WESTAMERICA BANCORPORATION - Quarter Report: 2009 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  _____  to  _____.

Commission file number: 001-9383

WESTAMERICA BANCORPORATION

CALIFORNIA (State or Other Jurisdiction of Incorporation or Organization)		94-2156203 (I.R.S. Employer Identification No.)

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code (707) 863-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Title of Class		Shares outstanding as of October 26, 2009
Common Stock, No Par Value		29,206,991

 

 

TABLE OF CONTENTS

		Page
Forward Looking Statements			3
PART I — FINANCIAL INFORMATION
Item 1 Financial Statements			4
Notes to Unaudited Condensed Consolidated Financial Statements			8
Financial Summary			24
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3 Quantitative and Qualitative Disclosures about Market Risk			49
Item 4 Controls and Procedures			49
PART II — OTHER INFORMATION
Item 1 Legal Proceedings			49
Item 1A Risk Factors			49
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3 Defaults upon Senior Securities			51
Item 4 Submission of Matters to a Vote of Security Holders			51
Item 5 Other Information			51
Item 6 Exhibits			51
Signatures			52
Exhibit Index			53
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1 - Certification of Chief Executive Officer Required by 18 U.S.C. Section 1350
Exhibit 32.2 - Certification of Chief Financial Officer Required by 18 U.S.C. Section 1350

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of current difficulties in the national and California economies and the effects of federal and state government efforts to address those difficulties; (2) continued low liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to, stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses including the recent acquisition of County Bank assets and assumption of County Bank liabilities from the Federal Deposit Insurance Corporation; (5) economic uncertainty created by terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the national and regional economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) significantly increasing competitive pressure in the banking industry; (9) operational risks including data processing system failures or fraud; (10) volatility of rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; and (12) changes in the securities markets. The Company undertakes no obligation to update any forward-looking statements in this report. The reader is directed to the Company’s annual report on Form 10-K for the year ended December 31, 2008, for further discussion of factors which could affect the Company’s business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report.

PART I — FINANCIAL INFORMATION

Item 1 Financial Statements

WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)

		At September 30,				At December 31,
		2009				2008
Assets:
Cash and cash equivalents		$	180,058			$	138,883
Money market assets			463				341
Investment securities available for sale			391,644				288,454
Investment securities held to maturity, with market values of:
$800,893 at September 30, 2009			780,846
$950,210 at December 31, 2008							949,325
Non-covered loans			2,267,130				2,382,426
Allowance for loan losses			(42,683	)			(44,470	)
Non-covered loans, net of allowance for loan losses			2,224,447				2,337,956
Covered loans			932,656				—
Total loans			3,157,103				2,337,956
Non-covered other real estate owned			4,319				3,505
Covered other real estate owned			18,740				—
Premises and equipment, net			38,982				27,351
Identifiable intangibles			38,264				15,208
Goodwill			121,699				121,699
Interest receivable and other assets			239,041				150,212
Total Assets		$	4,971,159			$	4,032,934
Liabilities:
Deposits:
Noninterest bearing		$	1,377,215			$	1,158,632
Interest bearing:
Transaction			660,001				525,153
Savings			962,823				745,496
Time			1,024,587				665,773
Total deposits			4,024,626				3,095,054
Short-term borrowed funds			222,030				457,275
Federal Home Loan Bank advances			85,904				—
Debt financing and notes payable			26,531				26,631
Liability for interest, taxes and other expenses			76,350				44,122
Total Liabilities			4,435,441				3,623,082
Shareholders’ Equity:
Preferred stock, authorized - 1,000 shares Issued and outstanding:
42 at September 30, 2009			41,335				—
Common stock, authorized - 150,000 shares Issued and outstanding:
29,207 at September 30, 2009			365,547
28,880 at December 31, 2008							352,265
Deferred compensation			2,485				2,409
Accumulated other comprehensive income			6,053				1,040
Retained earnings			120,298				54,138
Total Shareholders’ Equity			535,718				409,852
Total Liabilities and Shareholders’ Equity		$	4,971,159			$	4,032,934

