Westamerica Bancorporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. The filing is unaudited. Westamerica is a California-based bank holding company whose wholly owned subsidiary is Westamerica Bank.
Financial results and position
Amounts are in millions, except per-share data and ratios.
| Metric | Q1 2021 | Comparable period / change |
|---|---|---|
| Net interest and loan fee income, FTE | $42.6 | $40.5 in Q1 2020; $43.3 in Q4 2020 |
| Net interest margin, FTE | 2.74% | 3.10% in Q1 2020; 2.81% in Q4 2020 |
| Provision for credit losses | $0 | $4.3 in Q1 2020; $0 in Q4 2020 |
| Noninterest income / expense | $10.2 / $24.9 | $11.6 / $24.7 in Q1 2020 |
| Net income / diluted EPS | $20.1 / $0.75 | $17.0 / $0.63 in Q1 2020; $23.8 / $0.89 in Q4 2020 |
| Net cash from operating activities | $32.3 | $54.5 in Q1 2020 |
Compared with Q1 2020, net income increased $3.2 million, reflecting higher net interest income and no credit-loss provision in Q1 2021, partly offset by lower noninterest income and slightly higher expenses. Compared with Q4 2020, net income declined $3.7 million, primarily as the prior quarter included a $3.5 million gain on sale of a closed branch building and more make-whole bond interest income.
- Assets and funding at March 31: Total assets were $6.91 billion; loans were $1.29 billion, net loans $1.27 billion, and investment securities $4.46 billion. Deposits totaled $5.92 billion, including $2.80 billion noninterest-bearing. Cash and due from banks were $866.5 million.
- Debt and liquidity: Short-term borrowed funds were $95.5 million and other borrowed funds $1.7 million; the parent company reported no debt. Deposits increased $235.9 million from year-end. Cash rose $245.2 million during the quarter, while investing activities used $9.3 million and financing activities provided $222.2 million.
- Credit and capital: The allowance for loan losses was $23.5 million, down from $23.9 million at year-end; quarterly net charge-offs were $371,000. Nonperforming assets were $4.1 million. Company total risk-based capital was 16.88%; the Bank’s was 13.72%. Company tangible equity to tangible assets was 10.15%.
- Shareholder returns: The quarterly dividend was $0.41 per share, totaling $11.0 million. The company repurchased 4,000 shares for $232,000.
Material developments and unusual items
- First-quarter net interest income benefited from higher average investment and PPP loan balances, but the FTE margin fell year over year as yields on earning assets declined. Q1 2021 included $700,000 of make-whole interest income on corporate bonds redeemed before maturity.
- The Bank originated $91 million of second-round Paycheck Protection Program loans in Q1. PPP loans outstanding were $233 million at quarter-end; management expects no credit losses on these SBA-guaranteed loans.
- Available-for-sale securities generated a $45.5 million after-tax other comprehensive loss, principally from market-value changes. This reduced accumulated other comprehensive income and contributed to shareholders’ equity declining to $812.1 million from $844.8 million at year-end. Management attributed unrealized losses primarily to market conditions and interest-rate changes, and said it did not intend, or expect to be required, to sell the securities before recovery.
- One $15.0 million corporate bond, maturing July 2021, was rated below investment grade. The filing states substantially all other investment securities were investment grade.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management said it expects the Company and Bank to remain above regulatory “well-capitalized” thresholds while continuing quarterly dividends, subject to capital, earnings, asset quality, regulatory limits and Board discretion.
- Management described the Bank’s overall credit quality as reasonably stable, while cautioning that classified and nonperforming assets may fluctuate and could increase. At March 31, $1.8 million of consumer loans and one $2.3 million hospitality commercial real estate loan remained under COVID-related payment deferrals.
- Interest-rate simulations estimated that an immediate 1 percentage-point parallel increase would raise first-year net interest income 13.0% under a static balance sheet and 6.9% under a dynamic balance sheet. These are model estimates dependent on assumptions; the Company reported a slightly asset-sensitive position.
- Management said liquidity stress testing supported its view that liquidity was adequate, but gave no assurance against future liquidity pressure. Key stated risks include COVID-19 and economic conditions, interest rates, credit quality and collateral values, deposit competition, market liquidity, operations and cybersecurity, regulation, and legal contingencies.
- Legal proceedings were described as ordinary-course matters; management, based on counsel’s advice, did not expect a material adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the absence of a credit-loss provision remains appropriate as pandemic-related deferrals end and borrower conditions evolve; review loan grades, delinquencies, nonaccruals and allowance assumptions.
- How the securities portfolio’s unrealized losses, interest-rate exposure and the below-investment-grade bond develop, including whether values recover or credit concerns emerge.
- Whether PPP balances, deposit growth and cash levels persist, and how these affect net interest income and margin as loans are forgiven or repaid and funds are redeployed.
- Whether the reported interest-rate sensitivity and liquidity estimates hold under changing rates, deposit outflows, loan demand and market conditions.
- Whether dividends and capital remain sustainable given the reduction in equity during the quarter and future credit, market and operating conditions.