WESTAMERICA BANCORPORATION - Quarter Report: 2009 June (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 June 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  _____.

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 July 17, 2009
Common Stock, No Par Value		29,212,165

 

 

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			20
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3 Quantitative and Qualitative Disclosures about Market Risk			43
Item 4 Controls and Procedures			43
PART II — OTHER INFORMATION
Item 1 Legal Proceedings			43
Item 1A Risk Factors			43
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3 Defaults upon Senior Securities			44
Item 4 Submission of Matters to a Vote of Security Holders			45
Item 5 Other Information			45
Item 6 Exhibits			45
Signatures			46
Exhibit Index			47
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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 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
(unaudited)

		At June 30,								At December 31,
		2009				2008				2008
		(In thousands)
Assets:
Cash and cash equivalents		$	168,777			$	134,094			$	138,883
Money market assets			514				338				341
Investment securities available for sale			407,127				391,028				288,454
Investment securities held to maturity, with market values of:
$830,861 at June 30, 2009			830,618
$975,245 at June 30, 2008							978,298
$950,210 at December 31, 2008											949,325
Non-covered loans			2,322,005				2,431,011				2,382,426
Allowance for loan losses			(43,122	)			(50,964	)			(44,470	)
Non-covered loans, net of allowance for loan losses			2,278,883				2,380,047				2,337,956
Covered loans			1,031,643				—				—
Total loans			3,310,526				2,380,047				2,337,956
Non-covered other real estate owned			4,715				920				3,505
Covered other real estate owned			13,691				—				—
Premises and equipment, net			26,490				27,460				27,351
Identifiable intangibles			39,934				16,784				15,208
Goodwill			121,699				121,719				121,699
Interest receivable and other assets			269,504				138,180				150,212
Total Assets		$	5,193,595			$	4,188,868			$	4,032,934
Liabilities:
Deposits:
Noninterest bearing		$	1,334,871			$	1,195,004			$	1,158,632
Interest bearing:
Transaction			716,706				527,109				525,153
Savings			968,408				754,677				745,496
Time			1,137,152				686,702				665,773
Total deposits			4,157,137				3,163,492				3,095,054
Short-term borrowed funds			316,466				514,131				457,275
Federal Home Loan Bank advances			86,338				—				—
Debt financing and notes payable			26,564				36,699				26,631
Liability for interest, taxes and other expenses			47,859				64,101				44,122
Total Liabilities			4,634,364				3,778,423				3,623,082
Shareholders’ Equity:
Preferred stock, authorized - 1,000,000 shares
Issued and outstanding:
83,726 at June 30, 2009			82,611				—				—
Common stock, authorized - 150,000 shares
Issued and outstanding:
29,214 at June 30, 2009			365,355
28,889 at June 30, 2008							348,748
28,880 at December 31, 2008											352,265
Deferred compensation			2,485				2,409				2,409
Accumulated other comprehensive income			1,747				1,074				1,040
Retained earnings			107,033				58,214				54,138
Total Shareholders’ Equity			559,231				410,445				409,852
Total Liabilities and Shareholders’ Equity		$	5,193,595			$	4,188,868			$	4,032,934

See accompanying notes to unaudited condensed consolidated financial statements.

