Westamerica Bancorp. (WABC) reported its second quarter 2011 earnings of 78 cents per share, in line with the Zacks Consensus Estimate.
However, after considering the accruals for estimated settlement costs, Westamerica reported net income of $21.3 million or 74 cents per share compared with $22.4 million or 77 cents per share in the prior quarter and $23.6 million or 80 cents per share in the prior-year quarter.
Results for the reported quarter benefited from higher net interest income and non-interest income. However, the increase in non-interest expense was a headwind. Additionally, the company’s credit quality showed mixed results.
Quarter in Detail
Westamerica’s total revenue came in at $71.1 million, down 2.0% sequentially from $69.7 million and 1.7% year over year from $72.3 million. However, total revenue surpassed the Zacks Consensus Estimate of $69.0 million.
On a fully-taxable equivalent basis, Westamerica’s net interest income increased 1.5% sequentially but decreased 1.3% year over year to $55.8 million. The year-over-year decline was mainly due to a lower net interest margin (NIM). NIM improved 3 basis points (bps) sequentially but dropped 24 bps year-over-year to 5.38%.
Westamerica’s non-interest income was $15.3 million in the reported quarter, up from $14.7 million in the prior quarter but down from $15.8 million in the year-ago quarter. The sequential improvement was mainly attributable to higher merchant card processing fees, financial service commissions, and other fees. However, lower service charges on deposit accounts and new overdraft regulations, effective in the third quarter of 2010, caused a reduction in overdraft fees, which led to a year-over-year decline.
Non-interest expense grew 9.5% sequentially and 6.9% year over year to $34.3 million in the quarter under review. The hike was primarily due to accruals for settlement costs, along with higher loan collection related costs and professional fees. However, these negatives were partly mitigated by a fall in deposit insurance assessments due to new assessment rules effective April 1, 2011.
Efficiency ratio stood at 48.2%, marking an increase from 44.4% in the previous quarter and 44.9% in the previous-year quarter. The increase in efficiency ratio indicates deterioration in profitability.
Credit Quality
During the quarter, credit quality continued to show mixed results. 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, remained flat sequentially but climbed 19 bps year over year to 0.83%. Further, nonperforming assets were $124.1 million at June 30, 2011, down from $132.9 million at March 31, 2011 but up from $123.0 million at June 30, 2010.
Profitability and Capital Ratios
Profitability metrics reflect a modestly cautious outlook. Westamerica’s annualized return on assets deteriorated to 1.73% from 1.83% in the prior quarter and 2.00% in the year-ago quarter. Similarly, annualized return on common equity declined to 15.6% from 16.6% in the prior quarter and 18.2% in the prior-year quarter.
At June 30, 2011, total regulatory capital ratios for Westamerica Bancorp and its subsidiary, Westamerica Bank, were 15.7% and 15.6% respectively, exceeding the 10% requirement to be well capitalized as per regulatory standards.
Share Repurchase
On August 26, 2010, Westamerica’s board of directors had authorized a repurchase of up to 2 million shares by September 1, 2011. The company repurchased 401,000 shares valued at $20.0 million, at an average price of $49.01 in the second quarter of 2011.
Our Viewpoint
We expect continued synergies from Westamerica’s conservative credit culture and sound balance sheet. However, a weak interest rate environment and low investment returns will restrict significant bottom-line improvement in the near term. However, we believe that once the market rebounds to a more conducive operating environment, the company will be able to capitalize on opportunities, which will lead to increased top and bottom-line growths going forward.
Westamerica currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the company’s fundamentals, we maintain a long-term “Neutral” recommendation on the shares.
Westamerica’s peer company Western AllianceBancorp. (WAL) is slated to release its second quarter results on July 21.
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