Westamerica Bancorporation — Q2 2010 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2010. Westamerica is a California-based bank holding company. Comparisons are with the corresponding 2009 periods; balance-sheet comparisons are with December 31, 2009 unless otherwise noted. Amounts below are in millions except per-share data and percentages.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net income applicable to common equity | $23.6 | $22.1 | $47.1 | $74.3 |
| Diluted EPS | $0.80 | $0.75 | $1.59 | $2.54 |
| Net interest income, fully taxable equivalent (FTE) | $56.6 | $62.3 | $113.6 | $121.7 |
| Provision for loan losses | $2.8 | $2.6 | $5.6 | $4.4 |
| Noninterest income | $15.8 | $16.4 | $31.2 | $80.4 |
| Noninterest expense | $32.1 | $38.7 | $64.1 | $72.8 |
| FTE net interest margin | 5.62% | 5.34% | 5.61% | 5.35% |
| Efficiency ratio | 44.4% | 49.1% | 44.3% | 36.0% |
Profitability and revenue. Q2 income before tax was $32.8 million versus $32.4 million; reported net income was $23.6 million versus $23.2 million. Q2 return on assets was 2.00% and return on common equity was 18.24%. For the first half, reported income declined sharply year over year, principally because the first half of 2009 included a $48.8 million County Bank acquisition gain, which increased that period’s net income by $28.3 million and diluted EPS by $0.98.
Cash flow, balance sheet, and funding. First-half operating cash flow was $38.0 million, compared with $91.4 million in 2009; investing activities provided $184.1 million and financing activities used $289.0 million. Cash and due from banks ended at $294.2 million, down from $361.1 million at year-end. At June 30, total assets were $4.73 billion, total loans $2.85 billion, deposits $3.89 billion, and shareholders’ equity $527.7 million. Deposits declined $169.6 million from year-end. Short-term borrowings were $210.5 million, FHLB advances $10.2 million, and debt financing and notes payable $26.4 million. The company reported $1.0 billion of collateral requirements against investment securities and more than $700 million of overnight borrowing lines, with none outstanding.
Credit and capital. The allowance for loan losses was $39.7 million, or 1.87% of non-covered loans; the broader allowance for credit losses, including unfunded commitments, was $42.4 million. First-half net loan losses were $6.9 million, compared with $5.7 million. Non-covered nonperforming assets were $38.7 million, or 1.81% of non-covered loans and repossessed collateral, versus $33.3 million and 1.50% at year-end. Covered nonperforming assets were $84.3 million, down from $108.7 million; these assets are subject to FDIC loss-sharing agreements. Company Tier 1 and total risk-based capital ratios were 14.42% and 15.72%; the leverage ratio was 8.53%.
Material changes versus comparable periods
- Q2 common-equity income rose 6.7% and diluted EPS increased from $0.75 to $0.80. Lower operating expenses and the absence of preferred-stock dividends helped offset weaker net interest income, lower noninterest income, and a higher loan-loss provision.
- Q2 FTE net interest income fell 9.2%, mainly due to lower average earning-asset balances. Average earning assets were $4.03 billion, down $645 million year over year; lower funding costs and higher loan yields partly offset the decline.
- Q2 noninterest expense fell 17.0%, primarily from post-acquisition systems integration and branch consolidations, reduced staffing and occupancy costs, and lower FDIC assessments. Noninterest income fell 3.8%, led by lower deposit service charges.
- First-half common-equity income decreased $27.2 million, chiefly reflecting the prior-year County Bank acquisition gain, lower FTE net interest income, and a higher loan-loss provision. The 2009 preferred shares were fully redeemed in the fourth quarter of 2009, eliminating preferred dividends in 2010.
- Compared with year-end, total loans declined $166.9 million and deposits declined $169.6 million. Covered nonaccrual loans decreased, while non-covered repossessed collateral and total non-covered nonperforming assets increased.
Outlook, management commentary, and risks
- Management anticipated maintaining cash levels during 2010 and expected weak demand from creditworthy borrowers, subject to economic and competitive conditions. It projected $69.6 million of investment-security paydowns and maturities in Q3 2010.
- Management described liquidity as strong and considered asset liquidations or additional long-term debt unnecessary for ongoing needs. It expected dividends to continue, subject to Board discretion and review of capital, earnings, asset quality, and other factors.
- Management expected the Company and Bank to remain above regulatory “well-capitalized” standards. Interest-rate exposure was assessed as neutral to slightly asset-sensitive; modeled earnings were not expected to change meaningfully under the stated flat-rate or specified rising-rate scenarios. These are model estimates, not earnings guidance.
- Management considered the allowance adequate and the acquired-loan credit discounts adequate at quarter-end. It cautioned that economic conditions, collateral values, interest rates, credit deterioration, deposit competition, and loan demand could affect results. Covered assets are concentrated in a weak California Central Valley market; FDIC indemnification reduces, but does not eliminate, exposure.
- The filing reports no pending or threatened legal matter expected by management to have a material adverse effect. It identifies the July 2010 Dodd-Frank Act as a regulatory risk, including possible effects on deposit-insurance assessments and industry interchange-fee revenue; the ultimate impact was uncertain.
- No specific full-year earnings or revenue forecast was provided. First-half results are not necessarily indicative of full-year results. The filing also reports unrealized securities losses, but management did not consider the securities other-than-temporarily impaired at June 30; future declines could lead to impairment.
Important facts for investors to verify
- Whether loan-loss provisions, net charge-offs, non-covered nonperforming assets, and repossessed collateral continue to rise, and whether the allowance remains adequate.
- The performance and remaining credit discounts of FDIC-covered loans, the terms and duration of loss-sharing protection, and the potential for losses beyond recognized discounts.
- Whether deposit and loan trends, investment-security cash flows, and funding needs support management’s liquidity and cash-level expectations.
- Whether margin pressure from shrinking earning assets is offset by funding costs and asset yields, and whether the FTE margin and efficiency improvements persist.
- The effect of Dodd-Frank and other regulatory changes on FDIC assessments, interchange income, and capital requirements; also monitor dividend and share-repurchase decisions against capital levels.