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Westamerica Bancorp’s (WABC - Analyst Report) first-quarter 2013 earnings came in at 64 cents per share, missing the Zacks Consensus Estimate by a penny. This also compares unfavorably with the prior-quarter earnings of 70 cents and the year-ago earnings of 75 cents.

On a sequential basis, results were adversely impacted by reduced top line and increase in operating expenses. However, improving credit quality and stable capital ratios were the positives for the quarter.

Westamerica reported net income of $17.3 million, down 9.7% from the prior quarter and 17.8% from the prior-year quarter.

Performance in Detail

Westamerica’s total revenue came in at $59.4 million, down 4.0% from the previous quarter and 12.6% from the year-ago quarter. Moreover, total revenue marginally missed the Zacks Consensus Estimate of $60 million.

On a fully-taxable equivalent basis, net interest income (NII) fell 5.3% sequentially to $43.8 million. The sequential decline came on the back of lower yields on loans and investment securities along with reduced loan volumes, partially offset by lower interest expenses.

Net interest margin was 4.27%, down 22 basis points (bps) sequentially.

Non-interest income totaled $14.3 million in the reported quarter, rising marginally over the prior quarter. The improvement was mainly driven by higher debit card fees and trust fees, merchant processing services costs, financial services commissions and other income, partially offset by lower service charges on deposit accounts and ATM processing fees.

Non-interest expenses went up 1.6% sequentially to $28.7 million. The sequential rise was primarily attributable to rise in salaries & benefits expenses, occupancy costs, other real estate owned expenses, operational losses, stationery and supplies, partially offset by decline in outsourced data processing,  amortization of identifiable intangibles, professional fees, furniture and equipment, courier service, loan expense, telephone charges, postage as well as other operating expenses.

Credit Quality

Westamerica’s credit quality continued to show a marked improvement during the quarter. Provision for loan losses remained flat, sequentially as well as on a year-over-year basis, at $2.8 million. Moreover, nonperforming assets were $52.9 million at Mar 31, 2013, down 10.7% from $59.3 million at Dec 31, 2012 and 34.6% from $80.9 million at Mar 31, 2012.

Profitability Ratios

Profitability metrics reflects a modestly cautious outlook. Westamerica’s annualized return on assets was 1.43% as of Mar 31, 2013 compared with 1.55% as of Dec 31, 2012 and 1.68% as of Mar 31, 2012. As of Mar 31, 2013, the annualized return on common equity was 12.9% against 14.1% as of Dec 31, 2012 and 15.5% as of Mar 31, 2012.

Capital Ratios

As of Mar 31, 2013, total regulatory capital ratio came in at 15.99%, down from 16.33% as of Dec 31, 2012 and 16.09% as of Mar 31, 2012. Further, tier I capital ratio as a percentage of risk-adjusted assets was 14.71%, falling from 15.06% in the prior quarter-end and 14.83% in the end of the prior-year quarter.

Share Repurchase Update

In July, Westamerica announced a new share repurchase program, under which the company is authorized to repurchase up to 2 million common shares through Sep 1, 2013. In the reported quarter, the company repurchased 195,000 shares, at an average price of $44.47 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 restrict any significant bottom-line improvement in the near term.

Currently, Westamerica retains a Zacks Rank #4 (Sell). Among other banks, Bank of Hawaii Corporation (BOH - Snapshot Report) and Zions Bancorp. (ZION - Analyst Report)) are scheduled to report earnings on Apr 22 and SVB Financial Group (SIVB - Analyst Report) is expected to report on Apr 24.

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