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Westamerica Bancorp’s (WABC - Analyst Report) second-quarter 2013 earnings came in at 64 cents per share, missing the Zacks Consensus Estimate by a penny. Further, this was in line with the prior-quarter figure.

Results were adversely impacted by reduced net interest income, partially offset by almost stable fee revenues and a drop in operating expenses. Further, capital and profitability ratios deteriorated and loan and deposit balances declined. However, improving credit quality was the tailwind.

Westamerica reported net income of $17.1 million, down 1.2% from the prior quarter.

Performance in Detail

Westamerica’s total revenue came in at $56.9 million, down 2.1% from the previous quarter. Moreover, total revenue missed the Zacks Consensus Estimate of $58.0 million.

On a fully-taxable equivalent basis, net interest income (NII) fell 2.8% sequentially to $42.6 million. The decline was due to lower yields on loans and investment securities and reduced loan volumes, partly offset by declining interest expenses. Further, net interest margin was 4.12%, down 15 basis points (bps) sequentially.

Non-interest income totaled $14.3 million in the reported quarter, almost at par with the prior-quarter figure. Higher merchant processing services costs, debit card fees, ATM processing fees, trust fees, financial services commissions were offset by a fall in other income as well as service charges on deposit accounts.

Non-interest expenses dipped 1.7% sequentially to $28.2 million. The fall was primarily attributable to a decline in salaries and benefits expenses, occupancy costs, other real estate owned expenses and operational losses, partly offset by a rise in professional fees, equipment, as well as other operating expenses.

Westamerica‘s average loans declined 4.0% from the prior quarter to $2.0 billion as of Jun 30, 2013. Additionally, total average deposits fell 1.6% sequentially to $4.1 billion.

Credit Quality

Westamerica’s credit quality continued to improve during the quarter. Provision for loan losses declined 35.7% sequentially to $1.8 million. Moreover, nonperforming assets were $50.4 million as of Jun 30, 2013, down 4.7% from $52.9 million as of Mar 31, 2013.

Capital and Profitability Ratios

Westamerica’s capital and profitability ratios depicted moderate results. As of Jun 30, 2013, total regulatory capital ratio came in at 15.98%, down from 15.99% as of Mar 31, 2013. Further, Tier I capital ratio as a percentage of risk-adjusted assets was 14.64%, down from 14.71% in the prior quarter-end.

Westamerica’s annualized return on assets was 1.42% as of Jun 30, 2013, compared with 1.43% as of Mar 31, 2013. As of Jun 30, 2013, annualized return on common equity was 12.7% against 12.9% as of Mar 31, 2013.

Share Repurchase

In the reported quarter, the company repurchased 249,000 shares at an average price of $44.29 per share.

Our Viewpoint

Westamerica’s strong expense control initiatives, conservative credit culture and solid capital position are expected to act as tailwinds for the company. However, a weak interest rate scenario and low investment returns are expected to deter any significant bottom-line improvement in the near term.

Currently, Westamerica carries a Zacks Rank #3 (Hold).

Among other west banks, City National Corporation (CYN - Snapshot Report) is scheduled to report results on Jul 18, while Bank of Hawaii Corporation (BOH - Snapshot Report) and Zions Bancorp. (ZION - Analyst Report) will report on Jul 22.

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