WESTAMERICA BANCORPORATION - Quarter Report: 2009 March (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 March 31, 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		94-2156203
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 April 29, 2009
Common Stock,		29,190,079
No Par Value

 

 

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			17
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3 Quantitative and Qualitative Disclosures about Market Risk			36
Item 4 Controls and Procedures			37
PART II — OTHER INFORMATION
Item 1 Legal Proceedings			37
Item 1A Risk Factors			37
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3 Defaults upon Senior Securities			38
Item 4 Submission of Matters to a Vote of Security Holders			38
Item 5 Other Information			38
Item 6 Exhibits			38
Signatures			39
Exhibit Index			40
Exhibit 3(b) - By-laws, as amended (composite copy)
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 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; (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 March 31,								At December 31,
		2009				2008				2008
		(In thousands)
Assets:
Cash and cash equivalents		$	149,053			$	139,621			$	138,883
Money market assets			513				336				341
Investment securities available for sale			436,343				477,686				288,454
Investment securities held to maturity, with market values of:
$920,513 at March 31, 2009			918,745
1,029,937 at March 31, 2008							1,016,613
950,210 at December 31, 2008											949,325
Non-covered loans			2,356,237				2,448,320				2,382,426
Allowance for loan losses			(43,803	)			(52,234	)			(44,470	)
Non-covered loans, net of allowance for loan losses			2,312,434				2,396,086				2,337,956
Covered loans			1,089,071				—				—
Total loans			3,401,505				2,396,086				2,337,956
Other real estate owned			4,756				954				3,505
Covered other real estate owned			13,391				—				—
Premises and equipment, net			26,729				28,031				27,351
Identifiable intangibles			41,630				17,571				15,208
Goodwill			121,699				121,719				121,699
Interest receivable and other assets			314,501				143,685				150,212
Total Assets		$	5,428,865			$	4,342,302			$	4,032,934
Liabilities:
Deposits:
Noninterest bearing		$	1,353,696			$	1,202,165			$	1,158,632
Interest bearing:
Transaction			730,153				542,468				525,153
Savings			968,411				749,471				745,496
Time			1,204,021				700,534				665,773
Total deposits			4,256,281				3,194,638				3,095,054
Short-term borrowed funds			441,418				635,264				457,275
Federal Home Loan Bank advances			86,772				—				—
Debt financing and Notes payable			26,598				36,736				26,631
Liability for interest, taxes and other expenses			81,128				76,555				44,122
Total Liabilities			4,892,197				3,943,193				3,623,082
Shareholders’ Equity:
Preferred stock			82,550				—				—
Common stock, authorized — 150,000 shares
Issued and outstanding:
28,874 at March 31, 2009			353,917
28,772 at March 31, 2008							336,545
28,880 at December 31, 2008											352,265
Deferred compensation			2,409				2,923				2,409
Accumulated other comprehensive income (loss)			2,274				(3,954	)			1,040
Retained earnings			95,518				63,595				54,138
Total Shareholders’ Equity			536,668				399,109				409,852
Total Liabilities and Shareholders’ Equity		$	5,428,865			$	4,342,302			$	4,032,934

See accompanying notes to unaudited condensed consolidated financial statements.

