Westamerica Bancorporation — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020. Westamerica is a California bank holding company focused on small businesses, providing banking services through Westamerica Bank in Northern and Central California.
Key financial results
| Metric | 2021 | 2020 |
|---|---|---|
| Interest and loan fee income | $173.4 million | $165.9 million |
| Net interest income | $171.5 million | $164.0 million |
| Net interest margin, FTE | 2.62% | 2.91% |
| Noninterest income | $43.3 million | $45.6 million |
| Noninterest expense | $97.8 million | $98.6 million |
| Net income | $86.5 million | $80.4 million |
| Diluted earnings per share | $3.22 | $2.98 |
| Operating cash flow | $88.7 million | $107.7 million |
Balance sheet and funding at December 31, 2021: Assets were $7.46 billion, up from $6.75 billion; deposits were $6.41 billion, up from $5.69 billion; loans were $1.07 billion, down from $1.26 billion; investment securities were $4.95 billion, up from $4.58 billion; and shareholders’ equity was $827.1 million, down from $844.8 million. Cash and due from banks totaled $1.13 billion. Short-term borrowings, principally repurchase agreements, were $146.2 million, versus $102.5 million a year earlier. The parent company reported no debt.
Profitability, credit and capital: Return on average assets was 1.23% (1.30% in 2020); return on average common equity was 11.52% (11.30%); and the efficiency ratio improved to 45.0% from 46.2%. Net loan losses fell to $342,000 from $2.0 million. Nonperforming assets declined to $1.0 million from $4.8 million. The year-end loan-loss allowance was $23.5 million, or 2.20% of loans, compared with $23.9 million, or 1.90%, in 2020. The company’s total risk-based capital ratio was 15.47%; the Bank’s was 13.17%. Both exceeded applicable minimums, and the Bank was categorized as well capitalized.
Material changes and notable items
- Net income rose 7.6%. Higher average balances of securities and interest-bearing cash, PPP loan yields, and $2.8 million of “make-whole” interest on corporate bonds redeemed early supported net interest income. The margin nevertheless compressed as lower-yielding cash represented more of earning assets and asset yields declined.
- There was no provision for credit losses in 2021, compared with a $4.3 million provision in 2020 associated with pandemic-related uncertainty. The allowance remains subject to management forecasts and estimates.
- Noninterest income declined $2.3 million, in part because 2020 included a $3.5 million gain on sale of a closed branch building and a $603,000 recovery on previously charged-off loans. Merchant processing, debit-card and trust fee income increased.
- PPP loans fell to $45.9 million from $186.9 million as borrowers repaid or received forgiveness. Pandemic-related loan deferrals outstanding at year-end were only $84,000, all consumer auto loans.
- Net cash increased $510.8 million during 2021, largely reflecting $726.0 million of deposit growth; investing activities used $306.1 million, while financing activities provided $728.2 million. The company paid $44.3 million in common dividends and repurchased $232,000 of stock.
- Accumulated other comprehensive income declined $64.7 million, primarily reflecting a reduction in unrealized gains on available-for-sale securities. The portfolio’s fair value remained above amortized cost in aggregate at year-end; management attributed unrealized losses principally to market conditions, including interest rates, and did not expect to sell securities before recovery.
Outlook, risks and contingencies
Management provided no quantified earnings or revenue guidance. It cautioned that pandemic effects remained uncertain and could pressure net interest margin and noninterest income and increase credit losses. At year-end, the company described its balance sheet as slightly asset-sensitive; its simulations estimated first-year net interest income increases of 13.2% for an immediate 1.00% parallel rate increase under a static balance sheet and 7.9% under a dynamic balance sheet. These are model estimates, not forecasts or guarantees.
Key exposures include California-centered lending and deposits, real-estate collateral (about 53% of loans), interest-rate and securities valuation risk, deposit competition, and climate and natural-disaster effects. Estimated uninsured deposits were $3.1 billion. The securities portfolio was $4.95 billion, including $2.75 billion of corporate securities and $1.39 billion of collateralized loan obligations; management said substantially all securities were investment grade. The company also disclosed uncertainty around PPP compliance and SBA guarantees. Routine legal matters were not expected to have a material adverse effect; a previously accrued customer-refund obligation had $981,000 remaining at year-end.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses, particularly the assumptions used in reasonable and supportable economic forecasts, was identified as a critical audit matter.
Most important facts for investors to verify
- Whether deposit growth persists and how much of the $3.1 billion estimated uninsured balance is concentrated or rate-sensitive.
- Whether securities portfolio valuation changes, including the decline in accumulated unrealized gains, affect equity, liquidity or future income.
- Whether net interest margin stabilizes as interest rates and the mix of cash, securities, loans and deposits change.
- Whether loan quality and the $23.5 million allowance remain adequate as pandemic support and PPP-related effects recede.
- Whether reported earnings are sustainable without the $2.8 million bond redemption income and amid continuing fee-income and margin pressures.
- How capital, dividends and repurchases evolve; the board’s intention to continue quarterly dividends is subject to earnings, capital, regulation and its discretion.