See accompanying notes to unaudited condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands, except per share data)
Interest Income:
Loans		$	48,530			$	36,710			$	143,148			$	112,716
Money market assets and funds sold			1				1				3				3
Investment securities available for sale
Taxable			2,352				1,858				6,775				7,281
Tax-exempt			1,920				2,183				5,775				7,503
Investment securities held to maturity
Taxable			3,025				4,671				11,384				14,682
Tax-exempt			5,368				5,552				16,368				16,839
Total Interest Income			61,196				50,975				183,453				159,024
Interest Expense:
Transaction deposits			263				346				761				1,145
Savings deposits			915				1,048				2,874				3,482
Time deposits			2,095				3,566				7,890				12,984
Short-term borrowed funds			509				1,954				1,572				9,360
Federal Home Loan Bank advances			295				—				714				—
Notes payable			423				524				1,267				1,680
Total Interest Expense			4,500				7,438				15,078				28,651
Net Interest Income			56,696				43,537				168,375				130,373
Provision for Loan Losses			2,800				600				7,200				1,800
Net Interest Income After Provision For Loan Losses			53,896				42,937				161,175				128,573
Noninterest Income:
Service charges on deposit accounts			9,479				7,555				27,017				22,379
Merchant credit card			2,163				2,611				6,818				7,903
Debit card			1,267				970				3,656				2,852
ATM fees and interchange			965				756				2,792				2,238
Trust fees			319				293				1,056				973
Financial services commissions			129				186				420				689
Other			1,639				1,336				5,712				4,689
FAS 141R gain			—				—				48,844				—
Securities impairment			—				(41,206	)			—				(59,384	)
Gain on sale of Visa common stock			—				—				—				5,698
Total Noninterest Income (Loss)			15,961				(27,499	)			96,315				(11,963	)
Noninterest Expense:
Salaries and related benefits			16,402				12,621				50,221				38,670
Occupancy			4,008				3,465				14,831				10,297
Outsourced data processing services			2,258				2,098				6,740				6,323
Amortization of identifiable intangibles			1,671				788				5,051				2,433
Furniture and equipment			1,789				903				4,618				2,825
Courier service			989				835				2,881				2,488
Professional fees			913				485				2,580				1,704
FDIC insurance assessments			1,442				131				4,820				359
Other			5,679				3,877				16,198				11,835
Visa litigation expense			—				—				—				(2,338	)
Total Noninterest Expense			35,151				25,203				107,940				74,596
Income (Loss) Before Income Taxes			34,706				(9,765	)			149,550				42,014
Income Tax Provision (Benefit)			9,449				(9,809	)			48,285				2,989
Net Income			25,257				44				101,265				39,025
Preferred stock dividends and discount accretion			1,466				—				3,151				—
Net Income Applicable to Common Equity		$	23,791			$	44			$	98,114			$	39,025
Average Common Shares Outstanding			29,210				28,908				29,072				28,895
Diluted Average Common Shares Outstanding			29,429				29,273				29,313				29,292
Per Common Share Data:
Basic earnings		$	0.81			$	0.00			$	3.37			$	1.35
Diluted earnings			0.81				0.00				3.35				1.33
Dividends paid			0.35				0.35				1.06				1.04

See accompanying notes to unaudited condensed consolidated financial statements.

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(unaudited)

