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Westamerica Bancorp.’s (WABC - Analyst Report) second-quarter 2012 earnings of 75 cents per share were in line with the Zacks Consensus Estimate. This was also at par with the prior quarter earnings and a penny ahead of the prior-year quarter earnings.

Results were impacted by a lower top line. Nevertheless, decline in operating expenses along with the improving credit quality and stable capital ratios were the positives for Westamerica.

Westamerica reported a net income of $21.0 million in line with the prior quarter but marginally down from $21.3 million in the prior-year quarter.

Quarter in Detail

Westamerica’s total revenue came in at $63.9 million compared with $66.4 million in the previous quarter and $71.1 million in the year-ago quarter. Total revenue also lagged the Zacks Consensus Estimate of $65.0 million.

On a fully-taxable equivalent basis, Westamerica’s net interest income (NII) fell 2.6% sequentially and 9.9% year over year to $50.3 million. Downside in NII resulted from lower yields on loans and investment securities, along with reduced loan volumes.

Net interest margin stood at 4.89%, down 23 basis points (bps) sequentially and 49 bps year over year.

Westamerica’s non-interest income was $13.5 million in the reported quarter, plummeting 7.7% from $14.7 million in the prior quarter and 11.5% from $15.3 million in the year-ago quarter, hurt by lower service charges on deposits as well as ATM processing fees. However, these were partially offset by rise in merchant processing services and debit card fees. `

Non-interest expenses decreased 2.3% sequentially and 14.5% year over year to $29.3 million in the quarter under review. Both the declines were primarily attributable to reduction in salaries & benefits expenses along with substantially lower other real estate owned expenses.

Efficiency ratio stood at 46.0%, slightly rising from 45.3% in the prior quarter but falling from 48.2% in the previous-year quarter. The increase in efficiency ratio indicates deterioration in profitability.

Credit Quality

During the reported quarter, Westamerica’s credit quality continued to show marked improvement. Provision for loan losses remained flat, sequentially as well as on a year-over-year basis, at $2.8 million.

Annualized net loan losses, as a percentage of average originated loans, was 0.65%, down 4 bps sequentially and 18 bps year over year. Likewise, nonperforming assets were $79.3 million at June 30, 2012, down from $80.9 million at March 31, 2012 and $124.1 million at June 30, 2011.

Profitability and Capital Ratios

Profitability metrics reflected a modestly cautious outlook. Westamerica’s annualized return on assets was 1.69% as of June 30, 2012 compared with 1.68% as of March 31, 2012 and 1.73% as of June 30, 2011. Moreover, as of June 30, 2012, the annualized return on common equity was 15.6% against 15.5% as of March 31, 2012 and in line with the prior-year period.

As of June 30, 2012, total regulatory capital ratio came in at 15.77% compared with 16.09% as of March 31, 2012 and 15.92% as of June 30, 2011. Further, tier I capital ratio as a percentage of risk-adjusted assets was 14.49% against 14.83% in the prior quarter-end and 14.58% in the previous-year quarter end.

Share Repurchase Update

In the third quarter of 2011, Westamerica had announced a new share repurchase program, under which the company will be able to repurchase up to 2 million common shares through September 1, 2012. During the second quarter of 2012, the company repurchased 317,000 shares worth approximately $14.4 million, at an average price of $45.45 per share.

Our Viewpoint

We believe that a weak interest rate scenario and low investment returns will restrict any significant bottom-line improvement in the near term. However, we anticipate continued synergies from Westamerica’s strong expense discipline, conservative credit culture and a sound balance sheet. Once the market rebounds to a more conducive operating environment, the company will be able to capitalize on opportunities.

Two of Westamerica’s peers, CVB Financial Corp. (CVBF - Snapshot Report) and Columbia Banking System Inc. (COLB - Snapshot Report) are slated to release their second-quarter results on July 18 and July 26, respectively.

Currently, Westamerica retains a Zacks #4 Rank, which translates into a short-term Sell rating. Also, considering the fundamentals, we are maintaining long-term ‘Underperform’ recommendation on the shares.

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