Westamerica Bancorporation — 2018 Form 10-K Summary
Business context and reporting period
Westamerica Bancorporation is a California bank holding company serving individuals and businesses, with a focus on small businesses in Northern and Central California. This filing covers the fiscal year ended December 31, 2018; quarterly data below highlights the fourth quarter. Amounts are in U.S. dollars.
Financial performance, condition and liquidity
- Full-year results: Net income was $71.6 million, or $2.67 diluted EPS, versus $50.0 million and $1.89 in 2017. Net interest and loan fee income was $149.8 million; fully taxable equivalent (FTE) net interest income was $155.4 million. Noninterest income was $48.1 million and noninterest expense was $106.9 million.
- Fourth quarter: Net income was $19.1 million, or $0.71 diluted EPS, compared with $4.2 million and $0.16 in fourth-quarter 2017. The 2017 quarter included the adverse tax effects of the Tax Cuts and Jobs Act.
- Margins and returns: FTE net interest margin was 2.98%, up from 2.95% in 2017. Return on average assets was 1.27% (0.92% in 2017); return on average common equity was 11.35% (8.39%); and the efficiency ratio was 52.52%.
- Balance sheet: At year-end, assets were $5.57 billion, deposits $4.87 billion, loans $1.21 billion, investment securities approximately $3.64 billion, and shareholders’ equity $615.6 million. Loans declined from $1.29 billion in 2017, while investment securities increased from $3.35 billion.
- Credit quality: Nonperforming assets fell to $5.8 million from $7.9 million. Net charge-offs were $1.7 million, or 0.14% of average loans, versus $1.0 million, or 0.08%, in 2017. The loan-loss allowance was $21.4 million, and the company recorded no provision in 2018.
- Cash flow and funding: Operating cash flow was $96.6 million; investing activities used $253.6 million, primarily reflecting securities purchases; financing activities provided $2.2 million. Cash and due from banks decreased $154.7 million to $420.3 million. Customer deposits and equity funded 98% of average assets. Short-term borrowings were $51.2 million; the filing reports no parent-company debt and no Federal Home Loan Bank advances.
- Capital and shareholder returns: Company total risk-based capital was 17.03% and the Bank’s was 13.94%; the Bank was classified as well capitalized. The company paid $1.60 per share in dividends and reported a 60% payout ratio.
Material changes versus the prior comparable period
- Net income rose $21.5 million year over year. Higher average investment balances and asset yields supported higher net interest income, partly offset by lower average loan balances.
- 2018’s lower tax provision ($19.4 million versus $37.1 million) materially aided the comparison. The 2017 provision included a $12.3 million deferred-tax-asset remeasurement charge following tax-law changes; effective tax rates were 21.4% in 2018 and 42.6% in 2017.
- Noninterest income declined $8.5 million because 2017 included $8.0 million of securities gains. Merchant-processing income increased, while deposit service charges declined.
- Year-end available-for-sale securities had $60.4 million of gross unrealized losses, up from $34.3 million in 2017. The related 2018 after-tax other comprehensive loss was $19.7 million, and accumulated other comprehensive loss reached $40.0 million.
Outlook, risks, contingencies and unusual items
- Management provided no specific earnings or revenue guidance. It expected regulatory capital to remain above the highest effective standards and anticipated continuing quarterly dividends, subject to board discretion and conditions.
- Management described the balance sheet as slightly asset-sensitive: modeled first-year net interest income changes under a 1% rate move ranged from -7.5% to +5.3% in the static simulation and -3.6% to +2.8% in the dynamic simulation. Results depend on assumptions and actual balance-sheet mix.
- Key risks include California economic concentration, real-estate collateral exposure, interest-rate and securities valuation risk, competition, deposit funding and liquidity, cybersecurity/vendor disruptions, regulatory change, and natural disasters. About 55% of loans used real estate as principal collateral; approximately 22% were to Central Valley borrowers.
- Unusual items included a $3.5 million 2018 accrued liability for a mediated lawsuit settlement, subject to court approval, and a $5.5 million liability accrued in 2017 for customer refunds of pre-2017 revenue, which remains subject to revision. Management did not expect other pending legal matters to materially affect results.
- The FDIC indemnification on $5.7 million of residential real-estate-secured loans expired February 6, 2019. The company planned to adopt CECL on January 1, 2020 and was still assessing the adoption impact; it had not decided whether to use a three-year regulatory-capital phase-in. Adoption of lease accounting in 2019 was expected to record a $15.3 million lease liability and corresponding right-of-use asset.
- Management and the auditor reported effective internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether loan balances continue to contract and whether credit losses, classified loans, or the allowance change materially as the portfolio mix evolves.
- The drivers and potential earnings or capital effects of the investment portfolio’s unrealized losses, especially if securities must be sold or credit conditions deteriorate.
- The final amount and resolution of the lawsuit settlement and customer refund obligation, including any revisions to accrued liabilities.
- The eventual CECL adoption adjustment and its impact on allowance, retained earnings, regulatory capital, and subsequent credit-loss volatility.
- Whether deposit growth, low funding costs, liquidity, modeled interest-rate sensitivity, and dividend capacity remain consistent with management’s stated expectations.