		Common																Accumulated
		Shares				Preferred				Common				Deferred				Comprehensive				Retained
		Outstanding				Stock				Stock				Compensation				(Loss) Income				Earnings				Total
		(In thousands)
Balance, December 31, 2007			29,018				—			$	334,211			$	2,990			$	(4,520	)		$	61,922			$	394,603
Comprehensive income
Net income for the period																							39,025				39,025
Other comprehensive income, net of tax:
Increase in net unrealized gains on securities available for sale																			5,044								5,044
Post-retirement benefit transition obligation amortization																			27								27
Total comprehensive income																											44,096
Exercise of stock options			566								22,815																22,815
Stock option tax benefits											1,130																1,130
Restricted stock activity			11								1,261				(581	)											680
Stock based compensation											893																893
Stock awarded to employees			3								157																157
Purchase and retirement of stock			(703	)							(8,339	)											(26,779	)			(35,118	)
Dividends																							(30,128	)			(30,128	)
Balance, September 30, 2008			28,895				—			$	352,128			$	2,409			$	551			$	44,040			$	399,128
Balance, December 31, 2008			28,880				—			$	352,265			$	2,409			$	1,040			$	54,138			$	409,852
Comprehensive income
Net income for the period																							101,265				101,265
Other comprehensive income, net of tax:
Increase in net unrealized gains on securities available for sale																			4,986								4,986
Post-retirement benefit transition obligation amortization																			27								27
Total comprehensive income																											106,278
Issuance of preferred stock and related warrants							82,519				1,207																83,726
Redemption of preferred stock							(41,863	)																			(41,863	)
Preferred stock dividends and discount accretion							679																(3,151	)			(2,472	)
Exercise of stock options			350								9,094																9,094
Stock option tax benefits											2,179																2,179
Restricted stock activity			7								251				76												327
Stock based compensation											847																847
Stock awarded to employees			2								78																78
Purchase and retirement of stock			(32	)							(374	)											(1,116	)			(1,490	)
Dividends																							(30,838	)			(30,838	)
Balance, September 30, 2009			29,207			$	41,335			$	365,547			$	2,485			$	6,053			$	120,298			$	535,718

See accompanying notes to unaudited condensed consolidated financial statements.

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		For the nine months
		ended September 30,
		2009				2008
		(In thousands)
Operating Activities:
Net income		$	101,265			$	39,025
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,117				7,130
Loan loss provision			7,200				1,800
Net amortization of deferred loan cost (fees)			358				(72	)
(Increase) decrease in interest income receivable			(3,637	)			2,036
FAS 141R gain			(48,844	)			—
Decrease (increase) in other assets			48,191				(20,405	)
Increase (decrease) in income taxes payable			3,811				(4,089	)
Decrease in interest expense payable			(317	)			(2,469	)
Increase (decrease) in other liabilities			26,398				(13,373	)
Stock option compensation expense			847				893
Stock option tax benefits			(2,179	)			(1,130	)
Impairment of investment securities			—				59,384
Gain on sale of Visa common stock			—				(5,698	)
Writedown of property and equipment			37				9
Originations of loans for resale			(68	)			(1,269	)
Net proceeds from sale of loans originated for resale			70				1,283
Net gain on sale of property acquired in satisfaction of debt			(135	)			—
Writedown of property acquired in satisfaction of debt			83				195
Net Cash Provided by Operating Activities			134,197				63,250
Investing Activities:
Net repayments of loans			330,616				89,415
Proceeds from FDIC loss-sharing indemnification			43,696				—
Purchases of investment securities available for sale			—				(6,430	)
Purchases of investment securities held to maturity			(522	)			—
Proceeds from maturity/calls of securities available for sale			76,185				183,616
Proceeds from sale of securities available for sale			—				480
Proceeds from maturity/calls of securities held to maturity			172,002				82,666
Purchases of FRB/FHLB* securities			—				(120	)
Proceeds from sale of FRB/FHLB* stock			1,502				11,364
Proceeds from sale of Visa common stock			—				5,698
Proceeds from sale of property acquired in satisfaction of debt			10,009				311
Purchases of property, plant and equipment			(14,146	)			(638	)
Net cash acquired from acquisitions			44,397				—
Net Cash Provided by Investing Activities			663,739				366,362
Financing Activities:
Net decrease in deposits			(298,770	)			(135,002	)
Net decrease in short-term borrowings			(476,483	)			(310,626	)
Repayments of notes payable and debt financing			(101	)			(10,109	)
Exercise of stock options			9,094				22,815
Proceeds from issuance of preferred stock			83,726				—
Redemption of preferred stock			(41,863	)			—
Stock option tax benefits			2,179				1,130
Repurchases/retirement of stock			(1,490	)			(35,118	)
Dividends paid			(30,838	)			(30,128	)
Preferred dividends			(2,215	)			—
Net Cash Used in Financing Activities			(756,761	)			(497,038	)
Net Increase (Decrease) In Cash and Cash Equivalents			41,175				(67,426	)
Cash and Cash Equivalents at Beginning of Period			138,883				209,764
Cash and Cash Equivalents at End of Period		$	180,058			$	142,338
Supplemental Cash Flow Disclosures:
Loan collateral transferred to other real estate owned		$	23,804			$	706
Unrealized gain on securities available for sale, net			4,986				5,044
Interest paid for the period			21,719				31,120
Income tax payments for the period			27,553				24,056
Acquisitions:
Assets acquired		$	1,624,464				—
Liabilities assumed			1,575,620				—
Net			48,844				—

