Westamerica Bancorporation — Q2 2022 Form 10-Q
Business context and reporting period. Westamerica Bancorporation is a California-based bank holding company. This unaudited filing covers the three and six months ended June 30, 2022; balance-sheet comparisons are primarily with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q2 earnings: Net income was $25.3 million and diluted EPS was $0.94, versus $22.6 million and $0.84 in Q2 2021. For the first six months, net income was $47.9 million and diluted EPS was $1.78, versus $42.7 million and $1.59.
- Revenue and margins: Q2 net interest and loan fee income on a fully taxable equivalent (FTE) basis was $48.0 million, up $3.5 million year over year; noninterest income was $11.3 million, up $0.2 million. First-half FTE net interest and loan fee income was $91.8 million, up $4.8 million; noninterest income was $22.8 million, up $1.6 million. FTE net interest margin was 2.74% for Q2 versus 2.70%; first-half margin was 2.63% versus 2.72%. The efficiency ratio improved to 41.5% in Q2 from 43.7%.
- Costs and credit: Q2 noninterest expense increased $0.3 million to $24.6 million; first-half expense increased $0.3 million to $49.5 million. No provision for credit losses was recorded in Q2 or the first half. The allowance for loan losses was $22.3 million, down from $23.5 million at year-end. First-half net loan losses were $1.2 million; nonperforming loans were $0.9 million, compared with $1.0 million at year-end.
- Cash flow: First-half operating cash flow was $42.4 million. Investing activities used $373.3 million, principally reflecting net securities purchases; financing activities used $47.9 million. Cash and due from banks fell $378.8 million to $753.3 million.
- Balance sheet and funding: Total assets were $7.22 billion, down from $7.46 billion at year-end. Deposits were $6.42 billion, broadly unchanged; loans were $1.00 billion, down from $1.07 billion. Short-term borrowings were $118.2 million, versus $146.2 million. The parent company reported no debt. Shareholders’ equity fell to $617.1 million from $827.1 million.
- Capital: At June 30, the Company’s total risk-based capital ratio was 15.37%; the Bank’s was 12.70%. The Company and Bank exceeded the stated regulatory capital requirements. Tangible equity to tangible assets was 6.97%, versus 10.24% in the prior-year comparison presented in the financial summary.
Material changes and unusual items
- Interest income benefited from higher average investment-security balances and increased interest earned on cash, partly offset by lower average loan balances. Average loans fell $247 million year over year in Q2; average securities rose $615 million.
- Rising market rates caused substantial unrealized losses on available-for-sale debt securities. At June 30, gross unrealized losses were $272.8 million; the filing attributes them primarily to market conditions, including interest-rate changes, and says it did not intend, and was not likely required, to sell the securities before recovery of amortized cost. First-half after-tax other comprehensive loss was $237.7 million. Accumulated other comprehensive income moved from $49.7 million at year-end to a loss of $188.0 million, contributing to the decline in equity.
- First-half noninterest income included a $1.2 million payments-network reconciling payment in Q1. Higher estimated operating losses on low-income-housing limited-partnership investments raised other expense; related tax credits contributed to a lower effective tax rate.
- Q2 dividends were $0.42 per share; first-half dividends totaled $0.84 per share. No shares were repurchased in Q2. The existing authorization covered up to 1.75 million shares through September 1, 2022.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management describes the balance sheet as asset sensitive. Its simulations estimated first-year net interest income increases of 4.7% and 9.2% under dynamic-balance-sheet rate increases of 100 and 200 basis points; static-balance-sheet estimates were 12.8% and 24.9%. These are model scenarios, not forecasts, and depend on assumptions that may not occur.
- Management cited inflation, Federal Reserve tightening, economic uncertainty, COVID-19, climate-related events and the war in Ukraine as factors whose effects remain uncertain. The filing also identifies interest-rate, liquidity, credit, market, operational and cybersecurity risks.
- Deposits and shareholders’ equity supplied 97% of funding for average assets in the first half. Management said it was satisfied with liquidity based on its latest stress test, while cautioning that reduced liquidity cannot be ruled out. Approximately $1.0 billion of securities were pledged as collateral.
- Management expects the Bank to maintain capital above well-capitalized regulatory thresholds and expects quarterly dividends to continue, subject to Board discretion and ongoing evaluation. Routine legal proceedings were not expected to have a material adverse effect; no material pending legal proceeding was disclosed.
Important facts for investors to verify
- Whether rising rates, deposit pricing and deposit retention change the company’s net interest margin and the assumptions underlying its asset-sensitivity simulations.
- The duration and potential recovery of the securities portfolio’s unrealized losses, and the resulting effects on accumulated other comprehensive loss, reported equity and capital measures.
- Whether loan balances, consumer charge-offs and credit quality trends change, and whether the $22.3 million loan-loss allowance remains adequate as economic conditions evolve.
- How much of first-half earnings growth is recurring, given the $1.2 million payments-network payment and the impact of low-income-housing investment losses and tax credits.
- Future deposit, cash and borrowing trends, capital levels, and any dividend or share-repurchase decisions.