Westamerica Bancorporation — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2023, with balance-sheet comparisons to December 31, 2022 and year-over-year comparisons to Q1 2022. Westamerica is a California-focused bank holding company; its lending is primarily in Northern and Central California. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Earnings: Net income was $40.5 million and diluted EPS was $1.51, versus $22.6 million and $0.84 in Q1 2022 and $39.3 million and $1.46 in Q4 2022.
- Net interest income: GAAP net interest and fee income was $69.2 million, up from $43.3 million a year earlier. On the company’s fully taxable equivalent (FTE) basis, it was $69.6 million, up $25.8 million year over year. FTE net interest margin was 4.18%, compared with 2.51% in Q1 2022 and 3.95% in Q4 2022. Higher investment-security and interest-bearing-cash yields drove the increase; lower average loan balances partly offset it.
- Other income and expenses: Noninterest income was $10.5 million, down $1.0 million year over year, principally because Q1 2022 included a $1.2 million payments-network reconciling payment. Noninterest expense rose to $26.2 million from $24.9 million, including higher occupancy/equipment and FDIC assessment costs. The efficiency ratio was 32.7%, versus 44.9% a year earlier.
- Credit provision: The company recorded a $1.55 million reversal of provision for credit losses, attributed to a $2.2 million recovery on a previously charged-off commercial loan. Net recoveries were $0.8 million for the quarter. The loan allowance was $19.5 million, or 2.08% of loans, compared with $20.3 million, or 2.12%, at year-end.
- Balance sheet and deposits: Total assets were $6.70 billion, down from $6.95 billion at year-end. Deposits fell $326 million to $5.90 billion, including declines in both noninterest-bearing and interest-bearing balances. Loans were $938.6 million, down from $958.5 million. Cash and due from banks declined to $195.2 million from $294.2 million.
- Securities and market-value exposure: Investment securities totaled $5.13 billion at carrying value. At March 31, available-for-sale (AFS) securities had $330.3 million of gross unrealized losses; held-to-maturity (HTM) securities had $34.2 million of unrecognized losses. The company attributed losses primarily to market rates and spreads, said substantially all securities were investment grade, and stated it did not intend, nor expect to be required, to sell loss-position AFS securities before recovery. Accumulated other comprehensive loss improved to $231.6 million from $256.1 million at year-end.
- Cash flow, capital and returns: Operating cash flow was $55.1 million; investing activities provided $171.6 million, while financing activities used $325.7 million, primarily reflecting deposit outflows, share repurchases and dividends. Cash declined $99.0 million during the quarter. Shareholders’ equity was $642.9 million. Consolidated total risk-based capital was 16.47%; the Bank’s was 14.18%, and its common equity Tier 1 ratio was 13.63%. The company paid $0.42 per share in dividends and repurchased 274,000 shares for $13.7 million.
Material changes versus comparable periods
- Compared with Q1 2022, net income increased $17.8 million, chiefly as FTE net interest income rose with higher securities balances and yields and higher interest-bearing-cash yields. Average loans declined about $84 million.
- Compared with Q4 2022, net income increased $1.1 million; FTE net interest income rose $0.4 million, while noninterest expense increased $1.1 million, including seasonal payroll taxes and higher FDIC assessments.
- Deposits decreased $326 million and total assets decreased $250 million from December 31, 2022. Shareholders’ equity increased about $41 million, reflecting earnings and a reduction in accumulated other comprehensive loss, partly offset by dividends and repurchases.
Outlook, risks and unusual items
- Outlook: The filing gives no numerical earnings or revenue guidance. Management said quarterly dividends are expected to continue, subject to Board discretion and evaluation of capital, earnings, asset quality and other factors. Management expects the Bank to maintain regulatory capital above well-capitalized minimums based on current projections.
- Liquidity and banking-industry conditions: Management discussed Q1 2023 bank failures and industry concerns over deposit outflows, liquidity and securities losses. The company reported $195.2 million in cash, $2.57 billion of unpledged securities eligible for Federal Reserve borrowing, and access to $671 million of Federal Reserve borrowing based on pledged collateral. Management said its latest liquidity stress test was satisfactory, while cautioning liquidity could decline. Short-term borrowed funds were $83.1 million at quarter-end; the company reported no outstanding Federal Reserve or correspondent-bank borrowings.
- Interest-rate risk: Management characterized the balance sheet as asset-sensitive. Its simulations estimated first-year net interest income changes of +2.1% for a 100-basis-point increase and +3.1% for a 100-basis-point decrease in the dynamic simulation; the static simulation estimated +6.3% and −5.6%, respectively. These are model estimates dependent on assumptions, not guidance.
- Key exposures: The securities portfolio is substantial relative to deposits and includes $1.54 billion of AFS collateralized loan obligations and corporate securities with a $2.72 billion fair value; financial-sector issuers represented 56% of corporate securities. The loan portfolio included $495.9 million of commercial real estate loans. Management cited possible effects from interest rates, inflation, economic conditions, competition, climate events, deposit confidence and regulatory changes.
- Other items: Legal matters were described as ordinary-course proceedings not expected to have a material adverse effect. The company reported no material pending legal proceeding, no material change in internal control over financial reporting, and no material goodwill impairment. The 2023 adoption of ASU 2022-02 did not affect financial results.
Important facts for investors to verify
- Whether deposit outflows persist, and how deposit mix, pricing and funding costs evolve.
- Available liquidity under stress, including the usability and collateral requirements of borrowing sources and the potential need to sell securities.
- The extent and duration of securities’ unrealized losses, particularly in AFS and HTM portfolios, and the impact of further rate or credit-spread changes.
- Whether the large Q1 loan recovery is repeatable; monitor charge-offs, delinquencies, classified loans and allowance adequacy.
- Ongoing performance of net interest margin as asset yields, deposit costs and average interest-earning balances change.
- Capital and shareholder returns after deposit movements, dividends and repurchases; confirm whether the announced dividend expectation remains subject to Board approval.