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Note 2: Accounting Policies.

Certain accounting policies underlying the preparation of these financial statements require Management to make estimates and judgments. These estimates and judgments may significantly affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities.

Management exercises judgment to estimate the appropriate level of the Allowance for Credit Losses, which is discussed in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

As described in Note 3 below, Westamerica Bank (“Bank”) acquired assets and assumed liabilities of the former County Bank on February 6, 2009 from the Federal Deposit Insurance Corporation (“FDIC”). The acquired assets and assumed liabilities of County Bank were measured at estimated fair values, as required by the acquisition method of accounting for business combinations (Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 805, Business Combinations, formerly FASB Statement No. 141 (revised 2007)). Management made significant estimates and exercised significant judgment in accounting for the acquisition of County Bank. Management judgmentally assigned risk ratings to loans. The assigned risk ratings, appraised collateral values, expected cash flows, and current interest rates, and statistically derived loss factors were used to measure fair values for loans. Repossessed loan collateral was primarily valued based upon appraised collateral values. Due to the loss sharing agreements with the FDIC, the Bank recorded a receivable from the FDIC equal to 80 percent of the loss estimates embedded in the fair values of loans and repossessed loan collateral. The Bank also recorded an identifiable intangible asset representing the value of the core deposit customer base of County Bank based on an appraisal performed by an independent third party. In determining the value of the identifiable intangible asset, the third-party appraiser used significant estimates including average lives of depository accounts, future interest rate levels, the cost of servicing various depository products, and other significant estimates. Management used quoted market prices to determine the fair value of investment securities, FHLB advances and other borrowings.

Newly Adopted Accounting Policies

Purchased loans. Purchased loans acquired in a business combination, which include loans purchased in the County Bank acquisition, are recorded at estimated fair value on their purchase date but the purchaser cannot carryover the related allowance for loan losses. Purchased loans are accounted for under FASB ASC 310-30, Loans and Debt Securities with Deteriorated Credit Quality (formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-3), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccural status. Generally, acquired loans that meet the Company’s definition for nonaccrual status fall within the scope of FASB ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Covered loans. Loans covered under loss sharing or similar credit protection agreements with the FDIC are reported in loans exclusive of the expected reimbursement cash flows from the FDIC. Covered loans are initially recorded at fair value at the acquisition date. Subsequent decreases in the amount expected to be collected results in a provision for loan losses and a corresponding increase in the estimated FDIC reimbursement, with the estimated net loss impacting earnings. Interest is accrued daily on the outstanding principal balances. Covered loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other covered loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on covered loans placed on nonaccrual status is charged against interest income, net of estimated FDIC reimbursements of such accrued interest. In addition, some covered loans secured by real estate with temporarily impaired values and covered commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled (“covered performing nonaccrual loans”). When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Covered performing nonaccrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal.

