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
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six 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, FTE | 4.34% | 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.