Westamerica Bancorporation — Q3 2021 Form 10-Q
Business context and reporting period. Westamerica Bancorporation is a California bank holding company whose primary subsidiary is Westamerica Bank. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Financial statement amounts below are in millions of dollars unless specified.
Financial performance and position
| Metric | Q3 / September 2021 | Comparable period / prior date |
|---|---|---|
| Net interest and loan fee income (FTE) | $44.0 million | $41.8 million in Q3 2020 |
| Noninterest income | $11.3 million | $10.5 million in Q3 2020 |
| Noninterest expense | $24.7 million | $24.6 million in Q3 2020 |
| Net income / diluted EPS | $22.1 million / $0.82 | $20.1 million / $0.74 in Q3 2020 |
| Nine-month net income / diluted EPS | $64.8 million / $2.41 | $56.6 million / $2.10 in 2020 |
| Net interest margin (FTE) | 2.60% for Q3; 2.67% for nine months | 2.78% and 2.95%, respectively, in 2020 |
| Return on assets / common equity | 1.22% / 11.58% for Q3 | 1.24% / 11.17% in Q3 2020 |
| Efficiency ratio | 44.7% for Q3; 45.2% for nine months | 47.1% and 47.4%, respectively, in 2020 |
| Total assets | $7,403.6 million | $6,747.9 million at December 31, 2020 |
| Total deposits | $6,289.0 million | $5,688.0 million at December 31, 2020 |
| Loans, net of allowance | $1,108.6 million | $1,232.4 million at December 31, 2020 |
| Cash and due from banks | $1,011.0 million | $621.3 million at December 31, 2020 |
| Short-term borrowed funds | $119.1 million | $102.5 million at December 31, 2020 |
| Shareholders’ equity | $838.0 million | $844.8 million at December 31, 2020 |
- Revenue and profit: Q3 net income rose $2.0 million year over year; nine-month net income increased $8.2 million. Nine-month FTE net interest income grew $6.6 million, and noninterest income increased $0.8 million.
- Cash flow: For the first nine months, operating activities provided $71.1 million, investing activities used $268.7 million, and financing activities provided $587.3 million. Cash increased $389.8 million to $1,011.0 million.
- Credit quality: Provision for credit losses was zero for Q3 and the first nine months of 2021, versus $4.3 million for the first nine months of 2020. The loan allowance was $23.9 million at September 30, 2021. Nonperforming assets were $1.8 million, down from $4.8 million at December 31, 2020; net loan recoveries were $26,000 for the nine months.
- Capital: Company total risk-based capital ratio was 15.54%; the Bank’s was 13.08%. The Company’s tangible equity to tangible assets ratio was 9.83%, down from 10.91% at year-end 2020. The Company reported equity equal to 11.3% of assets, versus 12.5% at year-end.
Material changes versus prior periods
- Interest income benefited from larger average investment securities and interest-bearing cash balances, but the increased share of low-yield cash contributed to lower margins. Average interest-bearing cash represented 14.3% of earning assets in Q3 2021 versus 5.5% in Q3 2020.
- Q3 2021 results included $732,000 of “make-whole” interest income on corporate bonds redeemed before maturity; the nine-month total was $2.8 million. Management said these items increased EPS by $0.02 and $0.07, respectively.
- Loan balances declined from year-end 2020, including PPP loans, which fell to $103.0 million from $186.9 million. Deposits increased by $601.0 million and investment securities increased to $5.0 billion from $4.6 billion.
- Other comprehensive income reflected a $43.1 million after-tax decline in unrealized gains on available-for-sale securities over the first nine months, compared with a $77.6 million gain in the prior-year period. The filing attributes unrealized securities losses primarily to market conditions, including interest-rate changes, and says it did not expect to sell the affected securities before recovery.
- Q3 noninterest income gains came chiefly from merchant processing, deposit fees, and debit card fees. Nine-month expense was broadly stable, with lower salaries and occupancy costs offset by higher professional and other expenses.
Outlook, commentary, and risks
- No numerical earnings or revenue guidance is provided. Management said it expected the Company and Bank to remain above regulatory well-capitalized minimums and anticipated continuing quarterly dividends, subject to Board discretion and ongoing evaluation.
- Management described liquidity and capital as satisfactory based on its stress tests, while cautioning that future liquidity, earnings, or capital could be affected by unexpected events. Deposits and shareholders’ equity supplied 97% of average-asset funding in Q3; the $5.0 billion securities portfolio is an additional liquidity source, with about $899 million pledged as collateral.
- The Company was asset-sensitive in its interest-rate simulations: an immediate 1 percentage point parallel rate increase was estimated to raise first-year net interest income 13.6% under the static simulation and 8.8% under the dynamic simulation. These are model estimates, not forecasts; results depend on balance-sheet and rate assumptions.
- Key stated risks include COVID-19 and its economic effects, borrower performance after payment deferrals, interest-rate and liquidity changes, credit and collateral quality, securities valuations, competition, operational and cybersecurity risks, regulation, natural disasters, and legal contingencies. Management said it continued to assess pandemic effects.
- At quarter-end, $1.0 million of consumer automobile loans remained under CARES Act payment deferrals. The Company reported $234.1 million of unfunded loan commitments, of which $36.3 million was not unconditionally cancellable, and $3.4 million of standby letters of credit.
- Various routine legal matters were disclosed; the Company did not expect them to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether earnings growth excluding the $2.8 million nine-month make-whole income is sustainable, and how PPP fee income and loan runoff affect future net interest income.
- Whether deposit growth persists and how the large cash balance and securities portfolio perform as rates change; review securities duration, unrealized marks, and concentration in corporate securities and CLOs.
- Whether the $23.9 million loan allowance remains adequate as economic conditions evolve, particularly for consumer and commercial real estate exposures; monitor delinquencies, nonaccruals, and deferred borrowers.
- How much capital flexibility remains after dividends and any future repurchases; confirm that capital and liquidity remain above applicable regulatory thresholds.
- Potential impact of the disclosed commitments, customer refund liability, and other contingencies, and any subsequent changes in COVID-19 conditions or regulatory requirements.