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
		(In thousands, except per share data)
Interest Income:
Loans		$	49,523			$	37,274			$	94,618			$	76,006
Money market assets and funds sold			1				1				2				2
Investment securities available for sale
Taxable			2,556				2,312				4,423				5,424
Tax-exempt			1,983				2,630				3,855				5,320
Investment securities held to maturity
Taxable			3,569				4,827				8,359				10,010
Tax-exempt			5,440				5,611				11,000				11,287
Total Interest Income			63,072				52,655				122,257				108,049
Interest Expense:
Transaction deposits			293				347				498				799
Savings deposits			1,059				1,105				1,959				2,435
Time deposits			3,116				3,873				5,795				9,419
Short-term borrowed funds			568				2,483				1,063				7,405
Federal Home Loan Bank advances			288				—				419				—
Notes payable			421				578				844				1,156
Total Interest Expense			5,745				8,386				10,578				21,214
Net Interest Income			57,327				44,269				111,679				86,835
Provision for Loan Losses			2,600				600				4,400				1,200
Net Interest Income After Provision For Loan Losses			54,727				43,669				107,279				85,635
Noninterest Income:
Service charges on deposit accounts			9,116				7,529				17,538				14,825
Merchant credit card			2,223				2,712				4,655				5,292
Debit card			1,323				978				2,389				1,882
Trust fees			373				377				737				680
Financial services commissions			137				274				291				504
Other			3,214				2,465				5,900				4,832
FAS 141R gain			—				—				48,844				—
Securities impairment			—				(18,178	)			—				(18,178	)
Gain on sale of Visa common stock			—				—				—				5,698
Total Noninterest Income (Loss)			16,386				(3,843	)			80,354				15,535
Noninterest Expense:
Salaries and related benefits			17,448				13,065				33,819				26,049
Occupancy			5,413				3,443				10,823				6,833
Outsourced data processing services			2,378				2,105				4,482				4,225
Amortization of identifiable intangibles			1,695				788				3,380				1,646
Furniture and equipment			1,607				1,001				2,829				1,922
Courier service			994				824				1,892				1,653
Professional fees			779				683				1,667				1,219
FDIC insurance assessments			3,221				133				3,378				228
Other			5,131				4,295				10,519				7,956
Visa litigation expense			—				—				—				(2,338	)
Total Noninterest Expense			38,666				26,337				72,789				49,393
Income Before Income Taxes			32,447				13,489				114,844				51,777
Provision for income taxes			9,264				1,287				38,836				12,797
Net Income			23,183				12,202				76,008				38,980
Preferred stock dividends and discount accretion			1,107				—				1,685				—
Net Income Applicable to Common Equity		$	22,076			$	12,202			$	74,323			$	38,980
Average Common Shares Outstanding			29,126				28,916				29,002				28,888
Diluted Average Common Shares Outstanding			29,403				29,392				29,254				29,301
Per Common Share Data:
Basic earnings		$	0.76			$	0.42			$	2.56			$	1.35
Diluted earnings			0.75				0.42				2.54				1.33
Dividends paid			0.35				0.35				0.71				0.69

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																							38,980				38,980
Other comprehensive income, net of tax:
Increase in net unrealized gains on securities available for sale																			5,576								5,576
Post-retirement benefit transition obligation amortization																			18								18
Total comprehensive income																											44,574
Exercise of stock options			453								18,587																18,587
Stock option tax benefits											896																896
Restricted stock activity			11								1,261				(581	)											680
Stock based compensation											672																672
Stock awarded to employees			3								142																142
Purchase and retirement of stock			(596	)							(7,021	)											(22,697	)			(29,718	)
Dividends																							(19,991	)			(19,991	)
Balance, June 30, 2008			28,889				—			$	348,748			$	2,409			$	1,074			$	58,214			$	410,445
Balance, December 31, 2008			28,880				—			$	352,265			$	2,409			$	1,040			$	54,138			$	409,852
Comprehensive income
Net income for the period																							76,008				76,008
Other comprehensive income, net of tax:
Increase in net unrealized gains on securities available for sale																			689								689
Post-retirement benefit transition obligation amortization																			18								18
Total comprehensive income																											76,715
Issuance of preferred stock and related warrants							82,519				1,207																83,726
Preferred stock dividends and discount accretion							92																(1,685	)			(1,593	)
Exercise of stock options			350								9,070																9,070
Stock option tax benefits											2,179																2,179
Restricted stock activity			7								251				76												327
Stock based compensation											594																594
Stock awarded to employees			1								62																62
Purchase and retirement of stock			(24	)							(273	)											(814	)			(1,087	)
Dividends																							(20,614	)			(20,614	)
Balance, June 30, 2009			29,214			$	82,611			$	365,355			$	2,485			$	1,747			$	107,033			$	559,231

See accompanying notes to unaudited condensed consolidated financial statements.

