Zacks_Analysts' Blog : Westamerica Reiterated at Neutral - Analyst Blog

We are maintaining our long-term Neutral recommendation on shares of  Westamerica Bancorp. (WABC).

While we expect continued synergies from the company’s strong expense discipline, as well as a conservative credit culture and sound balance sheet, significant bottom-line impovement will be restricted in the near-term by a weak interest rate environment and low investment returns.

Westamerica’s fourth-quarter earnings came in at 81 cents per share, in line with the Zacks Consensus Estimate. This also compared favorably with the prior year's 79 cents.

Westamerica’s results benefited primarily from a decline in non-interest expenses. However, decreases in both interest and non-interest incomes were the headwinds.

Westamerica had continued to pay dividends even during the financial crisis, which testified to its healthy capital position and operating earnings. Furthermore, the company has repurchased and retired its common stock in an attempt to return capital to shareholders and decrease dilution. The company bought back 533,000 shares worth $28.7 million in 2010, 42,000 shares worth $2.0 million in 2009, and 719,000 shares worth $35.9 million in 2008.

Despite the challenging economic environment, net interest margin (NIM) has been steadily rising due to an increase in net interest income and service charges on deposit accounts. NIM inched up to 5.54% in 2010 from 5.42% in 2009 and 5.13% in 2008. With the acceleration of global economic recovery, more growth and investment avenues are expected to open up.

On the flip side, Westamerica will expectedly continue experiencing credit quality pressure in the upcoming quarters as a result of strong buoyancy being observed in the macro indicators such as private consumption, unemployment and interest rates.

Moreover, Westamerica’s worsening average interest earnings assets remain a cause of concern. Its average interest earnings assets are deteriorating considerably owing to the weak interest rates and low investment returns amid the ongoing sluggish economic recovery.  As of December 31, 2010, the company’s average interest earnings assets declined 8.5% year over year to $4.09 billion. This is likely to limit the earnings upside in the upcoming quarters.

Westamerica currently retains its Zacks # 4 Rank, which translates into a short-term ‘Sell’ rating. However, its closest competitor Western Alliance Bancorporation (WAL) retains its Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating.