Westamerica Bancorporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context and results
Westamerica is a California-focused bank serving small businesses, professionals and consumers, principally in Northern and Central California. Its main revenue source is net interest and fee income. Management cited low market rates, runoff of higher-yielding loans and securities, and weaker deposit and merchant-processing fees as pressures on earnings.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net income | $15.2 | $17.1 | $30.5 | $34.4 |
| Diluted EPS | $0.58 | $0.64 | $1.15 | $1.27 |
| Net interest income, FTE | $38.6 | $42.6 | $77.4 | $86.5 |
| Net interest margin, FTE | 3.76% | 4.12% | 3.79% | 4.19% |
| Provision for loan losses | $1.0 | $1.8 | $2.0 | $4.6 |
| Noninterest income | $13.2 | $14.3 | $26.2 | $28.6 |
| Noninterest expense | $27.0 | $28.2 | $53.8 | $56.9 |
Year over year, net income declined about 11% in both the quarter and first half. Q2 FTE net interest income fell about 9.5%; reported net interest income, before the FTE adjustment, was $34.5 million versus $38.1 million. Management attributed the decline mainly to lower average loan balances and asset yields. The efficiency ratio was 52.1% for Q2 and 51.9% for the first half, compared with 49.5% and 49.4%, respectively. Return on assets was 1.24% for Q2 and 1.25% for the first half; return on common equity was 11.57% and 11.61%.
Financial position, cash flow and capital
- Assets and earning assets: Total assets were $4.931 billion at June 30, up from $4.847 billion at December 31, 2013. Loans were $1.785 billion, down from $1.828 billion; investment securities totaled approximately $2.347 billion, up from $2.212 billion.
- Deposits and liquidity: Deposits were $4.213 billion, compared with $4.164 billion at year-end. Noninterest-bearing deposits were $1.814 billion. Cash and due from banks totaled $484.9 million. Management said deposits and equity supplied 97% of average funding in the first half and reported satisfaction with liquidity stress-test results.
- Borrowings: Short-term borrowed funds were $69.0 million, FHLB advances $20.3 million, and a term repurchase agreement $10.0 million. The term repo matured in August 2014; $20.0 million of FHLB advances mature in January 2015. A $35 million unsecured credit line was undrawn.
- Cash flow, first half: Operating cash flow was $45.5 million versus $48.9 million. Investing activities used $43.8 million, versus providing $3.2 million, reflecting increased securities purchases. Financing activities provided $11.2 million versus using $159.2 million in 2013. Cash increased $12.9 million to $484.9 million.
- Capital and shareholder returns: Shareholders’ equity was $538.8 million; equity-to-assets was 10.93%. Company total risk-based capital was 15.04% and leverage was 8.26%; the Bank’s corresponding ratios were 14.01% and 7.47%. The Company paid $20.1 million in dividends and repurchased and retired 708,000 shares for $36.4 million in the first half. The quarterly dividend was $0.38 per share.
Material changes and credit quality
- Average loans fell $192 million in Q2 and $224 million in the first half year over year; management said it was not aggressively pursuing loan growth at then-current competitive pricing. Average investment balances increased, partly offsetting loan runoff.
- Noninterest income declined 7.6% in Q2 and 8.3% in the first half, primarily from lower deposit service charges and merchant-processing fees; management cited customer attrition and lower transaction volumes in merchant processing.
- Noninterest expense decreased 4.4% in Q2 and 5.3% in the first half. Lower OREO-related costs, legal/professional fees and other expenses contributed.
- Net charge-offs were $0.7 million in Q2 and $1.3 million in the first half, below comparable 2013 amounts. The allowance for credit losses, including off-balance-sheet exposure, was $35.1 million; the loan-loss allowance alone was $32.4 million.
- Total nonperforming assets were $29.6 million, down from $35.0 million at December 31, 2013 and $50.4 million at June 30, 2013. However, purchased non-covered nonperforming assets increased to $16.6 million from $3.6 million at year-end. The FDIC loss-sharing protection for County Bank non-single-family residential loans expired February 6, 2014; related loans were reclassified as non-covered. Single-family coverage continues through February 2019.
Outlook, risks and unusual items
- Outlook: No specific earnings or revenue guidance was provided. Management’s most-likely forecast for the 12 months ending June 30, 2015 assumes relatively stable market rates and continued lower yields on new or refinanced loans and securities than on older assets. Management expects to continue quarterly dividends, subject to Board review and capital, earnings and asset-quality conditions.
- Interest-rate and securities risk: The balance sheet was described as risk-neutral to slightly liability-sensitive, depending on model assumptions. Management bought shorter-duration securities to limit exposure to rising rates, accepting lower yields. The Company does not use derivatives for interest-rate risk management. Securities had substantial unrealized losses, principally attributed to market-rate changes; management said it did not intend, and was not more likely than not required, to sell the securities before cost recovery. Future impairment remains possible.
- Credit and funding risks: Management cautioned that classified and nonperforming assets may fluctuate and that future loan-loss provisions may be needed, including on acquired loans. Liquidity depends in part on deposit stability, market access and the ability to meet unfunded commitments. Loan commitments were $318.7 million and standby letters of credit were $29.2 million.
- Other matters: The Company reported various threatened or filed legal matters but did not expect a material adverse effect. It reported no material change in risk factors from its 2013 Form 10-K. Revised regulatory capital rules were scheduled to begin taking effect in 2015; management’s pro forma assessment showed capital above the specified standards.
Important facts for investors to verify
- Whether net interest margin and net interest income stabilize as legacy higher-yield assets run off and market rates change.
- Whether loan balances, merchant-processing activity and deposit service-charge income recover or continue to weaken.
- Credit trends in purchased non-covered loans following expiration of FDIC loss-sharing protection, and the adequacy of the allowance.
- Realized liquidity and interest-rate sensitivity, including deposit behavior, pledged securities and upcoming borrowing maturities.
- Capital levels and the sustainability of dividends and share repurchases under lower earnings or revised capital requirements.