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

		Three months ended
		March 31,
		2009				2008
		(In thousands,
		except per share data)
Interest Income:
Loans		$	45,095			$	38,732
Money market assets and funds sold			1				1
Investment securities available for sale
Taxable			1,867				3,112
Tax-exempt			1,872				2,690
Investment securities held to maturity
Taxable			4,790				5,183
Tax-exempt			5,560				5,676
Total Interest Income			59,185				55,394
Interest Expense:
Transaction deposits			205				452
Savings deposits			900				1,330
Time deposits			2,679				5,546
Short-term borrowed funds			495				4,922
Federal Home Loan Bank advances			131				—
Notes payable			423				578
Total Interest Expense			4,833				12,828
Net Interest Income			54,352				42,566
Provision for Loan Losses			1,800				600
Net Interest Income After Provision For Loan Losses			52,552				41,966
Noninterest Income:
Service charges on deposit accounts			8,422				7,296
Merchant credit card			2,432				2,580
Debit card			856				904
Trust fees			364				303
Financial services commissions			154				230
Other			2,896				2,367
FAS 141R gain			48,844				—
Gain on sale of Visa common stock			—				5,698
Total Noninterest Income			63,968				19,378
Noninterest Expense:
Salaries and related benefits			16,371				12,984
Occupancy			5,410				3,390
Outsourced data processing services			2,104				2,120
Amortization of identifiable intangibles			1,685				858
Furniture and equipment			1,222				921
Courier service			898				829
Professional fees			888				536
FDIC insurance assessments			157				95
Other			5,388				3,661
Visa litigation expense			—				(2,338	)
Total Noninterest Expense			34,123				23,056
Income Before Income Taxes			82,397				38,288
Provision for income taxes			29,572				11,510
Net Income			52,825				26,778
Preferred stock dividends and discount accretion			578				—
Net Income Applicable to Common Equity		$	52,247			$	26,778
Average Common Shares Outstanding			28,876				28,861
Diluted Average Common Shares Outstanding			29,105				29,210
Per Common Share Data:
Basic earnings		$	1.81			$	0.93
Diluted earnings			1.80				0.92
Dividends paid			0.36				0.34

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				Income(Loss)				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																							26,778				26,778
Other comprehensive income, net of tax:
Net unrealized gain on securities available for sale																			557								557
Post-retirement benefit transition obligation amortization																			9								9
Total comprehensive income																											27,344
Exercise of stock options			176								6,528																6,528
Stock option tax benefits											224																224
Restricted stock activity											67				(67	)											0
Stock based compensation											336																336
Stock awarded to employees			2								127																127
Purchase and retirement of stock			(424	)							(4,948	)											(15,258	)			(20,206	)
Dividends																							(9,847	)			(9,847	)
Balance, March 31, 2008			28,772				—			$	336,545			$	2,923				($3,954	)		$	63,595			$	399,109
Balance, December 31, 2008			28,880				—			$	352,265			$	2,409			$	1,040			$	54,138			$	409,852
Comprehensive income
Net income for the period																							52,825				52,825
Other comprehensive income, net of tax:
Net unrealized gain on securities available for sale																			1,225								1,225
Post-retirement benefit transition obligation amortization																			9								9
Total comprehensive income																											54,059
Issuance of preferred stock and related warrants							82,519				1,207																83,726
Preferred stock dividends and discount accretion							31																(578	)			(547	)
Exercise of stock options			9								299																299
Stock option tax benefits											3																3
Stock based compensation											294																294
Stock awarded to employees			1								46																46
Purchase and retirement of stock			(16	)							(197	)											(470	)			(667	)
Dividends																							(10,397	)			(10,397	)
Balance, March 31, 2009			28,874			$	82,550			$	353,917			$	2,409			$	2,274			$	95,518			$	536,668

See accompanying notes to unaudited condensed consolidated financial statements.

