RF) 9.89 10.15 0.030 1.18 13.95 0.91 2.63 2.93 2.38 8.74 200.00 4.61 -25.65
Trustmark Corporation (NASDAQ:TRMK) 26.84 22.85 0.230 4.03 54.76 1.14 -14.87 -14.01 -7.18 -6.37 0.00 1.26 -8.02
UMB Financial Corp (NASDAQ:UMBF) 64.28 58.70 0.225 1.53 29.13 1.76 -8.68 -8.33 -2.52 9.53 4.65 5.01 -12.50
Umpqua Holdings Corp (NASDAQ:UMPQ) 19.14 17.07 0.150 3.51 57.14 1.11 -10.82 -10.03 -3.67 4.53 50.00 0.13 -19.40
WestAmerica Bancorp. 56.46 51.29 0.380 2.96 63.87 2.50 -9.16 -8.48 -3.64 -0.41 2.70 -0.49 -46.51
Zions Bancorporation (NASDAQ:ZION) 29.96 29.00 0.040 0.55 8.94 0.98 -3.20 -3.07 -3.24 5.00 300.00 10.62 -30.24

Average 2.22 35.68 1.56 -5.48 -4.96 -1.47 4.95 3.20 -22.58

The KBE Bank EFT (dominated by the mega-cap banks) has changed -2.95% year to date - with divs it has changed -2.63%.
With the 10 Treasury at 2.67% and the sector average yield (on Q1 divs) at 2.22% - the spread is -45 basis points.
Weeding out banks paying sub ten cent dividends, the average yield would be 2.57% and average price/book would be 1.72.
* The change in the dividend and book is the Last Twelve Months. They are the ratios of the Q1-14 div to the Q1-13 div and the Q4-13 book to the Q4-12 book.
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Price to book ratios strongly - and correctly - correlated to asset quality. WABC has great asset quality. WABC merits having a higher price to book ratio than most of the banks in this coverage universe. But I am really uncomfortable with the degree to which WABC's ratio exceeds the average.

Let's now look at historical and projected EPS numbers and the Price/Earnings numbers:

Banks Price/EPS Ratios 04-25


EPS / Share % EPS Growth Price/EPS 14 EPS Range
Co. 2009 2010 2011 2012 2013 2014 2015 11-12 12-13 13-14 14-15 2013 2014 2015 High Low Range

