Westamerica Bancorp in San Rafael, Calif., continues to pump out record earnings - despite a shrinking loan portfolio.
As the $4.6 billion-asset company waits for the northern California economy to ramp up, it is relying on fee income from deposit services, relentless cost-cutting, and share buybacks to boost profits and per-share earnings.
Some investors complain that Westamerica has not been aggressive enough in pursuing loans. But others say that it is being prudent and that its performance ratios - some of the best in the industry - validate the strategy.
Westamerica's second-quarter net income rose 4.1% from the year-earlier period, to $24.6 million. Fee income climbed 5.7%, to $11.6 million, mainly from more revenue from debit card fees and other deposit account charges, and from higher sales of mutual funds and annuities.
Net interest income was virtually flat, however, at $54.3 million. Though growth in commercial and industrial lending, and in consumer loans picked up, commercial real estate lending fell by 14.9%. That resulted in a 4.5% drop in total loans, to $2.27 billion.
The results resembled the earnings statements of about the past 10 quarters. Westamerica scaled back on business lending in 2000, after the dot-com bust. It withdrew even further in 2002, when the refinancing boom drove rates on commercial real estate loans so low that it did not want them, said chairman, president, and chief executive David L. Payne.
"We cut back on our lending, because the pricing for CRE loans had just gotten too skinny and too irrational," Mr. Payne said.
To offset the decline in loan volume, he has been a stickler for streamlining expenses. Second-quarter noninterest expenses dropped 1.9%, to $25 million, mainly because Westamerica has left positions vacant as it waits for the region's economy to recover. The upshot: an already low efficiency ratio dropped to 37.9%.
Analysts do not seem to mind the approach because the company has some of the best performance ratios in the industry. Westamerica's returns on assets and equity rose again during the quarter, to 2.2% and 31.1%, respectively - far above industry averages, according to the Federal Deposit Insurance Corp.
"Every bank has to make a decision regarding growth versus profitability, and Westamerica is focused on maintaining profitability," said Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc. in San Francisco. Different banks have different approaches, but "it's hard to criticize" Westamerica, he said.
The company has its critics. Investors posting items on Internet message boards routinely complain that it is too risk-averse. They are particularly miffed that Westamerica refused to participate in the commercial real estate refi boom of the past several years.
But in a market where business customers prefer fixed-rate loans, Westamerica has been wise to wait until interest rates start rising, said Adam Barkstrom, an analyst in the Richmond, Va., office of Legg Mason Wood Walker Inc.
"They've opted not to get into bidding wars for commercial real estate loans, because they did not want to get locked down with a lot of lower-rate paper," Mr. Barkstrom said. "With the expectation of rates going up, I think it's been the very prudent thing to do."
The FDIC is worried that problems could crop up among the California banks that have been active in that boom.
In its quarterly report on state banking conditions, the agency pointed out that the median ratio of CRE loans to Tier 1 capital among California institutions was 439% as of March 31, versus 358% five years earlier. While this ratio is generally always higher in the Golden State than elsewhere, FDIC officials would be more comfortable if that ratio were in the 300% range.
Mr. Payne said Westamerica will more actively pursue commercial real estate loans when market conditions and pricing improve. In the meantime, it is starting to do more C&I lending, Mr. Payne said. That activity increased slightly in the second quarter, to $624 million.
Some investors who would like to see Westamerica grow more aggressively through acquisitions worry that Mr. Payne's reputation for cost-cutting has scared away sellers.
Westamerica bought six banks between 1992 and 1997 but has purchased only two since then. In the mid-1990s it was known for slashing costs and firing management at acquired banks in a quest to make deals accretive within three months.
The company has always given the boards of its acquisitions two options, Mr. Payne said: It will pay a higher price and reduce expenses by firing employees, or it will pay a lower price and retain many of them. Given that choice, boards almost always choose the higher price, he said.
Still, Mr. Payne insists that Westamerica has eased up on cost-cutting. For example, it kept important employees and business lines when it acquired First Counties Bank of Clearlake in 2000 and Kerman State Bank in 2002.
"I'm learning there are multiple ways to accomplish an accretive acquisition," he said.