Covered Other Real Estate Owned. Other real estate owned covered under loss sharing agreements with the FDIC is reported exclusive of expected reimbursement cash flows from the FDIC. Upon transferring covered loan collateral to covered other real estate owned status, acquisition date fair value discounts on the related loan is also transferred to covered other real estate owned. Fair value adjustments on covered other real estate owned result in a reduction of the covered other real estate carrying amount and a corresponding increase in the estimated FDIC reimbursement, with the estimated net loss charged against earnings.

Recently Adopted Accounting Pronouncements

In first quarter 2009, the Company adopted the following new accounting pronouncements:

•

FASB ASC 805, Business Combinations (formerly FAS 141R (revised 2007), Business Combinations);

•

FASB ASC 815-10, Derivatives and Hedging (formerly FAS 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133); and

•

FASB ASC 820-10-55-23B, Fair Value Measurements and Disclosures- Overall — Implementation Guidance (formerly, FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 15).

In the second quarter 2009, the Company adopted the following new accounting pronouncements:

•

FASB ASC 320-10-65-1, Investments — Debt and Equity Securities Guidance related to Recognition and Presentation of Other-Than-Temporary Impairments (formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments);

•

FASB ASC 820-10-65-4, Fair Value Measurements and Disclosures- Overall — Transition Guidance related to Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (formerly FASB Staff Position (FSP) FAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly);

•

FASB ASC 825-10-65-1, Financial Instruments — Overall — Transition Guidance related to Interim Disclosures about Fair Value of Financial Instruments (formerly FSP FAS 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments); and

•

FASB ASC 855, Subsequent Events (formerly FAS 165, Subsequent Events).

FASB ASC 805, Business Combinations, requires an acquirer in a business combination to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. The revised statement requires acquisition-related costs to be expensed separately from the acquisition. It also requires restructuring costs that the acquirer expected but was not obligated to incur, to be expensed separately from the business combination. The Company applied these revised provisions in accounting for the acquisition of County Bank.

FASB ASC 815-10, Derivatives and Hedging, changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. The Company had no derivative instruments designated as hedges as of September 30, 2009.

FASB ASC 820-10-55-23B, Fair Value Measurements and Disclosures- Overall — Implementation Guidance, relates to the requirements that pertain to nonfinancial assets and nonfinancial liabilities covered by accounting guidance for Fair Value Measurements. The adoption of this guidance did not have any effect on the Company’s financial statements at the date of adoption.

FASB ASC 320-10-65-1, Investments — Debt and Equity Securities Guidance related to Recognition and Presentation of Other-Than-Temporary Impairments states that an other-than-temporary impairment (OTTI) write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is more likely than not that it will not be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The adoption of these provisions did not have any effect on the Company’s financial statements at the date of adoption.

FASB ASC 820-10-65-4, Fair Value Measurements and Disclosures- Overall — Transition Guidance related to Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, addresses measuring fair value in situations where markets are inactive and transactions are not orderly. In these circumstances quoted prices may not be determinative of fair value. Even if there has been a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement has not changed. Under these provisions price quotes for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly. The adoption of these provisions did not have any effect on the Company’s financial statements at the date of adoption.

FASB ASC 825-10-65-1, Financial Instruments — Overall — Transition Guidance related to Interim Disclosures about Fair Value of Financial Instruments, states that entities must disclose the fair value of financial instruments in interim reporting periods as well as in annual financial statements. The methods and assumptions used to estimate fair value as well as any changes in methods and assumptions that occurred during the reporting period must also be disclosed. The adoption of these provisions did not have any effect on the Company’s financial statements at the date of adoption.

FASB ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The accounting guidance defines: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Management has reviewed events occurring through October 30, 2009, the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure.

Recently Issued Accounting Pronouncements

FASB Update 2009-05, Measuring Liabilities at Fair Value.

This Update provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures — Overall, for the fair value measurement of liabilities.

This Update clarifies:

•

In circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value by using one or more following: a) the quoted price for the identical liability when traded as an asset; b) the quoted prices for similar liabilities or similar liabilities when traded as assets; c) the income approach, such as present value technique; and/or d) the market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.

•

When estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.

•

Both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.

