Westamerica Bancorporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; amounts below are in U.S. dollars. Westamerica is a California-based bank holding company.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest and loan fee income, FTE | $72.1 million | $60.8 million | $211.9 million | $152.6 million |
| Net income | $41.6 million | $34.8 million | $122.3 million | $82.7 million |
| Diluted earnings per share | $1.56 | $1.29 | $4.58 | $3.07 |
| Net interest margin, FTE, annualized | 4.43% | 3.44% | 4.32% | 2.90% |
| Efficiency ratio | 30.8% | 34.1% | 31.8% | 39.7% |
- For Q3, net interest income growth was primarily driven by higher yields on interest-earning assets, partly offset by lower average earning-asset balances and higher interest-bearing liability rates. The nine-month FTE increase was $59.3 million.
- Noninterest income was $11.3 million in Q3, down from $11.8 million; nine-month income was $32.5 million, down from $34.7 million. The prior-year period included a $1.2 million payments-network reconciling payment; life-insurance gains were also lower in 2023.
- Noninterest expense was $25.7 million in Q3 and $77.7 million for nine months, increases of $0.9 million and $3.4 million, respectively. Higher salaries and benefits, FDIC assessments and, year to date, occupancy costs contributed.
- Q3 credit-loss provision was $0.4 million. The nine-month period recorded a $1.15 million reversal, reflecting a $2.2 million recovery on a previously charged-off loan in Q1.
Financial position, liquidity and capital
- At September 30, 2023, assets were $6.57 billion, down from $6.95 billion at December 31, 2022. Loans were $885.9 million, down from $958.5 million; total deposits were $5.70 billion, down from $6.23 billion.
- Cash and due from banks totaled $420.6 million. Short-term borrowed funds were $115.3 million, versus $57.8 million at year-end 2022. The parent company had no debt.
- Operating cash flow was $166.2 million for the nine months, compared with $71.9 million a year earlier. Investing activities provided $476.8 million, while financing activities used $516.7 million; deposit balances declined by $526.3 million in financing cash flows. Ending cash increased by $126.3 million from year-end.
- Shareholders’ equity was $648.4 million, up from $602.1 million. The company reported a 9.9% equity-to-assets ratio, 18.60% total risk-based capital, and 12.08% leverage ratio. The Bank’s total risk-based capital ratio was 15.12%; reported capital ratios exceeded the stated regulatory thresholds.
- Available-for-sale securities had fair value of $3.91 billion and held-to-maturity securities had amortized cost of $888.9 million. Combined securities fair value was $4.72 billion versus $5.20 billion amortized cost, including $477.4 million of gross unrealized losses. Accumulated other comprehensive loss was $285.7 million.
Changes, outlook and risks
- Management attributed the marked improvement in earnings and margin chiefly to rising yields on securities and interest-bearing cash amid Federal Reserve rate increases. It described the balance sheet as generally asset-sensitive; modeled first-year net interest income changes vary materially by rate scenario and assumptions.
- Deposits declined during 2023 amid monetary tightening and broader industry deposit trends. Management expected the extended 2022 tax-filing and 2023 tax-payment deadlines to affect deposits in Q4 2023 as customers paid taxes.
- At September 30, estimated uninsured deposits were $2.67 billion. The company reported $420.6 million in cash, $1.93 billion of estimated unpledged securities eligible for Federal Reserve borrowing, and access to up to $964 million of Federal Reserve borrowing based on pledged collateral. Management said its latest liquidity stress test was satisfactory, while cautioning that liquidity could decline.
- Management does not intend to sell available-for-sale securities in unrealized-loss positions and stated it was more likely than not it would not be required to sell them before recovery. It warned that a forced sale of held-to-maturity securities to meet liquidity needs could cause losses and harm capital and results.
- Management cited banking-sector volatility, potential deposit outflows, higher FDIC assessments, interest-rate and securities valuation risks, credit and economic uncertainty, competition, operational and cyber risks, inflation, and climate-related risks. Nearly all investment securities were described as investment grade; management attributed unrealized losses primarily to market interest rates and spreads, not credit deterioration.
- No specific earnings or revenue guidance was provided. Management said it expects to continue quarterly dividends, subject to Board discretion and review of capital, earnings, asset quality and other factors. Q3 dividend was $0.44 per share.
- The filing reports no material pending litigation expected to adversely affect the company. It disclosed a third-party vendor file incident that could have affected a limited number of customers; the company notified affected customers and reported no known misuse as of September 30, 2023.
Important facts for investors to verify
- Whether deposit levels and the sizable uninsured-deposit base remain stable, particularly following Q4 tax payments and amid industry competition.
- How unrealized securities losses, possible forced sales, collateral availability and pledged assets affect liquidity and capital under stress.
- Whether higher asset yields continue to outweigh deposit-cost increases and any decline in earning-asset balances; review the rate-sensitivity scenarios and their assumptions.
- Whether consumer delinquencies, charge-offs and classified loans develop adversely, and whether the $17.7 million loan-loss allowance remains adequate.
- How sustainable reported earnings are excluding the Q1 loan recovery, prior-year payments-network payment and differences in life-insurance gains.