BOKF 2.96 3.51 4.17 5.13 4.62 4.24 4.54 23.02 -9.94 -8.23 7.08 14.31 15.59 14.56 4.42 3.90 12.26%
BOH 3.00 3.80 3.39 3.67 3.37 3.63 3.88 8.26 -8.17 7.72 6.89 16.50 15.32 14.33 3.85 3.50 9.64%
BXS 1.25 0.27 0.45 0.90 0.98 1.33 1.59 100.00 8.89 35.71 19.55 23.68 17.45 14.60 1.38 1.20 13.53%
CATY 0.10 0.10 1.06 1.28 1.43 1.65 1.76 20.75 11.72 15.38 6.67 16.82 14.58 13.66 1.68 1.60 4.85%
CBSH 2.07 2.52 2.82 2.90 2.75 2.76 2.96 2.84 -5.17 0.36 7.25 15.71 15.66 14.60 2.95 2.75 7.25%
CFR 2.80 3.44 3.58 3.86 3.78 4.11 4.33 7.82 -2.07 8.73 5.35 20.35 18.72 17.77 4.25 3.95 7.30%
CYN 0.16 2.36 3.21 3.83 4.11 4.06 4.42 19.31 7.31 -1.22 8.87 17.97 18.19 16.71 4.20 3.88 7.88%
EWBC 0.10 0.96 1.60 1.88 2.10 2.31 2.52 17.50 11.70 10.00 9.09 16.74 15.22 13.95 2.31 2.24 3.03%
FHN 0.10 0.10 0.50 0.10 0.06 0.71 0.83 -80.00 -40.00 1083.33 16.90 191.00 16.14 13.81 0.80 0.60 28.17%
FNB 0.32 0.59 0.70 0.84 0.84 0.84 0.94 20.00 0.00 0.00 11.90 14.82 14.82 13.24 0.88 0.74 16.67%
GBCI 0.56 0.61 0.24 1.05 1.31 1.55 1.71 337.50 24.76 18.32 10.32 20.08 16.97 15.38 1.60 1.45 9.68%
HBHC 2.26 1.40 2.02 2.13 2.09 2.35 2.49 5.45 -1.88 12.44 5.96 16.33 14.53 13.71 2.54 2.20 14.47%
PB 2.41 2.73 3.01 3.23 3.58 4.13 4.39 7.31 10.84 15.36 6.30 16.53 14.33 13.48 4.36 3.90 11.14%
RF 0.10 0.10 0.17 0.74 0.81 0.86 0.91 335.29 9.46 6.17 5.81 12.53 11.80 11.15 0.93 0.79 16.28%
TRMK 1.40 1.57 1.59 1.78 1.91 1.68 1.71 11.95 7.30 -12.04 1.79 11.96 13.60 13.36 1.77 1.56 12.50%
UMBF 2.20 2.26 2.64 3.04 3.14 3.09 3.56 15.15 3.29 -1.59 15.21 18.69 19.00 16.49 3.40 2.96 14.24%
UMPQ 0.10 0.15 0.66 0.93 0.95 1.05 1.29 40.91 2.15 10.53 22.86 17.97 16.26 13.23 1.12 1.02 9.52%
WABC 3.17 3.21 3.06 2.93 2.52 2.38 2.44 -4.25 -13.99 -5.56 2.52 20.35 21.55 21.02 2.59 2.31 11.76%
ZION 0.10 0.10 0.85 1.22 2.35 1.79 1.93 43.53 92.62 -23.83 7.82 12.34 16.20 15.03 1.99 1.72 15.08%

Average 5.73 61.66 9.38 26.04 16.10 14.74
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There is one more spreadsheet that tells a less than pleasant story. I use "historical EPS projection accuracy" as a key metric in assessing risk - or my required rate of return. In 2008 and 2009, when EPS projections were falling like a rock, the projections for WABC were rock solid. That's a solid reason why long-term holders of WABC could have an emotional attachment to the company. But look at the numbers for 2011, 2012 and 2013.

Changes in EPS estimates since the beginning of each year

2007 2008 2009 2010 2011 2012 2013 Accuracy
Bank Begin End Chng Begin End Chng Begin End Chng Begin End Chng Begin End Chng Begin End Chng Begin Cur Chng Rating

