Westamerica Remains on Hold

Westamerica Bancorporation (WABC - Analyst Report) is a bank holding company based in San Rafael, California providing traditional retail banking services, electronic banking, trust, credit card, and 401(k) retirement plans through its branches and trust offices. As of March 31, 2008, WABC had $5.4 billion in total assets, $2.4 billion in loans, and $4.3 billion in deposits.

On April 17, 2009, WABC reported its 1Q09 results. The results included the acquisition of Country Bank on February 6, 2009. Adjusted earnings of $0.73 per share were four cents short of our estimate. Results benefited from an impressive increase in net interest income, mainly due to the acquisition. However, the net interest margin declined 9 bps sequentially to 5.35%, as a result of lower short-term interest rates. Credit quality still remained strong, whereas provision losses (though still at lower levels compared to its peers) doubled sequentially and trebled year-over-year to $1.8 million.

WABC remains one of the more profitable banks in the industry with its profitability metrics remaining far above the median. The company delivered an impressive annualized ROE (excluding the FAS 141R gain and tax refund) of 21% and ROA of 4.24% in 1Q09. However, WABC’s large securities portfolio detracts significantly from the quality of earnings (implying a lower multiple), introduces an unnecessary element of risk, and goes a long way in explaining WABC’s high marks for efficiency, ROE, and ROA.

The company has consistently maintained its dividend payout policy even during these unprecedented financial times which reflects its healthy level of capital, asset quality and operating earnings.

We believe that WABC should continue to trade at a sizeable premium to its peers, given its strong capital levels and superior credit metrics. These positives mainly result from its minimal exposure to housing loans, though we anticipate some moderation in the credit quality in the coming quarters mainly due to the commercial real estate portfolio of the bank. We also see payback problems spreading from mortgages to other types of loans.

In view of the above, we are maintaining our Hold recommendation on the shares with a six-month price target of $53.00 per share.