Business context and reporting period
Westamerica Bancorporation filed this Form 10-K for the fiscal year ended December 31, 2023. It provides banking services primarily to small businesses, individuals and commercial customers in Northern and Central California through Westamerica Bank. The company reported approximately $6.36 billion in assets and operated 77 branches in 20 California counties.
Financial results and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Net interest and loan fee income | $280.1 million | $219.8 million |
| Net interest margin, FTE | 4.37% | 3.17% |
| Net income | $161.8 million | $122.0 million |
| Diluted EPS | $6.06 | $4.54 |
| Return on average assets / equity | 2.35% / 18.08% | 1.65% / 15.21% |
| Efficiency ratio | 31.7% | 37.2% |
| Loans / deposits at year-end | $866.6 million / $5.47 billion | $958.5 million / $6.23 billion |
| Shareholders’ equity / total assets | $772.9 million / 12.14% | $602.1 million / 8.66% |
| Cash and due from banks at year-end | $190.3 million | $294.2 million |
Operating cash flow was $158.2 million; investing activities provided $547.3 million, primarily reflecting loan repayments and securities maturities/calls; financing activities used $809.4 million, including a $751.0 million decline in deposits, $46.0 million in dividends and $13.7 million in share repurchases. Short-term borrowed funds were $58.2 million at year-end, consisting of repurchase agreements; the parent company reported no debt.
Changes versus the prior comparable period
- Net income rose $39.7 million, or about 33%, as higher yields on earning assets lifted FTE net interest income by $59.9 million. Higher funding costs and lower average loan and interest-bearing cash balances partly offset the benefit.
- Year-end deposits fell $751.0 million and loans fell $91.9 million. Management attributed deposit pressure to tighter Federal Reserve policy and customers’ payment of deferred taxes in the fourth quarter; average loans also declined.
- Noninterest income decreased $1.6 million, partly because 2022 included a $1.2 million payments-network reconciliation payment and higher life-insurance gains. Noninterest expense rose $3.9 million, including higher compensation, occupancy costs and FDIC assessments.
- The allowance for loan losses declined to $16.9 million from $20.3 million. The 2023 result included a $1.2 million reversal of provision, reflecting a $2.2 million recovery on a previously charged-off loan and a $0.4 million provision. Net loan losses were $2.3 million, or 0.25% of average loans.
- Accumulated other comprehensive loss improved to $190.3 million from $256.1 million, primarily reflecting a $65.8 million after-tax improvement in available-for-sale securities marks. The portfolio still had $271.5 million of gross unrealized losses on available-for-sale debt securities at year-end.
Outlook, risks and unusual items
The filing provides no specific earnings, revenue or loan-growth guidance. Management said it expects to continue quarterly dividends, subject to Board discretion, earnings, capital, asset quality and regulatory limits. The Board intended to maintain quarterly cash dividends, but gave no assurance of future payments.
Management described the balance sheet as generally asset-sensitive. Its year-end simulations estimated first-year net interest income changes of +1.8% and +3.2% under dynamic +100 and +200 basis-point rate scenarios, respectively; under the static model, corresponding estimates were +5.7% and +11.0%. These model-based estimates depend on assumptions and are not forecasts.
Liquidity risks include deposit outflows, industry concerns and the possibility of having to sell securities at a loss. The company reported $2.54 billion in estimated uninsured deposits, $190.3 million in cash, $265 million of expected securities principal payments during 2024, and $1.95 billion of estimated unpledged securities eligible for Federal Reserve borrowing. The Bank Term Funding Program was scheduled to stop making new loans on March 11, 2024. Management said its latest liquidity stress test was satisfactory, while acknowledging liquidity could weaken.
Interest-rate increases have reduced securities market values. Held-to-maturity securities had a $28.8 million fair-value shortfall to amortized cost at year-end; management said it did not intend, and did not expect to be required, to sell securities before recovery of cost. Other key exposures include California economic and real-estate conditions, commercial real-estate collateral, consumer auto-loan losses, concentration in corporate securities, climate and natural-disaster events, competition, and cybersecurity/vendor risks.
A third-party vendor notified the company in 2023 of a possible compromise involving files that could have affected a limited number of customers. The company notified affected customers; as of year-end, it reported no indication of misuse. The company reported no cybersecurity incident that materially affected or was reasonably likely to materially affect it during 2023. It also reported no material pending legal proceeding and stated routine matters were not expected to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control; the allowance for credit losses and its economic forecasts were identified as a critical audit matter.
Investor verification points
- Track deposit balances, the uninsured-deposit mix, deposit pricing and customer retention after the 2023 outflow.
- Assess the sustainability of the higher net interest margin as rates and deposit costs change, including the assumptions behind management’s rate-sensitivity models.
- Review securities portfolio marks, especially available-for-sale unrealized losses and held-to-maturity fair-value exposure, alongside collateral availability and liquidity facilities.
- Monitor consumer-loan charge-offs and recoveries, commercial real-estate credit quality, and the assumptions supporting the $16.9 million loan-loss allowance.
- Confirm capital, dividends and any future repurchases remain consistent with regulatory limits; the prior repurchase authorization expired September 1, 2023, with no replacement plan in place.
- Follow any developments from the vendor data incident and the March 2024 end of new Bank Term Funding Program lending.