This Update is effective for the Company’s December 31, 2009 year-end reporting period. The Company does not report liabilities at fair value on a recurring basis. Management does not expect the adoption of the Update to have a material effect on the Company’s financial statements at the date of adoption.

In June 2009, the FASB issued FASB Statement No. 166 (“FAS 166”), Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 and FASB Statement No. 167 (“FAS 167”), Amendments to FASB Interpretation No. 46(R).

FAS 166 was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since the issuance of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes.

FAS 167 was issued to improve financial reporting by enterprises involved with variable interest entities. Specifically to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.

Both Statements must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. Management does not expect the adoption of these Statements to have a material effect on the Company’s financial statement at the date of adoption, January 1, 2010.

Note 3: Federally Assisted Acquisition of County Bank

On February 6, 2009, Westamerica Bancorporation’s bank subsidiary, Westamerica Bank (“Bank”), purchased substantially all the assets and assumed substantially all the liabilities of County Bank from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of County Bank. County Bank operated 39 commercial banking branches primarily within California’s central valley region between Sacramento and Fresno. The FDIC took County Bank under receivership upon County Bank’s closure by the California Department of Financial Institutions at the close of business February 6, 2009. Westamerica Bank submitted a bid for the acquisition of County Bank with the FDIC on February 3, 2009. The FDIC approved Westamerica Bank’s bid upon reviewing three competing bids and determining Westamerica Bank’s bid would be the least costly to the Deposit Insurance Fund. Westamerica Bank’s bid included the purchase of substantially all County Bank assets at a cost of assuming all County Bank deposits and certain other liabilities. No cash or other consideration was paid by Westamerica Bank. Further, Westamerica Bank and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at February 6, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share in 80 percent of loss recoveries on the first $269 million of losses, and absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $269 million. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss sharing agreements with the FDIC, the Company recorded a receivable of $129 million at the time of acquisition.

The County Bank acquisition was accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations. The statement of net assets acquired as of February 6, 2009 and the resulting bargain purchase gain are presented in the following table. The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of a merger as information relative to closing date fair values becomes available. A “bargain purchase” gain totaling $48.8 million resulted from the acquisition and is included as a component of noninterest income on the statement of income. The amount of the gain is equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed. The acquisition resulted in a gain due to County Bank’s impaired capital condition at the time of the acquisition. The operations of County Bank provided revenue of $46.0 million and net income of $7.7 million for the period of February 6, 2009 to September 30, 2009, and is included in the consolidated financial statements. County Bank’s results of operations prior to the acquisition are not included in Westamerica’s statement of income.

Statement of Net Assets Acquired (at fair value)

		At
		February 6, 2009
		(In thousands)
Assets
Cash and cash equivalents		$	44,668
Federal funds sold			12,760
Securities			173,839
Loans			1,174,353
Core deposit intangible			28,107
Other real estate owned			9,332
Other assets			181,405
Total Assets		$	1,624,464
Liabilities
Deposits			1,234,123
Federal funds purchased and securities sold under repurchase agreements			153,169
Other borrowed funds			187,252
Liabilities for interest and other expenses			1,076
Total Liabilities			1,575,620
Net assets acquired		$	48,844
County Bank tangible stockholder’s equity		$	58,623
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Loans and leases, net			(150,326	)
Other real estate owned			(5,470	)
FDIC loss-sharing receivable (included in other assets)			128,962
Core deposit intangible			28,107
Deposits			(10,823	)
Securities sold under repurchase agreements			(2,061	)
Other borrowed funds			1,832
FAS 141R Gain		$	48,844

The pro forma consolidated condensed statements of income for Westamerica Bancorporation and County Bank for the nine months ended September 30, 2009 and 2008, and the year ended December 31, 2008 are presented below. The unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods.

The pro forma purchase accounting adjustments related to loans and leases, deposits, securities sold under repurchase agreements and other borrowed funds are being accreted or amortized into income using methods that approximate a level yield over their respective estimated lives. Purchase accounting adjustments related to identifiable intangibles are being amortized and recorded as noninterest expense over their respective estimated lives using accelerated methods. The pro forma consolidated condensed statements of income do not reflect any adjustments to County’s historical provision for credit losses and goodwill impairment charges.

