Westamerica Bancorporation — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; the filing also provides unaudited fourth-quarter results. Westamerica provides banking services primarily to small businesses, professionals and consumers in Northern and Central California through Westamerica Bank. At year-end, it operated 80 branches, reported $5.62 billion in assets and employed 737 full-time-equivalent staff.
Key financial results
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Interest and loan fee income | $158.7 million | $151.7 million | Up $7.0 million |
| Net interest and loan fee income | $156.8 million | $149.8 million | Up $7.0 million; FTE income was $161.4 million, up $6.0 million |
| Noninterest income | $47.4 million | $48.1 million | Down $0.7 million |
| Noninterest expense | $99.0 million | $106.9 million | Down $7.9 million |
| Net income | $80.4 million | $71.6 million | Up $8.8 million |
| Diluted EPS | $2.98 | $2.67 | Up $0.31 |
| Net interest margin (FTE) | 3.11% | 2.98% | Up 0.13 percentage points |
| Return on average assets / equity | 1.44% / 11.90% | 1.27% / 11.35% | Both improved |
| Net loan losses / average loans | 0.16% | 0.14% | Net charge-offs were $1.9 million |
Fourth-quarter 2019 net income was $20.7 million, or $0.77 diluted EPS, compared with $19.1 million and $0.71 in fourth-quarter 2018. Total 2019 revenue, calculated as net interest income plus noninterest income, was approximately $204.2 million.
Balance sheet, funding and cash flow
- Year-end assets were $5.62 billion, up from $5.57 billion. Deposits were $4.81 billion, down from $4.87 billion; loans were $1.13 billion, down from $1.21 billion.
- Investment securities totaled approximately $3.82 billion, up from $3.64 billion. Cash and due from banks were $373.4 million, versus $420.3 million.
- Shareholders’ equity increased to $731.4 million from $615.6 million, including a $66.0 million after-tax increase in unrealized securities gains recorded in other comprehensive income. Equity/assets rose to 13.02% from 11.05%.
- Short-term borrowed funds, consisting of repurchase agreements, were $30.9 million, down from $51.2 million. The parent company reported no debt.
- 2019 operating cash flow was $80.7 million; investing activities used $22.3 million and financing activities used $105.3 million. Cash declined by $46.9 million to $373.4 million.
- Checking and savings balances represented 96.2% of average deposits. The average cost of interest-bearing liabilities was 0.07%; management emphasized lower-cost deposits as a funding strategy.
- Regulatory capital remained above minimums: company total risk-based capital was 16.83%, and the Bank’s was 12.58%. The Bank was classified as well capitalized.
Material changes versus 2018
- Higher earning-asset yields and larger average investment balances lifted FTE net interest income; lower average cash and loan balances partly offset the benefit. The FOMC cut rates three times in 2019.
- Expense declined mainly from lower loss-contingency costs, salaries and benefits, FDIC assessments and intangible amortization. Noninterest income eased, including lower deposit service charges and debit-card fees; merchant-processing income increased.
- Loan balances continued to contract, while securities holdings expanded. Nonperforming assets fell to $4.9 million from $5.8 million, and nonaccrual loans declined to $4.4 million from $4.9 million.
- Net unrealized securities gains reversed the prior-year after-tax unrealized loss: 2019 other comprehensive income was $66.0 million, compared with a $19.7 million loss in 2018.
Outlook, risks and unusual items
- Outlook: The filing gives no earnings or revenue guidance. Management said it expected to maintain capital above the highest effective regulatory standard and continue quarterly dividends, subject to board discretion and ongoing evaluation. It also said its latest capital and liquidity stress tests supported its view that those positions were satisfactory.
- Interest-rate sensitivity: The balance sheet was described as slightly asset-sensitive. A static simulation estimated first-year net interest income would change by -8.2% with an immediate 1 percentage-point rate decline and +5.1% with a 1-point increase; the dynamic simulation estimated -4.1% and +1.9%, respectively. These are model estimates, not forecasts.
- Credit and geographic risks: Substantially all business is in California; real estate was primary collateral for approximately 57% of loans, and about 22% of loans were to Central Valley borrowers. Management cited economic, borrower, collateral-value and natural-disaster risks. The $19.5 million loan-loss allowance included a $3.7 million unallocated component; the auditor identified estimation of this unallocated allowance as a critical audit matter.
- Securities risk: Corporate securities were $1.83 billion, with financial-sector issuers representing 42% of that amount. One corporate bond, with $15.0 million amortized cost and $14.5 million fair value, was rated below investment grade. Management did not consider the disclosed unrealized losses other-than-temporary and said it did not intend, or expect to be required, to sell before cost recovery.
- Contingencies: 2019 expense included a $301,000 increase in estimated customer refunds for revenue recognized before 2018 and a $252,000 lawsuit settlement, both included in $553,000 of loss contingencies. The $252,000 settlement was paid in 2019; a separate $3.5 million settlement accrued in 2018 was paid in January 2019. The estimated customer-refund liability was $5.843 million and subject to revision. Management did not anticipate additional losses for the cited matters; it reported no material pending legal proceeding otherwise.
- Accounting and tax items: The company adopted lease accounting in 2019, recognizing lease liabilities and right-of-use assets; year-end operating lease liability was $17.1 million. Adoption of the callable-debt premium amortization standard reduced retained earnings by $2.8 million after tax. CECL took effect January 1, 2020; the filing’s accounting note expected an immaterial cumulative-effect adjustment, while noting credit-loss estimates remain subject to uncertainty.
- The 2019 income-tax provision was $24.8 million (23.6% effective rate), versus $19.4 million (21.4%) in 2018. The 2017 comparison was affected by a $12.3 million deferred-tax remeasurement charge from tax-law changes and $8.0 million in securities gains.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether loan contraction continues, and how credit quality, consumer-loan charge-offs and the allowance—particularly its qualitative unallocated portion—develop.
- The composition, credit quality, unrealized gains or losses, and interest-rate and liquidity exposure of the expanded securities portfolio.
- Whether deposit balances and mix remain stable and how rate changes affect funding costs and net interest margin.
- The final CECL adoption impact and any subsequent changes in the estimated $5.843 million customer-refund liability or other contingencies.
- Whether dividends and any share repurchases remain supported by earnings, liquidity, capital and regulatory restrictions.