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Lower provisions and prudent expense management drove Westamerica Bancorp’s (WABC - Analyst Report) second-quarter 2014 earnings of 58 cents per share. The figure was in line with the Zacks Consensus Estimate, but lower than 64 cents earned in the year-ago quarter.

Westamerica’s share price fell marginally following the earnings release, reflecting subdued investor response. The stock closed at $50.91, declining from $51.19 reached the previous day.

A decline in revenue was offset by lower operating expenses and a fall in provision for loan losses. While asset quality remained impressive, deterioration in capital and profitability ratios acted as headwinds.

Westamerica reported net income of $15.2 million, down 11.4% from the prior-year quarter.

Performance in Detail

On a fully-taxable equivalent (FTE) basis, Westamerica’s total revenue (net of interest expense) came in at $51.8 million, down 9.0% from the prior-year quarter.

Net interest income on FTE basis fell 9.5% year over year to $38.6 million. The decline was a result of lower yields on loans and investment securities as well as reduced loan volumes, partially offset by decreased interest expenses. Further, net interest margin fell 36 basis points (bps) year over year to 3.76%.

Non-interest income totaled $13.2 million, down 7.6% from the year-ago quarter. The fall was due to a decrease in all the components, except for debit card fees and trust fees.

Non-interest expenses decreased 4.4% year over year to $27.0 million. The decrease was primarily caused by a decline in other real estate owned expenses and professional fees, partially offset by higher occupancy costs.

Westamerica’s average loans declined 9.6% year over year to $1.80 billion as of Jun 30, 2014. However, average deposits were $4.23 billion, up 2.6% from the prior-year quarter figure of $4.19 billion.

Credit Quality

Westamerica’s credit quality showed a marked improvement in the quarter. Provision for loan losses declined 44.4% year over year to $1.0 million. Non-performing assets were $29.6 million as of Jun 30, 2014, down 41.2% from $50.4 million as of Jun 30, 2013.

Capital and Profitability Ratios

Westamerica’s capital and profitability ratios deteriorated. As of Jun 30, 2014, total regulatory capital ratio came in at 15.04%, down from 15.98% as of Jun 30, 2013.Also, Tier I capital ratio was 13.57%, down from 14.64% at the prior-year quarter end.

Westamerica’s annualized return on assets of 1.24% as of Jun 30, 2014 was lower than 1.42% as of Jun 30, 2013. Likewise, annualized return on common equity was 11.6%, against 12.7% as of Jun 30, 2013.

Share Repurchase

In the reported quarter, the company repurchased 271,000 shares worth $13.4 million.

Our Viewpoint

We believe that the sluggish economic recovery and low interest rate scenario will continue to limit Westamerica’s top-line growth. However, declining expenses and an improving credit quality remain its strengths.

Currently, Westamerica carries a Zacks Rank #4 (Sell).

Among other West banks, SVB Financial Group (SIVB - Analyst Report) and Glacier Bancorp, Inc. (GBCI - Snapshot Report) are expected to report on Jul 24, while BofI Holding, Inc. (BOFI - Snapshot Report) is expected to release fourth-quarter and full-year fiscal 2014 results on Aug 7.

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