BOKF 3.59 3.22 -10% 3.64 2.27 -38% 3.10 2.96 -5% 3.07 3.51 14% 3.63 4.17 15% 4.32 5.13 19% 4.67 4.62 -1% 1.5
BOH 3.97 3.69 -7% 3.96 4.06 3% 3.41 3.00 -12% 3.13 3.80 21% 2.96 3.39 15% 3.25 3.67 13% 3.45 3.37 -2% 1.0
BXS 1.74 1.69 -3% 1.79 1.45 -19% 1.38 1.25 -9% 1.30 0.27 -79% 0.57 0.45 -21% 0.74 0.90 22% 0.97 0.98 1% 3.0
CATY 2.39 2.43 2% 2.43 1.37 -44% 1.19 0.10 -92% 0.10 0.10 0% 0.68 1.06 56% 1.36 1.28 -6% 1.45 1.43 -1% 2.0
CBSH 3.16 2.82 -11% 3.13 2.41 -23% 2.65 2.07 -22% 2.26 2.52 12% 2.81 2.82 0% 2.83 2.90 2% 2.83 2.75 -3% 1.8
CFR 3.71 3.61 -3% 3.78 3.50 -7% 3.66 2.80 -23% 3.23 3.44 7% 3.71 3.58 -4% 3.63 3.86 6% 3.83 3.78 -1% 1.2
CYN 4.99 4.52 -9% 4.93 2.84 -42% 2.69 0.16 -94% 1.19 2.36 98% 3.20 3.21 0% 3.60 3.83 6% 3.99 4.11 3% 2.2
EWBC 2.59 2.60 0% 2.59 0.10 -96% 0.31 0.10 -68% 0.78 0.96 23% 1.34 1.60 19% 1.75 1.88 7% 2.00 2.10 5% 2.0
FHN 2.81 0.10 -96% 1.35 0.10 -93% 0.10 0.10 0% 0.02 0.10 400% 0.41 0.50 22% 0.66 0.10 -85% 0.84 0.06 -93% 4.0
FNB 1.21 1.15 -5% 1.18 0.44 -63% 1.07 0.32 -70% 0.58 0.59 2% 0.73 0.70 -4% 0.84 0.84 0% 0.88 0.84 -5% 2.2
GBCI 1.29 1.26 -2% 1.35 1.19 -12% 1.18 0.56 -53% 0.55 0.61 11% 0.74 0.24 -68% 0.88 1.05 19% 1.13 1.31 16% 2.5
HBHC 3.10 2.27 -27% 2.62 2.05 -22% 2.51 2.26 -10% 2.17 1.40 -35% 1.80 2.02 12% 2.54 2.13 -16% 2.62 2.09 -20% 5.0
PB 2.16 2.09 -3% 2.23 1.86 -17% 2.19 2.41 10% 2.58 2.73 6% 2.76 3.01 9% 3.04 3.23 6% 3.42 3.58 5% 1.0
RF 2.93 2.26 -23% 2.69 0.10 -96% 0.26 0.10 -62% 0.10 0.10 0% 0.13 0.17 31% 0.47 0.74 57% 0.78 0.81 4% 2.5
TRMK 2.19 1.88 -14% 2.01 1.59 -21% 1.36 1.40 3% 1.32 1.57 19% 1.60 1.59 -1% 1.60 1.78 11% 1.84 1.91 4% 2.0
UMBF 1.67 1.77 6% 1.97 2.38 21% 2.30 2.20 -4% 2.25 2.26 0% 2.28 2.64 16% 2.61 3.04 16% 2.97 3.14 6% 1.0
UMPQ 1.87 1.26 -33% 1.38 0.91 -34% 0.56 0.10 -82% 0.15 0.15 0% 0.59 0.66 12% 0.78 0.93 19% 0.88 0.95 8% 2.5
WABC 2.99 2.98 -0% 3.07 3.09 1% 3.07 3.17 3% 3.36 3.21 -4% 3.37 3.06 -9% 3.27 2.93 -10% 2.80 2.52 -10% 2.7
ZION 6.08 4.42 -27% 5.15 0.10 -98% 1.04 0.10 -90% 0.10 0.10 0% 0.40 0.85 112% 1.61 1.22 -24% 1.73 2.35 36% 4.0
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With Q1-14 EPS of $0.60/share and a full year EPS projection of $2.38/share, WABC may be able to avoid another year of significant earnings disappointments. But the 2014 projection compared to a 2013 actual of $2.52 and a 2012 actual of $2.93. Projection accuracy may improve due to "projection ambition" having fallen.

Conclusion

When it comes to valuations, I would ignore the fact that WABC's yield is much higher than sector average - and focus on the price to book and P/E ratios. There is a reason that WABC's yield sticks out. WABC is projected to be paying 63.87% of 2014's EPS to pay its dividend while the average bank in this coverage universe is paying out 35.68%. That should be reason enough to ignore yield as a valuation metric. The price to book and P/E ratio of WABC is too high for a bank headed in the wrong direction. The operating metrics give evidence to that wrong direction. And given the consensus analyst 2015 projection of $2.47, that direction is not changing course at fast enough pace to warrant the current valuations.

Disclosure: I am long BOKF, CFR, PB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.