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		For the three months
		ended March 31,
		2009				2008
		(In thousands)
Operating Activities:
Net income		$	52,825			$	26,778
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			592				2,273
Loan loss provision			1,800				600
Net amortization of deferred loan (fees) cost			(156	)			95
(Increase) decrease in interest income receivable			(5,865	)			25
FAS 141R gain			(48,844	)			—
Decrease (Increase) in other assets			27,928				(4,214	)
Increase in income taxes payable			27,654				10,910
Increase (decrease) in interest expense payable			623				(1,000	)
Increase in other liabilities			6,276				1,683
Stock option compensation expense			294				336
Stock option tax benefits			(3	)			(224	)
Gain on sale of Visa common stock			—				(5,698	)
Writedown of property and equipment			—				5
Originations of loans for resale			—				(877	)
Net proceeds from sale of loans originated for resale			—				887
Net gain on sale of property acquired in satisfaction of debt			(110	)			—
Writedown of property acquired in satisfaction of debt			65				—
Net Cash Provided by Operating Activities			63,079				31,579
Investing Activities:
Net repayments of loans			98,125				53,340
Purchases of investment securities available for sale			—				(3,836	)
Proceeds from maturity/calls of securities available for sale			24,964				60,390
Proceeds from maturity/calls of securities held to maturity			33,581				28,675
Purchases of FRB/FHLB* securities			—				(38	)
Proceeds from sale of FRB/FHLB* stock			—				11,287
Proceeds from sale of Visa common stock			—				5,698
Proceeds from sale of property acquired in satisfaction of debt			1,118				—
Purchases of property, plant and equipment			(102	)			(413	)
Net cash acquired from acquisitions			44,397				—
Net Cash Provided by Investing Activities			202,083				155,103
Financing Activities:
Net decrease in deposits			(71,307	)			(70,152	)
Net decrease in short-term borrowings			(256,616	)			(163,335	)
Repayments of notes payable and debt financing			(33	)			(37	)
Exercise of stock options			299				6,528
Proceeds from issuance of preferred stock			83,726
Stock option tax benefits			3				224
Repurchases/retirement of stock			(667	)			(20,206	)
Dividends paid			(10,397	)			(9,847	)
Net Cash Used in Financing Activities			(254,992	)			(256,825	)
Net Increase (Decrease) In Cash and Cash Equivalents			10,170				(70,143	)
Cash and Cash Equivalents at Beginning of Period			138,883				209,764
Cash and Cash Equivalents at End of Period		$	149,053			$	139,621
Supplemental Cash Flow Disclosures:
Loan collateral transferred to other real estate owned		$	15,716			$	341
Unrealized gain on securities available for sale, net			1,225				557
Interest paid for the period			5,954				13,828
Income tax payments for the period			1,400				600
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 three months ended March 31, 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 are recorded at estimated fair value on their purchase date and prohibit the carryover of the related allowance for loan losses, which include loans purchased in the County Bank acquisition. 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 reversal of the nonaccretable difference 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.

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 March 31, 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. For additional information, See Note 4.

Recently Issued Accounting Pronouncements

On April 9, 2009, the FASB issued FASB Staff Position (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.

On April 9, 2009, the FASB issued 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, 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.

FSP FAS 115-2, FAS 124-2 and FSP FAS 157-4 are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted if both Staff Positions are adopted simultaneously. The Company will adopt both FSPs on June 30, 2009, and does not expect the adoption to have any significant effect on the Company’s financial statements.

On April 9, 2009, the FASB issued 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. This FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted if FSP FAS 115-2, FAS 124-2 and FSP FAS 157-4 are also early adopted. The Company will adopt both FSPs on June 30, 2009 and does not expect the adoption to have any effect on the Company’s financial statements.

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 three years in respect to losses and five years in respect to loss recoveries. As a result of the loss sharing agreements with the FDIC, the Company has recorded a receivable of $129 million.

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 $11.5 million and net income of $1.2 million for the period of February 6, 2009 to March 31, 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 quarters ended March 31, 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.

