Westamerica Misses by a Penny

Westamerica Bancorp. (WABC - Analyst Report) reported its third quarter 2011 earnings of 79 cents per share, a penny below the Zacks Consensus Estimate. Though it was favorable compared with the prior quarter’s earnings of 74 cents per share, it was below the prior-year quarter’s earnings of 81 cents per share.

Results for the reported quarter were impacted by a lower top line. However, lower non-interest expenses, along with improving credit quality, added a positive note.

Westamerica reported net income of $22.4 million compared with $21.3 million in the prior quarter and $23.7 million in the prior-year quarter.

Quarter in Detail

Westamerica’s total revenue came in at $69.9 million, down 1.8% sequentially from $71.1 million and 2.6% year over year from $71.7 million. Total revenue also lagged the Zacks Consensus Estimate of $70.0 million.

On a fully-taxable equivalent basis, Westamerica’s net interest income fell 2.1% sequentially and 3.5% year over year to $54.8 million. The year-over-year decline was mainly due to a lower net interest margin (NIM), which declined 6 basis points (bps) sequentially and 22 bps year over year to 5.32%.

Westamerica’s non-interest income was $15.2 million in the reported quarter, marginally down from $15.3 million in the prior quarter but up slightly from $15.1 million in the year-ago quarter. The sequential drop resulted primarily from lower service charges on deposit accounts, merchant card processing fees, financial service commissions, trust fees and debit card fees.

Non-interest expenses decreased 8.5% sequentially and 0.4% year over year to $31.4 million in the quarter under review. The decline was mainly due to reduction in salaries as well as benefits expenses and professional fees. However, these were partly mitigated by higher loan collections costs.

Efficiency ratio stood at 44.9%, marking a fall from 48.2% in the previous quarter but a hike from 43.9% in the previous-year quarter. The increase in efficiency ratio indicates deterioration in profitability.

Credit Quality

During the quarter, Westamerica’s credit quality improved. Provision for loan losses remained flat sequentially and year over year at $2.8 million.

Annualized net loan losses, as a percentage of average originated loans, was 0.60%, down 23 bps both sequentially and year over year. Further, nonperforming assets were $107.8 million at September 30, 2011, down from $124.1 million at June 30, 2011 and $161.7 million at September 30, 2010.

Profitability and Capital Ratios

Profitability metrics reflect a modestly cautious outlook. Westamerica’s annualized return on assets improved to 1.81% from 1.73% in the prior quarter but deteriorated from 1.95% in the year-ago quarter. Similarly, annualized return on common equity grew to 16.4% from 15.6% in the prior quarter but declined from 17.9% in the prior-year quarter.

At September 30, 2011, total regulatory capital ratios for Westamerica Bancorp and its subsidiary, Westamerica Bank, were 15.6% and 15.7% respectively, exceeding the 10% requirement to be well capitalized as per the regulatory standards.

Share Repurchase

During the quarter, Westamerica announced that its board of directors has authorized a new share repurchase program, under which it will be able to repurchase up to 2 million common shares through September 1, 2012. Previously, on August 26, 2010, the company’s board of directors had authorized a repurchase of up to 2 million shares by September 1, 2011.

Hence, during the third quarter, the company repurchased 316,000 shares valued at about $13.5 million, at an average price of $42.37.

Our Viewpoint

We expect continued synergies from Westamerica’s strong expense discipline, conservative credit culture, and sound balance sheet. Once the market rebounds to a more conducive operating environment, the company will be able to capitalize on opportunities, leading to increased top and bottom-line growth. Further, the new share buyback authorization raises our hopes for enhanced investor confidence. However, a weak interest rate environment and low investment returns will restrict any significant bottom-line improvement in the near term.

Westamerica currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.

One of Westamerica’s peers, Pacific Capital Bancorp (PCBC - Snapshot Report) is slated to release its third quarter results on November 4.

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