WESTAMERICA BANCORPORATION (WABC) stock intrinsic value fair value estimate & owner earnings analysis

Westamerica Bancorporation is a Northern and Central California bank holding company with about $5.8 billion of assets, 76 branches in 20 counties and only 627 employees. Its strategic focus is small-business banking. Its defining feature is its funding: 46% of average deposits are noninterest-bearing, and total funding cost was just 0.24% in 2025. The bank holds few loans (about $726 million at year-end 2025) and mostly places its deposits in securities and cash. That makes earnings depend far more on interest rates and the size of the deposit base than on credit quality. Credit has been excellent, with net recoveries in each of the last three years. What has happened. Owner earnings (net income less stock-based compensation, with depreciation roughly offsetting capital spending) rose from $2.23 per share in 2016 to $6.01 in 2023 as rates rose, then fell to $5.14 in 2024 and $4.48 in 2025. Net interest income fell because the securities portfolio ran off (average balances down $546 million in 2025 and $502 million in 2024) and deposit costs rose, taking the net interest margin from 4.37% in 2023 to 3.82% in 2025. The most recent evidence is better: net interest income was $52.5 million in both the first and second quarters of 2026, quarterly net income was essentially unchanged at about $27.4 million, and first-half 2026 net income was 8.9% below the first half of 2025. Noninterest expense has been flat at about $102-104 million for three years. Deposits have drifted down from $5.01 billion (2024) to $4.84 billion (2025) and $4.77 billion (June 2026). One change since the last analysis: share count has fallen sharply, from about 25.7 million diluted shares in 2025 to about 23.3 million in the second quarter of 2026, after $103.8 million of repurchases in 2025 and $92.5 million in the first half of 2026. Those buybacks also used up part of the bank's surplus capital. Our earlier figures were built on a different basis and are not comparable. Earnings level. We use the median of 2018-2025 owner earnings, about $100 million a year ($4.30 per current share). That window covers a full rate cycle: normal rates in 2018-19, near-zero rates in 2020-21, and the rise to a peak in 2023-24. 2017 is excluded because a one-time deferred tax charge from the 2017 tax law change distorted that year. The anchor sits below the current run-rate of about $108.6 million a year, so we are not lifting the level on a few good quarters. Growth-path check: owner earnings fell 16.1% in 2025 (from $137.2 million to $115.1 million). The base case starts with a 13.0% decline to the $100 million level. That is a smaller decline than 2025's, and the dated reason is that first-half 2026 earnings were down only 8.9% with two flat quarters in a row (second quarter 2026 report). The base is still below the current run-rate because the bank's own 2025 interest-rate simulation says that even with unchanged rates, net interest income declines as deposit costs rise. Base case: owner earnings hold at $100 million a year for ten years, with no growth credited. Nothing secured or repeatable supports growth: loans and deposits are shrinking, and the bank has no acquisition or branch-opening program under way. After year ten, the low-cost deposit franchise (demonstrated through every year of the last decade) keeps producing earnings but erodes about 2% a year in line with recent deposit attrition. The business is worth about $1.42 billion. The bank has no meaningful debt (apart from about $132 million of short-term customer borrowings that fund operations and are already charged through earnings), so nothing is deducted. We add the net value of surplus capital: Common Equity Tier 1 capital was about $849 million after the 2026 buybacks (our estimate from reported June 2026 equity of $853 million, unrealized bond losses of $118 million and goodwill of $122 million), versus about $624 million needed to hold the 16% ratio the bank maintained from 2016 to 2022 (14.9%-16.2%; it was 22.8% at year-end 2025). The $225 million surplus is counted at half its face value, $112.5 million, because the earnings it already generates are inside the $100 million. Base value: about $65.82 per share on 23.3 million shares. Bear case: a prolonged low-rate era of the kind the bank lived through in 2014-2016, when net income was only $59-61 million, combined with a California credit cycle like 2008-2011. Owner earnings fall to $90 million in year 1, then run at about $62 million (the 2014-2016 level, scaled up modestly for today's larger balance sheet) for years 2-7, less about $10.5 million a year in years 2-3 for loan losses (4% of the $726 million loan book, about $29 million pre-tax or $21 million after tax), recovering only to $70 million in years 8-10 (the 2018-19 level), then eroding 3% a year as deposits keep leaving. The business is worth about $900 million. Surplus capital is reduced by the credit losses, and we count half of what is left, about $102 million. Bear value: about $43.01 per share. We did not add dilution because the capital ratio stays far above requirements even in this case. We also did not include a bond-portfolio loss beyond today's disclosed unrealized loss, because there is no named evidence that it would be realized. Bull case: the bank's own earnings sensitivity does the work. Earnings hold at about $108 million (today's run-rate) in years 1-2, then rise to $122 million in years 3-10. That figure comes from management's simulation, in which a 2-percentage-point rate rise lifts first-year net interest income by about 10.7% on a static balance sheet, roughly $16 million after tax on top of today's run-rate. Earnings decline 1% a year after year ten. Business value is about $1.84 billion; surplus capital at a 15% ratio ($264 million surplus) adds $132 million. Bull value: about $84.45 per share. We excluded growth in loans, share gains, acquisitions and further buybacks beyond the surplus because none is secured or repeatable. What would make this wrong: a further, faster drain of the free deposits (they fell $171 million in 2025 and $67 million in the first half of 2026, and nearly half of the deposit base is what makes the earnings), a long period of near-zero rates, or a decision to spend the surplus capital on an acquisition at a poor price. How we set the margin-of-safety price. We are reasonably sure of the earnings level: the bank has earned $48-160 million every year of the last decade with no loss year, net loan losses are minimal, and costs are flat. But the level moves with interest rates by a wide range (from $70 million in 2018 to $160 million in 2023), and the cause of the recent erosion, deposit attrition, is still running. The worst plausible outcome is a multi-year near-zero-rate period like 2014-2016 together with continued deposit outflow, which cuts earnings by roughly 40%; the structure would survive it comfortably because the bank has almost no debt, a 21-22% capital ratio and mostly government and agency securities, and no dependence on a single customer or a controlling owner. If we are wrong on the two things we are most likely to be wrong about, rates staying low for long and deposits continuing to leave, per-share owner earnings could be about $2.70 for several years, and the shares would still be worth roughly the bear value because of the surplus capital. The price assumes a holding period of five years or more, during which the dividend of $1.92 a share is paid and surplus capital is expected to be returned (about $9.70 a share at face). A price of $38 a share corresponds to owner earnings of about $4.30 a share (an 11% yield), a $1.92 dividend (5%), and tangible shareholders' equity before unrealized bond losses of about $36 a share. If earnings hold at the cycle median and the surplus capital is returned over the first two years, five years of earnings and returned capital plus a reasonable value at the end of the period implies about a 20% annual return; the bear case implies a positive mid-single-digit return rather than a loss. The margin-of-safety price is $38 a share.