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On Sep 24, 2013, we upgraded our long-term recommendation on Westamerica Bancorp. (WABC - Analyst Report) to Neutral from Underperform. Our decision was based on a steady decline in the company’s operating expenses.

The Rationale Behind the Upgrade

In the present economic scenario where many companies are facing the challenge of rising expenses, Westamerica’s decreasing operating expenses is its strength. Moreover, the company is still performing well in terms of profitability, as indicated by its strong return on equity (ROE) and return on assets (ROA).

Additionally, Westamerica maintains a healthy capital position. Going forward, we expect the company to continue building capital over the next two years, leading to a better financial position.

However, the company’s second-quarter 2013 results were disappointing. On Jul 16, Westamerica reported earnings per share of 64 cents, missing the Zacks Consensus Estimate by a penny. Results were adversely impacted by lower net interest income, partially offset by almost stable fee revenues and a drop in operating expenses.

The Zacks Consensus Estimate for 2013 and 2014 were constant at $2.56 and $2.53 respectively, over the last 60 days. Hence, Westamerica currently carries a Zacks Rank #3 (Hold).

While we do not expect any significant improvement in interest income in the near term due to the prevalent low interest-rate scenario, we anticipate continued synergies from the company’s conservative credit culture and stable balance sheet. Further, once the market rebounds to a more conducive operating environment, Westamerica will be able to capitalize on growth opportunities.

Other Stocks Worth Considering

Some better-performing banks include BofI Holding, Inc. (BOFI - Snapshot Report), Glacier Bancorp Inc. (GBCI - Snapshot Report) and City National Corporation (CYN - Snapshot Report). While BofI Holding and Glacier Bancorp carry a Zacks Rank #1 (Strong Buy), City National Corporation has a Zacks Rank #2 (Buy).

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