Westamerica Bancorporation — Q3 2022 Form 10-Q
Business context and period. Westamerica Bancorporation is a California banking company. This unaudited filing covers the quarter and nine months ended September 30, 2022; income comparisons are to 2021, while balance-sheet comparisons are primarily to December 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest and loan fee income | $60.8 | $43.8 | $152.6 | $130.4 |
| Net interest and loan fee income, FTE | $60.8 | $44.0 | $152.6 | $131.0 |
| Noninterest income | $11.8 | $11.3 | $34.7 | $32.5 |
| Noninterest expense | $24.8 | $24.7 | $74.3 | $73.9 |
| Net income | $34.8 | $22.1 | $82.7 | $64.8 |
| Diluted EPS | $1.29 | $0.82 | $3.07 | $2.41 |
| Net interest margin, FTE | 3.44% | 2.60% | 2.90% | 2.67% |
| Return on assets / common equity | 1.85% / 17.08% | 1.22% / 11.58% | 1.49% / 13.98% | 1.25% / 11.62% |
Balance sheet and capital at September 30, 2022: assets $7.18 billion; loans $979.0 million; total deposits $6.50 billion, including $3.07 billion noninterest-bearing; short-term borrowed funds $76.9 million; cash and due from banks $413.7 million; and shareholders’ equity $539.0 million. Total risk-based capital was 14.67% at the Company and 11.82% at the Bank. The Company’s equity-to-assets ratio was 7.5%, compared with 11.1% at year-end 2021.
Cash flow for the first nine months: operating activities provided $71.9 million; investing activities used $770.3 million, primarily reflecting securities purchases; financing activities used $20.0 million. Cash and due from banks declined $718.4 million to $413.7 million.
Material changes versus prior periods
- Q3 net income rose $12.7 million year over year; nine-month net income rose $17.9 million. Management attributed higher net interest income mainly to larger investment-securities balances and improved yields, partly offset by lower average loan balances.
- Average loans fell year over year by $187 million in Q3 and $219 million for the nine-month period; average investment securities increased by $937 million and $688 million, respectively.
- The investment portfolio’s carrying value increased to $5.31 billion from $4.95 billion at year-end. Available-for-sale securities had $414.5 million of gross unrealized losses at September 30, versus $10.4 million at year-end 2021. The filing attributes the decline primarily to rising market rates and says the Company does not intend, and does not expect to be required, to sell the securities before recovery of amortized cost.
- Accumulated other comprehensive loss moved to $290.8 million from $49.7 million of income at year-end, largely reflecting after-tax unrealized available-for-sale securities losses. Total shareholders’ equity declined accordingly.
- Total deposits increased $81.3 million from year-end, while loans declined $89.1 million. The allowance for loan losses decreased to $21.2 million from $23.5 million; nine-month net loan charge-offs were $2.3 million, compared with net recoveries of $26 thousand in 2021.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management said dividends are expected to continue, subject to Board discretion and ongoing review of capital, earnings, asset quality and other factors. The Company reported no parent-company debt and said current capital projections indicate the Bank expects to remain above well-capitalized regulatory thresholds.
- Rising rates supported asset yields: the Company reported an asset-sensitive position. Its modeled first-year net interest income changes for +1% / +2% rate shocks were +3.3% / +6.5% under a dynamic-balance-sheet simulation and +7.8% / +15.0% under a static simulation. Management cautioned that model assumptions may not materialize. The filing notes further Federal Reserve rate increases announced after quarter-end.
- Management highlighted uncertainty from inflation, Federal Reserve policy, economic conditions, COVID-19, climate-related events and the war in Ukraine. Risks also include interest-rate and liquidity exposure, deposit competition, securities valuations, credit quality, and changing collateral values. The Bank said its latest liquidity stress test supported management’s view that liquidity was adequate, but no assurance was given against future liquidity pressure.
- Q3 included a $923 thousand life-insurance gain, equivalent to approximately $0.03 per share. Nine-month noninterest income also benefited from a $1.2 million payments-network reconciliation payment. Nine-month low-income-housing limited-partnership operating losses increased to $4.3 million from $1.8 million; related tax credits were $2.4 million.
- Provision for credit losses was zero in Q3 and the first nine months of 2022. Nonperforming loans were $966 thousand at quarter-end; management considered the $21.2 million loan allowance adequate. Routine threatened or filed legal matters were not expected to have a material adverse effect, according to the Company.
- For comparison, 2021 results included make-whole interest income on early-redeemed corporate bonds of $732 thousand in Q3 and $2.8 million for the first nine months.
Important facts for investors to verify
- Review the size, composition, maturity profile and rate sensitivity of the securities portfolio, including the substantial unrealized losses and management’s stated ability and intent to hold securities to recovery.
- Track deposit levels, deposit mix and pricing as rates rise, alongside cash balances, short-term borrowings and liquidity stress-test assumptions.
- Monitor consumer-loan charge-offs, delinquency trends and allowance adequacy; nine-month net charge-offs increased to $2.3 million.
- Separate recurring earnings from the life-insurance gain and payments-network payment, and assess the effect of rising limited-partnership losses and related tax credits.
- Assess the implications of lower equity and tangible-equity ratios and confirm regulatory capital remains above applicable requirements.