Westamerica Bancorporation 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2009. Westamerica Bancorporation is a California-based financial holding company. The reporting period is significantly impacted by the acquisition of County Bank from the FDIC on February 6, 2009, which added approximately $1.62 billion in assets and $1.58 billion in liabilities. The Company also participated in the Troubled Asset Relief Program (TARP), issuing preferred stock to the U.S. Treasury in February 2009.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Income (Common Equity) | $22.1 million | $12.2 million | $74.3 million | $39.0 million |
| Diluted EPS | $0.75 | $0.42 | $2.54 | $1.33 |
| Net Interest Income (FTE) | $62.3 million | $49.7 million | $121.7 million | $97.7 million |
| Noninterest Income | $16.4 million | ($3.8 million) | $80.4 million | $15.5 million |
| Noninterest Expense | $38.7 million | $26.3 million | $72.8 million | $49.4 million |
| Provision for Loan Losses | $2.6 million | $0.6 million | $4.4 million | $1.2 million |
| Total Assets | $5.19 billion | $4.19 billion | — | — |
| Total Deposits | $4.16 billion | $3.16 billion | — | — |
| Shareholders' Equity | $559.2 million | $410.4 million | — | — |
| Return on Assets (Annualized) | 1.68% | 1.15% | 2.92% | 1.80% |
| Return on Equity (Annualized) | 19.03% | 11.90% | 33.06% | 19.44% |
| Net Interest Margin (FTE) | 5.34% | 5.16% | 5.35% | 4.97% |
Material Changes vs. Prior Period
- Acquisition Impact: The acquisition of County Bank drove significant growth in assets, deposits, and loans. It contributed a $48.8 million FAS 141R gain to noninterest income in the first half of 2009.
- Income Volatility: Q2 2008 results were depressed by an $18.2 million "other-than-temporary" impairment charge on FHLMC and FNMA preferred stock. Conversely, YTD 2009 included the $48.8 million acquisition gain.
- Expense Growth: Noninterest expenses increased 46.8% in Q2 2009 compared to Q2 2008, primarily due to acquisition-related costs (salaries, occupancy, equipment) and a sharp rise in FDIC insurance assessments (from $0.1 million to $3.2 million).
- Interest Rates: Net interest margin expanded due to a faster decline in rates paid on interest-bearing liabilities (down 60 bps) compared to yields on earning assets (down 34 bps).
- Capital Structure: Shareholders' equity increased by $149.4 million from year-end 2008, driven by the $83.7 million issuance of preferred stock to the Treasury and retained earnings.
Guidance, Outlook, and Risks
- Integration Costs: Management expects lower noninterest expenses (excluding FDIC assessments) in Q3 and Q4 2009 as branch consolidations and systems integrations for County Bank are completed.
- FDIC Assessments: Quarterly FDIC assessments are estimated at $1.5 million starting in Q3 2009, subject to rate changes.
- Dividend Restrictions: Due to the TARP preferred stock issuance, common stock dividends are restricted to $0.35 per share until the preferred stock is redeemed or transferred.
- Credit Quality: Non-covered nonperforming assets increased to $35.0 million (1.50% of non-covered loans/OREO). Covered nonperforming assets (from County Bank) totaled $105.1 million. Management notes that credit quality is dependent on economic conditions in the California Central Valley.
- Interest Rate Risk: The balance sheet remains slightly "liability sensitive." Management is deploying tactics to move toward a "neutral" position.
Investor Verification Checklist
- Acquisition Accounting: Verify the sustainability of the $48.8 million FAS 141R gain and the ongoing accretion/amortization impacts on future earnings.
- FDIC Loss Sharing: Review the terms of the loss-sharing agreement (80% coverage on first $269M losses) and the $47 million in net losses already submitted to the FDIC.
- Nonperforming Assets: Monitor the trend of non-covered nonaccrual loans, which rose to $29.6 million, and the specific exposure to residential construction and commercial real estate.
- Preferred Stock Redemption: Assess the timeline and cash flow requirements for redeeming the $83.7 million TARP preferred stock to lift dividend restrictions.
- Investment Portfolio: Review the unrealized losses on available-for-sale securities ($4.6 million) and held-to-maturity securities ($13.4 million) to gauge potential future impairment risks.