WESTAMERICA BANCORPORATION quarterly report, Q2 FY2023

Westamerica Bancorporation — Q2 2023 Form 10-Q

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2023. Westamerica is a California-focused bank holding company. Unless noted otherwise, amounts below are in millions of dollars.

Financial performance and condition

MetricQ2 2023Q2 2022Six months 2023Six months 2022
Net income$40.2$25.3$80.7$47.9
Diluted EPS$1.51$0.94$3.02$1.78
Net interest and loan fee income, FTE$70.3$48.0$139.8$91.8
Noninterest income$10.7$11.3$21.2$22.8
Noninterest expense$25.8$24.6$52.0$49.5
Net interest margin, FTE4.34%2.74%4.26%2.63%

For the first six months, operating cash flow was $107.7 million, investing cash flow was $339.7 million, and financing cash flow was negative $475.4 million. Cash and due from banks ended June at $266.2 million, down from $294.2 million at year-end 2022.

At June 30, total assets were $6.58 billion, deposits $5.71 billion, short-term borrowed funds $138.0 million, and shareholders’ equity $651.9 million. Loans were $919.6 million, net of a $18.5 million allowance; total investment securities were $4.95 billion. The company reported total risk-based capital of 17.56% and tangible equity to tangible assets of 8.20%.

Gross unrealized losses were $358.9 million on available-for-sale securities and $46.9 million on held-to-maturity securities. The company attributed the losses mainly to interest rates and market spreads, said it did not intend to sell loss-position securities, and stated it was not more likely than not to be required to sell them before recovery of cost.

Material changes versus comparable periods

  • Q2 net income rose $14.9 million year over year, principally as higher yields and average investment-securities balances lifted net interest income. The FTE net interest margin increased 1.60 percentage points.
  • Six-month net income rose $32.8 million. Net interest income increased $48.0 million FTE, while noninterest income declined $1.6 million and noninterest expense increased $2.5 million.
  • Deposits fell $519.4 million from December 31, 2022; noninterest-bearing deposits declined $226.2 million and interest-bearing deposits declined $293.1 million. Loans fell $38.9 million, while short-term borrowed funds increased $80.2 million.
  • The six-month credit-loss reversal was $1.55 million, reflecting a $2.2 million recovery on a previously charged-off loan. The allowance for loan losses declined from $20.3 million at year-end to $18.5 million.

Outlook, risks and unusual items

  • The filing provides no specific earnings, revenue, loan-growth or margin guidance. Management said dividends are expected to continue subject to Board discretion and ongoing evaluation of capital, earnings, asset quality and other factors.
  • Management described the balance sheet as asset-sensitive. Its one-year dynamic simulation estimated net interest income increases of 1.4% for a 1-percentage-point rate increase and 0.8% for a 1-point decrease. The static simulation estimated increases of 6.1% and a decrease of 5.2%, respectively. These are model estimates subject to assumptions and uncertainty.
  • Management highlighted banking-industry volatility, potential deposit outflows, liquidity pressures, rising rates, inflation, competition, credit conditions and unrealized securities losses. Estimated uninsured deposits at June 30 were $2.612 billion. The company reported $266.2 million of cash and $2.073 billion of estimated unpledged securities eligible for Federal Reserve borrowing; it reported no Federal Reserve or correspondent-bank borrowings at quarter-end.
  • During Q2, the company was notified of a possible compromise involving files processed by a third-party vendor, potentially affecting a limited number of customers. The incident was not on company systems; the filing reported no indication of misuse.
  • Other notable items: a $125,000 securities loss in Q2; $14.5 million of shares retired during the first half; and a $1.2 million payments-network reconciling payment in the first half of 2022 that did not recur. Management said routine legal matters were not expected to have a material adverse effect.

Important facts for investors to verify

  • Deposit trends, the proportion of uninsured deposits, customer retention and the cost of funding as market rates change.
  • Liquidity and contingent funding capacity, including availability and collateral requirements for pledged and unpledged securities.
  • The duration and potential effects of securities valuation losses, especially if liquidity needs require sales.
  • Net interest margin sensitivity, including how actual deposit pricing, asset yields and balance-sheet mix compare with management’s model assumptions.
  • Consumer-loan charge-offs and delinquencies, commercial real estate exposures, and whether recoveries or changes in credit estimates affect future provisions.