Westamerica Bancorp. (WABC) reported its first quarter 2011 earnings of 78 cents per share, a penny below the Zacks Consensus Estimate.

However, after considering the after tax expenses related to the integration of the former Sonoma Valley Bank of $0.4 million, Westamerica reported net income of $22.4 million or 77 cents per share compared with $23.8 million or 80 cents per share in the prior-year quarter.

In August 2010, Westamerica Bank entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the assets and deposits of Sonoma Valley Bank.

Results for the reported quarter were aided by lower non-interest expenses. However, decreases in both interest and non-interest incomes were the headwinds.

Quarter in Detail

Westamerica’s total revenue came in at $69.7 million, down 2.5% from $71.6 million in the prior quarter and 3.8% from $72.5 million in the prior-year quarter. However, total revenue surpassed the Zacks Consensus Estimate of $69.0 million.

On a fully taxable equivalent basis, Westamerica’s net interest income dropped 2.5% sequentially and 3.6% year over year to $55.0 million. The year-over-year decline was mainly due to a lower net interest margin and weak loan volumes.

Net interest margin (NIM) fell 4 basis points (bps) sequentially and 25 bps year over year to 5.35%. Primarily, a fall in investment securities yields accounted for the sequential decline.

Westamerica’s non-interest income was $14.7 million in the quarter, down from $15.1 million in the prior quarter and $15.5 million in the year-ago quarter. The decline was due tservice charges on deposits due to new overdraft regulations that were effective July 1, 2010.

Non-interest expense fell 0.6% sequentially and 2.2% year over year to $31.3 million, reflecting Westamerica’s strong expense management. The reported quarter’s non-interest expense also included expenses related to the integration of the former Sonoma Valley Bank of $0.7 million.

Efficiency ratio stood at 44.9%, marking an increase from 44.0% in the prior quarter and 44.2% in the year-ago quarter. The increase in efficiency ratio indicates deterioration in profitability.

Credit Quality

Credit quality was mixed during the quarter. 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 fell to 0.83% from 1.03% in the prior quarter but inched up from 0.66% in the year-ago quarter. However, nonperforming assets were $132.9 million at March 31, 2011, down from $143.7 million at December 31, 2010 and $136.1 million at March 31, 2010.

Profitability and Capital Ratios

Profitability metrics reflect a modestly cautious outlook. Westamerica’s annualized return on assets decreased to 1.84% from 1.87% in the prior quarter and 1.99% in the year-ago quarter. Annualized return on common equity declined to 16.6% from 17.5% in the prior quarter and 18.8% in the prior-year quarter.

At March 31, 2011, total regulatory capital ratios for Westamerica Bancorp and its subsidiary, Westamerica Bank, were 15.8% and 15.5% respectively, exceeding the 10% requirement to be well capitalized as per the regulatory standards.

Our Viewpoint

We expect continued synergies from Westamerica’s strong expense discipline, 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.

Going forward, however, we believe that the company has the capacity to capitalize on the opportunities once the market rebounds to a more conducive operating environment, leading to top and bottom-line growth.

Westamerica currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. Considering the company’s fundamentals, we maintain a long-term “Neutral” recommendation on the shares.

Westamerica’s peer company Western Alliance Bancorp. (WAL) is scheduled to release its first quarter results on April 25.

 
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