		Nine months ended September 30, 2009																Nine months ended September 30, 2008
		(In thousands except per share data)																(In thousands except per share data)
						County				Pro Forma				Pro Forma								County				Proforma				Pro Forma
		Westamerica				Bank				Adjustments				Combined				Westamerica				Bank				Adjustments				Combined
Interest Income		$	152,357			$	57,284			$	(3,603	)		$	206,038			$	159,024			$	91,110			$	(3,603	)		$	246,531
Interest Expense			8,191				15,483				(7,626	)			16,048				28,651				32,249				(7,626	)			53,274
Net Interest Income			144,166				41,801				4,023				189,990				130,373				58,861				4,023				193,257
Provision for Credit Losses			7,200				11,734				—				18,934				1,800				26,827				—				28,627
Net Interest Income after Provision for Credit Losses			136,966				30,067				4,023				171,056				128,573				32,034				4,023				164,630
Noninterest Income (Loss)			40,548				11,437				48,844				100,829				(11,963	)			4,603				48,844				41,484
Noninterest Expense			75,875				34,267				4,956				115,098				74,596				89,896				4,956				169,448
Income (Loss) Before Taxes			101,639				7,237				47,911				156,787				42,014				(53,259	)			47,911				36,666
Income Tax Provision (Benefit)			36,590				3,043				20,147				59,780				2,989				7,642				20,147				30,778
Net Income (Loss)		$	65,049			$	4,194			$	27,764			$	97,007			$	39,025			$	(60,901	)		$	27,764			$	5,888
Net Income (Loss) Applicable to Common Equity		$	61,898			$	4,194			$	27,764			$	93,856			$	39,025			$	(60,901	)		$	27,764			$	5,888
Earnings (Loss) Per Common Share		$	2.13			$	0.14			$	0.96			$	3.23			$	1.35			$	(2.11	)		$	0.96			$	0.20
Diluted Earnings (Loss) Per Common Share			2.11				0.14				0.95				3.20				1.33				(2.08	)			0.95				0.20
Average Common Shares Outstanding			29,072																28,895
Diluted Average Common Shares Outstanding			29,313																29,292

		Year ended December 31, 2008
		(In thousands except per share data)
						County				Pro Forma				Pro Forma
		Westamerica				Bank				Adjustments				Combined
Interest Income		$	208,469			$	117,175			$	(4,477	)		$	321,167
Interest Expense			33,243				40,462				(9,717	)			63,988
Net Interest Income			175,226				76,713				5,240				257,179
Provision for Credit Losses			2,700				55,370				—				58,070
Net Interest Income after Provision for Credit Losses			172,526				21,343				5,240				199,109
Noninterest (Loss) Income			(2,056	)			5,775				48,844				52,563
Noninterest Expense			100,761				115,774				5,989				222,524
Income (Loss) Before Taxes			69,709				(88,656	)			48,095				29,148
Income Tax Provision			9,874				7,381				20,224				37,479
Net Income (Loss)		$	59,835			$	(96,037	)		$	27,871			$	(8,331	)
Net Income (Loss) Applicable to Common Equity		$	59,835			$	(96,037	)		$	27,871			$	(8,331	)
Earnings (Loss) Per Common Share		$	2.07			$	(3.32	)		$	0.96			$	(0.29	)
Diluted Earnings (Loss) Per Common Share			2.04				(3.28	)			0.95				(0.28	)
Average Common Shares Outstanding			28,892
Diluted Average Common Shares Outstanding			29,273