		Quarter ended March 31, 2009																Quarter ended March 31, 2008
										Proforma				Pro Forma												Proforma				Pro forma
		Westamerica				County Bank				Adjustments				Combined				Westamerica				County Bank				Adjustments				combined
Interest Income		$	52,885			$	20,606			$	(1,119	)		$	72,372			$	55,394			$	32,834			$	(1,119	)		$	87,109
Interest Expense			3,324				5,831				(3,225	)			5,930				12,828				12,604				(3,225	)			22,207
Net Interest Income			49,561				14,775				2,106				66,442				42,566				20,230				2,106				64,902
Provision for Credit Losses			1,800				11,734				—				13,534				600				1,407				—				2,007
Net Interest Income after Provision for Credit Losses			47,761				3,041				2,106				52,908				41,966				18,823				2,106				62,895
Noninterest Income			13,404				6,234				48,844				68,482				19,378				4,607				48,844				72,829
Noninterest Expense			25,639				13,656				1,497				40,792				23,056				19,997				1,497				44,550
Income (Loss) Before Taxes			35,526				(4,381	)			49,453				80,598				38,288				3,433				49,453				91,174
Income Tax Provision (Benefit)			13,535				(1,842	)			20,795				32,488				11,510				816				20,795				33,121
Net Income (Loss)		$	21,991			$	(2,539	)		$	28,658			$	48,110			$	26,778			$	2,617			$	28,658			$	58,053
Net Income (Loss) Applicable to Common Equity		$	21,413			$	(2,539	)		$	28,658			$	47,532			$	26,778			$	2,617			$	28,658			$	58,053
Earnings (Loss) Per Common Share		$	0.74			$	(0.09	)		$	0.99			$	1.65			$	0.93			$	0.09			$	0.99			$	2.01
Diluted Earnings (Loss) Per Common Share			0.74				(0.09	)			0.98				1.63				0.92				0.09				0.98				1.99
Average Common Shares Outstanding			28,876																28,861
Diluted Average Common Shares Outstanding			29,105																29,210

		Year ended December 31, 2008
						County				Proforma				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: Fair Value Measurements

In accordance with FAS 157 the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

	•		Level 1 — Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
	•		Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mortgage-backed securities, municipal bonds and collateralized mortgage obligations as well as other real estate owned and impaired loans collateralized by real property where the fair value is generally based upon independent market prices or appraised values of the collateral.
	•		Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Level 3 includes those impaired loans collateralized by other business assets where the expected cash flow has been used in determining the fair value.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents the balances of available for sale securities measured at fair value on a recurring basis.

At March 31, 2009
(In thousands)
Total		Level 1				Level 2				Level 3
$436,343		$	6,848			$	429,495			$	0

The amortized cost and estimated market value of the available for sale investment securities portfolio as of March 31, 2009 follows:

		At March 31, 2009
		Amortized				Estimated
		Cost				Market Value
		(In thousands)
U.S. Treasury securities		$	3,010			$	3,060
Securities of U.S. Government sponsored entities			1,018				1,090
Mortgage-backed securities			167,254				170,719
Obligations of States and political subdivisions			178,219				181,552
Collateralized mortgage obligations			68,776				68,275
Asset-backed securities			9,999				7,020
FHLMC and FNMA stock			824				930
Other securities			2,778				3,697
Total		$	431,878			$	436,343

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

		At March 31, 2009
		(In thousands)
		Amortized				Estimated
		Cost				Market Value
Securities of U.S. Government sponsored entities		$	100,000			$	100,796
Mortgage-backed securities			79,699				80,938
Obligations of States and political subdivisions			543,872				550,181
Collateralized mortgage obligations			195,174				188,598
Total		$	918,745			$	920,513

Assets Recorded at Fair Value on a Non-Recurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at quarter end.

		Fair Value
		March 31,
		2009				Level 1				Level 2				Level 3
		(In thousands)
Non-covered other real estate owned (1)		$	2,129			$	—			$	2,129			$	—
Non-covered Impaired loans (2)			4,289				—				3,833				456
Total assets measured at fair value on a non-recurring basis		$	6,418			$	—			$	5,962			$	456

Note 5: Loans

A summary of the major categories of non-covered and covered loans outstanding is shown in the following tables:

		At
		March 31,				March 31,				December 31,
		2009				2008				2008
		(In thousands)
Non-covered loans:
Commercial		$	519,334			$	516,445			$	524,786
Commercial real estate			822,880				848,991				817,423
Construction			43,833				84,498				52,664
Residential real estate			445,220				473,525				458,447
Consumer installment & other			524,970				524,861				529,106
			2,356,237				2,448,320				2,382,426
Allowance for loan losses			(43,803	)			(52,234	)			(44,470	)
		$	2,312,434			$	2,396,086			$	2,337,956

The carrying amount of the covered loans at March 31, 2009, consisted of loans accounted for in accordance with SOP 03-3 (“SOP 03-3 loans”) and loans not subject to SOP 03-3 (“Non SOP 03-3 loans”) in the following table.