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		For the six months ended
		June 30,
		2009				2008
		(In thousands)
Operating Activities:
Net income		$	76,008			$	38,980
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			533				4,654
Loan loss provision			4,400				1,200
Net amortization of deferred loan cost			124				87
(Increase) decrease in interest income receivable			(3,306	)			2,297
FAS 141R gain			(48,844	)			—
Decrease (Increase) in other assets			55,701				(3,359	)
Decrease in income taxes payable			(7,366	)			(2,845	)
Increase (decrease) in interest expense payable			275				(2,066	)
Increase in other liabilities			11,316				3,278
Stock option compensation expense			594				672
Stock option tax benefits			(2,179	)			(896	)
Impairment of investment securities			—				18,178
Gain on sale of Visa common stock			—				(5,698	)
Writedown of property and equipment			—				9
Originations of loans for resale			(68	)			(877	)
Net proceeds from sale of loans originated for resale			70				884
Net gain on sale of property acquired in satisfaction of debt			(166	)			0
Writedown of property acquired in satisfaction of debt			83				0
Net Cash Provided by Operating Activities			87,175				54,498
Investing Activities:
Net repayments of loans			188,361				68,824
Proceeds from FDIC loss-sharing receivable			6,421				—
Purchases of investment securities available for sale			—				(5,566	)
Proceeds from maturity/calls of securities available for sale			53,289				139,285
Proceeds from maturity/calls of securities held to maturity			121,708				66,990
Purchases of FRB/FHLB* securities			—				(77	)
Proceeds from sale of FRB/FHLB* stock			1,502				11,325
Proceeds from sale of Visa common stock			—				5,698
Proceeds from sale of property acquired in satisfaction of debt			5,557				—
Purchases of property, plant and equipment			(566	)			(581	)
Net cash acquired from acquisitions			44,397				—
Net Cash Provided by Investing Activities			420,669				285,898
Financing Activities:
Net decrease in deposits			(168,279	)			(101,298	)
Net decrease in short-term borrowings			(381,808	)			(284,468	)
Repayments of notes payable and debt financing			(67	)			(74	)
Exercise of stock options			9,070				18,587
Proceeds from issuance of preferred stock			83,726				—
Stock option tax benefits			2,179				896
Repurchases/retirement of stock			(1,087	)			(29,718	)
Dividends paid			(20,614	)			(19,991	)
Preferred dividends			(1,070	)			—
Net Cash Used in Financing Activities			(477,950	)			(416,066	)
Net Increase (Decrease) In Cash and Cash Equivalents			29,894				(75,670	)
Cash and Cash Equivalents at Beginning of Period			138,883				209,764
Cash and Cash Equivalents at End of Period		$	168,777			$	134,094
Supplemental Cash Flow Disclosures:
Loan collateral transferred to other real estate owned		$	14,668			$	307
Unrealized gain on securities available for sale, net			689				5,576
Interest paid for the period			14,413				23,280
Income tax payments for the period			19,144				15,642
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 six months ended June 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 County Bank on February 6, 2009. The acquired assets and assumed liabilities of County Bank were measured at estimated fair values, as required by FASB Statement No. 141 (revised 2007), Business Combination (“FAS 141R”). 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 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 Federal Deposit Insurance Corporation (“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 which were purchased and assumed from County Bank.

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 American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 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 SOP 03-3. 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 (“covered performing nonaccrual loans”) even though the borrowers continue to repay the loans as scheduled. 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. 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 December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations (“FAS 141R”). This Statement replaces FASB Statement No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also retains the guidance in Statement 141 for identifying and recognizing intangible assets separately from goodwill. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. That replaces Statement 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. Statement 141 required the acquirer to include the costs incurred to effect the acquisition (acquisition-related costs) in the cost of the acquisition that was allocated to the assets acquired and the liabilities assumed. This Statement requires those costs to be recognized separately from the acquisition. In addition, in accordance with Statement 141, restructuring costs that the acquirer expected but was not obligated to incur were recognized as if they were a liability assumed at the acquisition date. This Statement requires the acquirer to recognize those costs separately from the business combination. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company applied FAS 141R in accounting for the County Bank acquisition.

On January 1, 2009, the Company adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“FAS 161”). FAS 161 changes disclosure requirements for derivative instruments and hedging activities. The Statement requires enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect financial position, financial performance, and cash flows. The Company had no derivative instruments designated as hedges as of June 30, 2009.

On January 1, 2009, the Company adopted the provisions of FASB Staff Position (FSP) No. FAS 157-2 relating to the requirements that pertain to nonfinancial assets and nonfinancial liabilities covered by FAS 157, Fair Value Measurements. The adoption of the FSP did not have any effect on the Company’s financial statement at the date of adoption.

On June 30, 2009, the Company adopted FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The adoption of the FSP did not have any effect on the Company’s financial statement at the date of adoption.

On June 30, 2009, the Company adopted 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, which provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of the FSP did not have any effect on the Company’s financial statement at the date of adoption.

On June 30, 2009, the Company adopted FSP, FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The adoption of the FSPs did not have any effect on the Company’s financial statements at the date of adoption.

On June 30, 2009, the Company adopted FASB Statement No. 165, Subsequent Events. The Statement 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. Specifically, the Statement 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 July 24, 2009, the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure.

Recently Issued Accounting Pronouncements

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 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 Bank has identified $47 million in net losses to submit to the FDIC under such loss-sharing agreements during the period from February 6, 2009 through June 30, 2009.

The County Bank acquisition was accounted for under the purchase method of accounting in accordance with FAS 141R. 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 $28.7 million and net income of $4.8 million for the period of February 6, 2009 to June 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 six months ended June 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.