Note 4: Investment Securities

The amortized cost, unrealized gains and losses, and estimated market value of the available for sale investment securities portfolio as of September 30, 2009 follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Market Value
		(In thousands)
U.S. Treasury securities		$	3,003			$	20			$	—			$	3,023
Securities of U.S. Government sponsored entities			1,015				68				—				1,083
Mortgage-backed securities			151,077				3,783				(2	)			154,858
Obligations of States and political subdivisions			165,129				5,363				(424	)			170,068
Collateralized mortgage obligations			46,864				802				(248	)			47,418
Asset-backed securities			10,000				0				(2,135	)			7,865
FHLMC and FNMA stock			824				1,910				—				2,734
Other securities			2,778				1,849				(32	)			4,595
Total		$	380,690			$	13,795			$	(2,841	)		$	391,644

The amortized cost, unrealized gains and losses, and estimated market value of the held to maturity investment securities portfolio as of September 30, 2009 follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Market Value
		(In thousands)
Securities of U.S. Government sponsored entities		$	25,000			$	89			$	—			$	25,089
Mortgage-backed securities			66,489				1,955				—				68,444
Obligations of States and political subdivisions			528,147				21,409				(794	)			548,762
Collateralized mortgage obligations			161,210				3,767				(6,379	)			158,598
Total		$	780,846			$	27,220			$	(7,173	)		$	800,893

The amortized cost, unrealized gains and losses, and estimated market value of the available for sale investment securities portfolio as of December 31, 2008 follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Market Value
		(In thousands)
U.S. Treasury securities		$	3,014			$	68			$	—			$	3,082
Securities of U.S. Government sponsored entities			11,019				71				(13	)			11,077
Mortgage-backed securities			40,302				941				(3	)			41,240
Obligations of States and political subdivisions			156,602				5,042				(598	)			161,046
Collateralized mortgage obligations			61,565				143				(1,857	)			59,851
Asset-backed securities			9,999				—				(3,552	)			6,447
FHLMC and FNMA stock			824				—				(3	)			821
Other securities			2,778				2,222				(110	)			4,890
Total		$	286,103			$	8,487			$	(6,136	)		$	288,454

The amortized cost, unrealized gains and losses, and estimated market value of the held to maturity investment securities portfolio as of December 31, 2008 follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Market Value
		(In thousands)
Securities of U.S. Government sponsored entities		$	110,000			$	1,731			$	—			$	111,731
Mortgage-backed securities			85,676				867				(299	)			86,244
Obligations of States and political subdivisions			545,237				12,983				(2,875	)			555,345
Collateralized mortgage obligations			208,412				1,744				(13,266	)			196,890
Total		$	949,325			$	17,325			$	(16,440	)		$	950,210

The amortized cost and estimated market value of securities as of September 30, 2009, by contractual maturity, are shown in the following table:

		Securities Available								Securities Held
		for Sale								to Maturity
						Estimated								Estimated
		Amortized				Market				Amortized				Market
		Cost				Value				Cost				Value
		(In thousands)
Maturity in years:
1 year or less		$	10,873			$	10,963			$	32,386			$	32,556
1 to 5 years			73,324				75,378				48,933				50,513
5 to 10 years			67,415				69,940				412,917				430,034
Over 10 years			27,535				25,758				58,912				60,748
Subtotal			179,147				182,039				553,148				573,851
Mortgage-backed			197,941				202,276				227,698				227,042
Other securities			3,602				7,329				—				—
Total		$	380,690			$	391,644			$	780,846			$	800,893

Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-backed securities. At September 30, 2009 and December 31, 2008, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

An analysis of gross unrealized losses of the available for sale investment securities portfolio as of September 30, 2009, follows:

		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Mortgage-backed securities		$	10			$	—			$	233			$	(2	)		$	243			$	(2	)
Obligations of States and political subdivisions			11,200				(342	)			4,066				(82	)			15,266				(424	)
Collateralized mortgage obligations			3,438				(17	)			12,652				(231	)			16,090				(248	)
Asset-backed securities			—				—				7,865				(2,135	)			7,865				(2,135	)
Other securities			—				—				1,968				(32	)			1,968				(32	)
Total		$	14,648			$	(359	)		$	26,784			$	(2,482	)		$	41,432			$	(2,841	)