Westamerica Bancorporation — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2015, compared with the same 2014 periods. Westamerica is a California banking company; its principal revenue source is net interest and fee income. Unless noted, financial amounts below are in millions of dollars.
Financial and operating performance
- Q2 earnings: Net income was $14.8 million, down 2.6% from $15.2 million; diluted EPS was $0.58, unchanged. First-half net income was $29.3 million, down 3.8%; diluted EPS was $1.15 versus $1.15.
- Net interest: Q2 net interest income on a fully taxable equivalent (FTE) basis was $37.4 million, down 3.0%; first-half FTE net interest income was $74.3 million, down 4.0%. Net interest margin declined 39 basis points year over year to 3.37% for Q2 and 3.40% for the first half.
- Other income and costs: Noninterest income fell 7.0% to $12.3 million in Q2 and 6.2% to $24.6 million in the first half. Noninterest expense was nearly flat at $26.9 million in Q2 and $53.6 million in the first half. The efficiency ratio rose to 54.1% for Q2 from 52.1%, and to 54.2% for the first half from 51.9%.
- Credit costs and quality: No loan-loss provision was recorded in Q2 or the first half, versus $1.0 million and $2.0 million, respectively, in 2014. Net loan losses were $0.36 million in Q2 and $0.66 million in the first half. The allowance was $30.8 million, or approximately 1.9% of loans. Nonperforming assets were $25.7 million, down from $29.6 million a year earlier but up from $24.5 million at year-end 2014.
- Balance sheet and liquidity: Total assets were $5.03 billion, broadly unchanged from year-end 2014. Loans were $1.63 billion, down 4.1% from year-end; deposits were $4.35 billion, essentially flat. Cash and due from banks fell to $289.6 million from $380.8 million. First-half operating cash flow was $34.5 million; cash declined $91.2 million, reflecting investment purchases, debt reduction, dividends and share repurchases.
- Debt and capital: Short-term borrowings were $82.7 million; the $20.0 million FHLB advances outstanding at year-end were repaid in January. The $35 million unsecured credit line was undrawn. Shareholders’ equity was $525.3 million; the company-level total risk-based capital ratio was 13.08%, and tangible equity to tangible assets was 7.99%. The quarterly dividend was $0.38 per share.
Material changes versus prior periods
- Management attributed lower net interest income mainly to declining loan balances and yields, as low market rates and lower-yielding new loans weighed on asset returns. Higher investment balances and lower-cost funding partly offset the pressure.
- Average loans fell year over year, while average investments increased. The company said it was not aggressively pursuing loan growth because competitive pricing did not offer adequate forward earnings potential.
- Credit metrics improved year over year: management cited a 13% decline in nonperforming assets, while net losses remained low. Lower personnel costs helped reduce first-half noninterest expense, partly offset by higher OREO and equipment costs.
- Available-for-sale securities had $5.6 million of after-tax other comprehensive loss in Q2, compared with $3.7 million of income in Q2 2014. Unrealized losses were attributed primarily to market interest-rate conditions; management did not consider the securities other-than-temporarily impaired.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management’s most likely 12-month earnings forecast assumed rates would remain relatively stable or short-term rates would rise gradually. The company described its balance sheet as slightly asset-sensitive, subject to model assumptions.
- Management is positioning for potentially higher rates by holding floating-rate and shorter-duration securities, while noting that these generally yield less than longer-duration investments. It expects high liquidity to provide flexibility to reinvest at higher yields if rates rise.
- Key risks include persistent low rates and margin pressure, uncertain loan and deposit growth, credit deterioration and collateral values, liquidity and funding stress, securities valuation changes, competition, regulatory changes, cyber and operational risks, and natural disasters. Management cautioned that future provisions and increases in problem loans could occur.
- First-half results included tax benefits from an amended California tax return and a state tax audit settlement. The filing reported no material pending legal proceeding expected to adversely affect the company. Management said risk factors had not materially changed since its 2014 Form 10-K.
Most important facts for investors to verify
- Whether loan balances and net interest margin stabilize, and whether management’s rate and asset-liability assumptions prove accurate.
- Whether credit quality remains sound, including trends in nonperforming assets, classified loans, charge-offs and the adequacy of the allowance.
- How securities portfolio growth, unrealized losses, pledged collateral and cash balances affect liquidity and interest-rate exposure.
- Whether fee income and expense trends support earnings as the benefit from zero loan-loss provision and tax items changes.
- Capital levels, regulatory dividend capacity, and the sustainability of dividends and share repurchases.