Westamerica Bancorporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Westamerica is a California bank holding company; its principal subsidiary is Westamerica Bank. Financial amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest and loan fee income, FTE | $44.5 | $42.1 | $87.1 | $82.6 |
| Noninterest income | $11.0 | $9.6 | $21.2 | $21.2 |
| Noninterest expense | $24.3 | $24.8 | $49.2 | $49.4 |
| Provision for credit losses | $0 | $0 | $0 | $4.3 |
| Net income | $22.6 | $19.6 | $42.7 | $36.5 |
| Diluted EPS | $0.84 | $0.72 | $1.59 | $1.35 |
| Net interest margin, FTE | 2.70% | 2.99% | 2.72% | 3.04% |
Second-quarter net income rose about 15% year over year; first-half net income rose about 17%. Q2 return on assets was 1.29% and return on common equity was 12.16%. The efficiency ratio improved to 43.7% from 48.0% in Q2 2020.
At June 30, total assets were $7.15 billion, up from $6.75 billion at December 31, 2020. Deposits were $6.08 billion, versus $5.69 billion; loans were $1.19 billion, down from $1.26 billion. Cash and due from banks totaled $939.9 million. Investment securities totaled approximately $4.72 billion. Shareholders’ equity was $842.2 million, compared with $844.8 million at year-end. Short-term borrowed funds were $90.0 million; the parent company reported no debt.
For the first six months, operating cash flow was $45.5 million, investing cash flow was negative $83.5 million, and financing cash flow was $356.7 million. Cash increased $318.7 million to $939.9 million. Total risk-based capital was 15.75% at the company and 13.09% at the Bank; the Bank’s leverage ratio was 7.44%. The quarterly dividend was $0.41 per share.
Material changes and drivers
- Net interest income increased, mainly from larger average investment, PPP loan, and interest-bearing cash balances. Lower yields on earning assets—particularly low-yielding cash—reduced margin; the FTE margin fell 29 basis points year over year in Q2.
- Q2 and first-half 2021 results included $1.4 million and $2.1 million, respectively, of make-whole interest on corporate bonds redeemed early, adding approximately $0.04 and $0.06 to EPS. These are unusual items to distinguish from recurring earnings.
- Noninterest income was higher in Q2, led by merchant processing and debit-card fees. First-half noninterest income was nearly unchanged: fee growth was offset by lower deposit service charges and a $603,000 loan recovery included in first-half 2020.
- Noninterest expense declined modestly, primarily from lower salaries and benefits attributed to attrition, partly offset by higher professional fees.
- Loans contracted from year-end, while deposits and the securities portfolio grew. The $165 million of PPP loans outstanding at quarter-end was SBA-guaranteed; the Bank originated $106 million under the second PPP round in the first half.
Outlook, risks and contingencies
- The filing gives no specific earnings, revenue, margin, or loan-growth guidance. Management said it expects the company and Bank to remain above well-capitalized regulatory minimums while continuing quarterly dividends, subject to board discretion and ongoing evaluation.
- Management considered the $23.7 million loan-loss allowance adequate and recorded no credit-loss provision in the first half of 2021. Nonperforming assets were $4.4 million at June 30; nonaccrual loans were $4.2 million. Management cautioned that classified and nonperforming assets may fluctuate and future deterioration cannot be ruled out.
- COVID-19 effects remain uncertain. CARES Act deferrals outstanding at quarter-end were $586,000, all consumer auto loans. Management also cited commercial real estate exposure to wildfire, drought, climate-related impacts, and changing office-space demand.
- The investment portfolio is a material exposure: $4.72 billion at quarter-end, including $2.60 billion of corporate securities and $1.09 billion of CLOs. Management reported that 99% of corporate securities were investment grade; a $14.9 million below-investment-grade bond matured and paid in full in July 2021. Interest-rate changes could affect portfolio values and net interest income.
- Management described the balance sheet as asset-sensitive. Its modeled first-year net interest income change for a 100-basis-point increase was +13.7% under a static simulation and +7.1% under a dynamic simulation; these are model estimates, not guidance.
- Liquidity was supported by deposits, cash, and securities; about $866 million of securities were pledged as collateral. Management said recent stress tests supported its liquidity and capital condition, while noting that future liquidity or capital pressure cannot be excluded.
- The company reported ordinary-course legal matters and did not expect them to have a material adverse effect. A previously accrued customer-refund obligation stood at $994,000. Disclosure controls were reported effective, with no material control change identified during the quarter.
Important facts for investors to verify
- How much of earnings growth is repeatable after excluding early-redemption make-whole interest and comparing against the prior-year credit-loss provision and loan recovery.
- Whether the falling net interest margin persists as cash balances remain high and earning-asset yields remain pressured.
- Trends in loan balances, PPP forgiveness and fees, credit grades, deferrals, nonaccruals, and allowance assumptions—especially commercial real estate.
- Portfolio credit concentration, duration and sensitivity to interest rates, and changes in unrealized securities gains or losses and accumulated other comprehensive income.
- Deposit growth and mix, liquidity needs, pledged collateral, capital ratios, and the sustainability of dividends under changing conditions.