Third-quarter profits at Westamerica Bancorporation fell 16% year on year to $16.7 million, or $0.63 a share, from $20.0 million, or $0.73 a share. Earnings decreased largely due to lower net interest income as a result of declining asset yields. While we are not making changes to our narrow moat rating or fair value estimate, we probably will trim our near-term earnings assumptions.

Net interest income fell 16% year-on-year to $36.8 million. The bank’s reported NIM narrowed by 66 basis points to 4.01% as yields compressed and earning assets fell. Net interest income has been tracking close to our full-year views. Non-interest income fell 1% to $14.4 million as the largest contributor, deposit account service charges, fell 6%. Generally, non-interest income has been weaker than what we had projected. Non-interest expense fell 5% to $27.8 million, helped by lower compensation costs and a reduction in other expenses.

Non-performing assets fell 27% to $51.9 million, or about 1.1% of total assets, down from about 1.5% a year earlier. The loan-loss allowance came to a comfortable 439% of nonperforming originated loans. The Tier 1 capital/risk-adjusted assets ratio stood at a relatively strong 14.59%, down from 14.96% a year earlier. Westamerica has been buying back stock–a total of 256,000 shares were bought or canceled at an average price of $48.48 in the quarter–and the bank still has room in its buyback authorization.  Overall, we are pleased with the return on common equity of 12.4% annualized earned during the quarter.

We continue to think the company is capable of delivering better returns in future years, although it will take a more normalized rate environment to nudge profitability significantly higher. Westamerica is a well-run bank that we trust will restrain costs prudently and that over time will benefit from better conditions to support loan growth in California, in our view. In the near term, however, we think revenue headwinds will remain.