Westamerica Bancorporation — FY2020 Form 10-K
Business context and reporting period. This 10-K covers the fiscal year ended December 31, 2020, with comparisons to 2019. Westamerica is a California bank holding company serving individuals and businesses, with a strategic focus on small businesses in Northern and Central California. Its bank operated 79 branches in 21 counties. The company reported approximately $6.75 billion in assets, $5.69 billion in deposits and $845 million in shareholders’ equity at year-end.
Financial performance and position
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Net interest and loan fee income | $164.0 million | $156.8 million |
| Net interest income, fully taxable equivalent (FTE) | $167.7 million | $161.4 million |
| Noninterest income | $45.6 million | $47.4 million |
| Provision for credit losses | $4.3 million | None |
| Net income | $80.4 million | $80.4 million |
| Diluted EPS | $2.98 | $2.98 |
| Net interest margin (FTE) | 2.91% | 3.11% |
| Return on assets / common equity | 1.30% / 11.30% | 1.44% / 11.90% |
| Assets / loans / deposits | $6.75bn / $1.26bn / $5.69bn | $5.62bn / $1.13bn / $4.81bn |
| Allowance for loan credit losses | $23.9 million | $19.5 million |
| Shareholders’ equity / equity-to-assets | $844.8 million / 12.52% | $731.4 million / 13.02% |
| Short-term borrowings | $102.5 million | $30.9 million |
Cash flow: Net cash provided by operating activities was $107.7 million; investing activities used $748.9 million, principally reflecting securities purchases; financing activities provided $889.0 million, largely from $875.4 million of deposit growth. Cash and due from banks increased by $247.9 million to $621.3 million. The filing does not present a conventional free-cash-flow measure.
Liquidity and capital: Customer deposits and shareholders’ equity provided 97% of funding for average assets. The $4.58 billion securities portfolio was a substantial secondary liquidity source; approximately $888.6 million of securities were pledged as collateral. Company and Bank total risk-based capital ratios were 16.68% and 13.80%, respectively; both exceeded applicable regulatory requirements. The parent company reported no debt.
Material changes versus the prior comparable period
- Net income and diluted EPS were essentially unchanged. Higher FTE net interest income, supported by larger average investment balances and PPP lending, was largely offset by a $4.3 million credit-loss provision and lower noninterest income.
- Net interest margin declined to 2.91% from 3.11%, as market rates fell and lower-yielding investments made up a greater share of earning assets. Funding costs remained very low.
- Year-end deposits rose 18% and assets rose 20%. The company funded $249 million of PPP loans during 2020; $187 million remained outstanding, net of deferred fees and costs, at year-end.
- The investment securities portfolio increased to $4.58 billion from $3.82 billion. After-tax unrealized gains on available-for-sale securities lifted accumulated other comprehensive income to $114.4 million from $26.1 million.
- Noninterest income fell $1.8 million, including lower activity-based fees during the pandemic, partly offset by a $3.5 million gain on sale of a closed branch building. Noninterest expense decreased modestly to $98.6 million.
- Net loan losses were $2.0 million, or 0.16% of average loans, versus $1.9 million and 0.16% in 2019. Nonperforming assets declined to $4.8 million from $4.9 million.
Outlook, risks, contingencies and unusual items
- Management outlook: Management expects net interest margin and noninterest income to decline and credit-related losses to increase for an uncertain period because of pandemic-related economic weakness. It did not provide quantified earnings or growth guidance.
- COVID-19 and loan modifications: At year-end, deferred-payment balances were $7.8 million in commercial real estate loans, primarily hospitality and retail, $2.5 million in consumer loans and $33,000 in commercial loans. Management described the allowance as adequate, while emphasizing uncertainty in the economic outlook and credit estimates.
- PPP exposure: SBA guarantees PPP loans, but the company warns that ambiguity in program requirements creates compliance, litigation, reputational and potential guarantee-recovery risks if loans were originated, funded or serviced deficiently.
- Portfolio and geographic risk: Operations and deposits are concentrated in California. Real estate was the principal collateral for approximately 48% of loans. The securities portfolio included $1.16 billion of collateralized loan obligations, reported as senior tranches rated AAA or AA, and $2.12 billion of corporate securities; 99% of corporate securities were investment grade. Economic stress, market liquidity, issuer credit deterioration, interest-rate changes, oil prices and natural disasters could affect asset values and credit quality.
- Interest-rate sensitivity: Management characterized the balance sheet as slightly asset-sensitive. Its simulations estimated first-year net interest income increases of 12.96% under a static +1.00% parallel rate shift and 6.90% under a dynamic +1.00% shift; these are model estimates, not guidance, and depend on assumptions and balance-sheet composition.
- Other items: The 2020 results included the $3.5 million branch-property gain and a $4.3 million credit-loss provision. The company paid $4.4 million in customer refunds accrued in prior years and had $1.4 million remaining at year-end. It reported no material pending legal proceedings and did not expect routine cases to materially affect results.
- Accounting and audit: The company adopted CECL on January 1, 2020; adoption increased the loan allowance by $2.0 million and retained earnings by $52,000, among other adjustments. The auditor identified the reasonable-and-supportable economic forecasts used in the loan-loss estimate as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal control; management and the auditor concluded internal control was effective.
Most important facts for investors to verify
- Whether pandemic-related deferrals, especially hospitality and retail commercial real estate, develop into delinquencies, nonaccrual loans, charge-offs or additional reserve needs.
- How PPP forgiveness, fee recognition and SBA guarantee compliance affect remaining PPP balances and reported interest and fee income.
- Whether the large securities portfolio, including CLOs and corporate bonds, remains liquid and retains credit quality, and how unrealized gains or losses affect equity and capital.
- Whether the lower interest-rate environment further pressures margin and fee income, and whether actual results track management’s stated outlook.
- The sustainability of deposit growth, liquidity, regulatory capital, dividends and share repurchases; 2020 dividends totaled $44.3 million and share repurchases totaled $16.5 million.