Westamerica Bancorporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are in millions. The filing is unaudited, and management cautions that interim results are not necessarily indicative of full-year results.
Business context and key financial results
Westamerica Bancorporation is a California bank holding company; its principal subsidiary is Westamerica Bank. The bank’s business includes commercial and consumer lending, deposit services, payment processing, and a substantial investment securities portfolio.
- Net income: $22.6 million, or $0.84 diluted EPS, versus $20.1 million and $0.75 in Q1 2021. Q1 2022 results included a $1.2 million payments-network reconciling payment.
- Net interest and loan fee income: $43.3 million GAAP; $43.8 million on a fully taxable equivalent (FTE) basis, up from $42.6 million FTE in Q1 2021. Noninterest income was $11.6 million, versus $10.2 million.
- Expenses and credit: Noninterest expense was $24.9 million, approximately unchanged year over year. Provision for credit losses was zero. Net loan charge-offs were $589,000, compared with $371,000 in Q1 2021.
- Margins and returns: Net interest margin was 2.51% FTE, down from 2.74% in Q1 2021. Return on assets was 1.24%; return on common equity was 11.82%.
- Cash flow: Operating activities provided $31.8 million; investing activities used $85.6 million; financing activities used $40.8 million. Cash and due from banks decreased $94.5 million to $1.04 billion.
Financial position, liquidity, and capital
- At March 31, total assets were $7.31 billion; total deposits were $6.41 billion; shareholders’ equity was $701.7 million.
- Loans were $1.00 billion, down from $1.07 billion at December 31, 2021. Total investment securities were $4.90 billion. Noninterest-bearing deposits were $3.00 billion.
- Short-term borrowed funds were $124.4 million, down from $146.2 million at year-end. The parent company reported no debt.
- The bank relied primarily on customer deposits and equity for funding; these provided 97% of average total assets in Q1. Approximately $1.0 billion of securities were pledged as collateral.
- Company total risk-based capital was 15.60%; the bank’s was 13.15%. The bank’s capital ratios exceeded the filing’s “well-capitalized” thresholds.
- The quarterly dividend was $0.42 per share. The company repurchased 3,000 shares for approximately $218,000 during the quarter.
Material changes versus comparable periods
- Compared with Q1 2021, net income increased $2.5 million. Management attributed higher FTE net interest income primarily to larger average investment securities and interest-bearing cash balances, partly offset by fewer average loans and lower investment-security yields.
- Noninterest income increased $1.4 million year over year, primarily because of the $1.2 million payments-network payment; higher debit card fees also contributed. The payment is an unusual item and should not automatically be treated as recurring.
- Average loans fell by $222 million year over year, while average investment securities rose by $507 million and average interest-bearing cash by $468 million. PPP loan balances and related income declined substantially as loans were forgiven or repaid.
- Compared with December 31, 2021, deposits were down $8.1 million and loans were down $65.6 million. Shareholders’ equity fell $125.4 million, mainly reflecting a $138.0 million after-tax loss in other comprehensive income from unrealized losses on available-for-sale securities.
Outlook, risks, and unusual items
- The filing provides no earnings or revenue guidance. Management reported that the Federal Reserve began raising rates in March 2022 and anticipated further increases, while noting that inflation, COVID-19, monetary policy, climate events, and the war in Ukraine could affect the company and its customers.
- The company’s interest-rate model characterized the balance sheet as asset-sensitive: a modeled parallel rate increase of 1% or 2% implied a first-year net interest income increase of 6.8% or 12.9%, respectively. These are scenario estimates, not guidance; results depend on model assumptions and actual balance-sheet changes.
- Available-for-sale securities had $135.3 million of gross unrealized losses at quarter-end, versus $10.4 million at year-end. Management attributed the losses principally to market interest-rate changes and said it did not intend, and was not more likely than not required, to sell the securities before recovery. It reported the securities as investment grade and did not identify credit-related losses at quarter-end.
- Credit quality indicators included $484,000 of nonaccrual loans and $431,000 of loans 90 days or more past due and accruing. The allowance for loan losses was $22.9 million; management considered it adequate. The filing notes that future delinquencies, losses, and collateral values remain uncertain.
- Other items to monitor include $28.6 million of outstanding affordable-housing investment commitments and a $982,000 accrued customer-refund obligation. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. It also said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether underlying earnings remain solid after separating the $1.2 million network payment and assessing other nonrecurring items.
- How rising rates affect realized net interest income and deposit costs compared with the company’s conditional asset-sensitivity model.
- Whether the large unrealized securities losses recover, persist, or lead to sales, and how they affect equity and capital.
- Whether loan balances, delinquencies, charge-offs, and the allowance remain appropriate as economic conditions change.
- Whether deposit stability, pledged collateral, short-term borrowings, and unfunded commitments continue to support liquidity.
- Whether dividends and repurchases remain consistent with earnings, capital needs, and the board’s discretion.