		SOP 03-3				Non SOP 03-3				Total Covered
		Loans				Loans				Loans
		(In thousands)
Covered loans:
Commercial		$	5,669			$	372,517			$	378,186
Commercial real estate			27,251				530,027				557,278
Construction			22,154				7,338				29,492
Residential real estate			141				6,292				6,433
Consumer installment & other			1,019				116,663				117,682
Total loans		$	56,234			$	1,032,837			$	1,089,071

The following table represents the Non SOP 03-3 loans receivable at the acquisition date of February 6, 2009. The amounts include principal only and do not reflect accrued interest as of the date of acquisition or beyond. (In thousands)

Gross contractual loan principal payment receivable		$	1,151,844
Estimate of contractual principal not expected to be collected			57,701
Fair value of Non SOP 03-3 loans receivable			1,108,605

The Company applied the cost recovery method to loans subject to SOP 03-3 at the acquisition date of February 6, 2009 due to the uncertainty as to the timing of expected cash flows as reflected in the following table. (In thousands)

Contractually required payments receivable (including interest)		$	210,561
Nonaccretable difference			(144,813	)
Cash flows expected to be collected			65,748
Accretable difference			—
Fair value of loans acquired		$	65,748

Changes in the carrying amount of loans subject to SOP 03-3 were as follows for the quarter ended March 31, 2009. (In thousands)

Carrying amount at the beginning of the period		$	—
Purchases (1)			65,748
Reductions during the period			(9,514	)
Carrying amount at the end of the period		$	56,234

Acquired loans within the scope of SOP 03-3 had an unpaid principal balance (less prior charge-offs) of $164 million and $149 million at February 6, 2009 and March 31, 2009, respectively.

There were no loans held for sale at March 31, 2009, March 31, 2008 and December 31, 2008.

Note 6: Goodwill and Other Identifiable Intangible Assets

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize impairment during the three months ended March 31, 2009 and March 31, 2008. The changes in the carrying value of goodwill were (In thousands):

December 31, 2007		$	121,719
			—
March 31, 2008		$	121,719
December 31, 2008		$	121,699
			—
March 31, 2009		$	121,699

Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three months ended March 31, 2009 and March 31, 2008, no such adjustments were recorded. The gross carrying amount of identifiable intangible assets and accumulated amortization was:

		March 31,
		2009								2008
		(In thousands)
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Core Deposit Intangibles		$	52,490			$	(14,842	)		$	24,383			$	(11,927	)
Merchant Draft Processing Intangible			10,300				(6,318	)			10,300				(5,185	)
Total Identifiable Intangible Assets		$	62,790			$	(21,160	)		$	34,683			$	(17,112	)

As of March 31, 2009, the current year and estimated future amortization expense for identifiable intangible assets was:

						Merchant
		Core				Draft
		Deposit				Processing
		Intangibles				Intangible				Total
Three months ended March 31, 2009 (actual)		$	1,416			$	269			$	1,685
(In thousands)
Estimate for year ended December 31,
2009			5,734				962				6,696
2010			5,534				774				6,308
2011			4,954				624				5,578
2012			4,497				500				4,997
2013			3,957				400				4,357
2014			3,621				324				3,945

Note 7: Post Retirement Benefits

The Company offers a continuation of group insurance coverage to qualifying employees electing early retirement, for the period from the date of retirement until age 65. For eligible employees the Company pays a portion of these early retirees’ insurance premiums. The Company reimburses a portion of Medicare Part B premiums for all qualifying retirees over age 65 and their qualified spouses. Eligibility for post-retirement medical benefits is based on age and years of service, and restricted to employees hired prior to February 1, 2006. The Company uses an actuarial-based accrual method of accounting for post-retirement benefits.

The following table sets forth the net periodic post-retirement benefit costs:

		For the three months ended
		March 31,
		2009				2008
		(In thousands)
Service cost		$	(79	)		$	(100	)
Interest cost			55				66
Amortization of unrecognized transition obligation			15				15
Net periodic cost		$	(9	)		$	(19	)

The Company does not fund plan assets for any post-retirement benefit plans.

