Westamerica Bancorp. (WABC) reported second quarter 2010 earnings per share of 80 cents, in line with the Zacks Consensus Estimate and prior quarter earnings of 80 cents. However, earnings were higher than the 75 cents per share reported in the year-ago quarter.
 
During the year-ago quarter, Westamerica’s earnings of 75 cent included Federal Deposit Insurance Corporation (FDIC) insurance assessment charge of 6 cents. Excluding this, earnings increased 8.7% year over year.
 
Overall results reflected increase in provision for loan losses, decrease in interest and non-interest income and increase in non-covered, non-performing assets. These were partially offset by a decrease in operating expenses, low cost of funding on loan and investment portfolios along with a risk reduction in loan portfolio.
 
During the reported quarter, net income applicable to common equity was $23.6 million, in line with the prior quarter and up from $22.1 million in the year-ago quarter.
 
On a fully-taxable equivalent basis, Westamerica’s net interest income was $56.6 million, down from $57.0 million in the prior quarter and from $62.3 million in the year-ago period. Low levels of interest-earning assets and weak loan volumes due to sluggish economic conditions and de-leveraging by businesses and individuals caused the decline. As well, interest expense plummeted 11.4% from the prior quarter and 45.2% year over year to $3.1 million. The decline in interest expenses aided net interest margin (NIM) to grow to 5.62% from 5.60% in the prior quarter and 5.34% in the year-ago quarter.
 
Westamerica’s non-interest income was $15.8 million, up 1.3% from $15.5 million in the prior quarter but down 3.8% from $16.4 million in the year-ago quarter. The substantial year-over-year increase in trust fees, financial services commissions and mortgage banking income was more than offset by a decline in service charges on deposits, debit card fees and merchant credit card.
 
Total non-interest expense was flat sequentially but slashed 17.0% year over year to $32.1 million. Westamerica’s full time equivalent staff dropped 1.4% from the prior quarter and 13.4% year over year to 1,018 members.
 
Credit metrics showed some improvement compared with the prior quarter but deteriorated from year-ago quarter. Provision for loan losses remained flat sequentially and inched up 7.7% year over year to $2.8 million. Annualized net loan losses on non-FDIC covered loans, as a percentage of average non-FDIC covered loans, increased to 0.64% from 0.56% in the year-ago period but decreased from 0.66% in the prior quarter. However, non-performing assets not covered by FDIC loss-sharing agreements were $38.7 million as of June 30, 2010, up 9.6% from $35.3 million as of March 31, 2010, and 10.7% from $35.0 million as of June 30, 2009.
 
Total earning assets were $4.03 billion, down 1.9% sequentially and 13.8% year over year. Total deposits were $3.9 billion, down 2.5% from the prior quarter and 7.3% year over year.
 
Profitability metrics also reflected a modestly cautious outlook. Westamerica’s annualized return on assets increased to 2.00% from 1.99% in the prior quarter and 1.68% in the year-ago quarter. Annualized return on common equity declined to 18.2% from 18.8% in the prior quarter and 19.0% in the year-ago quarter. Efficiency ratio of 44.4% increased from 44.2% in the prior quarter, but decreased from 49.1% in the year-ago quarter. The sequential increase in efficiency ratio indicates an improvement in profitability and a better managed balance sheet.
 
As of June 30, 2010, total regulatory capital ratios for Westamerica Bancorp and its subsidiary, Westamerica Bank, were 15.7% and 15.4%, respectively, exceeding the 10% requirement to be well capitalized under regulatory standards. Westamerica’s long-term debt was marginally reduced to $26.5 million at the end of second-quarter 2010.
 
Although stability was seen in the credit quality and profitability metrics as compared with the prior quarter, Westamerica has a long road ahead to climb up to its historical highs. We expect continued synergies from the company’s strong expense discipline, conservative credit culture and sound balance sheet. However, weak interest rates, low investment returns and deteriorating credit quality will restrict significant bottom-line improvement in the near term.
 
Going forward, however, we believe that Westamerica has the capacity to capitalize on the opportunities once the market rebounds to a more conducive operating environment, leading to an increase in both top- and bottom-line growth.
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