Westamerica Bancorp. (WABC - Analyst Report) reported its fourth-quarter 2011 earnings of 77 cents per share, slightly below the Zacks Consensus Estimate of 79 cents. The result was also down compared with the prior quarter’s earnings of 79 cents and the prior-year quarter’s earnings of 81 cents.

For the full year 2011, Westamerica recorded earnings per share of $3.06, down 5% from $3.21 in the prior year. The full year earnings also missed the Zacks Consensus Estimate of $3.16.

Results in the quarter were impacted by a lower top line. However, fall in operating expenses along with improving credit quality were the positives for Westamerica.

Westamerica reported a net income of $21.8 million compared with $22.4 million in the prior quarter and $23.7 million in the prior-year quarter. For fiscal 2011, the net income stood at $87.9 million versus $94.6 million recorded in 2010.

Quarter in Detail

Westamerica’s total revenue came in at $68.2 million, down 2.4% sequentially from $69.9 million and 4.7% year over year from $71.6 million. Total revenue slightly lagged the Zacks Consensus Estimate of $68.0 million.

For full year 2011, total revenue was $279.0 million, down 3.2% from $288.1 million in the previous year. However, this was ahead of the Zacks Consensus Estimate of $275.0 million.

On a fully-taxable equivalent basis, Westamerica’s net interest income fell 2.4% sequentially and 5.4% year over year to $53.4 million. The year-over-year decline was mainly due to a lower net interest margin, which fell 8 basis points (bps) sequentially and 15 bps year over year to 5.24%.

Westamerica’s non-interest income was $14.9 million in the reported quarter, dipping 2% from $15.2 million in the prior quarter and 1.3% from $15.1 million in the year-ago quarter. The drop was mainly due to lower service charges on deposit accounts, ATM processing fees and debit card fees.

Non-interest expenses decreased 2.3% sequentially and 2.7% year over year to $30.7 million in the quarter under review. The decline was primarily attributable to reduction in salaries as well as benefits expenses and deposit insurance assessment fees. However, these were partly mitigated by higher professional fees and loan collections costs.

Efficiency ratio stood at 44.9%, at par with the previous quarter but slightly rising from 44.0% reported in the previous-year quarter. The increase in efficiency ratio indicates deterioration in profitability.

Credit Quality

During the quarter, Westamerica’s credit quality improved. Provision for loan losses remained flat, sequentially and year over year, at $2.8 million.

Annualized net loan losses, as a percentage of average originated loans, was 0.65%, up 5 bps both sequentially, but down 38 bps year over year. Further, nonperforming assets were $101.0 million at December 31, 2011, down from $107.8 million at September 30, 2011 and $143.7 million at December 31, 2010.

Profitability and Capital Ratios

Profitability metrics reflect a modestly cautious outlook. Westamerica’s annualized return on assets was 1.78% as of December 31, 2011 compared with 1.95% as of December 31, 2010. Similarly, annualized return on common equity declined to 16.1% from 18.1% in the prior period.

At December 31, 2011, total regulatory capital ratios for Westamerica Bancorp and its subsidiary, Westamerica Bank, were 15.7% and 15.2% respectively, exceeding the 10% requirement to be well capitalized as per the regulatory standards.

Share Repurchase

During the third quarter, Westamerica had announced new share repurchase program, under which it will be able to repurchase up to 2 million common shares through September 1, 2012. During the fourth quarter, the company repurchased 361,000 shares worth approximately $15.5 million, at an average price of $42.83.

For the fiscal 2011, the company repurchased 1.32 million shares amounting $60.6 million in total, at an average price of $45.99.

Our Viewpoint

We expect continued synergies from Westamerica’s strong expense discipline, conservative credit culture and sound balance sheet. Once the market rebounds to a more conducive operating environment, the company will be able to capitalize on opportunities, leading to increased top and bottom-line growth. However, a weak interest rate environment and low investment returns will restrict any significant bottom-line improvement in the near term.

One of Westamerica’s peers, Central Pacific Financial Corp (CPF - Snapshot Report) is slated to release its fourth quarter and full year 2011 results on January 25.

Westamerica currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.