Note 8: Contingent Liabilities

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $433.2 million and $350.8 million at March 31, 2009 and December 31, 2008, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Standby letters of credit outstanding totaled $32.0 million and $29.0 million at March 31, 2009 and December 31, 2008, respectively. The Company also had commitments for commercial and similar letters of credit of $1.8 million and $1.7 million at March 31, 2009 and December 31, 2008, respectively.

During 2007, the Visa Inc. (“Visa”) organization of affiliated entities announced that it completed restructuring transactions in preparation for an initial public offering planned for early 2008, and, as part of those transactions, the Bank’s membership interest in Visa U.S.A. was exchanged for an equity interest in Visa Inc. In accordance with Visa’s by-laws, the Bank and other Visa U.S.A. member banks were obligated to share in Visa’s litigation obligations which existed at the time of the restructuring transactions. On November 7, 2007, Visa announced that it had reached a settlement with American Express related to an antitrust lawsuit. Visa has disclosed other antitrust lawsuits which existed at the time of the restructuring transactions. In consideration of the American Express settlement and other antitrust lawsuits filed against Visa, the Company recorded in the fourth quarter of 2007 a liability and corresponding expense of $2,338 thousand. In the first quarter 2008, Visa funded a litigation settlement escrow using proceeds from its initial public offering. Upon the escrow funding, the Company relieved its liability with a corresponding expense reversal in the amount of $2,338 thousand.

On October 27, 2008, Visa announced that it had reached a settlement with Discover Financial Services related to an antitrust lawsuit that existed at the time of Visa’s restructuring requiring the payment of the settlement to be funded from the litigation settlement escrow. On December 22, 2008, Visa announced that it had funded its litigation settlement escrow in an amount sufficient to meet such litigation obligation pursuant to Visa’s amended and restated Certificate of Incorporation approved by Visa’s shareholders on December 16, 2008. As such, the Company has not recorded a liability for this settlement.

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations.

Note 9: Shareholders’ Equity

On February 13, 2009, the Company issued to the United States Department of the Treasury (the “Treasury”) 83,726 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”), having a liquidation preference of $1,000 per share. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Company may, at its option, subject to any necessary bank regulatory approval, redeem the Series A Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred Stock is generally non-voting. Prior to February 13, 2012, unless the Company has redeemed the Series A Preferred Stock or the Treasury has transferred all of the Series A Preferred Stock to third parties, the consent of the Treasury will be required for the Company to declare or pay any dividends or make any distribution on its common stock, other than regular quarterly cash dividends not exceeding $0.35 or dividends payable only in shares of its common stock, or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement with the Treasury. The Treasury, as part of the preferred stock issuance, received a warrant to purchase approximately 246,640 shares of the Company’s common stock at an initial exercise price of $50.92. The proceeds from Treasury were allocated based on the relative fair value of the warrant as compared with the fair value of the preferred stock. The fair value of the warrant was determined using a valuation model which incorporates assumptions including the Company’s common stock price, dividend yield, stock price volatility, the risk-free interest rate, and other assumptions. The Company allocated $1.2 million of the proceeds from the Series A Preferred Stock to the warrant. The discount on the preferred stock will be accreted to par value over a five-year term, which is the expected life of the preferred stock, and reported as a reduction to income applicable to common equity over that period.

Note 10: Earnings Per Common Share

The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income applicable to common equity by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income applicable to common equity by the average number of common shares outstanding during the period plus the impact of common stock equivalents.

		For the three months
		ended March 31,
		2009				2008
		(In thousands, except per share data)
Weighted average number of common shares outstanding — basic			28,876				28,861
Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise			229				349
Weighted average number of common shares outstanding — diluted			29,105				29,210
Net income applicable to common equity		$	52,247			$	26,778
Basic earnings per common share		$	1.81			$	0.93
Diluted earnings per common share			1.80				0.92