		Six months ended June 30, 2009																Six months ended June 30, 2008
										Pro Forma				Pro Forma												Proforma				Pro Forma
		Westamerica				County Bank				Adjustments				Combined				Westamerica				County Bank				Adjustments				Combined
		(In thousands exept per share data)																(In thousands exept per share data)
Interest Income		$	102,974			$	39,763			$	(2,790	)		$	139,947			$	108,049			$	62,644			$	(2,790	)		$	167,903
Interest Expense			5,741				11,218				(5,412	)			11,547				21,214				22,605				(5,412	)			38,407
Net Interest Income			97,233				28,545				2,622				128,400				86,835				40,039				2,622				129,496
Provision for Credit Losses			4,400				11,734				—				16,134				1,200				15,327				—				16,527
Net Interest Income after Provision for Credit Losses			92,833				16,811				2,622				112,266				85,635				24,712				2,622				112,969
Noninterest Income			27,226				8,799				48,844				84,869				15,535				7,212				48,844				71,591
Noninterest Expense			52,411				24,746				2,790				79,947				49,393				51,172				2,790				103,355
Income (Loss) Before Taxes			67,648				864				48,676				117,188				51,777				(19,248	)			48,676				81,205
Income Tax Provision (Benefit)			25,030				364				20,468				45,862				12,797				(10,172	)			20,468				23,093
Net Income (Loss)		$	42,618			$	500			$	28,208			$	71,326			$	38,980			$	(9,076	)		$	28,208			$	58,112
Net Income (Loss) Applicable to Common Equity		$	40,933			$	500			$	28,208			$	69,641			$	38,980			$	(9,076	)		$	28,208			$	58,112
Earnings (Loss) Per Common Share		$	1.41			$	0.02			$	0.97			$	2.40			$	1.35			$	(0.31	)		$	0.98			$	2.01
Diluted Earnings (Loss) Per Common Share			1.40				0.02				0.96				2.38				1.33				(0.31	)			0.96				1.98
Average Common Shares Outstanding			29,002																28,888
Diluted Average Common Shares Outstanding			29,254																29,301

		Year ended December 31, 2008
										Pro Forma				Pro Forma
		Westamerica				County Bank				Adjustments				Combined
		(In thousands exept per share data)
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	)

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 June 30, 2009 follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Market Value
		(In thousands)
U.S. Treasury securities		$	3,007			$	36			$	—			$	3,043
Securities of U.S. Government sponsored entities			1,016				50				—				1,066
Mortgage-backed securities			158,096				1,567				(209	)			159,454
Obligations of States and political subdivisions			171,539				3,874				(1,381	)			174,032
Collateralized mortgage obligations			56,327				622				(593	)			56,356
Asset-backed securities			9,999				0				(2,395	)			7,604
FHLMC and FNMA stock			824				655				(3	)			1,476
Other securities			2,778				1,382				(64	)			4,096
Total		$	403,586			$	8,186			$	(4,645	)		$	407,127

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

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Market Value
		(In thousands)
Securities of U.S. Government sponsored entities		$	45,000			$	385			$	—			$	45,385
Mortgage-backed securities			72,502				1,398				(3	)			73,897
Obligations of States and political subdivisions			536,938				8,160				(4,272	)			540,826
Collateralized mortgage obligations			176,178				3,679				(9,104	)			170,753
Total		$	830,618			$	13,622			$	(13,379	)		$	830,861

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

During 2008, the Company recognized $62.7 million in loss on the sale of securities and other than temporary charges on FHLMC and FNMA stock and other securities.

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 June 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		$	8,700			$	8,761			$	51,393			$	51,811
1 to 5 years			76,057				78,019				45,706				46,668
5 to 10 years			69,255				70,488				414,208				417,586
Over 10 years			31,550				28,477				70,631				70,146
Subtotal			185,562				185,745				581,938				586,211
Mortgage-backed			214,422				215,810				248,680				244,650
Other securities			3,602				5,572				—				—
Total		$	403,586			$	407,127			$	830,618			$	830,861

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 June 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 June 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		$	39,588			$	(208	)		$	420			$	(1	)		$	40,008			$	(209	)
Obligations of States and political subdivisions			25,724				(841	)			9,365				(540	)			35,089				(1,381	)
Collateralized mortgage obligations			6,383				(59	)			15,040				(534	)			21,423				(593	)
Asset-backed securities			—				—				7,604				(2,395	)			7,604				(2,395	)
FHLMC and FNMA stock			—				—				2				(3	)			2				(3	)
Other securities			—				—				1,936				(64	)			1,936				(64	)
Total		$	71,695			$	(1,108	)		$	34,367			$	(3,537	)		$	106,062			$	(4,645	)